Summary

Implementation of State Auditor’s Recommendations Audits Released in January 2004 Through December 2005 Special Report to Assembly and Senate Standing/Policy Committees January 2006 Report No. 2006-406R The first five copies of each California State Auditor report are free. Additional copies are $3 each, payable by check or money order. You can obtain reports by contacting the Bureau of State Audits at the following address: California State Auditor Bureau of State Audits 555 Capitol Mall, Suite 300 Sacramento, California 95814 (916) 445-0255 or TTY (916) 445-0033 OR This report is also available on the World Wide Web http://www.bsa.ca.gov The California State Auditor is pleased to announce the availability of an on-line subscription service. For information on how to subscribe, please contact the Information Technology Unit at (916) 445-0255, ext. 456, or visit our Web site at www.bsa.ca.gov Alternate format reports available upon request. Permission is granted to reproduce reports. C S A ALIFORNIA TATE UDITOR ELAINEM.HOWLE STEVENM.HENDRICKSON STATEAUDITOR CHIEFDEPUTYSTATEAUDITOR January 24, 2006 2006-406 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 report includes the major findings and recommendations, along with the corrective actions auditees reportedly have taken to implement our recommendations. This special report also includes an appendix that compiles recommendations that warrant legislative consideration and an appendix that summarizes monetary benefits auditees could realize if they implement our recommendations. This information will also be available in nine special reports specifically tailored for each Assembly and Senate budget subcommittee on February 28, 2006. These nine special reports will be available on our Web site at www.bsa.ca.gov. 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 BUREAUOFSTATEAUDITS 555CapitolMall,Suite300,Sacramento,California95814 Telephone:(916)445-0255Fax:(916)327-0019 www.bsa.ca.gov/bsa 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 Agriculture and Water Resources 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 9 Report Number 2002-016, Water Replenishment District of Southern California: Although the District Has Addressed Many of Our Previous Concerns, Problems Still Exist 15 Report Number 2003-137, California’s Independent Water Districts: Reserve Amounts Are Not Always Sufficiently Justified, and Some Expenses and Contract Decisions Are Questionable 23 Appropriations Report Number 2003-131, Franchise Tax Board: Significant Program Changes Are Needed to Improve Collections of Delinquent Labor Claims 31 Report Number 2004-140, Department of Transportation: Various Factors Increased Its Cost Estimates for Toll Bridge Retrofits, and Its Program Management Needs Improving 35 Business and Professions and Governmental Organization 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 41 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 51 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 55 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 61 Report Number I2004-2, California Military Department: Investigations of Improper Activities by State Employees (Allegation I2002-1069) 69 Report Number I2004-2, Department of General Services: Investigations of Improper Activities by State Employees (Allegation I2003-0703) 71 Report Number 2004-108, California Commission on Teacher Credentialing: It Could Better Manage Its Credentialing Responsibilities 73 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 81 Report Number 2004-115, The State’s Offshore Contracting: Uncertainty Exists About Its Prevalence and Effects 89 Report Number I2005-1, Department of Finance: Investigations of Improper Activities By State Employees (Allegation I2004-1104) 93 Report Number 2004-033, Pharmaceuticals: State Departments That Purchase Prescription Drugs Can Further Refine Their Cost Savings Strategies 95 Report Number 2004-113, Department of General Services: Opportunities Exist Within the Office of Fleet Administration to Reduce Costs 103 Report Number 2004-134, State Athletic Commission: The Current Boxers’ Pension Plan Benefits Only a Few and Is Poorly Administered 115 Report Number I2005-2, California Military Department: Investigations of Improper Activities by State Employees (Allegation I2004-0710) 119 Education Report Number 2003-129, The Fiscal Crisis and Management Assistance Team: Its Recommendations, if Implemented, Should Help Financially Troubled School Districts 121 Report Number 2004-108, California Commission on Teacher Credentialing: It Could Better Manage Its Credentialing Responsibilities (see summary on page 73) Report Number 2004-120, Department of Education: School Districts’ Inconsistent Identification and Redesignation of English Learners Cause Funding Variances and Make Comparisons of Performance Outcomes Difficult 125 Report Number 2004-125, Department of Health Services: Participation in the School-Based Medi-Cal Administrative Activities Program Has Increased, but School Districts Are Still Losing Millions Each Year in Federal Reimbursements 135 Energy, Utilities, and Communication Report Number 2003-121, California Public Utilities Commission: It Cannot Ensure That It Spends Railroad Safety Program Fees in Accordance With State Law 143 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 61) Report Number 2004-130, Los Angeles Department of Water and Power: Its Transfers of Funds to the City Comply With the City Charter; However, It Needs to Improve Its Controls Over Contracts, Expenditures, and Personnel Records 147 Health and Human Services 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 155 Report Number 2003-111, Oversight of Long-Term Care Programs: Opportunities Exist to Streamline State Oversight Activities (see summary on page 3) Report Number 2003-114, 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 51) 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 167 Report Number 2003-124, Department of Health Services: Some of Its Policies and Practices Result in Higher State Costs for the Medical Therapy Program 173 Report Number I2004-2, Department of Health Services: Investigations of Improper Activities By State Employees (Allegation I2002-0853) 181 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 183 Report Number I2005-1, Department of Health Services: Investigations of Improper Activities By State Employees (Allegation I2003-1067) 189 Report Number 2004-033, Pharmaceuticals: State Departments That Purchase Prescription Drugs Can Further Refine Their Cost Savings Strategies (see summary on page 95) Report Number 2004-125, Department of Health Services: Participation in the School-Based Medi-Cal Administrative Activities Program Has Increased, but School Districts Are Still Losing Millions Each Year in Federal Reimbursements (see summary on page 135) Report Number 2004-133, Emergency Preparedness: More Needs to Be Done to Improve California’s Preparedness for Responding to Infectious Disease Emergencies 191 Report Number I2005-2, Department of Health Services: Investigations of Improper Activities By State Employees (Allegation I2004-0930) 197 Insurance Report Number 2003-138, Department of Insurance: It Needs to Make Improvements in Handling Annual Assessments and Managing Market Conduct Examinations 199 Jobs, Economic Development, and the Economy 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 205 Report Number 2002-018, Workers’ Compensation Fraud: Detection and Prevention Efforts Are Poorly Planned and Lack Accountability 211 Judiciary Report Number 2005-030, State Bar of California: It Should Continue Strengthening Its Monitoring of Disciplinary Case Processing and Assess the Financial Benefits of Its New Collection Enforcement Authority 227 Labor, Employment, and Industrial Relations 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 205) Report Number I2004-1, California Unemployment Insurance Appeals Board: Investigations of Improper Activities by State Employees (Allegation I2003-0836) 233 Report Number 2002-018, Workers’ Compensation Fraud: Detection and Prevention Efforts Are Poorly Planned and Lack Accountability (see summary on page 211) Report Number 2003-131, Franchise Tax Board: Significant Program Changes Are Needed to Improve Collections of Delinquent Labor Claims (see summary on page 31) Report Number I2004-2, California Military Department: Investigations of Improper Activities By State Employees (Allegation I2002-1069) (see summary on page 69) Local Government 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 235 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 9) 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 15) 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 23) 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 241 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 55) 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 245 Report Number 2004-130, Los Angeles Department of Water and Power: Its Transfers of Funds to the City Comply With the City Charter; However, It Needs to Improve Its Controls Over Contracts, Expenditures, and Personnel Records (see summary on page 147) Natural Resources Report Number 2004-138, Department of Parks and Recreation: It Needs to Improve Its Monitoring of Local Grants and Better Justify Its Administrative Charges 253 Report Number 2004-122, Department of Fish and Game: The Preservation Fund Comprises a Greater Share of Department Spending Due to Reduction of Other Revenues 259 Report Number 2004-124, Department of Parks and Recreation: Lifeguard Staffing Appears Adequate to Protect the Public, but Districts Report Equipment and Facility Needs 265 Report Number 2004-126, Off-Highway Motor Vehicle Recreation Program: The Lack of a Shared Vision and Questionable Use of Program Funds Limit Its Effectiveness 271 Privacy and Public Safety 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 281 Report Number I2004-1, California Department of Corrections: Investigations of Improper Activities By State Employees (Allegation I2003-0896) 285 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 155) 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 167) 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 61) Report Number I2004-2, California Military Department: Investigations of Improper Activities By State Employees (Allegation I2002-1069) (see summary on page 69) Report Number 2004-105, California Department of Corrections: Although Addressing Deficiencies in Its Employee Disciplinary Practices, the Department Can Improve Its Efforts 287 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 183) 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 297 Report Number I2005-1, California Department of Corrections: Investigations of Improper Activities By State Employees (Allegation I2004-0834) 303 Report Number 2004-114, Department of Justice: The Missing Persons DNA Program Cannot Process All the Requests It Has Received Before the Fee That Is Funding It Expires, and It Also Needs to Improve Some Management Controls 305 Report Number 2004-133, Emergency Preparedness: More Needs to Be Done to Improve California’s Preparedness for Responding to Infectious Disease Emergencies (see summary on page 191) Report Number 2005-105, California Department of Corrections: It Needs to Better Ensure Against Conflicts of Interest and to Improve Its Inmate Population Projections 311 Report Number I2005-2, California Department of Corrections and Rehabilitation: Investigations of Improper Activities By State Employees (Allegation I2004-0649, I2004-0681, and I2004-0789) 319 Report Number 2005-111, California Department of Corrections and Rehabilitation: The Intermediate Sanction Programs Lacked Performance Benchmarks and Were Plagued With Implementation Problems 321 Public Employees, Retirement, and Social Security Report Number I2004-1, California Unemployment Insurance Appeals Board: Investigations of Improper Activities By State Employees (Allegation I2003-0836) (see summary on page 233) Report Number I2004-1, California Department of Corrections: Investigations of Improper Activities By State Employees (Allegation I2003-0896) (see summary on page 285) Report Number I2004-2, Department of Health Services: Investigations of Improper Activities By State Employees (Allegation I2002-0853) (see summary on page 181) Report Number I2004-2, California Military Department: Investigations of Improper Activities By State Employees (Allegation I2002-1069) (see summary on page 69) Report Number I2004-2, Department of General Services: Investigations of Improper Activities By State Employees (Allegation I2003-0703) (see summary on page 71) Report Number 2004-124, Department of Parks and Recreations: Lifeguard Staffing Appears Adequate to Protect the Public, but Districts Report Public and Facility Needs (see summary on page 265) 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 287) Report Number I2005-1,Department of Health Services: Investigations of Improper Activities By State Employees (Allegation I2003-1067) (see summary on page 189) Report Number I2005-1, California Department of Corrections: Investigations of Improper Activities By State Employees (Allegation I2004-0834) (see summary on page 303) Report Number I2005-1, Department of Finance: Investigations of Improper Activities By State Employees (Allegation I2004-1104) (see summary on page 93) Report Number 2004-123, California Public Employees’ Retirement System: It Relied Heavily on Blue Shield of California’s Exclusive Provider Network Analysis, an Analysis That Is Reasonable in Approach but Includes Some Questionable Elements and Possibly Overstates Estimated Savings 325 Report Number 2004-033, Pharmaceuticals: State Departments That Purchase Prescription Drugs Can Further Refine Their Cost Savings Strategies (see summary on page 95) Report Number I2005-2, California Military Department: Investigations of Improper Activities by State Employees (Allegation I2004-0710) (see summary on page 118) Report Number I2005-2, Department of Health Services: Investigations of Improper Activities By State Employees (Allegation I2004-0930) (see summary on page 197) Report Number I2005-2, California Department of Corrections: Investigations of Improper Activities By State Employees (Allegation I2004-0649, I2004-0681, and I2004-0789) (see summary on page 319) 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 31) Transportation 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 241) 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 35) Appendix A Summary of Recommendations for Legislative Consideration by Policy Area 329 Appendix B Summary of Monetary Benefits Identified In Audit Reports Released From July 1, 2001, Through December 31, 2005 337 Index State and Local Entities With Recommendations From Audits Included In This Special Report 345 INTRODUCTION This report summarizes the major findings and recommendations from audit and investigative reports we issued from January 2004 through December 2005. 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 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. 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 estimated that auditees could realize if they implement our recommendations in two appendices. We estimate that auditees could have realized more than $741 million of monetary benefits during the period July 1, 2001, through December 31, 2005, if they implemented our recommendations. For example, in our audit of the Department of Health Services’ MediCal Administrative Activities program (Report 2004‑125, August 2005), we estimated that school districts could have received an additional $57 million in fiscal year 2002–03 had all school districts participated and certain districts fully used the 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 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. California State Auditor Report 2006-406 1 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 January 11, 2006. To obtain copies of the complete audit and investigative reports, access the bureau’s Web site at www.bsa.ca.gov or contact the bureau at (916) 445‑0255 or TTY (916) 445‑0033. 2 California State Auditor Report 2006-406 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 April 2005 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  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  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  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—skilled nursing facilities—there is little opportunity Aging’s efforts. for the Department of Health Services (Health Services) to alter  Better communication the scope, number, or frequency of its reviews because the between the departments federal government mandates how these reviews are conducted of Social Services and as a 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 2006-406 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 would make combining the separate reviews by the two departments problematic. 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 (agency) to determine by March 1, 2005, the appropriate department to oversee health care centers. However, this determination is dependent on developing a Medi‑Cal waiver for the program, and as of November 2005, the agency indicates that it and the federal government have not reached an agreement on this waiver. 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 4 California State Auditor Report 2006-406 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: Legislation enacted. Although the Legislature did not act on our recommendation to create a single license for PACE, it did pass Assembly Bill 847, which the governor approved in September 2005. This legislation authorized Health Services, Aging, and Social Services to grant exemptions from licensing requirements applicable to clinics, residential care facilities for the elderly, and home health agencies to a PACE provider that submits a written request, along with substantiating evidence to support the request. 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 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. California State Auditor Report 2006-406 5 Health Services’ Action: Corrective action taken. Effective January 2005 Health Services indicates that it will no longer conduct parallel site reviews with Aging staff unless requested to do so. Further, Health Services states that it is revising its protocol to focus on independently reviewing Aging oversight activities rather than conducting parallel site reviews. 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. 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: Partial corrective action taken. Social Services previously identified four adult day program facilities that it has licensed and that also share space with a health care center. Social Services indicates it continues to work with local health services departments and adult day program providers to ensure that no client needing services is refused the ability to attend an adult program facility with the rescinding of the adult day program license. 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 6 California State Auditor Report 2006-406 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. Aging’s Action: Pending. Assembly Bill 2127, which the governor approved in August 2004, requires all Alzheimer’s centers to be licensed as an adult day program or health care center by January 2008. Aging, Health Services, and Social Services indicates they are working together to implement this requirement. California State Auditor Report 2006-406 7 8 California State Auditor Report 2006-406 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 June 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  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  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.  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  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 2006-406 9 do not always offer adequate assurance that these expenses have  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. 10 California State Auditor Report 2006-406 District’s 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 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 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 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. 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 California State Auditor Report 2006-406 11 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’s 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 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. 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. 12 California State Auditor Report 2006-406 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’s 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 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. 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 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. California State Auditor Report 2006-406 13 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. District’s Action: Corrective action taken. The district states that it revised its hiring and promotion policies and procedures that include documentation standards. It reports that these policies have been adopted. In addition, the district reports that its general counsel presents formal reports on its use of separation agreements to the board on a quarterly basis. Finding #5: The Center for Water Education 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. Center’s Action: Corrective action taken. The district reports that the center has adopted formal contracting policies and procedures for all contracts. 14 California State Auditor Report 2006-406 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 June 2005 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  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  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  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  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.  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 2006-406 15 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’s Action: Partial corrective action taken. The district stated that during its annual budget process for fiscal year 2005–06, it set its assessment rate at $134.66 per acre‑foot of water, which it reports is adequate to keep its reserve fund at an appropriate level. The district also 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. 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. 16 California State Auditor Report 2006-406 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’s Action: Partial corrective action taken. The district reported that it is planning to evaluate its capital improvement plan with respect to scheduling the existing projects and adding new projects, and, at that time, it plans to incorporate measurable outcomes in its strategic plan. Additionally, the district indicated it has included in its capital improvement plan a ranking of projects and an indication of which projects the board has approved. The district also stated that it continues to seek alternative sources of funding and has put into place a process to discuss this funding with the technical advisory committee. Further, it plans to include any alternative sources of funding in its capital outlay schedule. 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. California State Auditor Report 2006-406 17 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’s 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. 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. 18 California State Auditor Report 2006-406 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. District’s 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. California State Auditor Report 2006-406 19 District’s Action: 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 revised its administrative code in December 2004 to require board members and staff to submit expense claims on forms supplied by the district and that these forms will 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. District’s 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. Further, the district reported that it has reassessed its use of public funds for purposes such 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 20 California State Auditor Report 2006-406 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 in March 2005, the board adopted a resolution that sets an annual travel budget for each director. 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 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’s 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. California State Auditor Report 2006-406 21 22 California State Auditor Report 2006-406 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 August 20051 the following:  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  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.  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  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.  A director at one water district made questionable decisions in which she had financial 1 The 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 2006-406 23 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. • 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. 24 California State Auditor Report 2006-406 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 Districts’ Actions: Partial corrective action taken. Four of the five water districts implemented this recommendation. According to the fifth water district—Walnut Valley—its decision for this recommendation was still pending as of June 2005. 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 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 California State Auditor Report 2006-406 25 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, it drafted revisions to the financial transactions report for special districts. The controller also stated that its Advisory Committee on Financial Transactions recommended that a technical advisory committee be established to provide input and recommendations concerning the draft revisions. As of July 2005, the controller was in the process of establishing the technical advisory committee so that it would include a diverse representation of special districts. 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. 26 California State Auditor Report 2006-406 Water Districts’ Actions: Corrective action taken. The three water districts stated that they have implemented this recommendation. 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 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 California State Auditor Report 2006-406 27 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 Districts’ Actions: Corrective action taken. Five of the six water districts have adopted and implemented procedures to enhance the reporting of director expenses to address this 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. 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. 28 California State Auditor Report 2006-406 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 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. 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. California State Auditor Report 2006-406 29 • Guide directors in completing economic disclosure forms and stress the importance of disclosing all economic interests as required by law. Water Districts’ Actions: Partial corrective action taken. Regarding the provision of periodic training related to conflicts of interest, three of the five water districts stated that they provided applicable training to their directors. A fourth water district—San Gabriel—stated that two of its five directors had attended ethics training seminars. San Gabriel further stated the water district is not pursuing training for the other three directors because of pending legislation. Senate Bill 393, if enacted, would require and define the specific ethics training requirements for special district directors. While not stating that its directors had attended applicable training, the fifth water district—Walnut Valley—stated that its board adopted a conflict‑of‑interest and ethics training policy in January 2005. Regarding the provision of guidance to directors in completing economic disclosure forms and stressing the importance of disclosing all required economic interests, two of the three water districts at which we observed deficiencies told us that they provided applicable training to their directors. While not stating that its directors had attended applicable training, the third water district—Walnut Valley—stated that it adopted an economic disclosure policy in January 2005. 30 California State Auditor Report 2006-406 FRANChISE TAx BOARD Significant Program Changes Are Needed to Improve Collections of Delinquent Audit Highlights . . . Labor Claims Our review of the Franchise Tax Board’s (board) collection activities in connection with REPORT NUMBER 2003-131, MAy 2004 delinquent fees, wages, penalties, costs, and interest Responses of the Franchise Tax Board and the Department of (claims) referred by the Industrial Relations as of May 2005 Department of Industrial Relations (Industrial Relations) found the The Joint Legislative Audit Committee requested that the following: Bureau of State Audits review the Franchise Tax Board’s (board) collection activities in connection with delinquent  The board’s success in fees, wages, penalties, costs, and interest (claims) that the generating collections for these claims is limited— Department of Industrial Relations (Industrial Relations) referred our analysis of 310 claims to it. Many of the claims that Industrial Relations refers to the filed in fiscal years 2001–02 board involve an employer owing a wage earner unpaid wages; and 2002–03 shows that Industrial Relations if Industrial Relations collects those wages, it passes them on to received payments on only the wage earner. 20 percent of them.  Further, our review of Finding #1: The board’s success rate in collecting money on 60 claims shows that, Industrial Relations claims is limited. as of February 2004, the board has taken We analyzed 310 Industrial Relations claims filed in fiscal years an average of almost 18 months to process 2001–02 and 2002–03 and found that the board collected these claims, and it only 20 percent of them. The board often takes a significant still has not completed amount of time to process these claims, and we believe it could processing many of them. be more successful if it responded more promptly to the cases  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 sample of claims selected to determine where the delays occur automating its system, 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 the end of February 2004, and many are still not completed. not receive the additional funding to implement the changes. Our review of the amount of time involved between the individual steps of the claim collections process found that a  Although state law significant delay occurred after the board issued the demand‑for‑ requires Industrial 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 demand‑for‑payment notice, the board does not always follow fee to cover the board’s its policy. We found that the board took an average of 277 days collection costs, it currently does not do so. to generate an order to withhold. California State Auditor Report 2006-406 31 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. As Industrial Relations stated in its original response to our audit report, its staff  attempts to obtain information from both the employer and the worker during its mediation process. However, although it requests that the employer provide either a federal or state employer identification number, Industrial Relations believes it does not have the authority to mandate that employers provide this information. 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 32 California State Auditor Report 2006-406 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’s Action: Corrective action taken. The board stated that it provided Industrial Relations a report on the backlog of cases in April 2005 covering inventory from July 2004 through April 2005. According to the board, this report showed significant improvements. Industrial Relations’ Action: Corrective action taken. Industrial Relations stated that it meets quarterly with the board’s staff to discuss any issues that may arise, including the board’s progress on reducing its backlog of cases. In addition, when requested, the board provides Industrial Relations with status reports on cases referred to it. According to Industrial Relations, the board has shown remarkable improvement in the processing of cases and reducing the backlog. 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 California State Auditor Report 2006-406 33 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. Board’s Action: Partial corrective action taken. The board stated that Industrial Relations increased the amount of funds allocated to the program for the fiscal year 2004–05 contract and loaned the board a part‑ time employee, effective January 2005. The board also indicated that it hired two temporary employees and is currently working with Industrial Relations to address staffing needs for fiscal year 2005–06. 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: Partial corrective action taken. Industrial Relations stated that it is currently upgrading its computer system. One component of the upgrade is to determine how to electronically transfer information to the board. To discuss this further, Industrial Relations has scheduled a meeting with the board to determine how best to accomplish this transfer. Industrial Relations also indicated that it continues to discuss the possibility of adopting regulations that would allow the board to collect fees from debtors. However, Industrial Relations believes there is a concern that the board would not collect enough fees and Industrial Relations would still be required to fund the board’s collection efforts. 34 California State Auditor Report 2006-406 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 Department of Transportation response as of December 2005 The Joint Legislative Audit Committee (audit committee) Audit Highlights . . . requested that the Bureau of State Audits examine the delays and higher cost estimates for the Toll Bridge Our review of the Department Seismic Retrofit program (program). Specifically, the audit of Transportation’s (Caltrans) committee requested that we identify the factors contributing Toll Bridge Seismic Retrofit Program (program) found that: to additional capital and support cost increases, which of these factors were unforeseen at the time that the AB 1171  Cost estimates have estimates were prepared, and the extent to which the design of increased $3.2 billion since April 2001, including the signature span of the San Francisco‑Oakland Bay Bridge’s a $900 million program east span (East Span) independently contributed to costs contingency reserve. increases. In addition, the audit committee requested that we  Approximately examine Caltrans’ basis for the program’s schedule, evaluate $930 million of the the adequacy of procedures for modifying cost estimates and $3.2 billion increase completion dates, and determine whether Caltrans employs relates to the May 2004 best practices when managing projects that cost more than bid for the superstructure of the signature span $1 billion. Specifically, we found: of the San Francisco- Oakland Bay Bridge’s east span (East Span); the Finding #1: Rising costs and delays plague completion of the remainder is attributable State’s largest public safety project. to other categories. In its August 2004 report to the Legislature on the status of the  Various factors have program, Caltrans disclosed cost estimates that were $3.2 billion, driven cost increases, including volatile markets or about 63 percent, higher than the estimates it prepared in for steel and contractor April 2001. Caltrans’ 2001 estimates formed the basis for the services, a lengthening program budget the Legislature adopted in AB 1171. Caltrans’ of the East Span’s reevaluation of program costs was triggered in May 2004 by timeline, and Caltrans past experience with the receiving the sole bid for the signature span’s superstructure, program, which is reflected which exceeded Caltrans’ 2001 estimate by $930 million. in contingency reserves. 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 2006-406 35 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 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 36 California State Auditor Report 2006-406 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 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. California State Auditor Report 2006-406 37 Caltrans’ Action: Partial corrective action taken. With the assistance of consultants, Caltrans indicates that it prepared a risk management plan for the East Span project. Caltrans also says that it hired a dedicated project risk management coordinator to ensure implementation of the plan. As part of the plan, Caltrans developed a comprehensive list of risks, called a risk register, and has created draft risk registers for the signature span, and the eastern foundation and tower subprojects. Caltrans states that it is developing monitoring and control processes to identify, analyze, and plan for new risks and to track all existing risks. In its latest quarterly program report, dated November 14, 2005, Caltrans, however, noted that some of the risks identified in the risk register cannot be quantified because they are conditions or assumptions on which the project was planned. Caltrans says that any changes to these conditions or assumptions would require revisions to budgets, plans, and other performance measures. Further, Caltrans says it has not quantified some risks that are external in nature and represent possible policy changes that might be imposed on Caltrans. Finally, as conditions warrant, such as recent market fluctuations and the suspension span bid opening, Caltrans states it will update risk probabilities, potential impacts, and response strategies. 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, 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. 38 California State Auditor Report 2006-406 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: Corrective action taken. Caltrans says that during 2005 it updated capital outlay and capital outlay support costs each quarter and integrated them into its reports to the Legislature. Caltrans indicates that it updated the cost estimates for contracts currently under construction and that it considered cost exposure associated with identified individual risks when revising its engineer’s estimate for the East Span. Further, it says that it will periodically determine if remaining contingency reserves are adequate to cover the amount of the program’s remaining risks. 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 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. California State Auditor Report 2006-406 39 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: Corrective action taken. During 2005 Caltrans submitted program status reports to the Legislature between 45 and 48 days after the end of each quarter. Caltrans indicates that it provided these reports to the FHWA in addition to the federally required Annual Update to the Finance Plan for the East Span, which it provided to the federal government on November 16, 2005. Legislative Action: Partial legislation enacted. Assembly Bill 144 (AB 144), approved by the governor in July 2005, provided funding for the completion of the signature span of the East Span. It also established a Toll Bridge Program Oversight Committee that is to provide reports to the Legislature within 45 days of the end of each quarter. The reports are to provide details on each toll bridge seismic retrofit project and all information necessary to clearly describe the status of the project, including the current or projected budget for capital and capital outlay support costs. However, AB 144 does not require these reports to provide the level of detail we recommended, such as reporting on pending change orders or other contractor claims; commitments against the project and program contingency reserves; current estimates of contract values that are not yet entered into; and a detailed description, along with specific financial estimates, of issues or events that could have a financial impact on the program. In addition, AB 144 does not require certification by key Caltrans executives—the director and deputy director of finance— and an independent engineering consultant on the completeness and accuracy of the report as we had recommended. 40 California State Auditor Report 2006-406 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’s response as of Our review of the California June 2005 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  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 2006-406 41 Finding #1: Some of the Gambling Commission’s interpretations of compact provisions have been disputed. Concerns have arisen about specific decisions the Gambling  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  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  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 Gambling 42 California State Auditor Report 2006-406 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 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 California State Auditor Report 2006-406 43 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 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. 44 California State Auditor Report 2006-406 Governor’s Office’s 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 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’s 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. California State Auditor Report 2006-406 45 • 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 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. 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 46 California State Auditor Report 2006-406 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’s Action: Corrective action taken. At its February 16, 2005, meeting the Gambling Commission voted to follow the California Department of Justice, Division of Gambling Control’s Tribal Casino Advisory regarding the term “Gaming Device” as that term is used in the Tribal‑State Gaming Compacts. Pursuant to this advisory each terminal or player station attached to a gaming system is accounted for as a separate gaming device. The Gambling Commission now adheres to this application of the term “Gaming Device” in its treatment of multiple terminal/station systems. 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 Rancheria (Lowerlake) 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 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 California State Auditor Report 2006-406 47 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’s Action: Pending. The Gambling Commission directed the specific questions raised by the Bureau of State Audits to the BIA. According to the Gambling Commission, it has made every effort, both by letter and telephone, to obtain clarification from BIA and has received no response. The Gambling Commission further stated that this matter has been made even more complex by questions that have been raised about the propriety of the re‑recognition action taken by a former director of the BIA. The questions raised about re‑recognition involve other tribes in addition to Lower Lake. The Gambling Commission reported that it would continue its efforts to seek clarification from the BIA and to explore options that might be available to it in the resolution of this issue. 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. 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 48 California State Auditor Report 2006-406 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’s 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 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’s Action: Pending. The Gambling Commission is in the final stages of adopting a conflict‑of‑interest policy in accordance with the provisions of California Government Code, Section 19990. According to the Gambling Commission, the process of adopting a policy includes employee and labor union(s) review and input. Employees have reviewed the policy and submitted their input to their personnel unit. Labor unions also completed their review and Gambling Commission staff has met with union representatives concerning the proposed policy. As of June 2005, the Gambling Commission was reaching the conclusion of the process and the policy was under review by the Department of Personnel Administration. It is anticipated that the Gambling Commission will give the final draft to the unions by the end of July 2005, with a proposed implementation date of 30 days from the date of the final draft. The Gambling Commission will then provide a copy of the approved policy to its staff. California State Auditor Report 2006-406 49 50 California State Auditor Report 2006-406 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 July 2005 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, Statutes 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  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  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.  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 2006-406 51 reports it requested from a psychology subcommittee and its  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’s Action: Partial corrective action taken. In March 2005 the Department of Health Services (Health Services) revised state regulations for acute psychiatric facilities that will facilitate the department’s efforts to allow psychologists to more fully participate in the treatment of patients as either attending or co‑attending clinicians. In addition, the department continues to work with Health Services and employee representatives at the department’s four hospitals to revise the special order that defines the duties and responsibilities of hospital medical staff, including psychologists. The department expects to approve the revised special order in the near future. 52 California State Auditor Report 2006-406 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’s 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 possible, bylaws committees to more closely reflect the composition of their medical staffs. In June 2005 the medical staff at one of the department’s four hospitals voted to approve amendments to its medical staff bylaws to require the medical executive committee to reflect, as appropriate, the overall membership of the medical staff. The department expects the three other hospitals to modify medical staff bylaws within the next few months. In addition, the department reported that its hospitals have made progress in modifying the membership of the committees to more closely reflect the composition of their medical staffs. California State Auditor Report 2006-406 53 54 California State Auditor Report 2006-406 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 August 2005 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 first five commissions.  The state commission Specifically, the audit committee requested us to review and consistently followed contracting rules evaluate the policies and procedures the state commission and a applicable to all state sample of county commissions use to collect, deposit, distribute, agencies, but some county and spend Proposition 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  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  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. 1 El Dorado County, Kern County, Los Angeles County, San Diego County, and Santa Clara County. California State Auditor Report 2006-406 55  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  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  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’s Action: Corrective action taken. According to First 5 Santa Clara, its commission approved a 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’s Action: 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 the evaluation of proposals, and it will clearly disclose to the public the nature of any future funding awards it makes and its decision‑ making process in awarding contracts in its minutes. 56 California State Auditor Report 2006-406 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’s Action: Corrective action taken First 5 Santa Clara stated it is actively pursuing outside resources and has recently received three substantial grants. First 5 Kern’s Action: 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: Corrective action taken. First 5 Los Angeles stated it had established a team to actively seek matching funds from government agencies, corporations, and other private funding organizations. First 5 El Dorado’s Action: 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’s Action: Corrective action taken. First 5 San Diego stated that the commission had adopted a 20‑year financial plan that maintains grant‑making levels 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’s Action: Corrective action taken. First 5 California stated it has documented success in receiving significant funding commitments from the foundation community, private and public partners, and the state and federal governments, and will continue its efforts in this area. California State Auditor Report 2006-406 57 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. First 5 Santa Clara’s Action: Pending. First 5 Santa Clara stated it is working with the Government Finance Officers Association (association) to develop guidelines for administrative costs for use by county commissions. First 5 Santa Clara stated it will review the association’s recommendations on administrative costs and will forward this information to the county commission for its consideration. First 5 Los Angeles’ Action: Pending. First 5 Los Angeles stated it is working with the association to develop guidelines and a proposed definition of administrative costs, the final draft of which will be issued soon. First 5 El Dorado’s Action: Pending. First 5 El Dorado stated that it would develop and adopt administrative cost policies. First 5 San Diego’s 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. Once the association’s guidelines are finalized and reviewed, First 5 San Diego stated it would prepare a recommendation and forward it to the county commission. 58 California State Auditor Report 2006-406 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. First 5 Santa Clara’s Action: Partial corrective action taken. First 5 Santa Clara stated that it had completed a comprehensive annual evaluation report that was submitted to its commission in September 2004 that found a number of positive outcomes related to indicators in the county commission’s strategic plan. First 5 Santa Clara also stated it had completed an updated community indicators report in January 2005 organized by four of its commission’s goal areas. According to First 5 Santa Clara, evaluation outcome measures and indicators are being aligned with its new strategies and that an evaluation workshop for commissioners is scheduled for September 2005. First 5 Kern’s Action: Partial corrective action taken. First 5 Kern stated it is continually addressing the concerns expressed by its independent evaluator and that its evaluator stated that significant progress had been made in addressing and meeting objectives. First 5 Los Angeles’ Action: Partial corrective action taken. First 5 Los Angeles stated that over the past year, it had made significant progress in the implementation of the results‑based accountability framework that forms an integral part of its strategic plan for fiscal years 2004–05 through 2008–09. First 5 Los Angeles stated that its framework tracks outcomes and indicators of child and family well‑being on several levels—for example, measurement of outcomes at the county and grantee level will be available in September 2005 and early 2006, respectively. First 5 El Dorado’s Action: Partial corrective action taken. 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. California State Auditor Report 2006-406 59 First 5 San Diego’s Action: Partial corrective action taken. First 5 San Diego stated that, starting with its fiscal year 2004–05 evaluation, its performance will be measured through the outcome evaluation that provides data on the performance of each of its major initiatives and the aggregate performance of all of its funded projects during the year. First 5 San Diego stated that its performance would also be compared to community indicators to assess, to the extent possible, its impact countywide. 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’s Action: Pending. First 5 California stated that it established 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 by December 15, 2005. 60 California State Auditor Report 2006-406 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 August 2005 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  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).  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  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  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 2006-406 61  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  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 its existing project database to allow wireless E911 costs to be more easily identified and developed a reporting system to assist management in monitoring these costs. 62 California State Auditor Report 2006-406 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 its project, which it calls Next Generation E911 Network, in which General Services is evaluating ways to incorporate emerging technologies with a more flexible, sophisticated and cost‑effective 911 system. General Services states that it has evaluated responses to a request for information that it sent out to obtain industry feedback on the 911 database requirements. General Services concluded that emerging industry standards must be finalized and technology trials completed prior to formulating a decision to California State Auditor Report 2006-406 63 move ahead with a 911 database replacement, along with supporting network enhancements. General Services states that it is monitoring the industry’s progress both in developing the necessary standards and, subsequently, obtaining the National Emergency Number Association standards organization’s agreement to those standards. Additionally, General Services states it has continued to follow the progress of several technology trials that are being conducted in various locations in the nation; and that once the trials are conducted and their outcomes are reported, which in some cases may be by the end of 2005, it will be in a better position to make an informed decision regarding the future path for California. Subsequently, if it determines that significant upgrades are justified, 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. 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. 64 California State Auditor Report 2006-406 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’s Action: Corrective action taken. The CHP states that it completed and submitted a purchase order for a management information system for all of its communications centers that will enable each center to monitor wait times. The CHP states that all but four of its centers have implemented the new system and the remaining four will be complete by December 31, 2005. 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 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 California State Auditor Report 2006-406 65 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’s Action: Partial 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 its Information Management Division, Office of Legal Affairs, and Department Training Division are presently developing the necessary policy and processes for implementation of the new strategy. 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. 66 California State Auditor Report 2006-406 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 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’s 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 is developing a benchmark that will consider call volume data, communication center size, and incorporate shift parameters and the impact of seasonal and special events that affect high traffic volumes. The benchmarks will be utilized to evaluate and validate dispatch staffing levels. The CHP states that it intends to develop a benchmark using six months of call data collected after its new management information system is implemented. The CHP reports that a committee comprised of management and dispatch personnel has developed a staffing questionnaire and gathered statistical data from representative communication centers. The CHP will use this information to complete a budget change proposal for additional dispatchers for fiscal year 2006–07. California State Auditor Report 2006-406 67 Finding #6: 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. 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’s Action: Corrective action taken. The CHP reports that using a salary comparison of 13 public agencies’ (agencies) dispatcher salaries that CHP had prepared as a basis, the Department of Personnel Administration surveyed the agencies and confirmed that the CHP dispatcher salary scale is not in parity with that of the agencies surveyed. According to the CHP, based on the results of this survey, the Department of Personnel Administration negotiated a tentative agreement with the dispatchers’ union that includes a 10 percent pay raise during the term of the two‑year agreement. The contract is still pending ratification of the union membership, and approval by the Legislature and governor. The CHP states that although the dispatchers’ salary is still below the average pay of the 13 public safety agencies surveyed, when combined with continued recruitment and retention efforts, it should allow the CHP to fill and retain more dispatcher positions. 68 California State Auditor Report 2006-406 California military department Investigations of Improper Activities by State Employees, January 2004 Through June 2004 InveStIgAtIon I2002-1069 (RepoRt I2004-2), SeptembeR 2004 California military Department response as of november 2005 We investigated and substantiated an allegation that the California Military Department (Military Investigative Highlight . . . Department) improperly granted employees an increase in pay they were not entitled to receive. Over a two-year period, the Military Department paid employees at two of its three Finding: the military Department overpaid its training centers $128,400 employees $128,400. more than they were entitled to receive. Between July 1, 2001, and June 30, 2003, 19 employees at two 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 the employees of the third training center received the pay increase at some time during the two-year period. Military Department’s 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 California State Auditor Report 2006-406 69 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 (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. 70 California State Auditor Report 2006-406 DEpARTmENT OF gENERAL SERvICES Investigations of Improper Activities by State Employees, January 2004 Through June 2004 INVESTIGATION I2003-0703 (REPORT I2004-2), SEPTEMBER 2004 Department of General Services’ response as of November 2005 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  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,  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  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 2006-406 71 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 the garage 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. General Services’ Action: Corrective action taken. General Services issued the employee a counseling memo and recovered $139 from him for the value of the gasoline the employee admitted that he 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. 72 California State Auditor Report 2006-406 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 November 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  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.  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  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  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 California State Auditor Report 2006-406 73 certain assumptions in this report. Finally, although no requirement 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’s Action: Pending. The commission indicates that it has established performance measures for each of its teacher development programs. In addition, the commission will now require annual reports from program sponsors on the academic progress of participants and the commission is in the process of establishing consequences for underperformance. Finally, the commission indicates that it plans to submit a budget change proposal to fund the independent evaluation of the paraprofessional program during fiscal year 2007–08. 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. 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 74 California State Auditor Report 2006-406 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’s Action: Pending. The commission indicates that it will now include analysis of the statistics presented in its annual reports to provide context to education professionals and policy makers. The commission plans to collaborate with colleges and universities by spring 2006 to determine the funding necessary to activate the teaching performance assessment, and indicates that it will continue to work with colleges and universities to implement the teaching performance assessment on a voluntary basis. In regard to developing performance measures for teacher preparation programs, the commission states that it will keep informed of surveys and reports that other entities prepare, such as the California State University’s annual employer survey. Finally, the commission indicates that it is considering the systematic collection of valid and reliable data from surveys and performance assessments as part of its review of the accreditation system. 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. California State Auditor Report 2006-406 75 Commission’s Action: Pending. With the appointment of eight new commissioners, and the election of a new chair and vice chair, the commission indicates that it is revisiting how it reviews and updates the strategic plan and quantifies performance measures. The commission anticipates that the strategic plan will be updated in spring 2006, which takes into account the likelihood of new appointments of commissioners for the remaining vacancies. In addition, the commission indicates that the executive director will reformat his annual report of accomplishments to fit the strategic plan. 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 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’s Action: Pending. The commission states that it continues to streamline the teacher credentialing process. For example, the commission indicates that it is gathering information from stakeholders and constituencies, and obtaining technical assistance on the feasibility and advisability of exam consolidation. It anticipates presenting results of this effort to the commissioners for consideration in early 2006. 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. 76 California State Auditor Report 2006-406 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 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’s Action: Partial corrective action taken. The commission has implemented or is in the process of implementing our recommendations related to customer service and application processing. Specifically, the commission indicated that it now gathers data on the types of questions asked in telephone calls and e‑mails, and it uses this data to improve the information provided on its Web site and leaflets. In January 2005, the commission revised its Web site to make it easier to use and to address questions its customers routinely ask. California State Auditor Report 2006-406 77 Since the implementation of TCSIP in February 2005, the commission indicates that it is monitoring average processing time for the four processing teams and that in fiscal year 2006‑07 it plans to perform a time management study for each type of application. In addition, the commission is working to develop reports from TCSIP to track average processing times and to identify those applications that have taken more than 75 business days to process. The commission agrees that it should use automated processes from TCSIP where possible, and thus it has convened a stakeholder workgroup to help it develop a process that would allow all commission stakeholders to electronically submit initial applications. To this end, the commission expects to have a process in place by January 2006 that would allow all colleges and universities to electronically submit applications and it is working towards a goal of February 2007 to have a process in place to use TCSIP to automatically review these applications. Further, in regards to the electronic submission of applications from school districts, although the commission indicates that a number of technological, fiscal, and logistical issues need to be resolved first, it is projecting an implementation date of July 2007 for this process. To encourage more educators to renew credentials online, the commission indicates that it will gather information on the types of renewals received online and review this data quarterly to determine where to focus its outreach efforts. In addition, the commission indicates its new Web site has a clearly displayed link for online renewals and that both the Web site and its leaflets now state that online renewals are given a priority processing over paper renewals. Finally, the commission indicates that it has automated its response to and routing of all incoming 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. 78 California State Auditor Report 2006-406 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’s Action: Pending. The commission indicates that it has completed the development and implementation of program standards to meet the act’s requirements, with the exception of the teaching performance assessment. By spring 2006, the commission states it will have a plan to guide its ongoing standard‑setting activities. The commission indicates that it has developed a methodical approach to the appointment of advisory panels that includes evaluating a candidate’s qualifications against the commission’s requirements, and developing candidate rankings for deliberation and discussion. Further, commission staff agrees with our recommendation to present the actual field‑survey results to the commissioners and are prepared to do so the next time program standards are developed. Finally, the commission indicates it will follow its record retention policy to ensure that important documents are maintained for specified periods of time in case they are needed later for general information, research, or legal proceedings. 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. California State Auditor Report 2006-406 79 Commission’s Action: Pending. The commission indicates that the Committee on Accreditation and the Accreditation Study Work Group developed recommendations and options for consideration by the commissioners, which directed commission staff to send the recommendations to colleges and universities for review and comment. The commission notes that should it implement a revised accreditation system, a transitional period would be necessary as colleges and universities have advocated for a 24‑month preparation period before being subject to a review. 80 California State Auditor Report 2006-406 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’s response as of December 2005 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  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  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  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  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 2006-406 81  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’s Action: Partial corrective action taken. The office stated that it is continually reviewing its implementation plan, and is in the process of revising the plan to ensure that it is usable and contains all necessary changes. The office estimates its efforts in this area are 90 percent complete. 82 California State Auditor Report 2006-406 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. 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, California State Auditor Report 2006-406 83 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. • 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’s Action: Partial corrective action taken. The office has developed duty statements for the two employees who currently work full time on HAVA activities. While the office has developed a written policy that specifically prohibits the use of any state or federal resources for partisan political activity, the policy is still under review by the Department of Personnel Administration and must ultimately be approved by the applicable unions for represented office employees. The office has distributed the new policy to all of its 84 California State Auditor Report 2006-406 nonrepresented employees for them to read and sign. The office also has revised its HAVA contracts to include a provision prohibiting partisan activities, has developed a time sheet and certification process for time spent on HAVA activities, and implemented a process to review invoices to ensure work products are received and that charges are reasonable and allowable prior to approving payments. 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. • 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. California State Auditor Report 2006-406 85 • Follow General Services policies when using CMAS for contracting needs. • Comply with state policy for procuring commodities. Office’s Action: Partial corrective action taken. The office stated that it intends to use competitive bidding requirements to award contracts except in those rare circumstances in which non‑competitive procurement is allowable and appropriate. When competition is not used, the office stated that it would use a process to screen consultants before they are hired. The office indicated that it has already sent 75 percent of its contracting staff to specialized training and seminars and received training certifications regarding the State’s procurement and contracting practices, and intends to send the remaining 25 percent of its contract staff to this training in the spring of 2006. The office also stated that it has revised its contracting processes to require that every contract include a detailed scope of work, specific deliverables, and performance measures, and these processes include criteria for using CMAS and procuring commodities. 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. Office’s Action: Corrective action taken. The office submitted its fiscal year 2004–05 spending plan to Finance in February 2005. Finance and the Joint Legislative Budget Committee subsequently approved spending authority for all requested items except those relating to the statewide database and a source code review. 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 86 California State Auditor Report 2006-406 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’s Action: Corrective action taken. The office stated it is developing a more streamlined process for disbursing funds to the counties that are replacing their voting equipment. The new process authorizes the State Controller’s Office to send reimbursements directly to the counties to save time. California State Auditor Report 2006-406 87 88 California State Auditor Report 2006-406 ThE STATE’S OFFShORE CONTRACTINg Uncertainty Exists About Its Prevalence and Effects Audit Highlights . . . REPORT NUMBER 2004-115, JANUARy 2005 Our review of the extent of the The Joint Legislative Audit Committee (audit committee) State’s offshore contracting directed us to examine the extent to which state‑funded revealed the following: work is being contracted or subcontracted out of the  No current state laws or country. Specifically, the audit committee asked us to review regulations address the use any Department of General Services’ (General Services) policies of offshore contracting, and procedures relevant to offshore contracting (offshoring) and making it difficult to judge directed us to survey selected state agencies to identify those the prevalence and effects of offshore contracting. that have, or are most likely to have, contracted for services offshore during the previous three fiscal years. Further, for a  Our analysis of the limited sample of those agencies identified as having contracts for survey data suggests the services offshore, the audit committee asked us to review and State is spending little on services performed offshore: evaluate the agencies’ policies and procedures for offshoring, including how the agency protects against the disclosure of • Thirty-nine entities sensitive and confidential information. responding to our survey reported 185 contracts totaling $689.9 million where Finding #1: State agencies receive no guidance on offshore at least some portion of contracting. the work was possibly performed offshore. State agencies currently receive no guidance related to offshoring and are not required to track where their contracted services are • For 109 of these being performed or report the extent to which services are being contracts totalling $349 million, performed offshore. As the State’s contracting and procurement respondents estimated oversight agency, General Services oversees state purchasing, that only $9.7 million approves contracts for services, and sets contracting policies (2.8 percent) was for for the State. According to General Services, neither the State services performed offshore but could not Contracting Manual nor any current state law or regulation provide an estimate specifically addresses the use of offshore contracting, the practice for the remaining of subcontracting portions of a contract offshore, or the issue of 76 contracts. determining where contracted services are performed. This lack  The offshore contracts of guidance can result in inconsistency in contract provisions we reviewed generally among state agencies and makes it difficult to judge the effects contain provisions to and prevalence of offshoring. protect sensitive and confidential information from disclosure. We recommended to the Legislature that if it desires information and data on offshore contracting of state services to be more continued on next page . . . readily available, it may consider granting General Services the authority to require contractors to disclose, as part of their bid California State Auditor Report 2006-406 89  Proposed legislation on state work or during performance of the contract, details designed to place on any and all portions of the project that subcontractors or restrictions on and limit employees outside the United States will perform. offshore contracting could face legal challenges or have unintended Legislative Action: Legislation vetoed. consequences. During the 2005–06 session, the Legislature passed Assembly Bill 524 that would have required all successful bidders on state services’ contracts to complete a questionnaire and report on the portions of the contract that would be performed by subcontractors or employees outside of the United States. The governor vetoed the bill on September 29, 2005. Finding #2: The extent of state entities’ offshore contracting remains unclear. Our survey of selected state agencies and campuses (entities) gives a limited understanding of the extent of these entities’ offshore contracts because, as mentioned earlier, state agencies are not currently required to collect or track data on state‑funded services being performed offshore. Because of the difficulty in identifying where subcontracted work is performed, capturing with any certainty the amount of state funds spent on services performed offshore is a challenge. However, from our limited data, the State apparently has been spending little on services performed in foreign countries. Specifically, we surveyed the 35 state agencies with the largest dollar amount of contracts for certain services and the five University of California campuses with medical centers about their use of offshoring. These entities reported 185 contracts totaling $638.9 million in which at least some portion of the work has possibly been performed offshore. Asked to estimate the dollar amount of these offshored services, entities reported that they did not know the amount for 76 of these contracts. For the remaining 109 contracts, totaling $349 million, entities estimated that only $9.7 million (2.8 percent) of the contracted services were performed offshore. Finding #3: Previous efforts to determine the prevalence of offshoring also yielded limited results. Three other organizations that tried to determine the prevalence of services contracted offshore also produced limited results. Specifically, General Services, in response to a February 2004 90 California State Auditor Report 2006-406 legislative directive, provided documentation detailing all the internal contracts it entered into that had work performed out of state or out of the country. General Services found that when contractors’ specified work was performed offshore, the degree of offshore work was not always apparent. According to General Services, such data is extremely difficult to gather because the State currently has no requirement for state agencies to collect and track any offshore information. Additionally, a nonprofit corporate research company claims that most states cannot estimate the total amount or value of state contract offshoring because most state governments do not know where service work they contract out is performed. Finally, the U.S. Government Accountability Office concluded that although there are anecdotal accounts of state governments using offshore contracts, no comprehensive data or studies of the extent to which state governments use these contracts are available. Finding #4: Contract provisions related to subcontracting are not consistent among entities. Our survey results show that state entities are inconsistent about including contract provisions related to subcontracting, delegating, or assigning contract duties. Specifically, we asked survey participants if their general contract provisions prohibit any or all of the contracted services to be subcontracted, assigned, or delegated. Eleven of the 39 entities responding reported that they generally prohibit any or all services from being subcontracted, assigned, or delegated. Another 24 responded that their contract provisions generally do allow for services to be subcontracted, and the remaining four entities did not respond to the question. Of the 24 entities that generally allow for subcontracting, four reported that their contracts generally do not require the contractor to notify the agency when subcontracting services. However, when entities do not require such notification, they are unaware of who is providing the services, making it difficult to effectively manage the contract. Finding #5: Offshore contracts generally contain provisions protecting confidential information. The offshore contracts we reviewed generally contain provisions to protect sensitive and confidential information from disclosure. Current state and federal laws protect an individual’s confidential information, such as medical records, from disclosure. Of the 185 contracts that state entities reported as having at least some portion of the work performed offshore, we identified 11 contracts in which the contractor has access to confidential information. All 11 of these contracts contain, at a minimum, general terms that prohibit the contracted parties from disclosing sensitive and confidential information, and some specifically describe the contractor’s responsibility in protecting this information. Nine of the 11 contracts allow the State to terminate the contract if the entities consider the contractor to be in material breach of the terms and conditions, including those protecting sensitive and confidential information. Finally, nine of the 11 contracts include a provision dictating that the governing law of the contract shall be the laws of the State. California State Auditor Report 2006-406 91 General Services requires state contracts to include standard terms and conditions that subject the contract to the laws of California, including those related to confidential information, and that impose liability on the contractor for all actions arising out of the contracts. However, it is important that all parties to the contract, including all subcontractors, either domestic or offshore, are aware of these standard terms and conditions and comply with them. Finding #6: Legislative attempts to restrict offshore contracting raise serious legal concerns. The federal government and 40 states, including California, have proposed or adopted legislation to restrict offshoring. These include laws that would prohibit all contracts in which work is performed offshore, provides preferences to state or local vendors, require that state contracts detail and report all services performed offshore, and require disclosure if contractors send sensitive or confidential information offshore. Existing research indicates that state efforts to restrict offshoring may violate constitutional provisions allowing the federal government to set uniform policies for the country as a whole in dealing with foreign nations. Also, restricting or limiting offshoring may invite retaliatory trade sanctions against the United States. Before proposing measures to restrict offshoring, policymakers need to consider whether such actions are both legally sound in the United States and capable of withstanding international legal challenges. 92 California State Auditor Report 2006-406 DEpARTmENT OF FINANCE Investigations of Improper Activities by State Employees, July 2004 Through December 2004 INVESTIGATION I2004-1104 (REPORT I2005-1), Investigative Highlight . . . MARCH 2005 The Department of Finance Department of Finance’s response as of November 2005 improperly divulged confidential information. We investigated and substantiated an allegation that the Department of Finance (Finance) improperly disclosed confidential information. Finding: Finance improperly disclosed confidential information. In violation of privacy rights, Finance published the name and Social Security number of a former state employee in a publication that is distributed throughout the State and is available on the World Wide Web. In addition, Finance identified two other state employees and a state vendor whose names and Social Security numbers had also been improperly disclosed. Finance’s Action: Corrective action taken. Finance removed the confidential information from its Web site and from any Web search engines that may have archived information from its Web site prior to being updated. In addition, Finance provided hard copy updates, without the confidential information, to users of the publication and revised its procedures to prevent violations of this nature in the future. Finally, Finance took steps to notify those individuals of the improper disclosure. California State Auditor Report 2006-406 93 phARmACEUTICALS State Departments That Purchase Prescription Drugs Can Further Refine Their Cost Savings Strategies REPORT NUMBER 2004-033, MAy 2005 Audit Highlights . . . California Public Employees’ Retirement System and the Our review of the Department of General Services’ responses from the State State’s procurement and and Consumer Services Agency, and the Department of reimbursement practices as Health Services’ response from the Health and Human they relate to the purchase Services Agency as of November 2005 of drugs for or by state departments revealed the Chapter 938, Statutes of 2004, required the Bureau of following: State Audits (bureau) to report to the Legislature on  Although the Department the State’s procurement and reimbursement practices as of General Services they relate to the purchase of drugs for or by state departments, (General Services) including, but not limited to, the departments of Mental generally got the best prices for the drug Health, Corrections, the Youth Authority (Youth Authority), ingredient cost because Developmental Services, Health Services (Health Services), of up-front discounts, and the California Public Employees’ Retirement System it had the highest state cost after considering (CalPERS). Specifically, the statutes required the bureau to rebates, dispensing fees, review a representative sample of the State’s procurement and co-payments, and third- reimbursement of drugs to determine whether it is receiving party payments. the best value for the drugs it purchases. The statutes also  The Department of required the bureau to compare, to the extent possible, the Health Services’ net State’s cost to those of other appropriate entities such as the drug ingredient cost federal government, Canadian government, and private payers. and state cost are lower than General Services Finally, the bureau was required to determine whether the and the California Public State’s procurement and reimbursement practices result in Employees’ Retirement savings from strategies such as negotiated discounts, rebates, System’s (CalPERS) because and contracts with multistate purchasing organizations, and it receives substantial federal Medicaid program whether the State’s strategies result in the lowest possible costs. and state supplemental The bureau examined the purchasing strategies of the three rebates. primary departments that contract for prescription drugs—the  Although CalPERS Department of General Services (General Services), Health receives rebates through Services, and CalPERS. We found that: entities it contracts with to provide pharmacy services to its members, it Finding #1: In some instances, CalPERS cannot directly verify cannot directly verify it is that it is receiving all of the rebates to which it is entitled. receiving all of the rebates to which it is entitled. Negotiating drug rebates is one tool available to reduce drug continued on next page . . . expenditures. Drug manufacturers typically offer rebates based on the extent to which health care plans influence their California State Auditor Report 2006-406 103 products’ market share. Although CalPERS does not directly  In our comparison of contract with drug manufacturers, it receives rebates from some 57 prescription drug entities it contracts with for pharmaceutical services. In some costs across the three instances CalPERS receives rebates under a pass‑through method. state departments and select U.S. and Canadian In the pass‑through method, the entity negotiates rebates and governmental entities, contracts with pharmaceutical manufacturers so that rebate the Canadian entities payments between the manufacturer and the entity are based got the lowest prices on historical and prospective pharmacy utilization data for all of about 58 percent of the time. However, federal the members of the health care plan that the entity administers. law strictly limits the The entity then collects and passes through to plan sponsors, importation of prescription such as CalPERS, either a percentage or the entire amount of drugs through the Food, the rebates earned by the sponsors based on their member Drug, and Cosmetic Act whose stringent utilization. requirements generally exclude any drugs made Typically, these entities prohibit CalPERS from having access to for foreign markets. any information that would cause them to breach the terms of any contract with the pharmaceutical manufacturers to which they are a party. Because CalPERS does not have access to the entities’ rebate contracts with the manufacturers, CalPERS cannot directly verify that it is receiving all of the rebates to which it is entitled. According to CalPERS, this rebate practice between the entity and the manufacturer is an industry practice and is not unique to it. CalPERS intends to continue to pursue greater disclosure requirements in future contracts with its contracting entities. We recommended that the Legislature consider enacting legislation that would allow CalPERS to obtain relevant documentation to ensure that it is receiving all rebates to which it is entitled to lower the prescription drug cost of the health benefits program established by the Public Employees’ Medical and Hospital Care Act. Additonally, CalPERS should continue to explore various contract negotiation methods that would yield more rebates for the drugs it purchases and that would allow it to achieve greater disclosure requirements to verify that it is receiving all of the rebates to which it is entitled. Legislative Action: Unknown. CalPERS’ Action: Partial corrective action taken. CalPERS reports that the providers for two of its HMO plans will furnish rebate information as part of the financial statements that they regularly provide to it. CalPERS also stated the provider of another of its HMOs considers rebates proprietary and confidential, and the provider does not 104 California State Auditor Report 2006-406 identify rebates in its financial statements. However, a recent pharmacy carve‑out analysis, conducted by a consultant for pharmacy claims from May 2003 through April 2004, confirmed that this HMO’s management of the pharmacy benefit is the most cost‑effective of CalPERS’ health plans. CalPERS stated that it will continue to assess this HMO’s performance and management as part of its recurring rate analysis. CalPERS also reports that it released a pharmacy benefits manager request for proposals for its self‑funded PPO plans in May 2005 that specifically asked bidders to complete a financial questionnaire and furnish data on pass‑through retail pricing, mail service pricing, administrative fees, rebates, and account profit and loss statements. CalPERS believes that this request for proposals represents a significant step forward in achieving greater disclosure and accountability. Finding #2: General Services is in the early stages of its direct negotiations with manufacturers and aims to increase its ability to reduce the net ingredient cost of prescription drugs. Although rebates typically decreased the cost of prescription drugs for Health Services and CalPERS, General Services’ net ingredient costs, drug ingredient cost minus any rebates or additional discounts, for the drugs in our sample are about the same as its costs for the drugs before any discounts or rebates. General Services says this is because it is still in the early stages of its direct negotiations with manufacturers to achieve reduced drug costs. Currently, departments purchasing drugs through General Services can obtain rebates only for one drug product class, a rebate General Services obtained through contract negotiation efforts. For that one drug product class, state agencies received at least $1.5 million in rebates for their purchases in fiscal year 2003–04. To ensure that state departments purchasing drugs through General Services’ contracts are obtaining the lowest possible drug prices, we recommended that General Services seek more opportunities for departments to receive rebates by securing more rebate contracts with manufacturers. General Services’ Action: Partial corrective action taken. General Services reports that to obtain the best and lowest drug price, its primary strategy continues to be to negotiate price discounts upfront with the manufacturer. However, General Services notes that if rebates result in the State obtaining the best and lowest prices, they have been and will continue to be pursued. Finding #3: Although General Services has made progress, it still needs to negotiate more contracts with drug manufacturers. In a January 2002 report, State of California: Its Containment of Drug Costs and Management of Medications for Adult Inmates Continue to Require Significant Improvements, the bureau recommended that General Services increase its efforts to solicit bids from drug manufacturers to obtain more drug prices on contract. At that time, General Services had about 850 drugs on contract, but during most of fiscal year 2003–04 had California State Auditor Report 2006-406 105 only 665 drugs on contract. General Services states that because of limited resources, it is focusing on negotiating contracts with manufacturers of high‑cost drugs. However, opportunities still exist for General Services to increase the amount of purchases made under contract with drug companies. We recommended that General Services continue its efforts to obtain more drug prices on contract by working with its contractor to negotiate new and renegotiate existing contracts with certain manufacturers. General Services’ Action: Partial corrective action taken. General Services reports that its strategic sourcing contractor and its partners are providing support to General Services in its efforts to negotiate and renegotiate contracts with drug manufacturers. Specifically, the contractor is assisting General Services in its negotiations with two manufacturers that could provide atypical antipsychotic category of drugs, which make up approximately 30 percent of annual drug costs. The contractor is also being used, as needed, to assist in the renegotiation of two existing contracts within the same category of drugs that both expire during calendar year 2006. In addition, General Services reports that it has pursued the negotiation of contracts with manufacturers of gastrointestinal and anticonvulsant classes of drugs that are widely used by the State. It recently issued a request for proposals for one of these drug classes, and is currently in the process of evaluating responses. For the other class of drugs, General Services has recently entered into discussions with a high volume manufacturer of that drug, and at the request of the manufacturer, is currently gathering data on the usage of that drug. Upon completion of that activity, General Services states that it will enter into contract negotiations to achieve better pricing, including, if feasible, the provision for obtaining rebates. Finding #4: General Services was not able to demonstrate that it fully analyzed how to improve its procurement process. General Services was unable to provide documentation demonstrating that it addressed another recommendation in our January 2002 report: that it fully analyze measures to improve its procurement process, such as joining the Minnesota Multistate Contracting Alliance for Pharmacy (MMCAP) or contracting directly with a group‑ purchasing organization. General Services does contract with the alliance, but that contract covers only 16 percent of the drug purchases state departments made. With state departments purchasing almost half their prescription drugs at the prime vendor’s price, General Services stands to reap benefits for the State by figuring out additional ways to procure prescription drugs. General Services recognizes that it can do more to ensure that its strategies result in the lowest possible cost to the State. In September 2004, General Services hired a contractor to analyze state spending and identify opportunities to generate savings. General Services 106 California State Auditor Report 2006-406 stated that, as resources become available, it intends to solicit bids to contract directly with a group‑purchasing organization to determine if additional savings can be realized beyond the savings generated by the alliance. We recommended that General Services follow through on its plan to solicit bids to contract directly with a group‑purchasing organization to determine if additional savings can be realized. However, in doing so it should thoroughly analyze its ability to secure broader coverage of the drugs state departments purchase by joining MMCAP. The analysis should include the availability of current noncontract drugs from each organization being considered and the savings that could result from spending less administrative time trying to secure additional contracts directly with drug manufacturers. General Services’ Action: Partial corrective action taken. General Services has determined that an alternative method of accessing a group‑ purchasing organization should be assessed as soon as feasible. It reports that this assessment will include an analysis of the benefits of joining the cooperative purchasing arrangement used by MMCAP. General Services recently started its analytical work to determine if additional savings could be obtained by directly contracting with a group‑purchasing organization. If the analysis determines that additional savings can be realized, General Services will develop and issue a request for proposals for a new method of accessing a group‑purchasing organization. General Services expects that a request for proposals, if warranted, will be issued during calendar year 2006. Finding #5: General Services has not fully considered how to identify and mitigate obstacles to enforcing its statewide formulary. In our January 2002 report, the bureau recommended that General Services fully consider and try to mitigate all obstacles that could prevent the successful development of a statewide formulary, such as departments not strictly enforcing such a formulary at their institutions. A drug formulary is a list of drugs and other information representing the clinical judgment of physicians, pharmacists, and other experts in the diagnosis and treatment of specific conditions. A main purpose of a formulary is to create competition among manufacturers of similar drugs when the clinical uses are roughly equal. However, the success of a statewide formulary and the State’s ability to create enough competition to negotiate lower drug prices for certain products depends on how well state departments adhere to the formulary when they prescribe drugs. Although General Services has developed a statewide formulary, it has not identified the obstacles to enforcing it. General Services has not required departments to adopt a policy requiring strict adherence to the statewide formulary and does not monitor departments’ adherence to the formulary. General Services does not believe its role is to enforce the formulary, but the goals of a statewide formulary in reducing drug costs cannot be realized without such enforcement. California State Auditor Report 2006-406 107 We recommended that General Services facilitate the Common Drug Formulary Committee and Pharmacy Advisory Board’s development of guidelines, policies, and procedures relating to the departments’ adherence to the statewide formulary and ensure that departments formalize their plans for compliance. General Services’ Action: Partial corrective action taken. General Services reports that at the Common Drug Formulary Committees’ August 2005 and October 2005 meetings, preliminary discussions were held on our recommended actions related to the need for written guidelines, plans, policies, and procedures governing the administration and enforcement of the statewide formulary. The committee approved the formulary during the October meeting, which will allow additional resources to be focused on administrative and enforcement issues in the future. According to General Services, the Pharmacy Advisory Board will meet in January 2006 to approve the statewide formulary, and at that meeting, a discussion will be held on the steps to be taken to ensure the adequate and effective administration and enforcement of the formulary. Finding #6: General Services does not have information concerning non-prime vendor drug purchases made by departments required to participate in its bulk purchasing program. Although state law requires specific state departments to purchase drugs through General Services, our survey of various departments indicates they are not always doing so. Specifically, California Government Code requires the departments of Corrections, Developmental Services, Youth Authority, and Mental Health to participate in General Services’ bulk purchasing program. In addition, California Public Contract Code requires that all state departments purchasing drugs totaling more than $100 must purchase them through General Services. California State University, the University of California, and some entities within the California Department of Veterans’ Affairs are exempt from this requirement. Although we found that departments generally purchase most drugs through General Services’ contract with its prime vendor, they also purchase drugs through other vendors. Nine state entities purchased prescription drugs using General Services’ prime vendor, but each of these entities also purchased drugs from non‑prime vendor sources during fiscal year 2003–04. For example, although the Youth Authority purchased drugs from the prime vendor costing roughly $1.8 million, it also purchased drugs costing almost $451,000 through other vendors. Seven of the nine entities we surveyed purchased 20 percent to 100 percent of their drugs through non‑prime vendor sources. General Services stated that it did not have insight into the amounts and kinds of drugs that entities were purchasing through other sources and therefore has not analyzed these purchases. 108 California State Auditor Report 2006-406 In order to make more informed decisions concerning the operation of its prescription drugs bulk‑purchasing program and to be able to expand the program to include those prescription drugs that best serve the needs of state departments, we recommended that General Services ask those departments that are otherwise required to participate in the bulk purchasing program to notify General Services of the volume, type, and price of prescription drugs they purchase outside of the bulk purchasing program. General Services’ Action: Corrective action taken. General Services reports that it now requires those departments that must participate in the bulk‑purchasing program to provide detailed information on drugs purchased outside of the program. This information will aid General Services’ pharmaceutical and acquisitions staff in making decisions about the bulk‑purchasing program. Finding #7: Health Services needs to improve the accuracy of its pharmacy reimbursement claim data. Our review found that Health Services sometimes uses incorrect information when paying pharmacies. In several instances Health Services’ payments to pharmacies were based on outdated or incorrect information. Health Services receives updates from a pricing clearinghouse and changes its prices monthly. One factor that Health Services uses to determine the appropriate drug price for a claim is the date of service. Specifically, Health Services uses this date to query its pricing file and identify the price in effect during the date of service on the claim. However, Health Services holds the price updates it receives from its primary reference source until the subsequent month because its budgetary authority only allows for monthly updates. Additionally, Health Services did not update its prices to reflect the elimination of the direct pricing method, which was the price listed by Health Services’ primary or secondary reference source or the principal labeler’s catalog for 11 specified pharmaceutical companies. Despite state law eliminating this method as of December 1, 2002, Health Services continued to use it during fiscal year 2003–04 to reimburse pharmacies. Health Services stated that the system change error related to the direct pricing method occurred prior to the July 2003 implementation of its fiscal intermediary’s Integrated Testing Unit, which is responsible for performing comprehensive tests of system changes to prevent program errors. Health Services also incorrectly calculated drug prices. Although Health Services began corrective action after we brought the issues to its attention, its analyses to quantify the full extent and dollar impact of these errors was not complete as of April 2005. To ensure that it reimburses pharmacies the appropriate amounts for prescription drug claims, we recommended that Health Services analyze the cost‑effectiveness of increasing the frequency of its pricing updates. If this analysis shows that it would be cost‑effective to conduct more frequent updates, Health Services should seek budgetary authority to do so. Health Services should also identify prescription drug claims paid using the direct pricing method, determine the appropriate price for these claims, and make the necessary corrections. In addition, we recommended that Health Services ensure that the fiscal California State Auditor Report 2006-406 109 intermediary’s Integrated Testing Unit removes future outdated pricing methods promptly. Finally, Health Services should ensure that its fiscal intermediary’s Integrated Testing Unit verifies that, in the future, drug prices in the pricing file are calculated correctly before authorizing their use for processing claims. Health Services’ Action: Corrective action taken. Health Services reports that a budget health trailer bill amended the Welfare and Institutions Code to increase the frequency of drug price updates to weekly instead of monthly. Health Services has implemented this change through manual updates until system changes are made to enable an automated process. Health Services expects to implement these system changes in January 2006. In addition, Health Services determined that using the direct pricing method, which was eliminated by state law effective December 1, 2002, caused it to overpay 457,368 claims for a total of $2.9 million, and to underpay 199,380 claims by more than $450,000. Therefore, Health Services reports that its total net recoupment will be approximately $2.5 million for the period of December 1, 2002, through June 30, 2005. Finally, Health Services has implemented safeguards within the fiscal intermediary’s Integrated Testing Unit to assure that these types of errors in the formulary file will not occur on future system changes. 110 California State Auditor Report 2006-406 DEpARTmENT OF gENERAL SERvICES Opportunities Exist Within the Office of Fleet Administration to Reduce Costs REPORT NUMBER 2004-113, JULy 2005 Audit Highlights . . . Department of General Services’ response as of December 2005 Our review of the Office of The Joint Legislative Audit Committee (audit committee) Fleet Administration (Fleet) requested that the Bureau of State Audits (bureau) within the Department of General Services found that: conduct an audit of state‑owned vehicles with a focus on the cost‑effectiveness of the garages that the Office  Fleet’s analyses, indicating of Fleet Administration (Fleet) within the Department of that its vehicle rental rates are competitive with General Services (General Services) operates. Specifically, the those of commercial rental audit committee asked the bureau to determine whether companies, do not fully General Services has a process in place to measure the cost‑ demonstrate its cost- effectiveness of its garages and fleet of rental vehicles and, effectiveness because Fleet lacks assurance that the to the extent possible, determine whether it is cost‑effective commercial rates it used for the State to own, maintain, and rent its vehicles and own are similar to what state and operate its garages. Additionally, the audit committee agencies typically pay. asked the bureau to evaluate the potential for cost savings  The terms of the current resulting from no longer having Fleet own and maintain contracts that Fleet has vehicles and the potential savings from the consolidation with commercial rental and/or disposition of state‑operated garages. Finally, the audit companies and the noncompetitive method it committee asked the bureau to review and evaluate General uses to select companies Services’ policies and procedures for ensuring the accountability may not be in the State’s of state vehicle purchases, including the controls in place to best interest. monitor vehicle purchases and determine whether other state  Fleet currently lacks a agencies purchase motor vehicles in accordance with applicable minimum-use requirement requirements and in the best interest of the State. for vehicles that state agencies rent on a long- term basis as well as We found the following: standards related to the idleness of its short-term rental vehicles, both of Finding #1: Fleet’s analyses of its cost-effectiveness indicate which could identify that it is competitive, but its analyses are limited. opportunities to reduce the number of vehicles in To measure its cost‑effectiveness, Fleet periodically compares its motor pool. its rates to those of commercial rental companies. The commercial rental rates used in the analyses were generally continued on next page . . . either rates, obtained through the Internet or by telephone or e‑mail, that the companies offered to the general public at individual locations in the State or the maximum rates that the companies have agreed to in their contracts with Fleet. When California State Auditor Report 2006-406 111 Fleet compared the two amounts for each vehicle type, the  Fleet is responsible for comparisons indicated that its rates are competitive with those overseeing the vehicle that commercial rental companies offer and that state agencies purchases made by state save money by using Fleet’s services when they are available. agencies, but its policy defining minimum usage, which Fleet is supposed to However, Fleet lacks assurance that the rates state agencies consider when assessing typically pay are similar to the companies’ public rates because a state agency’s need to state agencies are generally required to rent vehicles using the purchase vehicles, may be set too low. contracts that Fleet has with commercial rental companies; therefore, state agencies would pay the rates offered under  Fleet’s actions contributed the terms of Fleet’s contracts. Further, the maximum contract to a $1.4 million deficit at June 30, 2004, in the fund rates used in earlier analyses do not provide for a meaningful that Fleet uses to operate comparison because, as Fleet acknowledges, commercial rental and maintain parking lots companies do not typically charge such high rates. for state employees. A more comprehensive way to measure Fleet’s cost‑effectiveness would be to compare Fleet’s costs to operate the motor pool to how much the State would spend using commercial rental companies, considering the rates that the companies typically charge the State. Fleet’s contracts with commercial rental companies require them to submit quarterly data to Fleet that could help it determine how much the companies charge state agencies for their services. However, the reports that Fleet receives do not currently identify the average monthly, weekly, or daily rental rates the companies charge by vehicle type. If Fleet required its contractors to report information that would help it determine how much state agencies typically pay, those amounts would be a better basis of comparison. We recommended that in addition to rate comparisons, Fleet should compare the actual cost of operating its motor pool to the amount that the State would pay commercial rental companies. In doing so, Fleet should use the actual motor pool rental activity, such as the number of days or months that it rents vehicles by each vehicle type, and apply it to rates that commercial rental companies actually charge state agencies. To understand how much state agencies typically pay when using the services of contracted commercial rental companies, Fleet should require, through its contracts, that the companies report information on vehicle rentals that would enable Fleet to determine the average daily or monthly rate actually charged for each vehicle type. 112 California State Auditor Report 2006-406 General Services’ Action: Partial corrective action taken. General Services reports that upon the development of the necessary financial and vehicle usage data, Fleet will use that information to compare the actual cost of operating its motor pool to the amounts that commercial car rental companies charge state agencies. General Services reported that Fleet entered into a contract for consulting assistance to provide additional information technology programming support, with the primary goal of extracting more data from the existing system and that it has created various reports that provide additional timely and relevant cost information to help to manage Fleet operations. Additionally, according to General Services, it plans to enter into new commercial car rental contracts to begin on January 1, 2006, which will include provisions for the receipt of information on actual charges incurred for the daily and weekly leasing of vehicles. General Services states that it will use this information in future cost‑effectiveness studies. Finding #2: Existing contracts raise questions as to whether they are in the best interest of the State. We question whether the contract terms and the noncompetitive method that Fleet uses to select commercial rental companies result in contract rates that are as beneficial to the State as they could be. According to Fleet’s chief, the intent of the contracts is to ensure that state employees renting vehicles from commercial rental companies are protected against companies charging them whatever they want. However, the amounts that commercial rental companies actually charge can be significantly lower than the maximum rates specified in the contracts. An individual representing two of the seven companies with which Fleet contracts stated that Fleet requires the maximum rates in the contracts to encompass all fees such as airport or county fees and that this must be carefully considered as these fees are out of his companies’ control. Further, he said that the contract rates have a large cushion built in to protect against vehicle price increases that could occur over the potentially long contract term. Although its contracts are for one year, Fleet can twice exercise the option to extend a contract for one year. Fleet also requires commercial rental companies to insure the vehicles while state employees drive them, which raises rates. Fleet does not know if this requirement is in the State’s best interest because it has not conducted an analysis and could not tell us the cost that insurance adds to commercial rental rates in Fleet’s contracts. For example, it has not compared the cost of insuring cars through the commercial rental companies to the costs of other methods, such as self‑insuring. If the State is able to self‑insure commercially rented vehicles or purchase insurance for less than what it pays through its existing contracts, the rates that commercial rental companies offer the State could decrease significantly. California State Auditor Report 2006-406 113 While still renting under Fleet’s contract with one rental company, at least one state agency has an agreement with the company to guarantee lower rates than those specified under the company’s contract with Fleet. Such agreements indicate that a more competitive process of selecting contractors may result in lower rates to the State. Because Fleet does not offer the State’s business exclusively to one or two companies, contractors may not have an incentive to offer a lower rate during the contract proposal process. Fleet acknowledges that a more competitive method of selection that would not limit availability of services could result in lower rates. In May 2005, the chief told us that Fleet was exploring a new option for state travelers that would employ competitively bid rental contracts with awards made to a primary and secondary commercial rental company. She also said that Fleet planned to contract for the base cost of vehicles (the cost before additional fees such as airport fees) to recognize the fees that vary by location. We recommended that before seeking additional commercial rental contracts, Fleet should do the following: • Determine if it can obtain lower guaranteed contract rates for the State by evaluating the extent to which using contracts that contain extension options contributes to maximum contract rates that are significantly higher than rates that the commercial rental companies could charge. • Determine if paying for insurance when renting vehicles from commercial rental companies rather than other methods, such as self‑insurance, is in the best interest of the State. • Continue its efforts to obtain lower rates from commercial rental companies by pursuing options for a more competitive contracting process. General Services’ Action: Partial corrective action taken. According to General Services, Fleet is pursuing a competitively bid process that allows for awards to be made to one primary and one secondary car rental company, instead of the current system whereby seven different companies provide services to the State’s employees. General Services reports that in October 2005, Fleet issued a Request for Proposal (RFP) to begin the process and expected to award contracts by mid‑December with a start date of January 1, 2006. Additionally, according to General Services, unlike the contracts in place during the audit, the RFP for the new commercial car rental contracts does not allow the contracted rental car company to charge customers any amount up to a maximum rate identified in their contract. Instead, the bidders must propose a set guaranteed base rate for each of several insurance scenarios. Moreover, General Services told us that the Office of Risk and Insurance Management will help Fleet determine the bidder proposal that represents the best value to the State. 114 California State Auditor Report 2006-406 Finding #3: Fleet has not established certain requirements and standards related to vehicle use. Although Fleet has established a minimum‑use policy to ensure that state agencies efficiently operate the vehicles they own, it has no such requirement for vehicles that state agencies rent from the motor pool on a long‑term basis. Without such a utilization policy, Fleet cannot ensure that its motor pool is used optimally. By not requiring state agencies to meet a minimum‑use requirement for long‑term rentals, Fleet may in effect be allowing state agencies that cannot justify vehicle purchases based on usage to obtain vehicles by renting them from Fleet on a long‑term basis. Since the function of a minimum‑use requirement is to minimize costs, the absence of such a policy can result in higher costs to the State. In addition to not establishing a minimum‑use requirement for its long‑term rentals, Fleet has not developed performance measures to determine if the vehicles that it rents on a short‑term basis are idle an excessive number of days. Best practices indicate that fleet managers should set policies and develop performance measures to ensure that their fleets consist of the appropriate number of vehicles in the appropriate composition. In May 2005, Fleet’s chief told us that Fleet is putting in place a method for collecting and analyzing data for a minimum‑use requirement that will be identical to the requirement for agency‑owned vehicles. Fleet expected to make its policy effective in July 2005. The chief also told us that it was developing performance standards to better assess utilization and idle time. Once Fleet establishes these standards, it can monitor its performance and identify opportunities to reduce the number of vehicles it owns. To ensure that the vehicles in Fleet’s motor pool are being used productively, we recommended that Fleet should continue its efforts to establish a minimum‑use requirement for the vehicles it rents to state agencies on a long‑term basis and should ensure that state agencies follow the requirement or justify vehicle retention when they do not meet the requirement. Additionally, for its short‑term pool, Fleet should continue to develop performance standards to better assess vehicle utilization and idle time. General Services’ Action: Partial corrective action taken. General Services reports that it now applies a minimum vehicle use of 4,000 miles or of 70 percent of workdays within a six‑month period as minimum‑use requirements to vehicles it leases to state agencies on a long‑term basis. However, in the near future it expects to revise the criteria to a minimum of 6,000 miles or 80 percent of workdays within a six‑month period. Related to the productivity of its short‑term vehicle pool, according to General Services, Fleet is continuing to develop performance standards to better assess utilization and idle time. As part of these efforts, it is contacting other governmental fleet entities to obtain relevant information. As of December 2005, General Services planned that the performance standards will be developed and operational by January 31, 2006. California State Auditor Report 2006-406 115 Finding #4: Fleet does not analyze its costs by vehicle type. Fleet does not analyze its costs by vehicle type and therefore cannot readily identify vehicles that are not cost‑effective to own. It is important for Fleet to understand its costs to manage the motor pool and ensure that the motor pool’s composition of vehicles is not costing the State more than is necessary. Potentially, Fleet could reduce its costs by limiting the types of vehicles that it has available. If Fleet finds that the cost of owning a specific vehicle type significantly exceeds the rate it charges, it could make decisions to align the rate with its costs. Further, if Fleet determines that owning a specific vehicle type costs more than state agencies will spend by using alternatives to the motor pool, Fleet could make decisions to eliminate or limit those types of vehicles. We recognize that the decisions Fleet makes regarding the composition of its motor pool may consider other factors, such as the needs of state agencies for particular types of vehicles. However, if Fleet analyzed its costs by vehicle type, it could better ensure that it is meeting the needs of the state agencies it serves in the most cost‑effective manner. According to its chief, as of May 2005, Fleet was working to develop a feasibility study report for a fleet management system. She expected this system to provide reports that will include information to help Fleet calculate costs by vehicle type, such as fuel use by vehicle type and repair and maintenance costs by vehicle type. The chief also told us that Fleet was in the process of incorporating additional performance measures related to costs by vehicle type to identify other opportunities for cost savings. We recommended that to ensure that the composition of its motor pool is cost‑ effective, Fleet should continue its efforts to obtain costs by vehicle type. It should consider this information in its rate‑setting process as well as in its comparisons to the costs of alternatives to the motor pool. General Services’ Action: Partial corrective action taken. According to General Services, Fleet is continuing to take significant actions to obtain the necessary information to determine the actual cost of its motor pool operations and the actual usage of its motor pool. Specifically, Fleet developed a new system that provides for employee time charges to be captured in a manner that provides more useful information on tasks performed in both inspection and garage operations. In addition, General Services indicates that Fleet is continuing to actively work with General Services’ information technology staff to assist it in obtaining additional management information, including repair and maintenance records by category, vehicle type, and garage location, from Fleet’s existing automated internal fleet management information system. General Services reports that the new financial and usage management information will be available by June 30, 2006, and that it will consider this information in the development of vehicle rates and in comparisons to the costs of alternatives to the motor pool. 116 California State Auditor Report 2006-406 Finding #5: Fleet does not periodically assess the cost-effectiveness of individual garages. Although Fleet operates several garages throughout the State, it does not periodically analyze the revenues and expenses incurred at each garage. Consequently, Fleet does not know if any of its garages are operating at a loss. In fact, Fleet’s accounting system does not track most revenues and expenses for its vehicles by their respective garages. Although Fleet tracks certain revenues and expenses, such as tire sales and certain personnel costs by garage location, it does not track the revenue from vehicle rental fees and certain expenses, such as most of Fleet’s depreciation, fuel, and insurance expenses, for the individual garages. Instead, Fleet tracks them in the aggregate for all garages. With its current accounting system, Fleet can determine if its garages as a whole are operating at a break‑even point, but it lacks the necessary information to determine the cost of operating each garage. Consequently, Fleet could unknowingly be operating a garage that costs more than the garage generates in revenue. Additionally, Fleet cannot use its accounting system to determine if the State would pay less if it closed one or more garages and obtained the garages’ services from alternative sources. As of April 2005, Fleet was reviewing ways to modify the accounting system so that it tracks the revenues earned at each garage and provides Fleet the financial information necessary to analyze each garage. To ensure that it does not operate garages in areas where alternative methods of transportation, such as vehicles from commercial rental companies, would be less expensive to the State, we recommended that Fleet examine individual garages to determine whether it is cost‑effective to continue operating them. Fleet should consider all relevant factors, such as the frequency with which it rents vehicles on a short‑term basis, the ability for other garages to take long‑term rentals, and the cost‑effectiveness of its repair and maintenance services. General Services’ Action: Partial corrective action taken. General Services states that this is a long‑term effort that involves the creation of new budget, fiscal, and information technology management systems and that until further management information is developed to fully judge the operations of the individual garages, Fleet continues to use existing data on utilization and costs to judge the efficiency and effectiveness of its garages. Nonetheless, General Services reports that Fleet has taken significant actions to improve its ability to adequately monitor the efficiency and effectiveness of garage operations. Specifically, Fleet reorganized its garage operations and hired a new manager over those operations who has a strong background in managing fleet programs, including the gathering of data that will allow the cost‑effectiveness of the individual garages to be more accurately evaluated. California State Auditor Report 2006-406 117 Finding #6: Fleet does not measure the cost-effectiveness of its repair and maintenance services. Fleet provides maintenance and repair services to its motor pool and agency‑owned vehicles at its garages. However, Fleet does not adequately track its labor costs and therefore does not know how much it actually costs to perform each of the services it provides. As a result, Fleet cannot fully assess its competitiveness. Fleet needs to know the cost of the specific services it provides to make decisions about which services to outsource or perform in‑house and which garages to close, consolidate, or expand. Although labor represents a significant cost for Fleet’s garages, Fleet does not determine how much time it spends performing various maintenance and repair services, such as changing oil or servicing transmissions. Fleet employs technicians who perform these services, but it does not require them to allocate their time to specific tasks. If Fleet tracked labor hours by task through its timekeeping system, it could use that data and the information it maintains in its fleet database to determine the labor required to perform each service. Without knowing the labor costs of its services, Fleet cannot determine if the State is spending less to perform repair and maintenance services than it would spend at commercial repair shops. In May 2005, Fleet’s chief told us that measuring its cost‑effectiveness is a Fleet priority and that by September 2005 Fleet anticipated implementing a timekeeping system that would allow it to track the amount of time staff spend performing tasks. With that information, Fleet will be able to analyze which tasks it can perform more cost‑ effectively than commercial repair shops can and if the current ratio of in‑house repairs to repairs performed by commercial repair shops is optimal. We recommended that Fleet should continue with its plan to track the time of its garage employees by task to determine the cost of its repair and maintenance services and that Fleet should compare its costs to the amount that commercial repair shops would charge for the services. General Services’ Action: Partial corrective action taken. General Services told us that a new system for tracking tasks was installed for use within Fleet in October 2005. According to General Services, it expects that its garage staff and Fleet’s asset management staff will be trained in the near future and will be actively using the new system by January 2006. Finding #7: Opportunities exist to improve Fleet’s purchase approval process. To ensure that state agencies do not make unnecessary vehicle purchases, state law requires Fleet to verify that the state agencies need the vehicles before it approves purchase requests. Fleet has made changes to strengthen its purchase process that have improved the amount of information that state agencies submit to justify their vehicle purchase requests; however, more changes are needed. 118 California State Auditor Report 2006-406 Until February 2003, Fleet’s policy was to require an agency submitting a purchase request for one or more vehicles to explain the agency’s need for the vehicles, but in practice it required no standard form or type of information for new purchases. In February 2003, Fleet introduced a standard form for vehicle purchase requests, specifically requiring state agencies to explain their needs. After improving the form in October 2003, Fleet now requires state agencies to explain how and where the vehicle will be used; why a special vehicle, rather than a standard sedan, is required; and whether the need for the vehicle is urgent. When state agencies provide this additional information, Fleet is able to complete a more thorough, meaningful assessment of need. Although the new form has resulted in Fleet’s receiving more detailed explanations of why state agencies need to purchase vehicles, Fleet still does not require state agencies to report why any underutilized vehicles they might have cannot fulfill their needs. Consequently, if it is to make a thorough assessment of need, Fleet must follow up with the state agencies. By requiring state agencies to explain in writing why their underutilized vehicles are not adequate to meet their needs, Fleet not only would reduce the amount of follow‑up it must perform but also could better ensure that state agencies consider increasing utilization of the vehicles they currently own before they request to purchase additional vehicles. To improve its review of vehicle purchase requests and the related documentation that it receives, Fleet should continue using its new request form with an amendment requiring state agencies to explain, on the request form, why any underutilized vehicles they might have could not fulfill their requests. General Services’ Action: Partial corrective action taken. General Services indicates that it will issue a Management Memorandum that requires state agencies requesting vehicle purchases to provide more detailed information on their underutilized vehicles as part of Fleet’s acquisition request review and approval process. According to General Services, this information will include explanations on why any underutilized vehicles that may exist cannot fulfill the agency’s needs and a certification from the agency’s fiscal officer that the requested acquisition is the most cost‑effective solution to meet the agency’s transportation needs. Finding #8: Fleet’s minimum-use requirement for state agencies may be too low. To ensure that state agencies do not purchase more vehicles than they need, Fleet set a policy that an agency‑owned vehicle must be driven at least 4,000 miles or 70 percent of the workdays every six months. A policy requiring that state‑owned vehicles be driven a minimum number of miles or days is critical to ensuring that the State’s vehicles are an economical method of transportation. Once a state agency owns a vehicle, the head of that agency is responsible for ensuring that it meets the minimum‑use requirement. Nevertheless, if a state agency has underutilized vehicles, as defined by Fleet’s policy, Fleet may not allow the agency to purchase additional vehicles. California State Auditor Report 2006-406 119 The State’s minimum‑use requirement provides a level of assurance that state agencies maximize the economic potential of their vehicles. However, Fleet’s policy on minimum miles is less demanding than the policies of some other governments. The National Association of Fleet Administrators, a professional society for the automotive fleet management profession, performed a survey of fleet operators in 2003 asking participants how many miles they required their vehicles to be driven in a year. On average, government respondents required vehicles to be driven 10,000 miles each year, 25 percent more than Fleet’s policy; and on average, commercial respondents required vehicles to be driven 15,000 miles, nearly 88 percent more than Fleet’s policy of 4,000 miles every six months, which equates to 8,000 miles each year. Further, Fleet could not tell us how it developed its minimum‑use requirement. Its policy is the same as it was 20 years ago. Consequently, Fleet cannot demonstrate that the requirement was set appropriately or that it is still applicable. Fleet’s chief told us in May 2005 that Fleet was reviewing public‑sector guidelines for fleet utilization in other states nationwide and would revise the policy in the near future. Fleet should continue with its plan to revisit its minimum‑use requirement for agency‑ owned vehicles to determine if the minimum number of miles or days that state agencies must drive their vehicles should be higher. When doing so, Fleet should consider factors such as the cost of alternative modes of transportation and warranty periods. Finally, Fleet should document the reasons for any decisions it makes. General Services’ Action: Partial corrective action taken. General Services reports that Fleet has completed its review of minimum‑use requirements and in the near future, General Services will issue a Management Memorandum advising state agencies of new criteria governing the minimum use of all vehicles. The minimum‑use requirements will be increased to a minimum of 6,000 miles or vehicle use of 80 percent of workdays within a six‑month period. According to General Services, it developed the new criteria after reviewing the minimum‑use requirements used by the federal General Services Administration and nine other states. Finding #9: Fleet inadequately managed parking lot funds. Fleet manages approximately 30 parking lots owned or leased by General Services as of May 2005 and is responsible for administering state parking policies. Through this parking program, state employees can obtain parking spaces in lots near state offices for their cars or bicycles. Fleet deposits the fees that it charges state employees for the parking spaces into its Motor Vehicle Parking Facilities Money Account (parking fund), which it draws on to operate and maintain the lots. In recent years, Fleet’s inadequate management of its parking program has caused the parking fund to lose money. The parking fund experienced losses in at least two recent fiscal years (2002–03 and 2003–04), and at the end of fiscal year 2003–04 had a deficit of $1.4 million. Although various factors contributed to the fund deficit, we focused on two that were within Fleet’s control. 120 California State Auditor Report 2006-406 Contributing to the parking fund’s losses is an agreement that Fleet has to purchase transit passes from a vendor to shuttle people free of charge from parking lots on the perimeter of downtown Sacramento (peripheral lots) to locations nearer their work sites. This agreement costs more than the peripheral lots are capable of generating in revenue, given the current rate structure, and it makes up a significant percentage of the parking fund’s total expenses. Fleet’s chief told us that in the near future, Fleet intends to stop paying the entire cost of shuttling passengers to and from peripheral lots. Another factor contributing to the parking fund’s losses is Fleet’s failure to collect fees from more than 400 parkers. According to Fleet’s parking and commute manager, Fleet staff discovered, while investigating the parking fund’s losses, that many individuals either never had or at some point stopped having parking fees deducted from their paychecks. In addition to individuals, some state agencies also had not paid fees for parking vehicles they owned in Fleet’s lots. After completing a reconciliation that it started in November 2004, Fleet identified roughly 400 parkers who were actively using their parking passes without paying. According to Fleet’s parking and commute manager, the fees for those spaces amount to $24,500 per month in revenue. However, Fleet was uncertain as to how long the oversight had occurred or how many more parkers who no longer have parking passes were involved. The chief of Fleet explained that these errors went unnoticed because Fleet maintains data on parkers in three databases and did not begin reconciling the information with the amount of fees it collected until November 2004. Fleet has developed a process to reconcile its parking database information with its revenue on a monthly basis. Such reconciliation should help detect these problems should they recur in the future. To ensure that it does not subsidize employee parking, Fleet should continue with its plan to stop paying the full cost of shuttling parkers to and from peripheral lots. Additionally, Fleet should, to the extent possible, seek reimbursement from parkers who have not paid for their parking spaces. To reduce the deficit in the parking fund, Fleet should continue with its efforts to reduce expenses and maximize revenues from parking facilities by promptly identifying parking spaces that become available and renting them again. General Services’ Action: Partial corrective action taken. According to General Services, since September 1, 2005, the parking fund administered by Fleet has not been used to purchase transit passes to shuttle parkers to and from peripheral parking lots. General Services also indicates that based upon Fleet’s comprehensive evaluation of information on potential nonpaying parkers that it developed in November 2004, it identified 49 parkers as appearing to owe unpaid parking fees and began contacting each parker to seek repayment of any unpaid fees. Further, General Services states that Fleet has implemented additional procedures to ensure that parking funds are maximized. As part of this process, Fleet is continuing to fill parking spaces the same week as they become vacant except in the peripheral lots. California State Auditor Report 2006-406 121 122 California State Auditor Report 2006-406 STATE AThLETIC COmmISSION The Current Boxers’ Pension Plan Benefits Only a Few and Is Poorly Administered REPORT NUMBER 2004-134, JULy 2005 Audit Highlights . . . State Athletic Commission’s response as of September 2005 Our review of the State Athletic Commission (commission) The Joint Legislative Audit Committee (audit committee) and the boxers’ pension plan requested that the Bureau of State Audits review the revealed that: State Athletic commission’s (commission) pension plan  Under the current plan operations. Specifically, the audit committee was interested in only four boxers per year the condition of the current plan, the best course of action are vesting. to ensure its long‑term viability, how much is being spent on  The current plan will administrative expenses, and whether the statutory requirements likely give an average for pension contributions and benefit distributions are being 55-year-old vested boxer met. In doing so, we noted the following findings: a pension benefit of $170 per month, while the original plan would have paid $98 per month. Finding #1: Although potentially more generous than the original plan, the current pension plan benefits even  During the four-year period fewer boxers. from 2001 through 2004, payments for pension plan Combining both the defined benefit plan (original plan) and administration costs were the defined contribution plan (current plan), only 14 percent six times greater than the amount of benefits paid of licensed boxers have vested as of December 31, 2003, and to boxers. account balances for most vested boxers are small. Under the  Since the inception current plan, which began in May 1996, only four boxers per of the current plan, year are vesting compared to 37 boxers per year vesting under the commission met the original plan. If the current vesting trend continues, the the minimum funding remaining number of vested boxers will plateau at below 80 in requirement in only one 2036. Although vested boxers currently approaching retirement out of nine years. age are likely to receive more benefits than the original plan  Poor administration of guaranteed, pension amounts will still be minimal. The current the pension plan resulted plan will likely give an average 55‑year‑old vested boxer a in untimely recording of pension contributions, pension benefit of $170 per month, while the original plan inaccurate reporting would have paid $98 per month. From 2001 to 2004, benefit of boxers’ eligibility payments to boxers totaled $36,000 while the payments to status, and incorrect administer the plan were six times higher. account balances. We recommended that the Legislature may want to reconsider the need for a pension plan for retired professional boxers since so few boxers annually meet the current criteria of a professional California State Auditor Report 2006-406 123 boxer. If the Legislature decides to continue the boxers’ pension plan, we recommended that the commission could consider eliminating the break in service requirement and/ or reducing from four to three the number of calendar years that a boxer must fight, if it believes the current vesting criteria is excluding professional boxers for which the pension plan was intended. Further, the commission should mail an annual pension statement to all vested boxers to increase the likelihood that vested boxers are locatable for benefit distribution after they turn age 55. Commission’s Action: Partial corrective action taken. In order to ensure that the pension plan provides benefits to the professional boxers that were intended, by December 2005, the executive officer expected to complete his review of alternative vesting criteria that would give consideration to a boxer’s age (i.e., actual age, number of years boxing, total actual number of rounds fought, number of times knocked out, number of times suspended, etc.). To increase the likelihood that vested boxers are locatable after they turn age 55, the commission plans to send each boxer an annual statement regardless of activity status. For any annual statements that are returned as undeliverable, it will re‑send the statement to any secondary address that may be available. Finding #2: The commission has many problems with its day-to-day administration of the boxers’ pension plan. The boxers’ account balances of $3.39 million could have been higher had the commission fully exercised its legal authority to maximize contributions to the current plan. Although the commission increased the ticket assessment to 88 cents per ticket in July 1999, it only met the target in one of nine years and has undercollected by a total of $300,000. Additionally, the commission performs its administrative duties related to the boxers’ pension fund slowly and inaccurately. We found problems with untimely depositing of incoming checks to the Department of Consumer Affairs’ (Consumer Affairs) bank account, remittances of pension contributions to the boxers’ pension fund, and production of accurate eligible round and purse information; missing boxing contest documents needed to support contribution allocations to boxers; and various errors in determining boxers’ eligibility and allocation of amounts to boxers’ accounts. As a result, the recording of pension contributions were delayed, boxers’ eligibility status were inaccurate and their respective account balances were incorrect. Moreover, the commission needs to periodically review boxers’ eligibility status and account balances to ensure that the pension plan administrator correctly determines boxers’ eligibility and account balances. To maximize pension fund assets, we recommended that the commission should raise the ticket assessment to meet targeted pension contributions as required by law and promptly remit pension contributions from Consumer Affairs’ bank account to the boxers’ pension fund. To ensure receipts are deposited in a timely manner, we recommended the commission should implement the corrective action proposed by the acting executive officer to Consumer Affairs related to ensuring timely deposit 124 California State Auditor Report 2006-406 of checks. Additionally, the commission should require promoters to remit pension fund contributions on checks separate from other boxing show fees so that deposits of checks and subsequent remittances to the boxers’ pension fund are not delayed. To ensure boxers’ information concerning eligibility status and pension account balances are accurate, the commission should retain all official documents from each boxing contest. Further, the commission should immediately work with the pension plan administrator to correct errors related to boxers’ eligibility status and account balances. Lastly, the commission should periodically review a sample of newly vested and pending boxers, and verify their eligibility status and pension account balances. Commission’s Action: Partial corrective action taken. The commission is considering various alternatives to meet the funding target, including negotiating with tribal governments to collect contributions from fights on tribal lands, redirecting some broadcast revenues to the pension fund, and raising the per ticket assessment to $1.25. The commission has taken steps to ensure that previously collected pension contributions have been deposited in the pension fund and that future collections are deposited in the pension fund in a timely manner. One of these steps is directing promoters to remit checks for pension contributions separate from checks related to show fees. In order to ensure eligibility information is being retained, the commission is creating a checklist of all documents that are required to be retained in its files. The commission is in the process of completing its research related to correcting errors in boxers’ eligibility status and account balances and anticipated it would finish this review by October 2005. California State Auditor Report 2006-406 125 126 California State Auditor Report 2006-406 CALIFORNIA mILITARy DEpARTmENT Investigations of Improper Activities by State Employees, January 2005 Through June 2005 INVESTIGATION I2004-0710 (REPORT I2005-2), SEPTEMBER 2005 California Military Department’s response as of November 2005 We investigated and substantiated an allegation that a Investigative Highlight . . . supervisor with the California Military Department (Military Department) embezzled public funds. A supervisor with the California Military Department embezzled at least $132,523 in state funds Finding: The supervisor fraudulently appropriated state funds over an eight-year period. under his control and failed to stop payments to a retired service member who had died and then stole the deceased individual’s retirement checks. Over an eight‑year period, the supervisor embezzled at least $132,523 as follows: $111,507 from the Military Department’s system for processing emergency state active duty payroll; $12,393 from the department’s revolving fund; and $8,623 from the retired state active duty system used to process retirement payments (retirement payments). The supervisor fraudulently initiated at least 60 checks in the names of his family members totaling a gross amount of $123,900. At least 43 of these payments, totaling $87,483, were deposited into his bank accounts. In addition, the supervisor stole at least four retirement payments totaling $8,623 that were payable to a former service member who had died. Military Department’s Action: Corrective action taken. The Military Department asked the California Highway Patrol (Highway Patrol) to investigate the criminal aspects of this case. The Highway Patrol interviewed the supervisor who admitted to the embezzlement and thefts. After completing its investigation, the Highway Patrol referred the case to the Sacramento County District Attorney for prosecution. The Military Department also enacted internal control practices requiring additional levels of approval for the payroll and payment systems the supervisor manipulated in order to embezzle state funds. California State Auditor Report 2006-406 127 128 California State Auditor Report 2006-406 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 May 2005 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  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  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  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  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 2006-406 129  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  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  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. 130 California State Auditor Report 2006-406 To obtain the broadest range of consultants to choose from, FCMAT should expand its list of consultants who receive request for application packets. FCMAT’s 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 two of its RFAs for comprehensive studies. 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’s 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 post‑study evaluations it received between March 2004 and January 2005. 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 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. California State Auditor Report 2006-406 131 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. 132 California State Auditor Report 2006-406 DEpARTmENT OF EDUCATION School Districts’ Inconsistent Identification and Redesignation of English Learners Cause Funding Variances and Make Comparisons of Performance Outcomes Difficult REPORT NUMBER 2004-120, JUNE 2005 Audit Highlights . . . The Department of Education’s response as of October 2005 Our review of the administration and seven school districts’ responses as of December 20051 and monitoring of English learner programs by the The Joint Legislative Audit Committee (audit committee) Department of Education (department) and a sample of requested that the Bureau of State Audits (bureau) school districts found that: review the administration and monitoring of state and federal English learner program (English learner) funds at  The department provides the Department of Education (department) and a sample of school districts leeway in setting certain criteria they school districts. Specifically, the audit committee asked us to use to identify students as examine the processes the department and a sample of school English learners and to districts use to determine the eligibility of students for the English redesignate them as fluent. learner programs, including an evaluation of the criteria used  Differences in school to determine eligibility for these programs and a determination of districts’ identification whether school districts redesignate students once they become and redesignation fluent in English. In addition, the audit committee asked us to criteria cause funding variances and a lack review and evaluate the department’s processes for allocating of comparability in program funds, monitoring local recipients’ management and performance results. expenditure of program funds, and measuring the effectiveness of  Sixty-two percent of the the English learner programs. Lastly, the audit committee asked 180 English learners us to, for selected school districts, test a sample of expenditures we reviewed, who to determine whether they were used for allowable purposes. We were candidates for focused our audit on the three main English learner programs redesignation but had not been redesignated, met whose funds are distributed by the department—federal school districts’ criteria for Title III‑Limited English Proficient and Immigrant Students fluent status but were still (Title III), state Economic Impact Aid (Impact Aid), and the state counted as English learners. English Language Acquisition Program (ELAP). In doing so, we  School district and noted the following findings: department monitoring of schools’ adherence to the redesignation process is inadequate. 1 The eight school districts we reviewed are: Anaheim Union High School District (Anaheim), Long Beach Unified School District (Long Beach), Los Angeles Unified School District  Of 180 tested expenditures, (Los Angeles), Pajaro Valley Unified School District (Pajaro), Sacramento City Unified School District (Sacramento), San Diego City Unified School District (San Diego), San Francisco eight were for unallowable Unified School District (San Francisco), and Stockton Unified School District (Stockton). purposes and 43 were As of December 31, 2005, one of the school districts—Sacramento—had submitted questionable. neither a two month nor a six month update on their progress in addressing our recommendations. continued on next page . . . California State Auditor Report 2006-406 133  The department performs Finding #1: School districts are inconsistent in the criteria limited monitoring they use to identify and redesignate English learners. of school districts’ expenditure of English Although the department has provided guidance to school learner program funds. districts for establishing criteria to identify students as English  The State’s evaluation of learners and to redesignate them as fluent in English, it has the impact of particular allowed the school districts some latitude in setting test score English learner programs thresholds for redesignation. State law requires school districts is weak. to use California English Language Development Test (CELDT)  The funding formula for results as the primary indicator for their initial identification Impact Aid is complicated of pupils as English learners, and as the first of four specific and likely outdated. criteria for redesignating English learners as fluent. State law also requires the department, with the approval of the California State Board of Education (board), to use at least the four criteria defined in law to establish procedures for redesignating English learners to fluent status. In September 2002, the department published board‑approved guidance for school districts to use in developing their initial and redesignation criteria. The department’s guidance on redesignation criteria consists of student performance on the CELDT and the California Standards Test (CST) in English Language Arts (CST‑ELA), as well as a teacher evaluation of academic performance, and parental opinion. However, because these are not regulations, school districts are not required to adhere to the department’s guidelines. As a result, school districts’ criteria for the initial identification of English learners vary and some school districts have established more stringent criteria that their English learners must meet to attain fluent status when compared to other school districts. In noting this fact, we are not concluding that a particular criterion or scoring standard is preferable to another, but rather that inter‑district variation exists. We recommended that the department, in consultation with stakeholders, establish required initial designation and redesignation criteria related to statewide tests that would provide greater consistency in the English learner population across the State. The department should pursue legislative action, as necessary, to achieve this goal. Further, school districts should ensure that their redesignation criteria include each of the four criteria required by state law for redesignating English learners to fluent status. Department’s Action: None.  The department states that guidance on the redesignation of English learners is in accord with current law and that if the law changes and flexibility is impacted, it will consult with 134 California State Auditor Report 2006-406 stakeholders. The department has not taken action to consult with stakeholders or to seek legislation to provide greater consistency in the English learner population across the State. Stockton’s Action: Corrective action taken. Stockton’s redesignation form now covers the four criteria required by state law, including a section for teacher comments and documentation. Finding #2: Inadequate monitoring of the redesignation process causes students who have met school district criteria for fluency to remain in the English learner population. Although the schools we reviewed generally were consistent in adhering to their districts’ initial identification processes, we noted that most of the same schools failed to fully complete, and in some cases even begin, the process of redesignating English learners to fluent status. In reviewing redesignations at eight school districts, we found that 111 (62 percent) of the 180 English learners we reviewed met the school districts’ redesignation criteria but had not been redesignated as fluent in the school district records. We focused our testing on English learners who were candidates for redesignation in fiscal year 2003‑04, but who had not been redesignated as fluent. There were about 42,000 such students at the eight school districts we reviewed. Further, although state regulations require school districts to maintain in students’ records documentation of input from teachers, other certified staff, and parents regarding redesignation, almost none of the students we reviewed who met school district criteria for fluency had documentation in their records explaining why they were still designated as English learners. We also found that an additional 21 of the students we reviewed had been redesignated as fluent, according to documentation at their schools, but continued to be reported as English learners in the districts’ student databases and reported as such to the department. When these databases overstate the number of English learners, school districts receive more funding than they are entitled to receive. One factor contributing to these errors is the inadequate monitoring effort school districts employ to ensure that schools adhere to their redesignation processes. Another factor is the department’s coordinated compliance review (compliance review), which includes testing of fluent students to ensure that they meet redesignation criteria, but did not, until May 2005, include guidance for its consultants to test current English learners’ records to ensure that they are designated correctly. Without adequate monitoring, the school districts and the department lack assurance that English learners who have met the criteria for fluency are consistently redesignated. We recommended that the department require school districts to document redesignation decisions, including decisions against redesignating students who are candidates for fluent status. Further, we recommended that school districts monitor their designation and redesignation processes more closely to ensure that schools actually complete the process and that school district databases accurately reflect all redesignations. California State Auditor Report 2006-406 135 Department’s Action: Corrective action taken. The department’s 2005–06 English Learner Monitoring Instrument, posted on its Web site, includes a requirement to document redesignation decisions. The department says that it has distributed this instrument at various meetings and trainings throughout the State. Anaheim’s Action: Partial corrective action taken. Anaheim stated that in the summer of 2005 it implemented a process for obtaining the latest information on the English proficiency status of students entering its schools from elementary feeder districts and for updating its junior high student records accordingly. Further, Anaheim says that, as of mid‑December 2005, it has completed a review of all English learner cumulative files for evidence of previous student redesignation for four of its eight junior high schools and will complete the review of the remaining four junior high schools by the end of January 2006. The district also indicates that in September 2005, English learner administrators and coordinators were trained in English learner program implementation, including reclassification, and that in January 2006 they will meet to review procedures for the annual reclassification process. Finally, the district has established a timeline for monitoring completion of the redesignation process in the winter of 2006. Long Beach’s Action: Partial corrective action taken. Long Beach stated that in the last six months it has implemented automated procedures to facilitate additional monitoring of student designations and redesignations. In addition, the district’s redesignation forms now include a section that clearly indicates why students who were not redesignated have been retained as English learners. Los Angeles’ Action: Corrective action taken. Los Angeles says that it modified its student information databases to automatically redesignate English learners when they meet district criteria and a parent notification letter has been printed. It also indicated that its Language Acquisition Branch is reviewing district data to monitor the redesignation process for students meeting district criteria. Pajaro’s Action: Corrective action taken. Pajaro stated that its district Bilingual Program Specialist will collect redesignation binders from school site Bilingual Resource Teachers to verify that the redesignation process is complete for all eligible students. For students that qualify for redesignation based on test scores but who remain English learners, Bilingual Resource Teachers must explain why the student was denied redesignation and attach supporting evidence. Sacramento’s Action: None.  Sacramento did not provide the bureau with a 60‑day or six‑month response. 136 California State Auditor Report 2006-406 San Diego’s Action: Partial corrective action taken. San Diego indicates that it sent a memorandum to all district principals in September 2005 outlining redesignation criteria and that it offered redesignation workshops in November 2005. In addition, it sent a plan for monitoring and evaluating English learner programs to the department in October 2005 that identified staff responsible for supporting and monitoring the redesignation process. San Francisco’s Action: Pending. San Francisco stated that it held a meeting to begin planning for the development of a redesignation monitoring structure and that it plans to establish this structure by January 31, 2006. It also said that it has begun a review of its data collection process as it relates to redesignations. Stockton’s Action: Partial corrective action taken. Stockton says it revised its Master Plan to include a section that addresses redesignation monitoring, specifically the timely and accurate data entry of redesignated students. The district also stated that in order to keep its database current, it has reinstituted a bi‑monthly process to follow up with schools. Finding #3: Diverse designation and redesignation criteria and inconsistent implementation of these criteria may cause funding variances and hinder comparisons of performance results. School districts’ use of more stringent designation and redesignation criteria, and a failure to implement redesignation criteria, can positively affect their funding and the outcomes for one of the three annual measurable achievement objectives (annual objectives) the department has established in accordance with Title III of the federal No Child Left Behind Act of 2001. Taking in and retaining high‑scoring English learners gives some school districts a funding advantage because funding formulas are based on English learner counts. The inclusion and retention of more‑advanced students also can be expected to make it easier for these districts to meet one of the annual objectives. Title III and ELAP funding is linked directly to English learner counts. Impact Aid funding also takes into account the number of English learners. School districts that opt for more stringent designation and redesignation criteria increase their English learner counts and in turn increase their English learner funding. Furthermore, school districts that do not fully implement their established redesignation criteria and thus fail to redesignate all eligible students maintain higher English learner counts and receive higher funding than otherwise would be the case. However, we found varying designation and redesignation criteria, as well as numerous errors in the redesignation process, at all sampled school districts. Therefore, we cannot determine how much of an effect divergent criteria and a failure to implement these criteria have on English learner funding. Further, school districts with relatively stringent initial designation and redesignation criteria may find it easier to meet the annual objective that measures students’ progress in learning English because they tend to have higher percentages of students who California State Auditor Report 2006-406 137 have attained proficiency on the CELDT. According to this objective, English learners attaining proficiency on the CELDT need only maintain their proficiency to meet the annual progress target, while those who do not attain proficiency must improve their proficiency level to meet the objective. Based on statewide department data, in fiscal year 2003–04, 77 percent of English learners who previously attained proficiency on the CELDT were able to maintain their proficiency level, while only 57 percent of English learners who had not attained proficiency on the CELDT were able to improve their overall proficiency level. Consequently, performance results for this objective are probably skewed by the varying redesignation policies, and it is questionable whether these performance results are really comparable across school districts. We recommended that the department consider changing the annual objective that measures students’ annual progress in learning English to offer less incentive for school districts to maintain students as English learners. Department’s Action: None.  The department does not believe that the objective that measures students’ annual progress in learning English needs to be revised at this time. It says, however, that it is still developing a common scale for the 2007 annual CELDT and that it will reexamine the growth metric to determine if the use of scale score growth rather than proficiency level gains should be recommended. Finding #4: Minimal monitoring of expenditures allows school districts to use some funds for unallowable costs. The total funding for the three largest English learner programs was roughly $605 million in fiscal year 2003–04, and the department distributed most of these funds to school districts. These funds must be used exclusively for supplementary services and activities geared toward the English learner population for each of the three programs. However, the department provides little guidance to school districts on how to document their use of these funds, and it does limited monitoring of the districts’ expenditures, thus increasing the risk that these funds may be used for unintended purposes. In fact, we noted that some school districts have inadequate documentation practices and sometimes spend funds for unallowable or questionable purposes. Of the 180 expenditure transactions we tested, eight were for unallowable purposes and 43 were questionable. Most of the questionable expenditures related to purchases that had no contemporaneous documentation linking the expenditures to English learners or were for transactions for the purchase of goods or services that included non‑English learners as well as English learners. For example, Los Angeles used Title III funds to make two separate purchases, totaling nearly $3.8 million, of mathematics materials for students in general instructional programs—an unallowed use of these funds. In addition, Stockton and Los Angeles spent ELAP funds at schools or on activities that are not covered by the grant award. Los Angeles spent $11 million in ELAP funds in fiscal year 2003–04 on an extended 138 California State Auditor Report 2006-406 learning program that covered a range of underachieving students in kindergarten through eighth grade, even though ELAP funds are restricted to English learners in grades four through eight. We recommended that the department perform the steps necessary to ensure the school districts we reviewed have taken appropriate action to resolve their unallowable expenditures of supplemental English learner program funds. In addition, we recommended the department revise the documentation policy it provides to school districts to better ensure that expenditures are directed clearly at activities that serve the English learner programs’ target populations. Lastly, to ensure that expenditure files clearly demonstrate that supplemental English learner program funds are directed at activities that serve the law’s target populations, we recommended that school districts implement documentation policies. Department’s Action: Partial corrective action taken. The department says it has sent letters to the school districts requesting documentation or the transferring of funds for the expenditures the bureau cited as unallowable. The department also states it has informed school districts that expenditures charged to English learner programs must have adequate documentation to support all costs, however, it does not indicate that it has revised its documentation policy. Long Beach’s Action: Partial corrective action taken. Long Beach says that its Office of Program Assistance for Language Minority Students (office) requires all sites to submit strategic plans listing the activities, supplemental materials, and personnel related to allocated categorical funds. For the current year, the office required that sites create new strategic plans rather than rolling over plans from the previous year. The office approves the strategic plans and all related expenditures. Los Angeles’ Action: Partial corrective action taken. Los Angeles indicates that it conducts periodic training through its Administrative Academy and other training using revised materials that emphasize district documentation policies and English learner program guidelines. It also says that it revisited its Coordinated Compliance Self‑Review process to improve the procedures for analyzing school level English learner program expenditures and verifying supporting documentation. Los Angeles also sent a memorandum regarding ELAP, which included budget guidelines and payroll documentation procedures, to its administrators and administrative staff. Pajaro’s Action: Partial corrective action taken. Pajaro says it planned to train principals in the allowable use of Impact Aid, Title III, and ELAP funds at the start of the 2005–06 school year. In addition, the director of Federal and State Programs now approves all ELAP expenditures. California State Auditor Report 2006-406 139 Sacramento’s Action: None.  Sacramento did not provide the bureau with a 60‑day or six‑month response. San Diego’s Action: None.  San Diego says that site administrators must approve all expenditures and that a budget analyst monitors expenditures from the central office. Sand Diego noted that the department’s compliance review training guide does not require a documentation trail, and did not indicate it has taken any steps itself to improve documentation. San Francisco’s Action: Pending. San Francisco indicated that it plans to develop a monitoring structure for the expenditure of Impact Aid, Title III, and ELAP funds for English learners. It plans to establish this structure by January 31, 2006. Stockton’s Action: Partial corrective action taken. Stockton indicates that it has established a new database system to document expenditures for programs, training, and materials for English learners, but it does not say whether it has implemented policies to ensure that expenditure files clearly demonstrate that funds are directed at activities that serve the law’s target populations. Finding #5: The department measures English learner progress in language proficiency and academics, but its evaluation of the contribution of specific English learner programs is weak. In accordance with federal law, the department has defined annual objectives to measure school districts’ success in increasing the percentage of English learners who develop and attain English proficiency. However, school districts inconsistently define their English learner populations, so it is difficult to compare one district’s success to another’s in meeting the targets for one of the annual objectives. Moreover, state law does not require program‑specific evaluations of Impact Aid, and a recent independent evaluation of school districts’ implementation of ELAP has not provided conclusive evidence or reliable data on ELAP’s effectiveness. Without dependable program‑specific evaluations, the State cannot isolate and measure the effectiveness of particular English learner programs. State law required the department to hire independent evaluators to conduct a five‑year study on the impact of Proposition 227 and to evaluate ELAP. However, the evaluators have been unable to reach decisive conclusions on the program’s value, in part because school districts combine ELAP with other funding sources to pay for a variety of English learner services and because student performance results are not comparable across school districts. Although the evaluators have not been able to provide decisive conclusions, they have provided meaningful insight and several recommendations regarding ELAP based on school districts’ responses to a survey. 140 California State Auditor Report 2006-406 We recommended that the department review the evaluators’ recommendations, subsequent to the submission of the final report in October 2005, and take necessary actions to implement those recommendations it identifies as having merit to ensure that the State benefits from recommendations in reports on the effects of the implementation of Proposition 227 and ELAP. Department’s Action: Pending. The department says that after the final evaluation is submitted in October 2005, it will study the recommendations from the evaluation and consider possible amendments to current laws to address identified issues. Finding #6: Funding formulas are generally equitable, but a poverty statistic for impact aid needs updating. Although the department’s formulas for distributing English learner program funds are generally sound, the funding formula for Impact Aid is complicated and likely outdated. The Legislative Analyst’s Office (legislative analyst) has observed that the complexity of the Impact Aid formula results in district allocations that are hard to understand based on underlying school district demographics and that the formula is weighted heavily toward poverty. Further, a key statistic used in the formula, the number of students in families receiving assistance under the California Work Opportunity and Responsibility to Kids (CalWORKs) program, has become less reflective of the population of students in poverty and is currently unavailable to the department. The governor vetoed a bill redirecting funds to study the Impact Aid formula, instead directing the Department of Finance and the Secretary of Education to work with the legislative analyst and the department to develop options for restructuring the formula. The department indicates that it will collaborate to develop a long‑term solution for allocating Impact Aid funds, including determining an appropriate replacement for the CalWORKs data. We recommended the department continue to work with the Department of Finance, the legislative analyst, and the Legislature to revise the Impact Aid funding formula to include statistics that better measure the number of students in poverty. Department’s Action: Pending. The department says that funding proposed in the 2005 Budget Act for studying the Impact Aid formula was vetoed. The department indicates that it is exploring other options to obtain funding to possibly revise the Impact Aid funding formula. California State Auditor Report 2006-406 141 142 California State Auditor Report 2006-406 DEpARTmENT OF hEALTh SERvICES Participation in the School-Based Medi-Cal Administrative Activities Program Has Increased, but School Districts Are Still Losing Millions Each Year in Federal Reimbursements REPORT NUMBER 2004-125, AUGUST 2005 Department of Health Services’ response as of October 2005 The Joint Legislative Audit Committee (audit committee) asked the Bureau of State Audits to review the Department of Health Services’ (Health Services) administration Audit Highlights . . . of the Medi‑Cal Administrative Activities program (MAA). Our review of the Department Specifically, we were asked to assess the guidelines provided by of Health Services’ (Health Health Services to local educational consortia (consortia) and Services) administration of local governmental agencies that administer MAA at the local the Medi-Cal Administrative level. Additionally, the audit committee asked us to evaluate Activities program (MAA) revealed the following: the process by which Health Services selects consortia and local governmental agencies to contract with, how it establishes the  School districts’ payment rates under the terms of the contracts, and how it participation in, and reimbursements for, monitors and evaluates performance of these entities. MAA have significantly increased since fiscal We were also asked to evaluate the effectiveness of a sample of year 1999–2000. consortia and local governmental agencies in administering  Despite receiving MAA and in ensuring maximum participation by school $91 million for fiscal districts. Furthermore, we were requested to conduct a survey of year 2002–03, we school districts regarding their participation in the program. estimate school districts could have received at least $57 million more had all school districts Finding #1: School districts underused MAA. participated and certain Although California school districts received $91 million in districts fully used MAA. federal MAA funds for fiscal year 2002–03, we estimate that  Health Services has not they could have received at least $53 million more if all school performed a sufficient districts had participated in the program and an additional number of local on-site visits. $4 million more if certain participating school districts fully used the program. School districts we surveyed identified a  Simplifying the MAA belief that the program would not be fiscally beneficial as one structure would increase efficiency and simplify of the primary factors in their decision not to participate in program oversight. MAA. However, several of the nonparticipating school districts we surveyed have not recently assessed the costs and benefits of the program, while many of the surveyed school districts that recently performed this assessment have now decided to California State Auditor Report 2006-406 143 participate. The main reasons offered by consortia and local governmental agencies as to why participating school districts did not fully use MAA were that they lacked an experienced MAA coordinator with sufficient time to focus on the program and generally resisted or lacked support for time surveying. If such issues are addressed, school districts may be able to obtain additional MAA reimbursements beyond our $57 million estimate. Health Services and the consortia and local governmental agencies that help it administer the program have not done enough to help school districts participate in MAA. Health Services acknowledges that it does not try to increase MAA participation and federally allowable reimbursements, commenting that it has neither a mandate nor the resources to do so. However, it is the state entity in charge of Medi‑Cal and could use its contracts with these local entities to mandate their performance of outreach activities designed to increase the use of MAA. None of the local governmental agencies we visited perform any outreach activities. Conversely, consortia have already voluntarily assumed some responsibility for increasing program participation in their regions even though Health Services does not contractually obligate them to do so. Consequently, Health Services has not established ways to measure and improve these outreach efforts. Consortia could improve their outreach to school districts by targeting nonparticipating school districts that have the potential for a high MAA reimbursement and by identifying participating school districts that underuse MAA and helping ensure that they have a correct understanding of those costs that are federally reimbursable. To help ensure comprehensive MAA participation by school districts and that all federally allowable costs are correctly charged to MAA, Health Services should require consortia to perform outreach activities designed to increase participation and hold them accountable by using appropriate measures of performance. In addition to the mass forms of outreach consortia currently perform, Health Services should require them to periodically identify and contact specific nonparticipating school districts that have potential for high MAA reimbursement and periodically identify and contact participating school districts that appear to be underusing MAA to help ensure that they have a correct understanding of those costs that are federally reimbursable. If Health Services believes it does not have a clear directive from the Legislature to increase participation and reimbursements, it should seek statutory changes. Health Services’ Action: Pending. Health Services is currently developing draft contract language that would require consortia to outreach to a predetermined percentage of nonparticipating schools in their region on a yearly basis. The schools targeted will be those schools with the highest average daily attendance. The draft language will be forwarded to Health Services’ Office of Legal Services for review and approval. Health Services will also require consortia to contact all school districts within their region to help ensure that they have a correct understanding of MAA costs and benefits. This will include providing direction and consultation to those school districts that may be underusing MAA. 144 California State Auditor Report 2006-406 Health Services will use the increased outreach percentage of nonparticipating schools in their region as a yearly measurement tool to determine if the consortia met the contractual targets. To verify contractual compliance, this measurement tool will also be used during the site reviews. With the addition of newly approved staff, Health Services will develop a database of participating and nonparticipating school districts, by region, that will be referenced in measuring and verifying outreach activities of the consortia during the site visit. Finding #2: Without regular site visits, Health Services cannot determine if local entities complied with MAA requirements. Health Services did not adequately monitor the MAA activities of consortia, local governmental agencies, or school districts. Effective November 2002, the federal Centers for Medicare and Medicaid Services (CMS) required Health Services to perform on‑site reviews of each consortium and local governmental agency at least once every four years. According to the CMS requirements, these reviews may be performed in one of two ways. Health Services can elect to review a representative sample of claiming units—the entities within a consortium or local governmental agency, including school districts, that participate in MAA. Alternatively, the consortia and local governmental agencies can focus a portion of their annual single audit on MAA claiming every four years. However, based on our review, neither method was consistently employed. From October 2001 to February 2005, Health Services conducted site visits of only nine of 31 consortia and local governmental agencies, including some school districts. During that period, it did not conduct any site visits during 2003 and only one during 2004. Additionally, four of the five consortia—the Los Angeles consortium performed some reviews—and three of the four local governmental agencies we reviewed did not perform onsite reviews of school districts. According to the chief of administrative claiming, Health Services has implemented new procedures as a result of its most recent MAA manual approved by CMS in August 2004 and has received the authority to hire additional staff to help implement the new manual, including performing site visits. According to the manual, Health Services is required to conduct site visits at a minimum of three consortia and one local governmental agency each year. Health Services should ensure that the site visits of consortia, local governmental agencies, and school districts are conducted as required. Health Services’ Action: Pending. Health Services is currently recruiting additional staff. Some of these staff will be specifically targeted for MAA activities. With these additional staff, the planned oversight, monitoring, site visit, and desk reviews will exceed federal monitoring requirements. California State Auditor Report 2006-406 145 Finding #3: Health Services’ existing procedures limit its ability to effectively measure MAA performance. Health Services has decreased the time it takes to pay an invoice, but its current invoice and accounting processes need to be updated so that it can more easily collect data to monitor MAA and to identify where additional improvements could be made. For instance, because it uses a manual process, which has the potential for human error, Health Services cannot easily determine the total federal reimbursements California schools have received from MAA, identify participating school districts, or ascertain the amount each school district receives in MAA reimbursements. Without these basic statistics, it is difficult for Health Services to adequately monitor the success of the program, and its ability to use statistical methods to identify fraudulent or excessive claims is limited. It also does not require regular reporting from consortia and local governmental agencies on their program efforts (annual reports). Further, Health Services has not established a way to measure the performance of consortia and local governmental agencies, and has not outlined the actions it would take if one of these entities consistently neglected their responsibilities. Health Services should update its current invoicing and accounting processes so it can more easily collect data on the participation and reimbursement of school districts. Additionally, Health Services should require consortia, and local governmental agencies should they continue to be part of MAA, to prepare annual reports that include participation statistics, outreach efforts and results, and other performance measures Health Services determines to be useful. Health Services should then annually compile the content of these reports into a single, integrated report that is publicly available. Finally, Health Services should develop written criteria for consortia, and local governmental agencies should they continue to be part of MAA, and take appropriate  action when performance is unsatisfactory. Health Services’ Action: Partial corrective action taken. Health Services is proceeding with the MAA Automation project, which will improve and streamline business processes and allow collection of data to perform comparative analyses and management reports to monitor consortia activities. Health Services’ proposal for MAA automation has initially received internal approval, and Health Services is currently developing the feasibility study. Health Services is currently recruiting for the newly approved staff positions and will have dedicated resources in the MAA to require consortia and local governmental agencies, should they continue to be a part of MAA, to prepare annual reports, and it will annually compile the content of these reports into a single, integrated report that is publicly available. Additionally, with the newly recruited staff, Health Services will develop written performance criteria for consortia and local governmental agencies, should they continue to be a part of MAA, and take action when performance is unsatisfactory 146 California State Auditor Report 2006-406 Finding #4: Some consortia and local governmental agencies are charging fees in excess of their administrative costs. School districts are receiving a reduced share of MAA reimbursements because some consortia and local governmental agencies are charging fees that exceed their administrative costs. Furthermore, representatives for three of the local governmental agencies we reviewed stated they do not perform an analysis that would allow them to identify whether the fees they assessed exceeded their costs. State law requires that Health Services contract with a consortium or local governmental agency to claim MAA reimbursement for a participating school district and allows that administering entity to collect a fee from the school district for such a service. We reviewed fees assessed by some of these entities, anticipating that the fees charged would be sufficient to cover the administrative costs incurred. However, we found that the fees charged by some consortia and local governmental agencies exceeded costs. This condition does not result in the State receiving additional MAA funds from the federal government. Rather, it results in the school districts receiving a smaller share of MAA reimbursements than they could have. Health Services stated it has not developed policies governing consortium and local governmental agency fees because it was unaware of the overcharging issue. Health Services should develop polices on the appropriate level of fees charged by consortia to school districts and the amount of excess earnings and reserves consortia should be allowed to accumulate. Health Services should do the same for local governmental agencies if such entities continue to be part of the program structure. Health Services’ Action: None.  Health Services continues to research this issue. However, it believes this is an issue most appropriately handled at the local level rather than managed by the State. We continue to believe it is critical that Health Services develop policies in this area. If Health Services believes it needs express authority to implement such policies, it should seek it. Finding #5: Some school districts are losing money because of the terms of their vendor contracts. School districts we reviewed lost an estimated $181,000 in federal MAA reimbursements for fiscal year 2003–04 because the fees they paid their vendors were based on the amount of MAA reimbursements they received. Although federal guidance has long prohibited requesting reimbursement for these types of fees, known as contingency fees, it was not until recently that Health Services issued guidance on this topic. In its 2004 MAA manual, Health Services indicates that claims for the costs of administering MAA may not include fees paid to vendors that are based on, or include, contingency fee arrangements. Although this guidance is helpful, it does not identify alternative fee arrangements that would allow federal reimbursement for vendor fees. Consequently, school districts may mistakenly believe vendor fees are not reimbursable under any circumstances. California State Auditor Report 2006-406 147 We recommended that Health Services help school districts invoice for all reimbursable costs, including vendor fees, by issuing clear guidance on how to invoice for these costs and instructing consortia, and local governmental agencies should they continue to be part of MAA, to make sure school districts in their respective regions know how to take advantage of these revenue‑enhancing opportunities. Health Services’ Action: Partial corrective action taken. Health Services currently provides training and issues Policy and Procedure Letters to the consortia to provide technical assistance and guidance to school districts in obtaining all appropriate reimbursement under MAA. With the addition of new staff, Health Services will strengthen its role in providing training, technical assistance, and guidance. Finding #6: Because of recent changes in billing practices, the federal government could be billed twice for the same services. Some consortia and local governmental agencies are changing their fee structures to allow school districts to claim their fees as a federal reimbursable MAA cost. However, because consortia and local governmental agencies also request federal reimbursement for their administrative costs, this practice could result in the federal government reimbursing both a consortium or local governmental agency and a school district for the same services. Health Services has not adequately monitored the activities of these entities and therefore was unaware of these changes at the local level. Consequently, Health Services has not created the policies necessary to prevent activities from being claimed twice. Although we did not identify any duplicate payments to the entities we reviewed, the potential for duplicate payments exists. We recommended that Health Services follow through on its plans to develop a policy governing the claiming of consortium and local governmental agency fees and instruct these entities to carefully monitor school districts’ invoices to make sure that any claiming of consortium or local governmental agency fees does not result in duplicate payments. Health Services’ Action: Pending. Health Services is currently drafting a Policy and Procedure Letter regarding these issues. Finding #7: Simplifying the MAA structure would make the program more efficient and effective. MAA would be more efficient and effective if Health Services required participating school districts to submit invoices through a consortium and to use a vendor selected through a regionwide competitive process. School districts currently submit MAA invoices through 11 different consortia and 20 different local governmental agencies. To ensure that it adequately monitors the activities of these two sets of local administering entities, Health Services plans to conduct site visits of all 31 once every 148 California State Auditor Report 2006-406 three years. However, although local governmental agencies represent nearly 65 percent of the 31 site visits to be performed, school districts only submit about 24 percent of their MAA invoices through local governmental agencies. Once Health Services implements the additional monitoring activities we recommend, its efforts would be better spent on the 11 consortia that process 76 percent of participating school districts’ MAA invoices. Using such an approach, it would likely be able to increase its oversight activities without requiring a significant increase in staff resources. We also recommended that Health Services require consortia to perform outreach activities designed to increase MAA participation and that it hold consortia accountable using appropriate measures of performance. We did not include local governmental agencies in this recommendation because the jurisdictions of consortia and local governmental agencies overlap. Efforts by both consortia and local governmental agencies to conduct outreach to the same school districts not participating in MAA would be a duplicative use of resources. In addition, if Health Services required simultaneous outreach efforts by consortia and local governmental agencies, it could confuse school districts and reduce the accountability of both entities for their outreach programs. Consortia are best suited to perform outreach to nonparticipating school districts because they are administered by educational units and thus may have a better understanding of school districts’ needs than would local governmental agencies, which are typically county health agencies. Finally, if each school district that needs MAA assistance is required to use a vendor competitively selected by its consortium, instead of entering into an individual contract with a vendor of its own choosing, vendors could be subject to stronger oversight and compelled to reduce their fees. Nearly all of the 27 participating school districts that responded to our survey used private vendors for some sort of MAA assistance. Some of these school districts used a vendor selected by consortia, but because not all consortia contract with vendors, many school districts do not have that option. Other school districts choose to contract directly with private vendors for MAA assistance, even though their consortia also contracted with vendors. This makes oversight of vendors difficult and does not take advantage of the volume discounts consortia may be able to achieve. Health Services should reduce the number of entities it must oversee and establish clear regional accountability by eliminating the use of local governmental agencies from MAA. Because current state law allows school districts to use either a consortium or a local governmental agency, Health Services will need to seek a change in the law. Additionally, we recommended that Health Services require school districts that choose to use the services of a private vendor, rather than developing the expertise internally, to use a vendor selected by the consortium through a competitive process. Depending on the varying circumstances within each region, a consortium may choose to use a single vendor or to offer school districts the choice from a limited number of vendors, all of which have been competitively selected. Health Services should seek a statutory change if it believes one is needed to implement this recommendation. California State Auditor Report 2006-406 149 Health Services’ Action: None. Health Services is continuing to review this issue. However, it states that regulations specifically allow school districts the option of claiming through either their consortia or their local governmental agency to afford maximum flexibility at the  local level. Further, Health Services does not believe its authority can be extended to school districts’ selection of vendors to support operations although it states that it continues to agree with the merits of this recommendation. Health Services continues to support maximum flexibility at the local level in order to appropriately manage MAA and select viable vendors based on regional variances. However, we continue to believe that simplifying the MAA structure to make the program more efficient is important, and thus, Health Services should implement the recommendations. Further, Health Services should seek a statutory change if it believes one is needed to implement the recommendation regarding vendor selection. 150 California State Auditor Report 2006-406 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 . . . June 2005 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  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  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  Inaccuracies in its cost activities. As a result, some inspectors inconsistently report allocation plan and their hours, and the commission uses estimates to determine table have caused the 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,  Without a system to track the commission did not take sufficient steps to ensure that similar direct and indirect costs, errors would not reoccur. In fact, we found that between July 2003 the commission cannot and February 2004 the commission incorrectly charged the establish reliable budgets Railroad Safety Program $281,000 for staff in its legal divisions. and set appropriate fees. 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 September 2004. Thus, it cannot ensure that the fees it collects are spent only on the direct labor charges of Railroad Safety Program employees. California State Auditor Report 2006-406 151 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’s Action: Corrective action taken. The commission indicated that, effective April 2005, upgrades to its timekeeping system have been fully implemented and its divisions have begun data entry into the system. Furthermore, the commission stated it made the appropriate adjustments to its accounting records prior to closing its records for fiscal year 2003–04. 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. 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’s 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. 152 California State Auditor Report 2006-406 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. Commission’s Action: Partial corrective action taken. The commission plans to update its existing plan and tables by July 1, 2005. Thereafter, the commission plans to review the cost allocations annually and/or when changes in the organizational structure require adjustments to the cost allocation factors. California State Auditor Report 2006-406 153 154 California State Auditor Report 2006-406 LOS ANgELES DEpARTmENT OF WATER AND pOWER Its Transfers of Funds to the City Comply With the City Charter; However, It Needs to Improve Its Controls Over Contracts, Expenditures, and Personnel Records REPORT NUMBER 2004-130, JANUARy 2005 Los Angeles Department of Water and Power’s response as of August 2005 The Joint Legislative Audit Committee requested that the Audit Highlights . . . Bureau of State Audits (bureau) review certain aspects of the Department of Water and Power’s (department) Our review of certain aspects operations. Specifically, the audit committee requested that the of the operations of the Los bureau review how and when the department transfers money Angeles Department of Water and Power (department) from its water fund and power fund to the city as well as the revealed the following: department’s policies and procedures regarding expenditures, contracting, and personnel practices.  The department followed the requirements of the City Charter of the city of Los Angeles (city) and Finding #1: The department followed the requirements the terms and conditions of the city charter when it transferred money to the city’s of its bond debt when it reserve fund. transferred more than $82 million from its The Los Angeles City Charter (city charter) authorizes the water fund and almost department to transfer surplus money from the Water Revenue $575 million from its Fund (water fund) and the Power Revenue Fund (power fund) power fund to the city’s reserve fund since fiscal to the city of Los Angeles’ (city) reserve fund. Although the year 2001–02. Board of Water and Power Commissioners’ (board) resolutions  The department did not currently identify the targeted annual transfers as 5 percent of always award contracts in the gross revenue from the water fund and 7 percent of the gross compliance with city and revenue from the power fund, these transfers are potentially department competitive limited by provisions in the department’s bonds. Under the bidding requirements, bonds’ provisions, transfers may not exceed the prior year’s net ensure that staff signed contracts only when income and remaining equity must meet specified equity‑to‑debt authorized, and did not ratios. Our review found that the department followed the always seek required requirements of the city charter and the terms and conditions of approvals from the Board of Water and Power its bond debt when it transferred a total of $82.4 million from Commissioners. the water fund and $574.7 million from the power fund to the city’s reserve fund since fiscal year 2001–02. continued on next page . . . California State Auditor Report 2006-406 155  In a November 2004 The department is not unique in transferring money from its report, the department’s water fund and power fund to the city each year. According to a internal auditor reported June 2003 presentation of financial information for 38 electric that the department’s power utilities compiled by Fitch Ratings, a financial research and administration of a series of contracts and debt rating company, 32 (84 percent) of the utilities studied transfer purchase orders for an average of 5.82 percent of their annual revenues to city general the implementation of funds. The department’s annual transfers are close to this average. an automated supply chain management project, valued at more We made no recommendation to the department regarding than $9.7 million, was this finding. materially flawed.  The department did not Finding #2: The department’s Corporate Purchasing Services ensure that only authorized employees approved (CPS) did not always follow its own and the city’s policies for invoices for payment. competitively bidding contracts for goods and services.  The department did not The department’s CPS is responsible for processing contracts use available information and purchase orders in compliance with city and department to consistently assess rules. However, CPS did not award contracts in compliance with compliance with, or ensure uniform enforcement of, city and department competitive bidding requirements for two of policies regarding the the 12 contracts we reviewed. The larger of the two contracts city’s purchasing card was the third of three consecutive contracts awarded to the same program—a program that uses credit cards issued vendor for graphic art and design services, valued at $149,500 each. by a commercial bank to CPS sought competitive bids for the first of the three contracts provide a cost-efficient but issued the other two contracts to the vendor without seeking procurement process. competition. The combined total of the three contracts is $448,500.  The lack of central control The department’s contract manual states that most expert services over the department’s usually can be performed by more than one vendor and should be personnel files has awarded via competitive bid. In addition, the city’s administrative reduced its ability to ensure that it adequately code requires the department to seek competitive bids when maintains personnel files practicable. However, the city’s administrative code also exempts that contain the records certain personal services contracts that are less than $2 million from necessary to support that requirement. Nonetheless, the department’s policy still urges and explain hiring and promotion decisions. competitive bidding. Because CPS did not adequately explain why obtaining competitive bids for the contract was not in the city’s  The individuals who interests, we believe CPS should have followed its policy and sought occupy seven of the exempt positions we bids for the latest contract and the one preceding it. reviewed carry job titles and perform duties that In addition, the CPS staff member who executed the contract are different from those was not authorized to do so. The contract we reviewed was approved by the mayor and city council. valued at $149,500. However, the CPS staff member who signed the contract had authority at that time to sign contracts only up to $50,000 in value. We recommended that to ensure the department receives high‑quality services and materials at the best available prices, CPS should comply with department and city competitive 156 California State Auditor Report 2006-406 bidding policies when awarding contracts for goods or services. In addition, CPS should ensure that its staff members sign contracts that obligate the department only when they are authorized to do so. Department’s Action: Partial corrective action taken. The department states that it continues to comply with the city charter, city administrative code, and department and city competitive bidding process when awarding contracts for goods and services through ongoing review and oversight by CPS. The department also states that CPS signature authorities are reviewed annually and the general manager has rescinded CPS signature authorities for contracts over $100,000. Finding #3: CPS awarded contracts for goods and services without obtaining required approvals. CPS does not always obtain approvals for the contracts it awards. For the graphic art and design services contract valued at $149,500 previously discussed and five other contracts valued at $150,000 each, CPS violated board policy because these contracts extended the value of the original contracts beyond the threshold set by board resolution without receiving its approval. By not seeking board approval for contracts when required, CPS cannot ensure that it adheres to the board’s control over the department’s contracts. We recommended that CPS recognize when the contracts it awards are extensions of existing contracts and seek board approval when the amended amount exceeds the threshold contained in the department’s policy for obtaining such approval. Department’s Action: Pending. The department states that at the direction of the general manager, the department is currently reviewing a supply management system that includes tracking contracts. Pending the implementation of a contract tracking system, the following actions are being taken: (1) dissemination of a general manager bulletin for department‑ wide release addressing contracts and (2) a committee will oversee approval of all contracts and act as gatekeeper for all formal contract requests. The department is also working with other city departments regarding their existing systems. Finding #4: The department’s internal auditor identified several issues related to its administration of a series of contracts. A November 2004 report prepared by the department’s internal auditor contained a finding that the department’s administration of a series of contracts and purchase orders for the implementation of an automated supply chain management project, valued at California State Auditor Report 2006-406 157 more than $9.7 million, was materially flawed. Before the system was completed, the vendor abandoned the project and turned off the system. Some of the internal auditor’s findings included the following: • The department had not sought competitive bids for any of the purchase orders or contracts it awarded to the vendor. • The department’s payments on one of the contracts and an amendment exceeded their combined value by almost $150,000. • The department had yet to recover the unused portion of the $275,000 it prepaid for maintenance fees. • The department had yet to recover two servers from the vendor’s premises, costing more than $13,000, which it purchased to support the system. To improve its controls over the contracts awarded for goods and services, we recommended CPS promptly implement the recommendations presented in the department’s internal auditor’s November 2004 report. Department’s Action: Partial corrective action taken. The department states CPS is in the process of implementing eight of the 11 internal auditor’s recommendations listed in the November 2004 report. Because of the potential for litigation regarding this contract, the department is working with the City Attorney’s Office on how to appropriately implement the remaining three recommendations. Finding #5: The Accounts Payables Unit (accounts payable) does not ensure that expenditures are authorized properly. The department’s accounts payable is responsible for overseeing payments to suppliers. However, although made for appropriate purposes, for 16 of the 45 payments we reviewed (36 percent), accounts payable audit clerks did not ensure that only authorized employees approved invoices for payment. In order to ensure that the department processes payments correctly and to ensure that payments are made only for authorized purposes, we recommended accounts payable strengthen its internal control procedures to include a process for verifying that contract administrators at the business unit level review and authorize invoices before approving them for payment. Department’s Action: Corrective action taken. The department states that accounts payable implemented a new payment process incorporating signatory review as of March 1, 2005. 158 California State Auditor Report 2006-406 Finding #6: CPS does not oversee the purchasing card program adequately. The city initiated the purchasing card (P‑card) program—a program that uses credit cards issued by a commercial bank—to provide a cost‑efficient procurement process for city employees. CPS is responsible for administering the department’s participation in the city’s P‑card program. However, CPS has not implemented procedures to use available information on violations of P‑card program policies, such as the results of CPS audits of cardholders’ purchases and business unit staff reports of P‑card policy violations. Such procedures would enable CPS to consistently assess compliance with, or ensure uniform enforcement of, P‑card program policies. These policies restrict the uses for the P‑cards, including prohibiting the purchase of certain types of items. They also set daily and monthly dollar limits on purchases and require business unit staff to review purchases to ensure they are authorized and approved. In addition, CPS has not provided clear guidance to the department’s business unit managers for determining the appropriate corrective action business units should take against P‑cards in response to P‑card policy violations and clear criteria for determining when it would be appropriate to restrict, suspend, cancel, or deactivate P‑cards. We recommended that to strengthen the oversight over the P‑card program and to obtain the information needed to evaluate the costs and benefits of the program and minimize abuses, CPS should: • Collect and use the information that results from CPS audits of cardholders’ purchases and business unit staff reports of P‑card policy violations to track violations on an ongoing basis, including repeat violations of P‑card policy. • Track and follow up business unit managers’ responses to reports of suspected P‑card policy violations that result from CPS audits of cardholders’ purchases to ensure that the corrective actions business unit managers take against P‑cards are effective and that policies are enforced consistently. • Provide clear guidance for determining the appropriate corrective action business units should take against P‑cards in response to violations and clear criteria for determining when it would be appropriate to restrict, suspend, cancel, or deactivate a P‑card. Further, CPS should ensure the uniform enforcement of such policies through its improved monitoring efforts. • Develop criteria or a process to deactivate long inactive P‑cards to reduce the risk of inappropriate use and to ensure that access to P‑cards is secure. • Use the information and data available, such as transaction data, compliance data, and activity data, to establish goals for minimizing the rates of policy violations for the P‑card program on an ongoing basis. California State Auditor Report 2006-406 159 Department’s Action: Pending. The department states that CPS continues to work with the financial institution that issues the P‑cards to have automated reports that will facilitate tracking violations, however, the financial institution’s upgrade of the software has been delayed to 2006. In addition, requests for resources for fiscal year 2005–06 were not approved due to departmental budget constraints. The department is reviewing its policies and processes for possible improvements and implementation, and CPS will continue to track P‑card violations on a limited basis and inform business unit managers of these violations. CPS will continue to ensure that employees who are assigned P‑cards sign and adhere to an acknowledgement of P‑card responsibilities. CPS is reviewing its policy and is developing criteria necessary to review and deactivate long inactive P‑cards with input from business units and the county controller’s office. CPS is using information and data available to establish goals for minimizing the rates of policy violations for the P‑card program on an ongoing basis. Requests for resources have been made for fiscal year 2005–06 and are being reviewed for appropriate levels. Finding #7: Decentralized responsibility for maintenance personnel files reduces comprehensive personnel record keeping and oversight of positions. The department’s lack of central control over personnel files has reduced its ability to ensure that it adequately maintains personnel files that contain the records required by department policy. For example, department policy requires that documents that support and explain civil service hiring and promotion decisions be kept in these files. These documents are an important element of resolving discrimination complaints that may arise against the department over its hiring or promotion practices. Each business unit, which may be located away from the department’s headquarters, maintains personnel files for its employees. However, the business units do not always ensure that these files are complete. As a result, the department could not produce the documents necessary to support and explain its hiring and promotion decisions for four of the 12 civil service appointments we reviewed. In addition, the department’s personnel files did not contain evidence that the employees who occupied nine of the department’s exempt positions possess the qualifications the department used to justify exempting these positions from civil service regulations. Further, according to research conducted by the department’s human resources director for seven of the exempt positions we reviewed, the individuals who occupy them carry job titles and perform duties that are different from the job titles and duties approved by the mayor and the city council for these positions. By not using these positions as approved, the department reduces the city’s control over the department’s exempt positions and reduces the transparency to the public of its hiring decisions for exempt employees. 160 California State Auditor Report 2006-406 To ensure that it adheres to its policies for a single comprehensive record for employees’ work history and uniform filing and file retention of employee personnel records, we recommended the department consider changing the decentralized nature of its personnel record keeping and establish a centralized system, administered and maintained under the supervision of the department’s director of human resources. In addition, the department should seek approval from the mayor and city council when it uses its exempt positions for duties other than those previously approved by the city. Department’s Action: Partial corrective action taken. The department states it is in the process of centralizing all employee folders. Exempt folders were compiled in February 2005, and the department initially anticipated centralizing all employee folders by March 2006. However, collection of the folders has been delayed by the construction of a file room. The department will seek approval of exempt positions not currently approved by the city council. The general manager is currently evaluating the department’s organizational structure and will meet with the newly elected mayor to obtain support for approval of these positions. California State Auditor Report 2006-406 161 162 California State Auditor Report 2006-406 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 May 2005 (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 Corrections1 (Corrections) uses to contract for health care services not  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  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  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  Corrections sometimes exceeds the authorized outlined in the bureau’s report titled California Department contract amount and fails to obtain proper approvals before receiving 1 On July 1, 2005, the Youth and Adult Correctional Agency and the departments and boards (including the Department of Corrections) within the agency became the nonemergency services. California Department of Corrections and Rehabilitation. However, for purposes of our continued on next page . . . report we use the former department name. 156 California State Auditor Report 2006-406  Corrections’ prisons of Corrections: Utilizing Managed Care Practices Could Ensure are not adhering to its More Cost-Effective and Standardized Health Care, issued in utilization management January 2000. program, established to ensure inmates receive quality care at contained Finding #1: Corrections’ reliance on a long-standing policy costs. Consequently, prisons are overpaying exemption to competitive bidding for medical services may for some services, not be in the State’s best interest. incurring unnecessary costs for the State. Corrections staff who negotiate contracts tend to rely on a 30‑year old state policy exemption that allows them to award contracts for most medical services without seeking competitive bids. We recommended that the California Department of General 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. General Services’ Action: Corrective action taken. General Services has eliminated its long‑standing policy exemption and in January 2005 issued Management Memo Number 05‑04 (Management Memo), 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 California State Auditor Report 2006-406 157 requires that the director of General Services (or his/her designee) determine whether to grant 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. Corrections’ Action: Corrective action taken. Corrections stated that it has amended its contract boilerplate language to include a requirement for the submittal of charge description masters (CDM). Corrections also reported that it met with the Office of Statewide Health Planning and Development and they developed procedures that will allow Corrections to obtain CDM annually, beginning in July 2005, for each hospital that it contracts with. In the interim, Corrections is requesting CDMs for existing and all renewals of existing hospital contracts prior to negotiating hospital contracts. 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 158 California State Auditor Report 2006-406 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. Corrections’ Action: Partial corrective action taken. Corrections reported that it developed and implemented a new medical rate exemption form and 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. 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 in April 2005, it awarded a contract for additional services from an expert in health care contract negotiations that will provide financial and technical expertise to improve contract rates and its negotiation process. California State Auditor Report 2006-406 159 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. Corrections’ Action: Corrective action taken. Corrections stated that its Health Contracts Services Unit (HCSU) in July 2004 initiated an ongoing process for contract renewal requests that requires staff to routinely analyze 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 review and approval, rather than the Office of Contract Services (contract services). 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. Corrections’ Action: Partial corrective action taken. Corrections reported that its HCSU staff, except newly hired staff, completed analytical skills, cost benefit analysis, and negotiation skills workshops. Further, as previously mentioned, HCSU has contracted for additional services from an expert in health care contract negotiations. Corrections reported that it anticipates that the contractor will provide training to HCSU staff beginning in September 2005. The training will include financial and technical expertise in contract rates, terms, and the negotiation process. Subsequent to HCSU staff training, Corrections will develop training plans for the field staff. 160 California State Auditor Report 2006-406 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. Corrections’ Action: Corrective action taken. Corrections reported that HCSU staff are currently documenting and including in the files their efforts to obtain per diem rates for each of the hospital contracts. Also, HCSU staff negotiating contracts are requesting rates to be tied to a reimbursement benchmark, such as Medicare. In those cases where hospitals refuse, the HCSU staff are pursuing per diem for inpatient services, as well as maximum caps on all outpatient rates that are a percent of billed charges. Corrections reported that if a hospital refuses all of the Corrections’ rate proposals, HCSU staff are not entering into the contracts. Finding #7: HCSD and prisons have not submitted many medical service contracts to Corrections’ 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. California State Auditor Report 2006-406 161 Corrections’ Action: Partial corrective action taken. Corrections stated that it formed a task force in October 2004 to reassess its  policy memo and the feasibility of requiring staff to submit corrective action plans. However, Corrections informed us that it had to redirect its focus to address recent legislation requiring it to merge with all departments under the Youth and Adult Correctional Agency to create the California Department of Corrections and Rehabilitation. Corrections stated that the newly created department will continue to issue semi‑annual report cards, however, until reports are available on the new divisions and programs, it believes requiring corrective action plans would be premature. Finally, Corrections stated that it has and will continue to place emphasis on reducing late contracts and amendments as well as ensuring fiscal accountability. 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. Corrections’ Action: Corrective action taken. Corrections reported that it has corrected the errors we identified and has modified its procedures. Corrections also stated that it has and continues to provide training to its staff and managers on the need to attach a report that identifies NTPs associated with each master contract and the residual amount when submitting contract requests for review and approval. Finally, Corrections stated that it conducts random audits to ensure compliance with its master contract 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. 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. 162 California State Auditor Report 2006-406 Corrections’ Action: Corrective action taken. Corrections reported that contract services 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, contract services 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. Corrections’ Action: Corrective action taken. Corrections stated that contract services issued a memorandum in April 2004 implementing a new policy requiring programs to submit documentation of their attempts to contact contractors to obtain services before requesting additional contracts for services covered under existing contracts. Contract services 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. California State Auditor Report 2006-406 163 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. Corrections’ Action: Partial corrective action taken. Corrections reported that it has a process in place to regularly analyze and discuss the usage of registry contracts with the health care managers through the monthly budget review process with fiscal management. Effective July 2004 the health care regional administrators and managers receive a copy of the vacancies versus registry report each month. In December 2004, HCSD’s Fiscal Management Unit developed a new reporting form for institutions to complete and submit with their monthly budget plans. The reporting form allows the health care managers to analyze registry usage and vacancies from a global perspective. Corrections also reported that as part of the HCSD’s strategic plan, it has established workgroups that will review data on patterns of registry utilization. Corrections reported that it plans to establish focus improvement teams to monitor processes and expects to have quantifiable data regarding outcomes beginning December 2005. 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. 164 California State Auditor Report 2006-406 Corrections’ Action: Corrective action taken. Corrections reported several changes to improve its UM program. Specifically, Corrections stated that its UM program staff have implemented efforts to ensure that field UM nurses adhere to the UM guidelines requiring staff to perform and retain documentation of their prospective and concurrent reviews. UM headquarters staff distributed and trained all UM nurses, health care managers, and chief medical officers on changes to the UM guidelines and its UM database in February and March 2005. Changes in the guidelines included new focus areas for review. These focus areas were established based on consultant reports indicating high cost and high volume services that may have been avoidable. Training also covered Corrections’ level of care criteria (Interqual) that it will use to standardize review of all acute care community admissions. Corrections stated that this will help identify and improve areas of unavoidable community inpatient stays. Changes to its UM database will enable executive staff to view management reports related to utilization of inpatient and outpatient resources. Corrections stated that it restructured the UM program to include additional supervising registered nurses, which will enable increased oversight, training, and monitoring of all UM program policies and procedures. UM nursing supervisors continue to monitor compliance activities, using a standardized supervisory review tool when they perform UM site visits. This tool will enable UM supervisors to identify the status of the UM program at each institution and provide further direction for improvement. Corrections also stated that the restructuring includes the establishment of additional registered nurse staff to work out of preferred provider hospitals (those with medical guarding units). These nurses will perform daily concurrent reviews using Interqual level of criteria. This will enable Corrections to monitor and decrease the number of unavoidable community hospital stays. In addition, these registered nurses will plan and assist with the discharge of inmate patients back to an institution in a timely manner. Finally, Corrections stated that it has begun collecting UM data to produce reports that will identify trends for management review and quality improvement. 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. California State Auditor Report 2006-406 165 Corrections’ Action: Partial corrective action taken. Corrections stated that it has finalized specific guidelines and provided training to UM nurses, health care managers, and chief medical officers for retrospective review of unscheduled community emergency room transfers and unscheduled admissions. Corrections stated that it selected specific focus areas based on previous areas of high cost and high volume. A team of physicians at each institution will evaluate these focus areas during the Medical Authorization Review subcommittee meetings, which are to be held on a weekly basis. The subcommittee shall determine after review and discussion which of the following four categories the transfer best describes: necessary and unavoidable, necessary and potentially avoidable, unnecessary due to internal capability, or unnecessary due to criteria not met. The collection of this data and other data will provide an opportunity for planning training needs, developing new protocols, and enhancing the quality and value of care. 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. Corrections’ Action: Partial corrective action taken. Corrections stated that its Health Care Cost and Utilization Program established a quality control process that includes reviewing a sample of invoices processed by the program’s field analysts. The quality control process also contains a peer review focus improvement team to further enhance its ability to identify overpayments/ underpayments. Corrections reported that it identified and recovered $9,513 in overpayments as of March 1, 2005. Additionally, Corrections reported that it is reviewing other potential net overpayments/underpayments totaling $96,906 for accuracy and validity and upon validation, Corrections plans to collect or reimburse vendors as appropriate. 166 California State Auditor Report 2006-406 Corrections reported that its Health Care Cost and Utilization Program staff and accounting staff have established a process to identify late payment penalties by institution and contractor. Corrections also reported that it has established a cross organizational team to resolve issues identified. Finally, Corrections reported that its Health Care Cost and Utilization Program staff identified the need to capture more detailed penalty payment information and are in the process of developing those enhancements. It anticipates that the enhancements will be included in the fiscal year 2005–06 contracts monitoring database. California State Auditor Report 2006-406 167 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 20051 (Corrections) contracts for medical services revealed The Joint Legislative Audit Committee (audit committee) the following: requested that the Bureau of State Audits (bureau)  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  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:  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  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 1 As of December 23, 2005, Corrections had not submitted a complete one-year response previously for the same reporting on whether its pending actions were implemented or what, if any, benefits inpatient stay. were achieved; therefore, the reported actions are from its February 2005 six-month response to our audit. continued on next page . . . 168 California State Auditor Report 2006-406  Corrections paid some To understand the reasons behind the rising trend in its hospitals amounts that inpatient and outpatient hospital payments, Corrections should were from two to eight do the following: times the amounts Medicare would have paid the same hospitals for the same • Enter complete and accurate hospital‑billing and medical inpatient services, including procedures data in its health care cost and utilization program a hospital operated (HCCUP) database for subsequent comparison and analysis by Tenet Healthcare Corporation, which was by the Health Care Services Division (HCSD) and correctional paid eight times the amount institutions of the medical procedures that hospitals are Medicare would have paid. performing and their associated costs.  One institution’s outpatient hospital payments • Perform regular analysis of its health care cost and utilization increased by $821,000 data, monitor its hospital payment trends, and investigate primarily because its fully the reasons why its costs are rising for the purpose of average payment per implementing cost containment measures. emergency room visit, which are paid at a percentage of the hospital • Investigate the significant and sudden increase in its inpatient bill without a maximum hospital payments, beginning in fiscal year 2000–01, for limit, increased from less the purpose of determining whether renegotiating contract than $950 per visit to more that $3,300 per visit. payment rates, reducing the length of stay in contract hospital beds, or other cost containment measures can most effectively  Corrections’ outpatient reduce its contract hospital costs. payment amounts averaged two and one- half times the amount • Complete its analysis of high‑cost cases to determine why Medicare would have paid the number of high‑cost inpatient cases and more‑expensive for the same services. outpatient visits are rising so that it can identify cost‑effective  A lack of key data being solutions to its increasing health care costs. For example, entered into Corrections’ Corrections should fully investigate the extent to which each database limits analyses of the potential cost drivers it has identified as part of its behind causes of increased analysis of high‑cost impatient cases is increasing its hospital payments and utilization, such as the extent to which inpatient costs. case severity is a cause. • Follow up with all institutions using new hospital contracts to determine if renegotiated contract payment terms are resulting in significantly higher costs, as they did for the two institutions that informed us of the significant effect on their inpatient hospital costs for high‑cost cases. Corrections’ Action: Pending. 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 California State Auditor Report 2006-406 169 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 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 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 170 California State Auditor Report 2006-406 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 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 California State Auditor Report 2006-406 171 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: • 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.  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 172 California State Auditor Report 2006-406 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. California State Auditor Report 2006-406 173 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 August 2005 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  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 Finding #1: The Department of Health Services’ authority to without the express fully fund certain county costs is unclear. statutory authority to do so. The department is required to divide MTP costs equally between the • Used a method for State and counties in accordance with Section 123940 of the Health sharing the State’s and Safety Code (Section 123940). However, the department has Medicaid program, fully funded the costs of county personnel to coordinate with the California Medical special education programs in public schools. These coordination Assistance Program (Medi-Cal), payments activities are required under Chapter 1747, Statutes of 1984 with counties that (AB 3632). Although AB 3632 does not require it, the department resulted in the State contends that it has the budget authority to pay 100 percent of incurring a larger county costs for coordinating the delivery of MTP services with portion of MTP costs than specifically special education. Despite the department’s practice of fully authorized in law. paying for the additional county costs related to coordinating activities under AB 3632, the department has not received express • Did not identify and reap the State’s share statutory authority to fund these county activities at a level of Medi-Cal payments greater than 50 percent of county costs. In particular, neither made to certain counties provisional language in the budget act nor language in the MTP’s for MTP services. implementing statute authorizes a deviation from the requirements  A majority of MTP claims of Section 123940. Consequently, the department’s legal authority are denied for Medi-Cal to fully fund these county coordination activities is unclear. payment due to a child’s lack of eligibility. Should the Legislature decide to discontinue fully funding county continued on next page . . . costs for coordinating the delivery of MTP services with special education, it should consider the impact such a decision might 174 California State Auditor Report 2006-406  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  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  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  The department identified provided in the preceding fiscal year. approximately $24,000 in MTP claims for fiscal year 2003–04 that are Department’s 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.  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. California State Auditor Report 2006-406 175 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. Department’s Action: Partial corrective action taken. The department agreed to refine the methodology for calculating the reimbursement for individual counties for mandated work resulting from AB 3632 interagency regulations. The department issued a policy letter on May 20, 2005, revising its prior instructions to counties. In this letter, the department requires counties to annually report data on the number of children receiving both MTP and special education services. Based on this information, the department calculates the number of state funded FTEs for the year. Although this new information on caseload is useful, the department’s new procedures do not require counties to report information on the actual costs associated with these activities. Without information on the time spent by county staff on these liaison and coordination activities, the department cannot know whether the amounts it is paying are reasonable. 176 California State Auditor Report 2006-406 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. Department’s Action: Corrective action taken. On June 3, 2005, the department issued a policy letter informing county California Children’s Services (CCS) programs that the department would revert to its previous methodology for sharing Medi‑Cal reimbursements to the MTP between the State and the counties. In accordance with our recommendation, the new policy calls for the department to reduce the State’s MTP costs by the entire General Fund portion and one‑half of the federal portion of Medi‑Cal payments made for MTP services. 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 California State Auditor Report 2006-406 177 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. 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’s Action: Corrective action taken. The department indicated that it has issued an instruction letter to each county using a COHS agency, directing them to report these COHS payments on their quarterly expenditure reports to the department. 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 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 178 California State Auditor Report 2006-406 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. Department’s 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 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. California State Auditor Report 2006-406 179 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 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’s Action: Pending. The department agrees that frequency limits on occupational and physical therapy services in the claims payment system should be reevaluated. However, the department views this as a resource intensive activity. In lieu of this, 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 them. 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 180 California State Auditor Report 2006-406 to resubmit individual denied MTP claims because the county did not have the required 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’s Action: Corrective action taken. Los Angeles County agreed with our recommendation and has assessed the cost‑ effectiveness of resubmitting previously denied claims that are deemed correctable. Los Angeles County indicates that the electronic resubmission of denied Medi‑Cal claims provides additional net revenue to the county and is cost‑effective. Therefore, the county will resubmit corrected versions of previously denied claims on an ongoing basis following each quarterly billing cycle. California State Auditor Report 2006-406 181 DEpARTmENT OF hEALTh SERvICES Investigations of Improper Activities by State Employees, January 2004 Through June 2005 ALLEGATION NUMBER I2003-0853 (REPORT I2004-2), SEPTEMBER 2004 Department of Health Services’ response as of October 2005 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. Health Services’ Action: Corrective action taken. Health Services reported that it served the manager with a formal reprimand and required her to reimburse the State $11,040, which represents her personal use of state vehicles and the misuse of state vehicles she authorized for her subordinates. Health Services reduced another manager’s pay by 5 percent for two months and required her to reimburse the State $1,466 for her personal use of state vehicles. Finally, Health Services required three other employees to pay a total of $582 for their misuse of state vehicles. 182 California State Auditor Report 2006-406 California State Auditor Report 2006-406 183 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 . . . Department of Developmental Services, the Division of Juvenile Our review of the departments Justice from the California Department of Corrections and of Developmental Services Rehabilitation, and Department of Mental Health responses as (Developmental Services), the Youth Authority (Youth of November 2005 and December 2005 Authority), and Mental Health (Mental Health) processes The Joint Legislative Audit Committee (audit committee) and related costs for releasing asked us to review the process and costs of the sex offenders into the local community revealed: departments of Developmental Services (Developmental Services), the Youth Authority (Youth Authority), and Mental  Developmental Services Health (Mental Health) for placing sex offenders in local cannot identify the total number of individuals it communities. Specifically, the audit committee asked us to serves who are registered review the three departments’ policies and procedures for sex offenders, or the identifying, evaluating, and placing sex offenders in local related costs, and is not communities. It also asked us to review the contracts these required to do so. departments have with homes used to house sex offenders and  Youth Authority’s out- to identify the placement costs that each department incurred of-home placement for the last three fiscal years. Finally, the audit committee asked standards do not conform to laws and regulations us to evaluate the relationship between regional centers’ housing otherwise governing agents and homeowners for a sample of placements made housing facilities. In through Developmental Services during the last fiscal year. For addition, it cannot track purposes of our audit, we defined a sex offender as follows: At the cost of housing sex offenders in the Developmental Services, these are consumers who are required community because of an to register as sex offenders under the Penal Code, Section 290; at inadequate billing system. the Youth Authority, this population includes youthful offenders  Only three sexually eligible for placement in its Sex Offender Treatment Program; violent predators (SVPs) at Mental Health, this population includes Sexually violent have been released to predators (SVPs) as defined by the Welfare and Institutions Mental Health’s Forensic Code, Section 6600. We found that: Conditional Release Program, but procuring housing for SVPs may continue to be difficult, Finding #1: Various laws complicate the treatment of sex and the program has offenders by Developmental Services. proven costly. Developmental Services cannot identify the total number of its continued on next page . . . consumers who are sex offenders and is not required to do so. Specifically, the Lanterman Developmental Disabilities Services 184 California State Auditor Report 2006-406 Act does not require that consumers provide criminal histories, In addition, the State such as prior sex offenses, when accessing services provided currently has no process through regional centers. Furthermore, the law only allows to measure how successful the California Attorney General to provide Developmental the SVP component of this Services the criminal histories of its potential consumers in very program is or to determine how to improve it. limited circumstances. That same law 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: Corrective action taken. 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. Developmental Services reports that it has implemented a plan to use the Megan’s Law Web site to identify consumers who are registered sex offenders. Developmental Services states that the information obtained from the Web site will be used solely to ensure that regional center consumers who are registered sex offenders receive appropriate services pursuant to the Lanterman Developmental Disabilities Services Act and will not be used in a manner prohibited by law. California State Auditor Report 2006-406 185 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 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 186 California State Auditor Report 2006-406 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. Division of Juvenile Justice’s Action: Partial corrective action taken. The Division of Juvenile Justice (division) within the California Department of Corrections and Rehabilitation (formerly the California Youth Authority) reports that it is working toward addressing the deficiencies in its out‑of‑home placement standards and modifying its regulations accordingly. Specifically, the division stated that a workgroup was formed and the group has revised the Parole Services Manual (PSM) to incorporate applicable, laws, regulations, rules, and standards of public safety and service delivery. The division formed another workgroup to evaluate parole agents’ compliance with its supervisory procedures. This group recommended changes to the PSM that require parole agents to adhere to case conference schedules and document their results. The division anticipates that the changes to the PSM made by both groups will be approved by March 1, 2006. In addition, the division reports that it made changes to its foster home agreement in September 2005 to include a specified period of time for the performance of services, the total amount of the agreement, and a description of the services. The division also reported that it formalized its billing system so that it can track the cost of sex offender group placements and that it has implemented measures to ensure the input of accurate data, and to enhance its ability to manage and monitor the system. Further, the division stated it completed a study of the out‑of‑home placement rates paid by each of its parole offices and found that the pay rate and services vary from office to office. The division developed a chart with three standard levels of service with a range of applicable costs to allow parole supervisors to review prior to procuring services, which it expects to fully implement by February 2006. Finally, the division reported that it revised its conflict‑of‑interest code policy for fiscal year 2005–06 to include positions for the employees who are performing duties similar to the supervising parole agent. 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 California State Auditor Report 2006-406 187 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 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’s Action: Corrective action taken. Mental Health reports that new funding to reestablish positions eliminated through past budget reductions has not been made available, hence it cannot reinstate the auditor position. However, Mental Health states that other steps have been implemented to better monitor and control contract costs. For example, Mental Health has reconciled all fiscal year 2004–05 claims paid to the contractor who has provided pre‑release planning and post–release services for SVPs in the Conditional Release Program. In addition, Mental Health has reviewed invoices supporting negotiated rate expenditure claims for fiscal year 2004–05, for this contractor’s costs of providing core services to SVPs, to determine if those claims are allowable, reasonable, and properly classified. Further, Mental Health’s Conditional Release Program staff also prepare an expenditure profile for each SVP, based on court approved terms and conditions, which outlines all authorized treatment and supervision regimens and compares this profile to actual negotiated rate expenditures to ensure these costs are reasonable, allowable under the contract, and consistent with court‑ordered treatment. 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 has updated the Conditional Release Program policies and procedures manual to specify that staff must always be aware of the need to discontinue a contract when current conditions make the procured activity or service unnecessary. This manual also includes a new life support fund policy for SVPs that specifies that the Conditional Release Program hospital liaison for SVPs is responsible for ensuring that SVPs pursue all other sources of support before receiving life support funds and ensuring that the hospital trust office initiates the Social Security Insurance/Medi‑Cal application process. This new policy also specifies that SVPs qualifying for and wishing to participate in the life support 188 California State Auditor Report 2006-406 program are required to sign a life support repayment agreement before entering the Conditional Release Program and that the amount of life support funds will be evaluated every six months. Finally, the new life support policy addresses housing costs separately from other support activities. Legislative Action: Unknown. California State Auditor Report 2006-406 189 DEpARTmENT OF hEALTh SERvICES Investigations of Improper Activities by State Employees, July 2004 Through December 2004 INVESTIGATION I2003-1067 (REPORT I2005-1), MARCH 2005 Department of Health Services’ response as of November 2005 We investigated and substantiated an allegation Investigative Highlights . . . that an employee of the Department of Health Services (Health Services) submitted false travel and An employee with the attendance reports. Department of Health Services:  Falsely indicated on at Finding: The employee submitted false travel and attendance least 22 occasions that she was working in order reports in order to receive wages and travel expenses she to receive $1,894 in wages was not entitled to receive. and overtime she was not entitled to receive. The employee, whose duties require her to travel regularly throughout the State to monitor and provide training to retail  Claimed and was paid businesses, improperly received $3,067 by submitting false $1,173 for expenses related to her travel that claims for wages and travel costs. We determined that, by she either did not incur or misrepresenting her departure and return times on her travel was not entitled to receive. and attendance reports, the employee was paid $1,894 for overtime and regular hours she did not work. We also found that the employee claimed and was paid $1,173 for expenses related to her travel that she either did not incur or was not entitled to receive. Specifically, the employee claimed $253 for parking expenses that she acknowledged to us she did not incur. The employee also improperly claimed $151 in mileage reimbursements by routinely overstating the distance to and from the airport when conducting state business. Because the employee presented false information on her travel claims, she also received $259 for meal expenses that she was not entitled to receive. Finally, the employee improperly received $510 for travel expenses that she claimed on days she did not work or that otherwise were not allowed. 190 California State Auditor Report 2006-406 Health Services’ Action: Pending. Health Services provided training to all its supervisors in the employee’s branch so they can better understand their responsibilities for reviewing travel claims and overtime requests submitted by those under their supervision. Those working in the employee’s branch will also begin using the State’s automated travel claim processing system (system). Because the business rules for travel are programmed into the system, Health Services believes the submission of improper travel claims will be reduced. Finally, Health Services has prepared a recommendation for disciplinary action for the employee and the recommendation is currently under review by Health Services’ staff. California State Auditor Report 2006-406 191 EmERgENCy pREpAREDNESS More Needs to Be Done to Improve California’s Preparedness for Responding to Infectious Disease Emergencies REPORT NUMBER 2004-133, AUGUST 2005 Department of Health Services, Emergency Medical Services Authority, and five local public health department’s Audit Highlights . . . responses as of November 20051 Our review of California’s The Joint Legislative Audit Committee (audit committee) preparedness for responding requested that the Bureau of State Audits conduct to an infectious disease emergency revealed the an audit of the State’s preparedness to respond to an following: infectious disease emergency requiring a coordinated response  The Emergency Medical between federal agencies, the Department of Health Services Services Authority has (Health Services), local health agencies, and local infectious not updated two critical disease laboratories. Specifically, the audit committee requested plans: the Disaster that we (1) evaluate whether Health Services’ policies and Medical Response Plan, procedures include clear lines of authority, responsibility, and last issued in 1992, and the Medical Mutual Aid communication between levels of government for activities Plan, last issued in 1974. such as testing, authorizing vaccinations, and quarantine  The Department of Health measures; (2) determine whether Health Services has developed Services (Health Services) an emergency plan; (3) determine whether California’s does not have a tracking infectious disease laboratories are integrated appropriately process for following up into statewide preparedness planning for infectious disease on recommendations emergencies; (4) determine if the management practices and identified in postexercise evaluations, known as resources, including equipment and personnel, at the state after-action reports. health laboratories are sufficient to respond to a public health  Although Health Services emergency; and (5) review Health Services’ standards for has completed 12 of 14 providing oversight to local infectious disease laboratories, critical benchmarks it and determine whether its oversight practices achieved their was required to complete intended results. by June 2004 for one cooperative agreement, we cannot conclude it The audit committee further requested that we evaluate completed the other whether a sample of local infectious disease laboratories are two. In addition, Health operated and managed effectively and efficiently and have Services has been slow in spending the funds the necessary resources to respond to an emergency, including for another cooperative sufficient equipment and personnel with the appropriate level agreement. continued on next page . . . 1 The five local public health departments are: County of Los Angeles, Department of Health Services (Los Angeles); Sacramento County Department of Health and Human Services, Division of Public Health (Sacramento); County of San Bernardino, Department of Public Health (San Bernardino); Santa Clara County, Public Health Department (Santa Clara); Sutter County, Human Services Department (Sutter). 192 California State Auditor Report 2006-406 of experience and training. We also were asked to review the  None of the five local local laboratories’ testing procedures for infectious diseases and public health departments determine if they meet applicable standards. we visited have written procedures for following up on recommendations Finding #1: The Emergency Medical Services Authority needs identified in after-action reports. to update two critical plans.  None of the five local The Emergency Medical Services Authority (Medical Services) public health departments has not updated two emergency plans: the Disaster Medical we visited had fully Response Plan and the Medical Mutual Aid Plan, the latest completed the critical versions of which are dated 1992 and 1974, respectively. The benchmarks for a cooperative agreement by state emergency plan, issued in 1998, mentions both plans and the June 2004 deadline. describes them as “under development.” The state emergency plan indicates that state entities would use the two plans to help respond to emergencies caused by factors that include epidemics, infestation, disease, and terrorist acts, therefore, we believe the two plans are critical for California’s successful response to infectious disease emergencies. Medical Services agrees that the plans must be updated to ensure that they reflect the State’s current policies and account for any changes in roles or responsibilities since they originally were issued. According to the chief of the Medical Services’ Disaster Medical Services Division, these plans have not been updated because Medical Services lacks resources and has competing priorities. We recommended that Medical Services update the Disaster Medical Response Plan and the Medical Mutual Aid Plan as soon as resources and priorities allow. Medical Services’ Action: Pending. Medical Services indicated that it is working to update the Disaster Medical Response Plan that will provide a concept of operations for all‑hazard response and define the roles and responsibilities of public and private agencies as part of the Standardized Emergency Management System. Medical Services stated that it plans to include a Medical Mutual Aid annex that will address the resource management process to identify, acquire, deploy, and support medical personnel, supplies, equipment, and casualty evacuation systems. According to Medical Services, a draft plan will be available in approximately 90 days and an interim plan will be available by the summer of 2006. California State Auditor Report 2006-406 193 Finding #2: Health Services does not have a tracking method to ensure that it benefits from the lessons it learned. Health Services could improve its ability to learn from its experiences by developing and implementing a tracking process for following up on the recommendations made in its postexercise evaluations, known as after‑action reports. According to guidelines set forth by the U.S. Department of Homeland Security’s Office for Domestic Preparedness, after‑action reports are tools for providing feedback, and entities should establish a tracking process to ensure that improvements recommended in after‑action reports are made. Similarly, the National Fire Protection Association also suggests in its Standard on Disaster/Emergency Management and Business Continuity Programs (2004 edition) that exercise participants establish procedures to ensure that they take corrective action on any deficiency identified in the evaluation process, such as revisions to relevant program plans. An exercise allows the participating entities to become familiar, in a nonemergency setting, with the procedures, facilities, and systems they have for an actual emergency. The resulting after‑action reports give these entities an opportunity to identify problems and successes that occurred during the exercise, to take corrective actions, such as revising emergency plans and procedures, and thus benefit from lessons learned from the exercise. Therefore, we believe that tracking the implementation status is a sound practice to ensure that state entities address all relevant recommendations in after‑action reports, which can then serve as important tools for increasing overall preparedness levels. In response to our concerns that Health Services lacked a written policy and procedures for following up on recommendations identified in after‑action reports for exercises, the deputy director for public health emergency preparedness provided us on July 14, 2005, with the recently developed policy and procedures. However, our review of the policy found that it does not include a standard format for tracking the implementation of recommendations, such as assigning an individual the responsibility for taking action, the current status of recommendations, and the expected date of completion. Therefore, Health Services still needs to refine its policy further by developing and implementing written tracking procedures to ensure it addresses all relevant recommendations that it identifies in after‑action reports. Without a tracking method, Health Services cannot be certain that it takes appropriate and consistent corrective action, such as revising emergency plans, and thus reduces its potential effectiveness to respond to infectious disease emergencies. We recommended that Health Services develop and implement a tracking method for following up on recommendations identified in after‑action reports. Health Services’ Action: Corrective action taken. Health Services developed and implemented a policy on after‑action reporting in response to our draft report in July 2005. This policy and the associated procedures provide a specific tool for tracking recommendations identified in after‑action reports. 194 California State Auditor Report 2006-406 Finding #3: We cannot conclude that Health Services completed a critical benchmark requiring it to assess its preparedness to respond to infectious disease emergencies. In the aftermath of the terrorist attacks in September 2001, and the anthrax attacks later that year, two federal agencies—the Centers for Disease Control and Prevention (CDC) and the Health Resources and Services Administration (HRSA)—offered cooperative agreements to states, local jurisdictions, and hospitals and other health care entities. The cooperative agreements are intended to provide increased funding to improve the nation’s preparedness for bioterrorist attacks and other types of emergencies, including those caused by infectious diseases. However, despite making progress toward completing many of the critical benchmarks established in the CDC cooperative agreement with a June 2004 deadline, we cannot conclude as of our review that Health Services completed critical benchmark number 3, which requires the State to assess its emergency preparedness and response capabilities related to bioterrorism, other infectious disease outbreaks, and other public health threats and emergencies with a view to facilitating planning and setting implementation priorities. Therefore, California may not be as prepared as it could be to respond to infectious disease emergencies. According to its deputy director for public health emergency preparedness (Health Services’ deputy director), Health Services prepared an assessment as did all local health departments. She also stated that some staff documented parts of their assessment and that Health Services’ application for CDC funding in 2004 included references to the assessments. However, she also acknowledged that Health Services did not prepare a single written summary of the assessment it prepared and the assessments prepared by local health departments. Without such a summary and without complete documentation of the assessments, Health Services has not demonstrated to our satisfaction that it has fully completed critical benchmark number 3. Health Services’ deputy director also told us that to obtain a more current assessment, Health Services has entered into a contract with the Health Officers’ Association of California (HOAC) to be conducted from mid‑2005 through December 2006. We recommended that Health Services should ensure that the contractor performing the current capacity assessment provides a written report that summarizes the results of its data gathering and analyses and contains applicable findings and recommendations. Health Services’ Action: Pending. Health Services stated that it has contracted with HOAC for an assessment of public health emergency preparedness in 61 local health departments. Health Services indicated that these assessments are to be completed by December 2006 and it is requiring HOAC to provide written reports that summarize the results of the analyses and contain applicable findings and recommendations for improvements. California State Auditor Report 2006-406 195 Finding #4: Local public health departments could do more to address after-action reports. Local emergency plans, such as the counties’ overall emergency operation plans and local public health departments’ (local health department) emergency operations and response plans, generally included sufficient guidance for emergency preparedness; however, the plans did not include specific procedures for following up on recommendations identified in after‑action reports. When we asked officials of the local health departments, they agreed with our assessment and confirmed that they did not have written procedures for following up on recommendations in after‑action reports although Los Angeles County has developed a draft policy. Moreover, the California Code of Regulations requires state entities to complete after‑action reports for declared emergencies within 90 days of the close of the incident. There is no requirement for preparing after‑action reports for an exercise or drill as there is for a declared emergency, but we believe that promptly writing after‑action reports for exercises is prudent and equally relevant. Waiting longer than 90 days to complete the reports might make it more difficult for the individuals involved in the exercise to recall specific details accurately. Therefore, we expected all participants in the November 2004 exercise hosted by Medical Services to have prepared after‑action reports within 90 days to identify any weaknesses in plans and procedures and to take appropriate corrective actions. However, as of July 2005, the after‑action report from Los Angeles County’s health department was still in draft stage, which is approximately seven months after the exercise. According to the executive director of the county’s Bioterrorism Preparedness Program (executive director), the Los Angeles County health department had not yet implemented all the recommendations identified. The executive director stated that it experienced delays in drafting its after‑action report because the individuals who participated in the exercise were inexperienced with the formalized after‑ action report process and completing the surveys and observations needed. She further stated that several drafts were reviewed and resubmitted by its management. However, because the Los Angeles County health department did not complete its after‑action report promptly, it did not address all the recommendations as quickly as it could have. Consequently, it is not as prepared as it could be to respond to infectious disease emergencies. We recommended that local health departments establish written procedures for following up on recommendations identified in after‑action reports and that they prepare after‑action reports within 90 days of an exercise. Local Public Health Departments’ Actions: Partial corrective action taken. Generally, four of the five local health departments we visited indicated that they have developed written procedures for following up on recommendations identified in after‑action reports and for preparing after‑action reports within 90 days of an exercise. Further, in its July 2005 response to our draft report, the fifth public health department— Sutter County—agreed that it did not have a written plan in place to assure the deficiencies reported in after‑action reports were mitigated properly and it also indicated that it planned to correct this. However, Sutter County has not provided us with a more recent update indicating whether it has done so. 196 California State Auditor Report 2006-406 Finding #5: Not all local public health departments have met the deadline to implement several federal benchmarks. None of the local health departments we visited had met all 14 of the CDC 2002 critical benchmarks by the required deadline of June 2004. Specifically, Los Angeles and Sacramento counties health departments did not meet the June 2004 deadline, but they report that they have since completed the benchmarks. Further, Sutter and Santa Clara counties did not meet one of the 14 2002 critical benchmarks as of June 2005, and San Bernardino County did not meet three. The purpose of the CDC cooperative agreement is, in part, to upgrade local health departments’ preparedness for and response to bioterrorism, outbreaks of infectious disease, and other public health threats and emergencies. Therefore, by not meeting the critical benchmarks, these jurisdictions may not be as prepared as possible to respond to an infectious disease emergency. We recommended that local health departments complete the critical benchmarks set by the CDC cooperative agreement as soon as possible. Local Public Health Departments’ Actions: Partial corrective action taken. As we state above, Los Angeles and Sacramento counties health departments reported that they had completed the critical benchmarks. Additionally, Santa Clara now reports that it has completed its last benchmark while San Bernardino reports completing two of three outstanding benchmarks. Finally, although in its July 2005 response to our draft report, Sutter County indicated that it is working to complete critical benchmarks, it has not provided us with a more recent update. California State Auditor Report 2006-406 197 DEpARTmENT OF hEALTh SERvICES Investigations of Improper Activities by State Employees, January 2005 Through June 2005 INVESTIGATION I2004-0930 (REPORT I2005-2), SEPTEMBER 2005 We investigated and substantiated an allegation that the Department of Health Services (department), Investigative Highlights… Genetic Disease Branch (branch) improperly paid a contractor for holiday time and improperly purchased Department of Health Services: equipment under personal and computer services contracts.  Improperly paid contract staff $57,788 for services Finding #1: The branch improperly paid for contract staff it did not receive. holiday time.  Circumvented procurement procedures and purchased We believe the branch may have violated state law prohibiting gifts $40,698 in equipment on of public funds by paying contract employees more than they were a services contract. entitled to receive. Although terms of the contract did not require it to do so, the branch authorized payment for 13 holidays to Contractor A’s staff from December 2003 through November 2004, costing the State $57,788 for services it did not receive. The contract under which the branch made these payments specifies that services shall be provided Monday through Friday, 8:00 a.m. to 5:00 p.m., except for official state holidays. The branch stated that effective January 1, 2004, it amended Contractor A’s three contracts to provide for holiday pay and provided a holiday pay schedule developed and approved by a former branch employee. However, it was never processed through the department’s contracts section, and therefore, did not constitute a formal, authorized written amendment to the contract. Finding #2: The branch circumvented procurement procedures. The branch circumvented state procurement procedures by using services contracts with both Contractor A and Contractor B to purchase two computers, three fax machines, and two laser printers for the branch. The computers cost $35,000, the fax machines cost $1,845 and the printers cost $3,853. 198 California State Auditor Report 2006-406 The branch’s agreement with Contractor B was for the contractor to provide maintenance of computer hardware and software. The branch circumvented the goals of state law as well as state procurement procedures by using money from this computer services contract to purchase two computers. Specifically, the branch approved a $15,500 invoice from Contractor B for, as the invoice stated, “time and materials not covered under the terms and conditions of the regular maintenance agreement” but was actually for the cost of the two computers. We believe the information on this invoice was a misleading statement about the true nature of the transaction. Further, it appears that the branch was aware of the true nature of the amount claimed on the invoice when it approved payment, thereby not only circumventing state procurement procedures but also approving and perpetuating misleading information. The branch also approved a second invoice from Contractor B for $19,500 with the same description of services. The branch told us this invoice was for the installation of emergency backup computers in Sacramento, something that was necessary as part of the recovery system required for critical public health services. It further said both invoices were approved under the mistaken impression that the contract had been amended to provide for this equipment. Similarly, the branch used a personal services contract with Contractor A to purchase fax machines and laser printers. The branch circumvented state procurement procedures requiring departments to obtain price quotes and compare prices. Furthermore, the contractor charged the branch another 10 percent for “additional administrative and accounting expenses.” Department’s Action: Pending. The department has requested to review our working papers and is in the process of determining what action to take. California State Auditor Report 2006-406 199 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 July 2005 The Joint Legislative Audit Committee (audit committee) Audit Highlights . . . requested that we assess the Department of Insurance’s (Insurance) effectiveness in improving consumer Our review of the Department of Insurance’s services and its Fraud Division activities as a result of the (Insurance) effectiveness 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  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  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 200 California State Auditor Report 2006-406  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  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  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.  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  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. California State Auditor Report 2006-406 201 Insurance’s Action: Corrective action taken. Insurance stated new regulations establishing a process that imposes a hard count of the number of vehicles covered by an automobile insurer became effective on July 3, 2005. Additionally, Insurance stated its Field Examination Division has procedures in place for the Budget and Revenue Management Branch to refer insurers to it for limited scope examinations when the Budget and Revenue Management Branch detects problems with the data of the number of insured vehicles and is unable to reconcile or resolve them. Furthermore, Insurance reported that the Budget and Revenue Management Branch established criteria for identifying unusual trends and has incorporated the application of the criteria in its internal procedures. Finally, Insurance reported that its Budget and Revenue Management Branch found it difficult to compare the number of private passenger vehicles insurers report on their assessment invoices to the number they report to its Statistical Analysis Division annually and instead intends to focus on the analysis of unusual trends discussed previously. 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. 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. 202 California State Auditor Report 2006-406 • Link its Legal Division’s case tracking system to its time reporting system to better document the use of SB 940 funds. Insurance’s 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 these positions have been filled. 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. 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. California State Auditor Report 2006-406 203 • 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. Insurance’s Action: Corrective action taken. Insurance reported that it established new procedures for staff 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 stated that it has reorganized its Fraud Division, as well as recruited and hired additional auditors to conduct financial and performance audits of the county district attorney offices that receive grants. Furthermore, Insurance reported that its Fraud Division has continued to improve communications with the California District Attorney Association Insurance Anti‑Fraud subcommittee, emphasizing effective reporting of performance measures, improvements in laws and regulations, and the requirements for timely reporting of financial statements. 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. 204 California State Auditor Report 2006-406 Insurance’s 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 believes that its current support staff ratio of 3:41 is reasonable. However, Insurance stated that, as a result of its implementation of a new database, revised duties might evolve and need to be assigned. 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’s Action: Corrective action taken. Insurance reported that in March 2005 its Market Conduct Division implemented a new exam tracking system, which includes timekeeping along with integrated expense and billable hour reporting into Accounts Receivables. The exam tracking system’s new features will allow the Market Conduct Division to collect exam time and cost information as well as exam results in an automated fashion for a single insurer exam or an insurer group exam by using exam identification numbers. California State Auditor Report 2006-406 205 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 January 2005 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  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  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. 206 California State Auditor Report 2006-406  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  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  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.  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 California State Auditor Report 2006-406 207 that the 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 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 208 California State Auditor Report 2006-406 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 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 California State Auditor Report 2006-406 209 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 (WCIS), 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. 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 WCIS 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. Industrial Relations’ Action: Partial corrective action taken. In its one‑year response, Industrial Relations reported it is continuing to work toward implementing various legislative reforms, including Senate Bills 899 and 228, and Assembly Bills 749 and 227. For example, Industrial Relations reported that it had completed rulemaking activities to implement the new official medical fee schedule required by one of these statutory reforms of the workers’ compensation system. In addition, Industrial Relations reported that it had adopted emergency regulations to implement utilization review and was beginning activities to develop permanent regulations. 210 California State Auditor Report 2006-406 Further, Industrial Relations reported it was continuing its work to develop and implement its WCIS to collect the data needed to manage the workers’ compensation system in a more efficient and effective manner. Industrial Relations reported it was refining the list of data elements to be collected and the electronic billing forms and standards it will use. Industrial Relations stated it expected full implementation of medical data reporting using the WCIS beginning in the fourth quarter of 2005. California State Auditor Report 2006-406 211 WORkERS’ COmpENSATION FRAUD Detection and Prevention Efforts Are Poorly Planned and Lack Accountability REPORT NUMBER 2002-018, APRIL 2004 Audit Highlights . . . Department of Insurance response as of April 2005, Fraud Our review of the State’s Assessment Commission response as of August 2005, program to reduce workers’ compensation fraud and Department of Industrial Relations’ response as of revealed that: November 2005  Although employers are Section 1872.83 of the Insurance Code (Chapter 6, Statutes of assessed annually to pay 2002), requires the Bureau of State Audits (bureau) to evaluate for efforts to reduce fraud in the effectiveness of the efforts of the Fraud Assessment the workers’ compensation system—an amount Commission (fraud commission), the Department of Insurance that has averaged about Fraud Division (fraud division), the Department of Insurance $30 million per year for the (Insurance), and the Department of Industrial Relations (Industrial past five years—the Fraud Relations), as well as local law enforcement agencies, including Assessment Commission (fraud commission) and district attorneys, in identifying, investigating, and prosecuting the insurance commissioner workers’ compensation fraud and employers willful failure to have not taken steps secure workers’ compensation benefits for their employees. to measure fraud in the system or develop a statewide strategy to Finding #1: The fraud commission and the insurance reduce it. commissioner cannot be certain that fraud assessment funds  Neither the fraud are effectively used to reduce fraud. commission nor the insurance commissioner The California Constitution authorizes the Legislature to create has acted to ensure that the and enforce a workers’ compensation system that requires assessments employers pay employers to compensate workers for job‑related injuries and are necessary or are put to the best use for reducing illnesses. Employers must pay for these benefits to injured the overall cost that fraud workers either by purchasing workers’ compensation insurance adds to the workers’ from an insurer or directly through self‑insurance. The total cost compensation system. of California’s workers’ compensation system has more than  Shortcomings also doubled recently—growing from about $9.5 billion in 1995 exist in the process to about $25 billion in 2002—giving rise to sharp increases in used to distribute fraud employers’ workers’ compensation insurance premiums and assessment funds to county district attorneys prompting several efforts to reform various aspects of the system. in a way that maximizes Some of these reform efforts have been targeted at combating their effectiveness in the fraud alleged to exist in the workers’ compensation system, fighting fraud. including fraud perpetrated by workers, medical and legal continued on next page . . . providers, insurers, and employers. 212 California State Auditor Report 2006-406  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  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  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  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  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’ 213 California State Auditor Report 2006-406  The fraud division’s compensation system. To establish benchmarks to gauge the special investigative audit effectiveness of future antifraud activities, these measures unit lacks a program should include analyses of available data from insurers and that effectively targets state departments engaged in employment‑related activities, insurers to achieve maximum compliance such as Industrial Relations and the Employment Development with suspected fraud Department. In addition, the insurance commissioner should reporting requirements, a consider reactivating an advisory committee comprising standardized approach to conducting audits, timely stakeholders focused on reducing fraud in the workers’ reports and follow-up, compensation system to contribute to the data analyses, and effective penalties to provide input about the effects of fraud, and suggest priorities promote compliance. for reducing it. This advisory committee should meet regularly  Improvement is needed and in an open forum to increase public awareness and the in sharing information accountability of the process. between the Industrial Relations and the fraud division to identify Insurance and Fraud Commission’s Action: Partial potential workers’ corrective action taken. compensation fraud. Insurance and the fraud commission reported that they had joined forces in proposing a joint research project and have partnered with the Commission on Health and Safety and Workers’ Compensation (CHSWC) and other state and local agencies in assembling a working group to develop a request for proposal to conduct a study to measure workers’ compensation fraud and abuse, particularly in the areas of medical providers, uninsured employers, and premium fraud. The proposed research will also address emerging trends in fraud schemes and attempt to quantify the return‑on‑investment of the antifraud program in California. In March 2005 the fraud commission voted to assess employers $1 million to fund the proposed research project. Insurance and the fraud commission estimate that the request for proposal will be advertised no later than June 1, 2005, and be awarded by early fall 2005. 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 California State Auditor Report 2006-406 214 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 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. California State Auditor Report 2006-406 215 • 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 and Fraud Commission’s Action: Pending. Insurance and the fraud commission believe that systematic identification and measurement of fraud is needed to identify the appropriate approach to control workers’ compensation fraud. Insurance reports that the Performance Measurement Committee (committee)—comprised of representatives from Insurance, the county district attorneys, and the fraud commission—has met on several occasions and submitted a proposal to the fraud commission for review and approval that will revamp the performance measurement criteria connected with the district attorneys’ grant application process. Insurance states the proposed revisions are consistent with the desire of the fraud commission to make the grant application review process standardized, consistent, and accountable. The fraud commission indicated that the new performance measurement criteria would be used to allocate funding to the participating district attorneys beginning with fiscal year 2006–07. Fraud Commission’s Action: Partial corrective action taken. Until the proposed research study to measure the magnitude of workers’ compensation fraud is complete, Insurance and the fraud commission reported that they have been working to develop a strategy to improve the efficiency, consistency, and accountability in the decision‑making process. Together with the fraud division and district attorneys, they stated that they will work to provide the best information available on reported fraud and trends, continue with roundtable discussions pertaining to antifraud efforts, and make adjustments to program objectives focused on reducing fraud. 216 California State Auditor Report 2006-406 Fraud Commission’s Action: Corrective action taken. Insurance reports that it now submits an annual report to the fraud commission that contains the results of its objectives from the prior year and objectives for the ensuing year together with estimates of the expenditures it will need to accomplish those objectives. Fraud Commission’s Action: Partial corrective action taken. The fraud commission stated that the fiscal year 2004–05 request for application used by district attorneys to participate in the workers’ compensation antifraud grant program had been modified by Insurance to the extent permitted by current regulations. The fraud commission reported that the majority of district attorneys that applied for funding included their prior year accomplishments, current year goals and objectives, and their anticipated expenses to accomplish them. Fraud Commission’s Action: Pending. The fraud commission did not address our recommendation in its response. We are therefore unsure whether a majority of the commission believes that altering the current funding formula would increase accountability over the use of antifraud program funds. Thus, we do not know if the fraud commission will encourage legislation to change the funding formula now required by law. 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. 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. California State Auditor Report 2006-406 217 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. • 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 and Fraud Commission’s Action: Partial corrective action taken. Insurance reports that new regulations have been drafted and are currently under review by the Office of Administrative Law. Insurance indicated that these new regulations include the commissioning of a variety of studies, including effective performance measurement methodologies for the program as a whole and the district attorneys’ use of grant funds. The studies will also recommend criteria, weighting and scoring, and baseline benchmarks against which to gauge performance. According to Insurance, until such studies are complete, it and the fraud commission shall issue written justifications explaining funding recommendations and determinations. The fraud commission reported it continues to work with the committee to develop standard decision‑making criteria and performance measurements. 218 California State Auditor Report 2006-406 Insurance and Fraud Commission’s Action: Corrective action taken. Insurance reports that for fiscal year 2004–05, district attorneys who apply for antifraud funds are required to provide a statement describing efforts and strategies in combating legal, medical, and premium fraud, and to include those strategic initiatives and objectives in joint plans between district attorney offices and fraud division regional offices. In addition, district attorneys are required to describe prior year’s accomplishments as well as proposed plans to meet the objectives identified by the insurance commissioner and the fraud commission. For fiscal year 2005–06, Insurance reports that proposed modifications to antifraud program regulations require the dissemination of the insurance commissioner’s strategic goals and objectives for the program at the commencement of each grant funding cycle. The proposed regulations also incorporate a comparison of grantee performance over time for the purpose of recommending and determining grant funding. The fraud commission reports it discusses its goals and objectives with the deputy district attorneys attending Insurance’s annual information meeting on the grant application process. In addition, the fraud commission stated it finalized its fiscal year 2005–06 goals and objectives at its March 2005 meeting, e‑mailed them to all county district attorneys to be considered in preparation of grant applications, and provided them to the performance committee. Insurance stated that the proposed regulatory changes now under review base grant funding on pre‑determined performance criteria and no longer includes the award of a base portion. According to Insurance, its legal staff has determined that the provisions of the Bagley‑Keene Public Meeting Act apply to the fraud commission and the fraud commission has decided not to seek an exemption from the Legislature. Insurance and Fraud Commission’s Action: Partial corrective action taken. Insurance reports it has amended its business plan to include performance measures for the fraud division as recommended by the fraud commission and the insurance commissioner. In addition, Insurance states that it, in conjunction with the fraud commission and representatives of the district attorneys, will establish performance measurements on which all future district attorneys’ funding allocation decisions will be based beginning with the fiscal year 2006–07 grant cycle. 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 California State Auditor Report 2006-406 219 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. 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’s Action: Partial corrective action taken. Insurance reports that it and the fraud commission have proposed limiting district attorneys’ options for charging indirect costs to the following two—5 percent of total funds granted or 10 percent of a grantee’s total salaries and benefits. However, the fiscal year 2005–06 grant application Insurance provided still allows grantees to  choose a third option of charging indirect costs to grants using cost rates approved by the U.S. Office of Management and Budget—the same option that resulted in the condition we originally reported. 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 previously discussed, the fraud commission and the insurance commissioner have not established a statewide strategy for the antifraud program. 220 California State Auditor Report 2006-406 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 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. California State Auditor Report 2006-406 221 Insurance’s Action: Partial corrective action taken. According to Insurance, it has modified its database to provide statistics and trends on workers’ compensation fraud. In addition, together with the fraud commission, Insurance stated it has forged partnerships to facilitate the study of the extent and nature of workers’ compensation fraud, as well as this type of fraud’s economic value. Insurance reports that it has taken steps to establish benchmarks that it can use to measure its and the participating district attorneys’ performance in meeting program goals and objectives, and to determine whether the antifraud program is operating as intended and resources are appropriately allocated. As stated in its response to finding #1, Insurance reported partnering with the fraud commission and representatives of state and local agencies to facilitate a research study that will measure the nature and extent of workers’ compensation fraud. Insurance indicated that a contract will be awarded to conduct such a study in early fall 2007. Insurance reports that it has modified its database to help identify and assist in increasing efficiencies in the intake process of fraud referrals from workers’ compensation insurance carriers and continues to emphasize that supervisors use standard criteria when determining case assignments. Insurance has also requested further modifications to its database to improve its ability to track fraud referrals. Insurance stated the request is pending. Insurance also reports that the joint research project identified in its response to finding #1 will include a study on the return‑on‑investment of the workers’ compensation antifraud program in California. Insurance’s Action: Corrective action taken. Insurance reports it has modified its business plan to include its noninvestigative responsibilities, including establishing appropriate goals and objectives, activities, and priorities. 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: 222 California State Auditor Report 2006-406 • 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’s Action: Partial corrective action taken. Insurance reports that it has proposed changes to its regulations regarding independent audits of district attorneys’ annual antifraud grants to require their respective financial officers to certify in a management letter included in each county district attorney’s independent audit report that all financial information contained in the report was presented accurately and true to the financial officer’s best knowledge. Insurance’s Action: Corrective action taken. According to Insurance, it has developed regulations and procedures to ensure district attorneys comply with the independent audit requirements and promptly submit their audit reports. 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 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. California State Auditor Report 2006-406 223 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.  Insurance’s Action: None. In its initial response to our audit, Insurance stated it would reevaluate its referral process and evidence standards within the context of existing statutes. Insurance further stated it believed all insurers should submit all suspected fraud claims for trend analysis and the establishment of priorities. Other than the passage of Assembly Bill 1227 discussed below, Insurance has not since responded to our recommendations that it continue its efforts to remove the barriers that prevent insurers from providing the desired level of fraud referrals and seek any necessary legal and regulatory changes in the fraud reporting process. Further, Insurance has not responded to our recommendations that it work with insurers to reduce the number of referrals that are not likely to result in successful investigation or prosecution, and to ensure that the referrals submitted contain the level of evidence necessary for the fraud division to assess the probability of a successful investigation or prosecution. 224 California State Auditor Report 2006-406 Insurance’s Action: Partial corrective action taken. Insurance reports it is currently engaged in the rulemaking process to implement the provisions of Assembly Bill 1227, passed in September 2004, to provide authority and an appropriate penalty structure to increase insurance company compliance with special investigative units. Insurance’s Action: Corrective action taken. As part of the strategy for its special investigative audit unit, Insurance reports that it has analyzed staff duties and position classifications in its special investigative unit to better complete reviews of insurers in compliance with government auditing standards. In addition, its special investigative unit staff now uses a policy manual to conduct risk‑based reviews of insurers, providing for more consistent, accurate, and timely reviews. Insurance also reports that all prior special investigative unit audits have been completed and reports issued. In addition, the new policy manual requires audit follow‑up and all follow‑up information is being documented and tracked in a newly developed database. Legislative Action: Legislation enacted. Assembly Bill 1277 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. 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, California State Auditor Report 2006-406 225 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. Industrial Relations’ Action: Partial corrective action taken. In November 2005, Industrial Relations reported it had jointly with Insurance created a referral form to report uninsured employers and forwards such referrals to Insurance quarterly, and was in the process of implementing a mechanism to allow reporting of suspected medical provider fraud. Industrial Relations also reported it was 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 reported that it had not secured funding to implement a required program where data obtained from the Uninsured Employers’ Fund,  Employment Development Department, and the Workers’ Compensation Insurance Rating Bureau can be compared to discover employers 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 226 California State Auditor Report 2006-406 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. 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.  Industrial Relations did not address these recommendations in its six‑month response received in November 2004, or its one‑year response to our audit report received in November 2005. Therefore, we are unable to provide the status for these recommendations. California State Auditor Report 2006-406 227 STATE BAR OF CALIFORNIA It Should Continue Strengthening Its Monitoring of Disciplinary Case Processing and Assess the Financial Benefits of Its New Collection Enforcement Authority REPORT NUMBER 2005-030, APRIL 2005 Audit Highlights . . . Our review revealed that the State Bar of California’s response as of October 2005 State Bar of California: As required by Chapter 342, Statutes of 1999, the Bureau  Continued to monitor its of State Audits conducted a performance audit of the backlog of disciplinary State Bar of California’s (State Bar) operations covering cases and reported 402 cases in the backlog January 1, 2004, through December 31, 2004. In planning this at the end of 2004. audit, we followed up on three principal areas identified during our 2003 audit: the State Bar’s processing of disciplinary  Continued to conduct cases, cost recovery as part of processing disciplinary cases, and semiannual reviews of disciplinary case the use of mandatory and discretionary funds to support State files; however, it noted Bar functions. deficiencies similar to those found in its 2002 reviews. Our report concluded that the State Bar continued to monitor  Developed a checklist for its backlog of disciplinary cases that resulted from its virtual case files and adopted a shutdown in 1998. In addition, the State Bar’s semiannual policy to spot check active reviews of randomly chosen disciplinary cases in 2004 disclosed cases as we recommended, but the checklist is not deficiencies similar to those found in its 2002 random reviews. comprehensive and staff To address these deficiencies and in response to our 2003 audit have not consistently recommendations, the State Bar developed a brief checklist performed the spot checks. to guide staff in processing disciplinary cases. However, its  Obtained additional legal staff did not always use the checklist and it is not sufficiently authority to collect money comprehensive. The State Bar also adopted a policy to spot check related to disciplinary open disciplinary cases to ensure that staff are maintaining files cases, but needs approval of administrative properly and handling complaints correctly. However, we found procedures before it that staff did not consistently perform the requisite number of can implement the new spot checks and sometimes failed to document the results. authority.  Is pursuing an increase in Further, the State Bar’s recoveries of disciplinary costs and Client revenues from membership Security Fund payments remained low. Therefore, to subsidize fees to help reduce these costs, it used a larger portion of the membership fees it projected deficits. collected than it would have if its recovery rates were higher. Although a law effective in January 2004 improved its ability to recover past and future costs, the State Bar has not yet been able to use this new authority because it is waiting for approval of 228 California State Auditor Report 2006-406 certain administrative procedures by the California Supreme Court. Finally, the State Bar is pursuing a revenue increase to help reduce projected deficits in its general fund and Client Security Fund. Specifically, we found: Finding #1: The State Bar continued to monitor its case backlog while seeing little change in the number of disciplinary cases it processed. The State Bar processed almost the same number of cases through its intake and enforcement units in 2004 as it did in 2002. In addition, although it reported that its backlog of disciplinary cases increased to 540 cases in 2003, the backlog it reported at the end of 2004 was 402 cases, which is almost identical to the backlog at the end of 2002. Even though the State Bar maintains an “aspirational goal” of reducing the backlog to 250 cases, it believes that having a backlog of about 400 cases may reflect the norm. We recommended that the State Bar continue its efforts to control its backlog of disciplinary cases. State Bar’s Action: Corrective action taken. The State Bar reported that it has reorganized the office of the chief trial counsel, in part, to address structural and reporting issues that have historically contributed to the creation of the backlog. In particular, it eliminated the separate trial unit and investigation unit and created four trial and investigation units that it believes will result in greater teamwork in performing adequate investigations and preparing cases for trial. The State Bar also stated that, since September 1, 2005, its deputy trial counsel, rather than investigators, oversees all disciplinary investigations. Finally, the State Bar indicated that its supervising trial counsel and assistant chief trial counsel monitor the age of investigations, focusing on the completion of backlog cases and avoiding addition of new cases into the backlog. The State Bar expects that these actions will significantly reduce the backlog by the end of 2005. Finding #2: The State Bar needs to fully implement its procedures and policies for monitoring disciplinary case processing. The State Bar’s random reviews of its disciplinary case files indicate that staff still have not consistently followed policies and procedures when processing complaints filed against its members. In particular, in its 2004 semiannual reviews of randomly chosen case files, the State Bar identified some of the same deficiencies as it identified in 2002 reviews. To address some of these issues, and in response to the recommendations we made in our 2003 report, the State Bar developed a checklist to ensure that staff complete important steps in processing complaints and include all necessary documents in every case file. Further, in 2004 the State Bar instituted a policy requiring team leaders to periodically spot check active files. However, we found that staff have not consistently used the checklist and it is not sufficiently detailed. In addition, we found little evidence of compliance with the spot‑check policy. California State Auditor Report 2006-406 229 We recommended that the State Bar: • Establish a written policy requiring staff to maintain a checklist of the important steps involved in processing disciplinary cases and include all necessary documents in every case file, rather than relying on an informal instruction that the checklist be used. • Develop a checklist that is more comprehensive than the current investigation file reminder, such as the tool that the audit and review unit uses when it randomly reviews disciplinary case files. • Make supervisors responsible for ensuring that each case file includes a checklist and that staff use it. • Enforce its policy of spot checking the files of active disciplinary cases and require team leaders to document the results of their spot checks. State Bar’s Action: Corrective action taken. The State Bar reported that it has developed a more comprehensive checklist and directed its staff to begin using the checklist effective July 1, 2005. In addition, the State Bar stated that it has issued a policy directive that addresses the monthly random audits of open investigation files, as well as the requirement to document the results of the random audits using a checklist form developed for that purpose. Finding #3: Changes in state law may improve the State Bar’s recovery of disciplinary costs and Client Security Fund payments. The State Bar’s cost recovery rates in 2004 were comparable to its recovery rates in 2002; however, they remained low compared with the total amounts billed. Specifically, the State Bar’s cost recovery rates in 2004 for discipline and the Client Security Fund were 40.5 percent and 10.7 percent, respectively. Therefore, the State Bar used a larger portion of its membership fees to subsidize its disciplinary activities and the Client Security Fund than it would have with a higher recovery rate. In the past, the State Bar had little success in recovering costs from disbarred attorneys or attorneys who resigned, in part, because it lacked specific authority to pursue recovery of debts under the Enforcement of Judgments Law. However, based on amendments to the Business and Professions Code, effective in January 2004, the State Bar now has the requisite legal authority, which may improve its ability to recover not only future costs but also some portion of the $64 million in billed costs that remain unrecovered since 1990. To enable it to carry out the statute, the State Bar has proposed to the California Supreme Court that the California Rules of Court be amended. The proposed amendments, which the State Bar submitted to the supreme court in February 2005, would require the superior court clerk of the relevant county to immediately enter a judgment against an attorney for the amount the State Bar certifies the attorney owes for disciplinary costs or Client Security Fund payments. After obtaining the money 230 California State Auditor Report 2006-406 judgment, the State Bar would be able to garnish wages or obtain judgment liens on real property the attorney owns. Until the Supreme Court approves the proposed procedures, the State Bar cannot exercise the money judgment authority. We recommended that the State Bar prioritize its cost recovery efforts to focus on attorneys who owe substantial amounts related to disciplinary costs and payments from the Client Security Fund. State Bar’s Action: Partial corrective action taken. The State Bar reported that, as of October 2005, it is still waiting for the Supreme Court’s action and approval of the proposed amendments to the rules of court. The State Bar also indicated that it continues to monitor the responses from disciplined attorneys to the demand letters that have been mailed in its two pilot projects—one targeting the most recently disciplined attorneys and another targeting 68 of the 100 disciplined attorneys who owe the most in disciplinary costs. As of October 2005, the State Bar reported that collections as a result of the first and second pilot projects have totaled $46,701 and $2,745, respectively. Further, the State Bar indicated that it is retrieving relevant documents from the files of disciplined attorneys so that it can file requests for money judgments when the Supreme Court’s expected order approving the proposed rules becomes effective. However, the State Bar indicated that one disbarred attorney who received a demand letter for repayment of disciplinary costs has filed a civil rights action in federal court challenging the constitutionality of the amendments permitting the State Bar to enforce disciplinary costs as money judgments. Because the State Bar believes other disciplined attorneys are likely to raise similar challenges, it is seeking to obtain a favorable ruling on the merits and has filed a motion for judgment on the pleadings. Finally, the State Bar reported that it has derived a list of attorneys with court‑ ordered restitution from the list of the 100 attorneys owing the most in Client Security Fund reimbursements and is reconciling the amounts these members owe. Finding #4: The State Bar is pursuing a revenue increase to help reduce projected deficits. Based on the State Bar’s financial forecast, the combined balance of its general fund, which accounts for activities related to the disciplinary system, and its Public Protection Reserve Fund, which was established to ensure the continuity of the disciplinary system, will sink into a deficit of $13.8 million by the end of 2008 unless revenues from membership fees increase. The forecast assumes a significant increase in staff salaries and wages beginning in 2006 and no change in membership fees. For its general fund the State Bar predicts that expenses will exceed revenues starting in 2005, which will eventually use up the surplus in the general fund. The State Bar also predicts that its Client Security Fund, which California State Auditor Report 2006-406 231 it uses to help alleviate the financial losses suffered by clients of dishonest attorneys, will have a deficit by the end of 2006. To avoid projected deficits, the State Bar has proposed a bill that would increase its membership fees by $5 for active members and $95 for inactive members and would change the criteria for active members to qualify for a partial fee waiver. If approved, these changes would become effective on January 1, 2006. We recommended that the State Bar continue to update its forecasts for key revenues and expenses as new information becomes available. For example, the State Bar should closely monitor the results of its enhanced collection enforcement authority and the benefits it may have on recovery of disciplinary costs and Client Security Fund payments. State Bar’s Action: Partial corrective action taken. The State Bar reported that its fee bill for 2006 and 2007 was signed into law in September 2005 and the fees have been incorporated into the 2006 budget adopted by its board of governors. The State Bar believes that the fee structure as authorized by the Legislature should provide sufficient funding to operate through 2007. In addition, the State Bar indicated that it will continue to monitor key 2005 revenues and expenses on a quarterly basis and will update its financial forecast accordingly. Finally, the State Bar reported that it continues to monitor its collection efforts for disciplinary costs and Client Security Fund payments while the proposed rule of court related to its enhanced collection enforcement authority is still pending final approval by the California Supreme Court. 232 California State Auditor Report 2006-406 California State Auditor Report 2006-406 233 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’s 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’s 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. 234 California State Auditor Report 2006-406 California State Auditor Report 2006-406 235 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 March 2005 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  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  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  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  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 of any purpose. 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 affect the 236 California State Auditor Report 2006-406 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 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 California State Auditor Report 2006-406 237 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. 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. 238 California State Auditor Report 2006-406 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 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’s 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 March 18, 2005, Colusa County’s EMS Fund has not been reimbursed. California State Auditor Report 2006-406 239 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 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’s 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’s Action: Corrective action taken. San Mateo County began asking hospitals that receive Maddy funds to provide support for EMS expenditures prior to paying these hospitals in fiscal year 2004–05. 240 California State Auditor Report 2006-406 Colusa County’s Action: 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. California State Auditor Report 2006-406 241 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 August 2005 (MTA) oversight of outside counsel found that: The Joint Legislative Audit Committee directed the  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  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.  A task-based billing The MTA could improve the oversight of its legal costs by format would aid in requiring the county of Los Angeles, Office of the County the review of invoices by allowing for a quick Counsel (County Counsel), to fully implement recommended determination of how management tools included in its contracts with outside much outside counsel counsel. County Counsel represents the MTA in transactional spent on particular efforts. matters such as drafting and reviewing contracts, provides  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 242 California State Auditor Report 2006-406 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. MTA’s Action: Partial corrective action taken. The MTA says that for large, complex cases, it has found that attempts to develop detailed case management plans and life of the case budgets at the outset of litigation have been ineffective. Nevertheless, the MTA states that it requested outside counsel to prepare a case management plan and life of the case budget for the one large, complex case filed against the MTA since publication of the audit. The MTA states, however, that because a litigation moratorium has been declared in that case, it has not had an opportunity to test the usefulness of the plan or budget as a management tool. 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 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. California State Auditor Report 2006-406 243 MTA’s 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. 244 California State Auditor Report 2006-406 California State Auditor Report 2006-406 245 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 June 20051 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  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  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.  Underestimated how much it would spend By agreeing to large increases in employee salaries and benefits, out of its general fund, the city shrank its financial assets and jeopardized its financial sometimes intentionally, and delayed making stability to the extent that major cuts were required in city spending reductions. services, including fire and police protection. In fact the city raised salaries by 16 percent to 27 percent for most employees  Relied on inaccurate reports to monitor and between fiscal years 2000–01 and 2002–03 and in some cases, adjust the budget. retirement benefit costs exceed 30 percent of what it pays employees in salaries. Between 1998 and 2003, the city council Since March 2004 the city has taken steps to improve its agreed to base its salaries for public safety employees (police financial health and how it officers and firefighters) on the salaries that certain other cities monitors its finances. in the Bay Area would be paying at future points in time. However, the city 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 1 We did not receive the city’s one-year response that was due December 7, 2005. Therefore, we are presenting the city’s reported progress in implementing our recommendations as of its six-month response. 246 California State Auditor Report 2006-406 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 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’s Action: Partial corrective action taken. According to the city, it negotiated three‑year contracts with five of its six unions, which did the following: • Set wages at the current level with one 3 percent wage increase for public safety employees over the three‑year life of the contracts, and one 2.5 percent wage increase for miscellaneous employees over the three‑year life of the contracts. • Phased in over a six‑month period having the employees pay the employee’s share of retirement contributions, including most public safety employees. • Capped medical rates and required employees opting to stay in higher‑costing plans to pay the difference. California State Auditor Report 2006-406 247 The city also reported that none of the agreements use a city salary survey to set compensation. Although it stated in its initial response that it was in general agreement with the recommendation, the city did not indicate in its six‑month response whether it developed a policy to set funds aside for fluctuations in its share of contributions to its employee retirement system. Finding #2: The city’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, the city started spending more money out of its general fund than it was receiving in revenue, beginning in fiscal year 2002–03. By the time the city 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’s Action: Corrective action taken. As discussed in its response to finding #1, the city indicated that it has taken steps to reduce its employee expenditures. Additionally, the city reported that it has taken a very conservative approach to budgeting and using its new revenue source, Measure Q, which was a 0.5 percent sales tax increase. According to the city, it is using a zero based budgeting approach for using the new revenues and will restore service levels as the revenues become measurable and available. Finding #3: The city 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, the city 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. 248 California State Auditor Report 2006-406 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 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. The city 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’s Action: Pending. The city did not include in its response whether it established a policy delineating how it may use one‑time revenues or a policy related to maintaining reserves.  However, in its initial response, 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 would be presented to the city council for action at its meeting on November 30, 2004. Finding #4: The city 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 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 California State Auditor Report 2006-406 249 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 the city 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’s Action: Corrective action taken. The city reported that it plans to continue budgeting using conservative estimates. Additionally, the city council adopted a policy to set aside $2 million in each of the next five years into a reserve for contingencies to cover unexpected events. Finding #5: The city 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. 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. 250 California State Auditor Report 2006-406 City’s Action: Partial corrective action taken. According to the city, it continues to use its process to better budget for salaries by comparing the positions on its position control list to its current staff. Additionally, the city reported that in the fiscal year 2004–05 budget, it set the contribution rates for its general liability and workers compensation insurance to cover the projected actuarial contributions for the cost incurred plus a contribution toward the unfunded liability of prior years’ costs. The city’s goal is to fully fund the unfunded liability over a 10‑year period. Finally, the city indicated in its 60‑day response that it would use the payment information in the bond payment schedules to develop its budget for fiscal year 2004–05. Finding #6: The city’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 the city’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 the city 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, 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 the city’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. California State Auditor Report 2006-406 251 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’s Action: Corrective action taken. In its 60‑day response, the city indicated that it prepares monthly financial reports and presents them to the city council. The reports cover all operations and all funds. The city also reported that the issue of periodic financial training for council members has been referred to city council’s rules committee for consideration. Finding #7: The city 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, the city 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, the city 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. 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 the city’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’s Action: Corrective action taken. In its 60‑day response, the city indicated that it prepares monthly financial reports and presents them to the city council. According to the city, each quarterly report will include an update of cash balances for each fund. 252 California State Auditor Report 2006-406 Finding #8: Late audited financial statements impaired the city council’s ability to protect the city’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. 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’s Action: Pending. The city reported that the city council is considering the issuance of a policy establishing a goal of issuing its annual financial report by each calendar year end. According to the city, it will take time to make the goal a reality. California State Auditor Report 2006-406 253 DEpARTmENT OF pARkS AND RECREATION It Needs to Improve Its Monitoring of Local Grants and Better Justify Its Administrative Charges REPORT NUMBER 2004-138, APRIL 2005 Audit Highlights . . . Department of Parks and Recreation’s response as of Our review of the Department September 2005 of Parks and Recreation’s (Parks) administration of local The Joint Legislative Audit Committee (audit committee) grants revealed the following: requested that the Bureau of State Audits review  Parks principally relies on Department of Parks and Recreation’s (Parks) process for certifications by recipients administering local grants. Specifically, the audit committee that they complied with asked us to assess whether Parks’ oversight activities ensure that grant requirements and expended grant funds for recipients are fulfilling the terms of their grants and spending allowable purposes. the funds only on allowable purposes. The audit committee  Parks has not consistently also asked us to determine how Parks defines administrative followed its procedures activities and related expenses, identifying the amounts charged to for monitoring recipients’ bond and other funds for administrative expenses. progress on projects, and such monitoring is inconsistently documented. Finding #1: The Office of Grants and Local Services (grants  Parks could not always office) could strengthen its ongoing monitoring of recipients. demonstrate that specific The grants office has not consistently followed its procedures project objectives for grants were met. for monitoring recipients’ progress on projects. As a result, it has not been in a strong position to identify recipients who  The expected results from are not complying with grant requirements. According to its the use of General Fund grants are at times not database, the grants office has disbursed $215 million as advance specifically defined in payments between July 1996 and mid‑October 2004. Given legislation and are subject the significant amount of funds advanced and the fact that to Parks’ interpretation. recipients are allowed as much as five or eight years to complete  Parks does not separately their projects, we expected the grants office to periodically assess track its actual costs of recipients’ compliance with grant requirements. administering local grants, creating the risk that bond funds have subsidized The grants office indicated that its project officers have historically the cost of administering conducted annual agency reviews, generally over the telephone, General Fund grants. to obtain updates on recipients’ progress. However, our review of project files found that annual agency reviews were mentioned in only seven of 14 instances. Further, for these 254 California State Auditor Report 2006-406 seven, it was generally unclear exactly what information project officers gathered from the recipients during the reviews. In some instances the files gave no indication of the information obtained or the specific projects discussed. Parks asserted that, in addition to annual agency reviews, project officers maintain continual contact with recipients, obtaining up‑to‑date information on the status of projects. However, our review revealed a lack of consistent interaction. For 12 of 18 projects, the files indicated that the grants office went more than 10 months without discussing the status of projects with recipients. For two of the 12 projects, the grants office went longer than two years without obtaining updates. Recognizing its need for improvement, the grants office in December 2004 implemented a new policy requiring recipients to report the status of their projects every six months. However this new requirement is essentially nothing more than another self‑certification by grant recipients. Parks should continue its efforts to more consistently monitor recipients’ use of grant funds, including its efforts to implement the new six‑month reporting requirement. Additionally, Parks should require recipients to submit evidence of project progress and inform Parks about significant project developments. Finally, Parks should revise its policies to ensure that project officers consistently document their interaction with recipients, providing sufficient detail regarding projects for effective future monitoring. Parks’ Action: Corrective action taken. Parks indicated that it requires grant recipients to submit a Progress Status Report twice a year for all active projects. As of September 2005, Parks’ revised policy requires that it stop payment on projects where this report is past due for more than 15 days. Along with each report, grant recipients will submit photos of work in progress, report on project status, and report on significant project developments and potential obstacles to project completion. Further, recipients sign under penalty of perjury that the information provided in the report is accurate. Finally, Parks states that it continues to contact all recipients that currently have active grant contracts via telephone to conduct annual agency reviews. Finding #2: The grants office cannot always demonstrate that the public benefited from its local grants as intended. Because it uses a monitoring process that relies heavily on recipients self‑certifying their appropriate use of grant funds, it is important that the grants office conduct thorough final inspections of projects to ensure that the public benefited as intended from the grants. However, our review of project files revealed that the project officers could not always demonstrate that they performed final inspections or that they ensured specific project objectives were met during inspections they did perform. The grants office indicated that it has waived its requirements for final inspections under unusual circumstances, such as small grant amounts and when photographs are available to document the work. However, Parks has not developed procedures outlining when it will waive this requirement, potentially resulting in an inconsistent approach. California State Auditor Report 2006-406 255 Such inconsistency was noted for one $500,000 grant where the grants office waived the final inspection requirement, accepting photographs instead. Given the significant amount of the grant, it would have been prudent to visit the site to ensure that the facilities mentioned in the contract were built as planned. For two other projects of 23 we reviewed, the grants office contended that the projects were visited but a final inspection not documented, including one grant for $985,000. Further, we noted that when final inspections were documented, project officers could not always demonstrate that specific project objectives were met before considering the projects complete. By not documenting that a final inspection was performed, or not documenting that specific objectives were met, the grants office is less able to demonstrate that the public benefited as intended from the grant. Parks should develop procedures describing the circumstances under which the grants office will conduct final inspections, ensuring that all recipients who expend significant grant funds are consistently reviewed. Additionally, it should continue with its efforts to better document its final inspections, ensuring that it demonstrates that specific project objectives were met. Parks’ Action: Corrective action taken. Parks has revised its policies regarding final inspections. Specifically, Parks’ new policy requires its staff to document, among other things, that project scope items are complete and that the facilities are open to the public. Further, Parks has established policies regarding when final payments on projects can be made before a final inspection has occurred. Parks will permit final payment of a project before a final inspection when certain conditions are met, such as when the dollar amount of the grant is relatively small or when circumstances exist which make timely inspection impractical. Parks’ policy states that when a final payment has occurred without a final inspection, a final inspection should nonetheless be conducted as soon as practical. As of September 2005, Parks indicated that it is conducting final inspections on all construction projects and verifying documents to confirm work was completed on all other projects. Parks states that final inspection reports and photos are being filed in the project file and in its computer system as appropriate. Finding #3: The expected results from the use of General Fund grants are not always clear. Between July 1996 and mid‑October 2004, the grants office disbursed more than $106 million in local grants from the General Fund. However, sometimes the intended uses of these grant funds are not specifically defined. In fact, in our review of the fiscal year 2000–01 budget act, we noted many instances of the Legislature appropriating General Fund grants with only the recipients’ names, grant amounts, and project names specified; the budget act provided no information on what was to be accomplished with the funds. The grants office states that in the absence of clear guidance, it works with the recipient 256 California State Auditor Report 2006-406 to clarify the project scope. However, the lack of specific legislative direction on the intended use of funds could allow the recipient to potentially submit multiple scope change requests, and the grants office may have little authority to deny the requests. Sometimes when working with a recipient to identify a project’s scope, the grants office interprets what is to be accomplished by the award. For example, the budget act might specify that the purpose of a General Fund grant is to complete construction of a new facility. However, Parks maintains that the legislative intent behind such a grant may not be as clear as it initially appears, questioning whether the Legislature intended the grant to result in a completed facility that would be open to the public or simply to help pay for construction. In such cases the grants office makes decisions as to when it considers a recipient has met its project objectives. However, the grants office does not always clearly establish at the beginning of the grant what the scope of the project is to be and what type of deliverable it expects to see before it makes final payment. Parks indicated that in the future, it will stop action on any General Fund grant when direction is less than perfectly clear in sponsoring legislation. It will ask for further statutory direction from the Legislature before moving forward on the grant. Should it choose to appropriate General Fund grants in the future, the Legislature should specifically define what is to be accomplished with the funds. In cases where Parks is unclear as to the expected results or deliverables from grant funds appropriated by the Legislature, Parks should continue with its new policy of stopping action on these grants and seeking further statutory language clarifying the intended use of these funds. Finally, to ensure that it is in a stronger position to hold recipients accountable, Parks should clearly document its expectations as to what is to be accomplished with these funds in its grant contracts. Legislative Action: None. It appears that the Legislature did not appropriate any General Fund grants to Parks within the Budget Act of 2005. Thus, no legislative action is needed. Parks’ Action: Corrective action taken. Parks has revised its policies regarding how its grant contracts will document Parks’ expectations as to what is to be accomplished with grant funds. Specifically, Parks’ new policy requires project scope language in grant contracts to be “sufficiently specific so that the product to be provided by the project is clearly defined.” Further, Parks’ new policy requires recipients to submit project scope change requests that include a new cost estimate, application, and evidence that the revised project still complies with the law or budget language that established the grant. Further, Parks asserts that it has provided training to its staff regarding its new policies. Finally, Parks provided evidence that it has sought legislative approval for project scope changes for three grants, indicating that it will seek legislative guidance on the intended use of grant funds. Parks indicates that it will advise grant recipients, along with Senate and Assembly members representing the area, whenever there is a question as to the project’s scope or applicant. California State Auditor Report 2006-406 257 Finding #4: Parks does not track its actual costs for the grants office’s administration of Propositions 12 and 40 programs. Although Propositions 12 and 40 require Parks to charge only its actual costs of administering each bond’s programs to the respective bond fund, Parks does not track its actual administrative costs incurred by the grants office relative to each of the bonds. We focused on the grants office’s costs because it is the office that has primary responsibility for monitoring local grants. In general, the actual cost of the grants office is initially charged to a single program cost account, which is funded by Propositions 12 and 40 as well as other funding sources. Although the amounts charged to the account reflect the total cost of the grants office, the costs cannot be directly attributed to Propositions 12, 40, or other funding sources. They typically reflect the total personnel and operating costs of the grants office. Similarly, the sources and amounts funding the single program cost account are not based on the actual work of project officers on programs funded by those sources. The amounts are appropriated by the Legislature based on Parks’ administrative cost plan, as modified by statutorily authorized adjustments. Once the program cost account is funded, actual administrative costs are charged to each funding source based on its share of the total funding received by the grants office. We question whether Parks’ methodology for charging the cost of the grants office to bond funds based on the share of funding the grants office receives is valid. Parks’ methodology, in effect, allocates more costs to the administration of large grants than that of small grants. However, according to a grants office manager, grant procedures are the same for administering large grants as they are for small grants, and the level of effort necessary to administer a grant does not depend on a dollar amount as much as it does on other variables, such as the experience and knowledge of the recipient and complexity of the project. Further, for federal funds, Parks is required to periodically assess the reasonableness of its cost allocation methodology to actual costs incurred. Following a similar approach for Propositions 12 and 40 funds would be a prudent practice. To ensure that it is reasonably charging administrative costs to the appropriate funding sources, Parks should perform quarterly comparisons of its actual administrative costs to the costs it recorded and adjust its methodology and recorded costs as necessary. Parks’ Action: Pending. Parks indicates that it has implemented a week‑long sample workload test for the entire grants office staff. The resulting information, and information from subsequent tests conducted in different workload periods, will be utilized to assess the best methods for comparing costs recorded to actual costs. Parks plans to provide an update on this and any subsequent tests in its one‑year response to the audit, which is due April 2006. 258 California State Auditor Report 2006-406 California State Auditor Report 2006-406 259 DEpARTmENT OF FISh AND gAmE The Preservation Fund Comprises a Greater Share of Department Spending Due to Reduction of Other Revenues REPORT NUMBER 2004-122, JUNE 2005 Audit Highlights . . . Department of Fish and Game’s response as of December 2005 Our review of the Department of Fish and Game’s (Fish and At the request of the Joint Legislative Audit Committee Game) administration of its we reviewed the Department of Fish and Game’s (Fish preservation fund disclosed the following: and Game) handling of the preservation fund as well as the funding of the State’s fish hatcheries from fiscal year  The preservation fund 2001–02 through 2003–04. The audit examined Fish and Game’s together with the General Fund pays for many setting, collecting, and spending of and accounting for revenue of Fish and Game’s generated by the sale of sport fishing licenses. Also, the audit programs. examined Fish and Game’s allocation of revenue to program  Although revenues to activities, their allocation of indirect costs, and their assessment the preservation fund of the sufficiency of funding levels. Finally, we determined have increased due to fee trends in the funding of the hatcheries. increases that took effect in fiscal year 2003–04 for sport fishing licenses, Finding #1: Fish and Game has not established written Fish and Game has spending priorities, nor has it identified sufficient funding had its General Fund appropriation reduced by levels for preservation fund programs. over $20 million between fiscal years 2001–02 and Because it has not measured the sufficiency of funding levels, 2003–04. Fish and Game is at a disadvantage in accurately projecting the funding necessary to operate programs at their intended  Also, between fiscal years 2001–02 and 2003–04, capacities. This affects the department’s ability to justify Fish and Game spent program funding allocations as it is difficult to build a down its preservation convincing case for a given level of funding without having fund reserves significantly. first defined a target service level and the associated costs.  The amount Fish and Further, Fish and Game never adopted a formal set of priorities Game spent on its to guide its spending. While Fish and Game has had to address hatcheries declined less frequent budget reductions, it has done so without the benefit than 3 percent from fiscal years 2001–02 to 2003–04 of a written list of funding priorities for its activities. Because of while spending of other recent reductions of General Fund support, and because Fish and programs declined more Game did not reduce its expenditures to the same degree that significantly. revenues declined, the department spent down the reserves that continued on next page . . . existed in the preservation fund. Fish and Game projects that at the end of fiscal year 2004–05, it will have a balance of only $665,000 in the preservation fund. This is in comparison to the $24.5 million fund balance at the beginning of fiscal year 2001–02. 260 California State Auditor Report 2006-406  Although, a long-range We recommended that Fish and Game update its strategic spending plan could plan and develop annual operational plans with specific serve as a useful tool goals and then determine the funding necessary to meet to guide department these goals allowing it to better measure the sufficiency of decisions, especially in times of fluctuating funding for its programs. funding, the department lacks such a tool. Fish and Game’s Action: Partial corrective action taken.  Finally, Fish and Game failed to follow its In September 2005, Fish and Game updated (currently in own procedures for draft form), the Strategic Plan Goals and Strategies of the 1995 properly allocating its Strategic Plan. The director of Fish and Game has set forth the indirect costs, resulting core fundamental priorities and has requested management in overcharges to some programs and to restructure in order to operate more effectively fiscally, undercharges to others. organizationally, and programmatically. Activity codes have been revised to better correlate to the Fish and Game’s funding priorities and mandates. In addition, Fish and Game is also in the midst of developing a priority‑based budget process for managing funds and its activities. Upon completion of this process, Fish and Game will be able to develop team action plans to execute more new strategies that will improve performance. Finding #2: Fish and Game spent more for both dedicated and non-dedicated programs than it collected in revenue. All revenue collected and deposited into the preservation fund can be spent only to support preservation fund programs. Within the fund, certain revenues are restricted to specific purposes established in statute; Fish and Game holds such dedicated money in separate accounts of the preservation fund. For example, Fish and Game Code, Section 7149.8, requires persons taking abalone to purchase an abalone report card in addition to a standard sport‑fishing license. Section 7149.9 requires that abalone report card revenue be deposited into the abalone restoration and preservation subaccount within the preservation fund. This section further stipulates that the funds received by this subaccount are to be expended for abalone research, habitat, and enforcement activities. In fiscal year 2003–04, the preservation fund contained 26 of these dedicated accounts, representing 15 percent of the total expenditures from the fund. California State Auditor Report 2006-406 261 Although dedicated programs have revenue streams to support them, from fiscal years 2001–02 through 2003–04, Fish and Game expended more on dedicated programs in total than these programs generated in revenue. For example, the streambed alteration agreement program carried forward a negative beginning balance ranging from $1.4 million to more than $4.4 million during these three fiscal years. The program annually expended close to $3 million, although it only collected between $1.3 million and $1.6 million in annual revenues. Fish and Game told us that the streambed alteration agreement program and similar dedicated programs used existing account balances to make up for these over‑expenditures. In fiscal years 2001–02 and 2002–03, the non‑dedicated portion of the preservation fund incurred even more expenditures in excess of revenues. Non‑dedicated expenditures exceeded non‑dedicated revenues by $4.3 million in fiscal year 2001–02 and by $11.6 million in fiscal year 2002–03. We recommended that Fish and Game take measures to ensure that revenues streams are sufficient to fund each of its programs, which may require that fees be adjusted or that the department’s General Fund be augmented to sustain dedicated and non‑dedicated program operations. Fish and Game’s Action: Partial corrective action taken. Fish and Game is addressing this issue through a complete review of revenues and expenditures. The actions, as proposed in the fiscal year 2006–07 Governor’s Budget, include a combination of expenditure reductions, program adjustments, and revenue increases. A fee increase was just approved by the Office of Administrative Law, effective November 12, 2005, for the Lake and Streambed Alteration Account (dedicated). Finding #3: Fish and Game has not demonstrated that it uses allowable resources to cover certain deficit spending. It is not clear that Fish and Game always uses dedicated resources in the preservation fund for their intended purposes. Two of the preservation fund’s dedicated accounts, as well as the non‑dedicated account, had negative overall balances as of June 30, 2004, and some of these deficits have persisted for several years. In essence, accounts with positive balances, whose revenues have exceeded expenditures over the lives of the accounts, are subsidizing the excess expenditures of the accounts with deficits. No problem would exist if the non‑dedicated account was covering these deficits because its resources can be used for a broad range of preservation purposes, including any of the purposes for which the dedicated accounts were created. However, with the non‑dedicated account itself running a deficit, the only resources available in the preservation fund to cover deficit spending are those dedicated accounts with positive balances. In addition to the non‑dedicated account, the lake and streambed alteration account, and the bighorn sheep dedicated account had negative overall balances as of June 30, 2004. For the three accounts, the deficit was $14.7 million in fiscal year 2003–04. 262 California State Auditor Report 2006-406 Fish and Game agrees that three of its dedicated accounts have negative overall balances. As a response to these negative funding issues, Fish and Game indicates it has reduced its planned spending by over $1 million in an effort to bring the preservation fund “into balance.” However, it did not specify the impact of the proposed reduction on the individual dedicated accounts. Furthermore, Fish and Game has submitted an increased fee proposal for the lake and streambed alteration account to improve the fund condition. We are still concerned that Fish and Game’s responses to these negative balance issues are insufficient. The revenues that flow into the dedicated accounts are restricted to the purpose for which the program and the account were established. Therefore, using the resources of one account to pay for the expenses of another account may not be appropriate. For example, the enabling legislation for the Bay‑Delta sport fishing enhancement stamp dedicated account makes it clear that funds collected from the sale of this stamp are for the long‑term benefit of Bay‑Delta sport fisheries, not to pay for the expenses of another program. We believe it is not sufficient for the department to address these issues by simply going forward with reductions in spending where necessary and increases in fees, although this is a good first step. We recommended that Fish and Game avoid borrowing from its dedicated accounts to fund expenditures of other accounts. If this is temporarily unavoidable, the department should track those accounts that were the source of the borrowed resources and ensure that the law establishing the account that was borrowed from allows for such borrowing. We further recommended that Fish and Game identify those dedicated accounts that have been used to pay for expenditures of other accounts and pay back these lending accounts. Fish and Game’s Action: Partial corrective action taken. Fish and Game is addressing this issue through a complete review of revenues and expenditures. The actions, as proposed in the fiscal year 2006–07 Governor’s Budget, include a combination of expenditure reductions, program adjustments, and revenue increases. A fee increase was just approved by the Office of Administrative Law, effective November 12, 2005, for the Lake and Streambed Alteration Account (dedicated). Finding #4: Fish and Game advanced $1.4 million from the preservation fund to the Native Species Conservation and Enhancement Account that may not be paid back. As of June 30, 2004, Fish and Game’s preservation fund showed a loan of $1.4 million to the Native Species Conservation and Enhancement Account (native species account). The loan was formalized in 1989. Fish and Game recorded payments from the native species account to the preservation fund in fiscal years 2001–02, 2002–03, and 2003–04, but Fish and Game could not provide to us an amortization schedule that would demonstrate when the loan would be repaid. California State Auditor Report 2006-406 263 The native species account’s revenue sources are donations received for the support of nongame and native plant species conservation and enhancement programs, an appropriation in the annual budget act from the General Fund, and revenues from the sale of annual wildlife area passes and native species stamps, as well as promotional materials and study aids. Fish and Game told us that it will continue to make annual payments on this loan, but only to the extent of revenues received into the native species account. Unfortunately, revenues to the native species account have not been sufficient to pay down the loan. Therefore, unless revenues to the native species account increase significantly, this loan may never be paid back. When the loan is not collected, the resources are not available for preservation fund programs. We recommended that Fish and Game resolve the advance from the preservation fund to the native species conservation and enhancement account through administrative or legislative means. Fish and Game’s Action: Partial corrective action taken. Fish and Game has been tracking all postings to the interfund loan, established by statute in 1988, between Fund 0200, the Fish and Game Preservation Fund and Fund 0213, the Native Species Conservation and Enhancement Account. Any interest, payments, adjustments, and revenue posted to Fund 0213 have been closely monitored for the ongoing payback of the loan. As of June 30, 2005, the loan balance was $1,150,950. However, the revenues for this account have dwindled over the past four years, from approximately $100,000 to $19,000 annually. Due to the insufficient revenues in Fund 0213, Fish and Game is not in the position to make the necessary payments to retire the entire loan balance and due to this being an interest bearing account, the delay compounds the debt owed daily. Therefore, Fish and Game is requesting forgiveness of this debt due to Fund 0200, the Fish and Game Preservation Fund. Finding #5: Fish and Game failed to allocate indirect costs in accordance with its cost allocation plan. Several of Fish and Game’s activities have been created for the benefit of all the divisions of the department. These activities, which it calls “shared services,” are the license revenue branch, legal services, air services, and geographic information systems. Fish and Game did not adjust the percentages used in allocating the indirect costs associated with these shared services to the divisions that benefited. It used the same percentages for allocating these indirect costs for fiscal years 2001–02, 2002–03, and 2003–04. As a result, some programs were overcharged, while others were undercharged for these costs. Fish and Game has not updated the percentages it used since prior to fiscal year 2001–02, the first year examined by this audit. 264 California State Auditor Report 2006-406 According to Fish and Game’s own guidelines for allocating shared costs, percentages are to be adjusted annually based on either the governor’s budget for the prior year or the actual services provided. Because annual adjustments were not made to the allocation ratios from fiscal years 2001–02 through 2003–04, Fish and Game inaccurately charged these programs for indirect costs. Our comparison showed that from fiscal year 2001–02 through 2003–04, the department’s calculations overcharged the hatcheries and fish planting facilities a total of $1.3 million of the license revenue branch’s and legal service’s indirect costs. During the same time period that some programs were overcharged, Fish and Game’s outdated percentages undercharged other programs for license revenue branch and legal service costs. To prevent inequitable distributions of indirect costs and administrative expenses, we recommended that Fish and Game review and update the percentages used in its allocations method annually. Fish and Game’s Action: Corrective action taken. Fish and Game has completed its review and update of the indirect cost charge percentages used in the annual allocation methods to ensure correct charges are made against various fund sources. California State Auditor Report 2006-406 265 DEpARTmENT OF pARkS AND RECREATION Lifeguard Staffing Appears Adequate to Protect the Public, but Districts Report Equipment and Facility Needs REPORT NUMBER 2004-124, AUGUST 2005 Department of Parks and Recreation’s response as of December 2005 The Joint Legislative Audit Committee (audit committee) Audit Highlights . . . requested that the Bureau of State Audits (bureau) review the sufficiency of the Department of Parks and Our review of the sufficiency Recreation’s (Parks) staffing levels and other resources necessary of the Department of Parks to protect the public at state swimming beaches. Specifically, and Recreation’s (Parks) staffing levels and other the audit committee asked the bureau to review and evaluate resources at state beaches the method Parks uses to determine what constitutes a sufficient necessary to protect the number of lifeguards at state swimming beaches. As part public found that: of an assessment of whether Parks has a sufficient number of  Even though Parks lifeguards at state swimming beaches, the audit committee asked reported a significant us to determine how Parks’ lifeguard staffing levels compare increase in estimated with those of cities, counties, and other states, if possible. The beach attendance and lifeguard workload from audit committee also asked us to evaluate whether Parks has 2000 to 2004, it did not sufficient equipment for lifeguards at state swimming beaches report an increase in and whether Parks adequately budgeted for lifeguards and drownings where there equipment to protect the public at those beaches. Finally, the was a staffed lifeguard tower or station. audit committee requested that we determine the number of drowning incidents reported at state, county, and city beaches  We noted instances in and whether there is a correlation between the number of which Parks’ aquatic safety statistics were drownings and either the number of lifeguards or the resources incomplete or inaccurate. available to lifeguards stationed at state swimming beaches. Our review revealed the following:  Although we estimate that Parks’ lifeguards worked slightly fewer hours in 2004 than in 2000, its Finding #1: Lifeguard staffing levels have been sufficient to lifeguard staffing patterns prevent an increase in drownings at guarded waters despite and its mix of permanent a reported increase in beach attendance and lifeguard and seasonal lifeguards workload. seem reasonable. Despite a reported increase in beach attendance and lifeguard continued on next page . . . workload, Parks reported a total of seven drownings in guarded waters at state beaches within its lifeguard districts over the 266 California State Auditor Report 2006-406 five‑year period from 2000 through 2004. Parks defines guarded  While Parks has reported water as a location within the viewing area of a staffed lifeguard an increasing number of tower or station. The three local governments we surveyed drownings in unguarded reported similar results. This suggests that the presence of waters over the last lifeguards has been effective at state and local beaches in five years, adding more lifeguards may not be an minimizing drownings in guarded waters. These trends are appropriate response. similar to a national trend discussed in a 2001 report by the  Parks’ districts with Centers for Disease Control and Prevention (CDC), which aquatic safety programs concluded that the total number of reported drownings at have significantly lifeguard‑staffed beaches has remained relatively stable since decreased their spending 1960 although both beach attendance and rescues by lifeguards on the equipment and have risen steadily. facility operations portion of their support costs from fiscal years 1999–2000 to Based on the data Parks reported, attendance at state beaches 2003–04. and lifeguard workload increased significantly from 2000  Even though lifeguard to 2004. Specifically, Parks’ lifeguard districts reported that sectors report a need attendance at state beaches increased from 23.4 million in 2000 for additional resources to 41.4 million in 2004, an increase of nearly 77 percent. Parks to maintain and add to and the three local beaches we surveyed use various methods their lifeguard equipment and facilities, Parks’ involving some level of estimation to calculate their reported management believes attendance. Therefore, it is difficult to closely compare the that the department has attendance data they reported. Consistent with its reported allocated sufficient funds to provide adequate increase in beach attendance, Parks reported that the overall aquatic safety. workload of lifeguards at state beaches increased significantly from 2000 to 2004. The most dramatic increase was in the number of warnings issued and preventive actions taken. Parks indicated that it issued almost four times the number of warnings and took almost twice the number of preventive actions in 2004 as it did in 2000. In comparison to its other workload statistics, Parks reported more modest increases in aquatic rescues and medical aids of 27 percent and 18 percent, respectively, from 2000 to 2004. Finding #2: In certain instances, Parks’ aquatic safety statistics were incomplete or inaccurate. Our review of Parks’ aquatic safety data for the five‑year period ending in 2004, identified instances in which the data were incomplete or inaccurate. For example, we found that one lifeguard district failed to report most of its aquatic safety statistics for 2001. In addition, we found three other lifeguard districts that did not report swimmer‑related rescues for 2001 and another that reported certain duplicate statistics for 2001 and 2002. In addition, Parks originally reported to us that 36 unguarded‑water drownings occurred within state park boundaries in 2004. Unguarded water is an area where Parks California State Auditor Report 2006-406 267 either has no lifeguard assigned at all or has a lifeguard assigned but the waters are outside the immediate view of the lifeguard. After we reviewed a summary of these incidents and a sample of the related public safety reports it provided, Parks revised the number to 31. These kinds of problems raise questions about the reliability of the aquatic safety data that Parks reported. Although we did not find an instance where the inaccurate data caused Parks to make an inappropriate management decision, if it is going to spend the time and effort to collect statistics regarding aquatic safety, it is reasonable to expect the information to be as accurate as possible. In addition, ensuring the completeness and accuracy of its aquatic safety statistics will help Parks make better management decisions regarding the allocation of its aquatic safety resources. We recommended that Parks should: • Make certain its districts that are required to track and report aquatic safety statistics are submitting them as required. • Require its staff to review the statistics for accuracy and completeness. Parks’ Action: Corrective action taken. In November 2005, Parks issued a memorandum to its district superintendents reminding them that all aquatic safety‑related statistics are due by January 10, 2006, and asking them to ensure that they review the data for accuracy and completeness. In addition, to help ensure the accuracy of data tabulation, Parks updated its daily log and monthly activity reports into a spreadsheet that automatically tabulates into a year‑end summary. Finding #3: Although we estimate that Parks’ lifeguards worked slightly fewer hours in 2004 than in 2000, its lifeguard staffing patterns and its mix of permanent and seasonal lifeguards seem reasonable. Parks’ lifeguards worked slightly fewer hours in 2004 than they did in 2000. Based on payroll data we obtained from the State Controller’s Office, we estimate that in 2000, lifeguards worked about 376,000 hours compared with 357,000 in 2004. Parks appears to adjust its lifeguard staffing levels to deal with changes in beach attendance and to use a reasonable mix of permanent and seasonal lifeguards to provide public protection at state beaches. Parks indicated that it attempts to increase the staffing levels of lifeguards in the summer months to cope with increased attendance at state beaches. According to Parks, the peak attendance season generally runs between April and October each year. For example, we found that the total number of hours lifeguards worked in the San Diego North sector during 2004 generally fluctuated with changes in reported attendance. In addition, this sector appeared to keep pace 268 California State Auditor Report 2006-406 with increasing attendance, because the four months with the most hours worked by lifeguards (June through September) coincided with the four months in which the reported levels of attendance were highest. In addition, we found that, based on the average number of hours lifeguards worked each month over the last five years, Parks used seasonal staff to augment the number of lifeguards on duty during the peak season. Permanent lifeguards worked a relatively steady number of hours each month on average over the five‑year period, whereas seasonal lifeguards worked a great deal during the summer months but very little during the nonpeak season. This staffing pattern indicates that Parks relies on permanent lifeguards to protect the public in nonpeak months, while this task falls primarily to seasonal lifeguards during the peak attendance season. Although seasonal lifeguards contribute heavily during the peak attendance season, 94 percent of seasonal lifeguards worked fewer than 1,000 hours in 2004, with 70 percent working fewer than 500 hours. Given that Parks set 1,778.5 as its standard measure of the annual hours a full‑time employee works, it apparently does not need to convert any of its seasonal lifeguards to permanent status. Finally, Parks requires all its permanent lifeguards to be peace officers. Parks reported that the workload levels related to the law enforcement aspects of a lifeguard’s job have increased dramatically. Since Parks relies primarily on permanent lifeguards for about five months of the year during the nonpeak attendance season, it seems important for Parks’ permanent lifeguards to be peace officers. Finding #4: While Parks has reported an increasing number of drownings in unguarded waters, adding more lifeguards may not be an appropriate response. Parks’ lifeguard districts have reported an increasing number of drownings in unguarded waters over the last five years. The majority of the 31 unguarded‑water drownings in 2004 occurred in north coast and inland lifeguard districts that generally receive less beach attendance than the south coast lifeguard districts. Overall, given the low number of drownings in guarded waters discussed earlier and the increasing number occurring in unguarded waters, one might conclude that adding more lifeguards would decrease the number of drownings in unguarded waters. However, although every drowning is a tragedy, based on the circumstances surrounding the 31 reported drownings in unguarded waters during 2004, we believe that adding more lifeguards may not be an appropriate response. In particular, for more than half these incidents, the level of lifeguard staffing did not appear to be an issue. Further, at the locations of the remaining incidents, it is not clear that Parks would choose to add more lifeguards if it received additional resources. We recommended that Parks monitor the circumstances surrounding drowning incidents that occur in unguarded waters to help it determine the amount and best allocation of resources sufficient to protect the public. California State Auditor Report 2006-406 269 Parks’ Action: Corrective action taken. Parks indicated that its aquatic specialist has been collecting all drowning incident reports, both guarded and unguarded water fatalities, for 2005 from the districts, and will be reporting on the primary and contributing factors involved in these drownings in an annual statewide report. Finding #5: Continued deferral of equipment repair and maintenance may eventually have a negative impact on Parks’ ability to adequately protect the public. Lifeguard districts significantly decreased their spending for equipment and facility operations costs from fiscal years 1999–2000 to 2003–04. As a result, according to the sectors within the lifeguard districts that operate aquatic safety programs (lifeguard sectors), some of their lifeguard equipment and facilities are in poor condition and in need of repair or replacement. Staff at Parks indicated that it generally cuts back on equipment and maintenance expenses when faced with budget cuts for operating expenses because they are nonfixed or discretionary expenses. This is consistent with responses to our survey, in which many lifeguard sectors expressed a need for additional resources to maintain and add to their lifeguard equipment and facilities. These sectors indicated needing primarily vehicles, rescue boats, and portable towers. In addition, although Parks plans to replace two of its permanent lifeguard facilities and expand another, lifeguard sectors reported that several other facilities are in need of repair or replacement. However, management at Parks believes that it has allocated sufficient funds to provide adequate aquatic safety while balancing the needs of all its programs. In contrast, the three local governments we surveyed reported having sufficient and operable equipment. Although no instances came to our attention in which the poor condition of equipment affected the lifeguard sectors’ ability to provide aquatic safety, we observed a few examples of equipment in poor condition. However, we were unable to assess whether the additional equipment needs reported by the lifeguard sectors were necessary, because we are not aware of any standard that specifies the amount of equipment lifeguards must have to perform their duties. Finally, although most lifeguard districts said they need additional funds to maintain their equipment, we are uncertain they would spend the additional funds to fulfill those needs. According to Parks’ budget office, the lifeguard districts have some control over their spending for nonfixed or discretionary costs, such as equipment and facilities maintenance, overtime, and temporary staffing. We recommended that Parks monitor how long it can continue to curtail spending on lifeguard districts’ equipment and facilities to avoid a potentially negative impact on its ability to protect the public. In addition, if Parks decides to allocate additional funding to its aquatic safety programs in the future, either for equipment expenses or for additional lifeguards, it should work closely with its lifeguard districts to clarify the intended purposes of any proposed changes in spending. For example, if Parks decides to allocate additional funding to augment its lifeguard staff, it should carefully consider 270 California State Auditor Report 2006-406 whether to expand coverage into unguarded waters in districts with existing aquatic safety programs or to implement new aquatic safety programs in districts at coastal or inland waterways without lifeguard coverage. Parks’ Action: Pending. Parks indicated that it appreciates the vital role that equipment and facilities have in the delivery and effectiveness of its aquatic safety program and recognizes that continuing reductions in spending could have potential impacts on public safety as well as other core programs. Parks also stated that it continues to use systems such as its computerized asset management program to help prioritize maintenance and to justify additional funding for critical programs. However, given the State’s current fiscal challenges and the need to balance resources across all of its core programs, Parks indicated that even critical projects cannot always be completed, or fully funded, in the manner and time it would prefer. Unfortunately, Parks asserts that this situation continues, limiting its options in fully funding the replacement of lifeguard facilities and equipment. Finding #6: Lifeguard sectors lack evidence to support their reported need for automatic external defibrillators. Although 15 of the 19 lifeguard sectors we surveyed said they need additional automatic external defibrillators (AEDs), Parks does not presently capture data that would be sufficient to assess its need for these devices. An AED is a piece of medical equipment that lifeguards can use to rescue victims of sudden cardiac arrest. For instance, lifeguard sectors reported that they used AEDs in six cases in 2004, which is the year they began reporting the number of times AED units were used. However, these reported cases might understate Parks’ need for AEDs because they may not indicate the number of instances in which AEDs should have been used. A more relevant statistic would be to track the number of times in which a rescue required the use of an AED, but one was not available. Parks could then use these data to assess whether it needs additional AEDs and, if so, how many. We recommended that, to clarify to what extent it needs AEDs, Parks should track not only its actual usage of AEDs but also the number of times it needed them but they were unavailable. Similar procedures could apply to demonstrating the need for other equipment. Parks’ Action: Corrective action taken. In the November 2005 memorandum to district superintendents, the chief of Parks’ public safety division instructed staff to record the number of medical cases in which AEDs were needed, but were unavailable, by using one of the boxes marked “OTHER” at the bottom of the form used to gather statistics with the heading “AED needed/unavailable.” California State Auditor Report 2006-406 271 OFF-hIghWAy mOTOR vEhICLE RECREATION pROgRAm The Lack of a Shared Vision and Questionable Use of Program Funds Limit Its Effectiveness Audit Highlights . . . Our review of the Off-Highway REPORT NUMBER 2004-126, AUGUST 2005 Motor Vehicle Recreation Program (OHV program) Department of Parks and Recreation, Off-Highway revealed that: Motor Vehicle Division, Off-Highway Motor Vehicle Commission responses as of November 2005  The Off-Highway Motor Vehicle Recreation The Joint Legislative Audit Committee requested that Commission and the Off-Highway Motor we review the Department of Parks and Recreation’s Vehicle Recreation Division (department) administration and allocation of moneys in (division) have not the Off‑Highway Vehicle Trust Fund (OHV trust fund). developed a shared vision to implement an OHV program that is balanced The Off‑Highway Motor Vehicle Recreation Program (OHV between OHV recreation program) was created to better manage the growing demand and the environment. for off‑highway vehicle (OHV) recreation while protecting  The division’s recent California’s natural and cultural resources from the damage that strategic plan is can occur from indiscriminate or uncontrolled OHV recreation. incomplete and does not The department’s Off‑Highway Motor Vehicle Recreation include some important Division (division) administers the OHV program. The division elements such as a comprehensive evaluation operates eight state vehicular recreation areas (SVRAs) and of the external and administers the grants and cooperative agreements program internal factors that could (grants program), which provides funding to local and federal affect the OHV program. government agencies for OHV recreation.  In the absence of a formally adopted strategy, The OHV program is funded primarily through collection of the commissioners voted the fuel tax, registration fees for off‑highway vehicles, and to approve grants and cooperative agreements SVRA entrance fees. The Off‑Highway Motor Vehicle Recreation based on their individual Commission (commission) provides for public input, offers interests rather than on policy guidance to the division, and approves grants and a strategy to achieve a balanced program. cooperative agreements. The commission also approves the division’s capital outlays. The governor and the Legislature  Recent legal requirements appoint the commissioners, who represent varying interests in continued on next page . . . OHV recreation and serve staggered four‑year terms. 272 California State Auditor Report 2006-406 to spend designated Finding #1: The commission and the division have not portions of OHV program formally adopted a shared vision for the OHV program, nor revenue for conservation, have they developed the goals and strategies necessary to restoration, and law enforcement have not meet that vision. been met and because The commission and the division have not formally adopted a the division has not set aside the cash, a growing shared vision for the OHV program to balance OHV recreation unfunded obligation exists. and protection of California’s natural and cultural resources,  The division and the nor have they developed the goals and strategies necessary to Department of Parks and meet that vision. In addition, the division and the commission Recreation (department) do not collaborate on the planning for the SVRAs and grants have spent or earmarked program. In the absence of a shared vision and goals, the $38 million for three land commissioners, the division, and stakeholders in the OHV acquisition project—one completed and two under program compete for the more than $50 million collected from consideration—that offer OHV recreationists each year to serve their diverse interests and little or no additional further individual agendas, potentially resulting in an inefficient OHV recreation. use of funds and discord among the interested parties.  Based on a questionable legal interpretation To ensure that the OHV program is adequately balanced between and inadequately OHV recreation opportunity and environmental concerns as supported cost estimates, the department is the Legislature intended, we recommended that the division using Off-Highway and the commission develop a shared vision that addresses the Trust Fund money— diverse interests in the OHV program. Once developed, the $3.6 million during fiscal year 2003–04—to support division and the commission should implement their vision by state parks that do not adopting a strategic plan that identifies common goals for the have OHV recreation. grants program and the SVRAs, taken as a whole, and specifies  The division made the strategies and action plans to meet those goals. questionable purchases of goods and services using contracts paid with OHV Department’s Action: Pending. funds and in numerous The department states that it recognizes a shared vision instances violated state contracting rules. between the division and the commission is optimal. However, it notes that the implementation of a shared  The division’s management vision implies a willingness of collaborative spirit within of the funds expended through grants and the relationship between the two parties. To the extent cooperative agreements possible, the department states that the division will needs improvement. continue to do its best to balance the concerns of those communities sharing a vested interest in the program as well as to collaborate with the commission for continued  improvement in the program. However, the department notes that as of its November 2005 response to our audit that the commission has not yet held a meeting to discuss findings of the audit report. California State Auditor Report 2006-406 273 Commission’s Action: None. The commission chair reports that because the commission has not met since the release of the audit report, it has taken no formal action in response to the audit.  However, the commission chair indicates that the commission will be discussing the concerns the audit raised in its December 2005 meeting and, although he provides no specific details, he indicates that he has requested the division work with the commission to address the audit recommendations. Finding #2: Although required by the law to do so by January 1, 2005, the division has not yet completed its strategic planning process to identify future OHV recreation needs. The division prepared a final draft of a strategic plan in March 2005, but it used an abbreviated planning process that did not include some important elements such as a comprehensive evaluation of the external and internal factors that could affect its ability to successfully implement the OHV program. In addition, the commission and the division have not collected the necessary data or prepared the required reports to successfully complete its strategic planning. For example, the division has begun but has not yet completed a new fuel tax study that will provide information on the number and types of off‑highway vehicles engaged in OHV recreation and the destinations and types of recreation sought by OHV enthusiasts. Without a comprehensive strategic plan, the division’s budgets are not guided by agreed‑upon goals and strategies for achieving them but rather on historical spending levels and available funds. We recommended the division complete its strategic plan for the SVRA portion of the OHV program by performing a thorough assessment of external and internal factors; collecting the necessary data; completing the required reports; and developing the action, spending, and performance monitoring plans to implement its strategic plan. Department’s Action: Pending. The department reports that it has been working with the division to further develop the final strategic plan, which will include the elements we recommended.  However, the department states that much of the needed data to complete the strategic plan will not be available until the fuel tax study is completed, which was expected in January 2006, but has been delayed until July or August 2006. Finding #3: The commission has not formally adopted a strategy for grants program funding. In the absence of a formally adopted strategy, the grants program lacks direction, and commissioners vote to approve grants and cooperative agreements based on their individual interests. As a result, the applicants for the grants program are often unaware of the commission’s priorities, and the funding issued by the grants program is not 274 California State Auditor Report 2006-406 done to achieve a balanced OHV program. According to the recipients that receive the largest grants and cooperative agreements, unclear guidance on the commission’s priorities presents challenges for them when applying for funds from the grants program. To make efficient use of division staff’s time and provide guidance to grants program applicants, we recommended the commission should develop and communicate priorities based on a strategy for using the grants program to promote a balanced OHV program. Commission’s Action: None. The commission chair reports that because the commission has not met since the release of the audit report, it has taken no formal action in response to the audit.  However, the commission chair indicates that the commission will be discussing the concerns the audit raised in its December 2005 meeting and, although he provides no specific details, he indicates he has requested that the division work with the commission to address the audit recommendations. Finding #4: The commission’s accountability for its funding decisions could be improved. The law currently requires the commission to provide a biennial report on certain elements of the OHV program, including the status of the program and its natural and cultural resources and the results of the division’s strategic planning process. However, the law does not require the commission to report its strategies and priorities, and how it awards OHV trust fund money to meet the legislative intent of the OHV program. In addition, the commission has not yet prepared the biennial report that was due to the Legislature on July 1, 2005. To improve accountability, we recommended the Legislature consider amending state law to require the commission to annually report the grants and cooperative agreements it awards by recipient and project category, and how the awards work to achieve the shared vision that it and the division develop. We also recommended that the commission prepare and submit the required biennial program reports when they are due. Legislative Action: None. Commission’s Action: None. The commission chair reports that because the commission has not met since the release of the audit report, it has taken no formal action in response to the audit.  However, the commission chair indicates that the commission will be discussing the concerns the audit raised in its December 2005 meeting and, although he provides no specific details, he indicates that he has requested the division work with the commission to address the audit recommendations. California State Auditor Report 2006-406 275 Finding #5: Some spending requirements in the law may impede the ability of the commission and the division to implement a vision for the OHV program. Based on a stakeholders’ consensus reached in 2002 that was adopted into the law, the division is required to spend the portion of fuel tax revenue attributable to unregistered off‑highway vehicles and deposited in the Conservation and Enforcement Services Account (conservation account) for restoration, conservation, and enforcement activities. That portion was $28.4 million, or 61 percent, of the OHV program’s fiscal year 2003–04 revenues. However, there is disagreement among the commission, the division, and the stakeholders about whether this spending requirement contributes to a balanced OHV program. Further, because the division has not been able to satisfy the spending requirement, since January 2003 it has accumulated an obligation to use unspent conservation account funds of $15.7 million, including $8.3 million designated for restoration activities. The department indicates the unspent cash to pay for this future obligation is not reserved; thus, it may present a substantial financial burden. We recommended that the division and commission evaluate the current spending restrictions in the law to determine whether they allow for the allocation of funds necessary to provide a balanced OHV program and, if necessary, seek legislation to adjust those restrictions. Department’s Action: Pending. The division is working with the department’s legislation unit to identify draft legislative bill language that will address the spending restrictions that currently exist in state law. Commission’s Action: None. The commission chair reports that because the commission has not met since the release of the audit report, it has taken no formal action in response to the audit.  However, the commission chair indicates that the commission will be discussing the concerns the audit raised in its December 2005 meeting and, although he provides no specific details, he indicates he has requested that the division work with the commission to address the audit recommendations. Finding #6: The law is not clear on the use of restoration funds. The present practice of the commission and division is to require areas and trails to be permanently closed to OHV recreation before restoration funds are used to repair damage from OHV recreation. However, the law does not support this practice, especially with respect to restoration funds that are used on federal lands. Rather, it states that when soil conservation standards or wildlife habitat protection standards are not being met in any portion of an OHV recreation project area that is supported by a cooperative agreement, the area that is out of compliance must be temporarily closed until those standards are met. 276 California State Auditor Report 2006-406 We recommended that the Legislature consider amending the Public Resources Code to clarify whether using OHV trust fund money to restore land damaged by OHV recreation requires that the land be permanently closed to off‑highway vehicles. Legislative Action: None. Finding #7: The division and the department have used money from the OHV trust fund for questionable purposes with respect to land acquisition. For three recent land acquisition projects, with planned costs totaling $38 million, the division and the department could not provide analyses that showed the benefit of these purchases to the OHV program. The division has purchased Deer Creek Hills, and Onyx Ranch and Laborde Canyon are still under consideration, and based on the available documentation, these projects do not appear to be the best use of the funds in implementing the OHV program. In each case, project land will be devoted largely to protecting or preserving natural or cultural resources with a relatively small portion or no portion at all available for OHV recreation. We recommended the division should develop and implement a process of evaluating land acquisition projects to ensure that they provide a strategic benefit to the OHV program. This process should include appropriate analysis of the costs and benefits of a proposed land acquisition, including an assessment of the need for additional land for OHV recreation. Department’s Action: Pending. The department states that the division is working with the department’s Acquisition and Real Property Division to develop and implement a land acquisition strategy, with a goal of completing this strategy by spring of 2006. Finding #8: The department made questionable and inadequately supported charges to the OHV trust fund to help pay for state park operations and departmental overhead costs. In fiscal year 2003–04 the department began using the OHV trust fund to pay for some of the costs to operate park districts that are not SVRAs because it interprets the law to mean vehicle use on any unpaved road in the state park system is eligible for OHV program funding. However, we believe the department’s interpretation is inconsistent with the Legislature’s clear intent for the OHV program and with provisions of law that limit the use of the OHV trust fund. These costs, which we found were inadequately supported, totaled $3.6 million for fiscal year 2003–04 and $2.7 million during the first three quarters of fiscal year 2004–05. The lack of adequate support for these costs is disconcerting because the department plans to use these costs as a basis for its future California State Auditor Report 2006-406 277 charges to the OHV trust fund for these activities. Moreover, because the department allocates its overhead costs based on direct costs to programs, the OHV trust fund was charged an additional $437,000 in fiscal year 2003–04 alone for the questionable costs we found. In addition, the department charged approximately $72,000 of the director’s office costs in fiscal year 2003–04 to the OHV trust fund, even though the law expressly forbids those charges. To ensure that money from the OHV trust fund is used appropriately, we recommended the Legislature amend the law to specify whether the department’s broad interpretation that any road that is not defined as a highway but is open for public use in a state park qualifies for funding by the OHV trust fund, or whether state law restricts the use of OHV trust fund money to areas where non‑street‑licensed vehicles can engage in traditional OHV activity. We also recommended that the department either discontinue charging the director’s office costs to the OHV trust fund or seek a statutory change to remove this restriction. Legislative Action: None. Department’s Action: Partial corrective action taken. The department states that it has discontinued charging costs of the director’s office to the OHV trust fund. Finding #9: The division’s contracting practices often violate state contracting rules, and it has not explored less costly alternatives to these contracts. For various reasons the division has increased its use of contracts over the past five years, with a peak in fiscal year 2002–03. However, the division has used contracts paid from the OHV trust fund for questionable purchases and it also violated rules that govern the use of contracts, including 80 instances of splitting a series of related tasks into multiple contracts to avoid competitive bidding and oversight. Further, the division has not adequately analyzed its operations to determine if either using existing staff or hiring additional employees would be less expensive than contracting for staff‑related work and ongoing needs. Most of these contracting problems occurred in fiscal years 2001–02 and 2002–03, but some were more recent. We recommended the division comply with state contracting requirements and that the department better monitor the division’s contracting practices. 278 California State Auditor Report 2006-406 Department’s Action: Partial corrective action taken. The department reports that the division now requires the division chief review and approve all headquarters contracts and district superintendents have been counseled and trained on review and approval of contracts. In addition, the division will review all contracts encumbered by the districts on a quarterly basis. Further, the department plans to provide contract training to appropriate division staff in January 2006. The department also states that some work previously performed by contractors has been permanently transferred to state employees. In particular, division staff are now taking an active role in organizing and setting up commission meetings. The department states that its Contracts Service Unit reviews all small dollar contracts to ensure compliance with state contracting requirements and alerts the appropriate managers should it identify multiple small contracts to the same vendor. Finding #10: Administration of the grants program lacks accountability. The division needs to better track funds it advances to grantees to ensure that advanced funds are used only for allowable activities and that unused funds are returned. Specifically, we identified $881,000 in outstanding advances, including $566,000 advanced to Los Angeles County, which were either not returned or that the division had been unable to determine how the funds were spent. In addition, the division does not ensure that all completed grants and cooperative agreements are audited, and in our review of 12 audit reports the division had not collected ineligible costs of $598,000 related to three audits. The division also circumvented state budget controls and its regulations when it reallocated unspent grant funds totaling $2.2 million among U.S. Forest Service districts. Further, the commission and the division sometimes use the OHV grants program to fund questionable activities. Finally, the division’s grants database does not meet its information needs and contains numerous errors and inaccuracies that limit its value. We recommended that the division keep track of funds advanced to recipients, ensure that all grants and cooperative agreements receive annual fiscal audits and performance reviews, follow‑up on audit findings and collect ineligible costs, discontinue its practice of reallocating unspent grant funds among Forest Service districts, and improve its grants database. Additionally, we recommended that the commission allocate funds only for purposes that clearly meet the intent of the OHV program. Department’s Action: Partial corrective action taken. The department reports the division has implemented policies that provide tracking, monitoring, and recovery of OHV program funds, and that the division is working to recover portions of outstanding grants and cooperative agreements owed to it by grantees identified in our audit report. California State Auditor Report 2006-406 279 The department states that the division is committed to performing site visits and it is developing site review guidelines to include in the OHV program regulations. In addition, the department indicates that the division is working to ensure grants are audited, audit findings promptly scheduled and resolved, and ineligible costs recovered. The division’s process includes notification to the grantees of audit exceptions, request for return of ineligible costs, and possible withholding of future payments as enforcement. The division is working with the department’s legislation unit to identify draft legislation to clarify the requirement in the law to audit grants and cooperative agreements. In addition, the department indicates it has halted all reallocations of unspent grant funds among U.S. Forest districts or among other grantees. Also, the department reports the division is working with the department’s Information Technology Division to improve the grants database. Finally, the department indicates that the division will follow a competitive process to ensure that funds allocated through grants and cooperative agreements are spent only on projects that meet the intent of the OHV program. Commission’s Action: None. The commission chair reports that because the commission has not met since the release of the audit report, it has taken no formal action in response to the audit.  However, the commission chair indicates that the commission will be discussing the concerns the audit raised in its December 2005 meeting and, although he provides no specific details, he indicates he has requested that the division work with the commission to address the audit recommendations. 280 California State Auditor Report 2006-406 California State Auditor Report 2006-406 281 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’ June 2005 (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  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  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  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.  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  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, 282 California State Auditor Report 2006-406 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: Pending. We are not aware of any legislation that has been introduced to require 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. However, the Legislature has introduced two bills related to condemned inmates at San Quentin. Assembly Bill 1715 proposes to allow the department to house condemned inmates at any prison that contains level four security, or is a condemned facility, designated by the department director. Senate Bill 901 proposes to decommission San Quentin no later than December 31, 2010. This bill, if approved, would require the governor to decide by March 31, 2007, which prison would house death row prisoners and be the site of executions. At June 30, 2005, both bills were pending in legislative committees. Department’s 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. California State Auditor Report 2006-406 283 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’s 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, 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 284 California State Auditor Report 2006-406 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. California State Auditor Report 2006-406 285 CALIFORNIA DEpARTmENT OF CORRECTIONS Investigations of Improper Activities by State Employees, July 2003 Through December 2003 ALLEGATION I2003-0896 (REPORT I2004-1), MARCH 2004 California Department of Corrections’ response as of December 2004 Investigative Highlights . . . We investigated an allegation that the California State Prison‑Los Angeles County (Los Angeles County The California State Prison- Prison) of the California Department of Corrections Los Angeles County (Corrections)1 mismanaged money collected from television and mismanaged money collected from television and motion motion picture production companies that filmed at the prison. picture production companies that filmed at the prison as follows: Finding #1: An employee misappropriated state funds by directing a $1,500 production company payment into an  An employee directed a production company employee association account. to pay $1,500 to an In violation of state laws, an employee responsible for employee association fund, rather than reimburse the coordinating with and billing production companies for costs State for its costs. incurred by Los Angeles County Prison, directed a television show that filmed at the institution to pay $1,500 to the prison’s  The Los Angeles County Prison failed to ensure it employee association, not to the State’s General Fund (General was reimbursed $1,800 Fund), as a reimbursement. The prison established the employee in costs incurred to association to promote employee morale by paying for activities accommodate two film such as employee parties and bereavement acknowledgements, production companies. or by participating in activities involving community‑based  The Los Angeles County charities. On July 14, 2002, the television show’s film crew shot Prison violated federal a segment at the prison. However, we found no evidence that tax laws by improperly directing $4,150 in the employee billed the television show for costs the prison donations received from incurred to accommodate the film crew or that the television production companies show reimbursed the State for these costs. The records provided through an inmate to us indicate that the employee instructed the television show religious account before transferring the money into to make its payment to the employee association and that he the employee association. handled the payment as a donation. Two days after receiving this payment, the employee association, which had only $254 in its account beforehand, spent $800 for an employee barbecue. 1 California Department of Corrections became the Division of Adult Operations and Adult Programs in July 2005. 286 California State Auditor Report 2006-406 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 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’s Action: Partial corrective action taken. As of January 2005 Corrections reported it completed its investigation. Corrections rescinded the appointment of one employee, who held a high‑level managerial position, and has not yet determined what action it will take against other employees involved in this case. California State Auditor Report 2006-406 287 CALIFORNIA DEpARTmENT OF CORRECTIONS Although Addressing Deficiencies in Its Employee Disciplinary Practices, the Department Can Improve Its Efforts Audit Highlights . . . Our review of the California Department of Corrections’ REPORT NUMBER 2004-105, OCTOBER 2004 (department) process of handling employee California Department of Corrections’ response as of disciplinary matters revealed October 2005 that the department:  Spends an average of The Joint Legislative Audit Committee (audit committee) 285 days to serve an requested that the Bureau of State Audits (bureau) adverse action or close examine the California Department of Corrections’ a case. (department) process of handling employee disciplinary  Can improve its disciplinary matters. Specifically, the audit committee requested that we process by simplifying its determine the extent to which the department has established investigative process for uniform policies and procedures for the use of legal services in straightforward, uncontested cases, by eliminating the employment matters and whether the institutions are following headquarters review of most those policies and procedures. adverse actions, and by taking steps to bring more standardization of penalties. Finding #1: The department averages 285 days to deliver an Further, many disciplinary adverse action or close a case. case files were disorganized and had key pieces of On average, the department takes 285 days to deliver a notice information missing. of adverse action against an employee or to close a case, and the  Has disciplinary policies process occasionally surpasses the one‑year deadline for taking and procedures that are action against peace officers—leaving the department unable to incomplete, out of date, correct or punish the employee. We found that the department and in need of revision. often does not meet the guidelines from its operations manual  Uses several redundant and a procedural bulletin for completing the various steps databases to track involved in the disciplinary process. To assist in meeting the disciplinary matters and each system is incomplete overall deadlines, the department should include similar steps in and inaccurate. its new procedures and then monitor the procedures to ensure that staff are following them. Unnecessarily lengthy time frames  Recently began requiring between the date an offense is alleged and the date action is job-specific training for a key position involved in taken can undermine the process—potentially lessening the its disciplinary process; effectiveness of any corrective action taken. however, it can do more to require training for other key positions. We recommended that the department identify, benchmark, and monitor for improvement the adverse action timelines for each continued on next page . . . step in the process. 288 California State Auditor Report 2006-406  Has yet to implement Department’s Action: Partial corrective action taken. several audit recommendations related The department stated that it is continuing to implement a to disciplinary matters database system—the Case Management System (CMS)—in from audits conducted in 2000 and 2001. which it will identify and benchmark adverse action timelines for each step in the process. However, although in May 2005 it estimated that the CMS would be operational statewide by August 2005, because of increases in the user base for the CMS and the implementation of a central intake process, it  now estimates that the CMS will not be operational until the beginning of 2007. The department also reported that the office of civil rights is now closing investigations in an average of 101 days—an improvement since our audit—and closer to its goal of 90 days. 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’s Action: Partial corrective action taken. The department reported that its office of civil rights implemented procedures allowing for expedited investigations. For other cases, the department indicated that it has developed and is implementing a centralized case California State Auditor Report 2006-406 289 initiation and intake system, which will enable it to take direct adverse action for straightforward cases. In October 2005, the department estimated that it would complete statewide implementation of this system by December 2005. Moreover, the department reported that it implemented the disciplinary matrix in March 2005 and it no longer requires regional or headquarters’ reviews of disciplinary actions. Finally, the department stated that it has discontinued the practice of transcribing all interviews and transcribes only those that are necessary. 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’s Action: Pending. The department reported that it will benchmark and monitor cases going before the State Personnel Board once it implements two new database systems—the CMS and ProLaw—and develops a monitoring plan. However, the department indicated that the monitoring plan has been delayed until January 2006 due to the complexities of implementing the two new database systems. 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 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 290 California State Auditor Report 2006-406 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. 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’s Action: Partial corrective action taken. The department stated that it is taking various actions to assist it in performing workload analyses and to achieve centralized management and monitoring of investigations. These actions include the development and implementation of a case initiation and intake system and the implementation of the CMS, among others. Based on workload estimates, the department indicated that it has internally approved a budget change proposal for additional investigators and it plans to submit a formal California State Auditor Report 2006-406 291 request to the Department of Finance in the near future. 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. Moreover, the department reported that it implemented its statewide disciplinary matrix in March 2005 in addition to developing and issuing several other standardized forms and checklists during the months of April through July 2005. Further, the department indicated that not only is each institution required to use the disciplinary matrix, but it must also complete a form that justifies and provides reasons for each penalty decision, including mitigating and aggravating circumstances. Finally, the department stated that it has developed an audit 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. 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’s Action: Corrective action taken. The department reports that its office of civil rights provides a written summary of each investigation, which clearly identifies all policy or statute violations. Additionally, the office of civil rights then monitors to ensure that remedial action is taken before closing the case files. 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. 292 California State Auditor Report 2006-406 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’s Action: Corrective action taken. The department stated that it hired staff, trained them in February 2005, and implemented its vertical advocacy model in March 2005. Further, the department is continuing to conduct time studies to determine the appropriate staffing levels. 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’s Action: None. The department reported that the adverse action process will reside with the hiring authorities and will be tracked and coordinated by the vertical advocates in the new CMS and ProLaw databases. Further, with the assistance from the regulation and policy management entity within the department, the updating of disciplinary policies and procedures will be the responsibility of the employment law unit and the personnel operations section, while the updating of the investigatory policies and procedures will be the responsibility of the office of internal affairs. California State Auditor Report 2006-406 293 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. 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’s 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 continuing its efforts to develop a mediation process to assist with early resolution of complaints. The department anticipates that the mediation process will be initiated by January 1, 2006. 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’s Action: Corrective action taken. The department reported that it incorporated a comprehensive new settlement policy in its operations manual and provided training on its new settlement policy to its hiring authorities, vertical advocates, and employee relations officers in March 2005. 294 California State Auditor Report 2006-406 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. Department’s Action: Partial corrective action taken. The department reported that it is continuing its implementation of both CMS and its ProLaw system. The department indicated it has fully converted its former database into the ProLaw database and the vertical advocates are learning to utilize the new database daily. However, as previously discussed in finding number 1, the implementation of the CMS has been delayed and the department now estimates that the CMS will not be operational until the beginning of 2007. Finally, the department reported that all staff charged with inputting information into the CMS and ProLaw databases receive introductory and ongoing training on data entry. However, the plan for monitoring the accuracy of the data entry has been delayed because of unforeseen complications with the implementation of the vertical advocacy model and the complexities of the database. California State Auditor Report 2006-406 295 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. Department’s Action: Partial corrective action taken. According to the department, the office of civil rights is currently developing a one‑ to two‑week investigative course for new investigative staff. Additionally, the office of civil rights held three 40‑hour training sessions during the first six months of 2005 for its current investigative staff and it plans to continue to provide comprehensive 40‑hour sessions to investigative staff on a semi‑annual basis. Moreover, in May 2005, the department indicated that it plans to 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. In its October 2005 response, the department stated that it is developing a computer‑based ERO training textbook lesson that will be available to all staff. 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. 296 California State Auditor Report 2006-406 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’s Action: Partial corrective action taken. The department reported that it has modified its current adverse personnel action database to track the success rates of the ERO positions until the CMS is fully implemented and modified to monitor the outcome of cases and the success rates of the various classifications. Additionally, the department stated that it and the Department of Personnel Administration have agreed to use the staff services manager I classification for disciplinary officers. 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’s Action: Partial corrective action taken. According to the department, its Office of Audits and Compliance (OAC) has redirected internally a position that is charged with developing and implementing a project management methodology. The department believes that the project management approach ensures that management and staff are fully aware of the status of every audit from inception through completion of all action items and, on an as‑needed basis, can provide information about any specific action item or all action items associated with a specific audit. The department stated that it is through this process that the OAC intends to ensure a higher level of accountability in audit responses. California State Auditor Report 2006-406 297 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 2005 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  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  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  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  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. 298 California State Auditor Report 2006-406 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. PIA’s Action: Corrective action taken. PIA states that it has developed a methodology to allocate central office and transportation costs among its enterprises and will continue to utilize this methodology when analyzing the performance of its enterprises. PIA also states that it has established a system to consistently document its pricing analyses. Finally, PIA states that it has finalized a special or discount pricing policy and incorporated it into its manual of policies and procedures. 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 California State Auditor Report 2006-406 299 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, 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’s Action: Corrective action taken. PIA states that it has established inmate employment targets for the 2005–06 annual plan and that it will continue to monitor and report its final results in the year ending June 30, 2006. PIA further states that it has established “profitability per inmate” criteria, presented it to the Prison Industry Board, and will continue to monitor and report its final results in the year ending June 30, 2006. 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 300 California State Auditor Report 2006-406 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. 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’s Action: Corrective action taken. PIA states that, based on the Department of Corrections and Rehabilitation data, it estimated cost savings regarding sentence reduction credits as well as cost savings that PIA programs provide in lieu of non‑PIA programs. 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 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 California State Auditor Report 2006-406 301 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’s Action: Partial corrective action taken. PIA states that in July 2005 a contractor completed a design for a research study to measure the impact of PIA on its participants’ post‑release success and that, effective November 2005, PIA entered into a two‑year contract with an independent contractor to conduct the study. PIA also states that it is tracking the unique components of the Inmate Employability Program and that, as part of the study, PIA will examine the link between these unique components and post‑release employment, earnings, and returns to prison. 302 California State Auditor Report 2006-406 California State Auditor Report 2006-406 303 CALIFORNIA DEpARTmENT OF CORRECTIONS Investigations of Improper Activities by State Employees, July 2004 Through December 2004 INVESTIGATION I2004-0834 (REPORT I2005-1), MARCH 2005 California Department of Corrections’ response as of November 2005 Investigative Highlights . . . We investigated and substantiated an allegation that the California Department of Corrections The California Department (Corrections)1 improperly granted registered nurses of Corrections (Corrections) (nurses) an increase in pay associated with inmate supervision improperly granted registered nurses (nurses) an increase in that they were not entitled to receive. pay associated with inmate supervision as follows: Finding: Corrections improperly granted nurses premium pay  Between July 1, 2001, and associated with inmate supervision. June 30, 2003, Corrections paid 25 nurses $238,184 We found that 25 nurses at four institutions received increased more than they were pay associated with inmate supervision even though they entitled to receive. either did not supervise inmates for the minimum number  Corrections failed to of hours required or they lacked sufficient documentation to maintain sufficient support their eligibility to receive the increased pay. Between documentation for 17 of the 25 nurses and although July 1, 2001, and June 30, 2003, Corrections paid these nurses Corrections provided records $238,184 more than they were entitled to receive. for the remaining eight nurses, we found that most Corrections reported that it could not provide documentation of these nurses failed to incur the required number to support the pay increase it authorized for 17 of the 25 nurses of supervisory hours to merit because the institutions that employed these nurses either had the pay increase. no inmate supervisory hours to report, did not require nurses to track these hours, lacked sufficient documentation to support the hours claimed, or had destroyed all timekeeping records relating to inmate supervision. Although Corrections provided figures showing that the remaining eight nurses did supervise inmates, we found that in most instances these nurses failed to incur the required number of supervisory hours to merit the pay increase. For example, one nurse received a pay increase 1 As of July 1, 2005, the California Department of Corrections has been renamed the Department of Corrections and Rehabilitation. 304 California State Auditor Report 2006-406 of approximately $7,983 over a 16‑month period. However, the nurse met the inmate supervisory threshold of 173 hours per month on only two occasions, resulting in an overpayment of $7,030. Of the 25 nurses we reviewed that received this premium pay, we found that $238,184 of the $255,509 in inmate supervisory pay received was not justified. Corrections’ Action: Partial corrective action taken. As of June 2005, Corrections reported that it had obtained sufficient documentation to justify the pay increase it gave to 10 of 25 nurses identified in our report.  However, Corrections has yet to provide us with this documentation for our review. Previously, Corrections had reported it was unable to provide sufficient documentation to support the premium pay for these nurses. Corrections was unable to locate such documentation for three nurses and has initiated plans to collect these overpayments. In addition, Corrections has yet to complete its analysis of 12 of the 25 nurses identified in our report. California State Auditor Report 2006-406 305 DEpARTmENT OF jUSTICE The Missing Persons DNA Program Cannot Process All the Requests It Has Received Before the Fee That Is Funding It Expires, and It Also Needs to Improve Some Management Controls Audit Highlights . . . REPORT NUMBER 2004-114, JUNE 2005 Our review of the Department Department of Justice’s response as of December 2005 of Justice’s Missing Persons DNA Program (missing The Joint Legislative Audit Committee requested the persons program) revealed Bureau of State Audits to assess the Missing Persons DNA the following: Program (missing persons program) administered by the  Created in January 2001, Department of Justice (Justice), with a focus on determining the missing persons whether it is meeting its statutory provisions and efficiently program reached full using its funds. operation in July 2004, which appears reasonable considering the issues Finding #1: The missing persons program has recently it faced in establishing operations. reached full operation but will not complete existing work before the fee supporting the program expires.  As of February 2005, the missing persons program After the missing persons program was created in January 2001, had received 799 requests it faced several challenges in reaching full operation. These and completed DNA challenges included a hiring freeze for state agencies, the analysis for 261 of them, but is unlikely to complete extensive training necessary for its staff, and low pay rates testing for all requests compared to other jobs requiring the same skills. Given these before the fee supporting it challenges, it seems reasonable that it took until July 2004 for expires. the missing persons program to reach full operation. However,  It may be too soon to as of the end of February 2005, the program had received decide whether the 799 requests for DNA analysis and 538 were awaiting analysis, existing fee supporting which equates to 23 months of work. Program management has the missing persons program should be made acknowledged that it will not be able to complete DNA analysis permanent. for all the requests before the fee supporting the missing persons  Several elements of the program expires in January 2006. missing persons program are sound, but its Although some accumulation of work beyond what can management information immediately be processed is reasonable, the amount of work the and timekeeping missing persons program has accumulated suggests that in the databases, which could otherwise serve as valuable short term the program does not have the capacity to process all management tools, include of the requests it receives. In positioning itself for the long term, inaccurate data. the program must ensure that its workload estimate is accurate. continued on next page . . . 306 California State Auditor Report 2006-406  The missing persons Thus far, the program’s estimate has been close to the number program is receiving of requests it has received. However, the program’s workload the funding to which it estimate is based on a calendar year 2000 report from Justice’s is entitled and its costs Missing and Unidentified Persons System showing that coroners are appropriate for a laboratory to incur. and local law enforcement agencies submitted 150 reports of unidentified human remains in that year. More recent information shows that the average number of deceased unidentified persons reported from 2001 through 2004 is 190 per year, 40 more than the program’s estimate. In addition, the program’s current estimate does not include the number of requests it will receive related to missing persons, including personal articles and DNA supplied by parents and relatives. To ensure that it is based on the most current data and reflects future program demands, we recommended that the missing persons program review its workload estimate periodically. Justice’s Action: Corrective action taken. The missing persons program reports that in December 2004 Justice implemented a system for tracking service requests using Justice Trax software. The missing persons program stated that it now has reliable workload statistics on a monthly and yearly basis. Finding #2: It may be too soon to decide if the existing fee supporting the missing persons program should be made permanent. Between January 1, 2001, and June 30, 2004, the missing persons program recorded revenues of $11 million and expenditures of $7 million in the Missing Persons DNA Data Base Fund (DNA fund). As of June 30, 2004, the program had a fund balance of nearly $4 million. Justice plans to use the fund balance in the DNA fund to continue operating the program should the $2 fee end on January 1, 2006, as the California Penal Code, Section 14251, currently requires. Using expenditure data from the first six months of fiscal year 2004–05 to estimate the program’s expenditures for the full fiscal year, we estimate that the fund balance is sufficient for the program to operate for more than one year at current staffing and expenditure levels after the fee expires. However, Justice’s plan assumes that certain changes will occur that would enable the missing persons program to continue operating using its fund balance, even though the authorization for the DNA fund and the $2 fee increase on death certificates both end on January 1, 2006. In California State Auditor Report 2006-406 307 addition to the missing persons program receiving a fiscal year 2005–06 appropriation, the Department of Finance would have to move the program’s appropriation and fund balance to the General Fund. The missing persons program’s operations would be halted by June 30, 2006, when its fiscal year 2005–06 appropriation expires, unless legislation continues the necessary fee or the Legislature appropriates any remaining fund balance in a successor fund for fiscal year 2006–07. Assembly Bill 940 proposes making the $2 fee increase on death certificates permanent, to fund the missing persons program indefinitely. However, since the missing persons program has amassed a fund balance of $3.9 million and needs to update its workload estimate, coupled with the fact that the program only recently achieved full operation, it may be too soon to decide if its funding should be made permanent. Therefore, we recommend that it may be more prudent for the Legislature to extend the $2 fee increase on death certificates for a defined period of time and then reassess the program’s accomplishments and needs. Legislative Action: Legislation enacted. Assembly Bill 940 (Chapter 471, Statutes of 2005) was approved by the governor on October 4, 2005. This bill extends the fee supporting the program until January 1, 2010. Finding #3: Several elements of the missing persons program are sound. In creating the missing persons program, Justice has put into place several sound elements. Specifically, the program’s staffing approach and training levels appear appropriate, it has successfully educated local law enforcement agencies about its program, and it has made reasonable efforts to obtain federal funding. Missing persons program staff train for nearly two years before they are qualified to work with minimal direct supervision. Although the timeline is lengthy, the training process ensures that staff meet accreditation requirements and industry standards. In addition, its training process is comparable to that of laboratories doing similar work. At its inception in 2001, the missing persons program did not have an existing pool of requests on which to begin analysis. By February 28, 2005, it had received 799 requests from local law enforcement agencies in 50 of California’s 58 counties, such as Los Angeles, Orange, and San Diego. This suggests that the program has been effective in making its mission and services known to local law enforcement agencies. The program has used a combination of information bulletins, presentations at industry conferences, and a training video to communicate its mission and services. Section 14251(a) of the California Penal Code states that the $2 fee increase on death certificates would remain in effect until January 1, 2006, or until federal funds became available, whichever is sooner. Thus, it appears that the Legislature contemplated a real possibility of federal funds to operate a missing persons DNA database. Although 308 California State Auditor Report 2006-406 our review disclosed that some federal grants relate to DNA analysis, these funding opportunities are not specifically earmarked for DNA analysis of missing persons or unidentified human remains. Nevertheless, according to Justice, its process to identify appropriate federal grants includes sending representatives to the National Institute of Justice’s annual meeting where future grant opportunities are discussed and using its budget office to research and coordinate efforts to identify federal funding. Finding #4: The missing persons program could not provide sufficient documentation to support that it adheres to the priorities its advisory committee established. The program’s advisory committee, consisting of coroners, law enforcement officials, and other stakeholders, set up priorities for the program for processing DNA requests. However, we could not determine if the program is following the guidelines, because its list for documenting the priority it assigns to a request and the reasons why is incomplete. The list is designed to capture the following information: the request number; whether the request concerns a child; the cause of death, if known; whether the request concerns a specific missing person; and comments about the materials available for analysis, for example, a tooth, a femur, or hair. Despite containing these categories, the list does not provide enough information to determine the request’s priority, because it does not state the priority that was assigned and does not include all of the priority categories contained in the guidelines. To ensure that the missing persons program is completing the most critical requests first and that its limited resources are focused on the highest‑priority requests, it should amend its priority list to include all of the information used to determine the priority assigned to each request. Justice’s Action: Corrective action taken. The missing persons program told us that it has included the priority code that is consistent with the guidelines developed by its advisory committee on its priority list for case assignments. The missing persons program stated that each case is maintained in the case assignments list along with its priority code so that the priority assigned to any particular case can be determined. Further, the missing persons program maintains the case assignment list on its computer network such that any laboratory management personnel can access the list and make staff assignments. Finding #5: Some of the data the program’s management information and timekeeping databases contain are not reliable. The missing persons program uses a variety of databases, two of which contained data we believed would be relevant to the audit. One is a database the program uses to assist it in tracking and storing information related to requests for DNA analysis, and the other is one it uses for staff timekeeping. However, through our testing we determined that the data contained in the databases are inaccurate and not reliable for our audit purposes. The database the program uses to track requests contains some inaccurate California State Auditor Report 2006-406 309 dates and the timekeeping database lacks controls to ensure that approved time records are not changed, was missing a staff member’s time, and included some time that was not recorded properly. To make certain that it has effective tools to help manage and measure the program, missing persons program management should take the necessary steps to ensure that its management information and timekeeping databases contain accurate and reliable data. Justice’s Action: Partial corrective action taken. The missing persons program reported that it has addressed the inaccuracies in its management information database. The missing persons program concurred with our evaluation of its timekeeping system. It is currently evaluating options that will address the concerns cited in the report. The missing persons program noted that it anticipates having a usable prototype within a few months. Finding #6: Justice is receiving the revenues earmarked for the program and the program’s expenditures appear reasonable. According to Justice’s accounting records, revenues for the program are $3 million per year. This amount substantially agrees with the fees due based on the number of death certificates issued for fiscal years 2001–02 through 2003–04. We reviewed the program’s expenditures for these same three fiscal years. Its facilities costs are the most significant expenditures, totaling $1.4 million for rent and $2 million for tenant improvements. However, these expenditures appear reasonable considering the program’s space needs, the tenant improvements made, and the methodology Justice follows to determine the program’s share of facilities costs. Finally, Justice’s methodologies for apportioning personal services costs seem reasonable and the program’s expenditures for other operating expense and equipment costs seem appropriate for a laboratory to incur. 310 California State Auditor Report 2006-406 California State Auditor Report 2006-406 311 CALIFORNIA DEpARTmENT OF CORRECTIONS It Needs to Better Ensure Against Conflicts of Interest and to Improve Its Inmate Population Projections Audit Highlights . . . REPORT NUMBER 2005-105 SEPTEMBER 2005 Our review of the California California Department of Corrections and Rehabilitation’s Department of Corrections’ (department) processing response as of November 2005 of two no-bid community The California Department of Corrections’ (department) correctional facility (CCF) contracts and its projections fiscal year 2003–04 budget did not include funds to of inmate populations continue the contracts for three private community revealed the following: correctional facilities (CCF). However, in 2004 the department  Although one CCF experienced a large unexpected increase in inmate population contract was never because parole reform programs were not carried out and executed, actions because new inmate admissions from counties increased. Since taken by two of the prior population projections had generally projected a stable contractor’s employees who formerly worked population through 2009, the department did not expect this for the department may large increase. To respond to this situation, the department have violated conflict-of- put thousands of added beds into use, some located in interest laws. “overcrowding” areas—temporary beds placed in areas that are  The department does more difficult to secure, such as gymnasiums and dayrooms. not ensure that retired In summer 2004, the Youth and Adult Correctional Agency annuitants in designated and the department decided to reactivate two of the closed positions file statements of economic interests. CCFs, McFarland and Mesa Verde, using one‑year, no‑bid contracts, while initiating a competitive bidding process for a  The department, the longer‑term solution. facility owner, and the potential contractor all incurred costs before The department’s Population Projections Unit (projections the department received unit) generates population projections for time frames that approval to proceed with span six fiscal years, monitors and reports on the quality of a no-bid contract. the projections, and explains inconsistencies between actual  Information the and projected populations. The annual population projections department relied upon to correspond with the State’s budget cycle and drive the determine the need for the no-bid contracts appears department’s annual budget request. The department prepares accurate. its budget request using the fall population projection and continued on next page . . . submits this request to the Department of Finance (Finance) for use in preparing the Governor’s Budget. It revises its budget request based on the spring population projection and submits the revision to Finance for inclusion in the May revision of the 312 California State Auditor Report 2006-406 Governor’s Budget. The department also uses these projections  The department’s inmate to assess the ability of its facilities to house the inmate population projections population over a six‑year timeline. are useful for budgeting, but have limited value for longer-range planning, The Joint Legislative Audit Committee (audit committee) such as determining requested that the Bureau of State Audits evaluate the process when to build additional the department used to negotiate and enter into two no‑bid facilities. contracts for private prison facilities to determine whether  Because certain practices its policies and procedures are consistent with and adhere to increase the subjectivity current laws and regulations, particularly in relation to conflict‑ of the department’s of‑interest rules. In addition, the audit committee asked us projections and no documentation of the to analyze information the department used in its decision to projection process exists, enter into the two no‑bid contracts to determine whether our statistical expert could such information was accurate and reliable, to analyze the not establish the validity reasonableness and consistency of its method of tracking and of the projection process. projecting inmate population, and to assess the validity of any cost savings it identified. Finding #1: The department began incurring costs related to the Mesa Verde contract prior to receiving appropriate approval. Before awarding a contract without competition, the department must obtain the approval of General Services. Also, as part of the contract award process, after General Services’ approval of the request justifying an exemption from competitive bidding, the department operations manual requires contracts to be forwarded to the contractor for signature. This was the process the department used in executing the McFarland contract. However, it sent the Mesa Verde contract to the contractor for signature before obtaining General Services’ approval of its justification for exemption. The department later rescinded its request for exemption because of a decline in inmate population and because of conflict‑of‑interest concerns. It did notify the contractor by letter that the contract was not fully approved or in effect until General Services gave its final approval. Nevertheless, the department, the facility owner, and the potential contractor all incurred costs before receiving approval from General Services. California State Auditor Report 2006-406 313 We recommend that, to strengthen controls over its processing of no‑bid contracts, the department wait until all proper authorities have approved the no‑bid contract justification request before sending a contract to a contractor for signature or signing the contract itself. Department’s Action: None. The department states that its normal contracting procedures comply with this recommendation. However, it further states that when timing is critical for procuring essential services, obtaining the contractor’s signature in advance helps to expedite the process, but does not, in any way, execute the contract. Finding #2: Although the department has controls in place to identify conflicts of interest, a conflict may have existed with the unexecuted Mesa Verde contract. Despite conflict‑of‑interest disclosure requirements in the contract, Civigenics––the Mesa Verde contractor––did not disclose that two of its employees had worked for the department within the past year. As of July 2005, these same two Civigenics employees were also listed as current retired annuitants available to work at the department. According to Civigenics officials, the company hired one former high‑ranking department employee to develop a strategic plan and the other to help with the reactivation of Mesa Verde. The employment of the two individuals by both the department and Civigenics created potential conflicts of interest that, had the contract been fully executed, could have rendered it void. Moreover, certain contacts between these two individuals and the department during the contract formation process raise the possibility that conflict‑of‑interest laws were violated even though the contract was never fully executed. We recommended that the department require key contractor staff to complete statements of economic interests (statements). Department’s Action: Pending. The department states it will meet with the Office of Legal Affairs (OLA) to revisit the legal issues of imposing a mandatory requirement that all key contractor staff complete a Statement of Economic Interests form. The department further states that previously, OLA had advised it that requiring all key contractor staff to complete a Form 700—Statement of Economic Interests may be too over‑inclusive without legal basis to do so, but added that the department may be able to use a form that mirrored the Form 700. Finding #3: The department can improve its collection and review of required disclosure forms. 314 California State Auditor Report 2006-406 State law requires agencies to adopt a conflict‑of‑interest code that designates employees in decision‑making positions and requires them to file periodic statements. Accordingly, the department has adopted regulations that list the designated positions and spell out the disclosure requirements. Although most of the employees who are assigned to designated positions with a role in developing the CCF contracts completed the required statements, some did not. All 20 department staff who had a role in developing the two facilities contracts we reviewed filed statements covering all or part of 2004, but two retired annuitants associated with one of these contracts did not. Also, the department does not ensure the completeness of the statements employees do file. Four of the 20 employees whose statements we reviewed filled out their statements incorrectly. Because the department does not review all the filed statements for accuracy or completeness, it cannot ensure that its employees in designated positions have met their respective disclosure requirements. The department’s practice of continuing former employees as active retired annuitants when they are not actually working could create confusion about whether its retired annuitants are subject to revolving‑door prohibitions or the conflict‑of‑interest provisions that apply to current employees. According to the department, one of the primary reasons it hires staff who retire at the deputy director level and above as retired annuitants is to provide expert testimony in pending litigation. Typically, the department appoints retired annuitants to one‑year terms and will reappoint them in the subsequent year if their services are still needed. However, because of the state hiring freeze in effect during 2001, the former department director issued a memo directing each institution and the department’s headquarters personnel office to delete the expiration dates of all currently employed retired annuitants as of December 31, 2001, to eliminate the need to seek formal freeze exemptions approved by Finance each new calendar year. According to the chief of Personnel Services, although as of August 2005, the department is still abiding by its policy of not entering expiration dates on its appointments of retired annuitants, it plans to ask each division to annually advise personnel services’ staff which retired annuitants are no longer working. The department will then separate the identified retired annuitants from state service. However, until it implements this change, the department will continue to be at risk from potential conflicts of interest with its contractors and has no way of knowing if its retired annuitants are still needed. We recommended that the department: • Ensure that its retired annuitants in designated positions submit required statements. • Ensure that statements submitted by staff are complete. • When appointing retired annuitants, limit such appointments to a one‑year period and require annual reappointment. • Consider contracting with retired staff to provide expert testimony in litigation instead of its current practice of hiring them as retired annuitants. California State Auditor Report 2006-406 315 Department’s Action: Partial corrective action taken. The department states that retired annuitants performing duties in designated positions will be required to annually file statements of economic interests. For other staff, the department states that it will perform a cursory review on the cover page of each statement of economic interests to ensure all items are complete. The department further states that it is posting expiration dates on all current retired annuitant appointments, and will enter a 12‑month expiration date on all new appointments. Finally, the department is studying the feasibility of contracting with former employees to provide expert testimony in litigation rather than hiring them as retired annuitants. Finding #4: The cost comparisons the department used to justify the no-bid contracts were incomplete. Although the information on which the department based its decision to open two CCFs using no‑bid contracts appears reasonable, its justification for these contracts included incomplete cost comparisons. The department stated in its justification that the two contracts represented a potential cost savings to the State because the per diem rates for the facilities are less than the daily jail rate of $59, the maximum the department can reimburse counties for detaining certain state parolees who have violated parole and therefore are being sent back to prison. However, the two costs are not comparable. Because the CCF contract amounts, unlike the daily jail rate, do not include all the costs of housing an inmate, the department’s claim of cost savings is misleading. Compared to other CCF contracts in place in 2004, however, the average annual per‑bed cost of the two no‑bid contracts appears to be within a reasonable range. We recommended that the department include all its costs when it decides to include cost comparisons in justification requests or state that the cost comparison is incomplete. Department’s Action: Corrective action taken. The department states that future no‑bid contract justifications containing cost comparisons or benchmarks used for housing inmates will be comparable. Finding #5: With high error rates, the department’s longer-term projections do not accurately predict its need for inmate housing. In developing its budgets, the department primarily relies on information from the first two years of a projection, which reflects the period for which the department is preparing a budget. The average error rate of the projection process in the first two years is less than 5 percent and therefore appears reasonable for this purpose. However, because of the time needed to build a new prison, the department also uses projections to assess the sufficiency of its facilities to house future inmate populations. For this assessment the department uses all six years of the projection period. The 316 California State Auditor Report 2006-406 department’s average error rate increases rapidly beginning in the third year, reaching almost 30 percent by the end of the sixth year. Therefore, the department’s reliance on its projections in assessing the sufficiency of its facilities and planning future prison construction appears misplaced. We recommended that, if the department intends to continue using the projections for long‑term decision making, such as facility planning, it ensure that it employs statistically valid forecasting methods and consider seeking the advice of experts in selecting and establishing the forecasting methods that will suit its needs. Department’s Action: Pending. The department states that it is working with the Office of Research to establish an interagency agreement with statistical experts at either the CSU or UC systems to review the existing simulation model and projections process. Finding #6: The department does not properly update its projection data. The department’s projection model uses data from prior experiences to establish the likelihood of certain events occurring at steps along the projection process. For example, at a given point in the simulation model, an inmate hypothetically may have a 40 percent chance of being released on parole, a 50 percent chance of remaining in prison for at least another month, and a 10 percent chance of dying in prison. However, the department does not always properly update the frequencies—or relative percentages of the likelihood of different options occurring––using sufficient historical data. Rather than using a statistical process to develop the frequencies, the department takes the same frequencies used in its previous projection and then updates the numbers based on analysts’ experience and review of the actual data since the last projection. This method increases the possibility of bias entering into the projection. According to our statistical expert, the department cannot support its forecasts using its present methodology. We recommended that, to increase the accuracy and reliability of its inmate projection, the department update its variable projections with actual information, whenever feasible to do so. Department’s Action: Pending. The department states that it will develop a database that will store data and be used to update its variable projections in its simulation model. Finding #7: Contrary to its policy, the projections unit used speculative estimates in its projections. At the direction of the department and contrary to its own policy, the projections unit used estimates in its projections that are not based on past experience or that include information from programs whose effects could not be reasonably estimated in California State Auditor Report 2006-406 317 several instances. Specifically, in the 2004 spring and fall projections, the department’s former chief deputy director of support services directed the projections unit to include the estimated effects of various parole reforms. According to the manager of the projections unit, these estimates were based on changing criteria, and the parole reforms in question had numerous issues that needed to be resolved before any reasonable expectation of population reductions could be estimated. From our review of department policy memos, we noted that criteria such as which inmates were eligible for these programs and the maximum amount of time inmates could be enrolled changed during the time period in which these projections were being made. Nonetheless, department management required the projections unit to include the estimates in its population projections, thus compromising the unit’s independence. Without being able to function independently of internal or external pressure to use certain data or arrive at certain conclusions, the credibility of the projections unit’s forecasts is diminished. We recommended that the department disclose when a projection includes estimates for which inadequate historical trend data exists, such as the estimated effects of a new policy, and the specific effect such estimates have on the projection. Department’s Action: Corrective action taken. The department states that in the future, when a projection includes estimates for which inadequate historical trend data is limited, it will publish two projections; one which will be based on historical trends and one which includes the estimates; and it will show the impact that the estimates have on the trend projection. Finding #8: The department failed to obtain information from counties that would have alerted it to rising admissions. In addition to the unrealized effects of parole reforms, the spring 2004 population projection was also understated because of an unexpected rise in inmate admissions from counties. Because county superior courts sentence felons to state prison, changes in county policies on prosecuting criminals can affect inmate admissions at the state level. Los Angeles County was the primary source of the rising inmate admission rate during this period. According to the department’s director, the new chief of police of the city of Los Angeles changed the city’s approach to policing, increasing the number of people being sent to prison. However, until recently, the department did not have an effective process in place to communicate with local governments to identify such changes and their effect on the number of inmates being sentenced to prison. The department is developing ways to establish better communications with the counties. We recommended that the department continue its recent efforts to enhance its communications with local government agencies to better identify changes that may materially affect prison populations. 318 California State Auditor Report 2006-406 Department’s Action: Pending. The department states that it is communicating with the California District Attorney’s Association in an effort to establish contacts with the district attorneys offices in major counties. It adds that the department will work with the association to establish a shared data base. Finding #9: Lack of documentation casts doubt on the validity of the projection process. To assess the statistical validity of its projection process, our statistical expert met with key department staff to review the documentation of the projection method. However, the department does not have documentation describing its complete projection model, so we were unable to assess its validity. According to our statistical expert, documenting a projection process, including the computer program used, is important so others can evaluate the process and understand its limitations and capabilities. She added that, for staff within the department, such documentation is very valuable for the continuity of the forecasting process when current staff retire or leave. She concluded that data analysis is a constantly evolving process and appropriate documentation is crucial in all stages to continuously improve the analysis as more and more data become available. According to the chief of the branch that includes the projections unit, it is currently revising the projection model and plans to produce documentation for the revised version. We recommended that the department fully document its projection methodology and model. Department’s Action: Partial corrective action taken. The department states that it is in the process of writing documentation for its simulation model, and is about 50 percent complete. California State Auditor Report 2006-406 319 CALIFORNIA DEpARTmENT OF CORRECTIONS AND REhABILITATION Investigations of Improper Activities by State Employees, January 2005 Through June 2005 INVESTIGATIONS I2004-0649; I2004-0681; I2004-0789 (REPORT I2005-2), SEPTEMBER 2005  California Department of Corrections and Rehabiliation’s Investigative Highlight . . . response as of November 2005 Department of Corrections We investigated and substantiated allegations that and Rehabilitation failed to the California Department of Corrections and account for 10,980 hours of Rehabilitation (Corrections) did not track the total union leave time at a cost to number of hours available in a rank‑and‑file release time bank the State of $395,256. (time bank) composed of leave hours that union members donated. Finding: Corrections failed to adequately account for time- bank hours. Corrections lacked an adequate system of internal accounting and administrative controls over the number of hours in the time bank used by Peace Office Association members which allowed Peace Officer Association members to take release time without Corrections knowing whether the time‑bank balance was sufficient to cover the anticipated leave. We identified three employee representatives whom Corrections released for a combined total of 10,980 hours between May 2003 and April 2005, which cost the State $395,256, to perform duties for the Peace Officers Association and who were suppose to have this time charged against the time bank. Corrections indicated that in the latter part of 2004, it began generating management reports that included information on time‑bank use and donations and that it is analyzing this information to better assess the overall impact of such union‑leave activities. Although we acknowledge that Corrections has considerably improved its monitoring of the time bank’s activity, it still failed to account for a significant amount of time‑bank hours used. Further, in the management 320 California State Auditor Report 2006-406 reports that it used to assess current time‑bank activity, Corrections did not correctly account for the hours that the three representatives used. Such errors underscore the need for Corrections to perform its own accounting to ensure that requests for time‑bank use are charged against its balance and are sufficiently funded by employee leave donations. Corrections’ Action: Partial corrective action taken. Corrections reported that it is continually evaluating the impact time‑bank activity is having on department operations and plans to discuss such issues during its 2006 contract negotiations with the Peace Officers Association. Further, it reported that it has updated policies and tracking codes pertaining to union leave to more  effectively capture the time being used by unions. However, Corrections has not demonstrated that it has established and kept track of time‑bank balances so that it can be assured that the time bank has sufficient balances to cover leave requests. Further, Corrections has yet to ensure that its current method of accounting for time‑bank activity accurately reflects all of the time‑bank hours used, which indicates a serious flaw in Corrections’ tracking system. California State Auditor Report 2006-406 321 CALIFORNIA DEpARTmENT OF CORRECTIONS AND REhABILITATION The Intermediate Sanction Programs Lacked Performance Benchmarks and Audit Highlights . . . Were Plagued With Implementation Our review of the California Problems Department of Corrections and Rehabilitation’s (department) intermediate sanction programs for REPORT NUMBER 2005-111, NOVEMBER 2005 parole violators revealed the following: California Department of Corrections and Rehabilitation  Although the department response as of November 2005 had data regarding parole violators in the The Joint Legislative Audit Committee (audit committee) programs, it did not requested that the Bureau of State Audits review how the analyze the data or California Department of Corrections and Rehabilitation establish benchmarks (department) handles parole violators under its New Parole that it could measure the programs’ results against. Model policy. Specifically, the audit committee requested that we assess the steps used and the extent to which the department  The department’s savings has implemented and monitored its new parole policy, focusing were substantially less than anticipated on the intermediate sanction programs, including electronic because its savings monitoring, substance abuse treatment control units, and estimates were based on community detention houses. In addition, the audit committee unrealistic expectations asked us to determine whether the department had established and the programs were implemented late. performance measures to measure the efficacy of its parole policy in lowering the recidivism rate.  To minimize the risk to public safety, less dangerous parole On April 11, 2005, shortly after the audit committee approved the violators were placed in audit, the department secretary terminated the department’s use the intermediate sanction of the intermediate sanction programs as an alternative to parole programs; however, a revocation and return to prison. The programs we were asked to small percentage of parole violators were convicted audit had been operating for 14 months or less when they were of new crimes during the canceled, so the data available for our analysis were limited. time they otherwise would have been in prison.  Although implementation Finding #1: The department could have established of the intermediate benchmarks and evaluated the intermediate sanction sanction programs programs against them, but did not. was planned for January 1, 2004, Although the department’s Division of Adult Parole Operations the implementation (parole division) had gathered data about the intermediate was delayed due to sanction programs, it did not analyze the data to evaluate the labor negotiations, a department leadership programs’ impact on public safety. In addition, the parole change, and unanticipated contracting problems. 322 California State Auditor Report 2006-406 division did not establish benchmarks, such as acceptable return to custody rates for participants that it could measure the program against. Monitoring the programs’ impact on public safety against established benchmarks would have provided information relevant to the secretary’s decision to terminate the programs, such as whether the percentages of parolees in the programs who were convicted of new crimes or who committed parole violations when they otherwise would have been in prison were within acceptable limits. In addition, had the parole division established benchmarks for what it considered success, such as a minimum number of parole violators completing the programs, and analyzed the available data—similar to what we did for our report—the secretary could have used the analyses in deciding whether terminating the intermediate sanction programs was the best choice. Finally, by defining benchmarks before implementing the programs, the parole division could have determined whether it needed additional data to measure against the established benchmarks. When planning future intermediate sanction programs, the parole division should decide on appropriate benchmarks for monitoring performance, identify the data it will need to measure performance against those benchmarks, and ensure that reliable data collection mechanisms are in place before a program is implemented. After implementing a new intermediate sanction program, the parole division should analyze the data it has collected and, if relevant, use the data in its existing databases to monitor and evaluate the program’s effectiveness on an ongoing basis. Department’s Action: Pending. The department agrees with our recommendations and indicates that it has designed the new In Custody Drug Treatment and the Electronic In‑Home Detention programs to fit with evidence‑based research to reduce recidivism. However, the department recognizes some limitations exist in the ability of its databases to provide and compile relevant information, but to the extent that the databases can provide useful information for analysis, it will continue to use them for that purpose in a more systematic manner. Finding #2: Late implementation and unrealistic expectations prevented the intermediate sanction programs from achieving desired savings. For various reasons, none of the intermediate sanction programs were implemented by January 1, 2004, as planned, so parole violators could not be placed in the programs as early as had been intended. Compounding the delayed implementation was the parole division’s unrealistic expectation that the programs would be fully occupied by the first date of implementation. The parole division also did not take into account that there would be a ramping‑up period during which occupancy in the programs would increase gradually, but instead, assumed full capacity from the beginning. California State Auditor Report 2006-406 323 The parole division did not evaluate the data it had about the Halfway Back and Substance Abuse Treatment Control Units (SATCU) programs, so it was unable to calculate the savings achieved by the programs. It was apparent, however, that the savings were substantially less than anticipated because of the delays in implementing the programs and placing parole violators in them. Using the parole division’s estimates and data about the programs and the participants, we estimated that for the 5,742 parole violators placed in the programs by December 31, 2004—2,567 in the SATCU program and 3,175 in the Halfway Back program—the department saved $14.5 million—$7.4 million and $7.1 million, respectively. The savings equates to an average $1.2 million per month over a 12‑month period, far short of the average $8.4 million per month it would have had to save to achieve its planned savings of $50.2 million for fiscal year 2003–04 and $100.5 million for fiscal year 2004–05. We recommended that the parole division should ensure the savings estimates developed during program planning are based on reasonable assumptions, and if those assumptions change, update the savings estimates promptly. Department’s Action: Pending. The department concurs with our recommendation and indicates it will ensure that any discussions with legislative staff or other researchers includes reasonable projections or estimates, and that it updates and reassesses projected savings in a timely manner. Finding #3: The parole division could have established a performance baseline and used it to analyze the effect the intermediate sanction programs had on parolee behavior, but did not. The parole division hoped that parole violators would benefit from services they received while in the SATCU and Halfway Back programs to help them integrate back into society and successfully complete their parole terms, resulting in a lower recidivism rate. Although the tradeoff may be difficult, achieving the desired benefits of using intermediate sanctions in lieu of returning eligible parole violators to prison requires a willingness to accept the additional risks associated with keeping individuals who are proven to be uncooperative in the community. The parole division minimized the risk to public safety by placing less‑dangerous parole violators in the programs. However, depending on the program, this supervision or strict control occurred for between 30 days and an average of 45 days, which is significantly less than the average 153 days a parolee would have stayed in prison for parole violations. Based on our data analysis, of the 2,567 parole violators placed in the SATCU program and 3,175 parole violators placed in the Halfway Back program by December 31, 2004, 128 (5 percent) and 114 (4 percent), respectively, were returned to prison for new convictions during the time they otherwise would have been in prison. Notwithstanding the significance of those crimes to their victims, the percentage of parolees participating in the two programs who were convicted of new crimes is small. 324 California State Auditor Report 2006-406 An additional 1,732 parole violators placed in the Halfway Back and SATCU programs were returned to prison for committing parole violations during that time. However, the parole division had no benchmarks to determine whether these results were acceptable. The parole division should consider analyzing the effect programs have had on parolee behavior and should use the knowledge it gains from the analyses to make future intermediate sanction programs more effective. The analysis should include the benefits of adding features to make these programs more effective. Department’s Action: Pending. The department agrees with our recommendation but points out that analyzing the effects programs have had on parolee behavior is a lengthy and sophisticated process that requires the expertise of professionally trained researchers. Nonetheless, the department states that it will begin identifying benchmarks and processes to collect data to measure performance against those benchmarks. California State Auditor Report 2006-406 325 CALIFORNIA pUBLIC EmpLOyEES’ RETIREmENT SySTEm It Relied Heavily on Blue Shield of California’s Exclusive Provider Network Analysis, an Analysis That Is Reasonable in Approach but Includes Some Questionable Elements and Possibly Overstates Estimated Savings Audit Highlights . . . Our review of the decision REPORT NUMBER 2004-123, MARCH 2005 by the California Public Employees’ Retirement California Public Employees’ Retirement System’s response as System (CalPERS) board of of September 2005 administration (board) in May 2004 to approve an The Joint Legislative Audit Committee requested the exclusive provider network Bureau of State Audits to examine the California Public for CalPERS members in the Employees’ Retirement System (CalPERS) decision to Blue Shield of California (Blue Shield) health maintenance discontinue contracting with certain hospitals through the organization (HMO) found Blue Shield of California (Blue Shield) health maintenance the following: organization (HMO) provider network. Our consultants  Our consultants found that found that many components of Blue Shield’s analysis appear many components of Blue reasonable but some questionable elements exist such as using Shield’s analysis appear claim data from non‑CalPERS sources. In addition, Blue Shield’s reasonable but some original savings estimate did not incorporate a health system’s questionable elements exist such as using claim data financial terms that were expected to produce substantial from non-CalPERS sources. savings in 2005 only if the board did not adopt the exclusive  Blue Shield’s original provider network. Also, Blue Shield’s estimate of $31.4 million in savings estimate did not savings does not take into consideration the impact of members incorporate a health leaving its HMO provider network and joining other health system’s financial terms care plans. Further, Blue Shield did not adequately address that were expected to a recommendation to investigate differences in emergency produce substantial savings in 2005 only if the board room assumptions for one health system. According to did not adopt the exclusive our consultant, Blue Shield’s hospital savings estimate of provider network. $20.6 million could drop to only $8.9 million if the model‑  Blue Shield’s estimate of review actuary’s assumptions were used. Moreover, the CalPERS $31.4 million in savings board, health benefits committee (committee), and health does not take into benefits branch staff relied primarily on Blue Shield’s summary consideration the impact of its analyses and its presentations in deciding to approve the of members leaving its HMO provider network exclusive provider network. Although a model‑review actuary and joining other health- was hired to, among other things, review Blue Shield’s cost care plans. savings projections, he was unable to express an opinion on continued on next page . . . the savings estimate of $36.3 million related to the 38 hospitals; 326 California State Auditor Report 2006-406  Blue Shield did not thus, his report could not provide a credible basis for the adequately address a CalPERS board to evaluate the savings estimate. Finally, in one recommendation to instance, our consultant found that Blue Shield deviated from its investigate differences original criteria for excluding hospitals from the network. in emergency room assumptions for one health system. According to our consultant, Blue Shield’s Finding #1: CalPERS relied primarily on Blue Shield’s hospital savings estimate summary of its analyses and presentations in making the of $20.6 million could drop decision to exclude hospitals. to only $8.9 million if the model-review actuary’s A provision of the contract between CalPERS and Blue Shield assumptions were used. specifies that Blue Shield cannot disclose information to CalPERS  The CalPERS board, health that would cause it to breach the terms of any contract to which benefits committee, and it is a party. According to Blue Shield, the terms of the contract health benefits branch between it and providers in its network specifically prohibit the staff relied primarily on Blue Shield’s summary disclosure of certain information, including rates of payment. of its analyses and its Consequently, CalPERS health benefits branch staff did not have presentations in deciding access to hospital rates, nor could they review Blue Shield’s cost to approve the exclusive model. As a result, CalPERS was unable to verify the accuracy of provider network. Blue Shield’s cost comparison data.  Although a model-review actuary was hired to, We recommended that the Legislature consider enacting among other things, review Blue Shield’s cost savings legislation that would allow CalPERS, during its contract projections, he was unable negotiation process, to obtain relevant documentation supporting to express an opinion on any analyses it will use to make decisions that materially affect the savings estimate of the members of the health benefits program established by the $36.3 million related to the 38 hospitals; thus, his Public Employees’ Medical and Hospital Care Act. report could not provide a credible basis for the CalPERS board to evaluate Legislative Action: Unknown. the savings estimate.  In one instance, our consultant found that Finding #2: CalPERS did not fully consider all of the findings and Blue Shield deviated from recommendations made by the actuary hired to perform a third- its original criteria for party review prior to approving the exclusive provider network. excluding hospitals from the network. CalPERS health benefits branch staff directed Blue Shield to hire an independent actuary (model‑review actuary) to conduct a third‑party review to resolve differences between Blue Shield’s and a health system’s analyses. Blue Shield’s contract with the model‑review actuary also required him to review the cost savings projections for the exclusive provider network. The model‑review actuary issued his final report to Blue Shield and CalPERS in April 2004, which contained numerous findings and recommendations. Although the board and committee discussed Blue Shield’s savings estimate in meetings held before the board voted to approve the exclusive provider network in May 2004, our review of the transcripts found that they did not California State Auditor Report 2006-406 327 discuss all of the model‑review actuary’s findings and recommendations or the impact of the findings and recommendations on the CalPERS board’s decision. Without fully addressing all of the concerns raised by the model‑review actuary, CalPERS had no assurance from an independent source that Blue Shield’s savings estimate, as well as other aspects of its model, were accurate. We recommended that, to ensure its decisions are in the best interests of CalPERS members, CalPERS should require its health benefits branch staff to evaluate fully the findings and recommendations of third‑party reviews and present their results to the board and committee. CalPERS’ Action: Corrective action taken. CalPERS stated that, effective September 1, 2005, it implemented procedures to formalize its criteria for analyzing and reporting on third‑party reviews. These procedures require CalPERS’ management to designate a staff Third‑party Review Coordinator to oversee reviews. The procedures also require the coordinator to monitor, evaluate, and report to CalPERS’ management the outcomes and efficacy of analyses performed in third‑party reviews, including any deficiencies or limitations. Finally, the procedures require CalPERS’ management to ensure that the coordinator reviews, approves, and presents all findings to the board and its committees. CalPERS further stated that its third‑party review procedures address the bureau’s concerns in the audit report. Specifically, CalPERS stated that the procedures provide a clear statement of work, a thorough review of work by staff and management, documentation, and clear channels of communication of the results of the review to CalPERS’ management and the board. 328 California State Auditor Report 2006-406 California State Auditor Report 2006-406 329 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 2004 through December 2005. 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 2002-016, Water Replenishment District of Southern 16 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. continued on next page 330 California State Auditor Report 2006-406 Policy Area/Report Number and Title Page Recommendation 18 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. 2003-137, California’s Independent Water Districts: 25 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. Appropriations 2004-140, Department of Transportation: Various 40 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 of the Bay Bridge, 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. Business and Professions and Governmental Organization 2003-122, California Gambling Control Commission: 44 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. 49 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. California State Auditor Report 2006-406 331 Policy Area/Report Number and Title Page Recommendation 2004-106, Wireless Enhanced 911: The State Has 63 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 2004-108, California Commission on Teacher 75 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. 2004-115, The State’s Offshore Contracting: 90 If the Legislature desires information and data on Uncertainty Exists About Its Prevalence and Effects offshoring of state services to be more readily available, it may consider granting General Services the authority to require contractors to disclose, as part of their bid on state work or during performance of the contract, details on any and all portions of the project that subcontractors or employees outside the United States will perform. 2004-033, Pharmaceuticals: State Departments That 96 The Legislature should consider enacting legislation that Purchase Prescription Drugs Can Further Refine Their Cost would allow CalPERS to obtain relevant documentation to Savings Strategies ensure that it is receiving all rebates to which it is entitled to lower the prescription drug cost of the health benefits program established by the Public Employees’ Medical and Hospital Care Act. 2004-134, State Athletic Commission: The Current 115 The Legislature may want to reconsider the need for a Boxers’ Pension Plan Benefits Only a Few and Is Poorly pension plan for retired professional boxers since so Administered few boxers annually meet the current criteria of a professional boxer. 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. 2004-120, Department of Education: School Districts’ 126 The department, in consultation with stakeholders, should Inconsistent Identification and Redesignation of English establish required initial designation and redesignation Learners Cause Funding Variances and Make Comparisons of criteria related to statewide tests that would provide Performance Outcomes Difficult greater consistency in the English learner population across the State. The department should pursue legislative action, as necessary, to achieve this goal. 133 The department should continue to work with the Department of Finance, the Legislative Analyst’s Office, and the Legislature to revise the Impact Aid funding formula to include statistics that better measure the number of students in poverty. 2003-125, Department of Health Services: Participation 136 If Health Services believes it does not have a clear in the School-Based Medi-Cal Administrative Activities directive from the Legislature to increase participation Program Has Increased, but School Districts Are Still Losing and reimbursements, it should seek statutory changes. Millions Each Year in Federal Reimbursements continued on next page 332 California State Auditor Report 2006-406 Policy Area/Report Number and Title Page Recommendation 141 To simplify and improve program oversight, and to increase the efficiency of MAA operations, Health Services should do the following: • Reduce the number of entities it must oversee and establish clear regional accountability by eliminating the use of local governmental agencies from MAA. Because current state law allows school districts to use either a consortium or a local governmental agency, Health Services will need to seek a change in the law. • Require a school district that chooses to use the services of a private vendor, rather than developing the expertise internally, to use a vendor selected by the consortium through a competitive process. Depending on the varying circumstances within each region, a consortium may choose to use a single vendor or to offer school districts the choice from a limited number of vendors, all of which have been competitively selected. Health Services should seek a statutory change if it believes one is needed to implement this recommendation. Health and Human Services 2003-124, Department of Health Services: Some of Its 174 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. 2004-111, Sex Offender Placement: Departments That 184 To most appropriately provide services and support to Are Responsible for Placing Sex Offenders Face Challenges, its consumers, we recommended that the Department of and Some Need to Better Monitor Their Costs Developmental Services (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. 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. 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. California State Auditor Report 2006-406 333 Policy Area/Report Number and Title Page Recommendation 2004-033, Pharmaceuticals: State Departments That This audit is also included in the Business and Professions Purchase Prescription Drugs Can Further Refine Their Cost and Governmental Organization policy area. See that policy Savings Strategies area for the wording of our recommendation. 2003-125, Department of Health Services: Participation This audit is also included in the Education policy in the School-Based Medi-Cal Administrative Activities area. See that policy area for the wording of our Program Has Increased, but School Districts Are Still Losing recommendation. Millions Each Year in Federal Reimbursements Jobs, Economic Development, and the Economy 2002-018, Workers’ Compensation Fraud: Detection 215 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. 223 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. 226 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. 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. 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. continued on next page 334 California State Auditor Report 2006-406 Policy Area/Report Number and Title Page Recommendation 2003-101, County Emergency Medical Services Funds: 236 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. 237 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. 238 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. Natural Resources 2004-138, Department of Parks and Recreation: It 256 Should it choose to appropriate General Fund grants in Needs to Improve Its Monitoring of Local Grants and Better the future, the Legislature should specifically define what Justify Its Administrative Charges is to be accomplished with the funds. In cases where Parks is unclear as to the expected results or deliverables from grant funds appropriated by the Legislature, Parks should continue with its new policy of stopping action on these grants and seeking further statutory language clarifying the intended use of these funds. 2004-126, Off-Highway Motor Vehicle Recreation 275 The division and commission should evaluate the current Program: The Lack of a Shared Vision and Questionable spending restrictions in the law to determine whether Use of Program Funds Limit Its Effectiveness they allow for the allocation of funds necessary to implement a strategy to provide an OHV program that is balanced between the need for recreation and protection of the environment. If necessary, the division should seek changes in the law to include minimum spending guidelines that not only ensure that elements of the OHV program are addressed but also allow the commission and the division the flexibility to implement a balanced program as the law intended. California State Auditor Report 2006-406 335 Policy Area/Report Number and Title Page Recommendation 276 The Legislature should consider amending the Public Resources Code to clarify whether using OHV trust fund money to restore land damaged by OHV recreation requires that the land be permanently closed to off-highway vehicles. 277 To ensure that money from the OHV trust fund is used appropriately, the Legislature should amend the law to clarify the allowable uses of the OHV trust fund. Specifically, the Legislature should specify whether the department’s broad interpretation that any road that is not defined as a highway but is open for public use in a state park qualifies for funding by the OHV trust fund, or whether state law restricts the use of OHV trust fund money to areas where non-street-licensed vehicles can engage in traditional OHV activity. 277 The department should discontinue charging the director’s office costs to the OHV trust fund, as the law requires. However, if the department believes that this statutory restriction is inappropriate, it should seek a statutory change to remove the requirement. 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. 2003-130, California Department of Corrections: 282 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. 283 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. 284 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. continued on next page 336 California State Auditor Report 2006-406 Policy Area/Report Number and Title Page Recommendation 2004-114, Department of Justice: The Missing Persons 307 As the Legislature considers Assembly Bill 940 regarding DNA Program Cannot Process All the Requests It Has the continuation of the $2 fee increase on death Received Before the Fee That Is Funding It Expires, and It Also certificates, it may wish to extend the fee increase for Needs to Improve Some Management Controls a defined period of time and then reassess the missing persons program’s accomplishments and needs. Public Employment, Retirement, and Social Security 2004-123, California Public Employees’ Retirement 326 The Legislature should consider enacting legislation that System: It Relied Heavily on Blue Shield of California’s would allow CalPERS, during its contract negotiation Exclusive Provider Network Analysis, an Analysis That Is process, to obtain relevant documentation supporting Reasonable in Approach but Includes Some Questionable any analyses it will use to make decisions that materially Elements and Possibly Overstates Estimated Savings affect the members of the health benefits program established by the Public Employees’ Medical and Hospital Care Act. 2004-033, Pharmaceuticals: State Departments That This audit is also included in the Business and Professions Purchase Prescription Drugs Can Further Refine Their Cost and Governmental Organization policy area. See that policy Savings Strategies 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. California State Auditor Report 2006-406 337 AppENDIx B Summary of Monetary Benefits Identified In Audit Reports Released From July 1, 2001, Through December 31, 2005 We estimate that auditees could have realized more than $741 million of monetary benefits during the period July 1, 2001, through December 31, 2005, 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, 2005 Audit Number/ Date Released Audit Title/Basis of Benefit Monetary Benefit July 1, 2005 through December 31, 2005 2004-113 Department of General Services: Opportunities Exist Within the Office of Fleet Administration $45,000 (July 2005) to Reduce Costs Increased Revenue—The Department of General Services estimates that it will recover about $45,000 from the individuals who used its parking lots without paying. 2004-134 State Athletic Commission: The Current Boxers’ Pension Plan Benefits Only a Few and Is $33,300 (July 2005) Poorly Administered Increased Revenue—If the commission raises the ticket assessment to meet targeted pension contributions as required by law, we estimate it will collect an average of $33,300 more per year. 2004-125 Department of Health Services: Participation in the School-Based Medi-Cal Administrative Activities $10,300,000 (August 2005) Program Has Increased, but School Districts Are Still Losing Millions Each Year in Federal Reimbursements Increased Revenue—We estimate that California school districts would have received at least $53 million more in fiscal year 2002–03 if all school districts had participated in the program and an additional $4 million more if certain participating schools had fully used the program. A lack of program awareness was among the reasons school districts cited for not participating. By stepping up outreach, we believe more schools will participate in the program and revenues will continue to increase. However, because participation continued to increase between fiscal years 2002–03 and 2004–05, the incremental increase in revenue will be less than it was in fiscal year 2002–03. Taking into account this growth in participation and using a trend line to estimate the resulting growth in revenues, we estimate that revenues will increase by about $10 million per year beginning in fiscal year 2005–06. continued on next page 338 California State Auditor Report 2006-406 Audit Number/ Date Released Audit Title/Basis of Benefit Monetary Benefit I2005-2 California Department of Corrections: Investigations of Improper Activities by State Employees $587,700 (Allegations Cost Recovery—The Department of Corrections (Corrections) failed to properly account I2004-0649, for the time that employees used when released from their regular job duties to perform I2004-0681, union-related activities. In addition to recovering past payments, Corrections can save I2004-0789) $192,500 annually by discontinuing this practice. (September 2005) Annualized carry forward from prior fiscal years: $150,315,500 2001-102 Department of Insurance Conservation and 300,000 Liquidation Office 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 2002-101 California Department of Corrections 14,500,000 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 2003-125 California Department of Corrections 20,700,000 2003-124 Department of Health Services 4,600,000 I2004-2 Department of Health Services 9,300 I2004-2 Military Department 64,200 2004-105 California Department of Corrections 290,000 I2004-2 California Department of Corrections 119,000 Totals for July 1, 2005, through December 31, 2005 $161,281,500 July 1, 2004, through June 30, 2005 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. Recognizing that Corrections will need some time to negotiate cost-based reimbursement contract terms, we estimate that it could begin to realize savings of $20.7 million annually in fiscal year 2005–06. 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. California State Auditor Report 2006-406 339 Audit Number/ Date Released Audit Title/Basis of Benefit Monetary 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 2004) their personal use. We estimate the Department of Health Services could save an average of $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 2004) Military Department has returned all the overpaid employees to their regular pay levels, it 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. I2005-1 California Department of Corrections: Investigations of Improper Activities by State Employees $357,200 (Allegation Cost Recovery—In violation of state regulations and employee contract provisions, the I2003-0834) Department of Corrections (Corrections) paid 25 nurses at four institutions nearly $238,200 (March 2005) more than they were entitled to receive between July 1, 2001, and June 30, 2003. In addition to recovering past overpayments, Corrections can save $119,000 annually by discontinuing this practice. Although Corrections now contends that the payments to 10 of the 25 nurses were appropriate, despite repeated requests, it has not provided us the evidence supporting its contention. Thus, we have not revised our original estimate. 2005-030 State Bar of California: It Should Continue Strengthening Its Monitoring of Disciplinary Case $2,700 (April 2005) Processing and Assess the Financial Benefits of Its New Collection Enforcement Authority Cost Recovery—As a result of our recommendation that it prioritize its cost recovery efforts to focus on attorneys who owe substantial amounts, the State Bar sent demand letters to 68 of the top 100 disciplined attorneys and so far has recovered one payment. 2004-033 Pharmaceuticals: State Departments That Purchase Prescription Drugs Can Further Refine Their $2,468,700 (May 2005) Cost Savings Strategies Cost Recovery—As we recommended, the Department of Health Services identified and corrected all of the drug claims it paid using an incorrect pricing method. It expects to recoup the nearly $2.5 million in net overpayments that resulted from its error. Annualized carry forward from prior fiscal years: $110,033,000 2001-102 Department of Insurance Conservation and 300,000 Liquidation Office 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 June 30, 2005 $117,825,060 July 1, 2003, through June 30, 2004 continued on next page 340 California State Auditor Report 2006-406 Audit Number/ Date Released Audit Title/Basis of Benefit Monetary Benefit 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. 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: $110,033,000 2001-102 Department of Insurance Conservation and 300,000 Liquidation Office 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 $123,229,800 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. California State Auditor Report 2006-406 341 Audit Number/ Date Released Audit Title/Basis of Benefit Monetary Benefit 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. We estimate that Corrections could realize savings of $14.5 million beginning in fiscal year 2005–06, with savings increasing each year until reaching $58 million in fiscal year 2008–09. 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. 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. continued on next page 342 California State Auditor Report 2006-406 Audit Number/ Date Released Audit Title/Basis of Benefit Monetary Benefit Annualized carry forward from prior fiscal years: $61,103,000 2001-102 Department of Insurance Conservation and 300,000 Liquidation Office 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 $91,305,000 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. 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. California State Auditor Report 2006-406 343 Audit Number/ Date Released Audit Title/Basis of Benefit Monetary Benefit 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, 2005 $741,338,360 * Although we identified monetary benefits the auditee could reasonably expect to realize if it implements our recommendations, these benefits would be realized in a future period rather than the period in which the report was issued. Therefore, the appropriate amounts either are or will be included in future years’ annualized carry forward. 344 California State Auditor Report 2006-406 California State Auditor Report 2006-406 345 INDEx State and Local Entities With Recommendations From Audits Included in This Special Report Entity Page Reference Aging, Department of 3 Athletic Commission 115 California Public Employees Retirement System 95, 325 Children and Families Commission, California 55 Commission on Teacher Credentialing, California 73 Corrections, Department of 155, 167, 183, 281, 285, 287, 303, 311,319, 321 Developmental Services, Department of 183 Education, Department of 125 Emergency Medical Services Authority 191 Finance, Department of 93 Fish and Game, Department of 259 Franchise Tax Board 31 Fraud Assessment Commission 211 Gambling Control Commission, California 41 General Services, Department of 61, 71, 89, 95, 103, 155 Health and Human Services Agency 95 Health Services, Department of 3, 95, 135, 173, 181, 189, 191, 197 Highway Patrol, California 61 Industrial Relations, Department of 31, 205, 211 Insurance, Department of 199, 211 Justice, Department of 305 Mental Health, Department of 51, 183 Military Department, California 69, 119 Off-Highway Motor Vehicle Commission 271 Parks and Recreation, Department of 253, 265, 271 Prison Industry Authority 297 Public Utilities Commission 143 Secretary of State 81 Social Services, Department of 3 State and Consumer Services Agency 95 346 California State Auditor Report 2006-406 Entity Page Reference State Bar of California 227 State Controller’s Office 23 Transportation, Department of 35 Unemployment Insurance Appeals Board, California 233 Youth and Adult Correctional Agency 297 Local Entities Page Reference Alameda County Water District 23 Anaheim Union High School District 125 City of Richmond 245 County of Colusa 235 County of Los Angeles 173, 191, 235 County of Marin 235 County of Sacramento 191 County of San Bernardino 191 County of San Diego 191 County of San Mateo 235 County of Santa Clara 191 County of Sutter 191 Crestline-Lake Arrowhead Water Agency 23 Fiscal Crisis Management Assistance Team 121 Leucadia Wastewater District 23 Long Beach Unified School District 125 Los Angeles Unified School District 125 Los Angeles County Metropolitan Transportation Authority 241 Los Angeles Department of Water and Power 147 Metropolitan Water District of Southern California 9 Otay Water District 23 Pajaro Valley Unified School District 125 Sacramento City Unified School District 125 San Diego City Unified School District 125 San Francisco Unified School District 125 San Gabriel Valley Municipal Water District 23 Stockton Unified School District 125 Walnut Valley Water District 23 California State Auditor Report 2006-406 347 Entity Page Reference Water Replenishment District of Southern California 15 Western Municipal Water District 23 Wheeler Ridge-Maricopa Water Storage District 23 348 California State Auditor Report 2006-406 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 California State Auditor Report 2006-406 349