Sequestering Savings From the Closure of Developmental Centers

Sequestering Savings From the Closure of Developmental Centers MAC TAYLOR LEGISLATIVE ANALYST JANUARY 2018 analysis full gutter AN LAO REPORT Cover Photo: The cover photo of the Sonoma Developmental Center was provided courtesy of the California Department of Developmental Services. LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Executive Summary The Supplemental Report of the 2017-18 Budget Act requires the Legislative Analyst’s Office to analyze a proposal about sequestering potential savings from the closure of Developmental Centers (DCs) and keeping the savings in the Department of Developmental Services (DDS) community services system. This report addresses that requirement. In this report, we discuss the two main potential sources of savings—(1) net operational savings and (2) increased revenues from the sale or leasing of DC properties. Background State Closing Most of the Remaining DCs. DDS is in the process of closing three DCs—Sonoma DC by the end of 2018 and Fairview DC and the general treatment area at Porterville DC by the end of 2021 (what we are calling closure DCs). From 2017-18 through final closures, DDS will transition 534 remaining DC residents to the community. While DDS will continue to run Canyon Springs Community Facility and a secured treatment program at Porterville DC, the imminent closures mean that nearly all DDS consumers— more than 315,000 individuals with developmental disabilities—will be served in community-based settings. DC Closures Have Led to Community Development Costs. The state has incurred significant costs over time (in the low hundreds of millions of dollars) to develop new housing and other community-based programs to accommodate the special needs of individuals transitioning from DCs into the community. It has also incurred costs (about $20 million) to develop community-based crisis and safety net services. DCs have traditionally served as the “safety net” for DDS consumers in crisis. Once closed, DCs will no longer fill this role. Net Operational Savings From DC Closures DC costs are very expensive, largely due to the substantial fixed costs of running and maintaining the facilities. While the state will reduce its costs notably by closing DCs, it will incur significant new costs to provide services to former DC residents in the community. Net Operational Savings Could Reach $100 Million Annually. As shown in the figure, we estimate that once DC closure activity is complete the state will save about $100 million annually (in today’s dollars). The components of the calculation are: • General Fund Avoided Estimated Annual Net Operational Savings Costs at DCs. The After DC Closures 2017-18 General Fund costs at closure DCs total General Fund (In Millions of 2017-18 Dollars) about $200 million. This Reduced spending at closure DCs $200 is the amount the state Less: will avoid spending once DDS cost of community services for former DC residents -60 DCs are fully closed. DDS cost to operate/provide safety net and crisis services -25 • New Ongoing Costs in other state departmentsa -15 Annual Costs in the Community. Once Total Estimated Annual Net Operational Savings $100 a closures are complete, Costs include the state portion of Medi-Cal, Supplemental Security Income/State Supplemental Payment, and In-Home Supportive Services payments. we estimate the state DCs = Developmental Centers and DDS = Department of Developmental Services. www.lao.ca.gov 1 analysis full gutter AN LAO REPORT will incur annual General Fund costs of about $75 million to serve the 534 DC residents moving to the community. We estimate the state will also spend about $25 million General Fund annually to provide community-based safety net services. This amount could vary significantly depending on the specific needs of the former DC residents once transitioned to the community. It is also important to note this amount does not include the significant one-time costs to develop community-based safety net services and housing and programs for consumers moving from DCs in the intervening years between 2017-18 and the completion of closures. Potential Revenues From DC Closure Properties The other potential source of savings that could result from DC closures is the sale or repurposing (specifically leasing) of DC closure properties. Selling DC Properties. The Legislature could decide to sell individual parcels or entire DC properties to generate revenue for DDS. To do so, it would likely have to bypass the typical process for disposing of surplus state properties. Selling properties would reduce the state’s liability at these locations and generate an influx of revenue, but the valuation and sale potential of each DC depend on its unique characteristics—such as location, infrastructure, and local zoning rules. Aging infrastructure at Sonoma DC, for example, would adversely affect its valuation and sale potential. Leasing DC Properties. The Legislature could instead allow DDS to lease portions of the DC properties to private entities to generate an ongoing source of revenue for DDS. There is precedent for DDS leasing property for the development of mixed-income housing—Harbor Village, on Fairview DC grounds, includes more than 550 housing units, of which 31 percent are occupied by DDS consumers. A second housing development is also in the planning phase at Fairview DC. Using leases in this way increases available affordable housing—which could be a legislative policy objective. However, if the terms of the Harbor Village agreement serve as a guide, it could take many years before such an arrangement generates revenue for DDS. In addition, the location of each DC, coupled with local zoning rules and preferences, could affect the viability of this option. For example, the location of Sonoma DC may not be ideal for housing DDS consumers because it is not in close proximity to other community-based services. LAO Bottom Line. Each of the closure DCs has unique characteristics that will affect the state’s ability to generate revenues from the sale or leasing of properties. Sonoma DC and Fairview DC present the most fertile opportunities, but developing on these properties would require close collaboration with local governments. Developing mixed-income housing through a state lease would also require careful consideration of how DDS consumers would be integrated into the community. Other Practical Implications for Legislative Consideration Does the Current Legislature Want to Tie the Hands of Future Legislatures? While earmarking savings from DC closures could provide a potential source of dedicated funding for DDS, doing so constrains the ability of future Legislatures to make budgetary decisions. Regardless of its action on the proposal reviewed in this report, the Legislature always has the choice to increase funding for DDS. How Would the Legislature Effectively Target Savings to the DDS System? Should the Legislature decide to target savings for the DDS system, it would likely want to deposit the savings into a special fund and decide how the fund could be used. It would be fiscally prudent to ensure any ongoing spending commitments align with ongoing sources of funding. In addition, the Legislature would benefit from requiring a comprehensive assessment of service gaps and related unmet funding requirements in the community services program. This would help guide the use of any additional resources provided for the program. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT INTRODUCTION The Supplemental Report of the 2017-18 Budget various options to implement the proposal as well Act called for the Legislative Analyst’s Office (LAO) as the proposal overall. This report addresses those to examine a proposal by Assembly Member Devon requirements. Mathis about sequestering savings from the closure of In this report, we (1) provide brief background Developmental Centers (DCs) for Regional Center (RC) information about DC closures and the DDS budget, community services. It directed our office to conduct (2) discuss potential savings in terms of net operational an analysis of the possible savings that could result savings and increased revenues from the sale or from the scheduled closure of DCs; ways to keep these repurposing (specifically leasing) of DC properties, and savings in the Department of Developmental Services (3) address other practical implications and trade-offs of (DDS) system for the benefit of DDS consumers; and the proposal. the policy, fiscal, and practical implications of the BACKGROUND Deinstitutionalization Is a National Trend Overview of DC Closures Deinstitutionalization is a national trend for people State to Close Most of the Remaining DCs with developmental disabilities, particularly after the by the End of 2021. DDS currently operates three U.S. Supreme Court’s 1999 Olmstead v. L.C. decision DCs and one community facility for individuals with provided that under the Americans with Disabilities developmental disabilities. (DDS has operated up to Act of 1990, states must place individuals with seven DCs and two community facilities in the past. mental disabilities in the least restrictive integrated Between 1996 and 2015, it closed four of the DCs and community-based settings possible (taking into account one of the community facilities.) Porterville DC includes available state resources). According to the American both a general treatment area as well as a secured Association on Intellectual and Developmental treatment program, which serves individuals under a Disabilities, the number of residents with developmental court order because they are a safety risk to themselves disabilities living in public institutions nationwide or others and/or have been deemed incompetent to declined from about 85,000 in 1990 to about 25,000 in stand trial. In 2015, the Governor announced plans 2013. Over the same period in California, the number to fully close two DCs—Sonoma and Fairview—and of DDS consumers living in DCs declined from about partially close a third—the general treatment area at 6,700 to about 1,500. Porterville DC. The Legislature enacted Chapter 23 of The Federal Government Facilitates Provision 2015 (SB 82, Committee of Budget and Fiscal Review) of Community-Based Services. The federal Centers requiring DDS to submit closure plans for DCs that for Medicare and Medicaid Services (CMS) have would close. Figure 1 (see next page) shows the greatly expanded states’ ability to receive funding locations, closure dates (if applicable), and number of for home- and community-based services through residents at each state-run institution. Medicaid Waiver programs. In 2017-18, DDS expects Transition of DC Residents to the Community to receive nearly $2 billion through these programs, Involves a Comprehensive Assessment. Since which are intended to provide community-based 2012, statute requires RCs—the independent nonprofit services as an alternative to institutionalization. CMS agencies that coordinate services for DDS consumers only provides waiver funding to states if the cost of living in the community—to conduct a comprehensive waiver services provided in the community does not assessment of each DC resident who will be moving exceed the cost of services provided in an institutional into the community. The assessment, which includes setting. input from RCs, the consumer, and the consumer’s www.lao.ca.gov 3 analysis full gutter AN LAO REPORT Figure 1 State to Fully or Partially Close Three Developmental Centers (DCs) Sheduled Number of Residents State-Run Institution County Closing? Closure Date (as of July 1, 2017) Sonoma DC Sonoma Yes December 2018 256 Fairview DC Orange Yes December 2021 162 Porterville DC—General treatment area Tulare Yes December 2021 116 Porterville DC—Secured treatment program Tulare No — 205a Canyon Springs Community Facility Riverside No — 48b a Statute currently limits the population at Porterville DC’s secure treatment program to 211. b Canyon Springs Community Facility can serve up to 63 residents at one time. family (if applicable), identifies the services and supports DDS Must Develop a Community-Based “Safety the consumer needs to live in the community. It Net” as a Result of Closures. Sonoma DC and also indicates which of these services and supports Fairview DC each currently house an acute crisis center, are currently available and which would need to be which can serve up to five people at any given time. developed. The RCs use this information to prepare DDS makes these centers available to anyone in the and submit proposals to DDS for the development DDS system who is in crisis and needs temporary of new or expanded community-based services and treatment (for up to 12 months). The ten slots are nearly supports, such as community living options or health always full. Once DDS fully closes these two DCs, the care services. acute crisis centers will no longer be available to the Community Placement Plan Guides Development system at large. As required by statute, DDS presented of New Services. DDS develops an annual community a plan for crisis and safety net services in May 2017. In placement plan (CPP) that responds to the needs of DC addition to identifying needed funding to help develop residents transitioning into the community. DDS uses numerous vendor-operated homes and services, the CPP funds for the following four purposes: plan calls for the development of five state-run acute crisis homes (three in Northern California and two in • Start-up: Development of new housing and other Southern California), two state-run mobile crisis teams, community-based programs. and state-operated intensive wrap-around services for • Assessment: Comprehensive planning of an people with mental health diagnoses in addition to their individual’s needs as discussed above. developmental disabilities. The 2017-18 state budget • Placement: An individual’s community service appropriated $21.2 million (mostly General Fund, costs in the first months after transitioning from including CPP funding) for the development of these the DC. homes and services. • Deflection: Community service costs of individuals Overview of DDS Budget who would have otherwise been placed in a DC in the past. The service delivery model at DCs differs significantly from the service delivery model in DDS’s community The annual CPP responds to many of the RC services program. Whereas DCs are more akin to a proposals for the development of new or expanded “one-stop shop” with all services and care delivered services and supports. The state budget currently on-site by state employees, community services are allocates about $55 million of base funding annually for delivered more “a la carte” with RCs coordinating the CPP, which has been augmented in recent years on and paying for individual services from a variety of a one-time basis. For example, it was augmented by independent providers. In this section, we describe $73 million General Fund in 2016-17 and by $22 million each model and how DDS budgets for them and General Fund in 2017-18. 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT provide an overview of current expenditures and operating costs (which include the salaries of service funding sources. coordinators). When a DC resident transitions to the DC Budget Includes Costs to Provide Services community, he or she will have had a comprehensive On-Site and Operate and Maintain Facilities. DCs, assessment to determine what he or she will need in which are run by state employees, provide all the the community. DDS’s community services program services and supports residents require on-site, such budget reflects the cost to provide these identified as medical, dental, pharmaceutical, therapeutic, and services to the individual. day program services. State employees also prepare State Currently Spends Nearly $360 Million and serve meals, provide employment opportunities General Fund on DCs. DDS’s 2017-18 budget for for residents, and maintain the grounds and facilities. all DCs and Canyon Springs Community Facility The service and support needs of residents are (Canyon Springs) totals about $490 million (all funds). determined through an individual planning process, The state’s General Fund provides $360 million or which includes participation by the resident, his or her three-quarters of DC funding, while federal Medicaid family (if applicable), relevant DC and/or RC staff, and reimbursements cover the rest. (Medicaid funds others. DCs are licensed as acute care hospitals and these long-term institutional services and supports, include skilled nursing units, intermediate care facility/ including both medical and nonmedical care, for eligible developmentally disabled units, and acute crisis units individuals with developmental disabilities. To receive (at Sonoma and Fairview DCs). DDS prepares a budget funding, state-run facilities must comply with federal for DCs, which is based on resident population (and regulations. Sonoma DC’s intermediate care facilities/ when certain residents are scheduled to transition to developmentally disabled units for example, no longer the community), the level of care and staffing needed receive federal funding after failing certification surveys. for each type of unit, and other overhead and operating Because of its more correctional-like setting, the secure costs. treatment program at Porterville DC is ineligible for Community Services Budget Includes RC federal funding.) The total DC population at the start of Administrative Operations Costs and the Cost to the fiscal year on July 1, 2017 was 795 and will decline Purchase Services for Consumers. In the community to an estimated 537 at the end of the fiscal year on services program, a consumer’s services and support June 30, 2018 as DC residents continue to transition to needs are also determined through an individual the community. planning process by an interdisciplinary team that General Fund Currently Provides About includes the consumer, his or her family (if applicable), $3.8 Billion for Community Services. DDS’s the RC service coordinator, and any other relevant RC 2017-18 budget for the community services or service provider staff. RCs coordinate the individual program totals $6.4 billion (all funds) to serve nearly services and supports—such as residential, medical, 318,000 individuals. The General Fund provides day program, respite, employment, and transportation $3.8 billion, while federal funding accounts for nearly all services—for consumers. Nearly 45,000 independent the rest—primarily Medicaid Waiver and Title XX social service providers provide the services and receive services funding. (Medicaid Waiver programs fund a payment from RCs. Before RCs can pay for these variety of community-based services and supports that individual services from their purchase-of-service are not otherwise covered by Medicaid for individuals (POS) budget, statute requires them to first access who require long-term services and supports and services available through other state programs, such would otherwise be institutionalized.) Notably, the DDS as Medi-Cal, or from private third-party payors, such community services program budget includes the cost as private health insurance plans. DDS prepares a to transition and place DC residents in the community budget for the community services program that is and provides for their ongoing community-based based on estimated population, POS costs, and RCs’ services. www.lao.ca.gov 5 analysis full gutter AN LAO REPORT NET OPERATIONAL SAVINGS DC costs are very expensive, in large part due to someone at a DC—roughly $735,000 from all fund the substantial fixed costs of running and maintaining sources in 2017-18. By comparison, his proposal the facilities. In 2017-18, the state will employ more mentions a 2015-16 analysis by our office that pegged than 3,800 people to serve DC residents and run and the average annual state cost (including DDS costs maintain the facilities—roughly five to six employees per and costs in other programs) to serve consumers who DC resident. The state will reduce its costs notably as had formerly resided at Lanterman DC (which closed in Sonoma DC, Fairview DC, and the general treatment 2014) in the community at $75,000 to $300,000 (from area of Porterville DC are closed down over the coming all fund sources) depending on residence type. few years. At the same time, these reduced costs Need to Focus on General Fund Impact of will be offset to some degree by the cost to provide Closing Specific DCs. The amount noted above for services to former DC residents in the community. The average per-person DC cost includes federal funding net savings in the intervening years between now and as well as the costs to run Canyon Springs and the the completion of closure activity can be difficult to secure treatment program at Porterville DC, both of assess because of timing issues related to the phasing which will remain open. The only potential source of out of DC costs while community-based costs are net operational state savings, however, results from being phased in. (The nearby box notes how timing General Fund costs avoided (rather than total costs explains the greatly varying average per-person cost at avoided) at what we are calling closure DCs—Sonoma DCs over the next few years as closure activity reaches DC, Fairview DC, and the general treatment area at its completion.) To simplify an otherwise complex Porterville DC (rather than at all DCs and Canyon calculation, we assess current DC costs and the Springs together). In this regard, DDS will spend about amount by which these costs will be reduced after the $200 million from the General Fund in 2017-18 at final closures against the ongoing annual costs in the closure DCs (about $500,000 per person)—a rough community as a result of these closures. We make this estimate of the total amount of General Fund costs that calculation in 2017-18 dollars. will be avoided once the closures are completed. State Will Incur New Community-Based Calculating Net Operational Savings Costs as a Result of DC Closures. About 534 DC Assembly Member Mathis’s proposal notes the residents will transition from DCs to the community significant average annual per-person cost to serve from 2017-18 through final closures. To serve these Continually Changing and Increasing Per-Person Costs at DCs Annual per-person Developmental Center (DC) costs have been increasing substantially in recent years as fixed costs at the DCs (which remain regardless of the number of residents) are spread over fewer and fewer residents. Because residents are regularly transitioning to the community from DCs, the average per-person cost will vary significantly from one point in time to another, even within the same fiscal year. For example, the average per-person cost will be higher at the end of 2017-18 than at the beginning of 2017-18 because the Department of Developmental Services will be moving 274 residents to the community over the course of the year. In addition, the per-person DC cost one year does not equate to the amount by which spending would decline the following year for each person who moves. For example, to say it costs $500,000 General Fund per person at Fairview DC in 2017-18 does not mean the state will reduce its Fairview DC expenditures by $500,000 in 2018-19 for each person who moved to the community in 2017-18. Because of fixed costs, a good portion of that amount will not be realized as savings until after Fairview DC closes. 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT individuals in the community after final closures, these one-time amounts in our estimate (since we estimate annual General Fund costs of about these costs would be properly allocated over $75 million (in today’s dollars). This includes $60 million several years as they provide benefits over time), in General Fund costs to DDS for provision of they would serve to reduce the amount of net community services and RC service coordination, operational savings if included. Similarly, we which we based on the average 2016-17 General Fund did not include the cost to develop safety net cost to DDS to serve people who moved from DCs in resources (about $20 million). 2013-14 through 2015-16. It also includes $15 million • The annual DDS cost to serve the remaining in General Fund costs to other state departments DC residents in the community after final DC for the state share of programs such as Medi-Cal, closures will likely be more than the cost to serve Supplemental Security Income/State Supplementary individuals who moved in earlier years (which Payment (SSI/SSP), and In-Home Supportive Services. was the basis for the $60 million amount). The In addition, as discussed earlier, the state will fund remaining DC residents tend to be somewhat vendor-run and state-run community-based safety more medically fragile and have more complex net and crisis services due to DC closures. DDS will service needs on average than consumers who operate at least five homes and two mobile crisis units moved in earlier years. and provide intensive wrap-around services for DDS • The total General Fund cost to provide safety net consumers with mental health diagnoses. It will also and crisis services after development is uncertain. pay for services provided at six new vendor-run homes The $25 million amount in Figure 2 is extrapolated and wrap-around services for consumers transitioning from current estimates by DDS to operate four from the secure treatment program at Porterville DC. homes and a mobile crisis team in 2018-19. We estimate that these safety net and crisis services • The costs in other state programs as a result of will cost about $25 million General Fund annually by the DC closures is highly uncertain. time DCs are fully closed. Although the cost estimates for serving individuals LAO Bottom Line: Net Operational Savings Could in the community are uncertain, we expect the state Reach $100 Million Annually, but Vary Significantly to realize at least some net operational savings (as we From This Amount. As detailed in Figure 2, we have defined it). For example, even if each of the costs estimate that the most the state will save, on net, in listed in Figure 2 were twice what we estimated, the annual General Fund spending following DC closures state would still break even as a result of DC closure is $100 million in today’s dollars. This amount could activity since 2017-18. vary significantly for several important reasons: Figure 2 • We do not include in this net Estimated Annual Net Operational Savings savings amount a dollar figure After DC Closures to account for the significant one-time costs to develop General Fund (In Millions of 2017-18 Dollars) community-based homes Reduced spending at closure DCs $200 and programs for consumers Less: moving from DCs. For example, DDS cost of community services for former DC residents -60 the state spent approximately DDS cost to operate/provide safety net and crisis services -25 $75 million in 2015-16 and $90 million in 2016-17, and will Costs in other state departmentsa -15 have spent about $25 million Total Estimated Annual Net Operational Savings $100 in 2017-18, on such “start-up” a Costs include the state portion of Medi-Cal, Supplemental Security Income/State Supplemental Payment, and In-Home Supportive Services payments. costs from DDS’s CPP. While DCs = Developmental Centers and DDS = Department of Developmental Services. we chose not to include www.lao.ca.gov 7 analysis full gutter AN LAO REPORT POTENTIAL REVENUES FROM DC CLOSURE PROPERTIES When the state must decide what to do with a Potential Benefits of This Option state-owned property that is no longer required for For one, the state would no longer be responsible its existing purposes, it is important to consider its for the properties, which means it would have reduced goals first. Is the goal to generate revenue? Provide liability for the property and would not have to maintain affordable housing? Create open space or parks? it. Two, the one-time influx of revenue could be set Meet the land and facilities needs of another state aside and earn interest, which could serve as an department? Between 1996 and 2015, DDS closed ongoing source of revenue for investments in the DDS four DCs (including two campuses at Agnews DC), and system. Three, the principal could provide a one-time in three cases, the land was transferred to California source of revenue for special projects or priorities. State University to expand its campuses or add a new campus. Figure 3 provides more detail about these Potential Challenges and Issues recent closures. Raised by This Option Assembly Member Mathis’s proposal suggests that one goal regarding what to do with the closure DC Numerous issues arise in trying to sell the DC properties should be generating revenue to benefit the properties to generate revenue for DDS activities. DDS Community Services Program. If the goal is indeed The Unique Characteristics of Each Property to generate revenue from the sale or leasing of remaining Affect Market Value and Sale Potential. Each DC DC properties, there are several ways to do this, which site has unique characteristics in terms of location, we discuss below. We also highlight some of the key age of facilities, infrastructure, historical value, local benefits and challenges associated with each option. interest, and size. These unique characteristics will affect the market value of each (making it unlikely to find SELLING DC PROPERTIES comparable properties to easily determine their market value). Some of these characteristics may complicate The Legislature could decide to sell individual parcels the sale potential of the property. These unique or entire DC properties as a way to generate revenue characteristics of each closure include: for DDS. Figure 3 What Happened to DC Properties After Other Completed Closures? Year Sold, Leased, or Transferred to DC Location Acreage Closed Another State Entity? Revenues Stockton DC Stockton, San Joaquin County 100 acres 1996 Transferred to California State University N/A (CSU) Stanislaus, Stockton Center Camarillo State Camarillo, Ventura County 1,500 acres 1997 Transferred to CSU Channel Islands N/A Hospital and DC Agnews DC — San Jose, Santa Clara County 324 acres 2009 Sold mainly to private entities. One parcel $250 million West Campus leased. Agnews DC — San Jose, Santa Clara County 424 acres 2009 Sold to a combination of private entities $120 million East Campus and local government. Lanterman DC Pomona, Los Angeles County 300 acres 2014 Transferred to CSU Cal Poly Pomona N/A DC = Developmental Center. 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT • Sonoma DC. Sonoma DC, which opened in Third, the general treatment area and the secure 1891, is located on 900 largely undeveloped treatment program share utility infrastructure and acres in the heart of California’s wine country, support facilities, which the state will need to making it a potentially appealing property for a retain to continue serving the secure treatment vineyard, hotels, other tourism-related businesses, program. In recent years, for example, the state or a housing developer. However, local has invested close to $8 million for roof repairs, preferences required local voter approval, and fire alarm upgrades, and a nitrate removal system zoning rules may restrict extensive commercial for the water supply (this project is currently and housing development by a private entity, underway). especially since there is known local interest in Current Value of DC Properties Is Unknown. preserving a vast amount of open space and It is unknown what each of the three closure protecting wildlife habitat. In addition, alternative properties—including both land and buildings—are uses of the existing, aging infrastructure on the currently worth. While all three sites underwent a site would be costly. 1996 conditions assessment by a private company and • Fairview DC. Fairview DC, which opened in a 2012 infrastructure assessment by the Department 1959, is located on 114 acres in the City of of General Services (DGS), these assessments shed Costa Mesa in Orange County. It is surrounded limited light on current valuation. Much of the focus on three sides by a golf course. The golf course was on the types of infrastructure improvements, sits on land that was formerly part of Fairview such as seismic retrofit, that were needed to protect DC but sold to the City of Costa Mesa. The the health and safety of residents. At Sonoma DC, Fairview DC property currently includes a 564-unit DGS is currently in the process of working with a mixed-income housing complex called Harbor private company to complete an updated conditions Village. Another 20 acres has been set aside for assessment of the property, which will likely be released a second mixed-income housing development in February or March of this year. This assessment will (both housing developments are discussed later in inform a valuation of the property and understanding of this report). Although Fairview DC’s urban location its sale potential. Because Fairview DC and the general in Costa Mesa make it ideal for development, the treatment area at Porterville DC are set to close later City of Costa Mesa has already passed zoning than Sonoma DC, some of the activities that will inform rules that would limit development. In addition, valuation have not yet begun. voters passed Measure Y in 2016, which requires We have chosen not to speculate on the value of voter approval for certain development projects. each DC closure property as it is highly dependent on • Porterville DC. Porterville DC, which opened in a variety of factors, including local zoning rules and 1953, sits on 670 acres in the town of Porterville preferences, the cost to repair infrastructure, location, in Tulare County. Porterville DC is somewhat and valuation-related information that is not fully known more remote than the other DCs, with the closest at this point. airport in Visalia, 40 miles away. Six groundwater Legislative Authority May Be Needed to Bypass wells supply Porterville DC’s water and the site Typical Surplus Property Process. The box on the includes its own water treatment plant. It may next page describes the typical process for disposing be challenging to sell the property of the general of surplus state properties. What triggers the typical treatment area to a private entity. First, the process is the property being declared excess by the relatively remote location may decrease demand. state department using it. DDS has indicated that it will Second, the general treatment area is located not declare the Sonoma DC property excess and has next to the secure treatment program, which is assured local government and stakeholder groups that a locked facility for individuals who have been it will solicit input on the disposition of the property. deemed a safety risk and/or incompetent to Regarding Fairview DC, DGS and DDS are currently stand trial. Demand to develop next to a locked working together to determine whether DDS has facility is likely low. (A more conceivable potential future programmatic needs there and what the timeline buyer might be in a prison- or health-related field.) www.lao.ca.gov 9 analysis full gutter AN LAO REPORT might be for declaring the property excess. Regarding Uncertainties, the state’s discretionary budget reserve. Porterville DC, DGS and DDS are still in the process of There is precedent for the Legislature bypassing the determining whether any parcels at Porterville DC could surplus property process. For example, Chapter 510 of be declared excess in light of the ongoing operation of 2016 (AB 1900, Jones-Sawyer) deemed the San Pedro the secure treatment program. Superior Courthouse not to be surplus and authorized If the Legislature decides it wants to sell the DC the Judicial Council to sell it and deposit the proceeds properties as a way to generate revenue for the benefit into a special court facilities construction fund. of DDS, it may have to authorize bypassing the typical Local Governments’ Preferences Could Affect surplus property process, for two main reasons. First, Sales. DC properties are subject to local zoning rules when a property is going to be sold, the typical process if sold or leased to a private entity, which could affect provides that it first be offered to local government the value of the property and the interest of private and then to affordable housing developers. If neither entities in purchasing the properties. For example, the expresses interest, the surplus state property can be City of Costa Mesa has zoned a portion of Fairview sold at fair market value to private entities. Second, DC property as open space and other portions for according to the State Constitution, any revenue single-family residential development, public facilities, generated from the sale of surplus state property is or recreational uses. (If the land is not sold, but instead to be deposited into the Special Fund for Economic transferred to another state department, it would not Typical Process for Disposing of Surplus State Properties When a state department determines that it no longer needs a state-owned property for its current or future programmatic purposes, it triggers a process for disposing the property, as follows: The state department notifies the Department of General Services (DGS) that it no longer needs the property in question. The property is declared excess. DGS directs the state department to work with the Office of Historic Preservation to assess the historic value of properties that are at least 50 years old. DGS notifies state departments of the excess property. Departments have 60 days to express preliminary interest. DGS also works with its Real Estate Services Division to proactively identify any departments with current or future need for land or facilities in the area of the excess property. With approval of the Department of Finance, the excess property is transferred to a selected state department. If no state department expresses interest in the excess property, it is added to DGS’s annual list of surplus properties, which is submitted to the Legislature for approval. Upon approval, DGS can sell the land in the following order, according to statute: • It is first offered to local agencies. • It is then offered to nonprofit affordable housing developers. • It is then offered to private entities or individuals at fair market value. Section 9 of Article 3 of the California Constitution requires that proceeds from the sale of surplus state properties be deposited into the Special Fund for Economic Uncertainties, the state’s discretionary budget reserve. 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT be subject to local zoning rules.) If the Legislature Leasing DC Property to a decides its primary goal is to generate revenues from Housing Developer the sale of the properties, it may need to work with local In this section, we discuss one specific leasing governments to maximize sale potential. This could option—providing a long-term ground lease to a include for example, rezoning parcels for commercial or developer of mixed-income housing. We focus on this residential development. option since, as noted in the box on page 12, there is precedent for this type of project within the DDS LEASING DC PROPERTIES system—Harbor Village and Shannon’s Mountain, both DDS could work with DGS to lease portions of the located on Fairview DC property. We note that while DC properties to a private entity. It is not common to do revenue generation is a benefit of this option, it would so. The primary reason the state does occasionally do unlikely be the primary driver. This option mainly serves this is to keep the property available for potential future other public policy objectives—namely the provision use by the state. As required by statute, lease proceeds of affordable housing to specified beneficiaries. Below, are typically deposited into the General Fund. If the we discuss the potential benefits and challenges of state leases the property to a private developer, the long-term ground leases for housing developments. property is subject to local zoning rules. Potential Benefits. One benefit of this option, given California’s well-documented housing shortage, Potential Benefits of This Option is that it provides housing to DDS consumers and Leasing parcels of DC properties to private entities other members of the community (low-income would generate an ongoing source of revenue for DDS and otherwise). Like Harbor Village and Shannon’s if the Legislature stipulated that DDS could keep the Mountain, the Legislature could authorize DDS to proceeds. Retaining the properties also means they use surplus rental proceeds to subsidize the rental could be available for potential future use by the state. payments of DDS consumers (and any needed Finally, as discussed in detail below, there is precedent refurbishments to accommodate their special needs). for using this option as a means to increase the supply DDS consumers who live in their own apartments of mixed-income housing for DDS consumers and other typically pay rent with SSI/SSP. It is often difficult to area residents. find affordable apartments in high-cost areas of the state, such as the Bay Area and Orange County (where Potential Challenges and Issues Sonoma DC and Fairview DC, respectively, are each Raised by This Option located). While the primary goal of this option is not to generate revenue, but to provide housing, rental As noted earlier, each DC closure property comes proceeds could ultimately generate revenues for the with its unique characteristics, some of which would benefit of the DDS system. not necessarily be conducive to leasing or attractive Potential Challenges and Issues. There are several to potential lessees, such as location or aging challenges and issues associated with this option that infrastructure. In addition, we note that the state rarely should be considered. Fairview DC property would serves as lessor of properties. The state is not in the be a good location for another housing development business of being a landlord and it typically tries to because it is close to other services, such as day avoid the liability and other risks associated with leasing programs and health care services. However, Fairview out properties. While the state sometimes negotiates DC already has one housing development (Harbor a lease to increase the supply of affordable housing, it Village) and another underway (Shannon’s Mountain). is not typical to lease the properties to a private entity It may be difficult to develop a third because of local primarily to generate revenues. The state may also have zoning rules and required voter approval, although the an interest in selling the land rather than leasing it as state could attempt to work with the City of Costa Mesa a way for both state and local governments to begin to sort through these issues. Another consideration with generating property tax revenue and creating jobs. developing additional mixed-income housing at Fairview DC is the notion of community integration, which is one www.lao.ca.gov 11 analysis full gutter AN LAO REPORT goal of deinstitutionalization. Integration of individuals question of whether this could be viewed as contrary with developmental disabilities into the community to required community integration. There may be ways at-large is also a requirement to receive federal funding to ensure that DDS consumers still live in an integrated through Home- and Community-Based Medicaid way, but the issue should be addressed in a deliberative Waiver funding. If hundreds of DDS consumers are fashion. concentrated on Fairview DC property, it raises the What Are Harbor Village and Shannon’s Mountain? Harbor Village Includes 564 Housing Units on Fairview Developmental Center (DC) Property. In 1981, the Department of General Services (DGS) and the Department of Developmental Services (DDS) entered into a long-term ground lease with a private developer to develop residential housing on a 60-acre parcel within Fairview DC grounds. The lease and subsequent lease amendments authorized development of 564 housing units (apartments and some single-family detached units) at a complex named Harbor Village. The lease stipulated that units would be reserved first for Fairview DC employees and it also reserved a certain share for DDS consumers transitioning from Fairview DC into community living situations. Units could then be rented to individuals with incomes under 80 percent of the median income in Costa Mesa. Any remaining units could then be leased at fair market rates to people working in the City of Costa Mesa. Currently, DDS consumers occupy 177 units (31 percent). The original lease terms did not require the developer to pay any monetary rent to the state and allowed it to receive a 15 percent return-on-investment (ROI) of hard costs related to construction, improvements, and management. A subsequent amendment established a small rental fee the developer must pay the state (currently about $9.30 per unit per month, or $5,251 total), with 85 percent going to DGS and 15 percent to DDS. In the early 2000s, the complex began generating surplus rental revenues above costs and ROI. The lease was amended to stipulate that surplus rental proceeds would be split evenly between the developer and DDS up to a $21.2 million cumulative total. DDS has used its portion of the surplus to modify and renovate units to meet the particular needs of DDS consumers living at Harbor Village and to subsidize the rents of DDS consumers living at Harbor Village. (Typically when a DDS consumer lives in his or her own apartment, DDS does not subsidize rent payments, except in certain circumstances authorized by statute.) DDS expects cumulative surplus rental proceeds to reach the cumulative $21.2 million cap in 2019-20 or 2020-21, after which 100 percent of surplus rental proceeds will flow to DDS. DDS expects to receive about $1.9 million annually in surplus when that happens. Chapter 23 of 2015 (SB 82, Committee on Budget and Fiscal Review) requires DDS to deposit these proceeds in a trust fund in the State Treasury and use it provide affordable housing and transitional services for people with developmental disabilities. DDS has interpreted Chapter 23 to mean surplus proceeds above what it uses to subsidize rent and renovate units for DDS residents at Harbor Village. The long-term lease expires in 2036 at which time Harbor Village will revert to full state ownership. Shannon’s Mountain Will Provide an Additional 332 Apartments at Fairview DC. Chapter 23 authorized DGS and DDS to develop another 20 acres on Fairview DC property for mixed-income housing through a 55-year lease. DGS and DDS have worked with the City of Costa Mesa on zoning rules and other local issues to move the project forward. The parcel, known as Shannon’s Mountain, will include 332 housing units and must guarantee a minimum of 20 percent of units for DDS consumers. Chapter 23 authorizes DDS to use rental proceeds to subsidize the rents of DDS consumers. DGS will soon solicit proposals from housing developers to start the project. Shannon’s Mountain will be modeled after the Harbor Village complex, although the exact terms of the lease, including the incentive structure for the private developer, will be negotiated through the procurement and contracting process. 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Although it is conceivable to develop at least one revenue for DDS (which may reach about $1.9 million residential housing complex at Sonoma DC, it may annually in the next two years). not be an ideal location for DDS consumers to live because it is not close to other established services LAO BOTTOM LINE ON such as community-based day programs and health OPPORTUNITIES TO GENERATE care services. If mixed-income housing is pursued at REVENUES FROM DC CLOSURE Sonoma DC, care should be given to ensure that DDS consumers have access to good transportation options PROPERTIES or that new services are developed close by. Each of the remaining closure DCs has unique The more remote location of the general treatment characteristics that will affect the state’s ability area of Porterville DC (and its close proximity to the to generate revenues from the sale or leasing of secure treatment program that will remain) make it a properties. Sonoma DC and Fairview DC present the relatively unlikely candidate for developing integrated most fertile opportunities for revenue generation, but community-based housing. developing on these properties (by a private buyer or As mentioned previously, the primary purpose of by a private entity through a lease with the state) would developing mixed-income housing on DC properties require close collaboration with local governments and would likely not be to raise revenues, but to provide communities given local zoning, local preferences, and residential options for DDS consumers and other required voter approval of development projects. The Californians (both low-income and otherwise). Still, this general treatment area of Porterville DC is a relatively option would likely result in at least some revenues from unlikely candidate for commercial or residential housing rental proceeds, providing an ancillary benefit to DDS. development, particularly given its relatively remote The state should not necessarily expect revenues to location and its close connection with the adjacent result quickly, however. At Harbor Village, it took about secure treatment program (including shared utility 30 years for rental proceeds to translate into surplus infrastructure and support facilities). OTHER ISSUES FOR LEGISLATIVE CONSIDERATION In addition to deciding how to assess net operational Does the Current Legislature Want to savings from closing DCs and generate revenues from Tie the Hands of Future Legislatures? the sale or leasing of these properties, the Legislature should consider other practical implications of the Sequestering Savings Could Provide a Potential concept of the proposal being analyzed in this report. Source of Dedicated Funding for DDS . . . We have identified possible net savings in operational spending Other States Are Grappling and ways to raise revenues through the sale or leasing With Similar Issues in Their of DC properties. The Legislature could dedicate Developmental Services Systems this funding to DDS and set its priorities for how it should be spent. If the Legislature decides that the We note that a number of other states are grappling DDS community services program would benefit from with issues similar to those raised in the proposal—the targeted additional investment in certain areas, this closure of institutional-like settings for individuals with “new” stream of funding could address those funding developmental disabilities and the potential to generate requirements. savings that can then be used to expand coverage, . . . Yet Doing So Constrains the Ability of improve upon services in the community for this Future Legislatures to Make Budget Decisions. population, or fund other state priorities. The box on Constitutional mandates, voter initiatives, federal page 14 provides key insights based on the experience matches, and other decisions to earmark funds for of other states in dealing with these issues. specific purposes restrict the ability of the Legislature to www.lao.ca.gov 13 analysis full gutter AN LAO REPORT respond to new or changing budgetary conditions. Past Legislature does not have to tie future funding decisions decisions constrain a significant share of the spending in to a complicated formula that may or may not even the current state budget. The proposal under discussion result in significant operational savings. in this report would be another example of constraining How Would the Legislature Effectively future legislative budgetary decisions by earmarking the use of net operational savings or revenues from DC Target Savings if Dedicated to the closures to be spent in the DDS system. DDS System? Legislature Always Has the Choice to Increase As mentioned at the beginning of this report, Funding for DDS Community Services. Regardless Assembly Member Mathis’s proposal would specifically of whether the Legislature decides to tie additional earmark savings/new revenues for the DDS community spending in DDS community services to “savings” services program. Should the Legislature choose to from DC closures, it can decide at any time to increase earmark the savings in this way, there are several issues DDS funding. For example, in 2016-17, it provided for its consideration. DDS nearly $300 million in additional funding from Legislature May Want to Establish Special Fund the General Fund to address identified unmet funding and Determine Its Appropriate Uses. Should the requirements in the DDS system. Importantly, the Key Insights From Other States Calculation of Net Operational Savings Appears More Relevant in States With Waiting Lists. California is one of the only states in the nation that provides entitlement-like services to every individual with a qualifying developmental disability. In contrast, most states budget a limited amount of funding to their programs for people with developmental disabilities (sometimes just enough to meet federal funding matching requirements) and consequently maintain waiting lists for services. By controlling growth in caseload, these states can control growth in costs. This feature makes it more relevant in some ways for these states, such as Maryland (which currently has about 8,000 people on its waiting list), to annually calculate the net operational savings that result from institutional closures because they typically use the net operational savings to take people off the waiting list without incurring additional state costs. Officials in New Jersey—which, like California provides services essentially as an entitlement—indicated to us that New Jersey does not go through the annual exercise of calculating net operational savings. This was stated to be because any savings from institutional closures are almost always overwhelmed by increased costs due to year-over-year program growth in its community services program that occurs on the natural. Use of Calculated “Savings” From Institutional Closures Varies. Our review of several other state’s experiences found that the use of savings from institutional closures varied, reflecting the varying policy priorities of these state’s respective Legislatures. For example, New Jersey deposits any proceeds from the sale of institutional properties into the state’s General Fund rather than earmarking it for developmental services. However, New Jersey officials indicated to us that sales of its institutional properties tend to be difficult because of property location and the cost associated with tearing down aging facilities. On the other hand, some states dedicate savings to be used in the developmental services system, although the uses vary across states. For example, revenues raised from the sale of institutional properties in Maryland get deposited into a trust fund. The state does not spend the principal, but uses the interest to pay for community-based services for people with developmental disabilities. Virginia uses revenues raised by selling or leasing state-owned institutional properties to pay for one-time community service development and for the cost of transitioning institutionally-based residents to the community. 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Legislature decide to dedicate net operational savings example of one-time or limited-term spending would or revenues from the sale or leasing of closure DC be the provision of development funds to help service properties for DDS use, it may want to have the funding providers get a program up and running in a geographic from the savings/revenues deposited in a special fund. area where service gaps have been identified. To achieve whatever its goals may be, the Legislature Community Service Gaps Need to Be Better should decide on its priorities for spending from, Understood to Effectively Target DC Closure and eligible uses of monies in, that special fund. To Savings. If the Legislature were to adopt a proposal maintain legislative oversight, we would recommend to earmark funding from the closure of DCs for DDS that spending from the special fund require legislative community services, it would want to consider how approval in the annual budget process. to target the spending of these resources effectively. Ongoing or One-Time Uses of Special Fund It may have difficulty prioritizing spending decisions, Should Align With the Ongoing or One-Time Nature however, because gaps in service provision in the of the Funding Source. While both net operational community are not fully understood. This is a challenge savings and lease revenues represent ongoing sources for the Legislature regardless of whether it adopts a of funding, proceeds from the sale of a DC property proposal to earmark funding from DC closure savings. represent a one-time source of funding. (If, however, Although the system is structured through the IPP the principal from a sale were invested, it could earn process ideally to account for and fund each individual’s interest, an ongoing source of revenue. Similarly, the needs, it is a commonly held view that RCs struggle principal could be gradually spent down over time, to help consumers find certain services, such as effectively turning it into a longer-term funding source.) affordable, accessible, and safe housing; regular dental As the Legislature determines appropriate uses of care; employment opportunities; and transportation. the special fund, it should consider whether a cost It is currently difficult to quantify the full extent of any to be funded is ongoing or one-time in nature. If the service gaps since DDS lacks a standardized method Legislature authorized DDS to use the special fund for for understanding these gaps on a systemwide basis. ongoing costs, it runs the risks of creating future fiscal At best, DDS may know anecdotally that certain pressures unless these authorized uses are aligned services are hard to find or that certain providers are with an ongoing source of funding. (An example of an going out of business. Accordingly, no matter what ongoing cost would be the restoration of the social action the Legislature takes on the proposal under and recreational activity program benefit that had been consideration, it would benefit from directing that there eliminated in tight budgetary times.) When the source be a comprehensive assessment of service gaps and of funding is one-time in nature, it would be fiscally related unmet funding requirements in the community prudent for the Legislature to target the use of such services system. Such assessment would help guide funding to one-time expenses. This latter approach can the use of any additional resources provided for this still be used to benefit the DDS system, but without system. committing the state to costly ongoing expenses. An CONCLUSION We estimate the state could realize up to should the Legislature so choose. To maximize the $100 million in net annual operational savings upon full revenue-raising potential, the Legislature would likely closure of designated facilities. have to bypass the typical process for disposing of While it is unclear how much revenue could be surplus state property and work closely with local generated from the sale or leasing of DC properties, governments to ensure appropriate zoning rules are in such actions—while presenting challenges— place. Should the Legislature choose to sell properties, could provide a funding source to make additional it should also decide whether DDS can spend down the investments in the DDS community services program principal or only spend the interest earned. www.lao.ca.gov 15 analysis full gutter AN LAO REPORT As the Legislature makes decisions about the for DDS purposes, it may want to target such funding potential savings that may result from DC closures, based on its priorities and having directed that there we think that it should consider the policy trade-offs of be a comprehensive assessment of service gaps and tying the hands of future Legislatures by dictating future related unmet funding requirements in the community spending decisions regarding the use of these savings. services program. Should the Legislature choose to earmark the savings 16 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT www.lao.ca.gov 17 analysis full gutter AN LAO REPORT LAO PUBLICATIONS This report was prepared by Sonja Petek and reviewed by Mark C. Newton. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 18 LEGISLATIVE ANALYST’S OFFICE