Rethinking the 1991 Realignment

Rethinking the 1991 Realignment MAC TAYLOR LEGISLATIVE ANALYST OCTOBER 15, 2018 analysis full gutter AN LAO REPORT LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Executive Summary In 1991, the Legislature shifted significant fiscal and programmatic responsibility for many health and human services programs from the state to counties—referred to as 1991 realignment. Many changes have been made to this system over the last 27 years. Most recently, the 2017-18 Budget Act made significant changes to how the state and counties share in the cost of In-Home Supportive Services (IHSS). This report evaluates the effects of those and previous changes. What Is Realignment? Realignments change the administrative, programmatic, and/or fiscal responsibility for programs between the state and the counties. In almost all cases, 1991 realignment increased counties’ fiscal responsibility for a wide range of programs and services including IHSS, child welfare, California Work Opportunity and Responsibility to Kids (CalWORKs), low-income health care, and low-income mental health services. Due in part to requirements under the State Constitution, the state provides counties dedicated revenues to pay for their share of these costs. Realignments Should Follow Certain Principles to Achieve Intended Benefits. Realignments are intended to have long-term benefits for counties by providing (1) greater local flexibility over programs and services based on local needs and (2) incentives to encourage counties to innovate to achieve better program outcomes. Better program outcomes also benefit the state fiscally because counties’ service improvements have the potential to reduce overall costs. Moreover, with a share of cost, counties have an incentive to control program costs in areas over which they have more control (like administration). To achieve these benefits, we believe realignments need to follow certain core principles. For example, one key principle is that realignments aim to align the state’s and counties’ share of cost based on their relative control over those programs. That is, counties’ share of cost should reflect the discretion they have over how to deliver services in the program. Understanding Key Changes to 1991 Realignment. 1991 realignment moved in the right direction to better align county costs with their level of program control and create better fiscal incentives for counties. However, since 1991, there have been a number of programmatic and revenue changes that make it so that 1991 realignment no longer meets many of the core principles of a successful realignment. For example, both federal rules and legal decisions obligate the state and counties to provide services to anyone who meets eligibility rules for certain realigned programs—like IHSS—limiting the state’s and counties’ ability to control costs. Other policy decisions—like those affecting IHSS provider wages and federal labor rules—and increasing caseload also have made 1991 realignment more costly. While the state did not increase realignment revenues in response to these changes (or reduce counties’ share of program costs), the state did redirect revenues when realignment costs went down. For example, the Affordable Care Act significantly reduced counties’ low-income health responsibilities. As a result, the state required counties to redirect freed-up realignment revenues to achieve state savings. 1991 Realignment No Longer Meets Many LAO Principles. Due to the various changes to 1991 realignment programs without corresponding changes to the funding structure, 1991 realignment today no longer meets many of the core principles of a successful state-county www.lao.ca.gov 1 analysis full gutter AN LAO REPORT fiscal partnership. Today, counties’ share of some program costs exceeds their ability to control those costs. In addition, overall realignment revenues are not sufficient to cover the costs of those programs over time. Lastly, the flow of funds in realignment is extremely complex and not flexible enough to allow counties to respond to changing needs and requirements. As a result, 1991 realignment likely is not achieving the desired benefits. Options for Improving 1991 Realignment. There are a few ways to better align the fiscal structure of 1991 realignment to achieve the intended benefits. One set of options would change the cost sharing ratios between the state and counties to better align counties’ share of costs with their ability to control those costs. Specifically, the state could reduce counties’ share of IHSS costs and increase their share of cost for another program (like felony forensic court commitments). The second set of options would better align revenue and costs by changing the flow of realignment revenue and increasing funding to address revenue shortfalls. The third set of options outlines other improvements that could be made to 1991 realignment including applying lessons from other realignments, better tracking realignment revenues and costs, encouraging counties to maintain reserves, and carefully consider future program expansion. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT INTRODUCTION California has shifted programmatic and funding by requiring counties to share in program costs. responsibility between the state and counties To achieve these benefits, we believe there are for various programs over the last 40 years. certain principles any realignment needs to follow. Historically, these shifts—or realignments—aimed This report evaluates the extent to which one of to benefit both the state and counties by providing California’s more notable realignments undertaken greater local flexibility over services, allowing in 1991 achieves the intended benefits and meets counties opportunities to innovate and improve these principles. program outcomes, and encouraging cost savings THE IMPETUS FOR THIS REPORT Since 1991, realignment has gone through a In anticipation of the DOF report, our report number of structural and programmatic changes. outlines key historical fiscal and programmatic More recently, the 2017-18 Budget Act made changes made to 1991 realignment that go significant changes to how the state and counties beyond the new IHSS financing structure. We also share in the cost of the In-Home Supportive discuss how these changes generally increased Services (IHSS) program, the costliest social program costs among existing realigned programs services program in 1991 realignment. Following and expanded program responsibilities within these changes, it became clear that the funding 1991 realignment. We then assess whether structure of 1991 realignment could no longer fully 1991 realignment continues to benefit the state cover county costs for certain realigned programs. and counties based on realignment principles Consequently, the budget agreement required the we identify. Lastly, we provide the Legislature Department of Finance (DOF) to review and report with some options to consider to improve on the funding structure of 1991 realignment as 1991 realignment. Figure 1 (see next page) part of its January 2019 budget proposal. provides a basic road map for the components of this report. WHAT IS REALIGNMENT? This section provides basic background on what realignments have affected responsibility for many realignment means. This section also explains some program areas including criminal justice, health of the historical context for realignment in California and mental health, child welfare, and California due to the requirements of the State Constitution. Work Opportunity and Responsibility to Kids Realignment Refers to Changes in Program (CalWORKs). Responsibility Between the State and Counties. State Constitution Requires Reimbursement Counties administer most state health programs for State-Imposed Local Requirements. Since and human services programs (referred to as 1979, the State Constitution has required the state social services programs within 1991 realignment). to reimburse local governments for state-required Realignments change the administrative, programs and services. These are referred to programmatic, and/or fiscal responsibility for as state mandates. Local governments receive these programs between the state and counties. reimbursement for state mandates through Most, realignments have shifted responsibility mandate claims. As a result, when realigning and resources from the state to counties. These administrative, programmatic, or fiscal responsibility www.lao.ca.gov 3 analysis full gutter AN LAO REPORT Figure 1 Report Road Map Section Summary What Is Realignment? Provides basic background on realignment generally. Benefits and Principles of Realignment Outlines the intended benefits of realignments. Identifies principles we believe any realignment needs to follow in order to achieve these benefits. 1991 Realignment Basics Describes programs affected by 1991 realignment and how funds are distributed. 2011 Realignment Outlines overlap between 1991 and 2011 realignments. Highlights new realignment provisions included due to counties’ experience in 1991 realignment. Understanding Key Changes to Explains cost impacts and revenue changes to realignment since 1991. 1991 Realignment 1991 Realignment No Longer Meets Discusses the extent to which 1991 realignment meets our principles of Many LAO Principles realignment. 1991 Realignment Likely Not Achieving Discusses the extent to which the intended benefits of 1991 realignment Intended Benefits are being achieved. Options for Improving 1991 Realignment Outlines options the Legislature could consider to better align 1991 realignment with the principles and achieving the intended benefits. from the state to counties, the state must provide Proposition 13 dramatically reduced county counties with funds to cover the cost of those revenue. In response, the state provided a increased responsibilities. Rather than reimburse “bailout,” which we describe in the box on page 6. counties based on their actual costs, the state Consequently, when enacting realignments, typically provides counties specific revenue the state provides new revenues to counties sources—like a portion of the sales tax—to pay because of the limitation on counties’ revenue for their increased fiscal responsibilities under and, as described earlier, the State Constitution realignment. In some years, revenues may exceed requires reimbursement of state-imposed local counties’ costs. In other years, the revenues requirements. provided may not be sufficient to cover counties’ California Has Enacted Two Major costs. Over time, however, the revenue provided Realignments. In California, the most significant through realignment is intended to roughly cover realignments occurred in 1991 and 2011. These counties’ costs for required realigned programs. realignments affected multiple programs and Realignment Provides Counties Additional resulted in significant revenue shifts from the Revenues for Increased Responsibilities. Prior state to counties. While the focus of this report is to 1978, counties used local revenue to support 1991 realignment, 2011 realignment affected some their share of costs for state and local health, programs that were part of 1991 realignment. (We mental health, and social services programs. discuss the impacts of 2011 realignment later in After Proposition 13—passed in 1978—counties this report.) increasingly relied on state funding for many of these programs. In large part, this was because 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT BENEFITS AND PRINCIPLES OF REALIGNMENT This section describes the benefits realignment is services based on local needs and (2) incentives to intended to achieve. We also identify key principles encourage counties to innovate to achieve better we believe any realignment needs to follow in order program outcomes. Better program outcomes to achieve those benefits. also would benefit the state because counties Short-Term Benefits During Budget Shortfalls. would improve services and potentially reduce Both 1991 and 2011 realignment were enacted in overall costs (for instance through more effective the midst of significant recessions and helped the and efficient service delivery). Moreover, by giving state address its budget shortfalls. Specifically, counties a share of program costs, counties realignments generally shifted a greater share would have an incentive to develop strategies to of program costs from the state to counties and control program costs within their control (like provided counties with a new dedicated revenue administration). This would benefit the state by stream outside of the state General Fund to pay reducing the overall cost of the programs. for these increased costs. In other words, the state To Achieve Benefits, Realignments Need to reduced its spending commitments by shifting Follow Certain Core Principles. We believe there costs to counties without having to transfer existing are certain core principles any realignment needs General Fund to counties to pay for these increased to follow in order to achieve the benefits described costs. This resulted in savings that helped the state above. We have identified what we believe these address its budget problems. While these actions core principles to be in Figure 2. For example, clearly benefited the state at the time, counties and one key principle is that realignments aim to align others argue that the realignments also reduced the state and counties’ shares of cost based on their cuts the realigned programs otherwise would have relative control over those programs. That is, received due to the budget shortfall. counties’ share of cost should reflect the discretion Long Term, Realignments Intended to Benefit they have over how to deliver services in the Both the State and Counties. While realignment program. Programs for which the state wants to set was born out of a budget crisis, it was intended specific service delivery requirements are not good to have long-term benefits by providing counties candidates for realignment. Later, we use these with (1) greater local flexibility over programs and principles to evaluate 1991 realignment. Figure 2 LAO Realignment Principles 9 Counties’ Share of Costs Reflect Their Ability to Control Costs in the Program Counties should be financially responsible over those program aspects for which their decisions affect cost. 9 Revenues Generally Cover Costs Over Time Counties’ realignment revenues should—over time—generally cover counties’ costs for their required realigned program responsibilities. 9 Flexibility to Respond to Changing Needs and Requirements Funding allocations should be sufficiently flexible to allow counties to use funding where it is most needed. 9 Funding Is Transparent and Understandable The funding provided to counties should be easily understandable. Total program funding also should be easily known. www.lao.ca.gov 5 analysis full gutter AN LAO REPORT State “Bailout” After Proposition 13 Proposition 13 Limited Property Taxes. Proposition 13 was a landmark decision by California’s voters in June 1978 to limit property taxes. Prior to Proposition 13, each local government—cities, counties, and special districts—could set its property tax rate annually. The average rate before Proposition 13 passed was 2.67 percent. This average rate reflected the sum of individual levies of multiple local governments serving a property (including schools). After Proposition 13, a property’s overall tax rate for all local governments is limited to 1 percent. At the time of passage, Proposition 13 caused property tax revenues to drop by roughly 60 percent (almost $7 billion at the time). State “Bailed Out” Local Governments. The state provided $4 billion to local governments ($1.5 billion to counties) to partially backfill their revenue losses from Proposition 13 in 1978. For counties, this backfill developed into an ongoing change in the state-county fiscal partnership. Specifically, the state provided funding to counties to “buy-out” their share of health and social services program costs that they had previously paid for using local revenue—primarily property taxes. 1991 REALIGNMENT BASICS The 1991 realignment package: (1) transferred Subaccount, and the Mental Health Subaccount. several programs and responsibilities from the Additional subaccounts have been added since state to counties, (2) changed the way state and 1991. county costs are shared for certain social services Base and Growth Allocations. Generally, programs, (3) transferred health and mental health the total amount of revenues allocated to each service responsibilities and costs to the counties, subaccount in one year becomes the base level and (4) increased the sales tax and vehicle license of funding in the next year. Growth in revenues fee (VLF) and dedicated these increased revenues between two years is allocated differently across to the new financial obligations of counties for subaccounts. The growth allocation provided to realigned programs and responsibilities. This social services programs—largely through the section outlines the programs and services affected Caseload Subaccount—is based on the actual by 1991 realignment and describes the basic growth in the counties’ cost of those programs structure and flow of funds. from year to year. If any revenues remain after providing growth to social services programs, they Key Terms are divided among the remaining subaccounts. (We Understanding the mechanics of realignment— describe this division in more detail below.) here and later in the report—requires familiarity with Base Restoration. In some years, realignment certain terms used to describe the flow of funds revenues are not sufficient to meet the base level of and funding allocations. We define these terms funding for all subaccounts. In 2011 realignment, below. this “deficit” is tracked and repaid when revenues Revenue Allocations. The realignment are stronger. This is referred to as base restoration. legislation established the Local Revenue Fund, However, 1991 realignment subaccounts are and within it a series of subaccounts, into which not eligible for base restoration. Consequently, dedicated revenues are placed to fund different when revenues decline, the base level for those groups of programs and responsibilities. These subaccounts generally is lowered—only when include the Social Services Subaccount, the Health 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT growth funding is provided in future years will the programs by aligning counties’ share of cost with base for those subaccounts increase. their ability to control costs in those programs. Unmet Need. In some years, revenue growth is Generally, 1991 moved in the right direction with lower than the increase in costs for social services regard to state-county share of costs. Additionally, programs. This is referred to as unmet need. Unmet for some programs, 1991 realignment tried to need is tracked over time and as revenues increase expand counties’ ability to control services and additional funds are provided to the Caseload thereby control costs. For example, the realignment Subaccount to cover those costs. Repaying prior legislation authorized counties to change IHSS years’ unmet need reduces the growth available for services for a limited amount of time. This included other realignment subaccounts. the ability to reduce IHSS service levels or have counties change how they administered IHSS in Poison Pill. Statute implementing order to be more efficient. (Later in the report, we 1991 realignment included a provision that if any discuss challenges with reducing IHSS service county made a state mandate claim that resulted levels.) in state costs of over $1 million, 1991 realignment would end. To date, no counties have made that Figure 3 lists the social services programs mandate claim against 1991 realignment. affected by 1991 realignment and the cost-sharing ratio established under the original legislation. Programmatic Components of For the majority of social services programs, 1991 Realignment 1991 realignment increased counties’ share of cost largely to reflect counties relatively higher Below, we explain how 1991 realignment ability to control program costs. (As explained later, affected county program responsibilities and costs realignment also provided counties with revenues for certain social services, health, and mental health to support the increase in those shares of cost.) programs. However, for CalWORKs cash assistance and county 1991 Realignment Increased Counties’ Share administration, realignment reduced counties’ share of Costs for Certain Social Services Programs. of cost mainly due to a belief that counties had Prior to 1991, counties received state funding limited ability to control these program costs. for many social services programs based on the 1991 Realignment Transferred Certain Health Proposition 13 bailout described earlier. Counties and Mental Health Responsibilities and Costs also paid for a relatively small portion of program to Counties. In contrast to counties sharing in costs using local revenues. 1991 realignment aimed the financing and administration of defined social to increase county fiscal responsibility for these Figure 3 Change to County Share of Nonfederal Cost for Social Services Programs Under 1991 Realignment County Share of Nonfederal Program Costs Social Services Programs Prior to Realignment Realignmenta Foster Care Assistance 5% 60% California Children’s Services 25 50 County Services Block Grant 16 35 In-Home Supportive Services 3 35 County Administration (CalWORKs Eligibility, Foster Care, CalFresh) 50 30 Child Welfare Services 24 30 CalWORKs Employment Services — 30 Adoption Assistance — 25 CalWORKs Cash Assistance 11 5 a Reflects the county share of nonfederal program costs originally established in 1991 as a result of realignment. www.lao.ca.gov 7 analysis full gutter AN LAO REPORT services programs, 1991 realignment transferred How Funds Typically Flow in 1991 certain mental health service responsibilities to Realignment. Figure 4 provides a basic counties. This means, for the most part, that description of how funds are distributed within there was no preexisting statewide program 1991 realignment. Specifically, the figure shows model counties had to follow when taking on the how funds generally flowed before 2017-18. From realigned mental health service responsibilities. 2017-18 through 2022-23, the flow of funds was As a result, counties had greater flexibility to changed to increase the funding available for IHSS. establish a local program structure and administer We describe those—primarily temporary—changes these service responsibilities independent of later (in the “Revenue Changes” section). Absent what other counties were doing, based on the further changes to statute, the flow of funds largely mental health needs of their county residents. In will return to its pre-2017-18 pattern after 2022-23. addition, realignment increased counties’ costs • Step One: Fund the Base. Sales tax and for certain health programs. The responsibilities VLF revenues dedicated to 1991 realignment and costs transferred to counties included certain first fund the base level of funding provided community-based mental health services, public to social services, health, and mental health health, and indigent health (health care services for programs (which, as noted earlier, typically is generally low-income, uninsured adults). the prior year’s cost). 1991 Realignment Funding • Step Two: Sales Tax Growth to IHSS. One of the permanent changes made to Counties Receive Dedicated Sales Tax and 1991 realignment in the 2017-18 Budget Act VLF Revenue for Realignment Costs. To pay was to prioritize the use of any increases for counties’ increased costs for social services in sales tax revenue for IHSS costs. As a programs and health and mental health service result, any year-over-year increase in sales responsibilities, the state dedicated two revenue tax revenue first is allocated to counties’ sources to 1991 realignment: (1) a new half-cent IHSS costs (through the Social Services sales tax and (2) a portion of the VLF. The half-cent Subaccount). sales tax was new revenue, approved by the voters • Step Three: Remaining Sales Tax Growth for the purposes of realignment. The VLF was to the Caseload and Social Services increased by changing the calculation of a car’s Subaccounts. Any remaining sales tax growth value for the purposes of the tax. As described after step two then funds prior-year increases earlier, counties received revenue for realignment in county costs for the other Social Services due to the Constitutional provision that the state Subaccount programs (only through the pay for state-imposed requirements. Caseload Subaccount). Today, Counties Receive Over $6 Billion • Step Four: Growth to County Medical Through 1991 Realignment. 1991 realignment Services Program (CMSP) Subaccount. A revenues total about $6.5 billion (over $3 billion portion of the remaining sales tax growth from sales tax, $2 billion from VLF, and about (if any) and a portion of the year-to-year $1 billion transferred from another realignment for growth in the VLF goes to the CMSP mental health). Of the $6.5 billion, about $2 billion Subaccount, which then is allocated to the of 1991 realignment revenues pays for CalWORKs Health Subaccount. (The proportion of sales grants, which in effect offsets state General Fund tax and VLF growth allocated to the CMSP costs for the program. Of the remaining $4 billion, Subaccount is based on formulas set in about $2 billion pays for counties’ share of social statute. These funds are used to fund indigent services program costs—the largest being total health program costs for counties that IHSS county costs. The remaining $2 billion is participate in CMSP. ) roughly split between counties’ health and mental health responsibilities. • Step Five: General Growth. The remaining growth from the sales tax (if any) and VLF is 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Figure 4 How Funds Flow in 1991 Realignmenta Local Revenue Fund Revenue Collection VLF Growth Sales Tax Growth Base VLF Revenues Base Sales Tax Revenues Revenue 1 Allocation 2b 3 Social Services Caseload Subaccount Subaccount 4 Health CMSP Subaccount Subaccount Remaining 18% Growth Family Support Subaccount 5 Mental Health General Growth About 40% Subaccount Subaccount $1.1 Billionc Sales Tax Growth About 40% CalWORKs MOE Subaccount Sales Tax Growth, Child Poverty and Family if Available, and Supplemental Support Subaccount VLF Growth a Figure generally shows how funds flowed before 2017-18 and how funds will flow after 2022-23. b This allocation of the sales tax growth did not occur until 2017-18, but will continue after 2022-23. c Funds transferred to the CalWORKs MOE Subaccount are backfilled by 2011 realignment funds. VLF = vehicle license fee; CMSP = County Medical Services Program; and MOE = maintenance of effort. www.lao.ca.gov 9 analysis full gutter AN LAO REPORT allocated to the General Growth Subaccount. year-to-year increases in total social services Of the funds allocated to the General Growth program costs and any unmet costs from prior Subaccount, 18 percent goes to the Health years with growth revenues. Any remaining growth Subaccount, roughly 40 percent goes to the revenues are then used to cover county health and Mental Health Subaccount, and the remainder mental health service costs. goes to the Child Poverty and Family Funding for Health and Mental Health Supplemental Support Subaccount (hereafter Responsibilities Not Directly Linked to County the Child Poverty Subaccount). Costs. Unlike how social services programs are funded, there is no direct link between funding Funding for Social Services Programs levels and actual health and mental health service Intended to Cover Actual Program Costs costs. Specifically, the amount of realignment Over Time. As discussed earlier, social services revenues counties receive to administer health programs are the first to receive realignment and mental health services is based on a series of revenues. Over time, realignment revenues are formulas, not on the amount counties spend on intended to cover actual program costs associated administering these services. These formulas are with the increase to counties’ share of cost primarily based on how much counties spent on under realignment. The state tracks year-to-year health and mental health responsibilities in the early increases in costs for each social services program. 1990s. In effect, this means that counties may have Additionally, the state tracks increases in costs to adjust program rules and service levels in any from prior years that were not met with realignment given year to ensure that actual health and mental revenues. Realignment prioritizes paying for health service costs mesh with available revenues. 2011 REALIGNMENT This section describes the relationship between responsibilities between 1991 and 2011 realignment 1991 and 2011 realignments. It also explains the include, but are not limited to, foster care, child differences between 1991 and 2011 realignment. welfare, adoptions, and mental health. The result Major Components of 2011 Realignment. of these changes was that counties generally In 2011, the state undertook a second major became fiscally responsible for additional program realignment. Again, this realignment, in part, responsibilities. As a result, counties often use 1991 was in response to a budget shortfall. The most and 2011 realignment funds interchangeably to significant parts of this realignment affected the cover the costs in these programs. state’s criminal justice system; however, there were Key Differences Between 1991 and 2011 changes to other programs as well. Specifically, Realignment. 2011 realignment used lessons 2011 realignment affected programmatic, learned from 1991 realignment to better realize administrative, and fiscal responsibility for adult the county benefits of realignment. Specifically, offenders and parolees, court security, various 2011 realignment included the following provisions: public safety grants, mental health services, • Constitutional Protections. To prevent substance abuse treatment, child welfare programs, new, unfunded programmatic requirements, and adult protective services. Proposition 30 (2012) added provisions to Counties Generally Combine 1991 the State Constitution exempting counties and 2011 Realignment Funds to Pay for from any legislation that increases the Overlapping Program Responsibilities. The overall costs of 2011 realignment programs fiscal responsibilities for a number of programs if sufficient funding to enact the legislation affected by 1991 realignment were further changed is not provided. This provision protects by 2011 realignment. Key shared program counties from additional costs being added to 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT 2011 realignment. 1991 realignment does not among accounts with counties’ Boards of include this explicit protection. Supervisors approval. 2011 realignment allows • Base Restoration. 2011 realignment first for transfers without this approval requirement. distributes revenue growth to restore any • Reserves. 2011 realignment explicitly created prior-year revenue shortfalls in programs’ base a reserve account for saving revenues in funding. Base restoration does not occur in excess of projections. 1991 realignment has 1991 realignment. no reserve account nor are counties explicitly • Fund Transfers. 1991 realignment allows a authorized to maintain reserves. certain percentage of funds to be transferred UNDERSTANDING KEY CHANGES TO 1991 REALIGNMENT This section discusses the changes to By becoming a Medi-Cal benefit, IHSS largely 1991 realignment over the past 27 years. We do became an entitlement program subject to not include every change to 1991 realignment federal Medicaid rules. Integrating most IHSS and the associated programs, but rather attempt services into the Medi-Cal program allows to characterize the larger changes to the system the state to draw down more federal funds, over this time. We organize these changes into resulting in state and county savings. Over two main categories: cost impacts and revenue time, however, the entitlement nature of IHSS, changes. Impacts to cost mainly have been driven as a Medi-Cal benefit, has limited the state’s by changes to program rules and responsibilities and counties’ ability to change program rules, or increases in caseload. Similarly, many revenue eligibility requirements, and control program changes have been due to state actions. We costs. summarize the cost impacts and revenue changes • Growing Number of Legal Decisions. in Figure 5 (see next page). We end the section Some realigned programs must adhere to with a discussion on the impacts of these changes certain legal decisions, limiting the state’s and on counties. counties’ ability to change service levels or program rules. For example, during the recent Cost Impacts recession when the state proposed reducing Limited Flexibility to Change Service Levels. IHSS services, there was litigation asserting Since 1991, the required level of service and that these reductions violated federal rules. program rules for a number of realigned programs We discuss this decision in more detail in the has become more prescriptive and stringent. box on page 12. For example, federal rules and legal decisions Federal, State, and County Policy Decisions obligate the state and counties to provide services Generally Have Made Existing Realigned to anyone who meets eligibility rules for certain Programs More Costly. In recent years, federal, realigned programs—for purposes of this report we state, and county governments have made policy refer to these as “entitlement programs.” Below, decisions that have increased costs for major we provide two examples of how federal rules and realigned programs. While these decisions did court decisions for entitlement programs have not increase service requirements in realigned affected state and county control over IHSS: programs, they did increase the costs to provide • IHSS Becoming a Medi-Cal Benefit. Since existing services. Examples of such policy changes 1991, IHSS has become a Medi-Cal benefit include: (California’s Medicaid health care program). www.lao.ca.gov 11 analysis full gutter AN LAO REPORT Figure 5 Key Changes to 1991 Realignment Cost Impacts Revenue Changes Increased Service Requirements The required level of service and program rules for certain realigned programs have become more prescriptive and stringent primarily due to federal rules and legal decisions. Recent Policy Decisions Affecting Existing Programs Temporary Redirection of Realignment Revenues Federal, state, and county policy decisions generally have Realignment revenues have been temporarily redirected to increased service costs for existing realigned programs. increase funding for certain counties or programs. New Program Requirements Realignment Revenues Used to Cover State Costs The state and counties have adopted new program The state has required counties to redirect freed-up responsibilities beyond what was originally included in realignment revenues to cover state CalWORKs costs. 1991 realignment. Increased Caseload Certain realigned programs have experienced a significant increase in caseload since 1991. Changes to Counties' Share of Program Costs While limited, changes were made to counties' original share of costs established in 1991, some resulting in higher county program costs. • IHSS Provider Wage Increases. IHSS that are collectively bargained or established provider wages increase in two main ways— at the local level. In 1999, the state required (1) increases that are in response to state that counties establish an employer of record minimum wage increases and (2) increases for IHSS providers for purposes of collective Settlement Agreement Related to Proposed IHSS Reductions During the recession, the state proposed a number of changes to the In-Home Supportive Services (IHSS) program intended to create budget savings, including the institution of stricter eligibility rules and reducing service hours by 20 percent. Multiple class action suits were brought against the state to prevent these changes from taking effect (Oster v. Lightbourne, et al. I and II and Dominguez v. Brown, et al.). Ultimately, the federal district courts issued temporary injunctions preventing the state from making these changes. While the state did appeal these injunctions, a legal settlement was reached in 2013 resulting in a reduction to IHSS service hours (less than what the state initially proposed). Currently, the state has temporarily restored IHSS service hours that were eliminated. Based on current law, the restoration is effective through 2018-19. 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT bargaining. Due to this action, all counties of the indigent population became eligible for today have the ability to negotiate and Medi-Cal coverage due to the ACA optional establish IHSS provider wages above the expansion. As a result, counties’ costs state minimum wage. Under the current IHSS and responsibilities for indigent health care financing structure, counties do not have a services significantly decreased. (In the next share of costs associated with increases to section, we discuss how the state utilized the state minimum wage, but do have a share these health care-related realignment savings of costs associated with local wage increases to fund General Fund costs for CalWORKs.) above the state minimum wage. Some counties have noted, however, that the • Federal Labor Rules. In February of 2016, increased enrollment in Medi-Cal as a result the state implemented the new federal labor of the ACA has increased demand for county regulations for home care workers. Under behavioral health services. the federal regulations, the state is required State and Counties Adopted New Program to compensate IHSS providers for overtime Responsibilities, Generally Increased Overall (hours worked in excess of 40 hours per Program Costs. Based upon our conversations week), time spent waiting during medical with counties, realigned program costs also have appointments, and time spent traveling increased as a result of newly adopted program between the homes of IHSS recipients. Similar responsibilities by the state and counties beyond to increases to the state minimum wage, what were originally included in 1991 realignment. these federal labor rules—as interpreted in Examples of these new program responsibilities California—increase service costs for IHSS. include: • Patient Protection and Affordable Care Act (ACA). Under the ACA, states had the • Adult Specialty Mental Health Managed option to expand eligibility for their Medicaid Care Program. By 1998, the state shifted programs. California opted to expand programmatic and fiscal responsibilities for Medicaid eligibility, which took effect in much of adult specialty mental health services January 2014 (see the box below for details). to counties, including certain psychiatric The effect of the ACA on realigned health inpatient hospital services and outpatient and behavioral health (mental health and specialty mental health services. At the time, substance use treatment) program costs is the state provided counties with additional mixed. For example, counties are responsible funding for these newly realigned mental for providing health care and behavioral health program responsibilities (specifically, health services to the “indigent” population— the amount the state was spending on these generally low-income, uninsured adults. Much services). Over time, any cost increases were Effect of Patient Protection and Affordable Care Act (ACA) On Medi-Cal Eligibility Under the ACA, states had the option to expand eligibility for their Medicaid program. Before the ACA, Medicaid eligibility was generally restricted to families with children, seniors and persons with disabilities with incomes below 108 percent of federal poverty level (FPL). Therefore, nondisabled, childless adults under age 65 were ineligible for Medicaid regardless of income. Under the ACA, states had the option—which was exercised by California—to expand eligibility for their Medicaid programs to all qualified residents under age 65 with household incomes at or below 138 percent of the FPL beginning January 2014. As of today, over 3 million Californians have obtained health insurance through the Medi-Cal optional expansion. www.lao.ca.gov 13 analysis full gutter AN LAO REPORT largely expected to be paid for with growth in has grown by roughly one-third over that same 1991 realignment revenues. Some counties time period.) Additionally, counties have expressed have stated that 1991 realignment funds that the utilization of local mental health services alone are not enough to pay for the increased has grown significantly since 1991. (We were demand and overall costs for these mental not able to quantify caseload growth for specific health program requirements over time. 1991 realigned mental health services because • Drug Medi-Cal Organized Delivery System such service-level caseload data is not available.) (ODS) Pilot Program. In 2016, counties The reasons for the significant caseload growth were given the option to participate in a pilot in IHSS and mental health are not completely program to provide substance use disorder understood, but likely are due to demographic services for Medi-Cal beneficiaries beyond the and population changes in counties. In the case of required services under Medicaid. Currently, IHSS, some counties have expressed that caseload 40 counties opted into the pilot program, growth is partially due to a significant rise in the of which about half have OSD services up local senior (aged 65 and older) population and and running. Participating counties stated a preference to age at home rather than in an that they took on these additional program institution. responsibilities as a way to increase behavioral State-County Cost Sharing Arrangement health service levels and draw down additional Recently Changed for IHSS. As described earlier, state and federal funding. In addition, some costs for realigned programs have increased counties believed that providing additional primarily due to new federal and state policies, behavioral health programs could potentially program requirements, service cost growth, and reduce other health care costs, such as caseload growth—things largely outside the control costs associated with emergency room and of counties. Despite increasing program costs and hospital inpatient visits. Our understanding limited local flexibility, the state-county cost-sharing is that counties took on these new program structure for realigned programs generally have requirements with the expectation that they remained the same. The most recent, and could use multiple funding sources, including significant, exception was the implementation of a growth in 1991 realignment revenues, to fund new IHSS maintenance of effort (MOE). ODS program costs. Between 2012-13 and 2016-17, the share of cost for IHSS established under 1991 realignment Overall, due to the provisions of the poison was replaced with an IHSS MOE—referred to as pill (described on page 7), counties generally the 2011 IHSS MOE. Over the five years in which are reluctant to submit mandate claims against the 2011 IHSS MOE was in effect, growth in the new state-imposed program responsibilities that county IHSS MOE was less than the growth in occurred after 1991. Additionally, to some extent, total IHSS costs, resulting in counties paying counties have been able to use a mix of revenues— for a smaller share of the nonfederal IHSS costs including 1991 and 2011 realignment funds, Mental and the state General Fund paying for a greater Health Services Act funds, and federal grants—to share of nonfederal IHSS costs relative to the cover new mental health program costs added to original cost-sharing ratios established under realignment. 1991 realignment. Additionally, the relatively slower Caseload Expanded Significantly in IHSS growth in county IHSS costs allowed a greater and Mental Health. Since 1991, key realigned share of realignment funds to pay for health, mental programs have experienced a significant increase health, and CalWORKs costs. in caseload, resulting in higher program costs. In 2017-18, a new county IHSS MOE was For example, caseload in the IHSS program has established—referred to as the 2017 IHSS MOE. more than tripled in the past 27 years, from about The 2017 IHSS MOE changed county costs to 160,000 in 1990-91 to an estimated 545,000 in roughly reflect the original county cost-sharing 2018-19. (In contrast, the population of California ratios established under 1991 realignment 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT (35 percent of the nonfederal share of IHSS service (These counties are commonly referred to costs and 30 percent of the nonfederal share of as under-equity counties.) The state tried to IHSS administrative costs). As a result, the 2017 address this issue beginning in 1994-95 by IHSS MOE significantly increased IHSS county creating multiple health and mental health costs relative to what county costs would have “equity subaccounts” that would provide been under the 2011 IHSS MOE. Specifically, under-equity counties with additional total IHSS county costs are expected to have realignment growth revenues based on each increased by about $640 million in 2017-18 relative county’s overall population and the population to 2016-17. Moving forward, it is expected of local low-income residents. These that the majority of total realignment funds for allocations increased recipient counties’ social services programs—roughly 80 percent in overall health and mental health funding. 2017-18—will be needed to cover IHSS county The final equity payments were provided costs for the foreseeable future. (If the historical in 2000-01. While the equity shortfall for cost-sharing ratios had remained in place between these counties was reduced, there are still 2012-13 and 2016-17, the amount of realignment differences in funding among counties that do revenues used to cover IHSS county costs would not necessarily reflect differences in program have increased incrementally. As a result, without funding needs. the 2011 IHSS MOE, the realignment funding • Temporarily Redirecting Growth Revenues issues highlighted in this report would have to Pay for IHSS County Costs. The surfaced earlier.) We discuss in detail the technical 2017-18 budget package changed the flow of differences between the 2011 and 2017 IHSS MOE funds in response to increased IHSS county in the box on page 16. costs. Specifically, in addition to receiving all sales tax growth, IHSS will temporarily Revenue Changes receive almost all of VLF growth. As a result, In this section, we explain key changes to the Health and Mental Health Subaccounts realignment revenues since 1991. In general, will receive no VLF growth funds for three revenue changes are due to broader trends in the years—from 2017-18 to 2019-20. The VLF tax base or state policies. growth funding for these subaccounts will Temporary Redirection of 1991 Realignment be partially restored in 2020-21 and fully Revenues. The state has temporarily redirected restored in 2022-23 and onwards. (We note realignment revenues mainly either to improve the that the 2017-18 budget package also made distribution of funds to certain counties or increase a permanent change to when counties receive the level of funding for certain programs. Below, we sales tax growth revenue to improve counties describe two ways in which realignment revenues ability to pay for IHSS costs.) have been temporarily redirected. 1991 Realignment Savings Used to • Temporarily Redirected Growth Revenue Offset State Costs. In recent years there have to “Under-Equity” Counties. Prior to been state and federal actions that reduced the enactment of 1991 realignment, realignment-related costs. The state has required counties’ per-person funding for health counties to redirect freed-up realignment revenues and mental health programs varied. to newly created subaccounts in order to achieve When 1991 realignment was enacted, the state savings (by offsetting state CalWORKs costs) distribution of realignment health and mental or support CalWORKs grant increases. Below, health funding was based on these local we describe three ways in which the state has allocations. For some counties, the funding redirected 1991 realignment funds: provided through 1991 realignment did not • Redirection of Mental Health Funds to necessarily reflect the resources needed CalWORKs MOE Subaccount. In 2011, to fully address their local program needs. mental health funds from 1991 realignment www.lao.ca.gov 15 analysis full gutter AN LAO REPORT were replaced with 2011 realignment funds. health funds are shifted to the CalWORKs In effect, this freed-up $1.1 billion within MOE Subaccount (created in 2011) within 1991 realignment-related mental health 1991 realignment, which offsets General Fund funding obligations. The freed-up 1991 mental costs for CalWORKs grants. This change does 2011 and 2017 County IHSS MOE Below, we describe the 2011 and 2017 county In-Home Supportive Services (IHSS) maintenance of effort (MOE) and discuss the differences between the two arrangements. 2011 IHSS MOE. As of 2012-13, all counties were required to maintain their 2011-12 expenditure levels for IHSS, to which an annual growth factor of 3.5 percent was applied beginning in 2014-15. Added to the MOE were any county costs associated with local IHSS wage increases. The state General Fund assumed the remaining nonfederal IHSS costs. Over the five years in which the 2011 IHSS MOE was in effect, the annual IHSS MOE growth factor was less than the year-to-year growth in total IHSS nonfederal costs. As a result, a greater share of nonfederal IHSS costs was shifted from counties to the state. Specifically, under the 2011 IHSS MOE, the state share of IHSS nonfederal costs increased from 65 percent in 2011-12 ($1.7 billion) to 76 percent in 2016-17 ($3.5 billion). Additionally, the relatively slower growth in county IHSS costs allowed the Health, Mental Health, and Child Poverty Subaccounts to receive a greater share of realignment funds. 2017 IHSS MOE. Budget-related legislation adopted in 2017-18 eliminated and replaced the 2011 IHSS MOE with a new county MOE financing structure. Under the new 2017 IHSS MOE, the counties’ share of IHSS costs was reset to roughly reflect the counties’ share of estimated 2017-18 IHSS costs based on historical county cost-sharing ratios (35 percent of the nonfederal share of IHSS service costs and 30 percent of the nonfederal share of IHSS administrative costs). Additionally, the 2017 IHSS MOE will increase annually by (1) the counties’ share of costs from locally negotiated wage increases and (2) an annual adjustment factor. As shown in the figure, the annual adjustment factor depends on the rate of growth in realignment revenues. If realignment revenues are less than prior-year levels, the adjustment factor for the 2017 IHSS MOE will be zero. If the realignment revenues grow by less than 2 percent, the adjustment factor will either be 2.5 percent in 2018-19 or 3.5 percent in 2019-20 and onwards. If the realignment revenues grow by more than 2 percent, the adjustment factor will be either 5 percent in 2018-19 or 7 percent in 2019-20 and onwards. The administration forecasts the adjustment factor will be 5 percent in 2018-19 and 7 percent in the coming years. Relative to the 2011 IHSS MOE, a higher adjustment rate means that fewer IHSS costs will be shifted to the state from counties. Additionally, to the extent that the MOE adjustment rate 2017 IHSS Maintenance of Effort (MOE) is greater than (or less Annual Adjustment Factora than) actual growth in total IHSS costs, counties . . . Then the IHSS MOE Will Increase By . . . If Realignment will be responsible for a Revenues Grow By . . . 2018-19 2019-20 and Onwards higher (or lower) share of No growth 0 0 IHSS costs relative to the Less than 2 percent 2.5% 3.5% original county share of More than 2 percent 5.0 7.0 cost established under a In addition to the annual adjustment factor, the 2017 IHSS MOE will increase by counties’ share 1991 realignment. of costs from local IHSS wage increases. 16 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT not affect overall funding for CalWORKs or Absorbing Changes 1991 realignment programs. Difficult for Counties • Redirection of Indigent Health Funding to Counties’ Ability to Pay for Increased New Subaccount. Prior to the ACA, counties Realigned Program Costs With Local Funds Is largely were responsible for indigent health Limited. As outlined in this section, program costs care. Counties paid for these costs with 1991 for realignment have increased for various reasons health realignment funds. Under the ACA, and the state’s and counties’ ability to control Medi-Cal covers many of the individuals costs is limited. In the case of realigned social for whom the counties previously had been services programs, although realignment provides responsible. As a result, counties’ indigent counties with revenues to pay for increased health costs have declined. In recognition program and service costs over time, counties of these savings, the state requires counties indicate that realignment revenues are not always to shift a portion of their Health Subaccount sufficient to cover the total program and service funding to a newly created Family Support costs in each year. In the years that revenues Subaccount. (We note that the remaining are not enough, counties must use other local portion of health realignment funds is used to revenues to meet their realigned program fiscal cover county public health program costs and responsibilities. Counties’ ability to raise additional any remaining indigent health care costs.) The local funds to cover unmet social services program funds in this subaccount are used to offset costs, however, is limited. In particular, counties General Fund costs for CalWORKs grants and cannot raise the rate on their largest source of county administration. In 2018-19, counties revenue—property tax—due to the provisions are projected to transfer, in total, $773 million of Proposition 13. Subsequent statewide ballot of health realignment funds to the Family measures also have constrained counties’ ability Support Subaccount. to raise revenue through other types of taxes, • Redirection of General Growth Funds to fees, and assessments. Consequently, over time, New Subaccount. Similar to indigent health counties’ ability to raise revenue using broad-based costs, the 2011 IHSS MOE reduced county taxes to support realigned social services programs social services costs relative to historical has become quite limited. cost levels. As a result, a greater amount of Unfortunately, there is no statewide data on revenue growth was made available for other what amount of local revenue counties spend 1991 realignment programs. In recognition of on 1991 realignment programs. As noted earlier, these savings, the 2013-14 budget package the state only tracks and repays unmet need for required counties to shift a portion of that social services programs costs. The state does growth (if available) to the newly created not provide base restoration if revenues are not Child Poverty Subaccount. The funds in sufficient to cover the prior year’s costs for all the Child Poverty Subaccount are used to 1991 realigned programs. As a result, counties fund certain CalWORKs grant increases. must use local revenues to cover those base costs. Absent these funds, existing CalWORKs The amount of local revenue used to cover these grant costs originally paid for by the Child shortfalls in the base is not tracked. Similarly, the Poverty Subaccount would be paid for by state does not track what amount, if any, counties the state General Fund. In 2018-19, counties spend on health and mental health services above are projected to transfer, in total, roughly the funding provided through 1991 realignment and $350 million of general growth funds to the other state sources. Child Poverty Subaccount. www.lao.ca.gov 17 analysis full gutter AN LAO REPORT 1991 REALIGNMENT NO LONGER MEETS MANY LAO PRINCIPLES The changes made by 1991 realignment aimed funding structure, 1991 realignment today no longer to create better incentives for counties to control meets many of the core principles of a state-county program costs and largely allow counties to tailor fiscal partnership we identified in Figure 2. Figure 6 health and mental health programs based on summarizes why 1991 realignment no longer meets local needs. Additionally, realignment intended to these principles, which we discuss in this section. increase counties’ ability to change program rules Counties’ Share of Program Cost and service levels for social services programs. Generally, 1991 realignment made progress Should Reflect Control towards creating better incentives for counties, Today, Counties’ Share of Program Cost but did not ultimately give them much control over Does Not Reflect Their Ability to Control Costs. social services programs. Moreover, due to the While the original cost-sharing ratios for realigned various changes to 1991 realignment programs programs moved in the right direction relative to without corresponding changes to the realignment Figure 6 Realignment No Longer Meets Many Principles Principle Shortcomings Counties' share of costs reflect their ability Changes in entitlement program requirements over time have resulted to control costs in the program. in counties' share of cost exceeding their ability to control costs. Revenues generally cover costs over time. Realignment revenues may not be sufficiently robust. Programs costs do not decline when revenues decline. Social services programs costs now exceed realignment revenues. Unclear if costs for health and mental health responsibilities are in line with realignment revenues. Flexibility to respond to changing needs Despite changes to program requirements, use of revenue remains and requirements. limited for counties. Counties do not receive funding based on level of need among their populations for some programs. Funding is transparent and understandable. Revenue structure is extremely complex, making it difficult to track the flow and use of funds. Specifically, changes to the flow of funds—to achieve General Fund savings and address IHSS costs— have made the structure unintelligible. 18 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT prior fiscal responsibilities, many no longer reflect service program costs for the foreseeable future. counties’ long-term ability to control costs in the Specifically, total IHSS county costs are estimated programs. Today, counties’ share of cost for many to exceed dedicated realignment revenue by about realigned programs exceeds their ability to control $540 million in 2017-18. While the additional state costs in those programs. As described earlier, General Fund assistance ($400 million in 2017-18 the erosion in county control is largely due to and declining to $150 million by 2020-21) and state and federal policy changes in combination temporary redirection of other realignment funds with increased caseload and court decisions are expected to cover the majority of the shortfall in requiring certain levels of service. For example, 2017-18, about $25 million of costs will go unmet past attempts to reduce IHSS service levels in in 2017-18. This shortfall is expected to grow in an attempt to reduce program costs have largely future years. As a result, counties will most likely failed due to legal protections. The state largely need to use an increasing amount of other local has not made commensurate adjustments to the revenue to fully cover IHSS costs. cost-sharing ratios within 1991 realignment in Unclear if Costs for Health and Mental response to these changes in county control. Health Responsibilities Are in Line With Realignment Revenues. Counties have expressed Revenues Generally Should that realignment revenues are insufficient to Cover Costs Over Time cover health and mental health responsibilities, however, there is not sufficient statewide data to Realignment Revenues May Not Be make this determination. In part, this is due to Sufficiently Robust. Since 1991, realignment the fact that the amount of realignment revenues revenues have grown 3.7 percent per year on allocated to counties for health and mental health average. In comparison, assuming constant responsibilities is determined by a formula, not tax rates, the personal income tax—the state’s actual costs. While the state collects data on largest source of revenue—has grown 5.5 percent how much funding each county receives from per year on average. The property tax—local realignment, the state does not collect data on the government’s single largest source of tax revenue— total cost incurred by counties to provide realigned has grown almost 5 percent per year on average. health and mental health services. Consequently, While realignment revenue growth was intended while the amount of revenue each county receives to generally keep up with the growth in costs, for health and mental health responsibilities is no assessment of whether revenue growth is known, whether costs for all health and mental sufficient to maintain services has been made. health responsibilities align with the allocated Moreover, realignment revenues tend to decrease realignment revenues is unknown. during recessions when caseload and demand for programs can increase (or at least remain Should Have Flexibility to Respond to constant). For example, between 2007-08 and Changing Needs and Requirements 2008-09 the CalWORKs caseload increased by 8 percent, whereas realignment revenue declined Despite Changes to Program Requirements, by roughly 10 percent. Moreover, 1991 realignment Use of Revenue Remains Constrained for does not explicitly allow counties to maintain Counties. The realignment structure allows reserves, which could help mitigate the impacts of for counties to shift up to 10 percent of year-to-year revenue declines. revenues between the Health and Mental Health Social Services Programs Costs Now Subaccounts on a one-time basis annually. Most Exceed Realignment Revenues. As noted earlier, counties must receive permission from their Board counties’ social services programs’ costs are of Supervisors to make this shift, which may make meant to be covered—over time—by realignment using this flexibility politically difficult for counties. revenues. However, primarily due to IHSS Aside from this flexibility, however, the structure of county costs, realignment revenues alone will no realignment does not allow for counties to move longer be enough to pay for total county social funds across subaccounts and has not been www.lao.ca.gov 19 analysis full gutter AN LAO REPORT adjusted in response to changing state and federal state CalWORKs costs—and the temporary program requirements. provision of additional revenues to cover IHSS Growth Distribution Among Counties Based county costs. As a result of these changes, the on the 1990s. As previously mentioned, counties tracking of realignment revenues and program largely receive revenue growth funds for health expenditures has increased in complexity and and mental health responsibilities in the same the flow of funds is more labyrinthine. Moreover, proportions as they did in 1991. Specifically, the while the state tracks how much realignment distribution formula is largely based on how much revenue counties receive, there is no statewide counties spent on those programs in the early data to determine how much total federal, state, 1990s. Consequently, those counties that did not realignment, and local revenue is provided for spend much on health or mental health services in each realigned program and responsibility. As a the early 1990s receive a relatively low proportion result, counties’ use of other revenue streams of the revenue growth today. For many counties, to supplement 1991 realignment revenues and the populations served by these programs have fund realigned program responsibilities is largely changed significantly since that time—both in terms unknown. of the number of eligible individuals as well as in No Automatic State Oversight Mechanism terms of their service needs. to Assess Overall Fiscal Health of 1991 Realignment. There is no annual appropriations Funding Should Be Transparent and process for 1991 realignment because counties Understandable receive dedicated revenues. As a result, there is no automatic process to determine whether Revenue Structure Extremely Complex. funding counties receive for these programs Understanding the flow of funds within and responsibilities is sufficient. Moreover, as 1991 realignment is very challenging. This is noted earlier, the state does not collect sufficient partially due to the permanent redirection of information to determine whether realignment realignment revenues for uses outside of the revenue is sufficient to meet all requirements. original intent of realignment—namely to offset 1991 REALIGNMENT LIKELY NOT ACHIEVING INTENDED BENEFITS Overall, due to increased program required services consume a significant portion of responsibilities, 1991 realignment no longer meets what counties provide through 1991 realignment. In many of the core principles we identified and likely many ways, counties have less flexibility to respond is not achieving the desired benefits of realignment. to local needs relative to when 1991 realignment As noted earlier, 1991 realignment was intended was implemented. to have certain benefits for both the state and Unclear Effects on Innovation and Improved counties. This section discusses the extent to Program Outcomes. While program outcomes which 1991 realignment is achieving those benefits are outside of the scope of this report, the lack of today. program flexibility may be constraining counties’ Decreased Local Flexibility. Throughout this ability to innovate. Moreover, there is very little—if report, we have cataloged the ways in which any—state oversight regarding counties’ delivery county flexibility over programs has diminished over of 1991 realignment services. Consequently, the the last three decades. While counties maintain state’s ability to assess realignment’s impact on control over some elements of program delivery, outcomes is limited. 20 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Unknown Cost Savings. As noted earlier, there given the increasingly prescriptive programmatic is no comprehensive data on total expenditures requirements which limit counties’ ability to for realigned programs. As a result, we cannot try different strategies, counties’ ability to assess the extent to which the state is achieving achieve savings through innovation likely also is any savings under realignment. In addition, constrained. OPTIONS FOR IMPROVING 1991 REALIGNMENT Below, we present options for (1) better aligning earlier, following 1991 realignment, a number the fiscal structure of 1991 realignment with the of state and federal policies and legal decisions LAO principles laid out earlier and (2) achieving have made it difficult for the state and counties to intended state and county benefits. We organize change service levels or program rules for IHSS. these options into three sections. The first section Given that the 2017 IHSS MOE is based on the presents options for changing cost-sharing ratios original cost-sharing ratio established in 1991 to better align counties’ share of costs with their (35 percent), counties current share of IHSS costs ability to control those costs. The second section arguably does not reflect their actual ability to presents options to better align revenues and costs. control program costs. One solution would be to The third section outlines other improvements that reduce the counties’ share of IHSS cost to better could be made to 1991 realignment to better align reflect their level of control over the program. it with our principles. Generally, all of these options (In particular, counties can affect program costs could be pursued in tandem or individually to through their administration of the program and improve 1991 realignment. negotiations over wages and benefits.) Reducing counties’ IHSS costs would reduce CHANGE COST-SHARING RATIOS the amount of realignment funds required to cover those costs. For instance, ending the 2017 This section outlines options for better aligning IHSS MOE and giving counties responsibility for counties’ share of cost with their ability to control between 20 percent and 25 percent of IHSS costs costs in realigned programs. Specifically, these in 2019-20 would reduce their costs by roughly options would reduce counties’ share of IHSS costs $800 million to $500 million. Absent other actions, and propose other programs—over which counties this change would mean there would be sufficient have greater control—to either realign or increase funding within realignment to cover counties’ the counties’ existing share of cost. We summarize IHSS costs plus free up roughly $500 million to these options and the principles addressed in $200 million in realignment funding that could flow Figure 7 and discuss one specific possibility in to health and mental health programs. Reducing greater detail below. counties’ IHSS costs, however, would increase Reduce County Share for IHSS . . . Although IHSS General Fund costs by roughly $800 million counties are expected to be able to cover the to $500 million (including the $200 million General majority of their share of IHSS costs in the short-term (in large Figure 7 part due to the additional General Change Cost-Sharing Ratios Fund assistance and temporary redirection of other realignment Options Realignment Principles Addressed funds), they have expressed 9 concern that realignment Reduce county share for IHSS and Counties’ share of costs reflect their increase county share for another ability to control costs in the programs. revenues will not be enough to program (such as forensic court cover increased IHSS costs in commitments). 9 Revenues generally cover costs over time. the coming years. As discussed www.lao.ca.gov 21 analysis full gutter AN LAO REPORT Fund support the state plans to provide counties forensic court commitments, counties are under the 2017 IHSS MOE). To reduce the impact positioned to treat both populations. In recognition to the General Fund, the Legislature could offset of this control and ability to provide services, the some or most of the increase in IHSS General Fund state has implemented various programs—most costs by increasing counties’ fiscal responsibilities recently in the 2018-19 Budget Act—to give for other programs over which counties have counties greater responsibility for felony forensic relatively greater control over costs. In effect, the court commitments. state would “swap” a portion of counties’ fiscal If the Legislature shifted this treatment responsibility for IHSS for a share of another responsibility to counties, we recommend program currently supported by the state General giving counties substantial portion of the fiscal Fund. responsibility because counties’ choices about . . . Increase County Share for Other treatment would significantly affect overall Programs. There are a few realignment swap costs. For instance, if counties were responsible options that, if carefully considered and designed, for roughly 50 percent of the cost for serving could better fit within the realignment principles individuals in felony forensic court commitments, outlined earlier. We believe the best option to total county costs would be roughly $500 million explore for such a swap would be forensic court annually (based on the current population). This commitments. Currently, counties are responsible amount reflects half of what the state plans to for almost all mental health treatment for spend in 2018-19 on state hospital treatment low-income Californians with severe mental health for felony forensic court commitments plus an needs. One exception, however, is treatment for estimate of the cost to treat those waiting in individuals found incompetent to stand trail or not county jail. Funding for this increase in mental guilty by reason of insanity in felony cases (referred health responsibilities could be provided to to as felony forensic court commitments). The state counties through 1991 realignment using revenue treats almost all felony forensic court commitments freed up from reducing counties’ IHSS costs. If in state hospitals; however, many individuals wait the Legislature shifted a larger share of cost to in county jails for many months given the limited counties, additional funding would need to be number state hospital beds. Counties are only provided to counties. responsible for providing treatment to individuals in misdemeanor forensic court commitments. BETTER ALIGN REVENUES AND Given counties’ current mental health COSTS responsibilities, the Legislature could consider making counties responsible for treating all This section outlines two ways to change forensic court commitments and making counties realignment funding allocations to address our responsible for a portion of those costs through realignment principle that over time revenues 1991 realignment. Counties could continue to generally should cover costs, as summarized in send individuals to state hospitals, treat them Figure 8. The first way addresses the growth in county jails, or use other community-based allocations, but does not fully address our principle treatment options as appropriate. Realigning these that revenues generally cover costs over time. responsibilities to the counties better fits our realignment Figure 8 principles in that counties would Better Align Revenues and Costs have better ability to control costs based on treatment decisions. Realignment Principle Additionally, given that the mental Options Addressed health needs of felony forensic • Update growth allocations 9 Revenues generally court commitments generally are • Increase funding to address existing cover costs similar to those of misdemeanor shortfalls 22 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT However, these changes would improve the funding provided to the Family Support and Child distribution of funds moving forward. The second Poverty Subaccounts would be reduced and shifted way, addresses overall program funding and would to the Health and Mental Health Subaccounts. make more progress towards meeting this principle. (Because the Family Support and Child Poverty Subaccounts offset General Fund costs related to Update Growth Allocations CalWORKs, reducing funding to these accounts Update Counties’ Growth Allocations for would increase General Fund costs in future Health and Mental Health Responsibilities. While years.) One advantage of this alternative is that no the amount of growth funding counties receive county would receive less growth funding under an for social services programs is meant to cover updated formula (compared to today). In addition, actual increases in costs, the amount of growth increasing funding for health and mental health funding counties receive for health and mental services could help counties cover the increasing health services is not tied to actual costs or local costs from the additional service responsibilities needs. Under this option, the amount of funding discussed earlier. each county receives for health and mental health Increasing the amount of funding available services would be updated to reflect counties’ would require not only updating the distribution current populations (rather than being based on formulas—described above—but also determining what counties provided in the 1990s). We describe how much additional funding might be required. below two methods—one using existing funding This would require the Legislature to direct the and one providing additional funding—to make this administration to work with counties to determine update. where service needs are growing more rapidly and Use Existing Resources. This change could be distribute additional growth funding based on this made without increasing funding for these services; measure. however, as a result, some counties would receive Increase Funding to Address more funding while other counties would receive Existing Shortfalls less funding (compared to today). To make this change, the formulas that govern the distribution Increase Funding to Address Shortfalls for of growth funding to each county within the Health Social Services Programs. As noted earlier, and Mental Health Subaccounts would need to the shortfall—excluding General Fund support be updated. There are many different approaches and temporary redirection of VLF revenues—for for updating these formulas including distributing social services programs is at least $540 million. funding proportionally based on counties’ share Moreover, this shortfall will grow in future years. of low-income individuals. Due to the temporary Rather than providing General Fund support redirection of VLF funding, this update would through the budget process, funding within not have any practical effect—because there is realignment could be redirected to cover this no growth funding to these subaccounts—for a shortfall. Specifically, funding in the Family Support few years. Moreover, for the foreseeable future, and Child Poverty Subaccounts could be reduced all sales tax growth funds will be used to cover and redirected to the Social Services Subaccount. counties’ IHSS costs. Consequently, the overall Because these subaccounts offset General Fund growth funding to these accounts will be limited. costs associated with CalWORKs, any reduction in As a result, there would be little change to the existing funding to these subaccounts would come distribution of health and mental health funding with simultaneous dollar-for-dollar General Fund among counties for many years. costs. Moreover, future CalWORKs grant increases Provide Additional Resources. Alternatively, the that would be funded with growth in the Child amount of growth funding allocated to the Health Poverty Subaccount would no longer occur absent and Mental Health Subaccounts could be increased legislative action. (These two subaccounts are by reversing recent changes to realignment that estimated to receive a combined total of roughly offset General Fund costs. Specifically, the growth $1 billion in 2018-19.) Redirecting funds in this www.lao.ca.gov 23 analysis full gutter AN LAO REPORT way would better match realignment revenues with Apply Lessons From 2011 Realignment. realignment costs and simplify the flow of funds 2011 realignment incorporated some of the lessons within realignment. learned from 1991 realignment. Those lessons Assess Potential Shortfall for Health and were not, however, extended to 1991 realignment Mental Health Responsibilities. The Legislature simultaneously. To improve 1991 realignment, the also could consider redirecting a portion of the Legislature could apply all or some of these lessons funding in the Family Support and Child Poverty back to 1991 realignment. Specially, the Legislature Subaccounts to the Health and Mental Health could: Subaccounts. As noted earlier, counties have • Provide Constitutional Mandate Protection. flexibility to determine how to provide health and Counties only would be required to carry mental health services using funds from those out new programmatic requirements within subaccounts. As a result, determining whether 1991 realignment if additional funding there is a funding shortfall in those subaccounts— were provided to cover the costs of those and therefore how much additional funding to requirements. (This change would require provide—is very difficult. Consequently, before voter approval.) By providing state funding for shifting funding to these accounts, the Legislature new program requirements, counties’ share would need to direct the administration to work of cost would reflect their preexisting program with counties to make this determination. At responsibilities. minimum, this would require determining what • Provide Base Restoration to All Programs. specific services should be paid by the Health and All subaccounts would be restored after any Mental Health Subaccounts and collecting data reductions due to lower revenues. Providing from counties on the cost of those services. more consistent funding to these programs would give counties greater flexibility to OTHER IMPROVEMENTS TO ALIGN respond to state and local needs and TO PRINCIPLES requirements. • Allow More Fund Transfers. Remove the This section outlines a variety of other changes requirement to receive Board of Supervisors that could be made to realignment to better align approval for fund transfers between it with our principles. Figure 9 summarizes these subaccounts. Simplifying the process in which changes and the principles addressed. funds can be transferred may give county Figure 9 Other Improvements to Align Principles Options Realignment Principles Addressed 9 Apply lessons from 2011 realignment. Counties’ share of costs reflect their ability to control costs in the program. 9 Flexibility to respond to changing needs and requirements. 9 Track realignment revenues and costs. Funding is transparent and understandable. 9 Encourage counties to maintain reserves. Revenues generally cover costs. 9 Consider long-term impact of policy decisions on Counties’ share of costs reflect their ability to control ability to control program costs. costs. 24 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT health and human service agencies more Mental Health Subaccounts to better understand flexibility to respond to state and local needs. how counties utilize those funds to meet local needs. These changes would make realignment Track Realignment Revenues and Costs. much more transparent and understandable. Piecing together counties’ funding for realigned Encourage Counties to Maintain Reserves. programs is very challenging. The state provides State law does not explicitly allow counties to information on realignment revenues distributed carry 1991 realignment funds over year to year to counties, but no statewide data are available to maintain a reserve. To allow greater program regarding how much counties spend in total continuity, the Legislature could allow counties across programs from all sources. As noted earlier, to create reserves that could be used across there is no account of how much counties rely on 1991 realignment programs. This would help local resources to support the currently realigned counties cope with the declines in realignment programs. Anecdotally, some counties report revenues and better align revenues with costs year spending a few million each year, while others to year. report spending hundreds of millions of dollars Consider Long-Term Impact of Policy annually. Not only does this limit information on Decisions on Ability to Control Program Costs. statewide spending for each program, but also As outlined earlier, state and county actions have limits the Legislature’s ability to evaluate whether expanded service levels and made providing sufficient resources are provided to counties over services more costly for many realigned programs. time given program requirements. For some programs, these changes are difficult Counties cannot respond to state incentives to roll back due to the entitlement nature of the to control costs because counties cannot easily program and court rulings. Consequently, the understand the factors driving their realignment Legislature and counties may want to carefully funding. To better understand the full cost of consider the benefits and permanency of certain realignment and enable counties to respond to decisions that expand program rules and ultimately cost incentives, the Legislature could require state make programs more costly. By limiting program agencies and counties to provide total program decisions to those the state and counties are willing spending across the realigned programs. The to fully fund long term, program costs are more Legislature also could consider whether counties likely to reflect the state’s and counties’ ability to should break out spending within the Health and control and pay for costs over time. CONCLUSION Overall, we find that the 1991 realignment realignment revenues alone are no longer sufficient structure no longer meets many of the core to pay for county social services programs costs principles of a successful realignment and likely is over time. Changing 1991 realignment will be not achieving the desired benefits of realignment difficult; however, there are options that both better for the state or counties. In particular, counties’ meet our principles and address—with differing share of cost for many realigned programs today General Fund implications—the funding shortfall in no longer reflects their ability to control program realignment. costs. This problem is made worse because www.lao.ca.gov 25 analysis full gutter AN LAO REPORT LAO PUBLICATIONS This report was prepared by Jackie Barocio and Carolyn Chu, and reviewed by Ginni Bella Navarre with assistance from Lourdes Morales. 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. 26 LEGISLATIVE ANALYST’S OFFICE