The 2021-22 Budget: Improving Legislative Oversight of Emergency Spending Authorities

The 2021-22 Budget: Improving Legislative Oversight of Emergency Spending Authorities Summary Governor Has Broad Powers to Declare Emergencies and Authorize Related Spending. State law gives the Governor broad powers to declare emergencies and allocate funds to support related activities. For example, the Department of Finance (DOF) can allocate funds from the Disaster-Response Emergency Operations Account (DREOA) to state departments for emergency costs with minimal legislative notification requirements. Furthermore, the California Emergency Services Act allows the Governor to spend any available funds to respond to an emergency with no legislative notification. The administration has made extensive use of these authorities during the state of emergency declared on March 4, 2020 in response to the coronavirus disease 2019 (COVID-19) pandemic. Under current law, the authority to use DREOA for COVID-19-related activities expires on June 30, 2021. Governor’s Proposals for COVID-19 Emergency Spending and Authority. The Governor proposes to extend the use of DREOA for COVID-19 response activities through 2021-22. The Governor also proposes budget Control Section 11.91 that allows DOF to (1) shift between various departments $1.4 billion in funds proposed in the 2021-22 budget for COVID-19-related activities and (2) spend federal and private funds on COVID-19-related activities. Governor’s Proposals Raise Various Concerns. Under the Governor’s proposal to extend the use of DREOA for COVID-19 response, there would be no reasonable checks and balances on the Governor’s COVID-19 spending authority. Specifically, the administration would have access to nearly unlimited funding in the budget year while having minimal requirements to notify the Legislature when funds are accessed and no requirement to report on how funds are actually spent on the state’s COVID-19 response. Our concerns with the proposed extension are reflective of the larger problems associated with the state’s existing emergency spending authorities that allow the Governor to spend an essentially unlimited amount of funds on emergency-related activities with very little opportunity for legislative oversight. Recommendations. Given the scale and nature of the COVID-19 emergency, it is reasonable to give the Governor some flexibility in spending funds for related activities. However, additional checks and balances on this flexibility are necessary for COVID-19 spending, as well as all future state emergencies. Accordingly, we propose a series of recommendations to help achieve this outcome. First, we recommend the Legislature adopt legislation to make fundamental changes to the Governor’s overall emergency spending authorities. Second, we recommend the Legislature consider a new budget control section process specific for COVID-19-related augmentations in 2021-22. Third, we recommend modifying the Governor’s proposed authority to transfer funds budgeted for COVID-19-related activities to require legislative notification. Fourth, we recommend rejecting the Governor’s proposed flexibility to spend federal and private funds. GABRIEL PETEK LEGISLATIVE ANALYST MARCH 2021 analysis full gutter 2021-22 BUDGET INTRODUCTION Current state law gives the Governor broad administration expects that a significant portion of powers to declare emergencies and to allocate these expenditures will be reimbursed by federal state and federal funds to support activities related emergency funds in the future.) to declared emergencies. These authorities are In this report, we describe the Governor’s broad designed to give the administration flexibility powers to declare an emergency and to spend to rapidly react to emergencies. The Governor both state and federal funds for emergency-related has made extensive use of these authorities to activities, as well as how these powers have been support the state’s response to the coronavirus used during the COVID-19 pandemic. Next, we disease 2019 (COVID-19) pandemic. In addition, describe the Governor’s budget proposals to modify, the Governor’s 2021-22 budget includes various extend, and expand these powers to respond to proposals to modify, extend, and expand these the pandemic in 2021-22. Finally, we assess these emergency spending authorities to facilitate the proposals and make associated recommendations planned expenditure of at least $1.8 billion from the to ensure sufficient legislative oversight. General Fund on COVID-19-related activities. (The BACKGROUND GOVERNOR HAS BROAD POWERS State of Emergency Declared for COVID-19. On March 4, 2020, Governor Newsom declared a TO DECLARE EMERGENCIES state of emergency due to the COVID-19 pandemic. AND AUTHORIZE RELATED STATE This emergency declaration authorized the SPENDING administration to use various emergency powers to respond to the pandemic, including emergency Authority to Declare State of spending authorities, which we discuss in more detail below. At the time this report was written, Emergency the state remains under the March 4 emergency Declaration Allows for Certain Response declaration. Efforts. State law authorizes the Governor to Various Authorities for Spending declare an emergency when there exist conditions of disaster or extreme peril to the safety of people Outside of Normal Appropriation and property caused by various conditions such Process as fire, flood, storm, and epidemic. Once an Spending Typically Authorized by Legislature... emergency is declared, state law gives the Governor The California Constitution entrusts the Legislature significant authority in directing state departments with the power of appropriation, including the to respond to the emergency. A declaration of a responsibility of appropriating funds in the state of emergency is required for many types of annual state budget and other legislation. In both federal assistance. For instance, it is a prerequisite circumstances, proposed spending is typically for the state to request that the President make evaluated through legislative processes that a major disaster or emergency declaration, which include committee hearings where members of provides opportunities for the state to seek financial the Legislature can ask questions, vote to make assistance from the federal government. changes to spending proposals put forward by the administration, and hear from the public and other stakeholders about the potential impacts of those 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET decisions. These processes provide checks and needs to spend on an emergency beyond the time balances on the Governor’s implementation authority allowed under state law, it could seek funds for the and provide the Legislature with the ability to emergency-related activities through the state’s exercise oversight to ensure state expenditures are annual budget process. This ensures that such appropriate and consistent with legislative priorities. expenditures are subject to the normal checks and However, the time frame for these processes can balances. span over several months. For example, state law Governor Has Made Extensive Use of requires the Governor to propose an annual budget DREOA During Pandemic. DREOA has been by January 10 and gives the Legislature until June the primary way the administration has allocated 15 to adopt a budget, though other bills authorizing state funds for COVID-19-related activities. As spending can be enacted on a shorter time frame. of February 24, 2021, DOF had transferred a …But Spending on Emergencies Can total of $7.2 billion to DREOA, and has allocated Circumvent These Processes. Given the a significant portion of that amount to various urgency of emergencies, spending decisions departments. Future transfers into DREOA are during emergencies go through markedly likely as the administration continues to fund different processes than the ones described COVID-19-related activities during the remainder of above. Specifically, current state law provides the 2020-21. (We note that a significant share of these Governor with flexibility to spend funds to respond costs are likely to be offset by federal emergency to emergencies without going through the state’s funds, which we discuss in greater detail later in this typical appropriation processes. report.) California Disaster Assistance Act (CDAA) Since declaring the COVID-19 emergency, the Authorizes Spending From Special Disaster Governor has extended the use of DREOA for and Emergency Account. CDAA, which was first COVID-19-related activities three times. The current enacted in 1974, was later modified to establish 120-day authorization to use DREOA expires on the Disaster Response-Emergency Operations June 24, 2021. Because the Governor extended Account (DREOA) as a subaccount of the Special the use of DREOA for the COVID-19 emergency Fund for Economic Uncertainties (SFEU). (The SFEU on July 1, 2020, the administration can continue is the state’s discretionary budget reserve of the to extend the use of DREOA for this emergency General Fund.) CDAA authorizes the Department through the end of 2020-21, even if the COVID-19 of Finance (DOF) to transfer funds from the SFEU state of emergency ends before that time. to DREOA and allocate funds from DREOA to state However, absent a change in state law, the departments for emergency response and recovery administration would be unable to use DREOA for costs. CDAA specifies that funds are allocated from COVID-19-related activities after June 30, 2021, DREOA upon notification of the Joint Legislative even if the state of emergency persists. Budget Committee (JLBC) by DOF. However, there is California Emergency Services Act (CESA) no requirement on the type of information that must Provides Extensive Authorities. CESA, which was be included in the notification. enacted in 1970, provides extensive emergency CDAA initially limits the use of DREOA for each powers, including spending authorities, to the emergency to 120 days following the Governor’s Governor for the duration of a declared emergency. declaration of the emergency. However, the In particular, CESA allows the Governor to: Governor can extend the use of DREOA for • Spend any available funds to respond to an emergency-related activities in 120-day increments emergency. When redirecting special funds generally through the end of the fiscal year in which dedicated for a specific purpose, state law the first 120-day extension was made—even if requires that the funds be repaid. However, no the declared state of emergency has ended. In specific time line for repayment is specified. this way, DREOA funds are available for recovery • Direct state departments to spend funds operations that last beyond the state of emergency. appropriated for specific purposes—including The Legislature established the limit on use of DREOA on the basis that, if the administration www.lao.ca.gov 3 analysis full gutter 2021-22 BUDGET those unrelated to an emergency—on (2) add Control Section 36 authorizing DOF to emergency response. allocate these funds to departments. Unlike DREOA • Use state department personnel, property, or CESA, Control Section 36 required DOF to notify equipment, and appropriations to respond to JLBC 72 hours prior to allocating funds, though an emergency. provided that the 72-hour requirement could be waived upon the approval of JLBC. DOF allocated Under existing law, the Governor is not required a total of $826.8 million to departments through to obtain approval from or provide notification (or Control Section 36 in 2019-20. Control Section 36 is other information) to the Legislature when using not included in the 2020-21 Budget Act. the spending authorities specified in CESA. For example, the Governor does not have to identify the GOVERNOR HAS BROAD amount of funds spent or redirected for emergency AUTHORITY TO ALLOCATE response, as well as the specific activities that were funded. Unlike DREOA, the Governor can only use FEDERAL FUNDS FOR the authorities in CESA while the specified state of EMERGENCIES emergency is in place. Governor Has Used CESA in Different Ways Federal Funding Available in During Pandemic. The administration has used its Emergencies authority under CESA to shift resources and funds to support COVID-19-related activities. For example, Federal Declarations Allow for Federal the administration identified over 3,000 employees Assistance. The federal government provides as available for redirection to “contract tracing” states with significant amounts of funding for activities—conducting case investigations and emergency-related activities, often through the notifying people who may have been exposed Robert T. Stafford Disaster Relief and Emergency to the virus of the need to quarantine. As of Assistance Act (Stafford Act). This act governs December 2020, roughly 1,900 state employees the President’s authority to declare disasters and were redirected to assist with these efforts. In establishes assistance programs administered by the addition, the California Department of Corrections Federal Emergency Management Agency (FEMA). At and Rehabilitation has shifted funds budgeted the request of a Governor, the President can make for support of the inmate population to various an emergency declaration when there is natural or COVID-19-related activities to reduce the spread man-made event or other circumstance beyond the of the virus in state prisons. We also note that the capacity of state and local governments to respond. Governor issued Executive Order N-41-20 on April 1, When the President declares an emergency, limited 2020 indicating he would use his authority under federal financial assistance is generally available CESA to transfer funds from other legally available to states and local governments up to $5 million. state funds into DREOA in order to spend more on In emergencies caused by natural events that are COVID-19-related activities, as needed. However, so severe they are beyond the capability of state the extent to which the Governor has made use of and local governments to respond, a Governor can this authority to date is unclear. request that the President make a major disaster Spending Authority for Specific Emergencies declaration. A wide range of federal assistance Like COVID-19. The Legislature has also periodically programs are available under a major disaster provided emergency spending authority to the declaration. Most notably, states can receive FEMA Governor for specific emergencies through one-time reimbursement for certain emergency response budget actions or legislation. For example, costs, usually in the amount of 75 percent of eligible Chapter 2 of 2020 (SB 89, Committee on Budget costs. Federal assistance during emergencies can and Fiscal Review) amended the 2019-20 Budget also be provided through federal legislation passed Act to (1) make available up to $1 billion from the in order to respond to a specific emergency. General Fund for COVID-19-related activities and 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET Federal Funds Have Been Imperative State Law Allows Federal Funds to Be to the State’s COVID-19 Response Allocated in Various Ways Federal Declarations and Reimbursements Federal Funding Appropriated in the Annual for Pandemic Spending. On March 13, 2020, Budget Act. Without legislative approval, the the President declared the COVID-19 pandemic administration generally does not have authority a national emergency under the Stafford Act. to spend money from the federal government. As On March 22, 2020 the President declared such, like General Fund, special funds, and all other the COVID-19 pandemic a major disaster for state funds, federal funds received by the state are California. These declarations allow the state appropriated in the annual budget process. For to seek reimbursement for eligible costs, with example, the budget includes authority for the state FEMA typically reimbursing 75 percent of the to accept federal funds, such as reimbursements costs. We note that the federal government has from FEMA for emergency-related spending. indicated that it will reimburse the state for a higher Control Section 28 Provides Broad Authority share of eligible costs—up to 100 percent—for to Appropriate Unanticipated Federal Funds. COVID-19-related activities. However, not all state Sometimes the state receives money from the spending on COVID-19-related activities is eligible federal government after the budget has been for reimbursement. passed. To address this issue, the budget includes Federal Legislation Has Provided Additional standard language in Control Section 28 giving Emergency Assistance. Congress passed the administration flexibility to spend unanticipated five separate pieces of federal legislation in federal funds. (Control Section 28 also gives the 2020 to provide additional federal funding related to administration flexibility to spend unanticipated COVID-19. They are: the Coronavirus Preparedness nonstate funds, such as private funds donated for and Response Supplemental Appropriations Act emergency-related activities.) (which became law on March 6); the Families Under Control Section 28, the funds can only be First Coronavirus Response Act (March 18); the spent if they: Coronavirus Aid, Relief, and Economic Security • Were unanticipated at the time the budget was (CARES) Act (March 27); the Paycheck Protection passed. Program and Health Care Enhancement Act (April 24); and the Consolidated Appropriations Act • Must be spent in the current fiscal year. of 2021 (December 27). • Would be expended for a purpose consistent Federal Funding to State So Far Exceeds with state law. $150 Billion. Including both legislation and • Are made available to the state under administrative actions, the federal government conditions permitting their use only for a has provided more than $150 billion to the state specified purpose. government for COVID-19-related relief. (This • Would not impose on the state a requirement estimate excludes tens of billions of dollars that also to spend other state funds for any program or flowed directly to individuals and businesses, for purpose. example, through the paycheck protection program.) In addition, the administration must provide a For much of this funding, for example, with federal 30-day notification to JLBC to allocate funds above funds for unemployment insurance, the state has a certain amounts. However, the Legislature allows very limited policy-setting role in directing how the for an expedited notification process should the funding is spent. For other funding, however, the need to distribute the funding be pressing. The state government can provide more direction. For administration has used this expedited process to example, the CARES Act dedicated $9.5 billion to distribute federal funds during the pandemic. the state from the Coronavirus Relief Fund (CRF), which involved many conditions, but nonetheless provided the state substantial flexibility in how the funds were directed. www.lao.ca.gov 5 analysis full gutter 2021-22 BUDGET Federal Funding for COVID-19 Generally cases, the Legislature has allocated federal funding Allocated Through Control Section 28 and for COVID-19 in budget-related legislation, as is Regular Budget Process. The administration typical for federal funding that does not meet the has allocated significant federal funding for conditions under Control Section 28. For example, COVID-19 through Control Section 28. For example, the 2020-21 budget appropriated the $9.5 billion in in January 2021, the administration notified JLBC CRF monies to a variety of purposes, including to it was spending roughly $6 billion in federal funding local governments and school districts. for education through Control Section 28. In other GOVERNOR’S PROPOSALS FOR COVID-19 EMERGENCY SPENDING AND AUTHORITY The Governor’s budget includes three major specific departments in the proposed budget as proposals intended to provide resources for it is currently unclear which departments will be COVID-19-related activities in 2021-22. First, engaged in these activities. Instead, funding would the Governor proposes control section language be allocated through DREOA as departments’ roles to extend his authority to use DREOA for become clear. By extending the use of DREOA, the COVID-19-related activities through the end of administration would have maximum authority to the budget year. Second, the Governor’s budget allocate more than $406 million for COVID-19-related proposes $1.4 billion from the General Fund activities from DREOA. (The administration expects in 2021-22 to support specific departments’ that a significant portion of these costs will be COVID-19-related activities, along with control reimbursed by federal funds in the future.) section language allowing the administration to Appropriation of $1.4 Billion for shift these funds between departments during COVID-19-Related Activities and Authorization the budget year. Third, the proposed budget to Shift Funds. The Governor’s budget proposes includes control section language allowing the a total of $1.4 billion from the General Fund to administration to spend federal and private funds support COVID-19-related activities in 2021-22 in on COVID-19-related activities. We describe each of nine specific departments, as shown in Figure 1 on these proposals in more detail below. the next page. (The administration expects that a Extension of Authority to Use DREOA for significant portion of these costs will be reimbursed COVID-19 Through 2021-22. As previously by federal funds in the future.) According to the mentioned, under current state law, the administration, including these funds in the proposed administration would be unable to use DREOA budget is intended to honor the intent of CDAA that for COVID-19-related activities after June 30, emergency-related activities be funded through the 2021, even if the state of emergency persists. budget process. The Governor’s budget includes a new Control In addition, the Governor’s budget proposes Section 11.92 that allows the administration to Control Section 11.91, which consists of two extend the use of DREOA through June 30, 2022 components. The first component of Control (the end of the budget year). The administration Section 11.91 authorizes DOF to shift the $1.4 billion estimates that it will use this authority to allocate proposed for COVID-19-related activities during $406 million for COVID-19-related activities. the budget year. Specifically, DOF would be able This funding would support (1) contact tracing to transfer funds between the nine departments ($143.8 million), (2) emergency operation costs with COVID-19 allocations, as well as to three ($177.5 million), and (3) hospital and medical departments without such allocations—the surge preparation ($84.5 million). According to the Governor’s Office of Planning and Research, the administration, these funds are not allocated to Emergency Medical Services Authority, and the 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET Military Department. According to the administration, • Are made available to the state under these three departments are likely to be engaged in conditions permitting their use only for COVID-19-related activities, but it has yet to identify COVID-19-related activities. what those activities would be. Under the proposed • Would not impose on the state a requirement to language, DOF would not be required to notify or spend state funds for any program or purpose. seek approval from the Legislature when shifting Some of these conditions are similar to those funds. that must be met for federal funds or private funds Authority to Spend Federal and Private Funds. to be allocated through the existing Control Section The second component of Control Section 11.91 28, which typically governs the appropriation of authorizes DOF to adjust departments’ budgets to unanticipated federal or private funds. However, the allow them to spend federal and private funds for proposed Control Section 11.91 process differs from COVID-19-related activities. Specifically, it allows Control Section 28. Most notably, DOF would not DOF to (1) increase federal trust fund authority for be required to notify the Legislature in advance of COVID-19-related activities for any department allocating federal or private funds to departments, and (2) create new items of appropriation to allow irrespective of the amount of funding involved. departments to receive and spend federal and/ According to the administration, this is intended to or private funds for COVID-19-related activities. streamline the allocation process. However, the control section would only permit Summary of Proposed Budget Control these adjustments if the received funds met various Sections. As discussed above, the Governor’s conditions. Specifically, funds could only be spent if budget proposes two new control sections—11.92 they: and 11.91—that would provide the administration • Support the state’s response to the with significant flexibility in spending state, federal, COVID-19 public health emergency. and private funds on COVID-19 response activities. • Would be expended for a purpose consistent Figure 2 on the next page summarizes the key with state law. provisions of each new control section. Figure 1 Governor’s Budget Provides $1.4 Billion General Fund for COVID-19-Related Activities 2021-22 (In Millions) Department Description Amount Public Health Statewide testing, primarily at the Valencia Branch Lab, including specimen collection. $820.5 Corrections and Rehabilitation Testing, treatment, surge capacity, and vaccination of staff and incarcerated persons. 281.3 Governor’s Office of Emergency California Disaster Assistance Act grant funds to reimburse local governments for certain 119.8 Services coronavirus disease 2019 (COVID-19) response costs. General Services Hotels for health care workers, housing for vulnerable people released from prison and 84.4 agricultural workers, and specimen transportation. State Hospitals Increased operating costs primarily related to increased sanitation, purchase of personal 52.0 protective equipment, and testing staff and patients. Developmental Services Surge sites for individuals served by the Department of Developmental Services who have 36.7 been exposed to or are at high risk of COVID-19. Board of State and Community Probation department supervision of people released from prison to county supervision. 12.1 Corrections Veterans Affairs Increased operating costs primarily related to increased sanitation, purchase of personal 5.3 protective equipment, and testing staff and residents. Social Services Rapid Response program to support services to immigrants. 5.0 Total $1,417.1 www.lao.ca.gov 7 analysis full gutter 2021-22 BUDGET Figure 2 Governor’s Proposed Control Sections for COVID-19 Spending Flexibility Control Section Description 11.92 Extends ability of administration to use DREOA for COVID-19-related activities through 2021-22, providing flexibility to spend more funding than the level identified in the budget. 11.91—First Allows DOF to transfer funds budgeted for COVID-19-related activities between departments with Component COVID-19 budget items. 11.91—Second Allows DOF to create new budget items and augment department budgets to allow them to spend Component federal and private funds for COVID-19-related activities. COVID-19 = coronavirus disease 2019; DREOA = Disaster-Response Emergency Operations Account; and DOF=Department of Finance. GOVERNOR’S PROPOSALS RAISE VARIOUS CONCERNS Extension of DREOA Authority an emergency basis in 2021-22. For example, it is possible that the state could experience a spike Problematic in infections requiring the state to rapidly allocate New Control Section Limits Legislative resources to minimize loss of life. In addition, it Oversight of COVID-19 Response. Under the is possible that the administration might need to proposal, there would be no reasonable checks and quickly take unexpected steps to facilitate vaccine balances on the Governor’s COVID-19 spending distribution. However, if the use of DREOA is not authority. Specifically, the administration would extended or an alternative source of funding is have access to nearly unlimited funding in the not established, the administration could end up budget year while having minimal requirements to using CESA spending authorities as long as the notify the Legislature when funds are accessed and COVID-19 state of emergency remains in place. no requirement to report on how funds are actually The use of CESA to fund COVID-19-related spent on the state’s COVID-19 response. As such, activities would be even more problematic in terms the Governor could notify the Legislature that of oversight and accountability because CESA has DREOA funds will be used for a certain purpose, no legislative notification or reporting requirements. but then decide to spend those funds on entirely Reexamination of Governor’s Overall unrelated purposes, so long as the expenditures Emergency Spending Authorities Warranted. Our were made on activities related to COVID-19. While concerns with the Governor’s proposal to extend the administration has provided information on DREOA for COVID-19 response are reflective of COVID-19-related spending that is not required by the larger problems associated with the state’s statute, we find that adequate information is still existing emergency spending authorities overall. lacking, as discussed in the box on the next page. As discussed earlier in this report, these spending Action Needed to Provide Appropriate authorities are extremely broad and allow the Mechanism to Fund COVID-19-Related Governor to spend an essentially unlimited amount Activities. While we find the Governor’s proposal of funds on emergency-related activities with very to be problematic, we find that some action is little opportunity for the Legislature to provide needed. Given the magnitude as well as the effective oversight. For example, as noted above, extended and continually evolving nature of the CESA spending authorities have no legislative COVID-19 pandemic, it is reasonable that the notification or reporting requirements. As such, the administration will continue to need flexibility to Governor could—without any legislative oversight— allocate funds for COVID-19-related activities on reallocate to emergency response activities any 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET legally available funds in the state treasury as well activities is a step in the right direction of providing as any available state employees and resources transparency on planned expenditures and during a state of emergency. If such a redirection honors CDAA’s intent that funding for extended took place on a large enough scale, it could have emergencies be included in the budget act. serious consequences, such as undermining the However, the first component of the proposed structure and condition of the state budget. This is Control Section 11.91 that allows the administration a considerable unilateral power for the Governor to to shift between departments funds budgeted wield without any meaningful checks or balances. for COVID-19-related activities, provides so much flexibility that it would be difficult for the Proposed Flexibility Prevents Legislature to know how these budgeted funds Legislative Oversight of Budgeted will actually be spent, or even which departments Funds will ultimately receive the funds as it includes no legislative notification requirements. For example, We find that the administration’s proposal the Legislature could approve the 2021-22 budget to budget $1.4 billion for COVID-19-related with the understanding that specific departments Governor Has Provided Fiscal Updates, but Information Remains Limited The administration has provided periodic reports to the Legislature to update the total estimated pandemic-related costs even though such reports are not required under the California Disaster Assistance Act or California Emergency Services Act. However, the information provided has been inadequate for the Legislature to conduct meaningful oversight. This is because the information often: • Lacks Adequate Details on Planned and Actual Spending. Much of the information provided on planned coronavirus disease 2019 (COVID-19)-related spending lacks adequate details. For example, the November 2020 fiscal update provided by the Department of Finance includes only brief descriptions or categories of planned spending (such as $105 million in “other staffing and operational costs” for the California Department of Corrections and Rehabilitation). In addition, the administration has provided very little information on how funds were actually spent. Without information on planned and actual spending, it is difficult for the Legislature to understand what activities the funds are supporting or whether the administration’s response approach is likely to be effective or is consistent with legislative priorities. • Not Provided Consistently. While the administration committed in August 2020 to providing monthly updates on COVID-19-related spending, it has provided these updates less frequently. In addition, the information is not provided in a consistent format. This makes it difficult to compare reports to easily identify changes or trends. • Does Not Appear to Reflect All Planned Spending. The administration does not appear to include planned COVID-19-related expenditures in its fiscal updates in cases where it has not entered into contracts or made public announcements of the expenditures. For example, the administration provided a COVID-19 fiscal update on August 14, 2020 that did not include the estimated cost—potentially reaching $1.7 billion—of a testing laboratory contract that the Governor announced on August 26. Including the cost of this contract in the August 14 report would have provided a more complete picture of planned expenditures. www.lao.ca.gov 9 analysis full gutter 2021-22 BUDGET and activities will receive specified funding levels, Control Section Provides Too Much but the administration would have the ability— Authority to Spend Federal and without notifying the Legislature—to transfer funds Private Funds to support a very different mix of activities that may not align with legislative priorities. In addition, The second component of the proposed Control Section 11.91 allows the administration Control Section 11.91, which would allow the to transfer COVID-19-related funds to three administration to spend new federal or private departments that currently have no proposed funds without legislative approval or notification, COVID-19 response activities—resulting in the would represent a significant expansion of already Legislature having no information on how the fairly broad authority. The existing language of funds would be used if transferred to these Control Section 28 provides the administration departments. While some flexibility to transfer with similar authority to allocate federal funds but funds between departments could be necessary— includes legislative notification and the requirement given that the actual needs and costs for certain the funding be unanticipated at the time the budget response activities could be different than currently was passed. Because the second component of assumed—it is critical for the Legislature to the proposed Control Section 11.91 would not maintain oversight of such transfers. include these conditions, the administration’s request represents an overreach of administrative authority. RECOMMENDATIONS Given the scale and nature of the Reform Emergency Spending COVID-19 emergency, we think it is reasonable to Authorities to Include Checks and give the Governor some flexibility in spending funds Balances for related activities in the budget year. However, we think that additional checks and balances on Require All Emergency Augmentations this flexibility are necessary for COVID-19 spending, Come From DREOA. In order to ensure that as well as all future state emergencies. Accordingly, emergency spending augmentations authorized we propose a series of recommendations to help under CESA and DREOA are tracked and follow achieve this outcome. First, we recommend the the same requirements for legislative notification Legislature adopt legislation to make fundamental and reporting, we recommend that the Legislature changes to the Governor’s overall emergency require all emergency augmentations come from spending authorities. Second, we recommend DREOA. Under this recommendation, the Governor the Legislature consider a new budget control could still redirect any legally available state funds section process specific for COVID-19-related to emergency response-related activities through augmentations in 2021-22. Third, we recommend CESA. However, these funds would first have to be the Legislature modify the Governor’s proposed deposited into DREOA. (We recommend additional authority to transfer funds budgeted for checks and balances on the Governor’s authority COVID-19-related activities to require legislative to transfer funds into DREOA below.) Having all notification. Fourth, we recommend the Legislature emergency augmentations coming from the same reject the Governor’s proposed flexibility to spend account would ensure that a consistent process federal and private funds. governs all emergency augmentations. We note that in practice, the current administration already does this by first transferring emergency funds into DREOA when using its CESA spending authority. 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET Establish an Amount for DREOA in the allows the Legislature to effectively evaluate Budget. In order to (1) ensure that the Governor the request in a shorter time frame. In can access a reasonable amount of funding addition, given that the emergency would be for emergencies, (2) give the Legislature input ongoing in such a circumstance, the need for into the level of funding available for emergency funds could be urgent. expenditures, and (3) minimize the chance that • Establish Longer Notification Period emergency spending will undermine the state for Larger Transfers or Transfers Made budget structure or condition, we recommend Proactively Before Emergencies. In other establishing the total initial level of funding cases, the Governor may want to transfer authorized each year for emergencies in the large sums into DREOA if the balance state budget. This amount would be budgeted in becomes low or there is a known risk of DREOA with the funds available to the Governor potential emergencies. In this case, a longer to respond to emergencies. As we discuss below, notification period would be warranted, such the Governor would only be authorized to augment as 30 or 45 days, to allow the Legislature to departmental budgets from the account by notifying conduct more oversight of the transfer and the Legislature when such allocations are made. its budgetary implications. For example, the Require Advanced Notification to Transfer Legislature could hold an oversight hearing Additional Funds Into DREOA. In some years, within this longer time frame. the Governor may need to exceed the amount of • Request Waiver of Notification Time Frame emergency funding budgeted in DREOA. In order in Urgent Circumstances. If the Governor to maintain this flexibility—while also ensuring the found it necessary to transfer funds to Legislature is involved in spending decisions that respond urgently to protect lives or property, could impact the overall structure of the state a process could be established to allow the budget—we recommend that the Legislature Governor to request a waiver to shorten the require advanced notification before additional time frame specified for advanced notification. funds can be transferred into DREOA, including For example, the administration could request when funds are deposited into DREOA using CESA JLBC to waive the 72 hour notification time authority. The notifications should be provided to frame mentioned above if there was sufficient JLBC, since most midyear budget changes and urgency, such as to address immediate current DREOA notifications go through JLBC. threats to people or property. If JLBC The amount of advanced notification and the approved a waiver of the time frame, the information provided to the Legislature could vary administration would be able to transfer the depending on different factors. For example, the funds immediately, or after a shortened time Legislature could: frame specified by JLBC. • Establish Shorter Notification Period Require Reporting on DREOA Allocations for Smaller Transfers Tied to Ongoing and Expenditures. In order to ensure that the Emergencies. Transfers below a specified Legislature has complete information on emergency dollar threshold that are tied to ongoing spending, we recommend the Legislature create emergencies and are accompanied by two different reporting requirements: details on how the funds would be spent • Notification of DREOA Allocations to could have a shorter notification time frame, Departments. We recommend the Legislature such as 72 hours. (The dollar threshold require DOF to notify JLBC at the time funds could be established in consultation with are allocated from DREOA to departments, the administration based on historical including the amount allocated to each emergency spending needs.) This is because department and details on how the funds will such transfers would have less significant be used. This would allow the Legislature budgetary implications. Moreover, the required to remain up to date on the administration’s details on how the funds would be spent www.lao.ca.gov 11 analysis full gutter 2021-22 BUDGET emergency response activities and exercise advanced notification to JLBC. For example, greater legislative oversight of them. the Legislature could make the $406 million • Monthly Reports on Planned and Actual the administration is proposing for augmenting Spending. We recommend requiring DOF COVID-19-related spending available through such to provide monthly emergency expenditure a control section. Under this approach, the amount reports. For each emergency-related activity, spent on COVID-19 could only be increased with an the monthly reports should show, at a amendment to the budget. minimum, all planned and actual emergency Modify Proposed Flexibility to spending by state entities, including Shift Budgeted Funds by Requiring expenditure of funds allocated from DREOA, federal funds, and private funds, as well as the Legislative Notification expenditure of funds budgeted for emergency The Legislature will want to evaluate the merits response or redirected within departmental of each individual COVID-19 budget proposal that budgets to respond to an emergency. This makes up the total $1.4 billion proposed, including information should include a description of the whether the proposal is justified, consistent with specific activities funded. This would provide legislative priorities, and reflects the level of the Legislature—and the public—with the resources needed for the appropriate department information necessary to conduct oversight to carry out the specific activity. For funding the of how the Governor spends funds during Legislature approves, we recommend providing emergencies. the administration flexibility to shift funds among the various proposed COVID-19-related activities. Consider Budget Control Section However, we recommend the Legislature modify Process for COVID-19-Related the first component of Control Section 11.91 to Augmentations require DOF to notify the Legislature when funds are transferred between items. This will facilitate In view of our recommended changes to the legislative oversight by allowing the Legislature to state’s overall emergency spending authorities, the be informed of changes to the planned use of the Legislature could consider approving the Governor’s funds before they are spent. proposed Control Section 11.92 to extend the use of DREOA for COVID-19-related activities Reject Proposed Flexibility to Spend through 2021-22, as it would be well positioned to Federal and Private Funds conduct oversight of COVID-19-related spending. However, given the unprecedented magnitude of We recommend rejecting the second component the COVID-19 pandemic and the broad scale of of Control Section 11.91 that would allow the the state’s emergency response, the Legislature administration to spend new federal or private may wish to have a greater level of involvement, funds without legislative approval or notification. specifically with regard to COVID-19-related This proposal represents a significant expansion spending. In this case, the Legislature could of already fairly broad authority and represents consider rejecting Control Section 11.92 an overreach of administrative authority. If the and instead create a different budget control Legislature rejects the Governor’s proposal, the section process specific for COVID-19-related administration would instead need to allocate augmentations. This process could be similar to these funds through Control Section 28, as is the the Control Section 36 process included in the state’s typical practice. While the administration’s 2019-20 Budget Act. If the Legislature were to proposal was intended to expedite the Control choose this option, the control section should Section 28 process, we find no need for this as (1) specify the total amount of funding available the Legislature can already expedite the process, for allocation and (2) the process for the Governor and has done so a number of times during the to notify the Legislature of planned allocations of pandemic. that funding to departments, such as by requiring 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET LAO PUBLICATIONS This report was prepared by Jessica Peters and Ann Hollingshead, and reviewed by Drew Soderborg and Anthony Simbol. 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. 13 LEGISLATIVE ANALYST’S OFFICE