LAO 2004-05 Budget Analysis: Perspectives and Issues

Analysis of the 2004-05 Budget Bill

Legislative Analyst's Office
February 2004

Mandates: Mounting Liabilities and Need for Reform

How Much Does the State Owe Local Agencies for Mandates? What Problems Should Mandate Reform Correct?

 

Summary

While the California Constitution requires the state to reimburse local governments for state mandates, over $2 billion of unpaid mandate claims have piled up at the State Controller's Office. The budget proposes to defer these current- and prior-year mandate bills to an unspecified future date.

In terms of mandate costs for 2004-05, the budget proposes to defer payment to local agencies for 82 mandates, repeal 29 mandates, and suspend local obligations to carry out 19 mandates. If this budget proposal is enacted, the state's outstanding mandate liabilities may exceed $2.7 billion by the end of 2004-05.

The administration's budget summary outlines ideas for changing the mandate system. While these ideas have merit, they do not go far enough to correct the structural problems inherent in the existing system. We identify six areas of concern that merit legislative consideration in any reform proposal:

  • Lack of payments undermines credibility of mandate requirement.
  • Little confidence in mandate determination process.
  • Claiming system invites problems.
  • Legislature needs better information.
  • Delays decrease legislative oversight.
  • Mandate determinations are stuck in the past. 

 Introduction

The California Constitution generally requires the state to reimburse local governments—cities, counties, K-14 educational agencies, and special districts—when it "mandates" a new program or higher level of service. This constitutional provision was approved by the state's voters in 1979, in recognition of local governments' reduced ability to raise tax revenues after Proposition 13.

Figure 1 illustrates the process specified in the Government Code for determining whether a state law or regulation imposes a mandate on local governments. If the Commission on State Mandates (CSM) finds a mandate, the Legislature traditionally has appropriated funding for: (1) newly identified mandates in an annual claims bill and (2) ongoing mandates in the annual budget bill. Because of the state's budget difficulties, however, the state has provided virtually no state resources for mandate reimbursement since 2002-03. Despite this lack of funding, local governments continue to be responsible for carrying out state laws and regulations that impose mandates.

Over the last two years, the budget conference and subcommittees have expressed significant concerns regarding the state's mounting liabilities and the mandate process in general. To address these concerns, the Assembly established a Special Committee on Mandates last summer. Since its establishment, this committee has reviewed over 40 mandates and begun consideration of changes in the mandate process.

Below, we discuss the state's mounting mandate liabilities, the administration's proposal for specific mandates, and the need for reforming the mandate determination and payment process.

How Much Does the State Owe?

As of November 1, 2003, the State Controller's Office (SCO) reported it had $1.5 billion in outstanding claims from local governments for mandated activities dating from 1990-91 through 2002-03. Since that date, we estimate that local agencies have submitted over $600 million in additional claims, bringing the amount of delinquent claims awaiting payment to more than $2.1 billion. About half of these claims are for educational mandates and their payment would "count" towards the Proposition 98 minimum-funding guarantee. Payment of the remaining mandate costs, in contrast, would require non-Proposition 98 General Fund resources.

The administration's proposed budget reflects the Legislature's intent (as expressed in Chapter 228, Statutes of 2003 [AB 1756, Committee on Budget]), that the 2004-05 budget not include funding for mandates. By the start of 2005-06, therefore, it is likely that the state's mandate backlog will exceed $2.7 billion. That is, the $2.1 billion owed in the current year, plus over $600 million for 2004-05. (Because new mandates are identified throughout the year and typically include several years of prior-year local government costs and local agencies may submit claims for an ongoing mandate's costs over a three-year period, estimating annual state mandate costs is subject to considerable uncertainties.)

Are the Claimed Amounts Valid? While the SCO typically performs a limited review of mandate claims as they are submitted and tallied, a sample of mandates also receives in-depth field audits after the Legislature appropriates funding for the mandates. Based on analyses done by this office, the Bureau of State Audits, and the SCO, it is likely that these future SCO field audits will determine that local agencies have overstated their mandate claims, possibly by as much as 25 percent overall. Even if SCO audits disallow a quarter of all mandate claims, however, the sum remaining by the end of the budget year (almost $2 billion) still would represent a significant fiscal challenge for the state—as well as a continued source of friction between state and local governments.

What Does the Administration Propose?

In its budget document and summary, the administration makes recommendations regarding individual mandates and the overall mandate determination and reimbursement system. Below, we discuss the administration's proposals for specific mandates, and the following section discusses the reform proposal.

Because it had difficulty with its new budget format, the administration informed us that the mandate display in the budget and the related provisions of the budget bill do not reflect the administration's intent. To correct these errors, the administration will propose changes to the budget bill in the spring.

To assist the Legislature in its review of the administration's intended mandate proposal, Figure 2 displays, by state department, the 29 mandates the administration proposes to repeal (that is, make optional) and the 19 mandates that the administration proposes to "suspend" during the budget year. (The shaded box provides information on mandate budget terminology.)

Mandate Budget Terminology

What Is Said

What It Means

How It Appears in the Budget Bill

“Repeal Mandate” or

“Make Mandate Optional”

State requirements to perform mandate are eliminated. Local agencies may choose to perform an activity or carry out a program, but are not reimbursed for these costs.

Repealed mandates typically are not listed in the budget bill. In the first year of repeal, however, a repealed mandate may be shown with a $0 appropriation.

“Suspend Mandate”

For the budget year only, local agency requirements to perform an activity or carry out a program are eliminated. Local agencies many implement the state mandate, but are not reimbursed for these costs.

Suspended mandates are listed in the budget bill with a $0 appropriation and provisions specifically identifying the measures as suspended.

“Defer Mandate”

Local agencies must carry out the state mandate. Funding will be provided in the future.

Deferred mandates usually are shown in the budget bill with a $1,000 appropriation. Any mandate that is not repealed, suspended, or fully funded, however, is considered “deferred”—regardless of how it is displayed in the budget bill.

With regards to the 82 remaining ongoing mandates, the administration proposes that local governments carry out these responsibilities in the budget year, but that local government reimbursement be deferred to an unknown future date. In the budget bill, deferred mandates are shown with a $1,000 appropriation. 

LAO Assessment of Mandate Proposals

Because the administration's proposal became available only shortly before the 2004-05 Budget: Perspective and Issues was complete, we had little time to review it. In most cases, however, our office has previously reviewed the mandates the administration proposes to suspend or repeal. Figure 2, therefore, specifies the LAO's recommendation regarding these mandates, as well as the publication in which a discussion of our recommendation can be found. In the few cases in which we have not recently reviewed a mandate, we will prepare a recommendation by the time of budget hearings. Finally, to assist the Legislature in its review of mandates the administration proposes to defer, Figure 2 lists those mandates we recommend the Legislature consider for suspension or repeal. 

Figure 2

Administration Proposals to
Repeal or Suspend Mandates

2004-05

Department/Mandate

Governor’s
Budget

LAO

Board of Corrections

 

Victims' Statements (Minors)

Repeal

Repeal—2003-04 Analysis, Page F-18a

California Coastal Commission

 

Local Coastal Plans

Suspend

Pending

Caltrans

 

Two Way Traffic Signals

Repeal

Repeal—2003-04 Analysis, Page F-18a

Conservation

 

Mineral Resource Policies

Suspend

Repeal—2003-04 Analysis, Page F-18a

Developmental Services

 

Guardianship/Conservatorship Filings

Repeal

Repeal—2003-04 Analysis, Page F-18a

Food and Agriculture

 

Animal Adoption

Repeal

Amend—
New Mandates,
December 2003

Forestry and Fire Protection

 

Very High Fire Hazard Severity Zones

Suspend

Pending

Franchise Tax Board

 

Substandard Housing

Suspend

Repeal—2003-04 Analysis, Page F-18a

Health Services

 

Inmate AIDS Testing

Suspend

Pending

Sudden Infant Death Syndrome (SIDS)
Autopsies

Suspend

Pending

SIDS Training for Firefighters

Suspend

Pending

SIDS Contacts by Local Health Officers

Repeal

Pending

SIDS Notices

Repeal

Pending

Industrial Relations

 

Structural and Wildland Firefighter Safety Clothing and Equipment

Suspend

Repeal—2003-04 Analysis, Page F-18a

Personal Alarm Devices

Repeal

Repeal—2003-04 Analysis, Page F-18a

Justice

 

Stolen Vehicle Notification

Suspend

Pending

Sex Offenders: Disclosure by Law
Enforcement Officers-Megan's Law

Suspend

Request  revision—New Mandates,
December 2003

Misdemeanors: Booking and Fingerprinting

Repeal

Pending

Local Government Financing

 

Domestic Violence Information

Repeal

Repeal—2003-04 Analysis, Page F-18a

Filipino Employee Surveys

Repeal

Repeal—2003-04 Analysis, Page F-18a

Involuntary Lien Notices

Repeal

Repeal—2003-04 Analysis, Page F-18a

Lis Pendens

Repeal

Repeal—2003-04 Analysis, Page F-18a

Proration of Fines and Court Audits

Repeal

Repeal—2003-04 Analysis, Page F-18a

Mental Health

 

Residential Care Services

Repeal

Repeal—2003-04 Analysis, Page F-18a

Short-Doyle Audits

Repeal

Repeal—2003-04 Analysis, Page F-18a

Short-Doyle Case Management

Repeal

Repeal—2003-04 Analysis, Page F-18a

Office of Emergency Services

 

Sex Crime Confidentiality

Suspend

Repeal—
New Mandates,
December 2003

CPR Pocket Masks

Repeal

Repeal—2003-04 Analysis, Page F-18a

Deaf Teletype Equipment

Repeal

Repeal—2003-04 Analysis, Page F-18a

POST

 

Law Enforcement Sexual Harassment Training

Repeal

Repeal—
New Mandates,
December 2003

Elder Abuse, Law Enforcement Training

Repeal

Repeal—
New Mandates,
December 2003

Secretary of State

 

Democratic Party Presidential Delegates

Repeal

Repeal—2003-04 Analysis, Page F-18a

Election Materials

Repeal

Repeal—2003-04 Analysis, Page F-18a

Handicapped Voter Access Information

Repeal

Repeal—2003-04 Analysis, Page F-18a

Local Elections Consolidation

Repeal

Repeal—2003-04 Analysis, Page F-18a

Voter Registration Roll Purge

Repeal

Repeal—2003-04 Analysis, Page F-18a

Social Services

 

Child Abuse Treatment Services
Authorization and Case Management

Suspend

Suspend
New Mandates
,
December 2003

State Treasurer's Office

 

Investment Reports

Suspend

Repeal—2000-01 Analysis, Page F‑110

County Treasury Oversight Committees

Suspend

Repeal—
New Mandates,
December 2003

Tax Relief

 

Property Tax-Family Transfers 

Repeal

Repeal—2003-04 Analysis, Page F-18a

Senior Citizens' Mobile Home Property
Tax Deferral

Repeal

Repeal—2003-04 Analysis, Page F-18a

Victims Compensation and Government Claims Board

Adult Felony Restitution

Repeal

Repeal—2003-04 Analysis, Page F-18a

Youth Authority

 

Extended Commitment, Youth Authority

Suspend

Request revision—
New Mandates,
December 2003

Education

 

Investment Reports

Suspend

Repeal—2000-01 Analysis, Page F-110

School Bus Safety I and II

Suspend

Pending

School Crimes Reporting II

Suspend

Pending

County Treasury Oversight Committees

Suspend

Repeal—
New Mandates,
December 2003

Law Enforcement Sexual Harassment Training

Repeal

Repeal—
New Mandates,
December 2003

Additional LAO Recommendations for Noneducation Mandates

Housing and Community Development

 

Regional Housing Needs Assessment

Defer

Repeal—2004-05 Analysis, Page

Local Government Financing

 

Brown Act Reform

Defer

Repeal—
New Mandates,
December 2003

Health Benefits for Survivors of Peace
Officers and Firefighters

Defer

Repeal—
New Mandates,
December 2003

Photographic Record of Evidence

Defer

Request revision—
New Mandates,
December 2003

Mental Health

 

Services to Handicapped Students

Defer

Amend—2002-03 Analysis, Page C‑159

State Personnel Board

 

Peace Officer Procedural Bill of Rights

Defer

Suspend—2002-03 Analysis, Page F-56

a  Included in discussion of long-suspended mandates.

Need for reform

In the administration's budget summary, it outlines concepts for modifying shortcomings within the mandate system. For example, the administration proposes establishing a requirement that local agencies use the "least costly approach" when complying with state requirements. (For more information on the administration's proposal, see nearby box.) In general, we think the administration's ideas have merit, but do not go deep enough to correct the structural problems within the system. Below, we discuss our major concerns with the mandate system, summarized in Figure 3, and identify key elements of needed reform.

Figure 3

Mandate System Problems Meriting Legislative Attention

 

Lack of Payments Undermines Credibility of Mandate Requirement

Little Confidence in Mandate Determination Process

Claiming System Invites Problems

Legislature Needs Better Information

Delays Decrease Legislative Oversight

Mandate Determinations Are Stuck in the Past

 

Governor's Proposed Changes to Reimbursement Process

In the Governor's budget summary, the administration expresses its intent to reform the process for reimbursing local agency mandate costs. Specifically, the administration indicates that existing law "has created a confusing, expensive process that is not resulting in either the expected reimbursement for local agencies nor informed fiscal choices for the Legislature and the administration."

The budget proposes several changes to the reimbursement process, including:

  • Legislation that would allow the Legislature to limit mandate costs through the annual budget act.
  • Revising the Commission on State Mandates procedures so that the Legislature approves reimbursement guidelines and cost estimates earlier in the process.
  • Limiting mandate reimbursement to the "least costly approach," rather than actual costs of complying.
  • Increasing audits of mandate claims.

Lack of Payments Undermines Credibility of Mandate Requirement

The provisions in the California Constitution requiring mandate reimbursements serve two important public policy objectives, they:

Neither of these objectives is realized, however, if the state continually delays payment of its mandate bills as it has since 2002-03. Ultimately, any substantive reform of the mandate system must address this central question of state and local responsibility and authority. If the system is to be credible and fulfill its intended purposes, the mandate system should ensure that the state reimburses local governments on a timely basis—or that local agencies have authority to discontinue implementation of mandates.

Little Confidence in Mandate Determination Process

For the mandate system to function well, all parties—local agencies, the Legislature, the administration, and the public—should have reasonable confidence that the process for determining which state requirements constitute a mandate is fair and accurate. Under the current system, local agencies question the impartiality of the decision-making process, and state viewpoints often are not well represented. Comprehensive reform should address these concerns

Local Agencies Perceive Bias. While CSM members and staff strive to avoid giving preferential treatment in their proceedings, local agencies inherently worry about the impartiality of commission decisions. Specifically, four of the seven commissioners represent state-elected officials or their appointees. The remaining three commission positions (two representing local agencies and one representing the public) are appointed by the Governor, but these positions frequently are left unfilled. In addition, local agency and public commissioners, unlike their state counterparts, cannot send alternates to hearings when they have scheduling conflicts. Thus, mandate decisions frequently are made by a commission dominated by state representatives.

State's Interests Not Well Represented. Because the commission functions like a court, each party must submit detailed reviews and legal analyses supporting its arguments. Local agencies, aided by mandate consultants, typically document their positions well. For many reasons, including workload constraints and a failure to perceive a direct fiscal interest in the outcome of the process, state agencies seldom play a very active role during the mandate process. In its audit of the School Bus Safety II mandate, for example, the Bureau of State Audits noted that neither the Department of Finance nor the California Department of Education provided input regarding the reimbursement guidelines for the school bus mandate, the statewide cost estimate for which later totaled $290 million. Similarly, in our December 2003 review of recently identified mandates, New Mandates: Analysis of Measures Requiring Reimbursement, we recommend the Legislature request the commission reconsider its decision making regarding six mandates. In many cases, the need for this review is at least partially attributable to state agencies' failure to provide important information during the mandate determination process.

Claiming System Invites Problems

As we have discussed in previous analyses, there is extraordinary variation among local agency mandate claims. For example:

When individual mandates are reviewed by this office, the SCO, or Bureau of State Audits, each office finds significant costs that appear inconsistent with the underlying mandate. These claiming anomalies undermine the credibility of local claims and, in the Governor's budget summary, are cited as a reason for delaying payment of state mandates. As we discuss below, chief among the reforms we think necessary is a revised approach to the methodology used to reimburse local agencies.

Current Methodology Lacks Specificity. For most mandates, the CSM adopts open-ended mandate reimbursement methodologies, usually drafted in terms that parallel the legal findings in the mandate's Statement of Decision. Essentially, a local agency's mandate claim is its estimate of costs incurred in carrying out certain broadly defined activities. While the commission's intent in approving this type of reimbursement methodology is to ensure that all of the state's very different local agencies may claim their mandated costs, the open-ended nature of this approach lends itself to problems. This reimbursement methodology also is difficult for the SCO to review without an on-site audit.

Different Approach Needed. Nothing in the State Constitution specifies that California must use this open-ended methodology for mandate reimbursements. In our view, a better way to reimburse most mandates would be to study a sample of local agencies and develop unit costs for local agencies to use in their mandate claims.

Legislature Needs Better Information

Although state agencies impose some mandates through regulations, the Legislature enacts most mandates in legislation. The Legislature also is responsible for appropriating funds to reimburse mandate claims. Despite the centrality of the Legislature in the mandate process, the existing system gives the Legislature very limited assistance with which to carry out these responsibilities.

As legislation is developed, for example, Members of the Legislature frequently seek ways of encouraging certain local agency actions without imposing a mandate. In addition, to prepare bill analyses for fiscal committees, legislative staff seek information regarding the potential costs for California's thousands of local governments to implement certain activities. Because of their role as a quasi-judicial agency, CSM staff and commissioners indicate that it is inappropriate for them to comment on specific legislation. Thus, the Legislature frequently does not receive the information it needs.

When reviewing bills with potential local impacts, the Legislature should consider how better to obtain the timely information and assistance it needs regarding mandates and their costs.

Delays Decrease Legislative Oversight

The Government Code specifies timelines for the mandate review process, generally requiring the commission to complete its work reviewing and estimating the cost for a new mandate within one year. Given the highly legalistic manner in which mandate determinations are made, and staffing levels at the CSM and the Department of Finance (the state's representative in mandate proceedings), the statutory deadlines are virtually never met. Instead, under the current process the commission indicates that it takes seven years for it to complete its work on a typical mandate. In addition to compromising the credibility of the mandate system, these lengthy delays reduce the Legislature's ability to provide oversight on mandated programs.

Costs Escalate Before Legislature Gets to Act. During the time that a mandate is under review by the CSM, local governments must carry out the mandated responsibilities without reimbursement. When the CSM's work is complete, accumulated local government costs for the mandate—for the period the mandate was under review—are reported to the Legislature for reimbursement in a claims bill. Should the Legislature determine it wishes to eliminate the mandate, its action would apply prospectively only. That is, the state still would be "on the hook" for local government mandated costs during the seven-year review period.

Information Comes Long After Measure Enacted. Because local agencies have a three year statute of limitations for filing new claims and CSM processing takes seven years, the Legislature may not learn about the costs of a new mandate until seven to ten years after the legislation was enacted. By this time, the Member of the Legislature who carried the legislation may no longer be in office and the reasons prompting the legislation may no longer be readily apparent. The lengthy mandate review process, therefore, complicates the Legislature's ability to review a mandate's costs and benefits.

In our view, developing a system that completes its work in a timely fashion so that the Legislature can provide oversight on mandate program costs should be a high priority in any mandate reform legislation.

Mandate Determinations Get Stuck in the Past

While Legislative Counsel has opined that the Legislature has authority to request the commission reconsider earlier decisions, there is currently no administrative process to carryout this review. As a result, when federal law, court rulings, or other matters change the framework under which a previously determined mandate was considered, state and local agencies have no process to request a reconsideration of a mandate decision. For instance, as we discuss in the "Education" chapter of the Analysis of the 2004-05 Budget Bill, there is no process for reconsidering the standardized testing and reporting mandate in light of the expanded federal testing requirements under the No Child Left Behind Act.

In our view, to promote state and local agency confidence in the mandate reimbursement system, mandate reform should include a process for updating mandate decisions to reflect modern legal opinions, federal law, and other factors.

Conclusion  

In theory, the mandate provisions in the California Constitution serve an important role in our governance process, protecting local governments from state-imposed increased costs and ensuring that the state considers local government costs as it deliberates the imposition of new local requirements.

In practice, however, California's system for determining and reimbursing mandates has many shortcomings, most notably a failure to ensure that local governments receive reimbursements on a timely basis. In our view, the mandate system needs substantial reform so that it can fulfill its purpose and generate mandate determinations and reimbursement claims in which state and local government has confidence. Figure 4 summarizes the key elements that we consider critical to any successful reform proposal.

Figure 4

Key Elements of Mandate Reform

 

The Legislature should have access to mandate cost and other information during the legislative process. State agencies also should have assistance during the development of regulations.

The body charged with making mandate determinations should be reconstituted so that all parties view it as objective.

State agencies should actively participate in the mandate determination process, ensuring that state views and interests are documented and presented.

Local governments should have some recourse to reduce their fiscal liabilities if the state does not fund mandates.

The mandate determination process should be timely, with the Legislature learning of new mandates and their costs before or shortly after the mandate is established.

The mandate claiming process should be simple, credible, timely, and easy to audit. Whenever possible, claims should reflect unit cost methodologies rather than open ended claiming.

Mandate determination and claiming procedures should be updated as needed to reflect modern conditions, laws, and court rulings.

While reforming the mandate system will not be easy, we note that it involves somewhat fewer complicating factors than many other program areas needing reform. Specifically, the existing constitutional provisions regarding mandates are broad: the California Constitution requires only that local governments be reimbursed for mandates. All other elements of the mandate system are in statute and amenable to change. In addition, the current mandate determination and reimbursement systems involve relatively few state and local employees. Finally, because concerns relating to state-local mandates are evident throughout the United States, other states have mandates reimbursement programs that the Legislature could review for suitability in California. 


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