Analysis of the 2004-05 Budget Bill Legislative Analyst's Office February 2004

Child Welfare Services

California's state-supervised, county-administered Child Welfare Services (CWS) program provides services to abused and neglected children, children in foster care, and their families. The CWS program provides (1) immediate social worker response to allegations of child abuse and neglect; (2) ongoing services to children and their families who have been identified as victims, or potential victims, of abuse and neglect; and (3) services to children in foster care who have been temporarily or permanently removed from their family because of abuse or neglect. The 2004-05 Governor's Budget proposes $2.1 billion from all funds and $610 million from the General Fund for CWS. This represents a decrease of 3 percent from the General Fund over current-year expenditures. This decrease is primarily due to a reduction in automation costs and declining emergency shelter and direct services costs.

Budget for Improving Children's Programs Should Reflect Legislative Priorities

The Governor's Budget proposes spending a total of $39 million ($4.6 million General Fund) on a variety of child welfare services and foster care program improvements. The majority of that funding is for continuing the Child Welfare Services (CWS) Redesign planning process including provision of technical assistance to counties as they complete the planning stages of the redesign and for upfront training for county personnel. The funds will not be used to provide additional or new services for children and families. We believe the funding request is premature and that the administration needs to provide more details to the Legislature about the specific goals of the CWS Redesign and the steps and funding needed to reach those goals. Accordingly, we recommend eliminating the proposed funding. (Reduce Item 5180-151-0001 by $558,000. Reduce Item 5180-151-0803 by $3,850,000. Reduce Item 5180-151-0890 by $14,343,000.)

Governor's Budget Provides $39 Million for Improving Children's Programs

Background. Over the last few years, California has undertaken three major efforts designed to improve the outcomes for children and families in the CWS program. The first effort was driven by the federal government when it established a performance-based review of the states to determine the success of their children's programs. States that failed the reviews were required to develop a Performance Improvement Plan (PIP). The second effort originated with the prior administration, which in the 2000-01 Budget Act obtained authority to establish the CWS Stakeholders group to review the current CWS system in California and make recommendations for restructuring the program (referred to as the CWS Redesign). The final effort is embodied in the Child Welfare System Improvement and Accountability Act (Chapter 678, Statutes of 2001 [AB 636, Steinberg]). This act called for the development of a county review process to identify strengths and weaknesses in local child welfare services programs and assist in sharing and implementing best practices. The Governor's Budget provides a total of $39 million in federal funds, state General Fund, county funds, and special funds to implement a variety of changes tied to these three efforts to improve child welfare services. Figure 1 provides details of the funding for the three separate projects.

Funding for the Child Welfare System Improvement and Accountability Act of 2001. With the enactment of Chapter 678 the Legislature declared that the State of California had failed in its obligation to protect and care for children removed from their homes and placed in the foster care system. As a way of addressing that failure, the Legislature required the development and implementation of an outcome-based system designed to evaluate county operations of child welfare services. The system includes Web-based reporting of county specific program outcomes, and requires counties to conduct self-assessments and to develop system improvement plans.

The Governor's budget proposes spending $9.5 million for improving data gathering for county self assessments, funding six reviewers for the required peer quality case reviews, and hiring 58 county coordinators for the county self assessments and system improvement plans. However, there is no funding dedicated to helping the counties implement any corrective actions that may be necessary as a result of the reviews.

Funding for Program Improvement Plan Requirements. Federal performance reviews of state child welfare services and foster care programs were conducted in California for the first time in the fall of 2002. California failed to meet any of the seven safety, permanency, and well-being outcomes measured by the federal government. The state also failed five of the seven "systemic factors" that measure the quality of services pro vided to children and families. As a result, the state was required to submit a PIP, with specific, measurable improvements that will be made under specific time frames. (For more detail on this issue see our discussion of California's performance in the 2003-04 Analysis of the Budget Bill.) Failure to achieve these improvements could result in federal penalties and reduced Title IV-E funding.

Specifically, the budget provides a total of $10.6 million for the federal PIP requirements. This includes $3 million to recruit minority foster parents, $6 million to backfill for social workers as they attend training, $1 million for improving data quality in CWS/Case Management System (CMS), and $500,000 for additional positions at the state level to handle the increased data activities.

Funding for CWS Redesign. The 2000-01 Budget Act appropriated $800,000 for the development of the Child Welfare Stakeholders' Group. These stakeholders were charged with reviewing the existing CWS program and providing recommendations for improvements. This process has come to be known as the CWS Redesign.

The prior administration spent three years on the redesign process intended to improve outcomes for children and families involved in the child welfare services program. The first year (2000-01) was set aside for studying the problems with the current program. The second year (2001-02) was designed to search for solutions and improvements. Finally, the third year (2002-03) was to be focused on developing a detailed implementation plan for the new, redesigned CWS program. Unfortunately, only the first two phases were completed during the three-year project. The final CWS Redesign report was released in September 2003. The report offers high-level concepts for improving the child welfare services program. It also notes that there currently are funding constraints which do not allow many of the concepts to be implemented and that state and federal law changes are necessary to implement many of the Redesign objectives.

The Governor's budget proposes allocating $19 million to counties to continue the planning process begun during the Child Welfare Stakeholders' Group and to provide upfront training.

Redesign Funding Should Be Eliminated

Redesign Proposal Lack Necessary Details. The Legislature appropriated $800,000 in the 2000-01 Budget Act to study the current child welfare services system with the expectation that detailed recommendations for improvements would be presented at the end of the study. It was anticipated that the final report would provide a detailed framework for improving the program. With this framework, the administration and the Legislature could then establish priorities and begin making improvements to child welfare services. However, as noted above, the final report provides only high level concepts for reforming CWS. In addition, the administration has failed to produce a detailed implementation plan that outlines the specific programmatic changes that will take place and their associated costs and outcomes. The administration proposes $19 million for planning, technical assistance, and training without sufficient detail as to what outcomes can be expected from this investment.

Analyst's Recommendation. In view of the above, we believe that the budget's funding request is premature, and we recommend that the $19 million budgeted for the CWS Redesign be eliminated. We also recommend that any future funding for the Redesign be contingent upon the administration presenting an implementation plan that identifies specific activities that will be implemented, their associated costs and the outcomes expected from those activities, and necessary legislation. This type of detailed plan would allow the Legislature to review an array of options designed to improve services. Such information would permit the Legislature to prioritize the program changes and select which improvements should be put into place and along what timeframe. Absent that type of detailed implementation plan, the Legislature does not have sufficient information to assess the value of the proposed restructuring of CWS.

We note that the majority of the funding for the Redesign is federal funding or from special state funds, therefore the General Fund savings resulting from this recommendation are relatively small ($558,000) in the overall context of the total expenditure for the Redesign. However, most of this funding could be redirected within the CWS program to fund other legislative priorities. Further, $7 million of the proposed amount is Temporary Assistance for Needy Families funding that has been redirected into Title XX. That funding can be redirected to the California Work Opportunity and Responsibility for Kids program and could possibly be used to offset some state General Fund expenditures.

Child Welfare Services/ Case Management System

Background

The CWS/CMS provides a statewide database, case management tools, and a reporting system for the state's CWS program. The system has been in operation for seven years and is maintained and operated by an independent contractor. The CWS/CMS system costs about $100 million annually to operate ($70 million for contractor costs and $30 million in other costs). 

Federal Government Provided Enhanced Funding. In 1993, the federal government offered enhanced funding to any state that agreed to develop a Statewide Automated Child Welfare Information System (SACWIS). A SACWIS system performs certain functions such as processing child abuse investigations and preparing foster care case plans. If a state chose to develop such a system, then the federal government provided "incentive funding" at 75 percent of total costs for the first three years of the project's development and then 50 percent for the subsequent years. If a state received incentive funding but is ultimately unable to meet the SACWIS requirements, the federal government requires that the state return the difference (25 percent) in funding. In 1994, the state received federal approval to develop CWS/CMS as California's SACWIS system.

CWS/CMS Does Not Meet SACWIS Requirements

In 1997, the state announced the completion of the CWS/CMS system when it became operational in all counties. The federal government, however, did not consider CWS/CMS complete because the system did not meet all the SACWIS requirements. Since 1999, the federal government has repeatedly raised concerns about the inability of the CWS/CMS system to meet SACWIS requirements. We discuss these federal concerns in more detail below.

Failure to Address Federal Procurement Requirements. In 1997, the federal government and the Departments of Finance and General Services directed the Health and Human Services Agency Data Center (HHSDC) to conduct a competitive procurement for a new contract to pay for the ongoing maintenance and operation activities of CWS/CMS. In 2000, the state began the competitive procurement. It was subsequently cancelled in 2002 because HHSDC was unable to address federal procurement requirements.

Inability to Implement All SACWIS Functions. In 1999, the federal government conducted a review of CWS/CMS and determined that the system did not meet the following SACWIS requirements: (1) adequate adoption case management, (2) an automated interface between CWS/CMS and the state's welfare and child support automation systems, (3) authorizations for service provider payments, and (4) foster care eligibility determinations. Of these requirements, the state has only begun addressing the adoption component.

Lack of Full Project Review. In 2001, the federal government directed the state to conduct a thorough project review of CWS/CMS. The scope of the review was to include (1) an audit of past and current CWS/CMS costs and expenditures, (2) an analysis of the state's procurement strategy for the new maintenance and operation contract, and (3) a review of CWS/CMS project roles and responsibilities. To date, the state has only completed the analysis of the procurement strategy.

Failure to Require Full CWS/CMS Usage. In 2002, the federal government conducted a review of the state and counties use of CWS/CMS. The review found that the state did not require counties to use all of the functions in the system despite the federal requirement that a state use all of the SACWIS functions. Current state policy allows each county some discretion in determining how much of the CWS/CMS system to use. For example, some counties use the CWS/CMS health and education data collection system whereas other counties do not use these functions. To meet SACWIS requirements, the state must require use of all CWS/CMS functions by all counties.

Failure to Transfer CWS/CWS Hardware to HHSDC. The CWS/CMS system operates at the contractor's data center in Boulder, Colorado. In June 2003, the federal government directed the state to transfer the CWS/CMS hardware to a state facility. The state has not started this effort.

Federal Government Reduces Funding

As a result of long-standing concerns, the federal government reduced funding for the maintenance and operation of the Child Welfare Services/Case Management System. As the administration does not recognize this drop in federal funds, the budget understates General Fund costs by $43 million for the current and budget years combined.

In June 2003, the federal government notified the state that it did not consider CWS/CMS a SACWIS compliant system for the reasons discussed above. As a result of this decision, the federal government, starting in July 2003, reduced its share of funding for CWS/CMS from roughly 50 percent to 30 percent. (The precise funding ratio is still being determined by the state and federal governments.) In addition, the federal government notified the state that it would not provide any federal funding for the current contract (which, again, is almost three-fourths of total system costs) after August 2005. We discuss the consequences of these funding reductions below.

Current-Year Deficiency About $23 Million. As summarized in Figure 2, the 2003-04 Budget Act estimates $56 million will be received in federal funding for CWS/CMS. This estimate is based roughly on (1) a 50 percent funding ratio and (2) an overall CWS/CMS cost of $111 million. Since the lower federal funding ratio began at the start of 2003-04, we estimate that the state share of cost for CWS/CMS will be about $78 million General Fund—$23 million more than what is estimated in the 2003-04 budget. (If the state took actions to reduce current-year expenditures, the state's share of costs would also decline. As of December 2003, the state had not reduced the CWS/CMS current-year activities.) The administration fails to account for this $23 million increase in projected costs in its spending plan.

Additional $20 Million Needed in Budget Year. The budget proposes $96 million for CWS/CMS ongoing maintenance and operation in 2004-05. This includes a $15 million reduction from estimated current-year expenditures due to the completion of one-time computer upgrades and contract reductions. The budget again assumes roughly a 50 percent federal funding ratio in 2004-05 ($49 million). Given that the current federal funding ratio is about 30 percent, we estimate the state's General Fund share of costs in the budget year will be about $67 million—$20 million more than what is proposed in the budget.

One-Time Repayment of $50 Million. Since the federal government has determined CWS/CMS to be a non-SACWIS system, the state will need to eventually repay the federal government for the incentive funding it received in the first three years of CWS/CMS development. According to the administration, this one-time repayment is about $50 million. In its June 2003 letter, the federal government indicates that the amount and payment time period are open to negotiation. The Governor's budget does not contain any funding to begin this repayment.

Additional Costs Beyond 2004-05. Beginning in August 2005, the federal government will no longer provide any funding for the state's current CWS/CMS contract. (The federal government will continue to provide its share of funds for the noncontract costs.) Consequently, the state will be financially responsible for all costs from the current contract until a new contract can be procured. Once a new contract is procured, the federal govern ment will share in the costs of the new contract. The federal share will depend on whether the state is SACWIS compliant. The administration estimates that it will complete the procurement for the new contract in 2008. Thus, we estimate the state will incur annual General Fund contract costs of about $75 million from 2005-06 to at least 2007-08.

Administration Should Consider Two Alternatives

The state has to make a choice about what to do with CWS/CMS. We believe there are two basic alternatives. One alternative is to make CWS/CMS compliant with SACWIS. The other alternative is to acknowledge that the system will not meet SACWIS requirements. Under either alternative, the state will need to procure a new contract in order to receive any federal funding. As of December 2003, the state had not conducted an analysis of the two alternatives. The administration has so far simply assumed that pursuing SACWIS compliance is advisable. Since the department has not prepared costs estimates for modifying CWS/CMS to meet SACWIS requirements, we are unable to recommend which of these two alternatives is the most cost-effective approach and would provide the most benefits to the state. We do, however, discuss below some of the general benefits and cost implications of each alternative.

Meeting Federal SACWIS Requirements. To meet SACWIS requirements, the state will need to implement a number of changes to the current CWS/CMS system. The federal government believes these SACWIS requirements offer significant program benefits to states' CWS programs. For example, if the state implemented the SACWIS foster care eligibility requirement, the state would be able to qualify children for foster care and Medi-Cal at the same time. The administration has not completed an analysis of the benefits from the SACWIS functions from the state's perspective. We do know, however, that the required changes to CWS/CMS would ultimately increase state costs by tens of millions of dollars. This alternative likely would also result in (1) restoration of increased federal funding and (2) avoidance of the one-time repayment of the incentive funding.

Non-SACWIS System. Alternatively, the state could declare CWS/CMS a non-SACWIS system. According to the federal government, the benefits of a non-SACWIS system are: (1) elimination of the need for SACWIS modifications, (2) more state control over changes and enhancements to the system, and (3) less federal review and oversight. A non-SACWIS system would allow the Legislature more discretion in setting the priorities for the CWS/CMS system. If the state chose to declare CWS/CMS a non-SACWIS system, the state would continue to receive a lower level of federal funding (30 percent). In addition, the state could face the one-time repayment costs for the incentive funding (about $50 million). 

Administration Should Report on Alternatives and Revise Proposal's Costs

The Legislature must make a decision on how to proceed with the Child Welfare Services/Case Management System (CWS/CMS) system. For this reason, we recommend the administration report at budget hearings on (1) the actions it can take to reduce the ongoing costs of the CWS/CMS system and (2) its analysis of the costs and benefits of the alternatives. In addition, we recommend that the administration provide a revised budget proposal that reflects the current federal funding ratio.

It is important that the Legislature set direction for the future of the CWS/CMS system. From a program standpoint, it is important to ensure that the system meets the needs it was intended to serve. From a budgetary standpoint, it is important to know current and future costs. For these reasons, we make recommendations below on how to best move forward with the system.

Address Increased Costs. For the current and budget years combined, the Governor's budget fails to account for a $43 million drop in federal funding (and corresponding increases in General Fund costs). The administration has existing authority in the current year to implement cost savings strategies to address $23 million of this amount. During budget hearings, we recommend that the administration report on any actions it has taken or could take to reduce CWS/CMS costs.

Require Administration to Analyze and Report on Alternatives. At this stage, the Legislature does not have the necessary information to make an informed decision. Yet, a choice needs to be made. Consequently, we recommend that the administration report at budget hearings on its analysis of the two alternatives, including each alternative's benefits and costs. The Legislature could then make an informed decision on the preferred alternative. The administration could then provide a revised budget proposal in its May Revision. The revised budget proposal should be consistent with the current federal funding ratio and include any costs to implement the proposed alternative.