Summary of LAO Findings and Recommendations on the 2010-11 Budget

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	Program	Budget Issue	LAO Finding Or Recommendation	Last Updated
Go Back	Governor's Recovery Act Inspector General	Proposed expenditures for the state's American Recovery and Reinvestment Act (ARRA) oversight, auditing, and reporting activities.	Recommend much smaller increase in proposed spending for Inspector General staff to help ensure that all 2010-11 ARRA oversight and reporting activities for the state are able to be paid from federal funds and that none have to be supported by the General Fund.	4-16-10

Detailed Narrative
This analysis of the administration’s proposed American Recovery and Reinvestment Act (ARRA) oversight and reporting spending covers activities included in four separate budget act items, including the Bureau of State Audits (BSA), the Department of Finance (DOF), the Governor's proposed State Inspector General, and the State Controller’s Office (SCO). Accordingly, this analysis is posted under each of these budget items on this Web site. *Background.* The federal stimulus act, ARRA, created unprecedented new requirements for state-level oversight and reporting of stimulus dollars provided to state entities. In May 2009, the U.S. Office of Management and Budget (OMB) represented that 0.5 percent of total ARRA funds would be made available to be spend for these state-level oversight and reporting duties, and the Legislature included Control Section 8.55 in the 2009-10 Budget Act to direct the spending of these federal dollars by BSA, the state’s ARRA coordinating task force, the Office of State Audits and Evaluation (OSAE) in DOF, the Office of the Chief Information Officer (OCIO), and the Governor’s ARRA Inspector General. Specifically, the 2009-10 budget authorized federal oversight spending in the amount of $1.6 million by BSA and $4.1 million to support activities by the other entities listed above. In a required report filed with the Legislature in January 2010, the administration described the difficulty in recovering the full amount of federal oversight funding promised by OMB, noting that available federal funds were likely to be only about 5 percent of the full 0.5 percent level described in May 2009. As allowed under Control Section 8.55, the administration requested from the Joint Legislative Budget Committee (JLBC) additional 2009-10 federal funds spending authority of $1.9 million for SCO’s proposed ARRA oversight and reporting activities, $1.1 million for the ARRA coordinating task force, and $1.1 million for the Governor’s ARRA Inspector General. Noting that spending at this rate in 2009-10 would exhaust federal ARRA oversight funds well before the end of 2010-11, the JLBC did not concur with the entire additional funding request for SCO (which was not authorized in the 2009-10 budget), $1 million of the $1.1 million request for the Inspector General, and $526,000 of the $1.1 million request for the ARRA coordinating task force. Accordingly, after these JLBC recommendations, ARRA oversight and reporting spending of no more than $6.5 million is authorized for these departments in 2009-10. Federal funds are expected to cover essentially all of this spending, consistent with the Legislature’s stated intent in the 2009-10 budget act. Subsequent to the JLBC’s response to the administration’s request, we understand that the administration continued to supplement the Inspector General’s limited resources with loaned staff from other departments. It is unclear to us how the use of these loaned staff is negatively affecting budgeted operations of other state departments. *Governor’s 2010-11 Proposal.* The Governor’s budget, as recently revised in April Finance Letters, proposes $9.4 million of ARRA oversight spending in 2010-11, a large increase over 2009-10 authorized levels. The proposed spending includes: *ARRA Task Force, State ARRA Web Site, and Other Activities.* $4.0 million for allocation by the ARRA coordinating task force, which includes $1.4 million for OCIO spending on the state’s required recovery.ca.gov Web site and $808,000 for OSAE assistance to departments receiving ARRA funds. *Governor’s ARRA Inspector General.* $3.4 million for the Governor’s ARRA Inspector General, including $2.8 million for her staff and $600,000 for contracted work of this office with OSAE. *State Controller’s Office.* $1.3 million for the State Controller’s Office to undertake required state and local agency audit work related to ARRA. *Bureau of State Audits.* $713,000 for ARRA workload of BSA through December 2010 only. (The administration has acknowledged since January that additional BSA spending would be required in 2010-11. Current estimates are that BSA’s 2010-11 ARRA workload will cost $1.2 million.) *Governor’s Proposal Needlessly Requires General Fund Expenditures.* Under the Governor’s proposal, total ARRA oversight and reporting spending in 2010-11 likely would exceed available federal resources by about $2 million to $3 million. This excess of spending would have to be paid from the General Fund. Because the Governor’s proposed ARRA oversight and reporting program exceeds federal requirements, this General Fund spending is unnecessary. Moreover, should the state budget all available federal ARRA oversight dollars now, no federal funding would be available later for (1) unexpected, critical ARRA auditing and compliance requirements for BSA and other departments in 2010-11 or (2) ARRA reporting requirements in 2011-12 and beyond (assuming the federal government allows use of federal funds for these requirements after the end of the federal government’s 2010-11 fiscal year). We strongly recommend, therefore, that the Legislature sharply reduce the Governor’s proposed ARRA oversight and reporting spending to well within the amount likely to be covered by available federal funds in 2010-11. *Recommended Reductions to ARRA Task Force Budget.* We recommend that the Governor’s proposed spending for the ARRA task force be reduced by $100,000 to reflect updated administration estimates of staffing costs. *Recommended Smaller Increase in Inspector General Staff Budget.* The Governor proposes a huge increase in the Inspector General’s budget: from $898,000 in 2009-10 (consisting of $649,000 for Inspector General staff and $249,000 for the office’s work with OSAE) to $3.4 million in 2010-11 (consisting of $2.8 million for staff and $600,000 for OSAE work). We recommend that the Inspector General’s OSAE budget be eliminated in 2010-11 and that the office’s staff budget be set at $800,000—a $151,000 increase over 2009-10. No statutory action is necessary to continue the work of the existing ARRA Inspector General’s office. Established by executive order—not through a codified statutory action of the Legislature—the office currently is housed for budgetary purposes in the Office of Planning and Research (OPR), which is proposed to be eliminated. We suggest that the Inspector General be housed in the Governor’s Office in 2010-11, which is appropriate, given that the Inspector General was created and appointed solely through gubernatorial action. (Should the Legislature wish to create a permanent non-ARRA Inspector General, as proposed in at least two bills introduced this year, that could be accomplished with a different statute and funding source than those proposed in the Governor's budget package.) *Recommend Adjustment to Reflect Full-Year BSA Spending.* As described above, the administration’s budget proposal included BSA spending only through December 2010. More recent estimates indicate that an additional $500,000 needs to be budgeted to cover BSA’s ARRA-related activities through the end of 2010-11. *Recommend Budgeting for an ARRA “Oversight Reserve.”* Under our recommendations, as described above, statewide ARRA oversight and reporting spending would be reduced below the Governor’s proposal by about $2.2 million to $7.2 million in 2010-11. This would leave about $300,000 of potentially available federal funding for other ARRA oversight and reporting activities in 2010-11 and beyond, to the extent permitted by the federal government. In effect, this would be a “reserve fund” for future ARRA oversight and reporting requirements. We recommend that the Legislature include provisional language in the DOF and BSA line items to authorize those entities to request from the JLBC the ability to spend all or a part of the reserve funds in 2010-11 if the funds (1) are certified by DOF as likely to be available from the federal government and (2) fulfill a mandatory ARRA oversight, auditing, or reporting need. With any request from DOF or BSA, DOF should be required to report to the Legislature the latest guidance on ARRA oversight and reporting requirements after 2010-11 and whether the federal government will permit the use of any funds unexpended in 2010-11 for those requirements.

Detailed Narrative

This analysis of the administration’s proposed American Recovery and Reinvestment Act (ARRA) oversight and reporting spending covers activities included in four separate budget act items, including the Bureau of State Audits (BSA), the Department of Finance (DOF), the Governor's proposed State Inspector General, and the State Controller’s Office (SCO). Accordingly, this analysis is posted under each of these budget items on this Web site.

Background. The federal stimulus act, ARRA, created unprecedented new requirements for state-level oversight and reporting of stimulus dollars provided to state entities. In May 2009, the U.S. Office of Management and Budget (OMB) represented that 0.5 percent of total ARRA funds would be made available to be spend for these state-level oversight and reporting duties, and the Legislature included Control Section 8.55 in the 2009-10 Budget Act to direct the spending of these federal dollars by BSA, the state’s ARRA coordinating task force, the Office of State Audits and Evaluation (OSAE) in DOF, the Office of the Chief Information Officer (OCIO), and the Governor’s ARRA Inspector General. Specifically, the 2009-10 budget authorized federal oversight spending in the amount of $1.6 million by BSA and $4.1 million to support activities by the other entities listed above.

In a required report filed with the Legislature in January 2010, the administration described the difficulty in recovering the full amount of federal oversight funding promised by OMB, noting that available federal funds were likely to be only about 5 percent of the full 0.5 percent level described in May 2009. As allowed under Control Section 8.55, the administration requested from the Joint Legislative Budget Committee (JLBC) additional 2009-10 federal funds spending authority of $1.9 million for SCO’s proposed ARRA oversight and reporting activities, $1.1 million for the ARRA coordinating task force, and $1.1 million for the Governor’s ARRA Inspector General. Noting that spending at this rate in 2009-10 would exhaust federal ARRA oversight funds well before the end of 2010-11, the JLBC did not concur with the entire additional funding request for SCO (which was not authorized in the 2009-10 budget), $1 million of the $1.1 million request for the Inspector General, and $526,000 of the $1.1 million request for the ARRA coordinating task force. Accordingly, after these JLBC recommendations, ARRA oversight and reporting spending of no more than $6.5 million is authorized for these departments in 2009-10. Federal funds are expected to cover essentially all of this spending, consistent with the Legislature’s stated intent in the 2009-10 budget act.

Subsequent to the JLBC’s response to the administration’s request, we understand that the administration continued to supplement the Inspector General’s limited resources with loaned staff from other departments. It is unclear to us how the use of these loaned staff is negatively affecting budgeted operations of other state departments.

Governor’s 2010-11 Proposal. The Governor’s budget, as recently revised in April Finance Letters, proposes $9.4 million of ARRA oversight spending in 2010-11, a large increase over 2009-10 authorized levels. The proposed spending includes:

ARRA Task Force, State ARRA Web Site, and Other Activities. $4.0 million for allocation by the ARRA coordinating task force, which includes $1.4 million for OCIO spending on the state’s required recovery.ca.gov Web site and $808,000 for OSAE assistance to departments receiving ARRA funds.
Governor’s ARRA Inspector General. $3.4 million for the Governor’s ARRA Inspector General, including $2.8 million for her staff and $600,000 for contracted work of this office with OSAE.
State Controller’s Office. $1.3 million for the State Controller’s Office to undertake required state and local agency audit work related to ARRA.
Bureau of State Audits. $713,000 for ARRA workload of BSA through December 2010 only. (The administration has acknowledged since January that additional BSA spending would be required in 2010-11. Current estimates are that BSA’s 2010-11 ARRA workload will cost $1.2 million.)

Governor’s Proposal Needlessly Requires General Fund Expenditures. Under the Governor’s proposal, total ARRA oversight and reporting spending in 2010-11 likely would exceed available federal resources by about $2 million to $3 million. This excess of spending would have to be paid from the General Fund. Because the Governor’s proposed ARRA oversight and reporting program exceeds federal requirements, this General Fund spending is unnecessary. Moreover, should the state budget all available federal ARRA oversight dollars now, no federal funding would be available later for (1) unexpected, critical ARRA auditing and compliance requirements for BSA and other departments in 2010-11 or (2) ARRA reporting requirements in 2011-12 and beyond (assuming the federal government allows use of federal funds for these requirements after the end of the federal government’s 2010-11 fiscal year). We strongly recommend, therefore, that the Legislature sharply reduce the Governor’s proposed ARRA oversight and reporting spending to well within the amount likely to be covered by available federal funds in 2010-11.

Recommended Reductions to ARRA Task Force Budget. We recommend that the Governor’s proposed spending for the ARRA task force be reduced by $100,000 to reflect updated administration estimates of staffing costs.

Recommended Smaller Increase in Inspector General Staff Budget. The Governor proposes a huge increase in the Inspector General’s budget: from $898,000 in 2009-10 (consisting of $649,000 for Inspector General staff and $249,000 for the office’s work with OSAE) to $3.4 million in 2010-11 (consisting of $2.8 million for staff and $600,000 for OSAE work). We recommend that the Inspector General’s OSAE budget be eliminated in 2010-11 and that the office’s staff budget be set at $800,000—a $151,000 increase over 2009-10. No statutory action is necessary to continue the work of the existing ARRA Inspector General’s office. Established by executive order—not through a codified statutory action of the Legislature—the office currently is housed for budgetary purposes in the Office of Planning and Research (OPR), which is proposed to be eliminated. We suggest that the Inspector General be housed in the Governor’s Office in 2010-11, which is appropriate, given that the Inspector General was created and appointed solely through gubernatorial action. (Should the Legislature wish to create a permanent non-ARRA Inspector General, as proposed in at least two bills introduced this year, that could be accomplished with a different statute and funding source than those proposed in the Governor's budget package.)

Recommend Adjustment to Reflect Full-Year BSA Spending. As described above, the administration’s budget proposal included BSA spending only through December 2010. More recent estimates indicate that an additional $500,000 needs to be budgeted to cover BSA’s ARRA-related activities through the end of 2010-11.

Recommend Budgeting for an ARRA “Oversight Reserve.” Under our recommendations, as described above, statewide ARRA oversight and reporting spending would be reduced below the Governor’s proposal by about $2.2 million to $7.2 million in 2010-11. This would leave about $300,000 of potentially available federal funding for other ARRA oversight and reporting activities in 2010-11 and beyond, to the extent permitted by the federal government. In effect, this would be a “reserve fund” for future ARRA oversight and reporting requirements. We recommend that the Legislature include provisional language in the DOF and BSA line items to authorize those entities to request from the JLBC the ability to spend all or a part of the reserve funds in 2010-11 if the funds (1) are certified by DOF as likely to be available from the federal government and (2) fulfill a mandatory ARRA oversight, auditing, or reporting need. With any request from DOF or BSA, DOF should be required to report to the Legislature the latest guidance on ARRA oversight and reporting requirements after 2010-11 and whether the federal government will permit the use of any funds unexpended in 2010-11 for those requirements.