The Department of General Services (DGS) is responsible for (1) providing a broad range of support services to operating departments and (2) performing management and oversight activities related to these support services. It provides these services primarily through two programs: statewide support and property management services.
The Governor's Budget proposes expenditures of $524 million from various funds ($11.2 million from the General Fund) to support the activities of the DGS in 1996-97. This reflects a net decrease of $15 million, or 2.8 percent, below estimated current-year expenditures. Approximately three-quarters of the department's funding is appropriated in other departments, and paid to the department for various services, primarily through the Service and Architectural Revolving Funds.
Statewide Support Services.Expenditures for statewide support services are $350 million in the budget year, representing an increase of $19 million, or 5.7 percent, above estimated current-year expenditures. This increase is based primarily on additional demand for printing services and the replacement of printing equipment ($9.7 million), increased material purchases to meet orders placed by customer departments ($5.1 million), and the continued replacement of microwave communications equipment ($2.2 million). The remainder of the proposed increase is for the increased cost of operating vehicles maintained by the department for state employee use, expansion of the State Records Center to accommodate an increase in documents sent by state agencies for storage, and continuation of the State Payphone Management Program.
Property Management Services.Proposed budget-year expenditures for property management services are $171 million, which is $34 million, or 18 percent less than current-year levels. The decrease is mainly due to one-time expenditures of $36 million in the current year for the local public buildings' portion of the 1990 earthquake safety bond funds. Other major changes include (1) an increase of $900,000 to address deferred maintenance needs in state office buildings, (2) a $500,000 increase to renovate state buildings for compliance with the American with Disabilities Act standards, and (3) a $600,000 increase to study the disposition and/or development of unused or underutilized state properties.
Background.In our Analysis of the 1993-94 Budget Bill, we reviewed the performance of the department in carrying out its responsibilities, and concluded that performance was seriously inadequate in many areas. We recommended a fundamental rethinking of how the department provides support services to other state agencies, including an end to its monopolies and the introduction of competition to determine who should provide services to state agencies. The department agreed that there was a need for fundamental change.
Performance Budgeting. The department has indicated that a key part of its efforts to improve its services is its participation in the Governor's performance budgeting pilot program (it is one of four pilot departments). The department has invested substantial resources in performance budgeting. However, it is not clear that performance budgeting will in and of itself cause major improvements in departmental performance. This does not mean that the department has not realized benefits from its participation in the pilot project, or that it has not made progress in improving performance as the result of some other initiatives. (We discuss the state's performance budgeting pilot project in the Crosscutting Issues section of this chapter.)
Reform Initiatives Yield Mixed Results.The DGS cites as examples of improved performance several initiatives it has undertaken, including procurement reform, its seismic retrofitting of state-owned buildings, an assessment of the state's telephone network (CALNET), state office consolidation projects, and the California Multiple Awards Schedule (CMAS), which facilitates state agencies' acquisition of information technology equipment and services.
We believe that a number of the department's initiatives have resulted in improvements which have benefited its customers. The CAL-CARD, which allows agencies to make small purchases by credit card, is one such example. Others, such as procurement reform, remain untested in terms of improved performance or net benefits to customers.
On the whole, we believe that departmental performance has improved in some areas during the last three years, but major changes that reflect a fundamental rethinking of the department's role in providing services to state agencies has not yet been achieved because departmental efforts to make substantial changes are still in process (see our following discussion on telecommunications, for example). Nevertheless, we continue to believe that departmental executive management is committed to making the major changes which are essential to its customer departments in an era of cost-cutting efforts and demand for quality service at competitive prices.
It is not clear whether executive management reform efforts will be as successful as desired. In part, this is because it is difficult to transform the culture of a department which provides goods and services that other state agencies have been forcedto use into a customer-oriented culture which must compete for work. In the following discussion, we cite two examples of the challenges and opportunities facing the department in improving its performance.
We recommend the adoption of supplemental report language directing the Department of General Services to maintain the annual statewide telecommunications plan required by statute, and include in that plan specific annual objectives for improving the state's application of telecommunications technologies. We further recommend that the Legislature direct the department to assure implementation of the plan by coordinating closely with the Departments of Information Technology and Finance, and by monitoring state agency uses of telecommunications.
The DGS's Responsibilities.The department's Telecommunications Division is responsible for statewide telecommunications. This responsibility includes developing policies and plans for telecommunications, preparing an annual strategic telecommunications plan, and providing management oversight of statewide telecommunications systems developments. The department is also required to report annually to the Legislature on its actions to reduce costs and to plan and advocate the most advantageous use of telecommunications technology in state government.
Based on our review, we conclude that the department's performance of its telecommunications responsibilities has been inconsistent--successful in some applications but unsatisfactory in others. In this regard, ultimate success may require close coordination among the DGS, the Department of Finance (DOF), and the new Department of Information Technology, because of their statewide fiscal and information technology oversight roles. We discuss below our assessment of the department's performance in the area of telecommunications.
Strategic Plan Has Not Been Maintained.The department has not maintained an annual strategic plan for telecommunications. The last annual strategic plan report to the Legislature was in March 1992. Consequently, the department has been operating for four years without an updated strategic plan. At the same time, the state has expended millions of dollars on various telecommunications applications, some of which have not fulfilled their objectives, while others have either not been monitored adequately or pursued fully.
The department released on February 5, 1996, a consultant's report containing initial findings regarding alternative strategic telecommunications directions for the state. According to the department, the consultant's report will be used to update the strategic telecommunications plan. At the time this Analysiswas prepared, it was not clear whether the updated plan would reflect the consultant's recommended strategic direction, or some other alternative. Given the growing dependence on telecommunications systems to carry out state programs, it is important that the state have an up-to-date strategic telecommunications plan, and that it be maintained on an annual basis as required by statute. Moreover, to allow the Legislature to evaluate the department's performance, the plan should include specific annual objectives for increasing the cost-effectiveness of state operations through the use of telecommunications.
Analyst's Recommendation.To ensure that the Legislature is informed of the department's performance, we recommend the following supplemental report language:
The Department of General Services shall fulfill its statewide telecommunications oversight responsibilities by maintaining the annual strategic telecommunications plan required by state law, and include in that plan specific annual objectives for improving the state's application of telecommunications technologies to make government more cost-effective. The department shall coordinate closely with the Departments of Information Technology and Finance to ensure implementation of the annual plan, and shall monitor state agency uses of telecommunications to ensure that the uses are consistent with the annual plan.
We recommend that the Legislature adopt supplemental report language requiring that the Department of General Services' strategic plan for telecommunications identify specific long-term goals, policies, procedures, and annual objectives for improving statewide benefits obtainable from (1) CALNET, (2) the capital area fiber optic cable loop, (3) state telephone usage, (4) telecommuting, (5) videoconferencing, (6) telemedicine, (7) facsimile transmission, and (8) electronic commerce.
We discuss below several telecommunications activities in which the department is either playing a lead role or otherwise has a statewide responsibility. While we believe that the department should get good marks for taking the lead in certain of these activities, we find that in many instances the opportunities for increasing the cost-effectiveness of state operations through various telecommunications applications have not been sufficiently pursued. In other instances, the department has not effectively fulfilled its statewide telecommunications oversight responsibilities.
CALNET.This is a statewide voice and data system estimated to cost $100 million when fully implemented. In last year's Analysis, we noted that CALNET was not breaking even and that the private contractor hired to install the system had failed to complete a key task, the delivery of a Network Management System. We noted that CALNET's viability was in question because it was losing business to outside competitors as state agencies determined that they could obtain better prices or services elsewhere. Since then, the department has amended the contract with the contractor, eliminating certain requirements the contractor was unable to meet and adjusting the value of the contract accordingly. This may reduce the amount the department pays the contractor, but the state is left with a system where state agencies continue to take their business elsewhere because they do not find CALNET to be a cost-effective service.
Downtown Fiber Optic Cable Loop Underutilized.In 1989, the department installed, at a cost of $883,000, a fiber optic cable loop in the Capital Area for the purpose of providing a communications link among downtown Sacramento state offices. (Fiber optic cable consists of bundled strands of glass threads which can carry, via light, voice, data, and video transmissions.) The department intended that the loop be a part of the CALNET system; however, the contractor winning the CALNET bid chose not to use the loop. Since then, a handful of state agencies are using the loop, and their payments for use of it are only enough to reimburse the department for its annual maintenance costs--$18,000--and not enough to pay off the original investment. Instead, according to the department, the installation expense is being recovered over a ten-year period by spreading the cost across the entire Telephone and Network Services Program.
State Telephone Usage: Susceptible to Abuse and Poorly Monitored.The DGS spent $1.6 million on telephone company services in 1994-95, including $200,000 for cellular phone charges. It advises that it monitors employee telephone usage on a decentralized basis by distributing telephone billing detail to the various operating units throughout the department. The bills are then scanned manually in an effort to determine any misuse, and employees who are found to have misused telephones are required to reimburse the department. Although this method is better than no monitoring, distributing responsibility widely does not ensure that all monitoring will be adequate.
Our review indicates that the department should explore methods of computer-based monitoring, using billing information which can be obtained from the telephone companies. Any improvements the department makes in reviewing telephone usage could be applied on a statewide basis.
Cellular Phones Especially Vulnerable.The department was unable to advise us as to how much the state spends on telephone usage, or how many cellular phones were in use by state agencies, despite the statutory requirement that the department oversee statewide uses of telecommunications. Recently published accounts of the misuse of cellular telephones in Los Angeles (both city and county governments) highlight the kinds of potential problems associated with providing cellular phones to employees for official business use. The problems cited in Los Angeles include the electronic theft of cellular phone numbers resulting in large charges which were billed to the public agency, charges for phones which were supposed to have been disconnected, and extremely high monthly charges for some individual employees--none of which were adequately monitored by the city or county, according to the reports. Add to these abuses the more typical employee misuse of an employer's telephone for extraordinary personal purposes, such as conducting a business, and it is apparent that the telephone is very susceptible to misuse. Therefore, its use needs to be monitored effectively.
Telecommuting Planning Lags.Telecommuting--where employees work part of the time from their home or a remote facility using telecommunication equipment--offers numerous potential benefits. These include cost savings (resulting from reduced office expenses), environmental improvement (fewer vehicles on the road), and increased worker productivity (because a telecommuter is subject to fewer interruptions).
Recognizing these benefits, the Legislature first authorized an experimental telecommuting program, under the direction of the DGS. And in 1994, the Legislature established the State Employee Telecommuting Program (Ch 1209/94 [AB 2672, Cortese]), encouraging state agencies to adopt policies that facilitate telecommuting by state employees. The legislation also required every state agency to develop and implement, by July 1, 1995, a telecommuting plan where it was determined that telecommuting was practical and beneficial to the agency.
According to a March 1995 survey from the department's Telecommuting Advisory Group, there are many agencies without formal telecommuting policies. On the other hand, the survey pointed out the need for the state agencies in which an estimated 3,200 employees already telecommute to collectively demonstrate the costs and benefits which have been experienced. We concur and recommend that the administration ensure that a cost-benefit analysis is completed soon.
We suggest that this be an administration responsibility, because recent legislation (Ch 980/95 [AB 1671, Katz]) appropriates $82,000 to the Department of Personal Administration (DPA) to develop and administer a statewide telecommunications program. The status of the DGS-administered telecommuting program is unclear, as Chapter 980 did not specifically transfer responsibility for this program from the DGS to the DPA. Given this situation, the administration should direct the appropriate agency, or agencies, to develop the cost-benefit analysis of telecommuting.
Improving Employee Productivity Through Videoconferencing.Videoconferencing, a method of conducting televised meetings in lieu of long-distance travel, offers a significant reduction in travel costs. For that reason, many state agencies have acquired, through master contracts issued by the department, videoconferencing equipment and established videoconferencing centers. Through the use of these centers, for example, state employees in Sacramento can conduct a televised meeting with individuals gathered at a videoconferencing center in Los Angeles. According to the department, 22 state agencies have invested at least $5.3 million for equipment alone. Given the millions of dollars spent annually on employee transportation costs and related lodging and meals--and the lost productivity while traveling-- videoconferencing appears to offer a cost-effective alternative in many cases to travel.
Despite the obvious benefits, however, an October 1995 report on state videoconferencing provided by the DGS states that, " . . . usage levels for some agencies are minimal and there is some resistance to using the technology on a regular basis."
Telemedicine Needs a Shot in the Arm.One of the telecommunication technologies which has been receiving increasing attention nationally is that of telemedicine. This involves a physician examining a patient, making a medical diagnosis, and prescribing treatment through a video communications link. Telemedicine has obvious potential benefits for several state agencies. Given the cost of maintaining the state's growing and aging prison population, telemedicine offers opportunities for cost savings. For example, it would allow the California Department of Corrections (CDC) to diagnose and treat prisoners in remote state prisons. The CDC has indicated an interest in testing the use of this technology. As telemedicine has applicability in other state programs, such as state hospitals, the DGS is the appropriate state agency to guide and facilitate the use of this technology. We believe that the department can accomplish this without a significant impact on its resources by leveraging the expertise in telemedicine which resides in the University of California system.
Facsimile Transmission: Useful but Costly.Facsimile transmission, commonly referred to as FAX, has been a significant benefit to government agencies in getting information quickly from one point to another. At the same time, it is becoming an increasingly larger cost component of organizations' telephone bills.
While information is not available about the cost of FAX to state government, there is some information from the private sector. For example, a poll of Fortune 500 companies found that FAX charges accounted for 40 percent of the average company's 1994 phone bill, and that the number of FAX machines at each corporate location had increased an average of 42 percent over a one-year period.
Despite its statewide telecommunications responsibilities, the department has performed little, if any oversight of the state's use of FAX machines, other than acquiring them through its master purchase contracts. The department does not know how many FAX machines are installed in state agencies, or the rate of growth, or the annual cost of their operation, including telephone charges. Moreover, the department does not have published guidelines or policy regarding its own use of FAX machines.
Without guidelines, FAX machines will be used in instances where it would be less expensive to send the information by other means where time is not a critical factor (for example, the state messenger service which the department manages). Moreover, given the increasing number of state employees using desktop computers, and continuous advances in computer capabilities (including FAX), there may be opportunities to reduce document transmission costs using desktop computers in lieu of manually-operated FAX machines. Through improved oversight and published guidelines, the DGS can help ensure that state agencies make the most effective use of the various document transmission options.
Electronic Commerce: Stuck on the On-Ramp?In last year's Analysiswe reported on the department's efforts to apply the concept of "electronic commerce" to state purchasing activities in order to reduce the cost of transactions associated with procurement. Through electronic commerce, orders, invoices, payments, and related matters, are accomplished electronically using computers and communication networks. We noted that in an October 14, 1994 report, the DGS indicated that electronic commerce ". . . is worth doing and the state should strive for full implementation." We also noted, however, that the department believed there were several obstacles to further implementation, including the state's information technology coordination situation. Since then, the department has continued to explore the application of electronic commerce, including providing procurement-related information via the Internet and automating a portion of the purchasing process.
Given the potential savings possible through the use of electronic commerce in state government, we believe that the department needs to be more aggressive in fostering its application and can begin by setting an example through applying electronic commerce more fully to its own operations.
Conclusion.We conclude that the DGS can and should improve its oversight of telecommunications systems. Therefore, we recommend that the Legislature adopt the following supplemental report language:
The Department of General Services' annual strategic telecommunications plan shall identify specific long-term goals, policies, procedures, and annual objectives for improving statewide benefits obtainable from (1) CALNET, (2) the capital area fiber optic cable loop, (3) state telephone usage, (4) telecommuting, (5) videoconferencing, (6) telemedicine, (7) facsimile transmission, and (8) electronic commerce.
State Payphone Management Program Could Be Missing Revenue Opportunities
We withhold recommendation on $451,000 and three positions requested to continue and enhance the Payphone Management Program. Further, we recommend that the Departments of General Services and Corrections jointly report at the time of budget hearings as to how the state will maximize General Fund revenues from pay telephones located at state prisons, and how the use of consultants will help in this regard.
Program Has Been a Money-Maker.The Payphone Management Program is a good example of an area in which the state has received significant added revenues through contracts with private telephone companies to install and operate pay telephones in state facilities. Initiated in 1986-87, annual program revenue derived from the state's share of pay telephone usage has grown from $904,000 in 1986-87 to $12.6 million in 1994-95. Approximately 86 percent of the annual revenue is derived from pay telephones in CDC facilities. The DGS has managed the program since 1993-94, when it was provided two three-year limited-term positions. The department is now proposing to make the two positions permanent, establish an additional position for administrative and clerical support, and provide $287,000 for consultant services.
State May Not Be Maximizing Revenues.According to the DGS, the state receives 22 percent to 32 percent of noncoin pay telephone revenue and 44 percent of coin revenue. As noted in our review of the CDC in the Judiciary and Criminal Justice section of this Analysis, annual revenue from prison pay telephones could more than double if the state was able to obtain the higher fee-sharing arrangements that other states have obtained. Any additional revenue which may be obtainable from a more favorable fee-sharing arrangement has been deferred, however, because the DGS and the CDC recently agreed to extend the current contracts a second time, until August 1997, rather than allow them to expire in August 1996. We understand that the extension was made because the DGS and the CDC were unprepared to rebid the prison pay telephone contracts this year.
Value of Consultant Contracts Not Clear. In addition to our concern that the state might be missing an opportunity to increase pay telephone revenue substantially, it is not clear that the $287,000 requested by the DGS for consultant services for this program is necessary. Of this amount, $175,000 is proposed for marketing support to increase the installation of pay telephones in state agencies, and related services, so as to increase General Fund revenue from this program. Given the significant growth in revenues generated by this program over the past several years, and the interests and marketing resources of the companies holding state pay telephone contracts, it is not clear why the state needs to do any marketing of its own. Similarly, it is not clear why the state should expend up to an additional $112,000 for a consultant to evaluate proposed changes to Public Utilities Commission and Federal Communications Commission regulations.
In view of the above, we withhold recommendation on $451,000 requested for the Payphone Management Program and recommend that the DGS and CDC jointly report at the time of budget hearings as to how the state will maximize General Fund revenues from pay telephones located at state prisons, and how the use of consultants will help in this regard.
We recommend that the Legislature approve $2.2 million requested to continue the upgrade of the Public Safety Microwave Network, and adopt supplemental report language directing the Departments of General Services and Finance to not include this amount in the department's baseline budget beyond 1996-97.
Plan Prepared in Response to Legislature's Direction. The Public Safety Microwave Network (PSMN) is a statewide microwave system operated by the DGS since 1978 to meet the communications needs of all public safety agencies within the state. In last year's Analysis,we noted that the DGS had embarked on a plan to upgrade the system at an estimated cost of $90 million. This involved converting its equipment to digital technology in order to keep up with the needs of its customer agencies. We pointed out, however, that the department had not yet prepared a conversion plan. In addition, it was not clear what effect the system upgrade would have on the fees charged by the DGS to client agencies. For these reasons, the Legislature adopted supplemental report language requiring the department to develop a conversion plan.
The plan submitted on January 22, 1996 provides the Legislature with a much better understanding as to how the DGS intends to accomplish the conversion. On that basis, we recommend that the Legislature approve the $2.2 million requested to continue the upgrade of the PSMN. Because the request is for one-time equipment purchases, we further recommend that this amount not be built into the department budget in subsequent years. The following supplemental report language is consistent with this recommendation:
The Departments of General Services and Finance shall not increase the department's baseline budget $2.2 million for the purposes of replacing microwave equipment.
We withhold recommendation on $920,000 requested for increased vehicle operating and maintenance costs, pending information from the Department of General Services as to the status of its efforts to automate fleet operations, including establishing a vehicle reservation system, and other steps to improve service to its customers.
The proposed budget includes $920,000 for increased costs associated with the operation and maintenance of the state vehicle fleet maintained by the DGS. The bulk of this increase is to cover the rise in costs of labor and replacement parts. A lesser portion would cover a relatively minor increase in the amount set aside for insurance.
Most Employees Continue to Stand in Line and Wait.The DGS operates several state garages and maintains approximately 5,000 of the state's total fleet of around 12,000 passenger vehicles (the remainder are spread across many other agencies). In last year's Analysis,we cited numerous concerns with the manner in which the fleet was being managed, noting that most employees who needed to use a state passenger vehicle were unable to reserve one. Instead, employees must go to a state garage and personally request a vehicle, and wait if none are immediately available. Wait time can easily exceed a half hour when demand is high.
Employees who tire of waiting have the option of postponing travel, traveling to a private rental agency for a vehicle, or taking their own car if one is available. Although the department will try to arrange for a private rental car, private agencies often have no cars available, and even if cars are available, the employee will have to wait until a shuttle can transport the employee to the rental lot. Not all employees have to wait, however, as reservations are made for higher-level employees. This situation clearly does not represent a commitment to customers which is a hallmark of the department's performance budget effort. In addition, it results in lost productivity.
Promised Reservation System Has Not Materialized. In response to these concerns, the DGS stated during last year's hearings that it would be acquiring a computer-based system to manage the fleet, and that the system would include an automated reservation system. The department indicated that the system would be operational by the end of 1995. According to the DGS, the implementation of the system has been delayed due to difficulties experienced by the contractor hired to provide it. Moreover, the department indicates that it has no plans to provide an interim reservation system for employees.
Customer Service Needs to Be Improved.A state employee who has never checked out a vehicle from the Sacramento state garage, and who tries to do so at a time when many employees are trying to obtain a state vehicle, will find a tiny, crowded office with no clearly posted instructions as to how to obtain a vehicle. Once the employee finds the necessary form to request a vehicle, it must be brought to the attention of a DGS employee for processing.
While the request process and waiting area beg for improvement, a tour of the state garage itself reveals that much effort--and funds--have gone into the vehicle maintenance and repair area, including specialized equipment. This suggests that fleet management has an appreciation for the technical part of fleet management, which is essential, but has not assigned equal importance to meeting the needs of state employees who require state vehicles in order to perform their work.
When we have raised the issue of competing with the private sector to meet employee vehicle needs, the department has maintained that its rental rates are significantly lower, and that putting fleet operations out to bid would not be a meaningful exercise. On the other hand, private rental agencies tend to be more customer-oriented, offering not only the ability to reserve a vehicle in advance, but also the ability to drop it off at another location, something the department's fleet operation does not allow.
For these reasons, we withhold recommendation on $920,000 requested for increased vehicle operating and maintenance costs, pending the department's explanation as to the status of efforts to automate fleet operations, including establishing a vehicle reservation system, and what other steps it intends to take to improve service to its customers.
We recommend the enactment of legislation requiring that telephone service providers remit 911 telephone use surcharges within 15 days following the month in which the surcharges were collected.
Telephone Companies Earn Interest on Monies Owed the State. The budget proposes a temporary General Fund loan of $10.1 million to meet the cash flow requirements of the 911 program. The loan would be repaid in 1997-98. This is the fifth consecutive year in which a loan has been requested. The loan is necessary because the department does not have sufficient funds in the State Emergency Telephone Number Account (911 Account) to cover the monthly payments to agencies which operate the 911 system (primarily local agencies, except for the California Highway Patrol, which handles cellular calls).
The 911 Account is funded by a surcharge on telephone calls, which is collected by the telephone companies through their monthly billings to customers.
Under current law, the amounts collected by the telephone companies are required to be remitted to the state no later than the last day of the second month following the calendar quarter in which they were collected. In other words, surcharges collected for the months of January through March do not have to be remitted to the state until May 31. With statewide quarterly surcharges approximating $18 million, the telephone companies, rather than the 911 Account, are receiving the benefit of earned interest while they hold the surcharges, typically until the last possible date allowed under the law, according to the DGS. At the same time, the law provides that the statepay the telephone companies interest on overpayments the telephone companies might make in remitting surcharge funds to the state.
Current System Hinders Cash Flow.Not only does the current situation result in telephone companies earning interest on monies owed the state, it aggravates a recurring cash flow deficiency in the 911 Account which is being covered by repetitive General Fund loans. Diverting scarce General Fund resources to cover these deficiencies prevents those resources from being used for other pressing state needs. According to the DGS, it would not have to borrow any General Fund monies for the 911 Account if telephone companies were required to remit surcharge funds to the state 15 days following the month in which the surcharge was collected. For this reason, we recommend the enactment of legislation requiring that telephone service providers remit 911 telephone use surcharges within 15 days following the month in which the surcharges were collected.
We recommend that the Legislature approve $5.8 million requested to cover the increased demand for specific departmental services, and adopt supplemental report language directing the Departments of General Services and Finance to not make the increases a permanent adjustment to the Department of General Services' baseline budget beyond 1996-97.
The budget includes $5.8 million for proposed increases in the areas of procurement ($5.1 million) and equipment replacement ($677,000) to cover the cost of increased customer demand. The department has requested that the increases be made permanent adjustments to the baseline budget. Thus, the increase would be included in future budgets.
Permanent Adjustments May Not Be Warranted. The department has committed to allow state agencies to choose among many goods and services providers by 1999, rather than being forced to use DGS services. Thus, we do not see the need to make the requested baseline adjustments permanent. By moving from a monopoly operation to one which will depend on business through competition, it is possible that some current DGS services will be eliminated or modified substantially. Consequently, permanent baseline adjustments are in our opinion unwarranted at this time. For this reason, we recommend that the Legislature approve $5.8 million requested to cover the increased demand for specific departmental services, but adopt the following supplemental report language directing the DGS and the DOF to not make the increases a permanent adjustment to the DGS' baseline budget:
It is the intent of the Legislature that the Department of General Services' baseline budget not include an increase of $5.8 million for purposes of procurement and equipment replacement. Additional procurement and equipment replacement shall be justified in the annual budget process.
We withhold recommendation on $712,000 and one position to expand the holding space of the State Records Center and support its operation, pending a conceptual plan from the Department of General Services, developed in coordination with the Department of Information Technology, to reduce the amount of paper documents being sent to the center.
The State Records Center (SRC) is comprised of two facilities located in West Sacramento, with a combined total of 180,000 square feet. The purpose of the SRC is to provide low-cost storage for documents owned by various state agencies, as well as to dispose of those stored documents which no longer need to be retained. The budget proposes $712,000 to add 70,000 square feet to the one facility which is leased, and add an additional warehouse worker.
Why Increase Paper in the Electronic Age?According to the department's budget proposal, the DGS must expand the SRC to accommodate an estimated increase of 44 percent in the demand for records storage space over the next 5 years. The budget proposal also indicates, however, that the amount of records (in cubic feet) sent to the SRC on an annual basis has not grown with any regularity, and in fact many records were permanently removed several years ago when the Franchise Tax Board opened its own storage facility.
We believe the department should work with the recently-established Department of Information Technology (DOIT) to assess methods for reducingthe amount of paper generated through government operations. We think this is particularly warranted given the administration's emphasis on using information technology to make government more cost-effective, as well as the department's own emphasis on applying information technology in lieu of manual transactions. Consequently, we withhold recommendation on $712,000 and one position to expand the holding space of the SRC and support its operation, pending a conceptual plan from the DGS, developed in coordination with the DOIT, to reduce the amount of paper documents being sent to the center.
The Department of General Services is currently reassessing the Capitol Area Plan (CAP)--the state's master plan for development of state-owned land near the Capitol. The department should submit the proposed changes and revised CAP to the Legislature for review and approval during this years' budget process. We recommend that upon legislative approval of the CAP, the Legislature provide funds for the preparation of an environmental impact report on the approved CAP. Furthermore, we recommend that the Legislature not approve any new state office projects for the Sacramento downtown area until the environmental impact process on the CAP is completed.
| Figure 16 Capitol Area Plan Major Elements and Goals |
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| Element | Goal | ||
| State office space |
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| Transportation | |||
| Parking facilities | |||
| Housing | |||
| Land use | |||
Recognizing a lack of planning and implementation of the CAP, the Legislature adopted Res. Ch 131/91 (SCR 39, Presley). This resolution requested the DGS to prepare a plan to consolidate, to the extent possible, state employees and functions within the Capitol Area and adjacent areas, consistent with the CAP. In December 1992 and July 1993, respectively, the DGS released the two phases of its Strategic Facilities Plan for Sacramento. In this plan, the DGS indicated that the state would need several million additional square feet of office space (above current levels) in the Sacramento area over the next 20 years. The DGS also indicated that the land use policies of the existing CAP would allow development of only about 1 million more gross square feet of state-owned office space in the Capitol Area.
Recognizing the need for additional office space and the potential for long-term cost savings by developing on state-owned land, the DGS plan called for modifying the CAP to allow increased office development. In the Supplemental Report of the 1993 Budget Act, the Legislature directed the DGS to reevaluate the CAP to assess the potential for increasing the development of state office space. The DGS subsequently concluded that about 1.8 million additional square feet (800,000 square feet more than under the 1977 CAP) could be developed in the Capitol Area.
In 1995, the DGS engaged a panel from the Urban Land Institute (ULI) to examine aspects of the state's office building program in Sacramento. The panel spent one week visiting the city and interviewed over 125 neighborhood, government, and business representatives before preparing its findings and recommendations. As part of its report, the ULI indicated that about 2.2 million additional square feet of state office space (compared to the DGS's 1.8 million square foot estimate) could be built in the Capitol Area. The ULI also concluded that the state, in developing new office space, should give immediate priority to locating these offices on state-owned land in the Capitol Area. This recommendation was based on both the opportunity for cost savings (from using state-owned land) and from a land use planning perspective. Specifically, the panel was concerned that, as the city's downtown expands to the north in the future, the State Capitol and Capitol Park would be left on the fringe. The panel concluded that additional development on state land east and south of Capitol Park would ensure that this area remains a focal point within the city.
In the current year, the DGS redirected $50,000 and received a $40,000 deficiency authorization to develop proposed revisions to the CAP, including an increase in the amount of state office space. After completion of this work (scheduled by the spring), the DGS will submit a revised CAP to the Legislature along with a request to fund the preparation of an environmental impact report (EIR) on the CAP. The completion of an EIR will facilitate implementation of the CAP by minimizing the time needed for environmental reviews of future building projects.
Analyst's Recommendations.We have long advised the Legislature that it is cost-effective for the state to own its office space. We also concur with the DGS that the state should place high priority on developing state-owned land close to the Capitol. We will review the DGS's proposed changes to the CAP when it is available and make recommendations as appropriate to the Legislature.
We also recommend that the Legislature not approve funding for preparation of an EIR or any other aspects of the CAP until the Legislature has approved the CAP. (This approval could be through separate legislation, budget act language or supplemental report language.) In reviewing the CAP, the Legislature should consider at least the following elements of a revised plan:
We recommend modification of the state Surplus Property Inventory law to require the Department of General Services to first seek authorization from the Legislature prior to selling any property. Until such legislation is enacted, we recommend that the Legislature budget any amount appropriated to the department to study specific properties for sale in a separate budget item. Further, we withhold recommendation on $1,385,000 in Item 1760-001-0002 for studies/assessments of specific properties, pending further discussions with the department on the proposed uses of these funds and the results of previously funded studies.
Background. As part of the implementing legislation for the 1994 Budget Act, the Legislature enacted Ch 150/94 (AB 2384, Assembly Ways and Means Committee), which required the DGS to identify state-owned property that is unused or underutilized by state agencies. (This legislation was enacted at a time when the state had experienced several years of budget shortfalls and with the expectation that sales of surplus properties would rather quickly generate additional General Fund revenues.) These properties--designated as the Surplus Property Inventory--are to be made available for sale, lease, or exchange to state agencies, local government, and the public. The department was required to prepare a plan for sale of these properties and submit this plan to the Legislature by January 1, 1995. Starting in 1995-96, the DGS is to sell, lease, or exchange at fair market value at least 10 percent of the properties on this statewide inventory each year. Proceeds from these transactions are to be deposited in the General Fund. The department is to report each January on activity related to the disposition of properties on the inventory.
Surplus Inventory. Pursuant to Chapter 150, the department evaluated almost 900 properties, which were then divided into five categories. In category 1 are properties in which the entire site is appropriately used for a state purpose. Category 2 includes those properties already declared surplus by the Legislature through the state's existing surplus property process. In the required January 1995 report, the DGS identified 166 properties in the remaining three categories of the Surplus Property Inventory:
Disposition Plan. The DGS indicated that its plan to dispose of the surplus properties would include the following:
Analyst's Concern With the Law.Our concern with the existing law is that the Legislature has essentially been removed from future decisions regarding the sales of state property. Under this law, by placing any property on the surplus inventory, the DGS has all necessary authority from the Legislature to dispose of that property. In some cases, the Legislature might not concur with sale of certain properties as identified by the DGS. For example, the Legislature might believe that it is not in the state's long-term interest to sell any property in the Capitol Area or to sell property adjacent to a state prison at a time when the prison population is growing significantly. We believe that the Legislature should have more involvement in the process than provided by current law. The Legislature should participate in decisions regarding the use of state property based on legislative priorities and perspectives regarding the state's long-term property needs.
Analyst's Recommendation.We recommend that the Legislature modify the existing law to require the DGS to annually submit and receive legislative authorization for those properties that it proposes to sell. Until such legislation is enacted, we recommend that the Legislature budget in a separate item the funds requested by the DGS for studies/assessments of properties included in the surplus inventory. This will allow the Legislature to consider the merits of the DGS's proposals to study specific sites and fund only those that are consistent with legislative priorities.
Budget Proposal.As mentioned above, the budget includes $1,385,000 for site studies/assessments of properties on the surplus inventory. Though the budget request covers 39 properties, about three-fourths of the total amount ($1,050,000) would be for the following six assessments:
The $1,385,000 request is about twice the amount that the DGS received in the current year for property evaluations. A few of the funded studies have been completed, but most are still underway. Consequently, we cannot yet evaluate the results of previously funded studies and determine the extent to which a large increase in overall funding for similar activities is merited in 1996-97. We therefore withhold recommendation on this request pending (1) a review of the previously funded studies as they are completed and (2) further discussions with the DGS on the amounts for and specific purposes of these evaluations.
We recommend the Legislature adopt supplemental report language requiring the Department of General Services to modify its current policies with regard to building standards for new state leases and building acquisitions.
As the state's property and leasing manager, the DGS is responsible for acquiring most of the general office space used by state agencies. This includes both state-owned facilities and space leased from the private sector. Statewide, agencies occupy 21.5 million square feet of space that is controlled by the DGS--6.8 million square feet that is state-owned and 14.7 million square feet of leased space. These offices are in several thousand buildings of varying size, age, and quality throughout the state.
When a new building is constructed or when an existing building undergoes significant alterations, such improvements must be made in accordance with regulations embodied in building codes. These codes govern all elements of building construction and are established in part to ensure that building occupants (1) have a safe environment in which to work, (2) can exit the structure in case of a fire, and (3) will survive an earthquake. In addition, the codes also prescribe means of providing appropriate access into and throughout a building for disabled individuals.
For California, building construction is governed by the California Building Standards Code which is published by the California Building Standards Commission. Local governments, however, may apply more stringent requirements than the state standards for buildings under their jurisdiction. Building codes are usually modified every few years as new knowledge is gained about the performance of buildings (such as during an earthquake) or to implement new government policies regarding such features as access for the disabled or energy efficiency. Due to this regular "updating" of code requirements, most existing buildings do not meet all current building codes. This does not imply that most buildings are unsafe for occupants, however, and the codes do not require immediate building alterations to meet updated requirements. Currently, the DGS has inconsistent policies in its treatment of state-occupied space with regard to current building requirements.
Policy for Existing State-Owned Buildings.The DGS does not have a policy to periodically renovate a state-owned building to bring all building systems to current codes. As noted above, such a policy would be unnecessary. Very few state-owned buildings meet all current codes, but these buildings generally are safe and accessible for state employees and visitors. When state-owned buildings are renovated for programmatic reasons, the required code compliance improvements are made to those building areas that are renovated. In addition, the State Architect has surveyed state-owned buildings to determine those which are seismic safety hazards. The structural elements of these buildings will be strengthened on a priority basis financed from general obligation bonds approved by the voters in 1990.
In our view, the department's policy on existing state-owned buildings is eminently reasonable. In fact, we know of no other employer--public or private--that has a different policy. As such, it is difficult to understand why the department has adopted differentstandards for newly leased or acquired state buildings.
Policy for State Leasing. Leasing of facilities for state agencies is the responsibility of the DGS's Office of Real Estate and Design Services (OREDS). The office has established certain administrative policies regarding building standards required for either newly leased buildings or renewals of existing leases. These policies generally require that leased buildings (1) be free from hazardous asbestos conditions, (2) meet the requirements of the Americans with Disabilities Act, and (3) meet all currentbuilding code requirements except regarding structural safety, for which an earlier, less stringent building standard is applied.
Thus, under the OREDS' requirements, even if a state agency had occupied a leased building for ten years and wished to renew its lease, the building owner would have to renovate the building in order to meet the current code requirements. Otherwise, the state could not remain in that building. Even if the building was renovated, the owner would again have to make it conform with building codes in place at the time of any future lease expiration. In essence, this state leasing policy results in the state financing improvements to privately owned buildings--improvements which are not required under the building code and are not necessary from the standpoint of providing a safe work environment. This policy is both costly and disruptive to the affected state programs. In addition, this policy can have the effect of reducing the choice of sites that could be available for the state to lease because some building owners may be unwilling to make such improvements.
Policy for Acquiring State-Owned Buildings.If the state constructs a new office building, that building will of course comply with all building codes in place at the time. The state can also obtain additional state-owned office space by acquiring an existing, privately owned building. The DGS policy for such acquisitions, however, is that the acquired building, regardless of age, must meet all currentbuilding codes. As a result, a privately owned building might be comparable to or better in quality than existing buildings the state already owns, but under the DGS policy, this building would be unacceptable for state acquisition without altering it to meet all building codes. This policy could therefore significantly increase the cost of buying a building or make such a transaction infeasible.
Policy Should Reflect Code Requirements Only.As discussed above, although building codes change every few years, most existing buildings are not unsafe. In those cases where a change in a building code is deemed to require immediate corrections to existing buildings, the codes will requireretroactive application of the changes.
The DGS requirement to bring all leased or purchased buildings to allcurrent codes (regardless of a need to do so) is costly and limits the choice of potential buildings for state use. We therefore recommend that the Legislature adopt the following supplemental report language directing the DGS to apply the following policy with regard to building requirements for state leases and building acquisitions.
The Department of General Services shall, in obtaining leased space or renewing existing leases or in purchasing office space, only require building improvements that (1) are specifically required under applicable building codes because of building alterations or (2) are retroactive requirements of the applicable building codes. In purchasing office space, the department shall require a level of structural safety comparable to that which is acceptable for existing state-owned buildings.
We recommend the Legislature adopt Budget Bill language, consistent with action in previous budgets, to prohibit increases in authorized positions for architectural and engineering positions because workload increases can be addressed with consultant contracts.
The Budget Bill contains two provisions which permit the administration to augment the budget for the DGS in cases where the Legislature has approved funds for services or equipment in the budgets of client departments. The first provision (Provision 1 under Item 1760-001-0666) allows the DGS to augment its budget by up to 10 percent so long as the DOF is notified within 15 days of the augmentation. The second provision (Provision 2) permits the Director of Finance to augment the DGS' budget beyond 10 percent to accommodate unanticipated requests from clients for which the DGS will be reimbursed.
The two proposed provisions are identical to provisions contained in the 1994 Budget Act and the 1995 Budget Act with one exception. Language was also included in the two previous budgets stating that the DGS could not use the provisional expenditure authority to add positions for architectural and engineering services in the Division of the State Architect (DSA). The DSA's Architecture and Engineering Services section provides architectural, engineering, and construction support services for state capital outlay projects and some special repair/deferred maintenance projects.
In our Analysis of the 1994-95 Budget Bill, we noted that the responsibility for managing the design and construction of major capital outlay projects (those with a total cost over $250,000) is the responsibility of the Office of Project Development and Management (OPDM) within the DGS. As part of this management responsibility, the OPDM in consultation with the DSA, determines which projects will be designed by the DSA and which projects will be designed by private design consultants. This practice allows the state to more efficiently manage fluctuations in workload and prevents the need for layoffs when workload decreases. We indicated that the DSA therefore did not require any authorization to increase design staff because design work that cannot be accomplished by existing DSA staff can be contracted out. Consistent with that recommendation, we recommend that the Legislature again add the following budget language to Provisions 1 and 2 under Item 1760-001-0666.
The Department of General Services shall not use this authority to increase the number of positions in the Division of the State Architect, Office of Design Services, for architectural or engineering services.
The Stephen P. Teale Data Center (TDC) is one of the state's two general purpose data centers (the other is the Health and Welfare Agency Data Center). It provides a variety of information technology services to over 200 state agencies. The cost of the center's operation is reimbursed by these client agencies.
The budget proposes $78.4 million from the TDC Revolving Fund for support of the center's operations in 1996-97. This is an increase of $1.6 million, or 2.1 percent, over estimated current-year expenditures. The primary reason for the increase is the addition of computing capacity to meet customer demand.
Of three oversight requirements included by the Legislature in the 1995 Budget Bill, but vetoed by the Governor, two are being addressed by the administration in a manner that we believe may achieve part of the Legislature's intent.
In passing the 1995-96 Budget Bill, the Legislature included language intended to address several areas of concern with the operations of the TDC. The concern developed over recent years as the result of the data center's equipment acquisition practices and certain of its business decisions, primarily those relating to cost recovery for certain services provided to customer departments. To address these concerns, the Legislature adopted Budget Bill language last year that required:
Increased Oversight by Administration Has Occurred.As regards the requirement that the TDC notify the Legislature prior to committing to certain expenditures, we believe that increased oversight of data center operations by both the center's parent agency (Business, Transportation, and Housing Agency) and the DOF, while not directly satisfying the Legislature's desire for notification, has addressed the underlying concern which led to the notification requirement. For example, the agency reviewed the data center's finances and directed reductions totaling $2 million in the current year, while the DOF has subjected major equipment expenditure proposals to a more thorough level of scrutiny. It is evident that the increased fiscal oversight of data center operations and new proposals, which these two agencies have brought to bear, provides a level of assurance that data center decisions to initiate new projects and acquire computers will receive appropriate external review.
What's Wrong With Customer Oversight? The requirement to establish a policy advisory committee to oversee data center activities would have allowed TDC customer departments to perform the same oversight role which customers of the Health and Welfare Agency Data Center have had for years. We believe that such customer involvement can help to ensure the long-term viability of a data center by ensuring that it deals with the interests of its client base, as opposed to making its own determinations as to what is best for customers. Moreover, a policy advisory committee would have a different focus than the agency and the DOF, and therefore would not be duplicative of the efforts of those two organizations. Given the administration's reluctance to increase customer involvement, and the fact that a comprehensive audit of the data center will be completed in 1996-97, we believe that the best approach regarding the matter of customer involvement may be to wait until the audit report is issued and see what actions the administration takes in response to the audit's findings and recommendations.
We withhold recommendation on $410,000 requested for support of the Human Resources Information System pending information from the data center, as to its plans to make this system self-supporting.
Background.The Human Resources Information System (HRIS) has been developed and enhanced over the past several years by the data center to provide leave accounting and other personnel-related services to client agencies. According to the data center, it will expend an estimated $410,000 in the budget year to support the system.
In last year's Analysis, we questioned whether the HRIS should be phased out because another system developed by the State Controller--the California Leave Accounting System (CLAS)--is partially duplicative of the HRIS and was becoming the system of choice by state agencies. At the same time, the number of employees covered by the HRIS was declining.
In response to this issue, the Legislature included in the 1995 Budget Act a requirement that the TDC and the Controller survey their clients and determine whether the two systems should be merged, and report their findings and recommendations to the Legislature. The reports, made separately by each department, essentially found that while there was overlap with respect to leave accounting, the Controller's system was designed to interface with other personnel-related systems maintained by the Controller, and the HRIS contained unique features that were not planned for inclusion in the CLAS. Additionally, each system was based on different software. Consequently, the reports did not find that a merger of the two systems was practical or warranted.
Numbers Do Not Reflect TDC's Confidence. The TDC estimates that in 1996-97 revenues from the HRIS ($450,000) will for the first time exceed the data center's cost to support the service ($410,000). If this occurs, it will be a positive turnaround. The TDC's expenditures for support of the HRIS since 1991-92 will have totaled an estimated $3.1 million by the end of the current year, as compared to estimated revenue for the same period totaling $1.8 million. Although the TDC estimates that it will reverse this losing trend by more than tripling the number of covered employees by the end of the current year, we believe that this may not materialize. In this regard, we note that information provided by the TDC last year suggested that HRIS coverage would apply to 18,000 employees by the end of 1995, whereas the data center now reports that only slightly more than 9,000 employees were covered at the end of 1995. The Legislature has previously expressed concern with the TDC undercharging for certain services because this results in the data center's other customers making up the difference.
For these reasons, we withhold recommendation on $410,000 included in the budget to support the HRIS, pending receipt of information from the data center, as to its plans to make this system self-supporting. This information should include the number of employees currently covered by the HRIS, and the basis for the data center's projection of additional customer departments.
We recommend deletion of $840,000 proposed to support the activities of the new Department of Information Technology (DOIT), because the funding method the administration proposes is inequitable. We further recommend that this item be adjusted to reflect whatever new funding method is ultimately adopted by the Legislature for the budget of the DOIT. (Reduce Item 2780-001-0683 by $840,000)
The budget includes $840,000 to help support the recently-established DOIT. This reflects approximately one-third of the DOIT's 1996-97 budget (the Health and Welfare Agency Data Center and the General Fund are providing the other two-thirds of support for the DOIT).
We discussed this funding method in our January 23, 1996 policy brief entitled, State Information Technology: An Update. In that report, we found that the method was flawed because it allowed many other large users of information technology to escape from helping to fund the DOIT, which was created to oversee the information technology activities of allstate agencies, not just the two large data centers. In our brief, we recommended that the Legislature direct the administration to develop a more equitable funding method. (We discuss this recommendation in more detail in our analysis of the DOIT in this chapter.) Accordingly, we recommend deletion of $840,000 proposed to support the activities of the new DOIT, because the funding method the administration proposes is inequitable. We also recommend that this item be adjusted to reflect the new funding method adopted with respect to the budget of the DOIT.
The Health and Welfare Agency Data Center (HWDC) provides information technology services, including computer and communications network services, to the various departments and other organizational components of the Health and Welfare Agency. The center also provides services to other state entities and various local jurisdictions. The cost of the center's operations is reimbursed fully by its clients.
The budget proposes $188 million for support of the center's operations in 1996-97, which is an increase of $27.6 million, or 17 percent, over estimated current-year expenditures.
We withhold recommendation on $15 million requested to expand by 20 the number of counties served by the Interim Statewide Automated Welfare System, pending receipt of information, prior to budget hearings, from the data center justifying this proposal.
Background.The budget includes $33 million to continue support for the Interim Statewide Automated Welfare System (ISAWS), one of three major projects in the Department of Social Services (DSS) transferred by the administration in 1995 to the HWDC for project management. The purpose of the ISAWS is to provide standardized computer support to county welfare operations. The ISAWS is one of up to four automated welfare system consortia authorized by the Legislature in the 1995 Budget Act. According to the Budget Act, the ISAWS is one such consortium, as is the Los Angeles Eligibility Automated Determination, Evaluation, and Reporting System (LEADER). The two other possible consortiums are not defined in the Budget Act, but would consist of groupings of counties not covered by the ISAWS or LEADER consortia.
In the current year, the ISAWS consortium is comprised of 15 counties representing approximately 10 percent of the state's welfare caseload. The budget proposes to increase the level of support for the ISAWS by $15 million in 1996-97--to a total of $33 million--to provide
for participation by 20 additional counties. These additional counties represent about 3 percent of the state's welfare caseload.
Proposal Conflicts With Audit Report and Is Premature.We have several concerns with the HWDC's proposal. First, in an April 1995 review of the Statewide Automated Welfare System (SAWS) project, the Bureau of State Audits found that the DSS' approach to welfare automation--based on the ISAWS--is too costly and is unlikely to succeed. The report identified a number of problems with the ISAWS, including that it cost more on a per welfare case basis than other California automated welfare systems, would lose money for nearly ten years, and was built on a proprietary software application that was inefficient for the type of work needed to support county welfare operations. The report stated that ". . . the ISAWS is not a good choice for statewide welfare automation."
We believe that expanding the ISAWS to accommodate 20 additional counties at a cost of $15 million is premature, because there has been no cost-benefit analysis, nor is it clear that there is any plan to do so. Yet, in authorizing the ISAWS as one of four consortia, the Legislature also specified in the 1995 Budget Act that the multiple-county consortia strategy include ". . . mechanisms for measuring and ensuring cost-effectiveness for use of General Fund moneys." For these reasons, we withhold recommendation on $15 million requested to expand the number of counties served by the ISAWS, pending receipt of information from the data center justifying this proposal.
We withhold recommendation on $25.7 million budgeted to continue implementation of the Statewide Automated Child Support System, pending receipt of additional information, prior to budget hearings, regarding: (1) recent revisions in project costs, (2) the Health and Welfare Agency Data Center's assessment of lessons learned from recent pilot testing of this system, and (3) the status of enhanced federal funding which is not currently available.
The Statewide Automated Child Support System (SACSS) is a federal and state-mandated automated system to provide a statewide child support enforcement tracking and monitoring capability. In 1995, the administration transferred the responsibility to manage this project from the DSS to the HWDC. The proposed budget includes $25.7 million to continue project development in 1996-97.
Project Costs Increase, Savings Decrease, and Schedule Extended. The ten-year project costs of the SACSS, estimated at $152 million when the Legislature approved last year's budget, are now estimated at $260 million, an increase of $108 million, or 71 percent. The increase is the result of several factors, including tasks which the HWDC says were inadvertently omitted from previous cost estimates, increased county child support caseloads, growth in the number of county sites using the system, and a renegotiated contract with the firm hired to develop and implement the SACSS. The HWDC's budget does not reflect the increased costs which are now anticipated, and the data center has advised that a budget revision will be submitted in the spring to increase the proposed expenditures for 1996-97.
At the same time that estimated project costs have increased, anticipated state and county savings over the ten-year project period have decreased by approximately 50 percent, from $276 million to $137 million, according to the Department of Finance (DOF). However, the DOF indicates that beyond the ten-year period the project is expected to break even.
In addition to changes in the project's estimated costs and benefits, the project implementation schedule has been extended by 17 months, from September 1995 to February 1997. This extension is due to a longer-than-anticipated amount of time to complete the detailed system design, and the decision to stagger the pilot testing phase in five counties.
Uncertainty of Recent Cost and Schedule Estimates.As part of the implementation process, the HWDC recently conducted a test of the SACSS with Fresno County to determine whether the system was ready for wider deployment in the counties. Such "usability" testing is consistent with good system development practice, and is conducted prior to putting a new system into full statewide production in order to identify system flaws and familiarize those who must operate the new system.
As a result of the usability test, along with experience gained in other counties in which the SACSS has been installed, the HWDC announced in late January 1996 that it was suspending installation of the system in additional counties and conducting an in-depth assessment of the project. The assessment will focus on implementation issues including training and the number of staff needed to support a statewide system. According to the HWDC, until the assessment has been completed (sometime after January 21, 1996), the impacts of these issues on costs, benefits, and schedule are not clear. (Any increased costs resulting from this assessment would be in addition to those identified in the recent revised estimate.)
State's Share of Costs Uncertain.The proposed budget includes $2.9 million from the General Fund as the state's share of project development costs in 1996-97. This estimate, as noted above, is subject to change. Moreover, it is based on the assumption that enhanced federal funding, which expired on September 30, 1995, will be extended to September 30, 1997. According to the DSS, an extension was included in federal welfare reform legislation which was vetoed by the President, and efforts are underway to include the extension in another bill.
Analyst's Recommendation.We withhold recommendation on $25.7 million budgeted to continue implementation of the SACSS, pending receipt of additional information regarding: (1) recent revisions in project costs, (2) the data center's assessment of lessons learned from the "usability" testing of this system in Fresno County and experiences in other counties in which the system has been installed, and (3) the status of enhanced federal funding which is not currently available. We will be prepared to make a recommendation once we have had an opportunity to review additional information regarding these issues.
We withhold recommendation on $11.6 million and three positions proposed to support the development and implementation of a Statewide Fingerprint Imaging System, pending receipt of information from the Health and Welfare Agency Data Center, prior to budget hearings, on: (1) how the proposed system will address the Legislature's previous direction to pursue the development of a biometric identification system to deter welfare fraud, (2) the estimated costs and benefits of the system, and (3) why the needs of the system cannot be met through use of the automated fingerprint system maintained by the California Department of Justice.
Background. During budget hearings last year, the administration proposed a $250,000 augmentation to the HWDC's budget to hire a consultant to assist with implementation of a statewide fingerprinting system to deter welfare fraud. The Legislature rejected the proposal and instead approved $100,000 to hire a consultant to identify a biometric identification system (fingerprint, palm print, etc.) which best meets the state's needs to reduce welfare fraud. The Budget Bill also included language requiring the HWDC to report to the Legislature by January 1, 1996, regarding recommendations to ensure that the state's system would be interoperable with other government systems.
In signing the Budget Bill, the Governor approved the $100,000, but vetoed the Budget Bill language and indicated that he would pursue separate legislation to authorize implementation of "an effective fraud detection system." He also directed the HWDC to use the $100,000 provided by the Legislature to hire a contractor to assist in developing the necessary plans and planning documents.
Although separate authorizing legislation was not obtained, on December 14, 1995 the Director of Finance notified the Joint Legislative Budget Committee (JLBC), pursuant to Section 27 of the Budget Act, that he was authorizing a deficiency of $391,128 in the current year for the HWDC in order to expedite the development and implementation of a Statewide Fingerprint Imaging System (SFIS). These funds would have been in addition to the $100,000 provided in the 1995 Budget Act. In response to this proposal, the Chairman of the JLBC notified the Director of Finance on January 12, 1996, that he did not concur with the director's proposal. In addition, he stated that the Director should provide the budget subcommittees with the following information during budget hearings: (1) how the proposed system will address the Legislature's previous direction to pursue the development of a biometric identification system to deter welfare fraud, and (2) cost and benefit data associated with the implementation and operation of the SFIS.
Budget Includes Development Funds. The HWDC's proposed budget includes $11.6 million and three positions to develop and implement a SFIS. According to budget documents, the purpose of the SFIS is to detect, deter, and otherwise eliminate multiple aid case fraud for the Aid to Families With Dependent Children (AFDC) program. Extension of the SFIS to other programs, such as Food Stamps and Medi-Cal, is apparently being planned. The project is on a very fast schedule according to the "business plan" prepared by the HWDC in support of its current-year deficiency request to the DOF. If the plan is followed, a contract will be awarded on May 15, 1996, at which point system development activities by the winning bidder are scheduled to begin.
Concerns With Administration's Proposal.The proposal to begin implementation of the SFIS in the current year is not only inconsistent with the Legislature's direction regarding current-year expenditures for a statewide fraud detection system, but it is also inconsistent with the normal process of justifying information technology projects. Moreover, the proposal appears to be inconsistent with statutory direction regarding the development of automated fingerprint systems. We discuss these issues below.
No Feasibility Study Report.First, the likely costs and benefits of the SFIS are unknown at this point because the HWDC has not prepared a feasibility study report (FSR), as is required for any major information technology project. Among other things, the purpose of an FSR is to provide a realistic assessment of project costs and benefits. Although the proposed SFIS schedule makes no reference to the preparation of a FSR, the HWDC advises that it will comply with the state's FSR requirements prior to the scheduled May 15, 1996 contract award.
Existing State Fingerprint System Apparently Ignored. The state has invested millions of dollars over the years to develop, operate and maintain at the Department of Justice (DOJ) the world's most comprehensive automated fingerprint system. Moreover, current law provides that all statewide automated fingerprint identification systems be maintained by the DOJ, unless a determination is made that the DOJ's system would be costlier or incapable of meeting a department's needs.
Conclusion.In disregarding the Legislature's explicit direction, the HWDC has embarked on a costly venture without having provided the Legislature adequate information as to its likely costs and benefits. Nor has the HWDC demonstrated why it should be granted an exemption from the law requiring that statewide fingerprinting systems shall be maintained by the DOJ.
We find that the proposal is contrary to specific direction provided by the Legislature in the 1995 Budget Act. Thus, we withhold recommendation on $11.6 million and three positions proposed to support the development and implementation of the SFIS, pending receipt of information, prior to budget hearings, from the HWDC on: (1) how the proposed system will address the Legislature's previous direction, (2) the estimated costs and benefits of the SFIS, and (3) why the needs of the SFIS should not be met through use of the automated fingerprint system maintained by the DOJ.
We recommend deletion of $840,000 proposed to support the activities of the new Department of Information Technology, because the proposed funding method is inequitable. We further recommend that this item be adjusted to reflect whatever new funding method is ultimately adopted by the Legislature for the budget of the department. (Reduce Item 4130-001-0632 by $840,000.)
The budget includes $840,000 to help support the recently established DOIT. This reflects approximately one-third of the DOIT's 1996-97 budget (the Stephen P. Teale Data Center and the General Fund would provide the remaining two-thirds).
We discussed this funding method in our January 23, 1996 policy brief entitled State Information Technology: An Update. In that report, we found that the method was inherently flawed, because it allowed many other large users of information technology to escape helping to fund the DOIT, which was created to oversee the information technology activities of allstate agencies, not just the two large data centers. In our brief, we recommended that the Legislature direct the administration to develop a more equitable funding method. We discuss this recommendation in more detail in our analysis of the DOIT earlier in this chapter. Accordingly, we recommend deletion of $840,000 proposed to support the activities of the new DOIT, because the administration's proposed funding method is inequitable. We also recommend that this item be adjusted to reflect whatever new funding method is adopted by the Legislature for the budget of the DOIT.
The Department of Personnel Administration (DPA) manages the nonmeritaspects of the state's personnel system. (The State Personnel Board manages the merit aspects.) The Ralph C. Dills Act provides for collective bargaining for most state employees. Under this act, the DPA is responsible for (1) reviewing existing terms and conditions of employment subject to negotiation, (2) developing management's negotiating positions, (3) representing management in collective bargaining negotiations, and (4) administering negotiated memoranda of understanding (MOUs). The DPA also is responsible for the compensation, terms, and conditions of employment of managers and other state employees not represented in the collective bargaining process.
The budget proposes total expenditures of $24.6 million for support of the department in 1996-97. The principle funding sources are:
We recommend that the Department of Personnel Administration report to the budget committees during budget hearings on the administration's collective bargaining proposals and the status of negotiations.
The DPA began negotiations in 1995 with the 21 bargaining units that represent rank-and-file state employees (other than higher education) for new MOUs governing compensation and other terms and conditions of employment. These MOUs are to replace MOUs that expired June 30, 1995. At the time this Analysiswas prepared, the DPA had concluded negotiations only with bargaining unit 5 (California Highway Patrol officers). This MOU was ratified by the Legislature in Ch 768/95 (SB 544, Dills), and signed by the Governor last October. Under current law, the provisions of the 20 expired MOUs generally remain in effect pending adoption of replacement MOUs.
The Ralph C. Dills Act directs the administration and employee representatives to endeavor to reach agreement before adoption of the Budget Act for the ensuing year. The act further specifies that provisions of MOUs requiring the expenditure of state funds be approved by the Legislature in the annual Budget Act before the provisions may take effect. Historically, however, agreements often have not been reached in time for the Legislature's consideration as part of the budget process.
In recognition of the statutory intent and the importance of these negotiations for the 1996-97 budget, we recommend that the DPA report to the budget committees during budget hearings on the administration's collective bargaining proposals and the status of negotiations.
Our overview of employee compensation issues in this Analysisincludes related discussion regarding state employee collective bargaining.
The Department of Finance (DOF) advises the Governor on the fiscal condition of the state, assists in developing the Governor's Budget and legislative programs, evaluates the operation of the state's programs, and provides economic, financial, and demographic information. In addition, the department oversees the operation of the state's accounting and reporting systems.
The Governor's Budget proposes expenditures of $28.7 million ($21.7 million from the General Fund) to support the activities of the DOF in 1996-97. This is $156,000, or less than 1 percent, more than estimated current-year expenditures.
We recommend that the Department of Finance advise the Legislature during budget hearings on its evaluation of the performance budgeting pilot project which the department oversees, and the status of its efforts to comply with directives in the Supplemental Report of the 1995 Budget Act.
Background. In 1993, the Governor proposed a performance budgeting pilot program involving four departments. The purpose of the pilot was to test the concept that performance budgeting could result in substantial cost savings, improved program performance, enhanced citizen satisfaction, and greater accountability. The program was subsequently enacted in statute in Ch 641/93 (SB 500, Hill) as the Performance and Results Act of 1993. The DOF is responsible for oversight of the program, and is required by Chapter 641 to evaluate the pilot to determine the extent to which performance budgeting results in a more cost-effective and innovative provision of government services, and report its evaluation to the Legislature by January 1, 1996. The report had not been released at the time this Analysiswas prepared; however, the DOF advised that it was in the process of being completed.
Investment in Program Is Significant. As noted in last year's Analysis, there has been a considerable investment of state resources by the pilot departments to implement performance budgeting; we estimated the investment at approximately $5 million through the end of the current year. Although most of these resources have been from the redirection of existing funding within the pilot departments, the effort is nevertheless costly, because it diverts these resources from other priority needs. Consequently, it is important that departments receive a good return on their investment; the DOF is in a good position to ensure this, given its responsibility to oversee the program.
Legislature Directs Department to Provide Guidance. The pilot departments, as well as our office, have noted that there has been minimal guidance from the DOF as the pilot has progressed, including the absence of a well-defined plan to guide pilot implementation. On the other hand, both pilot departments and the DOF have seen value in allowing each pilot department to be creative in its approach to performance budgeting, rather than forcing all participants into one mold. At the same time, we have noted that too little guidance can result in duplicative efforts, and we recommended in last year's Analysisthat the DOF provide guidelines to pilot departments to (1) ensure a standard format for reporting performance, and (2) avoid the redundant development of information systems to support performance budgeting. The Legislature adopted our recommendation in the Supplemental Report of the 1995 Budget Act. Because the evaluation report has yet to be submitted and the department has not issued guidelines as directed by the Legislature, we recommend that the department advise the Legislature during budget hearings as to its evaluation of the performance budgeting pilot project, and the status of its efforts to comply with supplemental report language relating to this project.
We recommend that the Department of Finance advise the Legislature at budget hearings as to the results of its efforts to either place in another state agency or sell, computers that are no longer needed by the Department of Motor Vehicles.
In July 1995, the Department of Motor Vehicles officially terminated its project to develop new vehicle registration and licensing databases. As a consequence, computers which the department had acquired at a cost of approximately $18 million became available either for use by another governmental agency or sale. When this issue was discussed during last year's budget hearings, the fair market value of the computer systems was estimated at no more than $800,000. The 1995 Budget Act requires the DOF to "make all efforts" to determine whether the computers could be used by another state agency, and to report to the Joint Legislative Budget Committee (JLBC) before making the computers available for sale.
Computers Continue to Lose Value. At the time this Analysiswas prepared, the DOF had not located another agency with which the surplus equipment could be placed, nor had it notified the JLBC that the computers should be made available for sale. As the computers continue to lose value on the open market, and are fast-approaching the point at which they will have only scrap value, we recommend that the department advise the Legislature, at the time of budget hearings, as to the results of its efforts to place the computers in another state agency, or determine that they are surplus to state needs and can be sold.
The Department of Veterans Affairs (DVA) provides services to California veterans and their dependents, and to eligible members of the California National Guard. The principal activities of the DVA include: (1) providing low-interest home and farm loans to qualifying veterans, using proceeds from the sale of general obligation and revenue bonds; (2) assisting eligible veterans and their dependents in obtaining federal and state benefits by providing claims representation, county subventions, and direct educational assistance to qualifying dependents; and (3) operating veterans' homes in Yountville and Barstow with several levels of medical care, rehabilitation services, and residential services.
The budget proposes total expenditures of $380 million for the DVA in 1996-97. This is $5.7 million, or 1.5 percent, less than the projected current-year expenditures. Total expenditures from the General Fund during the budget year would be $39 million, almost exactly the same amount as in the current year.
The 1.5 percent decrease in the overall budget reflects significant decreases in the Cal-Vet farm and home loan program that are largely offset by the significant increases for bringing the new veterans' home at Barstow to full capacity.
A new computer information system deemed essential to the operation of the new veterans' home in Barstow--and which the department advised the Legislature would be implemented last month--will not be completed until May 1997 at the earliest. We recommend that, at the time of budget hearings, the department detail its proposed interim computer system and its fiscal impact and the appropriate level of funding required in the 1996-97 budget if the activation of the nursing facility beds at the Barstow home were delayed until the permanent computer system is in operation.
Barstow Timetable Slips. Although the state has operated a home for veterans at Yountville in northern California since 1884, no veterans home has existed in southern California until now. Construction of the new Barstow veterans' home was recently completed on schedule. This is a 400-bed facility which is to include 220 domiciliary care beds, a 120-bed skilled nursing facility (SNF), and a 60-bed intermediate care facility (ICF). Last year, at the time of the May Revision, the DVA requested and the Legislature approved funding to activate the home in the current year. Under the original timetable presented by the DVA, occupation of the home was to begin in early January 1996 with full occupation completed in October 1996.
The DVA has revised its timetable and is now scheduled to begin occupying the home around the end of February 1996 with full occupancy in December 1996. The 1996-97 Governor's Budget for the DVA, which requests $17.1 million to operate the Barstow home, reflects the slower timetable for its occupation.
Computer Project for Barstow Home.The 1995 Budget Act included $2.5 million to procure and commence operation of a Veterans Home Information System (VHIS), a computer system with the capability to track medical billings generated by the SNF and the ICF units as well as the costs and revenues associated with the operation of the domiciliary beds. In the feasibility study report (FSR) submitted in April 1995 to justify the VHIS project, the DVA stated that it "must implement a modern VHIS prior to the opening of the Barstow facility." The report concluded that "a system of this type is essential if the Veterans' Home at Barstow Administrator is to have the management tools necessary to effectively manage the facility."
Although the FSR included language which called into question whether the VHIS system could be procured and operating by the scheduled opening of the Barstow home, departmental representatives assured the Legislature in writing in June 1995 that the procurement process could be completed and the system fully implemented by the target date (January 1996). The DVA stated that a relatively brief procurement and implementation process would be possible because hardware and software needed for the VHIS could be acquired off the California Multiple Awards Schedule (CMAS) list, which consists of items that are preapproved for purchase by state agencies. The regular bidding process ordinarily takes much longer than a CMAS procurement.
Upon receiving these assurances from the DVA, the Legislature provided the funding in the 1995 Budget Act to open the home but also adopted Budget Bill language directing the DVA not to commence operation of the Barstow home unless the VHIS project was implemented successfully. The Budget Bill language provided an exception, permitting the Secretary of the DVA to open the home without the VHIS system in place if he determined that an interim accounting system could be implemented that would not require a significant increase in the DVA staffing or cause a significant loss of federal trust fund or reimbursement revenues for operating the home, including Medi-Cal, Medicare, and fees paid by home residents. The language was vetoed by the Governor.
Computer Project 17 Months Behind Schedule.We have recently been advised by the DVA that procurement and installation of the VHIS cannot be completed in time for the scheduled opening of the home. Implementation will not be completed until May 1997 at the earliest, at least 17 months behind schedule. In effect, the project will take four times as long as the DVA had indicated when the Legislature approved the 1995 Budget Act. The DVA has advised that the cause of the delay was the DVA's discovery that acquisition of the advanced computer system it needed through the CMAS would be too risky. As a result, the DVA terminated the CMAS procurement process in September and initiated a bidding process that is projected to result in a contract award around May 1996.
At the time of this Analysis, the DVA advised that it intends to proceed with full activation of the Barstow home without the VHIS in place. An interim computer information system yet to be specified would be used temporarily. Because the DVA is still devising an interim plan, the department is not able to advise the Legislature regarding the staffing and other costs associated with this approach. Nor can the DVA advise the Legislature yet as to what impact use of an interim system would have on the home's ability to obtain reimbursements for medical and other billings.
Analyst's Recommendation.Because the Legislature has not received sufficient information about an interim solution, there is some risk that the unknown system now being devised by the DVA could be expensive to operate. Moreover, the state could end up incurring significant one-time costs for equipment that would become obsolete upon the activation of a permanent computer system.
For these reasons, we recommend that, at the time of budget hearings, the DVA (1) detail its proposed interim computer system and its fiscal impact on the DVA staffing and Barstow federal trust fund and reimbursement revenues, and (2) outline the appropriate level of funding required in the 1996-97 budget if the activation of the SNF and the ICF beds were delayed until the permanent VHIS is operating in 1997-98.
If the Legislature concludes that an interim computer system would be too costly to the state, it should consider reducing the funding of the Barstow home to halt activation of the SNF and the ICF beds until the permanent computer system has been installed and is working properly. (We note that there is less reason for concern about opening the domiciliary beds without a permanent VHIS in place, because complicated medical billings would not be necessary for these residents.) Domiciliary residents who became ill during this interim period would be treated at community medical facilities, but could transfer back to the Barstow home when the SNF and the ICF beds could be activated in a cost-effective manner.
We recommend that the Legislature adopt Budget Bill language imposing a moratorium on the development of additional veterans' homes at least until 1997-98 because of the uncertainty of federal support for operating them as well as uncertainty over the cost of the new Barstow veterans' home to the state General Fund.
Loan Authorized to Develop More Homes.Chapter 943, Statutes of 1995 (AB 940, Knight), initially contained provisions authorizing $36 million in state lease-payment bonds for the construction of three additional veterans' homes. Prior to the bill's final passage, however, these provisions of the bill were removed and replaced with language authorizing the State Controller's Office (SCO) to provide up to a $1.7 million loan from the General Fund to the DVA to complete site studies, suitability reports, environmental studies, master planning, and architectural drawings for two proposed additional veterans' homes in Chula Vista and Lancaster. The DVA is currently arranging to obtain the full amount of the loan from the SCO for the purposes provided in the legislation and intends to apply in August for federal funding to construct the facilities.
The Legislature and the Governor have yet to enact pending legislation that would provide the state matching funds required to secure the federal funding. Last year, the state match for building the two homes was estimated at about $24 million, which the DVA proposes be raised from the sale of lease-payment bonds. The DVA has indicated it will again seek legislation this year to provide the state match.
Since enactment of Chapter 943, we believe that additional information regarding the Barstow home's operating costs and potential federal law changes have added substantial uncertainty regarding the desirability of constructing new homes, as discussed below.
Operating Costs Could Be Significant.Given the state's prior difficulty in projecting the cost of the Barstow home, we are concerned about the fiscal impact on the General Fund if additional homes are built and opened. As recently as March 1994, the DVA had projected that the annual cost of operating the Barstow home would be $12.4 million, with $5.8 million contributed from the General Fund. The annual operational cost of the Barstow home at full occupancy is now projected to exceed $17 million, including a $10.7 million per year contribution from the General Fund. In effect, the General Fund cost of the new home almost doubled.
We believe the significant cost overruns in the operational budget of the Barstow home are cause to strongly reconsider the DVA's plans and legislative proposals to construct more homes along the lines of the Barstow model. If that same model were followed, and no other economies achieved, the additional homes might increase the state budget by another $36 million annually, creating an additional $22 million demand on the General Fund.
Federal Operational Funding Uncertain.While it appears that the costs of operating additional homes would be substantial, it is still unclear what level of federal funding will be available to support the medical and other costs of caring for residents of the proposed additional veterans' homes. Since the Legislature considered the issue of building more homes last year, both the Clinton administration and the Republican majority in Congress have proposed major reductions in the federal agencies and programs which support the existing veterans' homes. For example, the President has proposed to reduce Medicare funding by $124 billion and Medicaid funding by $59 billion over seven years in order to balance the federal budget. Republicans in Congress proposed a $168 billion reduction in Medicare and an $85 billion reduction in Medicaid over that same period. Both Medicare and Medicaid are a major source of funding for the existing veterans' home at Yountville.
As of this Analysis, the President and Congress have not reached agreement on these issues, and no overall agreement may be forthcoming until after the November elections. Until an agreement is reached on federal spending provided for these programs, there is a risk that the federal funds and reimbursements available to operate the existing as well as any new veterans' homes will be diminished.
Summary and Recommendation.Because the Barstow home has yet to open, this new veterans' home model is still untested and it is unclear how much of its operational cost will actually be recovered through federal funds and reimbursements. The delay in the implementation of the new computer system, as we discussed above, could affect the level of revenues received by the home. It may be well into 1997-98 before the state has a sound basis for projecting the fiscal impact to the state General Fund of opening the proposed additional veterans' homes.
Because of this uncertainty we recommend the adoption of Budget Bill language imposing a one-year moratorium on the development of additional veterans' homes. By that time, the operating costs and revenues for the new Barstow home will be more clearly established, and the federal government is likely to have resolved whether Medicare, Medicaid, and veterans programs will incur any significant budget reductions that could affect the federal funding and reimbursements needed to operate additional veterans' homes. In the meantime, the domiciliary unit at Barstow and also the units at the Yountville home would continue to serve the needs of veterans. Once these issues are resolved, if the DVA still wishes to pursue additional homes, it should report to the Legislature on their projected cost and revenues.
Specifically, we recommend adoption of the following Budget Bill language:
The Department of Veterans Affairs shall cease the development of any additional veterans' homes during 1996-97. If the department still wishes to pursue the development of additional veterans' homes, it shall submit a report to the Legislature by April 1, 1997, projecting the full operating cost of the additional veterans' homes and the General Fund, federal trust fund, and reimbursement expenditure authority required for each such facility.
We recommend a $500,000 General Fund reduction in the amount requested for operation of the Yountville veterans' home because increases in federal trust funds and reimbursements received by the home reduce the need for General Fund support. (Reduce Item 8960-011-0001 by $500,000.)
The 1995 Budget Act appropriated $500,000 in federal trust fund and reimbursements to the veterans' home in Yountville for unspecified special projects that would directly benefit members residing at the home. The additional funds were generated by the home as a result of improved collection efforts and federal funding increases. The Budget Act did not specify whether the $500,000 was a one-time expenditure or would be added to the funding base of the home. The DVA has since allocated the $500,000 for various special repair projects at the Yountville facility.
The Governor's Budget assumes that the $500,000 in additional revenues would continue to be received by the home during 1996-97. The pending budget request would permit the DVA to retain this expenditure authority in the home's funding base for unspecified purposes. The DVA has advised that it intends to use the funding to address a backlog of special repair projects at the home. However, the DVA has not yet determined which specific projects would receive priority for the funding. Moreover, the specific projects have not yet been submitted to either the Department of Finance or the Legislature for review.
Analyst's Recommendation.Because the DVA has not identified its intended use of these funds, we recommend that the $500,000 in federal funds and reimbursements be used to offset the state's General Fund costs of operating the home. Thus, we recommend that the home's General Fund budget request be reduced by $500,000. This action would help the DVA achieve a stated goal in its strategic plan of reducing the dependence of the veterans' home on the General Fund.
We are advised that the DVA is continuing efforts to increase its federal trust fund and reimbursement revenues. If the DVA succeeds in these efforts, additional funding should be available for at least some special projects once the DVA has provided justification.
We withhold recommendation on $572,000 requested for additional staffing to open a new intermediate care facility at the Yountville veterans' home, pending a review by the Department of Health Services of the staffing plan for the new facility.
New Wards to Be Activated at Yountville Home. The 1996-97 Governor's Budget requests funding to open two new nursing facilities at the Yountville home in facilities which have been remodeled and modernized.
The DVA has requested $1 million and 25.3 personnel-years to activate a new 21-bed SNF in which rehabilitation services would be provided in remodeled Ward 2B. We believe the proposal is reasonable and cost-effective and recommend that it be approved.
The DVA has also requested an additional $572,000 and 15 personnel-years to implement a plan to close down an outmoded ICF and shift most of the patients to a newly remodeled facility known as Section G. Although we believe that closure of the old ward and the opening of Section G is reasonable, the additional staffing for nurses requested is questionable and warrants further review before the Legislature acts upon this budget proposal.
Fewer Beds at Higher Cost.The DVA is proposing to close a 90-bed ICF known as Annex I staffed with 23.8 personnel-years of nursing positions, and activate an 80-bedfacility providing the same level of care in Section G staffed with 37.4 personnel-years of nurse staffing. Thus, the proposal would provide 13.6 additional personnel-years to serve ten fewer patients.
The DVA believes that additional staffing for nurses is necessary to ensure the health and safety of residents placed in Section G. Specifically, the DVA has stated that the additional nursing staff are necessary due to the floorplan of the facility, the change from an open-bay ward to two-person rooms, and its distance from the main hospital at Yountville.
Staffing Exceeds Licensing Standards.The Department of Health Services' (DHS') Licensing and Certification Division establishes the minimum staffing levels that must be met by California medical facilities, including Yountville home nursing units. According to the DVA, if Section G were staffed at the minimum level required by the DHS, the staffing for nurses would be 20.4 personnel-years, or less than the staffing that is proposed for the new facility orthe existing facility.
Although the DHS has not formally reviewed the Section G proposal, we are advised by the division that its lower staffing standards for ICF are considered sufficient to ensure the health and safety of patients. If that is the case, the additional staffing proposed by the DVA would be unnecessary.
Analyst's Recommendation.For these reasons, we withhold recommendation on the request, pending a review of the Section G staffing plan by the DHS.
The Veterans Memorial Commission is composed of nine members appointed by the Governor, the Speaker of the Assembly, and the Senate Rules Committee. The panel is authorized to raise and expend funds, including contributions from private donors as well as those received from a check-off on state income tax forms, to build a Veterans Memorial on the grounds of the State Capitol.
The Veterans Memorial Commission does not appear in the Budget Bill. This is because the Veterans Memorial Account, into which any contributions are transferred, is continuously appropriated without regard to fiscal year. The commission estimates that it had cash on hand and deposits of $250,000 as of June 30, 1995. The commission projects that it will receive $172,000 in revenues and expend $79,000 in 1996-97.
Because the fund-raising efforts for the memorial have failed, we recommend enactment of legislation to abolish the Veterans Memorial Commission and provide for a transfer of its remaining assets to an appropriate private or public program that would benefit California veterans. We recommend that the Secretary of Veterans Affairs report to the Legislature at budget hearings regarding his recommendation as to an appropriate recipient of these funds.
The Veterans Memorial Commission was created in 1985 to raise private donations to build a memorial to all California war veterans. In 1991-92, $700,000 in funds that had been raised to build a memorial to California's Vietnam War veterans was transferred to the commission to assist with the construction of the new memorial to all California war veterans. That same fiscal year, the Legislature enacted Ch 481/91 (SB 1029, Rogers) to establish a check-off to the state income tax form to raise additional contributions from taxpayers for the new memorial. The tax check-off provision will expire at the end of 1996.
Fund-Raising Effort Not Successful. At the end of 1995-96, after five years of extensive fund-raising activities, the memorial construction account had only about $250,000 in cash and deposits, less than half the money that was available in the fund when it began the effort. A 1994 Department of Finance audit found that the commission expended hundreds of thousands of dollars on fees for private fund-raising consultants, direct-mail fund-raising solicitations, administrative costs, and one staff position with little or no return in contributions to the memorial construction fund. We estimate that the commission would have $1.5 million available today had it simply set aside the surplus funds received from the Vietnam Veterans Memorial and the tax check-off, invested the funds in the state's Pooled Money Investment Account, and engaged in no fund-raising activity of its own.
Last year, commission officials advised the Legislature that they expected to complete their fund-raising activity and break ground for the new memorial by November 1995. However, memorial fund-raising has not improved much since that time, and it now appears very unlikely that the commission will achieve its fund-raising goal. That is the case, even though the commission recently reduced that goal from $2.8 million to $1.2 million to reflect a cost-saving redesign of the proposed memorial. The state income tax check-off, which is expected to generate $112,000 in memorial contributions during 1996-97, will expire at the end of 1996, depriving the memorial account of almost its only source of revenues.
Analyst's Recommendations.For these reasons, we recommend the enactment of legislation to abolish the commission and transfer its assets to an appropriate private or public program that would benefit California veterans. We recommend that the Secretary of Veterans Affairs report to the Legislature at budget hearings regarding his recommendation as to an appropriate recipient of these funds.
The state provides local property tax relief, both as subventions to local governments and as direct payments to eligible taxpayers, through seven different programs. The two largest are the Homeowners' Property Tax Relief (homeowners' exemption) and the Renters' Tax Relief (renters' credit) programs.
As required by the State Constitution, the homeowners' exemption grants a $7,000 property tax exemption on the assessed value of owner-occupied dwellings, and requires the state to reimburse local governments for the resulting tax loss. The exemption reduces the typical homeowner's taxes by about $75 annually. This is the amount that otherwise would be owed on the $7,000 exemption at the statewide average property tax rate of 1.06 percent (including debt levies). The Governor's Budget proposes an expenditure of $393 million on this program in 1996-97.
The renters' credit provides a refundable tax credit to Californians who rent their principal place of residence as of March 1 each year. The credit is applied first to any income taxes due, with any balance paid directly to the renter as a refund. Persons with no income tax liability must file a return to receive the tax relief payment. The amount of the credit is $60 for single renters and $120 for married couples or heads of households. The renters' credit program was suspended for three years, beginning in 1993, as one of many spending reductions enacted to address the state's budgetary problems. The program was reinstated beginning on January 1, 1996. The Governor's Budget, however, proposes eliminating this program effective January 1, 1996. The estimated cost for this program if it were not altered or discontinued in 1996-97 would be approximately $517 million.
The homeowners' exemption and renters' credit were established to mitigate rapidly rising property taxes in the late 1960s and early 1970s. The homeowners' exemption was established by Proposition 1A in 1968 to provide homeowners with direct property tax relief. Recognizing that renters also pay property taxes indirectly through rental payments, the Legislature simultaneously passed companion legislation which extended tax relief primarily to renters. Specifically, this legislation, Ch 1/68 (SB 8, Miller), doubled the personal income tax standard deduction, which most renters use to calculate their income tax liabilities. This legislation was contingent upon the voters' passage of Proposition 1A, establishing the homeowners' exemption.
The modern renters' credit was one element of a comprehensive property tax reform package, Ch 1406/72 (SB 90, Dills), passed by the Legislature in 1972. Among other changes, this legislation increased the homeowners' exemption to its current level ($7,000) and placed limits on property tax rates. It also created the renters' credit by establishing specific credits which renters could use to reduce their income tax liability.
Proposition 13 Has Reduced
The original renters' credit and homeowners' exemption were established during times of rapidly rising property tax liabilities. However, as we have indicated in previous analyses, the passage of Proposition 13 in 1978 has significantly reduced the need for general property tax relief. Both homeowners and renters have benefited from the reductions in property taxes resulting from the measure, which limits the property tax rate to 1 percent and limits the maximum allowable annual rate of increase in assessed value to 2 percent.
As a result of Proposition 13, property tax liabilities have dropped significantly. For instance, just prior to the passage of the proposition in 1977, Californians paid 5.5 percent of their total personal income in property taxes. Today, that figure is about 2.6 percent.
Consequently, it is unclear why the state needs to continue to provide additional property tax relief through the renters' credit and the homeowners' exemption. While the former can be eliminated through statute (as proposed by the Governor), the latter would require a constitutional amendment approved by the voters.
While the renters' credit program was created to provide property tax relief, it is often viewed in the context of generaltax relief. The renters' credit is primarily claimed by low- and moderate-income taxpayers. According to projections for the 1996 tax year, three-fourths of those eligible to claim the credit will have less than $30,000 in annual income (see Figure 17). In fact, projections indicate that 42 percent of those eligible for the credit will have no income tax liability. Most of these individuals will have less than $10,000 in annual income.
| Figure 17 | |||
|---|---|---|---|
| Renters' Credit Claimants by Incomea | |||
| Adjusted Gross Income | Number of Returns (In Thousands) | Percent of Total | |
| Less than $10,000 | 1,769 | 30.9% | |
| $10,000 to $20,000 | 1,476 | 25.8 | |
| $20,000 to $30,000 | 1,049 | 18.3 | |
| $30,000 to $40,000 | 642 | 11.2 | |
| $40,000 to $50,000 | 377 | 6.6 | |
| More than $50,000 | 415 | 7.2 | |
| Totals | 5,728 | 100.0% | |
| a Based on projections for the 1996 tax year. | |||
Given the income of those eligible to claim the renters' credit, many have come to view this program as a means for easing the tax burden of lower-income residents of the state. In fact, the Legislature and Governor recognized this aspect of the renters' credit program in 1991 and 1992. In order to limit spending, the credit was modified by making higher-income renters ineligible.
In deciding how to respond to the Governor's proposal to eliminate the renters' credit, the Legislature faces a difficult calculus. On the one hand, this program (along with the homeowners' exemption) can be viewed as it was originally intended--as property tax relief. In this case, it is no longer needed.
If, however, the renters' credit is viewed outside of this context and considered as an issue of general tax relief, the Legislature will have to make its decision with consideration of a variety of factors:
This budget item reflects state appropriations to local governments for a variety of purposes, including:
Supplemental Subventions Program.In 1980-81, the Legislature fully exempted business inventories from the property tax and increased the existing business inventory subvention to reimburse local agencies for the lost property taxes. Under this arrangement, the Legislature provided 100 percent reimbursement for business inventory revenue losses in 1980-81 through 1983-84. Beginning in 1984-85, the Legislature repealed the business inventory subvention and began providing a new "Special Supplemental Subvention" to reimburse local agencies for any further revenue loss related to the repeal of the business inventory subvention. The special supplemental subvention to cities was ended in 1988-89, but redevelopment agencies are still eligible for such subventions.
Monterey County Viewshed Subvention.The California Wildlife, Coastal and Park Land Conservation Act (Proposition 70) made a total of $25 million available to Monterey County for projects to preserve viewshed in the Big Sur area.
In the current year, the budget estimates spending on the program at $27 million. For 1996-97, the budget proposes expenditures of $164.9 million, with the increase due to a major new proposal regarding local law enforcement.
We recommend deletion of $150 million from this item because local law enforcement is more appropriately financed and controlled at the local level.
The Governor's Budget provides $150 million of state funds for local law enforcement under the Citizens' Option for Public Safety (COPS) program. Specifically, the administration proposes to modify the state's personal income tax forms to allow taxpayers to decide whether 1 percent of their income tax liability should be subvened to local agencies to augment police, sheriff and prosecution programs. The administration estimates that three-quarters of California's income tax filers will participate in this "check-off" program, providing $150 million annually to local agencies.
As we discuss more fully in our "Counties and the 1996-97 State Budget" piece in Part V of the Perspectives and Issues,local law enforcement is more appropriately financed and controlled at the local level. Accordingly, we recommend the Legislature delete the funds provided for the COPS subvention. If the Legislature wishes to provide additional revenues to cities and counties, we recommend that the Legislature partially reverse the property tax, rather than subvene state income taxes. We further recommend that cities and counties be authorized to use any such funding for the highest priority needs of the communities.
This appropriation provides for the state's contribution toward health and dental insurance premiums for annuitants of the Judges', Legislators', District Agricultural Employees', and Public Employees' Retirement Systems, as well as specified annuitants of the State Teachers' Retirement System. The program provides annuitants the option of selecting from as many as 18 state-approved health plans (depending on where an annuitant lives).
We withhold recommendation on the $278.7 million General Fund request for Health and Dental Benefits for Annuitants pending final determination of premium rates for calendar year 1997.
The budget proposes total expenditures of $278.7 million from the General Fund for health and dental benefits for annuitants in 1996-97. This is $2.8 million, or 1 percent, more than estimated expenditures for this purpose in the current year, reflecting an increase in the number of annuitants. However, the actual amounts needed in this item are dependant on negotiations over health premiums currently underway between the state and providers. According to Department of Finance staff, these negotiated premium rates will be available for legislative review as part of the May Revision of the budget. Pending receipt of these rates, we withhold recommendation on the amount requested under this item. Figure 18 displays General Fund expenditures for annuitant health and dental benefits for the three fiscal years starting with 1994-95.
| Figure 18 | ||||
|---|---|---|---|---|
| Health and Dental Benefits for Annuitants General Fund Expenditures 1994-95 Through 1996-97 | ||||
| (In Thousands) | ||||
| Program | 1994-95 Actual | 1995-95 Estimated | 1996-97 Budgeted |
|
| Health | $269,599 | $247,321 | $248,946 | |
| Dental | 27,601 | 28,590 | 29,734 | |
| Totals | $297,160 | $275,911 | $278,680 | |
We withhold recommendation on employer contribution rates for retirement benefits pending (1) final determination of the actual rates to be applied in the budget year and (2) receipt and review of information regarding the actuarial assumptions underlying the rates.
This control section specifies the contribution rates for the various retirement classes of state employees in the Public Employees' Retirement System (PERS). The section also authorizes the Department of Finance to adjust any appropriation in the Budget Bill as required to conform with changes in these rates. In addition, the section requires the State Controller to offset these contributions with surplus funds in the employer accounts of the retirement trust fund.
Under current law, the PERS is responsible for developing employer contribution rates each year based on actuarial analyses. At the time this Analysiswas prepared, a final determination of these rates had not been made.
Consequently, we withhold recommendation pending final determination of 1996-97 rates and receipt and review of information from the PERS regarding the actuarial assumptions underlying the determined rates. This information is typically available in March or April.
We withhold recommendation on these two control sections pending further discussions with Legislative Counsel and the administration on how best to clarify the use of this delegated expenditure authority.
Control Sections 27.00 and 28.00 are two of the most important provisions in the annual Budget Act. Through these sections, the Legislature delegates to the administration the ability to spend money not specifically authorized in the Budget Act. Specifically:
Purpose of the Sections.The basic reason for the Legislature to delegate this authority to the administration is to deal with certain unforeseen circumstances, especially when the Legislature is not in session (primarily the fall). For example, a department could learn shortly after the start of the fiscal year that due to an unanticipated event (say, a court order or a natural disaster), it needs to spend at a higher rate than the Budget Act assumed. In this case, Section 27.00 allows the department to incur a deficiency after notifying the Legislature.
Concerns with Recent Submittals.This past December, the Department of Finance (DOF) submitted several Section 27.00 and 28.00 proposals to the Legislature which--in our view--are inappropriate uses of these control sections:
Given the importance of these control sections, we believe it is critical to clarify the language of Sections 27.00 and 28.00 so that the Legislature is delegating only the authority that it determines is appropriate. We will be working with Legislative Counsel and talking further with the DOF to provide alternative language for the Legislature's consideration. Accordingly, we withhold recommendation on the sections at this time.
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