Department of Finance(8860) |
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 $29 million ($22 million from the General Fund) to support the activities of the DOF in 1997-98. This is $269,000, or approximately 1 percent, more than estimated current-year expenditures.
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 Chapter 641, Statutes of 1993 (SB 500, Hill), as the Performance and Results Act of 1993. In accordance with Chapter 641, DOF is responsible for oversight of the program, and was required to evaluate the pilot and report its evaluation to the Legislature by January 1, 1996.
Four Departments Remain Active Participants in Pilot Program. There are currently four departments participating in the pilot program: (1) California Conservation Corps, (2) Department of Consumer Affairs, (3) Department of General Services, and (4) Department of Parks and Recreation. Pursuant to Chapter 641, each department has entered into a budget "contract" with the Legislature. The contracts are adopted as part of the Legislature's review of the Governor's budget, and have been in the form of budget act language, budget trailer bill language, and memoranda of understanding included in the supplemental report of the budget act. Chapter 641 requires that annual budget contracts commit pilot departments to deliver identified outcomes for a specified level of funding. As we noted in last year's Analysis, participating departments have made a significant investment of resources in performance budgeting. We estimated approximately $5 million worth of resources were invested by pilot departments through 1995-96.
Status of Pilot Program Is Unclear. In its evaluation report submitted to the Legislature in early 1996, the DOF indicated that it was premature to assess the project because it was still in the process of being implemented. However, it was not clear from this report as to when the project might be deemed complete, at which time it would be possible to evaluate the results as required by Chapter 641. In the case of the Department of General Services (DGS), legislation enacted subsequent to DOF's report stipulates that DGS' pilot project will conclude by July 1, 1999, and requires the DGS to submit a final report, presumably upon the completion of the pilot project, and recommend whether the DGS should continue performance budgeting on a permanent basis.
Why Limit Relief From Administrative Oversight to Only Pilot Departments? Since the inception of the pilot project, participating departments have been exempted from various administrative controls imposed by the DOF, the DGS, Department of Personnel Administration, and the State Personnel Board. The purpose of the exemptions was to free departments from unnecessary administrative controls so they could improve their performance. The extent to which exemptions from administrative control agencies have actually resulted in improved performance is unclear. In those cases where the exemptions have resulted in improved performance, it would make sense to extend them to all departments. Such exemptions would free departments from administrative controls which do not add value to state government, but entail excessive paperwork and impose delays on governmental processes.
Analyst's Recommendation. At one time, the administration indicated that the pilot project would be a necessary precursor to implementing performance budgeting on a statewide basis. Our review of the pilot departments indicates that despite the investment of significant resources in the pilot projects, it has been difficult for departments to quantify the benefits realized as a result of administrative flexibilities and relief from statutory requirements they received through annual budget contracts. Other than the annual budget contracts, performance budgeting has not yet fulfilled its primary objective, which was to change fundamentally the state's budgeting process, nor is it clear that the pilot project has met other specific objectives outlined by the Governor when he established the pilot program. For these reasons, we recommend that the DOF advise the Legislature, during budget hearings, as to the status of the performance budgeting pilot project, the administration's future plans for performance budgeting, and the extent to which administrative flexibilities provided pilot departments should be provided to all state agencies.
By law, performance-budgeting pilot departments are required to submit draft budget contracts to the Legislature's fiscal committees by January 31 of each year. The purpose of these contracts is to require departments to deliver identified outcomes for a specific level of funding. Frequently, these contracts propose to include in the budget bill provisions that relieve departments of various administrative controls that are established by statute, regulation, or other actions of the executive branch. Similarly, pilot departments have used the budget bill to obtain exemptions from various other requirements established by the Legislature in statute. Discussions with the Legislative Counsel's Office indicate that it is inappropriate to use the budget bill to obtain exemptions from various statutes, because substantive changes to the law must be made through separate legislation. With respect to relief from administrative controls, except for those which may be tied to budget bill control sections, there does not appear to be a good reason to clutter the budget bill with agreements that do not involve legislative policy.
Consequently, we recommend that budget contracts submitted to the
Legislature not include provisions which should more appropriately be
addressed through either separate legislation or written agreements
between pilot departments and executive branch administrative agencies.
The performance-budgeting pilot departments are proposing a number of changes to their budget contracts for 1997-98. Generally, these changes are statutory exemptions from various requirements, such as those requiring that positions vacant continuously between October 1 and June 30 be abolished. Another proposed change would allow departments to prepay vendors, which is currently prohibited. We are informed that several of the changes, included in each of the contracts, were included at the request of the DOF in an attempt to attain some level of consistency among the pilot departments' budget contracts.
While there is merit in consistency, in the absence of any demonstrated significant improvement in performance as the result of statutory exemptions already approved, the case for expansion has not been made. Moreover, we do not believe that it is appropriate to use the pilot project as a means to provide to a select few departments exemptions which might be beneficial for all state agencies. Consequently, while some of the proposed budget contract changes may have merit because they would remove or modify a statutory requirement which the Legislature might agree is no longer required, these are changes which, as noted above, we believe should be addressed through separate legislation.
As regards proposed changes to executive branch administrative controls, they should be handled within the administration, and do not require inclusion in a contract with the Legislature. Therefore, we recommend that the Legislature disapprove proposed changes to annual budget contracts with performance budget pilot departments.
In our review of the Department of Information Technology (DOIT) in this Analysis, we discuss that department's efforts to provide guidance to state departments faced with the necessity of converting their computer programs to accommodate the year 2000 change. Such a conversion is necessary for most of the state's computer programs which include a date reference because they were written to accommodate only years beginning with a "19." Consequently, such programs will not perform correctly--or at all--for calculations involving dates occurring after December 31, 1999, unless the computer code is corrected.
The problem of code conversion for the year 2000 is one being faced by governments and the private sector worldwide. It is important to address the issue now because many computer programs involve transactions with future dates, such as when a license will expire, when a contract must be paid in full, or when a structure must be inspected. In fact, some systems have already been affected because they compute dates occurring after December 31, 1999.
Substantial Conversion Costs Indicated. Preliminary indications are that the state's potential cost of conversion will be substantial. This information is coming from the few departments which have identified year 2000 conversion costs and sought budget augmentations. Based on these preliminary indications, we estimated in last year's Analysis that total state costs could exceed $50 million. Some think that the actual cost may be closer to double that amount. The DOIT has surveyed state agencies as to their year 2000 conversion plans, and as part of its effort will assess the potential state cost. It is our understanding that the DOF has taken the position that, as a general rule, conversion costs should be absorbed. However, it has advised state agencies to submit budget augmentation requests no later than February 14, 1997 for conversion costs which an agency believes it is unable to absorb. According to the Governor's Budget Summary, the administration "... expects to evaluate and assess funding requests during the spring budget update."
Analyst's Recommendation. Given the urgency of the year 2000 conversion and the likelihood of a substantial increase in state expenditures in 1997-98 for conversion-related activities, we recommend that the DOF advise the Legislature during budget hearings as to the estimated cost to convert state computer programs to accommodate the year 2000, and how this cost will be budgeted.
The DOIT estimates the state's annual expenditures for information technology at approximately $2 billion. In addition, a survey conducted in 1995 by the Joint Committee on Information Technology in State Government, identified 28 state agencies that were in the process of developing information technology projects, each estimated to cost $1 million or more, at a total estimated cost of $2.3 billion. In addition, 11 agencies identified 11 planned new projects costing $1 million or more each, with a total cost estimated to be $124 million.
As indicated in various departmental budget reviews in this Analysis, state information technology projects continue to encounter significant implementation problems, and known deficiencies in the state's information technology infrastructure remain essentially unresolved. (Please see, for example, our analyses of the Department of Information Technology, California State Lottery Commission, Health and Welfare Agency Data Center, and Department of Corrections.) Moreover, as discussed in our review of DOIT, information provided to the Legislature regarding major information technology projects tends not to provide in many instances a clear understanding of important facts of these projects as required by Chapter 508, Statutes of 1995 (SB 1, Alquist).
One way to keep the Legislature better informed as to the state's information technology efforts is to display in the Governor's budget each department's total information technology expenditures, and all information technology project expenditures of $1 million or more, by project title. This would highlight all projects for which an expenditure of $1 million or more was made or proposed in any of these fiscal years addressed in the Governor's budget. Moreover, doing so would be consistent, we believe, with the special focus the Legislature placed on state information technology when it enacted major oversight reform in 1995. Moreover, highlighting costly information technology projects would facilitate the Legislature's understanding of the costs of a project over time. For all these reasons, we recommend the following supplemental report language:
The Department of Finance shall display for each organizational budget contained in the 1998-99 Governor's Budget, the total proposed expenditure for information technology, as well as any information technology project expenditure of $1 million or more, by project title in any of the three fiscal years covered in the budget.
Military Department(8940) |
The missions of the National Guard are to provide combat-ready forces to the federal government at the direction of the President, to contribute emergency public safety support at the direction of the Governor, and to otherwise assist the community as directed by proper authorities.
The 1997-98 Governor's Budget proposes expenditures of $472 million by the department. Of that sum, $444 million would come from the federal government, although only $29.3 million would be appropriated through the budget bill. The budget bill would also authorize the expenditure of $20.1 million from the state General Fund for the department, an increase of about $1.2 million or 6.5 percent in the budget year. The balance of the request ($7.4 million) is from reimbursements and a special fund.
Because of growing concern that many of its armories are deteriorating and that some have inadequate lighting and other security, the Governor's budget provides $846,000 from the General Fund to add 16 National Guard and 8 Air National Guard maintenance and repair staff, and provide more money for security lighting at armories. The budget also proposes a one-time expenditure of $1 million to do electrical work, roofing, paving, plumbing, ventilation system repair, painting, and to make other improvements at deteriorating armories, many of which are 40 to 65 years old.
Funds Were to Come From Improved Asset Management. While we believe these proposals have merit, we are concerned that the major source of support for these budget proposals is the General Fund. In 1995, the department requested $64,000 from the General Fund to establish an asset management program intended to facilitate the lease and sale of surplus armory property. In justifying its request to hire an asset manager at the time, the department indicated the new program would generate an additional $600,000 a year for armory maintenance. Although efforts to lease or sell surplus armory property are under way, the asset management program has generated very little additional revenues.
We believe it is appropriate to continue the asset management program, at least until it has had sufficient time to achieve results. We have been advised by the department that the leasing of one department property is pending and might be completed in the budget year. We are also advised that additional revenues potentially ranging into the hundreds of thousands of dollars might be generated in ensuing years.
However, the department has expressed an interest in using future proceeds from sales and leases of its property to establish new armory facilities. Given the department's 1995 proposal to use such revenues for maintenance and repair of its existing armories, we believe the Legislature should instead adopt budget bill language directing that any such revenues be used to offset the General Fund augmentations it is now proposing.
Analyst's Recommendation. For these reasons, we recommend approval of the $846,000 for staff to upgrade armory and air base maintenance and the $1 million augmentation proposed to repair and modernize National Guard facilities. However, because we remain uncertain about the potential for the asset management program to recover the revenues needed to support these positions, we recommend that the requested positions as well as the asset management position be made two-year limited-term positions. If, after two years, the department has failed to generate additional revenues from the sale or lease of armory properties, the Legislature would have an opportunity to reconsider the funding of these positions and whether the asset management function should be transferred to the Department of General Services.
We also recommend the adoption of budget bill language directing that the department's General Fund appropriation for armory maintenance be automatically reduced by any additional revenues received by the department through its asset management program.
Specifically, we recommend adoption of the following budget bill language:
To the extent that the Military Department receives revenues through its asset management program, and not withstanding any other provision of law, the department shall expend those funds, in lieu of funds appropriated in this item, for armory and facility maintenance, repair, and modernization, and an amount of the appropriation made by this item equaling the amount of that expenditure shall revert to the General Fund.
Background. Chapter 1195, Statutes of 1994 (AB 1808, Areias) established a program by which the Military Department is required to make 25 specified armories in 16 California counties available to cities and counties as emergency shelters for homeless persons during certain periods of cold weather. As provided under Chapter 1195, the program expires on March 15, 1997. The measure also required that prior to this expiration date the Departments of the Military, Housing and Community Development, and Economic Opportunity (since renamed Community Services and Development), prepare a joint evaluation of the effectiveness of the program and the progress of participating counties and cities to develop long-range shelter programs for homeless persons.
Budget Assumes Program Will Expire. The Governor's budget assumes the program will not be extended and accordingly would reduce the department's budget to eliminate the $630,000 that would be required for its continuation. Such funding has been provided in prior years to offset the costs to the department of the program, such as the need for additional security for its property.
The department is not seeking legislation to continue the program. The department believes that, because of security and other problems created by the presence of homeless persons at its facilities, it is inappropriate to use armories as emergency shelters.
Many Communities Still Lack Alternative Shelters. Although Chapter 1195 provided that use of the armories as shelters was to be a temporary measure until cities and counties developed alternative shelter arrangements, we are advised by the Departments of the Military and Community Services and Development that many communities still have no alternative shelter site available for the homeless. The armories have been providing emergency shelter for more than 191,000 persons annually.
Analyst's Recommendation. Although we acknowledge that the program has created some operational difficulties for the Military Department, we believe the relatively small state cost of the program--about $3.28 for each person who receives shelter--merits consideration of continuing the program. For this reason, we recommend that the Legislature, following its review of the forthcoming evaluation, consider enacting legislation to continue the program. If the Legislature chooses to enact such legislation, it would need to augment the Military Department's budget by $630,000 from the General Fund to provide the necessary financial support.
Department of Veterans AffairsAnd Veterans' Homes of California(8950-8965) |
The budget proposes total expenditures of $355 million for the DVA in 1997-98. This is $8.6 million, or 2.4 percent, less than the estimated current-year expenditures. Total expenditures from the General Fund during the budget year would be $40.1 million, which is $1.7 million, or 4.5 percent, more than the estimated current-year level.
The decrease in the overall budget reflects significant decreases in the Cal-Vet farm and home loan program that are largely offset by the significant additional costs of bringing the new veterans home at Barstow to full capacity and proposed staffing increases at the Yountville facility.
The Veterans' Home of California, which has been operating at Yountville in Napa County since 1884, provides five levels of medical and residential care for about 1,140 veterans. Specifically, it provides: (1) an acute care hospital for residents requiring significant medical services; (2) a skilled nursing facility (SNF) providing assistance in daily living, nursing, and therapy; (3) an intermediate care facility (ICF) providing both less living assistance and a minimal level of nursing care; (4) residential care in which minimal living assistance is provided; and (5) domiciliary care in which residents are fully self-sufficient.
The home is operated with a combination of funding sources, including Medicare and Medi-Cal reimbursements for medical and nursing services, aid and attendance allowances from the U.S. Department of Veterans Affairs (U.S. DVA), fees paid by home residents, and the General Fund.
Collection of Reimbursements Has Improved. Following significant cuts in the Yountville home's budget in 1992-93, the Legislature directed the DVA to improve its efforts to collect reimbursements from the federal government and other sources and thus lessen the financial burden of the home on the General Fund. A 1994 audit by the Bureau of State Audits (BSA) determined that the home might collect several million dollars in additional revenues through improved collection procedures and policy changes which could reduce the General Fund cost of operating the facility.
Partly due to the efforts of the home, but also partly due to cost-of-living increases provided by Congress for U.S. DVA veterans' assistance programs, the amount of reimbursements and federal funds generated by the home has been on the rise. From 1993-94 through 1997-98, these funding sources are anticipated to grow by more than $5.4 million, or almost 25 percent.
General Fund Share Had Declined. Initially, reductions made in the support budget of the home and improvements in the collection of federal funds and reimbursements meant that the home was less dependent than it had been on the General Fund. The General Fund share of home support decreased from 53 percent in 1992-93 to 46 percent in 1995-96 in keeping with the DVA's own stated goal of reducing the share of financial support it receives from the General Fund.
That pattern has reversed slightly since 1995-96 so that the home is once again becoming more dependent on General Fund support. Under the 1997-98 Governor's Budget proposal, the General Fund would pay 47 percent of the cost of operating the home. The pattern is the same for each level of care provided at the home. Because the DVA plans to open remodeled nursing wards at the Yountville home during 1998-99 at a potential cost of more than $4 million, we are concerned that the General Fund share will go even higher.
Operating Costs Growing Faster Than New Revenues. The reason that General Fund support is increasing is that the costs of operating the home are growing faster than new revenues. While federal funds and reimbursements are projected to increase by $1.4 million from 1995-96 through the budget year, home operating costs would go up $3.8 million during that time.
A comparison of the veterans' home with other nursing homes and hospitals suggests that Yountville's operational costs are high. For example, the average cost per day of operating a bed in Yountville's acute-care hospital in 1996-97 is projected to be $1,691. That is almost double the average rate of $923 to be paid to California hospitals under the Medi-Cal program. Similarly, while the SNF unit at Yountville is projected to cost $242 per bed for each day of operation, other nursing facilities are paid $215 daily for the same services.
Even though the budget for its operations is relatively high, the Yountville veterans' home has had difficulty this last year managing to stay within its budgeted level of expenditures. At the end of the 1995-96 fiscal year, the Director of Finance advised the Legislature that he was augmenting the budget of the veterans' home with $1 million in additional federal funds and reimbursements that was available because the home had overspent its budget for that year without prior notice or approval from the Legislature. At the time, the home indicated it was struggling to address cost increases for workers' compensation claims, overtime and temporary help personnel costs, pharmacy, and other costs.
The Legislature agreed to carry over $780,000 of the $1 million augmentation into the current-year budget but adopted budget act language directing that the DVA report to the Legislature on its efforts to better control its costs. After completing a "zero-based budget" review of Yountville operations, however, the DVA has not proposed ways to cut its costs but has instead requested a $1.4 million augmentation--funds which would be added to the prior $780,000 previously included in its operating budget. We discuss this latest augmentation request later in this analysis.
The 1996-97 Budget Act directed the BSA to conduct a comprehensive fiscal and performance audit of the Yountville home in order to determine whether the home appropriately manages its medical operations. The budget act directed the BSA to examine, in particular, whether the home was being operated under a managed care approach that would ensure high-quality medical care while minimizing the cost of that care.
The BSA analyzed Yountville home operations with the assistance of a private-sector consultant on managed care issues and released its report on January 29, 1997. The report concludes that the home could take steps to decrease its costs and increase revenues while improving the quality of care for patients. The report raised serious concerns about the operation and management of the home, especially in regard to the cost of the acute care and nursing facilities, and offered a series of recommendations to address those issues.
We believe some BSA proposals, and in particular the five we discuss below, can be implemented within the budget year. Other BSA proposals, in our view, either require intermediate actions that would probably delay their implementation until after 1997-98 or require further review.
Immediate Action Warranted. We have reviewed the BSA report and believe that five of its cost-saving recommendations should be implemented in the 1997-98 budget year. These BSA recommendations are as follows:
Initiate a study weighing the costs and benefits of closing the acute
care hospital and contract for more hospital care in nearby community hospitals, among other alternatives. (In the interim, the
BSA suggests that the Legislature could reduce the acute care
hospital budget to be more in line with average medical industry
costs.) The BSA estimates that savings of at least $854,000 annually
could eventually be achieved.
Thus, adoption of these five BSA proposals could initially reduce the Yountville home budget by about $1.6 million annually from the General Fund but generate additional one-time costs for studies, probably in the hundreds of thousands of dollars. We are continuing our review of the BSA recommendations to determine if there are other proposals that the Legislature could implement in the short-term.
Other Proposals Deserve Discussion. As discussed above, some of the BSA proposals to revamp Yountville home operations require either further study or intermediate steps before they could be implemented. Among these proposals:
We will continue to review the merits of these proposals. Because of their complexity and the need to safeguard the health care of the veterans who reside at the home, the Legislature should carefully consider how these and other BSA proposals resulting from the audit should be implemented.
Analyst's Recommendation. For these reasons, we recommend adoption of the five BSA recommendations listed above and also recommend that the BSA and the DVA report at budget hearings regarding how these and other BSA proposals that could produce savings after 1997-98 should be implemented.
Based upon a "zero-based" review of its budget, the DVA is requesting an augmentation of $1.4 million and 27.6 personnel-years, including $550,000 from the General Fund and about $890,000 from anticipated additional federal funds and reimbursements. The DVA states that the augmentation is needed to "adequately fund" the home. Specifically, the DVA is requesting additional positions and funding related to 11 different services or operations at the home, including alcohol and drug treatment, security, sanitation, social work, telecommunications, and various administrative functions.
We have reviewed the request in light of our concerns about the growth of General Fund cost of the Yountville home and the findings of the BSA, both discussed above. We believe most of the DVA requests are reasonable but that one should be rejected, another modified, and the sources of funding revised.
Pathology. The budget requests two laboratory technicians and $99,000 for increased laboratory workload. We recommend denial of this request because it is not justified on a workload basis. We note that the BSA audit found that the home's pathology services cost 13 times the state average. This funding would not be needed if in-house pathology services were contracted out as the BSA has proposed.
Telecommunications. The budget requests $550,000 to install cabling and wiring for a new telephone system and infrastructure for a new Veterans Home Information System (VHIS) Yountville.
We support the funding request because an improved data system is critical to improving the home's collection of reimbursements and implementing other reforms proposed by the BSA. However, we recommend the adoption of budget bill language directing the DVA to delay expenditure of these funds until it (1) has completed and received the necessary approval of other state agencies of a feasibility study report justifying the cost-benefit of the VHIS project, including the $550,000 in costs provided in the budget request, and (2) the DVA has validated that the Barstow VHIS, the technology upon which the Yountville system would be based, is working as planned. These steps will help the Legislature ensure that the $550,000 is spent appropriately.
Specifically, we recommend the following budget bill language:
Of the amount appropriated in this item, $550,000 shall be available for cabling and wiring for a new telephone system and information systems infrastructure for the Veterans' Home of California at Yountville. These funds shall not be expended until (1) the Department of Veterans Affairs has completed a feasibility study report justifying the cost benefit of the Veteran Home Information System (VHIS) project, including the $550,000 in cabling and wiring costs provided in this item, and obtained the necessary approvals from the Department of Information Technology and the Department of Finance, and (2) the Department of Veterans Affairs has validated the VHIS at the Veterans' Home of Southern California at Barstow is working as planned.
Funding Shift. We are advised that the Yountville home is likely to receive at least $200,000 in additional federal reimbursements for pharmacy costs incurred by the home. In addition, based upon the Clinton Administration's proposed 1998 federal budget, we believe it is likely that the federal government will again increase funding for medical care and veterans benefits provided by the U.S. DVA. We estimate this will generate at least an additional $200,000 in revenues to the home during the budget year. Neither the pharmacy nor the U.S. DVA funds have been allocated in the Governor's budget proposal for the Yountville home. This money could be used to partly offset the requested General Fund augmentation.
Analyst's Recommendation. Accordingly, we recommend that the $1.4 million augmentation be reduced by $99,000 and modified as described above with the adoption of budget bill language. Also, the DVA should report at budget hearings as to the additional funding it projects will be available from pharmacy reimbursements and other federal veterans programs to offset the requested General Fund augmentation.
The Veterans' Home of Southern California, located at Barstow in San Bernardino County, opened in February 1996 with 220 domiciliary care beds, a 120-bed SNF, and a 60-bed ICF. Since its opening, the DVA has had difficulty finding residents to occupy the facility and the scheduled date of full occupancy has slipped repeatedly.
The 1995-96 budget for the home was based upon the assumption that nearly all of the beds would be filled by October 1996. The DVA later revised that date to December 1996, and the Barstow home was budgeted on that basis. As of January 1997, however, the home had filled only about 150 of its 400 beds. The 1997-98 budget proposal for the Barstow home assumes that it will reach full occupancy by December 1997.
Barstow Home Has Been Overbudgeted Every Year. The delays in the timetable for occupying the home have had two significant consequences.
First, the delays have led to significant overbudgeting of the Barstow facility for two years in a row. Fewer staff than scheduled have been brought on line and other expenditures slowed because there were far fewer veterans to serve at the new facility than expected. The 1995-96 Budget Act initially allocated $5.4 million more to the home than was needed. It now appears that the 1996-97 Budget Act initially provided the Barstow home with at least $4.3 million more than is needed, and that figure could go higher.
The continued shortfall in residents has had a second significant impact: It has made it much more expensive to provide services to those residents who did move to the Barstow facility. Many Barstow home costs, such as maintenance of the grounds, remain the same regardless of the number of residents who live there. If fewer residents move to the home, the average cost of the services is higher than would otherwise be the case.
As a result, each SNF bed occupied at Barstow during 1996-97 is now estimated to cost an average of $173,000 a year to operate--more than double the cost of a similar bed at Yountville. An ICF bed at Barstow is expected to have an annual operational cost of $143,000 compared to the $58,000 annual cost at Yountville. Likewise, a domiciliary bed at Barstow is projected to cost $25,000 annually to operate, compared to the $18,000 cost at Yountville's domiciliary.
We are advised by the DVA that the cost estimates discussed above may be revised downward as the fiscal year progresses. However, even if they are revised, it appears likely that the costs of operating Barstow will remain high. The average cost of operating the Barstow facility is projected in the Governor's budget to drop substantially during 1997-98. However, that projected drop in costs assumes that the DVA's latest projection of steady population increases at Barstow is accurate.
BSA Audit Findings Should be Considered at Barstow. Although the BSA audit discussed in this Analysis did not involve a review of operations at Barstow, we believe that several BSA recommendations could be applied to the newer home. These include proposals that change the mix of nursing staff, the proportion of beds between SNF and ICF, the establishment of a home health agency, and scaling back the number of SNF beds officially designated for Medicare patients to increase federal reimbursement rates.
We would also note that the federal veterans' program funding increases proposed in the Clinton Administration's 1998 federal budget proposal should generate at least $80,000 in additional funding for support of the Barstow home. The General Fund support requested for the home should be adjusted downward to reflect the availability of these funds. The DVA should report at budget hearings on the availability of these funds to reduce the General Fund appropriation.
Analyst's Recommendation. In order to ensure that the Barstow home is not overbudgeted for the third year in a row, we withhold recommendation on the Barstow home budget pending the receipt of updated population growth projections for the facility and a corresponding adjustment of the 1997-98 budget request at the May Revision. We also recommend that the DVA report at budget hearings regarding the applicability of the Yountville audit findings to the Barstow home operations and the availability of additional federal funds and reimbursements available to reduce the amount of General Fund resources budgeted for the home.
Veterans Memorial Commission(8975) |
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 about $400,000 as of November 30, 1996.
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 surplus funds that had been raised to build the Vietnam veterans memorial 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 Chapter 481, Statutes of 1991 (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 was to expire at the end of 1996, but Chapter 960, Statutes of 1996 (AB 2955, Knight), extended the tax check-off provision to the end of 1997.
History of Fund-Raising Problems. In last year's Analysis, we noted that after five years of extensive fund-raising activities and repeated assurances to the Legislature that the project was near completion, the memorial construction account had less than half the money that was available in the fund when efforts began and the commission was far short of its then -$1.2 million goal.
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 concluded last year that the commission would have achieved its fund-raising goal 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. As a result, we recommended last year that the commission be disbanded and any remaining proceeds be transferred to another project that would benefit California veterans.
In response to legislative concerns, the commission redesigned its project to lower its cost to $1 million, successfully sought state legislation to continue the expiring state tax check-off another year, and presented the Legislature with a revised fund-raising plan which provided that the fund-raising would be completed in December 1996. In light of those assurances, the Legislature agreed to retain the commission.
Commission Fails to Meet Goals. Our analysis of the commission's performance over the past year indicates that it has made some progress in obtaining cash and in-kind contributions to the memorial project. Moreover, the commission has again redesigned the project to lower its cost to about $850,000, a fund-raising goal that would be easier for it to achieve. Nonetheless, the contributions obtained by the commission this year fell short of what is needed and completion of the project remains in doubt.
Figure 13 (see next page) shows how the contributions received by the commission compare to the $1 million fund-raising goal presented to the Legislature last spring. Although all commission fund-raising was supposed to have been completed in December 1996, the commission remained about $588,000 short of the contributions needed for the project as of November 30, 1996, and appeared unlikely to close that gap in December 1996. After adjusting for the latest cost reduction, the commission remains about $375,000 short of the contributions needed to complete the project.
| Figure 13 | ||
| Veterans Memorial Commission
Commission Fund-Raising Has Not Met 1996 Goals | ||
| Funding Source | Goal | Actual |
| Beginning fund balance | $410,000 | $397,000 |
| Small donor program | 5,000 | 450 |
| Sale of granite benches | 125,000 | 40,000 |
| Sale of flagstones | 50,000 | 16,000 |
| Major donors--flagpoles | 150,000 | -- |
| Major donor--granite boulders | 50,000 | -- |
| In-kind--construction supervision | 5,000 | 5,000 |
| In-kind--contract management | 10,000 | -- |
| In-kind--project management | 15,000 | 15,000 |
| In-kind--computer registry | 50,000 | -- |
| In-kind--sitework | 73,000 | -- |
| In-kind--concrete | 9,000 | -- |
| In-kind--electrical | 109,000 | -- |
| Totals | $1,061,000 | $473,450 |
| Fund-raising shortfall | $587,550 | |
Because the commission has repeatedly presented the Legislature with fund-raising timetables that it has failed to meet, we are uncertain whether even the new, lower fund-raising goal for the project can be achieved. In any event, the commission has assured us that it will complete its fund-raising campaign, as well as construction of the veterans memorial itself, by December 1997.
Analyst's Recommendation. For these reasons, we recommend the enactment of legislation to abolish the commission as of January 1, 1998-- the same date that the authority for the state tax check-off for the commission will expire. By that date, the commission will either have succeeded in its fund-raising activities for the project or it will not have.
We recommend that such legislation establish ongoing resources to maintain the memorial in the event that the project is successful. In any event, the legislation should direct the California Veterans Board (which now includes as a member the Secretary of Veterans Affairs), to provide the Legislature with a recommendation as to an appropriate recipient of any funds held by the commission at its termination.
Because the funds held by the commission originated from charitable contributions, we recommend that they be used for another project that would benefit or memorialize the efforts of California veterans after the California Veterans Board has had an opportunity to present the Legislature with a recommendation.
We can suggest two such projects that might be considered. For example, any funds left over from the memorial project might be used to renovate a deteriorating 106-year-old cemetery near the California Veterans' Home at Yountville, which the Department of Veterans Affairs estimates needs nearly $650,000 in repairs. Or, the Legislature may instead wish to redirect any leftover funds to a long-pending project to beautify and enhance the existing California Mexican American Veterans' Memorial across the street from the State Capitol.
Chapter 1221, Statutes of 1993 (AB 1350, Polanco) provides authority to establish a Mexican American Veterans' Memorial Commission along with a new state income tax check-off to assist in fund-raising efforts. However, the statute provides that such work cannot commence until the new memorial to all war veterans has been built on the grounds of the Capitol. If the Legislature wishes for the commission to be formed and for fund-raising to proceed, it may wish to amend state law to remove that requirement and allow the project to advance.
Health and Dental BenefitsFor Annuitants(9650) |
The budget proposes total expenditures of $278.7 million from the General Fund for health and dental benefits for annuitants in 1997-98. This is $10.7 million, or 4 percent, more than estimated expenditures for this purpose in the current year, reflecting an increase in the number of annuitants and no change in premium rates. Figure 14 displays General Fund expenditures for annuitant health and dental benefits for the three fiscal years starting with 1995-96. Although these costs are initially paid from the General Fund, the state recovers a portion of these costs from special funds (about 33 percent) through pro rata charges.
The actual amounts needed in this item, however, are dependent on negotiations over health premiums currently underway between the state and providers. The Governor's budget indicates that premium rates for the second half of the budget year are currently under negotiation. Hopefully, these negotiated premium rates will be available for review during legislative budget hearings. Pending receipt of these rates, we withhold recommendation on the amount requested under this item.
| Figure 14 | |||
| Health and Dental Benefits
For Annuitants General Fund 1995-96 Through 1997-98 | |||
| (In Thousands) | |||
| Program | 1995-96
Actual |
1996-97
Estimated |
1997-98
Budgeted |
| Health | $238,188 | $238,257 | $247,787 |
| Dental | $28,869 | $29,734 | $30,923 |
| Totals | $267,057 | $267,991 | $278,710 |
Control Section 3.60 |
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 any 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 Analysis was prepared, a final determination of these rates had not been made.
Consequently, we withhold recommendation pending final determination of 1997-98 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.
Tax Relief(9100) |
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 $405 million on this program in 1997-98.
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 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 suspended for an additional year as part of the 1996-97 budget agreement, and was reinstated beginning on January 1, 1997. The Governor's budget, however, proposes eliminating this program effective January 1, 1997. The estimated cost for this program if it were not altered or discontinued in 1997-98 would be approximately $525 million.
The renters' credit as it exists today was one element of a comprehensive property tax reform package, Chapter 1406, Statutes of 1972 (SB 90, Dills). 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.
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 2.5 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.
| Figure 15 | ||
| Renters' Credit
Claimants by Incomea | ||
| Adjusted Gross Income | Number of
Returns (In Thousands) |
Percent
Of Total |
| Less than $10,000 | 1,786 | 30.9% |
| $10,000 to $20,000 | 1,491 | 25.8 |
| $20,000 to $30,000 | 1,060 | 18.3 |
| $30,000 to $40,000 | 649 | 11.2 |
| $40,000 to $50,000 | 380 | 6.6 |
| More than $50,000 | 419 | 7.2 |
| Totals | 5,785 | 100.0% |
| a Based on projections for the 1997 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 the 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 onsidered as an issue of general tax relief, the Legislature will have to make its decision with consideration of a variety of factors:
Thus, in making its decision on the renters' credit, the Legislature
should consider what purpose the program serves and how this program
fits in with the overall allocation of the tax burden. Finally, if the Legislature wishes to provide assistance to lower-income residents of the state,
an alternative program with more focused objectives and delivery mechanisms may be more effective. For example, the Legislature may want to
consider using the money that would otherwise go for the renters' credit
and instead supplement efforts designed to improve the welfare system
or other state programs that benefit lower-income residents. Alternatively, the Legislature may want to consider other programs such as a
state earned income tax credit or other tax incentives to promote work
among lower income residents of the state. (Please see our Perspectives and
Issues, Part V for a discussion of the Earned Income Tax Credit.)
Local Government Financing(9210) |
The 1997-98 Budget Act does not include funding for the property tax administration loan program, created by Chapter 914, Statutes of 1995 (AB 818, Vasconcellos). This program makes $60 million in loan funds available to counties for property tax administration. These loans may be forgiven if counties can demonstrate that they have generated or preserved sufficient property tax revenue for schools to offset the costs to the state of the loan. When the loans are forgiven, a cost is accrued in Item 9210. The budget recognizes a cost for 1996-97 of $48 million for this purpose. No funding is included for 1997-98, although costs of approximately $50 million likely will be incurred as loans are forgiven.
Last year the Legislature enacted Chapter 134 (AB 3229, Brulte), creating the Citizen's Option for Public Safety Program--COPS. Under this program, counties and cities receive state funds, on a population basis, to augment public safety expenditures. The 1996-97 Budget Act (Item 9210) provided $100 million (General Fund) for COPS. The 1997-98 Governor's Budget proposes to continue this same level of program funding.
As we discuss more fully in Part VI of the Perspectives and Issues, we
recommend that the Legislature reconsider its goals for this program. If
the Legislature's primary goal is to augment local public safety expenditures, we recommend that the Legislature redirect the proposed
$100 million to another public safety program that is more clearly targeted to achieving specific statewide objectives. Alternatively, if the
Legislature wishes to provide local fiscal relief, we recommend the Legislature provide this relief in a more direct fashion. Among its options for
providing such fiscal relief, would be to reduce the amount of property
taxes local governments are required to transfer to schools.