The budget proposes expenditures of $133 million from various funds, including $103 million from the General Fund, for the agency in 1998-99. The total budget is $43.2 million, or 48 percent, more than estimated current-year expenditures. The budget-year increase is mainly due to a $50 million General Fund appropriation to the Infrastructure and Economic Development Bank for loans, loan guarantees, and other types of financing. The agency's budget has increased by over 230 percent since it was created in 1992. (Excluding the Infrastructure Bank augmentation, the agency's budget has increased over 150 percent.)

Other General Fund increases include $5.2 million for small business assistance programs and the establishment of four new trade offices. These increases are partially offset by reduced expenditures in a variety of areas--primarily in local assistance for removal of underground storage tanks and reduction in various special funds for one-time costs for local economic development projects.

New and Expanded Foreign Offices

The budget includes $1,053,000 from the General Fund to augment the level of expenditures on the state's foreign offices. This amount includes $750,000 to establish four new foreign offices--Singapore; Shanghai, China; Seoul, South Korea; and Sao Paulo, Brazil. The agency indicates that rather than develop "full-scale" offices, these would be staffed through a consultant contract at each location and funded with augmentations to the current foreign offices in Hong Kong, Japan, and Mexico, respectively. The augmentations would provide $150,000 for Shanghai and $200,000 for each of the other offices. The agency also has included $80,000 in the request for the Hong Kong office to continue a contract established in 1996 for a consultant to maintain a presence in Jakarta, Indonesia. These proposals are similar to the agency's request in 1997-98 that was denied by the Legislature.

Also included is $123,000 to increase the London office by one position and $100,000 for the Mexico office for a consultant under an interagency agreement with the California Department of Food and Agriculture.

The requested $1,053,000 would bring the total budget for these offices to $5.5 million, a 23 percent increase compared to estimated current-year expenditures.

Background. The state currently operates foreign offices in Tokyo, London, Mexico City, Frankfurt, Hong Kong, Taipei, and Johannesburg. There is also a representative office in Jerusalem, operating as the California-Israel Exchange, and a consultant contract for representation in Jakarta. According to the agency, the purpose of the foreign offices is to build additional business for the state that would not otherwise have been brought to California. In assessing the need for new offices, the agency considers:

• Economic factors, such as economic strength of a country, macroeconomic stability, market potential, infrastructure development, level of international trade and investment, and the existing economic relationship with California.
• Strategic factors, such as the role of the region in which the country is located; need for specific on-site assistance to California companies and international programs; need for assistance in overcoming language, business, and cultural barriers; and ability of the office to serve as a hub for the region.
• Input from businesses (considered decisive in considering the demand for a new location).

In addition to the foreign offices, the agency operates international trade and investment programs through the Office of Foreign Investments, Office of Export Development, Export Finance Office, Environmental Export Program, Office of Trade Policy and Research, and the Office of California-Mexico Affairs. California companies also have available the U.S. Department of Commerce, U.S. Department of Agriculture, and the U.S. Agency for International Development located around the world in embassies and consulates of the United States. In addition, the American Chamber of Commerce network helps support United States companies, and the World Trade Center in New York operates as a franchise-driven membership association. Thus, California companies have wide-ranging and extensive resources available for assistance in the foreign market.

Foreign Office Need and Location Are a Legislative Policy Decision. We believe that the establishment of foreign offices is a legislative policy decision that should be considered in policy legislation rather than through the budget. Specifically, the appropriate policy and fiscal committee in each house should consider policy issues such as (1) the extent that state government should be involved in foreign investments and trade; (2) criteria for determining when and where to open foreign offices; (3) methods for quantifying the benefits to the state that are a direct, and indirect, result from each existing and proposed location; and (4) the funding for these efforts (for example, since business is a major benefactor from these offices, should there be a sharing in the cost?). These decisions also need to be made in the context of other state and federal government activities in foreign investment and trade. These and other issues should be considered through legislation other than the Budget Bill. After specific policies are adopted by the Legislature, the cost of operating the foreign offices established under these policies would appropriately be considered in the annual Budget Bill. Consequently, we recommend that the Legislature delete the $830,000 requested for the new foreign offices and for extension of the Jakarta contract (that is currently funded from existing resources).

Expansion of Existing Foreign Office Not Justified. As mentioned above, the agency has also requested $123,000 for an additional position at the London office and $100,000 for a consultant (under an interagency agreement with the Department of Food and Agriculture) at the Mexico office. The agency has provided no justification for these requests, other than to cite the economies of both countries and to indicate that the augmentations would provide more resources to the foreign offices. There is no indication of what the Legislature could expect as a result of the expenditure of an additional $230,000. Consequently, we recommend the Legislature delete the $230,000 associated with these requests.

Agency Should Set Priorities Within Existing Resources

The budget includes $7.8 million for various augmentations related to the agency's programs in economic development, international trade, and administration. As mentioned above, the agency's budget has increased by over 150 percent since it was created in 1992. During this time the authorized positions for the agency have increased from 197 to 333 (proposed in the budget), a 69 percent increase. These increases have occurred despite the expectation at the time the agency was created that there would be economies and savings as a result of consolidating several state departments into the new agency. Given the expectations when the agency was created and the dramatic increase in the agency's budget and staffing levels since that time, we believe the agency should reassess all augmentation requests and set priorities within existing resources instead of continuing to increase its budget and staff for each desired incremental change in activity.

In addition, based on our review of the justifications for the proposed augmentations, the agency needs to provide the Legislature details on what outcomes are expected and how these outcomes would be measured for each of the proposals. For example:

• The $3 million request to augment the Small Business Expansion Fund is primarily based on the increasing operating costs of the Financial Development Corporations and the annual default of about $2 million in loans. It is not clear why the corporation's operating costs are increasing or what benefit the state is receiving from guaranteeing loans that default at the cost of $2 million per year.
• It is not clear what the state benefit will be from spending $245,000 to permanently establish an Office of Military Base Retention. According to the agency, with the base closure rounds complete the "Defense Department is again free to shift workload as it sees fit." The agency indicates that the office staff would study the strengths and weaknesses of military bases from a military perspective and advise local communities on how to keep a base from being closed or downsized. The agency has not identified which bases are a concern or what expertise the staff has to advise the Defense Department on military matters. Thus, it is not clear what the Legislature could expect from the expenditure of the $245,000.

As discussed above, the agency's budget has increased dramatically since 1992 and it is not clear what outcomes the Legislature could expect from the expenditure of an additional $7.8 million. In view of these factors, we withhold recommendation on the $7.8 million (1) until the agency reassesses the need for these increases by setting priorities within current resources to fund some, or all, of the requested augmentations within existing resources, and (2) pending the agency submitting information identifying the specific expected outcomes of spending additional funds and how the outcomes will be measured

The Governor's budget proposes expenditures of $29.6 million to support the activities of the DOF in 1998-99. This is an increase of $609,000, or about 2 percent, above estimated current-year expenditures.

Highlighting Information Technology Expenditures in the Budget

Lack of Expenditure Information. Currently, no standard for reporting information technology expenditures throughout state government exists. Financial data on major information technology projects often provide no clear understanding of important facts about the projects. As a consequence, it is often difficult for the Legislature to ascertain how much money is or has been allocated for a particular project. With over $2 billion appropriated for information technology each year, we believe that it is important that the Legislature have information that clearly shows how much money is being appropriated for the many information technology projects underway.

Ideally, the state should have an automated accounting and budgeting system that makes information technology projects and expenditures easily discernable when queried. Such a change would probably take substantial time and effort, however.

Last year, the Legislature adopted supplemental report language directing the DOF to identify in the Governor's budget the total proposed expenditures for information technology, as well as project expenditures of $1 million or more, by project title. The DOF did not include this information in the 1998-99 Governor's Budget, but indicates that it will present a separate report to the Legislature with the information.

Analyst's Recommendation. We recommend that the Legislature direct the DOF to identify for 1999-00 each department's total information technology expenditures and all information technology project expenditures of $1 million or more, by project title.

Specifically, we recommend the following supplemental report language:

The Department of Finance shall display for each organizational budget contained in the 1999-00 Governor's Budget, the total proposed expenditures 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.

Audit of Data Centers Due to Be Published Soon

The 1996-97 Budget Act provided $800,000 to the DOF to perform a financial audit of the state's two major data centers, the Health and Welfare Agency Data Center (HWDC) and the Stephen P. Teale Data Center (TDC), to determine the financial feasibility of consolidating them. The audit is due to be published in early 1998.

We recommend that the DOF report its findings to the Legislature during budget hearings on HWDC and TDC.

The Governor's budget proposes expenditures of $2.2 million to support the activities of OAL in 1998-99. This is virtually the same level as estimated current-year expenditures.

No Funding Proposed to Meet Statutory Requirement

Chapter 501, Statutes of 1996 (SB 1910, Johannessen) requires OAL to publish state regulations on the Internet by July 1, 1998. Currently, a private firm publishes the California Code of Regulations under a contract with the state. Under the current contract, governmental entities (including the Legislature) and the public must purchase the published regulations solely from the publisher. The contract expires on April 1, 1998, at which time the Code of Regulations must be returned to OAL in an electronic form.

Our review indicates that the OAL's current-year budget and proposed budget for 1998-99 does not contain funding--either a new appropriation or a proposed redirection of funding--to publish the regulations on the Internet as required by Chapter 501. When we inquired, the OAL indicated it had no plans to implement the measure at this time.

The budget proposes total expenditures of $360 million for DVA in 1998-99. This is $7.5 million, or 2 percent, less than the estimated current-year expenditures. Total expenditures from the General Fund during the budget year would be $46 million, which is $7.1 million, or 18 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 (known as the Cal-Vet loan program) that are partly offset by staffing increases and a major information technology project at the Yountville facility that are largely supported by the General Fund.

Time to Rethink State Approach to Veterans' Assistance

The Cal-Vet loan program has provided more than 400,000 California veterans of various wars the opportunity to buy a farm or home through state assistance. However, participation by veterans in the program has been declining sharply and the program has suffered significant financial and operational difficulties.

In our January 1998 report, Rethinking the Cal-Vet Loan Program, we outlined to our proposal to phase out additional Cal-Vet lending activity by 2007 and to direct surplus Cal-Vet funds to programs that will benefit both aging war veterans and state taxpayers. We noted that far fewer veterans than in the past need home loans, but that these veterans have a growing need for medical care, nursing home care, Alzheimer's treatment, and other types of state assistance. We concluded that it was time to rethink the state's approach to veterans' assistance given the changes which have occurred in recent times. We proposed in the report that use of surplus funds be submitted to California voters for approval, and that the transfer of such funds be accomplished carefully by means that ensure that all obligations of the state to bondholders are met and that adequate reserves are retained to meet the needs of the program.

Preliminary Steps Necessary. Before the Legislature acts on our proposal to phase out program lending activity and to ask voter permission to shift surplus Cal-Vet funds, we believe several preliminary steps are necessary:

• The DVA should conduct an analysis of the Cal-Vet operating fund to determine the size and the timing of the availability of the surplus.
• The DVA and the Veterans Finance Committee of 1943, a panel with authority over the interest rates set for the program, should analyze existing contracts related to the issuance of Cal-Vet bonds, as well as any relevant sections of the federal tax code, to ensure that they would not be violated by a future redirection of surplus funds.
• The California Veterans Board, which provides oversight of Cal-Vet and other veterans programs, should conduct public hearings to solicit the testimony of veterans and the general public and report to the Legislature regarding the best use of the available surplus.

Analyst's Recommendation. We recommend that the Legislature approve budget bill language directing that these preliminary activities occur during the 1998-99 budget year in order that it may take further legislative action to implement these changes in the program during the 1999 legislative session. Specifically, we recommend adoption of the following budget bill language:

(a) The Department of Veterans Affairs (DVA) shall conduct an analysis of the Cal-Vet operating fund to determine the size and the timing of the availability of surplus funds that could be transferred into other programs that would benefit California veterans and state taxpayers. The DVA may at its discretion employ cash-flow and debt-management consultants to assist in this analysis, which shall detail how much of the cash and investment assets in the Cal-Vet operating fund are needed for prudent reserves to (1) ensure the repayment of outstanding Cal-Vet program debt, and (2) to provide all funding necessary for loan and related insurance program operations. The analysis shall be based upon the assumption that the issuance of new Cal-Vet loans would cease by the year 2007 in accordance with federal restrictions on general obligation bonds. The analysis shall detail, year by year for the remaining duration of the program until all outstanding program debt and loans are retired, the projected amount of surplus funds that could be available for transfer for other purposes in each year. The DVA shall provide the analysis to the Legislature by January 1, 1999.

(b) The DVA and the Veterans Finance Committee of 1943 shall analyze existing Cal-Vet program agreements with bondholders, bond insurers, and bond rating agencies, as well as any relevant sections of the federal tax code, to ensure that they would not be violated by a future redirection of surplus Cal-Vet funds. If DVA or the Committee shall determine the existence of a conflict, they shall report to the Legislature regarding the nature of the conflict, the projected time period during which such a conflict would exist, and the steps that could be taken to resolve the conflict. The DVA and the Committee shall report its findings and determinations to the Legislature by January 1, 1999.

(c) The California Veterans Board shall conduct public hearings to solicit the testimony of veterans and the general public and report to the Legislature regarding the best use of the available surplus in the Cal-Vet operating fund. The Board shall commence its hearings no sooner than January 1, 1999, and shall provide its completed report to the Legislature by May 1, 1999.

(d) All reports to the Legislature specified in this Provision shall be provided to the Joint Legislative Budget Committee, the fiscal committees of the Assembly and of the Senate, and the policy or select committees of the Assembly and of the Senate relating to veterans affairs issues.

In order to clarify the Legislature's intention to implement significant changes in the Cal-Vet program, we also recommend adoption of the following supplemental report language:

It is the intent of the Legislature that:

(a) The Cal-Vet home loan program shall cease making additional loans effective January 1, 2007;

(b) The Department of Veterans Affairs (DVA) and the California Veterans Board shall continue loan-servicing, debt management, cash management, and other necessary operations of the program until all outstanding program debt and mortgages have been retired, except that the Department of General Services shall conduct a procurement for Cal-Vet loan services by January 1, 2006, in which DVA could compete with vendors on the basis of cost-effectiveness and service quality for the continued provision of those services;

(c) The Legislature shall consider placing a ballot measure before the California voters in June 2000 or at another appropriate time seeking authorization to transfer surplus Cal-Vet funds for use for specific, identified programs of benefit to California veterans and state taxpayers.

Serious Deficiencies in Care Found at Yountville Home

Background. 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 1,125 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 reduced 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 proposed 1998-99 budget for operation of the Yountville home is $60.9 million, an increase of $6.5 million, or 12 percent, over the current-year expenditure level. Of this sum, $31.5 million, or 52 percent, of support for the home would come from the General Fund. That is a significant increase from the current year, in which 46 percent of financial support for the home came from the General Fund. The balance of funds to support the facility consists primarily of Medicare and Medi-Cal reimbursements for medical and nursing services, aid and attendance allowances from the U.S. Department of Veterans Affairs, and fees paid by home residents.

State Inspection Led to Federal Penalties. In September 1997, the California Department of Health Services (DHS) completed a survey of the SNF and ICF nursing home beds and determined that the Yountville home was not in compliance with federal rules on the quality of care of patients. The U.S. Health Care Financing Administration (HCFA) concurred in the survey findings, concluded that they were "serious deficiencies," and determined that the conditions at the home "constitute substandard quality of care" for patients in nursing home wards.

These actions by federal authorities have significant potential consequences for the home's operations and finances. The HCFA imposed a $250 per day fine on the home, effective September 23, 1997, and indicated that those fines would continue until HCFA determined that the deficiencies had been remedied. More significantly, the HCFA prohibited federal Medi-Cal or Medicare reimbursements for any patients admitted to its SNF or ICF beds after November 11, 1997, until such time it determined that the deficiencies had been remedied.

The DVA has submitted a plan to correct the deficiencies noted by HCFA and the facility has since been reinspected. At the time this analysis was prepared, the suspension of federal payments and the daily fines of the facility still remained in effect but, according to DVA, were not anticipated to exceed an amount in the tens of thousands of dollars because of a slowing in admissions to the nursing beds. Federal authorities indicated that the findings of deficiencies may soon be resolved. In that event, the fines would cease and federal support for newly admitted patients would be reinstated.

However, it is likely that the nursing home wards would be subject to reinspection sometime within the next year to ensure that the problems found by the DHS are not continuing. A recurrence of the problems would put the home at risk of further fines, further suspensions of federal payments, and, if serious deficiencies were found, a federal order to close down the nursing home operation.

Analyst's Recommendations. Because of the significant potential ramifications of HCFA's actions for the home, we recommend that the DVA and the DHS report at budget hearings regarding the actions being taken by the home to address substandard quality of care for nursing home residents. The DVA should also report on the status of the federal regulatory actions to fine and withhold some federal support for the home and how the federal actions have affected the home operation and budget. The DVA should specifically report at budget hearings regarding: (1) the amount of fines assessed against the home, (2) the amount of funding lost due to HCFA's suspension of federal support, and (3) whether the fines levied against the home will be appealed.

Yountville Budget Includes Funds For Computers, More Hospital Beds

Augmentations Sought for Home. The 1998-99 budget proposal for the home includes the following augmentations requesting an additional $7.4 million and 41 positions:

• About $4.9 million on a one-time basis to implement a new computerized information system that can improve the tracking of medical costs and billings.
• About $1.7 million and 36 positions to begin phasing in 84 additional SNF and 58 additional ICF beds in Holderman Hospital Wings B and E upon completion of a seismic safety project. (The full cost of this proposal in 1999-2000 after all beds are activated would be $5.1 million and 131 positions.)
• $116,000 to add three staff members to drive home members to medical appointments.
• $193,000 for the one-time cost of dishes and other supplies to reopen the renovated kitchen and dining hall at the home, and an additional $291,000 on an ongoing basis to improve the quality of food served there.
• $250,000 for the one-time cost of purchasing a new heating, ventilation and air-conditioning (HVAC) system for the Lincoln Theater at the home. A nonprofit community organization has agreed to provide matching funds to upgrade the system to a standard suitable for a theater facility and will assume the cost of maintaining the system.
• $38,000 for one position to reopen the cemetery at the home for the burial of the cremated remains of home residents and to improve cemetery landscaping.
• One position, and approval to redirect $30,000 in existing funds for a staff member to repair wheelchairs of home residents.

Analyst's Recommendations. We recommend that the 1998-99 budget request for the Yountville home be reduced by $2.4 million and 57 positions. We also recommend approval of $5.7 million in budget augmentations for the home with the Budget Bill and supplemental report language and other changes proposed below:

• Computer Project. We recommend approval of the $4.9 million requested for the computer system, because of its potential to greatly increase federal funding and other reimbursements for the support of the home. Approval should be contingent upon the adoption of the following budget bill language requiring that a similar computer system now being installed at the Barstow veterans' home has been implemented successfully:

Of the funds appropriated in this item, the sum of $4,898,000 shall be available for the installation of the Veterans Home Information System at the Veterans' Home of California at Yountville. These funds shall be expended subject to a determination by the Department of Veterans Affairs oversight contractor, the Department of Finance, and the Department of Information Technology that all modules installed at the Barstow veterans' home have been successfully implemented, except for the cost accounting module that is not scheduled to be installed until during 1998-99. Notification of that determination shall be transmitted to the Joint Legislative Budget Committee and the fiscal and relevant policy committees of the Assembly and Senate.

• Hospital Expansion. We recommend deletion of the funding and positions sought for the Holderman hospital expansion (in effect delaying the activation of additional beds for six months until 1999-00) for several reasons. First, the additional SNF and ICF beds are not needed to support the existing residential population of the home. Historically, the department has argued that the need for SNF and ICF beds is dependent upon size of the residential and domiciliary population. The DVA, however, has no plans to request funding for residential or domiciliary expansion until 1999-00. (In our view, adding more residential or domiciliary beds would not be advisable until the 100 vacant beds at the new 400-bed Barstow veterans' home have been filled.) Second, it would be premature to expand nursing home beds so soon after the home has been fined and federal support suspended for providing a substandard quality of care for patients. By waiting until next year after another reinspection of home has been completed, the Legislature can ensure that existing patients are cared for properly before additional patients are added. Third, the DVA has indicated that it intends to fill some of the new nursing home beds directly through new admissions. This is contrary to the longstanding policy of the home of only admitting persons to the home who are in good health. Lastly, waiting a year would provide time to conduct the study we recommend below of the appropriate mix of nursing beds provided at the home.
• Acuity Study. We recommend that funding be provided to reimburse the Bureau of State Audits (BSA) for the cost of conducting a study during 1998-99 that would ensure that the home has the proper mix of SNF and ICF nursing beds before additional beds are opened at Holderman hospital. The BSA, which has recommended that such a study be undertaken, should report at budget hearings on the amount of funding necessary to conduct a so-called clinical acuity study.
• Motor Pool. We recommend deletion of the $116,000 and three staff requested to drive home members to medical appointments because we believe this task could be accomplished at less cost through contracting with medical transportation providers. The home's budget request indicates that it did not evaluate this alternative before requesting staff for this new function. A nonprofit provider of nonemergency medical transportation in Napa County has indicated that it could meet the needs of home residents and is fully insured to accept that risk. We further recommend the adoption of supplemental report language directing the Department of General Services to review whether the existing motor pool, with staffing costs of more than $156,000, and additional expenditures for the maintenance and operations of vehicles, could be reduced through reliance on outside providers for the transportation needs of members. We propose the following language:

The Department of General Services shall evaluate the motor pool at the Veterans' Home of California to determine whether expenditures for staffing and vehicles could be reduced by contracting with outside providers to meet the transportation needs of home members. The department shall report its findings to the Joint Legislative Budget Committee and the Legislature's fiscal and appropriate policy committees by December 1, 1998.

• Kitchen Remodeling. We recommend a net reduction of $285,000 and 18.5 dietary and food-service positions. At the time it requested $10 million to remodel the home's kitchen facilities, the home committed to making this personnel reduction and identified the specific positions that could be eliminated because the new operation would be more efficient. The personnel reduction from 114.5 personnel-years to 96 was a condition of legislative approval for the project adopted in supplemental report language in 1995-96. The DVA now is asking for additional funds for supplies to open the remodeled kitchen, but has failed to keep its commitment to reduce its funding and personnel. In documents supporting its request, the department cites personnel cuts to food services that were made before the remodeling project was approved by the Legislature and before DVA made its commitment to the personnel reductions. The reduction we have proposed reflects the activation of the new kitchen on January 1, 1999, halfway through the fiscal year. The full-year savings in 1999-00 would be $569,000.
• Lincoln Theater. We recommend approval of the full $250,000 requested for the Lincoln Theater HVAC system. However, we further recommend that the money be budgeted as a capital outlay item, rather than within the support budget of the home, in order to ensure that proper fiscal controls are in place for this work. We also recommend that the proposed Lincoln Theater funding be contingent upon the adoption of budget bill language requiring the commitment of the matching funds from the home's nonprofit partner to complete the work on the air-conditioning and heating system. We propose the following language:

The funds appropriated in this item for a new heating, ventilation, and air conditioning (HVAC) system for the Lincoln Theater are available for expenditure only if the Friends of Lincoln Theater, a nonprofit entity, provides the additional funds necessary to install a theater-quality HVAC system.

• Acute Care Hospital. We recommend DVA discuss at budget hearings the status of a report required by the Legislature regarding the potential for expanded use of the acute care hospital at the home. The report, which was due by January 1, 1998, but had not been received at the time this analysis was prepared, will provide guidance to the Legislature as to whether a $257,000 reduction in two physician positions at the hospital approved last year should be continued into 1998-99. Funding for the physicians was temporarily suspended in 1997-98 in order to allow for restoration of the positions in 1998-99 if the study indicated that expanded use of the acute care hospital was possible.
• Laundry Savings. We recommend that the DVA budget be reduced by $350,000 to reflect savings anticipated from a 1997-98 budget decision to contract out laundry services. The DVA, which has indicated that contracting out efforts are proceeding as planned, should report at budget hearings regarding the specific positions that should be removed from the DVA budget.
• Additional Reimbursements. We recommend that the DVA report at budget hearings regarding its estimate of the hundreds of thousands of dollars of additional funds that are likely to be available for reimbursement of certain pharmacy costs and for care of home residents during 1998-99, but that are not now included in the proposed 1998-99 budget for the home. We recommend that the additional federal funds and reimbursements be reflected in the 1998-99 budget for the home and that General Fund expenditures be reduced by a commensurate amount.

We recommend that the augmentation requests of the home for supplies for the new kitchen ($193,000), for improving the food quality ($291,000), for cemetery operations ($38,000), and establishing a wheelchair repair position be approved as budgeted.

Many Barstow Home Beds Still Vacant Two Years After Its Doors Have Opened

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. The DVA initially advised the Legislature that the home would be filled by October 1996. The DVA later revised that date to December 1996, then to December 1997, and now projects that the home will reach full occupancy as of June 1999. The unanticipated number of vacancies has resulted in over-budgeting of the facility in each year of its existence. It has also meant that the cost-per-bed of operating the home is much higher than for the Yountville home.

Recent Population Trends. The population of the facility leveled off during the last three months of 1997, with about 100 beds remaining vacant. This is at odds with DVA's latest projection of continued growth in occupancy. The DVA has indicated that it intends to monitor the trend and will revise its budget at the time of the May Revision if it appears there will be another significant change in the number of veterans living at the Barstow home.

As we noted in our discussion of the Yountville veterans' home, tens of thousands of dollars in additional funds will likely be available for reimbursement of certain pharmacy costs and for care of Barstow home residents. These anticipated funds have not yet been included in the proposed 1998-99 budget for the Barstow home. The proposed budget also does not take into account collections from third-party insurers that DVA anticipates will be received during the budget year as a result of installation of its new computer system.

Analyst's Recommendation. For these reasons, we withhold recommendation on the Barstow home budget pending the receipt of updated population growth projections for the facility at the time of the May Revision. The budget should also be adjusted at that time to reflect the availability of federal funds and collections from insurers that could reduce the amount of General Fund resources budgeted for the home.

The interest liabilities owed by each level of government to the other are offset against each other to arrive at a net "settle-up" payment, which occurs during the subsequent fiscal year. During 1994-95 (the first year of this budget item) and 1995-96, the state owed a net liability to the federal government. Item 9625 provides the appropriation to make the interest payment. The Governor's budget assumes $4.9 million in General Fund interest expenses for both the current year and the budget year.

State's Interest Obligation Is in Dispute

Figure 9 shows the history of this interest "settle-up" program. With regard to the current dispute, in 1996-97 the state incurred a net interest liability to the federal government totaling $11.2 million (based on 1995-96 obligations). However, before the state made this payment, the Department of Finance (DOF) added an additional program to the settle-up calculation--the State Criminal Alien Assistance Program (SCAAP). Federal SCAAP funds for 1995-96 did not arrive until January 1997, 18 months following the beginning of the fiscal year. The DOF calculated that this delay created an additional federal interest liability of $15.1 million. This SCAAP-related federal interest liability not only offset the entire state interest obligation for 1996-97, but left $3.9 million to be carried over as a credit toward the amount owed for 1996-97 and payable in 1997-88.

Figure 9
General Fund Interest Payments To the Federal Governmenta
(In Millions)
	1996-97	1997-98	1998-99
Net interest fund liability	$11.2	$9.9	$9.9
Less SCAAP offset for:
1995-96 ($15.1 million)	-11.2	-3.9	--
1996-97 ($11.0 million)	--	-6.0	-5.0
1997-98 (at least $4.9 million)	--	--	-4.9
Net amount owed by state	--	--	--
Amount in budget	--	$4.9	$4.9
Potential savings	--	$4.9	$4.9
aAssuming State Criminal Alien Assistance Program (SCAAP) interest liabilities are permitted. The SCAAP is a federal program which provides funds to states for incurred costs of incarcerating undocumented felons.

Additional Savings Possible. The state's delay in receiving SCAAP funds was not a one-time occurrence. In fact, the state is still awaiting reimbursement for the funds it expended for SCAAP purposes during 1996-97 (reimbursement is expected in February or March of 1998). The interest associated with this delay already is estimated to exceed $11 million. This new offset (which was only partially accounted for in the Governor's budget), combined with the $3.9 million residual from that of the prior year, would eliminate the entire state interest liability for 1997-98. Thus, the $4.9 million already appropriated for the current year would be saved.

In addition, some of the remaining $11 million federal interest owed for 1996-97 would carry over to the budget year. The combined effect of this carryover, in addition to yet another one related to delayed receipt of SCAAP funds for 1997-98, would eliminate the need to appropriate funds for the budget year as well.

Thus, the combined cumulative impact of the three consecutive years of SCAAP federal interest liabilities would, based on DOF's interpretation, completely offset the state liabilities for both the current and budget years. This would provide the Legislature with the opportunity to save $9.8 million from amounts budgeted.

The Federal Government Disputes DOF's Action. The federal government currently is of the view that SCAAP should not be included in the interest calculations under CMIA. State and federal officials are currently working to resolve this dispute. If the department's approach of using SCAAP-related federal interest liabilities is disallowed, the General Fund would be liable for $21.2 million in interest obligations (for the three years involved) beyond the amounts included in the Governor's budget. At this time, we withhold recommendation on this item and will report to the Legislature on the status of this dispute at the time of the budget hearings.

Budget Proposes to Modify Distribution of Penalty Assessments

The Governor's budget estimates that revenues from penalty assessments will be about $131 million in 1998-99. These revenues are deposited in the State Penalty Fund for distribution to eight other special funds, including the Driver Training Penalty Assessment Fund. The Governor's budget proposes to modify the distribution, increasing by $12 million the share allocated to the Peace Officers' Training Fund and reducing the Driver Training Penalty Assessment Fund by a like amount. This modification results in a General Fund loss of $12 million because Driver Training Penalty Assessment Fund balances have been transferred to the General Fund each year since 1992-93.

Background. Penalty assessments are imposed on persons who violate criminal and traffic laws. Funds are collected by the courts and transmitted to the State Treasurer. Penalty assessment revenues deposited in the Penalty Fund are divided among eight other special funds, based on a statutory formula, which support programs in seven different depart- ments. Figure 10 shows the statutory distribution of the State Penalty Fund for 1998-99.

Figure 10
State Penalty Fund Distribution
1998-99 (Dollars in Thousands)
Fund	Percent a	Amount
Restitution	32.02%	$42,275
Driver Training Penalty Assessment	25.70	33,792
Peace Officers' Training	23.99	31,544
Victim/Witness Assistance	8.64	11,361
Corrections Training	7.88	10,361
Local Public Prosecutor's/Defender's Training	0.78	850
Fish and Game Preservation	0.66	650
Traumatic Brain Injury	0.33	500
Totals	100.00%	$131,333
aStatutorily required distribution.

In addition to the special fund programs, the State Controller's Office receives $933,000 to defray its administrative costs.

Proposed Redistribution Results in Loss of Revenue to General Fund. Since 1992, the Legislature and the Governor have appropriated only about $1 million annually from the Driver Training Penalty Assessment Fund. Rather, using Control Section 24.10 of the annual Budget Act, the Legislature has transferred a portion of the Driver Training Penalty Assessment Fund balance to the Victim/Witness Assistance Fund and Peace Officers' Training Fund, and transferred the remaining balances to the General Fund. In the current year, transfers from the Driver Training Penalty Assessment Fund pursuant to Control Section 24.10 included $5.1 million to the Victim/Witness Assistance Fund, $2 million to the Peace Officers' Training Fund, and $25.6 million to the General Fund.

The budget proposes to amend Control Section 24.10 to substantially increase the transfer of funds from the Driver Training Penalty Assessment Fund to the Peace Officers' Training Fund and reduce the transfer to the General Fund by a like amount. Specifically, the budget proposes to transfer $14 million to the Peace Officers' Training Fund (or $12 million more than the current-year amount), $5 million to the Victim/Witness Assistance Fund, and $13.8 million to the General Fund. Thus, the proposal will result in a General Fund revenue loss of $12 million in the budget year.

Additional Funds for Peace Officers' Training Fund. The Peace Officers' Training Fund provides assistance to local law enforcement agencies for the costs of training. The state pays a portion of the training costs; the bulk of the costs are paid by local governments. According to the Commission on Peace Officer Standards and Training (POST), which administers the training program, the augmentation will allow the commission to fully pay for workload growth. Specifically, the commission notes that there has been an 11 percent increase in the number of officers eligible for training reimbursement. Of the $12 million increase, the commission plans to use $10.5 million to defray training and related costs, and use an additional $1.5 million to develop new multimedia training programs to make training more efficient.

Local Law Enforcement Has Received Other Funds. Although we concur that state funding has not kept pace with growth in the program, we note that local law enforcement agencies have received substantial funds from other sources in recent years that can be used for training. For example, under the federal crime bill, in federal fiscal year 1997, county sheriffs and local police departments in 53 counties received a share of the state's total grant amount of more than $72 million. In addition, under the state's Citizen's Option for Public Safety (COPS) program, sheriffs and police received a total of $75 million from the state's General Fund each of the past two years, and the budget proposes to continue the same funding level in 1998-99. Finally, we estimate that local law enforcement agencies will receive a total of $27.5 million from Proposition 172 funds in the current and budget years above the amount assumed in the Governor's budget.

Legislature Should Weigh Peace Officers Training Needs. We believe that the Legislature should consider that additional state and federal money has been provided to local law enforcement before it decides to augment the Peace Officers' Training Fund as the budget proposes. In addition, the Legislature should consider the needs of all of the training programs funded from penalty assessments. In particular, the budget proposes to augment the Peace Officers' Training Fund budget but is silent on the needs of the Corrections Training Fund, which reimburses sheriffs, police departments, and probation departments for training provided to local corrections staff. Like the other program, the state pays a share of costs of the corrections training program, while local agencies are responsible for funding the bulk of the costs. This program, administered by the Board of Corrections, has also seen a significant increase in demand, a 54 percent increase in eligible staff since 1992, but its share of the State Penalty Fund has remained unchanged. To meet increased demand, the Corrections Training Fund would need approximately $6.5 million more than currently allocated.

If the Legislature is concerned about state support for the training needs of local peace officers, it should weigh the needs of both the Peace Officers' Training Fund and the Corrections Training Fund as it decides how to use the balance in the Training Penalty Assessment Fund.

Legislature Should Consider Other Options for Use of Penalty Assessments. In addition to the possible uses of the Driver Training Penalty Assessment Fund outlined above, we suggest that the Legislature consider two other options:

• Reduce Penalty Assessments. The bulk of revenues for this fund are from penalty assessments on traffic fines. With a supply of revenue in excess of program needs, the Legislature may wish to consider reducing the level of assessments, which would reduce the revenues to the fund.
• Transfer Funds to Programs Supported by the Motor Vehicle Account. The Legislature may also wish to consider using the money to support programs that would otherwise require funding from the Motor Vehicle Account (MVA), such as the California Highway Patrol. In recent years, the MVA has experienced significant shortfalls and faces potential funding shortfalls in the budget year and future years (we discuss this issue in the Crosscutting Issues section of the Transportation chapter). Because penalty assessments come primarily from driving violations, there is a strong connection to the MVA-supported programs. In addition, use of the penalty assessment revenues in this way could forestall driving fee increases or program reductions in the future.

Budget-Year Costs Are Uncertain

The budget proposes total expenditures of $302.3 million from the General Fund for health and dental benefits for annuitants in 1998-99. This is $23.6  million, or 8.5 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 11 (see next page) displays General Fund expenditures for annuitant health and dental benefits for the three fiscal years starting with 1996-97. 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. 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 11
Health and Dental Benefits For Annuitants
(In Millions)
Program	1996-97 Actual	1997-98 Estimated	1998-99 Budgeted
Health	$235.8	$247.8	$269.2
Dental	30.0	30.9	33.1
Totals	$265.8	$278.7	$302.3

In addition, based on a review of past enrollment projections, the Governor's budget has consistently over estimated the number of enrollees in each budget year. Thus, when the negotiated premium rates are available, it may be appropriate to adjust the amount in the Budget Bill to account for fewer annuitants as well.