Department of Mental Health (4440)

The Department of Mental Health (DMH) directs and coordinates statewide efforts for the treatment of mental disabilities. The department's primary responsibilities are to (1) administer the Bronzan-McCorquodale and Lanterman-Petris-Short Acts, which provide for the delivery of mental health services through a state-county partnership and for involuntary treatment of the mentally disabled, (2) operate four state hospitals, (3) manage treatment services at the California Medical Facility at Vacaville (a state prison), and (4) administer nine community programs directed at specific populations.

The state hospitals provide inpatient treatment services for mentally disabled county clients, judicially committed clients, clients civilly committed as Sexually Violent Predators (SVPs), and mentally disordered offenders and mentally disabled clients transferred from the California Department of Corrections.

The budget proposes $1.5 billion from all funds for support of DMH programs in 1999-00, which is an increase of less than 1 percent over estimated current-year expenditures. The budget proposes $646 million from the General Fund, which is an increase of $8.9 million, or 1.4 percent, above estimated current-year expenditures. The increase is primarily due to (1) increases in the judicially committed and SVP populations in the state hospitals and (2) an increase in the cost of drugs used to treat state hospital patients.

Overbudgeting for SVP Evaluations

We recommend that the Legislature reduce the amount proposed for evaluations of potential Sexually Violent Predators by $1.2 million from the General Fund because the budget exceeds the amount needed on a workload basis. (Reduce Item 4440-001-0001 by $1,236,000.)

Background. In 1995, California followed the lead of several other states by enacting legislation (Chapters 762 and 763, Statutes of 1995 [AB 888, Rogan and SB 1143, Mountjoy]) enabling courts to civilly commit offenders determined to be "SVPs" to state mental hospitals. The commitments are sought for state prison inmates as they approach their scheduled parole dates. When the California Department of Corrections (CDC) identifies an inmate as a potential SVP, it refers the case to DMH for a more in-depth review. The SVP evaluation unit at DMH determines whether referred inmates meet the basic criteria for commitment and schedules psychological evaluations for those who do. The evaluations are conducted by department staff or one of 35 private clinicians who contract with DMH.

The budget includes $3.4 million for SVP evaluations and related costs, such as the time evaluators spend testifying in court, giving depositions, and updating their evaluations when court hearings are delayed. This amount is not based on an estimate of caseload and costs for the budget year, but is the amount that has historically been budgeted for SVP evaluations. However, actual expenditures for evaluations and related costs during 1997-98 were $1.9 million, and the department spent $1.1 million during the first half of 1998-99. Based on this trend, we would expect costs of $2.5 million in 1999-00, but we estimate somewhat lower costs due to a declining rate of referrals from CDC.

Slower Referral Rate Leads to Fewer Evaluations. From July through December of 1998, DMH conducted fewer evaluations than in previous years due to (1) a slower rate of referrals from CDC and (2) an increasing number of "recycled" cases--prisoners who are referred to DMH despite having been rejected from the SVP system previously and, therefore, do not require an evaluation. During this time period, DMH received an average of 52 referrals per month, 38 percent of which met the basic criteria and were scheduled for an evaluation. Based on data provided by DMH, we project a continuing decline in the referral rate and an average of 36 referrals per month during 1999-00, about 150 fewer than in 1998-99. However, we believe that any savings realized from this decrease in referrals will be offset by the following factors, so that costs in the budget year will be the same as in the current year:

Recommend Budget Reduction. In summary, we project that expenditures for evaluations will be $2.2 million in the budget year, or $1.2 million less than the budget proposes. This is about the same as projected current-year expenditures due to the net effect of the factors discussed above. Accordingly, we recommend that the Legislature reduce the DMH state operations budget by $1.2 million from the General Fund.

Medi-Cal Expenditures Out of State's Control

We recommend that (1) the department report at budget hearings on projected 1999-00 expenditures in the Early and Periodic Screening, Diagnosis, and Treatment (EPSDT) program and (2) the Legislature transfer $89 million in General Fund monies from the Department of Health Services budget to the Department of Mental Health for EPSDT mental health services, to be distributed to counties as part of their managed care allocations. This should help control program spending by establishing a link between program and funding responsibility. (Reduce Item 4260-101-0001 by $88,916,515 and increase Item 4440-101-0001 by $88,916,515.)

Background. The EPSDT program was established as a mandatory Medicaid service in 1967 and expanded by the Omnibus Budget Reconciliation Act of 1989. Under EPSDT, states are required to provide a broad range of screening, diagnostic, and medically necessary treatment services to Medi-Cal beneficiaries under age 21, even if the treatment is an optional service not otherwise covered in the state's Medicaid plan. The requirements apply to mental as well as physical health care and are intended to correct or improve conditions that could be more expensive to treat later in life. In this analysis, we focus exclusively on EPSDT mental health services.

In 1994-95, counties spent approximately $97 million from all funds (county, state, and federal) on mental health services for Medi-Cal beneficiaries under age 21. (This amount includes the funds used to match federal Medicaid dollars.) In 1995-96, DMH and the Department of Health Services (DHS) entered into an interagency agreement requiring DHS to provide state General Fund support as a match for EPSDT-eligible services administered by county mental health departments, above the baseline expenditure amount of $97 million. The baseline is essentially a maintenance-of-effort (MOE) requirement for the counties. This baseline or MOE amount was not increased until 1998-99, when it was changed to $115 million to reflect (1) an inflationary adjustment of about 3 percent and (2) about $15 million in services that were not previously accounted for in the baseline. The proposed 1999-00 baseline is $117 million.

Significant Growth Since 1995-96. While DMH indicates that it originally intended to cap the state's share of costs for EPSDT services after expenditures leveled off, that has never occurred. Service costs have increased significantly every year (see Figure 1), from $25 million above the baseline in 1995-96 to an estimated $189 million above the baseline in 1998-99. If budget-year expenditures increase by the same amount as current-year expenditures, the state will spend $248 million ($120 million from the General Fund with the remainder being federal funds) above the baseline for EPSDT mental health services in 1999-00. This would be an increase of nearly 900 percent in just four years. According to DMH, the large increase in expenditures on children and adolescents include both increased services for existing clients as well as services provided to new clients.

We have identified a number of issues for the Legislature to consider with regards to the EPSDT program, which are summarized below along with our recommendations.

Summary of Recommendations. In order to address the above concerns, we recommend that (1) the department report at budget hearings on projected 1999-00 expenditures in the EPSDT program and (2) the Legislature transfer $89 million in General Fund monies from the DHS budget to DMH for EPSDT mental health services to be distributed to counties as part of their managed care allocations, with future funding increases made through the annual budget process.

Decrease Mentally Disordered Offender Evaluation Payment Rates

We recommend a reduction of $137,000 from the General Fund in the Department of Mental Health, and a reduction of $100,000 from a proposed augmentation for the Board of Prison Terms, in order to equalize the rates paid for Mentally Disordered Offender evaluations. (Reduce Item 4440-001-0001 by $137,000 and reduce Item 5440-001-0001 by $100,000.)

The Mentally Disordered Offender (MDO) program was established by Chapters 1418 and 1419, Statutes of 1985 (SB 1054, Lockyer and SB 1296, McCorquodale) to commit mentally ill prison inmates to state mental hospitals. To be deemed an MDO, an inmate must have committed one of a number of specified violent crimes, be nearing release on parole, have a severe mental disorder, and pose a substantial danger of causing physical harm to others if released into the community. In addition, the offender must have received mental health treatment in state prison for at least 90 days during the year prior to his anticipated release date.

The Board of Prison Terms (BPT) refers inmates who meet the basic commitment criteria to DMH and the CDC for psychological evaluations. If the DMH and CDC evaluators disagree about whether an inmate is eligible for an MDO commitment, BPT is required to solicit the opinions of two independent evaluators to resolve the matter. Both must concur that the inmate is eligible in order for the MDO commitment to proceed; otherwise, the inmate will likely be released on parole.

Currently, DMH conducts evaluations using three staff clinicians and about 20 contractors across the state, who are paid a flat rate of $525 per evaluation, plus travel expenses and time spent in court, for a total of $614 per evaluation. The department has $398,000 budgeted for 648 contract evaluations and $408,000 for five positions (one staff psychiatrist, two consulting psychologists, and two clerical staff) in 1998-99.

Governor's Budget Proposal. The budget proposes an augmentation of $362,000 in DMH ($280,000 for contracted evaluations and $82,000 for an additional staff position) to help address about a 25 percent increase in the projected MDO workload--from 1,272 evaluations in 1998-99 to 1,572 in 1999-00. In response to recent court decisions, many more inmates are now receiving mental health treatment at CDC institutions, resulting in a significantly higher number of offenders who are potentially eligible for MDO commitment. Accordingly, BPT and CDC also propose to increase their efforts to commit more offenders to state mental hospitals as MDOs. For BPT, the budget proposes to fund a rate increase because the board pays its evaluators a significantly lower rate than DMH. Specifically, the budget proposes $318,000 to increase the BPT rate from $320 to the $568 base rate paid by DMH. We note that prior to 1993, when the rate was reduced as a way of cutting costs, BPT paid $400 per evaluation. Unlike DMH, BPT does not currently reimburse evaluators for travel or court time.

No Reason for Rate Differential. According to BPT, its lower pay rate has caused a number of clinicians to stop contracting with the board and instead work for DMH. While we agree that there is no reason for two departments to pay different rates for the same work, we do not believe that increasing the BPT rate to $568--a 78 percent increase--is justified. At the same time, dropping the DMH base rate from $568 to $320 may be overly drastic, possibly leading to recruiting problems. Instead, we propose a statewide rate of $400 per evaluation--the original BPT rate--plus $90 for travel reimbursement and court time, for both DMH and BPT. (Please see our analysis of BPT in the "Criminal Justice" chapter of this Analysis.) This would result in a savings of $137,000 in DMH from the General Fund and savings of $100,000 in BPT in 1999-00. Although DMH indicates that paying a lower rate could lead to lower-quality evaluations, we note that the department has hired a number of the same clinicians who had contracted with BPT, with no apparent difference in the quality of their work.

State Hospital Budget Underestimates MDO Commitments

The state hospital budget appears to underestimate growth in the Mentally Disordered Offender (MDO) population, given current trends in the referral and evaluation of prison inmates who are potential MDOs. We recommend that the department report at budget hearings on its MDO caseload estimates along with the projected support and capital outlay costs associated with an increasing number of MDO referrals and state hospital commitments in 1999-00 and beyond.

To be deemed an MDO, an inmate must have committed one of a number of specified violent crimes, be nearing release on parole, have a severe mental disorder, and pose a substantial danger of causing physical harm to others if released into the community. In addition, the offender must have received mental health treatment in state prison for at least 90 days during the year prior to his release date. Those who are committed as MDOs are housed and treated at Patton and Atascadero state hospitals, the highest-security institutions operated by DMH. Since the MDO statute was enacted in 1985, nearly all of the state's prisons have begun referring inmates to be evaluated for commitment under the law.

The Board of Prison Terms (BPT) refers inmates identified as potential MDOs to DMH and the California Department of Corrections (CDC) for psychological evaluations. As discussed in the preceding issue, the budget proposes augmentations to DMH in 1999-00 to account for an increasing number of referrals, due primarily to (1) more prisons making referrals and (2) a growing number of inmates receiving mental health treatment during their prison sentences, thus making them eligible for commitment if they meet the other criteria. The department evaluates about three-quarters of the referrals it receives.

The MDO Population Outpacing Budget Projection. As the number of referrals and evaluations has grown in recent years, so has the total MDO caseload. As of June 30, 1998, the hospitals were housing 564 MDO commitments. The 1998-99 Budget Act appropriated funds for 645 MDO commitments by June 30, 1999, which reflects a net population increase of 81 over the prior year. As of December 31, 1998, however, the MDO population had already increased to 635. If commitments continue at the same pace, the population will be over 700 by the end of June 1999.

The budget proposes an increase of $3.7 million to house and treat additional MDO commitments to the state hospitals. This is based on a projected net increase of 70 MDO patients during the budget year, thereby ending the year (June 2000) with a total of 715 patients. In light of current trends, this projection appears to significantly underestimate the 1999-00 population growth and, as a result, significantly underfunds the MDO caseload. We estimate that, based on these trends, the budget proposal would need to be increased by roughly $2 million. The department should be able to provide a more precise estimate during budget hearings.

Of additional concern is the need for appropriate security for these offenders. The 1999-00 population projections show both Patton and Atascadero state hospitals at capacity by June 30, 2000. It is unclear whether the department will be able to shift patients from Patton and Atascadero to the secured units at Metropolitan and Napa state hospitals, given legislatively mandated constraints on the number and type of judicially committed patients at both of those institutions.

Department Should Update Legislature on MDO Growth. Because the MDO caseload is growing so quickly, the state may incur a substantial increase in General Fund expenditures to support these patients in both the current and budget year. In addition, the department needs to formulate a plan for housing MDOs that takes into account the available secured beds at its four hospitals. Accordingly, we recommend that the department report at budget hearings on its caseload estimates for MDOs, along with the projected support and potential capital outlay costs associated with an increasing number of MDO evaluations and state hospital commitments in 1999-00 and beyond.

State Hospital Budget Methodology Needs Revision

We recommend the adoption of budget bill language requiring the Department of Mental Health to develop a marginal cost methodology for funding annual caseload changes at the state hospitals, rather than the current average cost methodology, in order to more accurately reflect the costs of supporting additional patients.State hospital funding adjustments for caseloads are made annually according to anticipated changes in the number and types of patients who will be admitted to the four institutions. The department's budget proposals for caseload changes not only include increases or decreases in overall funding, but also reflect changes in the sources of funding for different types of patients. In recent years, for example, the hospitals have housed a growing number of patients who are judicially committed under various sections of the Penal Code or civilly committed as Sexually Violent Predators. These patients are funded using General Fund monies. At the same time, there has been a decline in the number of patients placed and funded in hospitals by county mental health departments. As a result, General Fund expenditures have increased while reimbursements from the counties have declined significantly (see Figure 2).

Funding needs that are not caseload-driven or that constitute program enhancements are typically requested through separate budget change proposals. For example, the 1999-00 Governor's Budget proposes a $6.4 million augmentation ($4.4 million from the General Fund) to reflect growing medication expenditures at the hospitals.

Current Budget Methodology. The state hospital budget consists of three main components: staff who work directly with patients, such as psychiatrists and nurses; staff who provide indirect services, such as human resources managers and groundskeepers; and operating expenses such as food, medicine, and equipment. Since 1996-97, caseload-driven budget changes have been calculated using an average cost per patient. The average cost in 1997-98 for the three components was $107,000 per patient.

In order to calculate the total amount of funding needed due to caseload increases, the department multiplies the average cost by the number of new patients, then uses a staffing formula to determine the number of new direct-care positions to request. This formula allows the department to indicate how much of its total funding will be spent on direct-care staff, while the remainder is assumed to be used for indirect-care staff and operating expenses.

Average Cost Method Overstates Amount Needed. Budgeting caseload costs according to average costs tends to overstate the amount needed to cover the incremental costs that are incurred due to an increase in the number of state hospital patients. This is because the department's calculation of average expenditures includes items such as administration, building maintenance, and groundskeeping. Unlike direct-care staffing needs, these expenditures are relatively fixed. For example, each hospital has a single director; this does not change when additional patients are admitted.

While the average cost is important to know for planning purposes, funding for new patients should be based on the variable costs that are directly related to caseload changes--such as staffing, food costs, and the purchase of additional furniture or equipment to accommodate an increased number of patients--rather than the average cost per patient.

Instead of using an average cost approach, we believe the department should develop a marginal cost methodology to budget for additional state hospital patients. This methodology can be based on variable operating expenses as well as staffing formulas for both direct- and indirect-care staff, with increases for inflation. The CDC and the two state university systems, for example, follow a marginal-cost approach when budgeting for caseload or enrollment increases.

Summary and Recommendation. Using the average cost to budget for new state hospital patients will result in overbudgeting (and the converse is true if the same methodology were used to decrease costs as a result of caseload reductions). This is because average costs tend to be higher than marginal costs. In contrast, the marginal cost budgeting approach is commonly accepted and widely used in state government. The DMH could develop such a methodology by applying staffing ratios and associated operating expenses for both direct- and indirect-care staff.

Accordingly, we recommend the adoption of budget bill language requiring the department to develop, and submit to the Legislature, a marginal cost methodology for budgeting state hospital costs, to take effect for the 2000-01 budget. The methodology would replace the average cost approach and is not intended to preclude the department from submitting budget change proposals for specific needs or special factors.

Our recommendation can be implemented by adoption of the following language in Item 4440-011-0001:

The Department of Mental Health shall develop a methodology for funding annual caseload changes at the state hospitals that is based on the marginal cost of supporting additional patients, to be used in 2000-01 and thereafter. The department shall submit a report on its proposed methodology to the appropriate legislative fiscal committees, the Joint Legislative Budget Committee, and the Department of Finance no later than October 1, 1999.

Employment Development Department (5100)

The Employment Development Department (EDD) is responsible for administering the Employment Services (ES), the Unemployment Insurance (UI), and the Disability Insurance (DI) Programs. The ES Program (1) refers qualified applicants to potential employers; (2) places job-ready applicants in jobs; and (3) helps youths, welfare recipients, and economically disadvantaged persons find jobs or prepare themselves for employment by participating in employment and training programs.

In addition, the department collects taxes and pays benefits under the UI and DI Programs. The department collects from employers (1) their UI contributions, (2) the Employment Training Tax, and (3) employee contributions for DI. It also collects personal income tax withholdings. In addition, it pays UI and DI benefits to eligible claimants.

The budget proposes expenditures totaling $5.6 billion from all funds for support of the EDD in 1999-00. This is a decrease of $248 million, or 4.3 percent, from estimated current-year expenditures, primarily due to a decrease in projected UI and DI benefit payments and a decrease in expenditures in the Welfare-to-Work Program. The budget proposes $23 million from the General Fund in 1999-00, which is a reduction of $1.5 million (6.1 percent) compared to 1998-99.

Workforce Investment Act

The Workforce Investment Act (WIA) of 1998 replaces the Job Training Partnership Act which provides employment and training services to youths and adults. It does this by amending federal law regarding job training, adult education and literacy, and vocational rehabilitation. The goal of the legislation is to strengthen coordination among various employment, training, and education programs. We review the major provisions of the act and summarize the Governor's proposal for implementing the WIA in the state.

President Clinton signed the WIA into law on August 7, 1998. States must implement the new law by July 1, 2000, but may implement the program once the Department of Labor (DOL) completes its interim regulations, which is expected to occur in February 1999. We note that this legislation must be reauthorized in five years, which is in contrast to its predecessor--the Job Training Partnership Act (JTPA)--which was permanently authorized. Major provisions of the WIA include:

State Board. States are required to establish a state workforce investment board. The board must include the Governor, two members from each house of the Legislature (appointed by the respective leaders), and other members appointed by the Governor including representatives of business, education, labor, local government, and providers of job training. Business representatives are to hold a majority of the seats on the board. The board assists in the development of a state plan for submission to the Secretary of Labor. The board also advises the Governor on the statewide workforce investment system and the statewide labor market.

State Plan. States must submit a plan that outlines the five-year strategy for the statewide workforce investment system. The plan has many required elements, including (1) a description of the state performance accountability system, (2) identification of local service delivery areas, (3) the criteria for local officials to use when appointing members of local welfare investment boards, and (4) procedures that will assure coordination and avoid duplication among the various state and federal workforce development programs.

Option for Unified State Plan. In lieu of the single state plan, states may submit a "unified" plan to the federal government to integrate two or more of fifteen specified workforce-related programs. Individual elements of unified plans must be approved by the appropriate respective federal secretaries.

Local Workforce Investment Areas and Boards. The state is responsible for designating local workforce areas. Local governments with a population under 500,000 need state approval to be designated a WIA local area; larger local governments are entitled to automatic designation. In addition, states must approve as a local "temporary designation" area, any service delivery area (the JTPA Private Industry Councils) that (1) performed successfully under the Job Training Partnership Act and (2) has a population of at least 200,000. The chief local elected official appoints the members of the local board. Local boards must adopt five year plans that, among other requirements, are consistent with the state plan and identify the workforce investment and job skill needs of the community.

One-Stop Centers. Each local board must establish a system whereby any citizen can search for a job and access a range of employment, training, and education programs at a one-stop center.

Rewards and Sanctions. States will be held accountable according to performance measures negotiated with the DOL. States that improve on a year-over-year basis will be eligible for incentive grants from the DOL. States that fail to meet performance standards will receive "technical assistance" for the first year of failure. Failure to meet standards for a second year may result in a reduction of up to 5 percent of the federal funds for the program for which the state has failed to meet these standards.

Legislative Authority. State legislatures must appropriate any federal monies or block grants for workforce-related programs governed by the WIA.

Governor's Proposal. The administration proposes a Workforce Investment Initiative that is intended to improve worker education and training for the purpose of ensuring that California has a well-trained workforce. This initiative will include the submission of a "unified" plan to consolidate and improve existing education, training, and employment programs. Because the plan must be submitted to the DOL by April 2000, the administration expects to have a draft plan developed by October 1999. The state workforce investment board will assist the administration in developing this plan.

Department of Social Services CalWORKs Program (5180)

In response to federal welfare reform legislation, the Legislature created the California Work Opportunity and Responsibility to Kids (CalWORKs) program, enacted by Chapter 270, Statutes of 1997 (AB 1542, Ducheny, Ashburn, Thompson, and Maddy). Like its predecessor, Aid to Families with Dependent Children (AFDC), the new program provides cash grants and welfare-to-work services to families whose incomes are not adequate to meet their basic needs. A family is eligible for the Family Group component of the program if it includes a child who is financially needy due to the death, incapacity, or continued absence of one or both parents. A family is eligible for the Unemployed Parent component if it includes a child who is financially needy due to the unemployment of one or both parents.

The budget proposes an appropriation of $5.5 billion ($1.8 billion General Fund, $64 million county funds, $30 million from the Employment Training Panel Fund, and $3.5 billion federal funds) to the Department of Social Services (DSS) for the CalWORKs program. In total funds, this is a decrease of $681 million, or 11 percent. Similarly, General Fund spending is projected to decline by $216 million (11 percent). The budget total for CalWORKs, however, does not include funds transferred to the Department of Education to pay for Stage 2 child care or the child care reserve. When these funds are taken into account, total spending is projected to decline by $218 million, or 3.6 percent, in 1999-00.

Current-Year Update of the CalWORKs Program

Grants. The Legislature rejected the Governor's proposal to make permanent the previously enacted 4.9 percent grant reduction and delete the statutory cost-of-living adjustment (COLA) in 1998-99. On November 1, 1998 the temporary 4.9 percent grant reduction ended and, pursuant to Chapter 329, Statutes of 1998 (AB 2779, Aroner), a 2.84 percent COLA was provided. These grant increases resulted in an eight-month General Fund cost of $226 million in 1998-99.

Future COLAs Tied to Future Tax Reductions. Chapter 329 provides that future COLAs will be suspended in any year where revenues are insufficient to "trigger" an additional vehicle license fee reduction, beginning in 2000-01.

Technical Corrections. Chapter 902, Statutes of 1998 (AB 2772, Aroner) primarily made technical changes to CalWORKs. Significant provisions include (1) clarifying that the 18 to 24 month time limit for employment services prior to community service begins when a client signs a welfare-to-work agreement and (2) modifying the county performance incentives, to permit the method of allocation contained in the 1998-99 Budget Act. We discuss the issue of county performance incentives later in this section of the Analysis.

1999-00 Budget Issues

Impact of Maintenance-of-Effort Requirement

Because the Governor's budget proposes to expend all available federal funds and the minimum amount of General Fund monies required by federal law for the California Work Opportunity and Responsibility to Kids program, any net augmentation will result in General Fund costs and any net reductions will result in federal savings.

Maintenance-of-Effort (MOE) Requirement. To receive the annual federal Temporary Assistance for Needy Families (TANF) block grant ($3.7 billion for California), states must meet a MOE requirement that state spending on welfare for needy families be at least 80 percent of the federal fiscal year (FFY) 94 level, which is $2.9 billion for California. The MOE requirement drops to 75 percent if a state meets two specified work participation rates, but California is unlikely to meet both rates in the budget year. Although the MOE requirement is primarily met with state and county spending on CalWORKs and other programs administered by DSS, we note that $395 million in state spending in other departments is used to satisfy the requirement.

Proposed Budget Is at the MOE Floor, With Partial Match for Welfare-to-Work Program. For 1999-00, the Governor's budget for CalWORKs is at the MOE floor, with the exception of $25 million above the MOE for the purpose of providing the state match for the federal Welfare-to-Work block grant funds. Because California is to receive $364 million in Welfare-to-Work block grant funds and the federal match rate is 2 to 1, a total of $182 million in state matching funds must be expended by September 30, 2001. When the proposed $25 million match for 1999-00 is added to the $10 million expended for the match in 1998-99, an obligation to expend $147 million in matching funds would remain.

The Governor's budget also proposes to spend all available federal TANF funds in 1999-00, including the projected carry over funds ($409 million) from 1998-99. We note that without these carry over funds, General Fund spending would be significantly above the MOE floor in 1999-00, under the budget's assumption of fully funding the program.

Technical Adjustments Raise MOE Countable Spending. As discussed below, we believe that the budget needs to be increased by $27.5 million in order to fully fund the cost of providing the statutory COLA as proposed in the Governor's budget. In addition, we believe that $4.8 million in General Fund spending on women offenders and parolees should be counted toward meeting the MOE requirement. (These issues are discussed later in our analysis of the program.) Taken together, these two technical changes would raise spending an additional $32.3 million above the MOE requirement, absent other changes to the budget that would free up federal TANF funds for these expenditure increases.

Budget Underestimates Cost of Providing the Statutory COLA

The General Fund cost of providing the statutory cost-of-living adjustment will be $27.5 million above the amount included in the budget, due to an upward revision in the California Necessities Index. These costs should be reflected in the May Revision of the budget.

Pursuant to current law, the Governor's budget proposes to provide the statutory COLA in 1999-00, at a General Fund/TANF cost of $209.4 million. The COLA is based on the change in the California Necessities Index (CNI) from December 1997 to December 1998. The Governor's budget, which is prepared prior to the release of the December CNI figures, estimates that the CNI will be 2.08 percent, based on partial data. Our review of the actual data, however, indicates that the CNI will be 2.36 percent. Applying the actual CNI of 2.36 percent raises the cost of providing the COLA to $236.9 million, or $27.5 million above the amount proposed in the budget. The administration should address this issue in the May Revision of the budget.

We note that these additional costs could be funded with federal TANF funds if the Legislature frees up these funds by budget reductions (such as those we recommend later in this analysis). Alternatively, the General Fund could be used as a funding source. This would bring the budget above the MOE. In that case, these expenditures could count toward meeting the state's $147 million state match obligation for the federal Welfare-to-Work block grant.

The CalWORKs Grant Levels

Figure 1 shows the maximum CalWORKs grant and food stamps benefits effective July 1999, as displayed in the Governor's budget and adjusted to reflect the actual CNI. As the figure shows, grants in high-cost counties will increase by $15 to a total of $626 and grants in low-cost counties will increase by $14 to a total of $596.

As a point of reference, we note that the federal poverty guideline for 1998 (the latest reported figure) for a family of three is $1,138 per month. When the grant is combined with the maximum food stamps benefit, total resources in high-cost counties will be $874 per month (77 percent of the poverty guideline). Combined grant and food stamps benefits in low-cost counties will be $857 per month (75 percent of the poverty guideline). We note that the poverty guidelines are adjusted for inflation annually.

Figure 1
CalWORKs Maximum Monthly Grant and Food Stamps

Governor's Budget and LAO Projection

Family of Three

1998-99 and 1999-00
Recipient Category 1998-99a 1999-00 Change from 1998-99
Governor's Budget LAO Projectionb Amount Percent
Region 1: High-cost counties
CalWORKs grant $611 $624 $626 $15 2.5%
Food Stamps 254 249 248 -6 -2.4
Totals $865 $873 $874 $9 1.0%
Region 2: Low-cost counties
CalWORKs Grant $582 $595 $596 $14 2.4%
Food Stamps 267 262 261 -6 -2.3
Totals $849 $857 $857 $8 0.9%
a Effective November 1998.b Based on California Necessities Index at 2.36 percent (revised pursuant to final data) rather than Governor's budget estimate of 2.08 percent.

Count Spending on Programs for Women Offenders And Parolees Toward MOE Requirement

We recommend that the department count toward the California Work Opportunity and Responsibility to Kids maintenance-of-effort requirement $4.8 million in General Fund expenditures in the Department of Corrections on programs for women offenders and parolees.

Pursuant to the federal welfare reform legislation, California may count all state spending on families eligible for CalWORKs, even if they are not in the CalWORKs program, for purposes of meeting the MOE requirement. To be countable, such spending must be consistent with the broad purposes of federal welfare reform--providing assistance to families so that they can become self sufficient.

The California Department of Corrections (CDC) operates three programs for women offenders and parolees with children. These programs provide services (such as drug treatment, child care, and education) to assist women in reintegrating into society. Because these programs provide services that are consistent with the intent of the federal welfare reform legislation, they can be counted toward meeting the federal MOE requirement.

Total spending for these program in 1999-00 is projected to be about $11 million. We note that about 45 percent of the women in the programs are likely to have had a drug-related felony conviction. Because current state law makes drug felons ineligible for CalWORKs, the spending on program services that go to drug felons would not count toward the federal MOE requirement. After reducing total spending by 45 percent to account for women who are likely to have drug-related felony convictions, and reducing the remaining amount by an additional 20 percent to account for other spending (such as health care) that may not meet the federal requirements, we estimate that at least $4.8 million of spending in the budget year for these programs operated by CDC (and $4.2 million in the current year) would count toward the MOE requirement. The administration, however, has not included these expenditures in its MOE calculations. Consequently, we recommend that the department make this adjustment, which would bring estimated current-year expenditures $4.2 million above the MOE and the budget proposal $4.8 million above the requirement. This action would create options for the Legislature, which we discuss below.

We note that these General Fund expenditures above the MOE could be counted toward the state match for the federal Welfare-to-Work block grant. Alternatively, any federal TANF savings identified by the Legislature could be used to replace General Fund monies to bring the budget down to the MOE level.

Budget Underestimates Savings From Maximum Family Grant Policy

We recommend that proposed spending for California Work Opportunity and Responsibility to Kids grants be reduced by $20.4 million (federal Temporary Assistance for Needy Families funds) to reflect the incremental savings that will occur in 1999-00 due to the continuation of the Maximum Family Grant policy. (Reduce Item 5180-101-0890 by $20,400,000.)

Chapter 196, Statutes of 1994 (AB 473, Brulte) enacted the Maximum Family Grant program. This program prohibits increases in any family's grant due to children conceived while on aid, except in cases of rape, incest, or failure of certain contraceptives, unless there has been a break in aid of at least 24 consecutive months. This policy became effective in December 1996.

In May 1998, DSS estimated that this policy would save $22.4 million in 1997-98 and $68.9 million in 1998-99. Previous multiyear estimates for this policy prepared by DSS indicated the annual baseline savings were likely to grow to nearly $200 million after five years of implementation. We note, however, that for 1999-00, the budget does not reflect any increase in savings from additional children who will not qualify for a grant because of this policy. We estimate these additional savings to be approximately $20.4 million in 1999-00. Accordingly, we recommend that the budget be reduced to reflect these savings.

We note that DSS is in the process of reestimating the actual savings attributable to the Maximum Family Grant policy during 1998. Based on the department's quality control data, a better estimate of actual and projected savings should be available in the May Revision of the budget. If appropriate, we will modify our estimate of the additional savings in 1999-00 based on this information.

Budget for Services and Child Care Should Reflect Impact of Nonparticipation

Although the budget for grants includes a reduction of 13 percent to account for adults who will be sanctioned for failing to comply with program participation requirements, the budget for employment services and child care includes no such reduction. We recommend reducing the budget for employment services and child care to account for nonparticipation, for a savings of $150.8 million (federal Temporary Assistance for Needy Families funds). (Reduce Item 5180-101-0890 by $150,775,000.)

Based on data from the Greater Avenues for Independence (GAIN) program (which provided employment services to AFDC recipients prior to CalWORKs), the budget for CalWORKs grants reflects savings of $95 million to account for sanctions on adults who fail to meet various program participation requirements. Specifically, the budget estimates that during 1999-00 an average of almost 53,000 adults per month (13 percent of all cases with adults) will be sanctioned. The budget for welfare-to-work services and child care, however, has not been adjusted to reflect this nonparticipation. Since adults who are sanctioned will not receive welfare-to-work services, we recommend that the budget for services and child care be reduced to reflect the anticipated savings from nonparticipation. Based on an overall 13 percent nonparticipation rate, we estimate these savings to be $150.8 million in the budget year.

Incentive Payments Should Be Related to Improved County Performance

Of the $479 million proposed for county performance incentive payments, $287 million (60 percent) is the result of the baseline level of recipient earnings, rather than savings attributable to improved county performance in California Work Opportunity and Responsibility to Kids (CalWORKs). We recommend enactment of legislation to modify the methodology for calculating the incentive payments so that counties retain 50 percent of savings attributable to earnings (rather than the 100 percent included in the budget) because the rest of the savings would have occurred in the absence of CalWORKs. This change will result in budget savings of $193 million (federal Temporary Assistance for Needy Families funds) in 1999-00 . (Reduce Item 5180-101-0890 by $192,573,000.)

Background. The CalWORKs legislation requires that savings resulting from (1) exits due to employment, (2) increased earnings, and (3) diverting clients from aid with one-time payments, be paid by the state to the counties as performance incentives. Current law also requires that DSS, in consultation with the welfare reform steering committee, determine the method of calculating these savings.

Savings from Exits Due to Employment. For 1998-99, the steering committee recommended that county performance incentive payments attributable to savings from exits due to employment be based on the increase in exits compared to the average number of exits during 1994-95, 1995-96, and 1996-97. By estimating the savings from exits due to employment in comparison to a baseline, the incentive payments for exits are directly related to improved county performance.

Savings From Increased Earnings. In contrast to its approach with respect to exits, the steering committee did not incorporate a baseline for savings due to increased earnings. Specifically, the steering committee recommended that all savings attributable to earnings--regardless of whether they resulted from CalWORKs interventions or would have occurred absent any change in program implementation--be paid as fiscal incentives. We note that prior to implementation of CalWORKs, 17 percent of the caseload had sufficient earnings to result in reduced grants. For 1999-00, the DSS estimates that of the $385 million in savings resulting from increased earnings, $287 million (about 75 percent) would have occurred without CalWORKs. Thus, the steering committee approach provides counties with $287 million in "performance incentives" that they would "earn" even if CalWORKs recipients show no improvements in earnings from county implementation of the program.

Savings From Diversion. The Governor's budget proposes to provide all net savings that are attributable to diversion as county performance incentives. Specifically, the budget estimates that cases diverted by the counties would have been on aid for an average of six months, and that the average one-time diversion payment would be $1,175. Based on these assumptions, DSS estimates that fiscal incentive payments based on net savings from diversion will be $18.7 million in 1999-00. We note that the diversion payment is a new program component, so any savings should be attributable to CalWORKs.

Summary of Incentive Payments. Figure 2 summarizes the sources of the fiscal incentives. As the figure shows, $287 million, or almost 60 percent of the proposed budget for performance incentives, is based on savings that would have occurred in the absence of CalWORKs, rather than from improved county performance in implementing the new program.

Tying Incentives to Improved County Performance. One approach to bringing incentives in line with performance would be to limit incentive payments based on increased earnings to the $99 million in savings from earnings that are actually attributable to CalWORKs. This approach would reduce fiscal incentives by $287 million, down to a total of $192 million.

We note that even though DSS has estimated that only $99 million in statewide savings from earnings can be attributed to CalWORKs, it is administratively difficult to separate baseline savings from CalWORKs savings at the individual county level. This technical estimating problem is one reason why the steering committee did not limit the fiscal incentive payments in this way.

To address this problem, we recommend providing counties with 50 percent of all savings attributable to earnings. Under this approach, fiscal incentives would be reduced by $193 million, to a total of $286 million. Although this approach leaves counties with more in incentives than can be strictly justified on the basis of improved performance, it does not rely on a county-level estimate of the baseline and still provides counties with a significant fiscal incentive to assist recipients in obtaining employment. At the same time, it will result in savings to the state which, in years when CalWORKs spending is above the MOE level, will accrue to the General Fund, and in other years will be in federal TANF funds that can be used according to the Legislature's priorities for the CalWORKs program.
Figure 2
Governor's Budget for

County Performance Incentive Payments


(In Millions)

Reason for Incentive Payment Amount Percent
Incentives based on improved county performance
Exits due to employment $75 15.7%
Diversion 19 3.9
Increased earnings attributable to CalWORKs 99 34.4
Subtotal $192 40.2%
Incentives unrelated to improved county performance
Increased earnings attributable to pre-CalWORKs program (baseline) $287 59.8%
Total performance incentive payments $479 100.0%

Analyst's Recommendation. In summary, we recommend enactment of legislation to limit performance incentive payments that are based on earnings to 50 percent of total savings from earnings. Based on this recommendation, the budget for fiscal incentive payments should be reduced by $192.6 million (federal TANF funds).

Options for Using Identified Savings

Federal savings could be (1) redirected to other priorities in the California Work Opportunity and Responsibility to Kids program, (2) placed into a reserve for future years, and/or (3) transferred to the Social Services Block Grant (Title XX), where the funds could be used to offset General Fund spending in other departments. Among these options, we recommend that the Legislature place at least 50 percent ($166 million) of our identified savings into a reserve for expenditure in future years.

Options for Using Identified Savings. If adopted, the above recommendations would result in savings of $332 million. With the exception of the General Fund proposal of $25 million for the Welfare-to-Work match and the other adjustments noted previously ($27.5 million to fund the cost of the COLA and $4.8 million in Department of Corrections spending that should be counted toward the MOE requirement), the proposed budget is at the MOE floor. Thus, if the Legislature makes any budget reductions (beyond the $32.3 million discussed above), the resulting savings would be in federal funds. Such savings would be retained by the state because they are TANF block grant funds that can be carried over indefinitely.

The Legislature has three options with respect to any such federal savings: (1) redirect the savings into other priorities in the CalWORKs program, (2) place the federal savings in a reserve for expenditure in future years, and/or (3) transfer the federal funds (up to roughly $100 million) into the Social Services Block Grant (SSBG), where the funds could be used to replace General Fund spending in certain other departments. This last option requires some explanation.

In accordance with the federal TANF block grant provisions, as amended by the Balanced Budget Act of 1997, California may transfer up to $370 million of federal TANF funds into the SSBG, also known as Title XX funds. Once transferred, the funds become subject to the rules of the SSBG, including the condition that SSBG spending of transferred TANF funds must be for children or their families with incomes under 200 percent of poverty. For 1999-00, the budget proposes to use $176 million in SSBG funds to offset General Fund costs, mostly in the In-Home Supportive Services (IHSS) program and in the community-based programs of the Department of Developmental Services. We estimate that additional SSBG funds (from a TANF transfer) could be used to supplant approximately $100 million in General Fund spending for low-income children and families in these programs.

Analyst's Recommendation. Of the three options for using identified savings, we recommend that the Legislature place at least 50 percent ($166 million) of such savings into a reserve for future years. There are two advantages to this approach. First, we note that in the event of a recession, the state will be responsible for 100 percent of any increased costs for CalWORKs grants or services that would result from an increase in the caseload. Establishing a TANF reserve would help mitigate the fiscal impact of a recession. Second, creating a TANF reserve increases legislative flexibility. If counties need more funds for CalWORKs services, they could request them during the budget year and the Legislature could authorize additional funding.

Budget Proposes to Use County Carry-Over Balances as a Funding Source

In contrast to 1998-99, the Governor's budget proposes to use $251 million in projected county carry over funds as a source of funding for the estimated need for California Work Opportunity and Responsibility to Kids employment services in 1999-00.

Background. The 1998-99 Budget Act appropriated funds to the counties in the amount estimated to meet the need for employment services and child care for the CalWORKs program in 1998-99. In addition, $175 million in prior-year unexpended child care funds and $25 million in unexpended county administration funds were reappropriated for use by the counties in 1998-99 even though the estimated need for these services was fully funded. This approach is consistent with the CalWORKs legislation which provides that counties shall retain unexpended county block grant funds through June of 2000.

Budget Proposes to Use Unspent County Funds as Funding Source. For 1999-00, the estimated need for employment services (including county fiscal incentives) is $1,258 million. The Governor's budget, however, proposes to use $251 million in estimated unexpended county block grant funds from 1998-99 as a funding source in 1990-00. Pursuant to this policy change, the Governor's budget proposes $1,007 million in new funding for employment services in the budget year. We believe that this is a reasonable policy change. It would treat the state and federal funds in a manner that is similar to how most programs are budgeted. In other words, unspent General Funds revert back to the General Fund.

Transfer Extra Child Care Funds to Child Care Reserve

In addition to funding the estimated need for child care in 1999-00, the Governor's budget proposes to allow counties to retain $88 million in unexpended child care funds carried over from 1998-99. To ensure that child care funds are available to recipients who need them and used for their designated purpose, we recommend transferring $88 million from the county block grant allocation to the child care reserve.

Inconsistent Approach to Unexpended County Block Grant Funds. As described in the previous issue, the budget proposes to use 1998-99 unexpended county employment service funds as a funding source for 1999-00. Thus, the proposed appropriation for employment services has been reduced by the estimated $251 million in unexpended county block grant funds. The budget also estimates there will be $88 million in unexpended child care funds, but proposes to reappropriate these funds to the counties in addition to providing enough new funding to cover the entire estimated need for child care in 1999-00.

Analyst's Recommendation. The Governor's budget leaves counties with $88 million more than the estimated need for child care. We note that there is significant uncertainty in estimating the budget for child care because there is limited data upon which to estimate the child care utilization rate. Accordingly, rather than reducing the proposed budget for child care by $88 million, we recommend transferring $88 million from the county block grant allocation to the child care reserve. In this way, the funds would be restricted to child care, if needed, rather than placed within the county block grant allocation where the funds could be redirected to employment services or administration. Thus, our recommendation will ensure that sufficient funding is available for counties that have unanticipated needs for child care, while also providing assurance that these funds will be used for their designated purpose.

Penalty for Failure to Meet Federal Work Participation Rate

The federal Department of Health and Human Services has indicated that (1) California failed to meet the work participation rate for two-parent families during the final quarter of federal fiscal year 1997 and (2) the state is subject to a penalty of $6,964,000. We review California's status with respect to federal work participation rates, and estimate the cost of potential future penalties.

Background. The federal welfare reform legislation of 1996 penalizes states that fail to have specified percentages of their caseload engaged in work or some other type of work-related education, job training, or job search activity. The required participation rate for the overall CalWORKs caseload is 25 percent in federal fiscal year (FFY) 97, rising to 50 percent by FFY 02. For two-parent CalWORKs families, the participation rate is 75 percent in FFY 97 and FFY 98, increasing to 90 percent in FFY 99. These rates are adjusted downward to reflect the percentage reduction in the caseload since federal welfare reform was enacted in August 1996.

The penalty for failing to meet the specified work participation rates is up to 5 percent of the federal block grant, increasing 2 percent for each year of successive failure, to a maximum of 21 percent. California's block grant is $3.7 billion, so a 1 percent penalty is equal to $37 million. A federal penalty results in a reduction in TANF funds and a corresponding increase in a state's MOE requirement.

Department of Health and Human Services (DHSS) Notification. In December 1998, the DHHS notified California that the state had met the participation rate for all families but had failed to meet the higher rate for two-parent families. Specifically, after accounting for the caseload reduction factor, DHHS determined that California needed to have 19.5 percent of the overall caseload, and 68 percent of the two-parent caseload, engaged in work or some other work-related activity. For the overall caseload, California achieved a 20.6 percent participation rate (therefore exceeding the penalty threshold). For the two-parent caseload, California achieved a 24.5 percent participation--well below the required rate of 68 percent. Based on this finding, California is subject to a penalty of $6,964,321. We note that, according to DHHS, 16 other states and the District of Columbia failed to meet the participation rate for two-parent families.

Determining the Amount of the Penalty. According to federal law, California became subject to the work participation requirement effective July 1, 1997. So, with respect to FFY 1997 (October 1996 through September 1997), California was subject to the requirement for just one quarter of the year. The DHHS calculated the penalty by applying the penalty rate of 5 percent to one quarter of the state's block grant. The DHHS then used its discretionary authority to reduce the penalty based on the "degree of noncompliance" by multiplying the gross penalty by 17.7 percent (the proportion of two-parent cases in our caseload).

State Options. The state has four options in responding to DHHS. The state can (1) accept the penalty, (2) appeal the penalty by claiming California had "reasonable cause" for not meeting the participation rate, (3) enter into a corrective compliance plan, or (4) ask for a penalty reduction based on extraordinary circumstances such as a natural disaster. Currently DSS is reviewing these options and, at the time this analysis was prepared, had made no formal response to DHHS.

Impact of Penalty. The potential penalty of approximately $7 million has not been included in the Governor's budget. We note that if California were found to be out of compliance in FFY 1998, the penalty could increase to about $45 million (based on the DHHS methodology) because the maximum penalty increases to 7 percent and the penalty would be based on a full-year of the block grant, rather than just one quarter of FFY 1997. Because any penalties result in a loss in federal TANF funds and a corresponding increase in the state's MOE requirement, a penalty represents a potential state cost.

Withhold Recommendation on Savings Attributable to Diversion

We withhold recommendation on $15 million in projected net savings attributable to counties diverting clients from assistance with one-time diversion payments.

Current law allows counties to offer clients one-time "diversion" payments if the county believes that such payments will enable the client to remain self-sufficient and therefore off welfare. The DSS estimates that this diversion policy will reduce the CalWORKs caseload by approximately 2,700 cases during 1999-00, resulting in net savings of $15 million. In November 1998, we surveyed counties on their diversion programs. Based on the results of our survey, we believe that counties will divert significantly fewer clients than DSS estimates. Because better data reflecting actual experience with diversion will be available by the time of the May Revision of the budget, we withhold recommendation on the $15 million in estimated grant savings attributable to diversion.

Withhold Recommendation on Budget for CalWORKs Community Service

We withhold recommendation on the proposed budget for community service employment pending revised estimates of caseload and costs from the Department of Social Services and the counties.

The Governor's budget for 1999-00 is based on the workfare approach to community service employment, whereby recipients will participate in community service employment in exchange for their grant. The budget proposal for recipients who transition into community service after 24 months on aid is about $20 million (the specific amount is not separately identified in the budget). This estimate assumes that one hour of case management per month, with half of this time dedicated to creating the job slot, is sufficient funding for counties to provide community service positions to all participants. The budget assumes that employers will absorb all supervisory costs.

The DSS is currently revising its caseload estimate for community service to reflect the phase-in of recipients into CalWORKs. We also note that the cost for creating job slots in the New Hope Project (a community service employment program based in Milwaukee, Wisconsin) was significantly higher than the amount assumed in the budget. Given the uncertainty in the budget for community service, we withhold recommendation pending receipt of updated caseload and unit cost information from DSS and the county welfare departments.

Below, we discuss different approaches to budgeting for the incremental costs of the wage-based (the recipient's grant is converted into wages) approach to community service employment.

Options for Budgeting Community Service Employment

The Governor's budget for 1999-00 assumes the workfare approach to community service, with no funding for the incremental cost of the wage-based approach. We present two alternative approaches to budgeting these incremental costs.

Under current law, the state pays for all CalWORKs employment service costs above the 1996-97 level. The Legislature, however, has not established a budgeting approach for community service.

There are two broad approaches to community service: workfare and wage-based. Under workfare, recipients are required to participate in community service as a condition of receiving their grant. Under wage-based community service, the recipient's grant is "diverted" to an employer and paid as wages to the recipient.

The decision to provide either wage-based community service or workfare is made by the counties. As noted above however, the 1999-00 Governor's Budget assumes the workfare approach to community service employment, with the state/federal block grant funding 100 percent of the associated costs and the counties having no share of costs. On the other hand, the budget provides no state/federal block grant funds to cover the incremental cost of the wage-based approach to community service for counties that choose this option. As a result, incremental costs would be borne exclusively by the counties. Below, we describe three approaches that the Legislature could follow in budgeting the incremental cost of wage-based community service.

Conclusion. Although all of the approaches to budgeting the incremental costs of wage-based community service discussed above have merit, we prefer option two--state/federal block grant funding of the incremental costs. The wage-based approach is specifically authorized by current law, provides substantial benefits to the recipient in the form of the federal Earned Income Tax Credit (EITC), and may provide a better bridge to nonsubsidized employment and self-sufficiency. Accordingly, we believe it should be considered a base program cost and be fully funded in the budget for any county that elects this option.

For a complete discussion of the fiscal and policy issues pertaining to CalWORKs community service employment, please see our report CalWORKs Community Service: What Does it Mean For California?

Rethinking the Budget for CalWORKs Services and Administration

Current law requires the welfare reform steering committee to report to the Legislature on alternative ways of budgeting and allocating funds for California Work Opportunity and Responsibility to Kids services and administration. We review the current budget practices and present different approaches for consideration by the steering committee and the Legislature.

Currently, the budget process for CalWORKs services and administration combines past practices with certain new program features. Key features of the CalWORKs budget process are:

Issues for Legislative Consideration. Developing a budget system that addresses the needs of county administrators and CalWORKs recipients, while controlling public costs, is difficult. Below we present alternatives for improving (1) the development of the total budget for employment and services and (2) the method of allocating funds to the counties.

The current model does not reflect county variation in program implementation. Given that counties have the broad authority to design their own CalWORKs programs, basing the budget on individual county plans has some merit. The problem with this approach is that counties have no share of marginal program costs, so there are no built-in incentives for counties to control costs. Any cost control would have to come from the DSS review of the county plans, which is administratively cumbersome. For these reasons, we prefer the hybrid approach, whereby the budget is based on a statewide model that could incorporate new cost and program assumptions. This could be facilitated by a work group consisting of county representatives and DSS staff that would annually recommend changes to the existing model.

Achieving More Equity in the Allocation of Funds to Counties. As noted above, the single allocation of employment services, administration, and child care per aided adult varies significantly among the counties. Compared to the statewide average allocation per aided adult ($2,500), 12 counties had allocations at least $200 below the state average, and 14 counties (in addition to the 20 smallest counties) had allocations more than $500 above the average.

These differences mean that where a recipient resides will affect the level of resources that are available for that recipient for employment services and child care, and presumably their ability to obtain employment. We note that counties have different local economic conditions and face different cost structures. Accordingly, it is not unreasonable that the allocation per aided adult vary to some degree. Nevertheless, we believe that except for the 20 smallest counties (which are unlikely to achieve economies of scale) the allocation per aided adult should not vary by more than what would be warranted by local cost differentials and economic conditions.

To make county allocations more equitable, the Legislature could follow one of the following basic approaches: it could reduce funding to counties with high allocations and use these savings to increase the allocation to counties with low allocations. This approach is budget neutral, but results in significant reductions for high-allocation counties. Alternatively, the Legislature could increase funding for low-allocation counties and "hold harmless" counties above the average. This approach however, increases state costs and tends to work slowly towards equalization. We suggest consideration of a hybrid strategy--the first approach, with a limit on the annual reduction that any county will incur.

Accordingly, we recommend that the welfare reform steering committee consider these issues and options in developing its report to the Legislature.

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