Legislative Analyst's Office Analysis of the 2001-02 Budget Bill

Implementation of proposition 36

In November, California voters approved Proposition 36, the "Substance Abuse and Crime Prevention Act of 2000," a measure that makes significant changes to the state's criminal justice and drug treatment systems. Implementing Proposition 36 will pose challenges to the state and counties. In this analysis, we summarize the provisions of Proposition 36, its key organizational, implementation, and funding issues, and the steps taken so far by the administration to carry out its provisions. We also offer a number of options for legislative changes and state budget adjustments the Legislature may wish to consider that could assist counties in the successful implementation of the measure.

Background

Proposition 36 changes state law so that certain adult offenders who use or possess illegal drugs would receive drug treatment and supervision in the community rather than be sent to state prison, county jail, or supervised in the community without treatment. The measure also provides state funds ($60 million General Fund in the current fiscal year and then $120 million annually thereafter through 2005-06) to counties to pay for the treatment programs and related costs. In addition to substance abuse treatment, the measure authorizes the use of the funds appropriated under Proposition 36 for vocational training, family counseling, literacy training, probation supervision, and court monitoring of offenders subject to the provisions of the measure. Figure 1 summarizes the provisions of the new law.

Key State and Local Agencies Involved. The key players involved in the implementation of the proposition include several state agencies—specifically, the Department of Alcohol and Drug Programs (DADP), the Board of Prison Terms, and the California Department of Corrections (CDC). The key local government entities involved include county alcohol and drug treatment agencies, trial courts, county probation departments, and educational, social, and health services agencies. The specific implementation activities in which they are involved in regard to Proposition 36 are summarized in Figure 2.

Issues, Challenges, and Opportunities

Based upon our analysis of the measure and discussions with many of these key players, we issued a report in December entitled, Implementing Proposition 36: Issues, Challenges, and Opportunities. We found that the state and counties will face organizational, implementation, and funding issues, including:

• Developing methods for collaboration to ensure that all key players work closely together to increase the likelihood of successful implementation.
• Assessing drug treatment capacity within counties, the needs of offenders who will be treated under Proposition 36, the gaps in the continuum of drug treatment services, and ways to fill those gaps.
• Determining the criteria for supervising and monitoring offenders who will be in treatment, as well as when to revoke their probation and parole and return them to incarceration.
• Distributing funds provided under Proposition 36 to treat and supervise offenders in the community, as well as identifying other sources of funding.

A more detailed discussion of these challenges, and our recommended approach to addressing many of them, can be found in the report.

Initial Implementation Actions

Since the issuance of our report, the administration has taken several significant initial steps to commence the implementation of Proposition 36, which we discuss further below.

County Funding Allocations. In keeping with the requirements of Proposition 36, DADP has administratively established a Substance Abuse Treatment Trust Fund into which was transferred a current-year appropriation of $60 million from the General Fund. Upon the review and approval of the state Office of Administrative Law, DADP then issued emergency regulations which establish the formula to be used for the distribution of the initial $60 million.

The adopted regulation specifies that DADP may retain a portion of the $60 million for administration of the measure, and the department has set aside $1.2 million from the trust fund for this purpose. The remainder of the $60 million is to be allocated to counties under a new distribution formula devised by DADP.

Under the DADP formula, half of the funds would be allocated using a standard existing formula for the distribution of alcohol and drug treatment funds, one-fourth would be allocated based upon the prevalence of drug arrests in each county, and one-fourth would be allocated based upon the number of individuals receiving drug treatment services in each county as of November 1, 2000 (the start of the month the initiative was enacted). To ensure that small counties have sufficient resources to comply with the law, the DADP formula further guarantees each county at least $147,000 from the initial round of funding. The rules also prohibit use of the funds for capital outlay projects.

In late December, DADP announced in a letter to counties the specific allocations that would be made available to them almost immediately upon their compliance with the new regulations.

Funding Procedures. The DADP regulation requires all counties to request funds to implement the new law. In order to receive funds, a county Board of Supervisors must adopt and submit to DADP by March 1, 2001, a board resolution designating a lead agency responsible for the administration of all Proposition 36 funds and stating the county's agreement to comply with the various provisions of the law and the implementing regulations. Each county is further required by the regulations to establish a trust fund for all Proposition 36 funds.

In addition, the new DADP rules direct each county to submit to the state a county plan for implementation of Proposition 36, including provisions indicating how the county alcohol and drug program office, probation department, and courts will collaborate to carry out the law. A deadline for counties to submit their plan is not specified in the emergency regulation, although DADP officials anticipate that nearly all counties will comply by July 1, 2001, the date when the sentencing provisions of Proposition 36 diverting eligible offenders into treatment will go into effect.

Budget Proposal. The 2001-02 Governor's Budget details the administration's proposals for using Proposition 36 funds for staffing and other expenditures to implement the measure in both the current fiscal year and the budget year. Under the Governor's expenditure plan, the $1.2 million allocated for the current year would be used to support an initial complement of 15 staff positions that are being established administratively. The Governor's budget plan would increase administrative funding to about $2.8 million in 2001-02 and establish through the budget process a total of 25.2 staff positions for several organizational units within DADP, including a new Office of Criminal Justice Collaboration that would oversee the development of both Proposition 36 implementation and ongoing drug court programs.

The department's staffing proposal is summarized in Figure 3. The budget request also provides for additional office space, information technology, and supplies for the additional staff, and allocates $600,000 in the budget year for a public university study of the new law as required by Proposition 36.

Under the Governor's budget proposal, the funding for staffing and other expenditures would be appropriated to DADP from the Substance Abuse Treatment Trust Fund. Proposition 36 appropriates $120 million from the General Fund to that trust fund in 2001-02 and in ensuing years through 2005-06.

Additional Administration Steps in Progress. At the time this analysis was prepared, we were advised that the administration was in the process of taking several additional significant steps to implement Proposition 36. These include:

• Review of the statutory and regulatory authority of DADP to ensure that Proposition 36 treatment providers are licensed or certified, as the measure requires. The department is also considering what new requirements, if any, should be established for the credentialing of drug treatment counselors.
• Development of additional regulations for the distribution of funding from the Substance Abuse Treatment Trust Fund to counties in 2001-02 and in subsequent years. As we noted earlier, the formula established in the emergency regulations applies only to funding distributed in the current year.
• Creation of several panels to assist in the overall implementation of the measure. The DADP was planning to establish advisory panels to provide it with guidance from outside experts on overall implementation issues as well as specifically on the required evaluation of Proposition 36. Steps were also being taken to foster collaboration among the various state agencies involved in the implementation of the measure.

Proposition 36 Budget Issues

Budget Actions in DADP and CDC

We recommend that the Legislature approve the proposed Department of Alcohol and Drug Programs budget to implement Proposition 36. We further recommend in our analysis of the California Department of Corrections' (CDC) budget (Item 5240) that CDC's budget be reduced by about $45 million to reflect the drop in the prison inmate population that is likely to occur in the budget year.

Accept DADP Budget Proposal. Our analysis indicates the DADP budget proposal is consistent with the proposition's requirements for strong state oversight of county implementation of the measure. The DADP's proposed expenditures for the administration of Proposition 36 from the Substance Abuse Treatment Trust Fund appear to be reasonable given the department's significant new workload and responsibilities. The funding allocated to DADP in 2001-02 would amount to about 2.3 percent of the total appropriation from the trust fund in 2001-02. Accordingly, we recommend approval of the budget request.

Reduce Prison Budget. As we further discuss in our analysis of the CDC, the budget does not take into account the impact of Proposition 36 on the prison and parole populations during the budget year. This is the case even though the diversion of offenders to treatment commences in July 2001. The CDC estimates that, as a result of Proposition 36, 3,770 fewer prison beds will be needed in the budget year and that parole caseloads will decrease by 1,051 offenders.

In our analysis of the CDC budget (Item 5240), we propose a $61 million net reduction in the department's General Fund expenditures. This amount includes $45 million to reflect the impact of Proposition 36 and $16 million to reflect a continuing decrease in the inmate population not taken into account by recent administration population projections. The Legislature may wish to consider further adjustments to prison spending at the time of the May Revision. At that time, the CDC budget plan will be adjusted to reflect updated population projections which are likely to take into account the effects of Proposition 36.

As we discuss later in this analysis, the Legislature may wish to redirect part of this $45 million in General Fund savings due to Proposition 36 to enhance efforts to implement the measure or to use these savings to address other legislative priorities.

Funding Options For Implementing Proposition 36

We recommend that the Legislature consider a number of options for legislative changes and state budget adjustments that could increase the odds of Proposition 36's success. The list of options involves the California Medical Assistance Program and California Work Opportunity and Responsibility to Kids program, federal funding that is available for worker training, literacy education, and drug treatment programs, private insurance coverage of treatment, low-interest loans for treatment facilities, and the redirection of state General Fund savings from the implementation of the measure.

State Has Stake in Proposition 36 Success. A number of counties have predicted that the funding provided to them from the Substance Abuse Treatment Trust Fund will be insufficient to provide the treatment and supervision services necessary under Proposition 36. As we have previously advised the Legislature, we believe it is too early to reach that conclusion until the treatment needs and methods of supervision of the proposition have been determined.

However, our December report also acknowledged that additional resources beyond those appropriated by the measure would be needed in order to implement Proposition 36 in a more intensive and comprehensive way. These implementation issues include providing for the drug-testing of offenders; addressing the mental health, education, training, and other social service needs of offenders diverted to treatment; or addressing the long-standing understaffing of probation departments that existed long before the passage of Proposition 36. The measure specifically states that additional appropriations by the Legislature to the treatment trust fund are permitted.

The Legislature may wish to consider assisting counties in addressing these issues in light of the state's own significant stake in the potential success of Proposition 36. The successful implementation of the proposition could both improve public safety and result in significant net savings for the state (and counties) on prison operation and construction costs as well as other health and social services expenditures. Academic research has shown that well-designed and well-run substance abuse treatment programs can provide cost-effective treatment of drug addiction that prevents the further involvement of offenders in the criminal justice system.

The state could assist the counties by providing some modest additional resources to implement Proposition 36. Such resources could be provided at no net cost to the state General Fund, either by (1) effectively using non-General Fund resources such as available federal funds and private insurance coverage, and (2) redirecting General Fund savings that will accrue to the state as a result of the implementation of the measure.

Accordingly, the Legislature may wish to consider the following options for legislative changes and state budget adjustments that we describe below that would result in more intensive and more comprehensive implementation of Proposition 36. As these options are considered, we recommend that the Legislature carefully weigh the potential fiscal and policy benefits to the state from a more successful implementation of Proposition 36 against the overall fiscal condition of the state and its other important spending priorities.

Federal Block Grant Funds. Federal law provides California and other states with allocations of Substance Abuse Prevention and Treatment Block Grant funds. The Governor's budget for DADP proposes to allocate about $223 million of these block grant funds for expenditure during 2001-02. About $15 million would be budgeted for state operations and the remaining $208 million for local assistance.

However, DADP was recently advised by federal authorities that there will be an additional $12 million in block grant funds allocated to California during 2001-02. These additional block grant funds are not reflected in the Governor's budget and would be available if the Legislature so determined to further efforts to implement Proposition 36.

Some or all of these funds could be transferred to the Substance Abuse Treatment Trust Fund created by the proposition. The Legislature also has the option of creating a separate state program providing grants to counties for local Proposition 36 implementation efforts. Providing these funds to counties separately of allocations from the Substance Abuse Treatment Trust Fund would permit the block grant funds to be used for drug-testing of Proposition 36 offenders, given that the proposition bars use of money from the trust fund for this purpose. Another alternative would be to increase the amount of block grant funds budgeted for DADP local assistance, allowing the counties to determine whether they wished to use their share of the grants to augment Proposition 36 programs or for some other purpose.

Eligibility for California Work Opportunity and Responsibility to Kids (CalWORKs) Services. The federal welfare reform legislation generally provides that offenders with a recent drug-related felony conviction are not eligible for cash assistance or for services, such as drug treatment, transportation, child care, or help in obtaining employment. (Their children remain eligible for welfare assistance.) However, the federal legislation does give states the option of adopting statutes permitting cash assistance and services to be provided to some or all of these offenders. So far, California has not exercised its option to do so.

According to CDC data, about 18 percent of the offenders sentenced to prison for drug possession felonies are women. Given that many of these offenders have low incomes, and that many have custody of their children, it appears likely that several thousand offenders annually diverted to treatment programs under Proposition 36 could be eligible for CalWORKs services if they did not have a recent drug conviction on their record. (A parole violator diverted to drug treatment under Proposition 36 who did not have a recent conviction for a drug offense—for example, someone initially convicted of burglary and subsequently released to parole—could be eligible for CalWORKs cash assistance and services.)

If the Legislature were to change state law so that now-ineligible offenders were allowed to receive treatment services under the CalWORKs program, it appears likely that sufficient funding would be available to address their needs. In recent years, tens of millions of dollars of CalWORKs funds allocated to the counties for drug treatment and mental health services have gone unspent.

Under these circumstances, the Legislature may wish to consider amending the state welfare reform law to allow drug treatment and related services (but not cash assistance) to be provided through CalWORKs for Proposition 36 offenders who would qualify for such services were it not for a recent drug conviction. In our view, providing these treatment services would help reduce the welfare dependency of families of offenders whose involvement in crime is often associated with their addiction to illegal drugs. Counties would also be provided additional resources from CalWORKs that might otherwise go unspent to significantly enhance the treatment programs provided for offenders in compliance with Proposition 36.

Counting Welfare Spending as Matching Funds. The option of changing CalWORKs eligibility rules to allow certain Proposition 36 offenders to qualify for services could provide the state with additional fiscal flexibility. Pursuant to federal welfare reform legislation, California may count all state spending on families eligible for CalWORKs, even if they are not enrolled in the CalWORKs program, for purposes of meeting maintenance-of-effort (MOE) requirements for state matching funds. By counting appropriate Proposition 36 expenditures as MOE, the state is free to spend an equivalent amount of General Fund money for any other purpose it chooses. We estimate that the state could free up about $11 million General Fund annually for other purposes by counting appropriate Proposition 36 expenditures as MOE.

We would note that, even if the Legislature does not choose to change CalWORKs eligibility rules for offenders convicted in the courts on new drug charges, the state could count as MOE some of the Proposition 36 expenditures for parole violators who meet CalWORKs eligibility rules. This would be the case even if these offenders are not actually enrolled in the CalWORKs program.

As we discuss further, the Legislature may wish to redirect General Fund money that is no longer required as a state match for the CalWORKs program to further the implementation of Proposition 36 or to address other legislative priorities.

Funding Drug Treatment With Medi-Cal Funds. Some of the offenders diverted to treatment programs under Proposition 36 could be eligible for medical assistance under the Medi-Cal Program. Because substance abuse treatment qualifies as medical service provided under the program, Medi-Cal could, at least theoretically, provide a supplemental source of funding for implementation of Proposition 36. Medi-Cal is jointly funded by the state and federal governments on almost an even dollar-for-dollar matching basis. If the funding allocated to counties under Proposition 36 could be counted as the state share of Medi-Cal treatment for eligible offenders, additional federal funds could be obtained for treatment services at no further cost to the state.

There are legal questions about this approach, however, that would need to be addressed. For example, Medi-Cal reimbursement is limited in California for specified treatment services that are deemed to be "medically necessary." Reimbursement might not be available to pay for the treatment of an individual resulting from the legal order of a judge or the state parole board absent a clinical determination that the offender has an addiction problem. However, we believe it is possible to ensure that Medi-Cal only pays for the treatment of Proposition 36 offenders when it is determined through a clinical assessment, perhaps conducted under court order, that the offender meets the test of requiring medically necessary treatment. The Legislature may wish to seek a review of such legal issues to determine whether any changes in state law are necessary and feasible to enable counties to leverage their Proposition 36 allocations with federal Medi-Cal funding.

Medi-Cal-Funded Mental Health Treatment. Proposition 36 offenders who are seriously mentally ill could also be assisted under the Medi-Cal Program because mental health services are an authorized medical service. Given that more than 70 percent of seriously mentally ill offenders also have a substance abuse problem, it is likely that several thousand Proposition 36 offenders could benefit from mental health services. With some additional state help, counties might be able to make mental health services available for offenders with a "dual diagnosis" of both drug addiction and a serious mental illness.

As is the case with drug treatment services, we believe that counties could use their Proposition 36 trust fund allocations as a match for federal Medi-Cal funding if the offender meets the test of requiring medically necessary treatment. However, some of the same legal questions about using Medi-Cal for substance abuse treatment would also apply to the provision of mental health services in this way.

We also note that Proposition 36 does not specifically authorize the use of trust fund allocations for mental health services. However, a provision permits trust funds to be spent for "any miscellaneous costs made necessary by the provisions of this act" and therefore could be interpreted to allow funding of mental health services for an offender with a dual diagnosis of drug addiction. The Legislature may wish to consider amending Proposition 36 to clarify that trust fund allocations could be used for mental health services in such cases.

Workforce Investment Act Funding. The Legislature may wish to consider furthering Proposition 36 programs by using federal funds allocated to the state and county governments under the Workforce Investment Act. Proposition 36 authorizes judges and parole officials to mandate that offenders participate in vocational training and literacy education programs, and the measure allows funds from the Substance Abuse Treatment Trust Fund to be used to provide such training. If other sources of funds were available to pay for vocational training and literacy education, though, more money would remain available for counties' substance abuse treatment programs and related services.

The 2001-02 Governor's Budget appropriates about $800 million in funding received by the state under the Workforce Investment Act, a recent federal law that targets funds to assist adults facing serious barriers to employment. Up to 15 percent of the allocation is reserved for statewide activities, with the balance of funding allocated to counties. The Governor's proposed budget identifies few specific statewide projects, and proposes to leave most allocation decisions to the California Workforce Investment Board.

The Legislature, or the board, may wish to consider setting aside part of the state's allocation for Proposition 36 offenders, or encouraging counties to take similar actions with their Workforce Investment Act allocations. Our analysis indicates that some offenders subject to Proposition 36 may have other significant problems beside their drug addiction, such as a lack of job skills, that increase their risk of future involvement with the criminal justice system. These offenders may be less likely to commit probation or parole violations or commit new crimes if they received vocational training that made them employable using the federal funds available under the Workforce Investment Act. The federal law permits these funds to be used to provide job training and job preparation assistance for adults, as well as for literacy education provided in coordination with employment assistance services.

Private Health Insurance Coverage. Proposition 36 provides that any offender who is reasonably able to do so may be required to contribute to the cost of his or her placement in a drug treatment program. Not all offenders convicted of the nonviolent drug possession crimes subject to the provisions of Proposition 36 will be indigent, and our analysis indicates that many will face at least a nominal charge for the cost of their services. Moreover, some individuals subject to the drug treatment provisions of Proposition 36 may have health insurance that could provide substantial reimbursements of the cost of substance abuse treatment provided under the measure.

If third-party private reimbursement was available to pay for treatment services in such cases, more public money would remain available to counties to enhance their substance abuse treatment programs and to support other activities to implement Proposition 36 effectively. However, we are advised that, in such cases, some health insurers may decline to pay for such services on the grounds that they were the result of a criminal conviction rather than medical necessity. The Legislature may wish to ask Legislative Counsel whether there are any legal impediments to ensuring that third-party reimbursement is available to counties to help pay for treatment provided under Proposition 36. As in the case of Medi-Cal, we believe third-party payment for such services may reasonably be required when a clinical assessment has determined that they are medically necessary.

Capital Outlay Needs of Treatment Facilities. The DADP has predicted that Proposition 36 could result in the need for a significant expansion of residential facilities and nonresidential programs to serve offenders diverted to treatment under its provisions. We are advised by drug treatment providers that they will need new or expanded facilities for residential or outpatient treatment programs to serve Proposition 36 offenders in addition to their existing drug treatment patients. However, the DADP's emergency regulations prohibit the use of any of the first allocation of money from the trust fund for major capital outlay projects.

We believe the state could assist counties and drug treatment providers with their capital outlay needs through the existing loan program operated by the California Health Facilities Financing Authority. The authority has frequently provided 3 percent interest-rate loans for up to 15 years to drug treatment programs as well as other types of health program providers. We are advised that the authority may have up to $18 million available during the budget year for such loans. The Legislature may wish to request the authority to (1) assess whether it has sufficient funding available to meet the anticipated needs of providers participating in the implementation of Proposition 36 and (2) report at the time of budget hearings as to whether it has sufficient resources to meet the needs both of drug treatment providers and other types of medical providers seeking financing assistance.

Redirection of State Savings. Earlier in this report, we indicated that the Legislature has the option of redirecting anticipated state savings on prison operating costs due to Proposition 36 to further efforts to implement the measure. Any General Fund resources made available by counting Proposition 36 expenditures as a match to the CalWORKs program could also be used for such purposes.

For example, the Legislature could use these additional General Fund resources to provide counties with the funding needed to pay for drug-testing of Proposition 36 offenders. While the proposition prohibits the use of the Substance Abuse Treatment Trust Fund to support drug testing, the measure does not prohibit drug testing for offenders paid for from other funding sources such as we have identified. The Legislature may also wish to consider providing additional funding for court monitoring or probation supervision of Proposition 36 offenders.

Conclusion

In considering the alternatives we have offered in this analysis, the Legislature should bear in mind that some of these options represent courses of action that do not work in combination with each other. For example, to the extent that Medi-Cal funding is used to provide substance abuse treatment services for Proposition 36 offenders, those expenditures may not also be counted as state MOE for the CalWORKs program.

Other options may complement each other. That is the case, for example, with the alternatives on counting MOE and the option for making certain Proposition 36 offenders eligible for CalWORKs services.

Finally, as we stated earlier, we recommend that the Legislature carefully weigh the potential fiscal and policy benefits to the state from the successful implementation of Proposition 36 against the overall fiscal condition of the state and its other important spending priorities in making such funding decisions.