Legislative Analyst's Office Analysis of the 2002-03 Budget Bill

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 state prison treatment services at the California Medical Facility at Vacaville and, beginning in the budget year, at Salinas Valley State Prison; and (4) administer various 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, and mentally disordered offenders and mentally disabled clients transferred from the California Department of Corrections.

Budget Proposal. The budget proposes $2.2 billion from all funds for support of DMH programs in 2002-03, which is an increase of more than $100 million and 4.9 percent above estimated current-year expenditures. The budget proposes $943 million from the General Fund, which is a reduction of about $46 million, or 4.6 percent, below the Governor's revised budget plan for the current year. Reimbursements that would be received by DMH--largely Medi-Cal funding passed through to community mental health programs--would increase $150 million, or about 15 percent.

The overall proposed increase in DMH expenditures is primarily due to the expansion of the Early and Periodic Screening, Diagnosis, and Treatment program (EPSDT) for children with emotional problems. The budget reflects a $134 million increase in 2002-03 in the reimbursements received from Department of Health Services for support of EPSDT ($70 million comes from an increase in Medi-Cal General Fund spending and the balance from federal funds). An additional $16 million in reimbursements is provided in the budget for therapeutic behavioral services for EPSDT children ($7.9 million comes from an increase in Medi-Cal General Fund and the balance from federal funds). Also, an additional $14 million from the General Fund would be provided for caseload and other adjustments for managed care plans providing community mental health treatment.

Also contributing to the overall increase in DMH spending is a request in the state hospital budget for an augmentation of about $22 million from the General Fund (as well as a decrease of $12 million in reimbursements) for projected growth in the forensic patient population. The budget plan assumes that the overall number of hospital patients at the end of the budget year will be 4,687, about 390 more patients than were in the hospitals as of December 2001.

The net reduction in General Fund expenditures proposed by the Governor's spending plan results from an anticipated $35 million decrease in payments for state-mandated local programs as well as a series of other adjustments. This includes proposals to:

• Reduce supportive housing programs by $17.5 million, leaving $3.5 million available for additional projects.
• Defer about $12 million in support for services for special education pupils. Instead of receiving part of their state funding in advance though a categorical state program, counties would henceforth recover funding after the fact by filing claims for reimbursement against the state.
• Reduce Children's System of Care programs by $4.2 million.
• Discontinue about $2.7 million a year in payments that once were used to support a Santa Clara County mental health hospital but that had continued following its closure.
• Reduce by $1.5 million "dual diagnosis" projects intended to assist patients who have both substance abuse addiction and mental illness.

We discuss some of these specific proposals for spending increases and reductions later in this section of the analysis.

State Hospital Issues

Hospital Growth Projections Lowered

The state hospital system is no longer projected to grow nearly as quickly as the Department of Mental Health had previously predicted. Even with the significant downward revisions in projections that have occurred over the last four years, however, the department still appears to overstate the growth that is likely to occur over the next decade. A key factor appears to be a slowdown in the rate at which mentally disordered offenders and other criminal offenders are being committed to state hospitals.

Ten-Year Projections Revised Downward. On a periodic basis, DMH prepares projections of how the state hospital population is expected to grow over the ensuing ten years. These ten-year projections forecast the overall numbers of patients expected to require state hospital beds. They also examine the specific, high-security bed needs of forensic patients--that is, those transferred to the hospitals because of their involvement in the criminal justice system. They also forecast the caseloads for other patients committed to the hospital system under the authority of the Lanterman-Petris-Short (LPS) Act and financially supported by counties. These projections are important because the department`s budget requests and its capital outlay plans are largely based upon them.

Our analysis indicates that, over the past several years, the department's long-term population estimates have been dramatically revised downward. The change in the projections can be seen in Figure 1.

The earlier projections have already proven to be overstated. For example, the projections that were used as the basis for the 1998-99 budget plan assumed that the total population in the state hospital system would reach 4,900 as of June 2001. The actual patient population at that time was lower by about 550.

As a consequence, more recent projections--including the one released recently in support of the Governor's 2002-03 budget--have been repeatedly scaled back. For example, while the 1998-99 projections indicated that the hospital system would have 6,586 patients by June 2006, the most recent projections used as a basis for the 2002-03 budget plan suggests there will only be 5,337 by that same date--about 1,250 fewer patients than previously predicted.

The larger numbers assumed in the 1998-99 budget projections were based primarily on an assumption that there would be a strong and sustained growth of about 156 additional sexually violent predators (SVPs), per year, for a total of 1,545 SVP patients by June 2006. (The SVPs are prison inmates nearing release to parole who have been convicted of a violent sexual offense.) The most recent DMH projection is that the total number of SVPs as of June 2006 will be 658, based on a growth rate of about 55 additional SVPs per year.

Latest Projections Probably Still High. Barring major policy changes by the Legislature or court rulings that could change the rate of commitment of new patients to the state hospital system, our analysis indicates that even the lower, more recent DMH projections still overstate the growth that is likely to occur in the hospital system. Specifically, we estimate that the hospital system will have about 250 fewer patients at the end of 2002-03 than DMH is now projecting.

The primary explanation for the difference between our estimate and the department's is attributable to its methodology. The DMH projection is based upon a statistical three-year trending of data that does not sufficiently take into account more recent, and more moderate, trends in some population groups, or the programmatic changes that appear to explain why growth in certain groups has slowed.

For example, DMH projects ongoing growth in the mentally disordered offenders (MDOs) caseload (62 per year), even though the number of MDOs actually grew by four during 2001. For several years, the number of MDOs had been growing quickly, but the build-up in this population occurred during a period in which the number of offenders eligible for the MDO program dramatically increased and the efforts by the state to screen and refer state inmates to DMH for MDO commitments were escalating significantly.

The situation appears to have changed, however, in regard to both of these factors. The pool of offenders potentially eligible for MDO commitments is now fairly stable, and the number of MDO referrals, which had increased by a factor of six in four years, is growing much more modestly now (about 12 percent per year). The number of MDOs being discharged from the hospital system slightly exceeded the number of MDOs admitted during 2000-01, in keeping with DMH data showing a slight decline in the population during that same fiscal year. More recent data similarly suggest that growth in some other forensic groups, such as offenders deemed incompetent to stand trial, has also slowed and in some cases may actually be declining slowly now.

Legislature Needs Better Information. The department's population projections have significant ramifications both for state finances and the operation of the state hospital system. For example, the construction of a more than $300 million, 1,500-bed hospital in Coalinga for SVPs was justified largely on the basis of a projection that 1,500 hospital beds would be needed for SVPs by 2006. Had more accurate projections been available at the time, the Legislature might have considered authorizing a smaller facility or a different approach to meeting its future bed needs, such as further additions to existing hospitals.

Because of continuing disparities between the projections and actual population figures, both DMH and the Department of Finance (DOF) are reviewing how these projections could be modified to provide a more realistic forecast of future bed needs. We will continue to monitor these efforts and will advise the Legislature at the time of the May Revision what steps, if any, it should take to ensure it has better projections upon which to base major decisions on the future finances and capital outlay needs of the hospital system.

Patient Caseload Overbudgeted

We recommend a General Fund reduction of $12.6 million because state hospital caseload funding is overbudgeted. Additional General Fund savings in the Department of Mental Health budget of about $1.4 million are likely to occur in the current fiscal year due to lower caseloads. (Reduce Item 4440-011-0001 by $12.6 million.)

Governor's Proposal. The Governor's spending plan proposes to provide additional funding for DMH in both the current fiscal year and the budget year to accommodate the increases that the department projects will occur in the state hospital population.

For the current fiscal year, the administration has proposed a net increase of about $4 million in hospital funding relative to the funding previously authorized in the 2001-02 Budget Act. This increase includes: (1) a $3 million General Fund increase for the treatment of certain forensic patients, (2) a $1.3 million increase in reimbursements paid to DMH from the California Department of Corrections (CDC) for the treatment of prison inmates, and (3) a reduction of $350,000 in reimbursements paid to DMH by counties. (In December, the DOF submitted a Section 27.00 letter notifying the Legislature of its intention to increase General Fund expenditures by $2.9 million to implement part of this budget proposal. However, the Legislature did not concur with this increase.)

For the budget year, the spending plan requests a net increase of $9.4 million for state hospital population caseload adjustments above the revised current-year spending level proposed by the Governor. The budget proposal would: (1) increase General Fund expenditures in the DMH budget for treatment of certain forensic patients by $21.6 million, (2) increase reimbursements paid to DMH for treatment of CDC inmates by about $2.6 million, and (3) reduce reimbursements paid to DMH from counties for LPS patients by about $14.8 million.

The budget request is based on the department's ten-year population projections that were discussed earlier in this analysis. The DMH assumes that the overall state hospital population (which was 4,297 in December 2001) will reach 4,565 by the end of 2001-02 and 4,687 by the end of 2002-03. The DMH budget request further assumes that (1) the number of county LPS patients will decline, (2) the number of CDC state prison inmates receiving treatment in the state hospitals will remain level, and (3) the number of other forensic patients supported through General Fund appropriations in the DMH budget will increase.

Projections Off Track. Our review of recent hospital population data indicates that the overall number of patients has actually been declining, and is not growing significantly as assumed in the Governor's budget. The gap between the budget projection and actual population trends is evident in Figure 2, which compares the population growth assumed in the Governor's budget plan for the first half of the 2001-02 fiscal year to the weekly population counts for that period.

If this disparity between the projections and actual population counts were to continue, the Governor's budget plan would provide the state hospitals significantly more money than is needed in both the current and budget year.

LAO Projection: Lower Caseload Growth. Because of our concerns about DMH population projections, we have prepared estimates of the patient population for the current fiscal year and the budget year. Our estimating approach more fully takes into account recent statistical trends and significant changes in programs. It also differs from DMH estimates--because an additional six months of actual data were available.

Our estimates assume a somewhat higher caseload of LPS patients over the course of 2002-03 than does DMH, but assumes a lower number of CDC patients in the state hospital system.

Our estimates, which are summarized in Figure 3, indicate that the hospital population will grow from 4,297 (the number of patients reported as of the end of December 2001) to 4,435 patients by the end of the budget year. That is about 250 fewer patients than DMH has predicted will be present by that date.

Caseload Funding Needs Overstated. Based upon our population projections, we believe that the hospital caseload funding proposed by the Governor for the current fiscal year and the budget year is overstated. For the current fiscal year, we expect that the state will realize a net General Fund savings (partly in the DMH budget, and partly in the CDC budget) of about $8.7 million, as shown in Figure 4. We would note that, because the hospital caseload has been running so far below projections, the Legislature has already captured savings of $2.9 million. Thus, about $1.4 million in additional General Fund savings are available in the DMH budget in the current year. In regard to the budget year, we estimate that the state could realize savings of about $20 million from the General Fund (again, partly in the DMH budget and partly in the CDC budget).

Analyst's Recommendation. For these reasons, we recommend that the Legislature reduce General Fund expenditures for DMH and CDC in the budget year by a combined total of $19.7 million. We further recommend a partly offsetting increase in the DMH budget of $2.4 million for increased reimbursements from counties for the additional LPS patients that we have projected.

The state hospital beds used by CDC are provided through a memorandum of understanding with DMH in order to ensure CDC's compliance with a federal court order for the appropriate care of seriously mentally ill inmates. In order to ensure continued compliance with the court order, we recommend the adoption of budget bill language that would ensure that CDC could obtain General Fund deficiency authorization if its use of DMH hospital beds increased in compliance with the requirements of the court. The language would also require the automatic reversion of any funding provided to CDC for the purchase of beds in state hospitals that is in excess of its needs. In such situations, this should result in an equivalent matching decrease in the DMH budget of reimbursements from CDC.

Additional Beds Not Needed Yet

We recommend that the Legislature deny requests to spend an additional $3.4 million from the General Fund in the budget year to activate additional beds for patients at two state hospitals. Due to slower state hospital population growth, these additional beds will not be needed until 2003-04 at the earliest. (Reduce Item 4440-011-0001 by $3.1 million.)

Modular Space Added. The 2001-02 Budget Act provided $6.9 million in one-time funding to DMH to purchase 25 modular trailers that would be placed at Patton State Hospital and Atascadero State Hospital and used as program space for patients. The addition of the modular units would permit space previously used for treatment and recreation to be converted into temporary beds for as many as 500 additional patients. The funding was justified on the basis that the state hospital system would run out of bed space for patients requiring a secure setting in 2002-03.

The Governor's 2002-03 spending plan would provide $3 million to DMH from the General Fund for additional staffing for groundskeepers, clinical staff, instructors, and other staff that would be needed to activate the Patton and Atascadero beds. The budget would also provide an additional $427,000 from the General Fund to CDC, which provides perimeter security at Patton, due to the planned increase in the population at the hospital. The funding requests are again justified on the basis that the hospital system will run out of space in 2002-03 for these types of patients.

Analyst's Recommendation. We recommend that the DMH and CDC requests for this funding be denied because the slowdown in state hospital population means the additional beds would not be needed until 2003-04 at the earliest. The activation last year of a secure new 258-bed facility at Atascadero means that DMH would continue to have a surplus of about 125 such beds at the end of the budget year. The surplus in these secure beds might even be sufficient to meet the state hospital system's needs until 2004-05, when a new state hospital in Coalinga is scheduled to open.

New Prison Facility May Face Delay

The scheduled opening of a new mental health facility at Salinas Valley State Prison is reportedly being delayed for at least five months. The Department of Mental Health (DMH) and the Department of Corrections (CDC) should report at budget hearings on the status of its activation and the savings that could result if its opening is postponed. If the opening is postponed, the Legislature should adjust the DMH and CDC budgets to reflect the savings that will occur, which could be as much as $3.7 million.

The 2001-02 Budget Act provided $2.3 million to DMH for the partial-year cost of activating a newly constructed 64-bed psychiatric facility at Salinas Valley State Prison that will be staffed with DMH clinicians. (These funds were provided as reimbursements from CDC to DMH.) About $174,000 of the funding was for one-time costs for activation of the facil ity, with the remainder of the $2.3 million to be used for activation of the new facility as of April 2002. The Governor's 2002-03 budget plan would provide an additional $3.1 million in reimbursements from CDC for the facility. After accounting for the expiration of one-time funding from the current year, a total of about $5.4 million would be provided during 2002-03 for the anticipated full-year operation of the new mental health beds.

DMH Advised of Delays. Although CDC had not confirmed any change in the construction timetable at the time this analysis was prepared, DMH has indicated that it has been informed by CDC that the completion date of construction of the new Salinas Valley facility has been delayed until September 2002. According to DMH, it was advised by CDC to delay recruitment of staff for the new facility because neither the medical unit nor administrative space would be available until that date to house any staff.

If activation of the facility is postponed until September 2002, much of the $2.3 million appropriated in the current fiscal year, and as much as $1.4 million of the appropriation for the budget year, would not be needed. The savings could presumably be even greater than $3.7 million should the activation of the Salinas Valley beds be delayed beyond September.

Analyst's Recommendation. Given the uncertainly now about when the new Salinas Valley facility will be activated, the DMH should provide a status report on this issue at budget hearings. If activation of the facility is postponed, DMH should estimate the savings that will result both in the current and budget year from the delay and the Legislature should adjust the CDC and DMH budgets accordingly.

Budget Should Be Realigned

About 20 percent of the positions authorized for the state hospital system were vacant as of January 1, 2002, and a number of factors make it unlikely that most of these positions will be filled during the budget year. We recommend that the Legislature review a pending study on Department of Mental Health vacancies that should help determine which of the growing number of unfilled positions should be abolished. We further recommend that the Legislature direct the Department of Finance to prepare a revised 2002-03 hospital spending plan that more closely reflects (1) the number of staff positions that the hospitals system will actually be able to fill and (2) how excess funding from vacancies is actually being used for overtime, temporary help, operating expenses and equipment, and any other purposes.

High Vacancy Rate Persists. The Governor's revised budget plan for 2001-02 authorizes about 8,650 positions for state hospital staff. However, many of the positions have not yet been filled and will probably remain vacant through the end of the fiscal year. Midway through the 2001-02 fiscal year, DMH has indicated that about 1,750 of the authorized positions remain vacant. This represents a vacancy rate of about 20 percent--a rate far in excess of the 5 percent vacancy rate that is the standard for operation of most state agencies, and a rate higher than the 15 percent vacancy rate reported by the department at the same time the previous year.

Part of the reason for the high vacancy rate in the hospitals is that some positions included in the 2001-02 spending plan, such as those for a new unit at Salinas Valley State Prison, were never scheduled to be filled until later in the year. But the major reason so many positions go unfilled is the severe difficulties the department has experienced in recruiting and retaining nurses, mental health professionals, and certain other staff positions subject to labor shortages.

The funding that goes unspent as a result of these large numbers of vacancies is used to pay for hiring temporary staff or overtime for the hospital workforce. Additional funding originally intended for positions that were left vacant has been redirected to pay other operating expenses and equipment needs of the hospital system.

In response to legislative concerns about the high vacancy rates at DMH and other departments, the administration announced that it intended this spring to review the vacancy situation at 11 state agencies, including DMH, to reduce the number of excess vacant positions in state service.

Legislative Accountability Undermined. The disparity between the way funding and personnel are budgeted by the Legislature for the hospital system and the way these resources are actually used has become very significant. The DOF estimated that about $39 million in savings from vacant positions within DMH was shifted to other purposes in 1999-00.

At least 1,000 of the nearly 8,800 hospital positions proposed in the Governor's budget for 2002-03 would probably go unfilled all year, meaning that more large funding shifts are almost inevitable. We acknowledge that, in most cases, unused funding from vacancies are being used for other appropriate purposes, such as overtime for workers needed to take the place of authorized but unfilled positions. But this situation makes it difficult for the Legislature to hold DMH accountable for spending its funding for state hospital operations (now a $611 million a year operation) for the purposes for which it was approved.

Analyst's Recommendations. Some steps have already been taken to assist DMH and other state agencies in attracting qualified staff to its ranks. However, a widespread shortage of certain types of workers such as nurses probably means that large numbers of state hospital positions will continue to go unfilled. Rather than continue to authorize large numbers of positions that will probably not be filled during the budget year, we recommend that the Legislature act this year to ensure that department funding and staffing are more closely aligned with the way that the state hospitals are actually being operated.

One step would be to carefully consider the results of the forthcoming administration review of vacancies at DMH (as well as other state agencies). This study should provide guidance to the Legislature regarding which positions now in existence, and the funding associated with those positions, should be abolished.

Given the sizable number of vacancies in the state hospital system, and the increase in its vacancy rate compared to last year, we would further recommend that the Legislature direct the DOF to include in its May Revision of the 2002-03 budget, a revised funding plan that more closely reflects the number of staff positions that the hospitals will actually be able to fill in the budget year and that more accurately reflects actual departmental expenditures for overtime, temporary help, operating expenses and equipment, and any other appropriate purposes.

This technical realignment of the DMH budget is intended to directly budget appropriate levels of funding for these needs. It is also intended to permit the department to continue to meet its salary savings requirements, as well as have a reasonable opportunity to shift more of its personnel budget from overtime and temporary help to permanent full-time workers.

Community Services Program Issues

Mental Health Services For Special Education Pupils

Background

In 1976, Congress passed the Education for All Handicapped Act, guaranteeing handicapped children the right to receive a free appropriate public education, including special education and related services--such as mental health--necessary for the child to benefit from his or her education.

While local educational agencies initially were responsible for providing all the necessary services to special education children, Chapter 1747, Statutes of 1984 (AB 3632, W. Brown), and Chapter 1274, Statutes of 1985 (AB 882, W. Brown), shifted the responsibility for providing mental health services to counties. This local mental health program, in turn, became known as the "AB 3632" program.

Like other special education programs, the AB 3632 program is structured as an entitlement program, available free of charge to all children needing services. While little program utilization data are available, the DMH estimated that the program served about 17,000 pupils in 1997, including about 1,000 pupils in residential care.

Over the last decade, counties have paid for the cost of this program from a variety of sources:

• Categorical funding provided by DMH under the Assessment, Treatment, and Case Management of Special Education Pupils program.
• Mandate reimbursements for Services to Handicapped Students, pursuant to Article XIII B, Section 6 of the California Constitution.
• Public and private health insurance programs.
• Realignment resources.

While full program cost data are not available, state resources provided counties under the DMH, categorical program and as mandate reimbursements total nearly $100 million in the current year ($12.4 million categorical funding and $82.7 million in mandate funding). This level of direct state support has increased steadily from $41.2 million a decade ago.

Budget Proposal

The Governor's budget proposes to eliminate the categorical funding for the AB 3632 program. Because this categorical funding is considered an "offset" in calculating the amount counties may claim as mandate reimbursements, eliminating the categorical funding will result in a commensurate increase in the funding counties may claim as mandate reimbursements. The budget, however, proposes only $47.9 million for AB 3632 mandate reimbursements in 2002-03, less than one-half the amount of state support provided in the current year. As a result, the proposed budget may result in a significant budget-year deficiency.

In addition to the budgeting concern discussed above, our review of the administration's AB 3632 proposal raises two issues relating to legislative oversight of this program.

Legislature Has Little Authority to Direct Resources for "Mandated" Programs

Whenever a program is funded through the mandate process rather than a statutory formula, the distribution of resources varies markedly in a manner that reflects local record-keeping and claim-filing practices more than policy objectives, need, or legislative intent. Figure 5 shows the average annual mandate reimbursement received in regard to AB 3632 by ten counties between the years 1995-96 and 1999-00. As a point of reference, this figure also shows the number of K-12 pupils in the county in 1999. As the figure indicates, counties vary markedly in terms of funds reimbursed. For example, while the San Diego County has seven times more students than San Francisco, San Francisco's reimbursement was nearly 25 times the amount received by San Diego.

This vast difference in reimbursement levels reflects local choices regarding treatment services, collection of insurance and other health program payments, and--as we discuss further below--county reimbursement claiming practices.

Significant Controversy Regarding Mandate Claims

Over the last two years, the State Controller's Office (SCO) has audited county AB 3632 mandate reimbursement claims dating back to 1997 (three years of claims for each audited county). Based on information provided by counties and professional mandate claims preparers, we understand that SCO auditors have found that many counties are claiming reimbursements for 100 percent of the cost of providing mental health treatment services to special education pupils, rather than the 10 percent specified under the terms of this mandate. In addition, some counties are not reporting revenues that auditors indicate should be included as mandate cost "offsets." The magnitude of these auditing concerns is unknown, but could total as much as $100 million statewide for the three-year period. 

Ordinarily, after the SCO completes an audit of a local agency's claims, the office issues a draft audit. Once the local agency has responded to the draft audit findings, the SCO releases a final audit. If the SCO's final audit indicates that a local agency received state funds inappropriately, the SCO requests the local agency to repay the funds or withholds the amount from future mandate claims.

In this case, however, due to the magnitude of the issue and the focus of the program, the SCO has delayed issuing draft audits while counties investigate their options with the Commission on State Mandates for revising the mandate reimbursement methodology (referred to as the mandate's "parameters and guidelines"). The gray box provides a time line of the events and the technical matters involved in this mandate claim dispute. In general, the controversy results from poor communication between the parties drafting the 1991 realignment legislation and the parties drafting the mandate's reimbursement methodology.

While a full review of this controversy is beyond the scope of this analysis, it is important to note that state costs and county revenues for this program in the budget and future years depend on resolution of this matter. Specifically, if many county prior-year mandate claims are found to be inappropriate, those counties may receive little or no net state support for this program in the budget year. Conversely, if the suspect county claims are determined to be acceptable, other counties likely will modify their claiming practices to collect higher state reimbursements. These changes, in turn, would increase overall state program costs, potentially by tens of millions of dollars annually.

LAO Recommendation

We recommend the Legislature set aside funding for the AB 3632 program mandate--"Services to Handicapped Students"--pending development of a new program of county mental health services for special education pupils. (Reduce Item 4440-295-0001 by $47.9 million. Shift funds to new Item 4440-104-0001.)

We recommend that the Legislature reject the administration's proposal to provide all state support for this program through the mandate reimbursement process. As discussed above, the mandate process does not distribute funds equitably among counties or encourage counties to seek reimbursement from other health programs and private insurance. Moreover, given the significant controversy regarding the mandate claims, the Legislature has no assurance as to the level of resources counties will receive for this program in the budget year if offsets are made to county claims.

Instead of funding this program as a mandate, we recommend that the Legislature set aside the $47.9 million to support the development of a new program for county special education mental health services. In developing this new program, the Legislature could create a funding formula that provides greater equity across counties and could eliminate the legal uncertainties surrounding the current mandate reimbursement process. Given the mandate provisions of the California Constitution, however, the Legislature would need to structure the new program so that it was attractive enough for counties to "opt into" it. (Any county choosing not to opt into the new program would remain eligible for funding under the existing system. The Legislature could specify that counties remaining under the existing mandate program would be limited to claiming costs permissible under the existing mandate reimbursement methodology.)

What Approach Should the Legislature Take in Developing the New Program? To maximize county flexibility concerning this program, encourage cost containment, and promote efforts for early detection and intervention, we recommend the Legislature consider providing funding as a supplement to existing county mental health realignment funding. In allocating these funds among counties, we recommend that the Legislature consider the number of children attending school in the county--as mental health problems tend to be distributed across all populations.

We recommend that the Legislature also consider initiating a greater state effort to provide so-called early intervention services for children with emotional difficulties. Evaluations have indicated that the Early Mental Health Initiative (EMHI), a ten-year-old school-based program administered by DMH, has been effective in assisting kindergarten through third-grade children and minimizing the need for more costly services as the students grow older. The Proposition 98-funded program (currently budgeted at $15 million) could be broadened to more students and focused on intervening before children begin suffering more severe emotional problems--and become entitled to far more costly special education services.

In determining the total level of resources to support this new program, we recommend the Legislature consider:

• Supplementing the $47.9 million proposed for this mandate by the level of funding provided in the current year for the categorical program ($12.4 million).
• Increasing the resources available under the EMHI program. Additional funds could be provided under Proposition 98 without reducing other education programs if the minimum guarantee is revised upward at the time of the May Revision. (As discussed in the "Education Section" of this Analysis, we estimate the guarantee could increase significantly.
• Implementing a policy of partial audit forgiveness for counties opting into the new program.

TBS Costs of New Services Almost Double

The cost of expanding therapeutic behavioral services (TBS) to troubled children and older youth is almost double, on a cost-per-client basis, than the figures presented to the Legislature when a major expansion of this program was inaugurated last year. We withhold recommendation on the request for a net increase of $16 million for expansion of TBS pending an explanation from the Department of Mental Health at budget hearings on why the cost of the program is so much higher than was indicated last year and what steps if any could be taken to control the cost of these services.

Last year, the Legislature agreed to an administration proposal for the state to comply with a federal court order (in a case known as Emily Q. v. Bonta) mandating the provision of more intensive outpatient services for certain at-risk youth. These services, known as TBS, are an intensive, one-on-one, short-term intervention for children and older youth under age 21 who have serious emotional problems or mental illness. The TBS services are generally provided by counties at a time of emotional crisis or high stress with the aim of preventing the child's placement in a group home or, in some cases, a secure facility.

Last year, a federal court issued a permanent injunction requiring the state to implement TBS as a mental health service for a certain class of children and older youth as a component of the state's EPSDT program of mental health services. An estimated $18.8 million ($9.5 million General Fund) will be spent during the current fiscal year for the expansion of TBS services as ordered by the court.

The Governor's budget proposes to increase this funding total to $35.2 million in 2002-03. The money would be budgeted as reimbursements in the DMH budget from the DHS, which finances EPSDT mental health services through the Medi-Cal Program. Although counties play a key role in the delivery of TBS services, the state would pay the entire $17.4 million nonfederal share of TBS in the budget year.

EPSDT Costs Already a Concern. Our office has previously voiced concern about the 29 percent per year annual growth that has been occurring in the cost of EPSDT mental health services. We noted that the financial structure of the program, in which nearly all increases in nonfederal costs of these services are borne by the state, provides counties little incentive to ensure that programs are operated with appropriate cost controls. In response to legislative concern over the escalation in these costs, and the wide variation in EPSDT program costs from county to county, the Legislature adopted supplemental report language for the 2001-02 Budget Act directing DMH to conduct a field audit to help explain the disparities in spending from county to county.

Costs Much Higher Than Expected. Based upon our review of the Governor's budget, we are concerned that the cost of this new component of EPSDT--TBS--is costing the state significantly more than had been anticipated. The increase in the projected TBS caseload that is assumed in the budget, from 1,928 to an estimated 2,167 clients, is relatively modest. However, the cost per-client has escalated sharply to an average of $15,351 for each client receiving services. That is almost double the $8,470 average cost that DMH had estimated last year for expansion of TBS.

The 2002-03 budget request is based on data indicating the reimbursements paid to counties for the provision of TBS during the 2000-01 fiscal year. In all, about $15 million was paid for TBS for a reported 982 clients. The cost in individual counties varied significantly. In Los Angeles County, for example, the average cost per client was $24,446well above the statewide average cost of $15,351. In Riverside County, however, the average cost per client was only $3,142.

When DMH initially sought funding for expansion of TBS, it had estimated that each client would receive an average of 22 hours per week of services, for an average of 11 weeks, at an average cost of $35 per hour. The hourly rate was based on a survey of costs for a program providing services similar to TBS. At this time, DMH cannot explain why the cost of TBS has turned out to be much higher than estimated--whether the higher costs are due to a higher hourly cost, or to more weekly hours of service, or more weeks of services than expected. The department is exploring these issues and intends to modify its budget request for TBS at the time of the May Revision if it determines that a lower cost per client can be justified.

Analyst's Recommendation. Given the unexpectedly higher cost of this program, we recommend that DMH report at budget hearings on why the cost of the program is so much higher than was indicated last year and what steps, if any, can be taken to control the cost of these services. For example, the department should advise the Legislature as to whether any change in the financial structure of the program, such as a requirement that counties share in its cost, would result in better control of overall program costs. The ongoing field audit on EPSDT services, which is scheduled to be completed by April 1, 2002, could shed some light on how the TBS cost issue could also be addressed.