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

Employment Development Department (5100)

The Employment Development Department (EDD) is responsible for administering the Employment and Employment Related Services (EERS), the Unemployment Insurance (UI) and the Disability Insurance (DI) programs. The EERS 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 withholding. In addition, it pays UI and DI benefits to eligible claimants.

The budget proposes expenditures totaling $8.7 billion from all funds for support of EDD in 2002-03. This is an increase $313 million or 3.7 percent over current-year estimated expenditures. This increase primarily results from higher unemployment insurance benefits payments. The budget proposes $28.2 million from the General Fund in 2002-03 which is a reduction of $6.8 million (19 percent) compared to the current year. This reduction is primarily attributable to the Governor's budget proposal to eliminate the Job Agent Program in the budget year.

Budget Issues

Workforce Investment Act Discretionary Funds

The Governor's budget proposes to use most of the available Workforce Investment Act (WIA) discretionary funds to support existing employment programs. We review the history of budgeting WIA funds and comment on the Governor's proposal.

Background. The federal WIA of 1998 replaced the Job Training Partnership Act, which provided employment and training services. The goal of WIA is to strengthen coordination among various employment, education, and training programs. The 63 member Workforce Investment Board (WIB) advises the Governor on the operations of the state workforce investment system; however, the Board's actions are not binding on the Governor.

Pursuant to federal law, 85 percent of WIA funds ($611 million in 2002-03) are allocated to local WIBs, formerly known as Private Industry Councils). The remaining 15 percent of WIA funds ($91.7 million) is available for discretionary purposes such as administration, statewide initiatives, current employment service programs, or competitive grants.

Budget Process for the Current Year. For 2001-02, the Governor's budget made no specific proposal for expenditure of discretionary WIA funds. Instead, the Governor asked the Legislature to appropriate funds without specifying their particular purpose, thereby leaving that decision to the administration. The conference agreement for the 2001-02 Budget Act adopted the Governor's approach.

Although federal law and the Governor's budget do refer to these 15 percent monies as "Governor's discretionary" funds, this nomenclature is misleading. Section 191 of the WIA states that all WIA funds "shall be subject to appropriation by the State Legislature." Accordingly, these should be considered state discretionary rather than Governor's discretionary funds. We note that the federal Balanced Budget Act of 1997 provided federal Welfare-to-Work 15 percent "Governor's discretionary" funds that were similarly subject to appropriation by the State legislature. At that time, the Governor's budget made specific proposals to expend the discretionary funds on a competitive grant program, and the Legislature approved those proposals as part of the budget process.

Governor's Proposal. In 2002-03, the Governor's budget has a supporting schedule that proposes a specific expenditure plan for the WIA discretionary funds. Figure 1 shows the Governor's expenditure plan based on information provided by the Department of Finance. As the figure shows, $23.4 million is proposed for administration, $27.5 million is budgeted for required WIA activities, and $40.7 million is dedicated to various proposed programs.

Nearly all of the $40.7 million for proposed programs is being used to offset General Fund costs in existing programs, backfill for reductions in other federal funding sources, or continue programs originally funded under the Job Training Partnership Act. Whether to continue any of these programs is a policy decision for the Legislature. As described in the next issue, if the Legislature rejects any of these new programs, some of the WIA funds could be redirected to the EERS program operated by EDD, resulting in General Fund savings.

Use WIA Funds To Offset Employment Services Costs

We recommend using $4.6 million in unbudgeted federal Workforce Investment Act state discretionary funds to replace Employment Development Department (EDD) Contingent Fund support for the Employment and Employment Related Services Program. Because excess EDD Contingent Funds are transferred to the General Fund, this action results in General Fund savings of $4.6 million. (Reduce Item 5100-001-0185 by $4,600,000.)

The EERS Program provides a variety of services to facilitate a match between employers' needs and job seekers' skills. Job seekers typically receive these services through the "One-Stop" Career Center System. For 2002-03, the Governor's budget proposes $212.3 million (including $23.9 million from the EDD Contingent Fund for the EERS program. Because excess (anything above $1 million) EDD Contingent Funds are "swept" to the General Fund at the end of the fiscal year, any reduction in the EDD Contingent Fund expenditures results in General Fund savings.

As shown in Figure 1, there are $4.6 million in federal WIA state discretionary funds that are not budgeted for any specific purpose. (In the figure, these are noted as "Programs Under Development.") The WIA funds may be used to pay for the EERS program. Because there is no specific expenditure proposal for these funds, we recommend using $4.6 million in WIA discretionary funds to support the EERS program, and a corresponding reduction in EDD contingent fund expenditures. These actions will result in General Fund savings of $4.6 million. We note that if the Legislature elects to reject any of the other WIA expenditure proposals shown in Figure 1, up to about $4 million more in freed-up WIA funds could be used to offset General Fund costs in the EERS program.

Assessing the Faith-Based Initiative

For 2002-03, the Governor proposes $4 million to continue a competitive grant program that engages faith-based and community-based organizations in the delivery of social services. In this analysis we review this program's implementation in 2000-01 and 2001-02, and make recommendations should the Legislature elect to continue this program in 2002-03.

Background

The State of California, as well as the federal government, have increasingly considered using faith-based organizations (FBOs) as an alternative delivery system for providing certain social services. While only limited research measuring the effectiveness of faith-based social service delivery exists, state and local governments across the country have made investments in programs that engage the faith-based community in delivering services to the hardest-to-serve clients. The services provided by FBOs typically include education, job training, and life management skills designed to assist individuals in becoming self-sufficient.

Historical Perspective. Faith-based delivery of social services is not new. During the nineteenth and early twentieth centuries, religious organizations, and in particular the Catholic Church, played a large role in providing relief to impoverished individuals in the United States. The more recent government initiatives involving FBOs discussed in this report are different from the past in that religious organizations themselves, rather than affiliates, may in certain circumstances receive government funds and provide services within houses of worship.

The "Charitable Choice" Provision. In 1996, the U.S. Congress passed and President Clinton signed federal welfare reform legislation. While the major thrust of this legislation was to overhaul welfare, it also contained provisions that permitted churches and groups to receive federal funds without having to remove the religious content from their programs. (This change is referred to as the charitable choice provision of federal law.) This means, for example, that organizations can display religious symbols and use religious principles and language when serving clients. However, they cannot use federal funds to proselytize, conduct worship services or Bible study, or for other doctrinal instruction. In addition, providers cannot require clients to participate in religious activities as a condition for receiving services. A secular alternative must be available for people who do not wish to be served by FBOs.

Recent Federal Developments. In July 2001, the U.S. House of Representatives approved HR 7, the Community Solutions Act of 2001, which would expand the role of religious charities in federal social programs. Under current federal law, religious charities are allowed to receive grants from a limited number of federal programs, such as Temporary Assistance for Needy Families (TANF), to provide various services to eligible individuals. The HR 7 legislation would expand grants for religious charities into nine specified areas including housing, domestic violence, juvenile delinquency prevention, programs authorized by federal WIA, programs authorized by the federal Older Americans Act, and hunger relief. The legislation also includes a series of tax deductions worth over $13 billion for corporate and individual charitable giving over a ten-year period. Finally, the legislation makes the charitable choice provision of federal law mandatory, rather than optional, for the states. This measure is currently pending in the U.S. Senate Committee on Finance.

California Program Initiated in 2000-01 Budget. The Legislature appropriated $5 million from the General Fund for a Faith-Based Initiative during 2000-01.The program was authorized through budget bill language adopted in EDD budget item (5100-001-0001) of the 2000-01 Budget Act, rather than through stand-alone authorizing legislation. Under this initiative, EDD administers a grant program that funds FBOs that offer employment services to hard-to-serve individuals. An additional $4 million is included in the 2001-2002 Budget Act. The EDD defines a faith-based organization as "an organization, corporation, institution, association, entity, partnership, intermediary or collaborative established by or related to a FBO that is not pervasively sectarian and that is tax exempt under Section 501(c)(3) of the federal Internal Revenue Code and operates under its own auspices."

Theories Behind Faith-Based Social Service Delivery

Key Theories

There are several theories of why government and society might benefit from using FBOs to deliver social services. Some of these theories are discussed below. (We note that there is no systematic research that either proves or disproves the validity of these theories.)

Community Integration. Researchers, policymakers and practitioners often cite FBOs' integration into their community as a reason to use FBOs to provide government services. This integration may manifest itself in several ways, including both time-of-day and physical accessibility. Specifically, a FBO's close proximity and its potential for providing services beyond traditional business hours are characteristics that set it apart from its government counterparts.

Focus on Personal Change. In delivering social services, governmental organizations tend to focus on outcomes, such as did the individual complete the training, or did the individual obtain a job. Although FBOs are seeking similar positive outcomes, they may attempt to achieve these goals by changing the person on the "inside."

Avoiding Bureaucracy. Beneficiaries of services administered by FBOs often cite the lack of "red-tape" involved in receiving services. For some of the hard-to-employ, a government office may appear to be physically daunting and procedurally frustrating as a result of multiple steps in the assessment process. In contrast, a faith-based setting may be more "client-friendly" in that intake may require only one interview with one individual.

Reaching Out to Underserved Populations that May Fear or Dislike the Government. Some individuals who need employment services may fear or dislike the government due to prior contentious or unproductive relationships. For example, former and current foster care youth, may feel they have been "warehoused" by the foster care system and believe that government cannot help them enter the labor force. These and other such individuals may be more comfortable approaching an FBO for services because it may "speak their language " and the FBO is not part of the government. Faith-based social service organizations could be the first and/or last line of support for various underserved or unserved populations including immigrants, former foster youth, and parolees.

Research Assessing the Key Theories

Above we have reviewed some of the theories behind FBOs' potential as alternative social service delivery organizations. Only a limited amount of systematic research discussing these assertions exists. The research that is available is of an overwhelmingly qualitative nature; anecdotal, geographically specific, and difficult from which to generalize.

For example, a study conducted by John Orr of the University of Southern California's Center for Religion and Civic Culture, provided qualitative findings and conclusions about the California religious community's capacity and role in participating in the Welfare-to-Work program. This study concluded that FBOs can be more effectively encouraged by government to offer more and expanded services, but should not be looked to as a replacement for welfare agencies.

To develop this report, we interviewed policymakers, practitioners, and academics, to uncover relevant research on faith-based programs. At this time, completed quantitative studies, with experimental designs that measure the effectiveness of faith-based approaches compared to a control subject group, could not be identified.

California's Faith-Based Initiative

First Year: 2000-01

Funding Provided. In June 2000, the Legislature adopted the Governor's May Revision proposal for 2000-01 to provide $5 million from the General Fund to the California Faith-Based Employment Assistance Project. The purpose of this program was to provide competitive grants to FBOs that (1) had limited opportunity to compete for government fund sources and (2) had developed worthy proposals for assisting "the most difficult-to-serve and hardest-to-employ individuals." The Legislature also intended for EDD to assist organizations (1) in obtaining other funds, and (2) in coordinating with existing county programs.

Competitive Process. The EDD developed a competitive bid process in order to award funds to FBOs. Departmental staff sent out approximately 30,000 initial letters to organizations with 501 (c)(3) designations notifying them that applications were due in 80 days. (Organizations with active 501 (c)(3) status are tax exempt under Section 501(c)(3) of the federal Internal Revenue Code.)

Measuring the Level of Interest. Of the 30,000 initial letters sent, approximately 5,700 organizations responded either with letters of intent to apply, or otherwise established contact with EDD, asking for additional information on the solicitation for proposals. Ultimately, approximately 230 proposals were submitted for formal review.

Classifying the Organizations. The EDD developed two funding tiers in order to organize applicants according to the level of the respective program's experience in serving clients, the degree of success in accessing grant programs, and the amount of funding requested. Applicants were required to choose a funding tier based on the eligibility requirements for that tier. Applicants competed solely against those in the same tier and were not allowed to change their tier selection once the application was submitted.

Tier One applicants were the most experienced of the applicants, having demonstrated some previous success in the administration of an employment services program and in obtaining funds from other competitive grant processes. Tier One applicants vied for individual grants of up to $600,000 from a $3 million portion of the legislative appropriation. Tier Two applicants were those less-experienced organizations that were targeted by the initiative for the purpose of building their organization's capacity for successfully starting and maintaining an employment services program. Tier Two organizations could submit proposals for up to $200,000 of the remaining $2 million.

Scoring the Proposals. Applications submitted to EDD for review could not exceed 30 pages. The EDD reviewed proposals for responsiveness to the bid requirements and could award up to 100 points. The proposal's description of the service delivery approach was given the largest point share (about 45 points). The proposals that received the highest scores clearly identified the population they aimed to serve, substantiated claims of need with labor market and demographic data, and indicated how the proposed services would achieve stated goals for the client group. Additionally, successful applicants identified partnerships and collaborative relationships with other organizations (particularly local WIBs and local employment centers).

Governor Makes Final Decision. After scoring all of the proposals, EDD then forwarded the top 13 proposals from each funding tier to the Governor's office in rank order. The Governor then selected the top 10 proposals from each tier. Figure 2 lists the grantee organizations and their grant awards.

Target Populations and Range of Services Provided. Recipient organizations varied widely in the populations they target, the services they offer, and their geographic location. Target populations include long-time public assistance recipients, parolees, current and former foster care youth, recent immigrants and limited-English speakers. Services include intensive case management, counseling, life skills development (such as phone etiquette and proper dress), as well as job skills development. One program offers courses for becoming a Microsoft Office User Specialist, as well as a certificate course to become a certified nurse's assistant. Courses in vocational English as a second language are also offered in at least two programs. For illustration purposes, please see Figure 3 for a detailed description of the programs offered by two of the FBO grantees, as of June 2001.

Monitoring for Legal Compliance. Program managers at EDD conduct regularly scheduled site visits on a roughly monthly basis. Program managers make trips to ensure that the program is operating according to schedule, and provide assistance to organizations in meeting their prescribed performance benchmarks. Monthly reporting requirements serve as a written record of the organization's adherence to prescribed performance measures. Program managers also make trips in response to organizations that request in-person technical assistance.

Cost-Per-Client Served. A review of the 20 selected proposals indicates that 3,000 hard-to-employ clients were expected to be served in 2000- 01. The EDD believes that these clients would otherwise have received no government services. This is because the proposals presented evidence that they would successfully identify and serve populations not being served by other government programs. Based on 3,000 clients, average annual cost-per-client was about $1,700 in 2000-01. We note that this estimate does not account for variations in intensity of service at the individual grantee level.

Comparing Program Costs. In order to provide a frame of reference for assessing costs for the Faith-Based Initiative, below we review the Job Agent program, operated by EDD.

The Job Agent program provides employment-related services to economically disadvantaged individuals with significant barriers to employment. Job Agent clients, like many targeted through the various Faith-Based grantees, include clients with a lack of job skills, lack of language skills, limited education, a disability, poor work habits, and/or legal problems. Based on preliminary data, the Job Agent program, funded at $2.7 million, served approximately 1,850 clients at an average cost per client of approximately $960. This average cost is substantially less than the cost-per-client in the Faith-Based Initiative. We note, however, that the Faith-Based Initiative may be reaching clients that are unwilling to apply for direct government services in programs such as Job Agent. Further, services in the faith-based program are typically more intensive and often include one-on-one counseling, life skills training, and job placement services.

Preliminary Outcomes. The data that has been compiled so far only covers the very beginning of the program through March of 2001. According to EDD, at the end of the first quarter of 2001, the Faith-Based Initiative had served close to 900 individuals, about 31 percent of the program goal of 3,000 individuals. Of this total, 152 individuals, or, roughly 16 percent had obtained unsubsidized employment. Another 8 individuals were placed in subsidized employment, such as work experience positions in public or private agencies.

Second Year: 2001-02

Funding. For 2001-02, the Legislature approved the Governor's proposal for an additional $5 million to fund a new round of grants. The Governor vetoed $1 million in order to bolster the budgetary reserve, leaving $4 million for the second year of the program.

Program. The Legislature modified the budget bill language governing the administration of this program to (1) broaden the initiative to include community-based organizations that have no religious affiliation, and (2) explicitly prohibited grantee organizations from discriminating in their hiring practices. In addition, the revised language omits the reference to allocating funds using a "competitive process." This later change appears to be inadvertent because all of the budget subcommittee discussion of the initiative presumed a competitive process and EDD has elected to use virtually the same competitive process for allocating funds in 2001-02 as it used in the prior year. The two tier system will remain intact, as will the process for evaluating and scoring proposals. Finally for 2001-02, EDD decided that first year grantees may not compete for the new round of funding. Pursuant to the revised language, EDD may expend up to $250,000 of the $4 million appropriation for its program administration costs.

Legal Issues

Although California has provided funds to religious organizations prior to the Faith-Based Initiative, the new initiative has resulted in a lawsuit.

Lawsuit Concerning Preference Given to Religious Groups. The issue of giving a preference for FBOs in a competitive bidding process has resulted in a lawsuit against EDD. The lawsuit, filed by the American Jewish Congress on January 5, 2001, tests the constitutionality of the department's and initiative's statutory preference for FBOs over secular community-based organizations in the solicitation process. In a ruling on July 27, 2001, both the plaintiff's and defendant's motions for summary judgment, were denied.

This issue of preference was partially addressed by the control language adopted by the Legislature in the 2001-2002 Budget Act. Specifically, the revised budget act provision invites all community-based organizations, inclusive of faith-based and secular organizations, to apply for funds.

Considering Religious Affiliation in FBO Hiring Practices. The charitable choice provision of the 1996 federal welfare reform legislation raises questions surrounding the protection of civil rights. Some FBOs wanted to preserve their religious mission. To this end, FBOs would be allowed, under the current version of HR 7, to consider a prospective employees' adherence to the organization's religious mission and tenets in their hiring decision. In California, the issue of an FBO considering an employee's religious affiliation in their hiring practices was not specifically addressed in the first year of the state's initiative.

In response to both national and state reactions to the potential for discrimination, the Legislature added control language in the 2001-02 Budget Act that explicitly states that participating FBOs may not discriminate against "protected groups" in their hiring practices. The Legislature also reiterated the policy that FBOs may not discriminate against protected groups in their delivery of service to clients. The EDD operationalized the prohibition against discrimination of protected groups in accordance with Government Code Section 12920. For example, FBOs may not discriminate against those seeking employment on account of race, religious creed, or age.

LAO Findings and Recommendations

In implementing the faith-based initiative, Employment Development Department (EDD) (1) did not develop specific standards and procedures for ensuring that grantee organizations do not deliver services in a "pervasively sectarian" manner, and (2) allocated 60 percent of the funding to organizations that had previously received other funding. If the Legislature elects to continue this program in 2002-03, we recommend that EDD (1) require potential grantees to explain how they will avoid pervasively sectarian service delivery as part of the application process and (2) incorporate unannounced site visits into their monitoring program. We further recommend that the Legislature clarify in statute that EDD should focus the majority of the funding on organizations which have had limited opportunity to obtain government funds to provide welfare-to-work services.

Above we have described the implementation of the faith-based initiative during 2000-01 and 2001-02 Below we present our key findings. If the Legislature elects to continue funding the faith-based initiative, we present recommendations for improving implementation of this program.

Allocation of Funds Appears Inconsistent With Legislative Intent

In authorizing the faith-based initiative, the Legislature specifically stated that funds were to go to organizations "that have been limited in their ability to take advantage of this funding due to limited resources and a lack of experience in dealing with competitive contracting processes." As described earlier in this report, EDD developed two tiers for organizations applying for funds: Tier One for larger more sophisticated organizations (that may have had some previous success in obtaining government funds) and Tier Two for smaller less experienced organizations. In fact, EDD allocated 60 percent of the budgeted amount to Tier One organizations ($3 million) and the remaining 40 percent to Tier Two organizations ($2 million). Further, at least three of the Tier One grantees had substantial past experience in soliciting and handling government and private funds. Based on the budget act language adopted by the Legislature, we believe it intended for the majority of funds to go to organizations that have more limited experience in obtaining government funds.

Recommendation. With respect to future funding allocations, we recommend that the Legislature clarify that a significant majority of funds be allocated to the less experienced Tier Two organizations. Larger organizations could be encouraged to apply for other state and federal funds. Specifically, counties use TANF funds to help welfare families obtain training and become self-sufficient. Such TANF funds are covered by the charitable choice provisions of current federal law and may be provided to FBOs.

Avoiding Pervasively Sectarian Service Delivery

Under the California initiative as adopted in budget act provisions in 2000 and 2001, participating FBOs are prohibited from, (1) using government funds to proselytize or conduct worship services, (2) requiring clients to participate in religious activities as a condition of receiving services, or (3) delivering services in a "pervasively sectarian" manner. Nevertheless, witnesses at budget hearings during 2001 expressed concerns that certain participating FBOs were providing services in a pervasively sectarian manner. The EDD disagreed with these assertions and stated that their program monitoring ensured compliance with the law. However, we have identified several weaknesses in EDD's approach to ensuring that FBOs do not deliver services in a pervasively sectarian manner.

Lack of Precision in Defining "Pervasively Sectarian." In our view, EDD has provided a technical definition of the term "pervasively sectarian" that provides virtually no guidance to FBOs on what does and what does not constitute, "pervasively sectarian." The EDD believes that its program staff that monitors the grantees would "know it when they see it," and so far, they have not identified any grantee that has delivered services in a pervasively sectarian manner. We note that a clearer definition and specific guidelines could improve the monitoring conducted by EDD staff.

Program Monitoring Could Be More Effective. Although EDD visits grantees, observes service delivery, and communicates program requirements, the visits are scheduled in advance. This approach has potential limitations in that organizations are never in a position to be observed spontaneously. By conducting unannounced visits, the EDD monitoring program would be more effective in identifying (and perhaps preventing) services from being delivered in a pervasively sectarian manner.

Message on Avoiding Pervasively Sectarian Service Delivery Could Be Strengthened. The grant application process generally awards points to bidders based on (1) who they are targeting for services, (2) identification of barriers faced by potential clients, (3) how the proposed program will help clients become self-sufficient by addressing the barriers, and (4) how the program will coordinate with other local resources. The scoring system does not consider how an organization will avoid pervasively sectarian delivery of service. We believe this omission weakens the message concerning the importance of the prohibition on delivering services in a pervasively sectarian manner.

Recommendations. In order to ensure that FBOs adhere to the prohibition against delivering services in a pervasively sectarian manner, we make the following recommendations.

• Define Pervasively Sectarian More Precisely. The EDD should define the term pervasively sectarian with more precision and establish specific guidelines for grantees. This will provide FBOs with better information on what approaches are acceptable and unacceptable and will assist EDD monitoring staff in detecting potential problems.
• Incorporate Unannounced Visits Into EDD's Monitoring Program. In order to aid both EDD and organizations in maintaining compliance with the control language's provisions, the next round of grantees should be informed that unannounced visits could occur throughout the life of the program. Additionally, EDD should incorporate unannounced visits, as well as the regular, announced visits, into the monitoring program.
• Modify the Application Process to Avoid Pervasively Sectarian Service Delivery. The department's scoring system used in evaluating organizations' applications should include a criterion with a point value that scores the individual organization's plan for avoiding pervasively sectarian delivery of service. An organization that does not explain its method satisfactorily would risk a lower overall score and consequently jeopardize its competitiveness. Taking the above action would strengthen EDD's message concerning the importance of legal compliance. In addition, it would ensure that specific mechanisms are in place to avoid this problem.