Legislative Analyst's Office Analysis of the 2003-04 Budget Bill

Developmental Services (4300)

A developmental disability is defined as a disability, related to certain mental or neurological impairments, that originates before a person's eighteenth birthday, constitutes a substantial handicap, and is expected to continue indefinitely. The state Lanterman Developmental Disabilities Services Act of 1969 entitles individuals with developmental disabilities to a variety of services, which are overseen by the state Department of Developmental Services (DDS). Individuals with developmental disabilities have a number of residential options. Slightly more than 98 percent receive community-based services and live with their parents or other relatives, in their own apartments or in group homes that are designed to meet their medical and behavioral needs. The remaining 2 percent live in state-operated, 24-hour care facilities.

Community Services Program. This program provides community-based services to clients through the 21 regional centers (RCs) located throughout the state. The RCs are responsible for client assessment and diagnosis, the development of an individualized program plan, case management, and the coordination and purchase of various services, such as residential, supported living, and day program services. Day program services include early intervention services for infants and young children and daytime activity programs for adults. The department contracts with RCs to provide services to more than 183,000 clients each year.

Developmental Centers (DC) Program. The department operates five DCs, and two smaller facilities, which provide 24-hour care and supervision to approximately 3,600 individuals. All the facilities provide residential and day programs as well as health care and assistance with daily activities, training, education, and employment.

Budget Proposal. The budget proposes $3.2 billion (all funds) for support of DDS programs in 2003-04, which is a 9.6 percent increase over estimated current-year expenditures. General Fund expenditures for 2003-04 are proposed at $2 billion, an increase of $131 million or 7.2 percent above the revised estimate of current-year expenditures.

The budget proposes $2.6 billion from all funds ($1.6 billion from the General Fund) for support of the Community Services Program in 2003-04. This represents a $129 million General Fund net increase over the revised proposed level of current-year spending, primarily as a result of caseload growth, higher utilization rates for services, and other program changes.

The increases would be partly offset by several proposed reductions in the budget. These include policy initiatives to adopt unspecified statewide standards for the purchase of services for RC consumers, to shift more support for RCs to federal funds, to establish fees for some parents of children receiving services, to shift habilitation services from the Department of Rehabilitation to RCs, and to limit program eligibility by partially conforming the state's definition of who is considered to have a substantial disability to the federal definition.

The budget proposes $669 million from all funds ($368 million from the General Fund) for support of the DCs in 2003-04. About the same level of DC funding is proposed for the budget year as for the current year despite a projected drop of 70 clients in the overall DC caseload. The savings from the population decline would be offset by a projected increase in costs for caring for DC residents requiring higher levels of medical care or higher levels of staff supervision due to behavioral challenges.

State Should Restructure Developmental Center System

The state's five developmental centers (Agnews, Fairview, Lanterman, Porterville, and Sonoma) and two smaller facilities (Sierra Vista and Canyon Springs) provide 24-hour care to about 3,600 individuals with developmental disabilities. The developmental centers (DC) population has declined significantly over the last forty years. In response to this decline, the Governor's Budget proposes to develop a plan for the closure of Agnews. In this analysis, we examine the DC system's population trends and cost-effectiveness, and provide the Legislature with options and recommendations related to future DC operations. 

Introduction

Full Range of Care Provided

Facilities Provide 24-Hour Care. The state's five DCs (Agnews, Fairview, Lanterman, Porterville, and Sonoma) and two smaller, leased facilities (Sierra Vista and Canyon Springs) provide 24-hour care to about 3,600 individuals with developmental disabilities. The DCs provide a full range of care, including medical and recreational services. More than 8,600 permanent and temporary staff serve the current population at all seven facilities.

According to departmental data, about 30 percent of the current population of the DCs resides in skilled nursing units, about 1 percent receive acute care, and the remainder live in intermediate care units, which include clients with a variety of behavioral, physical, and social needs who do not require 24-hour skilled nursing. Of the total DC population, about 11 percent are designated by the department as forensic/severe behavior residents, who live in the DCs by court order generally because they are at risk of harming themselves or others. Forensic/severe behavior residents generally live in intermediate care units.

Funding

Significant General Fund Support. The Governor's January budget provides for $655 million in total expenditures for the DC system in 2003-04, not including DC-related headquarters costs. General Fund costs are estimated at $361 million. The DCs are generally reimbursed by the federal government under Medicaid (known as Medi-Cal in California) for about half of most costs. However, nine residential units at Porterville (out of 22) were decertified by the state's Department of Health Services (DHS) in September 2001 and are no longer eligible for federal funding. The loss of federal funds amounts to nearly $16 million annually. Also, Canyon Springs has not yet been certified by DHS and therefore remains ineligible for federal financial participation at this time. The DDS expects that Canyon Springs will be certified by March 31, 2003.

A Costly System in Decline

Despite a declining developmental centers (DC) population, the cost of care on a per resident basis has grown significantly and is likely to continue to grow. California and other states' experiences show that community services provide a cost-effective alternative to DCs, and offer an improved quality of life for many individuals. At this time, however, the state has not developed a clear, long-term policy on the future of the DC system that takes this alternative into account. 

Population Trends

Population Once Much Larger. The DCs once provided residences and services for many more people than they currently serve. The total DC campus system (including facilities in Stockton and Camarillo which have since closed) served approximately 10,500 persons at its peak operation in 1959—almost three times as many as are served now.

Through enactment of the Lanterman Act in 1969, the state created the RC system to provide community services for persons with developmental disabilities. As a result, the DC population fell as more individuals were served in community settings. By 1990-91, the DC population was less than 7,000. Most of the population decline of the DC system since that time is the result of the 1994 Coffelt v. Developmental Services lawsuit settlement, which required the state to make more community homes available as alternatives to institutions. The DCs initially downsized in population by 2,000 in response to the Coffelt settlement.

Population Decline Continues. The total population served in the DC system continues to decline. The proposed budget for 2003-04 assumes that approximately 205 DC residents will be placed in community living arrangements, that 64 DC residents will die, and that 190 individuals will be admitted into the DC system for a net decline of 79 during the year.

As a result of the continuing decreases in the DC population, we estimate that more than 900 beds are now vacant—a 20 percent vacancy rate. Figure 1 indicates the number of beds currently available at each DC, their estimated average population for 2002-03, and the number of staff positions proposed for each facility for 2002-03. 

Cost Trend Analysis

Costs Increased 24 Percent. Despite a declining DC population, system costs have grown significantly. As shown in Figure 2, total DC expenditures increased from about $519 million in 1990-91, to $567 million in 1995-96, to about $643 million in 2000-01. Although the overall DC population dropped by 44 percent over this ten-year period, costs still rose by 24 percent.

Developmental Center operating expenditures more than doubled, on a per-resident basis, from about $77,000 in 1990-91, to $118,000 in 1995-96, to about $170,500 in 2000-01. Figure 2 also displays the cost per resident for the two major cost categories: salaries, wages, and benefits; and operating expenses and equipment. The average cost per resident is expected to continue to grow even as the DC population continues to trend downward. The cost per resident is estimated to reach $179,000 in 2002-03 as the average population declines to 3,667.

Why Costs Have Grown

Per resident costs have grown due to several major factors discussed below.

"Fixed Costs" Remain. Significant areas of expenditures, such as administration and facility maintenance, have not decreased commensurately with the decline in the DC population. Large facilities such as DCs have fixed, physical plant costs, such as utilities, general facility maintenance, insurance, and communications that generally do not change commensurate with changes in their population. As shown in Figure 2, annual operating expenses and equipment costs at the DCs have increased from about $14,500 per resident in 1990-91 to almost $48,000 per resident in 2000-01. The cost per client for 2000-01 was particularly high because it included one-time expenditures for special repairs and start-up costs for the Canyon Springs leased facility. However, the estimated cost per resident of $33,840 for 2002-03, which did not include such significant one-time expenditures, still far exceeds the cost per resident twelve years earlier.

Higher Staffing Levels Due to Federal Mandates. Another major cost-driver in the DC system has been an increased level of staffing driven by a need to comply with federal certification standards and other federal mandates. Such mandates are intended to enhance the health and safety and to protect the rights of the residents. First, the state established new positions at Agnews and Sonoma DCs in the early 1990s as a result of a U.S. Department of Justice finding that those DCs provided inadequate care. Second, the state undertook a major staff augmentation systemwide that was phased in over four years beginning in 1998-99. The latter augmentations included level-of-care workers who deliver treatment programs, such as physicians, psychologists, audiologists, teachers, rehabilitation therapists, nurses, and psychiatric technicians ("psych techs"). The augmentations included some support staff, such as food-service workers and transportation escorts, as well as security staff.

Medical Care Costs. Cost increases in medical care also have significantly driven up DC expenditures in the last ten years. Our estimates show that the costs of medical services per resident grew by 337 percent, from $1,350 per resident in 1990-91 to $5,900 per resident in 2000-01. These costs are projected to reach $6,604 per resident in 2002-03. Most of the cost increases are due to the costs of drugs. While DCs spent as much as $9 million for this purpose ten years ago, they are projected to purchase $20.5 million in prescription drugs and other medication in 2002-03. While they have been growing by 16 percent annually, these increases in drug costs are generally in line with national trends in prescription drug spending.

New Leased Facilities Expensive to Operate. In 2000, the state opened two additional, leased facilities—Sierra Vista and Canyon Springs. These new leased facilities cost more per resident due primarily to more intensive staffing levels. The higher staffing levels are designed to care for individuals who need special assistance in order to adapt to community living. As Figure 3 shows, both Sierra Vista and Canyon Springs are projected to cost the most on a per-resident basis in 2002-03.

The higher per resident costs do not necessarily mean, however, that the use of leased facilities is not a cost-effective approach to providing services. The average length of stay of residents of the leased facilities is less than two years. If, as is intended, the length of stay of individuals placed in leased facilities is significantly less than the length of stay of comparable individuals in the DCs, the state could save money through leased facilities placements even if the annual cost per bed is higher. However, at the present time, we are unable to obtain data indicating whether this is in fact the case.

Trend Likely to Continue

Capital Outlay Needed. As the total DC population continues to gradually decline, general facility overhead costs at the five DCs are likely to continue to increase on a per person basis. In addition, expensive capital outlay modernization costs would eventually have to be incurred to continue the operations of the aging DCs (all of which are more than forty years old). In 1998, consultants from Vanir Construction Management, Inc. assessed the condition of the five DCs and recommended nearly $1 billion in capital outlay improvements, most of which have not yet occurred. Special facility repairs or major capital outlays have a significant one-time impact on per resident costs when an institution's population is declining.

Many DC Residents Could Be Served in the Community

What Client Evaluation Data Shows. Some DC residents, namely the forensic residents served at Porterville, are unique among the DC population and not appropriate for placement in a community setting. With this exception, many DC residents, however, could be served in the community.

Client development evaluation reports, which are usually prepared by a person's service coordinator, show that the characteristics of many those served in the DCs are similar to those living in the community. As Figure 4  shows, for example, about 3,300 DC clients have medical problems, while nearly 33,000 individuals with such special medical needs are living in the community. As another example, about 1,400 DC clients take behavior modifying drugs, while about 21,000 clients living in the community take such drugs. While it is clear that not all current DC clients are appropriate for community placement, many of the remaining DC residents have characteristics similar to those who have been successfully placed in the community.

Improved Quality of Life. California studies have shown that many residents who have transitioned from the state's DCs to community living arrangements have improved their quality of life. A 1998 study commissioned by the Legislature and conducted by the Center for Outcome Analysis in Pennsylvania assessed the well-being of such persons placed between 1994 and 1998 and found that consumers generally felt safer, had greater control over their lives, and typically were better integrated into their communities. Family members on average also expressed higher satisfaction with their relatives' quality of life in the community than in the DCs. 

The studies indicate that these results endure over time. A follow-up study in August 2000 looked at all persons who moved out of DCs between 1993 and 1999 and concluded that they were much better off according to measurements of such factors as behavior, independence, health, friendships, daily activities, and satisfaction. A follow-up study in 2001 indicated that there were some specific measures, such as the number of close friends and access to health care and dental care, in which former DC residents were not as well off as before. But that report concluded that when all factors measured were taken into account, these individuals were better off overall than they were in DCs.

Community Care Can Be Less Costly Than DCs

2001 Study Indicates Community Care Less Expensive. For many individuals, the shift to community living has the potential both to improve their quality of life and to reduce the cost of their care. This will not be true in all cases. Some persons would be more costly to serve in a community setting, particularly if they required more intensive staffing levels for their care. But the evidence indicates that community settings would be appropriate and cost-effective for many other current DC residents. A fiscal analysis of restructuring DC services conducted under contract for DDS in 2001 found that services could be delivered in the community at less cost than in the DCs.

The DDS's own cost data as well as Medi-Cal data indicate that shifting DC residents to the community to be served by one of 21 RCs would generally allow them to receive services at a lower state cost than otherwise. We estimate that a typical community placement would cost the state between $120,000 and $140,000 per year, inclusive of services purchased by RCs, the operational costs of the RCs, and Medi-Cal costs. That is 33 percent to 22 percent lower than the $178,770 average annual cost of serving that same individual in a DC.

Other States Are Downsizing Institutional Care

Major Changes Occurring in Other States. For the reasons discussed above, other states are closing institutions and providing services for the developmentally disabled in community settings. According to a 2002 University of Colorado study, the number of persons with developmental disabilities residing in public institutions declined by 21 percent between 1996 and 2000 (and by 68 percent between 1977 and 2000). The number of people receiving care in settings for six or fewer people grew by 20 percent between 1996 and 2000.

Generally, states that have been successful in such a transition developed community services that include resource networks and crisis response systems to address many of the reasons that caused individuals to become institutionalized in the first place.

Policy Direction on DCs Unclear

The state has conducted several important studies and reviews of the way it delivers services for the developmentally disabled, but has so far not established a clear, long-term policy to guide the future operations of the DC system.

DC Options Study. Chapter 93, Statutes of 2000 (AB 2877, Thomson), directed DDS to identify a range of options to meet the future needs of individuals currently being served in DCs. The DDS hired consultants to study various options for restructuring DC services and a large stakeholder group participated in devising options.

The DDS report concluded that the state should not undertake a large-scale effort to renovate and maintain the current DC system, and suggested that the funds needed for such an effort would better be spent to create a new "service structure" in the community. While the report presented a menu of ways in which the state could continue to play a role in providing services to residents moved from DCs to the community, it did not provide the Legislature with a timeline or specific recommendations for shifting residents from DCs or for developing this new service structure.

Community Placement Planning. The administration has taken steps to move some developmentally disabled individuals from the DCs through what it calls the community placement planning program. That program, implemented with state assistance to the 21 RCs, offers a mechanism for transitioning individuals from DCs and for reducing new admissions to DCs by ensuring the adequacy of resources needed to place them in the community.

Olmstead Compliance Planning. Prompted by the June 1999 U.S. Supreme Court decision L.C. & E.W. vs. Olmstead ("Olmstead"), a number of other states are seeking alternatives to institutional care. In the Olmstead case, the U.S. Supreme Court ruled that keeping institutionalized persons who could transition to a community setting constituted discrimination under the Americans with Disabilities Act (ADA), notwithstanding state resources and consumer preference. Accordingly, a number of states are conducting assessments of institutionalized persons and devising plans to comply with ADA and Olmstead requirements. Chapter 1161, Statutes of 2002 (AB 442, Committee on Budget), directed the Health and Human Services Agency to develop an Olmstead compliance plan for California by April 2003. That planning effort is now under way.

Planning, But No Clear Policy-Setting. Because California's Olmstead planning process began only recently, it is not yet clear whether that plan will address the future of the DCs. An earlier effort by the Legislature to address the future of the DC system, by commissioning the Options report released last year, had inconclusive results. The report was largely silent about what steps should be taken next by the state and did not provide a blueprint for future actions. No specific numerical goals have been set for the number of placements to be accomplished under the existing community placement program, nor is there a parallel and related DDS plan for downsizing the DC system. As a result, the state's policy for the future operation of the DC system remains unclear.

Governor's Budget Includes Agnews Closure Plan. The Governor's budget plan proposes that the DDS redirect existing resources to form a project team that would begin planning efforts to close Agnews by July 2005. In January 2003, the administration began taking initial steps to close the facility. By June 2003, a policy would be established to halt new admissions to Agnews. During 2003-04, under the Governor's proposal, the project team would continue to develop a master plan for Agnew's closure. While this planning process occurred, efforts to place Agnews residents in the community would be implemented in the San Francisco Bay Area and some clients would be transferred to other DCs.

The Governor's plan indicates that a funding request for closure would be included in the 2004-05 budget, and that the completed closure plan for Agnews would be submitted to the Legislature by April 1, 2004. During 2004-05, all remaining Agnews residents would be transferred to other DCs or placed in the community. The facility would shut down by July 2005. During this period, negotiations would also begin for the transfer of Agnews to the Department of General Services as potential surplus property. 

Recommendations and Options for Restructuring DCs

We recommend that the Legislature initiate a process to close two developmental centers (DCs). The DC system continues to face a declining population that could be served better and more cost-effectively in a community setting. Although the state would incur significant one-time costs to implement such an action in the short term, these costs would be more than offset by permanent and ongoing savings to the state in the long term. The Legislature should address key issues pertaining to the future of the remaining DC system.

Initiate Closure of Two DCs

We recommend that the Legislature initiate action to phase out two DCs at this time. Specifically, we recommend that the Legislature approve a modified version of the Governor's proposal to initiate closure of Agnews and also take steps to initiate the closure of Lanterman.

Why Close DCs? The current DC system perpetuates a significant misallocation of scarce state resources by keeping open aging facilities with ever-declining populations of individuals who, for the most part, could be better served in a more cost-effective community setting. In our view, a number of facts support the case for closing DCs.

The operating cost per resident of the DCs continues to grow even as the DC population is shrinking at a rate of 1 percent to 2 percent annually. Despite this population decline and the resulting bed vacancy rates equaling 20 percent on a statewide basis, the state has continued to incur the costs of maintaining large facilities. The future offers only more of the same—rising operational costs as measured on a per person basis as well as in total state dollars—as well as a need to invest significant additional state dollars for necessary capital improvements to the DCs potentially costing as much as $1 billion.

The closure of two DCs over the next five years would result in a more efficient DC system and significant net savings of state General Fund resources. We believe DDS and the RCs are capable of managing the transfer of the residents of two DCs at this time. Closure of more than two facilities is not recommended in the near term because of the difficulties involved in transferring DC residents. Although the state would incur significant one-time costs in the short term to close two DCs, our analysis indicates that these costs would be more than offset by permanent and ongoing savings to the state in the long term.

If appropriate plans are made and implemented, the residents shifted from the DC system as a result of the closures would enjoy a life more closely integrated with the community and with greater independence—both key policy goals established in state and federal law.

It is also apparent that, if the state does not follow the path of restructuring its DC system, it will inevitably be placed at risk of being compelled to do so anyway by the courts, at least to the extent allowed by state resources. Lawsuits filed at both the state and federal levels have sought to require the states, including California, to establish community alternatives to DCs in order to ensure that care is provided as the law and caselaw provide in the "least restrictive setting" available.

For these reasons, we recommend that the Legislature direct DDS to initiate a process to phase out two DCs. In particular, we recommend closure of the Agnews and Lanterman DCs.

Why Close Agnews and Lanterman? Agnew's high vacancy rate makes it the leading candidate for closure. As shown in Figure 1 above, Agnews has an estimated vacancy rate in excess of 40 percent. That vacancy rate far exceeds the other four DCs, which have vacancy rates of about 15 percent. Partially because of the high vacancy rate, Agnews also is the most expensive of the five DCs to operate on a per person basis. Agnews costs about $209,000 per resident, while the other four DCs cost on average $152,000 per resident per year.

We recommend the closure of Lanterman rather than Fairview at this time because this older facility would otherwise require greater and more costly capital improvement for its continued operation, and because its population is smaller than Fairview's. According to the 1998 Vanir Report, Lanterman, which is 25 years older than Fairview, would require about $20 million more in capital outlay projects than Fairview. Lanterman has about 150 fewer residents than Fairview. This smaller population would make it easier and faster to close than Fairview, thereby advancing the date at which operational savings could be achieved for the state. In the alternative, the Legislature may wish to consider closing Fairview instead of Lanterman because of Fairview's land value which is almost certainly significantly more than Lanterman's because of its Orange County location.

Closure of Agnews and Lanterman, one Northern California facility and one Southern California facility, would be a geographically balanced approach that would preserve the DC residential option for any individuals who would continue to require such placements in both parts of the state. Under our approach to DC closures, the state would continue, at least for the time being, to operate Sonoma in Northern California and Fairview in Southern California.

We would not recommend at this time the closure of the Porterville DC. That is because that facility serves a unique population within the DC system—individuals who have been committed to state custody through the criminal justice system who currently receive treatment in an environment requiring enhanced security. A significant state investment would have to be made in additional security measures if Porterville were closed and its residents moved to other DCs or other facilities.

Alternative Placements for DC Residents. Closure of two DCs would mean that current residents would have to be placed in alternative residences. The needs of each resident at Agnews and Lanterman first would have to be assessed to determine their appropriate alternative placement.

We believe the capacity exists, or could be developed as needed, to handle the shift to other residential options. The options include: intermediate care facilities (ICFs), most of which are small, four- to fifteen-bed facilities licensed by the DHS and located in the community; community care facilities (CCFs), which provide 24-hour residential care licensed by the Department of Social Services; supported or independent living arrangements; a relative's home; an adult foster home; or other DCs.

We estimate that currently licensed ICFs in the state could accommodate about 1,000 additional residents. The DDS indicated that data is not currently available that would indicate whether any extra capacity is available in CCFs. However, our analysis indicates that additional capacity could be developed in either ICFs or CCFs if it were needed. There are already established procedures by which the state helps to pay the start-up costs of new facilities. The remaining DCs could also accommodate residents of the DCs that were closed. The three remaining DCs would have the capacity to serve nearly 450 additional residents.

Fiscal Effect of DC Closures. Figure 5 (see next page) summarizes our estimates of the fiscal effects of closing the Agnews and Lanterman DCs. As the figure shows, the state would incur initial net annual costs of $10 million to $15 million related to the closure of these facilities. These costs would vary based on the extent to which clients could be placed in community settings instead of the remaining DCs. This additional net funding takes into account: (1) new costs to assess and place DC residents in community programs, (2) costs for relocation of staff, and (3) the savings to DDS operating costs that would result from the movement of individuals from DCs to the community or less expensive DCs.

We estimate that the magnitude of annual long-term net savings to the state from such a change could in five years reach at least $30 million to $75 million annually, with the actual level of savings depending upon the residential options considered. For example, as we discuss further below, community residential options requiring more intensive staffing levels than currently exist in the community would be more expensive and would reduce the net state savings that could be achieved with DC closures.

In addition to these ongoing savings on state operations, the closure of Agnews and Lanterman would allow the state to avoid an additional $250 million to $350 million in costs for capital improvements that would otherwise probably be necessary for the two closed facilities.

In addition, the land value of Agnews and Lanterman offers potential one-time income for the state General Fund that could be used to offset closure costs, to invest in the development of services for persons moved to the community from the DCs, or to fund other legislative priorities. Based upon data reported by the Department of General Services, we estimate the land value of Agnews, located in the Silicon Valley, to be between $80 million to $90 million. The land value of Lanterman, located west of Ontario on Interstate 10 between the cities of Pomona and Diamond Bar, is more difficult to estimate at this time. The value of that land would depend on a number of factors, including the environmental condition of the site, potential historic preservation issues, and local zoning decisions that would determine the type of development that could take place if the state were to sell the land to the private sector. Based upon a comparison of state property in nearby Chino, now being sold by the state for primarily residential use, Lanterman might be worth $20 million to $30 million.

Analyst's Recommendation. For the reasons discussed above, we recommend that the Legislature approve a modified version of the Governor's proposal to begin planning for the closure of Agnews. As we noted, under the Governor's proposal, a budget request for the resources to move ahead with closure would be included in the 2004-05 Governor's budget in January 2004, with a separate closure plan for Agnews subsequently submitted to the Legislature in April 2004 in keeping with the existing requirements for closure specified in state law.

While we concur with the proposal to close Agnews, we are concerned that the Governor's proposal would not provide the Legislature an opportunity to consider DDS' closure plan (to be submitted April 1, 2004) for the facility at the same time it was assessing the funding request (to be submitted January 2004) for the resources to close Agnews. The closure plan is an integral part of the funding request. Accordingly, we recommend the Legislature adopt statutory language directing DDS to submit its closure plan for Agnews to the Legislature by January 1, 2004. This would allow for legislative review of the closure plan at the same time as the budget request.

We also recommend that the Legislature adopt statutory language directing DDS to submit a closure plan to the Legislature for Lanterman DC by January 1, 2005. The statutory language should direct that both closure plans include detailed implementation steps and an estimate of the short-term costs for the closure of the two DCs. Further, we recommend that DDS begin assessing Lanterman's residents by July 2005, and complete closure by the end of 2007-08.

We believe the Legislature should proceed gradually with the DC closures according to the above schedules in order to ensure the smooth placement and transition of residents to the community. Based on our review, we recommend the closure first of Agnews because that facility has fewer residents, can be closed more quickly, and thus would at an earlier date generate savings for the state.

Planning a Successful Transition to the Community

Maximize Federal Funds. As the state shifts persons with developmental disabilities from state facilities to the community, it must be careful to ensure it is not unintentionally shifting the cost of their services from the federal government to the state. Currently, about half of the costs of DC services are reimbursed by the federal government. However, only about 25 percent of community service costs are currently reimbursed by the federal government under the Medicaid program. Therefore, to the extent that individuals are shifted from closed DCs to the community, the overall costs of providing their services might decline, but their Gen eral Fund costs to the state could increase. Therefore, a closure plan should ensure that the department takes the actions necessary to obtain the maximum reimbursements possible.

The Governor's January budget, which proposes to enhance federal funding for Regional Center programs by amending the state's existing Medicaid waiver program, is a good first step in this direction that we recommend the Legislature approve. The Medicaid waiver allows federal financial participation for a broad array of home and community-based services. These services are provided to eligible individuals who, without them, would require institutionalization in an intermediate care facility for the mentally retarded (ICF/MR) or a more restricted setting. The administration's proposal would increase the number of clients covered by the waiver, and would add several new services that the state could bill to the waiver.

Selling DC Properties Could Offset Closure Costs. Given the state's current fiscal situation, we recommend that the Legislature consider paying for the additional costs of DC closure with the proceeds of a sale of the DC properties. Specifically, we believe it might be possible for the state to structure a sale of the DCs that would allow some proceeds to be received by the state prior to the actual transfer of property. This approach would enable the state to pay the upfront cost of the proposed closures without putting additional pressures on the state General Fund. We are advised that one such way to accomplish upfront proceeds would be to sell the property with an agreement to lease back the property from the new owner until facility closure is completed.

An alternative approach would be for the state to obtain a short-term loan using the DC properties as collateral. The loan could be repaid immediately upon the sale of the property as the closure process were completed.

State rules governing the disposal of surplus property generally require the Department of General Services to determine whether the property is needed by another state agency before it can be offered for sale. However, the Legislature could consider enacting a statutory exception that would require the sale or partial sale of the DC properties, thereby superseding the state rules on surplus property.

Retaining Staff Expertise. Because DC staff have skills that are needed in other settings to serve people with disabilities, and because the state already has invested in training and licensing certain staff to deliver these services, we believe that efforts are warranted as part of the closure process to retain this staff expertise to the extent possible—either through state service or in community services.

The state could mount efforts to recruit registered nurses, psychiatric technicians, and social workers from the DCs that are being closed to positions in state facilities operated by the Department of Mental Health (DMH) and the California Department of Corrections. State hospitals and prisons run by those agencies often experience staff vacancy rates of 20 percent or more in key clinical positions. A shift of staff from closed DCs could help these other facilities reduce their vacancy problems. The state could also provide special relocation assistance to employees who took hard-to-fill positions in other state facilities.

Second, a number of DC employees could be employed by RCs to monitor the quality of services provided in the community. Our fiscal estimates take into account the costs of shifting DC staff to enhance Regional Centers for these purposes.

Future Restructuring Issues

Once restructuring plans have been set in motion, several other critical issues for the DC system remain that should be addressed by the Legislature in the future to ensure the continued cost-effective operation of services for the developmentally disabled. We outline these issues below.

Future of Three Remaining DCs. The future of the three remaining DCs is one key issue that should be addressed by the Legislature after the closures of Agnews and Lanterman have been set in motion. The Legislature should consider whether the Porterville DC should be operated solely to serve a forensic population (persons committed as a result of actions by the criminal court system), and whether the Sonoma and Fairview DCs should also eventually be closed. Alternatively, the state could consider continuing to operate all of the remaining DCs, but downsizing Sonoma and Fairview to transitional or crisis homes where individuals with developmental disabilities requiring assistance would reside for only a short time.

Future of Two Leased Facilities. Another issue warranting future legislative consideration is whether the state should continue to operate the two leased facilities that serve persons with severe behaviors. As discussed earlier in this analysis, the two leased facilities have the highest operating cost in the DC system on a per person basis. We would recommend that, soon after DC restructuring has commenced, DDS be directed by the Legislature to evaluate the costs and benefits of operating the two leased facilities, including a comparison of the costs of serving similar persons in the remaining DCs.

Because intensive staffing levels appear to be driving the costs of the two smaller facilities, we would further recommend that this cost-benefit analysis include a review of whether administrative and direct care staff could be reduced at the two facilities without unduly affecting the care provided to residents.

Reorganization of State Hospital Operations. The Legislature should also consider in the future whether state hospital operations should be consolidated into one, separate new department. Such a reorganization might make sense as the populations of DCs continue to dwindle. The population of forensic residents is growing in both systems. A significant portion of the DDS hospital population is dually diagnosed with a developmental disability and mental health needs. Nearly 100 percent of the residents in the two leased facilities have a dual diagnosis, and nearly 50 percent of Fairview's residents and 34 percent of Sonoma's residents have a dual diagnosis.

Because both hospital systems would be providing services to hospital residents with similar or overlapping needs, the state might be able to achieve some savings on administrative costs by consolidating hospital operations into one separate department. (The DDS and DMH could remain as separate departments operating their respective community programs.) Notably, both DDS and DMH hospitals once were a single operation.

Conclusion

During the past ten years, the DC population has dropped significantly. Although the population continues to decline at a slow rate, the cost per resident continues to increase due in part to the fixed costs associated with maintaining large, underused facilities. Consistent with the state's Lanterman Act and the U.S. Supreme Court Olmstead decision, we recommend that the state continue to take steps to downsize the DC system by closing the Agnews and Lanterman DCs. The state should ensure cost-effective services are available in the community for individuals relocated from the closed DCs by carefully implementing service delivery options and by maximizing the federal funds available to the state.

Community Program Issues

Parents Would Share Costs

The Governor's budget proposes a parental copayment program for children age 3 to 17 who live at home and receive Regional Center services. We support the Governor's proposal in concept, but would recommend that the Legislature carefully consider clarifying and improving some specific aspects of the plan as it moves forward.

Background

Under the Lanterman Act, the developmentally disabled are entitled to services regardless of their family's economic resources. Less than 1 percent of RCs clients or their families pay any share of the cost of the services they receive. Unlike most other social services or medical services programs, RC services are generally provided at state expense without any requirement that recipients demonstrate that they do not have the financial means to pay for them.

The Governor's Copayment Proposal

Additional State Revenues. The Governor's budget proposes that DDS develop and implement a new copayment program to assess and collect reimbursement from the families of developmentally disabled children who live at home and receive certain services provided by RCs. The DDS' preliminary estimate is that the copayment would result in $29.5 million in additional revenues for the state in the budget year. Under the Governor's approach, these additional revenues would be deposited in the General Fund, and would not be used to directly offset the cost of the RC program to the state.

As proposed, the copayment would be:

• Assessed on families of children age 3 to 17 who live at home and receive services purchased by RCs.
• Assessed based on annual adjusted gross income as reported on California state income tax returns.
• Assessed on families whose adjusted gross income is at least 200 percent of the federal poverty level for a family of four.
• Limited to 10 percent of the family's annual income or the cost of the services, whichever is lower.
• Required to be paid in full within 12 months of the initial assessment through monthly, quarterly, semi-annual, or lump-sum payments.
• Open to appeal within 60 days for billing errors, or changes in gross income.

Some Client Groups Unaffected. Currently, only the families of children under the age of 18 who live out-of-home pay a sliding scale fee based on the family's ability to pay. The Governor's proposal would add to the list of fee paying families those with children age 3 to 17 living at home (approximately 36 percent of the caseload). The remaining families, those with children age 0 to 3 living at home and age 18 and above, would not be required to pay any share-of-cost, and thus would also be unaffected by the Governor's plan. (These families make up almost 62 percent of the total RC caseload.) Figure 6 summarizes how each group of RC clients would be affected, if at all, by the Governor's fee proposal.

Copayments Depend on Income and Family Size. As noted earlier, under the Governor's proposal, families with net gross incomes of less than 200 percent of the federal poverty level (FPL) for a family of four, would not have to make copayments. The Governor's proposal also specifies that no family receiving Medi-Cal would be assessed a copayment.

Cap on Share of Costs. The Governor's plan is also specific as to exactly what costs could be charged to families. Families would be obligated to pay for the full cost of the services purchased by the RC for their child up to 10 percent of their income. For example, a family of four with an annual income of $40,000 would have their annual copayment capped at $4,000, with the RCs paying all additional costs for the services purchased above that amount. Under the Governor's plan, some high-income families whose children did not require costly services might pay 100 percent of the cost of the services the RCs provided for them.

Statutory Changes Needed. Implementation of the Governor's copayment proposal would require a change in state law to allow DDS access to Franchise Tax Board (FTB) information.

Implementation Timeline. In order to begin collection of copayments on January 1, 2004, as the administration proposes, DDS planned to begin development of regulations for the implementation of copayment regulations in February 2003. The administration is requesting the enactment of authorizing legislation by April 2003. Parents would be notified in June 2003 that they would be subject to making copayments, and DDS would begin assessing the amounts of the fees in October 2003.

An Analysis of the Governor's Fee Proposal

Imposition of Fees A Reasonable Approach. In our Analysis of the 2002-03 Budget Bill, we noted that the cost of operating RCs had more than doubled since 1995-96. We recommended that the Legislature consider requiring the imposition of additional fees for the support of RC services based upon the ability of a client or the client's family to pay for them. Our review of the Governor's proposal indicates that it is a reasonable approach for the Legislature to consider, especially given the state's current fiscal circumstances.

Revenue Estimate Will Be Revised. Currently, the DDS does not maintain income data on the clients that would be assessed copayments under this proposal. The DDS based its preliminary estimate of revenues upon information in its database relating to the cost of its services and demographic data from the Department of Finance (DOF). In order to provide a more accurate revenue projection, the DDS intends to revise its revenue estimate after it has reviewed FTB income data pertaining to the families of affected RC clients.

We would note that adoption of the administration's budget proposal to implement statewide standards on purchases of services could also affect the amount of copayments that could be collected. If, as has been proposed by the Governor, expenditures for services requiring a copayment are reduced through the implementation of such statewide standards, the amount of copayment collections would also decline. Because the specific standards to be implemented have not been determined, the fiscal impact of such a change on copayment revenues cannot be determined at this time.

Copayments Could Slow Cost Increase Trend. In addition to the revenues that would result from copayments, their very implementation would probably cause a decrease in the demand for RC services. Some families would probably elect to receive fewer services once they were required to pay for part or all of them in order to lower their copayment.

Copayments would probably have relatively little effect on the demand for services critical to the child's health and welfare, but would probably have more of an effect on utilization of other services that are more discretionary in nature. In other words, so long as copayments are reasonable in their amount and based upon a family's ability to pay them, copayments could help deter excessive use of the available services without deterring their appropriate usage.

The fiscal impact on demand for RC services is unknown, but could result in millions of dollars in General Fund savings annually by 2004-05 after the copayment proposal was fully implemented.

Proposal Lacks Several Key Details. Several components of the Governor's proposal lack sufficient detail for the Legislature to fully assess its potential impact on individual RC clients. For example, the proposal does not clearly indicate whether the schedule used to determine the copayment due from any particular family would be calculated based upon a set percentage of income, based upon a "sliding scale" in which wealthier families would pay a higher percentage of costs than poorer families, or based upon some other mechanism.

It is also unclear whether families would make copayments for the services they receive in the same month they receive them, or whether there would be a time lag between when the services are provided and when families were billed for them. This is a concern for families in cases in which the services provided for a client change significantly from month to month based on client needs.

Income Eligibility Requirements Could Be Adjusted. The FPL is a threshold developed by the U.S. Census Bureau for determining whether individuals or families have poverty status. As Figure 7 shows, the FPL takes into account the size of a family. For example, for a family of four the FPL is $36,204 or less and for a family of five the FPL is adjusted upwards to $42,630. Under the Governor's proposal, minimum family income level requirements for copayments would not be adjusted based on family size. Our analysis indicates that families of five or greater could be required to make copayments although their incomes were below 200 percent.

Proposal Could Be Broadened. As noted earlier, the Governor's proposal would not impose copayments for children age 0 to 3 or adults age 18 and older. Our analysis indicates that it would be possible to impose fees on both groups.

We are advised that charging a fee to family with children age 0 to 3 would require permission from federal authorities that could take up to one year to obtain. It is not certain whether the copayment would ultimately be approved, given that other states have not yet imposed copayments for this group of children . If it were approved, however, the additional revenue provided to the state would probably be significant, potentially several million dollars on an annual basis.

Relatively few RC clients in the 18 and over age group are likely to have sufficient financial resources to make a copayment for the RC services they receive. However, because this is such a large client group—almost 93,000 or 51 percent of all RC clients—the amount of state revenues the state could generate from charging copayments for this group could nonetheless be significant.

Additional Positions Not Justified. Although we would agree that DDS needs additional positions to implement the proposed fees, DDS has not provided the detailed workload estimates needed to justify adding 25.6 positions to its staff for this purpose. Absent this workload justification, the Legislature does not have sufficient information to evaluate the staffing request.

We would also note that the budget request proposes to make all of the new positions permanent. It is not clear this is warranted. While some billing functions would have to be performed manually during the initial phases of implementation, fewer would probably be needed as billing processes became fully automated.

Improving the Governor's Copayment Plan

We support the Governor's proposal in concept, but offer a number of recommendations to improve the proposal. These include clarifying the impact of the fees on families, broadening the fees to the Regional Center client groups and ensuring that the new revenues are used to support the program.

We support the Governor's proposal in concept. We believe the imposition of copayments based upon a family's ability to pay for the services its children receive is reasonable and appropriate given the dramatic and ongoing growth in state costs for the support of these services and the state's severe fiscal problems. We would recommend that the Legislature carefully consider clarifying and improving some specific aspects of the plan as it moves forward.

Clarify Impact on Families. We recommend that the Legislature direct DDS to clarify at budget hearings how the fee schedule would be structured and the intended timeframe in which parents would be billed for services purchased for their child.

Based upon the information presented by the department, the Legislature may wish to consider requiring a sliding scale schedule for the collection of the copayments that would go further to ensure that they are affordable to the families which would pay them. The Legislature may also wish to consider ensuring that some time lag is established between when services are incurred and when parents are billed for them to better protect families from excessive fluctuations in copayments that could otherwise occur.

Link Minimum Requirements to the FPL. In order to ensure that copayments are only assessed on those families with the ability to pay, we recommend that minimum family income requirements be linked to the FPL. Specifically, we recommend that copayments only be assessed on families with incomes greater than 200 percent of the FPL after taking into account family size.

Others Should Make Copayments. In order to ensure equity among RC clients, and to help address the state's difficult fiscal problems, we recommend the Legislature consider broadening the copayment proposal to other RC client groups. Specifically, we recommend that DDS report at budget hearings on the feasibility of assessing fees to families with children age 0 to 3 as well as for those age 18 and older.

Obtain Fiscal Estimates. The Legislature should direct DDS to provide the Legislature with its updated estimate of revenues from the Governor's copayment proposal when that information is available. We further recommend that DDS and DOF be directed to estimate the decrease in demand for RC services and the resulting savings to the state that could result from the implementation of its copayment plan, and then to incorporate this information into the DDS budget 2004-05 estimate for the RC system. Accordingly, we recommend the adoption of the following budget bill language:

Provision X. The Departments of Developmental Services (DDS) and Finance shall estimate the decrease in demand for Regional Center (RC) services and the resulting savings to the state from the implementation of its copayment plan and appropriately adjust the DDS budget estimate for the RC system for this factor beginning in 2004-05.

Review Staffing Requests. We withhold recommendation on the proposed additional staffing requested to implement the copayment proposal until such time as the DDS submits to the Legislature specific workload justification for the new positions.

We further recommend that any positions that are approved be limited to two-year terms. After the initial implementation of the copayment program is complete, DDS, DOF, and the Legislature will be in a better position to review the permanent positions needed to maintain the copayment system.

Revenues Should Support RC Programs. Under the Governor's copayment proposal, the new revenues would be remitted to the State Treasury and deposited into the General Fund, and would not directly offset the costs of the RC program. We recommend instead that additional revenues be a part of the DDS budget and the General Fund appropriation be reduced by an equivalent amount.

We are concerned that the Governor's approach would be inconsistent with the way the DDS's existing fee collections are budgeted. Currently, the existing fees are used to offset the cost of services for the children.

Budget Proposes Efficiencies in Habilitation Services Program

The Governor proposes to shift the Habilitation Services Program (currently in the Department of Rehabilitation) to the Regional Centers effective July 1, 2003. This shift would result in a net General Fund savings to the state of $1.5 million in 2003-04.

Background

Entitlement to Work Experience Services. The Habilitation Services Program (HSP) is an entitlement program that provides sheltered work experience and job skills services to approximately 20,000 developmentally disabled adults who are referred for such services by the RCs. These services are provided by about 210 community-based organizations, approximately 85 percent of which also contract with the RCs to provide other services to RC clients.

State General Fund support for HSP is currently budgeted within the Department of Rehabilitation (DR), and the DR is responsible for the administration of the program. However, program costs are largely determined by the number of referrals of clients to services from the RCs operated under the direction of DDS. Although DR's 15 habilitation specialists monitor overall compliance by community-based organizations with program rules, case managers at the RCs directly monitor participants' progress and service needs.

Governor's Proposal

Shift to Regional Centers Proposed. As part of the December revision budget reduction package, the Governor has proposed the enactment of legislation to consolidate HSP within the RCs effective July 1, 2003. The administration estimates that this shift would result in net state administrative savings to the state in 2003-04 of approximately $1.5 million associated with a net reduction of 11 positions. Specifically, 29 HSP-related positions at DR would be eliminated for a savings of $2.2 million annually from the General Fund, while 18 HSP-related positions would be added at DDS at a cost to the General Fund of $700,000 annually. We believe the proposal would result in a reduction of administrative costs without any disruption in services or program oversight.

Under this proposal, the entire$115 million in General Fund local assistance funding for the support of HSP currently budgeted within DR would be shifted to DDS effective July 1, 2003. The RCs would assume the responsibility now held by DR for monitoring program compliance. The RCs would also monitor the quality of the services provided to HSP clients, as they already do for RC clients receiving other types of services. The budget proposal assumes that the RCs will be able to absorb the additional workload associated with such program monitoring activities, and therefore includes no additional local assistance funding beyond the $115 million for provider payments. Given the state's fiscal difficulties, and the additional operating funds provided to the RCs in the current year, we believe it is reasonable to have the RCs absorb these costs.

Analyst's Recommendation

We recommend that the Legislature concur in the administration proposal to consolidate HSP at DDS. Given the significant role that RCs under the direction of DDS already play in the operation of the program, we believe the projected General Fund savings for the proposal should be achieved through more efficient administration of the program without any significant disruption in services to HSP clients.

Community Services Program Deficiency Expected to Increase

The budget requests an additional $13.7 million from the General Fund for 2002-03 to address deficiencies in the funding provided to Regional Centers (RCs) for caseload growth, cost increases, and utilization of services. The department expects that the size of this deficiency will increase as more current data about RC caseload and expenditure trends becomes available. These deficits are occurring despite actions by the Legislature directing the department to implement a $52 million unallocated reduction in RC operations in the current year. We recommend that the department report at budget hearings on the size of the deficit and what actions the department will take to ensure deficits do not occur in the future.

Governor's Proposal

RC Operating Costs Increasing. The DDS periodically estimates future caseload and utilization costs for RCs based upon historical data. The DDS has updated its projection of the cost of RC operations during 2002-03 based upon the most recently available actual RC caseload and cost data, in this case information updated through March 2002. The data suggest that the funding provided for these programs in the 2002-03 Budget Act will be insufficient by $13.7 million from the General Fund ($40 million all funds). Accordingly, the Governor's January 10 budget plan proposes to increase the DDS budget to address this funding deficit.

The $40 million deficiency (including all sources of funds) consists of several components. Increases in utilization and caseload growth total of $29.9 million. The population of RC clients is estimated to be 1,310 more than expected in 2002-03, driving additional costs of $1.8 million in RC operations costs. The deficiency also includes $2.3 million to restore funding for a current-year rollback in Medi-Cal provider rates that did not occur. The remaining $6 million deficiency reflects greater than expected costs for the habilitation services programs currently operated by the DR.

Assessing the Governor's Request

Deficit Will Probably Grow Larger. Initial data reflecting the trends in expenditures for RC purchases of services through June 2002 suggest that a significantly larger deficit than the one assumed in the Governor's budget plan is likely to occur. The additional General Fund costs could amount to tens of millions of dollars.The DDS is aware of this possibility, and intends to update its deficiency request for the May Revision based upon RC data through October 2002.

Notably, these significant projected increases in the cost of RC operations are occuring despite an attempt by the Legislature to slow the trend. Specifically, it adopted an unallocated $52 million General Fund reduction in the RC budget for the current year in light of the state's fiscal problems. It appears for all intent and purposes that DDS and the RCs have not taken sufficient actions to realize such savings.

Historically RC Forecast Has Been Accurate. Historically, the RC estimate has proven to be relatively accurate. In the past, it has been more typical for the RC budget to be below the budgeted level, with savings in recent years ranging from $8 million to $22 million annually.

We believe the RC deficiency is due in part to the failure to achieve the unallocated reduction. Rapid increases in certain components of the caseload, such as children diagnosed with autism, may have contributed to the problem. Another factor may be the significant time lag in the data upon which DDS is basing its projections of RC caseload and costs. Our analysis indicates that it might be possible for the department to develop reporting systems that would allow its projections to be based upon more recent and probably more accurate data.

Analyst's Recommendation

Based upon the caseload and cost data we have reviewed, we concur in the budget request for additional funding to address the current-year deficiency. In light of the preliminary data suggesting that the deficit could grow significantly larger than the Governor's budget request, we recommend that DDS report at budget hearings regarding (1) the potential size of the deficit and its causes; (2) how such a large deficit is likely to occur despite 2002-03 budget actions directing DDS to achieve $52 million in unallocated reductions; (3) what further actions, if any, DDS is taking to constrain growth in these RC expenditures; and (4) what actions, if any, the department proposes to take to improve its forecasts of RC operating expenditures so that the Legislature can budget more accurately for the true costs of providing community services for the developmentally disabled.

Self-Determination Projects Could Benefit Clients and the State

The Governor's budget proposes to extend and expand the self-determination pilot program through 2005. Our analysis indicates that the projects represent a potential "win-win" situation for clients and the state. Clients could gain greater control over their services and their life while the state could potentially hold down growth in program costs. We recommend the Legislature approve the expansion but take further actions to help ensure these goals are achieved.

Background

Test Authorized in 1998. State legislation (Chapter 1043, Statutes of 1998 [SB 1038, Thompson]) authorized DDS to test the concept of "self-determination" in the delivery of community services for persons with developmental disabilities. The legislation authorized the creation of three-year self-determination pilot programs at RCs and provided an initial allocation of $750,000 for this purpose. The projects were allocated an additional $500,000 in 1999-00. Legislation (Chapter 171, Statutes of 2001 [AB 430, Cardenas]) extended the term of the pilot projects until January 1, 2004.

The three RCs chosen to conduct the pilot projects were Tri-Counties RC, Eastern Los Angeles RC, and Redwood Coast RC. The projects commenced operation in the spring of 1999. Kern RC and San Diego RC subsequently submitted proposals to conduct pilot projects and were approved. Currently there are approximately 145 participants in the five self-determination pilot programs.

Clients Control Services and Funds. The main concept of self-determination is to allow clients to decide for themselves which services they need and to directly control the funds they use to purchase them—with appropriate assistance from their friends, families, and professionals in the field.

Four principles govern self-determination: (1) freedom for clients to plan their own lives with appropriate support instead of having their programs planned for them; (2) authority for a client to control an allocated sum of public funds in order to purchase services; (3) support, meaning the arrangement of resources that will allow a client to live as a participating member of a community; and (4) responsibility for assuming an active role in a community as well as accountability for spending public dollars. Under self-determination, clients may choose to have entities known as support brokers and fiscal intermediaries perform administrative functions on their behalf. (For more background on the concept of self-determination, see our Analysis of the 1999-00 Budget Bill, page C-72.)

Governor's Budget Proposal. The Governor's budget proposes to extend the pilot projects until June 30, 2005. The budget proposal includes a request for two DDS staff positions and $139,000 from the General Fund in 2003-04 to develop a request for a separate federal waiver program for the pilot projects that could result in an increase in federal funding for the support of these clients. The administration is also proposing to change state law to permit an expansion of the five initial pilot projects into other parts of the state.

The plan also proposes to impose a cap on budgets for individual clients participating in self-determination projects that would be set at 90 percent of their current expenditures. The remaining 10 percent of funds would be set aside to establish a "risk pool" of funding that could be used to meet the unanticipated needs of a client who exceeded his/her individual budget. Any funds remaining in the risk pool at the end of each fiscal year would revert to the General Fund.

Assessing the Governor's Proposal

Benefits of the Governor's Proposal. Our analysis of the Governor's waiver program proposal indicates that it has the potential to eventually generate a significant amount of additional federal funds for the state that could offset General Fund costs for RC services for clients. It could also help to contain future growth in these costs.

Currently, about 25 percent of RC clients are included within a federal waiver program, known as the Home and Community-Based Waiver (HCBW). Under the waiver, the state is able to draw down additional federal Medicaid funds for services aimed at helping to maintain eligible individuals in the community instead of in more expensive institutions. The administration is proposing to establish a new and separate waiver program for self-determination program participants that it believes could be designed to allow the state to draw down even more federal funds.

Under this approach, the state anticipates collecting federal reimbursement for certain costs that now cannot be billed under the existing HCBW. In addition, more clients, or perhaps even all of those participating in the pilot projects, could be included within the new self-determination waiver program, potentially making even more federal funding available to offset General Fund costs.

These changes could allow the state to capture as much as $594,000 in federal funds in 2003-04 that could be used in lieu of General Fund support of the existing pilot projects. These state savings would grow as self-determination projects expanded. For example, if the projects were expanded to serve 1,000 clients, we estimate the state could offset up to $5.5 million in state General Fund costs with increased federal funds.

As we noted earlier, the Governor proposes that RC clients who choose to participate in self-determination be capped at 90 percent of the funding they have received in the past. We believe this approach has merit and could provide an effective mechanism to control future program costs by limiting growth for this segment of the RC population. According to DDS, Wyoming, Vermont, and Pennsylvania have reduced costs by 5 percent to 20 percent by capping expenditures for their self-determination clients.

Potential Problems With the Governor's Proposal. As we noted earlier, under the self-determination approach to the delivery of community services for persons with developmental disabilities, support brokers and fiscal intermediaries perform some functions that are currently performed by RC personnel. Currently, the state is in effect paying twice for administrative support for clients participating in self-determination projects because RC support funding for this part of the caseload is not currently adjusted to reflect the shift of these activities to brokers and fiscal intermediaries.

The Governor's proposal does not provide sufficient detail regarding how it would calculate the budget for clients participating in the self-determination projects. Absent the establishment of a uniform method to determine the amount of funds a client receives annually, it would be difficult to predict and control costs for services for these clients in the future.

Analyst's Recommendation

We recommend the Legislature approve the Governor's proposal to extend the self-determination pilot program beyond the five existing pilot programs in order to determine the potential for capturing additional federal funds that could offset the state cost of community services.

However, we further recommend the Legislature modify the proposed statutory language for the expansion of the program to make any such expansion conditional on the development and adoption by DDS of a standardized annual budget redetermination method for clients participating in self-determination. We believe this requirement would ensure greater accuracy and consistency in budgeting for the self-determination program and in controlling the future cost of these services to clients.

While we believe self-determination pilot projects can be conducted in a cost-effective manner, we recommend that DDS demonstrate at bud get hearings that its self-determination model would not cost more than providing the same services to clients under the existing system. The department should also indicate what adjustments should be made to RC funding to reflect the shift of these activities to brokers and fiscal intermediaries so that the state would not pay twice for certain administrative activities on behalf of the clients in self-determination projects.