LAO 2003-04 Budget Analysis: Health and Social Services

Legislative Analyst's Office

Analysis of the 2003-04 Budget Bill

Department of Mental Health (4440)

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

The state hospitals provide inpatient treatment services for mentally disabled county clients, judicially committed clients, clients civilly committed as sexually violent predators, and mentally disordered offenders and mentally disabled clients transferred from the California Department of Corrections.

Budget Proposal-Overall Increase. The budget proposes $2.3 billion from all funds for support of DMH programs in 2003-04, which is an increase of more than $80 million and 3.7 percent above estimated current-year expenditures. The budget proposes $787 million from the General Fund, which is a reduction of about $60 million, or 7.1 percent, below the Governor's revised budget plan for the current year. Reimbursements that would be received by DMH—largely Medi-Cal funding passed through to community mental health programs—would increase $142 million, or 10.8 percent. 

The overall proposed increase in DMH expenditures is primarily due to the expansion of the Early and Periodic Screening, Diagnosis and Treatment program (EPSDT) for children with emotional problems. The budget reflects a proposed $88 million increase in 2002-03 in the reimbursements received from the Department of Health Services (DHS) for support of EPSDT ($43 million comes from an increase in Medi-Cal General Fund spending and the balance from county and federal funds). The Governor's budget plan proposes a further increase in EPSDT funding above this revised current-year level of expenditures of $142 million, of which about $70 million would come from the General Fund. We discuss the reasons for the augmentation request and our response to this proposal later in this analysis.

Also contributing to the overall increase in DMH spending is a request in the state hospital budget for an augmentation of about $18 million from the General Fund (as well as a decrease of $2.6 million in reimbursements) primarily to accommodate projected growth in the forensic patient population. The budget plan assumes that the overall number of hospital patients at the end of the budget year will be 4,640, about 400 more patients than were in the hospitals as of December 2002.

The Governor's budget proposes a $3.7 million increase from the General Fund to continue with preparations to open a new state hospital in Coalinga which is now under construction. Also, $3.5 million in additional reimbursement authority is requested so that the department can operate a 20-bed inpatient mental health facility at the Department of the Youth Authority's Southern Youth Correctional Reception Center in Norwalk.

Budget Proposal-General Fund Decrease. The net reduction in General Fund expenditures proposed by the Governor's spending plan results in part from the proposal in the Governor's realignment plan to transfer two of its community mental health programs to the counties along with an equivalent amount of funding. The Governor would realign state funding for Integrated Services for the Homeless, including all $54.9 million in local assistance and $407,000 in funding for state support of the program. The budget would also transfer $20 million for the Children's System of Care plus an additional $209,000 in department support funds.

The budget plan includes several other significant reductions in mental health program spending, including proposals to:

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

State Hospital Issues

Patient Caseload Overbudgeted

The Governor's budget requests a $30 million increase in General Fund support for various state hospital population adjustments. Our analysis of the Governor's proposal and recent hospital census data indicates that General Fund support for the hospital caseload is probably overbudgeted by about $3.6 million in the current year and $14.1 million in the budget year. (Reduce Item 4440-011-0001 by $14.1 million.)

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

For the current fiscal year, the administration has proposed an increase of about $2.9 million in General Fund support relative to the funding previously authorized in the 2002-03 Budget Act. This increase is based on census counts indicating that the Mentally Disordered Offenders (MDO) caseload is above the level initially budgeted.

For the budget year, the spending plan requests a net increase in General Fund support of about $30 million compared to the revised proposed level of spending for the state hospital system. This is comprised of: (1) $14.8 million in funding adjustments to account for the full fiscal effect in 2003-04 of population growth which DMH projects will gradually occur in the hospitals during the current fiscal year; (2) an additional $5.6 million to care for a projected net gain of 88 patients during the budget year; and (3) an augmentation of about $9.5 million for deficiencies in funding for operating expenses and equipment. We discuss this last request separately later in this analysis.

The Governor's January 10 spending plan assumes that the population of forensic patients—that is, those transferred to the hospital system because of their involvement with the criminal justice system—would grow during the budget year by 114 patients. The spending plan also assumes an offsetting reduction of 26 patients committed to the state hospital system under the authority of the Lanterman-Petris-Short (LPS) Act and who are financially supported by counties. This would result in a net gain of 88 patients.

Budget Assumptions Off Track. Our review of recent hospital population data indicates that the Governor's January 10 budget plan overstates the patient caseload that is likely to materialize in both the current and budget years. The Governor's spending plan is based on hospital census counts through the beginning of October. Our analysis reflects population data through the end of December that was not available at the time the Governor's budget plan was prepared. As can been seen in Figure 1, the overall population count so far in the current year has remained fairly level and has not grown in line with the caseload funding provided in the 2002-03 Budget Act.

Some specific categories of state hospital patients have grown in number, and these trends are reflected in the Governor's 2003-04 spending plan. For example, the Governor's budget assumes that the number of MDO patients is above the number assumed in the 2002-03 Budget Act, and that modest growth in the number of these patients will carry forward into the budget year. Our analysis indicates that these budget assumptions are in line with the hospital census data we have reviewed.

However, our analysis of that data indicates that the population growth assumed in the Governor's budget plan for certain other categories of patients is not materializing. These more recent trends suggest that both the current-year and budget-year requests for additional funding for the hospital system are significantly overstated. Specifically, the Governor's budget assumptions are not in line with the actual census count of patients classified as being Incompetent to Stand Trial, Not Guilty by Reason of Insanity, as well as county-supported LPS commitments. The data also indicate that the number of patients classified as Sexually Violent Predators is modestly above the levels assumed in the Governor's budget plan.

In summary, the Governor's budget plan assumes that the overall hospital population will reach 4,552 by June 2003 and 4,640 by June 2004. This seems unlikely, given the actual census count at the end of December of 4,238—a net drop of 12 patients since the current fiscal year began—and the modest decline seen in the hospital population during the past two years.

If this disparity between actual hospital census counts and the caseload assumed in the Governor's January 10 budget plan were to continue, the spending plan would provide the state hospitals significantly more money for this purpose than is needed in both the current and budget year. We estimate that the Governor's spending plan may provide as much as $3.6 million more from the General Fund for support for hospital caseload adjustments than is needed in the current year. (Instead of the $2.9 million General Fund augmentation requested by the Governor for the current year, the existing General Fund budget appropriation for 2002-03 appears to exceed the department's hospital caseload needs by about $700,000.) We also estimate, based on review of more recent caseload data, that the Governor's proposed 2003-04 expenditures from the General Fund for state hospital caseload are overbudgeted by about $14.1 million (about $20.7 million all funds).

Analyst's Recommendation. Given the continuing disparity between the actual census count in the state hospitals and the caseload assumptions in the Governor's budget, we recommend that the Governor's request for additional caseload funding for 2003-04 be reduced by $14.1 million from the General Fund. We are advised that the administration will update its hospital population projections this spring to reflect more recent hospital population trends. We will continue to monitor the hospital caseload and recommend further changes, if necessary, following our review of the May Revision.

Funding for Operating Expenses Requires Further Review

The budget requests a $9.5 million augmentation from the General Fund for caseload-related operating expenses for state hospitals. We withhold recommendation on this funding request pending further administration review of the proposal, and recommend that the Legislature examine restructuring how such operating expenditures are budgeted to improve legislative accountability.

Expense Adjustment Requires Further Review. As noted earlier, the budget plan proposes an augmentation of $9.5 million from the General Fund ($11.4 million all funds) for the stated purpose of adjusting the DMH budget for operating expenses and equipment (OE&E). The budget request indicates that, in 2001-02, DMH spent $11.4 million more from its OE&E budget than expected for drugs, utilities, outside medical services, and other purposes. However, it is unclear whether DMH will need these additional resources in 2003-04. We are advised that the administration considers the requested amount to be preliminary and that it intends to review and potentially revise this proposal at the time of the May Revision.

Our office is also continuing to review the proposal in light of the number of authorized but vacant positions in its state hospital operations. The DMH data we have reviewed indicate that more than 1,150 of the hospital system's nearly 8,700 authorized positions—about 13.3 percent of the total—were vacant as of January 2003. This large a number of vacancies raises a question as to whether the department would have a significant amount of unspent personnel funds that could be shifted instead to meet its OE&E needs. The Department of Finance (DOF) has estimated that, in 1999-00, when a similar situation was occurring, DMH shifted $39 million in savings from vacant positions to other purposes.

We note that, in our Analysis of the 2002-03 Budget Bill, we had proposed that a number of the vacant state hospital positions be abolished, and that surplus funding for personnel be permanently shifted to the OE&E component of the department's budget as justified to meet DMH's operational needs. We proposed this restructuring of the DMH hospital budget with the purpose of restoring accountability by DMH to the Legislature for the use of these funds. In our view, the current situation makes it difficult for the Legislature to hold DMH accountable for spending the money in the way it was budgeted.

However, we also note that the request for a special augmentation for OE&E funds is further evidence that the current standard caseload funding methodology for the state hospital system does not allocate the additional resources actually needed for such items as food and medications for patients. The $11,000 that is added to the budget for these purposes for each new patient (on a full-year basis) is probably insufficient to keep pace with the added costs of growth in the hospital population. The administration is aware of this problem and is considering possible remedies.

More accurate budgeting for caseload-related increases in OE&E costs would probably reduce the need for special OE&E augmentations, such as the current request for $9.5 million, which have periodically been requested and granted to DMH. Improvement of the standard caseload budgeting formulas could also further efforts to restructure the state hospital budget so that it more accurately reflects the level of expenditures that will actually occur, a step toward enhanced accountability to the Legislature on the use of its funds.

Analyst's Recommendation. We withhold recommend at this time on the proposed OE&E augmentation, pending the administration's further review of the proposal and possible changes to the request at the time of the May Revision. The Legislature may also wish to consider directing DMH and DOF to report at budget hearings regarding: (1) how, if at all, the OE&E augmentation should be offset with excess funding from vacant positions in the state hospital system, (2) how the state hospital budget could be restructured to more appropriately align the funding needed for personnel and OE&E needs, and (3) the fiscal ramifications of improving the standard caseload budgeting methodology to more accurately reflect hospital system needs for OE&E funding.

Another Delay for Salinas Valley Facility

The scheduled opening of a new mental health facility at Salinas Valley State Prison has been delayed repeatedly due to construction problems. We recommend that the current-year budgets of the Departments of Corrections (CDC) and Mental Health be adjusted at the time of the May Revision to reflect the savings of at least $1.5 million in operating costs for the new facility that will result from the delay in its activation. We further recommend that an additional $100,000 in funding for CDC operating expenses be deleted because it is unclear why these resources are needed at this time.

Background. The 2002-03 Budget Act and a subsequent budget adjustment provide about $5.4 million in General Fund support to CDC, with an equivalent amount of reimbursement authority to DMH, to open a new 64-bed psychiatric facility at Salinas Valley State Prison. (This sum includes $544,000 for recruitment and retention bonuses for the facility's new staff.) The Governor's budget plan proposes to provide full-year funding of $7.2 million for the operation of the facility during 2003-04, plus an augmentation to the CDC budget of $100,000 for various additional operating expenses.

Comparable to a longstanding arrangement between the two departments at the California Medical Facility at Vacaville, the new Salinas Valley facility will be staffed and managed by DMH to exclusively serve CDC inmates at the prison.

Staff In Place, But No Place to Accomplish Their Work. The level of funding provided to CDC and DMH to open the Salinas Valley facility during 2002-03 takes into account construction-related delays that postponed the date DMH was to assume control of the new building from April 2002 until September 2002. However, since that time, the building project has encountered further delays. The DMH indicates that it has been notified by CDC that the building will not become available for occupation by its staff until February 2003 and would not receive its first CDC patient until April 2003.

Amid this series of delays, we are advised that DMH nevertheless proceeded to hire 61 of the 103 authorized staff positions for the facility. The latest construction delays mean that this newly hired DMH staff will temporarily have no place to accomplish the work for which they were hired. We are advised by DMH that, until this situation is resolved, perhaps by March, the new hires are being directed to perform other medical and nonmedical work at the prison.

The DMH estimates that, as a result of the slowdown in the activation schedule, it will not spend about $1.5 million of the funds allocated for the operation of the Salinas Valley facility in the current fiscal year. The Governor's January 10 budget plan did not propose any financial adjustment to either the CDC or the DMH budgets to reflect the delay in the activation of the Salinas Valley facility. The CDC budget for Salinas Valley State Prison also has not been adjusted to reflect the additional funding available to them as a result of the delay in the opening of the mental health facility but not accounted for in the budget of that institution.

Basis for OE&E Augmentation Unclear. As noted earlier, the CDC budget requests an additional $100,000 for various estimated operating expenses for the Salinas Valley facility.

While these funds were provided within the CDC budget, these same funds have not been included as additional reimbursements within the DMH budget for the support of the mental health facility. Moreover, DMH was unaware of this budget request. Thus, at the time this analysis was prepared, we were unable to clarify why these additional funds are needed at this time.

Analyst's Recommendation. We recommend that the Legislature direct that the General Fund budget for CDC for the current year be reduced by at least $1.5 million, with an equivalent reduction to reimbursements in the DMH budget, to reflect savings from the delay in the activation of the new mental health unit at Salinas Valley. At the time of the May Revision, the current-year spending level for the two departments should be further adjusted to reflect an updated projection of these savings, including any additional savings that could accrue in the current year and the budget year if there are any further delays in the opening of the facility. In response to our inquires about this matter, we have been advised by CDC that such adjustments will be presented at the time of the May Revision.

In addition, the CDC budget should be adjusted at that time to reflect any savings to the department that will result from the availability in the current year of unbudgeted additional DMH staff. We recommend deletion of the proposed $100,000 augmentation for OE&E expenditures because it is unclear why these resources are needed at this time.

Community Program Issues

New Projection Method Increases EPSDT Costs

The Governor proposes a significant increase in state support for community mental health services for certain children in both the current and budget years based on a revised projection method for the costs of the program. We believe there is merit to the Department of Mental Health's effort to budget more accurately for the program, but recommend funding adjustments to correct for apparent overbudgeting for these costs. (Reduce Item 4260-101-0001 by $11.7 million.)

Background. The EPSDT, a federally mandated program, requires states to provide a broad range of screening, diagnosis, and medically necessary treatment services to Medi-Cal beneficiaries under age 21, even if the treatment is an optional service under a state's Medicaid plan. The requirements apply to mental health as well as physical health.

As we noted in the Analysis of the 2001-02 Budget Bill as well as in analyses of the state budget in previous years, the state's expenditures for EPSDT mental health services had been growing dramatically—as much as 30 percent annually.

In response to these concerns, the administration is requiring counties, which were previously obligated to provide a base level of funding but bore no share of the cost of the growth of the program, to be financially responsible for a 10 percent share of the nonfederal cost of program growth. In addition to this intended cost-control mechanism, the Legislature also adopted statutory language last year directing DMH to assist counties in implementing managed care principles that would help slow the growth in the program. The DMH is taking some steps to implement these provisions that its believes will have an unspecified future impact on the growth in program costs.

Budget Request Based on New Projection Method. Despite these changes, the Governor's budget plan again proposes significant increases in General Fund resources for EPSDT. The spending plan would augment the state budget by $43.4 million in the current year and an additional $69.7 million above that current-year spending level in the budget year. By 2003-04, the total state cost for the program would reach $381 million, an increase of about 16 percent above the proposed 2002-03 level of spending. (General Fund and federal fund support for the program are budgeted within the DHS budget, and budgeted as reimbursements in the DMH budget.)

The DMH indicates that the budget proposal reflects its collection of more recent information about the costs and caseload of EPSDT, an expected slowdown in program growth due to cost-containment efforts at the county level, and a change in the department's method for estimating future program costs. In the past, DMH has noted, its projections of EPSDT costs often turned out to be significantly below the actual level of expenditures. Once these funding deficiencies were later recognized, the administration has requested additional state funding—sometimes in the tens of millions of dollars—to "catch up" with underbudgeted amounts for EPSDT. For example, in January 2001, the DMH budget requested an additional $61 million for the EPSDT program primarily for this reason.

The 2003-04 budget plan is based on a new projection method that DMH believes more fully reflects the base level of funding needed for EPSDT services. One key change is that DMH's revised method takes into account specific data on EPSDT growth trends in each county, while the previous expenditure projection method was based on cost data that was aggregated on a statewide basis.

Projections Consistently More Accurate, But Consistently Higher. We believe there is merit to the DMH's attempt to budget more accurately for EPSDT, and agree that the new projection method of looking at county-by-county expenditure trends is likely to prove more accurate than its previous approach. However, we are concerned the new projection method has a tendency to err on the side of overbudgeting for EPSDT rather than providing less money than would be needed.

The DMH attempted to validate its new projection model by reviewing how accurate its new approach would have been had it been used in the past. As can be seen in Figure 2, projections made using the new method were significantly more accurate. For example, the DMH had initially believed that about $179 million (from all fund sources) was needed for support of EPSDT in 1998-99. The actual costs turned out to be almost $300 million. Had the new projection method been used, the Legislature would have been asked to budget about $333 million, much closer to the actual amount of funds needed.

Figure 2

New DMH Projections More Accurate But Exceed Funds Actually Needed

(In Millions)

Fiscal year

Total Actual Claims Paid

Estimate With:

Previous Method

Proposed Method













However, we would note that, as can also be seen in Figure 2, while the new method was consistently more accurate in projecting prior year spending needs, it also consistently erred on the side of providing more money for the program than was actually needed. For the three years tested in the validation of the projection, the average error amounted to about $25 million for all fund sources.

There is no way to know at this time, however, whether this is a flaw in the projection model or just a coincidental result of other factors affecting the three years of EPSDT expenditures that were reviewed. Further testing of the model in the future should resolve this issue.

Analyst's Recommendation. We believe it makes sense at this time to rely upon DMH's new projection method as a basis for revising the 2002-03 spending plan and planning the budget for EPSDT services for 2003-04. It is in the state's fiscal interest to budget more accurately for the costs that will be incurred for this program.

However, given the uncertainty that remains about this new projection method, we would recommend that the Legislature consider making adjustments to offset its apparent tendency to allocate somewhat more money for this program than would actually be needed. While we would acknowledge that this increases the risk that the Legislature will need to provide additional funding for EPSDT, we believe it is more fiscally prudent for the Legislature to err on the side of not providing more money than is needed for the program.

Specifically, we recommend that the proposed funding allocations in the Governor's budget plan for EPSDT (within both DHS and DMH) be reduced, both in the current year and the budget year, by the average amount of the error shown in DMH's attempt to validate its projection model—about $25 million when all sources of program support have been considered. Taking into account county and federal support for the program, this would result in a $12.3 million reduction in the revised current-year level of spending provided for EPSDT in the Governor's budget plan. The proposed 2003-04 appropriation for EPSDT would be reduced by about $11.7 million. Further adjustments to these funding levels could be made, if warranted, as DMH obtains additional caseload and cost data indicating the actual expenditure levels that have occurred.

In addition, we discuss the possibility of including EPSDT mental health services within a proposed state-county realignment of funding and program responsibilities in "Part V" of the 2003-04 Budget: Perspectives and Issues.

Return to Health and Social Services Table of Contents, 2003-04 Budget Analysis