LAO 2005-06 Budget Analysis: General Government

Analysis of the 2005-06 Budget Bill

Legislative Analyst's Office
February 2005

Developmental Services (4300)

A developmental disability is defined as a severe and chronic disability, attributable to a mental or physical impairment that originates before a person's 18th birthday, and is expected to continue indefinitely. Developmental disabilities include, but are not limited to, mental retardation, cerebral palsy, epilepsy, autism, and disabling conditions closely related to mental retardation. The Lanterman Developmental Disabilities Services Act of 1969 forms the basis of the state's commitment to provide developmentally disabled individuals with a variety of services, which are overseen by the state Department of Developmental Services (DDS). Unlike most other public social services or medical services programs, services are generally provided to the developmentally disabled at state expense without any requirements that recipients demonstrate that they do not have the financial means to pay.

The Lanterman Act establishes the state's responsibility for ensuring that persons with developmental disabilities, regardless of age or degree of disability, have access to services that sufficiently meet their needs and goals in the least restrictive setting. Individuals with developmental disabilities have a number of residential options. More than 98 percent receive community-based services and live with their parents or other relatives, in their own houses or 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 facilities.

Community Services Program. This program provides community-based services to clients through 21 nonprofit corporations known as regional centers (RCs) that are located throughout the state. The RCs are responsible for eligibility determinations and client assessment, the development of an individual program plan, and case management. They generally pay for services only if an individual does not have private insurance or they cannot refer an individual to so-called "generic" services that are provided at the local level by counties, cities, school districts, and other agencies. The RCs also purchase services, such as transportation, health care, respite, day programs, and residential care provided by community care facilities. The department contracts with the RCs to provide services to almost 200,000 clients each year.

Developmental Centers (DC) Program. The department operates five DCs, and two smaller leased facilities, which provide 24-hour care and supervision to approximately 3,300 clients. All the facilities provide residential and day programs as well as health care and assistance with daily activities, training, education, and employment. More than 8,300 permanent and temporary staff serve the current population of 3,300 at all seven facilities.

Budget Proposal. The budget proposes $3.7 billion (all funds) for support of DDS programs in 2005-06, which is a 4.7 percent increase over estimated current-year expenditures. General Fund expenditures for 2005-06 are proposed at $2.3 billion, an increase of $130 million, or 5.9 percent, above the revised estimate of current-year expenditures.

The budget proposes $3 billion from all funds ($1.9 billion from the General Fund) for support of the Community Services Program in 2005-06. This represents a $143 million General Fund net increase, or 7.9 percent, over the revised estimate 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 proposed reductions in the budget including policy initiatives to impose long-term cost containment measures on RC purchase of services and expand a self-directed services program commonly referred to as self-determination. Another policy initiative would implement a statewide Quality Management System (QMS) the administration believes is necessary to maintain and increase federal funding. The 2005-06 Community Services Program also includes a net reduction of $60 million in General Fund and an equivalent increase in federal funds due to the proposed transfer of federal Title XX Block Grant funds from the Department of Social Services.

The budget proposes $699 million from all funds ($373 million from the General Fund) for the support of the DCs in 2005-06. This represents a net decrease of $14 million General Fund, or 4 percent, over the revised estimate of current-year expenditures. The decrease in General Fund resources is mainly due to the continuing decline in the DC population.

The budget proposes $37 million from all funds ($24 million from General Fund) for support of headquarters. About 60 percent of headquarters funding is for support of the community services program with the remainder for support of the DC program.

The Regional Center System: Growth Trends Continue

The 2005-06 budget proposal for community services reflects the increasing costs to the state for the services and supports provided by regional centers (RCs) for persons with developmental disabilities. While the growth trend remains strong overall, the budget plan does not correct for recent trends indicating that caseloads are lagging somewhat below the level budgeted for 2004-05. We recommend that the Legislature reduce RC expenditures by $9 million General Fund ($12 million all funds) to correct for overbudgeting of expenditures in both the current and the budget year.


The Regional Center System

Fund Sources. General Fund support has typically accounted for about 65 percent of the RC budget in recent years, while federal reimbursements resulting from the state's participation in a Medicaid waiver program for certain clients are the source of about 21 percent of RC support. Other major sources of RC funding include: (1) federal Title XX Social Services Block Grant funds; (2) federal Targeted Case Management funds; and (3) other federal funds, mainly related to Early Start services for infants.

Two Types of Expenditures. The RC budget is mainly comprised of two major types of expenditures—purchase of services and RC operations.

The Governor's budget proposes $2.5 billion for RC purchase of services in 2005-06. The total purchase of services budget consists of ten basic service categories plus adjustments to reflect various funding or program changes, such as unallocated reductions, and changes in eligibility. Figure 1 shows the Governor's revised and proposed expenditures for 2004-05 and 2005-06 for each of these categories. The ten purchase-of-service categories are as follows:


Figure 1

Regional Center Purchase of Services
By Service Category

All Funds (Dollars in Thousands)





Service Category





Day Programs





Community Care Facilities





Support Services










In-Home Respite





Habilitation Services





Health Care





Out-of-Home Respite





Medical Facilities





Miscellaneous Services















The other major category of RC expenditures consists of RC operations, which includes eligibility determinations and client assessment, the development of individual program plans for clients, service coordination (also known as case management), as well as associated administrative and personnel management activities. The Governor's budget proposes $462 million for RC operations, including $26 million in so-called "pass-throughs" of funding for various contracts, programs, and projects that are not directly controlled by RCs.

Regional Center Caseload Trends

Growth Trend Continues. Between 2000-01 and 2005-06, the RC caseload is projected to grow from about 164,000 to more than 208,000, an average annual growth rate of about 5 percent. The caseload trend is shown in Figure 2.

Figure 2

Regional Center Caseload Growth



Increase From
Prior Year

Fiscal Year




























Why Caseload Is Growing. Several key factors appear to be driving caseload growth trends. Improved medical care and technology has increased life expectancies for the developmentally disabled. It is also possible that medical professionals are identifying more developmentally disabled individuals at an earlier age, and referring more persons to DDS programs as a result of state and RC outreach programs to medical professionals. The RC caseload growth also reflects a significant increase in the diagnosed cases of autism, the causes of which are not yet fully understood.

Program Expenditure Trends

Overall Spending and Cost Per Client. As shown in Figure 3, between 1998-99 and 2005-06, total spending increased by 102 percent (after adjusting for a program shift to DDS) while spending per person after adjusting for inflation has gone up 16 percent.

Why Spending Is Escalating. Several factors help to explain why per-person spending is increasing. One factor is an aging RC population which requires more intensive and more costly services and supports. Another probable factor pushing costs upwards is the increase in diagnosed autism caseloads and the comparatively higher costs of treating autistic individuals. Also, as new medical treatments, equipment, and technology become available, the scope of services that DDS is able to provide to developmentally disabled individuals is broadening. In addition, increased spending is, to some extent, a result of rate increases provided for some classes of vendors. We discuss rates and their impact on RC expenditures in more detail below.

Governor's Budget Proposal

Caseload Estimate Lagging. The 2005-06 budget plan includes DDS' updated caseload projections for RCs for the current fiscal year and the budget year. The budget plan estimates current-year caseload to be 199,255. However, based on the most recent caseload data, the current-year RC caseload is 940 below that number. The budget plan further estimates that the RC population will grow from 199,255 in 2004-05 to 208,020 in 2005-06, a year-to-year increase of 8,765 or 4.4 percent.

No Fiscal Adjustments Proposed. The budget plan does not propose any reductions in current-year spending as a result of the lower-than-expected caseload. Nor does it adjust the 2005-06 budget request for the lag in caseload growth. The DDS has indicated that it will update its caseload estimates and propose any fiscal adjustments at the time of the May Revision. If this RC caseload trend were to continue, we estimate that RC purchase of services may be overbudgeted by as much as $9 million General Fund ($12 million all funds) in the current fiscal year and $9 million General Fund ($12 million all funds) in the budget year.

Analyst's Recommendation. Based upon the caseload trend information available to the Legislature at this time, DDS expenditures for purchase of services are overbudgeted in both the current and the budget year. Accordingly, we recommend that the Legislature reduce RC expenditures in both 2004-05 and 2005-06 by $9 million General Fund ($12 million all funds) to limit expenditures to the level justified by the department's own experience.

The administration has indicated that it will provide updated caseload estimates at the time of the May Revision. We will continue to monitor caseload trends and will recommend appropriate adjustments in May when DDS' updated caseload estimates are available.

Towards A More Systematic Rate-Setting Model

The Department of Developmental Services (DDS) and its system of regional centers provide a wide array of services and supports for the developmentally disabled. Our analysis indicates that the way that DDS and the RCs set rates for the vendors who provide these services also varies widely—and as a whole lacks a rational and consistent approach. In this analysis, we review how rates are set for these services and offer an improved and systematic approach to rate-setting that could ensure that the state does not overpay for services.


Who Sets the Rates for RC Services?

Rate-Setting a Split Responsibility. The rates paid to vendors who provide the wide array of services available for persons with developmental disabilities are established by DDS on a statewide basis for some services, and others are determined at the RC level using guidelines established by DDS.

The DDS directly sets rates for community care facilities (CCFs), day programs, in-home respite, and the work activity program. Thus, DDS now directly sets the rates on a statewide basis for about $1.6 billion of community services provided by RCs, roughly 63 percent of the total $2.5 billion in purchase of services projected for 2005-06.

Although DDS has overall responsibility and statutory authority for the provision of community services, it has delegated some of that authority to the RCs. Specifically, it has provided the RCs with guidelines for determining how rates are set for about $900 million or 37 percent of the total $2.5 billion in purchase of services projected for 2005-06. We describe these rate-setting guidelines in more detail later in this analysis.

Some Vendor Rates Have Been Frozen

Rates a Key Fiscal Control. Three key factors drive spending for RC services: caseload levels, trends in the utilization of services, and rates. In order to slow growth in state costs for RCs, the Legislature has taken some steps in recent years to slow caseload growth and to decrease spending on services. In 2003-04 and 2004-05, it also acted to control costs by adopting legislation imposing rate freezes on selected community services. The Governor's budget proposes legislation to continue the rate freezes now in effect.

The programs and services affected by these rate freezes include: (1) day programs and in-home respite agencies; (2) vendors with whom the RCs contract for services; and (3) work activity programs. We discuss the effect and ramifications of these rate freezes later in this analysis.

Department Currently Studying Rate Reform

Reform Process Could Take Years. Last year, the administration proposed that several areas of the RC system be reformed as part of an effort at containing state costs, including a review of the rate-setting system for community services. In the 2004-05 Budget Act, the Legislature approved four permanent staff positions and $500,000 in one-time funding for contract resources to enable DDS headquarters to develop standardized rates for certain types of RC vendors. We are advised by DDS that the contractor will be required to: (1) conduct research and make recommendations regarding cost differences among different geographic areas in the state for certain community services; (2) develop and maintain a Web site that will allow vendors providing these services to submit cost statements electronically; (3) create and maintain a database and associated software for managing the cost information that is collected; and (4) develop software to help calculate the rates that should be established for these services.

The DDS indicates that this system-wide rate reform effort will require several years to complete. This process is expected to include a review with stakeholders of the existing rate-setting methodology applicable to their programs, identification of any drawbacks or inadequacies in the way rates are set, identification and development of any statutory and regulatory changes found to be necessary to address these problems, and implementation and monitoring of the revised rate-setting methodology. The DDS has emphasized that the rates that ultimately result from this process must be simple to administer, easy to understand, cost-effective, and flexible enough to allow for differences in costs between geographic regions.

Review Will Start With Selected Services. The DDS intends to focus some of its initial rate reform efforts on selected services for which it currently sets rates on a statewide basis. These include day programs, in-home respite agencies, and the work activity programs. The DDS also intends to focus some of its initial rate reform efforts on selected services, such as supported living, that previously have not had their rates set by the department on a statewide basis and for which per-person expenditures have varied greatly from RC to RC.

The DDS's rate reform effort will involve a survey to gather data about the rates paid for selected services. The survey instrument is designed to determine minimum levels of education, training, experience, and licensing required for the vendor staff who provide a service, as well as the rate that is paid to the vendor for that service. The survey instrument will also collect information on the highest and lowest rates being paid by a RC for a particular service, any special circumstances that significantly affect the rate, and how often that rate is adjusted by the RC.

The department intends to survey about six services every six months. Once the data have been analyzed, DDS will have follow-up meetings with RCs and stakeholders to clarify any further issues prior to proposing a revised or new rate methodology for a specific service. Once the new methodology is proposed, any statutory or regulatory changes necessary prior to implementation must be approved. Thus, establishment of a new rate or revision of an existing rate will likely take one year or more to accomplish, and the entire task of examining rate-setting for various RC services could take several years to accomplish. Based on our discussions with DDS, we do not believe that there is any plan in place to integrate data from the rate survey with data from the proposed quality management system that we discuss next.

Quality Management System (QMS) Proposal. For 2005-06, the DDS is requesting $522,000 (all funds) and four positions to implement a statewide QMS. According to DDS, implementation of a statewide QMS is necessary for maintaining and increasing federal financial participation. Currently, the quality assurance programs maintained by the 21 RCs differ among RCs in terms of their structure and their level of effectiveness. We will discuss the proposed QMS, and its potential relationship with RC rates, later in our analysis.

A Flawed, Complex, and Inconsistent System for Setting Rates

No Rational Basis for Some Rates. Four years ago, our office conducted a review of the way the rates paid to different types of physicians participating in the Medi-Cal Program were set. We determined that rates for different medical specialties, as well as rates overall, were largely established on an ad hoc basis, in response to improvement or deterioration of the state's financial condition, without regard to the state's goals as a purchaser of medical services. Specifically, we found that the state did not set rates on the basis of two critical factors—first, the potential effect of those rates on the access to care available to Medi-Cal patients, and second, the effect of those rates on the quality of care received by those patients.

Our analysis indicates that there is, similarly, no rational basis for the way rates are often set for community services for the developmentally disabled. The current rate-setting mechanisms do not sufficiently take into account cost-effectiveness, whether the quality of the services being purchased is adequate to meet federal, state, and local requirements or exceeds them, and individual RC client access to specific services. Also, the rate-setting process established for services for persons with developmental disabilities varies from service to service, from RC to RC, and even in some instances from vendor to vendor providing the very same service within an RC catchment area.

As we described above, DDS has begun a rate reform initiative to address problems with the current rate-setting system. This flawed and needlessly complex rate-setting system often does not serve the needs of RCs, vendors, and program beneficiaries, and our analysis further indicates that it results in some cases in unduly high costs to the state for its purchase of services. We discuss our findings in more detail below.

Great Variation in Rate-Setting

Rate Systems Used. As noted earlier, both DDS and the RCs all play a role in setting rates for community services for persons with developmental disabilities. Our analysis indicates that there is significant variation in the way rates are set from service to service. Some rates are set competitively while others are not. Some rates are based on historical cost data while others are tied to what other similar vendors are paid, or the rates paid under the state's Medi-Cal health program for the poor, or what the public would pay for the same services.

The more common rate-setting techniques used by RCs to set payment rates for RC services are discussed below.

The use of several different methodologies, described above, to set rates for RC services has resulted in a system in which DDS has considerable control over the rates paid for some services, but very little control over the rates paid for others—particularly those for which the RCs negotiate the rate. Utilization of a variety of rate-setting methodologies, some of which delegate the responsibility for setting rates to the RCs, limits DDS's ability to control costs and ensure that services are provided in the most cost-effective manner.

Quality and Access Concerns Not Integrated With Rate-Setting

The Lanterman Act requires that the services provided to RC clients reflect a cost-effective use of public resources. In order to achieve this, in our view, the rate for a service should be set at the level necessary to ensure that individual RC clients have access to that specific service. Rates should also be set at the level necessary to ensure that the quality of that service meets federal requirements and any other applicable state or local government requirements.

If the state sets a rate too low and federal quality standards for that service are violated, it would risk the loss of federal funds received under the Home and Community-Based Waiver. That, in turn, would create a risk that additional General Fund resources would be needed to make up for such a loss. Conversely, if the state set a rate at a level that was higher than necessary to meet federal standards, it would risk paying more than it needed to for that service. If there is sufficient capacity of quality services at a given rate, then there is no reason, from the state's perspective, to adjust the rates.

Our analysis indicates that DDS is not now systematically measuring the quality level and access to the services being provided to RC clients, or using such information to set rates for community services. One such example is the way rates are set for CCFs.

The ARM Example. The DDS establishes rates for CCFs using a rate-setting method known as the Alternative Residential Model (ARM) that was developed through a contract with a consultant. The consultant based its rate recommendation on an analysis of CCF cost data, the levels of service being provided by the facilities, and each facility's staff-to-client ratios. While the ARM may ensure that CCF providers are reimbursed based on the costs that they incurred, such a rate-setting approach does not necessarily serve the interests of the state or RC clients. In general, as we have indicated above, the interests of the state are best served when it pays the lowest rates sufficient to (1) obtain services of adequate quality to meet federal, state, and local government requirements and (2) ensure sufficient individual access to specific services for RC clients. In the case of ARM, the state's consultant did not conduct any assessment of the quality of services provided by CCFs. Moreover, the consultant provided no information that indicated whether or how differences in service quality or access to services for RC clients might relate to the variations in costs they identified and used as a basis for rate-setting purposes.

Day Programs and Respite Care Agencies. The rates for day programs and in-home respite service agencies are similarly established using formulas developed in the late 1980s that were based on measurement of the actual costs of like programs throughout the state. Again, quality of care or individual access to specific services are not systematically measured or used to set rates for these services. As a result, the state is at risk of both paying more than it may need to for these services without assurance that the services provided will be of adequate quality and will be accessible to RC clients who need them.

The rate-setting approach we have described is also potentially inequitable to these RC providers. For example, a provider who has recently contracted with an RC to provide day program services may receive a significantly higher reimbursement rate than another vendor who is providing the identical service, but who began providing the service at an earlier date. This is due to the way the rate-setting formula is structured.

Quality and Access Measurements Could Be Integrated Into Rate-Setting. As discussed above, our analysis indicates that DDS does not sufficiently incorporate quality measurements into the rate-setting methodologies that it uses, nor could it easily do so at this time. At present, DDS does not have the tools needed to make systematic, quantifiable measurements of service provider quality or of individual client access to specific services. Current efforts to integrate these measures with vendor rate-setting rely on the fragmented and inconsistent quality assurance programs operated by the RCs.

This situation could be changing. The 2005-06 Governor's Budget requests resources for DDS to support the development of a statewide QMS. We believe development of the QMS is necessary in order to meet federal requirements under the Home- and Community-Based Services Waiver and to continue to receive these federal funds.

The department also plans to complete the implementation of the California Developmental Disabilities Information System (CADDIS) by the end of June 2006. The CADDIS is designed to provide the RCs with an integrated case management and fiscal system that is intended to improve their efficiency in delivering services to clients. Together, QMS and CADDIS would provide DDS with an improved capability to incorporate quality and access measurements into rate-setting mechanisms in a systematic and ongoing process.

Rate Freezes Appear Effective in Short Term, But Problematic in Long Term

Cost-Per-Person Grew More Slowly. The rate freezes adopted by the Legislature in recent years appear to have been effective in slowing spending growth for the services that were affected by this budget strategy. For example, the average year-to-year growth in the cost per person for independent living specialists in 2002-03 was 12 percent. Growth dropped to 0.5 percent in 2003-04 when the freeze was in effect. While the freezes probably were the primary contributor to this trend, it is also possible that some of the slowdown in growth was due to decreased utilization of services by RC clients. We would note, however, that while the evidence suggests that rate freezes can be an effective way to control spending for RC services in the short term, both the legislature and the administration have viewed them as temporary measures.

DDS Rate Reform Initiative Generally on Target

Efforts Could Move State Toward More Rational System. Our analysis indicates that the rate reform initiative undertaken by DDS has the potential to result in long-term savings to the state and help to establish a more rational basis for setting rates. We find that the rate reform initiative is staffed at a reasonable level and that DDS is generally focusing its rate-reform efforts on the right services. Specifically, it is appropriately focusing its efforts on those services that are growing rapidly in cost and demonstrate great variation in payment rates and that thus offer the greatest potential for slowing future spending growth for services for persons with developmental disabilities.

Interim Rate-Setting Actions Possible to Hold Down Program Costs

Upper Payment Limits Possible. As already noted, the DDS rate-reform initiative is an ongoing effort that will take years to complete. While DDS moves forward in a deliberate fashion with this effort, an interim cost-control measure is available to the Legislature to ensure that the RCs do not pay excessive rates for RC services. The state could impose interim upper payment limits on services, identified by DDS through its rate-reform efforts, that have a wide variation between RCs in their average cost per unit of service.

Under this approach, DDS would calculate the average statewide cost for a particular service and then set an upper limit on vendor reimbursements based upon that statewide average. For example, if the statewide average cost of a service is determined to be $10 per hour, DDS could set an upper spending limit of 150 percent of that statewide average cost, or $15 per hour.

An upper payment limit could be applied to a service on a prospective basis. Service provider contracts already in effect would not fall under the upper payment limit until the contract came up for renewal. These contracts are generally renewed on an annual basis. The RCs could retain their current authority to negotiate rates with vendors for certain services, as long as those negotiated rates did not exceed the upper payment limits established for that service. In this way, RCs could still try to lower their costs. Exceptions to the limits could be granted by the department in any individual case where such an action was necessary to protect the health and safety of a RC client. Since DDS anticipates having finalized its analysis of its initial wave of rate surveys early in the 2005-06 fiscal year, we believe that there may be an opportunity to apply upper payment limits and achieve some savings in 2005-06. Such upper payment limits would be temporary in nature and could be removed upon DDS's implementation of a permanent new rate-setting mechanism for that service.

We believe that upper payment limits could be successfully applied to those services which are fairly standardized in nature and are generally purchased on an hourly or daily basis. Some services purchased to meet unique individual needs of a specific RC client are too disparate and unique in nature to have upper payment limits applied to them.

The exact fiscal effect of upper payment limits is unknown, and would depend upon the number of services to which limits were applied and the maximum rate levels actually established by DDS. We believe it is possible that, using such a mechanism, the state could begin to achieve some savings in 2005-06 and could also eventually avoid significant cost increases by millions to low tens of millions of dollars annually in the future.

Creating a Systematic and Rational Rate-Setting Process

We recommend that the Legislature consider taking a series of steps to ensure that rate reform proceeds on schedule and results in meaningful changes to existing rate-setting methodologies. These steps could move the state closer to having a systematic and rational process for setting vendor rates.

We recommend shifting the state toward a more systematic and rational approach to rate-setting for community services for the developmentally disabled based on (1) cost-effectiveness as required under the Lanterman Act; (2) measurement of individual access to specific services; and (3) the quality of the services provided based on federal, state, and local requirements.

We acknowledge that, in the short term, applying these criteria in a systematic way might result in rate increases that would increase state costs for some specific community services. Our analysis indicates, however, that our proposed approach would generally have the effect of ensuring that the state does not overpay for specific services. This is primarily because rates would no longer be driven upward by the present cost-based system, which rewards providers over time with higher rates with little regard to efficiency and quality of the service delivered. Under our revised approach, the state would be able to base rate-setting on the resources needed to compensate cost-effective providers of services. The state would pay only what was required to ensure individual access to specific services which meet quality requirements.

Accordingly, we recommend that the Legislature consider the following series of actions:

Continue Funding for the DDS Rate Reform Initiative. We recommend that the Legislature approve the funding and staffing levels proposed in DDS' 2005-06 budget request to move forward with its rate-reform initiative. Implementation of meaningful rate reform should result in savings or cost avoidances for the state, improved service quality and access to services, and reduce inequitable inconsistencies in the way that vendors are reimbursed for their services to clients.

Maintain Rate Freezes Currently in Effect. We recommend that the Legislature maintain, through 2005-06, the rate freezes now in effect as proposed in the Governor's budget. This action would continue to temporarily slow expenditure growth in the affected services until permanent rate reform can be implemented.

Incorporate Quality and Access Measurements Into Rate-Setting Methodologies. We recommend the enactment of legislation requiring DDS to incorporate measurements of quality and individual access to specific services into the rate-setting methodologies that it develops for RC services. The incorporation of quality and access measurements into rate-setting methodologies will be feasible as soon as the proposed QMS and CADDIS come on line within the next two years. We further recommend that the Legislature require DDS to submit a report after these new systems have been fully implemented, in January 2007, on how quality and access measurements will be incorporated into the rate-setting methodologies.

Control Costs Through Upper Payment Limits. We recommend that the Legislature provide DDS with statutory authority to promulgate emergency regulations to impose upper payment limits on the rates paid for certain RC services as an interim cost-control measure. The legislation would authorize the department to take immediate action to control costs by these means whenever it determines that the rates some RCs are paying for a service are higher than is generally justified by the data collected under the rate-reform initiative.

Developmental Centers Program

Agnews Developmental Center Closure Plan

The Department of Developmental Services (DDS) has released its plan for the closure of the Agnews Developmental Center. Our preliminary analysis indicates that the plan, which would extend the closure process by an additional year to June 2007, raises a number of significant fiscal and policy issues that the Legislature may wish to consider as it evaluates the administration's proposal. At the time of this analysis, we were advised that this plan would be updated in the near future. We will provide a more detailed analysis of these issues and the Agnews closure plan at budget hearings.

Agnews DC Closure Plan Released. In January 2004, the administration announced its intention to close Agnews DC as part of an overall policy to enhance community-based resources to a level where large, state-operated facilities such as Agnews would no longer be necessary. The administration plan is to focus on having as many developmentally disabled individuals as is appropriate live in their communities instead of institutions.

As justification for its policy, the administration cited the need for the state to comply with the 1999 United States Supreme Court decision, L.C & E.W. v. Olmstead ("Olmstead"), in which the court ruled that keeping persons in institutions who could transition to a community setting constituted discrimination under the Americans with Disabilities Act. The administration also cited as reasons to close Agnews the high capital improvement costs that would have to be incurred if the facility were left open, and the relatively high costs of providing institutional care at Agnews specifically as compared to community-based care. In our Analysis of the 2003-04 Budget Bill, we noted that the cost of care at DCs on a per-resident basis had grown significantly, and we recommended that the Legislature initiate a process to close two DCs, including Agnews.

In January 2005, the administration, in keeping with statutory requirements for DC closures, released a plan to close Agnews by July 2007, a closure date that is one year later than it had previously proposed.

Agnews Closure Plan Emphasizes Community Placements. The closure plan emphasizes DDS's commitment to placing Agnews DC residents in the community as facility operations are phased out. In this way, the plan differs significantly from the two most recent closures of DCs in California—Stockton DC in 1996 and Camarillo State Hospital and DC in 1997—both of which resulted in the transfer of large numbers of individuals to other state-operated facilities. In contrast, the closure plan for Agnews DC emphasizes development of an improved community service delivery system in the Bay Area that will allow Agnews DC residents to remain in their home communities. According to DDS this will be achieved by:

Closure Plan Raises Several Policy and Fiscal Issues. We discussed in detail the policy and fiscal implications of closing Agnews DC in the "Department of Developmental Services" section of the Health and Social Services chapter of the Analysis of the 2003-04 Budget Bill.Based upon our initial review of the Agnews closure plan, we have identified several additional fiscal and policy issues that the Legislature may wish to address in its deliberations over Agnews DC closure. Among these issues:

At this time, we are continuing to examine these and other policy issues related to the closure. Because we are advised at the time of this analysis that the Agnews closure plan will be updated in the near future, we will provide the Legislature with an updated analysis of the plan at budget hearings.

Developmental Centers Overbudgeted

We recommend the Legislature reduce Developmental Center expenditures by $4 million General Fund to correct for caseload overbudgeting in the budget year. In addition, we recommend that the Legislature recognize a like amount of savings in the current year due to caseload overbudgeting. (Reduce Item 4300-003-0001 by $4,000,000.)

DC Caseload Below Budget Levels. The 2005-06 budget plan includes DDS' updated caseload projections for DCs in the current fiscal year and the budget year. The Governor's budget plan assumes that the DC population will average 3,307 clients in 2004-05, and 3,101 in 2005-06, and will continue on the present long-term trend and decrease through the remainder of the current and the budget year.

Based on our analysis, the most recent caseload data for the months of November and December of 2004 show that the average population actually present at any given time in the DCs was about 3,220. (Our estimate was adjusted to take into account the greater-than-average number of DC clients that are on leave from the DCs during the holiday season.) Thus, the actual average DC population falls 87 clients below the caseload level of 3,307 that the Governor's current-year budget plan proposes to fund.

No Caseload Adjustments in Governor's Budget Plan. The Governor's budget does not adjust funding for the DCs to account for recent trends indicating that the DC population is dropping faster than expected and is thus below DDS projections. The DDS has indicated that it intends to update its DC caseload projections and the associated funding at the time of the May Revision.

We estimate that the DCs are currently overbudgeted by about $4 million General Fund in the current fiscal year and an additional $4 million General Fund in the budget year.

Analyst's Recommendation. We recommend that the Legislature reduce the DC budget by $4 million General Fund ($8 million all funds) both in the current year and the budget year to adjust for lower-than-projected DC caseload. We will continue to monitor DC caseload and recommend any appropriate budget adjustments at the time of the May Revision.

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