LAO 2005-06 Budget Analysis: General Government

Analysis of the 2005-06 Budget Bill

Legislative Analyst's Office
February 2005

Department of Child Support Services (5175)

The Department of Child Support Services (DCSS), created on January 1, 2000, administers California's child support program by overseeing 58 county child support offices. The primary purpose of the program is to collect from absent parents support payments for custodial parents and their children. Local child support offices provide services such as locating absent parents; establishing paternity; obtaining, enforcing, and modifying child support orders; and collecting and distributing payments.

The Governor's budget proposes expenditures totaling $1.2 billion from all funds for support of DCSS in the budget year. This is an increase of 28 percent over 2004-05. The budget proposes $471 million from the General Fund for 2005-06, which is an increase of $204 million, or 77 percent, compared to 2004-05. The increase is attributable to deferring payment of the federal child support penalty from 2004-05 to 2005-06, partially offset by a decrease in automation funding.

Administrative Expenditures Excessive

Many county child support agencies are spending large portions of their budgets on administrative expenditures rather than on core program services. We recommend enactment of legislation prospectively phasing in a 20 percent cap on administrative expenditures. We further recommend that for 2005-06, county administrative funding not exceed 25 percent. Adopting this recommendation would result in over $6 million in state General Fund savings. (Reduce Item 5175-101-0001 by $6,200,000.)

Current Administrative Spending. Administrative spending for this program, like most other programs, includes such things as the cost of clerical support staff, rent and utilities, office supplies, postage and printing, staff for payroll, and other human resources activities. These expenditures do not include salaries for the staff providing direct services such as attorneys, caseworkers, and investigators. Under current law, there is no cap on the amount a local child support agency is allowed to expend for these activities

An administrative cost ratio analysis conducted by DCSS revealed that, on average, California's 58 local child support agencies spent over 26 percent of their program allocations on administrative overhead costs in 2003-04 (the most recent data available). Expenditures ranged from a high of over 40 percent in San Francisco County to just over 16 percent in Stanislaus County. Thirteen local child support agencies are spending over 30 percent of their funding on administration.

While one might assume that a higher administrative ratio might be necessary in high-cost Bay Area counties, a review of the expenditures does not reveal any of those patterns. For example, while San Francisco is the highest of the counties, nearby Contra Costa ranks among the lowest with administrative expenditures coming in under 19 percent.

Administrative Spending in Other Social Services Programs. An average administrative cost ratio of 26 percent is high when compared to other social services and health programs. Child Welfare Services (CWS) is similar to child support in that it provides client services rather than a cash grant. For CWS, counties spend an average of 17 percent of their funding on administrative activities. In-Home Supportive Services also has no grant payment and has estimated administrative costs of approximately 12 percent in 2005-06. Administrative funding for the state's Medi-Cal program constitutes less than 7 percent of the total program funding. Clearly, spending on administration for local child support agencies exceeds that of similar programs.

Administrative Caps on Federal Funds. Excessive administrative spending has traditionally been a concern of the federal government. In an attempt to ensure that federal funds are used to provide services, the federal government has regularly established administrative funding caps. For example, administrative expenditures for federal Promoting Safe and Stable Families funding and Independent Living Program funding are limited to 20 percent. Likewise, administrative expenditures for Temporary Assistance for Needy Families funds are limited to 15 percent.

Why Other State Programs May Not Need Administrative Caps. Despite the existence of federal caps, California generally has not established administrative caps for its social services programs. However, most of those programs contain a significant county share of costs, which provides an incentive for counties to limit the amount they spend on administration. Child support is unique in that regard because it does not contain a county share of costs and thus does not have the same cost control incentive. An administrative cap would create this type of incentive in this program.

Analyst's Recommendation. In trying to determine our recommended level for administration funding, we relied primarily upon the 17 percent administrative funding ratio for CWS. Of the social services programs we reviewed, CWS and child support are the most comparable. Neither program distributes cash grants or other benefits to its participants. Both primarily provide caseworker services to families. Therefore, we recommend capping the local child support agencies' administrative expenditures at 20 percent. Further, we recommend phasing in this cap over the next two fiscal years. For 2005-06, county administrative allocations would be limited to 25 percent. Based on our estimates using available 2003-04 data, the allocations of 27 counties would be reduced, resulting in a savings of $6 million General Fund ($18 million total funds). Our recommendation exempts six small local child support agencies with allocations under $1 million from the administrative funding cap, because their small size limits their ability to achieve economies of scale.

We believe that phasing in the reduction would allow counties one year to make adjustments to their claims to the extent that they have been inadvertently claiming direct program costs as administrative costs. We also recommend that the department report to the Legislature on whether or not local child support agencies shifted large portions of their former administrative expenditures to direct services. To the extent that shifts take place, the department should verify their validity. Beginning with the 2006-07 budget, all administrative expenditures would need to fall under the 20 percent cap.

Under our approach, total funding per case would be $582. This is nearly double the average of the next ten largest states ($293). Even in the relatively high-cost state of New York, funding per case is $324 (significantly below California), and New York generally outperforms California on child support collection.

California Child Support Automation System Project

We withhold recommendation on the proposed transfer of $79 million to the Franchise Tax Board for the continued development of the California Child Support Automation System pending (1) renegotiation of a recent contract amendment to be consistent with prior legislative approvals and (2) the review of a cost/benefit analysis supporting early system certification.

The budget proposes to transfer $79 million ($27 million General Fund) from DCSS to the Franchise Tax Board (FTB) for the continued development of the Child Support Enforcement (CSE) component of the California Child Support Automation System (CCSAS) project. Chapter 479, Statutes of 1999 (AB 150, Aroner), requires FTB to act as DCSS' agent for the procurement, development, and maintenance of the CCSAS project.

Background. The CCSAS project consists of two major components—CSE and the State Disbursement Unit (SDU). The CCSAS CSE project cost is projected to be $1.3 billion ($876 federal funds and $465 million General Fund) over the next ten years. This amount includes $815 million for the primary contract, and $500 million in state staff and other contract costs. The CSE includes two phases: (1) phase I, which will provide a centralized database and reporting system and (2) phase II, which will provide a statewide CSE system. The FTB is currently developing both CSE phases. In addition, FTB is also working with another contractor to develop and implement the SDU, which is required by the federal government for state child support systems. The SDU would collect child support payments from noncustodial parents and their employers and then issue payments to custodial parents. Upon implementation of CSE phase I and the SDU in September 2006, the administration intends to request federal certification for an alternative statewide CSE system. The primary purpose of the early certification is to seek some relief starting in 2006-07 from federal penalties imposed on the state for failure to implement a statewide child support system.

Recent Contract Amendment. In December 2004, FTB signed a contract amendment which would increase costs of the primary CSE contract by $14 million. Specifically, the contract amendment consists of: (1) $7 million for additional contractor staff and data center operations for a revised schedule and (2) $7 million to enhance CCSAS training, expand the help desk, and provide additional maintenance and operations to support the revised schedule. The five additional months would allow for further testing and support for implementation of the SDU component.

Proposal. In the 2005-06 budget, DCSS is proposing to provide FTB with:

We have two concerns with the proposal that we discuss below.

Amendment Payment Inconsistent With Previous Legislative Approvals. In establishing parameters for the CCSAS project, Chapter 479 directs the state to use the same performance-based procurement and contract practices used in previous FTB tax automation projects. Under a performance-based contract, the vendor receives payments after a system is operating and achieving benefits. Based on previous legislative approvals, the CCSAS prime contract provides both performance and deliverable-based payments (deliverables include providing specific products). The recent contract amendment, however, provides a $7 million payment to the vendor for neither meeting a performance objective nor providing a deliverable. Under the amendment, the contractor would be paid for simply providing additional staff and beginning operation of its data center. This payment is inconsistent with both the legislative direction of Chapter 479 and the Legislature's approval of the contract's previous payment arrangements. According to FTB and DCSS, the state is currently renegotiating this payment to be consistent with prior legislative contract approvals.

Cost/Benefit Analysis Not Completed. If the state receives federal certification for an alternative system before implementation of CSE phase II, the federal government could limit its funding of all remaining CSE phase II development and maintenance and operation activities. This is because the federal government would not pay for development costs on certified systems. If this were to happen, the state would be required to complete the project exclusively with General Fund dollars. To better understand the early certification funding implications, the Department of Finance directed FTB and DCSS in June 2003 to conduct a cost/benefit analysis of the alternative certification schedule. According to FTB and DCSS, this cost/benefit analysis will be provided to the Legislature in March 2005. In our view, prior to making funding decisions regarding early certification, the cost/benefit analysis should be reviewed so the Legislature can better understand the full funding needs and potential risks of early certification.

Withhold Recommendation. Since the CSE contract amendment payment is currently being renegotiated and the cost/benefit analysis of the early system certification will not be available until March 2005, we withhold our recommendation on the proposed transfer of $79 million to FTB.

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