LAO 2006-07 Budget Analysis: Health and Social Services

Analysis of the 2006-07 Budget Bill

Legislative Analyst's Office
February 2006

Department of Alcohol and Drug Programs (4200)

The Department of Alcohol and Drug Programs (DADP) directs and coordinates the stateís efforts to prevent or minimize the effects of alcohol-related problems, narcotic addiction, and drug abuse. Services include prevention, early intervention, detoxification, and recovery. The DADP estimates that its treatment system will provide services to approximately 227,000 clients in 2006-07.

The DADP administers the Drug Medi-Cal Program, which provides substance abuse treatment services for beneficiaries of the Medi-Cal Program. It also negotiates service contracts and allocates funds to local governments (including funds provided under the Substance Abuse and Crime Prevention Act, the 2000 initiative also known as Proposition†36) and contract providers. The department also coordinates the California Mentor Initiative, a multidepartmental effort targeting youth at risk of substance abuse, teen pregnancy, educational failure, and criminal activity.

Governorís Budget Proposal. The Governorís budget proposes $615†million from all funds for support of DADP programs in 2006-07, which is an increase of about $5†million, or about 1†percent, above the revised estimate of current-year expenditures. The budget proposes about $243†million from the General Fund, which is an increase of about $4†million, or almost 2†percent, above the revised estimate of current-year expenditures.

The budget plan includes the following proposed spending and policy changes:

The Substance Abuse and Crime Prevention Act: Proposition†36 At a Crossroads

Proposition†36 provided annual appropriations from the General Fund through 2005-06 to implement a voter-approved initiative requiring drug treatment instead of incarceration in prison or jail for certain nonviolent drug possession offenders. The appropriation expires at the end of 2005-06 and the Legislature for the first time has discretion to determine the appropriate level of funding for a program that counties will still statutorily be required to provide. We withhold recommendation at this time on the proposed General Fund transfer of $120†million to the Proposition†36 trust fund and on reauthorization of 29.7 positions pending review of a cost-benefit study of the measure due out April 1, 2006.

Program and Funding Overview

Measure Approved by Voters in November 2000. The Substance Abuse and Crime Prevention Act of 2000 (Proposition†36) was approved by the voters in the November 2000 election and many of its provisions affecting criminal sentencing became effective July 1, 2001. The measure changed state law so that certain adult offenders who use or possess illegal drugs are sentenced to participate in drug treatment and supervision in the community, rather than being sentenced to prison or jail or being supervised on probation without treatment. For example, offenders convicted of nonviolent drug possession offenses are sentenced under Proposition†36 by the court for up to one year of drug treatment in the community and up to six additional months of follow-up care. Also, some offenders under parole supervision by the California Department of Corrections and Rehabilitation, and who are found to have committed nonviolent drug possession offenses, remain in the community and are directed to drug treatment. Some offenders, including those that refuse treatment or who had used a firearm while under the influence of an illegal drug, are excluded from the provisions of Proposition†36.

Sanctions Specified in Law. Under certain circumstances, offenders who fail to comply with their drug treatment requirements or who violated their conditions of probation or parole are subject to certain sanctions, such as being moved to an alternative or more intensive form of drug treatment. Once an offender has twice failed Proposition†36 treatment, he or she is subject to punishment with a 30-day jail sentence for a third conviction for a nonviolent drug possession offense.

Treatment Programs. Proposition†36 drug treatment programs must be licensed and certified by the state and can include various types of treatment methods selected by counties and the courts, including residential and outpatient services and replacement of narcotics with medications such as methadone.

Program Administration. Under the terms of the measure, the DADP allocates funds to counties, which administer or oversee the Proposition†36 drug treatment programs. Proposition†36 requires annual audits to ensure that its funds are spent only for the purposes allowed by the measure. Also, the initiative commissioned a study (now being conducted by a University of California at Los Angeles research institute) of the costs, benefits, and other outcomes of Proposition†36.

Proposition†36 Funded From State General Fund. Proposition†36 required automatic annual appropriations from the General Fund to a special fund called the Substance Abuse Treatment Trust Fund. The measure specifically allocated $60†million in startup funds for the 2000-01 fiscal year and $120†million per year for 2001-02 through 2005-06. These funds were generally not subject to annual appropriation in the budget act. About $116†million has been provided annually to counties for the operation of local Proposition†36 programs. In addition, about $3.9†million was provided to DADP to offset its administrative costs to operate the program. No appropriations are provided by Proposition†36 for 2006-07 or subsequent years, leaving it to the Legislature to determine how much, if at all, to appropriate for this purpose in the future.

Annual Spending Now Higher Than Annual Funding Allocations. Proposition†36 permits counties to carry over unspent Proposition†36 allocations from year to year, and a number of counties have done so. For example, only about $7†million of the initial $60†million round of funding was spent in 2000-01, with the balance carried over by counties into later years. The amount of available carryover funds available to counties has been dropping in recent years as programs have been ramped up.

Current annual county spending is higher than the current annual Proposition†36 appropriation of $120†million. This is because a number of counties have increased spending to a higher level by using the funds they carried over from prior years. In 2004-05, the last year for which complete cost reports are available, about $143†million was spent. However, that figure does not take into account any expenditures that could be disallowed as a result of ongoing annual audits discussed above. Netting out disallowed expenditures would probably eventually result in a modest reduction in this expenditure level.

Legislature May Augment Proposition†36 Appropriation. Proposition†36 states that the Legislature may appropriate additional funding to the trust fund beyond the $120†million in annual General Fund appropriated under its own terms through 2005-06. This has not occurred, although the Legislature has earmarked about $8.6†million per year in federal Substance Abuse Prevention and Treatment (SAPT) block grant funds for drug testing of Proposition†36 participants, partly because Proposition†36 does not allow for monies from the trust fund to be used for drug testing of participants.

The Future of Proposition†36

Funding Discontinued, but Requirement for Treatment Remains. While the appropriations required by Proposition†36 cease at the end of 2005-06, the requirement for diverting certain offenders from prison and jail to drug treatment remains fully in effect. If the state were to simply stop or significantly reduce funding, many counties would either have to reduce expenditures for their Proposition†36 programs or identify other funding sources to continue to support them. The loss of some or all of this funding could also affect the state correctional system because some trust fund resources are now used by counties to provide treatment services for state parolees who violate parole rules by possessing illegal drugs.

Federal Rules Limit State Options. The state currently receives about $262†million annually under the federal SAPT block grant program, almost all of which is used for the support of community drug treatment systems operated by counties. The SAPT block grant is provided to states on the condition that they maintain a specified ongoing level of state support for their drug or alcohol programs. States that violate this so-called maintenance-of-effort (MOE) requirement are at risk of losing one federal dollar of SAPT block grant funding for every state dollar they spend below the required MOE level. The Proposition†36 funding is counted as part of the SAPT MOE.

Thus, if the Proposition†36 appropriation were completely eliminated, and state spending on other eligible drug treatment programs did not increase to offset this loss, the MOE rules would cost the state about $180†million in federal funding over two years under the specific federal rules for SAPT MOE. This would amount to a major loss of funding for county drug treatment systems. We note that increasing spending levels under Proposition†36 may also Ēratchet upĒ the level of funding that would have to be sustained in the future to meet the SAPT MOE requirements.

Administrationís Budget Proposes Major Policy Changes

The Governorís budget proposes to maintain General Fund support of the trust fund at $120†million General Fund on a one-time basis for 2006-07 to fund Proposition†36 related activities. The allocations would largely mirror the current split in funding, with about $3.5†million allocated under the Governorís budget proposal for DADP administration of the program and about $116.5†million allocated to counties. The budget request would also reauthorize the 29.7 positions that now exist at DADP to carry out various Proposition†36-related activities, including auditing functions. According to the administration, these funds are proposed to be authorized on a one-time basis, and are conditioned on the Legislature enacting significant policy changes to Proposition†36 that the administration contends will improve participant outcomes and accountability. Any such changes would likely have to go back to the voters for their approval. The administrationís proposed changes include:

Funding Would Continue Through the Trust Fund. The administration proposes to continue to fund Proposition†36 activities through a General Fund appropriation in the annual budget bill that would be transferred to the existing Proposition†36 trust fund. The administration acknowledges in its budget proposal that other mechanisms for funding Proposition†36, that we discuss later in this analysis, are possible. For example, the budget could provide a General Fund appropriation to support Proposition†36 activities that would not be transferred to the trust fund. However, the administration cites potential legal problems with these alternative approaches and states its view that its funding mechanism is consistent with the will of the voters.

Setting an Appropriate Level of State Funding for Proposition 36

As noted earlier, the administration budget proposal would keep the stateís contribution to county Proposition†36 programs and its support of related DADP administration at roughly the same funding level that has been in place for five years. We believe there are a number of technical, fiscal and policy issues the Legislature should weigh as it decides how much funding to provide for Proposition†36 in 2006-07 and in future years, which we summarize in Figure†1, and discuss below.


Figure 1

Setting An Appropriation Level for Proposition 36

Issues for Legislative Consideration

   Cost-Benefit Analysis Due out in April. A cost-benefit study of Proposition 36 is due to the Legislature April 1, 2006, and the results of the study will be relevant to the Legislatureís deliberations over funding levels.

   Federal Maintenance of Effort (MOE) Requirements. The state would violate federal MOE requirements and lose federal grant money if it reduces Proposition 36 spending without increasing spending on other drug programs.

   Alternative Funding Mechanisms. The Legislature may increase its control over Proposition 36 policy and implementation by funding Proposition 36 through alternative funding mechanisms instead of through the Substance Abuse Treatment Trust Fund. However, the Legislature should seek legal counsel regarding this option, if it wishes to pursue it.

   Alternatives to General Fund Support. Proposition 36 costs could be offset through the collection of fees that could be charged to offenders or by any third-party insurance coverage available to offenders.

   Technical Funding Adjustments. The Legislature could adjust annual appropriations to take into account carryover funds from prior appropriations and the amount of funding recovered due to audit disallowances.


Cost-Benefit Analysis Relevant to This Decision. As noted earlier, an ongoing study of Proposition†36 outcomes is under way. Specifically, Chapter†78, Statutes of 2005 (Senate Bill 68, Senate Committee on Budget and Fiscal Review), requires DADP to submit a cost-benefit analysis of the measure to the Legislature by April 1, 2006. The results of that study will be relevant to the Legislatureís decision on a funding level for Proposition†36.

For example, if the study demonstrated significant county savings, the Legislature could consider setting a state funding level that assumes a county share of support for the program. We believe it is reasonable for the counties to share in the ongoing cost of Proposition†36 programs if it is found they share a substantial part of the savings resulting from the measure. If the study demonstrated state savings that substantially exceeded state costs, the Legislature may wish to consider expanding eligibility and the appropriated state funding to include other appropriate populations of offenders likely to increase the net savings to the state from Proposition†36.

Flexibility Exists for Meeting MOE Requirements. The Legislature could choose to fund Proposition†36 at a lesser amount than the $120†million General Fund proposed by the administration without necessarily incurring a loss of federal SAPT funds. As we noted earlier, this could occur if the Legislature increased funding commensurately for other drug programs-such as by expanding Drug Medi-Cal services that are available for women. (Such an expansion is allowed under past legislation that was enacted but never implemented because of a lack of state funding.) The SAPT MOE rules require that the state provide an overall level of support for eligible drug treatment programs, but does not require that any specific state program receive the same level of funding as before.

Alternative Funding Mechanism Might Allow Greater Legislative Control. If the Legislature approves a General Fund appropriation to transfer to the trust fund, as the administration budget proposal contemplates, all of the existing restrictions on the use of these monies would continue to apply (absent changes to the Proposition†36 statute). Alternatively, it may be possible for the Legislature to fund Proposition†36 through (1)†a direct General Fund appropriation for support of the program, or (2) a General Fund transfer to a new and separate trust fund created for this purpose. We note that further review of these approaches would be warranted in order to ensure they do not legally conflict with the statutory provisions of Proposition†36.

If the Legislature chose to fund Proposition†36 activities on an ongoing basis under one of the alternatives discussed above, any future unexpended General Fund appropriations could be reverted to the state General Fund instead of remaining with counties. Also, under this approach, it is possible that the restrictions imposed by Proposition†36-such as a prohibition on use of trust fund monies for drug testing-would no longer apply.

Alternatives to General Fund Support for Proposition†36 Possible. The Legislature could consider the appropriateness of using other sources of funding besides the General Fund to assist Proposition†36 offenders. For example, the Legislature should carefully examine the extent to which part of program costs could and should be funded by any third-party insurance coverage available to Proposition†36 offenders, as we discussed in our 2001-02 Analysis (see page C-48). Some ongoing Proposition†36 costs could also be offset through the collection of fees that could be charged to offenders for their treatment, as already allowed under the initiative.

Technical Funding Adjustments Could Be Considered. In determining the level of Proposition†36 funding it wishes to provide each year for counties, the Legislature could adjust the appropriation amount to take into account: (1) the amount of any carryover funding from prior appropriations for Proposition†36 that may be available to counties and (2) the amount of funding recovered by the trust fund due to audit disallowances and thus available for redistribution to counties. Specifically, it could reduce the appropriation it believes is warranted for this program each year by an amount equal to the estimated amounts that are available from these sources. Such funding offsets could amount to a few million dollars in 2006-07.

Enacting Additional Policy Changes

As noted, the Governorís proposed funding for Proposition†36 is contingent on the enactment of policy changes he has identified. There are a number of key policy issues the Legislature may wish to consider as it evaluates these proposals. We discuss these issues below and summarize them in Figure†2.


Figure 2

Enacting Policy Changes to the Proposition 36 Statute

Issues for Legislative Consideration

   Governorís Policy Proposals Lacking Key Details. The administration proposes significant policy changes that warrant legislative consideration. However, critical details of the administrationís proposal are missing.

   Other Policy Options Available. In a 2004 report, we proposed shifting various state funding allocations for drug treatment programs, including Proposition 36 funding, into a block grant. Additional policy changes relating to mental health services for Proposition 36 offenders and the way county allocations are made are also worth consideration.

   Some Changes Would Likely Require Voter Approval. Some of the changes being considered for the program likely could not take effect without voter approval.


Administration Proposals Lacking Key Details. As described above, the administration proposes a series of significant policy changes to the Proposition†36 program. These proposals warrant legislative consideration and debate, given that the state and counties now have almost five years of experience with Proposition†36 programs. However, at the time this analysis was prepared, important details of the administrationís proposal were missing. The administration has not submitted any proposed statutory changes for its proposal to the Legislature and has indicated it does not intend to do so. Depending on how such changes in Proposition†36 were crafted, they could constitute a new state mandate on local government for which state reimbursement would be required under the State Constitution. If the administration intends to require that counties assign each offender to the treatment level for which he or she is assessed, the cost to the state for such a potential mandate could be very costly in the future and state fiscal control over the program would be weakened. On the other hand, if the administrationís intention is to voluntarily encourage counties to more closely align offender treatment assessments with the treatment these offenders actually receive, it is possible that the creation of a new reimbursable state mandate could be avoided.

Legislature Could Advance Its Own Policy Changes. As it examines the administrationís proposals to modify the existing Proposition†36 statute, the Legislature may wish to consider other policy changes that could improve its implementation.

For example, the Legislature might wish to expand the permitted uses of state funds to allow them to be used for mental health services for offenders who have a dual diagnosis of both drug addiction and serious mental illness. (We discussed this concept on page C-46 of our Analysis of the 2001-02 Budget Bill.) The Legislature could also consider imposing additional conditions on the use of state funding to support Proposition†36, such as rewarding counties with the best performance and outcomes or which contribute the most matching resources to implement Proposition†36. (This concept was discussed in our 2000 policy report entitled Implementing Proposition†36: Issues, Challenges and Opportunities.) Finally, in a 2004 report to the Legislature, ďRemodelingĒ the Drug Medi-Cal Program, we proposed that the state shift various state funding allocations for drug treatment programs, including those for Proposition†36, to counties in the form of a block grant to provide counties greater flexibility and authority in the use of the state funds to meet locally determined treatment priorities.

Some Changes Would Likely Require Voter Approval. Proposition†36 specifies that it can be amended by a two-thirds vote of the Legislature, but only to further the act in a way consistent with its purposes. Depending on the specific changes desired by the Legislature, it is possible that some of the changes being considered could not take effect without being submitted to the voters for their approval.

The Office of Legislative Counsel last year examined some legal issues relating to Proposition†36 and concluded, for example, that legislation to jail Proposition†36 offenders for first-, second-, or third-time drug-related probation violations would constitute an amendment that would not further the act and would not be consistent with its purposes-and thus would require voter approval to go into effect. Depending on specifics, similar issues could arise regarding other proposals to change the measure.

Analystís Recommendation

Based on our review, we recommend the Legislature:

Dependency Drug Court Funding

Current law requires that the Dependency Drug Court program be funded unless it is determined that he program is not cost-effective with respect to the Foster Care and Child Welfare Services Programs. The proposed budget does not provide funding for Dependency Drug Court or provide trailer bill language to suspend this requirement. Accordingly, we recommend that the administration report at budget hearings on why it has not funded this program.

We discuss our recommendations related to ďDependency Drug CourtsĒ in the ďChild Welfare ServicesĒ analysis in this chapter.

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