Analysis of the 2006-07 Budget Bill Legislative Analyst's Office February 2006

Department of 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 eighteenth 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. Almost 99 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. Slightly more than 1 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 by the state, 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 more than 200,000 clients each year.

Developmental Centers (DCs) Program. The department operates five DCs, and two smaller leased facilities, which provide 24-hour care and supervision to approximately 3,000 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 7,700 permanent and temporary staff serve the current population at all seven facilities.

Overall Budget Proposal. The budget proposes $3.8 billion (all funds) for support of DDS programs in 2006-07, which is a 5.7 percent increase over estimated current-year expenditures. General Fund expenditures for 2006-07 are proposed at $2.4 billion, an increase of $156 million, or 6.9 percent, above the revised estimate of current-year expenditures.

Community Services Budget Proposal. The budget proposes $3.1 billion from all funds ($2 billion General Fund) for support of the Community Services Program in 2006-07. This represents a $160 million net General Fund increase, or 8.7 percent, over the revised estimate of current-year spending. It primarily is a result of caseload growth, higher utilization rates for services, rate increases, and other program changes. The community services budget plan includes the following proposals:

• Rate Increase. A $67.8 million ($46.1 million General Fund) proposal to provide a 3 percent rate increase to vendors of certain specified services that are purchased by RCs.

• Cost Containment. A long-term cost containment proposal is projected to reduce costs in the budget year by about $14 million (about $11 million General Fund). The administration plans to implement the proposal administratively through contract negotiations with the RCs. Implementation of these changes is expected to cost about $7.6 million from the General Fund each year on an ongoing basis for additional RC resources. However, the General Fund savings from these measures are projected to grow to about $21 million in 2007-08 and $32 million in 2008-09.

• Autism Initiative. Additional funding of about $2.6 million from the General Fund is proposed in 2006-07 to provide additional RC staff and other resources to begin to implement a new autistic spectrum disorder initiative. The initiative would provide training to RC staff, and develop best-practices guidelines both for treatment in such cases and to foster collaboration among the agencies that serve this group of clients.

The budget plan takes note of the status of the California Developmental Disabilities Information System (CADDIS) project. This information technology project, which has encountered serious problems with its development and implementation, is currently under review. The administration has indicated that it will come forward at an unknown later date with additional recommendations to the Legislature to determine the future of the project. The implementation of some pending proposals to draw down additional federal funds and to improve services to RC clients, such as the self-directed services initiative, largely depends on the successful implementation of CADDIS.

Developmental Centers Budget Proposal. The budget proposes $707 million from all fund sources ($383 million General Fund) for the support of the DCs in 2006-07. This represents a net decrease of $3.6 million General Fund, or about 1 percent, below 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 plan continues to assume the closure of the Agnews DC by July 2007, and provides resources to assist in the shift of some current Agnews residents to the community. The budget plan also proposes creation of a new intensive behavioral treatment residence unit at Porterville DC and provides additional funding and staffing for the Office of Protective Services, which provides law enforcement and firefighting services at the DCs.

Headquarters Budget Proposal. The budget proposes $37 million from all funds ($25 million General Fund) for support of headquarters. About 63 percent of headquarters funding is for support of the community services program, with the remainder for support of the DC program.

Better Oversight of RC Purchases Needed

Our analysis indicates that spending for some specific services and supports varies so widely among regional centers (RCs) as to raise concerns as to whether there are adequate fiscal controls over these expenditures. We recommend the adoption of budget bill language requiring the Office of State Audits and Evaluations within the Department of Finance to evaluate the accuracy and the consistency of the purchase of services data now being reported by the RCs.

Background

Who Decides Which Services RC Clients Will Receive?

Individual Program Plan (IPP) Is the Basis for Provision of Services. The IPP forms the basis for the provision of services to RC clients. Each IPP is developed by a team consisting of a service coordinator and other RC representatives, the client, and when deemed appropriate, the family or guardian. The IPP provides a schedule of the type and amount of services that will be provided to the client in order for him or her to achieve stated written goals and objectives, such as living independently and obtaining employment.

Since the RCs serve a diverse group of clients with a wide range of developmental disabilities, IPPs are developed using what is often termed a “person-centered” planning approach. Person-centered planning is based on offering individuals with developmental disabilities choices about the services they prefer to receive and working towards their “preferred” future. Under person-centered planning, two individuals who are the same age, have the same developmental disability and who are clients of the same RC may nonetheless receive different services under their IPP based upon their preferences.

How Do RCs Provide Services for Their Clients?

The RCs provide services to clients through two mechanisms. First, RCs purchase services directly from vendors. These services are commonly referred to as “purchase of services.” Secondly, RCs assist their clients in obtaining services from public agencies. These services are commonly referred to as “generic services” We discuss both types of services further below.

Purchase of Services. The budget for purchase of services consists of ten main service categories, plus one additional category relating to other adjustments. (A more detailed description of these categories is provided on page C-162 of our Analysis of the 2005-06 Budget Bill.) Figure 1 shows the Governor’s proposed spending plan for these purchase of services categories in 2005-06 and 2006-07.

Generic Services. Under state law, generic services are defined as those being provided by federal, state, and local agencies which have a legal responsibility to serve all members of the general public and that receive public funds for providing such services. There are more than a dozen different generic services that are regularly accessed by RC clients. For example, medical services for an eligible developmentally disabled person might be provided through the Medi-Cal health care program for the poor. City or county park and recreation programs also provide generic services for developmentally disabled clients.

State law requires that RCs access generic services first and make purchase of services only when generic services are unavailable. Access by developmentally disabled clients for some generic services is fairly consistent throughout the state. For example, Medi-Cal eligibility and benefits are offered consistently on a statewide basis. However, access to other generic services, such as county and city recreation programs, can vary regionally, with the result that some RCs spend considerably more for some recreational services than others.

Some Purchase of Services Provided Under a Federal Waiver. Under the federal Home and Community-Based Services (HCBS) waiver, federal funds can be drawn down to pay for about one-half the costs of certain community-based services for individuals at risk of institutionalization. In order to remain compliant with the conditions of the waiver, DDS is required to exercise fiscal oversight of RC expenditures. This includes conducting biennial audits of purchase of services, as discussed later in this analysis.

Tracking Purchase of Services Spending

The DDS, which is responsible for the overall supervision and fiscal management of community services, has a system in place to track RC expenditures for the purchase of services. When a RC purchases a service it is required to document that purchase and enter it into a central purchase of services database that allows DDS to track RC spending on a statewide basis. The data reported by the RCs are used to project future utilization of services by RC clients and now has become part of the basis for budget estimates submitted by DDS to the Legislature.

RC Purchase of Services Are Reported Under Expenditure Codes. As noted earlier, purchase of services fall into ten service categories. However, within those service categories, about 150 different and more specific expenditure codes are currently authorized by DDS and used by the RCs to classify purchase of service expenditures for entry into the central purchase of services database. Some service categories consist of more expenditure codes than others. For example, the habilitation services category shown in Figure 1 consists of three separate expenditure codes. In contrast, the miscellaneous service category shown in Figure 1 consists of 74 separate expenditure codes. The ten purchase of services categories are not mutually exclusive. For example, the expenditure code for a registered nurse is included under the health care, in-home respite, and miscellaneous service categories.

About 100 of the approximately 150 expenditure codes are established in official state regulations, and DDS defines the remainder. Most of these remaining 50 expenditure codes fall into the miscellaneous service category. The DDS periodically adds new expenditure codes or deletes obsolete codes as necessary to ensure that RC purchases are properly reported.

Expenditure Codes Are Audited by DDS Biennially. Federal rules require RCs to account for federal monies spent for services for the developmentally disabled. In order to receive federal funds under the HCBS waiver, DDS is required to audit each RC biennially. At the same time that DDS audits for compliance with the HCBS waiver, it also audits the RCs to determine compliance with applicable regulations and the provisions of the contract between DDS and the RCs. As part of that audit, DDS reviews a sample of reported purchase of services expenditures to determine whether the appropriate expenditure codes have been used by RCs. If the audit determines that incorrect expenditure codes have been used, audit findings are reported with recommendations for corrective action. In the subsequent biennial audit of that RC, follow-up is required to determine if prior recommendations for corrective action have been implemented.

Purchase of Some Services Varies Greatly Among RCs

Some Variation in Spending Reasonable. A 2003 study commissioned by the state compared RC spending patterns and found clear variations among RCs in purchase of services expenditures for the five-year period of 1995-96 through 1999-00. This study focused on whether there was any evidence of discrimination based on ethnicity or gender, after legitimate reasons for variation in per-capita RC costs, such as age and residence type, were taken into account. The authors of the study found that there was no evidence of discrimination, but indicated differences in per-capita expenditures among RCs may be due to factors not available for analysis.

Pattern of Purchases Varies Widely. The study referenced above focused primarily on variations in RC spending based on a review of aggregate spending across many expenditure codes. Our analysis has focused on a different issue-the variation that occurs in the spending reported by RCs within the same expenditure code.

Our review of the expenditure code data being reported by RCs indicates that the amount of services purchased under a particular expenditure code has varied widely from RC to RC. Moreover, the data show that not all RCs actually purchase services under every expenditure code. For example, the most recently available data for 2004-05 show that only 7 of the 21 RCs reported purchases under the expenditure code for creative arts programs.

We found several examples in the 2004-05 data (as well as in prior-year data) where the variation in spending among RCs was great:

• Total statewide expenditures reported under the expenditure code for client/parent support behavior intervention training were $17.2 million. But one RC alone accounted for almost $10 million, or about 58 percent, of the total spending. Another 16 RCs accounted for the remaining $7.2 million and 4 RCs did not report any expenditures under this expenditure code.

• Total expenditures under the expenditure code for behavior analyst were $5.4 million, with 1 RC accounting for about $3.7 million, or 68 percent, of the total spending. Another 18 RCs accounted for the remaining $1.7 million and 2 RCs did not report any expenditures under this expenditure code.

• Total expenditures under the service expenditure code for day care family member were $23.9 million, with two RCs accounting for about $11 million, or 46 percent, of the total spending. Another 18 RCs accounted for the remaining $12.9 million and 1 RC did not report any expenditures under this expenditure code.

Possible Explanations for Significant Variation in Spending. In some cases, the differences in spending patterns we have identified in the DDS data can be explained, at least in part, by the number of clients actually receiving a service, differences in the units of the services that are usually provided to clients, regional differences in the cost of providing a particular service, and the varying availability of generic services between regions. But our review indicates that these factors still do not fully explain some of the wide variations seen in spending among RCs for selected services, such as those discussed above.

One possible explanation is that RCs are reporting expenditures under incorrect expenditure codes as the result of a clerical error or misinterpretation of DDS regulations and expenditure code definitions. In theory, the existing audit process should be addressing such problems on an ongoing basis. However, at the time that this analysis was prepared, we were unable to determine whether DDS audit protocols are sufficient to identify and correct such problems on a system-wide basis.

Another possible explanation is that DDS and some RCs may be exercising inadequate fiscal control over purchases of some services. This appears to have been the case for one RC that had increased its spending under the supported living services expenditure code from about $9 million in 2000-01 to about $29 million in 2003-04. At this spending level, its outlays for this one expenditure code were more than twice those of the next highest RC. As a result of concerns of potential fiscal mismanagement of its RC services, DDS stepped in to exercise increased oversight of its operations.

As the examples we have identified show, the expenditures for selected expenditure codes have sometimes varied in the millions of dollars annually from one RC to another. This in turn could mean that even larger amounts of state funding-how much exactly is unknown-may be lacking adequate state fiscal controls.

Oversight of RC Purchase of Services Could Be Improved

DDS Making Some Efforts to Tighten Expenditure Controls. As a result of the situation discussed above, in which an RC faced tighter oversight in the aftermath of high rates of expenditure for supported living services, the DDS has begun taking some steps to improve its fiscal control of these services on a statewide basis. Specifically, DDS is conducting a comprehensive review of this expenditure code and has identified several cost containment measures involving regulatory changes and closer review of relevant RC expenditure and utilization data.

Also, the DDS has indicated that, as part of an ongoing project to reform the way rates are set for certain services, it is considering a variety of options to increase its oversight of these services. We are advised that the reforms being considered include: (1) adding time limits to the use of selected expenditure codes, (2) strengthening these expenditure code definitions, (3) moving certain expenditure codes into official regulations, and (4) consolidating some of the expenditure codes into a single code.

The DDS also reports that, in preparation for implementation of the CADDIS information technology project, it has recently been undertaking significant efforts to ensure that purchase of services data, including expenditure code data, are “clean” and being properly used by RCs. A DDS workgroup is refining the list of expenditure codes, and a revised list is awaiting final approval.

Finally, biennial audits are continuing as a condition of the HCBS waiver, providing some additional fiscal controls for those RC services made available under the waiver program.

DDS Actions Unlikely to Fully Address the Issue. The steps being considered by DDS could provide greater assurance that RC spending on purchase of services, which has grown considerably in recent years, is subject to appropriate fiscal controls. However, our analysis suggests that the proposed actions are not likely to prove sufficient to fully address this issue.

Notably, at the time this analysis was prepared, DDS was considering additional fiscal controls only on the 17 expenditure codes that are a part of its rate reform initiative. However, that rate reform effort will not examine all of the expenditure codes that data show reflects wide variation in spending among RCs. One such service code, for client/parent support behavior intervention training, is included under the rate reform effort, but two other expenditure codes with a pattern of wide variation in spending that we described above, behavior analyst and day care family member, are not now contemplated to be reviewed or modified.

Furthermore, at this time, DDS’ strategy of relying on CADDIS to help to address the issue is problematic. Implementation of CADDIS is behind schedule and its development has been plagued with technical difficulties, unforeseen problems, and cost overruns. It is now questionable whether CADDIS will ever be successfully implemented.

Also, while the biennial audits of RC expenditures continue to occur, we note that the irregular patterns of spending, such as those we have highlighted in our analysis, extend back three or more years. That raises questions as to whether the current auditing procedures are effectively addressing the wide variations in spending that have occurred in recent years.

Audit of Purchase of Service Data Warranted

We recommend that the Legislature direct the Department of Finance’s Office of State Audits and Evaluations to conduct an audit to evaluate the accuracy and the consistency of the purchase of services data now being reported by the regional centers.

The Benefits of Improved Reporting. We recommend that the Legislature take steps now to ensure that spending by RCs for the purchase of services is accounted for in a consistent manner, with purchases of like services being accurately reported under the same expenditure code by all 21 RCs. Given the wide variation we see in the expenditures being reported under some expenditure codes, it is not clear that the existing biennial audits are providing sufficient fiscal controls in this area.

Because the accuracy and the consistency of these data are now uncertain, the state lacks the tools that are needed to exercise strong fiscal oversight over RC spending and to identify those RCs and those specific categories of expenditures that warrant increased scrutiny. The exact fiscal benefit to the state is unknown, but we believe that improved fiscal controls over the reporting of RC purchase of service expenditures could help hold down the significant increases in costs that the state has experienced in recent years for RC purchase of services.

An improvement in the way expenditure data are reported has additional potential benefits. It could also improve the quality of the data used by DDS for its budget forecasts, so that its budget requests to the Legislature could more closely match the actual funding required to support community services programs. More reliable expenditure data for these services could also result in more informed policy decisions when issues arise regarding the provision of specific services in the community.

Furthermore, reliable expenditure data could be used by the Legislature and the Department of Finance (DOF) in their fiscal oversight roles to more closely monitor RC expenditures.

Audit Should Target Specific Issues. As a first step toward addressing these issues, we recommend that the Legislature direct the DOF’s Office of State Audits and Evaluations (OSAE) to conduct an audit to evaluate the accuracy and consistency of the purchase of services data now reported by the RCs. Because of their past focus on issues pertaining to fiscal controls, we believe OSAE is the appropriate choice to conduct an audit of this nature. The audit conducted by OSAE is likely to result in recommendations for improved oversight that could be appropriately implemented by DOF in its role as a state fiscal control agency.

The audit should address the following issues:

• The extent to which RCs are now purchasing identical services but reporting them under different expenditure codes.

• Whether RCs are reporting their purchase of services under the correct expenditure code.

• Appropriate additional steps that DDS could take to ensure that RCs report their purchase of services expenditures in a consistent and accurate manner.

• How improved RC expenditure data could be used to strengthen oversight of RC expenditures, including the biennial audits now being conducted for waiver compliance.

The Legislature should direct that the audit be completed by April 1, 2007, and the findings reported to the appropriate budget committees. Accordingly, we recommend the adoption of the following budget bill language:

It is the intent of the Legislature that the Office of State Audits and Evaluations (OSAE) review regional center (RC) expenditures for purchase of services as reported under the expenditure codes used to capture data on RC spending. The OSAE shall examine the following: (1) the extent to which RCs are now purchasing identical services but reporting them under different expenditure codes, (2) whether RCs are reporting their purchase of services under the correct expenditure code, (3) appropriate measures that could be taken by the Department of Developmental Services (DDS) to ensure that RCs report their purchase of services in a consistent and accurate manner under the expenditure codes, (4) how improved RC expenditure data could be used to strengthen oversight of RC expenditures by the Legislature and the Department of Finance, and (5) how audit protocols for the biennial audits conducted by DDS on RC expenditures could be adjusted to improve departmental oversight. The OSAE shall report its findings April 1, 2007 to the Chair of the Joint Legislative Budget Committee and the chairs of the fiscal committees of both houses of the Legislature.

Community Services Program

Caseload Overbudgeted for RCs

We recommend that the Legislature adjust the regional center budget request based on updated caseload data. Recently available data indicate that the General Fund support needed for purchase of services is overbudgeted by $25 million, $9 million in the current year and $16 million in the budget year. (Reduce Item 4300-101-0001 by $16 million.)

Background

Long-Term Trend Shows Strong Caseload Growth. Between 2001-02 and 2006-07, the average annual RC caseload is projected to grow under the Governor’s budget proposal from about 172,714 clients to more than 213,000 clients, an average annual rate of growth of about 5 percent. By means of comparison, the RC caseload would continue to grow at a faster rate than the population of California, which is projected to grow at an average annual rate of about 1.6 percent during that same time period. Similarly, the RC system would continue to experience a significantly faster rate of growth than most of the state’s other health and social services programs. We discuss some possible reasons for this relatively high rate of RC caseload growth later in this analysis. The RC caseload trend is shown in Figure 2.

What Are the Reasons for These Growth Trends? Several key factors appear to be contributing to strong ongoing growth in the RC caseload. 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. The RC caseload growth also reflects a significant increase in the diagnosed cases of autism, the causes of which are not yet fully understood.

Governor’s Budget Proposal

Estimate Based on Caseload, Costs, and Utilization of Services. Each year, the Governor’s budget plan is based on updated assumptions regarding four main factors that “drive” costs in the RC system: (1) the number of clients in the RC system, (2) the mix of clients, who have varying needs for services based on their different developmental disabilities, (3) the rate at which these clients are utilizing RC services, and (4) how the cost of those services is changing over time.

In accordance with past practice, the 2006-07 budget plan reflects DDS’ updated projections for the number of RC system clients for the current and budget years. The budget plan estimates the average annual caseload for the current year as 205,165, or just ten clients more than the estimate of 205,155 that was the basis for the RC system’s allocations under the 2005-06 Budget Act. The budget plan further estimates that the average annual RC caseload will grow to 213,740 in 2006-07, a year-to-year increase of 8,575 clients, or 4.2 percent.

Thus, the administration’s budget plan for 2005-06 assumes that the actual caseload in the RC system in 2005-06 is tracking very closely to the original budgeted level. Additionally, the administration proposes to significantly reduce the level of funding provided for RC purchase of services by a total of about $45 million (including about a $37 million reduction in General Fund resources). These further adjustments reflect updated expenditure data on baseline costs for RC purchase of services expenditures.

For 2006-07, the Governor’s budget proposes to increase spending for the RC system by about $178 million, including an increase of about $130 million from the General Fund. This increase mainly reflects estimated growth in caseloads, costs, and the utilization of services by RC clients.

Recent Data Suggests Caseload Overstated. The Governor’s budget request is based on the caseload data that was available through July 2005. However, more recent data through December 2005 indicate that the average annual caseload is likely to be about 1,300 below the level that DDS has estimated in the current year and about 2,100 below the level that DDS has estimated in the budget year. If this caseload trend were to hold, it also could mean that the Governor’s budget plan has overestimated the funding needed for the support of RC purchase of services. Our analysis indicates that the spending plan may be overestimated in the current year by about $15 million from all fund sources (about $9 million from the General Fund). The budget year level of funding may be overestimated by about $25 million from all fund sources ($16 million from the General Fund).

Analyst’s Recommendation. We recommend that the Legislature make an adjustment to the RC purchase of services budget to take into account the most recent available information on caseload trends. Specifically, for 2005-06, we recommend a reduction of $15 million from all fund sources (with a General Fund reduction of $9 million). A further reduction would be made for 2006-07 of $25 million from all fund sources (with a General Fund reduction of $16 million).

The administration has indicated that it will provide updated information on the overall RC caseload trend, any change in the mix of RC clients, and trends in the cost and utilization of services at the time of the May Revision. We will continue to monitor caseload trends and will recommend appropriate further adjustments in May when DDS’ updated budget request is presented to the Legislature.

Rate Increase No Substitute for Rate Reform

As it decides whether to provide a proposed 3 percent rate increase for certain regional center (RC) providers, we recommend that the Legislature enact legislation requiring the Department of Developmental Services to incorporate into the rate-setting methodologies that it develops for RC services measurements of quality and access to specific services.

Background

Rates a Key Fiscal Control. The Legislature has taken some steps in recent years to slow the growth in state costs for the RC system. Beginning in 2003-04 and continuing through 2005-06, it acted to control costs by adopting legislation imposing rate freezes and other cost-control measures on selected community services. These measures affected contracted services, community-based day programs, in-home respite service providers, habilitation services providers, and community care facilities-the services which make up the bulk of RC spending. The rate freezes and cost-containment measures were intended to be temporary actions to help address the state’s serious fiscal problems while allowing time to consider permanent and ongoing strategies to help contain RC program costs.

Rate Reform Effort Under Way. The 2004-05 Budget Act provided four permanent staff positions as well as $500,000 in one-time funding for contract resources to enable DDS to develop standardized rates for certain types of RC vendors. The DDS indicates that this system-wide rate reform effort will require several years to complete. As we discussed in detail in our Analysis of the 2005-06 Budget Bill (page C-167), there is great variation in the way that rates are set for the RC vendors who provide services, and the rate-setting approach overall lacks a rational and consistent approach. The rate reform activities approved by the Legislature were intended to address these concerns as part of a more comprehensive cost-containment program for the RC system.

The Governor’s Budget Proposal

Three Percent Rate Increase Proposed for Some Providers. The Governor’s budget plan proposes about $68 million from all fund sources ($46 million General Fund) to provide a 3 percent cost-of-living rate increase mostly for providers of services that were subject to the rate freezes and other cost-containment measures discussed above. Subsequent to release of the Governor’s budget plan, DDS identified some types of providers that were inadvertently included in the rate increase proposal and other types of providers that were inadvertently excluded from the proposal. The DDS has indicated that it will provide a revised rate increase estimate reflecting these adjustments at the time of the May Revision. According to the administration, the proposed rate increase is intended to help prevent programs from closing due to insufficient funding, thereby maintaining continuity of services for RC clients and promoting stability in the RC’s system of providers.

Rate-Setting Reform Still Warranted

Information Lacking to Evaluate Provider Rate Increase. The administration has not provided the Legislature any specific basis for providing a 3 percent rate increase, as opposed to a higher or lower percentage adjustment. Consequently, the Legislature lacks the information it needs to systematically and objectively evaluate the impact that the temporary rate freeze has had on providers.

We believe a better approach is warranted. In our 2005-06 Analysis, we voiced concern about what we termed the inconsistent manner in which rate increases for some RC vendors had been determined in the past. We found that such decisions had often been made in response to some improvement or deterioration of the state’s financial condition, and without regard to the state’s goals as a purchaser of these services. We also found that the Legislature lacks information on two critical factors-(1) the potential effect of those rates on the access to care available to RC clients, and (2) the effect of those rates on the quality of care received by those clients. We offered a number of steps the Legislature could take to move toward permanent rate reform based on having a systematic and rational process for adjusting vendor rates in keeping with these critical factors. In our view, the administration’s proposal continues its past practice of taking an inconsistent approach to rate-setting that lacks a rational basis and does not address the need for meaningful rate reform.

Analyst’s Recommendation

As noted earlier, the Legislature lacks the critical information identified above to determine whether the 3 percent rate increase proposed by the administration is warranted for the specific categories of services it has identified to ensure either quality of care or access to care for RC clients. The underlying conditions that led the Legislature to adopt and continue these rate freezes for selected RC services have not changed since 2003-04. The RC system costs for the purchase of services continue to grow at a significant rate that exceeds growth in state revenues.

As it balances the various programmatic and fiscal concerns in deciding whether to provide the proposed 3 percent rate increase for providers, we recommend that the Legislature enact legislation requiring DDS to incorporate measurements of quality and access to specific services into the rate-setting methodologies that it develops for RC services. Our recommended approach is explained in more detail in the 2005-06 Analysis.

Developmental Centers Program

Legislature Should Proceed Cautiously On Law Enforcement Expansion

The Governor’s budget plan proposes an expansion of Department of Developmental Services’ law enforcement operations. Given the declining caseload and increasing per-capita costs of the developmental center (DC) system, we recommend that the Legislature approve only part of the headquarters’ staffing request and limit any increases in DC resources and personnel to those critically needed to maintain the health and safety of DC clients.

Background

Facilities Provide 24-Hour Care. The state’s five DCs and two smaller leased facilities provide 24-hour care to about 3,000 individuals with developmental disabilities. The DCs provide a full range of care, including medical and recreational services, in a campus-like setting.

Office of Protective Services (OPS). The DDS’s OPS provides all law enforcement and fire protection services in the DCs and the two smaller leased facilities. The Law Enforcement Division (LED) of OPS, which includes both uniformed peace officers and special investigators, is responsible for keeping the peace; preventing crime; investigating alleged offenses occurring on the grounds of DCs; and protecting clients, employees, visitors, and state property.

DC System Subject of Investigations

The DC system has been the subject of two investigations conducted in recent years by the state Attorney General and the U.S. Department of Justice (U.S. DOJ) that could result in major operational changes at these facilities. We discuss the investigations and their ramifications below.

Attorney General Critical of Safety and Security Operations. In response to a 2001 legislative request, the state Attorney General conducted an investigation of DDS’ law enforcement and fire protection services. The Attorney General issued a March 2002 report which found that DDS’ law enforcement services were poorly managed and poorly organized.

The Attorney General offered 28 specific recommendations on how to improve the OPS, including the following:

• The number of senior special investigators should be increased, their role and responsibilities expanded, and the current vacant positions filled.

• The DDS should create an executive management position with the responsibility and authority to manage the LED. According to the Attorney General, the lack of a unified command structure for LED is its most critical problem.

• The LED should develop and implement a new organization plan that established a clear law enforcement chain of command. Under this structure, law enforcement personnel would report up the chain of command to the Chief of OPS at headquarters instead of to the executive director of the individual DCs.

The DDS has indicated that, to the extent possible within its existing budgetary resources, it has acted in recent years to reorganize the existing OPS operations into a centrally managed system consistent with the Attorney General’s recommendations.

U.S. DOJ Investigates Lanterman DC. In October 2004, U.S. DOJ conducted an on-site investigation of the Lanterman DC near Los Angeles pursuant to the Civil Rights for Institutionalized Persons Act (CRIPA), a federal civil-rights law that protects persons who are in public institutions such as the DCs. A U.S. DOJ report released in January cites incidences of abuse and neglect and physical assaults of clients.

Although DDS indicates it is already taking steps to address the problems identified at Lanterman, it is not yet known what specific further actions federal authorities may require to resolve the CRIPA investigation. Notably, CRIPA investigations of other State of California facilities, such as the state mental hospital system, have resulted in demands by federal authorities for significant changes in their operations as well as sizable increases in staffing and funding that could go beyond licensing and certification requirements that must be met to receive federal support for DC operations.

Governor Proposes Additional Resources for OPS

In order to reorganize the OPS along the lines recommended in the DOJ report, the administration is requesting additional positions and resources for both DDS headquarters and for the DCs. The budget plan proposes $752,000 from all fund sources (including $452,000 from the General Fund) and six DDS headquarters positions in the budget year to develop and implement policies, train personnel, manage OPS, and centralize its command structure.

In addition, the budget plan would provide the DCs with an augmentation of $660,000 from all fund sources ($380,000 General Fund). These additional resources would be used to support 81 additional law enforcement and fire services positions to help implement the recommendations of the Attorney General. According to DDS, part of these additional resources would be used for the ongoing support of 65 staff positions that were previously established for OPS through the department’s internal redirection of resources. Also, the budget request proposes to add 16 staff positions (six permanent positions and ten two-year limited-term positions) to address a backlog of pending investigations and a projected future increase in the investigation workload. The Governor’s budget request does not indicate what the fiscal impact of these proposals would be in 2007-08.

Per-Capita Costs Increasing as Population Drops

In our Analysis of the 2003-04 Budget Bill (page C-99), we described how the cost of care on a per resident basis in the DC system had grown significantly even though the population of the system was continuing to decline.

Since our 2003-04 Analysis, the trends we identified in 2003 have continued. The DC population has declined from about 3,800 clients to 3,000, and is expected to drop to about 2,800 during 2006-07 as Agnews closes. The cost per client in the DC system continues to escalate. We had estimated this cost at about $171,000 for 2000-01, but now estimate it to be about $236,000 in 2005-06.

Analyst’s Recommendation

Given the declining caseload and increasing costs of the DC system, we recommend that the Legislature approve only those increases in resources and personnel critical to maintaining the health and safety of DC clients. On this basis, we recommend approval of part of the budget request to strengthen OPS law enforcement operations at headquarters. However, we withhold recommendation on the balance of the request relating to DC staffing until it is clear how the CRIPA investigation has been resolved and, in particular, what if any actions are proposed to modify OPS’ operations.

Approve Two Headquarters Positions. Specifically, we recommend the Legislature approve two of the six additional staff positions requested for DDS headquarters. Approval of the proposed new OPS chief and deputy chief would enable DDS to implement the Attorney General’s most critical recommendations, including the creation of a stronger central chain of command. However, we recommend the rejection of the additional four headquarters positions proposed by the administration because they go beyond what our analysis indicates is needed to establish a functional chain of command.

Withhold Recommendation on DC Positions. We withhold recommendation at this time on all 81 additional positions requested by the administration to expand law enforcement operations in the DCs. We believe some of the 81 positions may be required to comply with federal funding requirements. The Legislature, in our view, should not act on this request until the Lanterman DC CRIPA case has been resolved.

The resolution of the CRIPA case at Lanterman could well result in significant requests for additional state resources to address the problems identified in that federal investigation. Given the nature of U.S. DOJ’s findings, it appears likely that federal authorities will require significant funding and staffing increases for Lanterman (and perhaps eventually other DCs) as well as potentially significant changes in OPS’ law enforcement operations. Absent a resolution of the U.S. DOJ matter, DDS’ budget request for the expansion of OPS personnel at the DCs is premature. We will continue to monitor this situation and advise the Legislature of our findings at the time of budget hearings.