Analysis of the 2007-08 Budget Bill: Perspectives and Issues
How Could the Legislature Expedite the Process of Making Mandate Determinations and Reduce the Complexity of Filing Reimbursement Claims?
Summary
The California Constitution requires the state to reimburse local governments for certain state mandates. The process for determining the existence of state mandates and providing local government reimbursements, however, has significant shortcomings. “Test claims” filed by local governments (alleging the existence of a mandate) typically take over five years to be resolved by the Commission on State Mandates. During this time, state fiscal liabilities mount and local governments carry out mandates without reimbursement. Local governments devote considerable resources to mandate record keeping, but the State Controller’s Office disallows about one-third of local government mandate claims because they do not comply with the commission’s complex guidelines. Local governments often appeal these claim reductions to the commission, causing further delays in the mandate determination process.
The administration’s proposal to reform this mandate process provides a good starting point for discussion. In this analysis, we review the administration’s proposal and offer the Legislature a similar, but more extensive, proposal that includes three significant changes to the mandate process:
(1) Simplify the process for local governments to file reimbursement claims by placing greater emphasis on unit cost methodologies.
(2) Allow mandate payment methodologies to be developed through negotiations between local government and the Department of Finance.
(3) Establish an alternate process to provide early settlement of mandate disputes and bypass the commission entirely.
The California Constitution generally requires the state to reimburse local governments when it mandates that they provide a new program or higher level of service. State law assigns the Commission on State Mandates the authority to (1) resolve disputes over the existence of state mandates and (2) develop methodologies (called parameters and guidelines, “Ps&Gs”) that local governments follow to calculate the amount they may claim as reimbursements.
Figure 1 summarizes the full mandate process—from imposition of a state requirement (box 1) to payment of and adjustments to reimbursement claims (boxes 10-12). The steps in box 2 to box 9 commonly are referred to as the “mandate determination process,” because these are the steps in which the commission determines whether a requirement constitutes a state-reimbursable mandate and defines how the state requirement will be reimbursed.
Over the last several years, state and local officials have expressed significant concerns about the mandate determination process, especially its length and the complexity of the reimbursement claiming methodologies.
It currently takes the commission over five years to complete the mandate determination process for a successful local government test claimant. Specifically, our review of new mandates claims reported to the Legislature in 2004 through 2006 found that the commission took almost three years from the date a test claim was filed (box 2 in Figure 1) to render a decision as to the existence of a state-reimbursable mandate (box 3). The commission took more than another year to adopt the mandate’s claiming methodology or Ps&Gs (box 5) and almost another year to estimate its costs and report the mandate to the Legislature (box 9).
This lengthy period presents several difficulties. Local governments must carry out the mandated requirements without reimbursements for five years, plus the additional time associated with development of the mandate test claim and waiting for the reimbursement funds to be appropriated and checks issued. Altogether, it is not uncommon for mandate funding to lag mandate enactment by six to seven years.
The lengthy mandate determination period also poses difficulties on the state. Specifically, state mandate liabilities accumulate throughout the determination period, making the amount of state costs reported to the Legislature (box 9) higher than would be the case if the process were completed on a more expedited basis. The delays also complicate state policy review of mandates because the Legislature receives a mandate’s cost information years after the debate regarding its imposition has concluded.
The commission’s large backlog of claims (it currently has over 100 claims under review) commonly is cited as a reason for the time delays. While commission staff suggests that they are reducing this backlog, workload data do not show significant progress. We note, for example, that local governments filed the same number of claims (46) over the last three years as the commission closed during this time (claims are closed when the commission reports a mandate’s costs to the Legislature or rejects the claim, or the claims is withdrawn or consolidated). We also note that the commission has yet to render its decision for 86 claims (14 of which were filed by local governments more than five years ago), and that the commission seldom decides more than 20 test claims in a year. From this, we conclude that the large backlog of claims is not likely to disappear in the near future, absent action by the Legislature and administration to change the mandate process.
The Legislature created the seven-member commission in 1984 as a quasi-judicial body and instructed it to act deliberatively in resolving the complex legal questions associated with determinations of state mandated costs. (Figure 2 shows the membership of the commission.) The work of the commission to render mandate decisions usually meets these legislative expectations as its decisions are well reasoned and typically withstand judicial challenges.
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Figure 2
The Commission on State
Mandates—Membership |
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Director of the Department of Finance |
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State Treasurer |
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State Controller |
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Director of the Office of Planning and Research |
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Two local government members (from a school district,
city council, or county board of supervisors)a |
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One public membera |
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a Appointed by the
Governor. |
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After the commission issues its Statement of Decision, however, the commission’s work products do not serve the state as well. Specifically, the reimbursement methodologies adopted by the commission (the Ps&Gs, box 5) typically are too complicated to be usable by local governments or be easily reviewed by the State Controller’s Office (SCO). The problem with the commission’s reimbursement methodologies stem from (1) the inherent difficulties in quantifying mandate costs and (2) the commission’s tendency to link reimbursement methodologies specifically to the legal description of the mandated activities specified in its Statement of Decision.
Few state mandates establish completely new local programs. Rather, state mandates usually modify elements of preexisting local programs or procedures—and indirectly trigger other changes to local programs or procedures (such as additional training or facility costs).
Local accounting and workload data systems typically report information on the cost of programs as a whole, as well as program and policy variables important to the local government. Local data systems seldom are designed to measure the marginal additional costs of new requirements. While local governments can modify their data systems to collect such information, making these changes can be difficult and frustrating if the data has limited usefulness from a local point of view.
Despite the practical limitations discussed above, the commission commonly adopts mandate reimbursement methodologies that delineate pages of highly specific activities for which local governments may claim costs. These activities frequently are described using the same legal description that the commission used in its Statement of Decision.
The problem with focusing on the legal definition of claimable costs is that the specified activities seldom are complete local government programs that are easy for a local government to quantify and document.
Example: POBOR Mandate. The Peace Officer Procedural Bill of Rights (POBOR), Chapter 465, Statutes of 1976 (AB 301, Keysor), provides a series of enhanced rights and procedural protections to peace officers who are subject to interrogation or discipline by their employer. In 1999, the commission found to be a mandate those procedural requirements of POBOR that exceeded the rights provided all public employees under the due process clause of the United States and California Constitutions. For example, POBOR requires local governments to hold an administrative hearing when they (1) transfer a peace officer as punishment or (2) deny a promotion for reasons other than merit. The due process clause in the State and U.S. Constitutions do not require such a hearing. Thus, local costs to provide administrative hearings under these specific circumstances are reimbursable. The costs to provide administrative hearings under many other circumstances, in contrast, are not.
The reimbursable activities specified in the commission’s 14-page POBOR Ps&Gs require detailed new record keeping by local governments. For example, the Ps&Gs permit local governments to claim costs to tape record and transcribe certain police officer interviews, but only if the peace officer commenced his or her own tape recording first. Similarly, local governments may send employees to training to learn about POBOR’s requirements. If the training covers other personnel issues, however, the local government only may file for reimbursement for the number of minutes of the training in which POBOR is discussed.
Given the complexity of the claiming methodologies, it is not surprising that the SCO finds that local governments’ claimed costs frequently (1) are not supported by source documents showing the validity of such costs or (2) are not allowable under the mandate’s reimbursement methodology. Accordingly, SCO has disallowed over one-third of all reimbursement claims over the last few years. (Some claims have been reduced by as much as 90 percent.)
Local governments appeal many of these audit reductions to the commission (see boxes 11 and 12), frequently claiming that the level of documentation required by the auditors is impractical or that the reimbursement methodology is unclear. These local appeals, in turn, further delay the mandate determination process. Currently, 118 audit appeals are pending before the commission. The commission estimates that each appeal takes staff about 100 hours to review and process. Thus, the commission currently has over six staff years of work to resolve these appeals, a workload that is notable given that the commission only has 14 staff.
The problems identified above are not new and the Legislature has taken steps to address them over the last few years. Specifically, the Legislature provided additional staff to the commission and Department of Finance (DOF) to assist them in reviewing and responding to mandate claims. The Legislature also enacted a one-year statute of limitations on local government mandate test claim filings. This statute of limitations was intended to reduce the problems the commission was experiencing researching test claims when the facts were dated.
Seeking to simplify the mandate claiming process and reduce the number of mandate audits, the Legislature enacted Chapter 890, Statutes of 2004 (AB 2856, Laird), with every member of the Assembly Special Committee on State Mandates serving as a coauthor. (The special committee met for over a year and reviewed the mandate process in depth.) Chapter 890 authorized the commission to adopt a “reasonable reimbursement methodology” for mandates, a methodology that places greater emphasis on the use of unit costs and other approximations of local costs, rather than detailed documentation of actual local costs.
Unfortunately, although DOF and local agencies have proposed reasonable reimbursement methodologies, the commission has not adopted one. A significant obstacle to use of this approach has been the commission’s legal interpretation that it must review actual local government cost data from all claimants—a requirement that has proved impossible to meet.
Seeking to address the problems discussed above, the Governor’s budget proposes to significantly change the mandate process. It has two main features. First, it creates an alternative dispute resolution process whereby DOF and local governments (except schools and community college districts) may jointly determine if local agencies are entitled to mandate reimbursement. Under this process:
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The DOF would notify the Legislature of a joint determination and the amount to be subvened.
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The Legislature could approve the joint determination and appropriate the funds—or suspend the mandate.
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Local agencies must withdraw any related mandate test claim if the Legislature provides the proposed funding.
Second, the proposal would use simple, unit-based methodologies to reimburse mandates found under the alternative dispute process. It would also repeal the statute authorizing the commission to adopt reasonable reimbursement methodologies.
The administration’s proposal provides a good starting point for discussion. Unlike California’s civil and criminal courts, the existing mandate determination process does not provide for alternative dispute resolution or negotiated settlements. Instead, all mandate test claims follow the lengthy process shown in Figure 1. The administration’s proposal acknowledges the potential to expedite the mandate process through the development of an “out of commission” negotiated process.
The administration also acknowledges the need to adopt simpler mandate reimbursement methodologies and indicates that payment for negotiated claims would be based on unit costs and other easy to administer approaches. The administration further indicates that it will encourage the commission to adopt simpler claiming methodologies for mandates under its review, drawing upon the commission’s existing legal authority to do so. The administration specifies that its intent in proposing repeal of the reasonable reimbursement methodology statute is to eliminate a statute that has not worked as intended.
While the administration’s general approach is on target, its mandate reform proposal would benefit from legislative review and modification because it:
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Diminishes the Legislature’s Information and Policy Options Regarding Mandates. Under current law, the Legislature receives a legal decision and proposed methodology regarding each mandate (box 10) and may direct the commission to reconsider these documents if it believes the commission did not consider important information. The Legislature also may modify the reimbursement methodology and/or reduce funding for a mandate, as long as its actions do not interfere with local government’s constitutional right to reimbursement. Under the administration’s proposal, in contrast, the Legislature’s role is reduced to reviewing the agreement negotiated between the administration and local governments—and accepting or rejecting it.
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Does Not Acknowledge the Legal Alternatives Available to Local Governments That Disagree With a Proposed Settlement. The administration’s proposal appears to assume that a mandate settlement, negotiated between DOF and some local governments, would be the sole form of mandate reimbursement available to local governments. Given that the California Constitution entitles local governments to reimbursement of their mandated costs, we think it is likely that the courts would allow local governments that are not satisfied with the funding provided under this negotiated settlement to file court actions for additional reimbursement.
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Expedites and Simplifies Few Mandates. The administration indicates that it wishes to focus its efforts on those claims that are subject to the annual mandate payment requirement of Proposition 1A, approved by the voters in November 2004. This measure provided exceptions for mandates affecting educational agencies and pertaining to employee rights. Such an approach greatly reduces the potential effectiveness of the administration’s proposal. Specifically, we note that 55 of the 86 mandate test claims pending before the commission are from educational agencies and 5 others relate to employee rights, both exempt from Proposition 1A’s annual payment requirement. Thus, less than a third of these 86 test claims potentially could be expedited under the administration’s proposal.
To address these concerns, we outline below a three-part mandate reform package that is similar to the administration’s proposal, but (1) maintains the Legislature’s policy control regarding mandates, (2) acknowledges the rights of local governments that disagree with the negotiated settlement, and (3) strives to expedite and simplify many mandate claims.
Building on the Governor’s proposal, we offer a reform package to expedite and simplify the mandate determination process without altering local rights or state responsibilities under the Constitution’s mandate reimbursement requirement. Given the variation in local government mandates, no single change would improve the process for all claims. Accordingly, our reform package includes three elements that we recommend the Legislature enact as optional alternatives to the existing process:
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Amend the Existing Reasonable Reimbursement Methodology Statute. Our proposal clarifies the type of easy-to-administer reimbursement methodology that the Legislature envisioned when it enacted this statute. While we would encourage the commission to use this approach to the greatest extent possible, the commission could adopt Ps&Gs using the existing approach (documented actual costs) if it were appropriate for a specific claim.
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Modify the Existing Mandate Process to Allow Reimbursement Methodologies and Estimates of Statewide Costs to Be Developed Through State-local Negotiations, With Minimal Commission Oversight. This option would replace the existing adversarial process (shown in boxes 4, 5, 7, 8, and 9) with a single negotiated step, expediting the existing process by at least a year. Because the negotiated Ps&Gs would be based on the reasonable reimbursement methodology approach described above, this negotiated process also simplifies the claiming process.
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Create an Alternative Dispute Resolution Process That Bypasses the Commission Process Entirely. This alternative would resolve mandate claims in about a year, thus offering the greatest potential for expediting the mandate process. While this alternative probably would be used for only a small number of claims (where there is a wide agreement between local governments and the administration), any reduction in the number of claims would improve the commission’s processing time for other claims.
We discuss these three elements in more detail below.
Given the difficulties parties have encountered trying to use the reasonable reimbursement methodology statute, we understand the administration’s frustration and its resulting proposal to repeal it. We also acknowledge that the commission’s broad underlying authority allows it to adopt unit-based and other easy-to-administer reimbursement methodologies without the reasonable reimbursement methodology statute. We observe, however, that the commission rarely has used this authority to adopt simple claiming methodologies and that the problems associated with the current claiming process are significant. We also find that there are significant policy advantages to the Legislature defining the type of easy-to-administer reimbursement methodologies that it wants to encourage. Accordingly, our proposal calls for amending the reasonable reimbursement methodology statute to facilitate its use, as opposed to repealing the statute as the administration proposes.
Based on discussions with state and local representatives, we think the reasonable reimbursement methodology statute could assume the role the Legislature intended if the Legislature made two changes. First, the commission should be authorized to consider cost information submitted by a representative sample of eligible claimants, associations of affected local governments, and other projections of local costs—rather than reviewing actual cost data from all claimants. Second, the commission should be authorized to approve a reasonable reimbursement methodology if it meets one of the two threshold criteria specified in current law (rather than both criteria). These criteria are: (1) total state mandate reimbursements are equal to total estimated local costs and (2) the methodology would fully reimburse the costs of at least 50 percent of all local claimants. While the commission should strive to adopt a methodology that satisfies both criteria, it would not be required to do so.
Amending the reasonable reimbursement methodology statute in this fashion would facilitate the commission’s ability to adopt easy-to-administer reimbursement methodologies and highlight a type of claiming methodology that would provide major benefits to state and local governments.
Specifically, greater reliance on unit-based and other simple claiming methodologies would reduce local government costs to file claims. (Due to the complexity of the current system, most local governments hire consultants who specialize in the preparation of mandate claims. Consultants sometimes deliver these claims, along with their voluminous required documentation, to the SCO’s office in forklifts.) Simplifying the claiming methodology would allow local governments to use local personnel to prepare their claims, and do so with minimal effort.
State government, in turn, also would experience considerable savings because it would take fewer state staff to process and audit mandate reimbursement claims. Under the current documentation-intensive approach to mandate claiming, it takes the SCO’s office over a month to simply file and tally annual mandate claims. Another 35 SCO staff are dedicated exclusively to auditing mandate claims. If mandate claiming were simplified, processing incoming mandate claims would be a minor task and many mandate auditors could be redirected to other high priority state program purposes.
Finally, we note that amending the reasonable reimbursement methodology statute would have an indirect, but very positive effect on the length of the mandate determination process. This is because greater use of unit-cost and other simple reimbursement methodologies would reduce the potential for disagreements in the mandate claiming process and lead to fewer audit appeals. Reducing audit appeals would free up commission time to focus on mandate determinations.
Under the current mandate determination process, it takes about two years to develop Ps&Gs and a statewide cost estimate. The reason this takes so long is because:
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Local governments and DOF (representing the state) work in an adversarial manner to develop Ps&Gs, frequently filing and responding to legal drafts of proposed Ps&Gs and seldom reviewing cost data together.
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The adopted Ps&Gs typically cannot be used to estimate statewide costs. As a result, the SCO sends the Ps&Gs (along with claiming instructions) to all eligible local government claimants to file initial claims. Estimates of statewide costs, in turn, are based on the initial claims filed by these local governments. (Ironically, although this process was developed to provide accurate statewide cost estimates, it inevitably understates costs significantly. This is because local governments seldom have the documentation readily available to complete the complex claims and do not file them immediately.)
The mandate determination process could be expedited by at least a year and claiming methodologies made more workable by establishing a process for negotiated development of Ps&Gs. This process would consolidate much of the work in boxes 4, 5, 7, 8, and 9 of Figure 1.
Under this proposal, shortly after the commission determined that a test claim was a reimbursable mandate (box 3), a local government claimant and DOF could notify the commission of their interest in developing negotiated Ps&Gs pursuant to the reasonable reimbursement methodology described above. To ensure that the process considers local costs from a broad range of local governments (not just the test claimant), the parties would be required to propose a plan to ensure that costs from a representative sample of eligible local government claimants are considered.
The local government claimant and DOF would review data together and jointly develop a reasonable reimbursement methodology. To ensure that the methodology remains useable over time, the methodology would specify a date upon which DOF and test claimant agree to reconsider it and propose amendments to the commission.
Prior to submitting the negotiated methodology to the commission, the local government test claimant and DOF would be responsible for ensuring that it is supported by a wide range of local governments. This support could be demonstrated in different ways, including securing letters of support from affected local governments, statewide associations of local governments, or a representative sample of affected local governments.
Based on the information reviewed, the local government claimant and DOF would estimate the statewide cost of the proposed reimbursement methodology. Because the methodology would be based on relatively simple factors (such as unit costs), the quality of the statewide cost estimate is likely to be significantly better than the estimates provided currently.
Under our approach, the commission’s review of the negotiated Ps&Gs and estimate of statewide cost would be largely procedural. The commission would review the parties’ proposed methodology to ensure that they took steps to consider costs from a sample of local governments and that the methodology is supported by a wide range of local governments. The commission also would review the methodology for general consistency with the underlying Statement of Decision.
This approach offers all of the state and local government saving and other benefits associated with the reasonable reimbursement methodology described in the previous section.
In addition, this negotiated settlement process would:
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Expedite the mandate determination process, trimming at least one year from the existing five-year process.
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Improve the accuracy of estimates provided to the Legislature regarding a mandate’s statewide costs, giving it greater ability to review the mandate’s costs and benefits.
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Give local governments and DOF opportunities to work together on mandate matters, potentially building trust and experience that would allow the parties to work together under the alternative dispute resolution process described below.
The third component of our mandate reform package, an alternative dispute resolution process, is the most wide sweeping. Although this process probably is suitable for only those mandate claims where there is significant consensus, use of this process would free significant time for the commission to focus on more complicated claims.
Figure 3 (next page) summarizes our proposed “fast track” process, and the responsibilities of the administration, local governments, and the Legislature. As can be seen, our alternative dispute resolution proposal is very similar to the administration’s proposal. Both allow for swift (possibly less than one year) settlement of mandate claims by bypassing the usual commission process. Both begin with negotiations between local governments and DOF—and culminate with the Legislature receiving a mandate identification proposal and simple payment methodology. Both proposals make the identified mandates subject to the payment requirements of Proposition 1A and allow them to be suspended by the Legislature pursuant to provisions of existing law. Finally, both approaches require local governments to withdraw any related mandate test claim if the Legislature provides the proposed funding.
The key differences between the administration and our alternative dispute resolution proposals pertain to our proposal’s: (1) emphasis on maintaining legislative policy control over mandates, (2) recognition of the legal recourse of local governments that do not accept the outcome of the alternative dispute resolution process, and (3) inclusion of education and employee rights mandate claims in our recommended process. Below, we discuss the issues relating to legislative policy control and options for local governments that disagree with the proposed settlement.
Under our approach, the information provided to the Legislature regarding mandates and the Legislature’s policy control over mandates would not be diminished. The Legislature would identify the mandate and specify its reimbursement methodology in statute. In future years, the Legislature could modify or repeal this determination. The Legislature also could reject a proposed mandate determination without suspending the mandate. (Under the administration’s proposal, the Legislature’s only choices are to approve a mandate proposal or suspend the mandate.)
Our approach acknowledges the legal alternatives available to local governments that disagree with the outcome of the alternative dispute resolution process. Given that this process entails intergovernmental negotiations, not judicial review, we assume that the courts would allow local governments to file separate actions with the commission (or courts) if they are not satisfied with the proposed resolution.
Our approach seeks to minimize the likelihood of this occurring and to reduce any resulting difficulties by:
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Requiring the administration and local government negotiators to (1) use information from a wide range of local governments to develop their proposed reimbursement methodologies and (2) assess and verify local support for any methodology before it is proposed to the Legislature. In addition, under our approach, the Legislature could reject a proposal and request that it be renegotiated to secure a higher level of local acceptance.
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Specifying that local governments that object to the proposed settlement may not receive the negotiated reimbursements (box 4b in Figure 3). Instead, these local governments must file a test claim with the commission and proceed through the regular mandate determination process.
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Promoting stability in the negotiated settlement by specifying that local governments that accept funding must remain under this reimbursement system and not file a test claim related to this mandate for five years. (This restriction would not apply, however, if the Legislature changed the reimbursement methodology or the funding amount so as to reduce the funding to which the local government was entitled.)
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Specifying that if a court or the commission later finds that the state’s reimbursement amounts were not sufficient, any state funding provided to local agencies pursuant to the alternative dispute resolution process counts as an offset to the state’s overall liability.
This approach offers all of the state and local government saving and other benefits of the reasonable reimbursement methodology described earlier and provides for very fast (probably less than one year) resolution of mandate claims. Overall, this approach would cut about four years from the existing mandate determination process.
While this process probably is appropriate for only a small number of claims where there is significant consensus, our review finds that even these less controversial claims currently require considerable commission time and attention. Redirecting some claims to this fast track process, therefore, would reduce the commission’s caseload and free up time for it to focus on more complicated claims.
The mandate determination process has been a mounting source of friction between state and local governments. The administration’s mandate reform proposal acknowledges the key sources of this friction—the undue complexity of the claiming methodologies and the extraordinary length of the mandate determination process—and can serve as a good starting point for legislative consideration.
In our view, the problems state and local governments are facing regarding the mandate process are amenable to legislative solutions and substantial improvements in the near term are possible. The mandate determination process could be expedited significantly and the claiming process made more manageable by (1) amending an existing provision of law that authorizes easy-to-administer claiming methodologies, (2) replacing a portion of the existing mandate determination process with state-local negotiations, and (3) establishing an alternative dispute resolution process that would bypass the commission process and provide swift resolution to mandate disputes.
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2007-08 Budget Analysis