Analysis of the 2007-08 Budget Bill: Health and Social Services

Department of Mental Health (4440)

The Department of Mental Health (DMH) directs and coordinates statewide efforts for the treatment of mental disabilities. The department’s primary responsibilities are to (1) provide for the delivery of mental health services through a state-county partnership, (2) operate five state hospitals, (3) manage state prison treatment services at the California Medical Facility at Vacaville and at Salinas Valley state Prison, and (4) administer various community programs directed at specific populations.

The state hospitals provide inpatient treatment services for mentally disabled county clients, judicially committed clients, clients civilly committed as sexually violent predators, mentally disordered offenders, and mentally disabled clients transferred from the California Department of Corrections and Rehabilitation (CDCR).

Budget Proposal Increases DMH Overall Budget. The budget proposes $4.8 billion from all fund sources for support of DMH programs in 2007-08, an increase of $653 million, or 16 percent, above the revised estimate of current-year expenditures due mainly to increases in the Mental Health Services Fund established by Proposition 63. The budget proposes about $1.9 billion in General Funds, which is a decrease of $217 million from the revised current-year budget. The year-over-year decrease of $217 million is due mainly to one-time funding proposed for 2006-07 to address a deficiency in the Early and Periodic Screening Diagnosis and Treatment (EPSDT) program.

State Hospitals Budget Proposal. The Governor’s spending plan proposes $1.2 billion ($1.1 billion General Fund) in 2007-08, an increase of $115 million ($88 million General Fund) from the adjusted 2006-07 budget. The proposed increase is due primarily to a projected increase in caseload for sexually violent predators (SVPs) due to passage at the November 2006 election of Proposition 83, known as Jessica’s law, and to comply with the Civil Rights for Institutionalized Persons Act consent decree requirements.

Community Services Budget Proposal. The Governor’s spending plan proposes $3.4 billion from all funds ($763 million General Fund) for support of the Community Services Programs, an increase of $562 million (a decrease of $264 million General Fund) compared to the revised 2006-07 budget estimate.

The community services budget plan includes the following proposals:

Community Program Issues

Early and Periodic Screening Diagnosis and Treatment Program: Estimate and Claims Processing System Need an Overhaul

The Governor’s Budget proposes $303 million General Fund for the current-year to address a prior- and current-year deficit in the Early and Periodic Screening Diagnosis and Treatment (EPSDT) program. We withhold recommendation on both the funding requested for the current year and the budget year pending receipt from the Department of Mental Health (DMH) of its revised EPSDT estimating methodology. We recommend the Legislature require the Office of State Audits and Evaluations within the Department of Finance to report at budget hearings on the findings from its review of the EPSDT estimating methodology and of DMH’s related administrative practices.


The EPSDT, a federally mandated program, requires states to provide a broad range of screening, diagnosis, and medically necessary treatment services to Medi-Cal beneficiaries under age 21, even if the treatment is optional under the state’s Medicaid plan. The requirements apply to mental health as well as physical health.

EPSDT Estimate Methodology Has Proven To Be Inaccurate. The EPSDT estimating methodology used prior to 2003-04 proved to be inaccurate. A new EPSDT estimating methodology was developed and first applied to 2003-04 expenditures at the time of the 2004 May Revision and has continued in use up to the present time. This new methodology has also proven to be inaccurate.

The DMH requested that the Office of State Audits and Evaluations (OSAE), within the Department of Finance (DOF), review the EPSDT estimating methodology as well as perform an internal control review of its fiscal systems. We are advised by DMH that it intends to present a revised estimate methodology for EPSDT in March 2007 to allow for legislative review prior to the May Revision.

DMH Awaits Federal Audit Findings. Late in 2005, DMH discovered that it had over-billed for federal matching funds for EPSDT for fiscal years 2003-04 and 2004-05. As a result, the federal Centers for Medicare and Medicaid Services (CMS) began to more closely review county reimbursement claims. In the fall of 2006, federal auditors reviewed DMH’s reconciliation of 2003-04 claims, but the department had not received a final report on the federal audit at the time this analysis was prepared.

The Governor’s Proposal

Budget Year. The Governor’s budget plan proposes $439 million General Fund for support of the EPSDT program in 2007-08, a decrease of $210 million, or 32 percent, below adjusted current-year expenditures. This year-over-year decrease in spending is mainly due to prior- and current-year deficiencies in the EPSDT program that we describe later. The budget plan proposes an increase of about $93 million General Fund for 2007-08 to provide for increased utilization, costs, and caseload.

Current-Year Deficiency. The Governor’s budget plan proposes a current-year increase of $303 million General Fund above the amount approved in the 2006-07 Budget Act. This increase consists of two parts: (1) prior-year deficiencies from 2003-04, 2004-05, and 2005-06 of about $243 million, and (2) a current-year deficiency of about $60 million. The administration attributes the prior-year deficiencies to a combination of “misestimating” of EPSDT claims and different accounting methodologies employed by DMH and the Department of Health Services in conjunction with a technical fund shift that occurred in 2006-07 The administration attributes the current-year deficiency of $60 million to greater-than-anticipated caseload growth. The administration has indicated that it will seek funding for these deficiencies in a supplemental appropriations bill.

The DOF sent a letter to the Joint Legislative Budget Committee (JLBC) in November notifying the JLBC of the $243 million prior-year deficiencies. The DOF sent another letter in January notifying the JLBC of the current-year deficiency of about $60 million General Fund.

JLBC’s Concerns

The JLBC sent a letter to DOF indicating several concerns with its proposal. First, the committee expressed its concern that the portion of the deficiency due to misestimating of provider claims and dating back to 2003-04 was not identified earlier by DMH and was not brought to the attention of the Legislature in a timely manner. The passage of more than two fiscal years before the existence of an ongoing problem with the EPSDT estimating methodology was identified indicates lax fiscal administration of this program.

The JLBC also indicated concern with the timing of the administration’s presentation of the new EPSDT estimating methodology. The administration had indicated that the DMH intends to present the revised estimating methodology for EPSDT at an unspecified date in March to allow for legislative input prior to the May Revision. The JLBC’s letter stressed that given the complexity of estimating annual expenditures in this program, receipt of the revised estimating methodology any later than March 1, 2007, may not allow sufficient time for legislative review. Without adequate review time, a revised estimating methodology may be adopted that does not address the causes of the misestimations that have occurred over the past three years as well as in the current year.

The JLBC’s letter also indicated that the independent review being conducted by OSAE is a positive and necessary step towards improving management of the EPSDT program. However, the review should include an assessment of, and recommendations on, how to improve the cost settlement process by which county claims are reconciled. Further, the JLBC’s letter urged that OSAE issue written findings and recommendations and share them with the Legislature.

Analyst’s Recommendation

In view of the concerns expressed by the JLBC, we withhold recommendation on both the administration’s deficiency funding request in the current year and on the budget-year request for funding for the EPSDT program. Until the administration has provided the Legislature with an updated estimating methodology, as requested by the JLBC, we do not believe the Legislature will have the information necessary to fully assess this issue. We recommend the department report at budget hearings on the potential for the prior-year EPSDT deficiency to increase due to unfavorable federal audit findings.

We further recommend that the Legislature require OSAE to report at budget hearings and testify on its review of the EPSDT estimating methodology and its review of DMH’s internal control systems.

New Sexually Violent Predator Laws Drive Increased Costs

Recent legislation, Chapter 337, Statutes of 2006 (SB 1128, Alquist), and the passage of Proposition 83, also known as Jessica’s law, will increase the Department of Mental Health (DMH) workload related to screening, evaluating and housing sexually violent predators (SVPs). We recommend that the Legislature recognize current-year savings of $6 million General Fund due to lower-than-projected SVP caseload. We also recommend the Legislature wait until more information is available before taking action to fund additional administrative and caseload costs in the budget year. We will provide an updated recommendation at the time of the May Revision.


Specified sex offenders who are completing their prison sentences are referred by CDCR to DMH for screening and evaluation to determine whether they meet the criteria as SVP. When DMH receives a referral it does the following:

Those offenders who are found to meet the criteria for a SVP, as specified in law, are referred to district attorneys (DAs). The DAs then determine whether to pursue their commitment by the courts to treatment in a state mental hospital as an SVP. If a petition for a commitment is filed, the clinical evaluators are called as witnesses at court hearings. Cases that have a petition filed, but that do not go to trial in a timely fashion may require updates of the original evaluations at the DA’s request. The amount of time it takes to complete the commitment process may vary from several weeks to more than a year depending upon the availability of a court venue and the DA’s scheduling of cases. While these court proceedings are pending, offenders who have not completed their prison sentences continue to be held in prison. However, if an offender’s prison sentence has been completed, he or she may be held either in county custody or in a state mental hospital.

Chapter 337, Statutes of 2006 (SB 1128, Alquist), and Proposition 83, Jessica’s Law. Chapter 337 was approved by the Legislature and signed by the Governor in September 2006. Chapter 337 made changes in law that generally increase criminal penalties for sex offenses and strengthen state oversight of sex offenders. For example, Chapter 337 requires that SVPs be committed by the court to a state mental hospital for an undetermined period of time rather than the renewable two-year commitment provided for under previous law. Chapter 337 also requires that every person required to register as a sex offender be subject to assessment using the State-Authorized Risk Assessment Tool for Sex Offenders (SARATSO) a tool for predicting the risk of sex offender recidivism.

Proposition 83, also known as Jessica’s Law was approved by the voters in the November 2006 statewide election. This measure increases penalties for violent and habitual sex offenders and expands the definition of an SVP. The measure generally makes more sex offenders eligible for an SVP commitment by (1) reducing from two to one the number of prior victims of sexually violent offenses that qualify an offender for an SVP commitment and (2) making additional prior offenses “countable” for purposes of an SVP commitment.

State Hospitals. State mental hospitals hold sex offenders who have been committed as SVPs. State mental hospitals also hold some sex offenders who have completed their prison sentences, but are still undergoing SVP evaluations for commitment proceedings. As of January 2007 the total SVP caseload was 635 with 234 patients in Atascadero, 400 patients in Coalinga and 1 in Patton. We note that both Atascadero and Coalinga state hospitals have experienced difficulties in recruiting and hiring qualified staff. At the time this analysis was prepared, Atascadero was not accepting additional patients mostly due to staffing shortages. Although Coalinga was built with a bed capacity for 1,500 SVPs, it currently houses about 450 patients (about 400 SVPs and about 50 non-SVP patients). The inability to staff the facility due mostly to its remote location, limits the number of SVPs that can be placed there.

Governor’s Budget Proposal

As shown in Figure 1, the Governor’s budget plan makes several requests related to the implementation of both Chapter 337 and Proposition 83. These proposals include:


Figure 1

Governor’s Budget Proposals for
Sexually Violent Predator Programs

(In Millions)

General Fund
















Analyst’s Concerns

Long-Term SVP Caseload Trend Still Uncertain. At the time this analysis was prepared, Chapter 337 had been in effect for about four months and Proposition 83 had been in effect for about three months. As a result, there is little historical data available upon which to base an estimate of future ongoing costs. Thus, the administration had minimal data to work with when it prepared its budget plan and had to make several assumptions in order to estimate the costs of implementing Chapter 337 and Proposition 83.

DMH Administrative Costs. As a result of Chapter 337 and Proposition 83, CDCR estimates that its number of sex offender referrals to DMH for evaluation determination as SVPs will increase from about 500 per year to about 5,500 in 2007-08. This estimate was based on an initial surge of referrals from CDCR to DMH immediately after the passage of Proposition 83. Based on discussions with the administration, DMH and CDCR are still developing protocols to ensure the efficient referral of sex offenders to DMH.

Our analysis indicates that CDCR will likely refer significantly more sex offenders to DMH than it did prior to the passage of Chapter 337 and Proposition 83. Therefore some additional staff will be necessary to address the increase in sex offender referrals. However, given the recent passage of Proposition 83, the exact magnitude of the referrals and associated staff requirements is unknown.

DMH Evaluation Costs. Prior to implementation of Chapter 337 and Proposition 83, generally between 50 percent to 60 percent of referrals to DMH went on to receive full evaluations. It is uncertain the average percent of referrals that will go on to receive full evaluations under the new laws. The most recent data indicate that about 33 percent of the CDCR referrals warranted full evaluations since the new laws went into effect. This is significantly lower than the 50 percent to 60 percent that generally received evaluations under the prior standard.

Caseload Costs. Before Chapter 337 and Proposition 83, on average CDCR referred about 500 inmates per year to DMH for screening and on average about 40 of these inmates, or 8 percent, ultimately were given civil commitments to a state hospital as an SVP. The budget plan assumes that the same percentage will receive commitments under the new laws. However, as discussed above, Proposition 83 reduced from two to one the number of prior victims of sexually violent offenses that qualify an offender for an SVP commitment. Therefore, it will likely be more difficult for DAs to prove a pattern of predatory behavior and thus obtain an SVP commitment for sex offenders with only one victim compared with two or more victims. As a result, a potentially significantly lower percent of the CDCR referrals to DMH may ultimately result in an SVP commitment under the new one-victim standard.

The budget proposal assumes 271 new SVP commitments in 2006-07. The administration has indicated that this is a “worst-case scenario” and that this estimate was based upon preliminary data. Our analysis indicates that the number of new current-year SVP commitments resulting from Chapter 337 and Proposition 83 is likely to be substantially lower than assumed by the administration. In our view the administration did not adequately take into account that SVP caseload growth would likely increase at a gradual rate, if at all, during the first few months after implementation of Chapter 337 and Proposition 83. This gradual rate of increase is due to the amount of time it takes for DMH to complete SVP evaluations, for DAs to prepare their cases and for commitment proceedings to be heard by the courts.

Analyst’s Recommendation

We withhold recommendation on the administration’s request for additional funds and positions for administrative costs as it is not certain at this time what the level of ongoing workload will be as a result of the new laws. Similarly, we withhold recommendation on the appropriate level of funding for evaluation costs to implement Chapter 337 and Proposition 83. We will update our recommendation at the time of the May Revision.

We recommend the Legislature recognize current-year savings of $6 million General Fund to take into account that the SVP caseload will initially increase gradually due to the amount of time it takes to have a sex offender committed as an SVP. We withhold recommendation on the Governor’s 2007-08 request pending further data. We believe an additional three months of data will allow a more accurate assessment of the appropriate level of state support for SVP commitments in 2007-08. We will update our caseload recommendation for both the current year and the budget year at the time of the May Revision.

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