DADP—Proposed New Drug Program Special Fund Unnecessary

Beginning July 1, 2009, the Governor proposes to fund some drug and alcohol treatment services in three state departments using the additional revenues from a proposed increase in the excise tax on alcoholic beverages. The revenues from this so–called nickel–a–drink increase in the alcohol excise tax would generate an estimated $585 million annually in new revenues in the budget year.

Under the administration budget plan, these new revenues would be deposited into the General Fund and then would subsequently be transferred into a newly created special fund called DAPTF for the support of alcohol and drug programs. As a result, the new alcohol tax revenues would be considered proceeds of taxes for the purposes of Proposition 98 and could affect the minimum funding requirement for K–14 education. The budget plan assumes that $312 million of the new revenues generated from the tax increase in 2009–10 would support programs for drug and alcohol treatment in DADP, $54 million for such a program in DSS programs, and $220 million for such programs operated by CDCR.

DADP Spending. The DAPTF funds would support DADP’s major programs that are now supported from the General Fund including the Drug Medi–Cal Program, various discretionary state grants for county drug and alcohol treatment programs, drug courts, and Proposition 36 programs. As shown in Figure 11, which summarizes the Governor’s spending plan for DADP, the year–over–year spending level for the Drug Medi–Cal Program is estimated to increase in 2009–10 due to caseload, cost, and utilization growth, while the funding for DADP’s other programs would generally remain flat.

Administration’s Proposal for Special Fund Has No Fiscal Benefit. Under the proposed statutory language we have reviewed funding for the DADP programs shown in Figure 11 is contingent upon approval of the Governor’s proposed tax increase. If the Legislature does not approve the tax increase, the Legislature would need to continue funding the cost of the DADP, DSS, and CDCR programs from the General Fund or find other funding sources. However, the state could face other serious fiscal consequences for DADP’s drug and alcohol programs if it did not continue to fund the programs in that department from the General Fund. That is because the DADP funds count towards the federal maintenance–of–effort (MOE) requirements for a federal program, the Substance Abuse Prevention and Treatment (SAPT) block grant. The state currently receives about $260.1 million annually under the federal SAPT block grant program that it shares with county drug and alcohol systems. If state support for DADP programs fell below about the $308 million level, the state would fail to meet federal MOE requirements. As such, the state would be at risk of losing one federal dollar of SAPT block grant funding for every state dollar spent below the required MOE level.

Proposal Limits Legislature’s Ability to Set Fiscal Priorities. We are concerned that the Governor’s proposal limits the Legislature’s ability to set fiscal priorities by dedicating the General Fund revenues from the proposed tax increase to a specific fund for a specific purpose. Our analysis of the available information regarding the proposal indicates that there would be no fiscal benefit from creating the DAPTF. For example, under the administration plan, the new tax revenues would “count” for purposes of determining the Proposition 98 funding guarantee for schools and community colleges. Dedicating the revenues to spending on alcohol and drug programs would limit the Legislature’s flexibility for no apparent purpose.

Moreover, this change adds needless technical complexity to budgeting for DADP, DSS, and CDCR in the future. As the cost of these three programs changed, up or down, over time, the administration and the Legislature would have to determine how these changes were aligned with the additional increment of alcohol excise tax revenues. Moreover, nothing in the proposed statute creating the special fund would require the departments to limit program spending over time to the amounts available from the alcohol tax increase. If additional funding were needed for the support of these programs, the departments could seek additional General Fund resources in future budgets to supplement their DAPTF allocations—monies that, in any event, were appropriations from the General Fund in the first place.

Missed Opportunity for Program Improvements. The administration’s proposal does not propose any programmatic improvements in the drug and alcohol programs that would receive the dedicated revenues from the alcohol tax increase. The proposal simply amounts to a funding shift. But other structural and financing changes are possible that could improve the management and outcomes of the state’s drug and alcohol treatment programs.

In our 2004 report entitled “Remodeling” the Drug Medi–Cal Program, we recommended dedicated state funding for these programs through a block grant or a realignment of state revenues and program responsibilities to counties. Under our approach, the state would abolish burdensome state laws and regulations to allow for more county flexibility in service delivery. We believe that our proposed approach would encourage a number of programmatic improvements, including reducing overall administrative costs for the programs and allowing counties to focus these resources on their highest priority drug and alcohol problems in their communities.

Reject Governor’s Special Fund Proposal But Consider a Realignment Approach

For the reasons described above, we recommend that the Legislature reject the Governor’s proposal to dedicate revenues from the excise tax increase on alcohol to drug and alcohol programs in DADP, DSS, and CDCR. The creation of the DAPTF is unnecessary. We also recommend that the Legislature consider funding alcohol and drug treatment programs with a realignment approach or state block grant that would give counties more administrative flexibility and control over programs and encourage programmatic improvements in drug and alcohol treatment services. As mentioned earlier, we believe the Governor’s proposal has missed an opportunity for improvements that could create program efficiencies, improve quality of care, and generate savings for the state.