Addressing Issues to Promote Its Long-Term Success

Executive Summary

As part of the 2011–12 budget plan, the Legislature enacted a major shift—or “realignment”—of state program responsibilities and revenues to local governments. In total, the realignment plan provides $6.3 billion to local governments (primarily counties) to fund various criminal justice, mental health, and social services programs in 2011–12, and ongoing funds for these programs annually thereafter.

The realignment plan adopted by the Legislature is similar to the one proposed by the Governor, as modified in the May Revision, with respect to the programs shifted and the amount of revenue provided to local governments. However, the adopted realignment package differs in two important respects from the administration’s proposal. First, the Legislature’s plan relies on a shift of existing state and local tax revenues rather than the extension of expiring tax rates as proposed by the Governor. Second, the adopted budget legislation does not include the Governor’s proposal for a constitutional amendment to, among other things, make the funding allocations to local governments permanent and protect the state from potential mandate claims.

In this report, we explain the construction and mechanics of 2011 realignment, as well as identify a few pressing implementation issues that we recommend that the Legislature address before the end of the current legislative session. This report also highlights a series of more extensive program and fiscal issues that we recommend the Legislature address to increase the likelihood of the 2011 realignment plan being a long–term success. (These are summarized in the nearby box.) The specific legislative strategies necessary to address these more extensive issues will be complicated to design because of the number and types of programs being realigned, as well as entail difficult tradeoffs. Therefore, we do not suggest that the Legislature tackle these issues this year. Instead, we recommend that the Legislature use the time remaining during this legislative session to create a fall policy development process. Specifically, we recommend that the Legislature create a forum whereby state, legislative, and local stakeholders consider options and develop policy recommendations for the Legislature to consider when it reconvenes in early 2012.

LAO Recommendations to Promote the Long–Term Success of Realignment Develop local funding allocation formulas with eye towards the long–term. Simplify the structure of the realignment accounts to provide financial flexibility. Enact statutory changes to give counties appropriate program flexibility. Make sure that local fiscal incentives are aligned with statewide goals. Promote local accountability. Clearly define the state’s role and funding responsibilities. Avoid state–reimbursable mandates.

Development of the Realignment Package

What Is Realignment? Several times over the last 20 years, the state has achieved significant policy improvements by reviewing state and local government programs and realigning responsibilities to a level of government more likely to achieve good outcomes. In 1991, the Legislature enacted a major realignment of health and social services programs and funding responsibilities. This 1991 realignment plan is ongoing and, in 2011–12, counties will receive over $4 billion to implement the programs that previously were state funding responsibilities. During years of fiscal difficulty, realignment proposals by the Legislature or administration often have included additional revenues earmarked for the transferred programs. In this way, realignment proposals have been viewed, in part, as budget solutions. (The nearby box provides more information about the 1991 realignment.)

Comparing 2011 and 1991 Realignments The realignment package adopted by the Legislature in 2011 is by no means the first significant realignment of state and local programs. For example, the Legislature has previously realigned responsibilities for juvenile offender populations, trial courts, and mental health services. The previous realignment most akin to the 2011 realignment in size and scope is the one implemented in 1991. As is the case with the 2011 realignment, the 1991 realignment was enacted, in part, because of a multibillion–dollar state fiscal shortfall. The 1991 realignment provided counties with dedicated tax revenues to fund the realignment of various mental health, social services, and health programs, including altering cost–sharing ratios. In both realignments, statutes created a complicated series of accounts and subaccounts into which revenues were deposited. Similarly, both realignment plans deposit their revenues into a dedicated local fund and do not count them towards the Proposition 98 minimum guarantee. While similar, the 2011 and 1991 realignments have notable differences. By including criminal justice programs, the 2011 realignment includes a broader scope of government programs. The 1991 realignment was also smaller in size, realigning about $2 billion of program responsibility (about $4 billion in today’s dollars). In 1991, the state provided counties with new tax revenues—increases of a half–cent sales tax and a change in the depreciation schedule for vehicles resulting in an estimated 24.33 percent increase the vehicle license fee—rather than shifting existing state revenues. Because of their similarities, we believe that the 1991 realignment can provide some valuable lessons for the state and counties as they implement 2011 realignment. For example, in our 2001 publication Realignment Revisited: An Evaluation of the 1991 Experiment In State–County Relations, we found that realignment had been largely successful because of its reliable funding stream for counties, increased flexibility, and incentives for innovation and less costly approaches to providing services. However, we also found that some aspects of the 1991 realignment—lack of data and a complicated system of allocation formulas, in particular—reduced the overall effectiveness of the realignment.

Realignment Proposed by Governor. In January, the Governor proposed a state–local program realignment as part of his 2011–12 budget. This initial proposal assumed a total of $5.9 billion in revenue from extending the 1–cent increase in the state sales tax and 0.5 percent increase in the vehicle license fee (VLF) rates. Both of these rates had been increased temporarily as part of the 2009–10 budget package and were set to expire July 1, 2011. The Governor’s proposal also included the one–time use of $861 million from the Mental Health Services Fund. The January budget proposal assumed that, effective July 1, 2011, the total of $6.8 billion in revenues would fund realignment of various public safety, mental health, health, and social services programs from state to local (primarily county) responsibility. The Governor’s original proposal also assumed passage of a constitutional amendment which, if ratified by voters, would have extended the tax increases for five years and dedicated the revenue to local governments for realignment, as well as provided the state with protection from mandate claims made by local governments for costs associated with the realigned programs. (As we discuss later in this report, the California Constitution generally requires the state to reimburse local governments if it “mandates” that they provide a new program or a higher level of service.)

Realignment Package Modified Several Times. The administration modified its original realignment proposal in February and as part of the May Revision. These modifications included technical changes to the administration’s estimates of program costs, as well as changes to the programs included in realignment. Figure 1 shows some of the major elements of the realignment package at various stages.

Final Realignment Package Approved in Two Phases. In March, the Legislature passed two bills related to the realignment of certain corrections and mental health programs and funding. However, the Legislature did not approve the proposed constitutional amendment that provided funding for the realignment package. In June, the Legislature passed Chapter 40, Statutes of 2011 (AB 118, Committee on Budget) and Chapter 35, Statutes of 2011 (SB 89, Committee on Budget and Fiscal Review), which provided the revenues for realignment and created the account structure to allocate the realignment resources. At that time, the Legislature also approved several other budget trailer bills related to realignment. Figure 2 lists the budget trailer bills related to realignment.

Architecture of 2011 Realignment

The 2011 realignment plan shifts the responsibility and funding for a series of major programs from the state to local level. The plan allocates the realignment funding to local governments pursuant to a complicated series of accounts and subaccounts. In this section, we describe the fiscal architecture of 2011 realignment, including the funds provided to local governments, the division of these funds among programs, and the plan’s fiscal effect on the state.

Realigned Programs

The realignment package includes $6.3 billion in 2011–12 for court security, adult offenders and parolees, public safety grants, mental health services, substance abuse treatment, child welfare programs, adult protective services, and California Work Opportunity and Responsibility to Kids (CalWORKs). Except for the funding for the realignment of adult offender and parolee populations, which goes into effect October 1, all programs were realigned effective July 1. Figure 3 displays the amounts dedicated to each of the realigned programs in 2011–12. (We provide detailed descriptions of the realigned programs and their realignment funding allocations in the Appendix of this report.)

Realignment Revenues

Unlike the Governor’s realignment proposal, the realignment package adopted by the Legislature does not extend the temporary sales and VLF tax rate increases that expired at the end of 2010–11. Instead, the budget reallocates $5.6 billion of state sales tax and state and local VLF revenues for purposes of realignment in 2011–12. Specifically, the Legislature approved the diversion of 1.0625 cents of the state’s sales tax rate to counties. This diversion is projected to generate $5.1 billion for realignment in 2011–12, growing to $6.4 billion in 2014–15 (see Figure 4). In addition, the realignment plan redirects an estimated $453 million from the base 0.65 percent VLF rate for local law enforcement grant programs. Under prior law, these VLF revenues were allocated to the Department of Motor Vehicles (DMV) ($300 million) for administrative purposes and to cities and Orange County ($153 million) for general purposes. The budget increases the motor vehicle registration fee by $12 per automobile to offset the lost revenue to DMV. The budget also shifts $763 million on a one–time basis in 2011–12 from the Mental Health Services Fund (established by Proposition 63 in November 2004) for support of the Early and Periodic Screening, Diagnosis, and Treatment Program and Mental Health Managed Care program.

Account Structure for 2011 Realignment

The revenues provided for realignment are deposited into a new fund, the Local Revenue Fund 2011. The budget package creates eight separate accounts and 12 subaccounts within this fund to pay for the realigned programs. One of the accounts, the Mental Health Account, is somewhat different than the other accounts because its funds support the CalWORKs program and interact with accounts created under the 1991 realignment plan. Another account created in the Local Revenue Fund 2011 is the Reserve Account, where revenues generated in excess of the amounts projected for some accounts are deposited. The budget legislation requires revenue deposited into the Reserve Account to be used to reimburse counties for programs paid from the Foster Care, Drug Medi–Cal, and Adoption Assistance Program Subaccounts. In addition, for 2011–12, the budget assumes that about $1.2 billion of the funds deposited into the Local Revenue Fund 2011 will be used to reimburse the state for costs associated with incarcerating and supervising inmates and parolees who were convicted prior to the implementation of realignment and, therefore, will not be realigned to local responsibility. Figure 5 illustrates the Local Revenue Fund 2011 and its accounts and subaccounts.

Allocation of Realignment Funds

The budget legislation establishes various formulas to determine how much revenue is deposited into each account and subaccount. Several of these accounts and subaccounts have annual caps on how much funding they can receive. The budget package limits the use of funds deposited into each account and subaccount to the specific programmatic purpose of the account or subaccount. The budget does not contain any provisions allowing local governments flexibility to shift funds among these programs. The budget legislation also contains some formulas and general direction to determine how the funding would be allocated among local governments. The budget legislation does not specify program allocations among the various accounts and subaccounts, or among counties, for 2012–13 and beyond (except for the CalWORKs/mental health transfer, which appears to be ongoing). It does, however, include legislative intent language specifying that (1) new allocation formulas be developed for 2012–13 and subsequent fiscal years, and (2) sufficient protections be put in place to provide ongoing funding and mandate protection for the state and local governments. Despite uncertainty surrounding these ongoing allocations, the revenues deposited into the Local Revenue Fund 2011 for purposes of realignment are ongoing.

State Fiscal Effect of Realignment

Most of State Fiscal Benefit Stems From Proposition 98 Savings. The budget assumes that, by depositing the sales tax revenue into a special fund for use by local governments for realignment, these funds are not available for the Legislature to spend for education purposes and thus are not counted as state revenue for purposes of calculating the Proposition 98 minimum funding guarantee. As discussed more fully in the education section of our 2011–12 California Spending Plan report, this action reduced the Proposition 98 minimum funding guarantee by $2.1 billion. Budget trailer bill language specifies, however, that the exclusion of these revenues is contingent upon voter approval of a ballot measure providing additional funding for K–12 school districts and community colleges. If no ballot measure is adopted satisfying these requirements, the funds would not be excluded from the Proposition 98 guarantee moving forward and the state would need to repay K–14 education for the loss of $2.1 billion for the 2011–12 year over a five–year period. The assumption that the realignment revenues are excluded from the calculation of the Proposition 98 minimum funding guarantee is subject to some dispute. We note, for example, that the Attorney General’s office has been requested to issue an opinion regarding this matter.

Additional State General Fund Savings. In addition to the Proposition 98 savings, the realignment plan achieves state General Fund savings in two other ways. First, using VLF revenue to fund local law enforcement grant programs reduces the state’s costs for these programs by $453 million. Second, the budget assumes about $86 million in net savings to the state associated with realignment of lower–level offenders and parolees. Offsetting these savings, however, is $34 million provided in the budget to support local government hiring, training, and other transition costs associated with implementing this corrections realignment in 2011–12. In the longer term, however, the realignment of inmate and parolee populations has the potential to significantly reduce cost pressures on the state’s prison system, potentially including costs for construction of new prison facilities, as well as achieve a large share of the state inmate population reduction ordered by the federal court.

Pressing Implementation Issues to Address in 2011

The 2011 realignment legislation is complex and wide sweeping. To ensure that its changes work as intended, there are a few pressing issues that we believe the Legislature should address before the end of the current legislative session, as well as a series of more extensive issues that the Legislature should consider addressing in early 2012. We discuss the more pressing implementation issues in this section.

Allocation of Revenues if Total Funds Are Less Than Expected

While we believe that the administration’s realignment revenue estimates are reasonable, they are estimates subject to change based on various economic factors. Especially given the weakness in the current economy, it would be wise to ensure that revenues are to be allocated in accordance with legislative priorities in the event that revenues do not reach expectations. Based on our reading of the realignment legislation, the first accounts to be funded are the Mental Health Account (which primarily funds CalWORKs) and the Local Law Enforcement Services Account (LLESA). If revenues are lower than anticipated by the end of the year, each program except CalWORKs and the local public safety grants funded by the LLESA will receive its proportionate share of the shortfall based on its share of the Local Revenue Fund 2011 revenues. It is unclear why CalWORKs and the local public safety grants were chosen to be protected in the event that revenues are low. Alternative approaches the Legislature may wish to consider are prorating reductions across all programs, prioritizing program funding differently (for example, by prioritizing entitlement programs), or allowing counties some flexibility to shift money among accounts to address shortfalls based on local priorities.

Prioritization of Programs if Total Revenues Are Higher Than Expected

As described earlier in this report, revenues in excess of those projected are generally deposited into the Reserve Account, which is to be used to fund entitlement programs in the Foster Care, Adoptions Assistance Program, and Drug Medi–Cal Subaccounts. However, it appears that excess revenues would go to these entitlement programs even if those revenues exceeded the costs to provide the programs. It is also worth noting that if revenues are high these entitlement program subaccounts will receive additional funding in two ways, both the transfers from the Reserve Account, as well as getting each subaccount’s proportionate share of excess revenues deposited into the Local Revenue Fund 2011. The Legislature may want to consider whether there is another way it would want to prioritize additional revenues.

Minimizing Mandate Risk

Under the California’s Constitution, the state generally must reimburse local governments when it mandates that they provide a new program, a higher level of service, or an increased share of cost for a state–local program. Government Code Section 17556 specifies, however, that the state is not required to provide mandate reimbursements if the state provides local agencies with additional revenues “specifically intended to fund the costs of the state mandate in an amount sufficient to fund the cost of the state mandate.”

Over the years, the Commission on State Mandates (CSM) has interpreted Section 17556 in a way that often does not give the state credit when the state provides resources to local agencies without directly linking the funds to an identified mandate. In addition, the voters approved Proposition 22 in 2010, amending the Constitution to prohibit the state from using VLF revenues for mandates.

Given the many shifts in program responsibilities and cost shares in the 2011 realignment package, as well as its reliance on VLF (including VLF revenues shifted from the 1991 realignment plan), the CSM could find that some provisions in the 2011 realignment package constitute state reimbursable mandates. If so, the state would be required to provide additional funds to local governments to reimburse them for these costs.

While addressing this fiscal risk is a complicated task, the Legislature could take some actions to minimize it in the short run. Specifically, we recommend that the Legislature specify that the first use of any 2011 realignment account is to offset any mandated costs imposed on local agencies related to the 2011 realignment legislation. Later in this report, we recommend that the Legislature consider additional actions to minimize its ongoing fiscal risks associated with mandates.

Contracting Back With State for Incarceration of Adult Offenders

Under the realignment plan, counties could contract back with the state to house in state prisons certain adult offenders who otherwise would be realigned to county responsibility. However, at the time of this analysis, how such a process would work remains unclear. While we understand that California Department of Corrections and Rehabilitation (CDCR) is currently working on the administrative details, legislative oversight of the process will be important, particularly given that the state is under a federal court order to reduce prison overcrowding. Given this, the Legislature may want to place an overall cap on the number of beds that counties can purchase in state prison facilities (not including fire camps, which generally are not part of the federal court order). In addition, the Legislature may want to specify in statute the rate prisons are to charge counties for use of state prison beds to ensure that the state receives reasonable compensation for these additional housing and inmate medical costs.

Existing Community Corrections Performance Incentive Grant Program

In accordance with Chapter 608, Statutes of 2010 (SB 678, Leno), counties currently receive funding based on their success in reducing the percentage of probationers sent to state prison compared to a county–specific baseline percentage of probationers they sent to prison between 2006 and 2008. Our analysis indicates that the realignment of certain adult offenders from the state to counties will “artificially” reduce the future percentage of probationers that counties send to state prison, thereby unintentionally making them eligible for more Chapter 608 funding. This is because the realignment plan will (1) increase the number of individuals on probation and (2) make certain crimes ineligible for prison sentences. In order to account for these impacts, we recommend that the Legislature revise the funding formula specified in Chapter 608. For example, the Legislature could freeze the performance incentive grants at their current levels and, over the next several years, collect data to create a new baseline that reflects the impacts of realignment. While the Legislature probably does not need to correct the Chapter 608 formula before the end of this session, it may want to at least adopt language clarifying that it intends to make such changes. This is because the current formula is based on data for each calendar year, and it might be helpful to counties to provide clarity as to whether the formula is going to change for the 2011 calendar year.

Further Actions Needed to Ensure the Long–Term Success of 2011 Realignment

Major measures revamping state and local government responsibilities seldom are fully developed and enacted in a single legislative session. The package of realignment bills enacted by the Legislature earlier this year is not an exception. As acknowledged in the realignment bills themselves, the Legislature has additional work that it needs to do to develop the financial architecture of 2011 realignment, determine the appropriate level of financial and programmatic flexibility to provide counties, and create the right fiscal incentives and accountability mechanisms. Thoughtfully addressing these more extensive and complicated issues will improve the long–term success of the 2011 realignment package.

In this section, we describe our major recommendations for the Legislature to consider as it refines and develops the details of 2011 realignment (see Figure 6). In general, our recommendations do not provide specific solutions to the issues raised. For example, we do not specify exactly what percentage of realignment funds should go to each county for each realigned program. The number, differences, and complexities of the programs included in 2011 realignment make such specific recommendations difficult. Instead, our recommendations should be read as guideposts for the Legislature as it continues to debate different options. (In fact, at the end of this report, we suggest that the Legislature develop a process for developing the long–term implementation details that is inclusive of the many relevant state, legislative, and local stakeholders.) In order to be as useful as possible, we first describe each of our recommendations and then provide specific examples as to how they apply to 2011 realignment.

Develop Local Funding Allocation Formulas With Eye Towards Long Term

The Legislature will need to determine how revenues will be allocated among counties for each realigned program for 2012–13 and beyond. For 2011–12, the Legislature chose to base county allocations largely upon historical funding allocations. This probably makes sense for the current year, a year of transition. However, over the longer term, it is critical for the success of these programs that allocation formulas not be based solely on historical allocations. County financial needs for each program are going to change over time based on changes in county population, caseloads, demographics, wealth, cost of living, and other factors. In the future, county allocations should be based on formulas that are responsive to the specific factors that affect the funding needs of each program. If, on the other hand, allocation formulas are created that simply institutionalize the funding status quo, some counties eventually will become overfunded and others underfunded relative to their comparative needs and with no rational policy basis to justify the disparities. If this were allowed to occur, underfunded counties might need to reduce services, seek additional funding from the state, and/or divert funding from other programs. Further, overfunded counties would have less fiscal incentives to control costs and run their programs efficiently. The Legislature and stakeholders may have concerns about adopting new allocation formulas that are significantly different than historical funding patterns. For this reason, it may make sense to phase in any changes so as not to have an adverse effect on any county in any single year.

In addition, the Legislature needs to consider how best to allocate the growth in realignment revenues over time, particularly if there are periods where revenue growth exceed program needs. For example, should funding for certain programs be prioritized, or should counties be given flexibility to allocate increased revenues based on local needs and priorities? Should revenue growth be prioritized to programs that have received baseline cuts in recent years, or where the Legislature believes there to be inadequate base funding levels? Should some of the revenue growth be used as an “incentive pot” to support innovative approaches?

In considering this issue, the Legislature should strive to avoid some of the allocation mistakes made in the realignment of mental health and other programs in 1991. In that realignment, allocation formulas were created based largely on historical funding patterns and reflected a combination of each county’s historical spending dating from the mid–1970s and caseloads and populations in 1991. While a share of the growth in the 1991 realignment revenues was dedicated to addressing underlying funding inequities among counties, the inequities were never resolved. The realignment legislation created equity subaccounts designed to provide a share of the revenue growth to “under–equity” counties based on each county’s population and poverty population. In 1994–95, there were 22 counties that fit the statutory definition of being under–equity counties. While the equity shortfall for these counties was reduced, there were still 22 under–equity counties in 2000–01, the final year of these equity payments.

2011 Realignment Examples: Local Corrections and Child Welfare. In determining future allocations for the newly realigned local corrections populations (from state prisons and parole supervision to local jails and community supervision), we recommend that the Legislature consider specifying an allocation formula in statute that is sensitive to future caseload changes at the county level, rather than one that essentially locks in fixed percentages of funding for each county. For example, the Legislature could consider using a formula that weighs heavily factors such as the number of adults ages 18 through 35. This formula could also include other factors such as the number adult felony convictions in each county for the crimes specified in the realignment plan. We believe these types of factors would be more responsive to changes in the populations, demographics, and caseloads that are likely to vary by county and change over time.

As another example, the base funding a county currently receives for Child Welfare Services (CWS) is based on social worker caseload standards established in 1984. There is wide variation in average funding allocations per child among counties. The 2011 realignment legislation calls for CWS funding in 2011–12 to be distributed among counties based on the existing allocation structure. Rather than tying future CWS funding to a county’s historical spending, the Legislature could develop a funding allocation based on broader measures, including factors such as the population of children in a county.

Simplify the Structure of the Realignment Accounts/Subaccounts To Provide Financial Flexibility

As discussed earlier, the 2011–12 budget package requires specific amounts of revenues be deposited into 20 different accounts and subaccounts, with additional allocation formulas dictating the amounts going to a dozen local law enforcement programs. The Legislature should consider simplifying this account structure for 2012–13 and beyond, as well as provide each county with some flexibility to shift funding designated for one program to another program. The current account structure is unnecessarily complicated and could be simplified. This simplification should be achievable without directly affecting the provision of programs. Simplifying the accounting structure for 2011 realignment has the potential to reduce the amount of administrative overhead counties (and the state, potentially) need to provide financial accounting and oversight.

Simplifying the account structure could involve the merger of some accounts and subaccounts. Merging accounts—or, alternatively, providing each county with some level of authority to transfer money among its programs—would permit counties greater flexibility in how they use the revenues provided for 2011 realignment. This could promote greater innovation, as well as allow counties to better respond to local needs and preferences (also discussed below). The specific amount of flexibility would depend on the final account structure created but could be increased or limited by statute. For example, the Legislature could allow counties to shift no more than a specified percentage of funding from one program to others. This may make sense for programs for which the Legislature has significant concerns about county commitment to providing a minimum level of services. In general, however, we recommend the Legislature limit the number of constraints it imposes on county ability to move funding among programs. The Legislature has given counties responsibility for providing these programs. It is reasonable, therefore, for the Legislature to also give counties the financial authority and flexibility to manage this responsibility.

Fiscal flexibility can be particularly important for counties over the long term. In years in which revenues are down or grow more slowly than anticipated, fiscal flexibility allows counties some ability to respond and focus resources on their highest priorities. Fiscal flexibility can also help counties respond to unique factors that drive up program costs in their communities or offer unusual opportunities for cost savings.

2011 Realignment Example: Juvenile Justice Grants. Under the realignment plan, county probation departments and other local agencies receive funding from two different accounts—the Local Law Enforcement Services Account and the Juvenile Justice Account—for five juvenile justice grant programs (shown in Figure 7). These programs are the Youthful Offender Block Grant, the Juvenile Reentry Grant, Juvenile Camps and Ranches Grant, the Juvenile Probation Grant, and the Juvenile Justice and Crime Prevention Act. Specifically, local governments will receive a separate allocation in 2011–12 for each program and must use the funds for the purposes of that program as specified in statutes. Given that these grant programs have overlapping goals and provide similar services, we recommend that the Legislature consolidate the funding for these programs beginning in 2012–13. Such a change would increase local flexibility by allowing local governments to use the funds in ways that meet their unique juvenile justice needs more efficiently and effectively. In addition, reducing the number of program–specific reporting requirements would reduce paperwork and administrative burdens, freeing up resources for more supervision, treatment, and oversight activities designed to achieve improved public safety results.

Enact Statutory Changes to Give Counties Appropriate Program Flexibility

For some of the realigned programs, the Legislature will need to make some policy decisions regarding how much programmatic flexibility to give counties. The Legislature will need to decide the degree to which counties will be required to operate programs consistent with past practices versus having the authority to provide higher or lower levels of service. Generally, we recommend giving local governments flexibility to encourage innovation and allow for greater responsiveness to local needs and preferences. This flexibility will necessarily be limited where federal requirements are in place. The Legislature may also have concerns that too much flexibility could mean that certain programs are not operated at an adequate level in some counties. In those cases where a minimum level of service is a priority of the Legislature, it can establish minimum standards or requirements. However, we would caution that setting extensive minimum requirements could reduce local ability to innovate and increase the risk of local governments filing claims for reimbursement of state–mandated costs. Instead, we suggest that the state might achieve better outcomes by focusing on establishing the right fiscal incentives and accountability mechanisms (see discussions below).

Our office found that one of the successes of 1991 realignment was the amount of programmatic flexibility provided to counties for community mental health programs. This flexibility was enhanced because of the more stable stream of dedicated revenues provided to a set of programs that had previously been subject to annual state budget allocations. We found that realignment’s reliable funding stream and increased flexibility allowed counties to develop innovative and less costly approaches to treating mentally ill patients. This included reduced reliance on more expensive mental health hospitals in favor of less costly community–based outpatient and day–treatment programs. Similarly, 2011 realignment has the potential to foster greater local innovation if counties are provided programmatic flexibility. For example, there appear to be few limitations on how counties choose to manage the newly realigned lower–level offender and parolee populations. This programmatic flexibility, particularly when coupled with the dedicated revenues provided under realignment, should allow local law enforcement agencies to plan for and implement innovative long–term strategies to better manage offenders in the community based on best practices and local needs.

2011 Realignment Example: Adult Protective Services. Although current state law requires all California counties to operate an APS program, it is not a federally required program. Therefore, the Legislature has considerable flexibility in determining how to promote the state’s overall goals related to elder and dependent adult protection under realignment. For example, the Legislature could make APS a county optional program, but require that counties share information with their communities regarding the safety of elders and dependent adults in their jurisdiction. In doing so, counties would have flexibility to invest in an APS program or spend funds on enhancing other county programs serving elders and dependent adults. In granting this level of flexibility, the Legislature should consider whether it is comfortable with giving counties the ability to decide whether to have an APS program, and whether local residents would have sufficient information to ensure that the county provided needed services to the elderly and dependent adults.

Alternatively, the Legislature could require each county to continue to operate an APS program, but give it significantly more authority to structure the program in a way that works best for the individual county. For example, current law requires county APS programs to investigate allegations of abuse and neglect within certain timeframes. The Legislature could give counties authority to establish timeframes that differ from the current statutory requirements, provided the county can demonstrate that it meets certain overall standards relating to adult protective services.

Make Sure That Local Fiscal Incentives Are Aligned With Statewide Goals

One frequently cited premise of realignment is that local governments will use their greater fiscal and program authority to improve program outcomes. For this premise to be realized, however, local program funding and authority must be linked in ways that provide inherent fiscal incentives for local governments to operate successful programs. This works in two ways. First, realignment should be structured so that local governments experience fiscal benefits when they successfully and effectively operate the realigned programs. Second, the costs associated with program failures should be borne largely by local governments and not shifted to the state. Similarly, local governments should have fiscal incentives to control costs and operate realigned programs efficiently. The Legislature should strive to structure realigned programs and their funding so as to encourage success, efficiency, and innovation.

2011 Realignment Example: CalWORKs. As described in more detail in the Appendix, 2011 realignment provides counties with additional funding for their CalWORKs grant programs through a complicated series of transfers that include 1991 realignment accounts. The outcome of these transfers is that annually each county receives additional funding for their CalWORKs programs. The amount a county receives is the same as the amount the county would have received for mental health services under the 1991 realignment. Prior to 2011 realignment, every county paid the same 2.5 percent fixed share of costs for its CalWORKs program so that a county’s costs increased when its program costs increased. Under 2011 realignment legislation, each county’s share of CalWORKs costs varies each year based on its annual program funding from 1991 mental health realignment. Under this funding structure, a county’s CalWORKs costs are not affected by its actual caseloads, program costs, or outcomes. Consequently, this approach provides counties with no incentive to control their CalWORKs costs. A better option would be to modify the CalWORKs funding formula so there is a fiscal incentive for counties to manage program costs. The Legislature could direct that any CalWORKs savings be redirected into (1) CalWORKs services and child care, (2) other social services programs within realignment (such as child welfare), and/or (3) any other local priority.

Promote Local Accountability

Establishing useful accountability measures is critical to the long–term success of realignment in several ways. Local program administrators responsible for implementing realigned programs need information to ascertain how effectively and efficiently their agencies are operating programs so as to make decisions on how to improve the programs in subsequent years. In addition, state and local officials will want information regarding the degree to which Realignment 2011 achieves its intended goals, namely improved programmatic outcomes and less costly program delivery. Perhaps most importantly, the general public and their elected officials will expect information on how well local agencies are operating the various realigned programs in order to hold officials accountable.

In establishing program accountability mechanisms for realigned programs, it is important that priority be given to creating reporting requirements and processes that are beneficial to local agencies, elected officials, and communities—those ultimately responsible for the local programs—rather than the state. This suggests that local stakeholders should be involved in the creation of these accountability mechanisms to better ensure the usefulness of the final requirements. Moreover, we suggest that any requirements emphasize outcome measures and be made available to the general public—for example, on the county website. In order to ensure that county administrators and state officials can effectively compare program outcomes across counties, the state should ensure the uniformity of any reporting requirements.

For realigned programs, the state’s traditional “top down” approach to oversight and accountability may not be the most effective or most responsive to local needs and pressures. Instead, it may be more effective for accountability to be achieved through having the fiscal incentives (rewards and sanctions) for good outcomes, as well as public display of program outcomes for review by the public, local media consumption, and stakeholder groups. For example, there is currently a collaborative venture between the University of California at Berkeley and the California Department of Social Services (DSS) that aggregates statewide child welfare and foster care data into customizable tables that are updated quarterly and made available on a public website. This data source allows those working at the county and state level to examine performance measures over time. It provides policymakers, child welfare workers, and the public with direct access to information on California’s entire child welfare system. The program is funded by DSS and the Stuart Foundation.

2011 Realignment Example: Local Corrections. As one example, the Legislature could require that counties make available to its citizens key outcome data associated with the realignment of the lower–level offenders and parolees realigned to local community supervision, such as the rate at which these offenders are subsequently rearrested and re–incarcerated for more serious and violent crimes. Such a process would facilitate local accountability by allowing the community and local leaders in each county to assess how effectively it is supervising and treating the realigned offenders. Counties would also be able to use the data to compare their performance with that of other counties and allow them to identify the successful counties from whom to learn best practices. In order for counties to make those comparisons, though, it would be necessary for the state to ensure that counties are collecting and reporting the data in consistent and uniform ways. Over time, state policymakers could use this statewide data to evaluate the long–term impacts of 2011 realignment on public safety.

Clearly Define the State’s Role and Funding Responsibilities

As local governments take over more responsibility for the operation of realigned programs, the state’s role necessarily diminishes. Even where the state transfers significant program authority to counties, however, the Legislature may still desire that state agencies retain some roles—such as related to program oversight, technical assistance, statewide coordination, and ensuring federal conformity. Defining these specific roles for each state agency is important to ensure that state administrators and their agencies adapt to their new functions and responsibilities. Absent clear legislative direction, it is easy to imagine state agencies being slow to recognize and embrace these new roles. In addition, defining state agencies’ roles is important so that local agencies know what resources are to be provided by—or requirements imposed by—state agencies.

2011 Realignment Example: Local Corrections. In adopting the realignment budget package, the Legislature approved legislation to eliminate the Corrections Standards Authority (CSA), an office of CDCR, and assign its former duties to a new 12–member Board of State and Community Corrections (BSCC) effective July 1, 2012. Unlike CSA, this new board will be independent of CDCR. The primary goals of BSCC are to (1) assist the state and local governments in implementing the realignment of various criminal justice responsibilities, (2) provide leadership in the area of criminal justice policy, and (3) develop data and information related to the implementation of outcome–based measures and evidence–based practices in community corrections efforts. The Legislature may want to provide more specific guidance in statute on how the board should carry out these goals. For example, the Legislature could require the board to compare program outcomes (such as recidivism rates) among counties, as well as formalize a process for identifying and sharing best practices used in successful counties. In the future, BSCC also could be required to aggregate county level data to assess the statewide effect of realigning certain adult offenders on local public safety to assist the Legislature in making subsequent policy decisions.

Avoid State–Reimbursable Mandates

The Constitution provides financial protections to local governments by generally requiring the state to reimburse them for the cost of mandated new programs, increased program responsibilities, and increased shares of costs for state–local programs. As discussed earlier in this report, it is possible that—absent additional legislative action or constitutional change—some of the changes in 2011 realignment could be considered a “state–reimbursable mandate.” In general, we recommend the Legislature avoid funding programs as mandates because the reimbursement process gives the state little ability to control program costs, is unduly bureaucratic, and tends to result in some local governments receiving disproportionately higher funding levels than others.

The clearest way to ensure that the 2011 realignment package does not result in state–reimbursable mandates would be for the state to pass a constitutional amendment similar to the one proposed by the Governor. That measure excluded the 2011 realignment program changes from the reimbursement requirement. Absent a constitutional change (a possibility that we discuss in the nearby box), the Legislature will need to carefully examine each program to minimize the chance that 2011 realignment could be viewed as imposing a state–reimbursable mandate. Specifically, the Legislature will need to ensure that (1) each county and city receives sufficient funds each year (from a revenue source that may be used to pay for mandates) to offset the cost of any mandated element of the 2011 realignment package and that (2) these funds are explicitly identified as intended by the Legislature to be available to pay for these costs.

What Happens Without a Constitutional Amendment? The administration has stated its intent to seek a constitutional amendment similar to what was proposed and considered by the Legislature in February. The details of such an amendment have not been publicly released, and it is unclear if the amendment would be sent to the voters by the Legislature (requiring a two–thirds supermajority vote of both houses of the Legislature) or through the initiative process. The major features of the February constitutional amendment were the approval of tax rate increases, the dedication of those tax revenues to local governments for the purpose of funding realigned programs, protection of those revenues from being diverted by the state, declaration that realignment revenues did not count towards the Proposition 98 minimum guarantee, a state–local risk–sharing formula to address unanticipated costs associated with lawsuits or new federal requirements, and state protection from local mandate claims associated with realigned programs. If it contained similar provisions, adoption of a constitutional amendment would provide local governments an increased level of certainty and provide the state with protection from new costs. What happens, however, if no constitutional amendment is adopted—either because the proposal does not reach voters or because voters reject it? Based on our understanding of how realignment currently is constructed, all the program realignments would continue, including the statutory policy changes related to the supervision of lower–level offenders and parolees. The diversion of the state’s sales tax and the vehicle license fee funding to the Local Revenue Fund 2011 also would continue. While counties would not have constitutional protection from the state diverting their realignment revenues in the future, the constitution’s existing mandate provisions would offer counties some level of financial protection. The state, on the other hand, would bear some risk that a local government that experienced higher program costs than it received in earmarked program revenues might file a successful claim for mandate reimbursements. Given this risk, the Legislature should explore a range of options to reduce the likelihood that part of the package could be determined to be a state–reimbursable mandate. In the 1991 realignment, for example, the Legislature created a series of “poison pills” to reduce the likelihood of a local government filing a mandate claim. While enacting a similar approach for the 2011 realignment would be difficult, it merits legislative consideration.

Counties will likely be concerned that stringent state mandate protections may leave them vulnerable to increased costs associated with unanticipated events, such as lawsuits, changes in federal law, or federal performance review penalties. For this reason the Governor’s proposed constitutional amendment also included a provision that required the state and counties to share in these increased costs equally should they occur. The Legislature may wish to consider similar language.

2011 Realignment Example: Child Welfare. Under prior law, the state and counties shared the nonfederal costs of CWS and Foster Care. Under realignment, counties pay for 100 percent of the nonfederal share of most child welfare costs. Without a constitutional amendment or other changes, counties could seek mandate reimbursement to the extent realignment revenues were less than the actual costs to provide these programs. This could happen either if the revenues provided to the child welfare subaccounts are lower than projected or if caseloads or other costs are higher than expected. Absent changes that would protect the state from county mandate claims, not only could state General Fund costs increase, but there would also be less incentive for counties to try to manage their child welfare programs efficiently within their resources.

Long–Term Decisions Need a Thoughtful Process

We believe that addressing the longer–term issues outlined in this report—such as determining ongoing allocation formulas, establishing accountability mechanisms, and avoiding mandates—are critical to the long–term success of this realignment. If the Legislature and administration address these issues in a thoughtful way, with a long–term vision, there is a greater chance that realignment could result in significant benefits for the state and local governments, including improvements in program outcomes and more efficient delivery of services.

For this reason, we believe the Legislature should use the interim period in the fall of 2011 to establish a thoughtful process for considering how best to address the long–term implementation issues outlined in this report. This process should be designed to include the active participation of not only the Legislature, but also the administration, county and city representatives, local program administrators, and local stakeholders. The objective of the process should be for these participants to reach consensus on how to address these longer–term issues. They should provide their input to the Legislature by early 2012 so that implementation legislation can be adopted before the start of the 2012–13 fiscal year. For example, the Legislature could direct the creation of working groups in each of the major program areas affected by realignment with instruction to meet regularly and report back to the Legislature on its progress periodically over the fall and in January around the time the Governor releases his 2012–13 budget proposal. The Legislature could also hold interim hearings to receive the input of the public and various stakeholders. Ultimately, we believe that this type of approach has the potential to identify ways to balance the sometimes–competing interests of different stakeholders, avoid mistakes of past realignments, and improve fiscal and programmatic outcomes associated with this realignment.

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