Legislative Analyst's Office
Analysis of the 2001-02 Budget Bill
The Franchise Tax Board (FTB) is one of the state's major tax collecting agencies. The board's primary responsibility is to administer California's Personal Income Tax and Bank and Corporation Tax laws. The board also administers the Homeowners' and Renters' Assistance program, the Political Reform Act audit program, and the Household and Dependent Care Expense Credit (HDCEC) program. In addition, the board administers several nontax programs, including collection of child support and court-ordered payments. A three-member boardthe Director of Finance, the Chair of the State Board of Equalization, and the State Controlleroversees the department. A board-appointed executive officer is charged with administering the day-to-day operations.
The 2001-02 Governor's Budget proposes $427 million ($385 million General Fund) and 5,755 positions in support of the FTB's operations. The total amount is $11 million and 118 positions less than the current year. The main changes are (1) position reductions from implementing e-filing and from the termination of the Student Loan Collection pilot program, (2) an increase in resources for processing and fraud investigation activities associated with the HDCEC program, and (3) the elimination of some vacant positions.
We withhold recommendation on funding for the Franchise Tax Board's California Child Support Automation System. We further recommend that the board, in conjunction with the Department of Child Support Services, submit an updated budget proposal to the Legislature that is consistent with its latest report to the federal Administration of Children and Families.
Chapter 479, Statutes of 1999 (AB 150, Aroner), required FTB to act as the Department of Child Support Services' (DCSS) agent for the procurement, development, implementation, and maintenance of the California Child Support Automation System (CCSAS). (For a comprehensive discussion of these developments, see our report entitled, Child Support Enforcement: Implementing the Legislative Reforms of 1999, issued January 27, 2000.)
The 2001-02 Governor's Budget proposes no increase in the current $19.5 million support level for the project ($4.8 million from the General Fund and $14.7 million in federal reimbursements).
Proposal Inconsistent With Report to the Federal Government. In November 2000, the board provided a Planning Advance Planning Document Update (PAPDU) regarding this project to the Administration of Children and Families (ACF). The ACF requires a state to submit this document when requesting additional funds or a schedule change to a federally funded automation project.
According to the PAPDU, the board currently estimates budget-year funding needs for the project of $29.7 million ($7 million from the General Fund and $22.7 million in federal reimbursements). In addition, the PAPDU reports a schedule extension of five months to account for the additional time needed to develop the project charter and define the requirements for the procurement proposal. Once that is done, the procurement for the new statewide system is expected to be completed by August 2002.
Board Should Explain Budget Inconsistencies. Based on our review of the PAPDU, the Governor's budget proposal for this project ($19.5 million), when compared to information in the PAPDU ($29.7 million), is underfunded by $10.2 million ($2.2 million General Fund and $8 million federal reimbursements). In addition, the PAPDU's project schedule is inconsistent with the last information provided to the Legislature. For these reasons, we recommend that the board, in cooperation with DCSS, provide to the Legislature prior to budget hearings a project and schedule update, an explanation of budget inconsistencies, and a revised budget proposal reflecting the funding required in the budget year.
Our review of the board's California Arrearage Management Project indicates that the project (1) has exceeded its original costs and time frame for implementation, (2) did not receive federal funding as originally anticipated, (3) may adversely affect implementation of the statewide California Child Support Automation System thereby continuing federal penalties related to administrative costs, (4) may ultimately require development of another statewide arrearage system, and (5) resulted in funding redirections and revised contracting strategies of which the Legislature was not notified. For this reason, we recommend that the board explain at budget hearings the reasons it did not advise the Legislature of the denial of federal funds and the resultant General Fund redirection and contracting revisions.
In addition, we recommend the Legislature consider amending existing law to delay a portion of the board's arrearage collection time frame. We further recommend that the board examine and report to the Legislature, prior to budget hearings, on the costs associated with deferring the arrearage collection time lines.
The Governor's budget proposes $11.2 million to continue project development efforts for its child support arrearage collection system, the California Arrearage Management Project (CAMP). This is the same amount as in the current year. The purpose of this system is to collect unpaid and overdue child support known as "arrearage."
Program History. In 1993, the board began a child support delinquency collection pilot project in six counties and expanded the collection program to all counties two years later. The board was responsible for collecting child support payments that were delinquent by 90 days or more. County district attorneys could also choose to have the board collect payments that were delinquent by 30 days or more as well as current support payments.
Single Statewide Automation System. The ACF required the state to develop a single statewide system by 1997 for all of its child support enforcement activities that met specific information technology and program requirements. One of these requirements was that the statewide system be able to perform arrearage collections as part of its overall collection functions. For reasons unrelated to arrearage collection activities, the state was unsuccessful in implementing the single system known as the Statewide Automated Child Support System. As a result, the federal government began imposing annual penalties by reducing federal funds for administration of the state's child support enforcement program. This year's reduction is expected to be $114 million and is expected to increase until such time as the state is able to implement the new CCSAS system.
Restructured Arrearage Collection Program. Chapter 478, Statutes of 1999 (AB 196, Kuehl) and Chapter 480, Statutes of 1999 (SB 542, Burton), assigned a number of additional child support collection responsibilities to the board, as summarized in Figure 1, and required the board to phase these in by December 31, 2002. At the time the legislation was enacted, the board had not determined the nature of the relationship between arrearage collection and the CCSAS system. The board, therefore, decided to develop CAMP as a separate system to meet the requirements and time frames of the new state legislation. Ultimately, however, the state's collection function will need to be included in the CCSAS in order to meet federal certification requirements for a statewide automation system.
Franchise Tax Board Responsibilities Under
Handle all cases over $100 which are more than 60 days in arrears. This is expected to double the department's caseload to approximately one million cases.
Design and implement a computerized database to centralize information regarding each case.
Establish a customer information center or network to respond to debtor inquires and disputes.
Contract with third parties, where necessary, to locate debtors and debtor assets.
Give priority to collection of child support debt. For example, if a debtor has both a child support delinquency and a personal income tax delinquency, the board is to collect the child support delinquency first.
Board Seeks Federal Funding for CAMP Development. In July 2000, the board submitted a request to ACF for an additional $3.7 million in federal funds for CAMP. This request also indicated a need for an additional $1.8 million of state funds in the budget year. The board reported to ACF that the total cost for CAMP was estimated to be $59 million.
In October 2000, ACF denied all federal funds requested by the board for CAMP. The ACF's letter stated "we continue to urge California to concentrate its system development efforts on implementation of a statewide CSE [child support enforcement system] and we find that CAMP, as proposed is not an interim enhancement to an existing system, but in fact a new system development . . . We urge the State to focus its full efforts on accelerated planning, development, and implementation of a statewide system. Federal Funding Participation will only be provided for new system development in the context of a statewide system."
In response to the federal funding denial, we understand that the board has redirected General Fund monies during the current year to continue the CAMP development effort. At the time this analysis was prepared, the board had not informed the Legislature of the federal funding denial or of this redirection.
According to the Governor's budget, the board is now pursuing a "performance-based contract" to meet the arrearage collection requirement. This contracting approach, which the board has used in its tax collection operations, allows the board to defer vendor payments until the automation system is operational and is achieving an agreed upon level of benefitsgenerally increased revenues. When the state achieves that benefit level, it begins to pay the vendor.
Concerns With State's Pursuit of CAMP. Our review of the implementation history of CAMP raises a number of concerns.
LAO Recommendations. Given the issues noted above, we recommend that the Legislature take two sets of action. First, we recommend that the Legislature require the board to report at budget hearing on the reasons why it did not advise the Legislature of the denial of federal funds, its redirection of General Fund monies, and its revised contracting strategy. Second, we recommend that the Legislature consider:
According to the board, counties are to begin transitions to the new CCSAS system in 2003 with full implementation occurring in 2005. The CCSAS time frame corresponds relatively closely to the latest CAMP schedule. Implementing the board's arrearage collection program to correspond with CCSAS implementation would mean an overall delay of at most two years.
We withhold recommendation on the board's request for $3.8 million (General Fund) and 64.4 personnel-years for processing and fraud detection associated with implementation of the Household and Dependent Care Expense Credit program pending receipt of additional information on actual filing for tax year 2000.
The Governor's budget proposes $3.8 million and 64.4 personnel-years (PYs) for the FTB to cover increased processing and fraud prevention activities associated with the implementation of Chapter 114, Statutes of 2000 (AB 480, Ducheny).
Program. Chapter 114 established the HDCEC. This tax credit, which became effective beginning tax year 2000, allows for a refundable credit to be taken as a percent (depending on income level) of household and dependent care expenses incurred as necessary costs to sustain employment. The credit is tied to the federal nonrefundable credit known as the Child and Dependent Expense credit. The credit is primarily limited by the taxpayer's California adjusted gross income, ranging from 63 percent of the allowable federal credit for adjusted incomes of $40,000 or less to 42 percent for incomes up to $100,000. The credit is not available for incomes over $100,000 and the maximum allowable credit is $907.
The FTB's Concerns Over Fraud. Based on the board's experience with the Renter's Credit and federal experience with the Earned Income Credit, the board is concerned that there could be substantial fraud related to income tax filings under the HDCEC program. Based on these programs, the board estimates the possible losses from fraudulent filings could range from $7.2 million to $104.6 million. Since the HDCEC is tied to the federal Dependent and Child Expense credit, and the federal forms must accompany the state tax filing, it would seem reasonable for the board also to assess the fraud experience in this federal program when estimating the potential fraud under HDCEC. In any case, tax filings for 2000 will be the first year of claims under HDCEC. Consequently, the board should be in a better position to assess the impact of this program as the 2000 tax filings are received and reviewed.
The board should undertake this review, as well as assess fraud activity in the federal nonrefundable program, and report its findings to the Legislature during the budget process. These data should provide a reasonable measure of the workload requirements for the HDCEC. Thus, we withhold recommendation on the $3.8 million and 64.4 PY request pending receipt and review of this information.