Legislative Analyst's Office Analysis of the 2002-03 Budget Bill

Department of Developmental Services (4300)

A developmental disability is defined as a disability, related to certain mental or neurological impairments, that originates before a person's eighteenth birthday, constitutes a substantial handicap, and is expected to continue indefinitely. The state Lanterman Developmental Disabilities Services Act of 1969 entitles individuals with developmental disabilities to a variety of services, which are overseen by the state Department of Developmental Services (DDS). Individuals with developmental disabilities have a number of residential options. While most live with their parents or other relatives, thousands live in their own apartments or in group homes that are designed to meet their medical and behavioral needs.

Community Services Program. This program provides community-based services to clients through the regional centers (RCs). The RCs are responsible for client assessment and diagnosis, the development of an individualized program plan, case management, and the coordination and purchase of various services, such as residential, supported living, and day program services. Day program services include early intervention services for infants and young children and daytime activity programs for adults. The department contracts with 21 RCs to provide services to more than 170,000 clients each year.

Developmental Centers Program. The department operates five developmental centers (DCs), and two smaller facilities, which provide 24-hour care and supervision to approximately 3,700 individuals.

Budget Proposal. The budget proposes $2.9 billion (all funds) for support of DDS programs in 2002-03, which is a 5 percent increase over estimated current-year expenditures.

General Fund expenditures for 2002-03 are proposed at $2 billion, an increase of $128 million. This increase is partly the result of caseload and cost increases for community-based services. This includes an increase to treat individuals with autism, an increase to move or divert consumers from Developmental Centers to the community, and cost increases for DC janitorial contracts. The budget also includes proposed reductions, including $52 million in savings as a result of unspecified statewide standards for the purchase of services for RC consumers, a decrease in DC operations due to a decline in population, and a reduction for a proposed elimination of 33 headquarters positions.

The budget proposes $2.2 billion from all funds ($1.6 billion from the General Fund) for support of the Community Services Program in 2002-03. The budget proposes a $135 million General Fund increase over the previous year for caseload and utilization growth in RC purchase of services.

The budget proposes $625 million from all funds ($346 million from the General Fund) for support of the DCs in 2002-03.

The Regional Center System: Its Mission and Funding Are Misaligned

The cost of operating regional centers (RCs) for the developmentally disabled have more than doubled since 1995-96, from $943 million to more than $2 billion, driven up by multiple factors, including annual caseload and cost adjustments for service entitlements, a decline in federal waiver support, and an absence of statewide service standards. Despite this rapid growth in expenditures, some RCs are having financial problems and some communities may be facing shortages of certain services. The Governor's budget includes a modest proposal to reduce RC spending but does not address fundamental fiscal problems with the RC system. In this review, we propose some initial steps the Legislature could take to achieve additional savings in RC programs that could be used either to slow General Fund spending on RCs or to reinvest in the RC system.

Background

The state's Lanterman Developmental Disabilities Services Act ("Lanterman Act"), first passed in 1969 and significantly amended in 1977, provides the basis for the state's commitments to fund community services for persons with developmental disabilities. The Lanterman Act establishes the state's responsibility for ensuring that persons with developmental disabilities, regardless of age or degree of disability, have access to services that sufficiently meet their needs and goals in the least restrictive setting.

In order to deliver services to persons with developmental disabilities, the Lanterman Act specifies that the state contract with RCs, which are nonprofit agencies that coordinate and develop services within their community. The state opted to contract with RCs, rather than use state or county agencies for service delivery, due to the complex service coordination needs of persons with developmental disabilities and their families. That coordination requires RCs to address social, medical, economic, legal, and other challenges that persons with developmental disabilities face.

The state now contracts through the Department of Developmental Services (DDS) with 21 RCs whose catchment areas cover the entire state. The RCs must serve all persons who meet the state's definition of a developmental disability and all children under age three who have or are at risk of developmental delays. In 2000-01, the RCs served more than 165,000 persons, including nearly 63,000 children and 86,000 adults with developmental disabilities and 16,000 children under age three who have or are at risk of developmental delays.

How and Why RC Costs Are Growing

Regional Center Expenditures Growing Rapidly

Since the mid-1990s, the RC budget (inclusive of General Fund, federal funds, and other fund sources) has more than doubled, from $943 million in 1995-96 to an estimated $2 billion in 2001-02. This trend is shown in Figure 1. General Fund expenditures also more than doubled, from nearly $600 million in 1995-96 to an estimated $1.5 billion in 2001-02.

In 2002-03, the total RC budget will reach $2.2 billion. These budget increases represent an average annual growth rate in total spending over seven years of almost 14 percent. About 5 percent of this growth represents increases in caseload, nearly 3 percent is due to inflation, and the remaining 6 percent represents other factors, such as growth in utilization of services and cost increases exceeding the rate of inflation.

General Fund Growth. Most RC support comes from the state General Fund. General Fund spending will be $1.6 billion or 74 percent of the expenditures proposed for 2002-03. General Fund dollars would grow by $145 million above current year spending, or by about 10 percent in 2002-03, under the Governor's budget proposal. This is less than in previous years. However, the rate of growth proposed for the budget year is still greater than for most other major health and social services caseload pro grams. If the state were to maintain this growth rate for RCs, General Fund expenditures by RCs over the next five years would grow by another $1 billion, to about $2.6 billion, by 2007-08.

Types of Expenditures. The RC budget is comprised of two major types of expenditures. The first type is RC operations, which includes client assessment and diagnosis, the development of individualized program plans for clients, and service coordination (also known as case management). The other major category of RC expenditures is purchases of services such as residential care, day programs, or transportation. The RCs are supposed to be the payer of last resort--they generally pay for services only if they cannot refer an individual to a so-called "generic" community service.

The purchase of services budget, which accounts for more than 80 percent of the total RC expenditures would reach $1.8 billion in 2002-03. The budget takes into account savings of $52 million that are to result from unidentified standardized statewide purchase of service practices that the department and stakeholder groups have yet to develop.

Figure 2 provides a breakdown of the proposed purchase of service budget for the budget year according to each general category of service. As the figure indicates, most of these funds would be allocated to residential care and day programs. Residential care is estimated to cost about $594 million, and day programs are estimated to cost about $554 million. Total expenditures for transportation services are estimated to be $154 million. However, the budget estimate prepared by DDS for RC expenditures does not itemize the costs of certain other categories of services, such as health care, respite, and support services, which together total another $535 million in purchases of services.

Entitlement Drives Service Costs

Eligibility. The RCs provide services to individuals who have been diagnosed with mental retardation, cerebral palsy, epilepsy, autism, or a disabling condition requiring treatment similar to that required for mental retardation. To qualify for services, individuals' disabilities must have originated before the age of 18, and they must constitute what is considered a substantial handicap.

Unlike most health and social services provided by the state, eligibility to receive both case management and community services does not depend on a "means" test or determination of financial need that is based on income level or assets. Further, with a few minor exceptions, services are provided without any requirement that those benefiting from the services, and who have the ability to contribute, pay a share of cost. For that reason, RCs generally do not collect data on the income or means of the clients or the families whom they serve.

Caseloads. Unlike other states, which have waiting lists for services, California does not place limits on the number of people who can receive services. Caseloads, therefore, have grown steadily according to demand, as shown in Figure 3. Between 1995-96 and 2002-03, the RC caseload is expected to increase from 128,000 to 182,000 clients. That amounts to more than 5 percent growth per year.

One significant component of this growth is the number of individuals diagnosed with autism. Autism caseloads have grown at an average rate of about 16 percent per year.

Individual Program Plans Determine Services. Under the Lanterman Act, RCs must assist each client in developing an individual program plan (IPP), which identifies a person's needs and goals, and the services necessary to meet those needs. The IPP becomes the general basis for determining the community services to which an individual is then entitled. The RCs have the responsibility of ensuring that services identified in the IPP are actually provided.

Although individuals are entitled to the services identified in their IPPs, those services nevertheless must be delivered within annual budgetary appropriations. However, the annual appropriations in support of the entitlement for caseload growth and the cost and utilization of services are generally adjusted each year based on historical spending patterns. Those adjustments increased the RC budget by $138 million in 2000-01 and by $177 million in 2001-02. The Governor's budget plan proposes a further increase in 2002-03 of $152 million.

Lack of Statewide Standards

Amount of Services Not Limited or Monitored. Also unlike most health and social services provided by the state, such as the Medi-Cal health program for low-income individuals, the amount of services provided by RCs is not limited through statewide standards. Without statewide standards on the availability of services, General Fund support has grown according to demand, not according to any predetermined policy or strategy to allocate dollars for services deemed to have the highest priority or the greatest effectiveness. Notably, DDS does not collect statewide data on the number of users and frequency of use for many services, and the department does not routinely analyze that data for utilization trends to identify opportunities to control costs.

Uncontrolled Growth in Services. Respite care is an example of a service that is growing dramatically in cost in the absence of any statewide standards to control its utilization. It allows family members of persons with developmental disabilities temporary relief from caregiving. Respite care can be provided in the home by a friend, family member, or agency, or outside of the home in a day facility or a 24-hour facility (in the case of overnight stays). One benefit of respite is that its availability can make it possible for persons with developmental disabilities to live at home instead of being placed in a 24-hour facility for care.

The RC expenditures for respite services have been growing significantly, from $70 million in 1997-98 to the nearly $176 million proposed for 2002-03--an overall increase of 150 percent over five years. Part of the increase in respite care costs--about $8 million in the budget year--is attributed to the autism caseload growth we discussed earlier. The DDS data suggest that the rapid growth overall in respite care expenditures is driven by a growing frequency of use of this service by users as well as caseload and rate increases.

Disparities in Service Levels. The absence of statewide standards has created wide variances across RCs in the delivery of services. The Bureau of State Audits found in 1998 that RC clients with similar needs were provided significantly different levels of financial, clinical, and social supports through the program. The DDS later studied these variances and likewise found some significant disparities among RCs in the extent and frequency of the services provided. For example, the DDS study found that the average transportation costs for clients attending day or work programs ranged from about $630 to nearly $3,000 per user. Notably, transportation service costs also are growing significantly. Transportation costs were about $99 million in 1997-98, but would increase to $154 million in 2002-03. That is an overall growth of 56 percent, or an average annual growth rate of 11 percent.

State Could Be Receiving More Federal Funds

Waiver Programs. The state has received federal approval for a Medicaid waiver program that allows federal financial participation for a broad array of home and community-based services (HCBS) to which RC clients are entitled, including personal care, day programs, transportation, and respite for caregivers. These services are provided to eligible individuals who, without them, would require institutionalization in an intermediate care facility for the mentally retarded (ICF/MR) or a more restricted setting.

The state first established the HCBS waiver program in 1982, and received approval for an expanded number and type of participant and services eligible for reimbursement in late 1992. In recent years, federal approval further expanded the waiver to include certain work programs provided by the state Department of Rehabilitation. Enrollment in the HCBS program is capped. The cap initially established in the 1980s allowed 3,360 individuals to participate at any one time. Subsequently, the cap was raised over the years to about 45,000, and by 2006 would reach about 51,000 individuals.

Waiver Enrollment. When the waiver program was first established, 449 persons participated. That number grew to about 3,300 in 1991-92. Since then, the number of clients billed to the waiver grew from 16,000 persons in 1992-93 to a peak of about 35,000 in 1996-97, as Figure 4 shows.

Due to a federal review of the state's waiver activities the following year, which found noncompliance with certain health and safety monitoring requirements, the federal government froze enrollment under the waiver. This meant that RCs could no longer add clients to the waiver even to replace clients who lost waiver eligibility and that the state was no longer eligible for the federal funds associated with those clients. Thus, the number of clients enrolled subsequently dropped by about 6,000.

Since October 2000, 19 of 21 RCs have met compliance requirements and are no longer subject to the freeze on enrollment. The number of persons actually participating under the waiver program remains significantly below the number permitted to do so under the state's enrollment cap. However, the numbers have been slow to rebound. According to DDS and the RCs, this is partially because RCs lack adequate resources to administer the waiver. We discuss this further later in this review.

State Compliance Efforts. Over the past several years, the state has committed additional resources to ensure compliance with federal requirements under the waiver, as well as to enhance the health and safety of individuals receiving community-based services. For example, the 2001-02 Budget Act appropriated about $7 million in ongoing funding for a new system to improve the reporting by RCs of abuse, neglect, and exploitation of persons with developmental disabilities. The 2002-03 Governor's Budget proposes another $2 million for implementation of this system. Other recent budget appropriations provided funding to improve the training of staff who take care of individuals living in community care facilities. In committing these new resources, the state has committed to comply with federal standards that allow the state to receive federal dollars for many services provided in the community. However, the state still has not sufficiently enhanced its efforts to capture the federal dollars for which it is eligible.

Community Services and Operations Face Financial Problems

Even with the dramatic growth that has occurred in RC funding, there are indications that community services and operations face financial problems. Service providers and the Association of Regional Center Agencies (ARCA) have expressed concerns that inadequate rates paid to service providers have resulted in high staff turnover, difficulty in attracting qualified staff, and in some cases, a lack of services for clients. Rate increases for some community service providers have not kept pace with the rate of inflation over the last ten years. The DDS released a draft report in May 2001 based on the work of a private consultant and of stakeholder groups that identified additional funding needs in the range of hundreds of millions of dollars annually for RC residential services. A forthcoming report on nonresidential services this spring also is expected to identify substantial additional funding needs. For purposes of this analysis, we did not attempt to independently validate the findings of the DDS study. However, it is clear that financial problems exist for RC providers.

The RCs likewise have indicated that inadequate funding of their operations budget has made it difficult for them to operate and manage their ever-growing caseloads. The RCs in high cost areas have reported problems in finding affordable space to rent and in recruiting and retaining the service coordinators who are critical to RC service delivery.

Their claims generally are supported by a 1999 study conducted by Citygate Associates which examined the RC operations budget. This study found that the method used by DDS to determine the RC operations budget did not generate the funds needed for RCs to meet their state and federal mandates. At the time of the 1999 study, the shortfall in funding needed by RCs to fulfill their mission was estimated to be nearly $80 million annually, or about 24 percent more funding than was actually being provided. The budget method generally has not changed since that time.

Governor's Budget Proposes Modest RC Savings

The Governor's budget proposes an unspecified reduction of $52 million in RC purchases of services. According to DDS, these savings will be realized through the development and implementation of statewide standards for purchase of services in the community without changing the entitlement to services. The DDS indicates that the administration will propose trailer bill language to authorize the implementation of statewide standards. We believe the Governor's proposal to establish statewide standards for purchases of services is a step in the right direction to address rapidly growing costs. As we further discuss below, the proposal has yet to be fully developed and does not include any detail on the estimated savings level associated with such standards. Our analysis suggests, however, that the establishment of meaningful statewide standards such as those now in place for other types of health service programs could be effective in helping to control costs.

In our view, the Governor's proposal does not go far enough to address the fundamental problem--an RC system that has few limits on caseloads and costs yet still faces financial problems.

For example, the proposed budget assumes no improvement in state efforts to obtain federal funding under the home and community-based services waiver. As indicated in Figure 5, the proposed budget for the RCs assumes enrollment under the waiver remains almost unchanged at about 33,000 clients in the budget year. As a result, there is also no increase in the percentage of clients billed to the waiver. In fact, federal reimbursements would decline 1 percent, continuing a trend by which expenditures increase while the percentage of federal dollars claimed continues to drop. Federal funding comprised 20 percent of total expenditures in 2000-01, but would be 17 percent of the total expenditures anticipated for 2002-03.

We would note that DDS has hired a consultant in the current year to study the possibility of increasing Medicaid federal dollars, including what can be done under the approved waiver. At the time this analysis was prepared, however, the consultant's findings were not yet available and no specific proposals had been included in the budget plan for the purpose of increasing federal dollars.

Recommendations and Options

We withhold recommendation on the Governor's proposal to reduce funding for regional center (RC) purchases of services by $52 million until the Department of Developmental Services provides more specific information to the Legislature as to how these savings would be achieved. We also recommend a $50 million reduction in General Fund support in the RCs purchase of service budget, and a corresponding increase in federal spending authority, as part of a strategy to take full advantage of a federal waiver allowing some client services to be supported with available federal funds. We further recommend an increase of $5 million in General Fund spending authority in the RCs' operations budget to implement this strategy. (Reduce Item 4300-101-0001 by $45 million. Increase Item 4300-101-0890 by $50 million.)

In addition, we propose options for the Legislature to consider to reduce General Fund expenditures, including requiring clients to pay a share of cost for services based on their ability to pay. Savings resulting from the implementation of any of the options could be used to reduce General Fund spending for RCs, or to reinvest in RC services in the community.

First Steps to Control Growth in General Fund

The Legislature has already indicated its concern about weaknesses in the RC system. One proposal to enhance community services currently under consideration is Assembly Bill 896 (Aroner), which would require closure of some of the Developmental Centers (DCs) now operated by the DDS and transfer of the savings on DC operations to community services. In order to ensure that all of the funds remain available to serve those with developmental disabilities, the bill would create one unified budget to encompass both DCs and community services.

At the time this analysis was prepared, the measure had passed the Assembly and was pending in the Senate. However, even if the Legislature were to choose that approach to bolstering RC resources, the long planning period needed to close a DC means that it could be some time before any savings from closing DC facilities would materialize.

In this section, we suggest some first steps the Legislature could take as it considers the 2002-03 budget to generate significant savings in RC expenditures that could be used either to help address the state's current fiscal problems or to reinvest in the RC system.

Analyst's Recommendations

Unspecified Reduction of $52 Million. As we noted earlier, the Governor's budget proposes an unspecified reduction of $52 million in RC purchases of services. According to DDS, these savings would be realized through the development and implementation of statewide standards for purchase of services in the community without changing the entitlement to services and supports. The DDS indicates that the administration will propose a budget implementation bill authorizing statewide standards for RC services. The department has not yet documented how this estimated level of savings would be achieved. Consequently, the Legislature does not have the information it needs to determine whether the administration proposal would actually achieve the level of savings that are claimed.

Accordingly, we withhold recommendation on this budget reduction proposal until DDS provides more specific information to the Legislature as to how these savings would be achieved. We recommend that DDS provide the Legislature with specific standards for purchase of services, estimated dollar reductions for each service standard, a timeframe for implementation, and proposed implementing language.

Because multiple factors drive purchase of services costs, it may be difficult to trace whether the standards eventually adopted under the Governor's proposal actually result in any savings. Caseload and utilization adjustments likely will result in a net increase in purchases of services of more than $150 million annually in the following budget year even with the implementation of standards. Therefore, we recommend that DDS also provide the Legislature with baseline data on historical growth assumptions that could be used to measure savings from implementing any new standards.

Potential for Federal Waiver Funds. As we noted earlier, the state has federal approval for a Medicaid waiver program that allows federal financial participation for a broad array of home and community-based services (HCBS) to which individuals are entitled, including personal care, day programs, transportation, and respite for caregivers. The state could add up to 13,500 clients to access additional federal funds for community services and still remain within its enrollment limit of 46,500. We estimate that the state could receive nearly $120 million annually in additional federal funds if it were able to take full advantage of the current waiver.

An alternative approach would be to add fewer clients, but target for inclusion under the waiver those clients who have the most needs for care. If the state added to the waiver about 3,000 clients living in community care facilities or in supported living arrangements, we estimate the state could save as much as $50 million General Fund annually by being able to claim additional federal funds. We also estimate that the state would need to spend about $5 million to achieve these savings, for a net General Fund savings of $45 million.

Administration of the waiver program depends on the RCs, whose staff have the critical responsibilities for conducting eligibility determinations, evaluations and reevaluations of persons enrolled on the waiver, and for completing all necessary documentation associated with those functions. Waiver administration significantly increases RC workload. The RC's proposed budget assumes no growth in waiver enrollment or in federal dollars. Although RCs currently receive some funding to administer the waiver--about $600 annually for each RC client billed to the waiver--the amount has remained unchanged for about five years and, according to ACRA, is below the actual costs that RCs must incur for administration of the waiver program.

Our analysis indicates that these potential barriers to increased enrollment under the waiver could be overcome if the RCs were permitted to retain 10 percent of any increase in federal dollars achieved in the bud get year as a result of their addition of new clients to the waiver. The dollars that RCs would retain would be in addition to the funds currently allocated for their waiver administration activities. This incentive would only apply to the 19 RCs that have passed DDS' compliance reviews to ensure that RCs meet health and safety and internal management requirements.

We believe that DDS could identify and that RCs could add at least 3,000 additional clients to the waiver in the budget year who are now living in community care facilities and in supported living arrangements. In keeping with this estimate, we therefore recommend a $50 million General Fund reduction in the RCs purchases of services budget, and a corresponding increase in federal spending authority to recognize the additional federal resources that would result from this recommendation. We also recommend that the Legislature increase the budget for RC operations by $5 million from the General Fund and adopt budget bill language specifying that these funds are available to RCs which place additional RC clients on the waiver program. The language would further require that any unused incentive funds revert to the General Fund at the end of 2002-03. The language would be placed in Item 4300-101-0001 and read as follows:

Of the funds appropriated in this item, $5,000,000 shall be available for Program 10.10.010--Operations, for allocation to regional centers (RCs) which increase enrollment under the home and community-based services waiver. Waiver enrollment targets for December 31, 2002 and June 30, 2003 shall be incorporated into RC contracts with the Department of Developmental Services (DDS). The DDS shall allocate the funds, equivalent to 10 percent of the anticipated federal dollars that result from adding new clients to the waiver. Any funds not allocated to RCs for this purpose will revert to the General Fund at the end of the 2002-03 fiscal year.

We further recommend that the department report at budget hearings on the findings (if they are available) of the contractor hired to study ways to increase federal financial participation for Medicaid-funded services. The Legislature would then be in a position to consider additional steps to maximize federal financial participation, particularly those findings that could have an impact in the budget year.

Share-of-Cost Options

As we discussed earlier, RCs purchase services for children and adults with developmental disabilities, generally at no cost to the clients or their families. One notable exception is a monthly fee now paid by some parents who have children in 24-hour care facilities. The Legislature may wish to consider other options for requiring some clients to pay a share of cost, or increased fees based on the ability of the client or the client's family to pay. Adoption of these options would provide savings to the RC program that could be used to reduce General Fund costs for RC services or be reinvested in the RC system to strengthen community services. Requiring a share of cost for services could also deter overutilization of services that might otherwise occur, thereby further reducing General Fund costs. Finally, establishing such cost-sharing for those who have an ability to pay would make RC services more consistent with other state-supported health programs.

The exact savings that would result from these options are difficult to estimate because, with the exception of those parents with children in 24-hour facilities, the RCs do not collect data on the incomes of the clients or their families. Our estimates discussed below do not take into account any potential effect on utilization of RC services. We also note that implementation of any of these alternatives would require statutory changes.

Parental Fees. Currently, parents of children under the age of 18 who receive 24-hour care in a state or community facility pay a monthly fee, based on (1) their gross income, (2) the number of persons dependent on that income, and (3) the age of the child receiving the care. The maximum fees that DDS charges have remained largely unchanged since 1984. They are $386 per month for a child from birth to age six, $418 per month for a child from seven to 12 years of age, and $473 per month for a child from 13 to 18 years of age. State law specifies that fees not exceed the cost of caring for a normal child at home.

Adjusting the maximum fee that can be charged to reflect the increase in the cost of living over the last 17 years would generate about $1 million annually that could be used to offset General Fund expenditures for these services. Additional revenue could be generated if the fee schedule were adjusted so that more families paid the maximum monthly fee.

Alternatively, the fees could be further increased to more fully reflect the actual costs of caring for a child in a 24-hour facility. Under this option, the fees that would be charged would no longer be limited as they are now to the costs of raising a child without developmental disabilities at home. However, in no case would the fees exceed the parents' ability to pay. This alternative, which would require legislative action, could generate about $5 million annually in revenues that could offset General Fund costs for these services.

Respite Services. Respite services for the families of RC clients (both children and adults) are generally provided at no cost, regardless of the income of the client or the parents or relatives with whom a client lives. As noted earlier, these costs have been growing rapidly. The proposed budget estimates RC expenditures for respite services to be nearly $176 million in 2002-03. Medicaid payments, under the home and community-based services waiver, will cover only about $21 million of these costs in the budget year. We estimate that requiring those who can afford to do so to pay for all or a part of services not covered by the Medicaid waiver would reduce General Fund expenditures by as much as $155 million in the budget year. As we previously indicated, the exact savings are difficult to estimate because the RCs do not collect data on the incomes of the families they serve.

Other Services for Children Under 18. The RCs spend about $300 million annually for various services for children under 18. Respite services and 24-hour residential care account for about one-third of these costs. Copayments already exist for two services--day care and diapers. However, other children's services, such as speech therapy and behavior management, could also be subject to contributions from families with an ability to pay. We estimate that contributions could result in up to $5 million in savings to the General Fund.

Parental fees would not be imposed for early intervention services provided by RCs to children under three years of age. We are advised that the federal grant award that partially funds early intervention services requires that they be provided at no cost to families. We offer an alternative approach for addressing the $65 million cost for these services in a later option.

Ability to Pay. State law requires persons with developmental disabilities who reside in a DC to pay DDS for their cost of care and treatment, subject to the clients' (not the parents') ability to pay. In 2001-02, the department expects to collect about $16 million from DC clients in private payments and insurance.

This option would extend the same financial responsibility to adult RC clients that is now required for DC clients. The fees collected under this approach would result in an offset to General Fund expenditures. Assuming that the department could collect an amount from RC clients proportional to that generated from DC clients, the General Fund offset would be at least $50 million annually.

This option would affect only a small percentage of RC clients. The majority of adults with developmental disabilities have a low income, as evidenced by the high percentage who are eligible for Supplemental Security Income/State Supplementary Program (SSI/SSP), a cash grant award for low income individuals, and Medi-Cal, the state's health program for low income individuals.

Other Options

Respite Services. Previously in this report, we noted that the Legislature has the option of imposing a share of cost for respite services. An alternative approach to controlling the cost of respite care would be to establish a limit on the maximum allowable annual expenditure for these services for each client. Setting a limit at two-thirds of the current average spending level, for example, would result in General Fund savings of about $55 million. Imposing any utilization controls on respite services would require a statutory change.

Early Intervention Services. The Early Start program, jointly administered by the State Department of Education and DDS, provides early intervention services to children under age three who have disabilities, or who are at risk of having disabilities, in order to enhance their development and to minimize the potential for developmental delays. The RCs receive nearly $20 million in federal funds under Part C of the Individuals with Disabilities Education Act to purchase these services in their communities.

In recent years, state costs for early intervention services have exceeded federal mandates by several million dollars. In addition, state-only funded early intervention services amount to another $45 million in expenditures. This option would shift part or all of the state's General Fund cost of the program to Proposition 98, thus permitting a net reduction in non-Proposition 98 General Fund expenditures. Shifting only those costs of the program for which the state receives federal funding would result in a net savings of $2 million. Shifting all costs incurred would result in a net savings of $45 million. Our analysis indicates these expenditures could appropriately be considered an education program eligible for support under Proposition 98.

Adoption of this option would require a statutory change. The savings we have estimated also presume that the state does not overappropriate the Proposition 98 minimum guarantee. Adopting this option would result in a reduction in funding for other K-14 educational programs proposed in the 2002-03 Governor's Budget, unless the estimated minimum funding guarantee increases in the May Revision as a result of new personal income data to be released by the federal government in the spring. As discussed in this Analysis, the minimum funding guarantee could increase by as much as $900 million.

The RC Performance Contracts. The state contracts with RCs for the provision of services for persons with developmental disabilities. State law requires that those contracts include incentive payments to RCs that meet or exceed established performance standards. The DDS' practice has been to provide these incentives to qualifying RCs by reappropriating up to one-half of an RC's budget savings. In recent years, these reappropriations have ranged collectively from $4 million to $11 million annually. Suspending the incentive payments until such time as the state's financial condition improves would result in a savings to the state General Fund.

Conclusion

The 2002-03 budget for the regional centers program has been growing rapidly. If current trends continue, expenditures would increase by another $1 billion over the next five years. Yet, as we have noted, despite the dramatic growth in RC funding, there are indications that community services and operations face financial problems and that RCs have found it difficult to operate and manage their ever-growing caseloads. This review outlines some first steps the Legislature could take in the budget year to begin to slow the growth in RC expenditures. Some of these options and recommendations could result in significant state savings which could be used to help address the state's current fiscal problems. The Legislature could also choose to reinvest the savings in the RC system to address its financial problems.

Budget Adjustments

Community Placement Plan Funding Should Be Offset With Federal Funds

We recommend that the Governor's proposed augmentation for the Community Placement Plan expenditures be reduced by about $7 million to reflect federal funds available to offset the cost to the General Fund. We also recommend the adoption of budget bill language reverting any unspent General Fund monies for this program at the end of the fiscal year. (Reduce Item 4300-101-0001 by $6.9 million.)

Background. Since 1994, when DDS settled the lawsuit Coffelt v. Developmental Services, the department has implemented a Community Placement Plan (CPP) each year to assist RCs with moving DC residents into the community. The plan is also intended to help reduce admissions to DCs by ensuring the adequacy of community resources. The Governor's budget provides funding for the CPP, covering costs incurred for placing individuals in the community in the budget year and the continued costs of individuals placed in the prior year.

Since the initial placement of 2,000 individuals in the community required under the Coffelt settlement, DDS has continued to move clients from DCs to the community each year. However, according to the department, the rate of placement has slowed down in the last few years.

Regional Center Budget. Each year, the proposed budget for the RCs includes additional funding for new community placements. Since the Coffelt settlement, funding has been based on formulas which estimate the average cost of such client placements. In the past three years, not all of the funding was used for this purpose and instead has been redirected to other community services. The 2002-03 Governor's Budget proposes to change the way client placement costs are computed. In general, average costs would no longer be used to determine the amount of funding available to DDS for CPP. Funding would instead be based on the estimated costs of placing in the community specific clients whom RCs already have identified. As a result, CPP resources would more closely approximate the actual costs of such placements.

The CPP costs in the current year, which were estimated under the old methodology, are projected to be about $30 million. The budget proposes to increase CPP funding by $20 million in 2002-03 to $50 million--a 67 percent increase. The vast majority of these resources are from the General Fund.

Of the additional $20 million proposed in the budget year, $1.5 million would be provided to RCs to assess individuals in DCs who could be placed in the community, and to develop community resources for future placements. An additional $3 million would pay start-up costs for new community facilities, and $14.5 million would be spent for services such as residential facilities and day programs for clients placed in the community. The Governor's plan indicates that the CPP estimate will be updated at the time of the May Revision.

Proposal Should Have Factored in Federal Funding. We are concerned that the Governor's proposal does not factor in the availability of federal funds that could reduce the cost of these improvements to the CPP. The Governor's budget request for the CPP assumes in effect that the state will not receive any of the federal funds that are available under the home and community-based services waiver we discussed earlier in this analysis. Because the individuals placed by the CPP would have complex medical and behavioral needs, we believe it is likely that most individuals assisted under the CPP would qualify for services under the waiver.

Analyst's Recommendations. Given the state's serious fiscal problems, and the $124,000 to $157,000 annual cost to the General Fund of many CPP placements, we believe it is important that DDS and the RCs make an effort to enroll eligible CPP clients under the waiver. Accordingly, we recommend that the Governor's funding request for the CPP be reduced by $6.9 million to reflect the additional federal funds that could be received to offset the cost of the proposal under the home and community-based services waiver. That means the state could offset some of the General Fund cost of this proposal with the federal funds that would be generated under the waiver program.

We also recommend that funds under the CPP only be used for that purpose. Accordingly, we recommend the following budget bill language under Item 4300-101-0001:

Any funds appropriated in this item for the department's Community Placement Plan, but not expended for that purpose, shall revert to the General Fund.

Technical Budget Adjustment for Leased Facilities

We recommend that the Department of Developmental Services report at budget hearings on the status of an interagency agreement with the Department of Health Services that could result in state General Fund savings of as much as $8 million for the operation of its Sierra Vista and Canyon Springs facilities. The department should also report at that time on the status of federal certification of the Canyon Springs facility.

Background. The DDS operates two leased facilities to care for individuals with behavioral needs--the Sierra Vista facility, a 58-bed facility located in Yuba City, and the Canyon Springs facility, a 63-bed facility located in Cathedral City. Sierra Vista was certified to receive payments for services by Medi-Cal (the state and federal health program for low-income individuals) in June 2001. Canyon Springs was expected to be certified for Medi-Cal payments on January 31, 2002.

Results of Interagency Agreement. The budget assumes that Sierra Vista and Canyon Springs will be reimbursed by the federal government for services provided for its residents at the same daily rate paid to intermediate care facilities in the community, rather than at the higher rate paid for care provided in institutions. The latter rate provides full reimbursement for all costs of services. The department reports that its budget request for the two facilities was based upon the lower rate because an interagency agreement with DHS that might result in reimbursement at the higher rate had not been completed.

However, the department recently indicated that an interagency agreement with DHS that would permit DDS to be reimbursed for these services at the higher rate was close to resolution. Such an agreement could mean that the Legislature could reduce General Fund expenditures by as much as $8 million and increase expenditure of federal funds by an equivalent amount.

We therefore recommend that the department report at budget hearings on the status of that agreement and, if the agreement is completed at that time, adjust the DDS budget accordingly to reduce General Fund expenditures for these facilities.

Federal Certification of Canyon Springs. At the time this analysis was prepared, Canyon Springs had not yet been certified. We therefore recommend that the department also report at budget hearings on the status of that facility's certification and any budget adjustments that the department would need to make in the case of a delay. Any delay in certification would result in an increase in the General Fund budget for the operation of Canyon Springs.