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

Child Welfare Services

California’s state-supervised, county-administered Child Welfare Services (CWS) program provides services to abused and neglected children, children in foster care, and their families. The CWS program provides (1) immediate social worker response to allegations of child abuse and neglect; (2) ongoing services to children and their families who have been identified as victims, or potential victims, of abuse and neglect; and (3) services to children in foster care who have been temporarily or permanently removed from their family because of abuse or neglect.

The 2007-08 Governor’s Budget proposes $2.4 billion from all funds and $714 million from the General Fund for the Child Welfare System. This amount includes an estimated $1.4 billion in federal funds. This represents an increase of slightly less than 1 percent in total funds and a decrease of 8 percent General Fund from the current year. The General Fund decrease is primarily due to the budget proposal to use $56 million in Temporary Assistance for Needy Families (TANF) funds to offset a like amount of CWS General Fund costs in 2007-08.

Despite Substantial Improvement, Federal Financial Penalties Likely in 2007-08

Federal law requires California to improve its performance on outcome measures established for the child welfare system. We provide an update on the state’s recent improvement on federal outcome measures, and an estimate of the risk of penalties based on current performance.

Federal Review System for Child Welfare and Foster Care

The federal Adoption and Safe Families Act (ASFA) of 1997 made significant changes to state CWS and foster care programs. Among other changes, ASFA required that the federal Department of Health and Human Services develop a set of outcome measures and create an ongoing state performance review process for these programs. The Child and Family Service Reviews, resulting from ASFA directives, include: (1) a focus on outcomes for children and families, (2) the use of multiple quantitative and qualitative measures to evaluate outcomes and performance, and (3) joint federal and state review teams.

Federal Child Welfare Performance Requirements. In 2002, the federal Administration for Children and Families (ACF) conducted its first performance review of California’s child welfare system. At the time of the review, California failed all seven of the outcome measures pertaining to child safety, well-being, and permanency. Child safety outcomes focus on the protection of children from abuse. Permanency outcomes measure the state’s success at providing stable foster care placements for a child and/or permanent resolutions for children who cannot return home. Finally, well-being outcomes pertain to meeting children’s educational, physical, and mental health needs, and maintaining connections to their family and communities. Each outcome may contain a number of subgoals, all of which must be met in order to receive a “passing” grade for the measure.

Corrective Action. Because California failed the 2002 federal review, the state was required to develop and implement a Performance Improvement Plan (PIP) in order to avoid penalties in the form of reductions in federal funding. In our Analysis of the 2006-07 Budget Bill, we reviewed the most recent data available, from the second quarter of 2005, and found that at that time the state was still failing all seven of these measures.

California’s Current Performance

The federal government will review the state’s performance on its PIP in April 2007 (examining data from the 3rd quarter of 2006). Because 3rd quarter data are not yet available for review, we have compared the state’s performance in the 2nd quarter of 2005 with the same quarter in 2006. Figure 1 shows that the state has made notable improvement and is now passing in four of seven outcome areas, while continuing to fail in the remaining three.

Partial Credit for Permanency Outcome? As Figure 1 shows, within the permanency outcome (#3), the state is passing four and failing two out of the six required subgoals. As mentioned above, normally, all subgoals within an outcome must be met in order for the state to “pass” the outcome measure. However, it is possible that California could receive partial credit for this outcome. The precedent for this occurred with the review of the District of Columbia, where federal penalties were decreased based on the number of subgoals that the district had met at the time of its final PIP review. From this perspective, California could be determined to have passed four of the outcomes completely, and one (permanency) partially.

Estimate of Penalty Exposure. Figure 2 presents our estimate of the potential federal penalties facing California. Our estimate is based on the most recent performance data from the second quarter of 2006, and it is possible that California will improve further in the third quarter of 2006. We calculate the state’s penalty exposure, assuming there is no improvement.

The federal penalties are assessed based on whether the state meets its goal for each outcome. For each outcome not met, a penalty of 1 percent is assessed on a portion of the state’s federal fund allocation. This penalty formula is applied to each year’s federal funding, beginning with federal fiscal year 2002. Because the state has a PIP, the federal government holds these penalties in abeyance until the final review, however, interest and the penalties continue to accumulate for each year. We estimate that the full penalty amount for the failure of three outcome measures (along with interest) to be about $26 million, as shown in Figure 2. This estimate does not reflect the possibility of receiving partial credit for the Permanency outcome subgoals, as discussed earlier. If the state received partial credit, penalties would be reduced to approximately $20 million.

When Will Penalties Be Applied? Once ACF receives the final data for review of the PIP in April, sanctions and penalties could be applied as soon as May or June 2007. The state may at that time begin an appeal of these sanctions. We cannot estimate how long an appeal would take. However, during appeal, interest on any penalties will continue to accrue at a rate of 12.25 percent.

Another Federal Review to Occur in 2008. The federal government is scheduled to conduct another review sometime in 2008. Although there will be some significant changes to the design of the review’s outcome standards, the state will still be held responsible for outcomes not met under the first review and PIP. Once the second review is completed, penalties for outcome areas still below federal standards double to 2 percent for each outcome area not in compliance. Because of the ongoing risk of penalties, the Legislature should continue to monitor closely the state’s performance on federal child welfare outcomes.

Balancing the Risk and Potential of the Federal IV-E Waiver Project

Over the next five years, the state will participate in a federal IV-E funding waiver demonstration project. The waiver caps the amount of federal funding available to the state during this period, while also providing an opportunity for the state to use these federal funds more flexibly. However, the limit on federal funding could pose some risk to the state. We review the implementation status of the waiver project, and recommend adopting budget bill language in order to better balance the risks to children with the opportunities to improve outcomes.

Federal Funding of CWS

Federal IV-E Funds Provide Limited Flexibility. Title IV-E of the Social Security Act, provides the majority of the federal funding dedicated to child welfare programs, such as foster care, adoptions assistance, and independent living. These funds are normally an open-ended entitlement which may be used to cover costs for board, care, and related administration for eligible children in foster care (including social worker salaries and support). Federal IV-E funds may be used for case management activities, including referral to services, but not for services themselves, such as counseling or treatment that would be used to prevent child abuse, speed reunification, or maintain safety for children who remain in their homes. There are other federal funds, (those authorized under Title IV-B) that may be used for these types of services and prevention activities. However funding under IV-B is capped, and the majority of these funds are usually spent by the end of the second quarter of each fiscal year.

IV-E Funding Waiver Granted. On March 31, 2006, the federal government approved the state’s request to waive certain provisions of Title IV-E under a IV-E waiver demonstration project. Under the terms of the federal IV-E waiver, up to 20 counties can participate, using federal funds for services that would not normally be eligible for federal reimbursement. The purpose of the waiver is to encourage and allow the use of innovative strategies or intensive services in order to prevent or limit placement in foster care. Two counties have chosen to opt into the waiver demonstration, Los Angeles and Alameda. Together these two counties account for 37 percent of the child welfare caseload in California.

Waiver Opportunity. The waiver presents a unique opportunity for the state to end what is described by some as a perverse funding incentive. This perverse incentive results from the availability of uncapped federal funding for the costs of foster care placement while capping federal funds for services that might avoid foster care placements. These services usually involve mental health and substance abuse assessment and treatment, or other types of family supports that address underlying causes of abuse and neglect. The waiver will allow the state to use IV-E funds for such services. Foster care placement is generally the most costly intervention for a case of child abuse or neglect. As a result, if the waiver project successfully decreases the use of foster care placement it will result in savings which the participating counties may re-invest in a broader variety of services for children.

How Will the Title IV-E Waiver Work?

Capped Allocation. Participating counties will receive a capped allocation of IV-E funds. The allocation amount is an average of the county’s IV-E expenditures for federal fiscal years 2003 through 2005. The capped allocation of federal funds is combined with the state’s contribution of General Fund support to create a “block grant” to the participating counties to fund child welfare and foster care services. The participating counties may not claim more than this annual allocation. Any unspent allocation will be available to the county in the subsequent year.

For the two counties who have chosen to participate in the waiver, this funding allocation is higher than it otherwise would be without the waiver. This is because both counties have experienced a decrease in their IV-E-eligible foster care caseload relative to the amount of block grant funding established under the waiver. We estimate that approximately $81 million in additional flexible funds will be available over the five-year waiver period for both counties.

Year-to-Year Funding Growth. The state’s agreement with the federal government allows the funding amount for the counties to increase by 2 percent for each of the five years of the waiver period. In addition, counties may opt to use up to 5 percent of their year-five allocation during their first year for start-up related expenses.

Legislative Direction. Chapter 75, Statutes of 2006 (AB 1808, Committee on Budget), authorized the department to develop memoranda of understanding (MOUs) with participating counties, which would include among other provisions, the allocation methodology for state funds and the required county share of cost. Chapter 75 provided broad authority to the administration to manage the implementation of the waiver, including the elements of the agreements between the counties and the state. These agreements define how the state and the counties share the risks posed by a capped allocation and the state’s total funding commitment over the five years.

Risks and Opportunities

Opportunities of Waiver Project. Increased funding flexibility offers an opportunity to “lock in” an historical amount of federal funds that is higher than current baseline estimates, and to provide more preventive services, using savings generated from lowering dependence on foster care. Further, if these strategies are successful, the waiver project will likely improve the system’s performance on both federal and state outcome measures.

Alameda County’s plan provides a good example of how the waiver may present an opportunity to improve performance on these outcome measures. Currently, Alameda County performs well on its rate of timely reunification for children in its foster care system. However, the county also has a high rate of reentry to foster care. The county plans to expand the services it offers to support children and families after reunification, in an attempt to prevent a reoccurrence of abuse or neglect. If successful, the county’s waiver project will impact the county’s performance on the related federal and state outcome measure, as well as avoid additional costs of subsequent foster care placements for a child.

Similarly, Los Angeles County plans an expansion of assessments and access to mental health or substance abuse services, at the initial investigation of abuse or neglect. Such assessments, now used on a limited basis, would be eligible for funding under the IV-E waiver. This type of service, conducted early in a case, can identify when an underlying issue might be present that, if left untreated, could affect the safety of a child remaining at home. The early identification of such issues may also reduce the time it otherwise might take for the county social worker to identify these issues, thus decreasing the amount of time a child spends in foster care. If successful, this intervention could improve both safety and permanency measures.

Financial Risk. Because the waiver shifts funding from an open ended entitlement to a capped allocation, it could pose a financial risk to participating counties. If project strategies do not produce the anticipated reduction in foster care and resulting cost avoidance, participating counties may be unable to provide the foster care services within the capped funding level. Some of this risk is the result of external factors, over which neither the state nor the counties have any control. For example, significant increases in a particular type of substance abuse or other unforeseen social or policy changes could create conditions leading to higher rates of child abuse and neglect or demand for foster care placement during the five-year period. If this occurs, and a participating county overspends its cap, there could be pressure on the state to make up the difference. Though the final MOUs with the counties had not yet been completed at the time this analysis was prepared, it appears that the Department of Social Services (DSS) has placed the liability for all costs that exceed the federal cap on the counties.

Child Safety Risk. Another potential risk stems from capped funding for foster care placement in the event of a caseload spike. To the extent that limited funding creates an incentive to reduce caseload, there is a risk that the county could favor the use of other interventions instead of removal from the home when removal might be the most appropriate alternative to prevent further abuse or neglect.

Balancing Risks and Opportunities. The federal funding waiver presents a significant opportunity for the state to meet a number of its most important goals with respect to child welfare programs. With the increased funding flexibility, the counties can potentially provide a mix of services to families and children that will enable them to improve their performance on child welfare outcomes. As discussed earlier in this chapter, the consequences of not improving on federal outcomes is federal penalties. Moreover, a continued decrease in the use of costly foster care placement is a longer term financial benefit to counties as well as the state.

Thus far, the Legislature has provided broad authority to the administration to define the terms of the waiver and manage the opportunities and risks. Below we describe the elements of the state’s plan, as they were available at the time this analysis was prepared. We also recommend ways the Legislature could mitigate potential risks and increase its oversight of the waiver project in general.

Current Plans for State Implementation

Amount of State General Fund Provided for the Waiver Project. Normally, state funds are provided for foster care and the administration of child welfare programs based on caseload. Like the federal funds described earlier, these funds are not capped and increase based on the number of cases the county is managing. Under the IV-E waiver project, DSS will freeze the state General Fund portion of foster care grant payments going to the participating counties at the 2005-06 levels, while providing an annual growth rate of 2 percent for child welfare administrative costs. This is in contrast to the federal funds, which will increase for both types of costs, by 2 percent each year. By freezing the General Fund allocation for foster care, the state’s plan decreases the pool of flexible funds available to the participating counties for reinvestment in waiver services, while conserving state General Fund resources.

Provisions to “Opt-Out” of Capped Allocation. The counties participating in the waiver project may opt-out if the demonstration is unsuccessful and the capped allocation proves to be insufficient to meet the counties‘ costs for services and grants. There are two main features of the opt-out policy: (1) a county must provide six-month notice to the state of its intention to opt-out of the waiver project and (2) the county is responsible for reimbursing any federal fund liabilities for services that would not have normally been eligible for IV-E funding. This feature of the state’s plan shifts to the counties any risk that these additional costs would pose to the state General Fund.

Most Risk Is Shifted to Counties. Both the arrangement for state General Fund allocation and the opt-out policies essentially shift the financial risks of the capped allocation to the counties. Because the benefits from successful use of the waiver would accrue to both the counties and the state, we think that the Legislature should modify these policies to ensure that the children in the child welfare system benefit as much as possible from the waiver’s opportunities, while controlling General Fund exposures.

Analyst’s Recommendation

Provide Reserve for State Foster Care Allocation. Overall, the state’s cost for foster care assistance payments is forecast to increase over the next five years by slightly less than 1 percent each year. In a county that is not participating in the waiver, these additional funds will support increases in foster care payments. Under the current arrangement, waiver counties will not receive this additional funding each year, which somewhat limits the advantages to them of participating in the project. The Legislature could offer to the waiver counties these growth funds (an average of $1.4 million each year, over the five years) as an “emergency reserve” that could be triggered by an increase in foster care caseload, if it occurs. Absent such a reserve, counties would have to absorb these costs. Thus, this reserve would alleviate some of the program risks to child safety described earlier. Accordingly, we recommend the adoption of budget bill language that establishes this reserve fund and sets out conditions for its use.

Monitor Outcomes for Increased Safety Risk. Though it is likely that participating counties will monitor caseload and outcome changes, we believe the potential impacts of the waiver on children merit further attention. Accordingly, we will review reported outcomes for Alameda and Los Angeles Counties and notify the Legislature of significant changes.

CWS Budget Methodology

Although statute requires the Department of Social Services to provide the Legislature with an updated budget methodology for child welfare services by February 1, 2007, this methodology had not been provided at the time this analysis was prepared. We withhold recommendation on the methodology, pending receipt of this proposal. We provide key issues for the Legislature to consider when reviewing the department’s proposal.

Current CWS Budget System

Funding for the CWS program comes from a variety of state, federal, and local sources. Listed below are the main components of state funding for core CWS.

• CWS Base Funding. The state currently allocates base funding to CWS by applying caseload standards (that is, number of cases handled by a caseworker) to average monthly case counts to determine the number of workers necessary to provide services in the program. The current methodology uses caseload standards agreed upon in 1984.

• Hold Harmless Funding. In preparing the budget for CWS, DSS adjusts funding upward when the caseload increases, but does not adjust funding downward when the caseload declines. The practice of not adjusting the budget to reflect caseload decline is known as the “hold harmless” approach and provides substantial additional funding to counties with declining caseloads.

• CWS Augmentation. The Legislature has been concerned about the size of social worker caseloads and its effect on services. As a result, the Legislature established the CWS augmentation in 1998, increased the amount available in 2000, and added an additional $98 million in 2006-07 to be continued on an ongoing basis. There is no county matching requirement for these funds.

Concerns About High Social Worker Caseloads

There has been an ongoing effort to determine how many cases a social worker can carry and still effectively do his or her job. In 1984, the County Welfare Directors Association and DSS established an agreed upon level of cases per social worker. In 2000, the Child Welfare Services Workload Study, required by Chapter 785, Statutes of 1998 (SB 2030, Costa), determined that social workers carried too many cases to effectively ensure the safety and well-being of California’s children. The SB 2030 Study, as it is commonly called, proposed minimum and optimum caseload standards for social workers. The state has yet to adopt these standards for caseload budgeting, although the other funding adjustments described above have been made with the intention of decreasing caseload sizes.

Legislature Requested Review of Budgeting

Chapter 75 required DSS to report to the Legislature with a new methodology for budgeting CWS funds. The legislation requires that the department’s review include the SB 2030 study, other research literature, as well as models from other states. Moreover, the legislation requires that the revised methodology be incorporated into the May Revision of the Governor’s budget for implementation in 2007-08.

Key Questions for Assessing CWS Budgeting Changes

Because the details of the administration’s proposal are not yet available, we cannot comment on the proposed changes at this time. However, we recommend that the Legislature consider the following questions in assessing this proposal.

How Does the Plan Adjust for the Effects of the Hold Harmless Policy? County funding through the hold harmless policy varies widely. Some counties may already have significantly lower caseload ratios as the result of hold harmless gains, and as a result, may reach recommended caseload standards with less additional funds. It would be more cost effective for the state to target its resources on counties with the greatest caseloads per worker than to provide increases regardless of current county caseloads.

Does the Proposal Connect Funding and Performance on Outcome Measures? Chapter 75 states that the $98 million for outcome improvement “be linked to improved outcomes.” Given the Legislature’s interest in outcome improvement, does the proposal link the allocation of funds to a county’s CWS outcomes?

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