Analysis of the 2008-09 Budget Bill: Health and Social Services

Department of Child Support Services (5175)

The Department of Child Support Services (DCSS), created on January 1, 2000, administers California’s child support program by overseeing 52 local child support offices (some small counties have joined together to form local child support agencies). The primary purpose of the program is to collect from absent parents support payments for custodial parents and their children. Local child support offices provide services such as locating absent parents; establishing paternity; obtaining, enforcing, and modifying child support orders; and collecting and distributing payments.

The Governor’s budget proposes expenditures totaling $858.9 million from all funds for support of DCSS in the budget year. The budget proposes $300.8 million from the General Fund for 2008–09 which is a decrease of $50.7 million (14 percent) compared to 2007–08. This decrease is primarily due to the Governor’s budget balancing reduction proposals and decreased costs for automation systems.

Increasing the Child Support Pass–Through

The Federal Deficit Reduction Act of 2005 increases federal participation in the amount of child support passed through to families who currently receive welfare assistance. The Governor’s budget proposes to increase the monthly pass–through from $50 to $100 in January 2009. We recommend delaying this proposal until July 2010, thereby saving $5.6 million in General Fund revenue in 2008–09 and $11.2 million in 2009–10.

Background. In general, child support which is collected from absent parents whose families are receiving cash grants through the California Work Opportunity and Responsibility to Kids (CalWORKs) program are deposited in the General Fund as a partial offset to the state’s costs for the cash grants. Since the enactment of the 1996 federal welfare reform legislation, federal law lets states decide whether to pass through to the custodial parent on welfare any child support collected from the absent parent. However, any amount of child support that the state decides to pass through to the custodial parent reduces dollar for dollar the amount of collections deposited in the General Fund. Currently, California elects to pass through the first $50 per month collected from the noncustodial parent to welfare families at a cost of about $25 million General Fund annually.

Pursuant to the Deficit Reduction Act, beginning in October 2008 the federal government will share in the cost of the child support that is passed through to CalWORKs recipients up to specified limits. Specifically, the federal government will participate in 50 percent of the pass–through of up to $100 for families with one child, and up to $200 for families with two or more children.

Governor’s Proposal to Increase the Pass–Through. The Governor’s budget proposes to increase the monthly child support pass–through from the current $50 to $100 for all welfare families beginning January 2009. As shown in Figure 1, this policy change results in lost General Fund revenue of about $5.6 million in 2008–09 and $11.2 million in 2009–10. This is because, as mentioned above, child support not passed through to families would otherwise be retained by the state as General Fund revenue, partially offsetting the cost of the grant provided to CalWORKs families. The lost revenue is greater in 2009–10 than in 2008–09 because the budget proposal is effective for only six months in 2008–09, and for a full year in 2009–10.

Although federal participation in the child support pass–through begins in October 2008, the Governor’s budget delays the increase in the pass–through until January 2009, two months after the anticipated completion of the single statewide automation system.

Analyst’s Recommendation. Without prejudice to the proposed policy change, we recommend postponing the increase in the pass–through from $50 to $100 until July 2010. This recommendation, if adopted, would retain the current pass–through of $50, and therefore, there would be no reduction in the income support for welfare families receiving child support. Adopting this proposal will increase General Fund revenues by $5.6 million in 2008–09 and $11.2 million in 2009–10.

Revenue Losses Exceed Savings for Certain Proposals

The Governor’s budget includes budget balancing reductions that would result in General Fund revenue losses that are greater than the associated General Fund expenditure savings. We review these proposals and recommend their rejection.

Governor’s Reduction Proposals. The Governor’s budget includes two budget reduction proposals where the estimated General Fund revenue loss exceeds estimated General Fund savings. In total, these particular reductions result in General Fund savings of about $1.7 million, while creating General Fund revenue losses of about $3.2 million. Additionally, the budget includes other reductions that we believe may potentially have a negative impact on General Fund revenues. We discuss these proposals in more detail below.

Reducing the Judicial Council Contract. The Governor’s plan reduces the contract between the Judicial Council and DCSS by $1.5 million General Fund in 2008–09. This contract provides for court commissioners, family law facilitators, support staff, and the court expenses necessary to establish child support orders. By assuming that the reduction will result in less court commissioners, and therefore less hearings and order establishments, DCSS estimates that this proposal will result in $1.8 million in lost General Fund revenues.

Reducing the Locate and Intercept Contracts. The Governor’s budget also reduces DCSS locate and intercept contracts by $175,000 General Fund in 2008–09. The DCSS has several contracts with various state agencies to locate noncustodial parents and intercept their assets for purposes of paying their child support obligations. The locate and intercept contracts are responsible for an estimated $160.5 million in child support collections per year. By reducing these contracts by $175,000 General Fund (about 8.8 percent), DCSS estimates that locate and intercept collections will decline by $1.4 million (about 8.8 percent) in 2008–09.

Other Potential Revenue Losses. The Governor’s budget proposes to make several reductions to DCSS state operations. One proposal includes a reduction of 11 employees responsible for pursuing, through various means, the recovery of funds from noncustodial parents. Reducing these positions could result in delayed recovery of child support collections for the state General Fund and for families. The DCSS indicates that this reduction proposal is being revised.

Analyst’s Recommendation. At the time this analysis was prepared, DCSS indicated that it is in the process of pursuing strategies to mitigate the General Fund revenue loss associated with the Judicial Council contract and locate and intercept reduction proposals. However, at this time additional proposals have not been identified by the administration. Because the difference between General Fund savings and lost General Fund revenue is so large for the locate and intercept reduction proposal, lost revenues are likely to exceed General Fund savings despite mitigation strategies. As a result, we recommend rejecting the reduction proposals that reduce Judicial Council and locate and intercept contracts. Finally, we withhold recommendation on the 11 positions proposed for reduction, pending the receipt of information demonstrating that the reduction does not result in more lost General Fund revenue than it saves in General Fund costs.

Fiscal Risks of Delayed Single System Implementation

In September 2006, the Department of Child Support Services applied for federal certification of the California Child Support Automated System. We review system implementation, federal certification, and the General Fund risks associated with delayed project certification.

Automation Components. The California Child Support Automation System (CCSAS) consists of two major components, the State Disbursement Unit (SDU) and Child Support Enforcement (CSE). The SDU was fully implemented in May 2006, and collects, processes, and distributes child support payments. The CSE component of the project provides a central database and case management system to support child support enforcement activities in all Local Child Support Agencies. The CSE portion of CCSAS is being implemented in two phases. The first phase of CSE is Version 1, which created a centralized database and reporting system for two preexisting systems (referred to as legacy systems). The second phase is Version 2 which will consolidate the two preexisting legacy systems and create increased child support capabilities. Within certain limitations discussed more fully below, the state share of the project costs is 34 percent and the federal share is 66 percent.

Two Certifications. Because California is implementing its single statewide system in two phases, there will be two federal certifications. The first certification will be of Version 1. As indicated below, this certification process is currently underway. Upon certification of Version 1, the state will receive a reimbursement for a federal penalty incurred for failing to have a single statewide system in place. The second certification is of Version 2. Counties began to transition from Version 1 to Version 2 in waves beginning in May 2006. The earliest Version 2 will be certified is November of 2008. After Version 2 is implemented, a federal funding cap placed on project costs will be lifted. Below we discuss each certification and how it impacts state funds.

Penalty Relief and Reimbursement. Since 1998, California has paid a total of nearly $1.2 billion in federal penalties for failing to have a single statewide system. The 2006–07 budget included $215 million to pay the federal penalty for federal fiscal year 2006 (October 2005 through September 2006).

As previously mentioned, the state is in the process of implementing a single statewide automation system in two phases. The first phase (Version 1) is known as the alternative system configuration (ASC). Once Version 1 and the SDU were fully operational in September 2006, the state applied for certification of this alternative system. After the state applied for certification federal penalties were held in abeyance pending federal certification. When the system is certified, the federal government will reimburse the state 90 percent ($193 million) of the final penalty paid in 2006–07. The budget assumes that the federal government will certify the ASC, and reflects this reimbursement as revenue in 2007–08. At the time this analysis was prepared, 37 federal certification findings must be corrected before the ASC can be certified. Therefore, it is more likely that the reimbursement revenue will occur in 2008–09.

Version 2 County Implementation Experiences. Counties began to transition from CSE Version 1 to Version 2 in waves beginning in May of 2007. As of January 2008, 24 counties (representing about 13 percent of the caseload) had converted to Version 2. We have visited six counties after their conversion. The first three counties experienced difficulties because of system defects, design flaws, and forms printing incorrectly. The state and vendor worked closely with counties to correct many of these problems before additional counties were converted. Subsequent county conversions have resulted in fewer complications. In February 2008, Orange County is expected to convert to Version 2. Orange County has three times the caseload of any county converted thus far (Orange County’s caseload is about 98,000). We will continue to monitor the county conversions to ensure the Legislature is advised of the status on a timely basis.

Federal Cap on Alternative System Configuration. When DCSS requested federal approval of the two phase approach to implementing a single statewide system, federal funding for the project was locked–in, or capped, at the cost estimates as of that date. This federal funding cap ensures that a state does not spend more in developing an ASC than it would spend building a single statewide system. The federal cap will be lifted when California’s single statewide system is completed and obtains federal certification. Los Angeles, currently scheduled to convert in November 2008, will be the last county to convert to Version 2. Thus, November 2008 is the earliest possible date for Version 2 certification.

Delayed Certification May Create General Fund Costs. Because the state is currently operating under a federal fund cap, any additional development costs above the cap must be covered solely by the General Fund. If the state is not certified in 2008–09, and CCSAS project costs remain at the currently estimated amounts, DCSS indicates that there would be an additional General Fund cost of approximately $11.4 million in 2009–10 to absorb the federal portion of the planned project costs for that year. This is because, at that point, DCSS estimates that project costs will exceed the amount approved under the federal cap. It is important to note that this estimated $11.4 million in additional General Fund costs in 2009–10 is not a firm number, but a point–in–time estimate. If project costs are higher than anticipated, General Fund costs, because of the federal cap could occur in 2008–09.