LAO 2006-07 Budget Analysis: Perspectives and Issues

Analysis of the 2006-07 Budget Bill

Legislative Analyst's Office
February 2006

Mental Health Mandates Continue to Pose Challenges

Should the Legislature Restructure Mental Health Ser-vices for Special Education Children to Address Major Fiscal and Policy Concerns With These State Mandates?


State costs for reimbursing counties for two state-mandated programs to provide mental health services for school children have grown significantly in recent years. Moreover, serious weaknesses are evident in the system for delivering these services for children in special education programs. To help guide legislative policy-making in this area, we provide background information on these two mandates, assess the Governorís budget and policy proposals relating to them, and outline the Legislatureís options for addressing these issues.


Costs for mental health services under two state-mandated programs that provide mental health services for special education students have grown significantly in recent years, and recent developments suggest that this trend is likely to continue. Moreover, we have identified problems with the ongoing implementation of these mandates involving weak fiscal controls, the lack of accountability for ensuring the quality of services, weak linkages to education, and the failure of some counties to provide these services at all to students.

In this analysis, we comment on the level of funding provided in the Governorís 2006-07 budget plan for these two mandates, examine in detail why the mandates are not an effective approach to operating such a large mental health services program, and outline two options for program reform in this area.


Federal Mandate Becomes a State Mandate. In 1976, Congress passed what is now known as the Individuals with Disabilities Education Act (IDEA) to guarantee handicapped children the right to receive a free appropriate public education. This included special education and related services, such as mental health care, necessary for the child to benefit from his or her education.

Initially, local educational agencies were responsible for providing all of the necessary services to special education children under this federally mandated program. However, Chapter†1747, Statutes of 1984 (AB 3632, W.†Brown) and related legislation shifted the responsibility for providing mental health services to counties. Also, subsequent state legislation shifted responsibility for mental health services for students placed in out-of-state residential facilities to the counties. These local mental health programs, in turn, have become known collectively as the ďAB 3632Ē mandates.

Even though the requirements stem from a federal IDEA mandate, the Commission on State Mandates (CSM) has determined that, by obligating county mental health systems to provide these services to eligible children, AB 3632 and its related legislation constitute reimbursable state mandates for counties. Article XIII B, Section 6 of the State Constitution generally requires the state to reimburse claims filed by local agencies, such as counties, for costs they have incurred when the state has required them by legislation or regulation to establish a new program or a higher level of service.

For several years, due to the stateí s fiscal problems, the state delayed making appropriations for the payment of these claims to counties, with the result that more than $350†million in reimbursements are now owed by the state to counties for AB 3632 services. However, the state no longer has the option of avoiding or delaying such appropriations if it wishes a mandate to remain in effect. This is because Proposition†1A, a constitutional amendment approved by the voters in November 2004, generally requires the state to either fund or suspend local government mandates each year. The measure also allows the state to pay off its past mandate obligations over a set period of time (subsequent legislation established the repayment period at 15 years).

Varied Sources of Funding Provided Over Time. Like other special education programs, AB 3632 is structured as an entitlement program, meaning that it is available free of charge to all children eligible for services. The most recently available Department of Mental Health (DMH) data indicate that about 30,000 children receive services under the provisions of AB 3632. This program has been supported mainly from the following funding sources:

The mix of funding sources actually used for the support of these services has varied over time. The $12†million DMH categorical program has not been in operation for four years and, as noted above, payments of reimbursements for mandates had been delayed for three successive years because of the stateís fiscal problems. However, reimbursement payments to counties are now beginning to resume, with further support for the program now coming mainly from federal special education funds, Medi-Cal and other public and private insurance coverage, and county realignment allocations.

SELPA Funding. In addition to these resources, recent state budgets have also appropriated $31†million annually from the General Fund to Special Education Local Plan Areas (SELPAs), regional educational agencies that are responsible for the planning of special education services. These funds, which are counted as part of the Proposition†98 funding guarantee for schools, are to be used by SELPAs and schools to provide early intervention services for children who are experiencing mental health problems before they require special education services.

This program operates separately of AB 3632 and the $31†million allocation is not available to county mental health agencies for the purpose of complying with the AB 3632 mandates.

Administration Still Seeking to Revise the AB 3632 Program

2005-06 Actions. Due to a number of fiscal and programmatic concerns about AB 3632 that we discuss in more detail below, the administration had proposed legislation last year to repeal the state laws mandating county mental health systems to provide these services to special education children. The administration further proposed legislation to return the responsibility for complying with federal IDEA special education mandates to the schools, but to also authorize SELPAs to contract with county mental health systems so as to minimize any disruption in the delivery of these services to children.

The Legislature rejected the administrationís proposal to repeal the mandates, keeping the responsibility for providing these special education services with county mental health agencies. The Legislature also approved an appropriation of $120†million from the General Fund to resume reimbursement of claims filed by counties for providing these services.

At the time he signed the 2005-06 Budget Act, the Governor issued a written statement indicating that he was approving the $120†million on a one-time basis. The Governor also directed DMH, in collaboration with CDE, to develop a plan to shift AB 3632 services from a state-mandated program to a categorical program in 2006-07.

2006-07 Budget Proposal. The administrationís January budget does not include a specific proposal for a redesigned AB 3632 program. Instead, the administration indicates that it intends to submit these changes to the Legislature in time for the May Revision. The administration indicates that, while consultations with education and mental health agencies and others on such changes had begun, additional work was necessary before a comprehensive plan to implement its proposed approach would be ready for legislative consideration.

Despite the lack of a specific plan, the administration reiterated its intention to eliminate the AB 3632 mandates and to establish a categorical program for the same purposes in their place. It has also indicated its willingness to consider proposals providing categorical program funding for either mental health agencies or for the schools.

Finally, the January budget plan:

Budget Plan May Not Fully Fund AB 3632 Services

Budget May Provide Insufficient Funding. Our analysis of the Governorís budget plan indicates that it would provide insufficient funding in the current year and budget year combined to fully fund the costs of the program under existing law. Depending on the design of the still-developing administration plan, additional funds beyond those now included in the budget plan may be needed for a new AB 3632 categorical program.

We acknowledge that it might be possible to achieve some reduction in the cost of AB 3632 services were they to be restructured from two mandates into a categorical program. However, the gap between existing county costs for the program in its current form and the amount of funding set aside in the Governorís budget plan for a new categorical program is significant.

Specifically, based on our review of preliminary data on county mandate claims for 2004-05 compiled by the State Controllerís Office (SCO), we estimate that at least $180million would be needed for each of the 2005-06 and 2006-06 fiscal years to support AB 3632 services. Figure†1 shows the amount of funds appropriated in the 2005-06 Budget Act for these mandates and the amount of resources the administration has proposed for them in 2006-07. Absent the appropriation of additional state resources, the funding gap that remains to be addressed if AB 3632 remains a state mandate could exceed $50†million in the current year and $60†million in the budget year, for a potential combined shortfall of more than $110†million over the two fiscal years.


Figure 1

LAO Estimate of Costs for AB 3632 Services

(In Millions)




Estimated Cost of County Services



Funding in Budget Act



Federal special education



Mandate appropriation in the
Department of Mental Health budget


Set-aside in Commission on State Mandates budget



        Total Funding Available



Estimated Funding Gap




Funding Gap Could Be Greater. The AB 3632 funding shortfall could be tens of millions of dollars greater than we have identified, especially if the Legislature decides to maintain them in the form of a state-mandated program. The SCO data upon which have based our estimate is preliminary and more complete data could well document higher total costs for AB†3632 services than we are now projecting. As shown in Figure†2, past trends have demonstrated steady and significant growth in AB 3632 costs.

Recent changes in circumstances also suggest higher costs are likely for AB 3632 services. For example, considerable as the spending has been for AB 3632 services in recent years, it appears likely that county spending for AB 3632 services might have been even greater had not the state repeatedly delayed payments of any such claims to an undetermined date. Previously, some counties might have experienced cash flow problems before they received reimbursement from the state, but now the lag in payments of claims is likely to be reduced.

Another factor likely to significantly increase program costs is recent legislation and CSM actions broadening the scope of the mental health services and administrative costs that are subject to reimbursement by the state under AB 3632. These legislative and CSM actions clarified that some services-such as case management, medication management, and psychotherapy-are now to be considered state-reimbursable costs. Retroactive claims for reimbursement for services that had been disallowed by state auditors for these services will be paid to counties, and future claims can also include these added services.

Similarly, counties have now been assured that they can use the realignment funds they receive under state law to help pay for AB 3632 services without having to reduce their mandate claims against the state to reflect these amounts. This includes realignment funds counties have used in the past to draw down federal Medi-Cal funding. These and other changes could increase the claims filed by counties against the state.

Shortfall Probably Requires General Fund Solution. Our analysis indicates that the shortfall in funding for AB 3632 that we have identified will probably have to be addressed using state General Fund resources. For example, we have concluded that, under federal rules, additional federal special education funds are not available for the support of AB†3632 services beyond the $69†million already proposed for this purpose in the education budget.

Existing Mandates a Poor Program Model

In our 2005-06 Analysis (please see page E-76), we discussed some of the problems with the stateís existing approach to the delivery of AB 3632 services through the two state mandates on county mental health agencies. In this analysis, we focus on four key issues: (1) weak fiscal controls, (2)†the lack of accountability for ensuring the provision of quality services, (3)†weak linkages to education, and (4) the failure of some counties to provide these services at all. We discuss these issues below.

Weak State Mechanisms to Control Costs

Our analysis indicates that the existing approach to delivery of AB†3632 services, by which the state reimburses counties for the provision of mental health services after-the-fact in response to claims, does not provide strong cost-control mechanisms or guarantee that state funds are well spent. As with all state-mandated programs, the state reimburses 100†percent of the allowable county administration and service costs that are claimed by counties. This reduces the incentive for cost management by local agencies.

This potential for costs to escalate is particularly significant in the case of AB 3632 because of the significant and unresolved disagreements that have arisen regarding which particular types of mental health services are necessary to fulfill the requirements of IDEA. The lack of a traditional categorical program structure, in which the costs and specific services that are authorized are spelled out clearly in statute and regulations, has sometimes left school agencies and counties confused as to which services and administrative costs are reimbursable under the two mandates.

A series of audits conducted by SCO since 2002 have disallowed almost $39†million in AB 3632 claims based on audits of $220†million in claims from counties. A large portion of the disallowances related to audit findings that medication management services could not be claimed under AB 3632-a decision that has now been reversed by legislation and CSM rulings. However, the CSM rulings did uphold audit findings that claims for reimbursement for crisis intervention services are not permissible.

The audits also found other evidence of weak fiscal controls in the provision of these services, such as claims for reimbursement for services funded by other programs as well as over-billing and data entry errors. Similarly, education agencies have reported finding counties providing AB†3632 services to students who are ineligible for special education services or to students who later cannot be found in any school district within that county. Some education agencies also have questioned whether, in some cases, the rates counties charged for AB 3632 services were higher than those charged for other county mental health programs.

A Lack of Accountability for Ensuring the Quality of Services

Our analysis indicates that the existing mandate approach also does not create an accountability mechanism to encourage the delivery of effective mental health services. The goal of AB 3632 is to help special education students do better in school. The existing program structure simply provides funds to counties for services rendered without (1) a program element to measure how well counties achieve the programís goals or (2)†a requirement to provide basic data on services provided to students in the program.

Weak Linkages to Education

Existing law assigns county mental health agencies the responsibility to provide AB 3632 services to help students succeed in school. To carry out this responsibility, county mental health agencies assess the needs of students who may need mental health services, develop the treatment plan for students who need these services, and deliver and pay for those services. Existing statute, however, does not (1) ensure that mental health and education agencies collaborate to design effective local programs, (2)†require counties to consult with K-12 education agencies regarding the delivery of services, or (3) provide an accountability mechanism to assess the extent to the programs are working to resolve the mental health problems of special education students. As a consequence, the existing AB†3632 mandate can foster an inappropriate separation between local K-12 and county mental health agencies.

This separation can make it difficult for educators to have input over the design and quality of AB 3632 services. For example, some educators indicate that counties do not provide important information regarding the status and progress of students receiving AB 3632 services. Other educators indicate that they would prefer that counties provide AB 3632 services at or near school sites in order to minimize travel costs and a studentís time away from the classroom. Under the existing program, however, educators have no formal authority to get needed information or to ensure that the provision of mental health services does not supplant teaching time during the regular school day.

The separation of program responsibilities also leads some educators to believe that they have no role in the AB 3632 program. Because the state has assigned most responsibilities to local mental health, some educators believe that issues regarding program accountability or effectiveness should be addressed by counties and the state. These mental health services, however, support a studentís individual education plan. As such, we think educators should be directly involved in the development of local AB 3632 programs as a way of maximizing the impact of services on each studentís educational opportunities.

No Services Provided in Some Instances

Federal special education law makes schools responsible for providing all special education services, including mental health services. Thus, if counties do not provide services, the responsibility falls to the schools to do so.

At least three local education agencies in California now administer all or some of the required AB 3632 services. These education agencies must provide the mental health services without access to AB 3632 funds or other available funding sources. The current program does not contemplate these situations, which can leave education agencies with the task of developing and funding a network of services without an adequate funding mechanism to pay for them.

Issues for Legislative Consideration

The issues discussed above reveal the kinds of problems that are created by using a state mandate to administer and finance a complex program that requires close coordination between the K-12 education and county mental health systems. State-mandated local programs provide only a source of funds. The existing AB 3632 mandate does not establish guidance about eligible services, accountability for ensuring the delivery of effective services, or the responsibilities of state agencies for program oversight.

To address these issues, we recommend that the Legislature initiate steps to restructure the way the state provides AB 3632 services to improve the way these services are provided to children and to avoid future fiscal problems.

Mandates Should Be Eliminated

Any restructuring, in our view, begins with the repeal of the existing AB 3632 mandates. To us, the evidence is strong that the current approach of relying on state mandates does not ensure the delivery of quality services for the children who need them. Moreover, under the current approach, the state is already experiencing significant increases in costs in this program, and faces difficulty in ascertaining whether these services are being provided in a cost-effective manner.

The Legislature also will have to address the funding shortfall for AB†3632 services that is likely to occur under the Governorís budget proposal. We see few reform options that would reduce AB 3632 costs by the roughly $60†million (about one-third of current estimated program costs) that would align the program with the level of resources that would be available under the Governorís budget plan.

The Legislature thus faces significant programmatic issues in the design of AB 3632 services and an immediate fiscal issue because the amount of funding proposed by the administration is likely to fall short of the amount needed to maintain the existing level of services. We believe the administration has an obligation to provide the Legislature with a policy proposal for modifying AB 3632 services that is in alignment with the funding that it proposes for these purposes.

Insist on Early Review of Administration Proposal

As noted earlier, the administration announced last July that it intended to prepare a proposal for a categorical program that would take the place of the AB 3632 mandates. Seven months after declaring its intention to prepare a plan for a categorical program, no such proposal has been presented to the Legislature and the administration now plans to present its completed proposal at the time of the May Revision. This proposed schedule, coming very late in the budget process, would not provide the Legislature sufficient time to assess the merit of such a plan.

Accordingly, we recommend that the administration be directed to present its preferred approach to the Legislature by April 1. If the Legislature is interested in restructuring AB 3632 services and repealing the two mandates, we recommend that it convene early legislative policy hearings to examine the administration proposal and the alternative approaches we discuss below.

Options for Reform of AB 3632

As discussed above, the absence of fiscal, program, and accountability measures for these services means that reforming the AB 3632 program requires developing these program components to guide the delivery of mental health services for special education students.

We see at least four major issues that any reform of AB 3632 should address:

Below, we briefly describe two options that address these major program issues.

Option: Shift Program Responsibility to K-12 Education. In our Analysis of the 2005-06 Budget Bill, we recommended shifting responsibility for AB 3632 services to a K-12 education categorical program, which we believe would alter the financing and governance for mental health services sufficiently to address most of the shortcomings of the current system. We continue to prefer this approach, under which special education programs would be provided a block grant of funds with which to support mental health services, thereby creating strong incentives for educators to operate efficient programs.

Our recommended approach would mend the separation between education and mental health services by making the education system responsible for the program, with the likely result of a greater focus on providing effective services to students. Because the responsibility for providing both special education and related mental health services would clearly rest with the schools, school accountability for student education outcomes would also be clarified. Moreover, there is no reason why this governance change should disrupt the delivery of these services to children, since, under our preferred approach, local education agencies could contract with county mental health agencies for the delivery of services.

Under our model, mental health and education agencies could nonetheless collaborate in providing mental health services to special education students. As noted earlier, counties in many cases would continue to serve as the main provider of these services under a contract relationship with school agencies. As with the current system, making the two systems work together-despite different governance structures, goals, and cultures-could present challenges.

Option: Mental Health Categorical Program. While we continue to believe our recommendation for a K-12 categorical program represents the best option available to the state, we believe the Legislature should also examine the alternative of creating a new AB 3632 categorical program operated by county mental health agencies.

This approach has some advantages. For example, it would keep all county mental health services for children in one county mental health system. This would allow schools to take advantage of existing expertise and economies of scale in the county-operated programs. It would also allow counties to identify and meet the mental health needs of special education students other than those services that are required for a studentís educational program. We discussed this possibility in our Analysis of the 2002-03 Budget Bill. (Please see page C-159.) One disadvantage of this model is that, if a county agency failed to fully carry out its responsibilities, school agencies would continue to remain financially and programmatically at risk under the federal IDEA mandate to provide these services.

A new program, however, could be designed to take advantage of the strengths of the county mental health agencies while also recognizing the shared responsibility for these services. For instance, the state could require joint planning of county AB 3632 programs in order to promote closer working relationships between education and mental health. Local accountability mechanisms also could be included in a new county program as an avenue to improving the quality of services to students. Even the funding mechanism could recognize the shared responsibility for AB†3632 services by requiring both education and mental health to support program costs when they exceed the amount provided by the state.


The 2006-07 Governorís Budget proposes a significant change in the existing AB 3632 program but does not yet provide a specific approach for the Legislature to consider. In addition, the budget proposal could be more than $110†million short of fully funding the program for 2005-06 and 2006-07, combined. In our view, the reform of AB 3632 that is contemplated by the administration is unlikely to generate enough savings to bring its proposal into alignment with the level of funding it has included in the 2006-07 budget plan.

We agree, however, with the underlying assumption in the Governorís proposal that the state needs to find a better mechanism for financing AB 3632 services than the existing state-mandates. Moreover, the current program raises a number of policy issues that warrant the Legislatureís attention. By addressing both the policy and fiscal issues together, we see an opportunity for the Legislature to place this program on a path that could result in more efficient and effective services at the local level.

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