DEPARTMENT OF DEVELOPMENTAL SERVICES · The Department of Developmental Services’ responses have been incorporated within the report and your response has been included in its entirety

DEPARTMENT OF DEVELOPMENTAL

SERVICES

Review Report

ACCOUNTING AND ADMINISTRATIVE CONTROLS

REVIEW

July 1, 2011, through June 30, 2015

BETTY T. YEE California State Controller

November 2016

BETTY T. YEE

California State Controller

November 30, 2016

John Doyle, Chief Deputy Director

Department of Developmental Services

1600 9th Street

Sacramento, CA 95814

Dear Mr. Doyle:

On August 12, 2016, we issued a draft report. After reviewing additional information, we issued

a revised draft report on November 7, 2016. We received your management responses to the

revised draft report on November 17, 2016. The Department of Developmental Services’

responses have been incorporated within the report and your response has been included in its

entirety as an attachment.

We reviewed the processes and administrative controls of the Department of Developmental

Services (DDS) to determine whether DDS has monitoring processes in place to ensure that an

appropriate amount of funding is being used for recipient services and that a disproportionate

amount of funding is not being used for administrative purposes such as salaries and

administrative expenses at DDS headquarters, state-operated developmental/community centers,

regional centers, and service providers. The engagement review period was from July 1, 2011,

through June 30, 2015.

We determined that DDS has no controls in place to monitor administrative costs. We noted the

following in regard to DDS processes and administrative controls (Findings 1 through 7 and

Observations 1 and 2):

Findings

1. $20 million in appropriations should not have been expended because DDS never fully

recovered retroactive payments;

2. DDS audits are not properly documented to demonstrate compliance with Generally Accepted

Governmental Auditing Standards;

3. DDS’ audits of regional centers would be more effective if auditors assessed and relied on

internal controls;

4. DDS did not comply with Welfare and Institutions (W&I) Code section 4652.5 –

Independent Reviews and Audits;

5. DDS does not have controls over the administrative costs that vendors recover;

John Doyle, Chief Deputy Director -2- November 30, 2016

6. DDS has a backlog of whistleblower cases; and

7. DDS’ budget is partially developed with unapproved federal reimbursements.

Observations

1. Regional centers are not in compliance with W&I Code section 4640.6 – Case Load Ratios;

and

2. DDS under-utilized authorized services for consumers.

If you have any questions, please contact Andrew Finlayson, Chief, State Agency Audits Bureau,

by telephone at (916) 324-6310 or by email at [email protected].

Sincerely,

Original signed by

JEFFREY V. BROWNFIELD, CPA

Chief, Division of Audits

JVB/rg

Attachment

cc. Betty T. Yee, California State Controller

Department of Developmental Services Accounting and Administrative Controls Review

Contents

Review Report

Summary ............................................................................................................................. 1

Review Authority ............................................................................................................... 1

Background ......................................................................................................................... 2

Objectives, Scope, and Methodology ................................................................................ 2

Conclusion ........................................................................................................................... 4

Views of Responsible Officials .......................................................................................... 4

Restricted Use ..................................................................................................................... 4

Findings and Recommendations ............................................................................................. 5

Observations ............................................................................................................................. 23

Attachment—Department of Developmental Services Response to Draft Report


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Review Report

The State Controller’s Office (SCO) reviewed the processes and

administrative controls of the Department of Developmental Services

(DDS) to determine whether the DDS has monitoring processes in place

to ensure that an appropriate amount of funding is being used for recipient

services and that a disproportionate amount of funding is not being used

for administrative purposes such as salaries and administrative expenses

at DDS headquarters, state-operated developmental/community centers,

regional centers, and service providers. The engagement review period

was from July 1, 2011, through June 30, 2015.

We determined that DDS has no controls in place to monitor

administrative costs. We noted the following in regard to DDS processes

and administrative controls (Findings 1 through 7 and Observations 1

and 2):

Findings

1. $20 million in appropriations should not have been expended

because DDS never fully recovered retroactive payments;

2. DDS audits are not properly documented to demonstrate compliance

with Generally Accepted Governmental Auditing Standards

(GAGAS);

3. DDS’ audits of regional centers would be more effective if auditors

assessed and relied on internal controls;

4. DDS did not comply with Welfare and Institutions (W&I) Code

section 4652.5 – Independent Reviews and Audits;

5. DDS does not have controls over the administrative costs that vendors

recover;

6. DDS has a backlog of whistleblower cases; and

7. DDS’ budget is partially developed with unapproved federal

reimbursements.

Observations

1. Regional centers are not in compliance with W&I Code section 4640.6

– Case Load Ratios; and

2. DDS under-utilized authorized services for consumers.

The SCO conducted the review pursuant to California Government Code

(GC) section 12410, which states, “The Controller shall superintend the

fiscal concerns of the state. The Controller shall audit all claims against

the state, and may audit the disbursement of any state money, for

correctness, legality, and for sufficient provision of law for payment.” In

addition, GC section 12411 states that “The Controller shall suggest plans

for the improvement and management of revenues.”

Summary

Review

Authority


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DDS is responsible under the Lanterman Developmental Disabilities

Services Act (Lanterman Act) for ensuring that approximately 280,000

persons with developmental disabilities receive the services and support

they require in order to lead more independent and productive lives.

California provides services and support to individuals with

developmental disabilities in two ways. The vast majority of such

individuals live in their families’ homes or other community settings and

receive state-funded services that are coordinated by one of 21 non-profit

corporations known as regional centers. A small number of individuals

live in three state-operated developmental centers and one state-operated

community facility. The number of people with developmental disabilities

in the community served by regional centers is expected to increase from

279,453 in the current year to 289,931 in fiscal year (FY) 2015-16. The

number of individuals living in state-operated residential facilities is

expected to be 996 by the end of FY 2015-16.

Planned Closure of all Developmental Centers

The revised budget proposes to initiate the closure-planning process for

the three remaining developmental centers (DCs)—Sonoma, Fairview,

and the General Treatment Area of Porterville—over the next six years.

DDS submitted a closure plan to the California State Legislature on

October 1, 2015, with the goal of closing Sonoma DC (SDC) by the end

of 2018. The closure of Fairview DC (FDC) will follow the closure of

SDC, and the General Treatment Area of Porterville DC (PDC) is set to

close by 2021.

The revision to the budget included $49.3 million ($46.9 million in

General Funds) of Community Placement Plan (CPP) funding to support

the transition of SDC residents. This funding will support the initial

development of homes for consumers, provide additional training for

providers, and develop additional programs such as supported-living

services, crisis services, and transportation support and services. This

funding will also be used for regional centers and state coordination of the

SDC closure. Specifically, DDS proposes $46.7 million for start-up and

placement expenses, $1.3 million for regional center coordination

expenses, and $1.3 million for state coordination expenses.

The engagement review period was from July 1, 2011, through June 30,

2015. Our review assessed DDS’ specific processes and procedures and

the internal control standards, to ensure that administrative costs are

appropriate and that program funds are not supplementing unnecessary

and/or excessive administrative costs for DDS’ headquarters, regional

centers, and/or vendor operations. Review objectives were as follows:

Determine whether DDS has documented processes and procedures

for the accounting and budgeting process for its headquarters and

regional center operations;

Determine DDS’ key internal controls over the administration,

budgeting, and accounting process for its headquarters and regional

center operations;

Objectives, Scope,

and Methodology

Background


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Evaluate the effectiveness and efficiency of these internal

administrative and accounting controls;

Determine the management and reporting process used by the DDS to

properly manage and oversee the performance of the regional centers

and their service provider vendors; and

Evaluate the effectiveness of DDS’s monitoring and compliance

controls over its regional center operations.

We accomplished the review objectives through various methodologies

including, but not limited to, the following:

Department of Developmental Services – Headquarters

Reviewing prior financial and budget reports;

Obtaining and reviewing written policies and procedures related to

accounting, budgeting, and program performance;

Conducting onsite visits to inquire about, observe, and understand

roles and responsibilities of employees responsible for administrative

and accounting controls and functions;

Reviewing management reporting and the effectiveness of monitoring

over the regional centers;

Reviewing any exception reporting done by the DDS and determining

the efficiency/effectiveness of the processes and procedures to ensure

the timeliness of corrective actions; and

Identifying key internal controls/process controls and testing their

effectiveness to determine whether:

o Administrative costs charged by the regional centers are being

monitored, reviewed, and approved;

o Regional centers are contractually obligated to comply to any

regulations that define the allowable and allocable costs; and

o Processes and controls are standardized and is being consistently

applied to all regional centers.

Regional Centers

Reviewing prior financial and budget reports;

Obtaining and reviewing written policies and procedures related to

accounting, budgeting, and program performance;

Conducting onsite visits to the regional centers to understand and

verifying DDS’ administrative and accounting control oversights—

specifically, assertions regarding program management process and

procedures such as administrative, budgeting, and accounting;

Reviewing management reporting and the effectiveness of monitoring

over vendors; and


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Identifying key internal controls/process controls and testing their

effectiveness to determine whether:

o Administrative costs charged by the vendors are being monitored,

reviewed, and approved;

o Applicable allowable and allocable costs regulations and

requirements are being passed down to the vendors; and

o Processes and controls are being consistently applied.

Our review found that DDS had no specific processes and procedures or

internal control standards to ensure that administrative costs are

appropriate, and that program funds are not supplementing unnecessary

and/or excessive administrative costs for the regional centers and vendor

operations. Specifically, it is DDS’ assertion that it does not have authority

within the regulations to establish processes and procedures that would

provide such assurance.

Millions of dollars are at risk because controls are not in place to ensure

that DDS adheres to section 4300-101-0001 Provision 2 of the Budget Act

of 2015 and various Welfare and Institutions Code requirements.

We discussed our results with representatives from DDS at an exit

conference held on June 15, 2016, at DDS headquarters. At the exit

conference, we stated that the final report will include their views. On

August 12, 2016, we issued a draft report. After reviewing additional

information, we issued a revised draft report on November 7, 2016. We

received management responses to the revised draft report on November

17, 2016. DDS’ responses have been incorporated within the report and

included in their entirety as an attachment.

This report is intended for the information and use of the DDS and the

SCO; it is not intended to be and should not be used by anyone other than

these specified parties. This restriction is not intended to limit distribution

of this report, which is a matter of public record.

Original signed by

JEFFREY V. BROWNFIELD, CPA

Chief, Division of Audits

November 30, 2016

Restricted Use

Conclusion

Views of

Responsible

Officials


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Findings and Recommendations

We questioned DDS’ authority to spend over $20,307,452 in

appropriations. Funds were expended to obtain Federal Financial

Participation (FFP) of $50,729,599 through retroactive payments to

Intermediate Care Facilities (ICFs). In order to make certain expenditures

eligible for federal reimbursement, DDS was required to pay claims for

services directly to ICFs. This resulted in double payments because DDS

had already paid regional centers for the same service. DDS reclassified

the original payment to the regional centers as an accounts receivable. The

receivable was abated when repayment was made by the regional centers.

The Budget Act of 2007 required DDS, in conjunction with the

Department of Health Care Services (DHCS), to submit a state plan

amendment (SPA) seeking FFP for the day treatment and transportation

services provided to ICF residents. Prior to the SPA, services for an

individual residing in an ICF were not reimbursable under the existing

1915 (c) waiver because the ICF placement is considered institutional as a

result of its licensing category. The only way the Centers for Medicare and

Medicaid Services (CMS) agreed to pay federal reimbursement for these

services to individuals in an ICF was for the ICF provider to pay these

costs, rather than the regional center. The SPA was approved in April

2011, after critical changes in State law were enacted. The statutory

changes were required in order for CMS to approve the SPA and allow the

State to retroactively bill for expenditures back to July 1, 2007, under the

new structure. There was insufficient time to make system changes to

allow regional centers to bill in real time on behalf of ICFs prior to

FY 2012-13. Due to these system limitations, DDS established accounts

receivables for these services until payments could be made to ICFs. DDS

required the regional centers to repay the day and transportation costs;

however, the regional centers repay the duplicate payment only when they

collect it from the ICF due to the impact such payment would have on

regional center cash flow.

DDS made the duplicate payments using funds provided by the General

Fund loans. After these payments were made, DDS received

approximately 50% as federal match for these expenditures. Therefore, we

expect the amounts due from the regional centers to have a 2 to 1

correlation ratio to the General Fund loan balance.

At the time of the SCO review, DDS had a cumulative fund loan balance

of $99,344,684; however, records showed that only $79,037,232 of that

balance was the result of delays in collecting reimbursements from the

Health Care Deposit Fund (HCDF) as required by the Budget Act.

FINDING 1—

$20 million in

appropriations

should not have

been expended

because

Department of

Developmental

Services never

fully recovered

retroactive

payments


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Federal Placeholders Amount

1915(i) $ 34,166,371

Early Periodic Screening Diagnosis and 43,409,186

Treatment

ICF – Developmentally Disabled 1,461,675

Total HCDF $ 79,037,232

Cumulative loan balance (99,344,684)

Difference $ (20,307,452)

General Fund loans established by the Budget Act of 2015 are for cash

flow needs due to delays in collecting reimbursements from the HCDF,

per section 4300-101-000, 1 Provision 2, which states:

A loan or loans shall be made available from the General Fund to the

State Department of Developmental Services not to exceed a cumulative

total of $395,000,000. The loan funds shall be transferred to this item as

needed to meet cashflow needs due to delays in collecting

reimbursements from the Health Care Deposit Fund. All moneys so

transferred shall be repaid as soon as sufficient reimbursements have

been collected to meet immediate cash needs and in installments as

reimbursements accumulate if the loan is outstanding for more than one

year.

The General Fund loans in the amount of $20,307,452 are not the result of

delays in collecting reimbursements from the HCDF, but are duplicate

payments to be collected from the regional centers. SCO auditors inquired

with regional centers as to amounts due them from ICFs. Regional center

records varied from DDS’ records. Some of the funds due are from dates

as far back as FY 2009-10. Some regional centers stated that they did not

believe they would be able to collect all of the amounts due from the

vendors despite W&I Code section 14132.925.b (3)(B)(ii), which provides

for collection of outstanding ICF payments to be offset against current

Medi-Cal payments due the provider. Fifteen regional centers reported a

total amount of $21.8 million owed by vendors as follows:

Unaudited

Regional Center Amount

ALTA $ 1,606,786

Central Valley 2,563,147

Eastern LA 404,968

Far Northern 844,703

Lanterman 52,000

Golden Gate 1,150,374

Harbor 714,469

Inland 5,208,878

Kern 1,305,839

San Andreas 450,000

San Diego 1,480,945

San Gabriel 1,650,405

Tri Counties 1,528,901

Valley Mountain 2,854,510

Total $ 21,815,925*

* North Bay, North LA, Redwood Coast, East Bay, Orange County, South Central

LA, and Westside Regional Centers did not respond to our balance inquiry.


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Seven regional centers did not respond to our inquiry; therefore, the total

amount due is likely greater. Based on the size of the regional centers that

did not report, this figure could be an additional $5 million.

Based on the information provided by the regional centers, the ratio of

amounts due from the regional centers and the amounts of the General

Fund loan balance is closer to 1 to 1, whereas the SCO expected a ratio

closer to 2 to 1. DDS does not match or correlate receipts of funds due

from regional centers to the amounts due the General Fund. Per

discussions with DDS, the General Fund loan needs are determined when

cash flow needs are determined. As a result, it appears that some

appropriations were restored, allowing DDS to expend the funds that

should have gone to repay the General Fund.

Although SPA payments are not reoccurring, DDS is likely to have other

retroactive payments in the future. If these payments are not separately

accounted for and matched against funding, General Fund dollars are at

risk. In this specific case, it is the position of the SCO that, at a minimum,

the appropriate ratio between the amounts due from regional centers

should have correlated with the amount owed to the General Fund. As

DDS borrowed from the General Fund to make the duplicate payments,

DDS should apply repayments received in their entirety to abate the

accounts receivable prior to using any portion of those repayments to fund

other activities.

Recommendations

The SCO recommends that:

DDS improve its process of notifying regional centers when payments

to the vendors are made so that the regional centers can collect the

duplicate payments in a timely manner, or develop a process that

allows the regional centers to hold payments from vendors with the

knowledge that a federal reimbursement is being processed.

DDS should develop process and procedures to ensure that the General

Fund is restored when funds are borrowed to make retroactive

payments. Appropriate correlation between funding source and

amounts due should be established in this process.

DDS Management Response

DDS agrees with the recommendation to improve the notification

process to RCs and is exploring the possibility of an automated process

for RCs and DDS to more efficiently share information for payments

made to Intermediate Care Facilities (ICFs) under the approved Medi-

Cal SPA DDS is not certain what is meant by "developing a process

which allows the RCs to hold payments from vendors ..." ICFs are

primarily paid by the Department of Health Care Services (DHCS) and

DDS has already implemented the Medi-Cal withhold provided for in

statute and also already holds any new DDS payments to ICFs when they

are reported delinquent by RCs.

For the second recommendation, DDS notes that this process is no longer

in use as of Fiscal Year (FY) 2012-13, and for FYs 2007-08 to 2011-12

the appropriation was only restored after receiving payment from either

the ICF or the RC for the day and transportation services.


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DDS does not agree with some of the statements and conclusions in the

audit finding in respect to DDS' implementation and accounting for a

retroactive SPA, which was required for federal compliance and to allow

a drawdown of federal financial participation (FFP).

It is important to note that the Legislature approved the request for a SPA

and the retroactive payments to ICFs during the State's Great Recession

to bring in $226.2M in FFP for day and transportation services for

residents in ICFs for the period from FYs 2007-08 to 2010-11. Receipt

of these funds avoided further General Fund (GF) reductions which

would have impacted services to consumers. The SPA is budgeted to

bring in nearly $60M FFP annually thereafter. Given the retroactive

payments approved by the Legislature for DDS to implement within the

existing appropriation, the only way DDS could accomplish this was to

make the expenditure and then abate it.

At no time has DDS used GF loan authority to intentionally overspend

the budget. When budget shortfalls were identified, DDS requested funds

through the budget process and provided explanations for the need.

DDS' payments to ICFs are part of DDS' Medi-Cal reimbursements, and

were necessary to collect reimbursements from the Health Care Deposit

Fund. DDS believes it is incorrect to say that the accounts receivables

are the results of duplicate payments provided by the GF loans. Due to

system limitations and statutory requirements, the RC arranged and paid

for day and transportation services to ICF residents on behalf of the ICF.

The RC payment was then booked as an accounts receivable, given the

retroactive payment pending to the ICF. When the Department paid the

federally eligible ICF supplemental payment directly to the ICF, the RC

could then repay the accounts receivable. Once that occurred, the RC

expense was abated, and the expenditure reflected as an ICF payment.

DDS did not take the reimbursement for services from the federal

government and abate the RC expenditure. The RC expenditure was only

abated when funds were received from the ICF directly or through the

RC when the RC was paid by the ICF. As of 2012-13 this process is no

longer used and ICFs are paid directly by DDS.

The finding also reports that RCs stated they did not believe they would

be able to collect all the amounts due from vendors. DDS makes every

effort to work with the ICFs to collect payments in full, while

maintaining services to consumers. Should an ICF go out of business due

to collection efforts, the RC would have to place all affected consumers

very quickly and possibly at a higher cost.

Welfare and Institutions (W&I) Code 14132.925.b (3)(B)(ii) provides

for collection of outstanding ICF payments to be offset against current

Medi-Cal payments due to the provider. The Medi-Cal offset process has

been an effective means of collection and will be continued. The DDS

Accounting Section is continuously working with each RC to reconcile

and collect on the outstanding payment amounts that the ICF homes owe

to RCs. DDS has documented the entire process and is now in search of

software to improve and streamline operations for DDS and the RCs.

Other collection efforts include:

DDS collecting amounts due by offset against both the DDS and the

DHCS payments made to ICFs, when it is possible to do so, in

cooperation with the RC, DHCS and SCO.


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DDS working with the ICF's to arrange monthly payments to clear

outstanding amounts past due.

DDS working with the Franchise Tax Board to offset tax refunds of

delinquent ICF providers.

The Department acknowledges that this process has been time

consuming. SCO's finding reflects the outstanding GF loan at the

time of the review was $99 million. Currently, considering the cash

in hand and in process to repay the loan, the outstanding loan amount

is less than $9 million. In the next several months DDS will repay

the loan amount in full, about half from the remaining balance due

from retroactive FFP reimbursements and the other half from ICF

collections.

SCO Comments

The SCO understands that the SPA retroactive payments were a one-time

transaction for this program. Our recommendation is for DDS to develop

a process for retroactive payments that could potentially occur in the future

and would require DDS to use the General Fund loan balance. Our

recommendation is the development of procedures that would ensure that

the entire General Fund loan used for any potential future retroactive

payments is completely recovered prior to any funds being available for

payments for additional services.

The SCO acknowledges that the General Fund loan balance has been

reduced since the review period. The SCO would like to emphasize that

improved cash management could reduce the need for DDS to seek

additional funding from the California State Legislature.

DDS’ audit authority is established in Title 17 of the California Code of

Regulations, section 50606, Regional Center Auditing Requirements. This

section establishes the applicable criteria when planning and performing

audits of regional centers. DDS stated that its audits are performed in

accordance with Government Auditing Standards (GAS) and GAGAS,

issued by the United States Government Accounting Office (GOA).

We performed a cursory review of a sample of DDS’s regional center

audits. Based on our review, we could not determine if GAGAS

requirements were met because DDS did not appear to properly document

its adherence to the standards.

For example:

DDS did not document how the DDS auditors considered fraud as

required by GAO 6.30;

DDS does not document the overall assessment of evidence as

required under GAO 6.69 through 6.72;

As DDS maintains the computer systems for the regional centers, it

was not apparent in the working papers if DDS does additional work

during the audit to assess the reliability of the computer-based data at

the regional centers. GAO 6.24 requires that auditors obtain sufficient

FINDING 2—

Department of

Developmental

Services’ audits

are not properly

documented to

demonstrate

compliance with

Generally

Accepted

Governmental

Auditing

Standards


-10-

understanding of information-system controls necessary to assess

audit risk and plan the audit within the context of the audit objectives;

DDS work papers contained an internal control questionnaire

However, it was not evident to us whether DDS assessed the design of

controls to determine their effectiveness. We also noted that audit

findings are not written to address internal control weaknesses but are

rather a result of substantive tests. GAO 6.16 and 6.17 provide

guidance for internal control reviews;

We noted during the review of work papers that the audit

documentation was not easy to follow. Items were marked as complete

in the audit program and were referenced to a section; however, it was

not clear how that section accomplished the task in the audit program.

GAO 6.79 provides guidance on audit documentation;

DDS audit files did not appear to have permanent files that combined

previous audits on the regional centers and use the information to

assess risk when planning current audits. Information obtained from

prior audits should be used to determine whether the implementation

of corrective actions was appropriate to address prior findings. GAO

section 6.36 provides guidance for previous audits; and

It was not apparent to us whether DDS complied with GAO 3.69

through 3.71.

We did not assess the adequacy of the audit worked performed and noted

only that the documentation to support the standards was not available.

During inquiry, DDS auditors stated that they believed they performed the

necessary work to comply with the standards but did not necessarily have

everything properly documented in the working papers.

In an effort to improve the documentation of DDS audits, the SCO has

agreed to provide audit forms, templates, and manuals to assist DDS in

documenting its audits and provide greater assurance that DDS audits are

in compliance with GAGAS and GAS.

Recommendation

DDS should improve its processes and procedures to improve audit

documentation and ensure that its audits are in compliance with GAGAS

and GAS. DDS should consider having a peer review performed to

determine its compliance with standards.


DDS believes our audits comply with GAGAS. The SCO report states

they performed a cursory review of a sample of DDS' RC audits. They

further stated they did not assess the adequacy of the work performed but

noted only that it did not appear that DDS properly documented its

adherence to the standards. DDS will consider reviewing, strengthening

and better documenting its audit organization's Quality Control System

in its audit workpapers. In addition, DDS will consider having a peer

review performed on its audit function.


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SCO Comments

DDS is correct in stating that the SCO performed cursory review and is

not making an opinion regarding compliance with GAGA; our finding is

stating only that documentation should be improved.

However, if the SCO was able to identify deficiencies without performing

a full review, it could be indicative of non-compliance with GAGAS.

Therefore, we encourage DDS to seek an independent peer review to

strengthen its audits and determine compliance.

Our review of DDS audits determined that the regional center and vendor

audit findings were mostly the result of substantive testing. Audit findings

were not the result of the DDS auditors’ assessment of the effectiveness or

efficiency of the auditee’s policies and procedures. DDS performs two

types of audits, (1) bi-annual regional center audits and (2) vendor audits.

As regional center audits are bi-annual, assessment of risk and reliance on

internal controls could greatly reduce the time required to perform some

of these regional center audits.

The DDS auditors’ work did not appear to identify key process controls or

the assurance that controls were in place to adequately mitigate risks and

achieve program goals and objectives. GAS 6.19 states:

6.19 The following discussion of the principal types of internal control

objectives is intended to help auditors better understand internal controls

and determine whether or to what extent they are significant to the audit

objectives.

a. Effectiveness and efficiency of program operations: Controls over

program operations include policies and procedures that the audited

entity has implemented to provide reasonable assurance that a program

meets its objectives, while considering cost-effectiveness and efficiency.

Understanding these controls can help auditors understand the program

operations that convert inputs to outputs and outcomes.

b. Relevance and reliability of information: Controls over the relevance

and reliability of information include policies and procedures that

officials of the audited entity have implemented to provide themselves

reasonable assurance that operational and financial information they use

for decision making and reporting externally is relevant and reliable and

fairly disclosed in reports. Understanding these controls can help

auditors (1) assess the risk that the information gathered by the entity

may not be relevant or reliable and (2) design appropriate tests of the

information considering the audit objectives.

c. Compliance with applicable laws, regulations, contracts, and grant

agreements: Controls over compliance include policies and procedures

that the audited entity has implemented to provide reasonable assurance

that program implementation is in accordance with provisions of laws,

regulations, contracts, and grant agreements. Understanding the relevant

controls concerning compliance with those laws, regulations, contracts

or grant agreements that the auditors have determined are significant

within the context of the audit objectives can help them assess the risk

of noncompliance with provisions of laws, regulations, contracts, or

grant agreements, or abuse.

FINDING 3—

Department of

Developmental

Services’ audits

of the regional

center would be

more effective if

auditors

assessed and

relied on

internal controls


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We asked DDS whether it risk-stratified its 21 regional centers from best

to worst for the purposes of audit risk. DDS stated that it did have a risk

priority, but did not document this process because it was common

knowledge which regional centers performed better than others.

Our analysis of DDS audits determined that regional center audits year-

over-year had 57 repeat findings. DDS identifies a process finding when

it is the result of substantive testing, whereas the identification of key

controls and testing of their effectiveness is not part of the audit process.

If DDS designed its audits with assessment and reliance on a regional

center’s internal controls, substantive testing could be greatly reduced for

some of the regional centers that had effective and reliable internal

controls. Results of internal control testing would allow DDS to assess a

regional center’s level of audit risk and, if bi-annual tests of controls

continue to validate that risk assessment, DDS would be able to reduce

work and audit testing at that regional center. This would allow DDS to

focus on regional centers for which risk assessment is higher or internal

control has a low level of assurance, requiring a higher level of audit work.

Recommendation

DDS should:

Assess the control risk of each regional center;

Determine its planned reliance on internal controls;

Perform internal control testing when it plans to rely on internal

control;

Bi-annually validate those controls to reduce substantive testing at

those regional centers;

Adjust reliance on internal controls accordingly; and

Document decisions to go straight to substantive testing when control

risk is deemed to be high.


The Department agrees with SCO that there could be a more well-

defined and documented assessment of internal controls and risk

environment to reduce substantive testing in the biannual RC audits. The

Department's RC audits historically have relied on a significant amount

of substantive testing due to a priority in focusing on fiscal compliance

in RC operations and purchase of services (POS.) In FY 2016-17 the

Department plans to review the RC audit objectives and redesign the

audits with a stronger focus on assessment of internal controls and risk

environment.

However, the current audit program for RCs does include a review of

internal controls prior to substantive testing for each section of the audit.

Internal control testing includes reviewing policies and procedures and

interviewing staff to discuss their implementation. In addition, DDS

conducts and documents walkthroughs of the internal control design to

test if the controls identified in the policies and procedures are being


-13-

effectively implemented. The nature, extent, and timing of substantive

testing is determined based on he reliance of the internal controls.

SCO Comments

In reference to comments mentioned in Finding 2, the SCO does not

disagree with DDS’s statements that certain process and procedures could

have been performed; however, the SCO observed that the documentation

of those processes and procedures should be improved. As certain DDS

audits are reoccurring, permanent files updating DDS’s assessment of the

procedures mentioned would be more appropriate.

During our audit period, section 4652.5 of the Welfare and Institution

Code required any entity receiving payments in excess of $250,000 and

$500,000 from one or more regional centers to contract with an

independent accounting firm for an audit or review of its financial

statements.

Fifteen regional centers stated that most of their vendors do not comply

with the requirements. Only one regional center stated that its vendors

comply with the requirements, and five regional centers did not answer the

SCO’s inquiry.

We performed onsite visits to six regional centers and determined that

vendors who received funding in excess of $250,000 and $500,000 were

not performing the required review and audits. The five regional centers

reported that only about 20% of the eligible vendors had submitted reports.

Due to the high level of non-compliance, we inquired with all the

remaining regional centers to determine compliance. Only the Regional

Center of Orange County reported that it enforced the review/audit

requirement.

Senate Bill (SB) 74, Chapter 9, Statues of 2011 added section 4652.5 to

the W&I Code, which states:

(a) (1) An entity receiving payments from one or more regional centers

shall contract with an independent accounting firm for an audit or review

of its financial statements, subject to all of the following:

(A) When the amount received from the regional center or regional

centers during the entity’s fiscal year is more than or equal to two

hundred fifty thousand dollars ($250,000) but less than five hundred

thousand dollars, the entity shall obtain an independent audit or

independent review report of its financial statements for the period.

Consistent with Subchapter 21 (commencing with Section 58800) of

Title 17 of the California Code of Regulations, this subdivision shall also

apply to work activity program providers receiving less than two

hundred fifty thousand dollars ($250,000).

(B) When the amount received from the regional center or regional

centers during the entity’s fiscal year is equal to or more than five

hundred thousand dollars ($500,000), the entity shall obtain an

independent audit of its financial statements for the period.

FINDING 4—

Department of

Developmental

Services did not

comply with

Welfare and

Institutions

Code section

4652.5 –

Independent

Reviews and

Audits


-14-

The thresholds were later increased to $500,000 for a review and

$2,000,000 for an audit with the passage of ABX2-1 on March 1, 2016.

ABX2-1 also amended section 4652.5 to state that the vendor review/audit

was due within nine months of the end of the entity’s fiscal year. The bill

also established a bi-annual requirement for the review/audit.

The high level of vendor non-compliance is due to the fact that, prior to

ABX2-1, section 4652.5 did not establish a time period in which these

reviews/audits were due, so vendors simply did not do them. Additionally,

section 4652.5 does not establish disciplinary criteria for a subject entity

if the review/audit is not completed. The only disciplinary action is

established in section 4652.5(B)(3)(c), which states:

(c) Regional centers that receive the audit or review reports required by

subdivision (b) shall review and require resolution by the entity for issues

identified in the report that have an impact on regional center services.

Regional centers shall take appropriate action, up to termination of

vendorization, for lack of adequate resolution of issues.

This corrective action applies only to review/audits that have been

completed as stated in section 4652.5(B)(3)(d) as follows:

(d) Regional centers shall notify the department of all qualified opinion

reports or reports noting significant issues that directly or indirectly

impact regional center services within 30 days after receipt. Notification

shall include a plan for resolution of issues.

Therefore, if the subject entity never completes a review/audit, there is no

defined corrective action in section 4652.5. Therefore, it is easier and less

expensive for an entity to simply not comply.

Recommendation

We recommend that the DDS Community Services Division work in

conjunction with all regional centers to develop a standard set of policies

and procedures in regards to the amended language of W&I Code

section 4652.5. DDS and regional centers should establish discipline terms

to ensure compliance with the regulation.


The Department believes we are currently in compliance with W&I Code

section 4652.5. While we acknowledge a lack of compliance by RC

vendors in obtaining the independent audit or review of its financial

statements as required by W&I Code section 4652.5, the law did not

specify a Department role or remedies to ensure compliance.

The RCs sole requirement under the W&I Code is to notify the

Department if audit/review reports identify significant issues that

directly or indirectly impact RC services. As the SCO notes, the high-

level of noncompliance is due, in part, to W&I Code section 4652.5 not

establishing a time period in which these reviews/audits were due. With

the passage of ABX2 1 (Chapter 3, Statutes of 2015-16, Second

Extraordinary Session), the Legislature has remedied this by requiring

vendors to submit the review/audit within nine months of the end of their

FY.


-15-

Nonetheless, the Department will review the level of noncompliance

with the Association of Regional Center Agencies to identify what

actions could be taken to improve vendor compliance with W&I Code

section 4652.5.

The Department notes that Senate Bill 1226 signed by the Governor on

September 21, 2016, requires that RCs submit to DDS all service

provider independent audit reports it receives for DDS' review and that

DDS compile and post data, by RC, on vendor compliance with audit

requirements and on audit opinions, on DDSs' data dashboard.

SCO Comments

Although the law did not specify a role for DDS or remedies to ensure

compliance, as the cognizant implementing agency, DDS can establish

policies and procedures to determine compliance with the statutes.

During the course of our review, we did not identify any process or

procedure that gives DDS control over the actual amount that regional

centers or vendors are reimbursed for administrative costs. According to

DDS, W&I Code section 4629.7 does not give the DDS any authority to

control the actual amount of administrative costs that is charged. Without

controls, there is little assurance that the amount of funding being used to

provide services to recipients is appropriate, versus a disproportionate

amount being spent on administrative costs.

When SB 74, Chapter 9, Statutes of 2011 added section 4629.7, DDS

originally believed that the change in statutes would allow it to curb and

limit administrative costs. W&I Code section 4629.7 states, in part:

Notwithstanding any other provision of law, all regional center contracts

or agreements with service providers in which rates are determined

through negotiations between the regional center and the service

provider shall expressly require that not more than 15 percent of regional

center funds be spent on administrative costs. For purposes of this

subdivision, direct service expenditures are those costs immediately

associated with the services to consumers being offered by the provider.

Funds spent on direct services shall not include any administrative

costs….

On September 16, 2011, DDS issued a clarification letter to the regional

centers explaining the requirements and implementation of the new

section. The letter stated that all negotiated contracts had to comply to the

new section; however, the DDS did not develop policies and procedures

to enforce this requirement.

According to DDS, it received resistance to the changes because regional

centers and vendors argued that existing contracts were legally binding

and that DDS did not have any authority to amend them. The contract

language was then only added for new contracts or when existing contracts

expired. However, if the language was not placed in new or renewed

contracts, DDS’ only recourse would be a finding stating that the specific

language was not there and that a correction should be made.

FINDING 5—

Department of

Developmental

Services does

not have

controls over

the

administrative

costs that

vendors recover


-16-

DDS believes that W&I Code section 4629.7 gives it the authority only to

determine whether language is present in negotiated contracts and that the

only corrective action or control is to demand that regional centers add it

to the contracts when it is omitted. Even when the language is added to the

contract, there is limited assurance that the rate was developed with actual

costs and that the service provider adheres to an administrative cap

provision.

During the course of the review, we inquired as to whether policies and

procedures were developed that created controls to ensure that actual

expenditures were in compliance with contract requirements for caps on

administrative costs. DDS has stated that no such policies and procedures

were developed because the legislation does not give DDS any authority

to determine what actual administrative costs were reimbursed. The

requirement is only to have the language in the development of the

contract.

DDS’ belief is evident in its audit work, as substantive testing is done only

to determine whether or not a service is provided not to determine whether

or not a disproportionate amount of the rate for the service is going to

administrative costs. DDS auditors stated that a finding would be written

if cursory calculations of available data demonstrated that a regional center

or vendor exceeded the 15% administration cap, but that there was not

necessarily a plan for corrective action or any type of consequence for non-

compliance. Additionally, a cursory review does not provide any

assurance that the figures are actual and properly allocated.

DDS continued to state that W&I Code section 4629.7 is too vague to give

it the authority to establish how the cap on administrative costs would be

calculated. DDS states that the legislation does not define who has the

authority to develop the calculations, how the regulation will be enforced,

or any consequences for noncompliance. As such, there are no policies and

procedures developed to establish guidelines for such calculations.

Therefore, DDS does not determine whether administrative costs are

allowable or unallowable because DDS believes regulations describe only

what can be included in the 15% cap. Additionally, DDS does not review

any calculation because the regulations do not establish any authority for

DDS to determine how it is specifically calculated. As such, DDS has

allowed the Association of Regional Center Agencies to establish

guidelines for developing the policies and procedures.

Appropriate processes and procedures would assist in partially

determining whether vendors complied with the 15% administrative cap.

The review/audits required by W&I Code section 4629.7 might provide

some insight into the amount of administrative costs charged by vendors;

however, as noted in Finding 4 of this report, there is little vendor

compliance with this requirement, and these reports are not available for

DDS or regional centers to review. However, review and audits provided

by independent accounting firms do not provide appropriate detail to

perform administrative costs or indirect costs calculations.


-17-

The SCO cannot determine whether or not the regulations actually limit

DDS’ ability to control and cap administrative costs. The SCO can only

conclude that, since passage of SB 74, Chapter 9, Statues of 2011, DDS

has not developed any processes and procedures that establish and define

allowable administrative costs. Therefore, DDS does not have any controls

in place that will provide any assurance that the actual amount of funds

service providers receive is not disproportionately going to fund

administrative costs rather than going to recipients.

Recommendation

The SCO recommends that DDS establish policies and procedures for

administrative costs that:

Define allowable and unallowable administrative costs;

Determine how the cap will be calculated;

Establish criteria for compliance and audit; and

Provide authority for corrective action and consequences for non-

compliance.

The SCO further recommends that DDS determine DDS’ specific

authority within the regulations by:

Documenting how the current regulations do or do not give DDS

authority to provide controls over its operation;

Identifying the gaps within the regulations that prevent DDS from

safeguarding the State’s assets and resources;

Providing a risk assessment that includes frequency and impact to key

process controls that are hindered or helped by regulations; and

Determining specific needs and changes to regulations that will give

DDS the authority to create adequate process controls over its

programs.


The Department believes this finding includes incorrect and partial

information that appears to be based on an incomplete understanding of

the RC service delivery and vendor rate system.

The SCO states that DDS has not developed policies and procedures for

compliance with the 15 percent administrative cost cap. The Lanterman

Act gives RCs significant operational control on the implementation of

policies. DDS appropriately describes the policies that must be in effect,

rather than directing each RC on the specific process and procedure they

need to follow. The draft audit report is incorrect in stating that W&I

Code section 4629.7 is too vague to give it the authority to establish how

the cap on administrative costs would be calculated. The draft audit

report only includes a short excerpt of W&I Code section 4629.7 (a).

Starting with W&I Code 4629.7 (a) (1) - (13) and (b) - (c) very specific

information is provided in the law to define administrative costs for RCs

and vendors.


-18-

The SCO states that without any controls there is no assurance that

recipients of services are receiving an appropriate amount of funding.

We believe this statement is incorrect. The recipients of DDS services

are individuals with developmental disabilities. Their services are

authorized under Individual Program Plans (IPP). Rates for the IPP

services are set in a variety of ways including rates set by DDS and RC

negotiated rates under median rate caps. The consumer does not receive

funding but rather receives a service and the vendor is paid a rate

established for that service.

Families and consumers receive an annual statement from RCs showing

expenditures for the consumer. This is a control to ensure services are

being delivered.

The Department does not agree with the second recommendation that

DDS determine DDS' specific authority with the regulations by

documenting how the regulations do or do not provide DDS authority to

provide controls, identify the gaps and determine needed changes to the

regulations. This is an overly broad recommendation in response to a

finding limited to one W&I Code provision. DDS does not believe

sufficient audit work has been performed to support a recommendation

incorporating all DDS regulations that would require extensive DDS

resources to implement.

SCO Comments

The SCO was not provided with any evidential matter showing that

vendors actually spend no more than 15% of the service fees for

administrative costs. DDS states in its response that there is a policy, but

during our review a policy was not presented. Even if a policy exists, DDS

did not appear to enforce any requirements. Furthermore, during the

review, DDS stated that the regulations did not require a 15%

administrative cost, only that the rate had to be developed with the 15%.

Regardless, the SCO recommends that DDS, as the cognizant agency,

develop and enforce policies and procedures to ensure that a

disproportionate percentage of service fees and not going to fund

administrative and overhead costs and an appropriate amount is being used

to provide the actual services to the service recipient.

Since the inception of the whistleblower hotlines, DDS Vendor Audits

Section has seen an increase in complaints and has not been able to divert

auditors from regularly scheduled audits to investigate. The Vendor Audits

Section has approximately 20 audits for fiscal issues as a result of tips

received from the whistleblower hotline.

Our review also determined that DDS’ Vendor Audits had approximately

$16 million in findings. DDS auditors stated that although they believed

the program staff has been able to recoup the dollar findings from the

vendors, the auditors have not performed any follow-up to the

findings/recommendation to ensure collections and corrections have been

made. DDS auditors stated that the appeals process and negotiations

extended the final results of the audits so far into the future that follow-up

FINDING 6—

Department of

Developmental

Services has a

backlog of

whistleblower

cases


-19-

becomes less relevant due to the amount of time that has passed and the

priority of the audit staff’s other assignments.

DDS performs audits that have the characteristics of claim auditing and

limited-process reviews. Based on a review of audits completed and audit

programs available, we believe that DDS has never performed any audit

specific to indirect costs. As such, the regulations appear to relegate

similar ICR audit requirements to the regional centers. Regional centers

are even more ill-equipped to perform such reviews.

Recommendation

We recommend that DDS:

Determine whether W&I Code sections 4629.7 and 4639.5 require

DDS to provide oversight over administrative costs and develop audit

plans to perform such tasks; and

Develop processes and procedures that prioritize issues identified

from the whistleblower hotline and assess the risk of findings

identified by the DDS audit that may require follow-up.


DDS agrees with SCO that a backlog of whistleblower cases is present.

However, the Department disagrees there is a correlation between a

backlog of whistleblower cases and SCO's interpretation of W&I Code

sections 4629.7 and 4639.5 with regards to the Indirect Cost Rate.

In response to the second recommendation, DDS already has processes

and procedures in place to prioritize and assess issues identified from the

whistleblower cases. DDS prioritizes the whistleblower complaints by

content first in order to determine whether the complaint pertains to

billing or the quality of services provided. Whistleblower complaints in

regards to billing or fraudulent billings are prioritized based on total

POS, service code, any other past issue(s), program management input,

and the date unsupported billings are received.

SCO Comments

In correlation with Finding 5, DDS, as the cognizant agency, should

determine processes and procedures to ensure that administrative costs are

appropriate. Administrative costs are defined in W&I Code sections

4629.7 and 4639. Administrative costs are usually imbedded in indirect

cost rates that would be used to develop the reimbursement rates for

services.

DDS also should develop documented corrected action plans to recoup the

dollar findings identified in its audits.


-20-

At the beginning of our review, DDS had $160.8 million due from General

Fund loans as the result of federal placeholders and intermediate-care

facility receivables related to FY 2011-12 and FY 2012-13. SB 82

provided $61,554,000 in funding that DDS applied to the General Fund

loan balance, along with outstanding payments of $99.3 million with

federal placeholders, as follows:

General Fund Loan Balances

Fiscal Year 2011-12 $ 80,240,987

Fiscal Year 2012-13 19,103,696

Total $ 99,344,683

Federal Placeholders

Fiscal Year 2010-11 $ 12,365,580

Fiscal Year 2011-12 20,090,842

Fiscal Year 2012-13 27,756,664

Fiscal Year 2013-14 18,824,146

Total $ 79,037,232

These loans and placeholders are the result of funding from expected

federal programs that have not yet been approved.

For FY 2011-12 and FY 2012-13, DDS had beginning loan balances of

$135,061,390 and $71,929,535, respectively, as of January 1, 2015. At the

start of the SCO review, DDS made payments totaling $38,231,402 and

$6,860,838 in FY 2011-12 and FY 2012-13, respectively. With the 2015

Budget Act’s amendment to Government Code section 16351, the

requirement to return General Fund loans within a year has been removed;

therefore, there is no statutory requirement establishing the timeframe in

which the remaining $99.3 million must be repaid.

Fifty-five percent of DDS’ budget is based on money from the General

Fund, and the other 45% is based on reimbursements from the Federal

Government. DDS is currently owed approximately $79 million by the

Federal Government via placeholders dating back to FY 2010-11.

DDS is reimbursed by the Federal Government for services that the

regional centers provide to consumers. DDS attempts to acquire all

reimbursements the Federal Government has to offer. When DDS is

seeking approval for a new program, it will add dollars to the budget for

what it expects to get back once its programs are approved.

In FY 2010-11, DDS applied for approval of the 1915(i) program and

began budgeting the reimbursable funds as a part of its annual budget. The

1915(i) took six years to gain federal approval, during which time DDS

utilized place holders to bill the Federal Government. This created cash

flow issues for DDS, as it is not receiving reimbursement for programs not

yet approved.

FINDING 7—

Department of

Developmental

Services’ budget

is partially

developed with

unapproved

federal

reimbursements


-21-

As such, DDS lacks processes and procedures that set criteria for

establishing an acceptable level of budgeted dollars that can be developed

with unknown funding amounts, or procedures to follow when the

projected funds sources are not realized.

Without established policies and procedures, the DDS General Fund loans

have the potential to become General Fund expenditures once the

appropriations expire, especially as some of the “short term” General

Gund loans have been outstanding for over five years.

Recommendations

We recommend that DDS develop policies and procedures that limit and

establish thresholds for the amount of federal placeholders and the period

they remain outstanding. These policies and procedures should establish

criteria for a reasonable period of time for reimbursement and prevent the

reverting of appropriations that burden the State’s General Fund.


DDS does not agree with this recommendation. Most of DDS'

expenditures occur in the local assistance portion of the budget. The local

assistance costs and reimbursements are determined person by person

and service by service. DDS submits two annual

Enrollment/Caseload/Population Estimates to the Department of Finance

(DOF) and the Legislature containing all expenditure and reimbursement

projections. Where new reimbursements are identified and budgeted, this

is done with full disclosure of the status of the application. As previously

noted, starting in FY 2009-10 in response to the statewide financial

impact of the Great Recession, DDS successfully obtained several new

reimbursement sources. DDS has no control over the amount of time it

takes to obtain federal approval. DDS follows all federal processes

available to States, including submission of placeholders to preserve the

State's right to claim reimbursement once the program is approved. DDS

believes the policies and procedures suggested by SCO would negatively

impact the State's ability to obtain reimbursement for services. DDS does

agree that extended approval times create cash flow challenges. DDS has

been in close communication with both SCO and DOF for several years

to inform both agencies of the status of repayment of these loans. DDS

does not expect this circumstance to reoccur, as most of the budgeted

reimbursements are now actively being billed and the DDS' budget now

reflects the Department's actual experience on expenditures and

reimbursements.

SCO Comments

On June 24, 2015, Senate Bill 82 (SB82) was passed and DDS was

appropriated $61,554,000 to be applied to Budget Act 2011 and 2012. In

November 2015, $45.9 million from SB82 repaid a portion of the

FY 2012-13 General Fund loan and the remaining $15.6 million was

applied to the FY 2011-12 General Fund loan.

The SCO finding did not mention that DDS was able to pay down the loan

balance because of additional appropriation granted by the California State

Legislature. In addition to Finding 1, amounts in these two findings were


-22-

significantly higher. As SB82 passed while the SCO was performing the

review of DDS, we did not include details of the legislation in the draft

report because the bill was the corrective action DDS needed to resolve its

shortfall in funding.

It is also important to note that DDS’ ability to borrow from the General

Fund has increased from $260M to $395M and the provision that the

General Fund Loan must be repaid within the one year has been removed.

As such, the SCO’s review and recommendations were meant to identify

the additional risk and exposure the General Fund is taking on with the

new changes.

Our finding was written to address what we believe is an underlying issue

that created the loan balances write-off and the need for DDS to seek

additional appropriation from the California State Legislature. The SCO

neither agrees nor disagrees with DDS’s response, but rather states that

additional policies, procedures, or monitoring should be performed to

ensure that DDS’ rights to the funding still exist when these placeholders

start to age.


-23-

Observations

Regional centers are not in compliance with state-mandated consumer-to-

case-manager ratios. W&I Code section 4640.6 sets the waiver consumer

ratio at 62:1 and the over-three, non-waiver, non-movers ratio at 66:1; the

average regional center ratios are 72:1 and 84:1, respectively. DDS lacks

procedures and controls to ensure that regional centers are in compliance

with state-mandated rules and regulations.

In 1997, the Federal Government reviewed the waiver program and froze

new entrances because of non-compliance with case-load ratios at that

time, resulting in a loss of an estimated $900 million in funding to DDS.

If the current ratios are not brought into compliance, DDS is at risk of

losing additional federal funding. Consumers are also at risk of not

receiving the attention their cases may require. While the SCO understands

that this is a policy issue, federal funds are still at risk.

Regional centers claim that the outdated core staffing formula contributes

to these ratios being noncompliant with the W&I Code. The core staffing

formula that DDS uses to allocate staffing funds to the regional centers is

based on 31-year-old data, and the case manager rate is not enough to

maintain the level of case managers. In order to retain case managers, the

regional centers must restructure the rates they pay employees, which may

mean they lack the funds to hire as many as they need.

Assembly Bill X2-1 (Chapter 3, Statutes of 2015-16, Second

Extraordinary Session) provides $29,700,000 in additional funding for

regional center staff, in an allocation to be determined by DDS.


The Department would like to clarify that the amount of ABX2 1 funding

referred to in the draft audit report was specifically for RC staff salary

and/or benefit increases and totaled $43.6 million ($29.7 million GF).

The ABX2 1 funding was to improve employee retention at RCs. The

Department notes there was an additional $17 million ($13 million GF)

in the 2016 enacted budget for RC operations funding to provide for an

estimated 200 new case manager positions. However, for RCs to be fully

compliant with statutory caseload ratios requires the allocation of

additional resources by the Legislature and the Administration. This is a

policy decision that is not controlled by either DDS or the RCs so the

relevance of this observation is unclear.

SCO Comments

The SCO understands that this is a policy issue and that positions can only

be filled based on funds approved by the California State Legislature;

however, federal funds could still be at risk.

OBSERVATION 1—

Regional centers

are not in

compliance with

Welfare and

Institutions Code

section 4640.6 –

Case Load Ratios


-24-

Regional centers are using only approximately 78% of their authorized

services per their Individual Program Plan, and there are large disparities

in services provided to certain ethnic groups.

Based on inquiry and data available on individual regional center websites,

we determined the allocated budget of each regional center and how much

was used for the same time period. Each regional center had expended

approximately 100% of its allocated budget.

As the recipients of the services over the same period at the regional center

used only 78% of their authorized services, there is a risk that the regional

centers would over-expend their authorized budgets if every recipient used

100% of his or her authorized services.

Authorizied

Regional Center

Total

Expenditures

per Individual

Program Plan

Percentage

Utilized

ALTA $ 253,635,232 $ 320,275,170 79.2%

Central Valley 31,728 188,685 16.8% *

Eastern LA 159,250,384 191,465,223 83.2%

Far Northern 94,242,639 122,411,489 77.0%

Lanterman 59,255,473 88,315,179 67.1%

Golden gate 179,201,022 205,895,690 87.0%

Harbor 125,807,547 158,550,175 79.3%

Inland 303,733,663 359,225,687 84.6%

Kern 118,710,063 174,259,228 68.1%

North Bay 141,595,855 166,555,829 85.0%

N LA 221,170 887,315 24.9% *

Redwood Coast 76,319,901 109,314,531 69.8%

East Bay 289,014,570 349,953,203 82.6%

Orange Co 277,645,924 359,064,600 77.3%

San Andreas 21,236 45,155 47.0% *

San Diego 225,587,871 316,523,620 71.3%

San Gabriel 153,439,263 179,870,171 85.3%

South Central LA 150,459,219 196,474,437 76.6%

Tri Counties 196,449,149 280,020,642 70.2%

Valley Mountain 136,382,287 163,809,840 83.3%

Westside 142,427,188 186,251,185 76.5%

Totals $ 3,083,431,384 $ 3,929,357,054

Average Utilization 78.0%

* Reported numbers appear to have discrepancies or inaccurate information

and have been removed from the average calculation

Regional Centers - Fiscal Year 2014-15

Actual Purchase of Services vs

Authorized Services per Individual Program Plan

At this time, it is unclear what DDS’ funding plans would be if all

consumers were to use 100% of authorized services in any given year.

DDS bases its budget on the actual costs of a prior year, with a small

percentage for new additions to the system.

OBSERVATION 2—

Department of

Developmental

Services under-

utilized authorized

services for

customers


-25-


The local assistance costs and reimbursements are determined person

by person and service by service based on historical actual expenditure

levels. DDS submits two annual Enrollment/Caseload/Population

(ECP) Estimates to DOF and the Legislature containing all expenditure

and reimbursement projections. Should service levels increase beyond

what is budgeted for any given FY, DDS would use the ECP Estimate

process and the deficiency process where needed to update the

Administration and the Legislature on the status of RC expenses

compared to the budget available.

SCO Comments

No additional comments.


Attachment—

Department of Developmental Services’

Response to Draft Report

State Controller’s Office

Division of Audits

Post Office Box 942850

Sacramento, CA 94250-5874

http://www.sco.ca.gov

S16-DDS-9000

Documents

DEPARTMENT OF DEVELOPMENTAL SERVICES · The Department of Developmental Services’ responses have been incorporated within the report and your response has been included in its entirety