Our review of state mandate determination and payment processes found that:
Over the last six years, since we issued our last report on state mandates,1 operational and structural changes have marginally improved the way state mandates are determined and subsequently managed in California. However, long delays and a growing liability indicate the need for further changes. Reimbursable costs for the mandate activities that local entities performed during fiscal years 2003-04 through 2007-08 were significant, averaging $482 million annually. A test claim from a local entity, such as a local governmental agency or a school district, begins the process for the Commission on State Mandates (Commission) to determine whether a mandate exists. Although the Commission has made progress in reducing its backlog of test claims over the last six years, the continuing backlog is large. In fact, many test claims from 2003 or earlier are still outstanding. This circumstance, combined with the long time elapsed before the Commission makes determinations, means that substantial costs will continue to build up before the Legislature has the information it needs to take any necessary action. In addition, cost estimates at the time the Legislature considers a potential mandate are inherently difficult to develop. This situation underscores the need for the Commission to more quickly complete the test claim process and develop a statewide cost estimate, which is the first accurate measure of what a mandate will actually cost the State. Finally, the Commission's backlog of incorrect reduction claims, which local entities file when they believe their claims for payment have been inappropriately cut by the State Controller's Office (Controller), has significantly increased.
The Controller uses a risk-based system for selecting claims to audit, has improved its process by auditing claims earlier than in the past, has sought parameter and guideline amendments to resolve identified claiming issues, and has undertaken outreach activities. Nevertheless, the continuing high level of audit adjustments for some programs indicates that the State could save more money if the Controller were able to fill 10 vacant audit positions. In addition, the Commission's lack of action on incorrect reduction claims has hindered the Controller's efforts to implement clear and consistent policies related to cost reimbursement. This has created uncertainty about what constitutes a proper claim. Finally, largely because of insufficient funding, the State's liability related to state mandates grew to $2.6 billion in June 2008. Consequently, the ongoing need to pay for past mandate activities is likely to affect adversely the State's spending on other priorities in the future.
Legislation affecting the structure of the state mandate system has had limited results. Participants in the mandate process rarely use options that could relieve the Commission of some of its workload, and when the options are unsuccessful they can lengthen processing times. However, these options have been available for less than two years, and the State has done little to publicize them. In addition, a recent court case has taken away the Legislature's ability to direct the Commission to reconsider its decisions in light of changes to the law. Although this avenue is now barred, a process that ensures mandate determinations are revised when appropriate is necessary. Commission staff said that in April 2009 a legislative subcommittee directed the Department of Finance (Finance), the Legislative Analyst's Office (Legislative Analyst), and Commission and legislative staff to form a working group to develop legislation to establish a mandate reconsideration process consistent with the court decision. Finance, the Legislative Analyst, and local entities have proposed other mandate reforms including ones focused on problems related to initial cost estimates and delays in mandate funding. Reform proposals merit further discussion, given the significance of the costs associated with state mandates.
Our assessment of current state mandate issues has led us to add the areas of mandate determination and payment to our list of high-risk issues. To the extent that resources are available, we will continue to monitor the progress of the Commission in reducing its work backlog, the level of the State's liability, and the status of recent and future reforms intended to improve the mandate process.
To ensure that it sufficiently resolves its backlog of test claims and incorrect reduction claims, the Commission should work with Finance to seek additional resources to reduce its backlog of work. In doing so, the Commission should prioritize and seek efficiencies to the extent possible.
To ensure that it can meet its responsibilities, including a heightened focus on audits of state mandates, the Controller should work with Finance to obtain sufficient resources. Additionally, the Controller should increase its efforts to fill vacant positions that can be used for auditing mandate claims.
To promote alternative processes related to establishing and claiming costs under mandates, the Commission and Finance should make information about these alternatives readily available to local entities on their Web sites.
To establish a reconsideration process that will allow mandates to be revised when appropriate, Commission staff should continue their efforts to work with the legislative subcommittee and other relevant parties.
To improve the state mandate process, the Legislature, in conjunction with relevant state agencies and local entities, should ensure the further discussion of reforms.
The agencies we reviewed agree with our recommendations and plan to take steps to implement them.
1 State mandates are new programs or higher levels of service required of local entities by the State. The State is required to provide funding to reimburse local entities for their associated costs.