Legislation effective in January 2005 authorizes the State Auditor's Office to develop a risk assessment process. We issued two previous assessments of high-risk issues facing the State. In our current review, we identified an additional issue as being at high risk:
Providing leadership, programs, and critical services to the people of California is a complex endeavor that encompasses the use of significant resources and is accompanied by inherent risks. A process for identifying and addressing the high-risk issues facing the State can help focus the State's resources on improving service delivery and contribute to enhanced efficiency and effectiveness. Legislation effective in January 2005 authorizes the Bureau of State Audits (bureau) to develop such a risk assessment process. We issued our initial assessment of high-risk issues in May 2007 (Report 2006-601), and we updated those issues and identified new issues in June 2009 (Report 2008-601). Our current review found that most of the issues we identified in 2009 as posing a high risk to the State continue to be a high risk; we also identified additional issues or departments as being at high risk.
The ongoing budget deficits remain on our list of issues that pose a high risk to the State. Our current review found that the State's budget condition remains unchanged. Specifically, the State has not yet implemented effective strategies for achieving a balanced budget. Instead, many of its proposed solutions to budget deficits push the problem into the future. For example, legislation enacted in 2008 accelerated revenue by limiting the amount of tax credits corporations could use to reduce their tax liability but allowed those unused credits to be carried forward to a future year and therefore reduced future revenues. Moreover, a number of factors make it difficult for lawmakers to effectively address the ongoing budget problem. For example, population segments that are dependent on some of the State's most significant programs continue to increase at rates greater than the increase in the general population. Additionally, voter-approved Proposition 22 prohibits the State's General Fund from borrowing fuel excise tax revenues, which reduces the resources available to cover cash deficits and increases the potential for external borrowing.
We have added the funding of the Defined Benefit Program of the California State Teachers' Retirement System (CalSTRS) as a new high-risk issue. These retirement benefits provide an incentive for teachers to make teaching a career. CalSTRS sets aside funds collected as a percentage of teachers' and administrators' salaries each year to pay future pension obligations. However, the laws governing the contribution rates for CalSTRS members and their employers have not changed in decades. As a result, the Defined Benefit Program is currently funded at 71 percent, well below the 80 percent considered necessary to fund a sound pension program. Additionally, CalSTRS reports that the program's assets will be depleted in 30 years. Considering that pension obligations can extend beyond 50 years, unless the State takes steps, such as raising the contribution rates for members and their employers, it may be responsible for providing the necessary funding to ensure that CalSTRS' Defined Benefit Program meets its obligations. Consequently, we have designated the funding of CalSTRS' Defined Benefit Program as a high-risk issue.
Likewise, the risk posed by paying and accounting for retiree health benefits through the pay-as-you-go method is unchanged, and therefore this issue remains on our high-risk list. The State continues to cover only the current year's cost of these benefits, without setting aside funds to cover future obligations. As a result, the State's total estimated liability grows each year and as of June 30, 2010, it totaled $59.9 billion, an increase of nearly $12 billion over the previous two-year period.
We also found that the various departments we reviewed still face challenges in administering funding received under the American Recovery and Reinvestment Act of 2009 (Recovery Act). Some of the four departments we reviewed are at risk of not being able to spend all Recovery Act funds awarded to them before the spending deadline, and they may have to forfeit any unspent funds. Two of the departments have already had to forfeit a combined total of $736,303 for two grants that had a spending deadline in 2010. Additionally, although some departments have not finalized their expenditures for some grants for which spending deadlines have passed, significant amounts of Recovery Act funds for these grants may revert to the federal government. In addition to the potential of forfeiting federal funds, the four departments we reviewed continue to demonstrate weaknesses in the internal controls over the federal programs they administer. Our audits in the past two years have uncovered many weaknesses in the administration of various Recovery Act programs by different state departments. A recent report by the U.S. Department of Education's Office of the Inspector General contained similar findings. Further, a report we issued in August 2011 found that of the seven grants with spending deadlines by December 31, 2011, that the Department of Education administers, the expenditures for one raise concerns that all funds will not be spent before the respective deadline. While spending for the remaining six grants appears to be on track for them to be fully spent before their spending deadlines, some subrecipients that received these grants have spent very little and do not appear to be on track to use all of their award amounts.
Managing the State's prison population and prison institutions continues to be a challenge for the California Department of Corrections and Rehabilitation (Corrections). The prison population is currently at 180.2 percent of the prison system's design capacity. Recently, the U.S. Supreme Court upheld a ruling that requires Corrections to reduce overcrowding to 137.5 percent of design capacity. Consequently, unless the State is able to construct sufficient facilities or identify other means of reducing the prison population by almost 43 percent, it may need to release some prisoners. The State has taken legislative action to reduce the number of prisoners by increasing the dollar thresholds above which property crimes are considered felonies. However, as of June 2011 Corrections still needed to reduce its prison population by 34,000 in two years in order to meet the court's ruling, therefore, these initiatives may prove to be inadequate. Also, the prison health care system is still under federal receivership. The latest report issued by the federal health care receiver (receiver) indicated successes, such as completing many of its 48 discrete actions, as well as challenges to the productivity and implementation of solutions the receiver faces. Further, the California Office of the Inspector General for Corrections found that nearly all prisons were ineffective at ensuring that inmates receive their medications and had poor access to medical providers and services. Consistent with our previous report, Corrections also continues to struggle to maintain consistent leadership and still has a number of vital upper-level positions that are unfilled.
Maintaining and improving infrastructure remains on our list of high-risk issues. The State's infrastructure is under increasing strain due to its age and the State's expanding population. Voters partially funded the State's infrastructure needs when they approved $42.7 billion in bonds in November 2006. A report the bureau released in May 2011 (Report 2010-117) found that work still needs to be done to ensure bond-funded projects appropriately progress. Additionally, as a result of the current financial condition, the State was not able to issue the $48.1 billion in bonds needed to fund infrastructure improvements included in the next phase of its strategic growth plan. Further, the State's worsening budget situation has required decision makers to shift focus away from the State's infrastructure needs.
Because a reliable supply of electricity provides a critical foundation for both California's economy and its citizens' standard of living, we added energy production and consumption as a high-risk issue in June 2009. Although the State has made some progress, it still faces uncertainty related to the need to retrofit or replace certain power plants. Currently, plants using once-through cooling, which is an environmentally harmful cooling method, have submitted plans to retrofit those systems to reduce the mortality rate of marine life as required by a state policy. However, these plans have not yet been approved, and the State faces the risk that the plans will not be sufficient and the plants will have to be shut down. Additionally, since our last report California has adopted a more aggressive target for the use of energy from renewable sources, such as wind and solar. However, the State still faces obstacles related to the construction of the infrastructure needed to transmit electricity from the locations where it is generated to the consumer. Consequently, the State is at risk of not meeting those targets.
Managing the State's workforce is another issue that remains on the bureau's high-risk list. The State continues to face the retirement of a significant number of both leadership and rank-and-file workers with unique perspectives and institutional knowledge critical to running state departments and programs. The percentage of state employees 60 years of age or older in leadership positions who are choosing to retire rose to 35 percent in fiscal year 2009-10, up from 26 percent in fiscal year 2007-08. We project that approximately 12,847, or 42 percent, of the employees in leadership positions as of June 30, 2008, could potentially retire by fiscal year 2014-15. Since our June 2009 high risk update, the State has made progress in streamlining the hiring process through the Human Resources Modernization Project (HR-Mod). However, it is uncertain which efforts initiated by HR-Mod will continue and what effect the governor's recent proposal to merge the Department of Personnel Administration and the State Personnel Board into a single department will have on the State's efforts to maintain the State's workforce. Further, many departments are still in the process of developing or assessing their workforce and succession plans.
The State's level of emergency preparedness remains a high-risk issue. Although there has been progress in this area, the Department of Public Health (Public Health) and the California Emergency Management Agency (CalEMA) still need to address various issues. Specifically, Public Health has established performance measures and deadlines in its strategic plan. However, it has not always achieved those performance measures. For example, it failed to meet its target of increasing the number of local health departments with Strategic National Stockpile ratings of 70 or better, which would mean their performance is acceptable to receive and distribute public health emergency medical assets. Similarly, although CalEMA has made progress on its Metrics Project, which is a resource typing and data gathering project aimed at developing a common structure and nomenclature for the inventorying and assessment of emergency resources and capabilities on a statewide basis, it is not yet complete. Additionally, it did not identify performance measures in its first strategic plan and has not started some activities related to the objectives as planned.
Since our last update, the State has shown improvement related to its oversight of information technology (IT) projects; however, this remains a high-risk issue. The California Technology Agency (Technology Agency) monitors projects to ensure that they remain on schedule and within budget; rejects projects that lack a business case, financial resources, or appropriate technology; and provides IT infrastructure and shared services. However, although the Technology Agency has strengthened its role in IT project oversight, due to the high cost of state IT projects and the Technology Agency's relatively new project management structure, IT oversight remains an area of high risk.
Finally, we have added the Department of Health Care Services and Public Health to our list as departments that present a high risk to the State. In recent years, the Legislature, because of a variety of concerns, has requested a higher number of audits for these two departments and recent audits have uncovered significant deficiencies in the policies and procedures of both departments that could affect public health. We have also identified a number of recommendations that these departments have not implemented after one year. However, we found that both of these departments have incurred less in administrative costs than the former Department of Health Services would have had the split not occurred. As a result, we no longer believe that spending by the two departments in comparison to that of the former Department of Health Services constitutes a high-risk issue.