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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 afinlayson@sco.ca.gov.
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
Department of Developmental Services Accounting and Administrative Controls Review
-1-
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
Department of Developmental Services Accounting and Administrative Controls Review
-2-
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
Department of Developmental Services Accounting and Administrative Controls Review
-3-
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
Department of Developmental Services Accounting and Administrative Controls Review
-4-
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
Department of Developmental Services Accounting and Administrative Controls Review
-5-
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
Department of Developmental Services Accounting and Administrative Controls Review
-6-
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.
Department of Developmental Services Accounting and Administrative Controls Review
-7-
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.
Department of Developmental Services Accounting and Administrative Controls Review
-8-
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.
Department of Developmental Services Accounting and Administrative Controls Review
-9-
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
Department of Developmental Services Accounting and Administrative Controls Review
-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 Management Response
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.
Department of Developmental Services Accounting and Administrative Controls Review
-11-
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
Department of Developmental Services Accounting and Administrative Controls Review
-12-
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.
DDS Management Response
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
Department of Developmental Services Accounting and Administrative Controls Review
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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
Department of Developmental Services Accounting and Administrative Controls Review
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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.
DDS Management Response
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.
Department of Developmental Services Accounting and Administrative Controls Review
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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
Department of Developmental Services Accounting and Administrative Controls Review
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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.
Department of Developmental Services Accounting and Administrative Controls Review
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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.
DDS Management Response
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.
Department of Developmental Services Accounting and Administrative Controls Review
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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
Department of Developmental Services Accounting and Administrative Controls Review
-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 Management Response
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.
Department of Developmental Services Accounting and Administrative Controls Review
-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
Department of Developmental Services Accounting and Administrative Controls Review
-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 Management Response
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
Department of Developmental Services Accounting and Administrative Controls Review
-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.
Department of Developmental Services Accounting and Administrative Controls Review
-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.
DDS Management Response
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
Department of Developmental Services Accounting and Administrative Controls Review
-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
Department of Developmental Services Accounting and Administrative Controls Review
-25-
DDS Management Response
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.
Department of Developmental Services Accounting and Administrative Controls Review
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
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