Report 2001-108 Summary - November 2001
California Department of Corrections:
Its Fiscal Practices and Internal Controls Are Inadequate to Ensure Fiscal Responsibility
Our review of the California Department of Corrections' (department) fiscal practices and internal controls revealed:
- Spending plans, which are used to control program expenditures and to identify potential shortfalls, are inaccurate and do not align with the department's spending authority.
- Excessive use of custody staff overtime and sick leave, combined with inadequate funding, is the primary cause of its budget shortfalls.
- Improved contracting practices could result in hundreds of thousands of dollars per year in savings and prompt payments to contractors.
- Proactive strategies for reducing costs related to legal actions are not fully implemented.
RESULTS IN BRIEF
The fiscal practices and internal controls of the California Department of Corrections (department) are inadequate to ensure effective fiscal management and to protect the best interests of the State of California (State). Over the past four years, the department has experienced budget shortfalls that made funding augmentations of between $20 million and $200 million necessary for the department to satisfy its financial obligations. The department's poor fiscal management may have contributed to these shortfalls. Specifically, department spending plans, used to control program expenditures and to identify potential shortfalls, fail to align with the department's spending authority-having variances as large as $168 million.1 When the department's spending plans do not agree with its spending authority, the department is either over- or underrepresenting to its various programs and institutions the amount of funds available. Consequently, the programs and institutions may inadvertently overspend the department's spending authority or believe that they have overspent when, in fact, they have not. This lack of alignment also hinders the department's fiscal management because the department's monthly budget reviews (the department's primary fiscal management system) base their decision making on these invalid spending plan figures.
Even when its fiscal management system identifies an area of potential concern, the department rarely takes corrective action. To its credit, the department does conduct two additional types of fiscal reviews designed to identify and address fiscal and operational problems; however, these reviews are too infrequent to serve as adequate replacements for its primary fiscal management system. Until the department uses valid information and acts to correct identified problems, its fiscal management efforts are futile.
Our analysis of the department's $197 million budget shortfall for fiscal year 2000-01 revealed that the primary cause for the shortfall was custody staff compensation, which accounted for approximately $147 million of the shortfall. About $87 million of that portion related to excessive overtime for custody staff required to make up for numerous vacant positions and exorbitant use of sick leave. The department could save the State about $42 million in overtime costs by filling roughly 1,500 of its 2,300 vacant custody positions. According to the department, filling these vacancies should also help its institutions cope with the increase of violence it has experienced in recent years.
The department could achieve further savings by reducing the custody staff's use of sick leave. In fiscal year 2000-01, custody staff used nearly 2.3 million hours of sick leave, an amount that is more than 64 percent higher than the department's budgeted level of 1.4 million hours. If the department lowered its current use of sick leave to the budgeted level, the department would need to fill 505 fewer custody positions of the 1,500 we mentioned earlier. This action would allow the department to avoid costly overtime and assist in balancing its custody staff budget. However, the department has not succeeded in achieving reductions in this area. Also contributing to the department's budget shortfall are escalating workers' compensation costs, which the department has not yet mitigated.
Other factors probably contributed to the department's shortfalls. However, our analysis was hampered primarily because the department could not provide adequate support for how it used budget augmentations. Consequently, we could not always determine the specific expenditures that exceeded the department's original spending plan and that created the shortfall. Nevertheless, most of the department's remaining budget shortfall appears related to significant increases in the costs of pharmacy contracts and medical services for inmates.
Moreover, we found that the department does not receive adequate funding relative to its actual costs for custody staff. Specifically, department expenditures for each filled position exceeded funding levels by $4,300 to $8,400 per year, depending on staffing levels. Nevertheless, the department's funding shortfalls in fiscal year 2000-01 appear to have been resolved by funding augmentations the Legislature approved during that period. However, as previously mentioned, the department's spending authority does not correspond to the department's spending. To clarify its fiscal condition and spending practices, the department should prepare and periodically report its spending plan and the results of its operations to the Legislature. Ultimately, this information should allow for a realignment of the department's spending authority to match its needs appropriately.
The department also has weak contracting practices that fail to protect the best interests of not only the department's subcontractors but also the State. For example, the department could save hundreds of thousands of dollars per year and place hundreds of additional parolees into the workforce by expanding its use of the Jobs Plus Program (Jobs Plus) and eliminating the Offender Employment Continuum Program (Continuum). Although these contracted programs offer similar services, Continuum costs the department $824 more per job placement and has a much lower job placement rate than does Jobs Plus. Had the department used Jobs Plus rather than Continuum for the 869 job placements that Continuum made in fiscal year 2000-01, it would have saved $716,360-funds the department could have used to offset shortfalls in other areas. In addition, had all the parolees referred to Continuum been referred to Jobs Plus, as many as 534 additional parolees could have been placed in the workforce.
The department has also spent too much for contract administration. For example, it paid $23,989 more than it should have to the Jobs Plus contract administrator during fiscal year 2000-01. In addition, the department could save even more in future Jobs Plus contracts by negotiating the contract administration cost rate used for federal programs. Had the department negotiated the federal rate in place at the time the department agreed to the current contract, it could have saved more than $230,000 in fiscal year 2000-01.
Moreover, the department is not ensuring that subcontractors providing substance abuse treatment services to parolees receive prompt payment. Some subcontractors have had to wait as long as four months to receive payment. Such lengthy delays can have severe repercussions for subcontractors, most of which are nonprofit, forcing some to rely on costly lines of credit to meet their financial obligations and threatening the solvency of others.
We also found that the department's monitoring of subcontractors is inconsistent-inadequate in some cases and excessive in others. In some cases, the department relies exclusively on primary contractors to perform invoice and site reviews on subcontractors even when contractor and subcontractor are the same entity. Inconsistent contract monitoring has prevented the department from allocating its limited resources in the most efficient, effective manner to ensure the accuracy of contractor invoices and the satisfactory delivery of services.
Although the department has reduced some of its costs, it has exaggerated the extent to which a reorganization has resulted in certain cost reductions. In an April 2001 hearing before the Joint Legislative Audit Committee, the department's chief financial officer reported that a reorganization of the department's Central Administration Division resulted in cost reductions of $19.6 million in fiscal year 2000-01. However, our analysis revealed that $13.6 million of the reported savings related to what we consider normal year-end budget activities rather than to reorganization.
Finally, although the department has made progress recently in developing and implementing strategies designed to reduce the occurrence and consequences of costly legal action against the department, it has not fully implemented its plans. Until the department fully executes all its cost-cutting strategies, it will not be able to control legal claims and costs as effectively as possible.
To ensure that it manages state funds responsibly, the department should take the following steps:
- Align its spending plan with its total spending authority.
- Make certain that divisions prepare and implement corrective action plans to resolve projected funding shortfalls.
- Move aggressively to fill all vacant custody staff positions.
- Continue pursuing means to lower to budgeted levels its staff's sick leave use.
- Contract with job placement programs that place more parolees in jobs at a lower cost per placement than does the Continuum.
- Seek repayment from the job placement contractor that it has overpaid.
- Negotiate administration cost rates in future contracts that are equal to or better than those allowed by federal programs.
- Ensure that all subcontractors are paid promptly.
- Fully implement all its strategies to reduce legal costs as soon as possible.
The department generally concurs with the report findings and recommendations and states that it will work diligently to implement strategies to improve fiscal, contracting, legal, personnel management, and business practices. However, the department also stated that it has inadequate staff resources to conduct the operational reporting to the Legislature that we recommend.