Elaine M. Howle
State Auditor

CALIFORNIA STATE AUDITOR

Doug Cordiner
Chief Deputy

Bureau of State Audits

555 Capitol Mall, Suite 300

S a c r a m e n t o, C A 9 5 8 1 4

November 23, 2009	

916.445.0255

916.327.0019 fax

w w w. b s a . c a . g o v

2009‑002.1b
(Letter Report)

The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California  95814
Dear Governor and Legislative Leaders:
On February 17, 2009, the President signed the American Recovery and Reinvestment Act
of 2009 (Recovery Act) to help fight the negative effects of the United States’ economic recession.
California expects to receive $85 billion in additional federal funding over the next several years
for both new and existing federal programs. With this increased funding comes a renewed
emphasis on accountability and public transparency to ensure federal funds are spent properly.
A key component of such accountability and transparency is the California State Auditor’s Office
(State Auditor’s Office) annual report on internal control and compliance with federal laws and
regulations. The State Auditor’s Office conducts this audit in accordance with the U.S. Office of
Management and Budget (OMB) Circular A‑133.
With the federal government awarding Recovery Act funds beginning in 2009, OMB issued
guidance dated June 2009 indicating the importance of an auditor’s early communication
to management regarding deficiencies in internal control. By recommending such early
communication, OMB intends for states to correct these findings as soon as possible to ensure
proper accountability and transparency for expenditures of Recovery Act awards. Based on
OMB’s guidance, as well as the public’s right to full transparency over the State’s spending of
Recovery Act funds, the State Auditor will be issuing interim reports that identify areas where
the State can improve its administration of Recovery Act funds, while also recognizing instances
when such funds were spent properly.
In this interim report, the State Auditor’s Office discusses the Department of Corrections and
Rehabilitation’s (Corrections) administration of a portion of the State Fiscal Stabilization Fund
Program—Government Services (Stabilization Funds—Federal Catalog Number 84.397) during
fiscal year 2008–09. Our review found that Corrections spent its entire $726.8 million award to
reimburse the General Fund for payroll expenses incurred during May and June 2009. Corrections’
use of these funds in this manner is consistent with the Recovery Act’s goals, which state that one
of its main purposes is to preserve and create jobs, while other goals include assisting those most
affected by the recession and stabilizing state and local government budgets. Also, according to
the requirements for the State Fiscal Stabilization Fund Program, certain stabilization funds can
be used for public safety.

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November 2009

Corrections’ Use of Stabilization Funds to Reimburse Its Payroll Costs
Was Appropriate
The Recovery Act provides the U.S. Department of Education
(Education) with $53.6 billion to administer the State Fiscal
Stabilization Fund Program. Under this program, Education can
allocate funding to the states to support education and other
governmental programs. The Recovery Act requires states to
spend 81.8 percent of their allocation to support elementary,
secondary, and postsecondary education, while spending the
remaining 18.2 percent of their allocation for public safety and
other governmental services, which may include assistance for
educational programs. In April 2009 the State applied for initial
funding under the State Fiscal Stabilization Fund Program. In the
State’s application, the governor indicated that California would use
the government services portion of its allocation by spending it all
on public safety, rather than spending these funds in other areas
such as transportation, public school renovation, or Medicaid. By
mid‑June 2009, the State had received more than $2.8 billion in
stabilization funds, of which $726.8 million could be used for public
safety and other government services.
The Governor’s Office of Planning and Research (Planning and
Research) entered into an interagency agreement with Corrections
on May 6, 2009, to expend federal funds in a manner consistent
with the public safety and other government services provision
outlined in the State’s April 2009 application. Even though
the agreement specified that Corrections would be spending the
funds received by Planning and Research, the State’s intention
was to use these funds to reimburse the General Fund, which
is the funding source for Corrections’ payroll costs. Earlier in
April 2009 the Department of Finance informed the Legislature
that “the Administration intends to use the federal funds to replace
General Fund expenditures of an equal amount in the budget of the
California Department of Corrections (CDCR).”
In May 2009 Corrections submitted an invoice to Planning and
Research for $450 million. Corrections submitted a second invoice
in June 2009 for $276.8 million. Although Corrections’ invoices did
not identify which General Fund costs were being reimbursed with
stabilization funds, Corrections did provide us with accounting
records demonstrating that its payroll costs exceeded the amounts
invoiced. We verified the accuracy of Corrections’ accounting
records by comparing them with similar records at the State
Controller’s Office.
Corrections’ decision to use $726.8 million of State Fiscal
Stabilization Fund Program funds ($450 million in May and
$276.8 million in June 2009) to reimburse portions of its payroll

California State Auditor Letter Report 2009-002.1b

November 2009

costs is consistent with the federal government’s requirement
that these funds be spent on public safety or other governmental
services. In fact, neither the Recovery Act nor the terms of
the grant agreement further define the term public safety.
Corrections’ mission is to enhance public safety through safe and
secure incarceration of offenders, effective parole supervision,
and rehabilitative strategies to reintegrate offenders into our
communities. Given its public safety mission, Corrections’ decision
to spend Recovery Act funds on its payroll costs is an allowable use
of funds.
Corrections May Have Overstated the Number of Jobs It Retained
Using Stabilization Funds
Section 1512 of the Recovery Act requires recipients of Recovery
Act funds to report quarterly on the use of those funds. OMB
issued guidance in June 2009, indicating that such reporting
would begin with the quarter ending September 30, 2009, and
clarified that recipients under the State Fiscal Stabilization Fund
Program are subject to this reporting requirement. Among the
items to be reported is an estimate of the jobs created or retained
by the project or activity paid for with State Fiscal Stabilization
Fund Program funds. In its report submitted in October 2009
Corrections indicated that it used $1.08 billion ($726.8 million
received during fiscal year 2008–09 and $358 million received
in fiscal year 2009–10) to retain the jobs of 18,229 correctional
officers working in adult prison facilities located throughout the
State. Specifically, Corrections reported that it used the funds for
payroll expenses.
Federal guidelines do not currently require, nor did we, audit the
information recipients must report under Section 1512. Since
Corrections submitted its first Section 1512 report on October 6, 2009,
our subsequent audit of fiscal year 2009–10 expenditures of federal
funds will likely examine these reports in more detail. Nevertheless,
in keeping with OMB’s emphasis on early communication of issues to
management, we conducted a high‑level review of the methodology
that Corrections used to report the number of jobs it retained using
stabilization funds. Based on our preliminary review, we believe that
Corrections may have overstated how many jobs it retained when it
reported its 18,229 figure to the federal government.
For the purposes of Section 1512 reporting, the federal government
defines jobs retained as an existing position that would not have
been continued to be filled were it not for Recovery Act funding.
Corrections had issued 3,655 layoff notices on May 15, 2009, roughly
one week before it received its first $450 million in stabilization
funds. Various media reports indicated that Corrections issued

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California State Auditor Letter Report 2009-002.1b

November 2009

between 1,300 and 1,450 additional layoff notices in August 2009,
bringing its total layoff notices to approximately 5,000. As a
result, the total number of layoff notices Corrections issued is less
than one‑third of the 18,229 figure that it reported to the federal
government as jobs retained. Corrections explained that it had
calculated its 18,229 figure by using the mid‑step salary range for
a correctional officer, excluding additional overtime payments or
benefits related to the position. However, such a methodology
for calculating jobs retained does not seem consistent with the
federal government’s definition of this term, since it appears that
Corrections simply reported how many correctional officers’
salaries were paid with Recovery Act funding, regardless of whether
these positions were truly at risk of being eliminated without
federal funding.
Respectfully submitted,

ELAINE M. HOWLE, CPA
State Auditor

California State Auditor Letter Report 2009-002.1b

November 2009

cc:	

Members of the Legislature
Office of the Lieutenant Governor
Milton Marks Commission on California State
Government Organization and Economy
Department of Finance
Attorney General
State Controller
State Treasurer
Legislative Analyst
Senate Office of Research
California Research Bureau
Capitol Press

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