September 2013

Report 2013-601

High Risk

COMMITMENT

INTEGRITY

The California State Auditor’s Updated Assessment of
High-Risk Issues the State and Select State Agencies Face

LEADERSHIP

The first five copies of each California State Auditor report are free. Additional copies are $3 each, payable by check
or money order. You can obtain reports by contacting the California State Auditor’s Office at the following address:
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, California 95814
916.445.0255 or TTY 916.445.0033
OR
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Whistleblower Hotline: 1.800.952.5665.

Elaine M. Howle State Auditor
Doug Cordiner Chief Deputy

September 26, 2013	

2013-601

The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814
Dear Governor and Legislative Leaders:
As authorized by Chapter 251, Statutes of 2004, the California State Auditor presents this
audit report assessing high-risk issues the State and selected state agencies face. Systematically
identifying and addressing high-risk issues can contribute to enhanced efficiency and
effectiveness by focusing the State’s resources on improving the delivery of services related to
important programs or functions.
We have added the 2011 realignment of funding and responsibility between the State and local
governments to the high-risk list. Realignment shifts funding and responsibility for certian
criminal justice and social services programs, totaling approximately $6 billion, primarily to
county governments. The State does not currently have access to robust data concerning the
results of realignment. As a result, the impact of realignment cannot be fully evaluated at this
time. Even so, initial data indicates that local jails may not have adequate capacity and services
to handle the influx of inmates caused by realignment.
We believe the State continues to face eight other significant high-risk issues: the state budget,
funding for the California State Teachers’ Retirement System, funding retiree health benefits for
state employees, funding for deteriorating infrastructure, ensuring a stable supply of electricity,
workforce and succession planning, strengthening emergency preparedness, and providing
effective oversight of the State’s information technology. We further believe that three state
agencies continue to meet our criteria for high risk as they face challenges in their day‑to‑day
operations: the California Department of Corrections and Rehabilitation, the California
Department of Health Care Services, and the California Department of Public Health.
We will continue to monitor the risks we have identified in this report and the actions the State
takes to address them. When the State’s actions result in significant progress toward resolving or
mitigating these risks, we will remove the high-risk designation based on our professional  judgment.
Respectfully submitted,

ELAINE M. HOWLE, CPA
State Auditor

621 Capitol Mall, Suite 1200

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

916.445.0255

916.327.0019 fax

w w w. a u d i t o r. c a . g o v

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Contents
Summary	1
Introduction	5
Chapter 1	
Pursuing Sound Fiscal Policy	

9

Chapter 2	
Meeting Realignment Challenges	

23

Chapter 3	
Managing the State’s Prison Population and Correctional Institutions	

29

Chapter 4	
Modernizing and Improving the State’s Infrastructure	

37

Chapter 5	
Effectively Managing the State’s Workforce	

45

Chapter 6	
Strengthening Emergency Preparedness	

51

Chapter 7	
Providing Effective Oversight of the State’s Information Technology	

57

Chapter 8	
Individual Agencies Exhibiting High‑Risk Characteristics	

67

Appendix	
Considerations for Determining High Risk	

71

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Summary
Results in Brief
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 California State Auditor 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)
and August 2011 (Report 2011‑601). Our current review found
that most of the issues we identified in 2011 as posing a high risk
to the State continue to be a high risk; we have also identified an
additional issue as constituting a high risk.
Various fiscal issues continue to pose a high risk to the State.
Although the budget condition has improved, it remains on the list
of high‑risk issues because of uncertainties concerning the size of
the State’s projected budget surplus and how the surplus should
be spent. Specifically, in its analysis of the Governor’s Budget May
Revision 2013–14, the Legislative Analyst’s Office projected that
state revenues would be $3.2 billion higher than those projected by
the governor for fiscal year 2013–14. The governor and Legislature
disagree about how to spend the surplus, making it difficult for the
State to set budget priorities. The Legislature also faces constraints
imposed by the state constitution and federal requirements that
make adjusting budget priorities even more difficult.
The funding status of the Defined Benefit Program of the California
State Teachers’ Retirement System (CalSTRS) has not improved,
and it remains on the high‑risk list. One of the major risks to
CalSTRS’ funding is that its board does not have the authority to set
contribution rates. The inability to adjust contributions, as well as
poor investment returns due to economic recessions, have caused the
funding ratio of the CalSTRS Defined Benefit Program to decrease
from 98 percent in 2001 to 67 percent in 2012, well below the
80 percent considered fiscally sound. At the current contribution
rate and actuarially estimated rate of return on investments, the
Defined Benefit Program’s funding ratio will continue to drop and
assets will eventually be depleted. Similarly, the State’s estimated
accrued liability of $63.85 billion related to retiree health benefits is
almost completely unfunded and continues to increase. The State
continues to cover only the current year’s cost of these benefits,
without setting aside funds to pay for future obligations. If the State

Report Highlights . . .
In our assessment of the high-risk issues
facing the State, we identified the 2011
realignment of funding and responsibility
for criminal justice and social services
programs between the State and local
governments as a new area of high risk.
We found the following in regards to issues
we previously identified as posing a high
risk to the State:
»» Funding for the California State Teachers’
Retirement System—the funding
ratio has decreased well below what is
fiscally sound.
»» Funding retiree health benefits for state
employees—the estimated accrued
liability of nearly $64 billion continues to
rise and is almost completely unfunded.
»» Managing and improving the State’s
deteriorating infrastructure—the
State’s investments in transportation,
water supply, and flood management
infrastructure have not kept up
with demands.
»» Ensuring a stable supply of electricity—
although much progress has been
made, the supply of electricity is
undergoing modification to better protect
the environment.
»» Workforce and succession planning—
challenges continue with many
employees approaching retirement age
and the recent reorganization of state
personnel agencies.
»» The State’s emergency preparedness—
key agencies lack fully developed strategic
plans and face challenges in meeting
some objectives.

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»» The State’s oversight of information
technology projects—the high costs of
certain projects and the failure of others
makes oversight critical.

continues this current method of funding, its liability for retiree
health benefits will continue to increase, presenting a risk to the
State’s ability to provide the level of health benefits promised to
its retirees.

The following three state agencies continue
to meet our criteria for high risk as they face
challenges in their day-to-day operations:

We have added the 2011 realignment of funding and responsibility
between the State and local governments as a new high‑risk
issue. Realignment shifts the funding of and responsibility for
many criminal justice and social services programs from the State
primarily to county governments. The funding for these programs
totals approximately $6 billion. The State does not currently have
access to reliable and meaningful data concerning the realignment.
As a result, the impact of realignment cannot be fully evaluated
at this time. Even so, initial data indicate that local jails may not
have adequate capacity and services to handle the influx of inmates
caused by realignment. Until enough time has passed to allow the
effectiveness and efficiency of realignment to be evaluated, we will
consider it a statewide high‑risk issue.

•	 California Department of Corrections
and Rehabilitation
•	 California Department of Health
Care Services
•	 California Department of Public Health

Managing the State’s prison population and quality of inmate
health care in the prison system continues to be a challenge for
the California Department of Corrections and Rehabilitation
(Corrections). While Corrections has reduced inmate overcrowding
in the prison system since our last report, it missed a population
benchmark set in December 2012 and continues to face the risk that
it will have to release inmates before they serve out their sentences
or are paroled. In addition, the State’s prison health care system
has been taken over by a federal health care receiver (receiver)
that has significant control over the system. Although the prison
health care system has seen many improvements under the receiver,
the process of improving inmate health care has been long and
expensive. Until control of the system is returned to Corrections,
the receiver can continue to order costly improvements to the
prison health care system that the State must pay for. Finally,
Corrections continues to struggle to permanently fill senior
positions and lacks a formal succession plan, which can hamper its
ability to ensure stability in leadership.
Maintaining and improving the State’s infrastructure remains on
our list of high‑risk issues. The State’s investments in transportation
and water supply and flood management infrastructure have not
kept up with demands. The California Transportation Commission
estimated that the State faces a funding shortfall of more than
$290 billion to adequately maintain its transportation infrastructure
for the 10‑year period from 2011 through 2020. Similarly, the
State’s water supply and flood management infrastructure requires
significant investments. Furthermore, although the State has made
progress in updating its aging electricity infrastructure to better
protect the environment and is currently on track to meet its

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renewable energy target by 2020, the supply of electricity remains
critical to the State’s economy, and the shift in its production
to sources and technologies that will have less impact on the
environment is an important effort that we will continue to monitor
as an area of high risk.
The State continues to face challenges related to its workforce and
succession planning as the proportion of employees approaching
retirement age increases. While state agencies we reviewed had
generally developed workforce and succession plans to ensure
continuity of critical services, we identified notable exceptions.
Further, with the recent reorganization combining the State
Personnel Board and the California Department of Personnel
Administration into the California Department of Human
Resources, the State faces the general risk associated with this type
of structural change.
The State’s emergency preparedness remains an area of high risk.
Two key California agencies that oversee statewide emergency
management—the California Department of Public Health (Public
Health) and the California Governor’s Office of Emergency
Services (Cal OES)—lack fully developed strategic plans to guide
their emergency preparedness efforts. Public Health’s emergency
preparedness office has the responsibility to coordinate planning
and other efforts to prepare Californians for public health
emergencies, including planning for the strategic stockpile of
medical supplies, maintaining contact information for crisis
response, and distributing funds to local health departments
for disaster planning. Cal OES exists to enhance safety and
preparedness in California and to protect lives and property by
effectively preparing for, preventing, responding to, and assisting
California in recovering from all threats, crimes, hazards, and
emergencies. However, our review found that both agencies face
challenges as they attempt to meet these objectives.
The high costs of certain projects and the failure of others
continues to make the State’s oversight of information technology
(IT) projects an area of high risk. As of July 2013 the California
Department of Technology (CalTech) reported that 46 IT projects
with total costs of more than $4.9 billion were under development.
In our August 2011 high risk report, we discussed four large IT
projects that would have a major impact on state operations—
the State Controller’s Office’s 21st Century Project, the Judicial
Branch’s California Court Case Management System, the
California Department of Finance’s Financial Information System
for California, and Corrections’ Strategic Offender Management
System. With this update, we examined the status of these
projects, as well as the California Department of Motor Vehicles’ IT
Modernization Project. We found that three of the five IT projects

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experienced major problems that require either part of the project
or the entire project to be suspended or even terminated. Further,
although CalTech is responsible for ensuring that state agencies
comply with the general controls specified in Chapter 5300 of
the State Administrative Manual, it does little to verify their
compliance. Given the pervasive general control deficiencies
at two agencies we reviewed—the Employment Development
Department and Corrections—we believe CalTech’s limited
oversight of the general controls state agencies have implemented
over their information systems represents another area of high risk
for the State.
Finally, Public Health and the California Department of Health
Care Services (Health Care Services) remain on the list of agencies
exhibiting high‑risk characteristics. Public Health continues to face
challenges and weaknesses in program administration and is slow to
implement audit recommendations with a direct impact on public
health. Its unresolved recommendations have increased from 20 to
23 in the past two years. Many of these recommendations have a
direct impact on public health and safety and, if not implemented,
could adversely affect the State. On the other hand, although Health
Care Services has made significant progress in implementing
unresolved audit recommendations, we continue to consider it a
high‑risk agency due to increased responsibilities resulting from
enactment of the federal Patient Protection and Affordable Care
Act and from the transfer of authority and responsibilities from the
former California Department of Mental Health.

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Introduction
Background
Legislation effective in January 2005 authorizes the California
State Auditor (state auditor) to develop a risk assessment process
for the State. In particular, Senate Bill 1437 of the 2003–04 Regular
Session of the Legislature added Section 8546.5 to the California
Government Code. It authorizes the state auditor to establish a
high‑risk audit program, to issue reports with recommendations
for improving issues it identifies as high risk, and to require state
agencies responsible for these identified programs or functions
to report periodically to the state auditor on the status of their
implementation of the recommendations. High‑risk programs and
functions include not only those particularly vulnerable to fraud,
waste, abuse, and mismanagement, but also those of particular
interest to the citizens of the State and those that have potentially
significant effects on public health, safety, and economic well‑being.
The State Auditor’s Criteria for Determining Whether State Agencies
and Major Issues the State Faces Merit High‑Risk Designations
To determine whether a state agency’s performance and accountability
challenges pose a high risk to the State, we first consider the
significance of an agency’s mission or functions and the extent to
which the agency’s management and programs are key to the State’s
overall performance and accountability. We then determine whether
risk is involved and if it constitutes one of the following:
•	 An issue that could be detrimental to the health and safety
of Californians.
•	 A program that could be at risk of fraud, waste, and abuse. For
example, a program involving payments to claimants for services
provided to third parties involves risk due to the difficulty in
verifying claims.
•	 A systemic problem that has created inefficiencies
and ineffectiveness.
To identify a high‑risk statewide issue, we consider the following:
•	 Whether it is evident in several state agencies.
•	 Whether it affects the State’s total resources.
•	 Whether it stems from some deficiency or challenge that
warrants monitoring and attention by the Legislature.

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For both state agencies and statewide issues, we also consider a
number of qualitative and quantitative factors, as well as whether
or not an agency has taken measures to correct previously
identified deficiencies or whether the State is taking measures
to reduce the risk a statewide issue may pose. In all cases, the
ultimate determination of high risk is based on the independent
and objective judgment of the state auditor’s professional staff.
The Appendix further describes these factors. Additionally, the
Appendix outlines the factors we consider in determining whether
it is appropriate to remove a statewide issue or agency from our
high‑risk list.
Scope and Methodology
California Government Code, Section 8546.5, authorizes the
state auditor to audit any state agency it identifies as high risk
and to issue related audit reports at least once every two years.
In May 2007 we issued a report1 that provided an initial list of
high‑risk issues, and we issued update reports on the status
of those issues and others that had been added in June 20092 and
August 20113.
Subsequent to our August 2011 report, the state auditor continued
to evaluate issues faced by the State for inclusion on our high‑risk
list. As a result, in July 2013 we issued a report designating
Covered California’s establishment of a health insurance exchange
as a high‑risk issue in California. Because this issue is newly
designated as a high risk, we have not updated it here. With this
2013 update, we are also adding to our list of high‑risk issues the
2011 realignment of funding and responsibilities between the State
and local governments. In addition, we highlight in this update
water supply and flood management as high risks under the
existing high‑risk issue of the State’s aging infrastructure. Finally,
we are removing the administration of the American Recovery
and Reinvestment Act of 2009 funds from our list of high‑risk
issues because state departments have made significant progress in
spending most of these funds.
To update our analysis of high‑risk issues and departments facing
risks and challenges, we interviewed knowledgeable staff at each
entity with significant related responsibilities to assess their
1	

High Risk: The California State Auditor’s Initial Assessment of High-Risk Issues the State and Select
State Agencies Face (Report 2006-601, May 2007).
2	 High Risk: The California State Auditor’s Updated Assessment of High-Risk Issues the State and Select
State Agencies Face (Report 2008-601, June 2009).
3	 High Risk: The California State Auditor’s Updated Assessment of High-Risk Issues the State and Select
State Agencies Face (Report 2011-601, August 2011).

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September 2013

perspectives on the extent of risk the State faces and reviewed the
efforts underway that they identified as mitigating the risks. We also
reviewed reports and other documentation relevant to the issues.

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Chapter 1
PURSUING SOUND FISCAL POLICY
Various fiscal issues continue to pose a risk to the State. Although
budget conditions have improved in the most recent fiscal year,
the State has a history of budget shortfalls and of using short‑term
solutions that push budget problems into the future. The budget
process and parameters have changed somewhat, but state decision
makers still face difficulties in adjusting budget priorities due to
limitations imposed by voter initiatives. In addition, the funding
ratio of the teachers’ retirement system has not improved—in
fact, it has decreased to 67 percent. Similarly, the State’s estimated
liability of $63.85 billion related to retiree health benefits is almost
completely unfunded, jeopardizing the ability of the State to provide
health benefits promised to its retirees. Finally, the State appears to
have spent federal funds associated with recovery from the recent
economic recession in a timely manner, and we no longer consider
this a high‑risk issue.
Adjusting Budget Priorities
In 2009 the California State Auditor designated the State’s budget
condition as a high‑risk issue. Although the budget condition has
since improved, it continues to be an area of high risk. The governor
has projected a budget surplus for fiscal year 2013–14, but there
is disagreement between the governor, the Legislature, and other
agencies on the size of the surplus and how the surplus should be
used. Further, the state constitution and federal limitations continue
to make it difficult to adjust budget priorities, and certain segments
of the population to which the State devotes considerable resources
continue to grow faster than the general population.
As shown in Figure 1 on the following page, after a number of
severe budget shortfalls, the State had a projected budget surplus
of just over $1 billion for fiscal year 2013–14. However, the size of
this projected surplus is disputed. In its analysis of the Governor’s
Budget May Revision 2013–14 (May revision), the Legislative
Analyst’s Office (LAO) projected that state revenues would be
$3.2 billion higher than those projected by the governor. Initial tax
receipts seem to be bearing out the LAO’s higher projections—by
June 2013 revenue from the State’s major income taxes was roughly
$1 billion above the revenue assumptions in the May revision of
the budget.

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Figure 1
Projected General Fund Budget Surpluses and Shortfalls as of the May Revision
Fiscal Years 1989–90 Through 2013–14
$20
10
0

Dollars in Billions

-10
-20
-30
-40
-50
-60
-70

2013–14

2012–13

2011–12

2010–11

2009–10

2008–09

2006–07

2007–08

2005–06

2004–05

2003–04

2002–03

2001–02

2000–01

1999–2000

1998–99

1997–98

1996–97

1995–96

1994–95

1993–94

1992–93

1990–91

1991–92

1989–90

-80

Fiscal Years

Sources:  California Department of Finance’s governor’s budget summaries and the Governor’s Budget May Revision for fiscal years 1989–90 through 2013–14
(May revisions); Legislative Analyst’s Office’s perspectives and issues, state spending plans, and overview of the May revisions.

The governor and Legislature disagree on how to use the surplus.
According to an analysis by the LAO, both the Assembly and the
Senate wanted to increase spending for health and human services
programs; however, these priorities were not carried forward to
the enacted budget. Instead, the governor saved the surplus in a
special fund for economic uncertainties. Both the May revision and
the enacted budget assume revenue levels of $97 billion. If actual
revenues continue to outpace projections, legislative leaders could
seek a midyear increase in spending.
The State has a history of using short‑term solutions to close
budget gaps, as shown in Table 1. Over the last 12 fiscal years, only
59 percent of budget deficits have been directly addressed through
increases in revenue or cuts in spending. The methods used to
close the gap for the remaining 41 percent of the shortfalls have
come from temporary fixes, such as increasing debt, shifting and
transferring funds, and deferring expenditures, which can push the
problem out to future years. For example, for fiscal year 2012–13,
a combination of increased revenue and reduced expenditures
was used to address 63 percent, or $10.4 billion, of the $16.5 billion
budget deficit. However, the strategies used for the remaining
37 percent, or $6.1 billion, of that year’s deficit only delayed
when the State would pay for expenditures in that fiscal year.

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For instance, to address budget shortfalls, the governor deferred
payments of $2.1 billion in funding for K‑12 education mandated
by Proposition 98—a voter‑approved constitutional amendment
that guarantees minimum funding levels for K‑12 schools and
community colleges. These deferrals created a liability that must be
paid back in the future.
Table 1
Types of Solutions Implemented to Reduce Budget Shortfalls
Fiscal Years 2002–03 Through 2012–13
FISCAL YEARS
 

Total amount of budget
solutions (in billions)*

2002–03

2003–04

2004–05

2005–06

2007–08

2008–09

2009–10

2010–11

2011–12

2012–13

OVERALL

$23.64

$39.40

$16.10

$5.85

$4.93

$23.97

$59.60

$19.30

$24.20

$16.51

$233.50

32%

21%

31%

71%

28%

36%

49%

63%

29%

27%

38%

Percentage by solution type 
Expenditure reductions
Revenue increases

17

15

15

2

34

17

23

23

37

36

21

Increased debt†

13

41

39

15

 

17

4

6

12

4

16

Fund shifts or transfers

12

11

15

13

26

4

6

5

19

18

12

Accelerated revenues

19

5

 

 

12

11

4

 0

0

0

4

Expenditure deferrals

7

5

 

 

 

8

 

3

1

15

4

Federal stimulus funds

 

 

 

 

 

 

14

 0

0

0

4

Accounting changes

 

2

 

 

 

7

 0

0

0

0

1

Other

 

 

 

 

 

 

 

 

2

 0

0

Sources:  California Department of Finance’s governor’s budget summaries and the Governor’s Budget May Revision (May revisions) for fiscal years 2002–03
through 2012–13; Legislative Analyst’s Office’s perspectives and issues, state spending plans, and overview of the May revisions.
Note:  Fiscal years 2006–07 and 2013–14 are not shown in the table because there were projected budget surpluses for those years.
*	 The solutions in this table do not precisely link with the May shortfalls presented in Figure 1 because of timing differences and the differences
between the shortfalls and the solutions to resolve them.
†	 Increased debt includes borrowing from internal sources.

The Legislature also faces constraints imposed by the state
constitution and federal requirements that make it difficult to
adjust budget priorities. As shown in Table 2 on the following page,
the passage of several propositions in 2010 and 2012 has changed
the State’s budgeting process, affecting the revenues available for
General Fund expenditure and making it more difficult for the
Legislature to generate revenues through fees and charges. For
example, Proposition 26 increased the vote requirement for certain
state and local fees and tax measures, making it more difficult
for state and local governments to raise revenue. In addition,
Proposition 30 temporarily increases taxes to support K‑12 and
community college expenditures while redirecting certain vehicle
license fee and sales tax revenues to local governments (discussed in
Chapter 2). Moreover, the California Constitution mandates many

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General Fund expenditures, and certain federal programs, such as
the Temporary Assistance for Needy Families program, require
state matching funds, further limiting the Legislature’s discretion
on spending. For example, the state constitution mandates an
expenditure level totaling 40 percent of the General Fund revenues
for specific education uses. These various constraints limit the
choices available to decision makers when attempting to address
budget shortfalls.
Table 2
Ballot Measures Approved by Voters in November 2010 and 2012
General Elections That Impact the State Budget
INITIATIVE

SUMMARY

Proposition 25

Changed the legislative vote requirement to pass budget and budget‑related
legislation from two‑thirds to a simple majority. Retained the two‑thirds vote
requirement for taxes. Required legislators to pass a budget bill by June 15
or forfeit salaries and expense reimbursement for every day a budget bill is
not passed.

Proposition 26

Required that certain state and local fees be approved by a two‑thirds vote.
Broadened the definition of a state or local tax to include payments formerly
considered to be fees or charges.

Proposition 30

Increased personal income taxes on high‑income taxpayers for seven years
and sales taxes for four years. Allocated temporary tax revenues to fund K–12
education and community colleges. Guaranteed that local governments receive
certain tax revenues for public safety services realigned from the State to local
governments in 2011.

Proposition 39

Prevents multistate businesses from choosing the method for determining their
state taxable income that is most advantageous for them. Some multistate
businesses have to pay more corporate income taxes due to this change.
About half of the increased tax revenue over the next five years is to be used to
support energy efficiency and alternative energy projects.

Sources: Voter guides for the November 2010 and 2012 elections, prepared by the California Office
of the Attorney General.

As we reported in our 2011 high risk report, a change in federal law
related to the estate tax has resulted in lost revenue for the General
Fund. Prior to January 2005 the State generally received about
$1 billion of the federal estate taxes that would have otherwise been
paid to the Internal Revenue Service. These revenues are commonly
known as a state pick‑up tax. However, the Economic Growth and
Tax Relief Reconciliation Act of 2001 and subsequent amendments
to it suspended the state pick‑up tax so that, as of January 1, 2005, the
State no longer receives this revenue. The American Taxpayer Relief
Act of 2012 permanently extended the suspension of the pick‑up tax.
One way the State can make up for this lost revenue is by imposing
a state estate tax. However, current state law, enacted through an
initiative measure, prohibits California from doing so. Voter approval
would be required to modify or repeal that prohibition.

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Finally, growth in certain population segments to which the
State devotes considerable resources continues to significantly
affect the state budget. Specifically, as shown in Table 3, while the
State’s population as a whole increased by 4 percent from fiscal
years 2005–06 to 2011–12, the number of Medi‑Cal recipients
increased by roughly 17 percent. This disproportionate increase
in Medi‑Cal recipients is reflected in the funding the Medi‑Cal
program received from the General Fund, which increased
from $12.7 billion to $14.3 billion over the same period. In
addition, the governor plans to expand California’s Medi‑Cal
program under the federal Patient Protection and Affordable
Care Act, increasing the number of eligible participants and
likely the associated cost for care. According to the LAO, by fiscal
year 2020–21, the State’s share of these expansion costs could range
from $300 million to $1.3 billion annually.
Table 3
Growth Rates of California’s General Population Compared to
the Growth Rates of Specific Groups

FISCAL YEAR

GENERAL
POPULATION

INMATES

2005–06

36,246,822

172,561

THOSE ELIGIBLE
FOR MEDI-CAL

K–12 STUDENTS

6,534,981

6,312,436

HIGHER
EDUCATION
STUDENTS

2,192,935

2006–07

36,552,529

173,312

6,553,257

6,286,943

2,246,098

2007–08

36,856,222

170,973

6,721,002

6,275,469

2,347,847

2008–09

37,077,204

167,832

7,094,877

6,252,031

2,456,556

2009–10

37,309,000

165,817

7,397,966

6,192,121

2,460,876

2010–11

37,570,000

162,368

7,594,872

6,217,002

2,394,074

2011–12

37,826,000

135,238

7,621,956

6,220,993

2,318,306

4.36%

(21.63%)

16.63%

(1.45%)

5.72%

Percentage change fiscal
years 2005–06 to 2011–12

Sources:  California Department of Finance population estimates prepared by the Demographic
Research Unit; California Department of Corrections and Rehabilitation, California Prisoners and
Parolees 2012; California Department of Education enrollment reports prepared by the Educational
Demographics Office; California Department of Health Care Services, Medical Care Statistics Section;
and California Postsecondary Education Commission higher education enrollment reports for the
fall of each fiscal year.

In our 2009 update we identified California’s inmate population
as a factor contributing to risk in the state budget. Although the
population of state prison inmates decreased by more than 21 percent
from fiscal years 2005–06 through 2011–12 much of this decrease
is due to the State’s prison realignment plan, discussed further in
Chapter 2. Under this plan, many low‑level offenders are being
housed in county‑level facilities. To help pay for their increased
inmate population, the counties are receiving increased levels of
support from the State—$400 million in fiscal year 2011–12, the

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first partial year of realignment, growing to more than $850 million
in fiscal year 2012–13 and exceeding $1 billion in fiscal year 2013–14.
Chapters 15 and 39, Statutes of 2011, provide a dedicated and
permanent revenue stream to counties, but they have done so by
diverting portions of the revenue generated through vehicle license
fees and the state sales tax that would otherwise have supported
other programs paid for by the General Fund.
Funding the California State Teachers’ Retirement System
The State continues to face the possibility of having to help
further finance the pension liabilities of the California State
Teachers’ Retirement System (CalSTRS) Defined Benefit Program.
The contributions required from CalSTRS members and their
employers are currently not sufficient to ensure payment of all
promised future benefits. Therefore, the funding of CalSTRS
continues to be a high‑risk issue for the State.
CalSTRS was created to provide California teachers with a secure
financial future during their retirement years and to provide an
incentive for them to stay in the teaching profession. With more
than 860,000 members and benefit recipients, CalSTRS is the
nation’s largest public teachers’ retirement system. CalSTRS is
responsible for administering the State Teachers’ Retirement Plan,
the primary program of which is the Defined Benefit Program,
which provides defined retirement benefits based on retirement
age, years of service, and compensation totals. Membership in the
Defined Benefit Program includes all employees in California public
schools in positions requiring membership, such as certificated
public school teachers, teaching superintendents, and educational
administrators from kindergarten through community college. In
addition to paying the current year’s pension obligations, CalSTRS
prefunds future pension benefits by setting aside funds each year.
The members, their employers, and the State are each required to
contribute a percentage of members’ salaries to prefund pension
benefits for CalSTRS members.
Pension systems have incredibly
long-lived liabilities, paying
promised benefits many decades
after they are first offered.

Pension systems have incredibly long‑lived liabilities, paying
promised benefits many decades after they are first offered. To
limit the risk of not having enough assets to cover retirement
benefits, the U.S. Government Accountability Office recommends
that retirement systems maintain a funding ratio of at least
80 percent of liabilities. This means a pension system should have
enough assets on hand in any given year to cover at least 80 percent
of its current‑year and future pension liabilities. However, poor
investment returns due to economic recessions, as well as the

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September 2013

inability to adjust contributions, have caused the funding ratio of
the CalSTRS Defined Benefit Program to decrease from 98 percent
in 2001 to 67 percent in 2012, as shown in Figure 2.
Figure 2
Value of Assets of the California State Teachers’ Retirement System Defined Benefit Program
as a Percentage of Its Liabilities
June 30, 2001 Through June 30, 2012
100%

*

Funded Ratio

80
60
40
20
0

†
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Years

Sources:  California State Teachers’ Retirement System (CalSTRS) Defined Benefit Program Actuarial Valuation as of June 30, 2012.
*	 According to a study by the U.S. Government Accountability Office, a sound pension plan should have assets that are at least 80 percent
of its current and future liabilities.
†	 Government Accounting Standards Board Statement No. 27 requires actuarial valuations to be performed biennially, or every other year.
Although CalSTRS typically performs such valuations each year, it did not do so in 2002.

One of the major risks to CalSTRS’ funding is that its board does not
have the authority to set contribution rates. Unlike the rates of the
California Public Employees’ Retirement System (CalPERS), CalSTRS’
rates are established by state law. As a result, only the Legislature, not
the CalSTRS board, has the authority to change the contribution rates.
Members contribute 8 percent of their salary, employers contribute
8.25 percent, and the State contributes roughly 2 percent to the
Defined Benefit Program. The member and employer contribution
rates have remained largely unchanged by the Legislature since
1972 and 1990, respectively—a stark contrast to the adjustments to
employer contribution rates that CalPERS makes each year.
California recently enacted the Public Employees’ Pension
Reform Act of 2013. A significant impact of this legislation is
that the normal retirement age for new CalSTRS members
increases from age 60 to age 62. New CalSTRS members retiring
earlier than age 62 generally must accept lower pension benefit
rates. This legislation also requires new members to pay at least
50 percent of their pension costs. However, this legislation has
not had a significant effect on CalSTRS’ funding ratio because
employees hired before 2013 are not affected by the legislation’s
significant provisions.

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At the current contribution rate and actuarially estimated rate
of return on investment, the Defined Benefit Program’s funding
ratio will continue to drop and assets will eventually be depleted.
The actuaries who examined CalSTRS’ Defined Benefit Program
determined the current combined contribution rate of employees,
employers, and the State to be about 19.47 percent of salaries in 2012.
To reverse the funding ratio decline and reach 100 percent funding
in 31 years, the actuaries concluded the combined contribution rate
would need to increase by 14.62 percent of  salaries for a combined
contribution rate of 34.09 percent of current‑year salaries.
As time passes, it will be harder to reverse the downward trend, and
the required increase in contributions may grow too large for the
State to take necessary action. According to a March 2013 actuarial
valuation report, even assuming the expected return on CalSTRS’
investments is achieved each year, the Defined Benefit Program is at
risk of having its funding status continue to decrease to zero in 31 years
if the Legislature does not increase contribution rates. Because the
State may bear some responsibility for funding the benefits promised
to CalSTRS members, unless the State takes steps to ensure that
funding for the CalSTRS program is increased, it may have to make
up for the deficit using revenue from taxes. Consequently, this remains
a high‑risk issue for the State that we will continue to monitor.
Funding Retiree Health Benefits

The State’s total accrued OPEB
liability—the estimated total for
all retiree health benefits that
will be paid in the future—has
grown from $59.9 billion in 2010 to
$63.85 billion in 2012.

The State has experienced increasing costs for providing retirees
and their family members benefits known as other postemployment
benefits (OPEB), which are additional benefits beyond pensions
and include, for example, medical and dental insurance premiums.
The State’s total accrued OPEB liability—the estimated total for all
retiree health benefits that will be paid in the future—has grown
from $59.9 billion in 2010 to $63.85 billion in 2012. If the State
continues the current method of funding OPEB, the growth of the
OPEB liability will continue to increase. The management
of the State’s OPEB liability continues to be a high‑risk issue
because the issues identified in our 2011 high risk update report
have not been resolved.
The State’s annual OPEB costs are rising due to a growing
number of retirees and increases in health care premiums.
The number of retirees has grown from approximately 134,000 in
fiscal year 2009–10 to about 144,000 in fiscal year 2011–12—an
increase of 7 percent. Over the same period, health care premiums
have risen by approximately 15 percent. These two factors have
resulted in an increase in OPEB expenditures from about $1.1 billion
in fiscal year 2009–10 to about $1.5 billion in fiscal year 2011–12, as
shown in Figure 3—an increase of 36 percent.

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September 2013

Figure 3
Expenditures on Other Postemployment Benefits

Expenditures in Billions

$1.50
1.25
1.00
.75
.50
.25

20
02
–0
3
20
03
–0
4
20
04
–0
5
20
05
–0
6
20
06
–0
7
20
07
–0
8
20
08
–0
9
20
09
–1
0
20
10
–1
1
20
11
–1
2

0

Fiscal Years

Source:  Data obtained from the California State Controller’s Office.

Our 2011 high risk report concluded that the increased OPEB
liability presents a risk to the State’s ability to provide the level of
health benefits promised to its retirees. The report described the
risk the State is incurring by using the pay‑as‑you go method. Each
year the State determines its annual required contribution, which
is an actuarially determined level of funding that is projected to
cover the current year’s cost of benefits as well as a portion of the
benefits earned in prior years. Since the State uses a pay‑as‑you‑go
method, which pays only for the current year’s expenditures, the
future OPEB liability that must be paid to state employees continues
to grow. For example, the annual required contribution in fiscal
year 2011–12 was $4.8 billion, while actual contributions totaled
only $1.8 billion. This resulted in an increase in the OPEB obligation
recognized in the State’s financial statements from $10.4 billion in
fiscal year 2010–11 to $13.4 billion in fiscal year 2011–12.
The State has the option to either partially or fully fund the total
OPEB liability. If the State chose to prefund the OPEB liability
by setting aside assets in advance to earn additional returns over
time, the annual required OPEB contribution and unfunded OPEB
liability would be reduced. As Table 4 on the following page shows,
the State could have reduced its OPEB liability by almost $22 billion
if it had committed, as of June 30, 2012, to fully prefund its future
retiree health benefits. Even partially prefunding its future retiree
health benefits at 50 percent would have reduced the State’s total
OPEB liability by over $12 billion.

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Table 4
Comparison of Funding Method Valuations
FUNDING METHOD
(DOLLARS IN BILLIONS)

 

Assumed rate of return on investments
Total estimated liability for retiree health
benefits as of June 30, 2012
Savings over pay-as-you-go
Annual required contribution
Savings over pay-as-you-go
Expected employer cash payments
Projected liability for fiscal year 2012–13

PAY AS-YOU-GO

PARTIAL
FUNDING
50%

FULL
FUNDING
100%

4.50%

6.06%

7.61%

$63.85

$51.28

$42.10

–

12.57

21.75

4.92

4.07

3.51

–

0.85

1.41

1.81

2.66

3.51

16.09

14.49

13.17

Sources:  State of California Retiree Health Benefits Program; Government Accounting
Standards Board Statement Nos. 43 and 45; and Actuarial Valuation Report as of June 30, 2012.

There are some bargaining units that prefund OPEB. For example, the
California Highway Patrol has an agreement with the State to prefund
its OPEB obligations. However, this amount is too small to affect
the State’s overall OPEB liability. The State’s OPEB 2012 Actuarial
Valuation Report concluded that, given the low level of prefunding
and the uncertainty of future contributions, the estimated liability for
retiree health benefits will continue to grow in the future.
Other states are managing their OPEB liabilities better than
California. According to a June 2012 report by the Pew Center on
the States titled The Widening Gap Update, as of 2010, California
has funded only 0.1 percent of its retiree health care liability,
causing the State to be categorized as having “serious concerns.”
In contrast, seven states have funded at least 25 percent of their
OPEB liabilities, including Alaska and Arizona, which have funded
50 percent and 69 percent, respectively. California has the largest
OPEB liability and is one of the least funded states in the country.
While the State has taken some steps to prefund OPEB for
some employees, it remains unclear whether the State will begin
prefunding OPEB for other employees and how the State will
manage the risks associated with its large liability for retiree health
benefits. Consequently, the State’s growing OPEB liability remains a
high‑risk issue in need of continued monitoring.
Ensuring Timely Expenditures of Recovery Act Funds
We no longer consider the timeliness of the State’s expenditures of
American Recovery and Reinvestment Act of 2009 (Recovery Act)
funds a high‑risk issue. In August 2011 we noted that various state

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September 2013

programs needed to ensure that these funds were spent before the
respective deadlines to avoid having to forfeit them to the federal
government. In addition, we noted that many state departments
continued to have a significant number of internal control
weaknesses related to their administration of the Recovery Act
awards. Our current review, however, found that the State has done
well in using its share of the Recovery Act money for its intended
purposes in a timely manner.
The federal government enacted the Recovery Act to counter
the negative effects of the United States’ economic recession.
With the distribution of more than $800 billion in funds, the
Recovery Act was expected to preserve and create jobs; promote
economic recovery; invest in transportation, environmental
protection, and other infrastructure; and stabilize state and local
governmental budgets. Timelines for obligating Recovery Act
funds were intentionally compressed by the Recovery Act to
ensure that a significant amount of funds would be injected into
the economy within a short time frame. Funds that were awarded
and not obligated by mandated deadlines were to be reclaimed by
the federal government in accordance with the Dodd‑Frank Act
of 2010. Figure 4 shows that California’s total Recovery Act awards
exceeded $87 billion and consisted of tax relief, grants, entitlement
payments, contracts and loans.
Figure 4
Breakdown of American Recovery and Reinvestment Act of 2009
Awards for California
(Dollars in Billions)
Loans—$4.2 (5%)
Contracts—$4.2 (5%)

Tax Relief—
$30.2 (35%)

Entitlements—
$23.7 (27%)

Grants—$25.2 (29%)

Sources:  U.S. Government Recovery Act Web Site and California State Auditor’s report High‑Risk
Update–California’s System for Administering Federal Recovery Act Funds: State Departments Are
Preparing to Administer Aspects of Recovery Act Funding, but Correction of Control Weaknesses and
Prompt Federal and State Guidance Are Needed (Report 2009-611.1, June 2009).

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The $30.2 billion in tax relief for 2009 through 2012 included benefits
such as education and first‑time homebuyer credits and business
tax incentives such as the five‑year carry back of operating losses
of small businesses. This component of the Recovery Act was not
directly under the State’s administration, although the influx in funds
to California’s economy was still significant. However, the State had at
least some oversight of the grants, contracts, and loans, as well as the
entitlement payments shown in Figure 4. These entitlement payments
included assistance for needy families, foster care and adoption
assistance, and a onetime $250 payment to Social Security recipients,
federal Railroad Retirement Board recipients, and veterans.
Because of the significant amount of funds involved, and because
California had demonstrated weaknesses in administering
programs for which federal funds were awarded in the past, in 2009
we determined that the administration of Recovery Act funds by
state agencies was a high‑risk issue. We noted that the then‑existing
internal controls may not provide sufficient assurance that Recovery
Act funding would be properly administered. In addition, we found
that although the California Recovery Task Force (task force) had
provided general guidance for securing and administering Recovery
Act funds, the task force should have provided a more detailed
framework for administering and monitoring Recovery Act funds.
In our most recent high risk report, in August 2011, we found that
the State was at risk of losing up to $8.6 billion in Recovery Act
funds because these funds were not being allocated and spent in a
timely manner.
Despite past challenges, our current
review found that California was
generally able to allocate and
spend Recovery Act funds within the
required time frames.

Despite these past challenges, our current review found that
California was generally able to allocate and spend Recovery
Act funds within the required time frames. As of April 2013
the State had received over 92 percent of its $57 billion in
Recovery Act awards for contracts, grants, loans, and entitlement
programs. In addition, four of the six departments we reviewed—
the Employment Development Department (Employment
Development), California Department of Education (Education),
California Energy Commission (Energy), and California
Department of Transportation (Caltrans)—have indicated to us
that they are planning to allocate and spend some or all of their
remaining funds. This success is due in part to the executive
branch’s monitoring of the administration and use of Recovery
Act funds. Specifically, a March 2009 executive order created the
task force as the lead agency to ensure that California properly
administered and accounted for the receipt of Recovery Act funds.
The task force remained in operation until July 2011. Additionally,
an April 2009 executive order created the Office of the Inspector
General (inspector general) as an entity independent of the task
force to protect the integrity and accountability of the expenditure
of Recovery Act funds.

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September 2013

Our current review of selected state departments found significant
progress in spending Recovery Act funds. We reviewed spending
data for the four high‑risk state departments discussed in our
August 2011 report—Education, Employment Development, the
California Department of Health Care Services, and the California
Department of Social Services—and two other state departments—
Caltrans and Energy. As shown in Table 5, these six departments
collectively reported expenditures totaling $34.7 billion (99 percent)
of the $35 billion in Recovery Act awards available to them.
Table 5
American Recovery and Reinvestment Act Awards and Expenditures at Six Departments We Reviewed as of
Spring 2013
REMAINING
FUNDS

PERCENTAGE
REMAINING

DEPARTMENT

TOTAL AWARD

TOTAL SPENT

California Department of Health Care Services

$13,223,817,558

$13,193,467,722

$30,349,836

Employment Development Department

11,144,152,700

11,098,822,572

45,330,128

0.41

California Department of Social Services

1,490,627,600

1,455,767,020

34,860,580

2.34

California Department of Education

6,253,587,701

6,172,725,391

80,862,310

1.29

314,535,926

311,717,554

2,818,372

0.9

California Energy Commission
California Department of Transportation
Totals

2,618,537,817

2,467,934,338

150,603,479

$35,045,259,302

$34,700,434,597

$344,824,705

Sources:  Expenditure reports provided to the California Department of Finance by the departments listed in the table.

While the remaining funds range from 0.23 percent to 5.75 percent,
the deadlines to expend some of these funds are still in the future,
allowing the State to continue to draw Recovery Act funds. The
departments stated that they will spend most of their remaining
funds, as indicated by the following:
•	 Before any applicable spending deadlines, Employment
Development is planning to spend more than $41 million for the
unemployment compensation modernization incentive program,
$2.3 million for unemployment insurance special projects, and
$149,000 for competitive grants for worker training. As a result,
the remaining unused balance of Employment Development’s
Recovery Act awards will be roughly $1.2 million.
•	 Caltrans is expecting to use its entire $150.6 million in remaining
Recovery Act funds by the September 2015 deadline.
•	 Education indicated that it expects to fully expend the
remaining school improvement grants of over $77 million by
December 31, 2013, leaving only about $3.1 million of its total
Recovery Act awards unspent.

0.23%

5.75
0.98%

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•	 Energy has commitments to spend (or has encumbered)
$2.7 million of its remaining $2.8 million Recovery Act award.
Because most Recovery Act awards have been spent, and
because four of the departments appear to have plans to spend
any significant remaining amounts, we no longer consider the
timeliness of the State’s expenditure of the remaining awards to be
a high‑risk issue.

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September 2013

Chapter 2
MEETING REALIGNMENT CHALLENGES
The 2011 realignment of funding and responsibilities between the
State and local governments is intended as a long‑term solution
to many challenges the State faces with respect to criminal justice,
mental health, and social services programs. Although it appears
that shifting certain criminal justice programs to the local level
has reduced the State’s prison overcrowding, the impact on jail
overcrowding at the local level has become a potential concern.
Further, the impact of realignment on other state programs, such as
child welfare services, is unclear at this time. Until enough time has
passed so that the effectiveness and efficiency of realignment can be
evaluated, we designate realignment as a statewide high‑risk issue.
Funding Realignment Programs
In 2011 California enacted legislation to undertake a major
realignment of public safety, health, and human services
programs. Realignment shifts the funding and responsibility for
these programs, totaling over $5.8 billion, primarily to county
governments. In 2012 California voters approved Proposition 30,
which contained provisions intended to ensure a stable funding
source for the realigned programs. The new law transfers directly
to counties a portion of the State’s sales tax revenues that would
otherwise have been collected in the State’s General Fund, as well
as certain motor vehicle license fee revenues that were previously
allocated to the California Department of Motor Vehicles and some
local governments. As shown in Table 6 on the following page, the
programs affected by realignment span a wide range of services.
With realignment, the Legislature intended to provide local
agencies with flexibility in administering the programs shown
in Table 6. According to the Governor’s Budget May Revision for
Fiscal Year 2012–13, realignment funding is structured to provide
counties with the flexibility to meet their highest priorities. For
example, rather than going through the State’s legislative process
to reallocate funds between certain programs, a county’s board of
supervisors can redistribute some realignment funds to respond to
the community’s specific needs.
The legislation affected each program area differently, depending on
which responsibilities shifted from the State to the local level. For
criminal justice programs, the Legislature realigned responsibility
for lower‑level offenders, parolees, and parole violators from the
State to the counties. As a result, individuals convicted of certain
nonserious, nonviolent crimes, and who do not have a history of

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serious, violent, or sex‑related offenses, are being incarcerated
in county jails or are under local supervision, rather than in the
state prison system. In contrast, realignment did not change major
functions of the child welfare system, according to the Legislative
Analyst’s Office (LAO). Instead, the Legislature transferred most
nonfederal funding responsibility for child welfare programs
to the counties; previously, the State and counties shared this
responsibility. Before realignment, when child welfare system
caseloads increased, the State and counties would share in these
increased costs. According to the LAO, the counties now bear the
primary financial responsibility for increased caseloads, thereby
placing greater financial pressure on the counties to contain child
welfare system costs.
Table 6
Estimated Program Allocations Covered Under Realignment
Fiscal Year 2012–13
(Dollars in Thousands)
PROGRAM

AMOUNT

PERCENT
BUDGET

Criminal Justice
Adult offenders and parolees
Public safety programs
Court security
Juvenile justice
Subtotals

857,500
489,900
496,400
98,800
$1,942,600

14.68%
8.39
8.50
1.69
33.26%

Protective Services*
Foster care and child welfare services
Adult protective services
Subtotals

$ 1,585,400
55,000
$1,640,400

27.14%
0.94
28.08%

Existing Community Mental Health Programs

$1,120,600

19.19%

$584,200
196,700
183,600
$964,500

10.00%
3.37
3.14
16.51%

Total Before Growth Factor
Program cost growth‡

$5,668,100
172,900

97.04%
2.96%

Total Allocated
Sales tax revenue (1.0625 percent)
Motor vehicle license fee transfer

$5,841,000
5,386,300
454,600

100.00%
92.22%
7.78

Total Revenues

$5,840,900

100.00%

Behavioral Health†
Early and periodic screening, diagnosis,
and treatment
Mental health managed care
Substance abuse treatment
Subtotals

Sources:  California Department of Finance Governor’s Budget May Revisions for fiscal years 2012–13
and 2013–14.
*	 Pursuant to Senate Bill 1020 (Statutes of 2012), the Legislature provides a single allocation
for protective services.
†	 The Legislature provides a single allocation for behavioral health.
‡	 Program cost growth represents sales and use tax revenues in excess of projections.

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September 2013

State oversight of child welfare programs remains largely intact, and
the counties still have to comply with federal and state laws and the
regulations that implement those laws. The chief of the Child
Protection and Family Support Branch (branch chief ) at the
California Department of Social Services (Social Services) indicated
that the oversight role of Social Services has largely remained the
same. Social Services still regularly monitors counties’ performance
and must conduct a comprehensive review of county child welfare
programs at least once every five years.
Assessing the Effects of Realignment
The 2011 realignment is intended to move program responsibility
to the level of government that can best provide services, eliminate
duplication of efforts, generate savings, and increase flexibility.
To allow the State and key stakeholders to assess the effects of
realignment, the State needs to begin gathering
reliable and accessible data. According to a report
issued by the LAO, the 2011 realignment included a
Key Stakeholders
broader array of programs than any other state‑local
State Departments
realignment in modern California history. Beyond
each county’s involvement, multiple statewide
•	 California Department of Corrections and Rehabilitation
stakeholders contribute to the implementation
•	 California Department of Health Care Services
of realignment, as described in the text box. For
•	 California Department of Social Services
example, the California Department of Finance, in
•	 California Department of Finance
consultation with appropriate state departments
•	 California State Controller’s Office
and the California State Association of Counties,
provides the California State Controller’s Office with
Other Statewide Stakeholders
distribution schedules for some realignment funds.
•	 Board of State and Community Corrections
In addition, because a change of this magnitude
takes time, some aspects of realignment are being
•	 County Welfare Directors Association of California
implemented before others. For example, the
•	 Chief Probation Officers of California
legislation shifted responsibility for adult offenders
•	 California State Sheriffs’ Association
to counties in October 2011, whereas a parole
•	 California State Association of Counties
revocation process was not transferred from the
Board of Parole Hearings to the county superior
•	 County Mental Health Directors Association
courts until July 2013. Consequently, the success of
Sources:  Realignment legislation and entity Web sites.
many aspects of realignment cannot be assessed
until more time has passed.
The State does not currently have access to reliable and meaningful
realignment data to ensure its ability to effectively monitor progress
toward achieving intended realignment goals. Effective July 2012 the
Legislature created the Board of State and Community Corrections
(community corrections board) to collect and make publicly
available up‑to‑date information reflecting the impact of state and
community correctional, juvenile justice, and gang‑related policies
and practices enacted in the State, among other responsibilities.

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The community corrections board is also responsible for collecting
each county’s public safety realignment plans and reporting on the
data and outcome‑based measures included in those plans. In its
reports, the community corrections board provides a disclaimer
on the limitations of the counties’ data. These limitations occur
because, for example, some of the data that counties provide to the
community corrections board are voluntary, each county maintains
its own data system for tracking offender populations, county
personnel may have different interpretations of variable definitions,
and county data may contain missing or overlapping information.
In a report we issued in September 2012 we concluded that very
limited data exist to measure whether the realignment, or shift
in care, of thousands of juvenile offenders from the State to the
counties has been successful.4
Although the realignment
legislation included a number of
data reporting functions, some
program areas cannot be fully
evaluated due to their early stage
of implementation.

Although the realignment legislation included a number of data
reporting functions, some program areas cannot be fully evaluated
due to their early stage of implementation. Under Chapter 35,
Statutes of 2012, Social Services must annually report to the
appropriate fiscal and policy committees of the Legislature,
and publicly post on its Web site, a summary of outcome and
expenditure data that allow for monitoring of changes since the
enactment of realignment. This report allows the Legislature
to monitor the results of transferring the primary financial
responsibility of nonfederal costs and increased caseloads to
the counties. In April 2013 Social Services issued its first annual
realignment report, which contained data on child welfare practices
that affect child and family safety, permanency, and well‑being.
According to the branch chief, more time needs to elapse before
Social Services can identify trends in performance measurements
that may have occurred as a result of realignment. The branch
chief indicated that Social Services measures some performance
outcomes over a longer period of time, with some indicators taking
as long as 12 months to measure.
Addressing Overcrowding in County Jails
The county jail system faces challenges in managing its inmate
population. Realignment shifted responsibility for housing certain
adult offenders from the State to the counties. By altering where
certain offenders serve their sentences, the Legislature, in effect,
transferred responsibility for these offenders to the counties.
According to the LAO, offenders sentenced for certain nonserious,
nonviolent crimes, who have no prior serious or violent criminal

4	

Juvenile Justice Realignment: Limited Information Prevents a Meaningful Assessment of
Realignment’s Effectiveness (Report 2011-129, September 2012).

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September 2013

convictions and who are not required to register as sex offenders,
will now serve their sentences in a county jail or under local
community supervision rather than in state prison.
According to data collected by the community corrections board,
the county jail population has steadily increased since realignment
went into effect in October 2011. Specifically, the average daily
population in the county jail system grew from 72,285 to 80,864
(12 percent) between October 2011 and September 2012.5 Not all
counties are adequately prepared to properly handle an increased
jail population. According to the chief deputy of the Sacramento
County Sheriff ’s Department (chief deputy), managing inmate
populations at the county level will be an ongoing challenge. The
chief deputy explained that the county jail system across the State
is not designed to house inmates for periods exceeding one year.
Under realignment, however, county jails will need to house
inmates with significantly longer sentences and often with more
substantial needs, such as long‑term medical and mental health
care. The support services captain of the Santa Clara County Office
of the Sheriff echoed this concern, stating that, in contrast to the
infrastructure found in state prisons, county jails are not set up to
effectively address the long‑term physical and mental health issues
of inmates.
Further, some county jails have been unable to incarcerate all
offenders due to capacity constraints, presenting a potential risk to
public safety. According to the Public Policy Institute of California
(institute), as of September 2012, the statewide average daily jail
population exceeded by nearly 4,000 inmates the community
corrections board’s target population of 76,910. The institute also
reported that 21 counties had an average daily population greater
than their rated capacity, and 18 counties were operating under
court‑ordered population caps for at least one jail in their county.
Between October 2011 and September 2012, the community
corrections board’s data show that the number of nonsentenced
offenders released each month by county jails due to capacity
constraints increased from 6,212 to 7,050 (13.5 percent). In other
words, these offenders were booked into jail facilities but released
because of a lack of housing capacity. Moreover, the monthly
number of sentenced offenders released early to supervision
programs grew from 3,527 to 5,700 (62 percent) during the same
time frame. Although the realignment legislation authorizes
counties to use state facilities to house felons, the State is already
struggling to meet a federal court order to reduce its inmate
population, as we discuss in Chapter 3 of this report. Therefore, this

5	

The average daily population reflects the monthly average of inmates tallied during daily
inmate counts.

Offenders were booked into county
jail facilities but released because of
a lack of housing capacity.

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option may not be practical in the short run. Until the State and
local governments can demonstrate that they are able to adapt to
their changed roles and responsibilities under realignment, we will
consider realignment to be a high‑risk issue.

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September 2013

Chapter 3
MANAGING THE STATE’S PRISON POPULATION AND
CORRECTIONAL INSTITUTIONS
In 2006 we designated the California Department of Corrections
and Rehabilitation (Corrections) as high risk due to issues related to
overcrowding in state prisons, the quality of inmate health care in
the prison system, and concerns about the consistency of leadership
in its senior management. Although Corrections has reduced
inmate overcrowding in the prison system since our last report
in 2011, it missed a court‑imposed population benchmark set for
December 2012. New legislation enacted in September 2013 provides
funding and new authority to Corrections to avoid early release
of inmates; however, it is too early to conclude on the success of
these efforts. Inmate health care has improved since our last report,
but Corrections has not yet reached a sustainable, constitutionally
adequate level, as required by the federal court. Finally, organizational
instability in Corrections’ management ranks and a lack of strategic
and leadership succession plans continue to hamper Corrections’
ability to provide consistent leadership. For these reasons,
Corrections continues to represent a high risk to the State.
Reducing Overcrowding in State Prisons
California continues to face challenges to reduce overcrowding in
the State’s prisons to meet a maximum level of prisoners ordered
by a federal court. Although, the State took recent actions to avoid
the early release of inmates, until California meets court-ordered
benchmarks, managing the prison population will remain a
high‑risk issue.
The State’s correctional institutions continue to hold more
inmates than their design capacity, which is defined by the federal
court as essentially one inmate per cell. In 2009 the federal court
ordered the State to reduce its prison population to no more than
137.5 percent of design capacity. When the U.S. Supreme Court
(Supreme Court) upheld this prison population reduction order in
May 2011, prison occupancy was at 180 percent of design capacity.
To reduce prison overcrowding, the federal court ordered the State
to meet four inmate population benchmarks at six‑month intervals
starting in December 2011 and ending in June 2013. Although the
State met the first two benchmarks, it missed the December 2012
benchmark of 147 percent, having an actual capacity of 149.8 at that
time. As indicated in Figure 5 on the following page, the State would
have also missed the court‑imposed benchmark for June 2013.

29

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September 2013

However, in January 2013 the State notified the federal court that
it would not meet the June 2013 benchmark, and the federal court
extended the final benchmark date to December 31, 2013.
Figure 5	
Court‑Ordered Targets and Actual Prison Capacity
200%

Court-ordered target capacity
Actual prison capacity

180
160
140
Percentage Occupied

30

120
100
80
60
40
20
0

May
2011

(Actual capacity at
time of U.S. Supreme
Court ruling)

December
2011

June
2012

December
2012

June
2013

Court-Ordered Benchmark Dates

Sources:  Rulings by the U.S. District Court and inmate population reports from the California
Department of Corrections and Rehabilitation.

The State introduced several new programs to comply with court
rulings and reduce overcrowding in the state prison system. As
stated in the previous chapter, the 2011 realignment shifted funding
and responsibility for some inmates from the State to the counties.
Although realignment has been a major factor in reducing state
prison overcrowding, so far it has not been enough by itself to
reduce the inmate population level to the final benchmark. An
April 2013 fact sheet released by Corrections shows that the
diversion of low‑level offenders and parole violators to county jails
instead of state prison has resulted in a decrease in the inmate
population of about 28,000 (17 percent).
Needing further inmate population reductions to meet the
court‑ordered benchmark, Corrections has implemented other
solutions in addition to realignment. These solutions, proposed
in a plan Corrections refers to as the blueprint, include improving
the State’s inmate classification systems, improving access to
rehabilitation programs, and standardizing staffing levels. In
addition to the solutions proposed in the blueprint, the federal
court ordered the State to create a list of proposed inmate
population reduction measures. The State came up with a list of

California State Auditor Report 2013-601

September 2013

17 options to reduce overcrowding but then explained that only
two—expanding new construction projects and expanding fire
camps—could be unilaterally implemented by the State’s executive
branch. The State constructed the California Health Care Facility
in Stockton, which opened in July 2013 and will apparently increase
capacity by 1,818 beds by December 2013. The State also plans to
maintain its fire camps at the level of roughly 3,900 inmates at these
camps. In its response to the federal court, the State outlined some
of the challenges with implementing the remaining 15 proposed
solutions, including the lack of authority to implement some of
the solutions without changes to state law. To avoid early release
of inmates, in September 2013 the legislature enacted Senate Bill 105
that allows the state to comply with the federal court order. The
new law appropriates $315 million to Corrections with the authority
to house inmates in various facilities and authorizes the state to
take other actions that may, ultimately, reduce overcrowding.
In May 2013 the State filed an appeal challenging the prison
population benchmark to the Supreme Court. The State claimed
that the primary reason that the court ordered a reduction in
the prison population was due to the substandard prison health
care system. The State claimed that inmate health care in the
California prison system exceeds constitutional standards and that
the 137.5 percent population benchmark is therefore no longer
necessary. In August 2013 the Supreme Court denied California’s
request for a stay of the court’s prison reduction order. Corrections
anticipates that in October 2013 the Supreme Court will rule on
whether it will hear the state’s appeal. Since the effectiveness of
current efforts to reduce prison population by the end of 2013
is not known, overcrowding in California’s prisons remains a
high‑risk issue.
Improving the Prison Health Care System
Although California’s prison health care system has seen many
improvements under the federal health care receiver (receiver) since
its appointment by the U.S. District Court for the Northern District
of California (district court) in 2006, the process of improving
inmate health care has been long and expensive. The goal of the
receiver is to bring California’s prison health care system up to
a sustainable, constitutionally adequate level. Until the district
court rules that this goal is met, California’s prison health care
system will remain under the control of the receiver. The receiver
has significant control over the health care system, including
administrative, financial, accounting, legal, contractual, personnel,
and other operational matters. Under this authority, the receiver
can order costly improvements to the prison health care system,

New legislation allows the state to
comply with the federal court order.

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September 2013

which must be paid for by the State. Consequently, until control of
the system reverts back to Corrections, this issue remains a high
risk to the State.
When the receivership began in fiscal year 2005–06, the cost
directly attributable to inmate medical care in California’s prisons
was $841 million. According to the governor’s budgets and
information provided by the receiver’s office, the receiver’s cost
of operating the prison health care system grew to $1.7 billion in
fiscal year 2011–12. For fiscal year 2013–14, a total of $1.5 billion
is budgeted.6
In 2008, at the request of the court and the receiver’s office, the
Office of the Inspector General (inspector general) started an
inspection program to provide an independent evaluation of
the quality of inmate health care. As of April 2013 the inspector
general had conducted three rounds of inspections at each
institution and assigned an overall score of zero to 100 percent.
Scores of 75 percent or below indicate a low adherence to standards,
while scores of 85 percent or above indicate a high adherence
to standards. As shown in Table 7, these inspections found that
the overall quality of inmate health care has improved over time
from 71.9 percent in 2008 through 2010 to 86.9 percent through
January 2013.
Table 7
Results of Medical Program Inspections by the Office of the Inspector General
HEALTH CARE QUALITY RATES
INSPECTION
ROUND

PERIOD
COVERED

RANGE OF RATES

OVERALL RATE

First

September 2008 to June 2010

62.4 – 83.2%

71.9%

Second

September 2010 to December 2011

73.0 – 89.5

79.6

Third

February 2012 to January 2013

77.6 – 93.4

86.9

Source:  Office of the Inspector General, Dashboard Monthly Comparison, May 2013.

However, the receiver has stated that the sustainability of these
improvements is yet to be determined by the district court. To
determine when a sustainable constitutional standard has been
reached, the district court may consider several other factors in
addition to the inspector general’s measurement. For example,
the district court indicated that it would send out its own experts

6	

These amounts do not include $118 million budgeted for nursing services under the Corrections’
mental health program, which was not included in the receiver’s costs until fiscal year 2011–12.

California State Auditor Report 2013-601

September 2013

to evaluate the quality of inmate health care. As of August 2013
seven reviews were complete with the results indicating additional
improvements in medical care are needed.
The receiver is required to provide periodic progress reports to the
district court. In May 2011, of the 48 required actions, the receiver
identified 34 as complete and 14 as in process or ongoing. In its
May 2013 report the receiver noted that of 48 required actions,
35 are complete and 13 are in process or ongoing. Even though
the receiver has completed only one additional item since 2011,
progress has continued to be made on the outstanding items.
However, the receiver also noted that more work needs to be done
to solve the challenge of providing timely access to health care and
delivery of medications to all inmates who need them.
In May 2012 the district court ordered the receiver to work with
Corrections to transfer, when appropriate, certain inmate health
care functions back to State control under a revocable delegation of
authority. Two formal delegations—one for health care access units
and another for medical facility activations—have already occurred.
In May 2013 the receiver submitted 10 draft delegations of authority
for Corrections to review. However, the receiver has not yet decided
to proceed with these additional delegations of authority. One
major concern noted in the receiver’s May 2013 report that could
slow down the pace of the delegations of authority is Corrections’
handling of a recent outbreak of coccidioidomycosis (valley fever)
in certain state institutions. Valley fever is an illness caused by
a fungus and may lead to hospitalization or death. The receiver
established a policy requiring that specific at‑risk populations
not be incarcerated at the two institutions most severely affected
by valley fever. In May 2013 the receiver indicated that he did
not believe Corrections’ response to the valley fever threat was
adequate, and he stated that he will take Corrections’ response to
the valley fever outbreak into consideration before returning any
additional elements of the prison health care system to Corrections’
control. As of July 2013 no update was available about when the
next delegation of authority will occur.
Maintaining Consistent Leadership	
Although Corrections has made progress in its planning to meet
its long‑term goals, more remains to be done, and it continues
to experience difficulty in permanently filling senior positions.
Therefore, Corrections’ leadership continues to be a high‑risk issue
for the State.

The receiver noted that more
work needs to be done to solve
the challenge of providing timely
access to health care and delivery
of medications to all inmates who
need them.

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We noted Corrections’ lack of organizational stability in
senior leadership positions in our August 2011 high risk
report, as Corrections struggled to fully staff its management
ranks. Corrections’ May 2011 organizational chart showed
seven acting and two vacant senior leadership positions. Our
current review of Corrections’ June 2013 organizational chart found
that Corrections has been successful in filling its vacant leadership
positions; however, it continues to have six leaders serving in
an acting capacity. In addition, vacancies in its warden ranks
increased from 12 in May 2011 to 13 in April 2013.7 With a facility
in Stockton becoming fully operational in 2013, Corrections now
has 34 warden positions. Corrections commented that vacancies
in its warden ranks are due to retirements. It further stated that
the process of selecting and hiring wardens is rigorous and can
take over a year to complete, and includes background checks by
Corrections, investigation by the inspector general, review by the
Governor’s Office, and final determination by the governor.

Corrections has set no firm
implementation date for when
a new succession plan may
be available.

In addition, Corrections lacks a formal succession plan to
ensure stability in leadership positions. Corrections stated that
its succession planning and headquarters training units, which
were charged with the responsibility of identifying and training
future leaders, were eliminated during budget cuts in prior years.
All positions in the succession planning unit were vacant as
of October 2010, and these positions were officially abolished
on January 1, 2011. According to Corrections’ deputy director
of human resources, since the abolishment of the succession
planning unit, senior leadership positions have been filled on an
as‑needed basis, as the old succession plan is no longer being
used. As for the training unit, some positions were eliminated in
May 2011 and the last positions were abolished in October 2011.
Though it anticipates reestablishing these units in the future,
Corrections currently has no written plan for achieving this goal.
As a result, Corrections has set no firm implementation date for
when a new succession plan may be available. In the meantime,
Corrections stated that it uses an informal mentoring program in
which retired annuitants provide some guidance for future leaders
and also uses an executive development orientation program to
provide an orientation and overview of information beneficial
to new or upcoming managers. Corrections intends to formalize
these programs when the succession planning and training units
are reestablished.
Corrections also has yet to finalize a new strategic plan. According
to its director of internal oversight and research, in February 2012
Corrections stopped using its 2010–2015 strategic plan and
7	

Each vacant warden position was filled with an employee operating in an acting capacity.

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September 2013

stopped tracking its progress toward achieving the plan’s goals
because, in response to the 2011 realignment, it shifted focus to
the development of the multi‑year blueprint. To help ensure its
success in implementing the blueprint, Corrections developed a
commitment matrix in February 2013 to identify goals, responsible
parties, due dates, and status reports to help management
track goal completion. Although the matrix appears to address
all major goals listed in the blueprint, program directors are
responsible for creating their own tracking methods within their
divisions. For example, the Facility Planning, Management, and
Construction Division prepares monthly reports to track progress
and provides bi‑weekly updates to leadership. Because, according
to the acting director, certain components of the blueprint involve
staffing and funding that were incorporated into the 2012–13 Budget
Act and related trailer bills, the California Department of Finance
(Finance) and inspector general also measure Corrections’ progress
toward selected blueprint goals. In their most recent reports,
Finance and the inspector general report that Corrections has made
progress toward goal completion. So while Corrections does not
yet have its new strategic plan in place, it is making progress toward
completing the goals listed in the blueprint.
The director of internal oversight and research stated that the
blueprint has served as Corrections’ strategic plan since April 2012;
however, we identified certain goals and objectives in its draft
strategic plan that are not covered by the blueprint. For example,
one of the objectives of the draft strategic plan is to increase the
number of victims participating in or receiving victim services
by 20 percent by June 30, 2013. However, the blueprint does not
include this objective in the list of goals. Corrections stated that,
while the blueprint is designed to save money, end federal court
oversight, and improve the prison system, it needs to finalize its
strategic plan to complement the blueprint. Under three overall
goals of operations, administration, and health care, the draft
strategic plan contains 17 objectives. Corrections has no firm date
for implementing the strategic plan, and the draft plan is subject
to change at any time by Corrections’ leadership in response to
changing priorities. When the strategic plan is final, Corrections
will publicize it on its Web site and develop a dashboard to
monitor the progress toward goal completion. With the timeline
for implementation of the draft strategic plan uncertain and
the ability of management to change or modify the listed goals, the
consistency of future leadership cannot be assured and, therefore,
remains a high‑risk issue.

While Corrections does not yet
have its new strategic plan in
place, it is making progress toward
completing certain goals listed in
its multi‑year planning document,
called the blueprint.

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Blank page inserted for reproduction purposes only.

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September 2013

Chapter 4
MODERNIZING AND IMPROVING THE
STATE’S INFRASTRUCTURE
In 2009 the California State Auditor (state auditor) designated
the State’s aging infrastructure and its ability to supply reliable
electricity to its residents as areas of high risk. The State’s
investments in transportation and water supply and flood
management infrastructure have not kept up with demands. As a
result, the State’s transportation systems and water infrastructure
are showing signs of deterioration. In addition, although the
State has made progress in updating its electricity infrastructure
to better protect the environment and is currently on track to
meet its renewable energy target by 2020. However, because the
supply of electricity is critical to the State’s economy, and the shift
in its production to sources and technologies that will have less
impact on the environment is an important ongoing effort, we will
continue to monitor this aspect of the State’s infrastructure as an
area of high risk.
The State’s Infrastructure Needs
California’s infrastructure is the foundation that connects the
State’s businesses, communities, and people, driving its economy
and improving the quality of life of its citizens. Much of the State’s
infrastructure is aging and needs to be improved to meet current
and future demands. However, infrastructure upgrades have not
kept up with changing conditions, particularly in the areas of
transportation and water. As a result, the State’s transportation
systems and water infrastructure are showing signs of deterioration
and require attention. Additionally, California will continue to
need new infrastructures to accommodate population growth,
which in turn will require additional resources for operations
and maintenance.
Improving Investment in Transportation
The preservation, maintenance, and expansion of the State’s aging
transportation infrastructure, including roads, highways, bridges,
and railways, are critical to the State’s ability to meet the needs
and demands of a growing population. However, current revenues
available from federal, state, and local sources for maintaining
and improving the State’s transportation infrastructure are not
sufficient. As a result of this underfunding, the condition of the
State’s transportation systems continues to deteriorate. For example,
25 percent of the State’s roadways were in fair or poor condition as

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The Transportation Commission
projected a shortfall of over
$290 billion, which means that
there will be only enough funding
to cover approximately 45 percent
of the overall estimated costs
of transportation projects and
programs that were identified in the
State’s needs analysis.

of December 2011, compared to 21 percent in 2001. The California
Transportation Commission (Transportation Commission), which
exists under the newly created California State Transportation Agency
(Transportation Agency), projected a shortfall of over $290 billion in
its 2011 Statewide Transportation System Needs Assessment for the
10‑year period from 2011 to 2020. The Transportation Commission
estimated the costs of maintaining, managing, and expanding the
State’s transportation infrastructure for the same 10‑year period as
being approximately $536 billion. However, it also estimated that
over the same 10‑year period, the State will raise $242 billion from
local, state, and federal sources for investment in transportation
infrastructure. This funding discrepancy means that there will
be only enough funding to cover approximately 45 percent of the
overall estimated costs of transportation projects and programs that
were identified in the needs analysis.
The State, under the direction of the Transportation Agency, has
convened a workgroup of state and local transportation stakeholders
to explore and evaluate options to meet the infrastructure needs over
the next decade, as well as to advise the governor on infrastructure
funding for the fiscal year 2014–15 budget. The Transportation
Agency became operational in July 2013 and, under the governor’s
2012 reorganization plan, includes the transportation entities that
were formerly part of the Business, Transportation and Housing
Agency. The secretary at the Transportation Agency explained that
the workgroup held multiple meetings in 2013 and that, although it
will not be able to solve the States vast funding gap, the workgroup
plans to prioritize the State’s transportation infrastructure needs,
determine how to measure outcomes, and evaluate the costs and
benefits of various policy options to use the State’s limited resources
in the most effective manner. As part of our ongoing assessment of
high‑risk issues, we will continue to monitor the State’s efforts to
address its transportation infrastructure needs.
Ensuring a Stable Water Supply and Upgrading Flood
Management Infrastructure
Upgrades of water infrastructure have not kept pace with estimates
of needs. According to the Public Policy Institute of California
(policy institute), there has been little expansion of the State’s
major water infrastructure since the early 1970s. Specifically, the
State’s water storage and delivery system is more than 35 years old,
the federal system in the State is more than 50 years old, and some
local facilities were constructed nearly 100 years ago. These systems
require costly maintenance and rehabilitation as they age. Aging
facilities are a risk to public safety, water supply reliability, and
water quality.

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September 2013

Current infrastructure disrepair, outages, and failures and the
degradation of local water delivery systems are in part the result
of many years of underinvestment in preventive maintenance,
repair, and rehabilitation. According to the California Department
of Water Resources (Water Resources), with annual expenditures
for 2010 totaling about $18 billion, local entities such as special
districts, water districts, utilities, and cities account for the largest
portion of spending on water infrastructure.8 Even with a significant
investment by these agencies in water infrastructure, water projects
at all levels of government are commonly underfunded. In fact,
a 2012 infrastructure report by the American Society of Civil
Engineers (ASCE) indicates that significant investments are still
needed to address the renewal and replacement, maintenance,
security, and reliability of California’s water infrastructure. The
report estimates that an additional annual investment of $4.6 billion
is needed for the next 10 years.
At the heart of California’s water supply issue is the Sacramento–
San Joaquin Delta (delta). Generally, the supply of water in
California does not naturally occur where demand is currently
the highest. Precipitation, the primary source of the State’s water
supply, occurs in the mountains in the north and eastern parts of
the State, while most water is used in the Central and southern
valleys and along the coast. The delta connects many of these
regions. In fact, the delta supplies an estimated 25 million people
with their drinking water and irrigates 4 million acres of farmland.
This has led to the development of vast infrastructure systems
that store and convey water to demand centers, such as the State
Water Project (SWP) and the federal Central Valley Project (CVP).
According to the U.S. Congressional Research Service (CRS), for
decades the transfer of water from the northern part of the State
through the delta to supply farms and cities in Southern California
has had profound impacts on fish and wildlife resources, water
quality, and regional water supplies. In response, state and federal
lawmakers have enacted legislation to protect the delta resources.
However, environmental protection laws and the resulting
regulatory restrictions have reduced water supplies and flexibility
to meet the quantity and timing of water delivered from the delta.
For example, according to the CRS, the U.S. Fish and Wildlife
Service and the National Marine Fisheries Service have each issued
federal biological opinions (biological opinions), which found
that increased pumping by the CVP and SWP would jeopardize

8	

According to Water Resources, completion of a full assessment of actual investment and fund
sources is difficult because of wide variations in how different entities prepare budgets, and the
sheer number of entities involved in providing water-related services. Finally, local funding is
especially difficult to track because activities often occur in the same proximity, many projects
serve multiple purposes, and many activities have multiple fund sources.

Even with a significant investment
by local entities in water
infrastructure, water projects
at all level of government are
commonly underfunded.

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September 2013

the continued existence of several species protected under the
Endangered Species Act. The biological opinions included proposed
actions that essentially resulted in restrictions on the amount of
water exported from the delta. The CRS stated that the resulting
restrictions, combined with reductions necessitated by drought
conditions, have resulted in some water users receiving a fraction of
the water normally supplied by the SWP and CVP.
One possible solution to problems involving the delta is the
Bay‑Delta Conservation Plan (Conservation Plan), which is
the governor’s plan to restore the delta ecosystem and improve the
reliability of water supplies in the State. The Conservation Plan
proposes to move water under the delta in order to reduce the
ecological impact on the delta. To achieve this, the plan calls for
the construction of two 35‑mile underground tunnels to divert
water from the Sacramento River southward. Water Resources
estimated that the Conservation Plan will cost about $24.5 billion
over the 50‑year lifetime of the project. It also estimated that
although funding will come primarily from user fees, state and
federal funding sources will make up 15 percent and 16 percent,
respectively. Initial state funding is anticipated to come from future
water bonds, only a portion of which have been approved by voters,
and the remainder is contingent on the passage of future bond
measures. In addition, Water Resources, the State’s lead agency
in compiling the environmental documents in support of the
Conservation Plan, stated that it expects that litigation may arise
in the future, which could potentially hinder the completion of
the plan. Therefore, although the Conservation Plan aims to solve
crucial problems for California’s water resources, it is still in the
planning stage and is expected to face challenges regarding time of
completion and funding.

According to Water Resources,
California’s flood protection
system, composed of aging
infrastructure with major design
and construction deficiencies, has
been further weakened by the lack
of maintenance, due in part to
limited funding.

Another area of infrastructure need concerns the flood control
and drainage systems serving California cities, including channels,
levees, dams, and pump stations, which vary widely in condition
and capacity to prevent flooding from major storms. According to
Water Resources, California’s flood protection system, composed
of aging infrastructure with major design and construction
deficiencies, has been further weakened by the lack of maintenance,
due in part to limited funding. The flood management sector has
traditionally relied on a large (65 percent) federal cost share for
new investments, but according to the policy institute, federal
contributions have been lagging and are likely to decline in the
future. State investments in flood prevention increased considerably
after Hurricane Katrina, with voters approving $5 billion in
state general obligation bonds in 2006. However, the remaining
funding falls far short of estimated needs. Specifically, the ASCE
estimated that flood control funding shortfalls across the State total
$2.8 billion over the next 10 years.

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September 2013

According to Water Resources, climate change may worsen the
State’s flood risk by producing higher peak flows and a shift toward
more intense winter precipitation. An increase in the snowfall
caused by climate change will allow more of the Sierra Nevada
watersheds to contribute to peak storm runoff. High‑frequency
flood events may increase with changing climate. Water Resources
believes that the risk of flood has put California’s public safety and
financial stability at risk. For instance, Water Resources indicated
that catastrophic flooding within the Central Valley alone could
equal or exceed the economic, social, and environmental damage
caused by Hurricane Katrina in 2005, which the U.S. Bureau of
Labor Statistics estimated cost in excess of $200 billion.
Although state law requires that the governor submit a five‑year
infrastructure plan annually to the Legislature, the most recent plan
is from 2008. When we followed up with the California Department
of Finance (Finance) for our 2011 high risk report, Finance stated
that it has not produced an infrastructure plan in the past four years
because the State’s severe fiscal challenges took priority. However,
Finance’s chief deputy director indicated that now that the State’s
fiscal condition has stabilized, Finance will once again produce the
infrastructure plan. Finance is currently working on an updated
five‑year infrastructure plan. Once the infrastructure plan is
complete, we will evaluate and monitor the State’s efforts as part of
our assessment of high‑risk issues.
Ensuring a Stable Supply of Electricity
A reliable supply of electricity provides a critical foundation
for California’s economy and its citizens’ standard of living.
In 2000 and 2001 the State experienced an energy crisis that led
to supply disruptions. Several factors contributed to the energy
crisis, including a shortage of generating capacity and design
flaws in the energy market, which allowed for the manipulation
of wholesale prices by generators and electricity brokers.
Additionally, droughts in the Pacific Northwest reduced the
availability of hydroelectric power to import into California. In
2009 we reported that, although the State had taken steps to
address the problems that caused the crisis, new challenges in
the electricity sector had arisen, and therefore designated the
production and delivery of electricity as a high‑risk issue for
the State.
We continued to designate electricity as a high‑risk issue in
our 2011 high risk report due to uncertainties related to the need
to retrofit aging power plants and meet the State’s renewable
energy target. In 2010 the State Water Resources Control Board
(Water Board) adopted a policy requiring the modification of

Finance states that it has not
produced an infrastructure plan
in the past four years because the
State’s severe fiscal challenges
took priority.

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September 2013

aging power plants’ cooling systems to reduce the mortality rates
of marine life. Despite fears that this action would disrupt the
supply of electricity, expert projections now indicate that the
supply will continue to meet demand. Since 2004 the California
Public Utilities Commission (CPUC) has been implementing a
resource adequacy program to ensure the reliability of electrical
service in California. Under this program, the entities that provide
retail power to customers, including investor‑owned utilities, are
required to demonstrate that they have sufficient capacity to meet
115 percent of the forecasted demand. This ensures that sufficient
resources are available to meet peak load and contingencies.
Since 2006 the CPUC has been authorizing additional capacity to
generate electricity and energy efficiency programs. As a result,
the State’s electric generation capacity has increased by nearly
20,000 megawatts—mainly from natural gas and wind resources—
since the peak of the energy crisis in 2001. As shown in Figure 6,
the CPUC projects that the electricity market has more capacity
than is needed for the next 10 years. In fact, the margin by which
forecasted capacity exceeds forecasted demand ranges from
45 percent in 2014 to 20 percent in 2022. The CPUC has established
that, for system planning purposes, an appropriate reserve margin
is between 15 percent and 17 percent.
Figure 6
Forecast Supply and Demand for 2012 to 2022
80,000
70,000
60,000
Megawatts

42

Supply

50,000
Demand

40,000
30,000
20,000
10,000
0
2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Years

Source:  California Public Utilities Commission’s Long-Term Procurement Plan, December 2012.

Moreover, an unexpected major event did not significantly
affect the State’s ability to meet the demand for electricity. The
San Onofre Nuclear Generating Station (San Onofre plant), which
provided nearly 20 percent of the power to more than 15 million
people in Southern California, has been offline since January 2012.

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September 2013

This disruption created a need for additional electricity resources in
Orange County and northern San Diego County. Fortunately, there
were adequate resources to meet the electrical system needs and no
loss of electric service occurred due to insufficient generation. Even
with the San Onofre plant permanently going offline, the electricity
supply is forecasted to meet expected demand.
Recognizing that the supply of electricity needs to remain stable,
the State is retaining the use of certain aging power plants on an
as‑needed basis and retiring others in advance of schedule while
implementing the Water Board’s 2010 policy. This policy requires
the modification of power plants’ once‑through cooling systems or
other comparable measures to reduce the mortality rates of marine
life. The once‑through cooling method involves drawing in ocean
water, circulating it through heat exchangers, and then discharging
the water back into the ocean at a higher temperature. The intent of
this policy is to ensure that the beneficial uses of the State’s coastal
water are protected while also ensuring that the electrical power
needs of the State’s residents are met.
In our 2011 high risk report, we noted that as of June 2011 all
14 fossil‑fueled plants using once‑through cooling had submitted
implementation plans and schedules to comply with the new
policy. According to its staff, the Water Board has reviewed all of
the implementation plans and is in the process of working with
various state entities, as well as the power plants, to implement
the policy. Additionally, the Water Board is working with the
California Independent System Operator (System Operator) to
assess the demand for electricity and the supply affected by the
implementation of the policy. If necessary, the implementation
deadline may be extended to keep certain once‑through cooling
plants running longer than originally planned. In March 2012
the California Office of Administrative Law approved a policy
amendment that delayed some of the deadlines for complying with
the original implementation policy. To reduce the environmental
effect, the amendment requires specified fossil‑fueled power plants
that are not able to comply by the deadline to install devices that
will minimize the environmental impacts caused by once‑through
cooling by the end of 2020. According to the April 2013 draft report
prepared by the Water Board on the implementation of this policy,
some facilities using once‑through cooling are retiring their power
plants in advance of the compliance dates established by the policy,
while others may require extensions.
By using more renewable resources in the production of electricity,
the State expects to meet its renewable energy target by the
established deadline. As noted in our 2011 high risk report, in
April 2011 the governor signed into law a bill that set the State’s
target for renewable energy production at 33 percent of retail

Even with the San Onofre plant
permanently going offline, the
electricity supply is forecasted to
meet expected demand.

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A 2012 CPUC forecast shows that
the State is on track to meet its
interim requirement of 25 percent
renewable energy target by 2016
and is well positioned to meet the
33 percent target by 2020.

electricity sales in California by 2020. In addition, a 2012 CPUC
forecast shows that the State is on track to meet its interim
requirement of 25 percent by 2016 and is well positioned to
meet the 33 percent target by 2020. In fact, the CPUC reported
that California’s three large investor‑owned utilities generated
20 percent of their electricity from renewable sources in
2012. Also, more new generating capacity using renewable
resources was built in 2012 than in any prior year. Specifically,
1,957 megawatts of renewable resources were added in 2012,
compared to 2,541 megawatts of total renewable resources added
between 2003 and 2011. Currently, the majority of renewable
resources are wind and geothermal. The CPUC’s forecast shows
that there will also be a larger proportion of solar as part of the total
renewable resource mix by 2020.
In our previous high risk report, we stated that the ability to
transmit renewable energy was a barrier to meeting the State’s
renewable energy target. In 2012 significant progress was made
toward the construction of CPUC‑approved transmission lines
providing capacity for solar, wind, and geothermal renewable
resources. Three transmission lines—Sunrise Powerlink,
Devers‑Palo Verde #2, and Tehachapi—were completed or are
expected to be completed in 2012, 2013, and 2015, respectively. In
fact, in its March 2013 transmission plan, the System Operator
found that given currently approved transmission projects, no
additional major transmission upgrades will be needed to meet the
33 percent renewable target by 2020.
Although California’s capacity for generating electricity appears
sufficient, disruptions such as prolonged droughts, natural disasters,
or fuel supply disturbances will always remain a risk at some level.
Because California imports a significant amount of electricity, the
risk of these disruptions comes not only from within the State, but
also from surrounding regions. In a typical year, California generates
70 percent of its electricity within the State, importing 30 percent
from the Pacific Northwest and the U.S. Southwest. As noted earlier,
reduced availability of imported electricity resulting from drought
conditions in the Pacific Northwest contributed to the energy crisis of
2000 and 2001. Given these inherent risks, and because the supply
of electricity is a cornerstone of California’s economic infrastructure
and is undergoing a transformation to technologies that have less
impact on the environment, we will continue to monitor the supply
and distribution of electricity in the State and to designate the issue
as a high risk.

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September 2013

Chapter 5
EFFECTIVELY MANAGING THE STATE’S WORKFORCE
The State continues to face challenges related to its workforce
and succession planning as the percentage of employees
approaching retirement age increases. Although state agencies
we reviewed had generally developed workforce and succession
plans to ensure continuity of critical services, we identified
notable exceptions. Further, with the recent reorganization that
merged most of the functions of the State Personnel Board and
the California Department of Personnel Administration into the
new California Department of Human Resources, the State faces
the general risk associated with this type of structural change.
State Workforce Retirements
The portion of the State’s workforce approaching retirement age
continues to grow, and the State’s older workers are retiring at an
increasing rate. The retirements of these workers in both leadership
and rank‑and‑file positions could deprive the State of both the
institutional knowledge and the experience these workers possess.
As a result, this issue remains a high risk to the State.
Since fiscal year 2007–08, an increasing segment of the State’s
workforce has been approaching retirement age. At the end of fiscal
year 2007–08, 37.5 percent of state employees were 50 years of age
or older, and in fiscal year 2012–13 that number had increased to
over 41 percent. As shown in Table 8, the portion of state employees
under the age of 50 has fallen, while the two oldest age groups
steadily represent more of the workforce. Specifically, the number
of employees 60 years of age or older increased from 7.4 percent
to just over 10 percent from fiscal years 2007–08 through 2012–13.
This trend suggests that the percentage of state employees eligible
for retirement is increasing.
Table 8
Percentage of State Employees by Age Group
Fiscal Years 2007–08 Through 2012–13
FISCAL YEARS
AGE GROUP

2007–08

2008–09

2009–10

2010–11

2011–12

2012–13

Under 50 years

62.5%

62.6%

62.1%

60.6%

59.5%

58.9%

50 to 54 years

17.5

17.1

16.9

17.2

17.4

17.2

55 to 59 years

12.6

12.5

12.6

13.1

13.5

13.7

7.4

7.9

8.4

9.1

9.6

10.1

60 years and older

Sources:  California State Auditor’s analysis of separation and employment data obtained from the
California Department of Human Resources and the California State Controller’s Office.

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In addition, an increasing number of state employees have been
retiring since fiscal year 2007–08. As shown in Figure 7, in fiscal
year 2007–08, 1,534 employees in leadership positions chose to
retire. By fiscal year 2012–13, that number had risen to 2,019,
an increase of over 31 percent. The rising number of employees
choosing to retire is even more pronounced for employees in
rank‑and‑file positions during the same time frame. Specifically, the
number of retirements rose from 3,907 in fiscal year 2007–08 to
5,497 in fiscal year 2012–13 (a 41 percent increase).
In our review, we found that employees in leadership positions
who were 55 to 59 years of age have been retiring at an increasing
rate over the past six years. For example, in fiscal year 2007–08,
11.5 percent of employees age 55 to 59 in leadership positions chose
to retire, while in fiscal year 2012–13, this percentage climbed to
13.7. In addition, over a quarter of employees age 60 and older in
leadership positions retire each year. With these retirements, the
State stands to lose the institutional knowledge and experience
these older workers possess. As a result, succession planning is
prudent to ensure continued delivery of high‑quality state services.
Figure 7
Employee Retirements by Position Type
Fiscal Years 2007–08 Through 2012–13
7,000

Leadership
Rank and file

6,000
Employee Retirements

46

5,000
4,000
3,000
2,000
1,000
0
2007–08

2008–09

2009–10

2010–11

2011–12

2012–13

Fiscal Years

Sources:  California State Auditor’s analysis of data provided by the California Department of Human
Resources (CalHR) and the California State Controller’s Office.
Note:  The Statewide Workforce Planning Coordinator (planning coordinator) at CalHR stated
that CAlHR could not determine the reasons that caused the increase in retirements in fiscal
year 2009–10; however, the planning coordinator indicated that there may be a correlation with
the implementation of statewide furlough days. The planning coordinator also stated that CalHR
developed and is in the process of implementing a confidential exit survey, which will provide
retirement data in the future.

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September 2013

Conducting Workforce and Succession Planning
Our review of the succession and workforce planning efforts of
six departments critical to the State’s mission revealed that, while
some agencies have generally continued to develop and implement
their workforce and succession plans, others have suspended
their workforce planning efforts. In our 2011 high risk report, our
review of five departments found that the California Department
of Public Health (Public Health), the California Department of
Social Services (Social Services), and the California Department of
Transportation (Caltrans) had completed workforce and succession
plans, and that the Governor’s Office of Emergency Services
(Cal OES) and the California Department of Health Care Services
(Health Care Services) had not yet completed them.
In our current review of workforce and succession planning
efforts, we added the California Department of Corrections
and Rehabilitation (Corrections) to the five agencies previously
reviewed. Our assessment revealed that, with the exception of
Corrections, all the departments we reviewed had either developed
or updated their succession plans. For example, in January 2013,
Caltrans released an updated succession plan that included solutions
for training and developing new leaders. Similarly, four of the
six agencies—Public Health, Social Services, Caltrans, and Health
Care Services9—have developed workforce plans. Both Cal OES
and Corrections cited extenuating circumstances that prevented
them from completing these plans. Cal OES indicated that the death
of a key contractor had slowed its planning, and as discussed in
Chapter 3, Corrections indicated that its succession planning unit
was eliminated during budget cuts in prior years. Both Cal OES and
Corrections anticipate continuing their workforce and succession
planning efforts in the future; however, they do not have specific
timelines or implementation plans in place.
Several agencies we reviewed indicated that they have undertaken
new projects in workforce and succession planning. For example,
Caltrans indicated that it recently developed a “knowledge
transfer” guidebook to address a potential loss of knowledge as a
result of retiring employees. Health Care Services indicated that
it is implementing a “DHCS University” focused on developing
the skills of its next managers. Finally, Public Health noted that it
was partnering with the Regents of the University of California to
develop a workforce and succession plan that would allow it to meet
the standards required for accreditation by the National Public
Health Department by December 2013.

9	

Health Care Services’ workforce plan is dated October 2008, which appears outdated when
compared to the other agencies’ workforce plans.

Our assessment revealed that, with
the exception of Corrections, all the
departments we reviewed had
either developed or updated their
succession plans.

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Monitoring the Effects of the Governor’s Reorganization Plan

The recent reorganization that
created the Department of Human
Resources comes at a critical time
when the State’s workforce is aging
and retirements are increasing.

The Governor’s Reorganization Plan No. 1, which became
operative July 1, 2012, merged the California Department of
Personnel Administration (Personnel Administration) and the
State Personnel Board (Personnel Board) into the California
Department of Human Resources (CalHR), among other actions.
As a result of the reorganization, CalHR assumed most of the
day‑to‑day roles of both the Personnel Administration and
the Personnel Board, including the responsibility of managing the
State’s workforce. As the State faces a growing number of
retirements, the impact of this restructuring and consolidation
of duties is an area of high risk that we will continue to monitor.
The mission of the CalHR’s Modernization Project’s (HR‑Mod) was
to modernize and streamline the State’s human resources program.
Although the governor’s reorganization plan abolished HR‑Mod,
CalHR has generally incorporated HR‑Mod’s goals and objectives
into its mission. For example, CalHR has continued HR‑Mod’s
work in simplifying the classification system, and indicated that it
has consolidated over 450 classifications. CalHR also has continued
HR‑Mod’s work in improving recruitment and hiring, indicating
that it has continued to make over 100 exams available online,
allowing easy access for applicants who can search jobs, submit
applications, take the state civil service test, and receive their scores
at their convenience. Additionally, CalHR has used servicewide exam
lists that allow candidates to take a single test for multiple similar
positions. Further, the department is continuing to work on the Exam
Certification Online System, which was envisioned to be a one‑stop
shop for state job seekers, allowing applicants to take a test and apply
for a vacancy all in one place.
CalHR is also responsible for providing agencies with materials and
training related to workforce and succession planning. It has made
most of its basic workforce planning materials, such as information
on California’s Seven Step Workforce Planning Model, available
to agencies on its Workforce Planning Web page, and similarly
offers most of its basic workforce planning training through online
webinars. CalHR indicated that it is reevaluating the need for
face‑to‑face classes due to low participation, and currently relies on
the online resources to meet the needs of state departments. It also
indicated that it directs agencies to other sources, such as e‑books
or e‑mail lists that can be used for workforce planning material,
and noted that aspects of workforce planning training are involved
in all basic supervision classes. Finally, CalHR has partnered with
California State University, Sacramento, to establish credentials to
designate human resources specialists with knowledge in topics
such as recruitment and selection, workforce development and
training, and workforce and succession planning. These efforts

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September 2013

come at a critical time, as indicated by the increasing number of
retirements described earlier, and we will continue to monitor
developments in this high‑risk area.

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Blank page inserted for reproduction purposes only.

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Chapter 6
STRENGTHENING EMERGENCY PREPAREDNESS
The State’s emergency preparedness remains an area of high
risk. Two key California agencies that oversee statewide
emergency management—the California Department of Public
Health (Public Health) and the California Governor’s Office of
Emergency Services (Cal OES)—formerly known as the California
Emergency Management Agency (CalEMA)—lack fully developed
strategic plans to guide their emergency preparedness efforts.
In addition, Public Health continues to face funding challenges
and Cal OES’s strategic priorities lack clarity. Public Health’s
emergency preparedness office has the responsibility to coordinate
planning and other efforts to prepare Californians for public
health emergencies, including planning for the strategic stockpile
of medical supplies, maintaining contact information for crisis
response, and distributing funds to local health departments
for disaster planning. Cal OES exists to enhance safety and
preparedness in California and to protect lives and property by
effectively preparing for, preventing, responding to, and assisting
California in recovering from all threats, crimes, hazards, and
emergencies. However, our review found that both agencies face
challenges in meeting these objectives.
Meeting Public Health Challenges
In our August 2011 high risk report, we noted that Public Health’s
strategic plan lacked specific performance measures and that it
faced challenges due to funding uncertainties. Our current review
found that Public Health still does not have a fully developed
strategic plan and continues to face challenges involving reduced
funding for its emergency preparedness programs and increased
federal requirements. Given its critical role in statewide public
health emergency management, Public Health remains on our
high‑risk list.
Public Health does not currently have a fully developed strategic
plan. In July 2011 Public Health released—as a transition
document between its previous strategic plan and a new, revised
strategic plan—an internal operations and performance plan
(operations plan). In fiscal year 2010–11, while Public Health was
in the process of drafting a new strategic plan, it experienced a
number of changes, including having three different directors
between February and June of 2011. These leadership and other
changes created the need for clarification of priorities and strategies
but also made it difficult for Public Health to create and finalize

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its strategic plan. Although Public Health intended to ultimately
release a new strategic plan, two years have passed and it has not
done so.
Under the operations plan, Public Health reduced performance
measures related to emergency preparedness from six to four and
lowered the benchmarks associated with staff training. The
deputy director of Public Health’s emergency preparedness
office (deputy director) stated that the reduction in performance
measures and benchmarks was necessary to set more realistic
expectations. The deputy director further explained that because
the operations plan has become outdated, Public Health produced
a one‑page strategic map outlining Public Health’s objectives and
priorities. Although the strategic map lays out the organization’s
vision, mission, goals, and objectives in a one‑page diagram, it only
briefly refers to emergency preparedness and contains no specific
plans or measures.
Despite the lack of a fully
developed strategic plan, Public
Health has helped publish
California’s statewide emergency
plan and has participated in
emergency preparedness exercises
and training.

Despite the lack of a fully developed strategic plan, Public Health
has made some progress in other areas. Since our last review, Public
Health partnered with the Emergency Medical Services Authority
in a 180‑page plan detailing the public health and medical function
of California’s statewide emergency plan. This document provides
the framework for statewide coordination of public health and
medical activities and services to support local jurisdictions with
their resource needs for emergency preparedness, response, and
recovery. Public Health also finalized the California Public Health
and Medical Emergency Operation Manual, which describes
individual roles and activities within the public health and medical
systems and outlines coordination between all levels of the State’s
emergency management structure.
In addition, Public Health informed us that it tracks its staff ’s
participation in emergency preparedness exercises and training.
Such exercises and training are critical to ensure that those who
participate in the response to emergencies are properly trained
and familiar with emergency operating systems and standardized
procedures. Specifically, Public Health indicated that, in fiscal
year 2012–13, its staff participated in three major exercises, which
are simulations to test and validate emergency plans and identify
capability gaps and areas for improvement. According to the deputy
director, the training participation rate for staff has grown from
19 percent in fiscal year 2010–11 to 81 percent in fiscal year 2012–13.
However, the deputy director acknowledged that the participation
rate in training for management functions in the emergency
operation center remained at roughly 50 percent during the same
time period.

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September 2013

Public Health also continues to work with local health departments
to improve their Strategic National Stockpile Technical Assistance
Review scores—a performance measure that is required to receive
federal funding. The national stockpile is a depository of medical
supplies, such as chemical antidotes, antibiotics, and surgical
items, designed to supplement and resupply state and local public
health agencies in the event of a national emergency. Scores of
69 to 100 indicate a location’s readiness to receive, distribute, and
dispense medical supplies from the stockpile. Public Health’s data
indicate that the average score of all 59 local departments improved
slightly, from 85.66 percent in June 2012 to 86.10 percent in June 2013.
Public Health continues to experience reduced funding for
emergency preparedness. Its federal funding for emergency and
hospital preparedness programs declined from approximately
$110 million in fiscal year 2003–04 to a little more than $71 million
in fiscal year 2012–13. Data provided by Public Health indicate that
state funding for Public Health’s emergency preparedness office
decreased from $8 million in fiscal year 2010–11 to $6 million in
fiscal year 2012–13.
At the same time that it has experienced deep budget cuts, Public
Health has had to respond to more stringent federal requirements.
Federal funding agreements require Public Health to meet certain
target capabilities for emergency preparedness (capabilities). Each
capability has a unique definition requiring specific functions, tasks,
and resource elements. For example, the Emergency Operations
Coordination capability is defined as actions taken in the immediate
aftermath of an incident to save and sustain lives, meet basic
human needs, and reduce the loss of property and the effect on
critical infrastructure and the environment. The deputy director
explained that in the past states could select, based on their own
needs assessment, capabilities to work on without any prescriptive
requirements for how they would address their selected capabilities.
However, effective in fiscal year 2011–12, the federal emergency
preparedness program issued new standards containing a total
of 23 capabilities. Public Health stated that its reduced funding
limits its ability to address such a broad scope of capabilities
and sustain its progress in emergency preparedness. Because of
Public Health’s lack of a fully developed strategic plan to guide its
emergency preparedness efforts and its funding uncertainty and
increased responsibility, it remains a high risk to the State.
Preparing for Emergencies
The emergency preparedness efforts of Cal OES continue to be a
high‑risk issue because Cal OES’s strategic priorities lack clarity and
it has not adequately developed performance measures to ensure

Public Health continues to
experience reduced funding for
emergency preparedness. Federal
funding for emergency and hospital
preparedness programs declined
from approximately $110 million
in fiscal year 2003–04 to a little
more than $71 million in fiscal
year 2012–13.

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that it is continually improving the State’s preparedness status. In
our 2009 high risk report, we noted that Cal OES had developed its
first strategic plan covering the five‑year period from 2010 to 2015,
including various goals and objectives that it believed would help
it better accomplish its mission. However, this plan did not include
any performance measures to gauge Cal OES’s success at meeting
those goals and objectives. At that time, Cal OES indicated that
it planned to develop measurements and benchmarks to quantify
its progress toward the strategic plan objectives. In addition, we
noted that Cal OES’s priority and objective task report (task report),
which was used to establish the priority tasks tied to the goals and
objectives in the strategic plan, was not up to date. Cal OES stated
that it planned to update the task report by June 2011.

Until Cal OES fully develops its
strategic plan with performance
measures and the assignment of
tasks, it cannot ensure that it is
making progress toward achieving
effective emergency management.

Our current review found that Cal OES is still in the process of
developing performance measures and no longer uses the task
report. According to the chief of its performance and evaluations
division (division chief ), an internal reorganization in 2012 caused
delays in the development of performance measures. Cal OES
created the performance and evaluations division in April 2013 to
lead a new strategic planning process for the agency. As part of
this process, Cal OES plans to update its strategic plan and create
a performance evaluation system, which will include performance
measures and a quarterly reporting mechanism. Currently, Cal OES
is training key staff and management in developing performance
measures for its new strategic plan, which it expects to complete
by December 2013. In addition, according to the division chief,
the task report was suspended because Cal OES needed to update
its strategic plan due to the recent reorganization and change in
leadership. Until Cal OES fully develops its strategic plan with
performance measures and the assignment of tasks, it cannot
ensure that it is making progress toward achieving effective
emergency management.
Our current review also found that Cal OES has discontinued
a project to centrally store data on the statewide inventory of
emergency resources and capabilities. Specifically, the Metrics
project was intended to be an online system that helped
local communities define, organize, and display emergency
resource data. Cal OES originally initiated the project to
address resource management needs highlighted in its 2007 gap
analysis report, which attempted to identify the shortfalls
between the resources available and what will be needed in a
catastrophic event. In our August 2011 high risk report, we noted
that the Metrics project had made some progress but was still
incomplete. Cal OES informed us at that time that it was expecting
the project to achieve its next milestone—launching the online

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system statewide by July 2012. However, Cal OES now states
that it determined that the project was not a sustainable model
because it required Cal OES’s limited resources to coordinate
the effort and perform a great deal of data management across the
jurisdictions involved.
Cal OES stated that it has essentially replaced the Metrics project
by using an existing information system and other tools to capture
the State’s emergency preparedness capabilities and to assess gaps
in coverage. For instance, it has undertaken four major catastrophic
disaster planning projects that involve assessing statewide
capabilities. Additionally, to validate statewide emergency planning
efforts, Cal OES participates in statewide emergency exercises and
helps develop corresponding action reports. However, without an
updated strategic plan and corresponding performance measures,
such as the number of exercises per year it desires to have occur
and what outcomes should result, it is difficult for Cal OES to
quantify and demonstrate its success in accomplishing its mission.
Due to the lack of development of a strategic plan and the absence
of meaningful performance measures, Cal OES emergency planning
continues to be a high‑risk issue.

Cal OES now states that it
determined that the project
to centrally store data on the
statewide inventory of emergency
resources and capabilities was
not sustainable because of
limited resources.

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Chapter 7
PROVIDING EFFECTIVE OVERSIGHT OF THE STATE’S
INFORMATION TECHNOLOGY
The high costs of certain projects and the failure of others
continues to make the State’s oversight of information technology
(IT) projects an area of high risk. According to the California
Department of Technology’s (CalTech) Web site, as of July 2013
there were 46 IT projects with a total cost of more than $4.9 billion
under development. Moreover, although CalTech is responsible
for ensuring that state agencies comply with the general controls
specified in Chapter 5300 of the State Administrative Manual
(SAM), it does little to verify their compliance. Given the pervasive
general control deficiencies at two agencies we reviewed, we believe
CalTech’s oversight of the general controls state agencies have
implemented over their information systems represents a new area
of high risk.
High Costs and Failure of Certain Major IT Projects
In our August 2011 high risk report, we discussed four large IT
projects that could have a major impact on state operations—the
California State Controller’s Office’s (state controller) 21st Century
Project, the Judicial Branch’s California Court Case Management
System (CCMS), the California Department of Finance’s Financial
Information System for California (FI$Cal), and the California
Department of Corrections and Rehabilitation’s (Corrections)
Strategic Offender Management System (SOMS). Additionally,
another project has recently raised concerns: the California
Department of Motor Vehicles’ IT Modernization Project
(Modernization Project), which CalTech terminated after the
completion of only one system of the two‑system project. Table 9
on the following page summarizes the status of the projects we
reviewed. The failures associated with some of these IT projects
continue to highlight IT oversight as a high‑risk issue for the State.
Three of the five IT projects listed in Table 9 experienced major
problems, while two others have not had the same level of difficulty.
The 21st Century Project, a project of the state controller, the largest
payroll modernization effort in the nation, was designed to combine
the State’s various payroll, employment history, leave, position, and
attendance data into one statewide system. However, the project has
been suspended after initial testing revealed a significant number
of errors and the system integrator’s lack of progress in correcting
the errors. In 2010 the state controller hired a system integrator to
develop, test, and implement the new system. In June 2012 a pilot
phase covering 1,300 state controller employees was implemented.

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As explained on the state controller’s Web site, eight months
of payroll testing of the new system failed to produce one pay
cycle without material errors. These errors included improper
deductions, payments delivered late or to the wrong payee, payroll
and pensionable wages incorrectly calculated, and union deductions
incorrectly determined. As a result, state employees were paid
too much, paid too little, or they and their family members
were denied medical coverage to which they were entitled. In
February 2013 the state controller terminated its contract with the
system integrator for failure to meet its contractual obligations, and
CalTech suspended the project pending an independent assessment
and a determination of appropriate next steps. According to
the project director, the state controller is planning to have this
assessment performed but is waiting for funding approval. If
funding for the assessment cannot be obtained, the implementation
of the 21st Century Project could be further delayed, resulting in the
State’s continued reliance on its current payroll systems that are said
to be outdated, inflexible, and costly to maintain.
Table 9
Estimated Costs and Status of Certain Information Technology Projects
PROJECT NAME

21 Century Project
st

California Court Case Management
System (CCMS)

OVERSIGHT AUTHORITY

California Department
of Technology
(CalTech)*
Judicial Council†

ESTIMATED COST
MAY 2011

ESTIMATED COST
JULY 2013

$308,000,000

$371,000,000

1,900,000,000
(projected as of
April 2010)

NA

CHANGE IN
ESTIMATED COST

PROJECT STATUS AS OF JULY 2013

$63,000,000 The 21st Century Project is
currently suspended.
NA

The Judicial Council
terminated CCMS.

Financial Information System for
California (FI$Cal)

CalTech*

1,620,000,000

617,000,000

(1,000,000,000) FI$Cal reported that the overall
project cost has been reduced by
over 45 percent without changes
in scope.‡

IT Modernization Project

CalTech§

208,000,000

208,000,000

0

CalTech terminated the IT
Modernization Project.

Strategic Offender
Management System

California Department
of Corrections and
Rehabilitation†

416,000,000

416,000,000

0

Final acceptance is scheduled for
June 2014.

Sources:  California Department of Technology May 2011 and July 2013 IT Project Tracking Spreadsheet and the California State Auditor’s analysis of
individual projects’ status reports.
NA = Not applicable. In March 2012, the Judicial Council terminated the project.
*	 CalTech has direct oversight authority over the 21st Century and FI$Cal projects. CalTech prepares oversight reports, and provides advice
and consultation.
†	 CalTech had no oversight authority over this project; however, it provided advice and consultation.
‡	 A large part of this reduction is the result of the project no longer including the cost of the subject matter experts working at the state departments
participating in FI$Cal.
§	 CalTech had direct oversight authority over this project. It reviewed independent project oversight reports prepared by the Department of Motor
Vehicles’ consultant and provided advice and consultation.

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The Judicial Branch’s CCMS was an attempt by the Administrative
Office of the Courts (AOC) to develop a statewide court case
management system. We reported that the AOC had experienced
significant challenges with the project that resulted from inadequate
planning and uncertain funding. Specifically, in February 2011 we
issued a report10 regarding CCMS, which found that the AOC
inadequately planned the project and consistently failed to develop
accurate cost estimates. In addition, the AOC did not structure its
contract with the development vendor to adequately control contract
costs. As a result, over the course of seven years, the AOC entered
into 102 amendments, and the contract grew from $33 million to
$310 million. As of June 2010 the AOC and several superior courts
had spent $407 million on the project. Subsequently, the Legislature
did not provide additional funds for the deployment of CCMS, and in
March 2012, the Judicial Council voted to halt the deployment.
The California Department of Motor Vehicles’ (DMV)
Modernization Project was intended to upgrade DMV’s existing
driver license and vehicle registration systems using more current
and easier to support technology. In December 2005 DMV
submitted a feasibility study report requesting to use a total of
$242 million over eight fiscal years for the Modernization Project.
In May 2012 DMV issued a notice to the systems developer
expressing concern regarding the developer’s ability to successfully
complete the Modernization Project. In January 2013 CalTech,
concerned by the lack of progress between DMV and the developer,
terminated the Modernization Project and directed DMV to
suspend all work related to the vehicle registration system and to
complete only the portion of the driver license system that was
near completion. As of February 2013 DMV had spent a total of
$136 million on the Modernization Project.
FI$Cal is a business transformation project for state government
in the areas of budgeting, accounting, procurement, and cash
management. In its March 2012 special project report, the
FI$Cal project reduced its November 2007 total cost estimate
of approximately $1.6 billion to $616.8 million while noting that
there were no scope changes from what the project had originally
reported. In April 201211 we reported that the four largest cost
reductions were in the categories of project and program staff;
contract services; hardware, software, and telecommunications;
and data center services. However, the project is not requiring
departments to track and report the cost of staff who are working
as subject matter experts on the project, which will cause FI$Cal’s

10	

Administrative Office of the Courts: The Statewide Case Management Project Faces Significant
Challenges Due to Poor Project Management (Report 2010-102, February 2011).
11	 FI$Cal, Status Letter (Report 2012-039, April 2012).

Although the AOC and superior
courts had spent $407 million
on the Court Case Management
System, in March 2012 the
Judicial Council voted to halt
the deployment.

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true cost to be underreported. This underreported cost could be
significant, as the project estimated the cost of subject matter
expert staff to be $264.4 million in November 2007.
Corrections SOMS project will consolidate existing databases and
records to provide an automated system that replaces manual paper
processes and improves offender management. Corrections
maintains responsibility for the implementation of SOMS and is
working with the court‑appointed federal health care
receiver (receiver). The receiver filed a request on behalf of
Corrections to the federal court to waive contracting statutes,
regulations, and procedures for SOMS which was approved by the
court. The waiver exempted SOMS from the State’s IT oversight.
However, Corrections has chosen to report certain project
information to CalTech. In our prior high risk report, we stated that
Corrections’ SOMS project was scheduled for completion in
October 2014 and would cost $500 million. However, according to
the Corrections’ June 2013 special project report, final completion
of SOMS has been rescheduled to June 2014, and the cost estimate
has been reduced to $385 million. Further, the special project report
stated that the project is now under CalTech oversight. Although
some projects are projected to cost less than originally anticipated,
the high costs and failure of certain projects continues to make IT
project oversight a high‑risk issue.
Overseeing IT Projects	

Five Stages of the
Project Management Life Cycle
1.	Concept:  Summarize information about a project.
2.	Initiation:  Authorize and define the scope of a
new project.
3.	Planning:  Define the project scope, develop the project
management plan, and identify and schedule the
activities that occur within the project.
4.	Executing:  Complete the work defined in the project
management plan to accomplish the project’s objectives
as defined in the scope statement.
5.	Closing:  Formally terminate all activities of a project,
transfer the complete project to others, or close a
cancelled project.
Source:  California Department of Technology’s Project
Management Methodology.

CalTech continues to use the California Project
Management Methodology (management
methodology) as a guideline to manage state IT
projects. Although the management methodology
appears adequate, CalTech’s oversight of these
projects remains an area of high risk.
The management methodology is based on the
work of the Project Management Institute. The
purpose of the management methodology is to
provide consistent project information regardless
of the state agency that is managing the project; to
provide policy makers greater visibility as to the
status of the IT projects; and to enable project
executives, control agencies, and other interested
parties to review and evaluate the status of
the IT projects as well as provide informed
direction and guidance to IT project managers.
The management methodology provides the
framework for the Project Management Life
Cycle (project life cycle), which we describe in
the text box. Included in the management

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methodology are templates for project team members to complete
for each stage of the project life cycle. This enables CalTech to
review a consistent set of data for all its projects.
The management methodology relies on departments’ project
teams and managers to report accurate and complete information
to CalTech regarding the status of their IT projects. For example,
during the initiation stage, project team members complete a
complexity assessment, classifying their IT projects as high, medium,
or low complexity based on criteria established in the management
methodology. This information is used to determine the level of
project oversight needed. All projects receive department‑level
oversight, medium‑complexity projects receive additional oversight
from the appropriate agency (or from CalTech for departments not
organized under agency oversight), and high‑complexity projects
receive oversight from CalTech or from a consultant.
CalTech appears to have appropriate steps in place to ensure
that IT projects are completed on time and within budget, if the
steps are followed. However, in the case of the FI$Cal project,
CalTech’s project oversight was not fully effective. According
to CalTech, it has direct project oversight of the FI$Cal project,
meaning that CalTech staff provide advice and consultation and
prepare independent project oversight reports (oversight reports)
for the project, among other responsibilities. In our September 2013
FI$Cal status letter,12 we concluded that although CalTech’s
oversight reports provide good information on many aspects of
the project, they often lack meaningful assessments of the project’s
schedule and budget. For example, although the oversight reports
have consistently reported that the project is on schedule, they have
also communicated significant concerns over the project’s progress
in the area of data management. However, the oversight reports
do not adequately discuss or evaluate this potential delay at a level
of detail that would allow stakeholders to appreciate the risks
to the schedule going forward and whether the project’s efforts to
mitigate these risks are effective. Further, the oversight reports
simply present cost information the project has reported to date,
and provide little or no insight as to how the expenditures affect
the future course of the project. According to our IT expert, a more
meaningful analysis would include a detailed comparison of actual
expenditures to date with planned expenditures to date and an
explanation of material variances. As a result of these observations
on the FI$Cal project, the effectiveness of CalTech’s oversight of IT
projects remains a high‑risk issue.

12	FI$Cal Status Letter (Report 2013-039, September 2013).

Although CalTech’s oversight
reports provide good information
on many aspects of the FI$Cal
project, they lack meaningful
assessments of the project’s
schedule and budget.

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Reorganizing IT Governance and Implementing the Strategic Plan

It is unclear at this time what
impact, if any, the latest
reorganization will have on the
future ability of CalTech to provide
oversight of state IT projects.

In our August 2011 high risk report, we concluded that CalTech’s
IT governance had improved and that its strategic planning
appeared adequate. The report also discussed how Governor
Schwarzenegger’s reorganization plan of 2009 integrated the
Department of Technology Services, the Office of Information
Security and Privacy Protection, and the Telecommunications
Division of the California Department of General Services into the
California Technology Agency. In 2012 the State’s IT governance
was again reorganized. In Governor Brown’s reorganization plan
of 2012, which became operational in July 2013, the California
Technology Agency became a department within the newly
formed Government Operations Agency. Although the State’s chief
information officer continues to report to the governor on issues
involving IT, it is unclear at this time what impact, if any, this latest
reorganization will have on the future ability of CalTech to provide
oversight of state IT projects. Additionally, as we discuss next, we
found CalTech’s current strategic planning efforts to be insufficient.
Consequently, we will continue to monitor IT governance as a
high‑risk issue.
CalTech needs to better track its progress toward meeting the
goals and objectives outlined in its strategic plan. State law requires
CalTech to produce an annual strategic plan and take appropriate
steps to implement the plan. In 2013 CalTech updated the strategic
plan originally presented in 2012, laying out a strategic vision
and direction for the State’s technology community. The strategic
plan outlines the mission, vision, and philosophy of the State’s IT
program; describes challenges and opportunities that will affect
the State’s IT environment; specifies the statewide IT goals and
objectives; and includes recent accomplishments and initiatives.
However, the strategic plan’s goals and objectives are not sufficiently
measurable, and the strategic plan does not describe the specific
tasks, timelines, and coordination necessary to achieve the plan’s
goals and objectives.
For example, one of the goals of the strategic plan is to leverage
“a reliable technology infrastructure and shared services that
are secure and economically and environmentally sustainable.”
To achieve this goal, the strategic plan lays out three objectives
and five high‑level action items, but it does not provide specific
information about the tasks and coordination needed to achieve the
goal. For instance, one of the objectives is to streamline data center
operations and infrastructure to eliminate costly and unnecessary
duplication, increase efficiency, reduce costs, and reduce energy
consumption. The strategic plan indicates that it will achieve this
objective by implementing e‑mail, desktop, network, data center,
server, and storage consolidation and virtualization. However, the

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strategic plan does not specify what, if any, savings these changes
will provide or how it defines success in achieving the objective, and
it does not include a timeline for its completion.
We inquired about CalTech’s effort to monitor progress on
the strategic plan, and the deputy director of health IT told
us that CalTech uses various reports that it generates, such as
the IT Cost Savings and Avoidance Report, IT Performance
Metrics Report, and IT Capital Plan to ensure that the State’s
IT resources are in alignment with the strategic plan. While we
recognize the importance of these reports, the information they
present generally does not relate to the strategic plan’s goals and
objectives. Consequently, CalTech does not appear to track the
dates and completion status for the goals and objectives outlined
in its strategic plan, and thus it is unable to effectively measure
its progress.
Overseeing IT General Control Assessments
Due to the limited reviews CalTech performs to assess the general
controls13 that state agencies have implemented for their existing
information systems, and the pervasive deficiencies we noted in
such controls at two agencies we visited, we believe CalTech’s
oversight of general controls is an issue that poses a high risk to the
State. Specifically, the State’s information assets—its data processing
capabilities, IT infrastructure, and data—are an essential public
resource. For many state agencies, program operations would
effectively cease in the absence of key information systems. In some
cases, public health and safety would be immediately jeopardized
by the failure or disruption of an information system. Further, the
nonavailability of the State’s information assets can also have a
detrimental impact on the state economy and the citizens who rely
on state programs. Finally, the unauthorized modification, deletion,
or disclosure of information included in agency files and databases
can compromise the integrity of state programs, violate individuals’
right to privacy, and constitute a criminal act.
Accordingly, to protect the State’s information assets from a wide
spectrum of threats and risks, state agencies are generally required
to implement general controls, including information security
and privacy policies, standards, and procedures specified in
Chapter 5300 of SAM. Although CalTech’s Office of Information
Security requires state agencies to certify their compliance
13	

General controls are the policies and procedures that apply to all or a large segment of a state
agency’s information systems and help ensure their proper operation. They include controls
related to security management, access control, configuration management, segregation of
duties, and contingency planning.

CalTech’s Office of Information
Security performs limited reviews
to validate the accuracy of what
information agencies specify in
their certifications of compliance.

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with SAM Chapter 5300 by January 31 of each year, it performs
limited reviews to validate what information agencies specify in
these certifications is accurate. Rather, the Office of Information
Security reviews the self‑certification documents to ensure that
they are completely filled out by each state agency and may
follow up with those state agencies that have not submitted the
required documentation.
The Office of Information Security
does not believe it currently
has sufficient resources for
conducting or monitoring general
control assessments or audits of
state agencies.

The director and chief information security officer of the Office
of Information Security acknowledged that it has the authority to
conduct independent general control assessments or audits of any
state agency, or to require them to be conducted at the expense
of the agency being evaluated. However, she stated that the Office of
Information Security does not currently have sufficient resources
for conducting or monitoring such assessments or audits.
As further evidence of the State’s poor oversight of general
controls, in 2012 we reported on the significant weaknesses
we identified at the Employment Development Department
(Employment Development) and Corrections during our review of
their compliance with the general control requirements specified
in SAM Chapter 5300. For example, in our March 2012 report
titled State of California: Internal Control and State and Federal
Compliance Audit Report for the Fiscal Year Ended June 30, 2011
(Report 2011‑002), we reported that although Employment
Development’s director certified in January 2011 that it had
implemented a fully developed Risk Management and Privacy
Program that complied with all applicable policy requirements,
we found major deficiencies in several areas that Employment
Development certified as fully implemented.
We found that Employment Development’s entitywide information
security policy was outdated, it had an insufficient risk management
program due to the inadequate risk assessment it completed
in August 2011, and it did not have an incident response plan
prior to January 2012. Consequently, we concluded that unless
Employment Development implements adequate general controls
over its information systems, the completeness, accuracy, validity,
and confidentiality of agency data will continue to be at risk. In
response to our finding, we noted in March 2013 that Employment
Development has partially corrected the weaknesses we identified
in its general controls. Specifically, since January 2012, Employment
Development has released 13 information security policies that
reflect changes in the direction of the Employment Development’s
information security program that more closely align its program
with federal and state guidelines.

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Given the pervasiveness of our findings and the limited reviews
CalTech’s Office of Information Security performs to assess state
agency compliance with the general controls specified in SAM
Chapter 5300, we suspect that similar control deficiencies currently
exist at other agencies throughout the State. Therefore, we believe
that CalTech’s oversight of the general controls state agencies have
implemented over their existing information systems should be
designated as an issue of high risk for the State.

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Chapter 8
INDIVIDUAL AGENCIES EXHIBITING
HIGH‑RISK CHARACTERISTICS
The California Department of Public Health (Public Health) and the
California Department of Health Care Services (Health Care
Services) continue to be on our list of departments posing a high
risk to the State, because they met a number of the criteria we
use to determine whether an agency presents a high risk. Our
current review suggests that these two departments still exhibit
high‑risk characteristics.
Public Health
Public Health remains a high‑risk agency due to weaknesses in
program administration, and because it has been slow to implement
recommendations with a direct impact on public health. Public
Health’s management and program functions are critical to the
State’s preparation for and response to public health emergencies,
such as preventing disease, disability, and premature death. Weak
performance and accountability at Public Health could adversely
affect the health and safety of Californians.
In our August 2011 high risk report we noted that Public Health had
20 unresolved recommendations from previous audits, including
15 with a direct impact on public health and safety. Our current
review revealed that the number of Public Health’s unresolved
recommendations has increased to 23. In fact, as of January 2013,
only 15 of these recommendations had estimated completion dates,
and many of these dates extend into 2015 and beyond. Thus, even
if Public Health eventually implements these recommendations,
which we made in 2008 and 2010, it will have taken between five
and seven years to take needed action.
As we discuss in our August 2011 high risk report, many of these
recommendations have a direct impact on public health and safety.
For example, we released a report in September 2008 regarding
Public Health’s laboratory field services, recommending that it
perform all of its mandated oversight responsibilities for laboratories
subject to its jurisdiction, operating within and outside California,
including inspecting licensed laboratories every two years,
sanctioning laboratories as appropriate, and handling complaints.
These recommendations have now been outstanding for five years.
In addition, other outstanding recommendations involve issues
that reveal significant weaknesses in Public Health’s program
administration. For example, as a result of a series of audits

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Based on a continued pattern of
failing to perform required duties
and failure to implement audit
recommendations, we are keeping
Public Health on our high-risk list.

involving Public Health in the past four years, we discovered that
it must improve its oversight to better protect the public from
low‑level radioactive waste, that it reported inaccurate financial
information in its management of the State and Federal Health
Facilities Citation Penalties Accounts, and that it did not adequately
manage the Kid’s Plate Program. Most recently, in a July 2013 audit
report, we found that Public Health had not conducted a significant
number of statutorily required licensing visits to developmental
centers. Based on a continued pattern of failing to perform required
duties and failure to implement audit recommendations, we are
keeping Public Health on our high‑risk list.
Health Care Services
Although Health Care Services has made significant progress in
implementing unresolved audit recommendations, it remains a high
risk due to its recently increased responsibilities. In our August 2011
high risk report, we noted that Health Care Services was a high‑risk
agency because it had 11 unresolved recommendations from
past audits. As of January 2013 the agency had resolved nine of
these outstanding recommendations. In addition, it received
two additional recommendations as a result of recent audits.14
However, Health Care Services remains a high‑risk entity due to its
new responsibilities under the Mental Health Services Act (MHSA)
and federal Patient Protection and Affordable Care Act (Care Act).
Effective July 2012 changes in state law transferred certain
responsibilities from the California Department of Mental Health
(Mental Health) to Health Care Services. These responsibilities
include guiding and monitoring counties’ implementation of the
MHSA. However, as we state in our August 2013 report,15 Health
Care Services faces several challenges regarding effective oversight
of county spending of MHSA funds and must provide guidance
to counties to effectively implement MHSA‑funded programs.
Our report recommends that Health Care Services conduct
comprehensive on‑site reviews of county MHSA programs,
including verifying county compliance with MHSA requirements.
In addition, to expand health insurance coverage and make health care
more accessible and affordable, the U.S. Congress enacted the Care
Act. The Care Act empowers states to take the lead in implementing
many of the legislation’s reforms, including options to significantly

14	

Due to a July 2012 shift of responsibility from Public Health to Health Care Services for the Every
Woman Counts program, Health Care Services inherited two additional recommendations to
implement for this program.
15	 Mental Health Services Act: The State’s Oversight Has Provided Little Assurance of the Act’s
Effectiveness, and Some Counties Can Improve Measurement of Their Program Performance
(Report 2012-122, August 2013).

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September 2013

expand their Medicaid programs, which are partially funded by the
federal government. According to its fiscal year 2013–14 budget,
California opted to provide health care coverage to over 1 million
adults with incomes at or below 133 percent of the federal poverty
level; these Californians were ineligible to receive Medicaid benefits
prior to the implementation of the Care Act. As a result, California
expects a significantly increased number of recipients of Medi‑Cal,
the State’s Medicaid program. Because it has oversight over
Medi‑Cal, Health Care Services is responsible for ensuring that
these individuals receive eligible services. Consequently, although
our current review found that it has made significant progress in
implementing our recommendations since our last high risk report,
we continue to designate Health Care Services as a high‑risk entity
because of its recently increased responsibilities.
We prepared this report under the authority vested in the California State Auditor by Section 8546.5 of
the California Government Code.
Respectfully submitted,

ELAINE M. HOWLE, CPA
State Auditor
Date:	

September 26, 2013

Staff:	

Benjamin M. Belnap, CIA, Audit Principal
Nasir A. Ahmadi, CPA
Richard D. Power, MBA, MPP
Tram T. Truong
Brian Boone
Joshua K. Hammonds, MPP
Kevin Henry, MBA
Jun Jiang
Nathaniel Jones
Joey Judson
Chuck Kocher, CIA, CFE
Michelle J. Sanders
Eva Yang

IT Audit Support:	Michelle J. Baur, CISA, Audit Principal
Sarah Rachael Black, MBA
Amanda Garvin-Adicoff
Legal Counsel:	

Donna Neville, Chief Counsel

For questions regarding the contents of this report, please contact
Margarita Fernández, Chief of Public Affairs, at 916.445.0255.

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Appendix
CONSIDERATIONS FOR DETERMINING HIGH RISK
Senate Bill 1437 of the 2003–04 Regular Session of the Legislature
(Chapter 251, Statutes of 2004) added Section 8546.5 to the
California Government Code to provide the California State
Auditor (state auditor) with the following authority:
•	 To establish a high‑risk government agency audit program for
the purpose of identifying, auditing, and issuing reports on
any agency of the State, whether created by the Constitution
or otherwise (state agency), that the state auditor identifies as
being at high risk for the potential of waste, fraud, abuse, or
mismanagement or that has major challenges associated with its
economy, efficiency, or effectiveness. This includes challenges
that cut across programs or management functions at all
state agencies or multiple state agencies; we refer to these as
statewide issues.
•	 When identifying state agencies or statewide issues that are at
high risk, in addition to reviewing the audit and investigative
reports produced by the state auditor, to consult with the
Legislative Analyst’s Office, the Little Hoover Commission, the
Office of the Inspector General, the California Department of
Finance, and other state agencies with oversight responsibilities.
•	 To issue audit reports with recommendations for improvements
in state agencies or with regard to statewide issues identified as
being at high risk not less than once every two years.
•	 To require state agencies identified as being at high risk,
including state agencies with responsibility for a statewide
issue, to periodically report to the state auditor on the status of
recommendations for improvement made by the state auditor or
other state oversight agencies.
In addition, Section 8546.5 requires the state auditor to notify the
Joint Legislative Audit Committee whenever it identifies a state
agency or statewide issue as being at high risk.
Qualitative and Quantitative Factors
In determining whether a state agency or statewide issue should be
identified as being at high risk, we consider a number of qualitative
and quantitative factors. Although we consider many qualitative
factors, we focus in particular on whether the risk could result
in significantly impaired service; program failure; significantly

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reduced efficiency and/or effectiveness; public injury or loss of
life; reduced confidence in government; or unauthorized disclosure,
manipulation, or misuse of sensitive information.
To the extent possible, we take into account the risk to the State
in terms of monetary or other quantitative aspects. We consider
that a $1 billion investment by the State for a program would be
an indicator of potential material loss. We also look at changes in
assets—additions and deletions—as an indicator of potential risk
to major agency assets being lost, stolen, or damaged. We further
consider risks that revenue sources may not be realized or improper
payments may be made. Finally, we also consider the number of
employees each state agency is authorized to hire in determining
the magnitude of human capital.
Responsiveness to Recommendations and Corrective Measures
Senate Bill 1452 of the 2005–06 Regular Session of the Legislature
(Chapter 452, Statutes of 2006) requires that state agencies
provide the state auditor with updates on the implementation
of recommendations we have made to them in the form and at
intervals prescribed by the state auditor. Moreover, Chapter 452,
Statutes of 2006, places additional reporting requirements on state
agencies that have not implemented audit recommendations that
are over one year old.
The state auditor also receives whistleblower complaints
about improper governmental activities under the California
Whistleblower Protection Act and regularly issues public reports on
substantiated complaints. That act requires state agencies either to
take corrective action on substantiated complaints and report to us
what action is taken or, if no action is taken, to indicate the reason
for not doing so.
We consider whether each state agency audited or
investigated demonstrated commitment in implementing
audit recommendations or taking corrective measures for any
substantiated complaints or issues noted in our reports. The
final determination as to how committed agencies are to making
changes to address audit recommendations or taking corrective
measures stemming from investigations may include additional
follow‑up reviews by the state auditor and ultimately is based on
our professional judgment.

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Ongoing Reporting and Future Audits
Once the state auditor identifies a state agency or statewide issue as
being high risk, the state auditor may require the affected agencies
to report on the status of recommendations for improvement made
by the state auditor or other state oversight agencies. Related to
that, the state auditor may require affected agencies to periodically
report their efforts to mitigate or resolve the risks identified by
the state auditor or other state oversight agencies. In addition, the
state auditor may initiate audits and issue audit reports with
recommendations for improvement in the affected agencies.
Removal of High‑Risk Designations
When we designate agencies or statewide issues as being at high
risk and place them on our high‑risk list, removing the designation
takes a demonstrated commitment by the leadership of the state
agency or agencies responsible for addressing the risk. The agency
or agencies should appoint a person, group, or entity responsible
to address the risk, and those responsible must devote sufficient
resources to mitigate or resolve it. Further, those responsible must
develop detailed and definitive action plans, including, when
necessary, plans to seek legislative action. Those plans should define
the root cause of the risk, identify cost‑effective solutions, and
provide a timetable for completion. Moreover, the responsible party
must have a process for independently monitoring and measuring
the effectiveness of steps taken and for periodic reporting
regarding progress.
When legislative and agency actions result in significant progress
toward resolving or mitigating a high‑risk issue, we will remove
the high‑risk designation. The agency or agencies must also
demonstrate progress in implementing corrective measures.
However, we will continue to closely monitor these issues. If risks
again arise, we will consider reapplying the high‑risk designation.
The final determination of whether to remove a high‑risk
designation will be based on our professional judgment.

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