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“Thrift is of great revenue.”

-Cicero

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• Eligibility processes for public assistance are inefficient. Paperbased and face-to-face eligibility determinations don’t get the job done.
• Valuable assets lie idle. The state owns millions in surplus properties that should be liquidated to generate cash and reduce maintenance costs.
• Tax enforcement efforts fall behind. The state leaves millions uncollected due to personnel shortages.
• California is entitled to more federal funds. State programs seeking federal funds are not coordinated leaving money in Washington, D.C.

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IN THE PAST, A SIMPLE EXPEDIENT TO DEAL WITH BUDGET PROBLEMS WAS TO RAISE TAXES TO CLOSE THE REVENUE AND SPENDING GAP. TODAY, THAT SHOULD BE THE LAST RESORT. IT IS UNFAIR TO ASK HARDPRESSED CALIFORNIA TAXPAYERS TO DO MORE UNTIL THE STATE HAS DONE EVERYTHING IT CAN TO SQUEEZE THE MOST OUT OF THE DOLLARS THE TAXPAYERS ALREADY PROVIDE.

Despite the work done to date by the Governor and the Legislature to deal with the state budget crisis, the state still has important work to do. The state needs to continue making progress on making current ends meet, and it needs to work to eliminate the long-term structural problems that put the state in this position to begin with.

In the past, a simple expedient to deal with budget problems was to raise taxes to close the revenue and spending gap. Today, that should be the last resort. It is unfair to ask hard-pressed California taxpayers to do more until the state has done everything to squeeze the most it can out of the dollars the taxpayers already provide.

In its review of government operations, CPR found numerous opportunities for the state to save or raise funds without new taxes or fees. These opportunities can help close the budget gap, and they can help the state maintain critical services on which Californians depend. Some of the ideas produce one-time, short-term savings. Others produce ongoing gains. Together, they can help the state get it current financial house in order, and they can also help safeguard against future crises.

By reorganizing government to be more efficient, by introducing new productivity-enhancing technology and by being more strategic in our workforce planning and management, the state should be able to get by with a smaller workforce than it currently employs. Given the upcoming bulge in retirements, this reduction can be accomplished without layoffs or hiring freezes.

By managing the government more efficiently, California can hold down the growth in state employment. Since a big part of the cost of state government is personnel, this should result in large dollar savings for taxpayers.

Arriving at these savings will not be an easy process. Broad-brush statewide policies like hiring freezes and layoffs are selfdefeating demoralizing and ineffective. By better managing the workforce statewide and hiring and training skilled workers we can effectively manage an evolving state workforce without a loss of services.

BROAD-BRUSH STATEWIDE POLICIES LIKE HIRING FREEZES AND LAYOFFS ARE SELF-DEFEATING, DEMORALIZING AND INEFFECTIVE. BY BETTER MANAGING THE WORKFORCE STATEWIDE AND HIRING AND TRAINING SKILLED WORKERS WE CAN EFFECTIVELY MANAGE AN EVOLVING STATE WORKFORCE WITHOUT A LOSS OF SERVICES.

By allowing natural attrition to take its course, and by exercising care in the hiring and training of new employees, the state should be able to save literally hundreds of millions in personnel costs over the next five years. We believe the state can get by with more than 12,000 fewer workers than it has now. The estimated cost savings versus the way the state currently does business is estimated at $4.3 billion between Fiscal Years 2005–2010.

For this approach to work, state government must operate more as though it is what it is—a single large employer, rather than an archipelago of independent island departments and agencies that act in their own interests rather than in the interests of the state government and the citizens they serve.

Action: The state should achieve budget savings by controlling and better planning for its workforce.

One of the largest and fastest growing areas of the state budget is health and human services. Today, these programs account for 32 percent of state spending or about $24.6 billion a year. The services these programs provide are vital to many of our neediest citizens.

For example, Medi-Cal, California’s federal Medicaid program, is estimated to have 6.7 million participants. Medi-Cal provides health coverage to low-income Californians who are members of families with dependent children, and to lowincome aged, blind and disabled persons. CalWORKs pays assistance to families with dependent children and helps these individuals toward employment.

Prescription for Change Control future personnel costs. Much of the cost of any organization is in its employees. We are working to build a better, more skilled workforce. We should leverage those skills to cut costs. Use technology to cut costs. Technology, strategically applied, can reduce the work in state programs, cutting costs while improving service. Eliminate fraud. Fraud costs the state hundreds of millions of dollars every year. We should redouble our efforts to find the people who abuse our programs. Better manage assets. The state owns millions of acres of land and square feet of real estate. If it’s not in use, we should sell it and allow its most productive use. Improve tax administration. We should make every taxpayer pay their fair share of state taxes and not a penny more. Increase California’s share of federal aid. Californians pay billions of dollars in federal taxes each year. The state should get its fair share of funds from Washington, D.C.

An estimated 1.2 million people qualify for both CalWORKs and Medi-Cal. A third program, the federal Food Stamps program, provides food for 1.9 million low-income Californians. About 61 percent of Food Stamp recipients also participate in Medi-Cal and CalWORKs (Exhibit 7).

County welfare departments determine who is eligible for benefits. California’s 58 county welfare departments process eligibility applications through face-to-face interviews. Applications affecting Medi-Cal only are received by mail. It takes 16,921 county eligibility employees to handle this outmoded system.

By contrast, the state’s Healthy Families program, which provides children’s health insurance coverage for low-income families, uses modern, Internet-based eligibility determination as well as applications through the mail.

Compared to Healthy Families, the county-based eligibility system is a technological relic. It takes too long, it isn’t customer friendly, and it is often inaccurate. For example, the counties use at least 19 different systems to handle eligibility processing. Even though the statutory limitation for determining Medi-Cal eligibility is 45 days, that deadline is often exceeded by 30 to 60 days. Healthy Families in contrast can process a complete application in a maximum of seven days with an additional 10 days for the effective date of coverage in the managed health plan.

Source: California Department of Health Services.

The worst effect of the system, however, is on the citizens its serves. Calls to welfare offices in three counties with large populations by a mother with a sick child seeking assistance with a Medi-Cal application resulted in the caller being directed to the welfare offices to pick up an application and receive a preapplication screening. The applicant wasn’t told she could apply by mail. Waiting times in the welfare offices, when the applicant did arrive, ranged from one to three hours, and office hours were generally 7:00 a.m. to 3:00 or 4:00 p.m.

This county-based process, which made sense in an earlier time, should be scrapped and replaced by a system modeled on the Healthy Families approach. There is precedent for this innovation. Several other states, including Pennsylvania, Florida and Michigan, have partially implemented a Web-based system using a common computer platform. Texas is in the process of developing an integrated eligibility system that mirrors what CPR is proposing.

TECHNOLOGY IS NOW AN EFFECTIVE TOOL IN THE BATTLE AGAINST FRAUD IN THE PUBLIC ASSISTANCE PROGRAMS. THAT TECHNOLOGY IS “SMART CARDS.”

Action: Eligibility processing for Medi-Cal, CalWORKs and Food Stamps should be centralized at the state level.

One concern with a change in the large public assistance programs like Medi-Cal and CalWORKs is the potential for fraud. In fact, the struggle against fraud and abuse in these programs is continual. The Legislative Analyst’s Office has put the estimated loss due to fraud in the Medi-Cal program at $1.8 billion annually. Some other estimates go as high as $3 billion. California has taken steps to detect potential fraud before paying claims, but most of the state’s current anti-fraud efforts are based on a post-payment strategy. The types of fraud are shown in Exhibit 8.

Source: California Performance Review.

Technology is now an effective tool in the battle against fraud in the public assistance programs. That technology is “smart cards.” Smart cards are identification cards with imbedded computer chips. A card that costs about $3 can store client demographic information, biometric information (such as one or more fingerprints), health information and security information. They can maintain stored value—basically act like a credit card—to allow clients to make co-payments. In some states, they are being considered as enhanced replacements of electronic benefits transfer cards that store state payments for Food Stamps and the equivalent of the CalWORKs program.

Used correctly, smart card technology can be an effective way to detect fraud prior to payment, the most effective means of finding and eliminating fraud. The technology used in these cards has been refined by widespread use in the private sector and by the federal government. The cost of individual cards, which used to be a major barrier, has decreased to the point where they are an excellent option for Medi-Cal.

Action: The Health and Human Services Agency should use smart card technology for Medi-Cal recipients.

Although there would be some upfront cost for the new technology and computer systems to manage it, this system could, over a five-year period, save the state at least $80.3 million.

The State of California owns millions of acres of real estate, plus more than 22,000 structures. It owns golf courses. It owns a stadium. It owns fairgrounds across the state, some located on patches of the state’s choicest land. The Governor has already directed a comprehensive review of the state’s asset portfolio for potential high-value urban properties to sell. The state’s existing surplus property sales program has generated $334 million in sales with another $175 million in escrow.

Despite these actions, CPR believes the state should go further. Given the current budget crisis, the state can’t afford to have unused, non-performing or underused assets on its inventory. However, when state-owned property is declared surplus, the process for its disposal is lengthy and cumbersome. Moreover, the state does not currently have an accurate inventory of the properties it actually owns or their fair market value.

Changes in existing laws to clear out bureaucratic undergrowth could result in more property sales and increased revenue for the state. As importantly, the state would relinquish a large portion of this property to the private sector, returning it to the property tax rolls and allowing for its further development.

Action: The state should undertake an inventory of its real property assets.

Under current law, decisions to declare an asset surplus require an affirmative approval from the Legislature. Individual agencies make the decisions to declare a property surplus, and the Department of General Services (DGS) only acts to facilitate those decisions—nobody has the authority to dispute an agency’s decision to keep a property. The state should establish centralized decision-making within the Executive Branch regarding the determination that real property has become a surplus asset. Surplus property decisions should continue to be subject to public review, but this recommendation will allow these surplus sales decisions to be expedited.

Action: The Department of General Services should be authorized to declare and sell surplus assets for the state.

CHANGES IN EXISTING LAWS TO CLEAR OUT BUREAUCRATIC UNDERGROWTH COULD RESULT IN MORE PROPERTY SALES AND INCREASED REVENUE FOR THE STATE.

Under the current approach, each property sale must be funded on a specific project-by-project basis, and funding requests must be made as long as 18 months prior to receiving funds for the study. Given the size of the state’s real property inventory and continual changes, this makes no sense and unnecessarily slows the process. An annual appropriation of $3–6 million for staffing and consulting services would return dividends for the state. Some of this funding could come from the sale of other parcels of land.

Action: The Department of General Services should be given a clear role in the oversight of real property management.

Current law allows sales at less than fair market value, which often means properties are disposed of with little or no benefit to the state. In many cases, the properties are literally given away.

Action: State law should be amended to require the sale of state property at fair market value.

Current law gives any non-state agency, such as local governments or certain nonprofit organizations, a right of first refusal for surplus properties. This right of first refusal can significantly delay the prompt disposition of surplus properties. While these entities should continue to have access to surplus sales, eliminating the right of first refusal would significantly speed up the sales cycle.

Action: State law should be amended to eliminate the right of first refusal for surplus property.

Taken together, CPR estimates that the improvements in the state surplus property law can speed up sales, netting the state an additional $47–95 million annually from sales. These funds would be better directed to solving the state’s funding problems or to delivering needed services to Californians.

Among its cost saving ideas, CPR took a hard look at state business practices for ways to cut costs. Some of those ideas have been discussed earlier in the report, but two additional recommendations are worth noting. There are significant cost savings to be gained by changing the state’s bonding and insurance requirements for large public projects, and the state can save money on its telecommunications bills by better cost monitoring.

When contractors bid on large public works projects, they are required to have sufficient insurance to guarantee successful completion of the project. Insurance coverage can include general liability, builder’s risk, worker’s compensation, design errors and omissions, as well as other special coverage. The cost of this coverage is part of the contractor’s administrative costs and is reflected in the cost of the project.

There is a less expensive alternative that can be used in many cases. Owner Controlled Insurance Programs (OCIPs) allow the general contractor to purchase the appropriate insurance that covers all of the parties involved in the project, including subcontractors. This allows the subcontractors to eliminate their own insurance costs for the project, thus saving the general contractor money that can be reflected in lower costs to the state.

AMONG ITS COST SAVING IDEAS, CPR TOOK A HARD LOOK AT STATE BUSINESS PRACTICES FOR WAYS TO CUT COSTS.

OCIPs are available to the state now through the Department of General Services’ (DGS) Office of Risk Management and have been used in some projects. DGS realized savings of more than $3 million on one project by using an OCIP. While OCIPs may not make sense for every project, industry experience generally reflects the DGS experience, with savings estimated at 1 to 3 percent of construction costs.

Action: The state should make greater use of Owner Controlled Insurance Programs for public works projects.

CPR analysis indicates that using OCIPs could save the state $22 million a year on large infrastructure projects. These funds are not General Fund revenue, but the savings could be more usefully applied to other infrastructure projects.

Another area where the state should focus attention is telecommunication costs. The state spends about $120 million annually on telecommunication services. Because of the size and extent of the state’s telecommunication expenditures, there is a continuing possibility of mistakes that could cost the state millions a year. Moreover, the state frequently contracts for enhanced phone service that is later abandoned without discontinuing payments for the service. This is frequently found in the case of high-speed data lines.

Asked and Answered Among the many suggestions and comments CPR received, a number wound up being addressed by CPR recommendations. Here are just a few of the actual suggestions we received and a brief description of the ideas we came up with in response: Comment: “Accountability, a percentage of people that work for the state have no accountability for their work. Accountability is a huge issue. Nothing gets done or it gets done very slowly. People are put into positions that are open without any regards to educational requirements and experience. You have a person in a position without any education in that field and experience. This creates a huge burden in that department whether or not they will admit it.” CPR: State law and regulation currently allow state employees who meet certain requirements to be appointed to classifications for which they have not been tested and may not meet minimum qualifications. To ensure the state has an effective and efficient workforce, CPR is recommending that employees be required to meet minimum qualifications before they are appointed to any civil service position. This will require a change in state law, and we recommend that the Governor work with the Legislature to get this done. Comment: “I too share the frustration of expensive textbooks. When I first heard about CPR and how it could change something in my life I thought of all the textbooks I have bought over the past few years. Seems like something should be done.” CPR: Expensive textbooks were a recurring theme in higher education comments. Our recommendations (found in the detailed version of this report) suggest that the university systems give consideration to textbook costs in their selection decisions, that they inform students when earlier editions might be available and encourage the selection of textbooks where the textbook is “unbundled” from various supplemental, and often unused, material. We also encourage the university systems to examine textbook rental systems as are already used in some state universities and suggests that the universities help students use the Internet to sell or swap used textbooks. Comment: “Consider an overhaul of our education system. During the 9th grade, teacher(s), the parent and student discuss the student’s future. Two options should be available: (1) Full-time academic environment or (2) Career path with vocational education courses and a part-time work environment. The emphasis in the academic environment would be college prep courses with the student furthering his/her education in college. The emphasis on the vocational path would be continued education and completion of an apprenticeship. No student should leave school without the training or a degree with which to support him/herself.” CPR: Career technical education (CTE), formerly known as vocational education, is a pathway to employment in skilled jobs that comprise up to 33 percent of California’s labor market. CTE is offered in occupational fields including information technology, business, health services and construction. High school CTE students go on to higher education at least as often as other students, are less likely to drop out of high school and have better employment potential than comparison groups. Despite these advantages, CTE course offerings and enrollment have declined over the past decade as California’s high schools have focused increasingly on college preparation. This trend should be reversed. California high schools should offer rigorous, challenging career technical coursework integrated with academic education to prepare high school students for both higher education and the workplace. This can be done by providing alternative paths to high school graduation—one that prepares students for university admission and another for either employment or college-level study in a skilled occupation. Our report recommends that California adopt high school graduation requirements allowing a choice of courses of study, including university preparation and academic/career technical education. Comment: “I drive for UPS. In the past, when I delivered to a State Department, they would order thousands of dollars in new computers. Then three months later they would order thousands of dollars more. When I asked out of curiosity about the second set, the reply would be that they had to spend it prior to the end of the fiscal year or their funding would be cut the next year. In other words, they would be punished for staying under budget and fiscally responsible.” CPR: There are reforms in the CPR report moving agencies toward performance-based budgeting and better measurement of performance to see that such budget strategies don’t continue. In addition, we are recommending a whole series of reforms in the purchasing area that will allow the agencies to make smarter purchases through centralized contracts that get the state the best deal using the leverage of the state’s enormous combined buying power.

An example of these problems comes from the California Department of Transportation (Caltrans). A Caltrans review early in 2004 uncovered a double-billing problem amounting to $220,000 over a six-month period. This finding led to a more extensive audit by Caltrans that produced even more savings through the elimination of unneeded cellular phones and land lines no longer used by the department.

Many states and private businesses have recognized savings totaling millions of dollars a year from audits of their telecommunications bills. California should also take a comprehensive look.

Action: The Department of General Services should audit state telecommunications bills to discover overpayments or unnecessary line charges.

Using the Caltrans experience as a measure, the state should be able to save as much as $2.5 million a year on its current telecommunications costs from this audit.

For additional savings, a similar process could be applied to other state utility bills.

MANY STATES AND PRIVATE BUSINESSES HAVE RECOGNIZED SAVINGS TOTALING MILLIONS OF DOLLARS A YEAR FROM AUDITS OF THEIR TELECOMMUNICATIONS BILLS. CALIFORNIA SHOULD ALSO TAKE A COMPREHENSIVE LOOK.

While state taxpayers oppose new taxes, particularly when the economy is struggling, they generally support the idea that people and businesses should pay the taxes they owe now. There is clear evidence that the state is losing millions of dollars because of non-compliance with the state’s major taxes. At times, this non-compliance is willful evasion of the tax laws. In other cases, individual taxpayers—and at times whole industries—are not fully informed of their tax obligations.

The state’s tax administrators struggle with these problems every day. Under California’s tax system, though, they are hampered by several factors. First, tax administration is divided among three different agencies—the Franchise Tax Board (income taxes), the Board of Equalization (sales and business taxes) and the Employment Development Department (state unemployment taxes). This problem is addressed by CPR’s proposed reorganization which is discussed later in this report. It would combine the three agencies into a single California Tax Commission.

Other problems will remain despite the reorganization unless the state takes action. One of these problems is outmoded technology. There are new technologies available to tax administrators that allow more effective identification of taxpayer non-compliance and maximize state spending on audit and compliance activities. The Franchise Tax Board (FTB) has been a notable success story in using this technology, yet incongruously, FTB’s innovations have not been adopted by the other tax collections agencies. Best practices should be used government-wide.

A system similar to the Franchise Tax Board’s could be developed on a performance basis, meaning the vendor is paid from the gains made on added taxes collected by the department. The FTB pioneered this approach, and it relieves the state of most upfront development costs. The approach has also been used successfully in several other states, including Iowa and Texas, with proven revenue gains.

WHILE STATE TAXPAYERS OPPOSE NEW TAXES, PARTICULARLY WHEN THE ECONOMY IS STRUGGLING, THEY GENERALLY SUPPORT THE IDEA THAT PEOPLE AND BUSINESSES SHOULD PAY THE TAXES THEY OWE NOW.

Action: The Board of Equalization should use an advanced database system to more effectively identify taxpayer non-compliance with state tax law.

The other problem area in state tax administration is people. One of the themes of CPR has been to manage the size of the workforce as an overall enterprise. This eliminates the need for broad-based and often self-defeating hiring freezes or layoffs. More importantly, it allows the state to recognize where it needs people to effectively manage its business. Tax administration is one of those places.

Hiring freezes have severely restricted the ability of the Franchise Tax Board and the Board of Equalization to employ audit and compliance staff. In the last year, these organizations have lost more than 1,000 staff years from critical tax collection activities. This is shortsighted and unfair to the state’s honest taxpayers. It means that dishonest taxpayers avoid paying the taxes they owe the state. The revenue agencies are significantly understaffed to deal with California’s large taxpayer populations. We believe that expanding the number of skilled audit and compliance personnel, coupled with improvements in technology, could significantly increase state revenue collections.

Recruitment of workers could take place in two critical areas initially. First, the state should hire more staff to cover phone collection operations. These workers are used to call delinquent taxpayers to remind them that they have tax due. The workers are normally less costly than regular compliance staff, and they can yield significant revenue gains for the state.

Second, more auditors should be hired to cover the income and sales taxes. By expanding staffing in the three departments, the state can realize a net gain of $73.8 million a year from delinquent taxpayers.

Action: The state should authorize the hiring and deployment of additional revenue collection personnel for the Employment Development Department, the Franchise Tax Board and the Board of Equalization.

The state can also help its current budget problems by offering taxpayers the opportunity to settle past debts with the state through a tax amnesty program. Typically, such programs involve a short window of time when taxpayers can pay delinquent taxes owed to the state with a waiver of penalty and interest.

THE STATE CAN ALSO HELP ITS CURRENT BUDGET PROBLEMS BY OFFERING TAXPAYERS THE OPPORTUNITY TO SETTLE PAST DEBTS WITH THE STATE THROUGH A TAX AMNESTY PROGRAM.

Since the mid-1980s, the District of Columbia and 35 states have conducted tax amnesty programs. Eleven states and New York City enacted amnesty legislation in 2003 alone. Florida, for example, completed a four-month amnesty program in October 2003. The state spent about $600,000 on the program, mainly in staff time. The return to the state treasury was $268 million. A tax amnesty conducted by Texas in March 2004, netted the state $379.1 million in state taxes and an additional $58.9 million in local sales tax.

California has had several amnesty programs in past years; however, only one has been undertaken since Fiscal Year 1984–1985—an amnesty for Californians using illegal tax shelters that has produced an estimated $1.3 billion thus far. With the proposed improvements in tax administration CPR is recommending, the timing is right for a more general tax amnesty. Taxpayers who fail to remedy past problems will soon confront a better-equipped and enlarged audit staff. By CPR estimates, an amnesty program should bring in an additional $220 million the state would not otherwise collect. It would also speed up some other collections into Fiscal Year 2004–2005.

Action: The Legislature should authorize a general tax amnesty for major state taxes, including the personal income tax, business taxes and sales tax. It should allow for partial wavier of penalty and interest and should extend the amnesty to past tax periods up to and including tax year 2003.

The window for the amnesty should be fairly brief to avoid interfering unduly with normal state tax administration activities. It should be followed up by rigorous enforcement actions against taxpayers who continue to be delinquent in their tax payments.

A final aspect of state tax administration that needs to be fixed is the tax settlement process. Both the Franchise Tax Board and the Board of Equalization have the authority to settle tax issues pending with taxpayers when it is in the state’s best interest.

There are a number of reasons for making such settlements, but in many cases, the cost of litigation may be higher than the value of the amounts in dispute, or the state may be at risk of losing key litigation if an issue is challenged in court. The settlement process allows tax administrators to make the best decisions to protect the state revenue base and clear out the tax caseload. The process can also benefit taxpayers since it allows them to reach an agreement with the state when issues are in dispute, saving time and money in a potentially unsuccessful challenge to state policy.

Although both tax departments can settle cases, the process is not currently used to the state’s advantage. Presently, at the FTB, there are almost 900 personal income and bank and corporation tax appeals with a total value of approximately $2.4 billion. At the Board of Equalization, more than 1,200 cases are pending with a total value of $320 million. These backlogs are not being cleared. By making a stronger effort to settle as many of these cases as possible, the state can improve its financial position and can end disputes that might otherwise linger for a number of years.

THE SETTLEMENT PROCESS ALLOWS TAX ADMINISTRATORS TO MAKE THE BEST DECISIONS TO PROTECT THE STATE REVENUE BASE AND CLEAR OUT THE TAX CASELOAD. THE PROCESS CAN ALSO BENEFIT TAXPAYERS SINCE IT ALLOWS THEM TO REACH AN AGREEMENT WITH THE STATE WHEN ISSUES ARE IN DISPUTE, SAVING TIME AND MONEY IN A POTENTIALLY UNSUCCESSFUL CHALLENGE TO STATE POLICY.

Action: The Franchise Tax Board should be directed to make a concerted effort to clear tax settlements as quickly as possible consistent with fair administration of the tax law and the best interests of the state and the taxpayers. The Board of Equalization should also more actively work to settle existing tax cases.

The savings from this change could be substantial, given the value of the backlog of cases involved. If, for example, half the dollar value of the cases were cleared, with the state receiving only half of the tax assessment, the state would realize a one-time revenue gain of an estimated $675 million.

The federal government distributed more than $362 billion in various formula-driven and special grant funds to state and local governments in 2002. California’s total share of these federal grants and payments amounted to $42.7 billion or 11.8 percent. In the same year, Californians paid $58 billion more to the federal government in taxes than it received in federal aid.

Partly, this is a result of formula funding deficiencies written into federal law that do not allocate funds as fairly as they should. The state should attempt to address that problem through Congressional action, but realistically, it is a difficult problem to rectify.

However, a part of the issue with federal funds is the complexity of federal programs and the laws and regulations governing their administration. Many states have discovered that a close, expert examination of programs the state administers, particularly in the human services area, can frequently lead to increases in federal funding.

Presently, the Office of Planning and Research operates a State Clearinghouse that is the single point of contact for review of federal grants received by the state. The review covers completeness, timeliness and accuracy. The Clearinghouse also reports to agencies as funding opportunities become available.

THE FEDERAL GOVERNMENT DISTRIBUTED MORE THAN $362 BILLION IN VARIOUS FORMULA-DRIVEN AND SPECIAL GRANT FUNDS TO STATE AND LOCAL GOVERNMENTS IN 2002. CALIFORNIA’S TOTAL SHARE OF THESE FEDERAL GRANTS AND PAYMENTS AMOUNTED TO $42.7 BILLION OR ELEVEN AND EIGHT TENTHS PERCENT. IN THE SAME YEAR, CALIFORNIANS PAID $58 BILLION MORE TO THE FEDERAL GOVERNMENT IN TAXES THAN IT RECEIVED IN FEDERAL AID.

The Department of Finance (DOF) coordinates the federally funded agencies in the preparation of an annual indirect cost rate plan. Federal grants typically cover a portion of a department’s general operating costs—its costs related to the program but not directly involved in it. The indirect cost reports are actually prepared by the individual agencies and reviewed by DOF. DOF does not have the authority to impose penalties on agencies that aren’t timely in filing their reports, and at the time CPR’s analysis was conducted, the single DOF position dedicated to the indirect cost plan was vacant. Collections for Fiscal Year 2002– 2003 amounted to only eight percent of the actual amount legitimately recoverable by the state.

States like New York and Texas, which have focused time and expert attention on maximizing federal funds to their states, have experienced great success. This normally requires focusing the task of making sure the state is receiving all of the federal dollars it deserves in one central agency and may even involve hiring private sector experts who are knowledgeable of the arcane aspects of federal funding formulas. It also means giving careful scrutiny to the state’s indirect cost rate plan to ensure that the state isn’t shortchanging itself on these costs.

Action: The Governor should immediately consolidate all activities related to determining the eligibility for and receipt of federal funding in a special unit within the Governor’s Office of Planning and Research.

STATES LIKE NEW YORK AND TEXAS, WHICH HAVE FOCUSED TIME AND EXPERT ATTENTION ON MAXIMIZING FEDERAL FUNDS TO THEIR STATES, HAVE EXPERIENCED GREAT SUCCESS.

The federal grant unit should develop aggressive strategies to ensure the state is receiving all of the federal aid to which it is entitled. This may include revising current spending policies at the state level to comply with federal regulations, allowing California to qualify for more federal dollars. The state should also make a more concerted effort to identify and report federal indirect costs correctly. Agencies should be directed to comply with state requirements for indirect cost rate plan reports.

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