COMMITMENT • INTEGRITY • LEADERSHIP	View full PDF report
California Department of Veterans Affairs and Department of General Services The Departments’ Mismanagement of the Veterans Home Properties Has Not Served the Veterans’ Best Interests and Has Been Detrimental to the State Report Number: 2018-112

Introduction

The California Veterans Homes

The California Department of Veterans Affairs (CalVet) oversees eight veterans homes across the State. The homes provide rehabilitative, residential, and medical services to the veterans who reside there. Veterans who are disabled or over 55 years of age and a resident of California are eligible to apply for admission to the homes. Each home provides different levels of care, including skilled nursing care and memory care. The homes also range in size. For example, the Lancaster home can house 60 residents on a 20-acre site while the largest home, the Yountville home (Yountville) in Napa County, can house up to 1,000 residents on a site that covers several hundred acres. A governor-appointed administrator manages the day-to-day operations of each home and reports to CalVet headquarters.

Leases of Veterans Home Properties

Under state law, the Department of General Services (DGS) has general authority to lease state-owned real property, including veterans home properties with the consent of the agency responsible for the property. It has specific authority to lease a veterans home property as long as the property is not needed for any direct or immediate purpose and the terms and conditions of the lease are in the best interests of the home. As shown in Table 1, DGS and CalVet have leased out a variety of spaces at the homes, the majority of which are at Yountville. Figure 1 shows the locations of the leases at Yountville. Some of these leases are for land only, upon which the lessee then constructs one or more buildings to suit its needs, and others are for existing facilities or office spaces. In addition to leases, CalVet and DGS have entered into other agreements permitting third parties to occupy space at the homes for extended periods of time. The scope of our review encompassed all agreements active as of June 2018 that CalVet and DGS entered into that gave a third party the right to occupy a portion of a veterans home property in exchange for some form of rent, services, or improvements to the property. Although not all of these agreements are technically leases, for the sake of simplicity in this report we refer to all such agreements as leases.

Table 1
Third Parties Have Leased Property at Some of the Veterans Homes

USE OF LEASED PROPERTY	LEASE EFFECTIVE DATE	LEASE DURATION	ANNUAL RENT DUE FOR FISCAL YEAR 2017–18	RATE OF ANNUAL RENT INCREASE DURING LEASE DURATION	LESSEE'S RENEWAL TERM OPTIONS
Chula Vista
Telecommunication facility	July 1, 2012	10 years	$47,564	5%	Two 5-year options
Automated teller machine (ATM)	August 1, 2015	5 years	$600	—	—
Fresno
Barber-beauty shop	June 1, 2016	5 years	$965*	—	—
Yountville
Napa Valley Museum	November 7, 1988	32 years	$7,348	5%	One 20-year option
Firefighter training facility	May 1, 1997	25 years	None—waived provided CalVet remains in an agreement for emergency and fire services	—	Two 4-year options
Fire station	July 1, 1997	25 years	None—waived provided CalVet remains in an agreement for emergency and fire services	—	Two 4-year options
Golf course	February 10, 1998	30 years	$115,483	—†	Three 10-year options
Convenience store	November 4, 1998	Indefinite	$27,000	—	—
Swimming pool	May 28, 2005	20 years	$1	—	Indefinite number of 10-year options
Barber-beauty shop‡	January 1, 2012	5 years	$996	5%	—
Storage units‡	October 1, 2012	5 years	$16,994	5%	—
Lincoln Theater	November 6, 2012	10 years	$20,000	—	One 5-year option§
ATM	November 1, 2013	5 years	$1,200	—	—
Post office	August 1, 2014	5 years	None—lessee maintains the building in place of rent	—	—
Barber-beauty shop	August 1, 2015	5 years	$1,015	$60	—
ATM	July 1, 2016	5 years	$300	—	—
Baseball field	November 1, 2016	5 years	$4,133	5%	—
Tug McGraw offices and garden	August 1, 2017	1 year	$3,557	—	—
The Pathway Home mental health facilityll	January 1, 2018	5 years	None—lessee provides mental health services to non-resident veterans in place of rent	—	—

Figure 1
There Are Many Leased Spaces at the Yountville Veterans Home

State law and DGS policy prescribe the requirements for leasing state property. DGS’s policy requires that agencies, including CalVet, submit a written request to DGS to develop a lease. The request must include a description of the benefits of the lease to the State, including consideration of the agency’s scope and mission, and the broad public benefit. DGS’s policy provides that, for veterans home properties, this requirement can be met by a description of the benefit the lease would provide to veterans. Under DGS policy, the lease should specify the rental fee for the property, which state law generally requires to be set at fair market rent—in other words, the most probable rent that a lessee would pay in an open market. Once the terms of the lease are established, DGS, CalVet, and the lessee sign the lease.

Rental fees from the leasing of veterans home properties must contribute to the funding of the homes, but they are not a significant source of revenue. General support for the homes comes predominantly from the State’s General Fund, from which the homes received more than $310 million in fiscal year 2017–18. However, the State is reimbursed for some of the costs of the homes by funding that CalVet receives from various sources—including the U.S. Department of Veterans Affairs (USDVA), Medicare, and fees that the residents pay to reside in the homes. Combined, these revenues provided about $107 million in funding in fiscal year 2017–18. State law requires that the proceeds from most leases of veterans home properties be deposited into the General Fund to augment the appropriation that the homes receive. In fiscal year 2017–18, those proceeds totaled $174,000. However, as we describe in our report, neither DGS nor CalVet have ensured that all lease revenue is directed back to the veterans homes.

State law also requires that the proceeds from a home’s base exchange convenience store (convenience store), golf course green fees and ball fees, and proceeds from other activities unique to each home, be deposited into the morale, welfare, and recreation operating fund (morale fund) specific to each home. As the name suggests, the money in these funds may be used to administer quality-of-life activities for the veteran residents. For example, the funding can be used for entertainment expenses, sports activities, and celebrations. Much of the revenue that the morale funds receive is generated from cost-of-care fees collected from the estates of deceased veteran residents. The balance for the Yountville home’s morale fund at the end of fiscal year 2017–18 was $4.2 million. In that year, the Yountville morale fund received just over $16,300 from the operation of its convenience store. However, as we discuss later, it should have received more.

Yountville also has state-owned employee housing (employee housing) where CalVet leases housing units to the home’s employees. Of the current 25 housing units—built between 1920 and 1955—only 19 are habitable. The remaining units require significant renovation. According to CalVet’s housing records, as of July 5, 2018, 15 of the 19 units were occupied. CalVet’s November 2018 housing policy outlines criteria for employee housing and assigns priority first to employees in positions that it deems critical for or supportive of the continuity of operations during emergency situations at the home, then to employees in positions that are difficult to recruit or that have high turnover. The remaining housing units are then available to all other eligible employees of the home. The law requires the California Department of Human Resources (CalHR) to issue rules for administration of employee housing throughout the State. All state agencies, including CalVet, are required by state law to comply with CalHR’s employee housing rules.

CalVet has received criticism over its management of uses of veterans home properties. In October 2013, our office issued an investigative report in which we found that CalVet had executed two imprudent leases on behalf of Yountville that violated state leasing requirements, including failing to obtain DGS approval, failing to obtain fair market rent for the leased property, and leasing the property for longer than five years. In January 2014, the Department of Finance criticized CalVet for failing to obtain DGS approval when it entered certain leases and for failing to monitor and enforce compliance with lease payments. As we discuss later in this report, we identified some of the same issues in our review of the active leases of the Yountville property. Although unrelated to CalVet, the USDVA experienced similar criticism when in 2011 it was sued for authorizing uses of its West Los Angeles campus—which is adjacent to CalVet’s West Los Angeles veterans home—that did not directly contribute to the operation of a home for disabled veterans.

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