Appendix

Scope and Methodology

We conducted this audit pursuant to the audit requirements in the Revenue and Taxation Code. Specifically, we reviewed the calculation of Proposition 56 taxes, the distribution of those funds, how each state entity that received Proposition 56 funds ensured that it used those funds for appropriate purposes, and whether state agencies complied with the reporting and administrative costs requirements of Proposition 56. The Table lists the audit’s objectives and the methods we used to address them.

Audit Objectives and the Methods Used to Address Them

AUDIT OBJECTIVE		METHOD
1	Review and evaluate the laws, rules, and regulations significant to the audit objectives.	Reviewed relevant laws, regulations, and portions of the state budgets for fiscal years 2017–18 and 2018–19.
2	Evaluate the administrative agencies’ processes for collecting and distributing the appropriate funds to agencies specified in state law.	Reviewed CDTFA’s policies and procedures and interviewed staff to determine how CDTFA ensures that it collects tobacco tax funds appropriately. Evaluated the appropriateness of CDTFA’s process for calculating backfill allocations, reviewed the reasonableness of the data used to support the calculation for fiscal years 2017–18 and 2018–19, and confirmed the accuracy of the calculations for those years. Reviewed the State Controller’s policies and procedures, interviewed staff to determine how it allocates and transfers funds to state agencies, and assessed whether it has appropriate safeguards over this process. Determined the amount of Proposition 56 funds distributed to each state entity for fiscal years 2017–18 and 2018–19.
3	For the state agencies that receive tax revenue, review and assess how each entity ensures that it uses the funds for appropriate purposes, including any oversight over the funds.	Selected Proposition 56‑funded programs administered by Health Care Services, Public Health, UC, Justice, and Education. We assessed each entity’s safeguards over the awarding and monitoring of funds through those programs and, for programs that award funds through a grant process, reviewed a selection of the grants to determine whether the entity followed its control processes. Reviewed whether agencies established secondary reviews for their awarding and monitoring processes to reduce the risk of error or fraud. We found that agencies generally had established such processes. We identified one exception at Health Care Services, but did not identify any funds spent inappropriately as a result of this lack of oversight. Reviewed documents and interviewed staff to determine TEROC’s role in providing guidance and oversight to Education, Public Health, and UC, and evaluated whether it is meeting its obligations related to this role.
4	Determine whether each entity published on its website the appropriate amount of tax revenue it received and how it spent the money in fiscal years 2017–18 and 2018–19	Reviewed the website of each of the selected state agencies as of July 2020 and determined whether the agencies had published information regarding the Proposition 56 revenue they received and spent in fiscal years 2017–18 and 2018–19. Because of the existing exceptions we identified in the course of our review of the agencies’ compliance with these requirements, we did not assess their compliance with the requirement to post this information on the social media outlets they deem appropriate. Identified what information the agencies published and verified whether the amounts they reported were accurate.
5	Determine whether each state entity used the appropriate amount of administrative funds as specified in state law in fiscal years 2017–18 and 2018–19.	Determined the Proposition 56 funds each entity spent on administrative costs during fiscal years 2017–18 and 2018–19 and whether the proportions were less than 5 percent of the total amount they received. Determined whether the selected agencies had established safeguards over their use of Proposition 56 funds for administrative purposes.

Source: Analysis of state law, planning documents, and information and documentation identified in the table column titled Method.

Factors Related to Auditor Independence

Revenue and Taxation Code Section 30130.57(g) required the State Auditor to promulgate regulations to define administrative costs for the purposes of the California Healthcare, Research and Prevention Tobacco Tax Act of 2016. The regulations that define those administrative costs, 2 CCR §§ 61200‑61240, became effective March 14, 2018, and were used, in part, as criteria for this audit. Further, each state entity that receives funds pursuant to the act, including the State Auditor, must comply with the California Healthcare, Research and Prevention Tobacco Tax Act of 2016.

Assessment of Data Reliability

The U.S. Government Accountability Office, whose standards we are statutorily obligated to follow, requires us to assess the sufficiency and appropriateness of computer processed information we use to support our findings, conclusions, and recommendations. In performing this audit, we relied on the following data and systems:

State Controller’s Financial Data

We used data from the State Controller’s Appropriation Control Ledger and Budgetary/Legal Basis Reporting System to determine the amounts of Proposition 56 taxes collected and distributed to state agencies and to determine the amounts of Proposition 56 funds that Health Care Services and Education spent on administrative costs during fiscal years 2017–18 and 2018–19. We assessed the reliability of this information by reviewing the tests of this system’s features and control environment that our office performed as part of the State’s financial audit. We determined that the data were sufficiently reliable for our purposes.

State Agencies Financial Data

We used data from the internal accounting systems of Public Health, UC, and Justice to determine the amounts of Proposition 56 funds each agency spent on administrative costs during fiscal years 2017–18 and 2018–19. To assess the accuracy of these data, we reviewed a selection of expenditures and determined whether the agencies classified them appropriately. To assess the completeness of these data, we reviewed the agencies’ accounting data and determined whether they matched totals in the State Controller’s reporting system. Based on these determinations, we found the data sufficiently reliable to support our audit findings, conclusions, and recommendations for UC, for Justice, and for Public Health for fiscal year 2018–19. Public Health did not demonstrate that its fiscal year 2017–18 data were complete and accurate. Although its financial management branch chief repeatedly asserted that Public Health could provide sufficient detail for the fiscal year 2017–18 data, the detailed information that Public Health provided did not match the totals in the State Controller’s reporting system. The financial management branch chief subsequently indicated that Public Health could provide complete data, but that it could not do so in the immediate future because it needed its resources to address COVID‑19 issues. Because Public Health could not provide certain individual transactions, we could not determine if Public Health had classified them correctly. As a result, we found that the data Public Health provided for fiscal year 2017–18 were not sufficiently reliable for the purposes of this audit.

CDTFA’s Taxable Sales Amount

We used data from a CDTFA report on sales of other tobacco products to determine the dollar amount of those sales in fiscal year 2018–19, and the potential change in tax revenue had the other tobacco products tax rate been different. We compared these data with more current lists of payments from distributors and manufacturers provided by CDTFA and found the lists included more revenue than CDTFA reported. CDTFA explained that this was due to adjustments made after the report was generated. Although this information indicates that the amount of revenue CDTFA collected was higher than it reported and would have increased our estimates of the additional revenue that could have been collected had the tax rate on other tobacco products been higher, we used the more conservative figure from CDTFA’s report. We did not perform further testing of these data and determined that they were of undetermined reliability. Although we recognize that this limitation may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations.

Awardee Locations from Health Care Services’ Loan Repayment Program

We used data from a Health Care Services’ list of physicians’ and dentists’ loan repayment program applications to identify the location of loan repayment program applicants. We verified that the data included logical information, but Health Care Services reported that they do not verify the location data. Therefore, we concluded that the data were of undetermined reliability. Although we recognize that this limitation may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations.

Health Professional Shortage Areas

We used data from the federal Health Resources and Services Administration to determine the locations of health professional shortage areas in California. This federal agency determines which areas should be considered shortage areas and is the sole source of this information. As a result, we did not conduct a data reliability assessment on these data. Although we recognize that this limitation may affect the precision of the information that we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations.

Smoking Rates in California

We used data from Public Health’s Tobacco Facts & Figures 2018 report to determine the smoking rates of adults in California over time. Because these data were used for contextual information and do not materially affect findings, conclusions, or recommendations, we determined that a data reliability assessment was not necessary.

Smoking‑Related Health Care Costs and Deaths

We used data from the federal Centers for Disease Control and Prevention’s state fact sheets to determine the number of smoking‑related deaths in California and the amount of money spent on tobacco‑related health care costs in California. Because these data were used for contextual information and do not materially affect findings, conclusions, or recommendations, we determined that a data reliability assessment was not necessary.