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Proposition 56 Tobacco Tax
State Agencies’ Weak Administration Reduced Revenue by Millions of Dollars and Led to the Improper Use and Inadequate Disclosure of Funds

Report Number: 2019-046

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California Department of Education

Elaine M. Howle, State Auditor
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

Subject:  Proposition 56 Tobacco Tax: State Agencies’ Weak Administration Reduced Revenue by Millions of Dollars and Led to the Improper Use and Inadequate Disclosure of Funds, Report Number 2019-046,
January 5, 2020

Dear Ms. Howle:

The California Department of Education (Education) appreciates the opportunity to provide comments and address the recommendations outlined in the California State Auditor’s (CSA) Audit Report titled, Proposition 56 Tobacco Tax: State Agencies’ Weak Administration Reduced Revenue by Millions of Dollars and Led to the Improper Use and Inadequate Disclosure of Funds.

Recommendation 1

To provide the public with relevant information and ensure the level of accountability that state law intends, each state agency that receives Proposition 56 funds should publish the following information on its website by April 2021 for fiscal years 2017-18 through 2019-20, and within six months of the end of the fiscal year, beginning with the fiscal year 2020-21:

Education’s Comments

①Partially concur. Education published the required data listed above on its web site as it became available each year as follows:

②Education respectfully requests that the CSA revise the draft report, page 40, Table 2, to reflect the April 18, 2019 posting date for the 2017-18 data. Links to the relevant web pages are provided below.

https://www.cde.ca.gov/ls/he/at/tupefunding.asp
https://www.cde.ca.gov/fg/fo/r8/expendreportfy1718.asp
https://www.cde.ca.gov/ls/he/at/tupefunding.asp
https://www.cde.ca.gov/fg/fo/r8/expendreportfy1819.asp

③Education strives to ensure that information posted on its web pages is transparent, accurate, and reliable, which requires final accounting reports. Because the public relies upon the information posted, Education does not believe that posting unreconciled funding information or funding estimates and subsequent corrections would be appropriate, especially since Education was in the process of implementing the new state-wide Financial Information System for California (FI$Cal) system. Going forward, Education anticipates timely posting the fully reconciled Proposition 56 funding information annually.

Recommendation 2

To ensure that it applies sufficient funding to address tobacco-related health disparities, by June 2021, Education should establish a formal procedure for meeting the requirement that it spend at least 15 percent of the Proposition 56 revenues funding its TUPE program to accelerate and to monitor the rate of decline in tobacco-related health disparities.

Education’s Comments

④Concur. Education strengthened existing processes by: 1) creating a Proposition 56 Funding Tree, which is incorporated into the TUPE Office Manual; and 2) establishing and implementing the “Youth Engagement to Address Tobacco Related Health Disparities Grant 2019-2022,” to accelerate and monitor the rate of decline in tobacco-related disparities in California in accordance with Proposition 56.

Recommendation 3

To obtain its full share of the 2017-18 Proposition 56 revenues, Education should negotiate with Finance and Public Health to ensure that it receives the full amount of its proportional share of the 2017-18 Proposition 56 funds.

If you have any questions regarding Education’s comments, please contact Kimberly Tarvin, Director, Audits and Investigations Division, by phone at 916-323-1547 or by email at ktarvin@cde.ca.gov.
Sincerely,

Stephanie Gregson, Ed.D.
Chief Deputy Superintendent of Public Instruction

COMMENTS

CALIFORNIA STATE AUDITOR'S COMMENTS ON THE RESPONSE FROM EDUCATION

To provide clarity and perspective, we are commenting on the response to our audit report from Education. The numbers below correspond to the numbers we placed in the margin of Education’s response.

①Our research indicated that Education had published this information by July 2019. Although we discussed this information with Education during the audit, it did not indicate that the date was incorrect. Based on the additional documentation that Education provided in its response, we have revised Table 2 for fiscal year 2017–18 to reflect the April 2019 date.

②During the publication process for the audit report, page numbers shifted. Therefore, the page number cited by Education in its response does not correspond to the page numbers in the final published audit report.

③Education’s response does not adequately address our concern that it does not publish information in a timely manner. Specifically, delaying its reporting until it has fully reconciled its accounting for the year may result in significant delays in presenting required financial information to the public. As we state here, Education limits the public’s ability to monitor its spending of Proposition 56 funds and reduces the relevance of the information it ultimately provides by not publishing this information in a timely manner. Therefore, we stand by our recommendation that Education provide required information within six months of the close of the fiscal year and make any subsequent corrections to this information if necessary.

④Education does not appear to fully understand our finding and recommendation. Education stated that it anticipates Finance will transfer Education’s unspent 2017–18 funds by the Spring of 2021. However, as we state here, even if the Department of Finance restores authority to spend the full amount of the funds remaining, there are insufficient funds in the account for Education to spend its proportional share of Proposition 56 funds for fiscal year 2017–18. Thus, we recommended that Education negotiate with Finance and Public Health—which spent more than its proportional share—to ensure that it receives the full amount established by the proposition.

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California Department of Tax and Fee Administration

December 11, 2020

Elaine M. Howle, State Auditor
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

Re:     Response to California State Auditor’s Draft Report: Proposition 56 Tobacco Tax-- Report 2019-046

The California Department of Tax and Fee Administration (CDTFA) appreciates the work of the California State Auditor (CSA) team. CDTFA administers the cigarette and tobacco product tax program, which generates more than $2 billion in annual revenue, with approximately $1.4 billion generated by Proposition 56, and we are committed to fulfilling our obligations as accurately and efficiently as possible. To that end, CDTFA will review and implement the CSA recommendations. Indeed, as our detailed response makes clear, we have already implemented a number of the recommended changes. As we have expressed to the CSA audit team, however, CDTFA believes that the audit report makes a number of assumptions regarding revenue and disclosure requirements that require additional context.   

①With regard to the analysis of the Other Tobacco Products (OTP) mark-up rate, CDTFA is concerned that the CSA’s assumptions regarding impact to revenue are premature and may be inaccurate. The audit report asserts that the Department under collected tobacco taxes because a component used in the OTP rate calculation, specifically the wholesale mark-up rate, is inaccurate.  The CSA report asserts that, “information from a variety of sources suggests that the markup is actually between 2 percent and 4 percent,” versus the 6% that CDTFA has used since the rate was set by the Board of Equalization.  While CDTFA agrees that the rate components should be reviewed and adjusted on a routine basis, until we complete a thorough market analysis, we believe that any discussion of impact to revenue is speculative. For reference, the mark-up rates used by a number of other states, including New Jersey, Delaware, Montana, Hawaii and Maryland, are all higher than the 4% rate that CSA asserts is the upper end of the range based on their preliminary review. As recommended, the Department will review and adjust, as appropriate, the mark-up rate at least every three years.

②     ③ Regarding the CSA review of CDTFA’s data disclosure practices, CDTFA believes that the department has fulfilled all required disclosure requirements.  Proposition 56 states that each department, “shall, on an annual basis, publish on its respective Internet Web site an accounting of how much money was received from the California Healthcare, Research and Prevention Tobacco Tax Act of 2016 Fund and how that money was spent.” As required, the department has annually published its Proposition 56 expenditures, which equal the amount of funds received, both on our online date portal and in our annual report, which is freely available online. Additionally, the data is available along with all of our tax and fee data through our open data portal.  CSA’s assertion that the standard Terms of Use agreement for our open data portal brings the department out of compliance seems to us at odds with the plain language of the disclosure requirement quoted above and appears to overlook that the information is also available in our annual report without any Terms of Use agreement. While CDTFA believes it has fulfilled the requirement, the Department has already implemented the CSA’s recommendation by: a) removing the Terms of Use Agreement from our Open Data Portal, and b) adding a separate webpage specifically for Proposition 56 funding.

Below are our responses to each of the specific items in the CSA audit report.
The State Could Have Collected Millions in Additional Revenue Had CDTFA Used More Accurate Information in Its Tax Rate Calculation

    1. CDTFA Excluded the Prices of Discount and Deep-Discount Cigarettes When Calculating the Average Manufacturer Wholesale Price

      2. CDTFA Response:

      ④      ⑤      ⑥      ⑦      ⑧ CDTFA uses the premium brand cigarette prices in calculating the tobacco product tax rate since it represents the vast majority of the cigarette market and is based on published industry data rather than multiple estimates. CDTFA believes this methodology produces a substantially accurate calculation of the tax equivalent to a cigarette in the most fair, consistent, reliable, and defensible manner. CDTFA is unable to validate the reliability, and impartiality, of the market share data source CSA used to calculate the tobacco product tax rate which was then used to estimate the potential revenue loss noted in the report. Also, CSA criticized (on page 22 of report) CDTFA for using various sources to support a six percent mark-up rate as reasonable. However, CSA appears to have also combined data and information from multiple sources when calculating the cigarette prices and market share. Also, it is important to note that there is no standard definition of what constitutes a premium brand cigarette and a discount brand cigarette. Various sources categorize brands differently. CDTFA will conduct industry research and procure, where available, the necessary subscriptions to identify market share, brand categorization and pricing to determine the impact that including discount cigarette prices has on the tobacco products tax rate. It is premature to estimate the actual revenue impact from including the discount cigarette prices.

    2. CDTFA’s Use of an Arbitrary Figure for the Wholesale Markup Rate Further Reduced Tax Revenue From Other Tobacco Products

CDTFA Response:

⑨     ⑩CDTFA provided information that the 6 percent wholesale mark-up was set by the Board of Equalization in 1988 and reviewed again in 2009 with the approval of the tobacco product tax rate calculation. CDTFA researched the cigarette manufacturers’ mark-up rate and determined that the mark-up still appears reasonable based on various data sources and studies. The studies reviewed did show other states, including Delaware, Hawaii, Maryland, Montana, and New Jersey, have similar mark-up rates ranging between 5 and 6 percent (see Tobacconomics 2015).  While the mark-up is on the high end of the range, California is certainly not alone in using a mark-up above the 4%, which CSA cites as the upper end of the acceptable range. CDTFA will at least every 3 years conduct a review of the markup rate, beginning March 2021 as directed, to ensure it is representative of our California industry and adjust as appropriate.  It should be noted that, while the audit presumes the rate will decrease and associates under collected revenue with this assumption, the rate and its revenue impact cannot be definitively known until detailed research is performed. Such research may, in fact, support a mark-up rate of 6 percent or higher.

Most State Agencies Did Not Meet the Reporting Requirements to Publish Information on the Proposition 56 Funds They Received and Used

    1. Required Reporting by CDTFA

CDTFA Response:

⑪     ②     ③CDTFA uses its Annual Report to display all revenue and costs for all programs administered by the department, including Proposition 56 revenue and expenditures. This Annual Report is available on our website and does not require a terms of use agreement. Additionally, we posted more detailed Proposition 56 revenue and expenditure by fund information in our data portal, which did require a standard terms of use agreement. It should be noted that CDTFA is unaware of any concerns ever being expressed from the public or any stakeholder regarding the accessibility or clarity of the data at issue. While CDTFA believes it has fulfilled the disclosure requirement, we have made the information more accessible by 1) removing the terms of use agreement from our data portal and 2) creating a webpage specifically for the Proposition 56 funds. 

Sincerely,

Nick Maduros
Director, CDTFA

 

COMMENTS

CALIFORNIA STATE AUDITOR'S COMMENTS ON THE RESPONSE FROM CDTFA

To provide clarity and perspective, we are commenting on the response to our audit report from CDTFA. The numbers below correspond to the numbers we placed in the margin of CDTFA’s response.

①We stand by our analysis and conclusions regarding the markup rate. The information we reviewed from a variety of sources consistently indicated that the current markup rate is between 2 and 4 percent. In addition, as we state here, a 2020 tobacco industry analysis reported that wholesale markup rates have decreased considerably, and projected an average markup rate of slightly more than 2 percent. Finally, notwithstanding the higher rates CDTFA describes for several states from the Merchant’s Association’s data, as of July 1, 2020, the average markup rate for the 23 states included in the data is less than four percent and no state has a markup rate of six percent or more.  

②      ②CDTFA’s reference to its annual report lacks context. As we describe here, CDTFA placed the relevant information in a footnote in the middle of its 95-page report. Further, CDTFA presented only its expenditure amounts. By placing the information in such an obscure location, and providing no other indication to the public of where it could find this information, CDTFA failed to meet the law’s intent for agencies to provide public accountability of their use of Proposition 56 funds.

③      ③As we state here, we believe CDTFA’s terms of use agreement represents a barrier to the public’s access to information about the Proposition 56 funds it received and how those funds were used. The information is not published if a person has to enter into a legal agreement before being granted access to the information. Therefore we stand by our assertion that CDTFA did not publish this information.

④CDTFA’s assertion that its calculation is substantially accurate is mistaken. As we describe here, by using information for premium, discount, and deep discount cigarettes, CDTFA could have increased tobacco tax revenue by $1.3 million. These funds would be used for programs that support the health of Californians.

⑤CDTFA’s questions about the reliability and impartiality of the market share data we used are unfounded. The information we used came from a credible independent industry analysis report we identify here. We provided this information to CDTFA during the audit. Thus, it is not clear why it was unable to validate the reliability and impartiality of this data. Moreover, CDTFA did not inform us of any other sources of better data.

⑥During the publication process for the audit report, page numbers shifted. Therefore, the page number cited by CDTFA in its response does not correspond to the page numbers in the final published audit report.

⑦CDTFA’s concern that we used data from multiple sources is misplaced. As we describe here, we multiplied prices related to each brand of cigarettes by the number of cigarettes those brands sold. In contrast, CDTFA illogically combined information from incompatible sources. As we state here, one piece of information that CDTFA used relates solely to cigarettes, while another piece is related to cigarettes, other tobacco, and nontobacco products. Thus, we stand by our calculation, and our assertion that CDTFA’s analysis is flawed.

⑧CDTFA’s reference to different definitions of premium and discount classes of cigarette brands is puzzling. While different sources may classify brands in different ways, our analysis is based solely on the classifications established by the Merchant’s Association, the same source that CDTFA uses in its calculation, as we report here.

⑨The documentation CDTFA provided to us regarding the 6 percent markup rate did not indicate its source or how it was derived. As we describe here, although CDTFA provided documentation that the 6 percent wholesale markup rate it uses was adopted in a public meeting in 2009, CDTFA could not provide evidence or a rationale for how it arrived at this determination.

⑩The “Tobacconomics” report that CDTFA refers to does not support its assertions. As described in the text box, this report from the University of Illinois at Chicago is entitled Tobacco Products Pricing Laws: A State‑by‑State Analysis, 2015. It shows that 25 states applied a statutory markup rate ranging from 2 percent to 6 percent with an average markup rate of 3.7 percent. Although that report indicates that several states had rates as high as 5 and 6 percent, CDTFA has not provided any evidence supporting why California’s markup rate should equal that of the highest rate listed in the report. Thus, based on the variety of sources we reviewed, we stand by our assertion that the current markup rate is between 2 and 4 percent.

⑪CDTFA has misrepresented the nature of the information it included in its annual report. Although it stated that the annual report included both Proposition 56 revenues and expenditures, as we describe here, CDTFA included only its Proposition 56 expenditures. Further, it placed this information in a footnote in the middle of the 95-page report. CDTFA provided no indication to the public that it could find the information in the report. Thus, its method of publishing this information does not meet reporting requirements.

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Department of Health Care Services

December 11, 2020

Elaine M. Howle
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

DRAFT REPORT RESPONSE

Dear Ms. Howle:

The California Department of Health Care Services (DHCS) is submitting the enclosed response to the California State Auditor’s (CSA) draft audit report titled, “Proposition 56 Tobacco Tax: State Agencies’ Weak Administration Reduced Revenue by Millions of Dollars and Led to the Improper Use and Inadequate Disclosure of Funds.” CSA issued four recommendations for DHCS.

With the exception of Recommendation No. 3 of Finding No. 2, DHCS agrees with all of CSA’s recommendations and has prepared corrective action plans for implementation.

DHCS appreciates the work performed by CSA and the opportunity to respond to the draft audit report. If you have any other questions, please contact Internal Audits at (916) 445-0759.

Sincerely,

Will Lightbourne
Director

 

Finding 1: Most State Agencies Did Not Meet the Reporting Requirements to Publish Information on the Proposition 56 Funds They Received and Used

Recommendation 1
To provide the public with relevant information and ensure the level of accountability that state law intends, each state entity that receives Proposition 56 funds should publish the following information on its website by April 2021 for fiscal years 2017-18 through 2019-20, and within six months of the end of each fiscal year, beginning with fiscal year 2020-21:

DHCS Agreement: DHCS agrees with the finding.

Current Status: Will Implement

Estimated Implementation Date: February 28, 2021

Implementation Plan:
DHCS has developed a webpage for the Prop 56 programs that include a website for the funds received by each program administered. Additionally, the webpage shows the amount of funds spent by the program. We will update the internet financial information to include the data elements noted in the audit finding which includes funds obligated for future expenditures by program. Any corrections to the financial information reported by DHCS for previous fiscal years, will be reflected in the current year as this fund operates on a cash basis.

 

Finding 2: Some State Agencies Have Not Established Adequate Controls Over Their Distribution of Proposition 56 Funds

Recommendation 2
To ensure that the State benefits from its use of Proposition 56 funds, Department of Health Care Services (DHCS) should, by June 2021, implement a policy to establish formal processes for granting all funds, regardless of whether a program receives a one-time allocation or is ongoing. The policy should require sufficient criteria to ensure that the funds awarded provide the benefit intended by the program.

DHCS Agreement: DHCS agrees with the recommendation

Current Status: Will Implement

Estimated Implementation Date: June 30, 2021

Implementation Plan:
DHCS will develop a policy to evaluate the process for granting Proposition 56 funds, whether the funding appropriation is one-time or ongoing. This policy will specify categories of qualifying criteria for granting funds that align with the stated intent of the funding and the purpose of the program. Upon implementation, the policy will be used to evaluate future requests for available Proposition 56 funding and make final determinations of funding allocations.

Recommendation 3
To ensure it awards funds to applicants who help address the need for providers in health professional shortage areas (HPSA), Health Care Services should amend its application selection process to require, by June 2021, that all participants practice in geographic areas that have shortages of such health care professionals, and annually verify that participants continue to practice in such areas.

DHCS Agreement: DHCS disagrees with the recommendation

Current Status: Will Not Implement

Estimated Implementation Date: Will Not Implement

Implementation Plan:

①     ②     ③     ④As written, the statute requires only that DHCS prioritize, among other things, limiting geographic shortages of services. The current methods employed by DHCS accomplish this goal, and elevating the priority of a consideration for geographic shortage areas may eliminate awards to qualified providers outside a geographic shortage area who, for example, significantly increase their caseload or speak another language which ensures more timely access or a heightened quality of care for certain beneficiaries. As such, DHCS disagrees with the recommendation to further emphasize or make limiting geographic shortages a program requirement. Furthermore, when available, DHCS incorporates an applicant’s HPSA score which assigns additional points to physicians/dentists who practice in identified areas with a shortage. Unfortunately, HPSA has not developed a scoring criteria for specialists, which may account for a portion of the disparities identified in the report. Perhaps most notably, an overwhelming majority of Medi-Cal beneficiaries are enrolled in a Managed Care Plan. As such, the program’s award process was amended during Cohort 2 (not reviewed during this audit) to include consideration for the approved alternative access standards applied to Medi-Cal Managed Care Plans which weighs geographic shortages within the applicable funding decisions.

Recommendation 4
To ensure participants are serving the agreed upon Medi-Cal patient caseloads, Health Care Services should finish its formal process, by June 2021, to verify the caseload percentage that participants self-report.

DHCS Agreement: DHCS agrees with the recommendation

Current Status: Will Implement

Estimated Implementation Date: December 2020

Implementation Plan:
DHCS will finalize the formal process with our contractor for reviewing the Annual Review documentation submitted by awardees for each cohort to ensure compliance with program requirements including caseload percentage.

COMMENTS

CALIFORNIA STATE AUDITOR'S COMMENTS ON THE RESPONSE FROM Health Care services

To provide clarity and perspective, we are commenting on the response to our audit report from Health Care Services. The numbers below correspond to the numbers we placed in the margin of Health Care Services’ response.

①Health Care Services’ suggestion that its awarding of funds has prioritized limiting geographic shortages is not supported by the information we reviewed. As we state here, out of 117 primary care physicians that were awarded funds, 79 were not in areas with geographic shortages. Thus, the majority of participants did not address this priority. Further, requiring that applicants be located in a geographic area with a provider shortage would not preclude Health Care Services from taking other factors into consideration. Health Care Services already uses a similar requirement for provider caseloads. As we describe here, Health Care Services requires participants to maintain a caseload of 30 percent or more Medi-Cal patients. Health Care Services could, similarly, require that applicants be located in geographic areas with provider shortages, and award additional points to those applicants that exhibit the other characteristics that Health Care Services intends to prioritize.  Given the significant dollar amount of funds awarded to these individuals and the need for Medi-Cal providers in certain geographic areas, we stand by our recommendation that Health Care Services should amend its application selection process to require that all participants practice in geographic areas that have shortages of health care professionals.

②Health Care Services’ suggestion that its use of applicants’ Health Professional Shortage Area (HPSA) score addresses the need to prioritize participants in areas with geographic shortages is misleading. As we describe here, Health Care Services’ scoring method assigned only 11 percent of the poi nts for being located in an area with a shortage of health care providers. As a result, the applicants’ HPSA scores had a relatively small effect on their selection. Furthermore, as we state here, Health Care Services denied applications of 104 primary care physicians working in areas with shortages of health care providers while granting funds to 79 physicians who were not in such areas.

③Health Care Services’ suggestion that specialists account for the discrepancies we identified in the report is misleading. Our description of Department of Health Care Services’ failure to award funds to applicants in health professional shortage areas is specific to primary care physicians. Similarly, Figure 8 is related solely to primary care physicians. We discuss Health Care Services selection of physician specialists separately here. Specifically, it selected 121 physician specialists for the loan repayment program, agreeing to repay a total of $28.4 million of their students loans. However, Health Care Services’ selection process did not assess whether these specialists would address shortages.

④As Health Care Services notes, we did not review its process for awarding funds in Cohort 2, as it occurred in 2020, after the period that we reviewed. We discussed the updated process with Health Care Services staff during the audit; however, at that time it had not finalized its updated procedures for awarding funds.

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California Department of Justice

December 11, 2020

Elaine M. Howle, CPA
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

Re: Report 2019-046 State Auditor’s Report on Proposition 56 Tobacco Tax

Dear Ms. Howle:

The California Department of Justice (DOJ) has reviewed the California State Auditor’s (CSA) draft report titled “Proposition 56 Tobacco Tax” and appreciates the opportunity to respond to the report. 

①     ②     ③In response to the enactment of Proposition 56 in November 2016, the DOJ implemented a tobacco grant program for local law enforcement agencies. This program operates pursuant to Section 30130.57(e) of the Revenue and Tax Code, which allocates $48 million annually to support tobacco-related law enforcement efforts, including $30 million to be distributed by the DOJ to local law enforcement agencies. Funds distributed to local law enforcement agencies are to be used to support and hire peace officers for programs that include enforcement of state and local laws related to illegal sales and marketing of tobacco to minors, and investigative activities and compliance checks to reduce illegal tobacco sales to minors. Consistent with this statutory mandate, the DOJ awarded grants to local law enforcement agencies through a competitive grant application process. Prospective applicants were notified that grant funds could be used only for authorized purposes and could not be used to supplant other sources of funding for the same purposes. Grant applications were subjected to a multi-step internal review. This process included a review to determine whether the activities for which grant funds were requested were eligible for funding; applications that sought funding for activities deemed not authorized by statute were denied. Beginning with fiscal year (FY) 2018-19, for grant reimbursements, processes have also been in place to monitor that the grant activities were consistent with approved awards.  Claims against each respective approved grant were only reimbursed if the expenses were allowable, chargeable to the grant, and substantiated with source documents, such as time records and invoices.  In July 2019, these grant monitoring policies and procedures were documented and formalized.

④     ⑤The Proposition 56 Tobacco Tax Report faults the DOJ for making grant awards to local law enforcement agencies that have included funding for tobacco-related education and training as well as for failing to make grant awards to enforce tobacco tax laws. The report states that educationalactivities do not qualify as law enforcement activities that can be funded with Proposition 65 grant monies, while tax evasion enforcement efforts do. The DOJ respectfully disagrees with this interpretation. Public education materials and training efforts by law enforcement agencies qualify for DOJ grant funding because theyaid in preventing illegal tobacco sales to minors in much the same way that compliance checks of retailers can help prevent such sales. In other words, education isa permissible component of a DOJ grant funded law enforcement program related to illegal sales and marketing of tobacco to minors. Activities to enforce tobacco tax laws, rather, do not qualify for DOJ grant funding because they are unlikely to prevent or detect illegal sales and marketing to minors.

In response to the CSA’s specific recommendations identified in the draft report, DOJ submits the following responses:

Finding 1

To ensure that it awards Proposition 56 funding in accordance with the requirements in state law, Justice should implement a formal grant application review process by June 2021 that ensures it does not award Proposition 56 funds for purposes—such as education and outreach—that are not described in the law governing its use of funds.

DOJ Response:

DOJ views that new and supplemental education and outreach activities are permissible components of a law enforcement program related to illegal sales and marketing of tobacco to minors. As previously mentioned, these efforts by law enforcement agencies can help prevent illegal tobacco sales to minors in much the same way that compliance checks of retailers can help prevent such sales.

Since the inception of the Tobacco Tax Program, DOJ established a process that consistently affords the following:

These actions will be documented as DOJ’s formal grant application review process.  

Finding 2

To provide the public with relevant information and ensure the level of accountability that state law intends, each state entity that receives Proposition 56 funds should publish the following information on its website by April 2021 for FY 2017-18 through 2019-20, and within six months of the end of each fiscal year, beginning with FY 2020-21:
•           The amount of Proposition 56 funds received by each program it administers.
•           The amount of Proposition 56 funds spent by each program it administers.
•           The amount of Proposition 56 funds obligated for future expenditures by each program it administers.
•           Any corrections to the information it reported in previous fiscal years.

DOJ Response:

Once the grant had been announced for the above-mentioned grant period, the amount available was published on the DOJ website.  In addition, once awarded, grantees and a brief description of their awards were published on the DOJ website.  In June 2020, DOJ  also  summarized and published  the funds received, spent, and obligated for FY 2017-18 and FY 2018-19.  A summary of FY 2019-20 grant fund activities will be published on the DOJ website by April 2021. 

Sincerely,

                                                                       
SEAN E. McCLUSKIE
Chief Deputy to the Attorney General

COMMENTS

CALIFORNIA STATE AUDITOR'S COMMENTS ON THE RESPONSE FROM Justice

To provide clarity and perspective, we are commenting on the response to our audit report from Justice. The numbers below correspond to the numbers we placed in the margin of Justice’s response.

①Justice’s description of the legal requirements for its awarding of its Proposition 56 law enforcement funds is misleading. Justice states that funds are to be used “for programs that include enforcement of state and local laws,” implying that other activities are allowable even if they are not for such law enforcement efforts. However, as we indicate here, state law does not specify other allowable purposes for these funds.

②Justice’s suggestion that the grants it awarded were consistent with the law’s mandate is misleading. As we indicate here, most of its grants that we reviewed were used for projects that included activities that did not align with the requirements in law, such as one grant that included funding for tobacco and nicotine education programs.

③Justice’s description of the process it had in place for monitoring the use of grant funds misrepresents when these processes were instituted. Although Justice asserts that it monitored whether expenses were allowable for grant reimbursements during fiscal year 2018–19, it did not create its formal guidance for monitoring how grantees spent Proposition 56 funds until after fiscal year 2018–19. As we state here, this was more than a year after it awarded some of the grants that we reviewed.

④Notwithstanding Justice’s statement, we stand by our conclusion that its use of these funds was incorrect. Although educating law enforcement officers on how to enforce the law is an allowable use, Justice awarded funds for providing tobacco education in schools and providing tobacco cessation programs. While these efforts may encourage minors to stop using tobacco and nicotine products, they do not constitute law enforcement efforts. As we describe here, Proposition 56 allocates funds to Education for school programs to reduce and prevent the use of tobacco and nicotine products by young people, but it requires the funds allocated to Justice to be used for law enforcement efforts.

⑤Justice incorrectly asserts that grant funds cannot be used for activities to enforce tobacco tax laws, and suggests that allowable activities are limited to those focused on detecting and preventing sales to minors. As we state here, state law prioritizes law enforcement efforts to prevent sales to minors; however, it does not limit Justice’s law enforcement efforts to only preventing illegal sales to minors. Further, Justice did not provide any evidence to support its assertion that activities to enforce tobacco tax laws are unlikely to prevent or detect illegal sales to minors.

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California Department of Public Health

December 11, 2020

Elaine Howle
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

Dear Ms. Howle:

The California Department of Public Health (Public Health) has reviewed the California State Auditor’s draft audit report titled “Proposition 56 Tobacco Tax: State Agencies’ Weak Administration Reduced Revenue by Millions of Dollars and Led to the Improper Use and Inadequate Disclosure of Funds.”  Public Health appreciates the opportunity to respond to the report and provide our assessment of the recommendations contained therein.

Below we reiterate the audit findings pertaining to Public Health and our response to the auditor’s specific recommendations.

Finding: “Most State Agencies Did Not Meet the Reporting Requirements to Publish Information on the Proposition 56 Funds They Received and Used.”

Recommendation to Public Health:
To provide the public with relevant information and ensure the level of accountability that state law intends, each state entity that receives Proposition 56 funds should publish the following information on its website by April 2021 for fiscal year 2017-18 through 2019-20, and within six months of the end of each fiscal year, beginning with fiscal year 2020-21:

  1. The amount of Proposition 56 funds received by each program it administers.
  2. The amount of Proposition 56 funds spent by each program it administers.
  3. The amount of Proposition 56 funds obligated for future expenditures by each program it administers.
  4. Any corrections to the information it reported in previous fiscal years.

Management Response:

①Public Health partially agrees with this recommendation. In response to parts (a) and (b), as soon as available, the California Tobacco Control Program (CTCP), the Office of

Oral Health (OOH), and the Stop Tobacco Access to Kids Enforcement Act (STAKE) Program (who are recipients of Proposition 56 funds) will each post on its program website a link to the Department of Finance Fund Condition Statements that detail the current year appropriation and prior year expenditures.  These statements are typically available by the January 10th release of the state’s budget.

②In response to (c) and (d), pursuant to Revenue & Taxation Code section 30130.56(c), “Each state agency and department receiving funds pursuant to this act shall, on an annual basis, publish…an accounting of how much money was received…and how that money was spent.”  Thus, Public Health is not required to publish future obligated expenditures or corrections from the previous year.

Finding: “Some State Agencies Lack Processes to Ensure That They Spend or Award Proposition 56 Grants for the Purposes Established in Law.”

Recommendation to Public Health:
To ensure that it applies sufficient funding to address tobacco-related health disparities, by June 2021, Public Health should establish a formal procedure for meeting the requirement that it award at least 15 percent of the Proposition 56 revenues funding its Tobacco Control Program to accelerate and monitor the rate of decline in tobacco-related health disparities.

Management Response:
Public Health agrees with this recommendation. To demonstrate that at least 15 percent of the Proposition 56 revenues appropriated to its Tobacco Control Program are awardedto accelerateand to monitor the rate of decline in tobacco-related disparities, Public Health will take the following actions: 

  1. By January 1, 2021, consistent with its existing business practice of awarding a minimum of 15 percent of its Proposition 56 funds toward accelerating and monitoring the rate of decline in tobacco-related disparities, CTCP will create a formal procedure, which will be incorporated into its Solicitation Manual, Chapter 1 Pre-Planning.
  2. CTCP annually releases a Tobacco Facts and Figures report that summarizes California tobacco-related data. A section will be added to this annual report that clearly describes efforts to monitor the rate of decline in tobacco-related disparities and the progress made.
  3. The CTCP Story of Inequity website tracks 22 tobacco-related disparity measures for eight population groups disproportionately burdened by tobacco-related disparities. To improve awareness and access to this website, by January 1, 2021, the link to the Story of Inequity website will be added to the Data Section of Public Health’s California Tobacco Control Branch website.

Finding: “Management of Administrative Costs”

Recommendation to Public Health:
To reduce the risk of exceeding Proposition 56’s limit on the use of funds for administrative costs, Public Health should, by June 2021, develop and implement a procedure for verifying that its administrative costs for its Proposition 56-funded programs do not exceed 5 percent.

Management Response:

③Public Health agrees with the recommendation and will take the following actions: CTCP, OOH, and the STAKE programs will review available financial data monthly in order to monitor administrative spending. The Financial Management Branch will provide program KK reports (detailed accounting data) monthly and pivot tables that identify the administrative costs to date. Identified administrative cost discrepancies will be resolved as part of the monthly review.

We appreciate the opportunity to respond to the audit.  If you have any questions, please contact Monica Vazquez, Chief, Office of Compliance, at (916) 306-2251.

Sandra Shewry, MPH, MSW
Acting Director

COMMENTS

CALIFORNIA STATE AUDITOR'S COMMENTS ON THE RESPONSE FROM Public Health

To provide clarity and perspective, we are commenting on the response to our audit report from Public Health. The numbers below correspond to the numbers we placed in the margin of Public Health’s response.

①The course of action Public Health intends to take does not comply with the requirements of Proposition 56. Proposition 56 requires each agency receiving funds to publish on its own website an accounting of how much money was received and how that money was spent.  Public Health’s plan imposes a burden on the public to access Finance’s website and identify the fund related to Proposition 56 among more than 30 other tobacco tax related funds. As a result, we stand by our recommendation that Public Health should post the relevant information on its own website, as required by law.

②Public Health is correct that the law does not specifically require that state agencies publish the amount of Proposition 56 funds obligated for future expenditures or corrections to information they previously published. However, the amount of funds obligated is necessary information for understanding how funds are being used when state agencies do not spend the entire amount that they receive. Further, as we describe here, state agencies stated that they could not publish information timely for a number of different reasons, including waiting for the State’s accounting system to close. Thus, to ensure that the public receives information when it may be of use to them, we recommend that state agencies publish preliminary information. If state agencies use preliminary information, it may be necessary to correct that information once it has been finalized. For these reasons, we stand by our recommendation that Public Health should publish this information.

③Public Health did not indicate whether it intends to implement a key aspect of our recommendation. Specifically, in addition to performing a calculation to verify that its administrative costs do not exceed 5 percent, Public Health should develop and implement a written procedure to ensure that it continues to do so in the future. As we state here, in the absence of such procedures, Public Health risks exceeding the allowed amount of administrative costs in the future.

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Tobacco Education and Research Oversight Committee

December 11, 2020

Attn: Ms. Elaine Howle
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

Re: Response to Recommendations from the California State Auditor for Audit 2019-046

Dear Ms. Howle,

The Tobacco Education and Research Oversight Committee (TEROC) would like to thank the California State Auditors for providing conclusions and recommendations based on an audit of TEROC and Proposition 56 as required by Revenue and Taxation Code Sections 30130.56 (a) and (b).

TEROC is a legislatively mandated oversight committee that monitors the use of Proposition 99 and Proposition 56 tobacco tax revenues for tobacco control, prevention education, and tobacco-related research in California.1,2 TEROC advises the California Department of Public Health California Tobacco Control Program (CTCP); the University of California (UC); and the California Department of Education (CDE) with respect to policy development, integration, and evaluation of tobacco education programs funded by Proposition 99 and Proposition 56.

TEROC appreciates the opportunity to respond to the two recommendations included in the audit findings.

  1. State law directs TEROC to evaluate the use of tobacco tax funds by Public Health, Education, and the University of California and requires TEROC to provide an annual report to the Legislature (Health and Safety Code Section 104370 (d)). The audit report recommends: “To ensure that the Legislature has the knowledge necessary to make informed decisions about tobacco tax-funded programs, TEROC should produce the annual report each year, as state law requires.”

    2. In order to comply with state law, TEROC will provide an annual report to the Legislature by December 31 of each year that includes information on: a) the number and amount of programs funded by  Proposition 99 and Proposition 56 through CTCP, CDE and the UC; b) the funds appropriated, funds expended, and any unspent balance for CTCP, CDE and the UC; c) a description and assessment of certain programs funded by Propositions 99 and 56; and d) recommendations for necessary policy changes or improvements for tobacco education programs.

    ① Although TEROC does not currently produce a single report annually, it does collect most of the data required by law and makes this information publicly available throughout each year. TEROC provides the Legislature with information on a regular basis through letters that TEROC members vote to write at each quarterly meeting. The financial information required by law is also publicly available from the annual reports produced by the Department of Finance and already included in public meeting information. Finally, meeting minutes from each quarterly meeting are public information and includes the recommendations and assessment information about the programs. In the future, this information will be compiled into a single report and submitted annually to the Legislature.

  2. State law requires TEROC to produce comprehensive master plan for implementing tobacco-related programs administered by Public Health, Education, and the University of California biennially and submit it to the Legislature (Health and Safety Code Section 104370 (f)). The audit report recommends: “To ensure it is meeting the Legislature’s expectations, TEROC should either provide the master plan to the Legislature every two years, as state law requires, or seek legislative change to reduce the frequency with which it is required to produce the master plan.”

②To comply with state law, TEROC will produce and submit its master plan to the Legislature by January 31 biennially so that subsequent master plans will cover two calendar years. TEROC had previously interpreted for over 20 years that it met the biennial requirement with reports covering fiscal years, e.g., 1995-19973. As this interpretation has not been raised as a concern by the Legislature, TEROC has not undertaken any changes in its master plan timeframe, particularly in light of diminishing Proposition 99 funds each year (as a result of decreased tobacco use) and the current process for developing a master plan, which requires significant funds and time commitments from both TEROC members and staff from the California Tobacco Control Program. In order to comply with the two-year requirement in state law and resolve any confusion, TEROC will provide subsequent master plans that cover two calendar years. TEROC will budget funds provided by Proposition 56 in order to compensate for the depletion of Proposition 99 funds available for master plan development. TEROC will also modify the process for writing and disseminating the plan to make the current process less cumbersome on TEROC members and staff.

We appreciate the opportunity provided by the audit conducted by the California State Auditor to improve the legislative reporting processes conducted by TEROC, and to ensure that California’s tobacco control program continues to lead the nation and the world in tobacco control. Since the passage of Proposition 56 in 2016, California has reduced its cigarette use prevalence rate from 11.9 percent in 2016 to 6.9 percent in 2019 based on data from the California Health Interview Survey. We believe that California’s tobacco control programs are critical to this success, and we expect that in future years that California can do even better.

Sincerely,

Michael K. Ong, M.D., PhD.
Chairperson

COMMENTS

CALIFORNIA STATE AUDITOR'S COMMENTS ON THE RESPONSE FROM TEROC

To provide clarity and perspective, we are commenting on the response to our audit report from TEROC. The numbers below correspond to the numbers we placed in the margin of TEROC’s response.

①TEROC’s statement that it provides most of the information it is required to publish each year is an overstatement. As we state here, it does not provide the required financial information for Proposition 56 funds, and the recommendations TEROC has provided do not constitute an annual description and assessment of certain programs funded by Propositions 99 and 56, as the law requires. Further, the Legislature should not be required to examine various documents, as suggested by TEROC, to obtain the information TEROC is required to provide. However, we are pleased to see that TEROC intends to compile all pertinent information into a single report and will submit that report annually to the Legislature.

②TEROC did not meet the requirement to produce a biennial report. As we describe here, it published the master plans once every three years, rather than every two years as required by state law.

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University of California

December 11, 2020

Ms. Elaine M. Howle
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, California  95814

Dear State Auditor Howle:

Thank you for the opportunity to review and respond to the draft audit report on Proposition 56 tobacco tax. Below is the University’s response to the recommendation in the report directed to the University of California Office of the President (UCOP).

  1. To provide the public with relevant information and ensure the level of accountability that state law intends, each state entity that receives Proposition 56 funds should publish the following information on its website by April 2021 for fiscal years 2017-2018 through 2019-20, and within six months of the end of each fiscal year, beginning with fiscal year 2020-21:

We agree with this recommendation and will update our UCOP websites to include this additional information for fiscal years 2017-2018 and 2018-2019 by April 2021.  We will publish this information for fiscal year 2020-2021 by the end of December 2021, and for each fiscal year thereafter, within six months of the end of each fiscal year.

We appreciate your team’s professionalism and cooperation during the audit process, and we look forward to implementing the report’s recommendations.

Sincerely,

Michael V. Drake, M.D.
President

 

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