Report 2013-601 Summary - September 2013

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


In our assessment of the high-risk issues facing the State, we identified the 2011 realignment of funding and responsibility for criminal justice and social services programs between the State and local governments as a new area of high risk.

We found the following in regards to issues we previously identified as posing a high risk to the State:

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


Providing leadership, programs, and critical services to the people of California is a complex endeavor that encompasses the use of significant resources and is accompanied by inherent risks. A process for identifying and addressing the high-risk issues facing the State can help focus the State's resources on improving service delivery and contribute to enhanced efficiency and effectiveness. Legislation effective in January 2005 authorizes the California State Auditor to develop such a risk assessment process. We issued our initial assessment of high-risk issues in May 2007 (Report 2006 601), and we updated those issues and identified new issues in June 2009 (Report 2008 601) and August 2011 (Report 2011 601). Our current review found that most of the issues we identified in 2011 as posing a high risk to the State continue to be a high risk; we have also identified an additional issue as constituting a high risk.

Various fiscal issues continue to pose a high risk to the State. Although the budget condition has improved, it remains on the list of high-risk issues because of uncertainties concerning the size of the State's projected budget surplus and how the surplus should be spent. Specifically, in its analysis of the Governor's Budget May Revision 2013-14, the Legislative Analyst's Office projected that state revenues would be $3.2 billion higher than those projected by the governor for fiscal year 2013-14. The governor and Legislature disagree about how to spend the surplus, making it difficult for the State to set budget priorities. The Legislature also faces constraints imposed by the state constitution and federal requirements that make adjusting budget priorities even more difficult.

The funding status of the Defined Benefit Program of the California State Teachers' Retirement System (CalSTRS) has not improved, and it remains on the high-risk list. One of the major risks to CalSTRS' funding is that its board does not have the authority to set contribution rates. The inability to adjust contributions, as well as poor investment returns due to economic recessions, have caused the funding ratio of the CalSTRS Defined Benefit Program to decrease from 98 percent in 2001 to 67 percent in 2012, well below the 80 percent considered fiscally sound. At the current contribution rate and actuarially estimated rate of return on investments, the Defined Benefit Program's funding ratio will continue to drop and assets will eventually be depleted. Similarly, the State's estimated accrued liability of $63.85 billion related to retiree health benefits is almost completely unfunded and continues to increase. The State continues to cover only the current year's cost of these benefits, without setting aside funds to pay for future obligations. If the State continues this current method of funding, its liability for retiree health benefits will continue to increase, presenting a risk to the State's ability to provide the level of health benefits promised to its retirees.

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

Managing the State's prison population and quality of inmate health care in the prison system continues to be a challenge for the California Department of Corrections and Rehabilitation (Corrections). While Corrections has reduced inmate overcrowding in the prison system since our last report, it missed a population benchmark set in December 2012 and continues to face the risk that it will have to release inmates before they serve out their sentences or are paroled. In addition, the State's prison health care system has been taken over by a federal health care receiver (receiver) that has significant control over the system. Although the prison health care system has seen many improvements under the receiver, the process of improving inmate health care has been long and expensive. Until control of the system is returned to Corrections, the receiver can continue to order costly improvements to the prison health care system that the State must pay for. Finally, Corrections continues to struggle to permanently fill senior positions and lacks a formal succession plan, which can hamper its ability to ensure stability in leadership.

Maintaining and improving the State's infrastructure remains on our list of high-risk issues. The State's investments in transportation and water supply and flood management infrastructure have not kept up with demands. The California Transportation Commission estimated that the State faces a funding shortfall of more than $290 billion to adequately maintain its transportation infrastructure for the 10-year period from 2011 through 2020. Similarly, the State's water supply and flood management infrastructure requires significant investments. Furthermore, although the State has made progress in updating its aging electricity infrastructure to better protect the environment and is currently on track to meet its renewable energy target by 2020, the supply of electricity remains critical to the State's economy, and the shift in its production to sources and technologies that will have less impact on the environment is an important effort that we will continue to monitor as an area of high risk.

The State continues to face challenges related to its workforce and succession planning as the proportion of employees approaching retirement age increases. While state agencies we reviewed had generally developed workforce and succession plans to ensure continuity of critical services, we identified notable exceptions. Further, with the recent reorganization combining the State Personnel Board and the California Department of Personnel Administration into the California Department of Human Resources, the State faces the general risk associated with this type of structural change.

The State's emergency preparedness remains an area of high risk. Two key California agencies that oversee statewide emergency management—the California Department of Public Health (Public Health) and the California Governor's Office of Emergency Services (Cal OES)—lack fully developed strategic plans to guide their emergency preparedness efforts. Public Health's emergency preparedness office has the responsibility to coordinate planning and other efforts to prepare Californians for public health emergencies, including planning for the strategic stockpile of medical supplies, maintaining contact information for crisis response, and distributing funds to local health departments for disaster planning. Cal OES exists to enhance safety and preparedness in California and to protect lives and property by effectively preparing for, preventing, responding to, and assisting California in recovering from all threats, crimes, hazards, and emergencies. However, our review found that both agencies face challenges as they attempt to meet these objectives.

The high costs of certain projects and the failure of others continues to make the State's oversight of information technology (IT) projects an area of high risk. As of July 2013 the California Department of Technology (CalTech) reported that 46 IT projects with total costs of more than $4.9 billion were under development. In our August 2011 high risk report, we discussed four large IT projects that would have a major impact on state operations—the State Controller's Office's 21st Century Project, the Judicial Branch's California Court Case Management System, the California Department of Finance's Financial Information System for California, and Corrections' Strategic Offender Management System. With this update, we examined the status of these projects, as well as the California Department of Motor Vehicles' IT Modernization Project. We found that three of the five IT projects experienced major problems that require either part of the project or the entire project to be suspended or even terminated. Further, although CalTech is responsible for ensuring that state agencies comply with the general controls specified in Chapter 5300 of the State Administrative Manual, it does little to verify their compliance. Given the pervasive general control deficiencies at two agencies we reviewed—the Employment Development Department and Corrections—we believe CalTech's limited oversight of the general controls state agencies have implemented over their information systems represents another area of high risk for the State.

Finally, Public Health and the California Department of Health Care Services (Health Care Services) remain on the list of agencies exhibiting high-risk characteristics. Public Health continues to face challenges and weaknesses in program administration and is slow to implement audit recommendations with a direct impact on public health. Its unresolved recommendations have increased from 20 to 23 in the past two years. Many of these recommendations have a direct impact on public health and safety and, if not implemented, could adversely affect the State. On the other hand, although Health Care Services has made significant progress in implementing unresolved audit recommendations, we continue to consider it a high-risk agency due to increased responsibilities resulting from enactment of the federal Patient Protection and Affordable Care Act and from the transfer of authority and responsibilities from the former California Department of Mental Health.