MOORLACH UPDATE — Capitol Weekly — July 18, 2013

The topic of prisoner realignment is being analyzed by a number of reporters and reputable think tanks. The Capitol Weekly is only one of the recent calls I’ve received to discuss AB 109 and its reverberations. In my State of the County address on January 24, 2012, I mentioned torpedoes that were aimed at the County’s ship of state. The first potential torpedo was the Vehicle License Fee grab by Sacramento, which hit our ship hard and we’re still reeling. The second torpedo mentioned in my presentation was on the state’s 2012-13 proposed budget, which the county weathered. The third torpedo was my concern about the realignment of state prisoners down to the County of Orange, which is being addressed professionally by our local stakeholders, in spite of Sacramento’s skimpy funding. I’m providing my slides beneath the Capitol Weekly article (also printed in California County News) as a reminder of the discussion.

The bad news? The Orange County Sheriff’s Department is $10 million short for the last fiscal year in state funding received to accommodate this mandate. Consequently, the Orange County Community Corrections Partnership executive committee recently voted to cut funding to our noncontract cities in the county by two-thirds. Add this fiscal concern to the Governor’s request to return supposed Affordable Care Act savings, and the county is facing more fiscal stress. The good news? The County of Orange public safety agencies are a well-oiled team of incredibly competent and collaborative professionals. As Chairman of the Orange County Criminal Justice Coordinating Council, I can attest that we devote a substantial amount of time to the topic of AB 109. The County’s Presiding and Assistant Presiding Judges attend regularly, as does the Presiding Juvenile Court Judge, the Sheriff attends almost every meeting, the District Attorney is well represented, the Chief Probation Officer is a constant, as is the Public Defender, the Health Care Agency (responsible for inmate care and Prop. 36 and 63 programs) is always present, and the Police Chiefs have been well-represented by Tustin Police Chief Scott Jordan. This team communicates and is working cooperatively with each other, and we are seeing positive results in the area of recidivism. In fact, I’m convinced that Sacramento can transfer everything down, with adequate funding, and we will take great care of ourselves.

As the County’s representative on the California State Association of Counties (CSAC) Board of Directors, as well as its Executive Committee, and as Chair of the Urban Counties Caucus, I can assure you that both organizations are working diligently to address these funding shortfalls. Regretfully, the State’s financial condition is so poor, that our Governor has been prying funds away from the counties at every opportunity (e.g. the fourth torpedo was the termination of redevelopment districts in order for the state to vacuum up their cash reserves). CSAC Executive Director, Matt Cate, has been working feverishly to get some relief. But, like Charlie Brown during his Halloween tour of the neighborhood, after looking in the trick or treat bag, many received a rock. As AB 109 became effective on October 1, 2011, it may still be too early to determine its impacts county-by-county, but, as noted, it is being researched and analyzed. Let’s hope the conclusions, and the state’s response to those conclusions, help to keep taxpayers safe and protected, which is the overriding priority for all levels of government (state, county and city).

Calculating costs of realignment, mandates no easy task

By John Howard

As the state shifts more and more responsibility to local governments, disputes over the size of the tab and who picks it up are growing.

In theory, the transfer of state authority to the locals, such as in the $6.3 billion realignment program in which some state prisoners are sent to county lockups and myriad services are shifted to the counties, is supposed to be a wash, or revenue neutral.

In fact, the counties say they are getting less than they bargained for.

On health care, as patients get moved to federally funded Medi-Cal under the Affordable Care Act, the state intends to scale back commensurately on how much goes to the locals for providing care to those patients. In theory, it sounds logical. In reality, however, perhaps not.

And a variety of state mandates requiring local funding – the recent flap over the locals’ costs associated with the Public Records Act, for example – tap scarce local resources.

“What we’re saying is ‘Give us the funding, don’t gyp us,” said Orange County Supervisor John Moorlach, who said the combination of state-ordered programs and an increasing number of mandates from Sacramento are taking a toll. “If you’re going to realign, then be fair. Be fair that we have enough resources to handle your inmates and enough to handle health care, to reduce costs in the future so we can invest in ourselves as opposed to the state sweeping it out.”

“Every year,” he added, “it’s one thing on top of another. It kind of stacks up, and it’s extremely difficult.”

Matt Cate, the top executive at the California State Association of Counties, says the state’s 58 counties and the Brown administration are negotiating through their differences and are making progress. In health care, the counties and the state agreed to local options as the ACA kicks in, he noted. In one, the counties could set aside their public health funding, then return 80 percent of it to the state, while retaining 20 percent. In the second option, there would be a straight 60-40 split.

Billions of dollars are at stake.

“For most counties, this would be a fair deal,” Cate said. “But no one knows yet how this health care piece is going to play out for sure. We don’t know how fast these people are going to Medi-Cal. Until that shakes out, it is going to be difficult to know if this financial transaction part of the ACA was done that perfectly.”

The stakes are just as high in the correctional realignment, which lawmakers and the governor approved in 2011.

“In terms of public safety, counties got a little over $1 billion in funding for housing and supervising offenders that were formally a state responsibility,” he said. “But we know that counties are getting far less dollars than the state was spending previously.”

“My agency” added Cate, who formerly ran the state prison system, “spent more on handling these offenders than the counties are receiving, and that was at a time when the state (budget) was $25 billion upside down.”

But it’s difficult to get to the bottom line on costs because there are other, less visible benefits to the locals, the state notes.

“As a result of realignment, a large portion of adult felony probationers who are revoked or commit new crimes (49.5 percent) now serve their sentences in county jails instead of prison. Consequently, it can be inferred that a similarly large percentage of the revocations and new crimes prevented as a result of SB 678 (a 2009 bill authored by Sen. Mark Leno, D-San Francisco) are also generating savings at the county level due to reduced sentences and time served in county jails,” the state Finance Department noted.

The Finance Department’s latest estimates show some $140 million in funding for the counties, plus about 15,000 felony probationrs who otherwise would have been in custody.

The state also saves money because of a change to what is called “standardized staffing” from the previous system of fixed-ratio staffing, which required at least one officer for every half-dozen inmates. “Standardized staffing allows for the inmate density to range from 100 to 160 percent of design capacity without the need to adjust the number of correctional officers,” the state said.

Big-ticket issues such as corrections and health care are not the only state-ordered programs confronting the locals. Still to be calculated are the costs of ensuring that state inmates in local custody obtain health care coverage after the first of the year, when the ACA gets under way.

A series of smaller, but still costly, programs known as “state mandates” have bedeviled the locals for decades and more mandates are coming to light all the time. A separate panel known as the Commission on State Mandates – an obscure body virtually unknown outside the Capitol — was set up to decide what constitutes a mandate and what doesn’t, and to determine who should pay for it – the locals or the state.

A review by the Legislative Analyst’s Office of “newly identified mandates” that require local spending included a half-dozen dealing with domestic violence background checks, identity theft and voter identification procedures, among others.

The LAO report noted several other mandates for which the Brown administration had proposed a suspension in funding, including the California Public Records Act, or CPRA, which captured the most public attention and which costs millions of dollars a year to comply with public’s request for documents. The administration, amid complaints from the media and good-government groups, later restored funding for the CPRA.

The LAO noted that the Commission on State Mandates “has yet to issue a statewide cost estimate (and) the annual state cost of funding the CPRA mandate is uncertain. However, given the breadth of activities required by the CPRA mandate and the number of local governments affected, we estimate that the annual state costs could reach the tens of millions of dollars.”

Getting reimbursed for the cost of the mandates is a major issue for the locals, who must have their requests approved by the Commission on State Mandates.

“And that can take seven to 14 years,” Cate said.

FIVE-YEAR LOOK BACKS

July 18

1998

Mark Anderson of the Sacramento Business Journal announced the County’s new external auditors in “Sacramento firm seals Orange County audit deal.” It seems like a timely topic, as the firm of Macias, Gini & O’Connell has just recently been approved to once again serve as the auditors of the OC.

The audit job most of the big accounting firms didn’t want has been taken on by a Sacramento company.

The job is auditing Orange County, the wealthy heartland of Southern California that went spectacularly bankrupt in 1994. And the auditor is the accounting firm of Macias, Gini & Co., which has been growing fat on the type of government contracts formerly devoured by the big players.

Orange County’s previous auditor was Ernst & Young, which was paid $554,000 a year to do the work.

Macias, Gini’s bid was $294,000 a year for three years, "And their scores were much higher" than those of a rival bidder, one of the Big Five international accounting firms, said John Moorlach, treasurer-tax collector for Orange County.

"Our research by our subcommittee came back very positive about their firm. … They came highly recommended by their client base."

Moorlach said he was concerned at first because Macias isn’t a major national firm, but those concerns were allayed by Macias’ qualifications and experience.

"I’ve got to hand it to them for a small firm, stepping into the Orange County job. That takes a lot of guts," he said.

Macias specializes in government audits and does work for the state, Sacramento and Contra Costa counties, the cities of Los Angeles, San Diego, Pleasanton and Santa Rosa, and the Sacramento Municipal Utility District, among others.

"Our intent has always been to grab this market niche," said Ken Macias, general partner. "A lot of firms don’t want to do government work because there is a perception that they don’t pay enough. They do pay well."

For many firms, government contracts were viewed as prestige work done as a loss leader. The Big Five used to dominate government audits, but "all of the big firms got terrified after Orange County," said John Dark, Sacramento County’s finance director. "They all backed out. They didn’t want to incur the liability of a crisis."

Orange County’s accountant at the time of the bankruptcy was KPMG Peat Marwick, one of the Big Five.

In May, the international accounting giant paid $75 million to settle lawsuits filed over its role in the debacle. KPMG said investment decisions were to blame for the bankruptcy, not its accounting, but it settled to avoid a long and costly court battle.

Into the breach stepped Macias.

"Macias is very knowledgeable in government accounting, and they have moved in and picked up a lot of accounts where the Big Five have declined to bid," Dark said.

And there’s more where that came from, Dark added. Every county in the state is required by law to audit its investments.

"Government work is a specialty. It has its own set of accounting rules, so there is a learning curve in doing it," said Linda McCrone, director of technical services for the California Society of Certified Public Accountants.

Macias Gini is active in government audit standard-setting boards and is one of 20 firms on the state’s Master Services Agreement for strategic and management consulting for state agencies through 2000.

"They scored well on their references they gave on agencies they had previously done work with, and they scored well on price," said Ken Hunt, spokesman with the state’s Department of General Services.

Macias Gini recently moved its headquarters from a 4,000-square foot office in River Center in South Natomas to a 5,000-square-foot location on Lennane Drive in North Natomas.

"We could have gone downtown to make a statement, but we wanted to offer everyone an office," Macias said. "You can get anywhere in Sacramento in 30 minutes, so it doesn’t matter where our office is."

The firm also has satellite offices in Walnut Creek and Los Angeles.

Macias Gini had revenue of $3.2 million in 1997, down slightly from revenue of $3.3 million in 1996. But it expects revenue to pick up this year thanks to big contracts like the Orange County deal.

The firm plans to add five people to its staff of 60 in the next couple of months, but it has no plans to expand out of state.

"We focus on California. Between cities, counties, special districts and utilities, there is much more depth we can explore here," Macias said.

Macias generally hires its professionals right out of college and trains them in house.

"We know how to train our people and we raise them ourselves. And then we pay them enough to keep them," Macias said.

About 30 percent of the firm’s professionals were hired from other firms, while 70 percent have been trained by the company.

"We’re education oriented," Macias said. "It helps us keep people around. It’s not just the pay, but the mentoring that employees seek."

The company’s professionals eventually end up doing statewide presentations on the latest trends and changes in government accounting.

"In a sense it is marketing for the firm," Macias said. "In these presentations, a lot of people realize that we know the issues and the latest information.”

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