Audit shows excessive reserves, lack of oversight for mental health funding

An audit released at the end of February by the California State Auditor shows that the 59 counties and local mental health agencies (LMHA) have amassed hundreds of millions in funding under the Mental Health Services Act (MHSA).

State Auditor Elaine Howel writes:

“Despite having significant responsibility for the MHSA program since 2012, [the Department of] Health Care Services has allowed local mental health agencies to amass hundreds of millions in unspent MHSA funds. This occurred because Health Care Services has not developed a process to recover unspent MHSA funds that under state law must be reallocated to other local mental health agencies. Further, absent Health Care Services’ guidance, the local mental health agencies accumulated $81 million in unspent interest and set aside between $157 million and $274 million in excessive reserves that they could better use to provide additional mental health services.”

The reserves totaled $535 million as of the end of fiscal year 2015-16. Approximately $230 million was subject to reversion. Total MHSA fund balance by county can be viewed here.

MHSA funding comes from the passage of Proposition 63 in 2004, which levied a one percent income tax on people who earn $1 million of more a year. DHCS and the Mental Health Services Oversight and Accountability Commission oversee the MHSA program.

MHSA funds that have not been spent within three years are subject to reversion to the state. Last year’s AB 114 allows counties with unspent MHSA funds that were subject to reversion as of July 2017 to keep the funds, but the funds must be spent by 2020.

The audit also found an additional $225 million in MHS Fund that has existed since at least 2012. Some local mental health agencies have not submitted their annual reports on time and there has been limited oversight of the local mental health agencies’ spending and programs.

The audit makes seven main recommendations to DHCS:

  1. DHCS should develop a MHSA fiscal reversion process to ensure that they can reallocate MHSA funds that LMHA’s do not spend within the statutory reversion time frames to other LMHA’s that are better positioned to use the funds to meet MHSA’s intent.
  2. DHCS should clarify that the interest the LMHA’s earn on unspent MHSA funds is subject to the same reversion requirements as the MHSA funds they receive.
  3. DHCS should establish and enforce a MHSA reserve level that will allow LMHA’s to maintain sufficient funds to continue providing crucial mental health services in time of economic hardship but will not result in them holding reserves that are excessive. DHCS should also establish controls over LMHA’s deposits and withdrawals to their reserves.
  4. Health Care Services should complete its analysis of the $225 million fund balance in the MHS Fund by May 1, 2018, to determine why this balance existed and, if there is any impact on funding to the local mental health agencies, distribute those funds accordingly. Further, it should establish a process to regularly scrutinize the MHS Fund to determine the reasons for any excess fund balances.
  5. To ensure DHCS provides effective oversight of LMHA’s reporting and spending of MHSA funds, DHCS should publish its proposed regulations in the California Regulatory Notice Register by June 2018. DHCS should then subsequently implement a process that will enable it to withhold MHSA funds from LMHA’s that fail to submit their annual reports on time.
  6. To ensure that LMHA’s appropriately report and spend MHSA funds, DHCS should publish its proposed regulations in the California Regulatory Notice Register by September 2018. DHCS should then develop and implement a MHSA fiscal audit process, independent of the Medi-Cal reviews, to review revenues and expenditures for the most recent fiscal year.
  7. To ensure that LMHA’s comply with their performance contracts and MHSA requirements, DHCS should establish a process for conducting comprehensive program reviews and begin conducting those reviews by July 2018.

Director of DHCS Jennifer Kent writes in a letter to Elaine Howle in response to the audit:

“DHCS disagrees with the CSA recommendation 6. DHCS agrees on all other recommendations and has prepared corrective action plans to implement them.”

The Mental Health Services Oversight and Accountability Commission also responded to the audit in a letter to Elaine Howle.

The Commission appreciates the fundamental finding that the Commission is implementing processes to evaluate the effectiveness of the Mental Health Services Act (MHSA) and acknowledges that more can be, and is being done, to improve our efforts.

The audit made three main recommendations specific to the Commission related to increased reviewing and analyzing of the innovation projects funded through MHSA. The Commission agreed with the recommendations but cautioned against the feasibility of making proposed chances by the suggested July 2018 deadline.