BILL ANALYSIS
SENATE HEALTH
COMMITTEE ANALYSIS
Senator Elaine K. Alquist, Chair
BILL NO: AB 564
A
AUTHOR: Portantino and Lowenthal
B
AMENDED: June 26, 2009
HEARING DATE: July 15, 2009
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CONSULTANT:
6
Dunstan/cjt
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SUBJECT
Substance Abuse Treatment Fund: prohibition of excessive
salaries
SUMMARY
Provides that the moneys in the Substance Abuse Treatment
Trust Fund shall not be used to provide a special benefit
that is unreasonable under the circumstances to any private
person or entity because of their relationship to a
nonprofit corporation receiving funding from the fund,
including excessive executive compensation either directly
or through rent, as specified.
CHANGES TO EXISTING LAW
Existing law:
Under Proposition 36 (November 2000 election), the
Substance Abuse and Crime Prevention Act of 2000 (SACPA),
requires that non-violent drug possession offenders and
parolees receive drug treatment instead of incarceration.
Requires that eligible parolees receive community-based
treatment for a non-violent drug possession violation of
parole.
Establishes the Substance Abuse Treatment Trust Fund and
requires the transfer of money from the General Fund
Continued---
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Lowenthal) Page 2
commencing in 2000-2001 and ending in 2005-2006. Requires
that the funds shall be allocated to counties through a
fair and equitable distribution formula.
Requires the Department of Alcohol and Drug Programs to
conduct periodic audits of the expenditures made by any
county that is funded, in whole or in part, with funds
provided by SACPA.
Provides for amendment of SACPA by a two-thirds vote of the
Legislature, provided the amendments further the Act and
are consistent with its purposes.
Regulates, under the Corporations Code and Government Code,
non profit corporations.
Requires the board of directors of a nonprofit corporation
to review and approve the compensation, including benefits,
of the president or chief executive officer and the
treasurer or chief financial officer to assure that it is
just and reasonable.
Establishes procedures and standards for "self dealing,"
which is defined as transactions between a member of the
board of directors and the nonprofit corporation.
This bill:
Provides that it is the intent of the Legislature to
reinforce the goals of Proposition 36 by ensuring that
money directed by the voters for drug treatment is used for
that purpose and not to provide large salaries to the
executives of large drug treatment facilities.
Limits the amount of any grant under SACPA that can be used
for executive compensation to an amount that does not
exceed one percent of the value of the grant multiplied by
the percentage of total revenues received by the
corporation for substance abuse treatment activities that
come from public sources. Provides that if the calculation
yields an amount less than one-quarter of one percent of
the value of the grant, an amount that does not exceed
one-quarter of one percent of the grant may be used for
executive compensation.
Prohibits grant funds being used for executive compensation
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Lowenthal) Page 3
by anyone who collects rent from a treatment facility in an
amount that exceeds one percent of the value of the grant.
FISCAL IMPACT
Unknown.
BACKGROUND AND DISCUSSION
According to the author, AB 564 is intended to limit
excessive executive compensation paid with public funds
allocated to drug treatment programs under Proposition 36.
The author explains that under AB 564, the amount of
Proposition 36 grant funds that could be used for executive
compensation would be limited to one percent of the grant
multiplied by the percentage of revenues the organization
receives from public sources, provided this limitation is
greater than or equal to one-quarter of a percent. The
author argues that this calculation ensures that programs
receiving substantial public funding are allotted more
funds for executive compensation than those funded by
private sources, while still limiting compensation to a
reasonable percentage. The author points out that the
federal government, through the National Institute of
Health (NIH), imposes a cap of $196,700 on salaries paid
from grants. The author argues that California lacks a
similar limitation to protect public dollars from being
spent on excessive executive salaries and that AB 564 would
ensure that Proposition 36 funds are used for the purposes
intended under the SACPA.
Background
On November 7, 2000, California voters approved Proposition
36, the Substance Abuse and Crime Prevention Act of 2000
(SACPA). Under SACPA, first- or second-time nonviolent
adult drug offenders who use, possess, or transport illegal
drugs for personal use receive drug treatment rather than
incarceration. SACPA was designed to:
Preserve jail and prison cells for serious and
violent offenders.
Enhance public safety by reducing drug-related
crime.
Improve public health by reducing drug abuse.
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SACPA created the Substance Abuse Treatment Trust Fund
(SATTF), allocating $60 million in start-up funds and $120
million annually from the 2001-02 fiscal year until
2005-06. Following that year, the Legislature appropriated
$120 million to the fund in the 2006-07 budget, $100
million in 2007-08, and $90 million in 2008-09. At this
point, it does not appear that there will be funding in
2009-2010.
Under the SACPA, funds allocated to counties may be used
for the purposes of providing drug treatment programs,
vocational training, family counseling and literacy
training, as well as the costs of administering these
services. SATTF funds may also be used to contract with
private drug treatment service providers that are licensed
or certified by the state. In many counties such contracts
represent most or all of Proposition 36 fund use. In Los
Angeles County, for example, which was allocated $30
million in 2007, all drug treatment centers receiving
Proposition 36 funding, with only one exception, are
private organizations that contract with the county.
The Offender Treatment Program (OTP) was established in
Fiscal Year (FY) 2006-07 to enhance SACPA outcomes and
accountability. The OTP statute authorized the allocation
of additional funds to counties that provide county
matching funds. OTP funds can be used for the following
purposes:
Enhancing treatment services for offenders who need
them, including residential treatment and narcotic
treatment therapy;
Increasing the proportion of sentenced offenders
who enter, remain in, and complete treatment, through
activities and approaches such as co-location of
services, enhanced supervision of offenders, and
enhanced services determined necessary through the use
of existing drug test results;
Reducing delays in the availability of appropriate
treatment services; and,
Use of a drug court model, including dedicated
court calendars with regularly scheduled reviews of
treatment progress, and strong collaboration by the
courts, probation, and treatment.
According to newspaper reports, Tarzana Treatment Center, a
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Lowenthal) Page 5
nonprofit center, relies on government contracts to serve
drug addicts in poverty or trouble with the law, and dwarfs
most other nonprofits in the same line of work. The Los
Angeles Times reports that it's by far the largest user of
public funds for drug treatment in Los Angeles County and
it draws 85 percent of its revenues from public programs.
The paper also reports that its top executives have made it
a lucrative operation for themselves, with compensation and
business arrangements that are highly unusual in the
industry. The Times reports that the chief operating
officer Albert Senella earned $428,057 in 2007 and other
executives also had very high salaries, received deferred
compensation and collected rent from buildings they own
that are used by Tarzana as treatment sites.
In response, the Los Angeles County supervisors unanimously
voted to investigate all county contracts with the Tarzana
Treatment Center. They extended existing contracts for a
year with the exception of Tarzana Treatment Center, which
they limited to three months. The supervisors also ordered
the Department of Public Health to step up efforts to
create a competitive bidding process for all drug treatment
contracts, a sharp departure from the county's long
tradition of renewing agreements when they expire.
According to press reports, Tarzana executives say they did
nothing wrong and argue that the bulk of their compensation
comes from revenue collected from the subset of patients
who pay with cash or insurance, they said. They also state
that the other financial arrangements were deemed in the
best interest of taxpayers.
According to Los Angeles County staff, the county reviews
administrative overhead to determine if the proportion is
reasonable, given the grant as a whole. They report that
administrative overhead is usually 10 to 20 percent.
Federal policies on executive compensation
The federal government restricts the executive compensation
in many grants. In particular there are salary cap
limitations imposed for Fiscal Year 2009 by the Omnibus
Appropriations Act, 2009 Public Law 111-8, which repeats
limitations that have been in effect for many years. This
bill includes appropriations for the Department of Health
and Human Services and also applies to grants made by the
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Lowenthal) Page 6
NIH, Agency for Healthcare Research and Quality, and to the
Substance Abuse and Mental Health Services Administration
(SAMHSA) grants, cooperative agreements, or contracts.
Executive salary is limited to an amount that is no greater
than Executive Level I of the Federal Executive Pay Scale.
Effective January 1, 2009, the Executive Level I salary
level increased to $196,700 annually.
Generally, the federal government does not have limitations
on the amount of rent that can be charged when real
property is owned by an executive of an entity that
receives a grant. Rather to ensure that grantees are
incurring costs that are appropriate for reimbursement, it
relies on a combination of generally accepted accounting
principles, federal regulations and specific cost
principles and requirements as established in the Office of
Management and Budget Circular A-122, which is targeted to
nonprofits only.
Prior legislation
AB 1808 (Committee on Budget), Chapter 75 of 2006, the
human services trailer bill for the 2006-2007 budget, made
statutory changes necessary to implement the policy changes
in the 2006-07 Budget agreement, including establishing the
offender treatment program.
Arguments in opposition
The California Association of Alcohol and Drug Program
Executives (CAADPE) opposes the bill because although they
agree with the intent of the legislation which is to assure
that public funds are expended in the most efficient
manner, they do not believe that AB 564 will achieve this
goal. They argue that instead, it will result in less
government efficiency. CAADPE also points out that AB 564
has not been properly vetted through the legislative
committee process as the bill was amended on June 26 and is
scheduled for hearing on July 15, 2009 which, they argue,
is not enough time for adequate public policy discourse and
for legislators to make informed decisions.
They also question the need for a separate state standard,
given that the federal government has standards governing
executive compensation for SAMHSA (Substance Abuse and
Mental Health Services Administration) grantees. CAADPE
argues that to establish a separate and inconsistent state
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Lowenthal) Page 7
standard will require non-profit agencies to establish
recordkeeping procedures to meet two reporting and
operating standards and would force non-profit agencies to
redirect a portion of public funds that otherwise would go
to program support into administrative functions to account
for the new state requirements outlined in AB 564. They
also argue that AB 564 sets arbitrary limits on cost
allocation procedures and ignores federal tax rules related
to non-profit organizations as well as generally accepted
accounting procedures (GAAP) which are acceptable methods
of determining cost allocation for rental property for
agencies with multiple grants. They note that GAAP takes
into consideration the fair market value of the leased
property and cost allocation methodologies with agencies
that have multiple grants and assign a proportion of the
grant activity to the rental cost of the facility.
PRIOR ACTIONS
All prior actions apply to a previous version of this bill.
COMMENTS
1. AB 564 was recently amended to address this subject.
Previously the bill dealt with the Vehicle Code and this
will be the first hearing for the bill as amended.
2. Can the Legislature act on this question?
Proposition 36, an initiative, does provide a means for
amendment by the Legislature. The amendment must be in
furtherance of the purposes of the initiative. AB 564
does contain a statement of intent that the bill's
purpose is to reinforce the goals of Proposition 36 by
ensuring that money for drug treatment be used for that
purpose and not to provide large salaries to the
executives of large drug treatment facilities.
3. The bill's provisions will interact with many existing
requirements that already govern nonprofits.
The bill's subject matter is somewhat complex, dealing
with appropriate executive salaries and rent for
nonprofits. Numerous other guidelines and requirements
apply to executive salaries and rents paid to nonprofit
organizations, including accounting rules, requirements
for nonprofit entities under state and federal law and
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Lowenthal) Page 8
the administrative cost rules for grants made under the
federal Substance Abuse and Mental Health Administration
(SAMHSA). It is unclear how the requirements in this
bill will interact with these other requirements. The
author points to the NIH requirements as an example of a
cap; suggested committee amendment would be to reflect
consistency with this restriction which is also used by
other federal agencies, including both NIH and SAMHSA.
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Proposed amendment
Beginning page 3, line 28
(2) In order to effectuate this subdivision, the
following requirements shall apply to the compensation of
any executive of a nonprofit corporation providing
services under this division:
(A) The amount of any grant of funds under this section
which can be used for executive compensation may not
exceed the amount calculated as the salary limitation
used in federal grants, contracts or cooperative
agreements by the federal Department of Health and Human
Services. 1 percent of the value of the grant multiplied
by the percentage of total revenues received by the
corporation for substance abuse treatment activities that
come from public sources. However, if this calculation
yields an amount less than one-quarter of 1 percent of
the value of the grant, an amount that does not exceed
one-quarter of 1 percent of the grant may be used for
executive compensation.
4. Bill's attempt to deal with improper transactions is
narrowly constructed.
The rent restriction in the bill is very narrowly
focused, applying only to individuals who are earning
executive compensation and who also receive rent under a
grant from property they own. According to the press
report, executives and board members of the Tarzana
Treatment Center received rent from buildings that they
owned that were used for grant-related purposes. Such a
transaction is defined in state law as self dealing and
there are already a number of restrictions and
limitations on these types of transactions that apply
more broadly. The bill's restriction could also limit
the ability of grantees to recoup costs that are fairly
and justly incurred. Rather than applying a new and
completely different standard, it may make more sense to
adopt existing standards which are broader and have been
tested.
Proposed amendment:
Page 4, line 1
(B) No grant of funds under this section shall be used
for executive compensation for anyone who collects rent
from a treatment facility unless the grantee certifies
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Lowenthal) Page 10
that they are incompliance with the Office of Management
and Budget Circular A-122 relating to Cost Principles for
Non-Profit Organizations in an amount that exceeds 1
percent of the value of the grant .
5. Why Proposition 36?
It appears that this program will not be funded in the
coming fiscal year. There are other grant programs
administered by the Department of Alcohol and Drug
Programs, or within the State Health and Human Services
Agency. It is not clear why this bill is focused on this
program alone and does not apply to other health grant
programs the state administers.
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POSITIONS
Support: None received
Oppose: California Association of Alcohol and Drug
Program Executives
California Opioid Maintenance Providers
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