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California Department of Veterans Affairs and Department of General Services
The Departments’ Mismanagement of the Veterans Home Properties Has Not Served the Veterans’ Best Interests and Has Been Detrimental to the State

Report Number: 2018-112


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California Department of Veterans Affairs

January 14, 2019

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

Dear Ms. Howle:

Thank you for the opportunity to review and comment on California State Auditor (CSA) Report 2018-112, related to leases and other state property use in the Veterans Homes of California – and in particular, the Yountville Veterans Home. I welcome the findings of this audit and I appreciate the diligence and professionalism of your staff.

At the start of my tenure as Secretary of the California Department of Veterans Affairs (CalVet), I immediately recognized a significant lack of oversight and standardization in CalVet’s Homes Division operations. The Veterans Homes were largely independent from each other and from headquarters, resulting in poor clinical survey performance, weak administrative controls, and varied policies and procedures. The most critical operations were triaged and I redirected resources accordingly. For much of the past three years, I reorganized Homes Division’s structure to focus on the adoption and standardization of best practices in a variety of areas, including clinical procedures; admissions; the Morale, Welfare, and Recreation Fund; contracting, personnel, and other administrative operations; emergency preparedness; regulation development; maintenance and construction oversight; and many other key functions. This standardization of core functions improved service delivery and has facilitated a coordinated, statewide approach to planning and decision making. With patient care performance ratings increased and structural issues dramatically enhanced, CalVet can now turn its attention to other operations, like lease management, that require similar improvements but are not – and should not become – part of the Veterans Homes’ primary mission.

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As reflected so clearly in your report, the Veterans Home of California – Yountville engaged in unfavorable property use arrangements for decades. While CalVet may be tethered to several old leases for years to come, we have restructured or terminated other arrangements and continue to work on further improvements. Since 2015, CalVet has made significant progress improving property management. CalVet has renegotiated prior agreements to ensure leases better serve residents and protect state interests; developed a licensing program for short-term uses of the campus; redirected staff to oversee property use; and begun assessing the best future uses of each Veterans Home. The audit recommendations, all of which have been implemented or will be implemented in the coming months, are critical to continuing to enhance property management. In anticipation of the audit and while it was conducted, many changes were implemented to create clear policies and procedures for program oversight and to centralize decision-making authority among appropriate leadership in Sacramento.

CalVet is absolutely committed to ensuring that all property use is in the best interest of the Veterans Homes and their residents, while complying with all applicable rules and regulations. I recently approved specific, strict approval criteria to ensure that all new or renewed property use agreements provide a significant benefit for the Veterans Homes and their residents. CalVet will no longer permit arrangements that do not further our mission. Regrettably, many non-compliant agreements were approved several decades ago. For instance, the leases that improperly exceed the State’s maximum duration of five years were entered into between 1988 and 2012, and include terms that provide little or no opportunity for renegotiation. Several of these leases provide limited benefits to residents, require little or no rent, and restrict CalVet’s ability to utilize the Veterans Home campus to its full potential.  CalVet will partner with the Department of General Services (DGS) to revisit each of these leases and explore opportunities to maximize the benefits to the Veterans Home.

CalVet has made significant improvements over the last three years, but there is more to do. Your report is a tremendous asset to me and my executive team as we continue to correct many of the inappropriate arrangements and inadequate practices stemming from decades of poor stewardship of CalVet property. This audit will generate germane and meaningful policy discussions about the evolution of veterans’ long-term care and the best uses of the Veterans Homes’ system – discussions which are long overdue. With greater accountability, coordination, and planning, CalVet will better serve our residents and ensure that any uses of the Veterans Homes will truly be in concert with the needs of California’s veterans.

 

The following are CalVet’s specific responses to each recommendation provided within the report:

Audit Recommendation #1:
To ensure that future leases of veterans home property are established in accordance with state requirements, CalVet should implement its property use policy when considering all proposed leases of veterans home property.

CalVet’s Response #1:
CalVet agrees with and has begun implementing this recommendation. In May 2018, I directed that all authority for approving property use be revoked from the Veterans Homes and centralized within CalVet’s executive leadership in headquarters. Further, I directed the development of a new property use policy, which I approved in December 2018, to better comply with state law and to ensure effective management of Veterans Home property. This policy went into effect and is already helping manage and guide decision making throughout the Homes Division. I have further directed that the new property use policy be subject to formal regulatory development to ensure transparency, due process, and continuity across leadership eras. The new policy includes protocols and procedures for developing and approving lease agreements, as well as specific criteria outlining uses of property that are in the best interests of the Veterans Homes and their residents. These criteria draw heavily from landmark federal legislation concerning the appropriate uses of the Greater Los Angeles campus of the United States Department of Veterans Affairs.  CalVet executive leadership will continue to monitor property usage and ensure the policy continues to be followed.

Audit Recommendation #2:
To ensure that it protects the State and the best interests of the Yountville veterans home, by March 2019 CalVet should complete its review of the four entities that do not have leases and should begin either evicting the entities or obtaining lease agreements with them through DGS.

CalVet’s Response #2:
CalVet agrees with and has begun implementing this recommendation. As detailed in the audit report, one lease is currently being negotiated with support from DGS. We are currently reviewing the three other arrangements and will notify each entity of our determination, taking appropriate action as necessary in the best interests of the Veterans Home. CalVet will report these decisions to the CSA by March 2019.

Audit Recommendation #3:
To ensure that its employee housing lease agreements are sufficient to protect the State, by June 2019 CalVet should revise its existing employee housing leases in accordance with the guidance CalHR has provided to agencies to protect the State’s interests, including making sure that they include terms that fully indemnify the State against damages and require rental insurance. 

CalVet’s Response #3:
CalVet agrees with and has begun implementing this recommendation. CalVet legal counsel developed new employee housing leases and all staff in employee housing have signed the new leases, which we will provide to the CSA for evaluation. These leases protect state interests, follow CalHR recommendations, and clarify tenant responsibilities. Approval authority for employee housing leases now rests with a select few executive staff with my direct engagement and oversight.

Audit Recommendation #4:
To avoid the appearance of impropriety and ensure property management of employee housing, CalVet should implement its new housing policy and ensure that employee housing decisions are made by its headquarters office in a clear and consistent manner.

CalVet’s Response #4:
CalVet agrees with and has begun implementing this recommendation. The new housing policy provides explicit direction on various aspects of the state-owned housing program, including payment of rent, eligibility, and tenant rights and responsibilities.  Additionally, housing is now apportioned to maximize the benefit to the Veterans Home, prioritizing employees with critical roles during emergency operations or positions that are difficult to recruit. All housing decisions are now made by headquarters to ensure comprehensive, effective, and equitable oversight and to eliminate any real or potential conflicts of interest. CalVet will also promulgate regulations to ensure the housing program continues to be managed appropriately.

Audit Recommendation #5:
To ensure that the veterans homes receive all of the funding to which they are entitled, by the May 2019 budget revision, CalVet should seek an augmentation equal to the lease revenues it generated from July 2015 through June 2018. If CalVet believes the state law requiring lease proceeds to augment its appropriation is outdated, it should seek a change to state law.

CalVet’s Response #5:
CalVet reviewed the existing statutory language in Military and Veterans Code section 1023(b) and determined that it is reflective of outmoded budgeting practices and has been obsolete for more than a decade. This section and several others should have been updated as part of the fiscal year 2008-09 budget and are not reflective of CalVet’s current operations.  Therefore, CalVet will seek technical revisions to eliminate these references, and to bring them in compliance with the existing budget structure.

Audit Recommendation #6:
To monitor whether lessees are current on payments, CalVet should track payment compliance for all lease payments that it receives and promptly follow up with lessees that do not pay as required. This should include collecting sufficient records from lessees that pay rent based on a percentage of sales to calculate the amount that each is required to pay to ensure the lessees make the correct rent payments.

CalVet’s Response #6:
CalVet agrees with and has begun implementing this recommendation. CalVet is currently reviewing all payment records and will take appropriate action against lessees that have not paid as required or have not adhered to any other lease terms and conditions. Based on our review of the full, unredacted audit report, CalVet will coordinate with DGS to develop new processes to monitor lease payments based on best practices.

Audit Recommendation #7:
To better manage its employee housing, beginning in June 2019 CalVet should comply with CalHR requirements by annually reviewing the rental rates for its employee housing units to ensure their consistency with market value and adjusting the rental rates accordingly.

CalVet’s Response #7:
CalVet agrees with and has begun implementing this recommendation. The new employee housing policy reflects this annual review requirement. CalVet headquarters will continue maintaining oversight of employee housing and will conduct annual reviews as required. All leases will be reviewed by CalVet legal counsel and approved by select members of the CalVet leadership team. CalVet will adjust rental rates, as appropriate, in accordance with CalHR policy and guidance.

Audit Recommendation #8:
To prevent unauthorized use of its property, CalVet should regularly monitor the use of the leased properties and take action to cease any activity that is not allowed by the terms of the lease agreements. Further it should take action to cease balloon launches from the golf course or amend its lease with the lessee to identify balloon launches as an approved use of the property.

CalVet’s Response #8:
CalVet agrees with and has begun implementing this recommendation. CalVet has reviewed every lease agreement and will be taking enforcement action where appropriate. CalVet will ensure all lessees comply with the terms of their leases. I have directed that no balloon launches or any other high-risk activities be conducted or approved on Veterans Home property and my executive leadership team will work with DGS to take any necessary steps to cease balloon launches from the golf course.

Audit Recommendation #9
To inform the Legislature about all sources of General Fund revenue, beginning with its May 2019 report CalVet should include lease payments in its required report until such a time as the Legislature centralizes receipt of these lease payments at DGS.

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CalVet’s Response #9:
CalVet agrees with and has implemented this recommendation. This oversight has been corrected and lease payment information was reflected in the January 10, 2019 budget estimate package for the Governor’s 2019-20 budget.

Again, thank you for sharing your findings. These recommendations will be a tremendous asset to CalVet as we continue to improve leasing protocols and ensure every use of the Veterans Homes is in the best interests of our veterans.


Sincerely,

Vito Imbasciani MD
Secretary




Comments

CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM THE CALIFORNIA DEPARTMENT OF VETERANS AFFAIRS

To provide clarity and perspective, we are commenting on CalVet’s response to the audit. The numbers below correspond to the numbers we have placed in the margin of its response.

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Our report focuses on leases of veterans home property that were active as of June 2018. Accordingly, we cannot comment on whether these leases better serve residents and protect state interests in a manner that is improved over that of prior agreements. Similarly, the scope of our review did not include an evaluation of the manner in which CalVet has assigned staff to manage home property, so we cannot comment on its redirection of staff to oversee property use. Finally, CalVet references the licensing program it developed for short-term uses of the homes. We identified deficiencies in this program, which we discuss earlier in our report.

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CalVet refers to actions it took after we shared our draft report for its review and comment. We look forward to reviewing documentation of CalVet’s progress in implementing our recommendation in its 60-day, six-month, and one-year responses to our audit.




Department of General Services

January 14, 2019

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

Re: CALIFORNIA STATE AUDITOR’S REPORT NO. 2018-112

Pursuant to the above audit report, enclosed are the Department of General Services' comments pertaining to the results of the audit.

The Government Operations Agency would like to thank the state auditor for its comprehensive review. The results provide us with the opportunity to better serve our clients and protect the public.

Sincerely,

Marybel Batjer, Secretary
Government Operations Agency

Enc




Date: January 14, 2019

To: Marybel Batjer, Secretary
Government Operations Agency
915 Capitol Mall, Suite 200
Sacramento, CA 95814

From: Daniel C. Kim, Director
Department of General Services

Subject: RESPONSE TO CALIFORNIA STATE AUDITOR’S REPORT NO. 2018-112

Thank you for the opportunity to respond to the California State Auditor’s (state auditor) Report No. 2018-112, [Redacted] Department of General Services: The Department’s Mismanagement of the Veterans Home Properties Has Not Served the Veterans’ Best Interests and Has Been Detrimental to the State, which addresses recommendations to the Department of General Services (DGS) resulting from its audit. The following response addresses each of the recommendations.

OVERVIEW OF THE REPORT

DGS has reviewed the findings, conclusions and recommendations presented in Report No. 2018-112, and generally agrees with the state auditor’s recommendations.

In summary, the state auditor reviewed existing leases entered into by DGS on behalf of the Department of Veterans Affairs (CalVet), several of which are long-term leases dating back as far as 1988. The auditor identified a number of opportunities for improvement in the administration of these leases and made 5 recommendations, which are as follows:

(1) Develop a definition for what constitutes “the best interest of the veterans homes” for leases let under Military and Veterans Code Section 1023,
(2) Collaborate with CalVet to review existing leases that may be voidable or not in the best interests of the state, and remedy those leases as appropriate,
(3) Issue a formal reminder to departments about DGS’ role and leasing authority to prevent voidable leases being entered into by departments without DGS oversight,
(4) Better document the rationale for rental rates, including benefits in-lieu of rent,
(5) Deposit payments from leases of veterans homes into the General Fund, reimburse funds mistakenly deposited into the Property Acquisition Law Money Account, and report on payments collected so that the Department of Finance (DOF) and the Legislature can provide a corresponding augmentation to CalVet.
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DGS believes that the issues identified that lead to Recommendation One (1) were addressed by Policy Bulletin 18-08 issued in July 2018, though the state auditor disagrees. DGS plans on implementing Recommendations Two (2) and Three (3), and believes that it had already implemented Recommendation Four (4) in July 2018 through the issuance of several policy bulletins. For Recommendation Five (5), DGS agrees that the issue raised by the auditor has merit, but instead recommends that lease payments be consolidated to CalVet to simplify the process.

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While there are technical points in the report that DGS disagrees with, the state auditor repeatedly notes that the lack of documentation in these lease files (particularly for the older leases) made it difficult to accurately state what DGS did or did not do in executing the leases. DGS is in full agreement and has accordingly issued a policy bulletin to address file documentation moving forward.

DGS will continue to seek every opportunity to improve its oversight of the leasing of state property and provide enhanced guidance to state agencies.

RECOMMENDATIONS

[Redacted] DGS Mismanaged Veterans Home Property by Entering Into Agreements That Do Not Align With State Law or the Interests of the Veteran Residents:

RECOMMENDATION # 1: To ensure that leases of veterans home property comply with state law and are consistent with the veterans homes’ mission to serve the veteran residents, by June 2019 DGS should adopt, in consultation with CalVet, a definition of what constitutes the best interests of the veterans homes and begin incorporating that definition into the State Administrative Manual. DGS should deny any requests for leases that do not meet those criteria. When leasing veterans home property, DGS should document its reasons for determining that the terms of the lease are in the best interests of the home.

DGS RESPONSE # 1:

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DGS fully agrees that leases let under Military and Veteran’s Code Section 1023 must be in the best interest of the Veteran’s Home and that leases let by DGS should be in the best interests of the state. DGS further agrees that the explanation as to how leases are in the best interests of a home or the state should be well documented in the lease file and enshrined in the lease itself in the recitals. To this end, DGS issued RESD Policy Bulletin 18-08 in July 2018. This policy bulletin requires that departments provide DGS with a justification as to how the proposed lease is appropriate to their mission and scope of responsibility (or provides a broad public benefit), which is vetted by DGS. If approved, the lease will move forward, and the statement of benefit is required to be noted in the lease recitals. DGS believes that this process, written as a singular policy for all lease transactions, covers the auditor’s recommendation.

RECOMMENDATION # 2: To ensure that all leases of veterans home property protect the interests of the State and the homes, DGS should review the lease that is void under state law and any that do not meet its criteria for being in the best interests of the veterans homes. DGS should attempt to reach new agreements with these lessees that address these areas of noncompliance and concern.

DGS RESPONSE # 2:

DGS and CalVet will work together to identify leases that are voidable or contain unfavorable terms and, where appropriate, terminate or attempt to renegotiate the terms.

RECOMMENDATION # 3: To remind state entities about the requirements for agreements that convey an interest in state property, by June 2019 DGS should issue guidance about DGS’s approval authority for such agreements.

DGS RESPONSE # 3:

By June 2019, DGS agrees to issue a formal reminder for state departments regarding DGS’ role and leasing authority.

RECOMMENDATIONS

[Redacted] DGS Has Inadequately Overseen Rental Fees and Payments, Reducing the Funds Collected and Reinvested for the Benefit of the Veterans:

RECOMMENDATION # 4: To ensure that it can justify the rental rates it approves, DGS should document its assessment of market value and market rent for all veterans home property leases before leasing the property. It should set rental rates equivalent to fair market rent in all cases except those in which it accepts improvements to the property or services to the veterans in exchange for reduced or waived rent. In the case of reduced or waived rent, DGS should document a calculation of the value of the property improvements or services and reduce the rent by an amount equal to the calculated values.

DGS RESPONSE # 4:

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To better document standing policy, DGS issued RESD Policy Bulletins 18-04, 18-05, and 18-06 in July 2018. These Bulletins describe DGS policy on the establishment of rental rates at and below fair market value, and use of in-lieu benefits. To ensure that there is a clear rationale for rental rates and demonstrated compliance with the bulletins, DGS’ State Owned Leasing and Development (SOLD) lease files will document the methodology used to establish the rental rate and/or associated reductions for in-lieu benefits (ex: capital improvements to the property or services rendered to the State that would otherwise be paid for by the State).

RECOMMENDATION # 5: To comply with state law, DGS should begin depositing lease payments from leases of veterans home property into the General Fund so that those funds may be used to augment the appropriation of the veterans homes, and should reimburse the General Fund for the amounts it inappropriately deposited into the property acquisition law money account. DGS should also notify the Department of Finance and the Legislature annually of the amount of lease payments it collects to ensure that those proceeds are appropriately directed to the veterans homes.

DGS RESPONSE # 5:

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DGS agrees that funds for leases let under Military and Veteran’s Code Section 1023 should be made available to the applicable veterans home. At this time, DGS’ ability to code lease payments to the General Fund is limited. Further, DGS cannot deposit funding into the General Fund that could be accessed by CalVet. As such, DGS plans to reach out to CalVet to discuss having all lease payments centralized with CalVet to avoid the need for annual augmentations. Additionally, centralizing the payments to CalVet would allow for more timely and better tracking of the lease payments.

CONCLUSION

DGS is firmly committed to ensuring that leased property is in compliance with state law and is in the best interests of the veterans homes, while protecting the interests of the State. As part of its continuing efforts to improve those processes, DGS will take appropriate actions to address the issues presented in the report.

If you need further information or assistance on this issue, please contact me at (916) 376-5012.


Daniel C. Kim
Director




Comments

CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM THE DEPARTMENT OF GENERAL SERVICES

To provide clarity and perspective, we are commenting on DGS’s response to the audit. The numbers below correspond to the numbers we have placed in the margin of its response.

1

As DGS notes in its response, we disagree with its belief that its July 2018 policy bulletin fully addressed the issues we identified regarding its process for ensuring that leases of veterans home property are in the best interests of the home. As we discuss previously, DGS has not defined how it will determine whether lease agreements are in the best interests of the home which, as we describe earlier, is a specific requirement for leases of veterans home property. The policy bulletin DGS refers to describes its general process for leasing state property and requires the agency with jurisdiction over the property to describe the benefits of entering into the lease. However, as we state previously, the presence of one or more benefits does not necessarily mean that a lease is in the best interests of a veterans home. Therefore, because DGS’s policy bulletin does not include a definition of what those best interests are, it does not address our concerns. Without this definition DGS cannot act in the oversight role that state law assigns to it. We would expect that DGS would fulfill its responsibility under state law to review proposals for new leases of home property to ensure that they comply with state law; however, until DGS collaborates with CalVet to define what it means for a lease to be in the best interests of the home, it cannot adequately do so.

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Although DGS states that it has already implemented our recommendation concerning setting rental rates equivalent to fair market rent and documenting its justification for the rental rates it establishes, we disagree. We acknowledge that in July 2018 DGS formalized its process for determining fair market value, but we found that DGS had not documented its fair market value assessment for most of the properties we reviewed. Until DGS begins documenting its assessment of market value and market rent before leasing veterans home property, it cannot demonstrate that it has fully implemented our recommendation.

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DGS argues that the lease payments for veterans home property should be consolidated to CalVet to simplify the process, and it further states that doing so would allow for more timely and better tracking of lease payments. We did not share our findings regarding CalVet’s lease payment tracking with DGS because our confidentiality requirements prohibit such disclosure until we publicly issue our report. However, we discuss previously that CalVet failed to properly monitor and enforce rental payments. In addition, we state that DGS already collects lease payments for several different state agencies and its payment tracking system is more robust than CalVet’s, making it better able to track payments.

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DGS mischaracterizes the sections of our report regarding its lack of documentation. Our report does not state that the lack of documentation in DGS’s lease files made it difficult to accurately state what DGS did or did not do in executing the leases we reviewed. Instead, we report that DGS lacked documentation demonstrating that it met certain requirements in state law when leasing veterans home property. For instance, earlier in our report we discuss that state law requires DGS to set rental rates at fair market rent, and we report that DGS could not demonstrate how it established fair market value for most of the leases we reviewed. Additionally, our report indicates that state law authorizes DGS to lease veterans home property under terms and conditions that are in the best interests of the home, but that DGS had not defined how it would determine whether leases comply with that statutory requirement. We further state that we found no evidence that DGS had documented any analysis of how it determined the leases we reviewed were in the best interests of the veterans home.

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DGS appears to indicate that it would face some challenges in implementing our recommendation. As we discuss previously, state law requires that the proceeds from most leases of veterans home properties be deposited into the General Fund to augment the appropriation that the homes receive. We further state that as a collector of lease payments for the properties, DGS has a responsibility to ensure the homes receive those proceeds. DGS has been collecting lease payments for leases of veterans home property for several years including the $118,000 in lease payments it collected from July 2015 through June 2018. Consequently, we expected that DGS would have already been aware of and acting in compliance with the state law governing proceeds from those leases. We look forward to reviewing documentation that shows how DGS has taken steps to adhere to state law at the department’s 60-day response to this recommendation.






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