Report 2018-112 All Recommendation Responses

Report 2018-112: 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 (Release Date: January 2019)

Recommendation for Legislative Action

To prevent future leases of veterans home property that obligate the property to third parties for unnecessarily extended periods of time, the Legislature should amend state law to clarify that leases of veterans home property may not exceed five years unless a statutory exception applies.

Description of Legislative Action

AB 240 (Chapter 61, Statutes of 2020) prohibits a lease from exceeding 5 years, unless the lessee is a local government or a nonprofit organization that provides services exclusively for veterans of the United States Armed Forces and their families, or the contract for the lease was executed before January 1, 2021. The statute authorizes a lease that was executed before January 1, 2021, to be renegotiated, except that any terms regarding the duration of the renewal of the contract shall not be extended. The statute further provides that a lease contract with any other party may be granted for a term greater than five years only with the approval of the Legislature by statute.

California State Auditor's Assessment of Annual Follow-Up Status: Legislation Enacted

Description of Legislative Action

AB 240 (Irwin) was introduced in 2019 and, in part, would specify that the lease or let of any real property held by the California Department of Veterans Affairs for a veterans home shall not exceed five years, unless the lessee is any state or local government, a nonprofit organization that provides services exclusively for veterans of the U.S. Armed Forces and their families, or a lessee pursuant to a contract executed before January 1, 2020. As of January 2020, this bill is in the Senate Inactive file.

California State Auditor's Assessment of 1-Year Status: Legislation Introduced

Description of Legislative Action

AB 240 (Irwin), in part, would specify that the lease or let of any real property held by the California Department of Veterans Affairs for a veterans home shall not exceed five years, unless the lessee is any state or local government, a nonprofit organization that provides services exclusively for veterans of the U.S. Armed Forces and their families, or a lessee pursuant to a contract executed before January 1, 2020.

California State Auditor's Assessment of 6-Month Status: Legislation Introduced

Description of Legislative Action

Assembly Bill (AB) 240 (Irwin) was introduced in February 2019 and would specify that the lease or let of any real property held by Veterans Affairs for a veterans home shall not exceed five years.

California State Auditor's Assessment of 60-Day Status: Legislation Introduced

Recommendation #2 To: Veterans Affairs, Department of

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.

Annual Follow-Up Agency Response From October 2020

CalVet's Property Use Policy was formalized and published in December 2018, and has been used in daily practice for processing lease agreements and licensing events. Since January 2020, there were two license agreements for events which met the criteria and were approved per the Property Use Policy. However, due to the global COVID-19 pandemic that occurred, all third party events were cancelled or severely modified for infection control. There were two organizations which requested short-term use at one of the Veteran Home properties, to hold their ceremony at the picnic grounds, including overnight camping by vendors. These were denied as those events did not adhere to the requirement that such events primary benefit the Home's residents. In addition, CalVet works closely with the Department of General Services on all proposed leases of the Veteran Home properties to ensure the property use is in the best interest of the Home and its members. Recently, there were two lease agreements that met the criteria and were approved per the Property Use Policy.

Documented Evidence:

1) CalVet's Property Use Policy (All Homes), policy #7654v1

2) Denials Criteria Checklist Log with Correspondence

3) License Agreements

4) Renewal Lease and supporting documentation for Tug McGraw

5) Renewal Lease and supporting documentation for Golden1

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

CalVet provided renewed leases for two tenants at the Yountville Veterans Home. The lease documentation that CalVet provided demonstrates that CalVet has begun implementing its new property use policy when leasing property at the veterans homes. For both leases, CalVet documented how the leases were in the best interests of the veterans homes, in particular the best interests of the veteran residents. CalVet also documented how the rental fees in the leases satisfied DGS's determination of market value for the leased property where appropriate. Continuing to implement its property use policy when entering new leases will ensure that the uses of the veterans home property are consistent with the best interests of the veterans homes and their residents.

1-Year Agency Response

As mentioned at CalVet's six-month update, the Department implemented a new property use policy in early 2019 and is operating in accordance with the policy. The adopted property use policy is guiding decision making not only for all potential lease agreements but also for all events to be held on Home property. CalVet no longer allows for the private use of facilities for events that generally benefited the general public rather than the Veterans Home's residents. For example, use of the picnic grounds at the Veterans Home of California - Yountville is reserved for organizations that provide entertainment and or meals to the Home's residents. Examples of events that have been discontinued or denied since implementing the new policy are:

- Corporate annual picnics;

- Certain fundraisers that do not benefit the Home;

- Filming requests for movies and commercials.

Events the Department continues to permit are those whose organizers have demonstrated a clear benefit to the Home's residents, or those the residents have specifically requested, such as a car show hosted by a local classic car club that did not profit from the event. In the case of permitted events, the Department and each event's organizers develop a written agreement that captures appropriate parameters, structure, accountability, and expectations.

California State Auditor's Assessment of 1-Year Status: Pending

In its response, CalVet describes its implementation of its property use policy when considering short-term uses of its property. Although implementation of that policy would address some of the issues that we identified with CalVet's licensing of the property for short term uses, the recommendation is that CalVet implement its property use policy when considering proposed leases of veterans home property. CalVet informed us that it has not issued a new lease since our audit was published. As a result, it has not been able to demonstrate that it has implemented its new policy for leasing veterans home property. Once it does, we will assess its implementation of that policy.

6-Month Agency Response

CalVet implemented a new property use policy in early 2019 and is operating in accordance with the policy. The adopted property use policy is guiding decision making not only for all potential lease agreements but also for all events to be held on Home property. CalVet has recently rejected proposed leases and events that do not comply with the property use policy and will continue to do so.

California State Auditor's Assessment of 6-Month Status: Pending

CalVet has not yet provided documentation to support that it has fully implemented the recommendation.

60-Day Agency Response

CalVet has fully implemented this recommendation. The property use policy is currently guiding decision making for all potential lease agreements. CalVet has rejected proposed leases that do not comply with the property use policy and will continue to do so.

California State Auditor's Assessment of 60-Day Status: Pending

In order to determine whether CalVet has implemented its property use policy we will need to review leases that CalVet has approved and rejected. However, according to staff at CalVet there have been no new leases since we issued the audit report. Therefore, we cannot yet conclude whether CalVet has fully implemented the recommendation.

Recommendation #3 To: Veterans Affairs, Department of

To ensure that it protects the State and the best interests of Yountville, 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.

60-Day Agency Response

CalVet has fully implemented this recommendation. CalVet is currently pursuing an approved lease for the Napa County Medi-Cal office space through the appropriate leasing process. In the meantime, Napa County is not using the office. The Napa Valley College has agreed to vacate the Holderman building by July 1, 2019. The medical equipment contractor vacated the Holderman building on March 19, 2019. CalVet has asked that the union office space be vacated by July 1, 2019.

California State Auditor's Assessment of 60-Day Status: Fully Implemented

Recommendation #4 To: Veterans Affairs, Department of

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.

60-Day Agency Response

CalVet has fully implemented this recommendation. All employee housing leases were rewritten and signed by tenants. The new leases reflect CalHR guidance.

California State Auditor's Assessment of 60-Day Status: Fully Implemented

Recommendation #5 To: Veterans Affairs, Department of

To avoid the appearance of impropriety and ensure proper 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.

60-Day Agency Response

CalVet has fully implemented this recommendation. Housing decisions are made by headquarters executive staff in accordance with an impartial state-owned housing policy that ensures the best use of the property.

California State Auditor's Assessment of 60-Day Status: Fully Implemented

Recommendation #6 To: General Services, Department of

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 that standard. 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.

Annual Follow-Up Agency Response From October 2020

DGS and CalVet have agreed upon a definition of what constitutes being "in the best interests of the Veteran's homes." DGS has referenced this in RESD Bulletin 18-08, and DGS and CalVet are using the definition for leases. In addition, DGS has incorporated the definition into the State Administrative Manual, Section 1323.1. This recommendation is fully implemented as of October 2020.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

DGS provided documentation of the definition of what constitutes the best interests of the veterans homes, as well as evidence that DGS incorporated that definition into the State Administrative Manual. The property use policy that established that definition also requires that property use arrangements contain a written analysis that sets forth the manner in which the arrangement meets that definition, including a description justifying and memorializing the benefits of that arrangement to the home.

1-Year Agency Response

DGS and CalVet have agreed upon a definition of what constitutes being "in the best interests of the Veteran's homes." DGS has referenced this in RESD Bulletin 18-08, and DGS and CalVet are using the definition for leases.

California State Auditor's Assessment of 1-Year Status: Partially Implemented

The definition that DGS refers to is the same definition that CalVet developed during our audit and which we describe in the report. However, the recommendation includes that DGS incorporate the definition of what constitutes the best interests of the veterans homes into the State Administrative Manual, which would make that definition a regulatory requirement rather than a policy. However, DGS has not incorporated the definition into the State Administrative Manual. Additionally, the RESD Bulletin that DGS refers to in its response makes no specific reference to the definition, nor does it require its application. Until DGS incorporates that definition into the State Administrative Manual, DGS will not have fully implemented the recommendation.

6-Month Agency Response

As noted in prior responses, DGS and CalVet have met for the purposes of collaborating on defining what constitutes being "in the best interests of the Veteran's homes." A draft document has been produced, and both departments are currently reviewing/editing the draft. DGS and CalVet anticipate that the editing process will continue through July. After an agreed upon definition is established, DGS will incorporate the definition by reference into RESD Bulletin 18-08.

California State Auditor's Assessment of 6-Month Status: Pending

60-Day Agency Response

As previously noted, DGS believes that a standardized process for departments to submit - and for DGS to review - justifications for leases is most appropriate. Specifically, for CalVet leases, CalVet has begun drafting an internal definition of what constitutes being "in the best interests of the Veteran's homes" when leasing veterans home property. DGS has met with CalVet and will have future meetings with them to provide guidance on that definition. When CalVet submits a lease request, they will need to show how it meets their definition as part of the process outlined in DGS' Bulletin 18-08.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #7 To: General Services, Department of

To ensure that all leases of veterans home property protect the interests of the State and the homes, DGS should review the current 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 any areas of noncompliance and concern.

Annual Follow-Up Agency Response From October 2020

DGS completed the review of the existing leases and reached out to all the lessees. Although the lessees declined to renew/amend their respective lease agreements at this juncture, DGS plans to negotiate the leases when they come up for renewal. Any such negotiations will ensure they meet the definition in SAM 1323.1. This recommendation is complete as of October 2020.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

DGS provided records of its contact with the lessees and the lessees' stated desires not to amend their leases. DGS also provided documentation regarding its attempts to establish a valid lease for the lessee whose lease was void under state law - the Town of Yountville's lease of the veterans home pool - but the Town declined to enter a new lease and returned the property to the veterans home.

1-Year Agency Response

DGS has completed its review of existing lease terms, and worked closely with CalVet in understanding the current practices/operations of the lessees to understand whether they are complying with the agreements and whether they are providing services beyond what is required in the leases. Subsequent to these reviews/internal discussions, DGS/CalVet held discussions with the lessees. DGS was able to achieve some gains, including additional free tickets to the home for each engagement at the Lincoln Theater for the members, the provision of exclusive use of the theater to the Administrator without any fee or remuneration for two Veteran Home events per calendar year. Likewise, the Napa Valley Balloon company has vacated the property relieving the state of the liability associated with the launching of balloons from the Yountville property. While several of the lease discussions with lessees are ongoing, DGS will continue to comply with the RESD Bulletins as new leases are requested and existing leases come up for renewal.

California State Auditor's Assessment of 1-Year Status: Partially Implemented

DGS provided the assessments that it and CalVet conducted regarding whether the active leases meet the criteria for being in the best interests of the veterans homes. DGS has not yet provided evidence of the additional gains it obtained for the veterans homes in its discussions with lessees, including evidence of free tickets from the Lincoln Theater for home residents.

6-Month Agency Response

DGS and CalVet have continued to work together to identify paths forward on existing leases. To date, the departments have met with 4 of the 14 lessees and are using these initial meetings as a template for the remaining 10. We will continue to work closely with CalVet on the current terms of these leases to explore any possible advantages to void or renegotiate current documents.

California State Auditor's Assessment of 6-Month Status: Pending

60-Day Agency Response

DGS has had an initial meeting with CalVet to discuss leases identified in the audit of concern. Future meetings have been scheduled with CalVet to review in detail the leases as well as to meet with the lessees in Yountville to see where leases, if appropriate, can be voided or renegotiated with more favorable terms for the State of California and CalVet.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #8 To: General Services, Department of

To remind state entities about the requirements for agreements that convey an interest in state property, by June 2019 DGS should issue guidance about its approval authority for such agreements.

1-Year Agency Response

As of September 17, 2019, DGS has provided a reminder to all department facility groups that they must go through DGS for leased space.

California State Auditor's Assessment of 1-Year Status: Fully Implemented

DGS provided evidence of the memorandum it distributed to state entities to remind them of DGS's lease approval authority.

6-Month Agency Response

DGS has drafted a memorandum, to be sent to all state departments, reminding them of DGS' role in the leasing process. Upon finalization, the memo will be distributed via e-mail to all facility contacts throughout the state.

California State Auditor's Assessment of 6-Month Status: Pending

60-Day Agency Response

DGS is drafting a formal reminder for state departments to follow. Once the reminder has been finalized, DGS will notify appropriate departmental contacts. In addition, DGS will discuss the new policy with members of the General Services Workgroup (GSW).

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation for Legislative Action

To improve the effectiveness of lease payment collection, the Legislature should amend state law beginning in fiscal year 2019-20 to require that DGS receive lease payments for all veterans home property leases, except those for employee housing and those that are required to be deposited into the morale fund.

Description of Legislative Action

As of January 29, 2022, the Legislature has not taken action to address this specific recommendation.

California State Auditor's Assessment of Annual Follow-Up Status: No Action Taken

Description of Legislative Action

As of January 29, 2021, the Legislature has not taken action to address this specific recommendation.

California State Auditor's Assessment of Annual Follow-Up Status: No Action Taken

Description of Legislative Action

As of January 2020, the Legislature has not taken action to address this specific recommendation.

California State Auditor's Assessment of 1-Year Status: No Action Taken

Description of Legislative Action

The Legislature has not taken action to address this specific recommendation.

California State Auditor's Assessment of 6-Month Status: No Action Taken

Description of Legislative Action

The Legislature has not taken any action to address this specific recommendation.

California State Auditor's Assessment of 60-Day Status: No Action Taken

Recommendation #10 To: Veterans Affairs, Department of

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 to its appropriation for the homes 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.

Annual Follow-Up Agency Response From October 2022

As stated in prior submission from October 8, 2021, no response is needed since the "Will Not Implement" was submitted during the update made on January 30, 2020.

California State Auditor's Assessment of Annual Follow-Up Status: Will Not Implement

Annual Follow-Up Agency Response From October 2021

As stated in prior submission from October 23, 2020, no response is needed since the "Will Not Implement" was submitted during the update made on January 30, 2020.

California State Auditor's Assessment of Annual Follow-Up Status: Will Not Implement

1-Year Agency Response

As mentioned at the Department's six-month update, as part of the 2019-20 budget process, the Legislature passed and Governor Newsom signed a budget trailer bill in which language in the Military and Veterans Code was updated to align with the Department's budget structure. The modifications eliminated outdated language directing certain revenues to augment the Veterans Home's budget appropriation, bringing the code in line with legislatively approved budget practices that have been observed since 2008 and meeting the State Auditor's recommendation.

As for the revenues generated between July 2015 and June 2018, CalVet has not pursued those funds, for two reasons. The first is the Department's interpretation of the language is that the Legislature never intended for CalVet to pursue that revenue as an augmentation since changing the structure of the budget, and that the language simply remained outdated until it was changed last year. The second reason is that, with the exception of fiscal year 2017-18, all other fiscal years have reverted. Pursuing the funds after the fact would not represent any additional revenue for use in the Veterans Home operations or programming for the residents.

California State Auditor's Assessment of 1-Year Status: Will Not Implement

CalVet is correct that the Legislature revised state law to no longer require that proceeds from leases of veterans home property be directed to veterans homes. However, in its response CalVet states that it will not pursue an augmentation to its appropriation for the lease revenues generated before that law change, from July 2015 through June 2018. As we discuss in the report, regardless of whether CalVet believed that the language in state law was outdated, state law in effect during that time required that proceeds from leases of veterans home property augment the appropriation to the homes. In its response, CalVet also states that pursuing these funds would not represent any additional revenue for the homes. However, CalVet advised our office that, even if CalVet could obtain those funds for the home, it would not do so because of its belief that the Legislature did not intend for the homes to receive these funds. Because CalVet has chosen to forego this revenue for the veterans homes, CalVet will not implement this recommendation.

6-Month Agency Response

As part of the 2019-20 budget process, the Legislature passed and Governor Newsom signed a budget trailer bill in which language in the Military and Veterans Code was updated to align with the Department's budget structure. The modifications eliminated outdated language directing certain revenues to augment the Veterans Home's budget appropriation, bringing the code in line with legislatively approved budget practices that have been observed since 2008 and meeting the State Auditor's recommendation.

California State Auditor's Assessment of 6-Month Status: Pending

CalVet has not yet provided documentation to support that it has sought a budget augmentation for the lease revenues it generated from July 2015 through June 2018. As we reported, this amount of $509,000 should have been added to the appropriation to the homes. We continue to recommend that CalVet seek this budget augmentation.

60-Day Agency Response

CalVet is currently reviewing the most appropriate action to address the statutory language.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #11 To: Veterans Affairs, Department of

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 that the lessees are making the correct rent payments.

Annual Follow-Up Agency Response From November 2022

CalVet's Commercial Leases policy has provided a defined process for monitoring lease payments. CalVet continues to have two tenants that pay rent based on percentage of sales. CalVet performs a payment compliance review on the sales information provided by these tenants, which consists of:

1. The AAFES store worksheet with a screenshot from their respective point of sale (POS) system to verify the rent amount calculated.

2. The Vintners Golf Club signed certification letter with their financial information to verify the worksheet for the rent amount calculated.

CalVet has held discussions with our Chief Counsel and has coordinated efforts with the Department of General Services (DGS) to ensure the one tenant that was in rent payment default no longer occupies leased spaces. CalVet confirms the notice of default and demand for payment of rents were provided to this tenant and the operating agreement is being terminated.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

Annual Follow-Up Agency Response From December 2021

CalVet continues to strengthen the process for monitoring lease payments and maintaining compliance for all lease payments. In doing so, CalVet will:

1. Ensure the documentation received from lessees paying rent based on a percentage of sales is sufficient to appropriately calculate the lease payment due and collected.

2. Enhance the follow-up action process which will include written notification to tenants that fail to pay on rent due.

California State Auditor's Assessment of Annual Follow-Up Status: Pending

Annual Follow-Up Agency Response From October 2020

A documented set of procedures for the process on tracking and collecting lease payments has been drafted by CalVet's State Asset Manager. The formalized process will demonstrate how lease payments are tracked and recorded. Currently, CalVet continues to maintain a file on each leased property and use a matrix to trace lease payments and collection of updated materials. An evaluation of sales revenue continues to be performed on a periodic basis.

Documented evidence:

CalVet's Commercial Tenant Rent Tracking Policy, draft policy 7912v.1

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

CalVet provided evidence of a tracking process for lease payments, but explained that it has not yet formalized that process. To ensure that CalVet collects all lease payments that it is owed, and that it collects the appropriate amount, CalVet must develop and implement formal procedures for doing so. Until CalVet demonstrates that it has implemented such procedures, we will not consider this recommendation to be fully implemented.

1-Year Agency Response

CalVet's State Asset Manager at the Veterans Home of California - Yountville maintains a file on each leased property, containing a checklist of all required documentation, and monitors the status. This employee also maintains a matrix of all expiration dates for components such as a license or insurance policy, and a calendar tracking lease payments and collection of updated materials. Additionally, the State Asset Manager is working closely with the Golf Course operator to evaluate their sales revenue and ensure rent payments are aligned with these figures in accordance with the payment formula.

California State Auditor's Assessment of 1-Year Status: Partially Implemented

CalVet provided evidence of a tracking process for lease payments, but has not yet formalized that process. To ensure that CalVet collects all lease payments that it is owed, and that it collects the appropriate amount, CalVet must develop formal procedures for doing so. Until CalVet develops such procedures, we will not consider this recommendation to be fully implemented.

6-Month Agency Response

CalVet agrees with and is implementing this recommendation. As mentioned in a previous update, staff met with one lessee identified in the report to review accounting records. Additionally, staff are working on a schedule and tracking tool as well as internal procedures to improve payment monitoring. CalVet also hired a new State Asset Manager earlier this year and they are working with Headquarters staff and CalVet's information services division to complete this workload.

California State Auditor's Assessment of 6-Month Status: Pending

60-Day Agency Response

CalVet agrees with and is implementing this recommendation. Staff have met with one lessee identified in the report to review accounting records and are considering procedural changes to improve payment monitoring. Further, a new State Asset Manager has been appointed who will monitor payment compliance as a primary responsibility.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #12 To: Veterans Affairs, Department of

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.

1-Year Agency Response

The CalVet State Asset Manager conducted this assessment in 2019 and will continue to do so each year. Currently, all tenants of state owned housing, either, are paying a rate that represents fair market value, or are paying incrementally increasing rates in accordance with CalHR guidelines and state law.

California State Auditor's Assessment of 1-Year Status: Fully Implemented

CalVet provided evidence that it complied with CalHR requirements by conducting and submitting to CalHR an assessment of the market value of the employee housing units in 2019. CalVet also provided evidence that it has raised rent on its employee housing units to market value where possible, and that it is incrementally increasing rental rates for the remaining tenants in accordance with CalHR guidelines.

6-Month Agency Response

CalVet has begun the market research and assessments associated with implementing this recommendation. This recommendation is partially complete, and work continues by headquarters staff and the State Asset Manager hired earlier this year. In keeping with CalHR's guidelines, CalVet anticipates completing this effort by September 30, 2019.

California State Auditor's Assessment of 6-Month Status: Pending

60-Day Agency Response

CalVet agrees with and will implement this recommendation beginning in June 2019.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #13 To: General Services, Department of

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 cases 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.

Annual Follow-Up Agency Response From October 2020

As noted in the prior response, DGS is working on renewing a lease at the Veteran's home. However, the COVID-19 pandemic has impacted those negotiations and it has taken longer to execute the agreement. However, DGS expects the lease to be finalized by the end of December 2020. The lease will be consistent with the RESD Policy Bulletins 18-04, 18-05, and 18-06 describing DGS' policy on establishment of rental rates at and below fair market value and the use of in-lieu benefits. It will also show the documentation standards described in RESD Policy Bulletin 18-11.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

DGS's policies describe the process that DGS will follow to determine fair market value, and the requirements that state departments must follow when requesting reduced rent for in-lieu benefits. After submitting its updated response to this recommendation, DGS provided evidence that it is implementing these policies. Specifically, DGS demonstrated that it had determined the fair market rent for a property at the Yountville veteran's home prior to leasing the property. It also provided evidence of the calculation of the value of the in-lieu benefits that the lessee would provide to the veterans home, and DGS's corresponding reduction of that rental amount. Because DGS demonstrated that it has begun implementing its policies, we consider this recommendation fully implemented.

1-Year Agency Response

DGS' State Owned Leasing and Development (SOLD) has updated its file documentation standards, as outlined in RESD Policy Bulleting 18-11, to include documentation that shows how fair market value rents were calculated. RESD Policy Bulletins 18-04, 18-05, and 18-06 describe DGS' policy on the establishment of rental rates at and below fair market value and the use of in-lieu benefits. DGS is currently in the process of renewing a lease at the Veterans home in Yountville, which will be the first example of a completed lease (new or renewal) at the Home since the audit.

California State Auditor's Assessment of 1-Year Status: Partially Implemented

DGS's policies describe the process that DGS will follow to determine fair market value, and the requirements that state departments must follow when requesting reduced rent for in-lieu benefits. We will reserve assessing this recommendation as fully implemented until DGS provides evidence that it has applied these policies when leasing veterans home property.

6-Month Agency Response

SOLD has updated its file documentation, as outlined in RESD Policy Bulleting 18-11, to include documentation that shows how fair market value rents were calculated. While we are currently in the process of renewing a lease at the Veterans home in Yountville, we do not yet have an example of any completed lease (new or renewal) at the Home.

California State Auditor's Assessment of 6-Month Status: Pending

60-Day Agency Response

DGS issued the Real Estate Services Division (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 the use of in-lieu benefits. DGS is documenting the files to ensure compliance and has issued RESD Policy Bulletin 18-11 to ensure consistent and appropriate documentation of all the State Owned Leasing and Development (SOLD) leases. As future CalVet lease requests are processed, the policy bulletins will be applied.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #14 To: General Services, Department of

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 it should reimburse the General Fund for the amounts it inappropriately deposited into the property acquisition law money account. DGS should also annually notify the Department of Finance and the Legislature of the amount of lease payments it collects to ensure that those proceeds are appropriately directed to the veterans homes.

1-Year Agency Response

DGS agrees that the lease payments deposited into the property acquisition law money account should be returned to the General Fund (GF). As such, CalVet recently invoiced DGS for the past 3 fiscal years. DGS has processed those invoices and remitted a check to CalVet for $118,000. DGS accounting also invoiced and remitted a check to CalVet for FY 2018-19. Moving forward to facilitate the funds getting to the GF more quickly, DGS accounting has initiated an agreed upon process between DGS and CalVet accounting where DGS will send checks to CalVet quarterly.

California State Auditor's Assessment of 1-Year Status: Fully Implemented

DGS provided records showing that it remitted checks totaling $118,000 to CalVet for the lease payment proceeds that it collected from fiscal year 2015-16 through fiscal year 2017-18. It also provided records showing that it remitted a check to CalVet for the lease proceeds it collected in fiscal year 2018-19. Because the Legislature recently amended state law to require that proceeds from veterans home leases are to be deposited into the general fund rather than directed to the veterans homes, we do not expect DGS to notify the Department of Finance or the Legislature of the amount of lease payments it collects for the purpose of directing those payments to the veterans homes.

6-Month Agency Response

DGS agrees that the lease payments deposited into the property acquisition law money account should be returned to the General Fund. As such, CalVet recently invoiced DGS for the past 3 fiscal years. DGS is processing those invoices to move those funds in the amount of over $118,000 to the General Fund. DGS and CalVet accounting are working on the best process for resolving the Current Year 2018-19 and future lease payment funds to ensure the payments are deposited into the General Fund moving forward.

California State Auditor's Assessment of 6-Month Status: Pending

60-Day Agency Response

DGS agrees that the lease payments deposited into the property acquisition law money account should be returned to the General Fund. As such, DGS is working to correct the past years' funds and transfer those funds to the General Fund. While the recommendation suggests that deposited lease payments should go to augment appropriations of the veterans homes, it is CalVet's position that this statutory requirement is an artifact of an outdated budget methodology that is no longer in use, and therefore, they recommend removal of the statutory requirement that deposited lease payments go to augment the current appropriations of the veterans homes.

California State Auditor's Assessment of 60-Day Status: Pending

Current state law requires that the veterans homes receive the proceeds from leases of veterans home property as an augmentation to their appropriation. Therefore, notwithstanding CalVet's position that this statutory requirement is outdated, unless and until the law changes, DGS should deposit the lease payments it collects to the General Fund and notify the Legislature and the Department of Finance that those amounts should be directed to the veterans homes.

Recommendation for Legislative Action

To protect the interests of the State and veterans homes, the Legislature should amend state law to require CalVet to promulgate regulations that define what types of short-term uses of veterans home property are in the best interests of the homes, including the interests of the residents of the homes, and to include in all short-term use agreements conditions that protect the State's best interests; prohibit CalVet from approving any short-term uses of the veterans home property that do not meet its definition of the best interests of the home; require CalVet to develop and implement a fee schedule for short-term third-party uses of veterans home property.

Description of Legislative Action

As of January 29, 2022, the Legislature has not taken action to address this specific recommendation.

California State Auditor's Assessment of Annual Follow-Up Status: No Action Taken

Description of Legislative Action

SB 1177 (Jones, 2020) would have required CalVet to promulgate regulations that define the types of short-term uses of Veterans' home property that are in the best interests of the homes, including the residents. The bill would have prohibited CalVet from approving short-term use agreements that do not meet that definition. The bill would have required all short-term use agreements to include conditions that protect the state's best interests. Finally, the bill would have required CalVet to develop and implement a fee schedule for short-term third-party uses of veterans' home property. This bill failed passage due to adjournment of the 2019-20 Regular Legislative Session.

California State Auditor's Assessment of Annual Follow-Up Status: Legislation Proposed But Not Enacted

Description of Legislative Action

AB 240 would further require that each use of real property held by Veterans Affairs for a home by a person or entity other than the home be in writing and meet certain criteria, including that it provide principal and direct benefits to the home and its members and be appropriate to the home's nature as a long-term care facility. As of January 2020 this bill is in the Senate Inactive file.

California State Auditor's Assessment of 1-Year Status: Legislation Introduced

Description of Legislative Action

AB 240 would further require that each use of real property held by Veterans Affairs for a home by a person or entity other than the home be in writing and meet certain criteria, including that it provide principal and direct benefits to the home and its members and be appropriate to the home's nature as a long-term care facility.

California State Auditor's Assessment of 6-Month Status: Legislation Introduced

Description of Legislative Action

AB 240 would require that each use of real property held by Veterans Affairs for a home by a person or entity other than the home meet certain requirements, including a requirement that the use generates revenue by compensating for the use of the real property at fair market value.

California State Auditor's Assessment of 60-Day Status: Legislation Introduced

Recommendation #16 To: Veterans Affairs, Department of

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 the balloon launches from the golf course or amend its lease with the lessee to identify balloon launches as an approved use of the property.

Annual Follow-Up Agency Response From October 2021

CalVet's State Asset Manager has developed and published a Commercial Leases: Use Monitoring, Rent Tracking and Ensuring Veterans Homes Resident Benefits Policy 7912 v.1 on 10/24/20), which addresses the following:

1. The process for the monitoring of property usage and required permits, licenses, inspections and insurance

2. Management's role and oversight responsibility to discuss compliance and due dates of all entries in the Lease summary of the lease.

3. Physical site visits monthly.

4. The process for monitoring leases that are less than fair market value rent or no rent in-lieu of services and record retention.

5. Tracking of Leases that require Veterans Home Resident Benefits and the Resident Awareness of lease Benefit.

This process has strengthened the internal controls for monitoring the use of leased properties and to take action to cease any activity that is not allowed by the terms of the lease agreements.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

CalVet previously provided evidence that the hot air balloon launches at the golf course on the Yountville veterans home have ceased. CalVet also provided its new, formalized policy describing how its State Asset Manager will monitor activities on the leased properties, and documentation of site visits to monitor leased properties.

Annual Follow-Up Agency Response From October 2020

A documented set of procedures for the monitoring activity performed by CalVet's State Asset Manager is being developed. The formalized process will demonstrate the following:

1. How monitoring activities of lease properties are completed;

2. Actions taken to resolve any discrepancies encountered;

3. The communication to respective CalVet management on the monitoring activities completed, along with actions that are pending.

The process will strengthen the internal controls for leased space.

Documented Evidence:

CalVet's Home Resident Benefits and Monitoring of Commercially Leased Premises, draft policy 7913v1

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

CalVet provided evidence that the hot air balloon launches at the golf course on the Yountville veterans home have ceased. CalVet also provided a policy describing how its State Asset Manager will monitor activities on the leased properties, but stated that it has not yet fully implemented that policy. Until CalVet implements formalized procedures for monitoring activities at the veterans homes, the recommendation will not be fully implemented.

1-Year Agency Response

As mentioned in the six-month update, CalVet has taken steps to ensure activities and uses on its properties benefit the Veterans Homes and are in keeping with their purpose. Specifically, hot air balloon launches have been discontinued on CalVet property. The parties identified in the audit as lacking valid property use agreements have vacated. The Department has provided copies of the letters to these tenants and, separately from this submission, will provide a copy of the letter it sent regarding the balloon launches.

Further, the Department hired a State Asset Manager for the Veterans Home in Yountville. This employee maintains a strong line of communication with all tenants and a presence at their leased spaces. This employee engages in frequent communication with these tenants. This serves two purposes: to address needs that arise in the leased spaces, such as maintenance, and to ensure the Department maintains a strong understanding of the activities occurring in these locations and that they are operating in accordance with the Department's new property use policy.

California State Auditor's Assessment of 1-Year Status: Partially Implemented

CalVet provided evidence that the hot air balloon launches at the golf course on the Yountville veterans home have ceased. CalVet also described a process that its State Asset Manager follows to monitor activities on the leased properties. However, CalVet has not yet formalized that process. Until CalVet develops formal procedures for monitoring activities at the veterans homes, the recommendation will not be fully implemented.

6-Month Agency Response

CalVet has taken steps to ensure activities and uses on its properties benefit the Veterans Homes and are in keeping with their purpose. Specifically, hot air balloon launches have been discontinued on CalVet property. The parties identified in the audit as lacking valid property use agreements have vacated. Further, the Department's policy maintains that licensed events that take place on the properties must significantly benefit the residents of the Veterans Homes and be conducive to the Homes' successful functioning as skilled nursing, assisted living, and independent living facilities.

California State Auditor's Assessment of 6-Month Status: Pending

CalVet has not yet provided evidence to support that it has fully implemented this recommendation.

60-Day Agency Response

CalVet agrees with and is implementing this recommendation. CalVet has notified the golf course that the balloon launches are not compliant with the lease and must be terminated by July 1, 2019. CalVet headquarters is now actively monitoring activities on leased properties and implementing appropriate corrective actions as necessary.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #17 To: Veterans Affairs, Department of

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.

60-Day Agency Response

CalVet has fully 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.

California State Auditor's Assessment of 60-Day Status: Fully Implemented

All Recommendations in 2018-112

Agency responses received are posted verbatim.