State of California

OFFICE OF THE INSPECTOR GENERAL
MATTHEW L. CATE, INSPECTOR GENERAL
FOR IMMEDIATE RELEASE
October 31, 2006
For Additional Information Contact:
Brett H. Morgan
Chief Deputy Inspector General
(916) 830-3600

The Department of Corrections and Rehabilitation has improperly paid millions of dollars to
substance abuse treatment providers because of its poor management of contractors
The California Department of Corrections and Rehabilitation overpaid three substance abuse treatment
contractors nearly $5 million over a four-year period and allowed one of the contractors to overstate its
expenses by more than $250,000, the Office of the Inspector General reported in a special review
released today.
The department has also violated state law by allowing contractors to retain ownership of potentially
millions of dollars of property purchased with state funds and failed to hold a contractor accountable for
mishandling confidential inmate information, the Inspector General said.
“These findings raise serious concerns about the department’s administration of substance abuse
treatment program contracts,” said Inspector General Matthew L. Cate.
“Fortunately, if the department acts promptly, it can recover the entire $5 million in overpayments and
the $250,000 in overstated expenses” Cate said. The department may have only until December 31st to
recover the funds, said Cate.
The Office of the Inspector General found that the department did not detect the $5 million in
overpayments because it failed to enforce contract terms that limit payments to the lower of established
rates or the contractors’ actual costs.

OFFICE OF THE INSPECTOR GENERAL ٠ http://www.oig.ca.gov/
٠ P.O. Box 348780, Sacramento, CA 95834-8780 ٠ 916-830-3638 ٠ fax: (916) 928-5974 ٠ e-mail: Inquire@oig.ca.gov ٠

The review revealed that the actual costs incurred by each of the three contractors––Mental Health
Systems, Walden House, and WestCare––in fulfilling their responsibilities as substance abuse service
coordinators during fiscal years 2000-01 through 2003-04 were less than the revenue the department paid
them for those periods. According to the terms of the contracts, the contractors should have refunded
the difference to the department.
In addition, the review found that one of the contractors–– Mental Health Systems––overstated its
expenses for providing services by more than $250,000 from fiscal year 2000-01 through 2003-04 by not
following normal accounting rules and expensing the entire value of 22 automobiles purchased with state
funds during that period. The department’s contract required the contractor to follow generally accepted
accounting principles, which require the contractor to depreciate the costs of the automobiles over the
useful life of the vehicle––typically five years.
In response to questions raised by Senator Jackie Speier, the Inspector General also reported that the
department has improperly allowed contractors to retain ownership of potentially millions of dollars of
equipment purchased with state funds. The problem results from a budget guide developed by the
department that allows some contractors to retain ownership of equipment purchased with state monies
if the equipment has a unit cost of $5,000 or less.
“This provision is not only inconsistent with state policy,” said Cate, “it also violates state law, which
prohibits gifts of public funds.”
The department did not capture the information needed to determine the value of equipment that the
department has improperly given to contractors. But considering that in fiscal year 2005-06 alone, the
department processed more than $2.6 billion in contracts, the Inspector General pointed out that the
amount of equipment relinquished to contractors through this inappropriate provision could be in the
millions of dollars.
The special review revealed in addition that the department failed to hold a substance abuse contractor––
Phoenix Houses of California––accountable for mishandling confidential inmate information. The
contractor provided substance abuse treatment services to inmates at the Substance Abuse Treatment
Facility and State Prison at Corcoran until its contract lapsed in June 2006. The Inspector General
reported that even though the investigative services unit at the prison determined that some of the
contractor’s records containing confidential inmate information had been found in the dumpster of a
OFFICE OF THE INSPECTOR GENERAL ٠ http://www.oig.ca.gov/
٠ P.O. Box 348780, Sacramento, CA 95834-8780 ٠ 916-830-3638 ٠ fax: (916) 928-5974 ٠ e-mail: Inquire@oig.ca.gov ٠

nearby private business, it closed its investigation because all of the parties interviewed denied dumping
the records.
“The investigative services unit’s investigation was inadequate in that it failed to develop the information
needed to allow the department to make appropriate factual and legal conclusions about who was
responsible for the improper dumping of the confidential information,” Cate said. “As a result, the
department did not hold the responsible party accountable for its actions.”
The full text of the Inspector General’s special review can be viewed and downloaded from the Office of
the Inspector General’s web site at http://www.oig.ca.gov/. To view the report, click on the report title,
“Special Review into Concerns Related to Substance Abuse Treatment Contractors” (October 2006) on
the home page or on the link to Bureau of Audits and Investigations, Special Reviews, under “Substance
Abuse Treatment Contractors, Special Review” (October 2006).
The Office of the Inspector General is an independent state agency responsible for oversight of the
California Department of Corrections and Rehabilitation. The office carries out its mission by conducting
audits, special reviews, and investigations of the department to uncover criminal conduct, administrative
wrongdoing, poor management practices, waste, fraud, and other abuses by staff, supervisors, and
management. The special review was conducted under the authority provided to the Inspector General in
California Penal Code section 6126.
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OFFICE OF THE INSPECTOR GENERAL ٠ http://www.oig.ca.gov/
٠ P.O. Box 348780, Sacramento, CA 95834-8780 ٠ 916-830-3638 ٠ fax: (916) 928-5974 ٠ e-mail: Inquire@oig.ca.gov ٠