LAC Department of Mental Health Public Portal

	LOS ANGELES COUNTY DEPARTMENT OF MENTAL HEALTH
	Policy 812.03 Financial Responsibility Requirements for Existing DMH Contractor
	PROCEDURES

Pursuant to the contract terms, a contractor must annually submit to the Los Angeles County Department of Mental Health (DMH/Department) Contracts Development and Administration Division (CDAD) a current audited, reviewed, or compiled financial statement. A financial statement is considered "current" if fiscal year or year ended period is less than 18 months prior to their submission to DMH.
Upon receipt of the contract negotiation package, CDAD completes Attachment II Request for Financial Viability Review and submits the completed form together with the contractor's financial statements to the Financial Services Bureau, Fiscal Audit Monitoring Section (FAMS).
FAMS staff (evaluator), using Attachment III Financial Statement Analysis for Non-Governmental Organization (NGO) form, evaluates the financial statements for appropriateness, the nature of the auditor's opinion (applicable for audited financial statements only), and the determination of financial ratios.
1. Evaluator determines the financial statement type as defined by the County standard, the extent of completeness, and timeliness status.
2. Evaluator ascertains that the opinion was rendered by the independent auditor, i.e., unqualified, qualified, etc. (applicable for audited financial statements only).
3. Evaluator determines, as indicated by the County standard, the contractor's quick, current, expense ratios, and net assets.
Solvency/Working Capital grading/review criteria:
1. Quick ratio: purpose - to evaluate that the available cash and quickly convertible to cash assets are sufficient to meet current liabilities.
  1. Short-term securities/investments are assumed to be valued at current fair market value for purposes of this financial ratio evaluation. Any changes made on the value of securities/investments as originally shown on the financial statement(s) that will affect the result of financial ratio evaluation would require the contractor to provide a proof certified by its Certified Public Accountant (CPA).
  2. Formula: cash + short-term investments + accounts receivable / current liabilities.
  3. Criterion: must be fair or good.
    1. Weak: < 1
    2. Fair: > 1 < 2
    3. Good: > 2
2. Current Ratio: purpose - to evaluate that the current assets are sufficient to satisfy current liabilities.
  1. Short-term securities/investments are assumed to be valued at current fair market value for purposes of this financial ratio evaluation. Any changes made on the value of securities/investments as originally shown on the financial statement(s) that will affect the result of financial ratio evaluation would require the contractor to provide proof which is to be certified by its CPA.
  2. Formula: current assets / current liabilities
  3. Criterion: must be fair or good
    1. Weak: < 1
    2. Fair: > 1 < 2
    3. Good: > 2
3. Expense/Income ratio: purpose - to evaluate the contractor's ability to generate sufficient income to meet its expenses.
  1. Adjustment of expenses may be made for any non-cash expenses for purposes of this financial ratio evaluation. Example of non-cash expenses are depreciation and amortization. Adjustment for one-time transactions and/or events such as reserve/contingency set aside(s) in a year may also be considered. One-time events will be dealt with by the DMH on a case-by-case basis.
  2. Formula: expenses before taxes - non-cash expenses – any one-time event expense(s) / gross income.
  3. Criterion: must be fair or good.
    1. (1) Weak: >1
    2. (2) Fair: =1
    3. (3) Good: <1
4. Tangible Net Asset requirement: purpose - to evaluate longer term financial viability.
  1. Intangible assets are not physical in nature. The term intangible is applied for accounting purposes to all non-physical property including organizational costs, leasehold costs, goodwill, patents, copyrights, trade names, secret formulas, franchises, and licensing.
  2. Tangible assets including short/long-term investments and real property may be valued either at cost or current fair market value for purposes of this financial viability ratio evaluation. Any changes made on the value of securities/investments and fixed assets as originally shown on the financial statement(s) that will affect the result of financial ratio evaluation would require the contractor to provide proof which is to be certified by its CPA.
  3. Tangible Net Assets means tangible assets less total liabilities.
  4. Formula: (total assets - intangible assets) - total liabilities.
  5. Criterion: must be "pass."
    1. Weak: Negative tangible net assets
    2. Pass: Positive tangible net assets
Upon completion of the analysis, FAMS prepares the financial viability report.
1. Whether a contractor meets or does not meet all or any of the four (4) review criteria as part of the evaluation process, FAMS notifies the CDAD and the Program Deputy Director, provides a copy of the report to the Director of Financial Services, and informs the contractor by mail on the result of the viability evaluation.
2. A contractor that does not meet all or any of the four (4) review criteria may appeal in writing to the DMH Director. The Director or his/her designee will forward the contractor's appeal letter and supporting documentation to the Director of Financial Services or Administrative Deputy for reevaluation of the contractor's financial statements. Such reevaluation will be on the basis of the information and documents submitted to the Director as part of the appeal process. The result of the reevaluation will be subjected to review and approval of the Director of Financial Services or Administrative Deputy. The original copy of the reevaluation report will be sent to the contractor and a copy will be provided to the DMH Director or his designee, Deputy Director, and CDAD Chief. The DMH Director or his/her designee will notify the contractor in writing of the appeal decision.
3. At the start of every fiscal year, FAMS will send a list to Provider Reimbursement Unit and District Chiefs containing all of the contractors that met or did not meet all or any of the four (4) criteria for the financial viability evaluation. FAMS will specify which criteria were not met for each provider.
On a quarterly basis, FAMS prepares a report of all contractors that did not meet all or any of the four review criteria as part of the financial viability evaluation, specifying which criteria were not met for each contractor. The report is provided to the DMH Executive Management Team (EMT) with an accompanying cover memo signed by the Director of Financial Services or Administrative Deputy.
1. A contractor that did not meet all or any of the four (4) review criteria of the financial viability evaluation may be required to submit a Business Plan (BP) for any of the following reasons.
  1. The contractor did not meet three (3) of the financial viability criteria; or
  2. The contractor's financial operations for each of the last three (3) consecutive years resulted in losses; or
  3. The contractor has a negative net worth.
2. The BP is to be for a period of one (1) year and is to include a projected monthly income/expenditure statement and projected cash flow statement, and is to be supported by a statement on how the deficiency/cies is/are to be corrected.
3. Contractor is to submit to DMH on a monthly basis the actual and projected income and expenditures statement and the actual and projected cash flow statement.
4. If the NGO repeatedly fails to meet the DMH's financial viability requirements, the DMH lead manager for the NGO is to evaluate and recommend to the EMT the appropriate action to be taken which may be termination or non-renewal of the contract.