California is the nation’s most populous state and the eighth-largest economy in the world. California is estimated to receive approximately $85 billion in Recovery Act funds, or about 10 percent of the funds available nationally. Nearly 80 percent of Recovery Act funding to states and localities is projected to be distributed within the first 3 years. Peak projected outlays are in fiscal year 2010, with outlays that year projected to be more than twice the level of fiscal year 2009 outlays. The California Recovery Task Force (Task Force), which was established by the Governor in March 2009, has overarching responsibility for ensuring that the state’s Recovery Act funds are spent efficiently and effectively and are tracked and reported in a transparent manner. The Task Force reports on the use and status of Recovery Act funds using the state’s recovery Web site (www.recovery.ca.gov). In addition to the Task Force’s efforts, other California entities with oversight responsibilities, including the State Auditor, have expanded the scope of their work to include a focus on state programs receiving Recovery Act funds. As of December 9, 2009, the Task Force estimated that approximately $53 billion has been allocated to California state agencies and local governments, nonprofits, local education agencies, and private companies through spending programs. The remaining portion, approximately $30 billion, is being provided to individuals and businesses in the form of direct tax relief. Approximately $33.7 billion has been awarded and $17.8 billion has been expended. As shown in figure 1, health, education, and labor accounted for almost 96 percent of California’s Recovery Act expenditures. The largest programs within these areas were the state Medicaid program and SFSF. To help measure the impact of the Recovery Act, the act contains numerous provisions that require recipients of Recovery Act funding to report quarterly on several measures. Nonfederal recipients of Recovery Act funds, such as state and local governments, private companies, educational institutions, and nonprofits, are required to submit reports with information on each project or activity, including amounts and a description of the use of funds and an estimate of the jobs created or retained. To collect this information, the U.S. Office of Management and Budget (OMB) and the Recovery Accountability and Transparency Board created a nationwide data collection system to obtain data from recipients, www.federalreporting.gov (FederalReporting.gov), and another site for the public to view and download recipient reports, Recovery.gov. Shortly before recipients could begin entering data into FederalReporting.gov for the second quarterly reporting period, OMB issued a memorandum for the heads of U.S. executive departments and agencies on December 18, 2009, updating its reporting guidance on the Recovery Act, in response to suggestions made by recipients, agencies, and our recommendations. The updated guidance focuses on issues related to data quality, nonreporting recipients, and reporting of job estimates, among other important reporting requirements. We previously reported that the Task Force, with the assistance of the state’s Chief Information Officer (CIO), created and deployed a central information technology system for state departments to report quarterly recipient report data. For the first two rounds of recipient reporting, California established a centralized reporting system, the California ARRA Accountability Tool (CAAT), which state agencies receiving Recovery Act funds used to report their data to the Task Force. California’s CIO, on behalf of the Task Force, was responsible for collecting the data from state agencies and uploading the data to FederalReporting.gov. California used Recovery Act funds to help balance the state fiscal year 2009-2010 budget, when the state faced a nearly $60 billion budget gap, and future budget shortfalls are expected. As discussed in our prior reports, California balanced its state fiscal year 2009-2010 budget by, among other things, making more than $31 billion in cuts, increasing taxes by $12.5 billion, and using over $8 billion in Recovery Act funds. However, California’s long-term fiscal prospects remain of concern. For example, in November 2009, the Legislative Analyst’s Office (LAO) estimated the size of the 2009-2010 and 2010-2011 budget shortfall at about $21 billion. According to the LAO, the main reasons for the budget gaps are: the inability of the state to achieve previous budget solutions in several areas, the effects of several adverse court rulings and, for 2010-2011, the expiration of various one-time and temporary budget solutions approved in 2009. The Governor’s 2010-2011 budget proposal was somewhat more optimistic and identified a $18.9 billion budget shortfall. Nonetheless, the budget gap constitutes roughly one-quarter of the state’s annual budget expenditures. The Governor declared a fiscal emergency on January 8, 2010, calling the legislature into special session to act on his proposed solutions to address the budget shortfall. Those proposed solutions include reductions in state programs, shifts of state funds to pay for general fund expenses, and requests for additional federal funds and greater flexibility. On January 22, 2010, the state Controller urged the state legislature and Governor to address the state’s projected budget and cash shortfalls for the remainder of the current fiscal year, as well as the next fiscal year, in order to protect California’s economic recovery, continue the financing of public works projects, and prevent even greater financial hardship. Further, the Controller stated that, if the budget situation is not resolved, the legislature and Governor will again face the prospect of a cash crisis beginning in July 2010. Local city and county governments in California are also struggling with declining revenues and budget problems. Additionally, local governments are affected by the fiscal situation of the state as a number of revenue sources—such as sales tax, gas tax, vehicle license, and many others— pass through the state. For example, in order to balance the California’s fiscal year 2009-2010 budget, state leaders agreed to borrow almost $2 billion in local property tax revenue and make $877 million in local government transportation revenue available to the state general fund for transit debt service. Officials we met with in the City of Los Angeles (Los Angeles) and the County of Sacramento said that they face budget shortfalls this fiscal year due to declines in state funding for programs, tax revenues, and fees. (Fig. 2 highlights information about the two local governments we reviewed.) For example, a Los Angeles official told us that, for the remainder of fiscal year 2010, they are trying to close a deficit of $212 million and have a projected $485 million deficit for fiscal year 2011. Sacramento County officials reported that the county is facing a nearly $14 million general fund budget shortfall for the remainder of fiscal year 2009-2010, and faces cuts of around $149 million for next fiscal year. According to government officials in both localities, Recovery Act funds are helping to preserve the delivery of essential services and repair infrastructure but have generally not helped stabilize their base budgets. Overall, as of February 18, 2010, a Los Angeles official reported that the city had been awarded about $597 million in Recovery Act grants, and Sacramento County officials reported the county had been awarded about $88 million in Recovery Act formula grants as of January 15. Most Recovery Act funds to local governments flow through existing federal grant programs. Some of these funds are provided directly to the local government by federal agencies, and others are passed from the federal agencies through state governments to local agencies. As shown in table 1, local officials reported their governments’ use of Recovery Act funds in program areas including public safety (Edward Byrne Memorial Justice Assistance Grant (JAG)) and Energy Efficiency and Conservation Block Grant (EECBG). Other Recovery Act funds received by these localities included formula grants for prevention of Internet crimes against children, public housing, emergency shelter, health centers, capital improvements, airport security and improvement, transportation, and additional competitive grant awards. Officials reported that Los Angeles has applied for about $893 million in additional Recovery Act grants, and the County of Sacramento has applied for an additional $330 million in competitive grants. In March 2009, California was apportioned $2.570 billion in Recovery Act funds for the restoration, repair, and construction of highways and other activities allowed under the Federal-Aid Highway Surface Transportation Program. As of February 16, 2010, the U.S Department of Transportation (DOT) Federal Highway Administration (FHWA) had obligated $2.525 billion (98 percent) of California’s apportionment. Highway funds are apportioned to states through federal-aid highway program mechanisms, and states must follow existing program requirements, which include ensuring each project meets all environmental requirements associated with the National Environmental Policy Act (NEPA), complying with goals to ensure disadvantaged businesses are not discriminated against in the awarding of construction contracts, and using American-made iron and steel in accordance with Buy American requirements. The Recovery Act also required that 30 percent of these funds be suballocated, primarily based on population, for metropolitan, regional, and local use. In California, according to state sources, a state law enacted in late March 2009, increased the suballocation so that more—62.5 percent of the $2.570 billion ($1.606 billion)—would be allocated to local governments for projects of their selection. The majority of Recovery Act highway obligations for California have been for pavement improvements—including resurfacing, rehabilitating, and constructing roadways. Of the funds obligated, approximately 65 percent ($1.643 billion) is being used for pavement widening and improvement projects, while 32 percent ($815 million) is being used for safety and transportation enhancements, and 3 percent ($68 million) for bridge replacement and improvement projects. Figure 3 shows obligations in California by the types of road and bridge improvements being made. According to information reported on Recovery.gov, as of December 31, 2009, California funded 761 highway infrastructure projects with Recovery Act funds.