Assembly committee kills bond misuse bill

June 20, 2012

By Katy Grimes

SACRAMENTO — California’s bond debt is on steroids, but it’s the taxpaying residents who will be responsible for the financial meltdown.

California politicians are well known for their budget fund shifts, “borrowing” from agencies and funds, and creative accounting gimmicks. Fund shifts and borrowing done using bond money approved by voters for specific infrastructure projects is not legal. But no one agency has the authority to stop this practice.

Sen. Minority Leader Bob Huff, R-Diamond Bar, wants to put a stop to illegal borrowing, specifically with bond funds passed by voters. Designed to ensure that voter-approved California General Obligation bond funds are spent on the actual projects that voters approved, SB 633 by Huff would give the California Department of Finance the authority to issue “cease and desist” orders on the misuse of bond funds, order corrective action and demand that corrective plans be fulfilled.

Early on, it appeared as if the bill would sail through the Legislature. But Tuesday SB 633, which had been approved by the Senate unanimously, was killed in an Assembly committee.

Bond fund spending grows

When faced with bonds, voters tend to pass them for important infrastructure projects like roads, freeways, schools, water and levees.

In a 2009 study, the Little Hoover Commission reported, “In 2006, California voters said yes to five bond measures for transportation improvements, K-12 and higher education facilities, affordable housing, levee improvements and natural resource protection.”

And then the recession hit California.

But bond money isn’t free–it is long-term debt which must be paid back, even in difficult economic times. Bond loans are paid back from the state’s general fund.

Currently, despite the economic downturn in California, the state’s debt is growing rapidly. General Obligation bonds, the bonds which voters are asked to vote on, are guaranteed by the California Constitution, and take precedence over all other state spending.

“In 2006, California voters said yes to five bond measures for transportation improvements, K-12 and higher education facilities, affordable housing, levee improvements and natural resource protection,” the Little Hoover Commission wrote in its bond spending report. But four of the five bond measures on the 2006 ballot were put there by the governor and Legislature, including the $9 billion High-Speed Rail bond.

“Despite the implosion of the worldwide economy in the fall of 2008, a plunge that hit California particularly hard, California voters generously took on another $10.5 billion in debt to lay the preliminary tracks for a high speed rail system and to fund improvements for children’s hospitals,” the Little Hoover Commission found.

But there is growing concern over how the bond money is actually spent. While there are audits done, it seems that no one agency has the authority to do anything about stopping an agency from illegally spending voter-approved bond money.

Interestingly, if any of these illegal borrowing and spending games was played using shareholder money in publicly held companies, the CEO would go to prison.

Good government legislation

According to Huff, “Since 2006, Californians have authorized the sale of $54 billion in general obligation bonds. Administration of such huge sums of money creates significant risk of wasteful or fraudulent spending, and California’s present fiscal crisis places a premium on ensuring every public dollar delivers maximum value. However, there are currently no meaningful penalties for the misuse of bond funds. SB 633 provides the much needed punitive consequences that will correct improper expenditures and ensure compliance with bond authorization acts.”

SB 633 would  have imposed sanctions on the boards and committees overseeing bond money, if the money is spent incorrectly.

According to the legislative analysis, because California has grown increasingly reliant on bond money during the ongoing fiscal crisis, voters continue to authorize the sale of general obligation bonds, adding $54 billion dollars in recent years to the state’s debt.

But the bonds are just another way for California to borrow, and must be paid back.

According to Huff, this massive amount of bond money creates many opportunities for waste and fraud.

The Department of Finance is already authorized to audit state agencies and departments which receive bond funds in order to discover if bond money has been spent as it was approved by voters.

According to the Department of Finance:

“there are more than 1,100 funds in California state government which have been created by one of the following three methods:

* “Legislation.  This is the most common method of creation. The statute will generally specify a fund’s sources of revenues and specify the purposes for which expenditures may be made.

* “Administrative Action. Government Code Section 13306 authorizes the Department of Finance (Finance) to establish a fund with the concurrence of the State Controller’s Office (SCO).

* “Initiative. This method requires a majority vote of a ballot measure (Proposition), proposed by the electorate or the Legislature, to become law.  Proposals from the Legislature may be a bond, Constitutional, or legislative initiative.”

Under SB 633, if the Finance Department finds illegal spending during an audit, the offending agency would be required to immediately repay all improperly expended funds to the bond fund, and pay a fine equal to a 5 percent penalty of the total amount of bond revenues that were illegally spent. And, the agency cannot pay the fine from the bond fund.

Misuse of bond money — illegal spending

During the Assembly Committee on Business, Professions and Consumer Protection, Huff told of misuses of bond funding found in a 2009 Department of Finance audit of the Santa Monica Mountains Conservancy. The investigation found inadequate tracking of project costs, vague descriptions in progress reports and expense claims and unreported project funding sources.

Another investigation and audit in a recent audit of Proposition 50, the Water Security, Clean Drinking Water, Coastal and Beach Protection Act, approved by voters in 2002,  found that money from the bond was used to pay for exclusive airport “Red Carpet Club” membership and other personal, travel related expenses that had nothing to do with water quality. Funding from Proposition 50 was also spent on employee perks such as transit subsidies and yoga and weight loss programs.

The Little Hoover Commission found that the state has spent $1.6 billion in bond money on the Bay Delta to improve water quality and restore the Delta’s ecosystem.  “It is not clear what was achieved by this investment, nor is it easy to track how the money was spent,” the commission reported.

The expensive Stem Cell Initiative, Proposition 71 in 2004, is costing Californians nearly $6 billion over 30 years to pay off both the $3 billion principal and $3 billion interest on the bonds. Payments on this bond average $200 million per year.

“The Legislature has no controls or statutes in place that impose corrective plans for the misuse of bond funding,” Huff said at the hearing. “Most bond-funded programs require annual appropriations from the Legislature, which means this body can play a more significant role in ensuring this funding is well spent.”

Huff acknowledged that the Finance Department already audits agencies, but has no “teeth” to do anything with the information.

Eleventh hour opposition

After receiving unanimous votes in the Senate Senate Governance and Finance Committee (9-0), and no opposition on the Senate floor (35-o), opposition at Tuesday’s hearing from the Nature Conservancy and the Trust for Public Land appeared to come out of nowhere, suggesting a carefully orchestrated bill killing.

The Business, Professions and Consumer Protection committee lists the following groups in opposition to SB 633:

Amigos de los Rios
Audubon California
California Releaf
California Urban Forests Council
Coalition for Adequate School Housing
Los Angeles Unified School District
The Nature Conservancy
The Trust for Public Land

According to the Nature Conservancy testimony and bill analysis, there are already existing mechanisms “to ensure transparency in bond expenditures.”

But that was a weak opposition given that Huff had already demonstrated that the Finance Department only has audit power, and no real authority to stop illegal bond spending. And that there is any bond funding abuse, especially in California’s crumbling economic climate, should be proof enough that the existing mechanisms are not working.

“The Department of Finance has the authority already to audit, but no teeth to do anything about it,” Huff said at the hearing.

After a 3-2 vote, the committee chairwoman, Assemblywoman Mary Hayashi-D-Hayward, placed the bill on call to allow other committee members to vote on it, but Hayashi did not initially cast a vote on the bill. Only after Huff left the committee hearing, and the committee voted again, did Hayashi vote “no,” along with three other Democrats, causing it to fail. Hayashi did not explain her opposition to SB 633.

Huff could bring this bond accountability bill back and start the process over, but there may be no point until some current members of the Legislature have departed after the November election.

8 comments

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  1. Wayne Lusvardi
    Wayne Lusvardi 20 June, 2012, 10:18

    Interesting report. In San Bernardino the County is considering issuing a revenue bond to buy up all the underwater mortgages by using eminent domain to acquire the mortgages. In other words, bonded debt is being used to get out of bad debts.

    Reply this comment
  2. Queeg
    Queeg 20 June, 2012, 11:24

    Yep. One big giant derivative to sell to some Spain, German and Estonian farmers!

    Reply this comment
  3. The DA
    The DA 20 June, 2012, 15:59

    Excellent article. Is there even one major newspaper in California that has reported on this strange turn by the Assembly?

    Reply this comment
  4. CalWatchdog
    CalWatchdog Author 20 June, 2012, 16:50

    DA – I haven’t found one other story about this issue yet. This is the problem with most news outlets. I am at the Capitol everyday. There is no shortage of reporters, but what they choose to cover, or are assigned to cover, is often not really news that impacts voters, and taxpayers.

    Thanks for reading and following us –

    Katy

    Reply this comment
  5. Hondo
    Hondo 20 June, 2012, 22:33

    One of the reasons I read this blog is that they, and Katy in particular, give enough space to completely cover the issue. Most newspapers only allow 500 words or so but even then they could cover this issue. I notice that Katy and most of the other writers here answer all the questions that need to be answered.
    As for the issue, Standard and Poor may drop kick California in the nuts by lowering their bond ratings to junk and below (which is where they belong) if they see enough abuse of bonds and an in the budget. Such as stealing from these specific bonds and spending the money elsewhere. Or by passing a budget that depends on tax increases that haven’t even been voted on yet. Or seeing last years budget where a promised balanced budget turned into a 17 billion dollar deficit using the same deceptions as they are using this year.
    California could be in for a huge rude wake up call from Standard and Poor.
    Hondo….

    Reply this comment
  6. Queeg
    Queeg 20 June, 2012, 23:01

    Sky is falling….sky is falling..

    Reply this comment
  7. Rex the Wonder Dog!
    Rex the Wonder Dog! 25 June, 2012, 00:29

    Sky fell already Teddy- ask San Diego, Stockton, Vallejo and San Jose. Ask ALL Californians on November 7 😉

    Reply this comment
  8. Wayne Lusvardi
    Wayne Lusvardi 28 June, 2012, 20:18

    I have gone back and re-read this article. It is one of the most meticulously researched and informative articles. Thank you again Dr. Grimes for this treat.

    Reply this comment

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