Created to make California’s tax system work better, the Board of Equalization has found itself under a cloud of radical criticism, plunging it into a moment of extraordinary crisis. 

“At a chaotic budget hearing for an agency that collects a third of California’s taxes, two lawmakers said late Wednesday they don’t believe the Board of Equalization can be trusted to fix the accounting deficiencies and misuse of public resources that a recent audit described,” the Sacramento Bee reported. 

“I have no faith in the organization to adopt practices,” railed Assemblyman Phil Ting, D-San Francisco, who chairs the Assembly Budget Committee, according to the Bee. “You can adopt all the policies you wish. But I have zero faith that you will practice your polices because you have not demonstrated that.” His remarks, the paper added, “came at a meeting in which the Board of Equalization’s executive director refused to answer questions because he said he feared a lawsuit, Ting asked five state employees whether they leaked a copy of a critical audit to The Sacramento Bee and Ting read an anonymous email that accused the agency’s top lawyer of misleading him during the hearing.”

Official sanction

The heated controversy came to a head this month in the wake of a devastating state administrative report showing bad accounting of nearly $50 million in funds. “Citing a review that found widespread mismanagement at the state Board of Equalization, State Controller Betty T. Yee […] called for stripping the panel of responsibilities for tax administration and audit and compliance functions so it can focus on handling taxpayer appeals,” the Los Angeles Times explained. “Yee’s proposal came in response to an evaluation by the state Department of Finance that found board officials were improperly redirecting resources and employees to pet projects in their districts.”

According to the investigation, conducted by the department’s Office of State Audits and Evaluations, “concluded the elected tax board members are violating the California Budget Act, which requires that they get approval from the Department of Finance and notify lawmakers before they move revenue-generating staff such as auditors to other duties,” Bloomberg BNA reported. “The tax board also doesn’t keep track of staff hours or calculate the amount of lost revenue resulting from employees being redirected.”

“The violations skew the required information the board must provide to lawmakers under the Budget Act each year about costs and lost revenue collections due to those reassignments, the auditor said. Without accurate information about staffing, the Legislature can’t assess the effectiveness of the SBOE’s existing compliance efforts or be sure the tax agency’s cost-benefit ratios are accurate, the audit said.”

A tightening circle

The Board has weathered sharp criticism before, especially in recent years. But this time, few if any outside the Board itself have offered much of a defense. “In the 1990s, Gov. Pete Wilson, facing budget deficits, sought to merge the board with the Franchise Tax Board,” as the Fresno Bee editorial board noted. “Gov. Arnold Schwarzenegger took office in 2003 promising to blow up the boxes, and took aim at the tax boards. And yet the Board of Equalization survives because many legislators, thinking about the next election, hesitate to abolish an office that pays $142,577 a year.” 

For the Board, today’s trouble began in earnest two years ago, when heightened scrutiny from Sacramento began to close in. “Although the board was dinged in November 2015 when an audit by Yee’s office found that it mistakenly sent $47.8 million in sales tax revenue to the state’s general fund, the Finance Department’s newest audit revealed that the board has done little since then to stanch the bleeding,” Courthouse News observed. “The board is still struggling with its accounting, having revised its proposed allocation adjustment 11 times to correct for errors and omissions,” the site added. 

State, feds on collision course over “sanctuary” policies

Good morning. TGIT. If today is anything like yesterday, buckle up. 

President Donald Trump on Wednesday said his administration would block federal funding for cities that don’t cooperate with federal immigration laws, with Democratic leaders in the state vowing to fight back.

A handful of California cities, like Los Angeles and San Francisco, have so-called “sanctuary” policies, which prompted the federal action. And in a statement of defiance, Senate President Pro Tempore Kevin de Leon said he would fast track his bill to make California a sanctuary state. 

“(T)he Senate will expedite the process to pass my bill, SB54, to prevent state and local tax dollars and law enforcement resources from being used to help ICE destroy families and damage our economy,” the Los Angeles Democrat said. 

But even as Democratic leaders strongly push to protect the sanctuary policies, the public is split. A Hoover Institution poll from earlier this month showed that 40 percent of voters support sanctuary policies, while 41 oppose (19 percent didn’t seem to care either way). 

CalWatchdog has more. 

In other news:

• Pensions: “The mayor of El Monte, a cash-strapped San Gabriel Valley city with many retired employees drawing two pensions, says there’s ‘no rational justification’ for the extraordinary, taxpayer-funded generosity. But at the same time, Mayor Andre Quintero says there’s nothing city officials can do about the situation in the near term.” The Los Angeles Times has more. 

• Sanctuary backlash: “Assistance promised to victims and law enforcement in response to the Dec. 2 terrorist attack is among the funding potentially jeopardized by President Donald Trump’s executive order blocking assistance to so-called sanctuary jurisdictions.” The San Bernardino County Sun has more. 

• Unfunded liability: “California faces a $76.67 billion cost to provide health care and dental benefits to retired state employees, state Controller Betty Yee reported Wednesday, an increase of $2.49 billion over the previous year’s estimate,” reports The Sacramento Bee. 

• Drought: “Hammered with record rainstorms and blizzards, nearly half of California is no longer in a drought, and the rest saw dramatic improvement over the past week, federal scientists reported Thursday. Overall, 49 percent of the state is now drought free, the highest level since April 2013, according to the U.S. Drought Monitor,” reports The San Jose Mercury News.

Legislature:

• In at 9 a.m. 

Gov. Brown:

• No public events announced. 

Tips: matt@calwatchdog.com

Follow us: @calwatchdog @mflemingterp

New follower: @Tony_Larson

The Fair Political Practices Commission found that in seven instances Yee’s state controller campaign did not file certain campaign finance disclosures in the time frame required by law — although the FPPC also found no evidence of intent to conceal.

The late disclosures were periodic reports, totaling only $68,000. By contrast, the campaign in total raised more than $1.5 million in 2014.

Earlier this month, The Sacramento Bee reported that Yee’s campaign treasurer, Jane Leiderman of Leiderman and Associates, took responsibility for the disclosure violations and agreed to pay the fine. 

“It’s always unfortunate when there is not compliance, and I do regret that the FPPC imposed the fine,” Yee told The Bee. “My treasurer has taken full responsibility, and everything has been handled responsibly.”

State’s largest pension fund down since last year

Good morning!

Lots of ethics and campaign finance stuff to get to today, but first:

“The California Public Employees Retirement System – the nation’s largest – lost about 2 percent of its market value in the fiscal year that just ended, according to unofficial numbers published last week on the CalPERS website. This came despite doubled-down efforts to beef up its bottom line,” writes The Orange County Register.

In other news:

• “San Diego Rep. Scott Peters and his family have been involved in a series of donation exchanges with the families of other congressional candidates, apparently legal trade-offs that allowed more money to flow to each campaign than might be allowed under contribution limits,” writes The San Diego Union-Tribune.
• “State Controller Betty T. Yee, the chief fiscal officer of California, has agreed to $2,082 in fines to be paid to the state political watchdog agency to settle seven charges that her campaign committee was late in reporting contributions before the 2014 election,” writes the Los Angeles Times.
• “An Oakland company is facing $114,400 in state and city fines for laundering campaign contributions to several former mayoral and City Council candidates, including Councilwomen Rebecca Kaplan and Desley Brooks, officials said Monday,” writes SF Gate.
• “The money is piling up on behalf of campaigns for 17 statewide ballot measures — the most since March 2000. And when it comes to big backers, Big Pharma is far and away the towering force,” writes The San Jose Mercury News. 

Legislature:

• Gone ’til August.

Gov. Brown:

• On vacation.

Tips: matt@calwatchdog.com

Follow us: @calwatchdog @mflemingterp

New followers: @AngeRosie @PacMediaGuild

State Controller Betty T. Yee disclosed the 2014 payroll data from 54 counties and 468 cities, which included information on more than 600,000 employees. The disclosure is part of the controller’s latest update to the “Government Compensation in California” website.

The open government online portal allows users to map compensation levels throughout the state, assemble charts, evaluate payroll trends and export data for in-depth statistical analysis.

Vernon: Smallest City, Biggest Pay

The state controller’s public employee payroll website has become a powerful tool for journalists and citizen watchdogs to identify wasteful spending and corruption in local government.

Among the municipalities with questionable payroll data from 2014: the city of Vernon. Although it is the least populous city in California, with just 123 residents, Vernon has double number of employees. And those employees earn $103,601 per year in salary — the highest average salary in the state. Vernon employees also take home, on average, another $32,462 per year in health and retirement benefits.

Vernon’s top salary is followed by the city of Hayward with $94,041 average salary, and Palm Desert at $89,582 in average salary. The state controller’s office notes that the average wages for city governments overall fell by 3 percent to $59,614.

In 2014, the average salary for county employees increased by approximately 3 percent to $60,993. At the county level, the nearly 19,000 employees at Santa Clara County received the highest average wage, earning $78,486 per year in wages and $27,655 in retirement and health benefits.

9 Local Governments Fail to Disclose Data

The controller’s office classified six cities as non-compliant entities for having “filed a compensation report that was incomplete, was in a format different than the one requested by the Controller’s Office, or was submitted after the reporting deadline.” San Francisco, the largest non-compliant entity joined the cities of Bell, Compton, Covina, Dana Point and Santa Ana on the list of non-compliant entities.

The counties of Modoc, Monterey and Riverside were the three counties, or 5.3 percent, that failed to file.

The city and county of Los Angeles remain the largest local government agencies. Los Angeles County employs 103,338 people with a cumulative wage of $7.2 billion in annual salary and $2.76 billion in health and retirement benefits. The city of Los Angeles paid out $4.5 billion in wages and $703 million in health and retirement benefits.

Yee’s latest disclosure builds on the work of her predecessor. In 2010, following the high-profile corruption case at the city of Bell, then-Controller John Chiang didn’t wait around for local governments to clean up their act. He ordered cities, counties and special districts, under Government Code sections 12463 and 53892, to share salary and other wage information with his office. Initially, some local governments balked, then dragged their feet in disclosing the payroll data.

To access State Controller Betty Yee’s payroll database, go to publicpay.ca.gov.

Top 10 Highest County Employees in California

1. Faculty Physician-Contract: $1,360,744
Kern County

2.Faculty Physician-Contract: $1,295,929
Kern County

3.Orthopedic Surgeon-Contract: $1,092,651
Kern County

4. Chairman, Department of Surgery: $851,665
Kern County

5. Medical Director II: $775,999
Los Angeles County

6.Physician – VMC: $760,461
Santa Clara County

7. Chief Physician III Surgery-Neurological: $728,489
Los Angeles County

8. Physician: $727,864
San Joaquin County

9. Physician – VMC: $684,365
Santa Clara County

10. Physician – VMC: $658,745
Santa Clara County

Top 10 Highest City Employees in California

1. Police Sergeant: $592,652
City of Burbank

2. Fire Chief: $487,871
City of Richmond

3. Chief Of Police: $487,644
City of El Monte

4. City Manager: $470,249
City of Lincoln

5. City Manager: $419,840
City of West Covina

6. City Attorney: $412,211
City of Escondido

7. Power Engineering Manager: $403,271
City of Los Angeles

8. Assistant City Manager:
$396,548
City of Oxnard

9.City Manager: $395,501
City of Escondido

10. Police Officer (PERS): $393,573
City of Oakland

In recent months, sponsors of tax increases have filed the necessary paperwork to obtain a ballot title and summary for multiple tax increases, including two versions of a Prop. 30 tax extension. Critics of higher taxes say that an extension of Prop. 30 violates the promise made in 2012.

“Prop. 30 was creatively advertised and sold to the voters by a union, the California Teachers Association, which depicted it as a ‘temporary’ tax to support public schools,” contends former Democratic State Senator Gloria Romero. “But even while Prop. 30 was being pitched to voters as a temporary tax increase, no one in the political world actually believed it. In fact, discussions were already underway before its passage about extending Prop. 30 tax increases beyond the two expiration dates.”

Version 1: Prop. 30 Tax Extension

In September, attorneys on behalf of the Alliance for a Better California, a coalition of education unions, organized labor and health care providers, introduced the “School Funding and Budget Stability Act,” which would impose higher income taxes on high-wealth earners for the next 12 years. The $9 billion in anticipated higher tax proceeds would go towards schools. That also explains why the California Teachers Association is among the proposal’s biggest supporters.

“Temporarily extending these critical revenues will help keep our state budget balanced, and prevent devastating cuts to programs affecting students, seniors, working families and health care,” Gale Kaufman, a longtime Democratic strategist and representative of the coalition, told the Educator, the CTA’s monthly magazine.

Under the plan, California residents earning more than a half-million dollars per year would continue to pay Prop. 30’s higher income taxes until 2030. The quarter-cent sales tax increase would expire next year as scheduled.

Version 2: Prop. 30 Tax Extension

Not content with one tax hike, the same group introduced a second Prop. 30 tax extension in December. The measure would impose Prop. 30’s higher tax rates on those earning more than $250,000 per year — with the proceeds allocated in a slightly different manner.

In an apparent bid to gain support from California’s hospitals, “The California Children’s Education and Health Care Protection Act of 2016” would allocate up to $2 billion towards Medi-Cal spending.

“Whether this version truly represents a joint teachers union/health care effort remains to be seen,” explains Loren Kaye, president of the California Foundation for Commerce and Education. “The health care union has not indicated its position on this approach; indeed, in a bizarre twist, it recently sued the CHA for entering into negotiations with CTA in the first place.”

“Amid this uncertainty, one fact remains unassailable: the CTA has a measure ‘on the street’ for which they can begin collecting signatures. Everything else for now is speculation,” he added.

Sponsors of the tax increase say it is desperately needed to avoid catastrophic cuts to schools and other public services.

“Unless we act now to temporarily extend the current income tax rates on the wealthiest Californians, our public schools will soon face another devastating round of cuts due to lost revenue of billions of dollars a year,” the sponsors of the ballot measure wrote in a draft initiative. “We can let the temporary sales tax increase expire to help working families, but this is not the time to be giving the wealthiest people in California a tax cut that they don’t need and that our schools can’t afford.”

Prop. 30 Tax Extension Could Backfire

Many economists fear that any Prop. 30 income tax extension could backfire and further drive high-income earners out-of-state. California’s $115 billion General Fund budget has become increasingly dependent on income tax revenue, which frequently fluctuates based on the stock market.

“(T)he initiative to extend Prop. 30 taxes, rather than solving a problem, creates a worse one,” writes Jerry Nickelsburg, a senior economist for the UCLA Anderson Forecast. “Our current greater dependence on high-income earners to balance the state budget makes us more vulnerable.”

Nevertheless, many state political observers say that a tax extension, which could generate upwards of $11 billion in revenue, is likely to pass in 2016. At a recent economic summit, “Controller Betty Yee predicted that a Proposition 30 extension and a cigarette tax will be on the 2016 ballot and both would pass.”

That assessment comes even as one-time supporters of Prop. 30 question the rationale for its extension.

“In a time of financial crisis, Prop. 30 made sense,” the Los Angeles Daily News recently editorialized. “But the state is no longer in crisis, and any ballot measure playing off the fear of a return to dark days should be seen for the political ploy it is by unionists seeking to protect their own interests.”

State Controller Betty T. Yee announced earlier this month an expansion of the eClaim feature for the state’s unclaimed property program. Property owners will now be eligible to submit their claims for property valued up to $5,000 using the controller’s streamlined paperless electronic claim process.

“The eClaim process is simple, efficient, and can be completed in a couple of minutes,” Yee said in a press release. “An increased threshold of $5,000 will allow many more Californians to claim lost or forgotten property online and quickly receive a check in the mail.”

Unclaimed Property: Your Money Held by the State

Under state law, when there’s been no activity on an account for three years, financial institutions are obliged to report this unclaimed property to the California Controller’s Office. In turn, the controller holds the funds until it is claimed by the owner. The most common types of unclaimed properties are bank accounts, stocks, bonds, uncashed checks, wages, life insurance benefits and safe deposit box contents.

Among the biggest problems facing the state’s unclaimed property program: a lack of public awareness about where people can find their old property. Most people don’t realize they’re owed money from a forgotten insurance settlement or an abandoned stock dividend.

However, for those owners aware of the program, obtaining the necessary paperwork to prove ownership can be costly and time-consuming. Many find the hassle of paperwork not worth a small dollar amount.

Unclaimed Property: eClaim created by Chiang

To address the paperwork hassle problem, in January 2014, then-Controller John Chiang created the eClaim feature to expedite the return process for properties valued at less than $500. Later that year, Chaing increased the value to $1,000. In total, more than 315,000 properties have been returned through the Controller’s eClaim feature.

The state currently holds more than $8 billion in unclaimed property that rightfully belongs to more than 32 million people and businesses. More than three-quarters of unclaimed properties are estimated to be eligible for the new expanded eClaim feature. Yee says that by increasing the threshold to $5,000, she’ll be able to return another $9.4 million per year.

Among those who could benefit from the eClaim feature is billionaire hedge fund manager turned environmental activist Tom Steyer. The former hedge fund manager has three unclaimed properties, each valued at less than $50, dating back to his time as founder of the San Francisco-based Farallon Capital Management.

LAO Report: State Can Do More

For decades, the state has made it difficult for owners to obtain their property. From 1990-2007, state law prohibited the Controller’s office from contacting approximately 80 percent of owners.

Earlier this year, the state Legislative Analyst’s Office released a report critical of the state’s unclaimed property system. The state could do a better job of finding owners, the report concluded, instead of passively waiting for the cash to be claimed.

It also argued that the state has a conflict of interest in managing the program.

“In particular, because property not reunited with owners becomes state General Fund revenue, the unclaimed property law creates an incentive for the state to reunite less property with owners,” the report found. “Now generating over $400 million in annual revenue, unclaimed property is the state General Fund’s fifth-largest revenue source. This has created tension between two opposing program identities — unclaimed property as a consumer protection program and as a source of General Fund revenue.”

Unclaimed Property: How to Search for Unclaimed Property

To find out if you have unclaimed property held by the state, go to www.claimit.ca.gov.

The Legislature is interested in the fact that Prop. 30 will end, Yee said, and she preferred that a tax reform discussion take place within the halls of the Legislature. However, Yee admitted she did not know how to slow down the initiative process to conduct a long-term conversation. Because voters are familiar with Prop. 30, she said, and if the final initiative presented to the voters has a “temporary” tag on it, she predicted the measure would pass.

The Economic Summit is an ongoing program dedicated to creating a roadmap to build economic prosperity in California. This particular session was dedicated to finding keys to develop more skilled workers, more water and more housing in California.

How to fund California’s future was the subject of the panel Yee participated on along with Ana Motosantos, former California Director of Finance. She is now associated with Tom Steyer’s Fair Shake Commission. The moderator was California Forward’s Lenny Mendonca. Motosantos concurred with Yee’s predictions on the tax measures.

The Controller has put together an advisory group working on tax reform. She argued that while California’s economy is doing well, now is the time to move on reform. However, she acknowledged that a big education program is needed. It is a matter of how to talk about tax reform to legislators and to the public, she said. Yee suggested discussing comprehensive tax reform not in ways of who might be winners or losers in a changed tax system, but in the terms of economic opportunity for all.

Yee’s tax reform group will deliver its report in March.

Motosantos said the Fair Shake Commission would consider taxes in February. The Commission, set up to consider answers to income inequality, is the brain-child of billionaire Tom Steyer. Critics claim the Commission is an effort by Steyer to broaden his credentials on a number of issues in consideration of a gubernatorial run. In that respect, the Commission’s take on tax reform could prove informative.

How much? More than the Gross Domestic Product of 100 countries, according to new data published by the State Controller’s office. In 2014, more than 650,000 state employees earned a total of $32 billion in wages and benefits.

As part of her ongoing effort to open up state government’s books, State Controller Betty Yee released the payroll figures in her latest update to the “Government Compensation in California” website. The open government portal provides self-reported payroll data for 240,736 positions in 150 state departments, 275,257 positions in 10 University of California institutions and the UC president’s office; 113,857 positions in 23 California State University institutions and the CSU chancellor’s office; and 20,316 positions in 58 Superior Courts.

The staggering amount of payroll data is matched by generous salaries and benefits provided to the top echelon of employees. Nine hundred sixty-nine state employees earned more than the President of the United States – with thousands more earning more than a quarter million dollars per year.

Highest Average Salaries: Institute for Regenerative Medicine, legislative staff

Topping the list of state agencies with the highest average salary is California’s stem cell agency. The average salary for employees of the California Institute for Regenerative Medicine (CIRM) is $117,627 per year. That’s 21 percent more than the salaries of state lawmakers, who earn $97,197 per year.

Despite having the highest average salary for any state agency, the stem cell agency boasts that it is “a good steward of the people’s money.”

“CIRM is a good steward of the people’s money – independent reviewers agree that we are lean, well-managed and effective,” the agency claims on its website. “We are delivering economic results for Californians – both at the state level, and in dozens of communities in every part of the state.”

After the state’s stem cell agency, the only other state agencies with average salaries in six-figures are employees of the State Supreme Court, Sierra County Superior Court and California Court of Appeals, according to the State Controller’s database.

Lowest paid employees: Conservation agency, commissions on disability and women

Progressive Democrats have near universal control over state government, but you wouldn’t know it from the average pay of some state agencies.

The lowest paid average workers represented agencies focused on the environment, women and people with disabilities. According to the state’s 2014 payroll data, the average salary for the 11 state employees at the California Commission on Disability Access was just $15,213 per year, slightly more than the $14,494 average salary paid to the four employees at the Commission on the Status of Women.

The small number of employees arguably skews the data. However, that’s not a factor for the 3,500 employees of the California Conservation Corps, who earned an average wage of just $12,973 per year. Easily one of the most efficient state agencies, the department responsible for “protecting and restoring California’s environment and responding to disasters” paid out less than $2,000 per year in average retirement and health care costs per employee.

UC, CalPERS top list of highest paid employees

In contrast to workers at the California Conservation Corps, coaches at state universities earned big bucks. Last year, the Top 10 state employees all earned more than $1.6 million each. This millionaires club was dominated by coaches at the UC campuses.

As the Los Angeles Times noted last month, “UCLA head football coach Jim Mora earned $3.5 million in 2014, followed by basketball head coach Steve Alford at $2.7 million. Khalil Tabsh, an obstetrician at Ronald Reagan UCLA Medical Center, earned $2.3 million and Ronald Busuttil, a transplant surgeon at the Westwood campus, earned $2.2 million.” In all, 28 UC employees earned more than $1 million in total compensation.

Excluding employees of the UC system, the highest salaries were paid out to investment officers with the state’s retirement systems. CalPERS’ chief investment officer took home nearly $740,000 in 2015 — 40 times more than an employee earning the state’s $9 per hour minimum wage. To put the compensation for CalPERS’ highest-paid employee into perspective, it would take just 10 days to match the annual salary for the state’s in-home support service workers, who provide care and support for the elderly and people with disabilities.

The Top 10 highest-paid state employees, excluding the University of California system, are:

1. Chief Investment Officer of California Public Employees’ Retirement System: $739,594
2. Senior Investment Officer, California Public Employees’ Retirement System: $651,444
3. Senior Investment Officer, California Public Employees’ Retirement System: $650,694
4. Dentist, Department of Developmental Services: $628,218
5. Chief Physician and Surgeon, Department of Corrections & Rehabilitation: $563,572
6. Chief Investment Officer, California State Teachers’ Retirement System: $562,528
7. Physician and Surgeon, Department of Corrections & Rehabilitation: $559,297
8. President and CEO, State Compensation Insurance Fund: $549,254
9. Chief Executive Officer, State Teachers’ Retirement System: $534,613
10. Senior Investment Officer, Public Employees’ Retirement System: $522,556

California’s state payroll data has been viewed more than 8 million times since disclosure began in 2010. The controller’s office will provide more updates later this year, which will include more state and local agencies.

How Much is Owed?

The FTB is trying to figure out exactly how much money is owed to about 24,000 individual tax filers and 3,000 businesses still eligible for refunds, and what it will cost the agency to process those claims, FTB Filing Division Chief Anne Miller told the board at its July 21 meeting:

These two interest calculations may impact a limited number of individuals and business entities that meet a set of specific and rare criteria. The criteria are centered primarily around overpayments being transferred or refunded from one particular tax year followed by an additional tax assessment on that same tax year. As a result, our systems may have overcharged interest.

Due to the complexity of the calculations, it’s been quite a challenge for us to determine the fiscal impacts. We estimate that if work was to be done manually on each of these individual accounts, it could take three hours per account. We have enlisted the help of our experts in the Economics and Statistical Research Bureau to help us with these calculations because they are so complex.

About 1,000 of the individual taxpayers are owed for more than one year, placing the total adjustments around 28,000. That equates to 40 FTB staffers working for a year to do the calculations, based on three hours per adjustment if an automated solution isn’t found.

“[W]e believe the adjustments could range from a very minor amount (a few dollars) to thousands of dollars for each account,” said the FTB in its Aug. 3 Tax News. The total amount owed could be in the millions of dollars, according to the California Taxpayers Association, which brought the problem to the attention of FTB management in March.

“CalTax is aware of millions of dollars in miscalculated interest based on what a limited number of taxpayers have told us,” said Gina Rodriquez, CalTax vice president for state tax policy. She continued:

In one case, the FTB overcharged interest by $1 million, and in another case $2 million.

In some of the cases that were reported to us, taxpayers asked the FTB to adjust the interest before their cases went final, i.e., before the taxpayer’s protest, appeal or settlement went final. Taxpayers who had already paid and subsequently discovered the error had to file refund claims to get the interest back if they already paid their assessments. In all cases reported to us, the FTB made the adjustment for the interest miscalculation without any argument, as they knew their calculations were wrong.

When I met with FTB management in the spring to discuss this issue, the FTB acknowledged that their computer system cannot properly calculate interest for taxpayers that fall into the two affected categories.

Origins of Miscalculation

The main category of miscalculation, potentially affecting 26,000 taxpayers, dates back to a lawsuit that May Department Stores Company won in 1996 against the United States for miscalculation of interest on the company’s tax underpayments a decade earlier. The IRS issued a notice in 1997 acquiescing to the court decision.

The complexity of the situation is evident on an FTB web page, which explains that you may be owed a refund under the May Department Stores ruling if:

• You filed an amended return for additional tax or received a deficiency assessment after the original return was filed for the same tax year, and
• On the original return, you elected an overpayment transfer to the subsequent year’s estimate tax, and
• On the subsequent year, the required first quarter estimate payment was less than the requested overpayment transfer amount. The maximum amount of the adjustment is one year of interest on the additional tax or deficiency amount.

The other miscalculation category, known as “corporation interest netting,” may affect about 1,000 businesses that have made a previous refund or payment transfer, then filed a subsequent deficiency or amended return for additional tax with interest for the same tax year.

Thus far fewer of those overcharged are aware that they are owed money. “We’ve received three written requests for interest adjustments as well as a few visits to our website,” Miller told the board. “But our contact center has not reported any phone calls on this issue.”

Time Running Out

The clock is ticking on taxpayers who want to receive refunds. The statute of limitations runs out four years from the date the return was filed if it was filed within the extension period, or one year from the date a payment was made.

FTB plans to avoid this situation in the future. “In order to better serve taxpayers who may qualify for the interest computation adjustments, we have trained our staff to proactively identify cases that meet this criteria as well as put procedures in place to ensure that cases that do meet the criteria proactively receive proper treatment,” said Miller.

FTB Chairwoman Betty Yee, who is also the state controller, was appreciative of Miller’s work. “Thank you for really responding with such a strong focus on just initially identifying the universe [of affected taxpayers], which I know was quite complex,” said Yee. “And now to try to put a fiscal impact around what’s been identified. We look forward to getting that information in September.”

In her capacity as state controller, Yee directed the FTB on April 8 to review the interest miscalculations. “These rulings deal with complex interest calculations that affect very few taxpayers. However, these taxpayers are entitled to receive refunds of allowed overpaid interest,” Yee said. “As chair of the FTB, I work to ensure the rights of taxpayers are protected.”

FTB Board Member Jerome Horton said, “I want to thank the department for being proactive on this and engaging. It’s very important. As always we have stepped up and done so.”

Miller is scheduled to provide an update at the board’s next meeting on Sept. 22.