California’s state auditors recently released an unflattering look at the state’s finances, part of their annual report. Issued several years in arrears, the assessment showed nearly $2 billion in deficit spending for the 2011-2012 fiscal year, piling more borrowed money onto what Gov. Jerry Brown has called a figurative “wall of debt.” 

“The report, which covers the fiscal year ending June 30, 2012, says that the state’s negative status — all of its assets minus all of its liabilities — increased that year, largely because it spent more than it received in revenue,” the Sacramento Bee reported. “About half of the $127.2 billion in accumulated red ink came from the state’s issuing general obligation bonds and then giving the money to local governments and school districts for public works projects, the auditor pointed out. The assets built with the bonds remain on local balance sheets while the bonded debt accrues to the state.”

Wrestling with debt

Over the past several years, however, Gov. Brown’s effort to keep debt from ballooning has made something of an impact. “California’s debt service ratio is on track to drop below 5 percent over the next several years,” as the Bee observed last month, citing the state’s nonpartisan legislative analyst: 

“The ratio, an indicator of the state’s debt burden, reflects how much general fund revenue and transfers go to pay off past borrowing. It rose to 6 percent in the late 2000s after voters approved tens of billions of dollars in borrowing for roads, schools and parks. But the ratio has declined to about 5 percent as general fund revenue grew, debt was refinanced, and the payback cost for some borrowing, such as transportation, was shifted to special funds.”

Nevertheless, California’s fluctuating income has remained a steady concern. “Brown’s administration urged caution in the face of sluggish state revenue in the summer and fall. October tax collections were $381 million, or 4.7 percent, below projections,” the Associated Press recalled in November, when revenue was “$1 billion below projections since the administration’s most recent forecast in May.”

Next year, the legislative analyst predicted, California will pull in a surplus of nearly $3 billion. But the specter of public pensions has not been diminished by the estimate. “The Governmental Accounting Standards Board and Moody’s, a major bond credit rating house, have been pushing states and localities to include unfunded retiree obligations in their balance sheets and were they to be added to California’s, it could push its negative net worth down by several hundred billion dollars,” the Bee cautioned. 

String of challenges

The auditors’ budget report continued a critical streak this year. Earlier this month, they found that “at least 184 complaints against registered nurses, which include practitioners and specialists, were still waiting to be assigned to nursing board investigators,” as ABC 10 recalled. “About 40 percent of those complaints involve ‘high-priority allegations’ such as patient death or criminal activity. Complaints come from a variety of sources, such as patients and the media.” (Nursing board oversight officials have insisted all complaints are now being reviewed.)

Before that, another audit targeted a key component of the state’s criminal justice bureaucracy. “In an August report, the California State Auditor examined how inadequate oversight had led to a badly compromised database” collecting gang membership records, according to the San Francisco Chronicle. State agencies, the auditors concluded, “lacked adequate support for 13 of 100 people we reviewed in CalGang and for 131 of 563 of the CalGang criteria entries we reviewed,” the Chronicle continued, noting the auditors “also found privacy violations, a failure to purge old records and transparency problems.”

And last month, they hit out at the state’s public school system for falling short on books. “Sampling school libraries in Sacramento, San Bernardino and Tulare counties, California state auditor Elaine M. Howle found schools with no librarians, non-teaching staff providing library services and lack of oversight of library services,” the San Jose Mercury News reported. 

It seems common sense that bond money approved by a state’s voters would be spent directly on the projects it was intended for.

Unfortunately, lawmakers, trying to find resources to bandage constant budget imbalances, often raid bond funds by borrowing against them to finance other areas of state and local government.

In California, this shuffling is shameless. The state Legislature went so far as to reject a measure by the Republican Senate minority leader that would have prevented it. As a 2013 investigative report by Katy Grimes detailed on CalWatchDog.com, California politicians “are well known for their budget fund shifts, ‘borrowing’ from agencies and funds, and creative accounting gimmicks.”

Voters approve bonds for specific purposes, such as spending on roads, freeways, affordable housing and levees. When politicians transfer the funds among agencies and commissions, they are essentially borrowing against borrowed money, and violating the taxpayers’ intent.

Bond Mismanagement

In 2011, for example, a California state audit found that voter-approved funds for the Santa Monica Mountains Conservancy, which was created by the Legislature in 1980, were going to ineligible programs that had vague missions and opaque budgets. Progress reports and reimbursement claims were “incomplete and inconsistent with grant scopes and budgets.”

The misuse of voter-approved bond money included a range of other expenditures for park and clean-water projects, adding up to a total of $6.4 billion in bond funds. The audit cited notable weaknesses, including “improper management, monitoring, and authorization of fiscal activities,” and “awarding grants or incurring expenditures not in accordance with the Bond Acts.”

That’s a lot of diverted money. It wasn’t the first time the Santa Monica Mountains Conservancy was chastised. A 2004 Department of Finance report found the group had mismanaged bond funds. The conservancy’s chairman at the time, Jerome C. Daniel, was unapologetic: “It bothers me to be questioned about the way we’re doing business, when what really matters is the end result,” he told the Los Angeles Times.

Audits of other local projects in California have shown similar mismanagement. Bond funds from Proposition 40, which totaled more than $120 million allocated for the California State Library Cultural and Historical Endowment, were used to reimburse “unallowable or unsupported expenditures” and pay for facility costs that “were not equitable or properly supported.” Planning grants were also used as a means to fund capital projects, and the CCHE “did not assess the grantee’s financial capacity to complete the project beyond the planning phase.”

Borrowing against bonds is not simply a violation of the public trust. It is also a dangerous balancing game that could end in a fiscal meltdown of state and local government. And it’s technically illegal.

Article 13A of the California Constitution holds that the money must be used for the specific purposes outlined by in the bond measure “and not for any other purpose, including teacher and administrator salaries and other school operating expenses.”

Lack of Accountability

But no one party in the state government has the authority to sanction those who misspend the money. Audits are periodically conducted by the state Department of Finance office that can assign a “corrective action plan.” But the department doesn’t have the authority to halt the misuse of funds or penalize agencies that don’t comply.

And those officials doing the borrowing can point to other government codes to justify their practices. For example, when the Sweetwater Union High School District in San Diego County caught flak in January 2011 for a plan to borrow $58 million against local bond measure funds, district officials pointed to a California Education Code Section 42603, which allows that money in any fund “may be temporarily transferred to another fund or account of the district for payment of obligations.” The district opted not to borrow funds in 2011 because of public pressure, but previously had borrowed $40 million in 2009-2010 and $28 million in 2008-2009, according the U-T San Diego.

Politicians seem to pay little attention to angry local voters. Last year the state Senate passed SB 633, by state Senate Republican Leader Bob Huff, R-Diamond Bar. It would have given the Department of Finance additional authority to issue cease-and-desist orders to state agencies and conservancies found to be using bond funds inappropriately. But it died in the Assembly.

Among the powerful interests that opposed the legislation was the Los Angeles Unified School District. A spokesman for LAUSD said the district hadn’t used bond money for unapproved purposes. But with the billions the district has raised in bond issues in the last several years, it wants to keep its hands untied.

Why aren’t the investors in the bonds up in arms? Under the current law, even if a government body goes bankrupt, bond investors are among the first creditors to be paid, no matter how their investment money is used.

The taxpayers will be the ones on the hook. Yet California voters have taken on billions in debt in recent elections for the high-speed rail system and for improvements in children’s hospitals, among other obligations. “Californians have authorized the sale of $54 billion in general obligation bonds” since 2006, said Huff.

Come 2014, Californians will vote on another bond initiative, one that promises a “safe, clean, and reliable drinking water supply,” according to its namesake. The last time California passed a water bond, in 2006 through Prop. 84, part of that money went to Santa Monica Mountains Conservancy — which, as noted above, misused the funds.