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. 

The bad news: Providing certain health care services just became way more expensive for the counties. 

The Brown administration is ending a program that coordinated care for seniors and low-income families because it was no longer cost effective. As a result, the state will save $626 million this year, forcing counties to pick up the check. 

The Coordinated Care Initiative allows Californians who are eligible for both Medi-Cal and Medicare to “receive medical, behavioral health, long‑term services and supports, and home and community‑based services coordinated through a single health plan,” according to the budget document released Tuesday. 

But the law allows the Department of Finance to end CCI if it is deemed no longer cost effective. Federal regulations requiring in-home caregivers to receive overtime after 40 hours per week drove the cost of the program up with the minimum wage hike.

Last year, state analysts estimated the plan to gradually increase the minimum wage to $15 per hour would cost the state $4 billion by 2021. Cutting the CCI program will lower the state’s burden to $2.6 billion, according to a Department of Finance official. 

Cutting the program will shift the labor costs onto the counties, which is estimated to cost more than $4.4 billion over the next six years, according to the California State Association of Counties. 

 “This would be devastating to counties all over the state,” CSAC President and Alameda County Supervisor Keith Carson said in a statement. “We undoubtedly would have to make cuts in other vital social services to cover these costs.”

Other highlights from the new audit of Cal Fire by the Office of State Audits and Evaluations of the Department of Finance:

* Cal Fire “did not have specific statutory authority to establish the Fund and did not request or obtain Finance authorization to establish this account outside” the Centralized Treasury system.

* Of the $3.66 million collected in the slush fund, “$2.4 million was expended.”

* Cal Fire’s “decentralized process for the Civil Cost Recovery Program increases the risk of lost or stolen goods.”

* Established state procurement and inventory processes were not followed”; and neither the California District Attorneys Association nor Cal Fire claims “ownership of $1.7 million of equipment and software items purchased with the fund.”

Slush funds are becoming a trend in state government. The Cal Fire audit was published a little more than a year after the discovery of the $54 million State Parks hidden fund last year. In that scandal, the State Parks Department claimed budget cutbacks justified increases in park entrance fees and monetary help from volunteer groups.

Uncovering the dirt

Cal Fire has the authority under the California Health and Safety Code to recover costs for fighting fires and providing rescue or emergency medical services — despite the fees and taxes, and the new fire tax California residents already pay. This money was supposed to be deposited in the state’s general fund.

“Cal Fire Director Ken Pimlott told The Bee he never knew the $3.66 million fund was cloaked from state leaders and the Department of Finance,” the Sacramento Bee reported in January. “Cal Fire froze the account last year and scheduled it for dissolution in February at the request of the prosecutors’ group.”

When news of fund first were reported, Pimlott claimed media coverage was “incomplete and sensational, and over time, truth would prevail,” the Los Angeles Times reported in January. He even went out on a limb and said those who attacked the fund would have their motives exposed.

The new state audit contradicts his earlier statements.

Pimlott now claims that Cal Fire officials believed they had the authority to set up the fund account. But according to the Times story, documents from 2008 show Cal Fire officials were aware of problems with the fund and were concerned that, if the fund were discovered, the Department of Finance would demand that Cal Fire place the money with the state treasury.

When the Department of Finance auditor asked for the legal reasoning for establishing the off-the-books fund, Cal Fire officials referred the question to the office of Attorney General Kamala Harris. However, the Attorney General’s office legally represents Cal Fire.

The Audit

The Department of Finance audit also condemned Cal Fire’s failure to even track the settlement monies. According to the audit, managers of the Cal Fire program did not even know how many settlement cases were involved, nor did they know how much money the agency received from the settlements. Auditors concluded that there was a heightened “risk of money being either lost, stolen or both.”

“A California fire account hidden from state lawmakers paid for $22,000 in metal detectors, $30,000 in GPS units — and $33,000 for a conference at a Pismo Beach resort, according to a spreadsheet released Tuesday showing expenses dating back to 2011,” the Bee reported.

The $3.6 million dollars in the Cal Fire fund was spent as follows:

* $766,000 for training;

* Nearly $374,000 to the District Attorneys Association in management fees;

* $1.7 million on equipment for which, as noted above, no inventory was kept.

Sen. Ted Gaines, R-Rocklin, called for an investigation last January into the state officials behind the slush fund account, but his request fell on deaf ears.