To address this growing problem, the state’s Special Funds were the subject of a hearing last week in the Legislature, which I attended. The 500-plus special funds have been routinely raided over the last several years to “balance” the state budget. The now-preferred budget gimmick is to shift “special funds” into the general fund in order to call the budget “balanced.”

The Senate Budget Committee conducted the oversight hearing to review this practice, but only covered what amounted to less than 0.5 percent  of the $4.6 billion in special funds that have been raided over the last several years.

Recent history

From 2007 to 2012, California had a $10.4 billion decline in its general fund, but a corresponding increase of $13.15 billion in its “special funds,” CalWatchdog.com’s Wayne Lusvardi reported in May 2012.

Last year, State Controller John Chiang reported California was patching its budget together by borrowing $4.3 billion from special funds accounts.

A few days later, the secret $54 million special parks fund was revealed.

Then-state Finance Director Ana Matosantos reported that the borrowing from special funds had ballooned to more than five times the borrowing amount since June 2008.

“Where are these dollars?” asked Senate Budget Committee Chairman Mark Leno, D-San Francisco. Leno said it was a “big problem” that the special funds “clearly have not been getting enough attention.”

Where are we today?

Gov. Jerry Brown’s last budget proposed to make only a partial repayment to the special funds accounts. The $566.4 million repayment would have been merely a drop in the bucket of the $4.6 billion owed to more than 80 California special funds. But even that amount was deferred when the actual budget was passed in June.

In April, Senate Budget and Fiscal Review Committee Vice Chairman Sen. Bill Emmerson, R-Redlands, sent Leno a letter requesting the full committee investigate the astonishing  growth of special funds, as well as the significant growth of borrowing these funds. Joining Emmerson in the letter were state Sens. Joel Anderson, R-San Diego; Jim Nielsen, R-Gerber; Tom Berryhill, R-Twaine Harte; and Mark Wyland, R-Escondido. They requested the investigation of special funds specifically from 2007 to 2012.

“The Governor’s Budget proposes to repay $566.4 million in 2013-14, with full repayment by the end of 2016-17,” the lawmakers said. “However, his proposed delay of over $1 billion of previously scheduled payments calls into question his commitment to that timetable, and the fact that over $4 billion of excess Special Fund revenues were available to backfill General Fund budget deficits, strongly suggests that fee payers have either been grossly overcharged, or have not been receiving the services for which they have paid, or both.”

But it was months before the hearing was scheduled, and only a minute portion of the debt was covered.

Budget background

Special Revenue Funds are an “account established by a government for a specific project,” such as gas taxes for transportation and highway maintenance, park user fees, and the like.

State agencies separately report information concerning special funds to the Department of Finance, but use differing accounting methods.

According to the Legislative Analyst’s Office, “Multiyear loans of special fund balances to the General Fund—in order 
to help balance the state’s annual General Fund budget—have grown from $749 million at the end of 2007-08 to $4.3 billion now (including additional loans in the 2012-13 state budget package). In addition, in 2012-13, up to $16 billion of special fund and other funds’ cash resources are likely to be used to ensure that the state can make General Fund payments on time.”

When the economy tanked in 2007-08, thousands of businesses closed, unemployment went sky-high — and fee payers got hosed paying for the increases in special fund accounts.

“In California’s budgetary accounting system, over 500 special funds receive specified fee and tax revenues to support particular public programs,” the state Legislative Analyst’s Office explained in a 2012 report. “The administration forecasts that special funds will generate about $38 billion of revenue in 2012-13, averaging around $70 million for each special fund.”

But the governor, the Department of Finance, and legislative leaders have helped themselves to the special fund monies for use in the general fund, in order to claim they have a balanced budget. They claim the funds are being paid back, but as the senators noted in their letter, these repayments are regularly delayed.

“Republicans formally requested an oversight hearing several months ago and we were assured by the Chair that the committee would review ‘a majority of fee-based funds,'” Emmerson said in a statement after the hearing. “Unfortunately, we only looked at $18 million in repayments, which is a fraction of the $4.6 billion owed to fee payers. There are 27 funds scheduled to receive repayments this year yet we are discussing only seven. What about the other 20?”

“My colleagues and I are also concerned that these special funds were able to grow to more than $4 billion calling into question whether fee payers have been grossly overcharged or have not been receiving the services for which they have paid, or both,” said Emmerson. “Moreover, these fees should be for services directly benefiting the payers and should not be spent on unrelated General Fund programs.”

Republicans have called for more oversight hearings to address many of the other special fund loans, including:

$611.8 million from the Unemployment Compensation Disability Fund

$480 million from the Motor Vehicle Account

$350 million from the State Court Facilities Construction Fund

$328 million from the Highway Users Tax Account

$285 million from the State Highway Account

$171.7 million from the California Beverage Container Recycling Fund

$133 million from the Off-Highway Vehicle Trust Fund

$95 million from the Hospital Building Fund

$11.5 million Dealer Record of Sale

By Katy Grimes

SACRAMENTO — It has never been more apparent that unelected state bureaucrats are also unaccountable to the Legislature. I attend legislative committee hearings every week, and despite the questions from lawmakers, the bureaucrats obfuscate, and get away with it.

High-speed rail is the most blatant example of this. Every hearing in which High-Speed Rail Authority CEO Jeff Morales has testified, leaves lawmakers shaking their heads because of his bureaucrat-speak — there are rarely answers to lawmakers’ questions.

And state bureaucrats get away with this.

A new Sheriff in town

The friendly, kind, portly bearded man who sat in the last row of the Assembly for six years is now in the Senate. Sen. Jim Beall may be kind and friendly, but Thursday he handed state bureaucrats their behinds. And it was a beautiful thing.

Used to speaking in circles at committee hearings, these bureaucrats, from the state Natural Resources agency, the troubled Parks and Recreation department, and the governor’s Department of Finance, didn’t know what hit them. It was as if Santa Clause had gone rogue.

Beall, a Democrat from San Jose, knows his way around a hearing room. He’s been a politician since he cut his teeth on the San Jose City Council, 1980 – 1994, as a county supervisor 1994 – 2006, and the Assembly 2006 – 2012.

The hearing was the Senate Committee on Budget and Fiscal Review, Subcommittee No. 2 on Resources, Environmental Protection, Energy and Transportation, and Beall made it very clear, politely, that he intended to get answers to his budget questions.

Troubled Parks Department appears still troubled

“The Parks and Recreation situation… what has taken place, since some of the funds have several problems?” Beall asked Farra Bracht with the Legislative Anakyst’s Office. Bracht explained the Dpartment of Finance went through all of the other special funds in the state, and matched them up with totals with what the Controller has.

“Regardless of the size of the fund, we need to make sure all of it is accounted for so we don’t get caught not accounting for it,” Beall said. “They are taxpayers funds.”

“This makes me nervous being chairman of the committee,” Beall said of the many special fund accounts in the state. “And when I am nervous, I do things.”

“A good starting point is to ask the Department of Finance what they are doing about it on an ongoing basis,” Bracht said.

Parks and Recreation scandal

While the State Parks and Recreation department was soliciting private donations to keep 70 state parks open, top agency employees were bilking the state for large vacation pay buyouts, and $54 million sat in a special fund, unreported.

Beall was relentless.

John Laird, the Secretary for the Natural Resources agency was unable to be at the hearing. Laird sent an Assistant Secretary for the agency in his place. But he mumbled his name, and no one asked him to identify himself again.  It was apparent Laird knew exactly which bureaucrat to send in his place if there was to be a grilling.

Kemp tried to quickly move away from the Parks and Rec scandal, but Beall instead asked him about the special funds. Kemp deferred to the Department of Finance.

And this is where the boring but masterful doublespeak and obfuscation began.

The Department of Finance said they were fully concerned with the problem, had done an extensive review of all special funds in the state treasury, and were satisfied there are no other cases of misrepresentation.

Beall asked about special funds not accounted for inside of the state treasury.

“We’re trying to determine the best way to do that, the best solution that satisfies everybody,” the finance representative said.

“You comments are so vague,” Sen. Jim Nielsen, R-Gerber, added. “Your comments give me no comfort.”

“Our job is to make things work correctly  — we will do that,” Beall said.

Beall and Sen. Hannah-Beth Jackson, D-Santa Barbara, asked Kemp to let them know specifically, the information needed to deal appropriately with special fund issues. They each made it very clear that neither of them was going to be happy with surprises.

“What do we do to help you in working together, so we govern responsible,” Jackson asked.

“Be as open and transparent as possible,” the Natural Resources Assistant Secretary said. “So when we sit down and talk, we communicate openly.”

Clearly frustrated, Jackson said, “I guess that’s as good as I’m going to get today.”

By Wayne Lusvardi

In 15th century Italy, the Medici Bank issued two sets of currency: gold Florins for exclusive use by the wealthy and silver Piccioli only for use by the poor.  Since it was forbidden to break down Florins into smaller coins that might be used by the poor, bankers had to invent a purely fictional accounting currency so that wholesale prices could be calculated.  Thus, the Lira a Fiorino, Denari, and Soldi were invented even though no such coins actually existed.

Unlike medieval Italy, the state of California does not have its own currency, but uses the U.S. dollar for accounting.  But 21st century California government apparently hasn’t advanced very much over medieval accounting methods.  While the value of the dollar is still the same, the number of dollars in each government fund depends on which agency is reporting it.

A new report issued by the California Legislative Analyst’s Office, “Issues Concerning the Accounting of California’s Special Funds,” indicates that the state Controller’s Office, the Department of Finance, the Legislature, and the governor’s office all use substantially different numbers in reporting fund balances in the state budget.  What’s worse, up to now there has been little to no disclosure that these numbers are inconsistent.  So presumably even the numbers the impartial LAO uses are not consistent with the Finance Department or controller.

Absurd Fund Accounting

As the LAO report sums up the absurdity of the state’s account reporting policies, “The fund balance is not the cash balance of a fund.”

If you want the actual fund balance, you are going to have to calculate that yourself. You can do this by subtracting the total fund liabilities from the total fund assets.  Don’t expect your government to accountably report the true fund balance for you.

And if you want the actual fund balance for the state’s “Special Funds” rather than the “General Operating Fund,” that number is calculated differently by excluding assets and liabilities.  Huh?

By now the state’s accounting practices sound so twisted that I’ve probably completely lost you and you don’t want to read any further.  But read on.  It get’s even more interesting.

Incestuous Fund Swapping

Since 2010, state Senate Republicans have requested the nonpartisan LAO to properly account for all the shifting of funds that have taken place back and forth from the general to the special funds.  Apparently, what brought about the LAO report now was the purported exposure that the State Parks Department was “hiding” $54 million in its “off-road vehicle recreational fund” while 70 state parks were closed for lack of funding.

While it is difficult to track all the shifts between the General and Special Funds, here are some of the larger shifts:

* $3.6 billion in net redevelopment funds went from special sunds to the general fund when redevelopment was shut down ($5 billion minus $1.4 billion left for affordable housing);

* $5 billion went from the general to special funds for prison realignment;

* About $3.6 billion has been sucked out of politically earmarked special fund accounts and into the deficit-plagued feneral fund (this includes the infamous $54 million in “hidden” state park trust funds).

* $2.1 billion was transferred from the general fund account designated for K-12 schools and community colleges to other fund accounts in the general fund, presumably for welfare-to-work, Medi-Cal, and other programs.

“Who’s On First?” – Abbott and Costello

It’s hard to tell the balance in each California state fund without a photographic memory and a lie detector test.  The recent LAO report dodges the issue of tallying up what the true level of funding for the General Fund should be when fund shifts are included. The only way to make any sense of what has been going on is to consider the total of both funds together.

According to the State Department of Finance, over the past 5 years the general fund has decreased by $10.4 billion but the special fund has increased by $13.5 billion.  That would indicate an actual increase of about $3.1 billion in both funds when considered together.   The claim by Gov. Brown and the Legislature that the general fund is running a deficit washes out to an increase when both funds are considered.

The LAO report calls for legislation to correct these discrepancies.

Most Fund Transfers to Cover Health & Welfare Programs

Many of the fund transfers from special fund accounts into the state general fund have been for health and welfare programs. Department of Finance spokesman H.D. Palmer is quoted in the Sacramento Bee:

“We’ve taken SSI (Social Security Income-Disability) grants down to their lowest level since 1983, CalWORKSs is down to the lowest since 1987 and state support for higher education is down by 25 percent.” 

But a new Report of the State Budget Crisis Task Force chaired by former head of the U.S. Federal Reserve Paul Volcker and Richard Ravitch, both Democrats,, states that the reason California’s Medicare levels are so low is that they have been successful in rolling some state-funded health care programs into the federal Medicaid program (p. 18).  Another reason cited as to why California’s medical program funding levels appears proportionately low is that its total budget is so large.

Gov. Jerry Brown has called for an emergency session of the state legislature on health care in December 2012 or January 2013.

Brown and the Legislature accuse the former state parks director of “hiding” $54 million in “special funds.”  Meanwhile, California government is hypocritically playing a game of “hide and seek” with its shifting accounts and different fund balances used by each state department.

By Wayne Lusvardi

The first wisdom of politics is that things often are not what they seem.  This appears to be the case with the much ballyhooed report that former California State Parks Director Ruth Coleman “hid” $54 million in the off-road vehicle recreation special fund.

A scandal broke out based on reports that the state was too broke to keep open 70 state parks while the Parks Department allegedly had $54 million or more in so-called “hidden” accounts.

In her resignation letter, Coleman said that she was “unaware of the excessive balance” of $133 million in the Off-Highway Vehicle Trust Fund (see Item Nos. 111, 112, 113 in Department of Finance report on special funds).  If Coleman was “hiding” funds. as charged John Laird, Secretary of the Natural Resources Agency:

* Why was the money hidden in plain sight in three accounts designated “Off-Highway Vehicle Trust Fund,” under Fund No. 0263. Which was authorized under the: (a) “Budget Act of 2008 as amended by Chapter 2, Statutes of 2009, Third Ext. Session,” (b) the “Budget Act of 2009,” and (c) the “Budget Act of 2010 as amended by Chapter 13?”

* Why, on May 31, 2011, did State Assembly Budget Committee No. 3 on Resources and Transportation vote to raid the Off-Highway Fund to transfer the funds to the General Fund, as reported by many off-road vehicle recreation organizations?

* Why, on June 6, 2011, did the Public Employees for Environmental Responsibility, stacked with envious state park employees, publicly protest that Off-Road Vehicle fund manager Daphne Greene was not sharing her program’s surplus with its “impoverished agency”?

* Why, on May 6, 2011, did the State Parks Department issue a solicitation for consulting real estate appraisal services through BidSync online bidding services for the acquisition of 415 acres of land to expand the Ocotillo Wells State Off Road Vehicle Park in Imperial County? The likely source of the funds for this land acquisition would have been the Off-Highway Vehicle Trust Fund.

* Why was the Off-Highway Vehicle Trust Fund reported to be a “Special Fund” instead of a “Trust Fund”?  According to off-road organization attorney Diana Tweedy, Trust Funds do not have the same legal status as a Special Fund and cannot be transferred to the General Fund without a state constitutional amendment.

* How could the Off-Highway Fund be “hidden,” when it was re-authorized and amended so many times by the Legislature since 2008?  How could it have been “hidden” if the state Assembly voted to raid the fund in 2011?  How could the fund have been “hidden” if “Public Employees for Environmental Responsibility” brought it to the public’s attention way back in mid-2011?  Why did State Parks initiate activities to expand existing state off-road vehicle parks in mid-2011 from the same fund, if the fund was “hidden?”

An Old Fashioned Grab of Highway Funds

Perhaps the answer to these questions lies with off-roader attorney Diana Tweed’s “Legal Memo” that the Off-Highway Vehicle Fund was a Trust Fund that was funded from a share of gasoline taxes and user fees from state off-road recreation parks.

Which brings us to the second wisdom of politics: “What is alleged to be ‘hidden’ may be a ‘red herring’ meant to divert attention from what is really going on.” Just as smelly fish were used to throw hound dogs off the scent of a fox, so it is with political diversions.

The recent state park special fund scandal apparently is an old-fashioned raid on highway funds.  Only in this case the highway funds are sitting in the accounts of the State Parks Department designated for land acquisition for off-road vehicle recreational parks.  Then why is there what appears to be a cover-up?

Why a Diversion?

While Coleman was allegedly hiding funds, cities and non-profit agencies were raising funds to keep state parks open in their regions so as not to deter tourist trade. How could politicians explain that they were exaggerating that the state was broke, and had no funds to keep all state parks open during an election year?   What Gov. Jerry Brown is doing is purging “Special Funds” — also known as “political earmarks” — and transferring those monies into the deficit-plagued “general gund.”

The Off-Highway Vehicle Recreation Division is a section of the State Parks Department that is not dependent on general funds.  It is self-sufficient and relies on a share of the gasoline taxes generated from the mileage of off-road vehicles and user fees from state off-road recreation parks.  Technically, the Off-Highway Vehicle Trust Fund is not a “special fund,” but a trust fund, just as there is a highway trust fund.

Another apparent reason for the political diversion about “hidden funds” is that there has been an ongoing political and bureaucratic tug-of-war between “preservationists” and “off-roaders” within the Parks Department and the state Legislature.  Off-roaders also tend to be inclined toward being Republican.  A question remains as to whether off-roaders will find a basis to sue the state over the transfer of these “hidden funds.”

Coleman is a registered Democrat with a long track record in state government.  She will likely end up serving elsewhere in government after serving as the “sacrificial lamb” in this political charade.

Fund Raid Takes from Double Tax — When Will It End?

Off-road attorney Diana Tweedy sumed it up best:

“With hundreds of millions of dollars in unpaid loans and the latest permanent and ongoing taking of OHV funds, off road enthusiasts are feeling the pinch. The general fund is supported with income and sales taxes paid by all the Californians. The diversion of OHV Trust Fund moneys to the General Fund is a second tax exclusively paid by off road enthusiasts on top of taxes they pay to the General Fund. These taxpayers are angry and will not put up with politics as usual unless something is done to address their grievances.” 

“Due to hundreds of millions of dollars in unpaid loans and the latest transfer of almost ten million dollars a year from the OHV Trust Fund, the mission of the OHV Program is in jeopardy. The transfers are interfering with Core Program objectives preventing the OHV Program from achieving its purpose. The loans must be paid back and the latest transfer must be revoked before the OHV Program can meet its objectives. 

“Epilogue — In May 2012, the Assembly Budget Committee voted to take more money from the OHV trust fund. When will this ever stop?”

Californians just want to have fun. But the politicians just want more money to waste and are grabbing it wherever they can.

By Wayne Lusvardi

Is the scandal over the State Parks Director Ruth Coleman hiding $54 million in plain sight in a special fund account beginning to make the public aware of all the political earmarks in the state budget? And that those earmarks are being purged? Looks like it.

Back on May 23, Calwatchdog.com was the first to reveal that, from 2007 to 2012, California had a $10.4 billion decline in its general fund and a corresponding increase of $13.15 billion in its “special funds.”  Special funds were being shifted into the general fund under a process of “borrowing.”

On July 10, Controller John Chiang reported that California was patching its operating budget by “borrowing” $4.3 billion from “special funds.”

On July 20 came the revelations about Coleman and the $54 million special parks fund.

By July 30, state Director of Finance Ana Matosantos reported that this borrowing from special funds was more than five times the amount from June 2008.

Are Special Funds the Same as Earmarks?

What is a “special fund?”  Special Revenue Funds are an “account established by a government for a specific project” such as gas taxes for maintaining and building new highways, or park user fees.

A specific project funded with a “special revenue bond” is typically not considered a “special fund” but a “bond fund.”  And federal funds for Medi-Cal or other programs run by the state, but subsidized by the federal government, are called “federal funds.” They are not special funds, even though they are also for specific purposes.

Property taxes collected by redevelopment agencies are “special revenue funds” designated for local government. But California has suspended the operation of all redevelopment agencies in the state and transferred those former “special funds” into its “general fund” for public schools.

Borrowing is another budget gimmick to make the public believe the funding accounts are segregated, when they are not.  This is called “fungibility” in public finance.  Tax revenues are “fungible” when they are interchangeable, or can be used to replace funds in another budget category.  It is like raiding your “college savings fund” for your children or medical savings account to pay your utility bills so you can continue to operate your household.

Given the ongoing state budget deficits, funding categories in the state budget have become arbitrary and the funds are often being used interchangeably. You no longer can look at just the general fund to understand what is going on.  You have to look at the special fund and the bond fund as well.

The definition of a “special fund” is almost the same as an “earmark.”  Safire’s Political Dictionary defines an “earmark” as: “to set aside funds for a special project or purpose.”

A political earmark is a term commonly used to describe separate funds that individual legislators or the governor specify be directed to projects and activities that will benefit or protect particular people or job categories in their home constituencies.

$34.1 Billion Borrowed Since 2008

The July 30, 2012 report from the Department of Finance noted the budgetary loans to the generalf fund, as required under Government Code 16320. A list of the 141 loans to the general fund can be found here.

California has accumulated $34.1 billion in borrowing from other funds for its general fund from 2008 to 2011.

California will borrow $5.93 billion more from special funds for its general fund in 2012-13. The bulk of the borrowing for 2012-13 will come from deferred payments to public schools ($2.22 billion or 37.5 percent), from economic recovery bonds ($1.34 billion or 22.6 percent), and from borrowing from local governments ($2.09 billion or 35.2 percent).

A troubling aspect of the above borrowings is that California is using bonds to pay for services, not just public-works projects. Bonds have to be paid back with interest. So this is no cost savings in the final analysis.  This is how New York State almost went into bankruptcy in the 1970s.

Of the $5.93 billion of total borrowings in 2012-13, only $181 million, or about 3 percent, will be borrowed from “special funds.”

State Budget Purging Special Fund Earmarks?

Under Assembly Bill ABX-4-2 (2009), the portion of the State Education Budget that funded “categorical programs” was deregulated.  This meant that political earmarks to protect certain non-essential jobs were eliminated. It became the responsibility of each local school district — not the state Legislature — to decide what ancillary jobs needed funding.  Core teachers were not affected by this deregulation.  Deregulating “categorical funds” saved public school budgets and didn’t adversely affect poor students.

Is the state general fund deficit compelling the state to also deregulate many of its special funds by “borrowing” just as school “categorical programs” had to be deregulated?

“Borrowing” funds designated for public schools sounds like “robbing children.” But is this transfer of funds what has already been authorized under AB-X-4 to deregulate school funding for ancillary jobs programs?

Raiding Highway Funds Only 1 Percent of Borrowings

It is interesting to note that “raiding” transportation funds has only amounted to less than 1 percent of all the “borrowings” over the last five years.  Ninety-nine percent of the “borrowings” have come from cutbacks in non-essential public school jobs programs, cutbacks in local governments such as redevelopment, deferred Medi-Cal costs, deferred public employee retirement payments to Cal-PERS, and state payroll deferrals. The state is still functioning despite all these “borrowings.”

Outstanding Amounts Borrowed from 2008 to 2011