David R. Doerr,
principal contributor Vol. XVII, No. 11
Ronald W. Roach, editor
March 19, 2004
Budget: Governor meets with county leaders; overspending on prisons is probed.
Workers’ Comp: Governor signs petition as legislators debate lack of work toward reforms.
Public Pay and Pensions: A source of state and local budget woes.
FTB: State auditor says FTB delays plan to measure marginal costs of new auditors.
Your Tax $$$ at Work (Ouch!): S.F. official loses his tainted painted SUV, and more.
“Everyone here has to tighten the belt,” declared Governor Arnold Schwarzenegger in his March 17 speech to county leaders, who continue to be unhappy with the governor’s plan to take $1.3 billion of property taxes to help the state balance its budget.
However, he encouraged the Sacramento gathering of counties’ supervisors by agreeing with them that there are “too many strings attached to the dollars that come from Sacramento. … I want to change that and restore local control.”
Supervisors also met privately with the governor and, according to Copley News Service, they told him they want to consider the property tax shift a loan.
CNS quoted San Diego County Supervisor Greg Cox as saying the governor gave signs that he was open to change. “We didn’t expect him to say OK. He didn’t say no. He said let’s sit down and see if we can come up with some alternatives.”
CNS also reported that counties want to negotiate a deal that calls for local governments to provide $816 million of the property tax sought by the governor, while taking more from cities, redevelopment agencies and special districts.
Cities and counties also are gathering signatures for a November ballot initiative that would require voter approval before the state could reduce local funding, including property taxes.
Elsewhere on the budget front:
Prison Spending is Probed. The Assembly Budget Committee on March 18 conducted an oversight hearing on the state prisons budget, focusing on why the system could not operate without going hundreds of millions of dollars over budget. The Schwarzenegger Administration intends to hold wardens accountable for their budgets, meaning they could lose their jobs.
According to the administration, overspending seems to be an acceptable and expected routine in recent years. Youth and Adult Correctional Agency Undersecretary Kevin Carruth, who had served prior to the Davis administration: “When I was here before, if you overrun your budget, you could fully expect to be fired.” He said the Department of Corrections has been running deficits since 1998-99, creating a “culture of it being OK to overrun your budget.” He said there were legitimate reasons for some additional costs, but “once you are running over, what’s another million here or there?”
State Auditor Elaine Howle noted that her office has been critical of department overtime, citing a November 2001 report that dinged it for not aligning spending with legislative authorizations. The department was not anticipating such things as vacations, using overtime pay that usually went to more experienced, higher-paid officers.
How do you control overspending? The Schwarzenegger Administration wants the prison system to have clear operations standards, with wardens required to seek permission to deviate from them. Wardens would have to justify the need for a function that requires overtime pay, said James Tilton of the Department of Finance. In the past, he said, “Very bluntly, in my opinion, the budget became meaningless to the Department of Corrections.”
As reported in The Sacramento Bee, the prison department blamed staff pay raises, soaring costs of inmate health care and unauthorized spending for a $5.6 billion budget that has soared 41 percent, or $1.6 billion, in the past five years.
Eliminating Two State Holidays Would Save $20 million. Assembly Member John Campbell has introduced AB 2460, which would eliminate two of the 14 paid holidays enjoyed by the state’s 200,000 employees. Mr. Campbell, according to The Sacramento Bee (March 15), said, “The vast majority of the public is going to see this as an issue of fairness and budget accountability.” But Jim Hard of the California State Employees Association called the bill a “cheap shot” and “political grandstanding” over savings that wouldn’t be a “blip on the state’s radar screen.”
While most private employers recognize 10 to 12 holidays, the average for state employees around the country is 11.2. Texas has the most (15), and Louisiana has the least, eight, plus a biennial Martin Luther King Jr. Day.
The Bee reported that the governor has not taken a position on the bill, and Mr. Campbell faces an uphill fight in a Democrat-controlled Assembly. For example, Hannah-Beth Jackson, a Democrat, said she is worried that such a measure would hurt morale of public employees. Assembly Member Dennis Mountjoy, a Republican, said fiscal conservatives must look “everywhere we can” to save money. “I don’t see a problem with this bill.”
The $20 million savings would represent what it costs taxpayers for two holidays when those who have to work are given extra pay. Under the bill, state departments would choose which holidays would not be observed by state employees each year.
LAO unearths budget nuggets. The Legislature’s budget analyst has combed the massive state budget proposed for 2004-05 to find the following nuggets that sometimes make one wonder who’s minding the store:
Ninety of the state’s 117 active information technology projects have experienced a change of 10 percent or more in budget, schedule or scope of work.
The governor’s proposed cutting of $46 million in enrollment funding at the University of California and California State University systems would still leave enough for the systems to add 6,100 students in 2004-05.
At the Department of Motor Vehicles, the average walk-in waiting time is 80 minutes, despite state law requiring that customers not have to wait in line more than 30 minutes.
Even with a proposed 44 percent increase in Community Colleges fees, California’s two-year colleges would still have fees that rank lowest in the nation.
Selling the Department of Forestry and Fire Protection’s “King Air” aircraft (which isn’t used to actually fight fires) would save taxpayers $400,000 a year. (The Sacramento Bee reported March 19 that the Federal Aviation Administration is investigating the state’s use of the $4.6 million turbo-prop plane. The FAA probe is to determine whether the state has properly certified the aircraft for shuttling state administrators to meetings. The Bee also quoted a department official, Karen Terrill, as saying the plane is used “very efficiently. It supports our mission, and it saves the taxpayers money.”)
The state must provide all revoked parolees with an attorney.
Of $3 billion in bond funds appropriated in 2002-03 for resources, $2 billion remains unspent.
Although Santa Ana schools have 50 percent more students targeted for Economic Impact Aid than Oakland, the latter district gets $900,000 more in EIA funding.
The budget proposes to eliminate the Office of Problem and Pathological Gambling.
Two million dollars appropriated to the Department of Justice in 2002-03 to acquire a site for a new statewide DNA laboratory were used to offset budget cuts in the department’s budget.
Although he still wants to work out a compromise with the Legislature, Governor Arnold Schwarzenegger was expected to put his signature on an initiative to overhaul the workers’ compensation system. According to the Riverside Press-Enterprise, the governor was to sign a petition during a March 19 noon-hour visit to a manufacturing company in Torrance.
Joel Fox, leader of the Small Business Action Committee that is sponsoring the initiative for the November ballot, said the governor’s action “is an important message that if people want reform, they should support the initiative.”
Meanwhile, in Sacramento, Democrats and Republicans debated over who to blame for not coming up with a deal. Assembly Speaker Fabian Nunez said Democrats have reached agreement with the governor on most major issues. However, he said there is no agreement on Democrats’ demand that insurance companies be regulated so their savings can be passed on to employers. But Assembly Republican Ray Haynes said Democrats have been dragging their feet. “The only thing getting the Democrats to the table right now is the threat of an initiative,” he said.
Senate Republican Leader Jim Brulte listed other unresolved issues, reported the Los Angeles Daily News. He said, for example, that an employer should not be held 100 percent responsible for treatment costs when found responsible for only 10 percent of the cause of an injury. He also said that “we’ll make sure the insurance companies don’t pocket excess profits.”
The Daily News quoted Vince Sollitto, spokesperson for the governor, as saying a legislative solution would provide the fastest relief to employers. He said, “The ballot initiative serves as an important backstop to the legislative discussions, but the governor believes we’re making progress.”
The governor wants meaningful reform on his desk by March 31.
The initiative campaign, which has received a $1 million donation from the governor’s political action committee, needs to gather more than 600,000 signatures by mid-April. Meanwhile, a spokesperson for the governor’s PAC said it would no longer be accepting contributions from insurance companies with a stake in the workers’ comp debate.
In another development, the Employers Fraud Task Force estimates of prosecutable workers’ compensation fraud – such as an “injured” truck driver caught competing in a rodeo -- run from $2 billion to $6 billion in California. However, Laura Clifford, executive director of the task force, said “soft fraud (jacked-up bills by medical providers) is even greater.” The Orange County Register (March 16) reported that, according to John Maloch, task force chair and risk analyst for the Walt Disney Company, reforms being considered in Sacramento are missing a crucial ingredient: more eyes to watch medical billings. For example, he said New York requires companies to follow up on each workers’ compensation claim with failure to file reports resulting in fines. He said that because there are doctors “that play the game,” Disney examines every medical bill. Original charges are cut in half. The company also limits claims examiners to about 150 cases, about half the insurance industry average. The task force has been formed by businesses to combat workers’ compensation fraud. Its Web page is www.fraudtaskforce.org.
Lavish pay and pension benefits showered on public employees have surfaced as a major force driving state and local government into deep fiscal crises.
News media around the state are taking note of this fact, reporting rumblings from numerous government bodies as school board members and county supervisors lament their predicaments and debate whether to raise taxes or cut services so they can continue to afford ever-growing payrolls.
How did it happen? Public employee unions, including those representing teachers, pay big bucks to elect sympathizers to support their quests for: (a) more pay, (b) fatter pensions, and (c) job protections that often stand in the way of efficiency. As the unions succeed with pay and benefits, growing the size of government, they also rake in more dues to increase political clout in future elections.
Public payrolls have grown far more than inflation in the last five years, reported the Los Angeles Daily News (March 13). In fact, the newspaper’s analysis found that costs of salaries and benefits for the financially troubled Los Angeles Unified School District grew three times the 17 percent rate of inflation.
Steven Frates, senior fellow at the Rose Institute of State and Local Government at Claremont McKenna College, told the Daily News: “At all levels of government, the rate of compensation has gone up much more rapidly than it has in the private sector and, most importantly, faster than the personal income of the people who pay for this.” Personal income per capita in California increased 24 percent over the five years through 2002-03. “There has been a wealth transfer. It has gone from the citizens to the people in government.”
The newspaper reported these statistics for the state, city of Los Angeles, Los Angeles County, and the LAUSD:
State of California – Costs of salaries and benefits, including pensions, soared 41 percent, from $13.3 billion to $18.7 billion. The number of full-time employees increased 10.5 percent, to 212,563.
City of Los Angeles – Pay and benefits, including pensions, increased 26 percent, from $1.8 billion to $2.2 billion. The paper said average pay for police officers grew 28 percent, compared to 23 percent for civilian workers. Overtime costs increased by 61 percent, and workers’ compensation costs were up 81 percent.
Los Angeles County – Salaries and benefits jumped 39 percent, from $5 billion to $6.9 billion, while average county employee’s pay increased 31 percent, to $49,343.
LAUSD -- Salaries and benefits grew 51 percent, from $3.6 billion to $5.4 billion, as the average compensation package grew 27 percent, to $65,526. On March 10, the board approved $427 million in budget reductions and gave the superintendent until April 9 to find $61 million more to cut. The board eliminated 480 positions, mostly nurses, clerks and administrators.
Other illustrations of the squeeze on public finances as a result of increased wages and benefits:
Retired Teacher Health Care Straps School District. The West Contra Costa Unified School District some 30 years ago agreed to provide fully-paid health care for employees and spouses for the rest of their lives, reported the San Francisco Chronicle (March 14). Now, the district’s health deal is costing $9.5 million, and district officials say next year’s health costs will jump as much as 20 percent.
Even if the district stopped offering lifetime health benefits to new hires, district actuaries say the cost would still amount to $275 million over time, with no money set aside for it. The teachers’ union notes that the health care benefit was in lieu of higher wages. The paper said fewer than a dozen of the state’s 1,000 school districts offer such generous retirement.
Meanwhile, voters on March 2 rejected an $80 parcel tax that would have raised $7.5 million annually, and the school board voted March 12 to place another measure on the June 8 ballot that would seek $85 a year from property owners. The board threatens to shut down athletics and libraries, but says they could be funded if voters approve the tax, including a newly proposed 7.2 cents-per-square-foot space tax.
The district, which also has been plagued by declining enrollment, is faced with the problem of cutting $16.5 million from its $180 million general fund.
Manteca Looks to Taxes to Offset Rising Retirement Benefits. In Manteca (San Joaquin County), the City Council has been considering higher taxes to deal with a revenue shortfall and rising pension benefits for public safety personnel.
The Stockton Record (March 13) reported that the city may conduct a poll to see whether voters would support a half-cent sales tax. Since the city has boosted benefits for police officers who retire at age 50 and for firefighters who retire at age 55, the city’s retirement costs have escalated. They’ve gone up $1 million per year since 1991.
The Bee: No to More Pay Raises. The Sacramento Bee (March 16) noted that the fact that Sacramento County supervisors have given pay raises and generous pension benefits to unionized employees doesn’t justify giving away more of the store. In an editorial, the paper urged the board to forego granting pay raises that would amount to 19 percent over two years for some of the 605 nonunion employees. It would cost $4 million over two years while the county faces a $45 million deficit. How can supervisors even think about pay raises in the midst of “draconian” budget cuts? The Bee asked. This board has given generous pensions, so a county worker can retire at 55½ years of age with 70 percent of pay, and sheriff deputies, after 25 years on the job, can retire at 50 with 75 percent pay, or wait eight years and take home 100 percent of pay. Just because everyone else is giving these rich compensation packages is lame justification, the newspaper said. “Someone at some level of government has to say no. Sacramento supervisors should be the first.”
Firefighter Pay Raises are Denounced. In a scathing editorial on March 14, The Sacramento Bee denounced a 27 percent, three-year pay raise granted by the Sacramento Metropolitan Fire District. The Bee said, “The extent of the Sacramento Metropolitan Fire District’s generosity should not be surprising. The board is dominated by members whose elections were bankrolled by the firefighters union.” The Bee said the 27 percent pay hike is actually bigger, as 9 percent per year compounds into 19.5 percent. The paper also says the figures do not include incentives. Senior firefighters will get an extra $267 a month for an EMT certificate, double the current amount. In three years, firefighters with five years on the job and EMT and Paramedic certificates will get $80,000 a year, not including overtime and education incentives.
California’s costly 91,000-child, $1.7 billion foster care program is under federal criticism, while the child-care lobby wants to turn the program on its head, testimony at an Assembly Human Services Committee March 16 revealed. Last year, the U.S. Department of Human Services flunked California on 12 of 14 foster care outcome measures and the state is at risk of losing federal support for the program. The feds want California to move children out of the program more rapidly.
Foster care is designed to move abused or neglected children into new homes. However, at the hearing, it was disclosed that some counties are moving entire families, including parents, into a foster home. Some counties are expanding foster care into another welfare program. In Monterey County, families that agree to provide emergency foster care can get taxpayer dollars to help buy a house. Alameda County wants to use foster care dollars to keep children in their own home. Despite these revelations, Frank Mecca, executive director of the County Welfare Directors Association, wants more flexibility that will allow more “innovation.” They are urging that they be allowed to spend foster care dollars to provide services to children not in foster care. In other words, they would expand general welfare programs.
Governor Arnold Schwarzenegger’s budget proposal indicates the administration is working on a $72 million foster care reform plan, including performance-based contracting for higher-cost placements and restructuring foster care rates. According to the budget, expenditures have grown 23 percent since 1998-99 (i.e. – during the Davis years) while caseload has declined 9 percent.
Legislative Analyst Elizabeth Hill has put on the table some additional options for reform: increasing incentives to reduce the time a child stays in an FFA home; reform of the special care increments that can add $2,000 a month, and development of a plan to increase the supply of foster homes.
In a February follow-up report by the state auditor to the Legislature on responses by agencies to prior audit recommendations (Report 2004-406), Auditor Elaine Howle states the Franchise Tax Board has delayed making any changes recommended in a 2002 audit to clearly show the marginal costs and revenues of new audits.
According to the 2002 report, the FTB “summarizes all desk, field, and IRS follow-up audit activity into a single category, which obscures the very different returns on each of the personal income tax and corporation tax audit types. Without this information, decision-makers are left without an accurate tool against which to measure whether the board’s staffing increases return their projected assessments.”
Since the 2002 report, the FTB has not changed its approach. The latest State Auditor report quotes the FTB as saying before making changes, it must discuss them with the users of the documents. The FTB further says that due to the recent budget situations and the change in administration, discussions have been delayed.
Other findings in the 2002 State Auditor’s report and FTB actions to implement them:
The FTB double counts the revenues generated by an audit as attributable to both the audit program and the collection program. In the 2004 report, the FTB said it is developing an enterprise activity-based costing tool and will be testing it this spring, and make recommendations for change by June.
Cost benefits for FTB audits do not reflect historical performance. For example, the return on desk audits was $3.87 per $1 of cost, instead of the estimated $6.36. In the 2004 report, the FTB states that it is making progress in assigning support costs for many sections. It is compiling the information necessary to compare prospective cost-benefit ratios against actual returns for its current work plan process.
New audits produced 79 cents for every $1 of
cost between 1992-93 and 2001-02, and $2.71 for every $1 of cost between
1998-99 and 2001-02.
In the 2004 auditor report, the FTB says it is well on its way towards
completing the design of a more refined methodology for measuring the
effectiveness of manual collection efforts.
The FTB was not using all of its funding for
collection program salaries to fill authorized positions but was using some
funding for other costs.
In the 2004 update, the auditor reported that the FTB reports that the
Department of Finance removed all vacancies in existence on June 30, 2003, but
has since returned some of the positions. A small number of vacancies existed
but that virtually every vacancy in the collection program was filled by
December 2003.
Repeating his mantra that the state should exhaust all methods of collecting taxes already owed before considering higher levies, state Controller Steve Westly on March 17 presented a “concrete plan” to save the state $1 billion or more.
He told a Capitol news conference that the plan includes three simple things: Cracking down on the “underground economy,” collecting unpaid taxes and restoring to the Controller’s Office the ability to engage in performance audits of government programs.
Mr. Westly, who is chair of the Franchise Tax Board, said the state should “take a hard look at ways to save the state money” before talking about cutting needed services, noting that $1 billion would provide health insurance for 800,000 children, provide life-saving drugs for 100,000 low-income HIV and AIDS patients, or provide in-home support for tens of thousands of elderly Californians.
“We should collect money that is already owed to the state before we talk about raising taxes,” he said, citing the state’s amnesty program for taxpayers who have invested in abusive tax shelters. This program, which began January 1 and ends April 15, has already brought in $119 million from taxpayers amending returns to avoid penalties, which will be much stiffer when the amnesty is over.
There could be an additional $165 million to $250 million yet to come in from this amnesty program, he said, adding that the FTB estimates California is being denied between $600 million and $1 billion a year from taxes on income that is invested in offshore tax havens.
(Cal-Tax comment: It is interesting to note that the FTB estimated that a tax amnesty program proposed by Senator Rico Oller in 2002 (SB 1439) would only bring in $9 million and net about half that after administrative expenses.)
Mr. Westly said California loses $3 billion every year to the underground economy as businesses and individuals fail to report income, and he urges an amnesty program for those who have underreported income. There would be substantial penalties – a reinstated misdemeanor penalty for underreporting income -- for those who do not take advantage of such an amnesty. The FTB, by auditing more effectively, could collect an additional $340 million to $410 million a year, he said, praising the FTB staff for its effective use of technology. (Cal-Tax comment: Under the current track record of the FTB audit program, the estimates appear to be wildly inflated. A recent state auditor’s report (see above story) questioned whether adding auditors produces much new revenue.)
There is a need to increase enforcement with reinstated penalties, he said, adding that he will be holding an April 7 hearing in Los Angeles to find specific ways to “clamp down on the underground economy.”
The Controller’s Office, with 200 auditors, now saves taxpayers about $200 million a year by ferreting out fraud and abuse, he said. But “where the rubber really meets the road” is in performance audits to determine if tax dollars are being used efficiently. He said there could be $600 million in savings from these efforts.
In 1998, then-Governor Gray Davis reduced the Controller’s Office budget to stop it from conducting performance audits of his administration (the controller at the time, Kathleen Connell, was often at political odds with the governor). Mr. Westly said the Legislature withheld money from the Controller’s Office budget “for political reasons.”
Governor Arnold Schwarzenegger also has a performance auditing program, but it may take several months for his commission to come up with recommendations. “We don’t have several months,” Mr. Westly said. “Let’s get these things rolling while we work on a more comprehensive plan.”
He said Republicans and Democrats should get behind the effort to “restore people’s faith that we are running the state of California with a tighter belt.”
“Will this make the budget deficit go away? Absolutely not,” he said, calling it a “good step forward” that will make budget compromise easier.
Assembly Member Judy Chu is developing necessary legislation, he said.
Backers of an initiative to tax telephone bills to pay for emergency health care services are reportedly close to submitting the signatures to qualify for the November ballot.
The Coalition to Preserve Emergency Care has pushed the initiative despite Californians’ overwhelming sentiment against new taxes, as displayed in the trouncing of Proposition 56 on the March 2 ballot. That measure was to make it easier for the Legislature to pass tax hikes.
Led by the California Medical Association, the coalition seeks to increase the tax on phone bills for 911 emergency service from 1 percent to 3.72 percent. There would be no limit on how high the tax could be on cell phones or commercial phone bills. The tax on cell phones would go up 400 percent.
The California Chamber of Commerce issued a statement March 17 calling the initiative flawed, lacking financial controls and fiscal oversight. “This initiative would cost consumers and small businesses $550 million per year in new taxes, an amount that would likely increase in the future,” the state chamber said.
Cal-Tax President Larry McCarthy criticized the initiative as a “wholly inappropriate shift of health care costs to telephone users in California.”
The proponents reported this week that they had gathered 633,000 signatures, already more than the 598,105 needed for a constitutional amendment.
In another November initiative development, an initiative that would tax millionaires to finance mental health services appears close to qualifying. Assembly Member Darrell Steinberg, a sponsor of the measure, announced they will submit 643,950 signatures, which is almost twice the number needed for qualification. The measure would impose a 1 percent tax on income above $1 million. Backers of the measure say it would generate nearly $700 million a year.
After a complete counting of all ballots, Tulare County election officials announced March 18 that the 0.25 percent Visalia sales tax proposal on the March 2 ballot exceeded the required two-thirds majority by 19 votes. The measure got 13,822 “yes” votes (66.76 percent) to 6,882 “no” votes.
The $4.5 million estimated to be generated by the tax is earmarked for public safety. There were no indications that anyone would ask for a recount, according to the Visalia Times-Delta.
In another nail-biter: After a 10-day wait, the Grant Elementary School District in Shasta County learned that its $1.7 million bond passed by nine votes above the 55 percent threshold. According to the Redding Record-Searchlight, funds will be used to finish the district’s new middle school. School officials started construction knowing they didn’t have the funds to finish it unless the bond issue passed. Currently the library is missing bookshelves, the home economics room has no appliances, the gym has no scoreboard or bleachers and portions of the structure are missing ceilings and carpeting.
Meanwhile, in other March 2 election fallout, a top aide to Secretary of State Kevin Shelley said counties’ election officials were at fault for snafus. Marc Carrel, assistant secretary of state for policy and planning, said county registrars of voters pressured the Secretary of State’s Office to certify a component of the electronic voting apparatus that was not fully tested and malfunctioned on Election Day, the San Diego Union-Tribune reported March 17. In San Diego County, 40 percent of the devices encoding voter cards that activate touch-screen ballots did not boot-up properly.
Mr. Carrel said San Diego County Registrar Sally McPherson had no choice but to use the devices, with or without state certification. Mr. Carrel said a back-up system should have been in place. Ms. McPherson denied she pressured the state, saying “counties encouraged the secretary of state to provide us with the ability to use the (devices).” San Diego County Supervisor Ron Roberts said, “I don’t think we had a partner in the secretary of state helping us to bring this on line in any sensible way.”
Performance Audits. AB 249 (Matthews) was amended March 16 to delete prior provisions and to change a provision in the 2003 Budget Act that prohibits the Controller’s Office from conducting performance audits. The bill allows the state’s chief financial officer to initiate performance audits under certain restricted conditions.
Corporate and Income Tax Exemption for New Pro Team Locating in a Redevelopment Area. AB 480 (Ridley-Thomas) was amended on March 15 to delete prior provisions and add a corporate and personal income tax exemption for specified professional athletic teams that locate in a redevelopment area. The exemption would run for five years. To be eligible, the professional sports team must compete either in football, baseball, basketball or hockey and must be a new franchise awarded by the league or an existing franchise relocating from another state. (Sorry, Al Davis. You’re not eligible.)
Fees on Petroleum Infrastructure Projects. AB 1991 (Lowenthal) was amended March 18 to impose a $100,000 fee with an application for certification of a petroleum infrastructure project, which is required by the bill, and an annual fee of $15,000.
Personal Income Tax Conformity: Claim of Right. AB 3072 (Assembly Revenue and Taxation Committee) conforms personal income tax law to a federal provision that allows taxpayers to deduct payments made for income for which the taxpayer originally thought he or she had an unrestricted right and included in gross income for a prior year.
Subchapter S Corps: Conformity Re Exclusion of LIFO Recapture. AB 3073 (Assembly Revenue and Taxation Committee) conforms to federal law excluding last-in, first-out (LIFO) recapture amounts from the computation of estimated tax payments required when an annual installment of LIFO recapture tax is due.
Property Tax Welfare Exemption: Expansion of Exemption for Facilities in Course of Construction. AB 3074 (Assembly Revenue and Taxation Committee) expands the property tax welfare exemption by providing “facilities in the course of construction” eligible for the exemption include prospective construction or rehabilitation of an existing structure where an application for a building permit has been submitted.
Property Tax Omnibus Bill: Contaminated Property Proposition 13 Base-Year Value Transfers: Welfare Exemption for Limited Liability Companies. AB 3075 (Assembly Revenue and Taxation Committee) revises property tax law on the transfer of a Proposition 13 base-year value of contaminated property and on eligibility of limited liability companies for the welfare exemption. Regarding the base-year value transfer, the bill defines the term of “equal or lesser value” and imposes a three-year time limit. The bill also allows LLCs to get a welfare exemption for property they own if the property is “used” exclusively for religious, hospital or charitable purposes. (The courts have given an expansive interpretation of charitable purposes.)
SUV TAKEN FROM S.F. OFFICIAL. Mayor Gavin Newsom has ordered a San Francisco Public Utilities Commission official to pay the city $6,000 for a paint job on a sports utility vehicle and extra equipment, including a radio and police lights and siren. And the mayor also had the SUV taken from Harlan Kelly, a $185,000-a-year PUC deputy who was put in charge of the Hetch Hetchy reservoir overhaul by former Mayor Willie Brown.
The San Francisco Chronicle’s Phillip Matier and Andrew Ross reported the developments on March 14, following up on their earlier column describing how Mr. Kelly had ordered the $4,000 paint job because he didn’t like the color (white) that it came in. Now he says he needed the radio, lights and siren because he had been deputized in his former Public Works job to ticket illegal garbage dumpers, and he wanted to continue the practice. PUC General Manager Pat Martel said policing illegal dumping was beyond Mr. Kelly’s job description.
The mayor, meanwhile, ordered an inventory of the PUC motor pool and found 31 SUVs, including a blue late-model Ford Explorer that Ms. Martel drives. She said the vehicle came in that color.
PUC President Dennis Normandy called for the PUC to hire a fleet manager to oversee handling of the agency’s vehicles because “we are not putting up with this type of shenanigans.” The columnists wrote that Mr. Kelly complied with orders and submitted a personal check for the $6,000, and get use of a PUC car on an as-needed basis.
Sierra Community College Top Brass Get Pay Hikes. One week after the dismal failure of a $394 million bond issue at the polls, the Sierra Community College Board of Trustees, by a 5-2 vote, rewarded the district’s administrators with a pay raise. According to the Roseville Press-Tribune, administrators get a one-half percent raise, a 2.5 percent bonus and a $29 benefit cap increase. Board Members Jerry Simmons and Nancy Palmer voted no, calling it a poor policy choice after the district told voters in the election campaign that it had no money to fix leaking roofs.
Monterey County Budget Savings Thwarted by Employee Union. An effort to save $266,000 at the Monterey County Jail by replacing county employee cooks with private ones collapsed this week after the local employee union objected, the Monterey County Herald reported March 17. After the Board of Supervisors agreed to replace the cooks with a contractor who would provide cooks at less money, Local 817 of the Service Employees International Union invoked an obscure provision in the Government Code that exempts government cooks from being replaced by private contractors. Aramark Correctional Services had been given the contract, which was recommended by county Administrator Sally Reed. John Vellardita, the union’s general manager, said the union was willing to work with the county to cut expenses and raise revenues, but he specifically ruled out working with Ms. Reed. As a result, the union has not responded to repeated requests to cooperate in finding cost-savings measures, the paper said.
Scotts Valley Schools In Fiscal Trouble. One day after the Scotts Valley Unified School District board fired its business chief, Santa Cruz County Superintendent of Schools Diane Siri said she will appoint an advisor to look over the district’s books, the Santa Cruz Sentinel reported March 17. Until this week, the small school district was projecting a $1 million budget shortfall in 2004-05. Now the figure has grown to $1.5 million. Among other things, the district failed to recognize that its new high school will require the district to cover special education costs for students until age 22. The county will also use its powers to stop any purchases by the district it deems unnecessary.
DEATH ROW PRISON COSTS ARE QUESTIONED. State Auditor Elaine Howle on March 16 questioned the state’s plan to build a new 1,000-bed Death Row at San Quentin, saying the department did not analyze options before deciding to go ahead with the $220 million project. The audit brought critical response from Assembly Member Joe Nation, who represents Marin County. He told the San Francisco Chronicle: “They didn’t do their homework. This is an example of the state not spending its money wisely.” Mr. Nation wants the state to shut down the 152-year-old prison and move Death Row elsewhere, so the prime real estate can be used for housing and a hub for ferries to and from San Francisco. The audit said prison officials did not study the costs of relocating condemned prisoners and did not study the costs of operating Death Row in Marin County, one of the state’s most expensive areas for employee housing, etc. The auditor did not conclude that the state should halt the project and said that it might cost more to move the 622 condemned men to another site than the state could profit from selling the land.
DEVELOPMENTALLY DISABLED: A COSTLY LACK OF STANDARDS. The Schwarzenegger Administration has been raked over the coals by the spending lobby over its proposal to tighten spending controls and apply brakes to runaway spending on centers that care for the developmentally disabled. However, the program has grown 41 percent in cost-per-person cared for by these centers since 1998, or three times the rate of population growth, reports the Legislative Analyst’s Office.
Statewide standards are needed, wrote Sacramento Bee columnist Daniel Weintraub (March 16), to deal with services and costs that vary as much as 30 percent from one area to the next. Administrative law judges appear to have too much discretion as they overrule program administrators and order state tax dollars to be used for what might be expected to be paid for by a family. For example, a regional center was ordered to pay for private swimming lessons instead of group lessons that the center thought sufficient. In another case, a judge ordered taxpayers to finance the addition of a bedroom and bath to a private home. Taxpayers also are paying more than $200,000 a year in 21 cases for intensive services in home settings with as many as three full-time aides assisting a single person, Mr. Weintraub wrote.
BODY PARTS, CONT’D. Another cadaver theft development is likely to fuel lawsuits against UCLA’s Medical School with taxpayers holding the bag. State health inspectors told top University of California officials more than a year ago that there were possible misuses of donated cadavers at UCLA School of Medicine. However, despite being warned in February 2003, officials waited a year before investigating the alleged ring of body parts profiteers, the Los Angeles Times reported March 16, citing a release of state documents.
The documents show the state’s Department of Health Services had long been concerned with Ernest Nelson, a cadaver dealer, and had been tipped that he was keeping body parts in his garage. Mr. Nelson and Henry Reid, director of UCLA’s willed body program, were arrested this month by UCLA police, Mr. Nelson for allegedly receiving stolen property and Mr. Reid for alleged grand theft. In early 2003, Mr. Reid had told his superiors at the university that he would deal with the problem; that the university would stop shipping body parts outside the university, and Mr. Reid promised to recover those that had been given to Mr. Nelson.
On March 17, The Times reported that companies that bought body parts have been sued by the widow of a man whose remains were donated to UCLA. Class-action is sought for the suit, the second such suit filed since the body parts scandal surfaced.
Meanwhile, former Governor George Deukmejian, already leading an investigation of the state prison system, has agreed to lead the body parts investigation.
VALLEJO SCHOOL BUDGET BAILOUT NEEDED? Vallejo school district officials may be asking for a state bailout of up to $50 million, which would make it the seventh district in the state since 1991 to be turned over to a state administrator. Oakland, also in the Bay Area, was the latest. The Contra Costa Times (March 16) reported that the district expects to be $20.3 million in the red by June and would need a loan of twice that to pay the deficit and cover expenses next fall. There were huge overstatements of district income and understatements of expenses, which Curt Pollock of School Services of California, the district’s fiscal adviser, says stemmed from lack of budget documentation and communication.
RICHMOND CONSULTANTS’ COSTS RISE. It is costing Richmond hundreds of thousands of dollars for a team of consultants to advise the East Bay city how to get out from under a $7 million budget shortfall, reported the Contra Costa Times (March 16). However, the City Council on March 16 rejected a request for nearly $290,000 in contract fees for a public relations specialist, bond counsel and international law firm specializing in bankruptcy and financial restructuring. But the council, while retaining a bond counsel for $95,000, kept the firm on board for at least another week. The contract of a San Francisco publicist was not extended. The council last month approved $265,000 for the consulting team, and Council Member Tom Butt said, “I can’t believe we are being asked to appropriate another $300,000 that we do not have to continue to support the bailout consulting team” through June.
ANOTHER UC FOUL-UP. According to the Los Angeles Times (March 16), UC Davis admissions officials this week admitted notifying 6,500 applicants that they had won academic scholarships of up to $7,500. However, they didn’t win. The paper quoted Lisa Lapin, university spokesperson, as saying this was the first time the campus has notified regents scholarship winners by e-mail. “Clearly, we have bugs in that system, and we’re working on it,” she said. The students were sent follow-up e-mails correcting the information within three hours. It was the second admissions SNAFU in recent weeks and third within two years. Two years ago, UC Davis mistakenly sent acceptance letters to more than 100 rejected students, mainly from foreign high schools, The Times reported. And it was disclosed earlier this month that a malfunctioning Web site may have allowed personal information of more than 2,000 UC applicants to be seen by other students.
STUDENT INFO HACKED AT SDSU. Officials at San Diego State University say more than 178,000 students, alumni and employees have been warned that hackers have accessed a university computer server. Names and Social Security numbers were stored on the server. The San Diego Union-Tribune (March 17) reported that this appears to be the largest notification made under a state law that took effect last July requiring notification of people when their computerized personal information is stored in a compromised computer. According to the university, hackers used the server in late December to send spam e-mail messages and transfer files, including MP3 music files. It was discovered in late February.
LAUSD MISMANAGES FOOD SERVICES. The Los Angeles Daily News (March 17) reported mismanagement of the Los Angeles Unified School District’s $255 million food services program has caused a loss of $72 million over three years through excessive hiring and other blunders. The paper reported that the food services division, which made a $10 million profit five years ago, is being watched closely as its reserves have fallen close to a state-mandated level, raising the possibility that the district’s general fund, which is under stress, may be asked for a bail-out. “Some bad decisions were made by management,” said David Tokofsky, a school board member. The new division manager, Marilynn Wells, said there was a “relaxed attitude toward the budget” under her predecessor, Orlando Griego, who was replaced in 2002. To balance the division’s budget, 155 positions have been cut and greater efforts have been made to encourage students to eat cafeteria food. Breakfast sales are up 18 percent this year; lunch sales are up 2 percent.
Limits Imposed on Who Can Work on Oakland School Construction Projects. In an action that critics charge will increase the cost of school construction in Oakland, Oakland school leaders and Alameda County unions have agreed to limit the work to union workers and require one-half of the workers to live in Oakland, the Oakland Tribune reported March 19. Mayor Jerry Brown hailed the agreement, saying it will allow students to make a lot of money. Kevin Dayton, an official with the Associated Builders and Contractors, said it could discourage minority-owned and women-owned companies from bidding as many smaller firms are not unionized.
PIGEON POOP RILES BART USERS. There’s no dollar sign attached to how much it is costing BART to deal with the chronic problem of pigeon droppings, but for some whatever it is won’t be enough. The San Francisco Chronicle reported that BART addressed the problem of newspaper readers getting “more poop than scoop” from their Chronicle. Workers repaired netting above the row of newspaper racks to prevent birds from roosting overhead. However, Sally Williams of Berkeley told the paper that torn netting over parking areas is a big problem. “My car must have been hit 200 times by bird droppings. It was the most disgusting thing I’ve ever had to clean up. It’s terrible, looking up at the nets and seeing it full of droppings and dead birds.” The paper said a BART official told it the problem would be investigated. The agency has put in multiple anti-roosting devices at the Oakland station, the official said.
BULLET TRAIN TO BE DERAILED? Signs continue to crop up indicating derailment, at least, for the $9.95 billion bond for the downpayment of the $33 billion high-speed passenger rail service. The measure was placed on the November 2004 ballot by the Legislature. Governor Arnold Schwarzenegger, in his January budget proposal, called for it to be taken off the ballot in November but has not called for its total demise. This can’t-afford-it-now move is supported by Jim Costa, former state senator from Fresno who authored the bond measure. He is the Democratic nominee for a congressional seat. The Legislature has until July to remove the bond from the ballot.
Four bills have been introduced, two putting it off until 2006, and one putting it off until 2010. The fourth bill would kill it altogether. The governor has included $1 million in his proposed budget to maintain the High Speed Rail Authority. The bill to kill the project is SB 1256, by Senator Tom McClintock, who says it is the “biggest boondoggle that has ever been proposed.” Assembly Member Russ Bogh’s AB 2865 would put it off until 2010, which would cause big problems for the proposal because by then expensive environmental studies will be out of date. Senator Don Perata’s SB 1483 and Senator Kevin Murray’s SB 1169 would put it on a 2006 ballot. Senate Transportation Committee Chair Murray told The Fresno Bee (March 15) that his “preference is to move it off to the shortest time possible, and if we’re still not in the fiscal place to do it, then postpone it (again).”
California Cities Place High Regulatory Costs on Home Construction. High regulatory costs, which amount to a “regulatory tax,” are imposed in the San Francisco, San Jose, Oakland and Los Angeles markets, according to a study by Edward Glaeser, Joseph Gyourko and Raven Saks published by the National Bureau of Economic Research (NBER working paper No. 10124). The authors said that the above areas, which are “well-known as the epicenter of the restrictions on new construction,” have regulatory tax ratios ranging from 32 percent to 50 percent of a house’s value.
West Contra Costa Schools: “Washington Monument” Strategy at Work? Is the “Washington Monument” strategy at work in the West Contra Costa school system? On March 2, voters turned down a $7.5 million property parcel tax. In response, the school district said it was eliminating funding sports and libraries. Following that, the San Francisco Chronicle reported on March 13 that district leaders have decided to go back to the voters on June 8 with an even larger parcel tax proposal, at $8 million. School board President Charles Ramsey said, “We raised the amount of the second parcel tax because we singled out sports and libraries this time and they cost more.”
The “Washington Monument” strategy relates to a ploy by federal bureaucrats to threaten to close the Washington Monument whenever Congress threatens to cut federal spending. The West Contra Costa district has a history of fiscal problems. In 1991, the district was ready to declare bankruptcy and was bailed out by a state loan.
Benicia EyeS Port Tax. Benicia officials are considering imposing a “port tax” and could bring the issue to voters for approval this November, the Vallejo Times Herald reported March 16. Council Member Tom Campbell said, “There’s millions of dollars of revenue we could have gotten from a port tax.” The tax could negatively impact the big Valero refinery in Benicia, as 135,000 barrels of crude oil a day pass through the port. The company, which is against the tax, has significant legal and economic concerns. One possible stumbling block is the United States Constitution which prohibits taxing of imports.
Cities With UC Campuses Meet to Get University to Pay Taxes. Leaders of cities with University of California campuses met in Oakland March 12 to discuss relations with UC, including taxes. According to a report in the Berkeley Daily Planet of March 16, Berkeley Mayor Tom Bates said, “It’s a fragile relationship” about the negotiations to get UC to pay a share of the city’s tax burden. The group agreed to sponsor tax legislation that would separate UC academic and for-profit projects.
Legislature Didn’t Do Much This Week. The do-nothing Legislature again was consistent this week: Doing next to nothing on legislation. There were a few committee hearings and action on a mere handful of relatively unimportant bills. The scheduled hearing on AB 1663 (Dutra), a proposal to extend the county option to impose additional vehicle registration fees, was canceled. The Senate confirmed Donna Arduin as state finance director.
L.A. POLICE TAX GAINS SUPPORT. Mayor James Hahn and the Los Angeles Police Commission have added their support to Los Angeles County Sheriff Lee Baca’s proposed half-cent sales tax for law enforcement. According to the Los Angeles Times, the mayor said hiring more police officers is crucial to making L.A. the safest big city in America. The proposed initiative would raise the county’s sales tax to 8.75 percent and bring in $500 million a year. The Sheriff’s Department would get 33 percent; the L.A. Police Department 34 percent, and the rest would go to smaller law enforcement agencies. A survey by the Public Policy Institute of California and the School of Policy Planning and Development at USC found that 65 percent of the 2,002 county residents surveyed support the tax hike. The same survey found 76 percent support for a countywide increase in taxes on adult beverages and cigarettes to pay for health services.
DMV: Car Tax refunds Almost Complete. Refunds to vehicle owners who paid the higher, 2 percent car tax from October 1 until late November are just about complete, the Department of Motor Vehicles announced this week. The last of the checks should be in the mail in the next week, the San Francisco Chronicle reported. The first checks went out on January 4. As of March 16, the department processed 4.6 million refunds, with an average of $135 being returned.
SAN JOSE MAYOR CONSIDERS NEW “911” FEE. San Jose Mayor Ron Gonzales is considering asking the City Council to impose a “fee” on “911” calls as part of a package to close a projected $85 million budget deficit, the San Jose Mercury News reported March 19. Such a fee is under legal challenge elsewhere, as it is a tax, not a fee. The idea ran into immediate opposition. Council Member Chuck Reed said, “A new general fee – a “911” fee – that’s not something I would support.” Despite the budget deficit, the mayor is also calling for substantial new spending initiatives, such as $10 million for expanding the convention center and $20 million to build a downtown music hall.
Recent appointments in the Schwarzenegger Administration:
Department of Health Services, Director: Sandra Shewry, a native of Ferndale who declines to state her political affiliation, was appointed on March 18. She has more than 20 years experience in the health care field, mostly in California state government. She was an assistant secretary of what is now the state’s Health and Human Services Agency during the Deukmejian Administration. Senate confirmation is required.
State Public Health Officer: Dr. Richard J. Jackson, a Democrat from Atlanta, has been senior advisor to the director of the Centers of Disease Control and Prevention since 2003 and was previously director of the National Center for Environmental Health. The appointment was announced March 18. He will report to the health services director.
Department of Consumer Affairs, Director: Charlene Zettel, a Republican from Poway and first Latina Republican elected to the state Legislature, was appointed March 16. She served in the Assembly from 1998 to 2002. She has served on the San Diego Regional Airport Authority since 2002 and was a public interest director of Federal Home Loan Bank in San Francisco. The appointment requires Senate confirmation.
Department of Managed Healthcare, Director: Lucinda Ehnes, a Democrat from Fair Oaks, was named to the post on March 16. She has served as a deputy director in the department and interim executive officer for the California Board of Optometry. Since last December, she has served as the division manager of Self-Funded Health Plans at the California Public Employees Retirement System. The appointment requires Senate confirmation.
Los Angeles Office, Director: Billie Greer, a Democrat from Westlake Village, was named to the post March 16. For the past decade, she has served as president and founding principal of Greer/Daily Inc., a public affairs and issues management firm.
Business, Transportation and Housing Agency, Deputy Secretary: Curt Augustine, a Republican from Davis, was named March 17. He will handle legislation. He most recently served as the executive vice president of the California Coalition for Construction in the Classroom.
Business, Transportation and Housing Agency, Deputy Secretary: Patrick Dorinson, an Independent from Folsom, will handle communications. His appointment was announced March 17. He has been director of public relations for the Mirant Corporation.
State and Consumer Services Agency, Deputy Secretary: Happy Susan Jean Chastain of Sacramento, who declines to state a political affiliation, was reappointed March 17 to handle the agency’s legislation.
Fish and Game Commission: Marilyn Hendrickson, a Republican from Vacaville and producer of the “California Sportsmen” radio show in Sacramento, was named to the commission on March 17. She operates Sep’s Pro Fishing, Inc.
State Building Standards Commission: Robert Pernell, a Sacramento Democrat, was named on March 17. He heads the Collaborative for High Performance Schools. Isam Hasenin, a San Diego Republican, was named on March 17. He is chief deputy director for the City of San Diego Development Service Department. These appointments require Senate confirmation.
California Lottery Commission: L. Rachael Montes, a Republican from El Monte where she once was mayor, was named to the commission on March 17. She is a small businesswoman. This position requires Senate confirmation.
Department of Corporations, Chief Advisor: Mark Uyeda, a Republican from Los Angeles, was named on March 17. He has served as counsel in the Los Angeles office of O’Melveny & Meyers.
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March 22 |
ASSEMBLY REVENUE AND
TAXATION COMMITTEE HEARING |
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March 23 |
STATE BOARD OF EQUALIZATION
MEETING |
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March 24 |
SENATE HEALTH AND HUMAN
SERVICES COMMITTEE HEARING |
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March 24 |
SENATE REVENUE AND TAXATION
COMMITTEE HEARING |
NOTE TO SUBSCRIBERS: THE NEXT CALTAXLETTER WILL BE PUBLISHED MARCH 26, 2004.