Cal-Tax Commentary

California's Structural Budget Deficit:
Eliminate Massive Fraud and Waste

By Larry McCarthy

Larry McCarthy

Larry McCarthy is president of the California Taxpayers’ Association (Cal-Tax), based in Sacramento.

Fraud and waste in public spending in California is costing taxpayers billions of dollars, according to media reports. Unlike budget officers in California, who ignore or work to cover fraud and waste, news outlets are reporting frequently on the serious and costly mismanagement in this state.

According to Governing Magazine, California’s financial management ranks near the bottom – exceeded only by one state. While the general public may not read Governing Magazine, polling and focus group results in recent years underscore high levels of dissatisfaction from the public regarding the mismanagement of state spending by Sacramento decision-makers.

From the budget and financial management information produced in Sacramento, Californians would never know there is a waste-and-fraud problem. The Department of Finance presides over a budget process where there is little systematic review of the spending base. California routinely rolls current spending forward with few questions and fewer answers about the cost effectiveness, outcomes, and performance of programs that cumulatively spend nearly $100 billion in General Fund revenues. Management information that is critical to deciding budget issues is for the most part unavailable to the Legislature and governor.

After a year of careful review, the Sacramento Bee identified categorical school spending which is 30 percent of school spending or $17 billion spent on programs for which there are no measurable results. The Los Angeles Times has reported that Medi-Cal fraud consumes 10% (or $3 billion) of the revenues for the Medi-Cal program. On January 31, 2006, Los Angeles Daily News reported that fraud in state funded child care programs could reach $1.5 billion. Additional press reports on waste and fraud can be found at Cal-Tax Online (Click here).

More than any other state, California offers promising opportunities to redirect and reprioritize spending. If elected officials in Sacramento had the political will to challenge public spending that is being ripped off, the structural budget deficit could be zeroed out.

The structural deficit is a $5 billion problem or 5% when calculated in relation to the total general fund. Those who oppose reform and vigilantly protect the status quo, identify numerous areas of the budget that cannot be reduced: K-12 schools, debt service, public employee pensions and numerous other areas of spending. They identify spending that is constitutionally or contractually obligated to stop any discussion of spending reform. The goal of the status quo lobby is to prevent financial management strategies in Sacramento. Whether it is protected spending or other areas of the budget, there is an opportunity to better manage spending to benefit children in school, build transportation, improve safety net programs for the poor, and address other critical needs.

We recommend the following steps to achieve the minimum assurance of financial management for an annual taxpayer investment of approaching $100 billion in General Fund spending and a total $125 billion state budget:

  1. Begin immediately to develop a plan to stop funding waste, fraud and misspending. It is very costly, difficult, and time consuming and insufficient to prosecute fraud after the fact. California must demonstrate that it can interrupt the flow of money to hucksters who steal from taxpayers and prevent billions of dollars from being stolen.
  2. Force budget officers and program managers to respond to reports of fraud and mismanagement and identify strategies that immediately interrupt the flow of funds to organizations and individuals defrauding the state or engaging in spending that is recklessly mismanaged.
  3. Require legislative and budget review hearings on media reports and audits that identify waste, fraud and mismanagement above specified thresholds as part of the annual budget process.
  4. For career advancement, require budget officers and program managers for the state of California to have a track record of effectively challenging mismanagement of public funds. It is vital that budget officers and managers successfully challenge misspending before being promoted.

Budget officers and program managers must present better information for legislators to use in attempting to make decisions on spending tax dollars. Appropriation authority of the Legislature cannot be properly exercised unless information is provided on program effectiveness, program benefits, quality of service provided and alternatives to current costly programs that are not achieving desired results. At a minimum, the following steps must be taken to assure taxpayers that their government is minding the store with care:

  • Determine any measurable evidence of the value of the program being funded, how many Californians were helped, and the return to taxpayers in the social benefit of this spending.
  • Require a statement of clear goals and objectives for each program, making it clear of the importance to warrant the expenditure being made. Make sure that budget officers, administrators and managers are clear that they will be accountable to report results as part of the regular budget process.
  • Discuss what would happen if the programs were not provided at all or provided with another delivery system from another public agency or private company. Example: What would be the outcomes if child support enforcement was provided by another state agency or a reputable private vendor that specializes in collecting debt?
  • Determine if there are other less costly and more effective ways of obtaining these objectives. Example: Greater reliance on county and regional transportation authority for building needed highways.
  • Question where the program would fit in if all programs were displayed in order of importance. Also ask: How important is the spending compared with more urgent spending demands?
  • Determine if the benefits would be greater if a portion of the funds spent on the program under review were reallocated to other programs. An important element of a thorough budgeting procedure is prioritizing spending. Because it is unrealistic to meet all spending demand for government programs and activities, it is useful to have a ranking of programs and activities based on demonstrated effectiveness, as well as suggested alternatives to expensive or ineffective programs.


Cal-Tax Digest. March 2006

©2006 California Taxpayers' Association