Spring 2003

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Tax $$$: Fraud & Waste

Over the years, Cal-Tax staff has accumulated examples of fraud and waste in the spending of taxpayer dollars, occasionally publishing the collections as evidence of the need for greater review and evaluation of public spending in California.

Most of the cases are cited as newspaper reports, many of them based on official government audits, as well as accounts of alleged criminal activity. Cal-Tax does not allege fraud occurred in these cases. The term is reserved for those cases where charges were attributed to legal authorities.

Mismanagement of public funds, whether a result of criminal intent, carelessness or incompetence, is a common thread in these cases regardless of whether laws were alleged to have been broken.

Cal-Tax also is examining some cases to determine if the waste has continued. In some cases, corrective actions have been taken. In others, waste – even fraud – appears to continue unabated.

Well over 100 cases have been chronicled in recent years, with the amounts of abused or misused taxpayer dollars amounting to billions of taxpayer dollars.

It also is disturbing to consider there is not comprehensive systematic review of public spending to assure taxpayers that $130 billion in state and local taxes collected each year are well managed. These investigative reports and government audits suggest that the surface has just been scratched.

Larry McCarthy,
Cal-Tax president.

In excess of 10 billion in tax dollars have been wasted by fraud and abuse in California state and local government, including education, over the past four years.

The fact that such fraud and abuse exists is not exactly news. Newspapers, either by reporting on official government audit conclusions or muckraking misdeeds into the open, are doing a pretty good job of informing the public of ripped-off tax dollars.

However, the missing perspective is an overview of government fraud and waste throughout California. Cal-Tax staff regularly combs news media and government audit reports for coverage of fiscal mischief and periodically compiles examples under one cover. We acknowledge that in some cases there have been corrective actions. Yet in others, such as the massive Medi-Cal program, the foster care program and rampant overtime by those who guard state prison convicts, there has been little progress toward fixing what is wrong. In other cases, bureaucrats who dropped the ball are long gone, leaving others to pick up the pieces.

Cal-Tax has been compiling these cases since mid-1999, occasionally publishing collections, first under an “Accountability Files” banner and more recently under a “Fraud and Waste” title. These reports are available at the Cal-Tax Web site, www.caltax.org. The cumulative $10 billion figure is conservative, and there must be even more fraud and waste waiting to be ferreted out by muckraking reporters and government auditors.

With all this fraud and waste documented, and much of it ongoing, policy-makers should focus on the spending of some $100 billion a year in tax dollars in California before they consider raising taxes.

Here are recent examples:

SDI WASTES MILLIONS THROUGH ERRORS, ABUSE. The State Disability Insurance program “cheated people out of benefits while overpaying others,” according to internal audits and interviews with state employees. From 1999 to 2001, the program overpaid between $124 million and $200.7 million to “injured” people who may not have deserved the payments, while as much as $191.9 million in benefits were denied or delayed by processing errors. There were errors on nearly 40 percent of processed claims. State employees complained of an increased workload, contributing to errors. A spokesperson for the program said, “These audits look very scary, but they’re not. … I’m very concerned about the errors, and we’re taking every step possible to reduce them and eliminate them.” The loudest complaints were from state employees asked to increase their output after being used to “sitting back all day with nothing much to do.” The investigative reporting of Robert Salladay was published in the San Francisco Chronicle (January 26, 2003).

SICK LEAVE SOARS AMONG PRISON GUARDS. As a side effect of the 2002 contract between the state and the California Correctional Peace Officers Association, wardens have less authority to challenge whether an officer claiming sick leave is actually sick. Thus, in 2002, the first year of the new contract, overtime hours amounted to 25 percent more than the level of 2000. As officers were called in to work shifts of officers calling in sick, some 23,000 officers amassed $200 million in overtime last year. At least 110 of the officers made more than $100,000 last year. Top scale last year was $54,888. Overtime, considered excessive by some, has been a long-festering issue in the Department of Corrections. The union says the solution is to hire more personnel. The latest story was in the Los Angeles Times (February 10, 2003).

REPORT: WORKERS’ COMP COSTS L.A. COUNTY LOCAL GOVERNMENTS $1 BILLION A YEAR. Skyrocketing local government workers’ compensation costs are crippling the economy, the Los Angeles Daily News reported April 13. The paper surveyed a cross-section of officials and employers, including Timothy Buresh, chief operating officer for the Los Angeles Unified School District. He said, “Just in Los Angeles County alone, government agencies are wasting more than $1 billion a year on workers’ compensation. LAUSD is heading toward $200 million a year. We should never be over $100 million a year. This has a huge, profound effect.” How much of an impact? “… workers’ compensation is probably costing us in excess of 1,000 teachers, plus their classrooms; 1,000 police and sheriff’s deputies; 1,000 firemen, their trucks and apparatus, and 125 new bus routes this year alone. That’s the cost of workers’ compensation waste, fraud and abuse at the government level.”

MILLIONS WASTED ON UNNECESSARY CITY CARS. A report by San Jose City Auditor Gerald Silva found millions of taxpayer dollars wasted on the purchases of new cars when old ones work fine, giving vehicles to employees who probably don’t need them, and purchasing more expensive models. The purchasing system has few controls, with cars stockpiled regardless of need and some with relatively low mileage being replaced. The city has eliminated $11 million in waste because of the report and there was potential for $20 million in additional savings. Mayor Ron Gonzalez ordered a freeze on all new vehicle purchases. The story was in the San Jose Mercury News (February 8, 2003).

HARASSED WHISTLE-BLOWER WINS. A jury’s $4 million award of taxpayer money has been affirmed by a Sacramento County Superior Court judge for a state Department of Education whistle-blower, James Lindberg. The jury agreed with the veteran department employee’s claim that he was harassed and demoted for telling authorities about fraud in the spending of $11 million in federal funds for adult citizenship classes. Although tossing out the jury’s punitive damages award against then-Superintendent of Public Instruction Delaine Eastin, calling it based on “more speculation than the law allows,” Judge Brian Van Camp wrote that from testimony the jury could have believed Ms. Eastin “knew of the fraud perpetrated upon the state” and “either was not concerned about it or had political motivation not to curtail it sooner.” According to testimony at the trial, Ms. Eastin was pressured by Latino state legislators to fund community-based organizations to conduct the classes. The story was in The Sacramento Bee (February 11, 2003).

TOO MANY GOVERNMENT HOLIDAYS? California state employees get 13 paid holidays annually, two more than the national average for states. Is this too much largesse, particularly when the state faces an unprecedented budget deficit? It costs $9.1 million in state employee overtime for every holiday, not to mention lost productivity. Eliminating one holiday would spare the Department of Aging from having to make midyear budget cuts. Assembly Member John Campbell: “I don’t know when all these different holidays were added (the last, Cesar Chavez’ birthday, was added in 2000), but pretty soon, as history goes on, if we keep having days for everything and everyone we think is good, we won’t have any working days.” The story was in the Orange County Register (February 12, 2003).

CRIME VICTIMS FUND RUNS DRY. Bureaucratic bungling has hurt the ability of legitimate victims of crime in California to collect from a fund that is running dry, according to a report by the Pacific Research Institute’s Andrew M. Gloger and Lawrence J. McQuillan. “Thousands for lawyers and therapists, not a penny left for victims of crime,” they wrote. The fund, financed from fines paid by convicts or assessments on their trust funds, is expected to be $80 million in the red by June 2004, they wrote. Instead of helping families recover from crimes, including therapy and funerals, state law upped the maximum award from $46,000 to $70,000 in 2000. The article says the board that oversees the fund “confirms that attorneys were rewarded generously ‘irrespective of the level of amount of legal services provided to the victim” and the fund has become “a pork barrel for government workers, therapists and lawyers.” The commentary was published in the Los Angeles Times (February 13, 2003).

MILLION-DOLLAR WATCHDOG. The state Department of Mental Health is spending about $1 million to create a supervised-release program for one convicted child molester. The department said the annual per-offender cost will be decreased to about $180,000 as more offenders enter the program. Department Deputy Director John Rodriguez: “I don’t disagree that we have tough financial times. But this is a public safety issue.” The story was in the San Jose Mercury News (March 15, 2003).

COMPENSATION RUFFLES FEATHERS. Owners of roosters, hens and other “backyard birds” that have to be destroyed to control Newcastle disease are compensated between $5 and $1,800 per bird. The federal and state combined Exotic Newcastle Disease Task Force would not say how one bird could be worth $1,800, but a state Food and Agriculture official said it was possible that some of the money has gone to breeders of fighting cocks. Cock fights are illegal in California but breeding and raising cocks that might be used in such activity is legal. Owners have to be compensated for fair market value. More than 3.1 million birds have been destroyed in the campaign to eradicate the disease. The report was in the Bakersfield Californian (March 17).

MILLIONS SPENT TO LURE TEACHERS. With financially strapped school districts giving out thousands of layoff notices, does it make sense for the state to spend more than $9 million this year operating six teacher recruitment centers and holding job fairs? Since 2000-01, the state has spent more than $330 million on programs designed to increase the number of teachers. The $9 million would keep 200 young teachers on district payrolls. The report by columnist Daniel Weintraub was in The Sacramento Bee (March 18).

DENTAL WORK SCAMMERS CHEAT MEDI-CAL; AUDIT URGED OF ENTIRE $25 BILLION PROGRAM. State lawyers have filed a fraud lawsuit against eight individuals in four “dental clinics” in Southern California, charging them with 64 counts of stealing the identity of unsuspecting dentists and cheating the Medi-Cal system out of at least $380,000. The legal crackdown was announced in a March 14 press release from the state Department of Justice, three days before legislators called for a special state audit of the $25 billion Medi-Cal program. The follow-up action was prompted by investigative reporting in the Los Angeles Times (December 26, 2002) that as much as 10 percent of Medi-Cal billings are fraudulent. The call for a state audit was reported in the Stockton Record (March 18, 2003).

REPORT HITS CSU SOFTWARE CONTRACT. In yet another example of expensive government problems with efforts to upgrade or install computer software, a poorly conceived California State University software contract is exceeding projected costs by $200 million. The Bureau of State Audits also said that a high-ranking CSU official was being paid as a consultant for the software firm that won the contract. The $662 million contract was poorly conceived from the outset, the bureau’s report said. Further, there are serious problems in the software that threaten the confidentiality of student information. According to Sacramento Bee columnist Daniel Weintraub, the software project “was never properly justified by university administrators, might not have been necessary and may not be accomplishing much of what the university set out to achieve.” The audit was released by State Auditor Elaine Howle (March 11, 2003).

FOSTER CARE NEEDS OVERSIGHT. Although more than $11 million has been spent studying California’s foster care program in the past three years, no dramatic progress has been made toward dealing with the $2 billion-a-year program’s shortcomings. That was a conclusion of the state’s Little Hoover Commission, whose chair, Michael Alpert, said, “With no one in charge, the foster care system fumbles forward, and often backward, and costs children and families their happiness, their prosperity and even their lives. The buck stops nowhere.” Los Angeles County spent $12 million in the past three years settling lawsuits involving foster children who died or were abused. The article was in the Los Angeles Daily News (February 4, 2003). 

FOSTER CARE EXPENSES HIT BY AUDIT. A Los Angeles County audit found more than $320,000 in questionable expenses at a foster care agency, including an annual salary of $227,000 for the former executive – 70 percent more than any comparable foster family executive. About $2.7 million of the $6.6 million received by the agency from Los Angeles, Riverside and San Bernardino counties stayed with the agency, the audit found. The report was in the Los Angeles Times (March 1, 2003).

MERCED CAMPUS BOONDOGGLE? The University of California’s tenth general purpose campus, UC Merced, is a non-existent campus with a $7.8 million payroll. The campus, not slated to open until the fall of 2004, already has cost taxpayers a quarter of a billion dollars during 15 years of planning, and no building has been constructed. A $253,599-a-year chancellor has been hired and faculty are being recruited. Meanwhile, students attending other campuses of the university are calling for the campus to be deferred, calling the expenditure unwarranted at a time that student fees are skyrocketing due to the budget crunch. The story was in the San Francisco Chronicle (March 10, 2003).

CATEGORICALS: AN EDUCATION LABYRINTH OF DOLLARS. The Legislature’s audit committee ordered a formal investigation of $11 billion in state education funding of categorical programs. The probe was prompted by a February 2-7 series by Deb Kollars in The Sacramento Bee that raised numerous questions about how the money is used and by whom. Categorical programs range from Special Education to Gifted and Talented Education. Senator Tom McClintock: “This is the big one. This is $11 billion of expenditures, and we really aren’t quite sure where they’re going.” The 100 programs soak up one-third of the state education budget. State Auditor Elaine Howle said the $185,500 audit will be finished by late summer. The story was in The Bee (March 13, 2003).

UNSPENT FEDERAL GRANTS. Citing red tape, the Davis administration has acknowledged that it has been unable to use all of the federal funds made available since 2000 budget cycles that could pay for anti-terrorism equipment.  The administration said the amount is less than the $30 million cited by the White House in the wake of Governor Gray Davis’ nationally broadcast speech critical of the Bush administration for not providing the states enough homeland security money. The story was in the San Francisco Chronicle (March 14, 2003).

MISSED CHILD SUPPORT DEADLINE IS COSTLY. California’s failure to implement a statewide automated child support collection system will cost the state $1.3 billion in federal penalties by 2006, according to a Bureau of State Audits report. The state has been fined since failing to meet federal standards in 1998, and the fine in 2003 is estimated to total $207 million, the state auditor noted. The story was in the Contra Costa Times (December 18, 2002). The child support collection effort “is on track,” said Department of Child Support Services Director Curt Child, saying the federal fines could stop as soon as the 2005-06 fiscal year. About $1 billion in support was collected in 2001 throughout California, only 41 percent of the total owed and just slightly better than the 40 percent for the year before. The story was in the San Francisco Chronicle (December 23, 2002).

FAILURE TO CURB INJURED WORKER COSTS. Soaring workers’ compensation costs have nearly doubled in the last five years in the city and county of Los Angeles. Combined expenses grew nearly 20 percent in a year to total $430 million. In a follow-up to a year-old report detailing the problem, costs were found to continue to grow despite accelerated efforts to investigate and prosecute fraud, improve workplace safety, screen prospective employees and hire risk management specialists. It was reported that a crackdown on fraud began in 2002 and two sheriff’s deputies were arrested, the first since 1987 of a county employee on workers’ comp fraud charges. The story was in the Los Angeles Daily News (January 11, 2003).

CITY PAYS FOR UNDONE WORK. An audit by City Controller Ed Harrington concluded that San Francisco building officials made improper advance payments of about $540,000 for computer work that was never completed. The story was in the San Francisco Chronicle (January 19, 2003).

PRISON MEDICAL COSTS SOAR. Failure to modernize prison health care has been blamed for soaring costs to taxpayers for treatments of state prison inmates. Costs went from $96 million in 1998 to an estimated $263.1 million in 2003, despite a warning three years earlier that millions of taxpayer dollars were being wasted. Among the problems needing fixing was allowing each of the state’s 33 prisons to make separate purchases of drugs and medical equipment, according to the Bureau of State Audits. The story was in the Inland Valley Daily Bulletin (January 26, 2003).

“YOU WORK, THEY STEAL.” At least $127 million in unemployment insurance payments were involved in fraudulent claims because the state hasn’t checked to make sure they were going to eligible recipients. What appeared to be organized crime against the state, by having payments forwarded to different addresses, was under investigation by federal authorities. The ease by which this scam -- one of the biggest thefts of government money in the state -- has been working was reported in a CBS 2 Special Assignment segment (January 23, 2003).