January 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.

California’s budget is nearly $35 billion out of balance. The budget crisis debate rages over whether it is from bloated government programs or not enough tax dollars. Barely mentioned, if at all, by those wringing their hands over proposed spending cuts and calling for new taxes are billions of tax dollars that have been stolen or squandered.

Before seriously considering new taxes, there must be comprehensive, systematic review and greater accountability for the $100 billion that the state spends annually. Cal-Tax staff has compiled more than 100 reports, mostly from newspaper investigative reporting and official government auditing, that amount to billions of squandered or fraudulently spent public funds. (Note: To see roundups of cases, go to Cal-Tax Online [www.caltax.org] and click on Tax $$$: Fraud & Waste.)

Cal-Tax last July issued a report listing obvious cases, involving in excess of $1 billion in fraud or waste. Some of these cases are repeated here, including further examination that has found continuing problems in the state’s Medi-Cal program, as well as in Oakland and Los Angeles public schools. The state’s controversial contract with state prison correctional officers increased costs of staffing by encouraging more use of sick leave and exacerbating the system’s overtime costs.

In some instances, corrective steps have been noted in newspaper follow-up coverage, and an attempt has been made to acknowledge such action. Cal-Tax is not alleging that fraud is involved in each case. Some involve legal authorities’ allegations of fraud; others are examples of mismanagement.

MEDI-CAL FRAUD. The Los Angeles Times’ Virginia Ellis reported on December 19, 1999 that the FBI estimated fraudulent spending of Medi-Cal funds cost taxpayers $1 billion. The system was “rife with fraud,” reaching 70 percent of billings for crutches, adult diapers, wheelchairs and other medical equipment.

On December 26, 2002, The Times, in an article by Ms. Ellis and Tim Reiterman, reported that Medi-Cal fraud costs taxpayers about $2.5 billion a year. They listed specific examples of theft and government reactions that have resulted in criminal charges filed against about 700 people and companies in the last few years, including almost $100 million in restitution as a result of state and federal prosecutions.

While state health officials believe civil enforcement actions have saved hundreds of millions more, the newspaper reported the state’s $25 billion-a-year Medi-Cal program “is so enormous, and the opportunities for fraud so widespread, that few think the efforts so far have done much more than hold the line.” The article quoted James Wedick, head of the FBI’s white-collar crime unit in Sacramento: “Health-care crime is rampant in California. Even though our efforts have increased and we’re getting good at it, I am still convinced there is as much fraud as ever.”

Some experts, The Times noted, figure 10 percent ($2.5 billion) of the annual Medi-Cal budget – half of it state general fund tax dollars – is stolen by doctors, dentists, pharmacists and others. For example, Medi-Cal was charged for perinatal services to women who had already undergone abortions; a dentist charged for filling teeth that had been extracted; a suspended doctor billed for hundreds of nuclear brain scans without proper equipment and expertise. A podiatrist, who used $24 generic shoe inserts, billed the state for $250 custom-molded supports.

The article noted a black market among body builders for Serostim, a human growth hormone used by AIDS sufferers. A one-month prescription costs almost $7,000. A San Diego County Grand Jury indictment in 2001 alleged that Medi-Cal was bilked for $3.5 million by a statewide ring using stolen beneficiary numbers and physician identities to create phony prescriptions, then peddling the drug at gyms and spas. (The San Diego Union-Tribune, on January 1, 2002, reported that nine persons used more than 500 fraudulent prescriptions at more than 75 pharmacies to defraud the Medi-Cal system.)

Cal-Tax searched news media reports for evidence of Medi-Cal fraud over the past two years and found that fraudulent activities apparently continue unabated and are much more pervasive than once thought. For example:

·         Owners of a Glendale medical laboratory pleaded guilty to billing the Medi-Cal program for $19 million worth of bogus blood tests, the Los Angeles Times reported on October 3, 2002.

·         Leaders of a criminal fraud ring with suspected ties to Russian organized crime were ordered to pay $1.6 million in connection with a scam that bilked the Medi-Cal program, (Los Angeles) City News Service reported April 3, 2002.

·         The state Bureau of Audits on December 12, 2002 released its annual report on the state’s Medi-Cal purchasing program, concluding millions of tax dollars have been wasted. The Department of Health Services’ “cost control procedures have been ineffective in reining in spending for items with no maximum allowable prices” for supplies such as hearing aids, canes, crutches, wheelchairs, bandages, diabetic tests, gloves and waterproof sheets, Auditor Elaine Howle concluded. The department is supposed to be surveying the market to update prices every 60 days and setting maximum prices based on lowest prices. It has delayed price updates for an average of 15.5 years, the audit found. DHS Director Diana Bonta responded to the audit, concurring savings could be achieved and saying steps are being taken. Her November 25 letter said a new contracting process and significant changes in the benefit administration will save taxpayers some $36 million a year, half of it state general fund dollars, when implemented. More than $356 million in state and federal money is spent annually on medical supplies for Medi-Cal patients. The state auditor replied that the department “overstates its efforts” to correct problems.

WELFARE FRAUD. The Los Angeles County Grand Jury reported that welfare fraud may be costing taxpayers as much as $500 million a year. (Los Angeles Times, July 1, 1999.)

$1.3 billion in penalties for Missed Deadlines. A December report by the California State Auditor notes that the state’s failure to implement a statewide automated child support collection system will cost the state $1.3 billion in federal penalties by 2006. The state has been fined since 1998, and the fine in 2003 is estimated to total $207 million, the auditor noted. The Contra Costa Times (December 18) article noted that South Carolina is the only other state paying fines for failing to meet the 1997 federal deadline. California now uses a variety of systems to track payments. California taxpayers spent some $111 million for a system that failed in 1997, the newspaper reported, and now state child support officials are negotiating with a consortium led by IBM for automated collection technology. The consortium submitted the lone bid for the project, valued at $1.3 billion over 10 years. Department of Child Support Services Director Curt Child said the audit confirmed that the department is meeting its goals. “This thing is on track,” he said, adding that the federal government could stop its fines as soon as the 2005-06 fiscal year. The San Francisco Chronicle (December 23) reported that about $1 billion in support was collected in 2001 throughout California, only 41 percent of the total amount of child support owed. That’s just slightly better than the 40 percent from the year before.

WORKERS’ COMP COSTS HIT RECORD HIGH. Los Angeles County’s workers’ compensation insurance costs hit an all-time high of $242 million in 2001, a 65 percent increase in five years. Not one case of fraud had been prosecuted in recent years. (Los Angeles Daily News, January 10, 2001.) Recent reports indicate that authorities have begun cracking down on fraud in this area.

MTA WORKERS’ COMP FRAUD. Los Angeles Metropolitan Transportation Authority officials have started trying to look into the question of fraudulent workers’ compensation claims. During the past five years, MTA’s workers’ comp insurance costs have climbed 51 percent, and possibly as high as $49 million a year. (Los Angeles Daily News, November 4, 2001.) The Daily News reported on May 5, 2002 that the district attorney had beefed up the workers’ comp fraud investigative force by hiring two additional prosecutors.

STATE PRISONS: SOARING SICK LEAVE. Use of sick leave and resultant overtime in the state prisons system increased dramatically in the first four months in 2002 of a new labor contract approved by the Davis administration. A 20 percent hike in sick leave will add $12.5 million to the state budget over a full year. Overtime would be up $58.4 million. The new contract makes it more difficult for prison wardens to clamp down on suspected abuse of sick leave. (Los Angeles Times, June 27, 2002.) The Bureau of State Audits documented excessive overtime and sick leave among prison guards in a January 26, 2000 report. The controversial contract with the correctional officers’ union liberalized sick leave policies, thus exacerbating an already costly situation that the guards’ union contends would be solved by merely hiring more staff. Critics of growth in the prisons budget respond that millions of dollars could be saved by contracting with the private sector to build and operate lockups.

Convict Heart Transplant. State prison officials on December 17 reported the death of a 32-year-old two-time felon less than a year after he received a heart transplant at the prestigious Stanford University Medical Center. Spokesperson Russ Heimerich said the exact cause of death had not been determined but it appeared that the man’s body was rejecting the heart while he convalesced at the Vacaville medical prison. He died on December 16 at the medical center, where he was admitted November 23. Mr. Heimerich told the Sacramento Bee that the costs to taxpayers for the operation and follow-up care “could easily reach $2 million when it’s all added in.” The Department of Corrections blames complications with a contract at the University of California at San Francisco hospital and timing of the heart’s availability for having the procedure done at Stanford. It was reported that the average heart transplant nationwide is a $200,000 procedure. The inmate was serving a 14-year-sentence for the 1996 robbery of a Los Angeles convenience store, and would have been eligible for parole in 2008. It was the first reported case in the nation of a prison inmate receiving a heart transplant. Mr. Heimerich said the “whole question of whether it is ethically correct is moot – we have to do it.” The courts have ruled that medical care must be provided inmates and, as the California prison inmate population ages, The Bee reported there is concern that the cost of inmate health care will far exceed last fiscal year’s $663 million. (The state’s prisons house about 155,000 convicts, and the governor’s budget proposal for fiscal 2002-03 estimated the Department of Corrections’ Health Care Services Program would require about $735 million.)

OAKLAND SCHOOLS. A February 9, 2000 column by Phillip Matier and Andrew Ross of the San Francisco Chronicle cited an audit of the Oakland Unified School District that found, among other irregularities and mismanagement, 400 teachers who were on the payroll but were not included in the district’s budget. The state audit, according to the San Jose Mercury News in a February 2, 2000 report by Dana Hull and Renee Koury, included 1,000 recommendations, including fiscal management.  Another Chronicle article, in 2000, cited a state audit that discovered suspiciously high attendance figures in Oakland schools that could have padded state funding by $10 million.

One would think that such scathing assessments of Oakland schools would have prompted improvements. Yet two years later the district’s fiscal performance is still in shambles. The Oakland Tribune on November 26, 2002 reported in a story by Alex Katz that there had been “gross overspending” by the district, leaving it with a $32 million deficit in 2001. County officials, according to the story, said the deficit in the current year could be “as high as $50 million.” The Chronicle (December 8, 2002) reported that Oakland’s 48,000-student district will ask the state for an estimated $100 million bailout. Among the district’s woes, the newspaper reported, was a 4,300-student drop in enrollment as students switched to charter schools, a 24 percent pay raise for teachers and an antiquated budgeting system that miscalculated overspending in nearly every department. The district failed to account for replacing 700 rookie teachers with credentialed teachers who are paid $8,000 more per year, according to the report by Meredith May.

S.F. SCHOOLS “FLUNKING PAYROLL.” That was the San Francisco Examiner’s February 18, 2002 headline on a story about Proposition F on the March 5 ballot, a measure to create an oversight committee for spending San Francisco school construction bond money. Angie Marshall, in the summer of 2000, applied for a speech pathologist job with the district, then turned it down to take a better offer in San Bruno. Then, in September 2000, she got a paycheck from the S.F. district. Another came in October. November’s check included a raise. The three checks together exceeded $13,500. She sent them back, informing the district that she had never worked for it. Then, in September 2001, she got another check, with a bonus, despite her repeated phone calls. Ms. Marshall also wondered why the checks were sent to an old address in Spokane, Washington. She said, “I know that what happened to me is most likely indicative of a much larger problem. I have no clue what’s going on. I’m just glad I didn’t accept a job, because if I did, maybe I wouldn’t be getting a paycheck.” The Examiner said district officials refer to Ms. Marshall as an isolated incident and insist that no one else was paid accidentally.  The district’s finances have been the subject of more than one newspaper report of questionable – if not illegal – spending practices. For example, it has been reported that the district didn’t know how many teachers were on its payroll. Also, an independent audit found the district misspent $140 million in bond money meant for school construction with most of the money going into paychecks for district staff. For reaction to the Marshall case, the newspaper quoted Kent Mitchell, teachers’ union president: “It’s disturbing, but not shocking. The number of payroll problems is much less than it used to be, but that doesn’t excuse even one. Doing payroll is not exactly rocket science.”

LOS ANGELES CITY SCHOOLS. The Los Angeles Unified School District has leased a 29-story downtown office building for five years for the district’s administrative headquarters, even though the building has earned the “lemon award” twice from a downtown business group, the Los Angeles Daily News reported in October 2001.

Checking further reports, apparently things are getting worse with that expensive admin building. After spending $184.2 million to buy and renovate the structure, the district is spending $1.2 million a year to lease 1,166 parking spaces at three locations, the Daily News reported on November 27, 2002. Labor contracts ban the district from charging their employees to park, so the district must come up with the free spaces, said School Board President Caprice Young.

POOR FOOD STAMP ADMINISTRATION. California faces tens of millions of dollars in federal penalties due to incompetence in managing the food stamp program. Federal officials said California operates the most error-plagued program in the nation, with errors found in 17.4 percent of cases last year. (Los Angeles Times, April 27, 2002, and San Francisco Chronicle, March 8, 2002.) Recent reports have the Davis administration unsuccessfully asking the Bush administration and Congress to waive the penalties.

ORACLE DEBACLE. The Bureau of State Audits reported that the state entered into a no-bid $95 million enterprise licensing agreement with Oracle Corporation for more software than was needed, paying up to $41 million more than it should have. (San Jose Mercury News, 2001, and confirmed by April 16, 2002 Bureau of State Audits report.) Publicity, including legislative hearings, resulted in dismissals or resignations, tightened contracting practices and an agreement by Oracle to terminate the contract.

STATE STOPS AUDITS OF SCHOOL ATTENDANCE. Bowing to pressure from school districts, the Davis administration said it was scrapping a program to audit school attendance. The action likely means that taxpayers will be paying for students not attending schools. (The Sacramento Bee, December 4, 2001.)

L.A. NEEDS BETTER MANAGEMENT. Los Angeles Controller Rick Tuttle said the city mishandles taxpayer dollars to the tune of more than $100 million a year. Mr. Tuttle said the city has allowed permit and license fee payment checks to sit uncashed for months. (Los Angeles Daily News, June 1, 2000.)

TURNING POINT ACADEMY. The state spent more than $10 million to create and run (with a staff of 34) a military-style academy for troubled youths. A pet project of the governor, it opened in March 2001. As of November, it had eight students, which amounts to $500,000 per student. (Sacramento Bee, November 25, 2001.) The academy’s budget fell victim to the 2002 budget crunch.

PRISON LABOR CONTRACT. The Legislative Analyst’s Office said a labor agreement approved by the governor with the California Correctional Peace Officers Association will cost the state more than $500 million a year, possibly as much as $1 billion a year when fully effective by 2006. A number of state legislators said they were unaware of the contract’s provisions when they ratified it. (Los Angeles Times, San Jose Mercury News, May 16, 2002.)

DISABILITY PENSIONS. The Los Angeles County retirement board granted work-connected disability pensions to 53 percent of 1,034 retiring public safety employees in the past three years. That contrasts with 20 percent of retiring Los Angeles city police and firefighters receiving disability pensions. A disability pension provides a higher percentage of salary, with half of it tax-free. Surviving spouses get 100 percent of a disability pension, not 60 percent under routine pensions. (Los Angeles Daily News, May 9, 2000.)

BIGGER PENSIONS LURE MORE COPS. Sacramento is facing an exodus of police officers lured into retirement by pensions that may be too good to refuse. How about 90 percent of final-year salary for those with 30 years of service and past 50^th birthdays? The city plans a $500,000 marketing campaign to increase the number of cadet applicants. (Sacramento Bee, March 20, 2002.)

S.F. SCHOOL SPENDING. When voters approved bonds and special property taxes to build and fix San Francisco school buildings, they expected the money to be used for that purpose. San Francisco Unified, since 1989, spent $60 million from bond funds on operations, not buildings. (San Francisco Chronicle, November 21, December 2 and 5, 2001.)

PUNISHED WHISTLE-BLOWER GETS $4.5 MILLION. A Sacramento County Superior Court jury awarded $4.5 million, mostly state tax dollars from the Department of Education, to a whistle-blower who tipped federal authorities to break up an $11 million embezzlement scam. The jury found that state Superintendent of Public Instruction Delaine Eastin “acted with malice” toward James Lindberg, an adult education consultant in the state Department of Education and 20-year department employee. He was demoted after reporting misused federal funds administered by the department for teaching English and U.S. citizenship to adults between 1995 and 2000. The jury also awarded punitive damages of $150,000 against Ms. Eastin, who leaves office in January. The department is appealing the verdict, reported the Sacramento Bee on December 7, 2002.

BELMONT LEARNING CENTER. An earthquake fault running under Los Angeles Unified’s half-finished Belmont Learning Center may doom the often-ridiculed most-expensive high school in America. After years of controversy over the decision to build on an old oil field near downtown – with dangerous gases seeping from the ground – the school board voted to abandon the project. New Superintendent Roy Romer resurrected it in 2000. Now, after $175 million over 14 years, news of the seismic safety problem caused Mr. Romer to announce December 4 that the campus could not be completed as designed. The Los Angeles Times and Los Angeles Daily News reported on the apparent demise of the Belmont project, which has been described as the most mismanaged school construction project in California history.  In a December 7 follow-up, the Daily News reported that school district officials ignored repeated warnings over the last seven years that the site could pose serious risks to students and faculty during an earthquake. A year and a half before ground was broken on the project, the school district’s own environmental consultant warned of “significant” seismic conditions at the site, the newspaper reported.

CHARGER TICKETS. One of the longest-running wastes of taxpayer dollars involves San Diego’s contract with the San Diego Chargers to play football in the publicly owned stadium. The city agreed to buy up enough tickets to assure at least 60,000 sold seats for each game, regular season and exhibition. The 1995 contract expires in 2005. With losing seasons suppressing attendance, the city had spent $25.3 million for unsold tickets and collected $28.8 million in rent through last season. More than one San Diego mayor has tried to renegotiate the contract, which included expansion of the stadium to attract a Super Bowl. If that wasn’t bad enough, city staff members recently broke the news to Mayor Dick Murphy and the council that taxpayers were buying tickets for seats that don’t exist – “phantom seats.” The city had been sued under the Americans with Disabilities Act and had to modify 1,840 seats, eliminating 673. The San Diego Union-Tribune reported November 21, 2002 that at a recent near-sellout of a game against defending champion New England, taxpayers bought 666 tickets, most of them for non-existent seats, for $38,454. The public – and the current council and mayor – were unaware of the deal that held the Chargers harmless for loss of seating capacity because it had been discussed in executive session due to the litigation over the stadium’s access to the handicapped.