January 2005

Table of Contents

Cal-Tax Home

Email Editor

Tax $$$: Fraud & Waste  

Message from Cal-Tax President Larry McCarthy: These reports of fraud and abuse underscore 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.

Regardless of whether laws were broken, mismanagement is a common thread in these cases.

The state and local governments in California spend well over $130 billion a year. They waste billions. How many billions are impossible to say. Hardly a day goes by without a report surfacing in the news media of fraudulent or wasteful spending of tax dollars. In recent years, the California Taxpayers’ Association (Cal-Tax) has tallied well in excess of $15 billion of misused and abused public funds by state and local government agencies, including schools.

“These figures for fraud and waste are based on press reports that pop up with alarming frequency and appear to be scratching the surface. Systematic investigations would reveal much more,” said Cal-Tax President Larry McCarthy.

Fraud by providers in the Medi-Cal program for the poor eats up at least $3 billion annually, year after year, officials have told investigative reporters. The Legislature took some steps to crack down on Medi-Cal cheats in 2004 after the Los Angeles Times reported massive amounts of fraud and waste in the program. How much tighter regulation and tougher penalties will cut into the fraud remains to be seen.

During 2004, some of the biggest examples of taxpayers being ripped off have involved state and local governments’ grants of generous public employee pension benefits. The Sacramento Bee has published a series of articles that seem to have shaken up the establishment and could lead to significant reforms in the year ahead.

Continuing sources of fraud or waste reports are school districts around the state. Misspent school funding is a sad saga unfolding as more districts seem to be risks for insolvency and state takeover.

Here are some of the lowlights, based on government audits and newspaper coverage making headlines in 2004:

PUBLIC PENSIONS:

“Chiefs’ Disease.” The Sacramento Bee, in a comprehensive investigative series, reported how many top officers of the California Highway Patrol file for workers’ compensation with claims of job-related injury or stress as they near retirement. Besides lucrative workers’ comp settlements, they tend to gain disability pensions nearly matching their highest annual salaries – and actually exceeding them since half of a disability pension is not taxable.

The Bee reported that an internal investigation ordered by the CHP’s new commissioner found 15 cases meriting further investigation for possible fraud, even criminal prosecution (The Bee, November 30, 2004). A special legislative hearing was scheduled in January 2005 to bring even more visibility to the problem and hopefully set the stage for long-needed reforms.

On December 19, The Bee’s pension abuses reporting team of John Hill and Dorothy Korber explained how a 1990 state law resulted in fatter state pensions, including one retiree who spiked her pension by $18,000 a year. This occurred because a bill allowed the pensions of state employees to be calculated on the basis of highest salary over the employee’s final year on the job, instead of an average over the final three to five years, which is what other states allow. It was approved in a deal to get state employee unions to sign off on use of pension funds to help balance the state budget, and it was to increase the employer (taxpayer) cost of state pensions by $63 million. Its cost is now $100 million, according to The Bee’s analysis of retirement data.

Workers’ Comp Claims that Lead to Disability Pensions are on the Rise in L.A. County.  Troy Anderson of the Los Angeles Daily News (December 12, 2004) reported the alarming frequency by which Los Angeles County firefighters and sheriff’s deputies file workers’ comp claims in the year before retirement. Los Angeles County supervisors ordered an investigation upon learning that 85 percent of county firefighters who got disability retirements claimed a disabling injury a year earlier. Supervisor Gloria Molina: “It would seem to me that it’s very unlikely that 85 percent of our retirees became disabled in the last year of their service with us. These numbers are horrendous. This is costing us an awful lot of money.”

TRANSPORTATION:

Bay Bridge Audit: Caltrans Messed Up. Auditing one of the hottest political potatoes in recent California transportation history, state Auditor Elaine Howle blamed neglect at the state Department of Transportation for $3.2 billion in cost overruns since April 2001 on the now $8.3 billion Toll Bridge Retrofit Program.

Most of the additional cost ($2.5 million) is on the controversial eastern span of the Bay Bridge between Oakland and San Francisco. The audit, released December 22, 2004, set the new cost of the Bay Bridge project at $5.9 billion. It criticized Caltrans mismanagement for lack of a comprehensive risk management plan and failure to alert the Legislature about increasing costs.

Replacement of the eastern span of the bridge was required after it was extensively damaged during the Loma Prieta earthquake of 1989. Initial plans to rebuild the bridge were scrapped as the mayors of San Francisco (Willie Brown) and Oakland (Jerry Brown) asserted their political will. Former Governor Jerry Brown demanded a more scenic suspension structure as a landmark gateway to the East Bay; former Assembly Speaker Willie Brown was interested in his city’s stake in land affected by the replacement structure. Then-Governor Gray Davis, after taking office in 1999, finally brokered a deal calling for the more elaborate span. It was to be completed in 2009; now they’re looking at 2012. Officials continue to cross their fingers in hopes that another major quake does not bring down a bridge that has gone without retrofit due to political gamesmanship.

The recently released audit blames about a third of the cost overruns on politicians’ demands for a fancier suspension span, while most of the additional expenses were due to Caltrans mismanagement.

Governor Arnold Schwarzenegger’s Business, Transportation and Housing Agency secretary, Sunne Wright McPeak, said the report underscores the need for a less-complex design, which the administration recently endorsed. She said Caltrans has already implemented many of the audit’s recommendations.

The Legislature was not officially notified of the cost overruns until August 2004, although auditors said that based on internal reports Caltrans should have known the program was over budget in November 2003.

Thus the Legislature was denied a full year of time to confront the problem which must be addressed in the early weeks of the 2005-06 session. The administration wants the Bay Area to pick up 80 percent of additional costs, while Bay Area politicians want more of the expenses spread statewide.

MEDICAL:

Legislators Probe Prison Medical Bills. California’s $6 billion-a-year prison system spends nearly $1 billion on medical bills, and a legislative hearing on June 1, 2004 raised questions about some of the costs: Why was a male inmate given breast reduction surgery? Why does the state contract with a Beverly Hills dermatologist for skin treatments? Why does the state spend millions to transport prisoners to hospitals hundreds of miles from their prison cells?

Senator Jackie Speier said she was informed by a whistle-blowing state employee that an inmate had surgery to reduce the size of his breast last month at a Manteca hospital. Department of Corrections Director Jeanne Woodford said she was unaware of such an incident. Prisons spokesperson J.P. Tremblay said the department would not have approved of such a procedure unless there was a medical reason. The system does not approve cosmetic surgeries, he said, and the case, if there is one, would be investigated. (On June 3, 2004 it was reported that the inmate’s surgery was authorized because of concern that a mass in the inmate’s breast could be cancerous.)

Assembly Member Rebecca Cohn demanded that the department add up all the costs for acne treatments by a Beverly Hills dermatologist. She also questioned why $108,000 was spent on 60 prosthetic eyes. “… that seems excessive to me,” she said. “Nobody’s responsible for the costs for medical care in the prisons; nobody seems to care.” (Coverage by The Associated Press, Los Angeles Times, San Francisco Chronicle and San Jose Mercury News.)

Audit: Prisons Pay Too Much for Medical Care. A state audit has found that California prisons have been paying local hospitals as much as eight times more than Medicare would for the same procedures. The average 21 percent annual increase in health care costs over the past five years is almost three times the national inflation rate for hospital services, even though there was no significant increase in the inmate population. According to The Associated Press (July 28, 2004), the report “is the latest broadside at a prison system where spending and management have been out of control.” Spending on outside medical services amounted to $112.6 million last year, according to the Bureau of State Audits, which recommends that the department renegotiate its contracts with hospitals and conform costs to Medicare rates. The Youth and Adult Correctional Agency said there are cost-control elements in the 2004-05 state budget.

Medicare Fraud. The San Jose Mercury News (November 13, 2004) reported on a Medicare scam that involves busloads of mostly poor immigrant Vietnamese taken from Santa Clara County to Southern California. By word of mouth, they are offered free transportation in chartered buses, free health exams, free lunches, free nutritional supplements. Reporters for the Mercury News/Viet Mercury found that the scam dates back to at least June. Federal officials said that in the past three months, Southern California health providers billed the government for at least $1.4 million for services provided to some 200 patients from Santa Clara County. These included some expensive services that may not have been needed and in many cases were never performed, the paper said. In an editorial, the paper called for Congress and the government to crack down on Medicare fraud that a Harvard health care expert, Malcolm Sparrow, suggests amounts to $50 billion to $75 billion nationally. In the case of the Vietnamese patients, the paper quoted an FBI official: “They don’t realize it’s criminal. They’re duped. They’re told: ‘We’re going to give you a free exam.’ And then the provider bills Medicare for thousands of dollars in unnecessary tests.”

Taxpayer-Funded Ambulances in San Jose Gather Dust. Ambulances purchased by the cities of San Jose and Santa Clara in 2001 for $1.9 million are almost never used, the San Jose Mercury-News reported June 13, 2004. City officials originally justified putting the city in the ambulance business, saying they would be needed over 400 times a year. According to the Mercury-News, over the service’s first 32 months, only 23 patients were transported by the vehicles – an average of about one patient a year per ambulance. One $151,000 ambulance, stationed in Almaden Valley, has never taken a patient to a hospital. The services were started as a result of lobbying by fire departments that were concerned that fewer fires might result in fewer jobs. San Jose Mayor Ron Gonzales said the city’s investment in ambulances has been worthwhile. In a Yogi Berra-like comment, he said, “It’s better to have it and not need it than not have it.”

SCHOOLS:

Guarding the School Chief: $173,308. The Oakland Tribune (September 15, 2004) reported that providing a personal bodyguard for the state’s Oakland schools administrator, will cost as much as $173,308 with overtime figured in. The cost to the financially troubled district for a California Highway Patrol officer was initially to be $70,000, and then it was adjusted to $140,000 for a full year. The officer, from the CHP’s dignitary protection detail, works the same long hours as the administrator, Randolph Ward, the paper noted. There have been a number of settings and circumstances perceived as threats, the paper said, citing a school district file. Mr. Ward declined comment at the September 14 board meeting. About nine months ago, a parent at a public hearing commented about bullets flying in Mr. Ward’s direction, The Tribune reported. Mr. Ward said people can criticize what he’s doing, but it won’t change his decision to have the protection. “I haven’t heard anybody step up to say they would take care of my family or send my kids to college,” he said.

$1 Million Wasted on Unused Software. Alameda County schools have wasted $1 million on a package of software and services that was neither needed nor used, the Oakland Tribune reported November 11, 2004. County school officials announced that they will have to spend the million on an old debt for the software that has gathered dust in storage and has become outdated. Local school district officials told the paper it is a “terrible waste of money” that schools can ill-afford.

Sickly School Employees. More employees in the sprawling Los Angeles Unified School District are calling in sick, costing taxpayers $430 million a year, the Long Beach Press Telegram reported April 30, 2004. The district’s 70,000 employees have missed 1.5 million hours of work so far this school year. About 25 percent of teachers are considered chronically absent, missing 10 or more days annually over the past few years, the paper reported.

Fresno Unified Can’t Pay Bills. The Fresno Unified School District board has obligated, mostly to public employee unions, more money than it has coming in, reported The Fresno Bee (December 9, 2004). As a result, the board voted to tell the state it cannot meet its financial obligations for at least the next two years. Ninety-four percent of the district budget goes to salaries and benefits.

Substitute Teachers are Costly. According to the Contra Costa Times (December 15, 2004), substitute teachers cost the four largest school districts in Contra Costa County $10 million a year. Mt. Diablo district required substitutes an average of 19.9 days per teacher in the 180-day school year. Teachers are allowed to use sick days for personal necessity, not just illness, 100 percent of the time in Mt. Diablo and 70 percent of the time in West Contra Costa, the paper reported.

LOCAL GOVERNMENT:

Workers’ Compensation Fraud Thrives. Workers’ compensation insurance fraud in Los Angeles County continues to soar, despite repeated calls for reforms, according to a new report from a citizens’ commission. The Los Angeles Daily News (September 20, 2004) reported that the Citizens’ Economy Efficiency Commission in Los Angeles County estimates costs of workers’ comp fraud at $7 million to $61 million annually in county government.

Tobacco Taxes Pay for Travel, Not Children. The Los Angeles Daily News (November 13, 2004) reported that Proposition 10 tobacco taxes in Los Angeles County, instead of paying for universal preschool, are largely unspent by a dysfunctional operation. Of the $820 million received by the county commission so far from the 50-cent-a-pack tax hike passed by voters six years ago, only 15 percent has been spent by the First 5 Los Angeles Commission. The paper said the commission has “foundered over poor planning, political infighting and conflicts of interest.” State auditors have criticized the First 5 L.A. Commission for spending 9 percent of revenues on administration and travel, noting that it spent more than other county commissions ($70,423 in 2002-03) and has no limit for lodging expenses.

The Bakersfield Californian (December 4, 2004) reported that almost $5 million of Proposition 10 tax money that should have gone to help children in impoverished families in Kern County was spent on consultants, public relations specialists and studies by university professors. “This money is supposed to go to kids, not to professors at Cal State Bakersfield,” said state Senator Dean Florez. The newspaper, in an editorial, blasted the program for spending too much on administration.

Taxpayers to Pay to Put Three Taxpayers in Different School District. Santa Clara County spent over $5,000 to put Measure D on the ballot, which moved the property of three homeowners from Campbell area school districts to Los Gatos area schools, according to the Los Gatos Weekly Times, (November 10, 2004). All the votes have been counted and Measure D in November passed 3-0. The issue was snob appeal, because of a perception that Los Gatos schools are better, which can boost values (as much as 20 percent, according to one source) of homes in the area.

Pricy Public Potty. Santa Barbara apparently is going to spend upwards to $1 million to design and build a downtown public restroom, if the program set in motion by the City Council’s approval of $95,542 to design the facility is carried through. Preliminary estimates of construction are about $655,030, but some feel that is a low-balled figure. Earlier estimates have been as much as $830,000 to construct it. Council Member Brian Barnwell, who voted for the design work, was quoted in the Santa Barbara News Press (November 17, 2004) that the city’s restroom plan should be a “Santa Barbara program – Cadillac all the way.” He believes the city has mismanaged downtown bathrooms, which involves paying three businesses $200 a month to keep their restroom doors open to the public. That is an insultingly low amount, he said. The new facility is to be next to Borders Music Books & Café (where there is a bathroom facility available to the public if they come into the store). The study also is to look into another bathroom facility at a downtown parking lot.

L.A. County: $86,000 in Overseas Calls. In the past three months, Los Angeles County Auditor-Controller J. Tyler McCauley’s 14 investigators substantiated 35 cases of fraud or abuse by county employees. The case that the Los Angeles Times featured in its October 22, 2004 article: a social worker with the county Department of Children and Family Services charged $86,000 in calls to Thailand on his county calling card. The calls were made before and after he resigned in 2002. Also: A county health department employee used false medical leave paperwork to hide the fact that he was in jail. Two other health department employees and a probation employee were thought to be on extended medical leave, when, in fact, they were deceased. Other cases involved forged timecards, use of county computers to watch porn, or stealing from the petty cash fund. Mr. McCauley: “It is outrageous. That’s why it’s called fraud.”

City Cell Phone Abuse. Two probationary Los Angeles sanitation truck drivers ran up $7,000 in calls from city-owned cell phones. They were properly chastised but not fired, according to the Los Angeles Daily News (December 6, 2004), in part because their supervisors neglected to educate them on proper usage of city phones. Also, this case caused the city to provide as much as $75 a month for sanitation truck drivers for cell phones. The two young drivers had their wages garnished to pay back the city for the calls made between May and October.

Taxpayers Pay $36.4 Million for Football Tickets. San Diego taxpayers paid $36.4 million over the past six years for unsold San Diego Chargers tickets, including $4.97 million for this past National Football League season. The San Diego Union-Tribune reported the ticket guarantee costs on January 12, 2004 from the lease that requires the city to buy up tickets so that the publicly owned stadium can be “sold out.”

Audit: “Horrendous Abuse” of Tax Dollars. In what Los Angeles County Supervisor Gloria Molina called “horrendous abuse” of tax dollars, auditors say contractors overbilled the county as much as 62 percent for immigrant refugee job-training programs. The Los Angeles Daily News (October 5, 2004) reported that problems were found in10 of 11 job programs for nearly 4,400 immigrant refugees, mostly from Armenia, Vietnam, Cambodia, China and Russia. “Some of these agencies owe us a lot of money,” Supervisor Molina said. “There is no doubt that we can’t blame everybody because we are as much at fault. But the reality is there is $2.9 million outstanding.” The audit is part of a yearlong investigation into misuse of funds spent by the county on contracts for senior and welfare services.

L.A. Wastes New Equipment, Audit Says. A surprise inventory of city of Los Angeles warehouses in March found $11.4 million worth of new motor vehicles – 272 of them – in storage, including 99 police cars that were still warehoused four to 18 months after they were delivered. City Controller Laura Chick reported that the city may be buying more vehicles than it needs or can be put into productive use in a reasonable time, reported the Los Angeles Times (August 27, 2004). Six of the patrol cars were vandalized with graffiti as they were not protected, the audit found. The controller ordered the audit after city employee unions claimed city equipment worth millions of dollars was sitting in storage.

S.F. Now Dead Runway Project is Costly. San Francisco Budget Analyst Harvey Rose has issued a report critical of the now-dead, $75 million project to expand runways at San Francisco International Airport. He found lavish spending on consultants, reported the San Jose Mercury News (May 22, 2004), including $4,000 flights to the East Coast, $500 hotel rooms and $16,000 computer work stations. The report of how the airport spent $75 million studying a project never assured of being built, according to The Associated Press, also found that premature spending on land amounted to $742,000. Kandace Bender, spokesperson for the airport, said the project was “completely on the up and up.” She said, for example, that an $800 meal involved a working dinner attended by more than a dozen people, and $4,700 in phone charges accounted for conference calls with experts.

Water Districts Audit Questions Spending. The Bureau of State Audits reported finding questionable spending in an examination of eight water districts, The Sacramento Bee reported (June 25, 2004), including thousands of ratepayer dollars spent on directors’ retirement parties, anniversaries, mixers and other socials functions. The audit was prompted by the newspaper’s coverage of water districts in the Sacramento region, but similar problems were found elsewhere, according to Senator Deborah Ortiz of Sacramento, who requested the audit. For example, Walnut Valley Water District in Southern California was found to have run up a tab of $18,000 for 15 out-of-town meals for directors and guests. State Auditor Elaine Howle said five of the eight districts surveyed may have problems explaining why they have amassed what seem to be unnecessarily large budget reserves.

Firehouse Elevator. The Carmel Pine Cone (December 10, 2004) reported that the Carmel city attorney has advised the City Council that an elevator is required in the firehouse by the Americans with Disabilities Act. The newspaper, in an editorial, noted that the elevator will lead to a part of the station only used by able-bodied firefighters while on duty. Since the area is not open to the public, the Pine Cone asked, “If (the ADA’s) ‘reasonable accommodation’ to ‘public accommodations’ requires elevators in firehouses, what’s next? Braille in the cockpits of commercial airliners?”