A soon-to-be released audit of the state Board of Equalization finds that the agency still can’t explain how it misallocated tens of millions of dollars worth of tax revenue and describes how one of its elected leaders effectively swelled his political staff by “redirecting” civil servants to his own projects.
The report’s authors say they found well-paid tax auditors on “parking lot duty” at a promotional event, a steep rise in spending on activities that do not appear connected to taxes, and misleading information provided to lawmakers.
The audit takes particular aim at board member Jerome Horton, finding that he has reassigned public employees to work for him, arranged events that strayed from the agency’s mission and opened a call center in his district without securing the consent of his fellow elected leaders. Horton has defended his outreach events as a way to reach large numbers of taxpayers. His staff did not respond to requests for comment on Thursday.
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Conducted by the state Department of Finance, the audit was based on interviews with more than 70 employees of an agency that handles more than $60 billion a year in state revenue and weighs tax appeals from businesses and individuals.
The document is scheduled to be made public on March 30 and does not yet contain the agency’s response, Finance Department spokesman H.D. Palmer said. The Bee reviewed a copy and discussed it with six sources who read it. They spoke on condition of anonymity because the audit has not been released.
Some employees are not performing the revenue-generating tasks they have been assigned, according to the audit, calling into question the agency’s budget requests and skirting the law.
“Certain board member practices have intervened in administrative activities and created inconsistencies in operations, breakdowns in centralized processes and in certain instances result in activities contrary to state law and budgetary and legislative directives,” the audit says.
It’s the first of several audits on the Board of Equalization that are expected to be released in coming weeks. The Legislature requested the investigation last year following another audit by State Controller Betty Yee in November 2015 that showed the agency had misallocated $47.8 million in sales tax revenue.
When the Department of Finance asked the Board of Equalization to explain how it had corrected the accounting weaknesses Yee’s audit identified, the Board of Equalization provided 11 different answers based on varying assumptions that it did not fully explain, the audit says. It said some of the calculations shifted revenue among accounts by as much as $1.1 billion.
“The potential fiscal impact to the local agencies and the state continues to be unknown” because the Board of Equalization cannot explain consistently how it allocates the revenue, the audit says.
While auditors began their work because of questions about the agency’s accounting, the investigation expanded to examine how elected members “redirect” civil servants for assignments that are not related to the agency’s core mission.
They found that overall spending on so-called “education and outreach” – events or printed materials that are intended to inform taxpayers about policy but often appear self-promoting – has tripled over the past five years. It rose from $920,000 in 2010 to $2.96 million last year.
That number tends to change when lawmakers or news organizations ask the agency how much it spends on “education and outreach.”
Documents released to The Bee this month from a Public Records Act request said the agency spent $1.6 million on board-directed outreach last year – $1.3 million less than the total in the new audit. A Senate subcommittee last year also received a different set of numbers when it asked for an accounting of education and outreach spending.
Auditors from the Department of Finance said the figures in their report likely did not capture total spending on promotional events and taxpayer outreach. They said their numbers do not include salaries for a group of employees who promote agency activities but do not report directly to board members.
When those employees are incorporated, the Department of Finance estimates that the BOE is spending about $5 million a year on education and outreach programs.
In one instance, the Finance Department found that 113 Board of Equalization employees spent a workday last November helping with parking and registering guests at a “connecting women to power” conference in Escondido sponsored by Board of Equalization member Diane Harkey.
Ninety-eight of the board employees had job titles that suggested they were non-political employees who should report to the BOE’s executive staff. Their job titles included tax technicians, supervising tax auditors and business tax specialists.
The conference had 23 breakout sessions, only two of which were directly related to taxes. Others included “desk yoga,” “think like a negotiator” and “no limit leadership.”
The agency spent $189,000 on that conference and one other “connecting women to power” event last year.
Harkey, in an interview with The Bee, called the audit “inaccurate.”
She said agency staff offered her and her team a range of education and outreach options, which included sponsoring events. They chose the “connecting women to power” event based on similar programs that Horton has hosted in the Los Angeles area over the years.
At a recent a board meeting, Harkey and Horton defended their use of large events as effective ways to connect with taxpayers in the dense, urban areas they represent. Harkey and Horton consider the conferences to be more efficient than smaller informational events the agency hosts in other parts of the state because of the large crowds they can attract.
“The audit narrative is really wrong,” Harkey said. “I am merely appearing at this agency event. To the extent that there’s something spent or diverted that should not be, that will be addressed.”
The Board of Equalization, with more than 4,000 employees, has five board members, including Yee. Each of the four Board of Equalization members who represent geographic districts are allotted $1.5 million to hire 12 workers. Those staff members can respond to residents, offer counsel to the elected representative or organize events that increase awareness about tax policy.
Board members also can request help from the agency’s external affairs department, which has employees all over the state charged with promoting tax policy and increasing public awareness.
The audit suggests that Horton, a former state assemblyman who has served on the board since Gov. Arnold Schwarzenegger appointed him to an open seat in 2009, in particular has co-opted the agency’s professional staff to instead work on his projects.
Key examples from the audit include:
▪ Horton “was involved” in the development of a customer service call center in Culver City. He requested expedited hiring, which resulted in employees starting their jobs on New Year’s Eve, 2012. Auditors could find no indication that Horton presented a proposal for a call center to the rest of the board, and said it’s unclear how it was approved.
▪ Since 2014, the agency has operated a “non-public” field office that houses 10 civil servants in El Segundo. It’s adjacent to Horton’s office, and the BOE’s executive staff could not explain why the non-political employees work there instead of at different BOE offices in the region.
▪ At least two employees who on paper report to agency executive staff in Sacramento misled auditors about their jobs. The employees initially said they work for the agency’s external affairs division, meaning they should promote the agency as a whole. Upon further questioning, one acknowledged that he had not met his boss in Sacramento and in fact worked for Horton’s staff. The other employee worked in the adjacent agency office. She acknowledged that she frequently answered phones in Horton’s office and organized events for him.
▪ Unlike other elected members, Horton offers a rotational program that allows civil servants to spend a year working in his office before returning to their normal assignments.
His use of BOE resources has come under scrutiny over the years. Last year, The Bee revealed that Horton decorated his Sacramento office with $118,000 worth of designer furniture. The story prompted the agency in April to revise its procurement policies in a manner that improved transparency on smaller contracts.
Horton’s “connecting women to power events” have gained press attention intermittently since 2010, with reports in Bloomberg and the Los Angeles Times noting the connection between his Board of Equalization events and a nonprofit foundation that his wife created. Last year, Horton solicited $81,500 in donations to the nonprofit, California Educational Solutions, to support the business conference and a project he promotes that helps lower-income families get help filing income taxes.
The agency in recent months has voted to curb Horton’s preferred outreach programs. In December, it restricted how much time employees can spend training to earn certificates that would let them file tax returns for California residents. That program is a favored one for Horton, who has created an elaborate income tax preparation event schedule in the past two years, with promotional materials featuring his picture. The BOE spent $221,000 last year on those events, with most of them occurring Horton’s district.
In January, the board voted to give itself an “education and outreach” budget for the first time. It aimed to keep spending on those programs below $1.6 million in a budget year.
Board of Equalization member George Runner described the finance audit as “an opportunity” for the department to reset policies. He pointed to the recent vote on outreach spending and a vote last year to replace its executive director as signs that the agency is righting itself.
“As for the majority of the board, we are rolling up our sleeves and getting it done,” he said.
Outreach spending climbs
The Board of Equalization spent three times as much money on outreach directed by its elected members last year than it did in 2010.
Outreach spending by budget year
2011-12: $1.05 million
2012-13: $1.49 million
2013-14: $2.72 million
2014-15: $3.95 million
2015-16: $2.96 million
Source: California Department of Finance audit