The cost of new and renewed office leases by California’s business-tax-collection agency increased nearly eightfold in the last five years – even though the number of people who make office visits to the department fell by nearly half.
State data analyzed by The Sacramento Bee show the Board of Equalization’s cost for those rental agreements grew from $691,000 in 2010-11 to $5.3 million last year. The money paid leases for 16 offices with some degree of public contact, including two new facilities.
Following a recent Bee report that revealed office leases for the board members in downtown Sacramento cost taxpayers $740,000 per year, lawmakers are scrutinizing the board’s spending as they decide its budgetary fate for next year.
Board officials argue they need more money to expand staff to handle new work, such as collecting California’s medical marijuana sales tax.
Yet the board has spent a growing portion of its budget on 22 offices statewide. Public visits, meanwhile, fell as the department exploited online technology, boosted taxpayers’ compliance with training sessions and seminars and sent auditors into the field more instead of requiring office appointments.
The downturn in visits and the upturn in lease expenses and office space are “difficult to reconcile,” said a budget subcommittee staff assessment prepared for an April 28 hearing.
“It appears to me that this is a situation where the board members decide they want to have an office somewhere and poof – there’s an office,” Sen. Richard Roth, D-Riverside, said during the hearing of the subcommittee he chairs.
On Monday, an Assembly budget subcommittee released a plan to cut $11.2 million from the agency’s budget and phase out certain field offices as their leases expire. Gov. Jerry Brown has proposed a $5 million increase.
Both committees explored data that show the Board of Equalization’s 22 branches received 157,527 visits last fiscal year, down 44 percent from the 2010-11 fiscal year.
George Runner, a former state senator whose board district covers most of eastern California and the Central Valley including Sacramento, said members have a responsibility to remain close to their constituents, but he noted that the offices have responsibilities beyond handling taxpayer inquiries.
“This is a nonissue,” Runner said. “The fact is that we need to have offices in the field that house our auditors, our compliance personnel and to conduct taxpayer training and workshops.”
The Board of Equalization is the only tax board in the nation whose members are elected by state voters.
Underlying the debate is the fact that the Board of Equalization is the only tax agency in the nation run by a board elected by state voters.
Mike Shires, a Pepperdine University expert on California’s state finances, said that the discussion over the agency’s office spaces illustrates how the board struggles to square the political interests of its board members with running an efficient nonpolitical operation.
“It’s become a political stepping stone,” Shires said. “They’ll tell you the offices put them close to their constituents ... but it is in the politicians’ interest to have as visible a profile as possible in their districts, especially if they’re looking ahead to the next office.”
Former board member Betty Yee served eight years before becoming state controller last year. Judy Chu was a board member before she won a 2009 race for Congress. Board Chairwoman Fiona Ma, a former state legislator, announced last week that she is running for state treasurer. Treasurer John Chiang, who last week announced his candidacy for governor, was twice elected to the board’s 4th District seat.
The board comprises four members elected by geographic district and a fifth at-large member, the state controller, who has a seat by virtue of office.
In 1879, California’s constitution established the agency as a publicly accountable body to ensure county property taxes were assessed equally and fairly throughout the state. The board has the same constitutional independence as the attorney general or other elected statewide officials. Like those offices, the Legislature sets its annual budget.
Lawmakers scrutinizing costs also have criticized a longstanding policy that leases Class-A office space for board members outside the agency’s headquarters at 450 N St. Last year, taxpayers paid a combined $740,000 per year on four offices, as The Bee reported last month.
Four of five board members left the 24-story headquarters in 2007 while work crews made extensive repairs to the water-damaged executive floor. When the work was done two years later, three of the five board members remained in leased space outside the building. Yet nearly 2,000 employees still work in the tower, which has a long history of mold, exterior water intrusion, corroded drain line leaks and other defects that have raised health concerns.
Sen. Richard Pan, a Sacramento Democrat whose district includes the board’s headquarters, took a few jabs at agency officials during the hearing.
“The captain should be the last to leave the ship,” Pan said, “not the first.”
Roth’s subcommittee recently stated that it is “the intent of the Legislature” that board members return their offices to the agency’s headquarters: “(M)embers of the Board of Equalization should be located in the same physical office space as the plurality of other BOE headquarters employees.”
It also added budget terms that, if approved by the rest of the Legislature and Gov. Jerry Brown, would block any Board of Equalization office expansion pending a review of current space and a clear plan for meeting its office needs. The committee set a Feb. 1 deadline for the report, right around the same time that 2017-18 budget talks will start.
The cost for rental agreements grew from $691,000 in 2010-11 to $5.3 million last year.
Runner and others who defend the board’s operations note that the agency has fewer than half the 52 offices it staffed 26 years ago. For the $595 million it spends to run the department this year, it will collect more than $60 billion in taxes – or about 98 cents spent for every $100 brought in. California’s taxpayer compliance rates are high, which Runner credits in part to the agency’s field offices for fostering public outreach and training.
State law also requires board members to “investigate the administration, enforcement, and operation” of tax laws within their districts, Runner said, and the offices provide a place for auditors to work to meet those obligations.
Earlier this year, after the boundaries of his district changed, Runner picked up about 25,000 tax accounts in what had been fellow Republican board member Diane Harkey’s district, and he opened a new office in Rancho Cucamonga. Several weeks ago, Runner and Board of Equalization staff hosted a grand opening to publicize the new office, which rents for nearly $385,000 per year.
The decline in office visits, Runner said, reflects a shift to “field audits” that require auditors to leave their desks and go to businesses to review records. Online services, he said, also pared back visits to offices.
“Yes, we have less foot traffic,” he said, “but that means the auditors have more time to do the rest of their job: collections and giving direction to taxpayers.”
“(The Legislature) believes that the main purpose of those offices is to deal with foot traffic,” he said. “It’s not.”
The Senate subcommittee report said it’s unclear what criteria the board uses to open, close or move field offices.
“(T)he agency specifically chose to locate the new office in Rancho Cucamonga when two existing field offices are within 25 miles of that city,” it said. “There are several other cities of comparable size with much longer drives to the nearest field office.”
I’m elected to represent the taxpayers in a particular district.
BOE Board Member George Runner, explaining why the board opened a office in his district within 25 miles of two other board offices
Runner said he had to open the office to meet voters’ expectations and that it doesn’t comport with the law or voters’ wishes to expect residents in his district to continue visiting an office in Harkey’s.
“I’m elected to represent the taxpayers in a particular district,” he said. “Accounts are assigned by district, because those are the people I represent.”
Board member Jerome Horton opened his own new Glendale office following redistricting – leasing for $1 million annually – at the end of last year. In that case, the new office absorbed some business from a closing office.
The Bee reported in April that Horton moved his office from the ninth floor to the 21st floor of the posh US Bank Tower at 621 Capitol Mall last year and filled it with $118,000 in designer furniture that cost an additional $12,000 for delivery and installation.
The board then moved swiftly to clamp down on purchasing contracts, approving a resolution requiring the agency’s new executive director, David Gau, to provide “weekly reports on all contracts over $50,000 under consideration.” Previously, the limit was $1 million.
The new policy also requires the executive director to “regularly report on significant changes” to leased space and requires board approval for new office leases for a handful of offices at headquarters. A change the board will consider Wednesday would go further, requiring board approval for any office leases that are not a member’s personal office.
Horton last week suggested an even larger change in board practices. In a letter to the board’s top administrator and in an interview with The Bee, Horton said it is only recently that the agency has begun to base office opening and closing decisions on political boundaries.
That change “has resulted in the questionable opening of additional offices at a cost of millions of dollars to California taxpayers,” Horton wrote. “You should discontinue this practice and follow the current Board policy of approving additional office space based on operational, work load, and customer service needs.”