The State Worker

Board member Jerome Horton fights his depiction in audit of tax agency

BOE Member Jerome Horton says board members don’t control agency purchases

At a May 25, 2016 meeting of the Board of Equalization, member Jerome Horton brushed off a Sacramento Bee report that said his office worked with agency staff to select $118,000 of furniture for his Sacramento office. Later, Horton told The Bee th
Up Next
At a May 25, 2016 meeting of the Board of Equalization, member Jerome Horton brushed off a Sacramento Bee report that said his office worked with agency staff to select $118,000 of furniture for his Sacramento office. Later, Horton told The Bee th

Jerome Horton this week issued a 3,200-word response to a forthcoming audit that raises sharp questions about his role in personnel decisions at the Board of Equalization, charging that the report ignores testimony that explains his actions and that the agency’s executive director failed to inform investigators about relevant policies.

Horton is the second longest-serving elected member on the board, and two of the agency’s recent executive directors now work on his staff.

The soon-to-be-released audit from the Department of Finance found that he has reassigned civil servants to work for him, organized events that strayed from the tax-collecting agency’s core mission and had a behind-the-scenes role in creating a customer service call center in his district. It was based on interviews with more than 70 Board of Equalization employees and visits to site offices around the state.

Here are excerpts from Horton’s statement on the audit.

Horton’s opening remarks:

“The evaluation is based on unsubstantiated hearsay, inappropriately excerption of portions of statements, the omission of conflicting testimonies, inclusion of documents know to be false; a total disregard of the involvement of the Department of General Services, State Personnel Board, BOE executive manage, Members of the Board, and Department of Finance in the decision making process. However, the problem is once the draft report was issued the DOF refused to accept the documented evidence that refutes these allegations and the Executive Director’s asserted that he did not know the approval processes and his failure to timely provide the documents and his mismanagement of the organizational data has resulted in the Board issuing conflicting, incomplete, inaccurate data to the legislature, as reflected in the evaluation and to the auditor resulting in their roles in these decisions not be disclosed.”

On BOE employees who fear retaliation from board members:

“ALLEGATIONS Regarding the two examples of alleged workplace retaliation in the report, such conduct by Board Members is strictly prohibited at BOE, and I have called upon the Executive Director to immediately investigate and report on the incidents.

“As mentioned, it is disappointing that the DOF chose to identify these individuals in their evaluation, especially if the DOF failed to properly disclose these allegations to the Executive Director in a timely basis.

“In this regard, I am also concerned that the Executive Director for over a year has failed to bring forth the Board’s recommended policy that requires annual evaluations of Career Executive Assignment employees in order to prevent unfair termination.”

On the call center:

“The truth is I legally advocated for the Customer Service Culver City Call Center and the El Segundo nonpublic office and related job opportunity, however these initiatives were designed by executive management in consultation with the Department of General Services, State Personnel Board, and Department of Finance respectively, discussed with individual Members, included in the Facilities Management plan and Tax Gap II Budget Change Proposal that was approved by the Board, and subsequently approved by the Department of Finance and the Legislature for funding. My advocacy for advertising the positions was subsequent to the approval and posting of the positions by the agency. This was all legal, appropriate and in hindsight productive decision. Further the ED approved the hiring of these positions and the Controller authorized their payment.”

Why Horton’s ‘connecting women to power’ events are relevant to the Board of Equalization:

“Although the auditor did not examine the 2016 Connecting Women to Power LA conference, the evidence shows that many of the sessions had a direct nexus with the BOE, including but not limited to the State Job Fair, a basic tax compliance class, leadership training for staff, and panel discussions on tax credits and filing requirements throughout the day, as well as consultation and registration information provided throughout the conference.

“The Chief Counsel, who has attended and/or observed the conference since 2010, opined that the event has a direct nexus with the tax administration duties of the BOE and a firm governmental purpose. These types of free one-stop-sessions attract thousands of small business owners who otherwise would not interact with BOE, to learn about tax compliance and tax agencies.”

Why Horton devotes staff time to helping people file their income taxes

“As mentioned, the audit is flawed in expressing an erroneous legal opinion that (volunteer income tax assistance) has ‘limited nexus’ to BOE throughout the report. On the contrary, the BOE Chief Counsel has determined that VITA has a legal government purpose and full nexus to the duties of the BOE under the Taxpayers Bill of Rights, Government Code sections 7081-7099.1. BOE’s direct nexus to VITA is further supported by the fact that: 1. BOE is the only taxing agency with jurisdiction over the majority of the taxes in the state, e.g., personal and business income, sales, use, property taxes, etc.), and BOE uses personal and business tax returns to verify total taxable sales and other tax issues. The IRS has concluded based on it data that VITA reduces tax fraud and increases tax filing and reporting in key areas for enhanced voluntary compliance.”

Horton’s full statement as released

The evaluation is based on unsubstantiated hearsay, inappropriately excerption of portions of statements, the omission of conflicting testimonies, inclusion of documents know to be false; a total disregard of the involvement of the Department of General Services, State Personnel Board, BOE executive manage, Members of the Board, and Department of Finance in the decision making process. However, the problem is once the draft report was issued the DOF refused to accept the documented evidence that refutes these allegations and the Executive Director’s asserted that he did not know the approval processes and his failure to timely provide the documents and his mismanagement of the organizational data has resulted in the Board issuing conflicting, incomplete, inaccurate data to the legislature, as reflected in the evaluation and to the auditor resulting in their roles in these decisions not be disclosed. Especially given that he was the Assistant Chief of Field, then Chief Deputy Director in May 22, 2014 and Executive Director from March 30 2016, to now; aware of or responsible for managing the activities in question and approving every transaction and all activities during these periods and that he participated in the 2016 Connecting Women To Power Event as a speaker and observer.

The truth is I legally advocated for the Customer Service Culver City Call Center and the El Segundo nonpublic office and related job opportunity, however these initiatives were designed by executive management in consultation with the Department of General Services, State Personnel Board, and Department of Finance respectively, discussed with individual Members, included in the Facilities Management plan and Tax Gap II Budget Change Proposal that was approved by the Board, and subsequently approved by the Department of Finance and the Legislature for funding. My advocacy for advertising the positions was subsequent to the approval and posting of the positions by the agency. This was all legal, appropriate and in hindsight productive decision. Further the ED approved the hiring of these positions and the Controller authorized their payment.

Considering that this information was not provided to the auditor, several of the key personnel who were instrumental in developing the transactions at the time were not interviewed, and the draft evaluation consequently reflected conflicting, incomplete, and inaccurate information, not knowing who the members of the executive management were – and not receiving factually correct responses to several audit inquiries, I have made a Public Records Act request of the agency for all documents related to these transactions and asked the Legislature to direct the DOF to accept and review all relevant evidence.

I am confident that these documents, together with testimonies of the executive team members who were party to the transactions at the time, legal opinions, and other data will support the following.

NEXUS

2

The DOF auditor alleged that the BOE’s educational seminars have “limited nexus” with the BOE including VITA. In support of their position the auditor extracted one phrase in Government Code section 7084 and 7081 – the Taxpayers Bill of Rights - to conclude that two of the BOE’s outreach activities have only limited nexus: the Connecting Women to Power Conference and the free Volunteer Income Tax Assistance (VITA) program. Conclusively the positive returns on the investment to the state are clear indications of the nexus of these initiatives.

CWP NEXUS

Although the auditor did not examine the 2016 Connecting Women to Power LA conference, the evidence shows that many of the sessions had a direct nexus with the BOE, including but not limited to the State Job Fair, a basic tax compliance class, leadership training for staff, and panel discussions on tax credits and filing requirements throughout the day, as well as consultation and registration information provided throughout the conference.

The Chief Counsel, who has attended and/or observed the conference since 2010, opined that the event has a direct nexus with the tax administration duties of the BOE and a firm governmental purpose. These types of free one-stop-sessions attract thousands of small business owners who otherwise would not interact with BOE, to learn about tax compliance and tax agencies.

VITA NEXUS

Recently the Chief Counsel found that the Board’s participation in the “free tax filing and reporting initiative” (VITA) is consistent with its duty to participate in taxpayer education and outreach activities put on by other agencies, (IRS & FTB) and to promote improved voluntary taxpayer compliance by developing understandable tax laws and informing the public/taxpayers of the proper application of those laws.” (See legal opinion.) Consequently, the Board recently voted to continue to allow VITA tax preparation training for BOE employees who volunteer for VITA and VITA advertising in BOE publications and notices for other events.

Further, the BOE is the only agency with jurisdiction over personal and business income, sales and use, and property taxes that are reported on IRS form 1040, California form 540 and related forms filed through VITA. In addition the audit and compliance manuals of the Board of Equalization prescribe that BOE auditors and collectors utilize these filed returns to perform their work. Noteworthy, BOE employees generously volunteer to perform tax preparation services are on their personal time without compensation.

As mentioned, the audit is flawed in expressing an erroneous legal opinion that VITA has “limited nexus” to BOE throughout the report. On the contrary, the BOE Chief Counsel has determined that VITA has a legal government purpose and full nexus to the duties of the BOE under the Taxpayers Bill of Rights, Government Code sections 7081-7099.1. BOE’s direct nexus to VITA is further supported by the fact that: 1. BOE is the only taxing agency with jurisdiction over the majority of the taxes in the state, e.g., personal and business income, sales, use, property taxes, etc.), and BOE uses personal and business tax returns to verify total taxable sales and other tax issues. The IRS has concluded based on it data that VITA reduces tax fraud and increases tax filing and reporting in key areas for enhanced voluntary compliance.

2. $1.2 Billion in use taxes and $1.3 Billion in sales taxes, administered by the BOE are lost to the state and hundreds of thousands of business go unregistered with the BOE, due to underreporting and non-reporting, which programs like VITA help to address.

3

3. The 3rd District VITA initiative in 2016 encouraged 14,950 taxpayers filing through VITA, 29% of whom had business income, to register with BOE and pay their sales and use taxes and file Schedule C with their return. These individuals paid an estimated $150,000 in use taxes and claimed $18.5 million in state and federal earn income tax credits (EITC) refunds.

CULVER CITY CALL CENTER AND EL SEGUNDO NON-PUBLIC OFFICE. CULVER CITY OFFICE AND JOBS

The allegation in the draft that the Culver City Call Center was not approved by the Board is false, and statements about my involvement in the hiring were misrepresented and distorted due in part to the failure of the agency to provide prudent data.

The Call Center proposal was developed by the Deputy Director of Administration and the Chief of Field Operations - based on their testimony - and was approved by the Board, the Legislature, the Department of General Services, the Department of Finance and others as part of BOE’s facilities management plan (under the Deputy Director of Administration Report) and the Tax Gap II Budget Change Proposal (BCP). As mentioned, a wide variety of BOE historical records show that the job classifications, duty statements, and recruitment for the Culver City Call Center positions were developed by BOE Call Center management in Sacramento and the Deputy Director of Administration, (who has retired) the Human Resources Chief (who is now the Deputy Director of Administration) and the Budget Director, in consultation with the State Personnel Board and all impacted Board Members. My limited involvement was mere advocacy for accelerating the advertising of the positions subsequent to the approval and posting of these positions in conjunction with Job Fairs was legal and appropriate. Also, the ED approved payment for these positions and the State Controller paid the employees for working on New Year’s Eve day. Despite the confusion, hindsight indicates a positive return on these actions and decisions.

EL SEGUNDO OFFICE OPERATIONAL DATES

According to the historical documents and testimony from the Deputy Director of Administration and the statewide Chief of Field Operations, the Executive Director erred in his statement that the El Segundo non-public office was originally established to accommodate District 3’s Assistant Chief of Field. The El Segundo non-public office was developed for the statewide Chief of Field Operations and his staff including District Liaisons, and the External Affairs Division located in Southern CA with an 8/17/2014 move in date. The documents also show that the District 3 Assistant Chief of Field was located there after the office was operational, when it became clear that there was sufficient space.

It is disappointing that the Executive Director could not to explain the history of the El Segundo nonpublic office, considering that the Facilities Management Chief and records are available to him especially given that he was appointed the Chief Deputy Director May 22, 2014 and made responsible for all BOE operations on October 28, 2015, and then appointed the ED in March 2016 and has been part of the Executive Management team for decades. Despite the confusion, hindsight indicates a positive return on these actions and decisions.

DISTRICT LIAISONS VS COMMUNITY LIAISONS. The audit omits key facts when alleging that District Liaisons (DLs) “advise the Board Member on complex and difficult audit and compliance issues,” resulting in a distortion of the 2-page District Liaison duty statement. Contrary to the allegation, the express language in the duty statement was omitted -

4

declaring that the DLs should “advise the Member on complex and difficult audits and compliance issues related to constituent services involving his office.” Also omitted is the duty statement specification - that this function constitutes only 5% of the performance of their duties.

The audit also omits evidence that the District Liaison program, as proposed by the Executive Director and approved by the Board Members, several years ago, these revenue generating positions have the responsibility for approximately 75 different taxpayer education classes, seminars, speaking engagements and the handling of hundreds of constituent service inquires previously handled by revenue-generating District office staff, including constituent concerns related to audits and appeals and advising Field operations. Despite the confusion, hindsight indicates a positive return on these actions and decisions.

Conversely the Community Liaison classifications (as Information Officers) perform primarily taxpayer public relations, communication duties, outreach planning and advising the Member on constituent needs and field operations. The auditor was correct that these classifications were developed by the agency specifically to fit the particular needs of the district.

JOB ROTATION PROGRAM

The auditor also erred in stating that the BOE’s “Rotational Program” was “created” by the District 3 Member. It was authorized by the State Personnel Board and utilized by numerous Executive Directors and Board Members starting over 30 years ago. As stated above, I myself served in a similar program in the office of Board Member Matt Fong in 1992, and in the office of Board Member Claude Parish 1999. Likewise, the statement that this rotational program is only offered at the Board of Equalization 3rd District Member’s office disregards that all members had the option of using this program and that similar programs are used by BOE, Department of General Service, the FTB, the Department of Justice and others. STAFF RESOURCE UTILIZATION The audit errs in using the term “Redirected,” describing the information on Table 1 (“Redirected Staff for Board Member Activities between July 2013 and November 2016”). The term “redirected” is erroneous – as the data shows that these were “loaned” positions under state personnel régulations. The audit also disregards data showing that the total number of loaned positions assigned to the 3rd District Member were 14, not 21 as stated. These errors disregarded that the budget surplus in my office offset the cost of the loaned positions (working on BOE tax matters), and they lead to false conclusions in the report.

ALLEGATIONS Regarding the two examples of alleged workplace retaliation in the report, such conduct by Board Members is strictly prohibited at BOE, and I have called upon the Executive Director to immediately investigate and report on the incidents.

As mentioned, it is disappointing that the DOF chose to identify these individuals in their evaluation, especially if the DOF failed to properly disclose these allegations to the Executive Director in a timely basis.

In this regard, I am also concerned that the Executive Director for over a year has failed to bring forth the Board’s recommended policy that requires annual evaluations of Career Executive Assignment employees in order to prevent unfair termination.

5

EXHIBIT A-CLARIFICATION ON VITA-MARCH 27, 2017

QUESTION 1: BOE Nexus, has there been a change in the legal opinion over the last six years?

CHIEF COUNSEL ANSWER: No, the legal opinion over the last six year has consistently concluded that there is sufficient nexus between BOE’s areas of responsibility and the use of BOE resources for VITA. QUESTION 2: Interpretation of TBR as it relates to BOE employees working on VITA on state time and attending BOE or Board Member VITA events.

CHIEF COUNSEL ANSWER: Legal has not previously incorporated aspects of the TBR into our analyses of the use of BOE resources for VITA activities.

QUESTION 3: Is the current policy that restricts employees from working (being paid) on VITA or working at BOE VITA events based on a legal department’s opinion or the discretionary action (new policy) of the Board Members?

CHIEF COUNSEL ANSWER: In light of discussions by the Board at the December 2016 board meeting, Members established a new policy with respect to VITA. QUESTION 4: Is it contradictory to the current policy to allow board member staff to be paid to work on VITA?

CHIEF COUNSEL ANSWER: No, it is not contradictory to current policy to allow Board Members’ personal staff to use state time to work on VITA activities. Members’ staff, in particular, their exempt staff, can be reasonably expected to work on diverse jobs, participate in outreach activities, and otherwise handle activities supporting the Board Member, as such activities (i.e., VITA) would be within the range of normal activities expected in the course and scope of their employment. QUESTION 5 If the Legal Department did not use the TBR in the analyses for determining nexus, what do you reference in determining the legal nexus?

CHIEF COUNSEL ANSWER: We check to see if it the use of funds has a meaningful connection to BOE’s areas of responsibility as stated in the following: • Gov. Code, § 15623 • BOE’s Strategic Management Plan 2015-2020 • Is the use of BOE resources related to the agency goals, as stated in the 2014-2015 Annual Report • Is the use of BOE resources meaningfully connected to any of the more than 30 tax and fee programs that the Board administers • Does the use of BOE resources have a connection to the Board’s duty and responsibility to: o oversee local property tax assessments through its County Assessment Standards Program, o value public utilities and specific properties within its State-Assessed Property Program, and o review Publicly-Owned Property Assessment disputes.

6

Government Code 15623

Each member of the State Board of Equalization elected by the voters of an equalization district shall investigate the administration, enforcement, and operation within the district from which he is elected of all laws, the administration and enforcement of which are vested in the board. Each such member may appoint a deputy to assist him in the performance of his duties under this section. The deputy shall be so appointed as to be exempt from civil service under paragraph (6), subdivision (a), Section 4, Article XXIV of the Constitution, and not otherwise. (Added by Stats. 1951, Ch. 655.) Question to Chief Counsel, March 23, 2017: Do Board Members have authority to provide guidance and advice to the Executive Director and other staff within the agency? Answer from Chief Counsel, March 23, 2017: Yes, per Gov. Code section 15623, each Board Member has the authority to investigate how tax and fee laws are being applied in their respective districts, and ensure that Board-approved policies are being properly observed/applied. Therefore, it is appropriate for individual Members to provide the Executive Director with ideas, recommendations, support, and guidance on policy, as well as other administrative matters. This type of action by individual Members does not amount to interference.

7

The Harris-Katz California Taxpayers’ Bill of Rights – RTC sections 7081 and 7084

7081-The Legislature finds and declares that taxes are the most sensitive point of contact between citizens and their government, and that there is a delicate balance between revenue collection and freedom from government oppression. It is the intent of the Legislature to place guarantees in California law to ensure that the rights, privacy, and property of California taxpayers are adequately protected during the process of the assessment and collection of taxes.The Legislature further finds that the California tax system is based largely on voluntary compliance, and the development of understandable tax laws and taxpayers informed of those laws will improve both voluntary compliance and the relationship between taxpayers and government. It is the further intent of the Legislature to promote improved voluntary taxpayer compliance by improving the clarity of tax laws and efforts to inform the public of the proper application of those laws.The Legislature further finds and declares that the purpose of any tax proceeding between the State Board of Equalization and a taxpayer is the determination of the taxpayer’s correct amount of tax liability. It is the intent of the Legislature that, in furtherance of this purpose, the State Board of Equalization may inquire into, and shall allow the taxpayer every opportunity to present, all relevant information pertaining to the taxpayer’s liability. (Amended by Stats. 2001, Ch. 670, Sec. 2. Effective January 1, 2002.)

7084-(a) The board shall develop and implement a taxpayer education and information program directed at, but not limited to, all of the following groups: (1) Taxpayers newly registered with the board. (2) Taxpayer or industry groups identified in the annual report described in Section 7085. (3) Board audit and compliance staff. (b) The education and information program shall include all of the following: (1) Mailings to, or appropriate and effective contact with, the taxpayer groups specified in subdivision (a) which explain in simplified terms the most common areas of noncompliance the taxpayers or industry groups are likely to encounter. (2) A program of written communication with newly registered taxpayers explaining in simplified terms their duties and responsibilities as a holder of a seller’s permit or use tax registrant and the most common areas of noncompliance encountered by participants in their business or industry. (3) Participation in small business seminars and similar programs organized by federal, state, and local agencies. (4) Revision of taxpayer educational materials currently produced by the board which explain the most common areas of taxpayer nonconformance in simplified terms. (5) Implementation of a continuing education program for audit and compliance personnel to include the application of new legislation to taxpayer activities and areas of recurrent taxpayer noncompliance or inconsistency of administration. (c) Electronic media used pursuant to this section shall not represent the voice, picture, or name of members of the board or of the Controller. (Amended by Stats. 1998, Ch. 612, Sec. 6. Effective January 1, 1999.)

Adam Ashton: 916-321-1063, @Adam_Ashton. Sign up for state worker news alerts at sacbee.com/newsletters.

Related stories from Sacramento Bee

  Comments