State Scandal over Special Funds Eases Just in Time to Borrow Heavily from Them

Wednesday, August 15, 2012

Although the state failed to turn up billions of hidden dollars potentially languishing in special funds when it completed its audit a few weeks ago, it has found them to be a very useful source of emergency funding as general revenues lag.

The 500+ special funds scattered throughout the government are repositories for about $37 billion a year in user fees and targeted taxes related to the activities they support. That’s about 40% as much money raised for the general fund primarily through property and sales taxes. California audited the funds after $54 million was found stashed in two Department of Parks and Recreation special funds even as the state was threatening to close 70 parks for lack of cash.

The governor and Legislature regularly borrow from those funds, sometimes to the departments’ detriment, with promises to repay the money back years down the road. But the California controller, who manages the state’s cash flow, also regularly borrows from the special funds to cover short-term revenue shortfalls.

This year he has been especially aggressive. Last year at this time, the state had tapped 48.4% of the money available from the funds but has doubled down this year. Controller John Chiang borrowed $9.6 billion in June and $8.5 billion in July as expenses exceeded tax receipts by a wide margin.

It’s a situation that could get worse very quickly. The state budget is constructed around an assumption that Governor Jerry Brown’s tax initiative on the November ballot passes and provides an infusion of cash down the road. There are contingencies built into the budget to cover the shortfall if the measure fails, but for now the issue is exacerbating the normal state cash flow situation.

Although the quickie audit conducted in early August failed to turn up a treasure trove of riches, it did find $119 million scattered about, bringing to nearly $286.5 million the total amount of money state officials may have been unaware of.

On Tuesday, questions were raised about how much state officials really know about hidden state funds. Former parks employee Cheryl Taylor, in a sworn declaration in court, alleged that she had told state attorneys months ago about $20 million in hidden money. Taylor said she told a representative from the attorney general‘s office about the money in January and that a parks department official had warned employees to keep it quiet.

Taylor, who now works for the California Department of Transportation, gave her declaration as part of a sexual harassment lawsuit filed by other employees that names Manuel Lopez, the ex-parks official at the center of the department’s fund scandal. She also said that she was ordered to demote an employee who reported the surplus in 2010.

–Ken Broder     


To Learn More:

California Scrambles to Pay its Bills with More Borrowing (by Chris Megerian, Los Angeles Times)

Former Parks Employee Says State Attorneys Told of Budget Stash (by Don Thompson, Associated Press)

No Buried Treasure Hidden in State Special Funds, Just a Lot of Confusion (by Ken Broder, AllGov)

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