Accused of mismanagement, California's tax collection agency 'is in complete disarray,' officials say

Reeling from allegations of financial blunders, nepotism and improper use of civil servants for political benefit, California’s tax collection board agency finds itself temporarily stripped of its power as it awaits the possibility of the biggest overhaul in its 138-year history.

Scathing audits and reports have state officials wondering whether the state Board of Equalization should remain as the only elected tax board in the nation.

“The organization is in complete disarray, and California taxpayers deserve better,” said Assemblyman Phil Ting, a former assessor-recorder of San Francisco. “We have to take a hard look at them and look at serious structural reform.”

The turmoil at the agency reached a boiling point April 13 when Gov. Jerry Brown signaled he had seen enough finger-pointing. Brown took away the board’s power to hire and approve contracts, and requested that state Atty. Gen. Xavier Becerra launch an investigation of the many “serious problems” identified in a recent Department of Finance audit.

"The report uncovered issues of inappropriate interference by the board that undermines its ability to carry out its core mission: the collection and administration of sales and use taxes and other revenues," Brown wrote in a letter to Becerra.

California's tax collection agency is 'eroding the trust of the public,' assemblyman says »

The five-member Board of Equalization oversees 30 tax and fee programs, including sales, use and property taxes that bring the state $60.5 billion annually — about 30% of all state revenue.

Though the agency is supposed to have 4,800 employees, there are 600 vacancies, including important administrative positions such as chief legal counsel, which is being handled by an acting counsel.

The board consists of four members elected by geographical districts — each with nine million residents — and the state controller, currently Betty Yee, who serves in the fifth seat as an ex-officio member.

Even the building the agency was based in has spent years in disrepair. The elected board members once had main offices on the 23rd floor of the Board of Equalization headquarters in Sacramento, but they were moved out in 2007 to make room for repair work amid safety concerns. The high-rise has a history of toxic mold, dodgy elevators, leaky pipes and shedding parts that include a glass panel that fell eight floors onto the sidewalk below. Officials estimate $40 million in repairs are needed.

In one sign of the board’s division, the members are now scattered among five buildings in the capital.

The departure of the board members from a building where 1,800 of the agency’s workers remain has also been a point of controversy. There are currently nine lawsuits against the Board of Equalization by employees who have remained in the dilapidated headquarters. Those legal challenges and lawsuits settled with 30 other plaintiffs allege the building is making workers sick and is a health and safety risk, according to Anthony M. Perez Jr., an attorney for employees who have sued.

The state says the building is safe. Perez said that claim is wrong and hypocritical.

“When the BOE Board members became aware of the mold, they high-tailed it out of the headquarters building to a safe working environment,” Perez said in one of the lawsuits.

Perez added that the rank-and-file staff was further angered in 2015 when then-Board Chairman Jerome Horton had his new office fitted with more than $118,000 in designer furniture, as first reported by the Sacramento Bee.

Others who disagree with Horton’s decision include fellow board member Yee.

“I wouldn’t have done it,” she said of the furnishings. “I would have considered it an inappropriate use of public resources.”

The same year, an audit by the state controller found that the board misallocated money — $47.8 million — to the state general fund that should’ve gone to other agencies. The board also failed to collect $1.5 million in debts that year, the audit found.

This month’s Department of Finance audit was a follow-up to the 2015 report and found the board still “had difficulty providing complete and accurate documentation” in response to basic financial inquiries and could not consistently explain why money was misdirected.

Horton, a Democrat from Inglewood, and current Board Chairwoman Diane Harkey, a Republican from Dana Point, are facing heat from the report, which questioned conferences held in their districts staffed in part with employees from the other offices.

The report said employees were reassigned from the tax auditing positions to supplement the district staffs of board members in a way that violated state rules requiring notification and approval by managers.

“Certain board member practices have intervened in administrative activities and created inconsistencies in operations,” the report said.

Although each board member receives dedicated staff and $1.5-million office budgets, the report found some board members routinely supplement their staff, taking employees whose jobs were to collect taxes and transferring them from the main office to help board members reach out to constituents.

For example, a conference last November in Harkey’s district called “Connecting Women to Power” brought in 98 board employees usually assigned to tax audit and compliance work, whose monthly salaries range from $2,384 to $8,450. The employees performed duties including “registration, parking lot duty, and break area facilitation,” the report said, adding the redirection was requested by someone on Harkey’s staff.

Yee and others said the conferences held by other board members are improper because they are promotion tools used to elevate their profiles with constituents.

Harkey denies that she was involved in redirecting staff to promotional activities. A former legislator, she had just taken office with the board when she said she was told by the administration that she could pick from a list of outreach activities done in the past that were aimed at educating the public about taxes and fees.

She said the staging of the conference in Escondido was an issue handled by administration staff.

“I’m not in charge of those people,” she said in an interview with The Times. “Once I found out that this was falling in my lap and there was something wrong, I decided we’re not doing it again.”

David Gau, the board’s executive director, confirmed to a legislative panel on April 20 that some board members have tried to have staff and resources reassigned without asking for approval from his office, which they are required to do.

“It has been a pervasive problem,” Gau said during a hearing of a Senate budget subcommittee.

The Department of Finance also questioned Horton’s office about spending $124,000 on postage and printing alone for a volunteer income tax assistance event sponsored by the IRS — even though the board does not collect income tax.

Horton said the assistance program helped 14,000 people with their tax filings and registered 5,000 additional businesses with the board.

Updates from Sacramento »

He denied that outreach conferences held in his and other board member’s districts were done to promote themselves politically. The events, he said in a letter to the governor, “were supported by BOE legal department opinions stating that they had a governmental and tax administration purpose.”

Among the report’s other findings:

  • Horton was involved in opening a Culver City call center in his district to answer customer questions and requested the expediting of assigning 10 employees there, though board records, according to the audit, “do not indicate that the call center had been presented, discussed, or approved by the Board during a public meeting.”
  • A new office with board employees was established in El Segundo — also in Horton’s district and adjacent to another board office — but the administration could not explain why it was opened, nor what the staff was doing there.

In a letter to the governor, Horton said that he legally requested the call center opening and that it was properly approved. All of the BOE members were involved and “culpable," he wrote. The El Segundo office opening was handled by administration, he said.

Harkey concedes that there has been a perfect storm of controversies, but she maintains that the problems are being addressed, and said she thinks the current structure can be made to work.

“There have obviously been some breakdowns in policy. I think there has probably been some board member overreach as well as some laxness on the part of the staff,” Harkey said. “I think nobody is totally guilty and nobody is totally innocent.”

In contrast, Yee and fellow Democratic board member Fiona Ma have called for a massive overhaul of the agency. Yee proposed stripping the panel of its tax administration responsibilities and audit and compliance functions so it can focus on handling taxpayer appeals.

“In order to rebuild taxpayer trust, meaningful reform is essential,” Yee said on March 31. “I urge the Legislature and the governor to strip the board members of all statutory functions and permanently move these duties and assigned staff to a separate new department under the governor.”

Ma has asked the governor to appoint a public trustee to oversee the agency, who she said should appoint a new chief legal counsel.

“Unfortunately, there is a lack of commitment at the executive management level to address even the smallest problems,” Ma wrote to Brown.

The agency’s problems have also drawn criticism from a candidate who had been running to join the Board of Equalization. On Thursday, former Assemblyman Richard Gordon dropped out of the 2018 race for a spot on the board, saying his decision was grounded in a belief that setting the agency up as an elected panel has contributed to its problems.

“The political process, candidly, interferes with the ability of the board to play its role as a quasi-judicial hearing body,” he said.

Ma has also requested an examination by the State Personnel Board into allegations by employees of favoritism in hiring and promotions. That investigation is pending.

Ma said former Executive Director Cynthia Bridges, before she was removed in March 2016, approved raises of up to 20% for selected managers, including David Gau, who later took her place as executive director.

“When I investigated, I found that there did not appear to be a consistent process used to award raises [to managers],” Ma said.

The pending personnel investigation was recently expanded to look into allegations Ma received in anonymous emails that alleged rampant nepotism in some offices, including employees who are supervising relatives.

Ma’s high-profile criticism of the agency has drawn backlash. An anonymous note with the warning “watch your back” was sent through interoffice mail, triggering an upgrade of security at the board, including a screening of employees, Ma told The Times.

Harkey said the agency is already taking steps to address problems identified in audits, but acknowledged “fractures” in the board, and a rank-and-file staff that she described as “pretty demoralized.”

The agency has been hampered by an outdated, 40-year-old computer system and turnover among senior staff.

“Overall the collecting, the assessing and distribution of taxes and fees is accurate. I think they do a good job,” Harkey said to The Times. “I think the current structure of the BOE is really very good.”

Legislators, who have held two hearings on the board’s problems, say they are prepared to force change through the upcoming budget deliberations.

“It clearly is something that calls into question the overall management of the agency that some of these things would be allowed to go on that are clearly not best practices,” Assemblyman Richard Bloom (D-Santa Monica) said.

Added Ting: “California taxpayers should be concerned.”

patrick.mcgreevy@latimes.com

Twitter: @mcgreevy99

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