Measure Would OK Home Loans for State Veterans

A quiet proposition on the Nov. 7 ballot asks California voters to approve $500 million in home loans for veterans through a program that state investigators have severely criticized as mismanaged.

Sponsored by Gov. Gray Davis, the Proposition 32 bond issue is expected to pass, as have all its 25 predecessors stretching back to the first loans issued to doughboys of World War I.

Extraordinarily popular, Cal-Vet Farm and Home Loan bond issues rarely stir controversy, typically winning voter passage by runaway margins averaging 69%.

But Proposition 32, approved unanimously by the Legislature last summer, will be the first veterans bond issue to face the voters in the aftermath of criticism of the Department of Veterans Affairs by two state watchdogs.

Intended as a gesture of appreciation to former military members whose lives were disrupted by service to their country, the low-cost, low-interest loans are repaid by the veterans.

In all, nearly $8 billion in Cal-Vet loans have been issued to more than 400,000 men and women who served during both world wars, Korea, Vietnam and other conflicts. Now aimed at Vietnam veterans, the program has been expanded to include certain former military members who served in peacetime.

Davis and other supporters say Proposition 32, one of the most obscure on the ballot, is needed to continue operating the 79-year-old enterprise. Otherwise, it is projected to run out of voter-approved bond funds in 2002, they warn.

The governor, who served in Vietnam and counts veterans among his core supporters, says the loan program keeps California’s promise to honor those who served and made sacrifices for state and country.

No political committees have been formally organized to promote or defeat Proposition 32.

But the Department of Veterans Affairs, rocked earlier this year by a series of investigations into controversial patient care at its home for aging and disabled veterans at Barstow, also has been at the center of two state investigations.

In separate reports, the nonpartisan legislative analyst’s office, in 1998, and the independent Bureau of State Audits, last May, accused the department of mismanagement of the loan program.

Among other problems, they found improper expenditures, noncompetitive interest rates and loan processing that took up to two months to complete compared with only a few days in the private sector.

The department strongly disagreed with some conclusions in the auditor’s report but conceded others. Last summer, it launched a comprehensive reform program that continues today.

“I think we’ve turned the corner,” George Flores, chief of Cal-Vet loans, said last week. Department officials refused to discuss Proposition 32 in relation to criticism of the loan program’s management, saying they are prohibited from commenting on any ballot issue.

The investigators did not allege fraud or other criminal behavior. And the legislative analyst noted that despite its shortcomings, the program remains financially secure.

But in its 1998 report the legislative analyst noted that the state-run enterprise has been plagued for years by a history of weak program operations and management that has reduced funds available for veterans by $200 million.

The document criticized virtually all aspects of the department’s loan business, including bond sales, investing cash, processing delinquent accounts, originating loans, administering insurance and servicing customers.

“Almost every major element of the program . . . has suffered because long-standing problems were allowed to continue without corrective action and proper oversight for many years,” the report charged.

The report proposed a list of reforms, including a blockbuster recommendation that no new loans be made after 2006, an action that would drastically restrict the department’s home mortgage business.

The suggestion got a frigid reception in the Legislature, whose members are eager to avoid angering military veterans.

In a second report, issued last May, the state auditor warned that the long-term viability of the loan program is threatened by restrictions on funding, the diminishing number of eligible veterans and bureaucratic inefficiencies.

In one case, the auditors said that as much as $1.3 million in Cal-Vet program funds were paid out in a single year to “administrative staff who do not provide service to the program or for staff whose service to the program has not been documented.”

The department disagreed with some of these conclusions. For example, it denied that poor cost controls and inefficiency had eroded funds and delayed applications. “The program has been operating under budget for the past two years,” it said.

On other conclusions, it concurred. In a detailed response July 25, officials said they had taken auditors’ recommendations seriously and had developed a “comprehensive plan to implement corrective action on all identified areas.”

At the top of the list, said Bruce Thiesen, interim secretary of veterans affairs, immediate action was taken by the department’s parent agency, the California Veterans Board, to make Cal-Vet loans more attractive. This included giving loan managers new flexibility to adjust rates swiftly to reflect market changes.

Thiesen said the agency was testing a plan that would ensure that only costs properly related to Cal-Vet loans will be charged to the program.

To get the department’s bogged-down electronic information system on track, the auditors recommended hiring an outside consultant to work with top-level agency managers.

Thiesen agreed to do so. He said that department managers had already been assigned to the project and that an outside consultant would be hired.