New Administration Narrows the Scope of Audit

Times Staff Writers

On the campaign trail, Arnold Schwarzenegger received thunderous applause from audiences around the state for what he said would be his first action if elected: an exhaustive audit of the state's accounts, performed by an independent outside firm that would find billions in waste. The results would be published, he promised so that "all the people can see."

Now, Schwarzenegger's financial aides say that while they have done an assessment of the exact size of the state's budget deficit, there are currently no plans for an audit with the scope, thoroughness, independence and public rollout the governor promised voters.

Donna Arduin, who was named to conduct the audit and subsequently became Schwarzenegger's finance director, says she is only now beginning to search for large amounts of waste in the state budget. Arduin presented the preliminary findings of her audit Saturday.

The pledge of an audit first came at Schwarzenegger's initial meeting with his economic advisors on Aug. 20.

"What I have to do when I go into office is to have an audit, a 60-day audit with an independent company ... free of political influence, to examine the books and find out how bad the situation really is," Schwarzenegger said, adding that it should be a business-style audit. "One thing I've learned in business is that you can't make sound decisions based on faulty information."

Eleven weeks later, the day after the election, Schwarzenegger, in announcing that Arduin would conduct the audit said: "As I said in my campaign, it is an independent group of experts I want to send in there to audit, to look at the books line by line."

"We can work together with them, but I want to have an outside audit so I know exactly where the waste is," he said. "I want to see the waste, I want to open up the books to the people of California so they can see where the waste is."

What the audit so far has consisted of is work by staff members of the Legislature and the Department of Finance, a review of prior budget reports by different state agencies, a five-hour meeting last Thursday and five charts with dozens of spreadsheets attached that were provided to reporters.

"I would not view this as an audit," said former state Controller Kathleen Connell, one of the three-member team named by Schwarzenegger to review the audit findings. "I view this as an important assessment of the debt the new administration inherits" that will help win the confidence of Wall Street firms that rate the state's bonds, Connell said in a telephone interview Wednesday.

In the interview, Connell suggested that Schwarzenegger undertake a thorough "performance audit" that would examine the whole of the state's books and could possibly lead to proposals for a thorough restructuring of state government. "That would be more in line with what we heard in the campaign," Connell said.

Stephen Moore, president of the Club for Growth, and another member of the supervising team, said the "the audit will essentially be a two-part" process. Determining "what the real numbers are, what we can do in education and corrections to root out waste, fraud and abuse -- we haven't done that yet. That will be a big task," he said.

H.D. Palmer, a spokesman for the Department of Finance, said the auditing done to date reflects only "the first phase of the work that has done, to define the size and scope of the problem. How big is the ditch?"

In the second phase, Arduin, while reviewing the new budget proposal in January, will identify waste, Palmer said. Although Arduin now works for the governor, having her review the budget the governor submits will still constitute an independent audit, Palmer said, because Arduin was not a government employee when she started her work and, because she was hired from Florida, is not a Sacramento insider. Moreover, the three-person independent review team will continue to guarantee an outside look at the findings, he said. The limited nature of the audit so far already has been widely noted in Sacramento.

"Although originally touted as an audit of all state finances, the report basically repackaged current information and told us what we already know -- the state's financial condition stinks," Brett McFadden, the lobbyist for the Assn. of California School Administrators, wrote this week in a memo distributed to members of the group.

"They haven't come up with anything," said Bob Stern of the Center for Government Studies. "They certainly haven't come up with billions of waste."

Interviews with audit participants, a review of documents used in the effort and Arduin's testimony Wednesday before the Assembly Budget Committee suggest a number of reasons why Arduin's effort so far has been narrower than Schwarzenegger's campaign rhetoric.

Schwarzenegger had only a 39-day transition period because he was elected in a recall. The available time was limited even more because Arduin had to turn part of her attention to preparing for her new job as finance director. Then she had to return to Florida earlier this month because of a death in her family.

Moreover, there have been numerous accountings of California budget's problems. It is solutions that are in short supply. Whatever the precise reasons, the absence of a comprehensive audit identifying billions in waste already is interfering with some of the new governor's other pledges.

As a candidate, Schwarzenegger said he could balance the budget by eliminating waste he found in the audit. As governor, he has announced he would make budget cuts, but so far has not identified any specifics.

As a candidate, he said he would never spend more money than he took in. "I teach my kids: Don't spend more than you have," he said, in another applause line from his stump speech. "We have to teach that to Sacramento."

But as governor, among his first major actions was to call a special session to put a "deficit recovery bond" of up to $15 billion before voters. That is money the state will borrow to cover the fact that it spends more than it takes in.

The audit has been controversial since Schwarzenegger first discussed it. During the campaign, his political opponents claimed that the audit was a dodge, a way to delay detailing specific budget cuts that might offend political constituencies. In response, campaign spokesman Sean Walsh said the audit would be "forensic" and "real" -- and aides routinely came to cite it as an example of how Schwarzenegger would be a "governor of the people."

Schwarzenegger himself made the audit a key talking point during a series of appearances he made on conservative talk radio shows to emphasize his fiscal bona fides.

"We also know there's so much trickery in this year's budget and next year's," he told Sacramento radio host Eric Hogue on Aug. 26 in a typical exchange.

"This is more special tricks and special effects than 'Terminator 3,' " he said. "I'll send accounting firms to really look at that, and do auditing for 60 days, then we can find out exactly where we can cut."

Schwarzenegger made the same point in a television ad -- "Now here is my plan: audit everything, open the books and then we end the crazy deficit spending" -- and in a Sept. 4 interview with The Times. "There are billions of dollars to be played around with when you open those books," he said then.

And in the closing days of the campaign, he often steered media interviews to the topic of the audit. He told ABC's Peter Jennings on the campaign's final weekend that "I have run many businesses. And I know when to take over business, to look in there and open up the books, and go through and audit it line by line. Before I buy it, I only can guess that there is a certain amount of waste.

"But when I get in there, then I really can go line by line through the whole thing and find the waste. And then I can make the changes."

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