Obituary: State Board of Equalization 1879 – 2017

Comedian Joan Rivers used to lament that she liked Las Vegas more when crime was organized.

Her eye was original. Twenty years ago, when everyone was talking about how wonderful it was that Vegas had been cleaned up and the mob had been thrown out, Joan said no, no, no, they are ruining the mystique. First of all, she said, those mobsters knew how to care for a lady, those guys with bent noses were respectful and gentlemen, except when they were killing you. Second, she said, organized crime is better than disorganized crime, which will replace it.

—Peggy Noonan

We here in California are in the transition from disorganized crime to organized; also known as one party rule. The consolidation of power has been breathtakingly broad in its scope and rapidity, and it’s just getting started. Last month we had the bogus transportation tax that was whisked thru the entire legislative process in seven days—yeah all committees, approval by both legislative houses, and the signature of the governor.

This month, the governor and his fellow travelers are putting on another display of raw power politics. Their latest target is the State Board of Equalization (BOE). Over the last several months, a carefully crafted plan has been systematically and flawlessly executed to do to BOE in six months what Charles Munger Jr. took a decade to do to the California Republican Party—abolish it in all but name. BOE will exist only as a vestigial organ of the State Constitution that serves no purpose.

While this could very well be one of the longest blog posts that I have ever written, I think you will be just as amazed as I was when I started digging into this campaign. Part of the length of this post is to preserve in the public domain quotations that tend to end-up behind paid firewalls of various media outlets and also to insure that I am not accused of taking things out of context.

My introduction to this subject was a peculiar post from former CRA bigshot, Steve Frank. Steve has a very abrasive way of writing and often exaggerates but given his recent humiliation in having to retract a story about Charles Munger Jr last month, I figured that he must be forced to vet his material better; at least for now.

Steve and I both know folks that work at the Board of Equalization so I figured that he must have something good. On the face of it, the claim in his post was outrageous; however, it was easy enough to verify it. The other curious thing was the dates. This article was posted on June 19th from a press release by Diane Harkey, Chairwoman of BOE, dated June 13th about a Constitutional budget deadline on June 15th.

Frank writes:

The Board of Equalization is dead.  Thanks to the Democrats, bureaucrats, instead of elected officials will decide tax cases.  In a comparatively short time—a whole government agency, elected by the people exists, now, in name only.

Death of California Board of Equalization: SB 86 and AB 102

OK, so why did Frank take so long to get this posted? He is a prolific blogger and often posts five times a day. (I think the short answer is that Harkey got no traction with the mainstream media in trying to shed some light on the governor’s actions.) I cannot find her press release on the BOE website or her linked page as Chairwoman. Also, a quick Internet search turns up nothing on this. Steve, by default, actually scooped everybody else. As I will illustrate, it’s a pyric victory because the fix was in.

Some background about BOE would be helpful to understand what is about to happen.

Established in 1879 by a constitutional amendment, the BOE was initially charged with responsibility for ensuring that county property tax assessment practices were equal and uniform throughout the state. Currently the tax programs administered by the BOE are concentrated in four general areas: sales and use taxes, property taxes, special taxes and the tax appellate program.
Link: BOE History

As currently configured, BOE has five members. Four members are elected every four years with each representing a particular area of the state and the fifth member is the State Controller.


Link: BOE map

Currently, George Runner (1) and Diane Harkey (4) are Republicans on the Board and Fiona Ma (2) and Jerome Horton (3) are the two Democrats. Ma and Harkey represent San Francisco and Los Angeles respectively. Please understand that these districts are drawn-up by population, (this issue will come up later in my discussion). The swing vote is interesting because the State Controller, Board member number 5, is a former member of BOE, Betty Yee. She formerly represented San Francisco.

Often the members of the BOE are legislators that were termed out under the legislative term limits laws. Harkey, Horton, Ma, and Runner were all in the legislature before being elected to BOE. Yee seems to have cut her political teeth in the Executive Branch.

Interestingly, no media coverage places any blame for the actions of the Legislature or Governor in this controversy on either Harkey or Runner. What has transpired is largely a Democrat operation to deal once and for all with BOE.

BOE has long been a thorn in the side of California’s elected officials. They can create precedent and have the right to modify regulatory actions enacted as a result of changes to law touching on the tax code. Arguably their most important function is as an appellate body when taxpayers want to appeal actions of the State. These appeals are not just limited to the actions of BOE but appeals of most taxing authorities in the State are routed thru BOE. BOE has been a buffer and interested third party in tax disputes. On their website you can easily find appeals of Fire Fees, Franchise Tax Board, Sales and Use Tax, and property tax matters.

The next thing to keep in mind as you read thru the material that I’m about to present is that many actions taken by BOE members with regards to civil service versus political appointees are identical to those of staff in the legislature. Legislative staffers often draw simultaneous paychecks for their civil service job at the legislature—their “day job” if you will—and also income from political consulting work for their member or other candidates. The transition from one to the other might involve carrying two cell phones or alternating schedules to accommodate the political cycle. Things during “election season” frequently operate in the gray areas of the campaign finance laws. Since the legislature writes and funds enforcement of campaign finance laws they tend to get a pass on enforcement as long as they don’t get too far out of bounds.

In short, BOE members learned how to navigate the legal minefield of civil service versus political appointee issues by their time at the legislature. My purpose is not to debate the merits of the current system, just to acknowledge how it works and to warn reads that they may encounter some hypocrisy as the story unfolds.

For most people, the current dust-up first appeared in newspapers like the Sacramento Bee in March of this year. The article below is coverage of a Department of Finance Audit.

March 24, 2017

Audit: California tax collectors on ‘parking lot duty’ for promotional events as politicos push boundaries

The audit takes particular aim at board member Jerome Horton, finding that he has reassigned public employees to work for him, arranged events that strayed from the agency’s mission and opened a call center in his district without securing the consent of his fellow elected leaders. Horton has defended his outreach events as a way to reach large numbers of taxpayers. His staff did not respond to requests for comment on Thursday.

Later on the article states:

It’s the first of several audits on the Board of Equalization that are expected to be released in coming weeks. The Legislature requested the investigation last year following another audit by State Controller Betty Yee in November 2015 that showed the agency had misallocated $47.8 million in sales tax revenue.

Further on

In one instance, the Finance Department found that 113 Board of Equalization employees spent a workday last November helping with parking and registering guests at a “connecting women to power” conference in Escondido sponsored by Board of Equalization member Diane Harkey.

Horton did what?

Unlike other elected members, Horton offers a rotational program that allows civil servants to spend a year working in his office before returning to their normal assignments.

His use of BOE resources has come under scrutiny over the years. Last year, The Bee revealed that Horton decorated his Sacramento office with $118,000 worth of designer furniture. The story prompted the agency in April to revise its procurement policies in a manner that improved transparency on smaller contracts.

Horton’s “connecting women to power events” have gained press attention intermittently since 2010, with reports in Bloomberg and the Los Angeles Times noting the connection between his Board of Equalization events and a nonprofit foundation that his wife created. Last year, Horton solicited $81,500 in donations to the nonprofit, California Educational Solutions, to support the business conference and a project he promotes that helps lower-income families get help filing income taxes.

Please note that Betty Yee moved from BOE to SCO (State Controller’s Office) in 2015 and one of her first acts was to audit BOE. Her audit found an error rate of 0.07967 percent for an agency that handles 60 billion dollars. Folks, that’s statistically zero. This and the fact that BOE employees move back and forth from political to civil service jobs in exactly the same way as the legislative staffers is the basis for all that follows.

Three days later, BOE member Fiona Ma chimed in

Link: Ma Letter #1

Dear Governor Brown:

I am writing to ask that you immediately appoint a Public Trustee to manage the day-to-day affairs of the California Board of Equalization. This extraordinary step is necessary and appropriate to restore public trust and to address the various serious issues outlined by the recent Department of Finance audit.

At this point, you have Yee and Ma both tag teaming to paint a bullseye on BOE as the focus of scandal while throwing their fellow Democrat Horton under the bus.

About two weeks later, Governor Brown jumps on the bandwagon and calls for an investigation.

April 13, 2017

Gov. Brown calls for an investigation of alleged mismanagement at California’s tax board

Gov. Jerry Brown on Thursday asked state prosecutors to investigate allegations that employees of the state Board of Equalization misused state resources.

He also suspended the board’s ability to approve new contracts, hires and promotions, requiring those actions to be approved by other agencies including the Department of General Services.

In a letter to board members, Brown also said he would ask legislative leaders to come up with new laws to address “serious problems” with the agency that were identified in a recent state Department of Finance audit. The audit uncovered mismanagement in the agency, which is responsible for collecting $60 billion in taxes annually.

Once Governor Brown chimes in, BOE is not just a local or state story; it is elevated to a national story.

April 14, 2017

California’s Tax Collection Agency Engulfed in Scandal

Five weeks later, Ma is back and proclaiming that things are even more dire than she thought back in March.

May 23, 2017
Link: Ma Letter #2

In response to my letter to the Governor on March 27, 2017 (see attached), I am encouraged by the Governor’s actions that instituted additional controls of the BOE operations by suspending BOE’s delegated authority for making decisions on personnel, contracting, and technology matters.

However, more still needs to be done. I am writing to strongly urge the Legislature to immediately direct the State Auditor to investigate the day-to-day affairs of the BOE, and issue a report to the Legislature and Governor on or before February 1, 2018. The report should include recommendations to the Legislature and Governor on administrative and legislative remedies to immediately address the findings in the various audits.

Two days later, this editorial was published

May 25, 2017
California Board of Equalization, classic case of going astray

The board’s refusal to embrace a single governance policy this week makes no sense. Meanwhile, board member Fiona Ma wants another state audit. What a mess. If the Board of Equalization won’t reform itself, Gov. Jerry Brown and the state Legislature should force needed changes upon it.

Three weeks later, Steve Frank is announcing that BOE is no more because of SB 86 and AB 102.

What happened?

In a nutshell, we just got scammed.  This whole progression was a carefully crafted campaign to discredit and then diminish the State Board of Equalization. Yee and Ma were working hand-in-hand with their party leadership to destroy BOE and replace it with a new agency controlled by handpicked people loyal to the governor. This kind of tactic and its scale were once common in the Soviet Union but are unfamiliar to most in this country.

My primary piece of evidence is the fact that the legislation to abolish BOE and replace it with handpicked bureaucrats appointed by the Governor was introduced in both house of the legislature in January of this year. Yep, over two months before the media campaign against BOE was launched.

Below is a summary of the legislation as it appeared earlier this week.

SB 86 introduced January 11, 2017

This bill would establish, in the Government Operations Agency, the California Department of Tax and Fee Administration and would place the department under the control of a director appointed by the Governor and subject to confirmation by the Senate. The bill would also authorize the Governor to appoint a chief deputy director and a chief counsel.

This bill would transfer to the California Department of Tax and Fee Administration the various duties, powers, and responsibilities of the State Board of Equalization relating to the administration of various taxes and fees except for those duties, powers, and responsibilities imposed or conferred upon the board by the California Constitution, as specified, and the duty to adjust the motor vehicle fuel tax rate for the 2018–19 fiscal year. The bill would, for these purposes, also provide for the transfer to the department of the board’s employees serving in civil service, the rights and property of the board, and the board’s funding, as provided.

This bill would authorize the California Department of Tax and Fee Administration to adopt regulations, including emergency regulations, necessary or appropriate to carry out these provisions. The bill would authorize the department to conduct certain inspections and examinations related to the administration of the taxes and fees under its jurisdiction. The bill would prohibit the director, the chief deputy director, and the chief counsel from divulging information concerning the business affairs of companies reporting to the department and would make it a crime to violate this prohibition. By creating a new crime, the bill would impose a state-mandated local program.

This bill would rename the secretary of the State Board of Equalization as the executive director and would specify that the board retains the authority to appoint the executive director and prescribe and enforce his or her duties. The bill would require each member of the board elected by the voters of an equalization district to have one office in Sacramento and one district office. The bill also would require each member of the board elected by the voters of an equalization district to have 2 staff persons who are exempt from civil service and other civil service staff persons, as specified. The bill would require board member procurements to be processed through the Department of General Services. The bill would repeal the authority of the board to request that the Governor convert one civil service position of the board into an exempt position, to obtain copies of licensee photographs from the Department of Motor Vehicles, and to conduct district investigations. The bill also would restrict ex parte communications in relation to a board adjudicatory proceeding.

Link: SB 86

AB 102 is virtually the same wording and was introduced January 10, 2017
Link: AB 102

The Legislature is famous for “gut and amend” bills in the eleventh hour of their closing session but this action is a magnitude of difference that is of astounding proportions. Gut and amend an entire agency and the biggest revenue generating one in the state. Wow!

The Board of Equalization will continue to exist in name only because to abolish it would require a constitutional amendment and a vote of the people. This would allow the actions of the Governor and Legislature to come under scrutiny and be subject to debate. In a one party state, this is a waste of time and resources and who knows? Having the BOE might be a good political tool to wield at some future date. If it can be unmade then it can just as easily be made into something else. (Think Mary Shelly does politics here.)

Each BOE representative will be allowed one office in Sacramento and one office in their district.

Oh, the effective date for creating the new agency and transferring all assets and responsibilities is July 1, 2017.

Today is June 23 and the bill has yet to be signed by the Governor. If the fix was not in, how would you expect a new agency to be up and running in less than a week?

Other thoughts

BOE would have had the lion’s share of the work collecting the new transportation tax enacted last month. Now the Governor can direct the money as he sees fit. Don’t be surprised if some finds its way to the bullet train to nowhere.

Lastly, BOE was the last Republican bastion in California. It was a safe harbor for people like George Runner to speak about fiscal conservatism and common sense tax policy. This bully pulpit is no more. Gone also is the safe haven for current CRA President Tom Hudson and former Sacramento County Republican Chair Sue Blake. Both Hudson and Blake are staff attorneys at BOE. The 2018 election cycle will be a much different environment for both.