(Ed’s Note: The following story was updated with Gov. Brown’s signature Tuesday on legislation dismantling the Board of Equalization.)
Ask the average Californian what the state Board of Equalization (BOE) does and you’re likely to get a blank look.
That may not matter anymore. Much of what the 138-year-old agency does — which includes collecting some $60 billion in taxes — may be taken away from it amid a spate of recent reports about potential corruption and possible criminality. The board has a long and checkered past, and is often referred to in the Capitol, accurately, as “powerful but obscure.”
It may soon just become “obscure.”
With Brown’s signature on the legislation, two new departments would take over much of the BOE’s responsibilities.
The board administers more than 30 tax and fee programs and hears appeals from “various business tax assessments, Franchise Tax Board actions and public utility assessments,” according to its official website. The BOE also issues rules and regulations regarding property taxes, establishes the tax values of railroads and some public utilities, and oversees the assessment practices of California’s 58 county assessors.
But it looks as if almost all of that is about to change dramatically.
The Legislature has passed a bill (AB 102, the “Taxpayer Transparency and Fairness Act of 2017”) to strip power from the agency, and Gov. Jerry Brown signed it Tuesday.
He has not said so publicly, but in an April 13 letter the governor wrote board members that his Finance Department “uncovered issues of inappropriate interference by the board that undermines its ability to carry out its core mission … ”
“Other serious personnel allegations involving the board were uncovered during Finance’s review that warrant immediate investigation,” Brown added.
With Brown’s signature on the legislation, two new departments will take over much of the BOE’s responsibilities:
–A Department of Tax and Fee Administration, will handle the tax and fee programs now under the BOE, such as tobacco taxes and fire prevention fees. It’s scheduled to begin operations July 1. Its director would be appointed by the governor.
–An Office of Tax Appeals will be created by Jan. 1. It is intended to be a tax court staffed by administrative law judges.
Defenders of the board see the changes as a Democrat-engineered power play aimed at burying the board’s crucial functions in the bowels of the bureaucracy, while removing public accountability over the agency’s decisions.
“Contrary to its misleading title, this rushed legislation is neither fair to taxpayers, nor transparent to the public,” board member George Runner, a Republican, said in a written statement. “By gutting the power of elected representatives, this bill leaves taxpayers defenseless against a revenue-hungry and powerful state bureaucracy that’s unaccountable to the public.”
The BOE currently has 4,800 employees. Some 4,400 of them will be transferred to the new organizations.
But the board retains a few responsibilities given to it by the state Constitution that are not changeable by legislation.
Board seats were seen as sinecures: George Reilly, a Democrat, served 44 years on the board, from 1939 to 1983, while Richard Collins, a Republican, served from 1907 to 1947.
In addition to a de facto disbanding of much of the agency’s powers and duties, there may also be civil and criminal charges.
Acting on Brown’s request, investigators from the state attorney general’s office are talking with BOE staff members and executives, and the probe may extend to the BOE’s elected board members.
The BOE has been around since 1879, and has been widely regarded as a backwater agency frequently serving as a home for departed legislators. (Four of the five current BOE board members are former legislators.)
Before the era of term limits, board seats were seen as sinecures: George Reilly, a Democrat, was elected to the board the same year Jerry Brown was born and served 44 years, from 1939 to 1983. Richard Collins, a Republican, served from 1907 to 1947, while Democrat Richard Nevins served from 1959 to 1987.
The agency has suffered from scandals for decades, and most recently has been subjected to scathing commentary from the Finance Department, which writes the governor’s budgets, and the Legislature’s nonpartisan fiscal adviser and individual officials.
“Several individuals stated that board members, acting individually, intervene in the daily operations within their respective districts.” — Finance Department report.
In a report issued last March, the Finance Department, with hints of outrage seeping through its typically restrained language, issued an exhaustive report on the BOE’s operations, declaring:
“During our evaluation, BOE had difficulty providing complete and accurate documentation in response to our evaluation inquiries and in some instances various levels of management were not aware of and could not speak to certain district activities for which they held oversight responsibilities …”
“BOE provided 11 different versions of its proposed sales and use tax allocation adjustment and with each version, Finance continued to find errors and omissions. Since the proposed adjustment continues to change and BOE has not prepared a comprehensive explanation of its assumptions and methodologies, further review of the proposed allocation adjustment is imperative …
“Several individuals stated that board members, acting individually, intervene in the daily operations within their respective districts. These individuals also reported a fear of retaliation if staff did not respond or follow the directions of the individual board members. Examples include being informed of potential office relocations or told “one more vote and you’re gone” meaning their job appointment could be dismissed by a vote of three board members.”
Board Chair Jerome Horton “has reassigned civil servants to work for him, organized events that strayed from the tax-collecting agency’s core mission and had a behind-the-scenes role in creating a customer service call center in his district. It was based on interviews with more than 70 Board of Equalization employees and visits to site offices around the state,” the Sacramento Bee reported on March 29, citing the Finance Department report.
In 1939, William Bonelli, a former legislator who served on the board, was one of seven people indicted by a Los Angeles grand jury for soliciting bribes to issue liquor licenses. He fled to Mexico.
Horton, in a 3,200-word response to the audit, said the report was “based on unsubstantiated hearsay … the omission of conflicting testimonies (and) inclusion of documents know to be false… However, the problem is once the draft report was issued,the DOF refused to accept the documented evidence that refutes these allegations.”
BOE scandals are sometimes colorful.
In 1939, William Bonelli, a former legislator who served on the board, was one of seven people indicted by a Los Angeles grand jury for soliciting bribes to issue liquor licenses. He fled to Mexico to avoid arrest on a corruption indictment and died there in 1970. He was 75.
In 1990, former state Sen. Paul Carpenter, a BOE board member, was convicted in federal court on four counts of racketeering, extortion and conspiracy after he was accused of using his legislative office to extract campaign contributions. Carpenter fled to Costa Rica shortly before he was to be sentenced, saying he was seeking treatment for prostate cancer. In Costa Rica, Carpenter and a friend won a national bridge tournament. Federal agents tracked him down and Carpenter served four years in prison. He died in 2002 at age 73, of cancer.
George Runner has mentioned the possibility of a ballot measure to restore the board’s powers on grounds that AB 102 is unconstitutional.
In 1991, William Bennett, a consumer crusader and longtime board member who revealed the ethical lapses of other officials, was himself charged with 23 counts of filing false travel claims. He pleaded no contest to a single claim, was fined $1,000, repaid the state $5,500 and agreed to perform 200 hours of community service. Bennett died in February of 2010 at 91.
Actor Rob Lowe alleged in 2015 that Jerome Horton, an elected member of the Board, used a slur about Jewish people during a private meeting concerning a complicated tax dispute over the sale of Lowe’s Montecito estate.
Runner, meanwhile, has mentioned the possibility of a ballot measure to restore the board’s powers on grounds that AB 102 violates the state Constitution. Sen. John Moorlach, a Republican from Costa Mesa, agreed, saying the bill violates the state Constitution and policies restricting how the Legislature can make major structural changes to state departments.
Sen. Jeff Stone of Temecula and other Republicans have said the bill takes away an important process for small businesses that want to appeal tax judgments. Stone accused backers of the bill of engaging in an “abuse” of a process.
Horton, the second-longest-serving member of the BOE board, in part blamed the Finance Department and the board’s executive director for the agency’s problems.
“The board exists to serve the public, and the report highlights the extent to which it has fallen short.” Jerry Brown.
The executive director “did not know the approval processes and his failure to timely provide the documents and his mismanagement of the organizational data has resulted in the Board issuing conflicting, incomplete, inaccurate data to the Legislature,” Horton said.
Brown earlier this year put a hiring ban in place at the agency and a suspension of new contracts until the issues are sorted out.
But he said the Finance Department report raised serious questions.
“The board exists to serve the public, and the report highlights the extent to which it has fallen short,” Brown wrote.