Schwarzenegger wants audit of public-school accounting

Something just doesn’t add up.

The state’s General Fund is going to be more than $300 million lower this year because of a problem with the way property taxes are reported. Officials from the Department of Finance say the hole comes from a discrepancy in the tax numbers reported by counties and the amount public schools say they’ve received. Officials are calling for a team of auditors to find the missing money.

Based on percentages, state officials say, schools should have received an extra $300 million from counties in the current budget year. Finance Director Mike Genest says the state is on the hook to make up the shortfall this year, but has requested that lawmakers set aside $2 million in next year’s budget to conduct a comprehensive audit of where the money went.

Genest says there have been gaps in the numbers reported by counties and schools before, “but never so big” as the gap in 2006-07. For the current budget year, the gap is about 3 percent, said Genest. That translates to about $300 million in missing money.

“There’s a disconnection between data sources,” Genest said in an interview Wednesday. “One data source we have is from the Board of Equalization. They give us a property-tax estimate that says we’re growing at 10 percent a year. Then there’s a survey of county assessors, and that number is right in there. Another source is community colleges: They report the property tax they receive from counties, and they’re growing at the same exact percentage.”

The one oddball, says Genest, is the number coming from K-12 schools.

“For most of history, the amount of property tax reported from the schools also matched up. Schools were right on the money. All of a sudden, in budget year ’05-06 especially, they’re reporting only 6 to 7 percent growth in their property tax dollars. That is the essence of the problem: Three of four data sources agreed with each other. All of a sudden, schools run off and have a much lower rate of growth.”

Administration sources say preliminary calls have been made to some of the state’s largest school districts, including Los Angeles and Sacramento. In those instances, they say, there did not seem to be a problem with the property-tax numbers. Los Angeles, on its own, accounts for about one-third of the entire K-12 system. So if Los Angeles’ books are in order, that means other schools in other parts of the state are that much further out of whack.

Finance officials made clear they do not want to suggest schools are deliberately misreporting their property tax dollars–they simply want to get to the heart of the problem.

Genest said there have been a host of changes in the way the state and local officials collect property taxes in recent years–everything from the lowering of the vehicle-license fee to the so-called “triple-flip” used to balance the state books in 2004, to a recent ballot initiative which built a wall around local property tax revenues.

“One explanation is that the schools are not reporting all of their property tax. If that’s the case, we’ll save a lot of general fund money,” said Genest. “The other thing can be that there was a misunderstanding of how all of these formula changes should be implemented.”

Gov. Schwarzenegger has set aside $2 million in his May budget revision to look into the matter. The administration wants the state Fiscal Crisis and Management Assistance Team to conduct a comprehensive audit to find out where the missing money went.

“There is some art to trying to project property-tax revenues,” says FCMAT’s Anthony Bridges. “But the discrepancy this year is large enough that the administration has asked us to look into it.”

Money for the audit request must be approved by the Legislature before the review can begin. The state controller’s office, which has an auditing team of its own, may also look into the matter.

While Genest expressed confidence that the audit would eventually reveal the missing $300 million, Legislative Analyst Elizabeth Hill said the state may want to prepare for the worst.

“If the same issue persists [into the 2007-08 budget year], that would be another $660 million hit that we have not account for in our numbers,” said Hill.