The California Bureau of State Audits set off a scandal on June 1st by disclosing that the State Controller’s Office made accounting misstatements amounting to $31.65 billion.  The timing of the announcement may be devastating to the Democrats who expected to use their super-majority to pass billions of dollars in increased spending, but may now find the net effects of the accounting restatements are a $7 billion General Fund deficit.   

California Governor Jerry Brown’s and State Controller John Chiang’s staff refused to go on camera and answer questions as the news broke. To give a perspective on the size of the accounting misstatements discovered by the Bureau of State Audits, the $31.65 billion in errors equals about a third of California’s $96.3 billion General Fund Budget for 2013-14. The improper accounting treatments included:

• $7.7 billion – Understated federal trust fund revenues and expenditures;
• $653 million – Overstated general fund assets and revenues
• $8 billion – Overstated California State University’s bond debt
• $9.1 billion – Understating a public building construction fund; and
• $6.2 billion – Overstatement of deferred tax-revenue.

As the former Treasurer of Orange County, California it is my preliminary judgment that under state law the negative $7.847 billion impact from overstating general fund assets and revenues and overstating deferred tax revenues may create an “on-budget” deficit to the state’s $96.3 billion “General Fund Budget.”

It is also my informed judgment that the positive $26.8 billion from understating federal trust funds, overstating of the State University bond debt and understating of the public building construction fund reserve are good news for the state. These positives are “off-budget” issues that are considered outside the state’s General Fund Budget. These monies cannot be transferred into the General Fund to cover any new deficit.   

Sacramento State University accounting Professor John Corless told CBS News that he agrees with auditors that those glaring mistakes should have been caught, “Someone’s not using their equipment right, and they’re not using their heads.”

Republican consultant Mitch Zak called for an investigation saying “It’s offensive as a taxpayer. There’s no consideration it appears if they misstate or mismanage my tax dollars that there’s any retribution.”

Neither State Controller Chiang nor his “John Chiang for Treasurer 2014” campaign spokesman would respond to reporters’ questions. None of Chiang’s opponents for State Treasurer got back to CBS13 with comments. 

The State Controller’s office blamed high staff turnover, lack of qualified staff, budget cuts, and late and incorrect data from numerous agencies for the errors.  In a statement issued to CBS13 in Sacramento, the office said , “All issues were corrected and identified before the final report was published, and not one cent of taxpayer dollars was affected.” 

The office’s statement may be technically true, but the California Controller's audit authority is independent of both the Governor and the Legislature. The California State Constitution requires an annual balanced budget as documented by the State Controller. Consequently, the governor’s budget and all the legislature’s spending actions must comply with the monthly financial statements and annual audits issued by the Controller’s office. The size of the newly discovered accounting misstatements will have a major impact on the Democrats’ spending.

Controller Chiang must not have known the Bureau of State Audit’s report would be so devastating, because on May 20th he issued a press release regarding his audits: 

“Audits protect Californians by highlighting problems and restoring accountability. The audits have served as catalysts for greater transparency and improved management of taxpayer dollars, allowing us to transform an accounting office into an accountability office.”  

The author welcomes feedback and will respond to comments by readers