Eureka

Beyond California’s Pandemic Response, Questions Of Government Mismanagement

Friday, March 12, 2021
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Almost two million Californians have signed petitions calling for the recall of Governor Gavin Newsom. The reasons for this are varied, ranging from his uneven response to the COVID-19 pandemic to staggering fraud in the state’s unemployment insurance system under his watch—and, of course, the flouting of his own public health rules when he attended a dinner with lobbyists at the French Laundry, a high-priced Napa Valley restaurant.  

While some of these failings were Newsom’s own, others stem from a failure of governance. For the last fifteen years, California has effectively been a one-party state. Golden State voters have sent Democrats exclusively to serve in statewide elected positions and, as a result, none of them has had the political interest or personal courage to hold Gavin Newsom—or former governor Jerry Brown, for eight years before him—responsible. California has lacked any real checks and balances or an opposing force to hold governors and others in Sacramento accountable for their decisions. 

But that’s not for a lack of people who could be playing this role. Indeed, California’s other statewide constitutional officials are independently elected and run entire agencies that are answerable only to the people of the Golden State. Instead, California’s statewide elected Democrats have usually been busier covering for one another—or figuring out how to position themselves for their next elected office—than bringing accountability and transparency to state government. 

Voters don’t often pay attention to who these other statewide elected officials are and what they’re doing, but they should. These public officials can and should play a crucial role in ensuring that the governor and others in Sacramento are accountable to voters—and blowing the whistle when things aren’t as they should be. 

A prime example of a statewide elected official who has the perfect platform to do this is the California state controller. As the chief fiscal officer of a state that translates as the world’s fifth-largest economy, the controller is responsible primarily for the “accountability and disbursement of the state’s resources.” The state controller can also audit any government agency in California that spends state taxpayer money. As a board member of the largest public pension systems in America—the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS)—the state controller also has the ability to sound the alarm about the billions of dollars in unfunded liabilities between the two systems and make policy recommendations to improve their operation.   

The incumbent state controller, Betty Yee, will leave office next November after two terms. She’s kept a low profile, but her performance in office has been lackluster. To her credit, Yee did blow the whistle on former California secretary of state (and current US senator) Alex Padilla, who gave a $35 million no-bid contract to a Democratic political consulting firm with close ties to the Biden administration for “voter outreach”—funds that California’s state legislature had intended to be sent to counties to pay for costs associated with voting during the COVID-19 pandemic. But in too many other cases, Yee has not used the state controller’s office to promote accountability and transparency in the governor’s office, or among public entities across the state.  

Most noteworthy was the controller’s failure to identify the massive mismanagement and fraud at the center of the state’s unemployment insurance system. We now know a considerable amount about the significant responsibility that Newsom and Julie Su —his labor secretary, who has been nominated by President Joe Biden to the be the US deputy secretary of labor—bear for the scandal. But it wasn’t because of an investigation launched by the State Controller’s Office.  

Instead, it was because the Joint Legislative Audit Committee instructed the California state auditor—an unelected career official named Elaine Howle—to conduct an emergency audit of the Employment Development Department (EDD), the state government agency that oversees the unemployment insurance program. Howle subsequently wrote two reports that broke open the story of the mismanagement at the EDD. The auditor concluded that the EDD had issued approximately $10 billion in payments based on fraudulent claims during the COVID-19 pandemic, including about $810 million that went to incarcerated individuals. Howle further concluded that the EDD may have issued as much as $20 billion more in payments based on fraudulent claims—meaning that California taxpayers may have been bilked for over $30 billion because of incompetence at the EDD. 

Yee notes on her website that she has audit authority that “is directed at ensuring that taxpayer dollars spent at the State and local level are free of fraud, waste, and abuse.” Yet, she seemed to miss what was happening at the EDD. In fact, Yee boasts that since taking office, she has identified almost $6 billion in waste, abuse, and fiscal mismanagement. But this number pales in comparison to the five times as much that California taxpayers may have lost in the EDD scandal alone.  

The State Controller’s Office should be the ultimate platform for holding both Sacramento and local politicians accountable. Here are some recommendations for how it might do that. 

First, the controller should use her audit authority aggressively, particularly in examining state programs—many of which are overseen by the governor—that may be ripe for fraud and abuse. Medi-Cal, the state’s Medicaid program, is just one example. The number of Californians enrolled in the program has increased by about 50 percent since 2014, but the controller has only periodically reviewed its operations. In fact, the last report that Yee issued on how California’s Department of Health Care Services administers the program was in January 2018, and even that audit didn’t even uncover the $4 billion in improper spending that a separate report—written by State Auditor Howle—disclosed later that year. In short, the controller should be auditing state and local government entities more frequently, and more aggressively, than is currently the case. 

Second, the controller should lead the way in identifying relevant policies and practices that need to be reformed or ended. One example is the requirement that state pension funds honestly and transparently report their unfunded liabilities, or put another way, clearly tell taxpayers how much they will owe once these retirement benefits for current and former government employees come due. Today, for example, CalPERS estimates that it is about 70 percent funded but bases this on an assumption that it will be able to achieve a 7 percent yearly rate of return. (This, by the way, is an improvement from 2004, when CalPERS assumed an 8.25 percent yearly rate of return.) But that’s a benchmark it has met only half of the time over the last ten years and one where CalPERS has significantly underperformed over the last twenty. A realistic accounting of expected returns would increase CalPERS’s unfunded liabilities by tens of billions of dollars. California’s taxpayers deserve to hear the truth on this and other issues, and the controller can make sure they do. (The Hoover Institution has studied the need for pension reform as part of California’s long-term economic policy challenges.)

Finally, the controller can hold politicians accountable for keeping the promises they make and help Californians understand how they fail to do so. This is particularly important as we consider all of the challenges that California has faced during the COVID-19 pandemic—and the questions that voters deserve answers to: Why has the delivery of vaccines been so uneven in the state? Are school districts actually using the funding they’ve received from Sacramento and Washington to help get kids back into the classroom safely? And why did major political donors to Governor Newsom receive no-bid contracts or plum appointments as part of the state’s pandemic response? These are the sorts of questions that the controller is well positioned to answer on behalf of California’s taxpayers. 

While many California voters will focus on Governor Newsom’s performance in office as he faces a recall election in the coming months, they should also pay attention to how they can change the culture in Sacramento in the years to come. And that begins by recognizing that while Newsom himself is responsible for some of the political trouble he finds himself in, California’s one-party system of governance—one that fundamentally lacks accountability and transparency—is also to blame.

Lanhee J. Chen is the David and Diane Steffy Fellow in American Public Policy Studies at the Hoover Institution and director of Domestic Policy Studies and lecturer in the Public Policy program at Stanford University.