Thursday, December 15, 2016
[San Mateo County] After tax hike, delayed reports reveal full county coffers
Blog note: this article references a grand jury report on the subject.
A delay in reporting the full scope of San Mateo County’s flush coffers has critics concerned that the county is violating its own directive to be more forthcoming with finances, especially when tax increases are on the ballot.
San Mateo County released its state-mandated comprehensive annual financial report on Nov. 22, two weeks after the election, despite initially saying it would release the document in October. County representatives maintain the report’s release date is unconnected to an election during which voters were asked to approve a tax extension. And they note residents could individually request the information at any time.
From 2006 until 2011, the county released its annual financial reports after the November election. In July of 2012, the San Mateo County civil grand jury began researching officials’ claims of a structural budget deficit and responded with a critical 2013 report, accusing the county of misleading voters by failing to include all anticipated revenues in its budget.
In 2012, the county began releasing its financial reports before the election. But in 2015 and again this year, the county waited to report its full financial picture until after voters left the polls.
This year, voters approved a 20-year extension of the Measure A half-cent sales tax in a new ballot measure known as Measure K.
“I think it’s problematic and very suspicious,” said Tim Johnson, a retired attorney who served as foreman of the grand jury that released the critical report in 2013. “It’s problematic when the county does not provide the most current information before an election relating to taxes.”
Current and former county officials disagree.
“It has nothing to do with the timing of the grand jury report. I know everyone thinks that,” said retired County Controller Bob Adler, who oversaw the financial report’s release from 2012 to 2014. “There’s nothing political about it. The sooner you get it done, the better.”
‘Excess’ adds up
At the crux of the disagreement is a county revenue source called the excess educational revenue augmentation fund — known as excess ERAF — which can exceed $100 million a year, and whether the county is fully complying with its promise to be more forthcoming when reporting anticipated revenues.
In its 2013 report, the grand jury criticized county officials for a lack of financial transparency because it didn’t include all anticipated revenue in the county budget while simultaneously claiming a deficit. The grand jury faulted the county for excluding from its budget educational revenue augmentation funds. Those are local property taxes designated to meet certain state-mandated funding requirements for school districts. Once those requirements are met, the leftover money is returned to the local jurisdiction — in this case, San Mateo County.
Before the grand jury report’s release, the county had claimed it was mired in a budget deficit of tens of millions of dollars, an argument it used to get several tax increases passed in 2012. In reality, the grand jury report argued, the county had a budget surplus if it accounted for all of its excess ERAF funds in its annual budget. That was information that potentially could have dissuaded voters from approving the tax hikes, had they been aware of it.
San Mateo County’s financial state is unique. It receives more excess ERAF revenue than any other California county, according to the California State Controller’s office.
Five California counties received excess ERAF in the 2014-2015 financial year: San Mateo, Napa, Marin, Santa Clara, and Mono, according to the California State Controller’s Office. That is largely due to high property values. In previous years, Napa County received around $10 million a year in excess ERAF, although that amount has dropped and it doesn’t anticipate receiving any this year, according to Napa County Auditor-Controller Tracy Schulze. Marin County usually receives around $30 million a year, according to Director of Finance Roy Given, and Santa Clara received $34.7 million in 2015 and expects around the same amount this year. Mono County received around $164,000 last year, according to Assistant Director of Finance Stephanie Butters.
In contrast, San Mateo County received $109 million in excess ERAF in the 2015-2016 financial year, according to the comprehensive financial report released in November.
Outside of budget
San Mateo County also differs from Marin, Napa, Santa Clara, and Mono in how it budgets its excess ERAF funds. Given said Marin County usually budgets around 80 to 90 percent of those funds. Napa, because it expects its excess ERAF to dry up, puts all of it toward non-recurring needs like capital projects or unfunded liabilities, said Schulze. Santa Clara puts all of its excess ERAF toward its general fund, according to County Budget Director Greg Iturria. And Mono County budgeted $125,000 of its excess ERAF, Butters said.
In contrast, San Mateo County budgets 50 percent of its excess ERAF each year. The difference between the revenue it actually received and the revenue included in its budget this year was $54.5 million.
That practice might make for conservative financial planning, especially since excess ERAF funds are subject to legislative risks and can decrease by wide margins in any given year. And the county has received the highest credit ratings from Moody’s and Standard and Poor’s for the past two years, according to the comprehensive financial report.
But conservative budgeting appears to have come at the cost of financial transparency. That raised the ire of the 2013 grand jury, which criticized the county for failing to disclose its extra ERAF funds, while claiming to have a budget deficit.
The grand jury report recommended that the county “report in the budget as ‘resources,’ all revenues it anticipates receiving in a fiscal year, including, without limitation, excess ERAF.”
The county instead includes half of its anticipated excess ERAF in its budget, citing the “potential volatility and at-risk nature of excess ERAF.” Consequently, the comprehensive annual financial report remains the only document the county releases that includes all of its anticipated revenue in a financial year.
The county disagreed with some of the grand jury’s recommendations, and County Manager John Maltbie wrote in an opinion piece at the time that the grand jury’s report “demonstrates an abysmal lack of understanding of the principles and practices of budgeting and financial management.”
County agreed to report
The county agreed, however, to most of the grand jury’s recommendations, including that it be more forthcoming and inform “the public of the most current assessment of the county’s deficit or surplus condition after accounting for all anticipated revenues, including excess ERAF.”
Although grand jury proceedings are confidential, county officials were aware of the grand jury’s investigation prior to the report’s release, Johnson said. And in 2012, 2013, and 2014, the county released its comprehensive annual financial report — the only document to include the full sum of revenues — before the November election.
But starting last year, the controller’s office returned to issuing the report after the election had passed. In 2015, the financial report wasn’t released until Dec. 10. That election was for municipal, school and special districts. There were no countywide tax measures on the ballot.
This year, the CAFR was released two weeks after residents approved Measure K, a 20-year extension of Measure A, a countywide sales tax that voters had initially approved in 2012. It is the same tax measure the grand jury cited in criticizing the county for complaining of a “structural deficit” even as money poured in in the form of excess ERAF.
The county controller’s office, which releases the comprehensive annual financial report, says its release date is not connected to election dates. Rather, the delayed 2015 and 2016 release dates are blamed on increased financial reporting for pension liabilities. The office isn’t legally required to release its report until Dec. 31 — a deadline it meets every year.
County blames new rules
“We always shoot to get (the report) out as soon as possible, and get it out by the end of October,” said San Mateo County Controller Juan Raigoza, who has released the last two reports. “But we’re not going to release an incomplete report or a report that hasn’t been audited.”
Beginning in 2015, Raigoza said, the controller’s office was required to comply with a new set of pension reporting requirements, which delayed the release of the reports this year and last year. Previously, unfunded pension liabilities were listed in the report’s footnotes. Now, he said, the controller’s office is required to list them on the report’s balance sheet, along with more detail about the assumptions the county makes when calculating them.
“(The new reporting standards were) by far the biggest change in governmental financial reporting in the last 12 or so years,” Raigoza said. “That was one of the reasons why we weren’t able to get (last year’s report) out until December.”
The new requirements were announced in June of 2012, three and a half years before the 2015 report was released.
Raigoza also said he was not familiar with the grand jury’s report from 2013, but acknowledged that the comprehensive annual financial report is the only document that contains the full sum of the county’s excess ERAF. He argued the county was not being opaque by releasing the comprehensive report after the election. He noted anyone could request the full amount of the county’s excess ERAF before the report was released.
“If you want, at any point in time, we can provide any information you need,” he said.
He also said that the full ERAF sum could be easily calculated using numbers given in the county’s budget. “If you want to know how much money was not included in this year’s budget, it’s a straightforward calculation,” he said. “If the board only budgets $50 million (of excess ERAF), just double it,” to determine the full amount, he said.
A spokeswoman for the county manager’s office offered a similar answer.
“The county agrees that its financial circumstances should be fully weighed by the board and the public when considering a tax proposal. The county informs the public of those financial conditions through its budget process, its public meetings and documents like the CAFR,” county spokeswoman Michelle Durand wrote in an email to the Review. “You and other members of the public are also welcome to contact the county with specific questions. The civil grand jury recommendation does not specify that the county should publish another document.”
County Manager John Maltbie declined the Review’s request for an interview.
Johnson, the 2013 grand jury foreman, said it was insufficient to expect members of the public to make the calculations on their own.
“The problem, of course, is that the public doesn’t know to call the controller to ask, ‘What is the excess ERAF?,’” he said. “The intent of the grand jury was for the county to be forthcoming regarding the true state of its finances. And if you have to call them up and ask for some arcane number, that’s not being forthcoming.”
December 14, 2016
Half Moon Bay Review
By Kaitlyn Bartley