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Analysis of the 2004-05 Budget BillLegislative Analyst's Office
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The Board of Equalization (BOE) is one of California's two major tax collections and administration agencies. In terms of its responsibilities, BOE (1) collects state and local sales and use taxes (SUT), and a variety of business and excise taxes and fees, including those levied on gasoline, diesel fuel, cigarettes, and hazardous waste; (2) is responsible for allocating certain tax proceeds to the appropriate local jurisdictions; (3) oversees the administration of the property tax by county assessors; and (4) assesses certain utilities and railroad property. The board is also the final administrative appellate body for personal income and corporation taxes that the Franchise Tax Board (FBB) administers. The BOE is governed by a constitutionally established board—consisting of four members elected by district and the State Controller.
The 2004-05 Governor's Budget proposes $327 million in support of BOE operations, of which $194 million is from the General Fund with most of the remainder consisting of reimbursements from local governments. The proposed level of total support represents an overall decline in funding of about $1.4 million from 2003-04 levels, and basically level support from the General Fund. The number of personnel years for the BOE is budgeted to remain approximately level for 2004-05 at 3,823.
We recommend that the Legislature direct the Board of Equalization (BOE) to reallocate staffing resources so as to mitigate the revenue impact of recent budget reductions. Currently, these reductions are estimated to result in a General Fund revenue loss of $27 million in 2004-05. Altering BOE's current reduction plan would result in recapturing as much as $20 million of this amount. (Redirect staffing and recognize additional $20 million in revenue.)
The BOE's Budget Reduction Plan. As part of the budget reductions specified in Section 4.10 of the 2003-04 Budget Act, the BOE was required to absorb ongoing annual budget reductions of approximately $16 million and 141 positions. The BOE has chosen to make these reductions in a manner that minimizes the impact on taxpayer services (as opposed to revenue activities), and avoids any staff layoffs. Many of the positions that are proposed to be eliminated or not filled have direct adverse revenue impacts, primarily due to their relationship to audit and collection activities. In addition, while some other positions scheduled to be eliminated are not directly related to revenue losses, they are a component of overall tax processing—the "tax pipeline"—and thus could have an indirect impact on revenues. The agency is unable to assign a particular revenue impact to these latter staffing reductions.
Of the 141 positions being lost, 91 of these positions have a direct revenue impact. The reduction in revenues included in the Governor's budget related to this loss of positions is estimated in 2004-05 to be $35.5 million for all funds and $27 million for the General Fund. Additional local government losses stemming from SUT declines would also occur as a result of these staff reductions.
Budget Reduction Alternatives Exist. Given the magnitude of the revenue losses associated with these staffing reductions, we believe the board should redirect staff resources from nonrevenue-related activities to revenue producing positions—particularly in the audit and collections areas. For example, a temporary shift of some 20 positions from certain taxpayer services activities to audit and collections would result in additional revenues of approximately $6 million in 2004-05, mitigating the negative revenue impacts from the proposed budget reduction plan.
Additional alternatives are also possible. For example, the BOE has in the past shifted some staff resources from revenue activities to nonrevenue activities such as technology services and call centers. (Provision 1 of the BOE's budget authority allows such shifts, provided that the board notify the Legislature of its intent.) A portion of these positions could be moved back to the revenue areas in order to reduce expected revenue losses. By such actions, we think that as much as $20 million in additional revenue could be realized.
While there would be an increase in revenue from such shifts, there would likely be some negative impact on taxpayer services. For example, there might be delays in responding to inquiries or even mailing refund checks.
LAO Recommendation. We recommend that the Legislature direct the BOE to reallocate staffing resources from various nonrevenue-related activities—such as those identified above—to revenue producing positions, in order to minimize the impact of Section 4.10 budget reductions. The BOE should report at hearings on alternative plans regarding the implementation of the budget reductions.
We recommend that the Legislature reduce budget authority for positions for Board of Equalization members to equal actual 2002-03 expenditure levels. (Reduce Item 0860-001-0001 by $0.7 million and special fund reimbursements by $0.3 million and 14 positions.)
In order to accomplish their constitutional and statutory tasks, board members of the BOE are given budget authority to hire professional staff. Such positions include attorneys, auditors, accountants, and other tax professionals. Staff members play an important role in providing board member assistance in their administrative deliberations and tax policy decision-making.
For 2002-03, professional board staff to the four district-elected board members totaled 38 positions, with annual expenditures of $2.9 million. For 2003-04 and 2004-05, 52 positions and a total of $3.9 million is budgeted. This represents an increase in expenditures of 36 percent. Approximately 66 percent of board member professional staff support is from the General Fund, with the remainder coming from reimbursements.
Tasks assigned to board member staff have not changed appreciably since 2002-03. Given the Legislature's concern about the number and compensation of state employees, we believe it is reasonable for board members to absorb reductions in staff resources as well. We consequently recommend that BOE board members' budget authority for personal staff be limited to actual budget expenditures made in 2002-03, and that the Legislature reduce this budget item in 2004-05 by $1 million ($0.7 million General Fund, $0.3 million special funds) and 14 positions.
We recommend that the Legislature remove the cap on reimbursements from special taxing districts and allow for full reimbursement of associated administrative costs. (Reduce Item 0860-001-0001 by $1.3 million and increase reimbursements by an identical amount.)
As part of its responsibilities, the BOE administers the SUT on behalf of local governments and special districts. Local governments and special districts are required to reimburse the BOE for costs associated with its administrative activities related to the collection and allocation of SUT revenues.
Under legislation adopted in 1998—Chapter 890, Statutes of 1998 (AB 836, Sweeney)—BOE is required in certain circumstances to reduce the reimbursements it receives from special taxing districts for administering the tax. This legislation establishes a maximum reimbursement amount for smaller districts as a means of making special taxes more financially feasible. The statute essentially requires that the state subsidize certain special taxing districts for their administrative costs.
While the establishment of special taxing districts makes the provision of locally based services more feasible, we believe that a strong policy argument can be made that these special taxing districts should be self-supporting, and that administrative costs of taxes that are approved by the voters or public bodies should be borne by them. We therefore recommend that the Legislature end the caps on reimbursements for these administrative costs, reducing General Fund expenditures by $1.3 annually and increasing reimbursements by the same amount.
We recommend the Legislature adopt supplemental report language directing the Board of Equalization to report by December 1, 2004 regarding field office consolidations and reduction alternatives.
Field Office Activities. In order to administer its various tax programs, the BOE maintains 27 field offices throughout the state along with four out-of-state field offices (Sacramento-based "Out-of-State," Chicago, New York, and Houston). These 31 offices provide access to taxpayers for various information requests and technical assistance. In addition, the field offices are used for housing certain tax auditing and collection activities that may be required in that area of the state (or country).
Do We Need So Many Field Offices? As we note elsewhere, the FTB also maintains 16 field offices throughout the state, some of which are co-located with BOE offices. Currently, the FTB is engaged in an ongoing effort to reduce its district offices and develop additional capacity for taxpayer assistance through more effective and efficient means—such as the use of the Internet or various forms of telecommunication. It is also considering additional steps to reduce field office expenses.
Opportunity to Consolidate. While FTB has engaged in an ongoing effort to reduce its reliance on field offices, a similar effort is not occurring at BOE. We recommend that BOE investigate options for field office cost reductions similar to those being explored by FTB. For example, we estimate that the consolidation of certain closely located offices in the southern California area would result in annual savings in the range of $500,000 to $750,000 (largely through lease, furniture, and utility savings) without resulting in any revenue reductions. This could be coupled with additional taxpayer service and administrative activities provided through Internet or telephone access in order to minimize the impact on taxpayer services.
Similarly, reductions in out-of-state offices could also occur. For example, the Houston office activities could be handled out of the Sacramento-based "Out of State" section. Due largely to one-time staff relocation expenses, the closure of this office would be unlikely to result in any meaningful budget-year savings; however, savings would likely occur in the longer term due to reductions in overall operating expenses.
LAO Recommendations. The opportunity for tax agencies to provide taxpayer assistance and conduct necessary administrative functions through electronic means has improved dramatically over the last decade, reducing the need for a physical presence. We recommend that the Legislature direct BOE to explore alternatives for reducing its reliance on field offices through closures and consolidations, as well as identify and describe additional improvements in the telecommunications area that would provide certain services more efficiently. Adopting the following supplemental report language would be consistent with this recommendation:
The Board of Equalization (BOE) shall provide to the Chair of the Joint Legislative Budget Committee and the chairs of the fiscal committees of the Legislature by December 1, 2004, a report containing the following information: (1) unit costs of providing taxpayer services and audit and collection activities at the BOE's 27 field offices; (2) net annual budgetary benefits of consolidating or closing four BOE field offices (one in each BOE district); (3) estimated impact on all BOE-collected tax revenues from field office consolidations or closures identified in (2) above; (4) net annual benefits of reducing or eliminating an out-of-state office. Data provided shall include one-time and ongoing budgetary and revenue impacts.