The Department of Finance (DOF) is the governor’s chief financial advisor. It puts his annual budget together and maintains the state’s accounting and financial reporting systems. The  cabinet-level department analyzes proposed legislation for its fiscal impact, creates and monitors current and future economic forecasts of the state, and estimates population demographics and enrollment projections.

California’s creation of the Department of Finance was in large part a response to a national progressive movement in the early part of the 20^th century. Budgeting at that time was controlled by interest groups, department heads and ranking legislative committee members in California and at the federal level. The executive, whether it be the governor or president, had little to do with the process. He didn’t propose a budget or defend it. Most departments had separate appropriation bills which passed at different times.

The seeds of budget reform were first planted in California by Gov. Hiram Johnson in 1911. Prior to then, there was no schedule for budget preparation in the legislature. Shortly after Johnson took office, the Board of Control was created to provide the governor with advice on appropriation bills before signing off on the legislature’s piecemeal budgetary actions.

The federal government adopted an executive budget process in 1921 and California quickly followed suit with a few new wrinkles. The state Department of Finance technically was created in 1921 as part of a reform effort by Gov. William Stephens and the legislature in response to massive budget overruns. It was headed by a three-member state Board of Control. Each of the board members had specific lines of authority over divisions such as Budget and Accounting, Claims and Disbursements, Purchases and Custody, Motor Vehicles, State Library and State Printer. The first head of the Department of Finance was Gilbert Daniels, from 1921-23. The first director of the department was Alexander Heron, from 1927-30.

However, the department didn’t adopt its budget formulation processes until 1927 when the legislature gave it general responsibility for supervising the state’s financial and business policies. This responsibility included conducting audits and the task of performing the technical, analytical and policy analysis necessary to prepare the governor's budget and implement it throughout the upcoming year.

Development of Modern Budgeting (Department of Finance website)

In addition to preparing the state’s annual budget, the Department of Finance is responsible for the state’s uniform accounting system.  The major objectives of the system are: coordination of the system of accounts kept by the individual state departments with the central accounts kept by the State Controller's Office; uniform and consistent accounting and reporting among all state departments; consistency between accounting and budgeting procedures; and uniform reporting by all state departments for inclusion in financial statements prepared by the Controller.

As the governor's chief fiscal policy advisor, the department analyzes proposed legislation for fiscal impact and alignment with the administration's policy priorities. It also provides consulting and training for departments throughout state government.

The department’s Fiscal Systems & Consulting Unit maintains state financial manuals and fund codes; provides consultation and training to staff from finance and other state departments; reviews departmental accounting related requests; conducts special fiscal reviews and studies; administers the federal Cash Management Improvement Act (CMIA); and determines the allocation of costs for the Pro Rata and Statewide Cost Allocation Plan (SWCAP).

The department’s CALSTARS unit consists of accountants, programmers, systems analysts and information system technicians that develop, maintain, and support the operation of the automated accounting system used by the majority of departments throughout the state.

The department has two research units. The Demographic Research Unit is designated as the single official source of demographic data for state planning and budgeting. The Economic and Financial Research Unit prepares economic forecasts and analyses of various economic developments, advises state departments and local government agencies and provides economic information to the general public. It also provides revenue estimates for the annual state budget process and analyzes tax issues potentially significant to the state.

The department’s other units include Budget Operations Support; Office of State Audits and Evaluations;  Performance Review Unit; and Financial Information System for California.

The Department

Nearly 45% of what the Department of Finance spends ($56.5 million in 2011-12) is devoted to budget activities that include advising the governor, analysis of issues for the legislature, document preparation and administration of the finished product. About 24% of the budget is spent administering the Calstars accounting system, which provides provide a uniform and complete accounting system for state agencies. Another 22% of the budget is spent on conducting audits and supervising audits by other departments. The rest of its budget is spent on its co-partnership in running another financial management system called FI$Cal and distribution of federal stimulus money.

Almost half of the department’s money comes from the state’s General Fund and all the rest is reimbursement for services rendered to other agencies.

The State of California

The department plays a critical role in formulating a state budget by helping shape the contours of the governor’s proposal. For 2011-12, the department proposed a plan that cuts the $26.6 billion deficit in half through cuts and realignments in anticipation of a voter-approved rise in taxes to cover the remaining shortfall. The budget plan would spend the most money on K-12 schools (38.3%), followed by Health and Human Services (29.1%), Higher Education (10.3%), Corrections and Rehabilitation (7%), Debt Service (7%), Teachers Retirement and Retiree Health (3.4%) and the Judiciary (0.9%). Other categories garner a combined 4% of the budget.

The proposed budget ends Redevelopment expenditures ($1.7 billion) and Enterprise Zones ($924 million). It projects reductions of $1.7 billion in Medi-Cal support, $1.5 billion for CalWorks, $1 billion for Higher Education, $750 million for Developmental Services, $486 million for In-Home Supportive Services and $308 million for lower pay for non-contract state employees. It continues the stabilization of K-12 funding.

It collects 55% of the money to pay for this from state personal income tax. Another 26.8% comes from Retail Sales and other taxes, 12.2% from Corporate Tax and 5.5% from other sources.

The Finance Department has outlined a series of “gimmicks” used in past years by all the parties involved (including the legislature and a willing public) to avoid paying the government’s bills and skirt constitutional requirements to balance the budget. It cited overly optimistic federal fund assumptions, tobacco securitization (selling bonds based on expected money from a lawsuit settlement), sales of the SCIF (Workers Compensation Fund) and EdFund (student loans), and accounting sleight of hand with Medi-Cal. Shifting of the state payroll by one day netted some rewards in the past that are due now.

Top 10 Contractors: According to the department, its largest contractors in 2012, excluding expenditures that do include FI$CAL procurements, were:

Top 10 Contractors: The department's largest service contractors in 2012, according to the  State Contract & Procurement Registration System (eSCPRS) in the Department of General Services, were:

April 2011 Budget Discussion (DOF website) (pdf)

3-Year-Budget (pdf)

Oil Drilling

In January 2009, the State Lands Commission killed an elaborate plan crafted by Plains Exploration & Production, a Texas oil company, and a coalition of Santa Barbara environmental groups to begin the first oil drilling off the Santa Barbara coast since 1969. Six months later the Schwarzenegger administration proposed legislation that would bypass the commission, which historically has had authority over oil drilling and other sensitive issues, and transfer authority for the project to the Department of Finance. Schwarzenegger was trying to close a $23 million budget gap and the department estimated the new drilling could add $2 billion in revenue over a 14-year period.

The 3-member Lands Commission is headed by the state’s Lieutenant Governor, Controller and Finance Director (or their representatives). Lt. Gov. John Garamendi characterized the move by the Department of Finance as a willingness on the part of the administration to “undermine 70+ years of checks and balances” in order to “drill baby drill.” And he added a history lesson. “Let’s keep in mind it was 70 years ago that a major scandal at the Department of Finance led to the State Lands Commission having the authority to issue leases.”

Garamendi was referring to the 1938 scandal that helped bring down the administration of Republican Frank Merriam at the hands of Democratic reformer Culbert Olson. “Olson accused Merriam of having let the Department of Finance … become ‘the agency of private interests,” according to the book “Crude Politics” by Paul Sabin. “The … scandal and the investigator’s report on legislative corruption, both in 1938, opened a window on internal administrative and legislative corruption in Sacramento.” The book described how “famed lobbyist Artie Samish … doled out slush fund cash to lawmakers backing the Finance Department’s plays on behalf of Standard Oil and other companies.

Samish was arrested for refusing to testify before a grand jury looking into allegations that Department of Finance executives held up oil companies for stock, cash, kickbacks and nepotism, in exchange for the rights to drill on state oil tidelands and sites offshore Southern California.

The current project at Tranquillon Ridge had won the support of some environmental groups because in exchange for allowing the new drilling, the company agreed to shut it down along with three other functioning oil platforms in 2022 and donate 4,000 acres of land for public use. The drilling proposal had split the environmental community on its merits, but even some of those that supported the drilling blanched at the Finance Department’s grab for power. Linda Krop, an attorney for the Environmental Defense Center, said her group had "grave concerns" about the precedent that would be set in bypassing the commission.

The legislation to shift power to the Department of Finance failed in the Senate but negotiations over the drilling continued until May 2010 when, shortly after the Gulf oil spill, the Schwarzenegger administration abruptly switched its position. Schwarzenegger said the state would have to cover the deficit without the oil money.

California Lands Commission Spurns Schwarzenegger's Oil Drilling Proposal (by Steve Chawkins, Los Angeles Times)

No: Arnold’s Plan is a Quick and Dirty Power Grab (A statement from Lt. Gov. John Garamendi)

How Oil Scandal Shaped State Policy (Calbuzz)

Census

The California Department of Finance’s Demographic Research Unit is the officially designated source of demographic data for state planning and budgeting. The unit was at odds with the U.S. Census Bureau for a decade over the size of California’s population. The numbers are critical because they are used by local and regional planners for myriad purposes, such as determining transportation models and housing needs. They are also used to determine the state’s representation in the House of Representatives and will be used in the state’s own redistricting efforts. In the run-up to the census conducted in 2010, the Department of Finance was predicting a larger increase in California’s population than the feds. Both were working off projections based on the last census in 2000. The difference was 1.5 million people.

Hans Johnson, the associate director of the California Public Policy Institute spelled out what was at stake. "It's a phenomenal difference. There's no doubt that as a state our population growth has slowed compared to previous decades—the key question is how much." 

The verdict: Census figures were closer to the federal bureau’s projection and the state was compelled to accept the lower number. Instead of gaining two seats in the House of Representatives, California’s number would remain steady. The state’s population was pegged at 37.3 million, instead of  38.5 million touted by the state.

Although there were rumblings in the state that the census had badly undercounted some of its residents, particularly illegal immigrants, and would contest the results, Department of Finance spokesman H.D. Palmer said the effort would be futile. The U.S. Supreme Court ruled in a lawsuit challenging the 2000 census that the bureau's figures are final, he said.

State Seeks 1.5 Million Missing People in 2010 Census (by Josh Stevens, Planetizon)

State Lowers Population Estimate Due to Census (by Dan Walters, Sacramento Bee)   

California's Slow Growth Means No New House Seats (by Kevin Fagan, San Francisco Chronicle)

California State Data Center (DOF website)

Realignment

Gov. Jerry Brown’s proposed 2011-12 budget called for a “historic” transfer of authority from the state to local level, reversing a 30-year trend in the other direction. While the Finance Department’s explanation focused on the plan’s attempt to bring order to a hodgepodge of previous shifts and move administration of programs closer to the communities that use them, the estimated $10 billion in projected savings for the state was the acknowledged prime mover. The plan would move funding for court security and responsibility for fire protection and medical emergency response in populated wildland areas to local government. Offenders without any current or prior serious or violent or sex convictions, adult parole, child welfare services and adult protection services would become the responsibility of local jurisdictions.

Realignment (Governor’s Budget Summary) (pdf)

California’s Budget Process (DOF website)

The Budget

Faced with a $26.6 billion budget deficit for 2011-12, Gov. Jerry Brown and the Department of Finance proposed a budget of heavy cuts in programs and social services, reductions in employee pay, the transfer of certain services to the local level, and taxes that must be approved by the voters. Brown said that if voters don’t approve the taxes, further devastating cuts in the budget would result. He promised not to use the illusory tricks and gimmicks that successive administrations have employed in down economic times to ease the pain or balance the budget. You can be a budget hero and balance the federal budget by proposing restoration of the Bush tax cuts on the rich and maybe the middle class; cutting the ever-escalating defense budget, privatizing Social Security and Medicare, whacking a few departments like Labor, Education or Environmental Protection, or just adding to the deficit tab.

But what’s the solution in California where you can’t run a deficit; constitutional changes like Proposition 13 cap local property taxes, Proposition 4 limits state spending and Proposition 98  mandates a certain portion of the state budget be appropriated to education? Choices generally fall in one of two categories: less government or more revenue. Does anyone have a Eureka moment?

From the Left

Although Democrats in the legislature have voted for cutting programs to help balance the budget for nearly a decade, they are willing to consider a broad spectrum of taxes to help make ends meet. The Los Angeles Times laid out many of the options in its do-it-yourself California Budget Balancer. You have the option to choose among roughly $40 billion in cuts and $40 billion in taxes to erase the state’s $26.6 billion shortfall. A gas tax of $1 per gallon could raise $15 billion. This seems like a less attractive proposition if the price of gasoline is rising. Continuation of temporary taxes, including vehicle license fees, a 1% sales tax and a .25% income tax surcharge net $9.4 billion. It’s a fan favorite. Raising the tax on alcohol by 30 cents and restoring the pre-Schwarzenegger 2% vehicle fee tax are worth $4.3 billion apiece. Then there is a cigarette tax, rate hike for high-earners, crude oil tax and repeal of a business tax break that raise between $1.2 billion and $2.6 billion, each. A tax on social security income would raise $500,000 and installation of speeding cameras where red-light cameras already exist would rake in $412,000.

The California Budget Project proposes cracking down on customers who buy products out of state (often on the internet) and don’t pay California sales tax. That would pull in $1 billion.

The values of most of these taxes aren’t in dispute. And their purpose isn’t in dispute. They are to fund a size of government that will shrink without them. Democrats would rather choose from the revenue side of the Balancer.

From the Right

Although arguments that lower taxes will automatically generate greater economic growth aren’t as potent as they once were, tax cuts paired with a craving for smaller  government still lay at the heart of Republican budget proposals. Virtually all the Republicans in the state legislature oppose raising taxes to balance the budget. Accepting all the possible cuts listed in the L.A. Times Budget Balancer gets you to the Promised Land without raising a single tax. It includes $10.8 billion slashed from higher education, $4.4 billion sliced from Health and Social Services, $2.5 billion carved out of Public Safety, $1 billion in payroll cuts, and $285 million sliced from state parks, the conservation corps and the legislature’s budget. As a bonus, Republicans could pass on the 50% K-12 per/pupil spending cut in favor of the less-draconian 30%.

As budget negotiations between Republicans and Democrats broke down in March 2011, the GOP took the unusual step of releasing their negotiating position. At that point, Democrats had already rejected their tort, civil service and tax reform proposals. Republicans were still fighting for a spending cap, pension reductions, education cuts and a reduction in regulatory activity. Republican Sen. Bob Huff was touting a $2.5 billion saving by cutting teachers’ pay 5%, while other cost-saving options were being kicked around. The Pacific Research Institute recommends privatizing the prison system, which it estimated could have saved up to $1.2 billion in 2009-2010, and opening the health care system to the free market. The health reforms include privatizing Medi-Cal, decreasing “overregulation” of nurses and “allowing low-cost medical clinics to compete.”

The value of many of the cuts suggested by Republicans, like tort and regulatory reform, are difficult to put reliable price tags on. But their purpose is not in dispute. They are meant to shrink the size of government. Although constitutional and institutional restraints remain a stumbling block to any resolution brokered by the Brown administration and his Department of Finance, the size of California’s government will continue to dominate the debate.  

California Budget Balancer?  (Los Angeles Times)

No Bang for the Taxpayer’s Buck (Pacific Research Institute) (pdf)

Governor's Budget: Proposal Would Hike Taxes and Fees, Reduce Programs (California Ag Network)

The Budget for Humanity (Californians United for a Responsible Budget)

Republicans Release List of Demands (Los Angeles Times)

Ana J. Matosantos, 2009-2013

Michael Genest, December 1, 2005 – December 14, 2009. Facing a budget shortfall of 43.9% of the state’s general funds, Genest explored the possibility of California declaring bankruptcy, but concluded it wasn’t an option.

Tom Campbell, December 1, 2004 – November 10, 2005

Donna Arduin, November 17, 2003 – Oct. 18, 2004

Steve Peace, January 21, 2003 – November 16, 2003

B. Timothy Gage, January 4, 1999 – January 17, 2003

Craig Brown, March 4, 1996 – December 30, 1998

Russell Gould, August 1, 1993 – February 23, 1996

Thomas Hayes, January 7, 1991 – July 31, 1993

Jesse Huff, January 4, 1984 – December 25, 1990

Michael Franchetti, January 3, 1983 – January 3, 1984

Mary Ann Graves, August 21, 1979 – December 31, 1982

Richard Silberman, December 1, 1978 – August 20, 1979

Roy Bell, January 6, 1975 – November 30, 1978

Verne Orr, January 1, 1970 – January 5, 1975

Caspar Weinberger, March 1, 1968 – December 31, 1969. Weinberger later served as President Ronald Reagan’s secretary of defense from January 21, 1981 – November 23, 1987. Following his resignation, he was indicted in the Iran-Contra scandal, but received a pardon from President H.W. Bush in 1992.

Gordon Smith, January, 2, 1967 – February 29, 1968

Hale Champion, July 1, 1961 – January 1, 1967

John Carr, August 1, 1959 – June 30, 1961

Bert Levit, January 5, 1959 – July 31, 1959

T.H. Mugford, July 15, 1958 – January 4, 1959

John Pierce, November 1, 1953 – July 14, 1958

James Dean, February 1, 1944 – October 30, 1953

John Hassler, January 4, 1943 – January 31, 1944

George Killion, September 11, 1940 – January 3, 1943

John Richards, October 2, 1939 – September 10, 1940

Phil Gibson, January 2, 1939 – October 1, 1939

Arlin Stockburger, January 31, 1934 – January 1, 1939

Rolland Vandegift, January 6, 1931 – August 30, 1934

Lyman King, January 31, 1930 – January 5, 1931

Alexander Heron, July 29, 1927 - January 30, 1930