With state leaders scrambling to find out how state parks officials kept tens of millions of dollars hidden for more than a decade, California's top finance officials Tuesday acknowledged what could be a far bigger problem: They have no system in place to account for $37 billion in "special funds'' scattered throughout state government.
Instead, finance officials revealed, they rely on an honor system to track money that could be stashed away in untold accounts similar to the funds that turned up last week, sparking a scandal in the state parks department.
Each year, dozens of state departments report how much money they have in more than 500 special-fund accounts, which are separate from the general-fund budget and mostly tap into user fees to make up more than a quarter of all state spending. But no one checks to ensure that the special-fund figures being reported match the actual cash left in the accounts.
"Our reliance has historically been on accurate and correct accounting being reported to us by the relevant departments," Department of Finance spokesman H.D. Palmer told this newspaper Tuesday.
The little-known practice of trusting -- and not verifying -- took a remarkable turn last week when Gov. Jerry Brown's administration discovered that top parks officials had withheld $54 million in two special-fund accounts by not reporting them over the last 12 years. Longtime State Parks Director Ruth Coleman resigned and her chief deputy, Michael Harris, was fired Friday.
The scandal has been a huge embarrassment for the Brown administration, which in campaigning for a November tax initiative had argued that the state was so broke it needed to close dozens of parks.
Lawmakers are calling for reforms, not necessarily through new laws but by ensuring the proper state finance agencies are working together to ensure that special-fund balances match what the departments are reporting.
"Obviously, this is a wake-up call," said Assemblyman Jared Huffman, D-San Rafael, chair of the Committee on Water, Parks and Wildlife, who said neither he nor any of his colleagues was aware of the honor-system practice.
"I think that the Department of Finance is going to want to make sure that this never happens again," Huffman said.
Since the parks scandal broke, no allegations have been made of other departments hiding money, but some lawmakers and others fear this could be the tip of the iceberg.
Now, as the state weathers its latest financial storm, Brown's finance department is reviewing all the special funds across state government to figure out whether any other departments took advantage of the honor system to hide funds.
"It would seem like we need a better system of accounting," said Derek Cressman, regional director of California Common Cause, a public advocacy nonprofit. "It doesn't seem like it's working adequately to have each department self-report."
The honor system does not apply to the $96 billion in general-fund revenue. The general-fund budget is the highly publicized and politicized spending plan that uses tax money to keep things like schools and prisons running.
With the general fund, each department's actual cash balances are matched with budget figures to make sure they're right, a financial process called "reconciliation" -- similar to matching your checkbook to the money in your checking account.
But that process isn't in place for the special funds.
Unlike tax revenue that flows into the state's general fund, special funds are accounts that collect fees from a wide variety of state enterprises -- fees that campers pay to visit state parks, fees collected from the sale of computers that are used to fund electronics recycling and fees that off-road motorists pay when they register motorcycles or dune buggies, for instance.
In the parks flap, the off-road account had $33.5 million hidden and the remaining $20.4 million was money collected from park entrance fees and concession contracts.
"When you talk about the budget problem, it's the general fund that's always under extreme scrutiny," said Mike Genest, who was Gov. Arnold Schwarzenegger's finance director from 2005 to 2009. "This couldn't happen as easily in the general fund because it's regularly reconciled. Special funds don't always get the attention."
So who should be checking on the special-fund money?
The state controller's office is in charge of figuring out how much cash is in each special-fund account and gives its figures to the Department of Finance, said Jacob Roper, a spokesman for Controller John Chiang. At the same time, finance officials are handed unverified figures from individual departments.
Palmer could not say why the finance department simply did not match the controller's cash figures with the parks department's numbers. Anyone with an Internet connection can check the cash figures against the budget on the state's website, though there is such a flood of numbers across the accounts that readers would have to know what they're looking for.
The financial irregularities were discovered only after newly installed parks finance officials began digging into their books as part of a separate investigation into unauthorized vacation time for parks employees. The parks money was never spent, allowing it to escape the further scrutiny that comes with budget appropriations.
Finance officials say they acted swiftly to fix the problems at the parks department and launch a sweeping review of all special funds.
"The fact that we've initiated the statewide review of all special funds indicates the seriousness to which we take this issue," Palmer said. "This is something that is many years in the making, and this administration is the one that uncovered it."