California Scheming? Funneled Donations Raise Ethics Queries

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By Laura Mahoney

Dec. 8 — The elected chairman of the California State Board of Equalization has been an important figure in getting money into the hands of nonprofit organizations since he joined the board in 2009, but it hasn't come without questions.

SBOE Chair Jerome Horton (D) has reported $731,835 in donations by organizations at his request, with that money going mostly to or through nonprofit organizations tied to his wife, a Bloomberg BNA analysis found.

Those donations, known as “behested payments” and considered legal as long as they meet disclosure guidelines, include hundreds of thousands of dollars from companies with business before the tax board. Critics, who question the ethics of the payments, say they allow the nonprofit to promote him and his wife through events and advertising loosely related to the board's tax mission.

Horton has accelerated the pace of behested payments from companies including Space Exploration Technologies Corp. (SpaceX), Time Warner Cable, Intuit Inc. and AT&T since Bloomberg BNA first examined such payments in 2011, when other board members first questioned the ethics of partnering with outside organizations.

Horton's behested payments represent 88 percent of all such payments to members of the elected tax board since 2009, and place him third among statewide and constitutional officers behind Gov. Jerry Brown (D) and Superintendent of Public Instruction Tom Torlakson (D), the Bloomberg BNA analysis found.

The payments and the use of funds are legal according to advice Horton has received from the California Fair Political Practices Commission (FPPC) and SBOE attorneys.

California law allows elected officials to direct contributions to organizations of their choosing at their behest as long as they disclose the payments within 30 days and state whether they were intended for a legislative, governmental or charitable purpose. Unlike direct campaign contributions, behested payments have no limits.

Events Cost Four Times More

On top of using behested payments to put together events the Hortons co-host, the SBOE chair called on the tax agency to spend an average of $75,000 on mailers, programs, venue rentals and staff travel to promote and conduct each of five events in 2014, the year for which Bloomberg BNA was able to obtain agency cost information.

The agency's spending on Horton's events was almost four times more than the average of $19,282 it spent to promote and hold 53 other tax-focused outreach events hosted by board members in the same year without ties to behested payments.

The Hortons' five events involving behested payments in 2014 brought in 5,365 attendees, compared to 10,107 total attendees at the 53 tax-specific outreach events, which were usually seminars focused on tax compliance for small businesses or nonprofit organizations, according to data from the SBOE.

The tax agency provided the cost and attendance information for outreach events to Bloomberg BNA Nov. 4 in response to a California Public Records Act request filed in April. Pay for staff time devoted to organizing and promoting the events isn't included in the information the SBOE provided.

SBOE Member Behested Payment Totals
Member and term 2009 2010 2011 2012 2013 2014 2015 Total 2009-2015  
John Chiang (D), State Controller, 2007-2014 $5,000   $35,000         $40,000 4.8%
Jerome Horton (D), SBOE member 2009-present   $60,000 $40,000 $147,218 $120,644 $244,045 $119,928 $731,835 87.6%
George Runner (R), SBOE member 2010 to present     $8,393       $5,000 $13,393 1.6%
Betty Yee (D), SBOE member 2006-2014, state controller January 2015 to present           $5,000 $5,000 $10,000 1.2%
Fiona Ma (D), SBOE member January 2015-present             $5,000 $5,000 0.6%
Diane Harkey (R), SBOE member January 2015-present             $35,500 $35,500 4.2%
  $5,000 $60,000 $83,393 $147,218 $120,644 $249,045 $170,428 $835,728  
Source: Fair Political Practices Commission                  

Some of the payments—a total of $84,750 from 2013 through 2015—went back out from the recipient nonprofits to pay for billboards and TV ads promoting the events co-sponsored by Horton and his wife's nonprofit. In one case, Time Warner Cable received $35,000 to pay for TV ads from the nonprofit affiliated with Yvonne Horton a few weeks after the broadcaster gave the nonprofit $25,000 to support the events the Hortons co-host.

Tighter Rules Needed

Although the payments and the nonprofit's use of them appear to be legal, they point to the need for tighter rules for the SBOE, which administers state taxes and adjudicates disputes about those taxes, according to some experts.

“The BOE is a different type of body as opposed to the Legislature, and there should be tighter rules about behesting,” Bob Stern, former president of the nonprofit Center for Governmental Studies and former general counsel of the FPPC, told Bloomberg BNA Dec. 2. “It's a whole different situation when they're seeking tax breaks. It's one thing to say [the contributors] can't give, but he shouldn't be soliciting payments.”

The Hortons' use of behested payments raises questions about undue influence of the contributors and the political benefits to the Hortons, Jessica Levinson, professor at Loyola Law School and vice president of the Los Angeles County Ethics Commission, told Bloomberg BNA Nov. 20.

“There's a straight face argument that he could directly benefit from them,” Levinson said. “It becomes a dispiriting example for the public that those in charge are receptacles of big sums of money that they can use as they see fit.”

If the SBOE is giving its stamp of approval to the events co-hosted by the Hortons, it is within its authority, Gregory Colvin, an attorney with Adler & Colvin in San Francisco who specializes in political and lobbying activities of nonprofit organizations, told Bloomberg BNA Dec. 1.

“What raises the eyebrow here is the extensive involvement of BOE staff and monetary resources that go beyond training people in tax compliance,” Colvin said.

“It sounds like one of those examples where everything is legal and everything is questionable,” Levinson said.

Appearance of Conflict

State Controller Betty Yee (D), who questioned the use of behested payments and partnering with outside organizations as a board member in 2011, agreed. Yee, who continues to serve on the SBOE since she was elected state controller in 2014, told Bloomberg BNA Dec. 2 that the board should consider adopting its own rules restricting behested payments.

“Although the payments are legal, it still doesn't mean that it doesn't establish some appearance of impropriety,” Yee said.

SBOE Member Fiona Ma (D), who has been on the board for almost one year and is a former Assembly member, told Bloomberg BNA Dec. 3 she will call on the board to hold a special public meeting to examine its spending, budget and policies regarding outreach activities. Ma said she wants the board's outreach spending to be fair, transparent and equal between board members, and she wants to consider board action limiting behested payments from entities with business before the board.

“We should, as board members, be avoiding any conflicts of interest or perceived conflicts of interest,” Ma said.

Horton: Payments ‘Governed by Law.'

Horton told Bloomberg BNA in a Dec. 3 e-mail that the events and the use of behested payments for them are legal and further the SBOE's mission. He denied that they present a conflict or appearance of conflict, or that they influence his treatment of the companies making the donations when they come before him at the board. He responded only to Bloomberg BNA's questions submitted in writing.

“I am governed by the law, not perception,” he said.

Horton also claimed the events held with California Educational Solutions (CES), a nonprofit organization founded by his wife, Yvonne Horton, are 1,400 percent more cost effective than other outreach events in enhancing tax compliance and building goodwill.

“The larger seminars, are 1,400 percent more cost effective, exposing 1,400 percent more taxpayers to state and federal tax codes, policies, and regulations and has far more tax educational and goodwill development content than the smaller [small business seminars] when you consider the property tax, nonprofit tax, business tax, sales taxes, tax credits, insurance taxes, and business development aspects woven throughout the conference,” he said.

Ma and Yee both said they have made several unsuccessful requests for the information the SBOE provided to Bloomberg BNA through its records request. The Assembly Revenue and Taxation Committee requested similar information in early 2015.

Yee said she has been rebuffed when she has suggested that the board evaluate whether its outreach events are effective in increasing taxpayer education and compliance. The board spent an average of $8,400 on the six outreach events she held in 2014 focused on small business and nonprofit tax compliance that brought a total of 1,300 attendees, according to the information provided to Bloomberg BNA.

Board members George Runner (R) and Diane Harkey (R) both told Bloomberg BNA Dec. 7 that it's up to each board member to decide how he or she will conduct outreach activities, which fall under the members’ duties to educate taxpayers and help them comply with tax laws. What works for one member may not work for another, they said.

“I don’t think that’s any other board member’s responsibility, or their business” Harkey said.

As long as information about behested payments and agency expenditures is transparent and available, voters can decide, Runner said. “If things are done inappropriately it becomes a political issue and it has to be dealt with that way,” he added.

Administrator and Adjudicator

The five-member SBOE is the only state tax body of its kind in the country, and questions about conflicts of interest, both real and perceived, have arisen for the quasi-judicial body since at least the 1920s.

The elected members have the dual roles of administering the sales and use tax and more than 20 other tax and fee programs, and adjudicating disputes between taxpayers and the state regarding those same programs. The SBOE chair and the state controller also serve on the three-member Franchise Tax Board, which administers income and franchise tax. The SBOE then serves as the adjudicatory body for taxpayer appeals that arise from taxes administered by the SBOE and the FTB.

The agency also issues regulations, takes positions on legislation and sets property tax values for utilities, railroads and telecommunications companies.

SpaceX Link?

Jerome Horton reported SpaceX's first contribution to CES at his behest on May 24, 2014, when the rocket maker contributed $7,500. Two days earlier, the SBOE approved regulatory changes that relieved the company from property tax assessments on rocket parts, equipment and fuel used to transport cargo to outer space. By adopting the regulations, Jerome Horton and the board intervened in a dispute between SpaceX and the Los Angeles County Assessor over whether the items were taxable.

The board adopted the regulations benefitting SpaceX a month after the governor signed a bill authored by Assemblyman Al Muratsuchi (D) to exempt the items from local property tax. 

SpaceX is based in the Los Angeles city of Hawthorne, which is in Muratsuchi's former legislative district and Jerome Horton's SBOE district.

“There is absolutely no link between these donations and the board's actions,” SpaceX spokesman John Taylor told Bloomberg BNA Nov. 20. He declined to comment further.

SpaceX founder and Chief Executive Officer Elon Musk also made $15,800 in direct 2014 campaign contributions to Jerome Horton, Muratsuchi, SBOE Member Runner (R), Lt. Gov. Gavin Newsom (D) and two other assembly members in and around the time the regulations and bill were pending.

Jerome Horton said in his written response to Bloomberg BNA that the board's actions were administrative and didn't have the effect of providing SpaceX with a tax exemption because the Legislature had already approved the exemption.

More recently, the FTB, on which Jerome Horton sits as the SBOE chair, voted 3-0 in March to begin developing regulations that apply to the apportionment of income arising from space transportation activities, at the urging of SpaceX.

SpaceX gave another $5,000 to CES on May 1.

California Educational Solutions

The SpaceX contributions and most of the payments made at Jerome Horton's behest in 2014 and 2015, totaling $267,764, were made directly to CES.

CES used much of the contributions to hold an annual conference in 2014 and 2015 co-hosted with Jerome and Yvonne Horton called Connecting Women to Power (CWTP). The Hortons have hosted the conference since 2011 at California State University, Dominguez Hills, Jerome Horton's alma mater.

Emily Shanklin, senior director of marketing and communications for SpaceX, appeared on a panel at the June 2014 CWTP conference called “Utilizing Social Media: 2014 Marketing Trends & Strategies.”

Shanklin appeared on the agenda for a similar panel at the 2015 women's conference with a slightly different title: “The Impact of Social Media: Effective Marketing Strategies, Trends & Branding to Skyrocket Your Business.”

AT&T and Time Warner Cable also made payments to CES in 2014 and 2015 at the behest of Jerome Horton to support the women's conference. Both companies regularly have business before the board.

Time Warner Cable and other companies also donated items to distribute to conference attendees. Herbalife International of America Inc. donated $24,000 worth of items, Neutrogena Corp. donated $15,714 worth and TWC donated $10,000 worth.

Time Warner Cable, AT&T

Deane Leavenworth, TWC vice president, appeared on the 2014 panel with Shanklin. AT&T External Affairs Director Donovan Green appeared on the panel “Funding for Small Businesses: Private Contracting & Bank Financing.” Representatives of TWC, AT&T and other organizations making behested payments also appeared on the agendas of various CES events.

In 2014, TWC participated in discussions with the board as it prepared to update rules for county assessors regarding the appraisal of possessory interest in public property. Time Warner wrote a letter to Jerome Horton April 14, and Leavenworth testified before the board April 22, 2014 in support of the board's proposal to update the rules to reflect recent court rulings and ensure the rules are applied consistently among the state's 58 counties.

The board adopted the rules, called a Letter to Assessors, at the April 22 meeting.

Because TWC is a cable company, it also receives a valuation for property tax purposes from the SBOE each year. In 2014, its Time Warner Cable Business LLC was valued at $31.2 million, according to assessment information available on the board's web site.

Yvonne Horton didn't respond to phone calls from Bloomberg BNA.

Committed Since Inception

As a telephone carrier, AT&T is also assessed every year by the board, and in 2014, the board valued AT&T's companies in California at almost $10 billion.

In 2011, AT&T won a $66 million ruling from the five-member board in an appeal regarding tax treatment of its investments in foreign companies.

Time Warner and AT&T rank first and second among those making payments at Jerome Horton's behest, with TWC giving $88,500 and AT&T giving $95,000 since 2010.

AT&T didn't respond to requests for comment from Bloomberg BNA.

In an e-mailed statement, TWC said it has been committed to the CWTP event since its inception because of its focus on women entrepreneurs.

“As part of our commitment to diversity, this partnership is just one example of the dozens of events and organizations we support in Southern California that help women-, minority- and veteran-owned businesses,” TWC said in a Dec. 2 e-mail to Bloomberg BNA.

Financial Empowerment 

Intuit Inc. didn't have business pending before the board when its Financial Freedom Foundation gave $10,000 in both 2014 and 2015 to sponsor CWTP, spokeswoman Diane Carlini told Bloomberg BNA in a Nov. 19 e-mail. The maker of Quicken tax preparation software said the focus of the conference fits with its charitable philosophy of financial empowerment of individuals and small businesses.

All SBOE Members Table
Payor of Behested Payments 2009-2015 SBOE Members            
Sum of amount Chiang, John Harkey, Diane Horton, Jerome Ma, Fiona Runner, George Yee, Betty Grand Total
Akin Gump Strauss Hauer & Feld LLP         $ 8,393   $ 8,393
AT&T   $ 5,000 $ 95,000       $ 100,000
Barona Band of Mission Indians   $ 5,000   $ 5,000 $ 5,000 $ 10,000 $ 25,000
Bridges Community Economic Development Corporation     $ 47,406       $ 47,406
Bulletin Displays, LLC     $ 20,000       $ 20,000
CA Fire Foundation $ 5,000           $ 5,000
California Association of Non-Profits     $ 5,000       $ 5,000
California Educational Solutions     $ 51,750       $ 51,750
California State Council of Laborers $ 5,000           $ 5,000
California Teachers Association     $ 5,000       $ 5,000
Coalition to Protect California Jobs and the Economy     $ 20,000       $ 20,000
CSU Dominguez Hills     87,697       $ 87,697
Darden Restaurants     $ 5,000       $ 5,000
Farmers Insurance     $ 21,000       $ 21,000
Fidelity National Financial $ 5,000           $ 5,000
Finders Key Purse     $ 8,750       $ 8,750
HAAS Automation, Inc.     $ 20,000       $ 20,000
Herbalife International of America, Inc.     $ 24,000       $ 24,000
Hollywood Park Casino     $ 7,300       $ 7,300
INTUIT     $ 40,000       $ 40,000
Los Angeles County Bar Association     $ 48,218       $ 48,218
Los Angeles Sparks, WNBA   $ 13,000         $ 13,000
Mike Eng for Assembly 2010 $ 5,000           $ 5,000
Neutrogena Corporation     $ 15,714       $ 15,714
Orange County Association of REALTORS   $ 5,000         $ 5,000
PACE CSEA $ 5,000           $ 5,000
Pacific Gas and Electric Company     $ 5,000       $ 5,000
Peace Officers Research Association of California $ 5,000           $ 5,000
PriceWaterhouseCoopers $ 5,000           $ 5,000
Sempra Energy     $ 5,000       $ 5,000
Southern California Edison     $ 5,000       $ 5,000
Space Exploration Technologies Corporation     $ 12,500       $ 12,500
Time Warner Cable $ 5,000   $ 88,500       $ 93,500
U.S. Bank     $ 35,000       $ 35,000
United Parcel Service     $ 15,000       $ 15,000
University of California, Irvine   $ 7,500         $ 7,500
Wells Fargo     $ 44,000       $ 44,000
Grand Total $ 40,000 $ 35,500 $ 731,835 $ 5,000 $ 13,393 $ 10,000 $ 835,728
Source: Fair Political Practices Commission              

“As the members of the Board of Equalization became more proactive in providing assistance to Californians on financial issues and created public outreach forums to the public, such as empowering female entrepreneurs, it was a great fit for our foundation,” Carlini said.

Farmers Insurance Group, which pays an insurance tax on premiums that is administered partly by the SBOE, has contributed $21,000 since 2011 to CES and another nonprofit with ties to Yvonne Horton, who also serves as the elected clerk of the City of Inglewood, at her husband's behest. In 2014, the company paid $34.9 million in tax on $1.4 billion in taxable fire and casualty premiums, $6.6 million in tax on $281 million in net life insurance premiums, and $247,220 on $10 million in net specialty insurance premiums, according to the SBOE.

In an e-mailed statement, Farmers Insurance told Bloomberg BNA that the contributions fit with its goal of making consumers smarter about insurance.

“This sponsorship has provided us with the opportunity to showcase our Los Angeles-based company and to support more than 5,000 local entrepreneurs and small business owners—a majority of whom are women,” the company said.

Tax Evasion Conviction

Horton has also reported $20,000 in behested payments from Haas Automation Inc., the largest machine tool building company in the country. Gene Haas, the company founder and an owner of a Formula One and NASCAR racing team, spent 18 months in federal prison in 2007 and 2008 after pleading guilty to federal charges of tax evasion, witness intimidation and conspiracy.

Jerome Horton told Bloomberg BNA he wasn't aware of Haas's criminal conviction, and he isn't aware of any business the company has pending before the board.

A representative of Haas Automation referred questions to a representative of the Gene Haas Foundation, which focuses on scholarships and support for students and veterans to build skills in the machining industry, as well as on children's charities and organizations that feed the poor, according to its website. A representative of the foundation didn't respond to requests for comment.

The company, based in Oxnard, Calif., gave $10,000 to CES in 2014 and 2015 to support the Hortons' signature event.

Connecting Women to Power

The daylong Connecting Women to Power event is free to attendees and in addition to sessions on using social media to market a business, it has featured panels on wealth management, leadership skills and managing stress. Officials from Canada, Israel, Germany, Mexico and South Africa have been on hand to advise attendees on expanding their businesses internationally. Attendees have learned how to recruit business investors and access financing. They heard a motivational speaker tell them how to turn their life stories into a money-making speaking career.

The SBOE spent $89,750 to promote the 2014 CWTP conference, including about $79,700 to mail invitations to 171,104 people and $5,170 to print 2,100 programs, according to the information provided through Bloomberg BNA's California Public Records Act request.

At the 2015 conference June 18, both Hortons offered welcoming remarks to 2,500 attendees, along with CSU Dominguez Hills President Willie E. Hagan and California Insurance Commissioner Dave Jones (D). Next, they heard a keynote presentation from Ann Marie Houghtailing, author of “How I Created A Dollar Out of Thin Air.”

One of the almost 30 panels and sessions at the conference each year typically deals with taxes administered by the State Board of Equalization, Franchise Tax Board, Internal Revenue Service and California Employment Development Department. SBOE Executive Officer Cynthia Bridges and FTB Executive Officer Selvi Stanislaus usually participate on the panel.

In addition, SBOE and FTB representatives are usually on hand at booths throughout the event to offer information to attendees. Representatives of the SBOE human resources department also are on hand to help attendees apply for jobs at the tax agency.

Work-Life Balance

As she has in past years, Yvonne Horton moderated an hour-long session in 2015 called “Work-Life Balance: Real Talk About Real Issues, Real People, Right Now!”

In a video of the 2014 session posted on Jerome Horton's YouTube channel, which is linked to his official SBOE Web page, Yvonne Horton kicked off the session by asking the attendees to take “my time” mirrors they received in their swag bags, look into them, and say the words of Maya Angelou: “I am a phenomenal woman and it is my time.”

The panel featured gospel singer and composer Gina Taylor, who said she struggles with balancing her work and life.

“I cannot balance my own life, but because I am connected to God and the Holy Spirit I look to him to help me balance my life and if I don't have that connection with him, I'm all over the place,” she said.

Susan Bowerman, sports dietetics specialist for Herbalife, was also featured on the panel. Yvonne Horton asked her about signs of stress and whether there are natural remedies to de-stress.

Bowerman said in addition to exercise, she recommends making healthy choices about eating and getting enough sleep to help reduce stress.

At the end of the session, Taylor performed her song, “Bless the Lord At All Times.”

Religious Content Removed 

The SBOE paid to print a notebook for the 2015 session after a lawyer for the agency advised that religious references be deleted, according to a memo obtained by Bloomberg BNA. SBOE Tax Counsel Kimberly D. Willy advised a staff member of the SBOE Outreach Services Division in a June 16, 2015, e-mail that a quote from the Book of Matthew, a psalm and several other religious references be removed from the notebook “to avoid the perception that state funds are being used to promote/print religious content.”

Willy also advised that the word “Session” be added to the publication title “Work Life Balance Notebook by Yvonne Horton” to clarify it was for use at the session “and not a separate book being published for Mrs. Horton using state funds.”

The eight-page notebook contained inspirational quotes and “nuggets” such as “Do the right thing—leave the consequences to Heaven,” and questions attendees should ask themselves or others such as “Is it okay to put your romance on a schedule?”

Willy said in the memo that production and distribution of the notebook was an appropriate use of state resources and consistent with state law because the agency had already determined that the event had a meaningful connection to the SBOE's areas of responsibility. Use of the agency's resources didn't appear to be for personal or campaign purposes, she said.

Events or Tax Help?

Jerome Horton reported to FPPC that most of the behested payments to CES in 2014 were used to organize and promote CWTP and four other events hosted by the Hortons that focused on a wide range of issues such as health and wellness, leadership skills and entrepreneurship with a partial focus on SBOE's governmental purpose of tax administration. However, the nonprofit's most recent tax return says the group used most of the payments for a different purpose—to support and promote income tax return preparation for low-income people in Jerome Horton's district.

The other 2014 events funded through the behested payments, according to FPPC disclosures, were a nonprofit financial conference held at El Camino College March 21; a Health, Wealth and Wellness Conference and Resource Fair held Oct. 25 at Hollywood Park Casino; an SBOE job fair held Nov. 14 at California State University, Los Angeles; and a smaller Connecting Women to Power conference held Dec. 2 at the Oxnard Performing Arts and Cultural Center.

In addition to receiving behested payments that funded the Hortons' events, CES also made payments to others for advertising in 2014 and 2015, according to FPPC filings.

CES gave $6,750 at the behest of Jerome Horton April 21, 2014, to the California State Outdoor Advertising Association to pay for advertising for the CWTP conference, according to his filings with FPPC. CES's 2014 tax return, however, states that the nonprofit spent $6,750 on a billboard to promote the income tax preparation assistance program.

The outdoor advertising association and SpaceX contract with the same lobbying firm in Sacramento, Capitol Strategies Group, according to filings with the California Secretary of State.

Circular Payments for Ads

Three months after the 2014 Connecting Women to Power conference, to which Time Warner Cable had contributed $15,000 in cash and $10,000 in items for attendees, CES made a $35,000 contribution at Jerome Horton's behest to Time Warner Cable on Sept. 12, 2014. Horton said in his disclosures to FPPC that the funds were used for the charitable and governmental purposes of “payment for public service announcements for BOE Connecting Women to Power, job fairs, and health/wealth events.”

In response to questions from Bloomberg BNA about the content and placement of the PSAs disclosed in Horton's FPPC filings, a spokeswoman for TWC told Bloomberg BNA in March 2015 the company could confirm that “the ad ran last fall in California,” but declined to provide details and directed inquiries to its “client,” which the spokeswoman declined to name.

In its response to Bloomberg BNA's April 2015 California Public Records Act request, the SBOE said Nov. 4 that the money was used to run public service announcements between Oct. 7 and Nov. 8, 2014, in areas of Jerome Horton's SBOE district including western and southern Los Angeles County and Ventura County.

The PSAs promoted the job fair and the Dec. 2 CWTP event, both hosted by Horton and CES, and ran on 11 channels, including CNN, Fox News, MSNBC, Lifetime and HGTV, the SBOE told Bloomberg BNA.

Running for Re-election 

In its Dec. 2 statement to Bloomberg BNA, TWC didn't respond to questions about the circular payments made to the nonprofit weeks before the nonprofit paid TWC for advertisements promoting the Hortons' events.

Jerome Horton was running for re-election in 2014 and appeared on the June 3 primary ballot and Nov. 4, 2014, general election ballot. He won 99.5 percent of the vote in the June primary and was re-elected with 83.3 percent of the vote in November.

Stern said CES's purchase of advertising from TWC appears to be exempt from a rule in the California Political Reform Act classifying communications that appear within 45 days of elections as political advertisements if they clearly identify a candidate for elective office. The rule, which requires that payments for political advertising be disclosed within 48 hours, applies to payments of $50,000 or more.

In his written response to questions about the timing of the ads before the November 2014 election, Jerome Horton pointed out that he was the incumbent Democrat “who had garnered over 99.5 percent of the vote in the primary, with my Republican challenger receiving .5% of the vote.”

A spokesman for the FPPC told Bloomberg BNA Nov. 17 that the uses of the funds—including the circular donations from TWC to CES and then back to TWC to buy ads—appear to be legal because behested payments to nonprofits are allowed under state law and Horton properly disclosed his. California has no laws restricting the use of the behested payments beyond the requirement that the candidate declare whether they are for a governmental, charitable or legislative purpose.

Horton didn't ask FPPC for specific guidance about the 2014 ads, according to the commission.

Legal Advice

The SBOE provided two documents to Bloomberg BNA through its public records request that said the ads and other activities supported by the behested payments were proper: a June 12, 2012, advice letter from the FPPC and an internal April 26, 2013, e-mail from Willy, the SBOE lawyer, to Horton's chief of staff.

The 2012 FPPC letter to SBOE Tax Counsel Deborah M. Cooke concluded that flyers promoting the 2012 CWTP event with references to Horton and then-SBOE Member Michelle Steel (R) were permitted under the state's mass mailing rules, and that SBOE expenditures related to the conference weren't subject to behested payment rules because the event related to issues before the tax agency.

The 2013 memo from Willy to Horton's chief of staff, Kari K. Hammond, concluded that using state resources to produce and distribute a 60-second video PSA for the 2013 CWTP event was allowable because the event has “a meaningful connection” to the agency's areas of responsibility and met several agency goals including maximizing voluntary compliance with tax rules. The use of SBOE resources didn't appear to be for personal or campaign purposes, Willy said.

The PSAs didn't raise mass mailing issues because they apply only to delivery of a tangible item. Televised or radio airing of the PSAs aren't prohibited mass mailings, she said.

The SBOE legal department reviews events and activities the agency or a board member sponsors and approves them if they comply with rules prohibiting use of SBOE resources for non-governmental purposes, for promotion of a member's election to public office, for direct or indirect payment to a co-sponsoring nonprofit organization or for entering into contracts in which a member has a financial interest, according to legal guidance from board staff.

The Legal Department and External Affairs Department must approve events the board sponsors. The SBOE executive director must approve use of SBOE resources at events it sponsors.

Charitable Purpose 

According to federal tax returns going back to 2005, CES was founded as a charitable organization “to help disadvantaged students attend college and gain access to educational tools and resources to enhance their educational experience.”

Before Jerome Horton became a member of the SBOE in 2009, the nonprofit spent less than $30,000 a year providing computers to disadvantaged students and holding educational health seminars and fairs, according to tax filings.

Yvonne Horton was president of CES until at least 2013, and is no longer president, but is listed on the group's 2014 tax return as the person who is in care of the organization's books. Jerome Horton said his wife is a volunteer with the organization and has never received any compensation.

In 2012, after Bloomberg BNA's 2011 examination of the SBOE's outreach activities with outside groups, Horton shifted behested payments from CES to Bridges Community Development Corporation—a nonprofit organization that is part of Glory Christian Fellowship International, a church in Torrance, Calif. Yvonne Horton also served on its board in 2009 and 2010, according to tax returns filed by the nonprofit. It used $50,000 in behested payments in 2012 and 2013 to support the CWTP event.

Different Nonprofits 

In his written comments, Horton said the payments shifted to the Bridges nonprofit to support an event for disadvantaged youth. Such an event doesn't appear on his FPPC disclosures.

For the first half of 2013, Jerome Horton reported behested payments to the California State University Dominguez Hills Foundation, but in July 2013 the payments shifted back to CES.

The nonprofit's 2014 federal tax return, however, is inconsistent with its original mission and Jerome Horton's behested payment reports. His reports to FPPC showed $120,000 in cash and $58,464 in in-kind donations to CES at his behest in 2014. According to the 2014 tax return, CES said it had $132,610 in revenue and spent $87,990.

“Through our VITA program we helped recaptured [sic] over 1 million, feeding over 300 volunteers and an extensive advertising program,” the return said in explaining its primary exempt purpose.

VITA Events

VITA is the Voluntary Income Tax Assistance Program, administered by the Internal Revenue Service, to help low-income people file tax returns and claim the federal Earned Income Tax Credit. Through VITA, the IRS partners with state agencies such as the Franchise Tax Board, as well as with community and nonprofit groups.

Jerome Horton's FPPC disclosures for 2014 behested payments don't mention VITA as a use of the money, although $73,000 was reported as funding for VITA support in other years.

The nonprofit's $87,990 in 2014 expenses listed on its tax return include $46,145 in expenses that aren't categorized, $3,600 in entertainment for events, $12,351 in VITA volunteer supplies, and $12,578 in seminar rentals.

According to a flyer provided to Bloomberg BNA under its public records act request, Jerome Horton sponsored eight VITA events in February and March, 2014. Held at various schools and community centers in his district, the free income tax preparation and resource fairs also offered medical and nutrition services, job preparation assistance, low-cost auto insurance and financial literacy training. CES isn't listed as a sponsor or partner organization for the events.

According to the SBOE, the agency spent an average of about $16,850 on each of the eight events, including venue and equipment rentals, staff travel and mailings.

Trend Has Started

In a nod to the Hortons' behested payments model, SBOE Member Harkey held her own Connecting Women to Power conference Nov. 4 at the University of California, Irvine, with some of the same corporate sponsors including Time Warner Cable and AT&T. Other sponsors included Chevron Corp., the Walt Disney Co., Western States Petroleum Association, and the Wonderful Co.

Harkey's nonprofit partner in the event was the California Prosperity Foundation, a name created for the event by the San Diego Prosperity Institute and San Diego Prosperity Foundation.

In Nov. 25 filings with the FPPC, Harkey reported $30,500 in behested payments through the foundation for the event: $13,000 in in-kind donations from Women's National Basketball Association team the Los Angeles Sparks in the form of tickets for a new women's empowerment campaign, $7,500 in in-kind donations for venue costs from UC Irvine and $5,000 cash each from AT&T and the Orange County Association of Realtors.

About 1,200 people attended the event, foundation president and chief executive officer T.J. Zane told Bloomberg BNA Nov. 30.

The institute calls itself a nonpartisan organization for fiscal conservatives focused on personal liberty and responsibility, free enterprise, reasonable regulation and low taxes. The foundation is a nonprofit organization under Internal Revenue Code Section 501c(3), and the institute is a nonprofit advocacy organization under Section 501c(4), Zane said.

Harkey said the hugely successful event helped attendees learn how to launch and grow a successful business, as well as how to interact with state tax agencies.

“My mission is to create more taxpayers, not just to hit taxpayers harder,” Harkey said. “We have a responsibility to have people not be afraid to come forward.”

She said she doesn’t expect the donors to ask her for any favors.

Old, New Rules

Like all elected officials in California, the SBOE members are subject to campaign contribution limits in primary and general elections. The SBOE also has its own set of rules, the 1990 Quentin L. Kopp Conflict of Interest Act, which limits contributions to $249 from entities with an interest in an adjudicatory proceeding before the board in the 12 months preceding board action.

Ethics authorities and some board members told Bloomberg BNA that the existing rules are inadequate.

“The board and the Legislature should be looking at new rules for the board,” Stern said.

Ma and Yee both pointed out that the board can adopt its own ethical rules without legislation. In 1994, the board adopted regulations exempting political action committee contributions from the $249 limit under the Kopp Act.

Last month, the board adopted a policy requested by Jerome Horton prohibiting members from sending mass mailings within 60 days of an election if any member appears on the ballot, although the policy exempts mailers for outreach events.

Ma said the board should align behested payment rules to the $249 limit under the Kopp Act for entities that have business before the board.

“I think this is a loophole that should be addressed,” she said.

Runner disagreed that more rules are necessary. “The more we try to crank down on that type of stuff, the more people try to get around it and it makes it harder to follow the money,” he said.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif., at

To contact the editor responsible for this story: Ryan Tuck at