Senate Standing Committee on Elections and Constitutional Amendments

Good morning, everyone. The Senate Committee on Elections and Constitutional Amendments will come to order. The Senate continues to welcome the public and has provided access to both in person and teleconference participation for public comment. We're going to have that opportunity when we finish with our speakers this morning. For individuals wishing to provide public comment via the teleconference service, the participant toll free number is 877-226-8163 and the access code is 736-2834. We also have one representative participating remotely.

For our remote participant, please mute your phone or a computer. Please select unmute before you begin speaking. Our IT personnel will put you back on mute when you are done. Once recognized to speak, please make sure you can be seen on the screen. State your name and then you're ready to address the Committee. For today's hearing, we'll be hearing all the panel of witnesses on the agenda prior to taking any public comment.

Once we've heard from all of the witnesses, we'll have a public comment period for those who wish to share their views on the topics on today's agenda. This morning's hearing will examine the ongoing challenges as it relates to the Franchise Tax Board and the audits that are required of both lobbying firms and their employers. The Franchise Tax Board is required to perform audits of 25% of lobbyists and lobbyist employers. According to the FTB, between 2017 to today, only four lobbying audits were completed and submitted.

This is far below the number required by the Political Reform Act. Today's hearing will hopefully shed light into the challenges and provide potential solutions to this ongoing problem by bringing together stakeholders involved in this auditing process, as well as other interested parties. We welcome my Vice Chair here, Senator Nguyen. Want to just check and see if she has any opening comments before we call the first witness?

I do.

Okay, terrific. Okay, so first up on the agenda is Robert Stern. Bob is the former President of the Center for Governmental Studies, and he was the principal co-author of the Political Reform Act of 1974. Bob, 49 years old and still kicking, and you're looking good, and I know you're joining us remotely. We want to welcome you and we look forward to your testimony.

Thank you very much, Mr. Chairman and Vice Chair Nguyen. My name is Bob Stern. I was a principal co-author of the Political Reform Act, a ballot initiative which was written in 1973 and approved by 70% of California's voters in June of 1974. Thanks for inviting me to participate in this hearing by Zoom. And also my thanks to your staff for providing an excellent background memo for today's meeting.

Now, my background: I worked for the California Legislature as a committee consultant to your counterpart in the Assembly, then known as the Assembly Elections and Reapportionment Committee, chaired by Henry Waxman. I worked for that committee and Henry Waxman for two years.

Then I became the elections counselor to the Secretary of State's Office for two years when Jerry Brown was Secretary of State. In that capacity, I also was the legislative representative for the agency on election related bills.

After serving as elections counsel the Secretary of State, I became the first general counsel of the California Fair Political Practices Commission, where I was its legislative representative and at times its press spokesman and also supervisor of its enforcement division. I also personally performed a campaign audit of the state controllers race for 1978, since the FPPC was required to do so instead of the Franchise Tax Board.

As you know, the state controller is on the Franchise Tax Board and thus the FPPC was required to do the audit, which I did. I was at the FPPC for nine years, until 1983, when I moved to Los Angeles to become President of the Center for Governmental Studies, an LA-based nonprofit organization that wrote model laws in the field of campaign financing, ethics, and other governmental reforms. There I helped write the LA campaign financing and ethics law.

I was with the Center for Governmental Studies for 28 years till I retired in 2012, when the organization ceased its operations due to a lack of funding. I was very surprised and I am outraged to learn that an important part of the Political Reform Act, the auditing of lobbying statements, has been ignored by the FTB, apparently for several years.

When we wrote the 1974 act, we wanted to ensure that a certain number of campaign and lobbying statements were not only reviewed on their face, but also the statements and its supporting financial documents were actually audited in the field. Because we knew the Franchise Tax Board was the premier auditing agency in the state, we gave them that responsibility. After I became general counsel of the FPPC, I learned within a few years that the FTB was not very excited about being involved in the auditing.

They assigned the lowest level staff to perform the audits, but we kept in touch with them and as far as I recall, they continued the audits. However, in retrospect, I think we made a mistake in not sponsoring legislation to transfer the auditing function to the commission or perhaps to the State Board of Equalization. That is my recommendation today. Unless the FTB can assure you they will resume the auditing as required by law.

At the time we wrote the act, we thought it was important that various responsibilities be divided so that one agency wasn't doing all the work and given all the responsibilities under the act. Today, I still think it's important that the Attorney General and local district attorneys have criminal enforcement authority.

But I think it's time to transfer the auditing function to an agency that will give it a high priority, the FPPC, or in the alternative, the State Board of Equalization, unless the FTB can assure you they'll continue doing the auditing. In the meantime, however, the FTB should do its mandated responsibility of auditing and field investigations as required by government code section 990 thousand. It is violating the act by not doing so. I want to commend this Committee, and particularly the Chairman, in conducting this oversight hearing.

Without it, the public and I would never have known that this state agency, the FTB, has been derelict in its duty for several years. I hope you will schedule a follow up hearing for next year to see what progress has been made in rectifying this terrible situation. I'm happy to answer any questions. Thank you again for letting me testify.

Thank you, Mr. Stern, for your direct testimony. Certainly. Thank you for your historical work in this area of political reform. And it's helpful, I know, to me and the Committee to hear your thinking behind the mandatory audits and how important it has been, as well as the beginnings and the concerns that you expressed that maybe they weren't so enthusiastic. I want to invite my colleagues to see if there's any follow up questions.

We're going to be hearing from the Franchise Tax Board's representative in a few minutes. And so I certainly would invite you to hang on with us and hear that together, their explanation. And if you have further comments or testimony later in the hearing, Bob, we would certainly welcome that as well.

Thank you.

I turn to my colleagues. Are there any questions here for Mr. Stern? Bob, will you hang around here? Okay?

Yeah, I just want to say hi to you, Bob. And I just want to echo the comments that have been made about Bob's important role in helping to craft the laws that have really made our system cleaner. And we need to keep working in this direction. And now, of course, these audits are an important part of that process. And I just appreciate the work of the Committee to shine some light on this, as Mr. Stern said, this dereliction. So looking forward to the rest of the hearing, and thank you, Bob.

Thank you, Senator Allen. Senator Nguyen, anything further? Okay, Bob, you'll stand by. We're next going to hear from Jeanne Harriman. Jeanne is the chief financial officer of the Franchise Tax Board. The Franchise Tax Board, as we have heard, is required by the Political Reform Act to perform the lobbying audits. And Ms. Harriman, welcome to the Committee and we look forward to your testimony.

Good morning. Thank you so much. As noted, I am Jeanne Harriman with the Franchise Tax Board. Thank you for including this oversight hearing today regarding the important matter of audits under the Political Reform Act, particularly audits focused on lobbyist firms and lobbyist employers. As noted in the materials supporting the hearing, FTB has worked with the FPP since the adoption of the Political Reform Act in 1974.

Let me just say FTB has never been well resourced for these audits since 1974, and with the resources that we have, we have attempted to do all and everything that we are able to do. I would note the volume and complexity of the audits over the last decade, with modifications to the Political Reform Act itself, as well as the change in the political landscape.

With additional new individuals entering into races, special elections, and a handful of other things that are common to be audited under political format, all have increased in volume and complexity, further stressing the resources that we have. FTB currently has 13 resources and this goes back almost 20 years when we look on our records as to the number of resources that we have available to do these audits.

Nine perform audits, two perform support and review of those audits, and one staff member performs support necessary to conduct those audits and finalize those audits. And in certain situations, depending on the incumbent's knowledge, can also perform some of the simpler tasks associated with an audit. FTB recruits staff for this program both within and outside of our organization. Because the audits are not income tax related and involve a separate body of law, the auditors receive the specialized training within FTB, including audit techniques and policies and procedures.

After the training, they are well qualified to evaluate compliance with the Political Reform Act and to assist the political entities as necessary in improving disclosure and record keeping performances. As noted, the entities to be audited are randomly selected by the FPPC at public drawings and or meet certain threshold amounts. FTB then receives a listing of cases for audit.

These audits are conducted in accordance with generally accepted auditing procedures and include interviewing Committee staff, preparing bank account reconciliations, evaluating internal controls, and examining documentations of receipts and expenditures, including third party information. Many of the audits are done in our audit however, some of our staff do travel throughout the state.

The size of the audits vary greatly, ranging from hundreds of millions of dollars under review and taking hundreds of hours to complete to the more simpler cases where there's a few thousand dollars being reviewed and taking just a small amount of time. At the conclusion of an audit, each entity receives an audit report containing the auditor's opinion of its compliance with the Political Reform Act and a description of any material issues.

Examples of material issues are personal use of campaign funds, inadequate disclosure of information regarding contributions, and expenditures, missing disclosure reports, and the failure to maintain adequate records. While today's hearings focus on lobbying related audits, FTB staff engage in political reform audits for 17 different workloads. None of these program mandates are met with the staffing levels we have. Over the last six fiscal years, FTB audits for these workloads have generally been targeted to or approached between 10 to 50% of the mandated levels.

As seen from the statistics in sporting the hearing materials today, the lobbyist type audits are 3% or less. In actuality, FTB recognizes the extreme challenges with the inability to meet these mandates. But let me be clear. We have not ignored the requirement. We have done everything we can with the resources that we have been granted to allow and accommodate this program.

We have engaged with external stakeholders several times over the last decade to discuss the feasibility of being authorized additional physicians to allow us to meet these mandates. We are continuing these conversations today. At this time, I'm happy to answer any questions you may have.

Thank you, Ms. Chairman, for being here and for sharing your perspective. Maybe I could begin with a few questions, and my colleagues may have some as well. You note the complexity of these audits and a lot of your testimony related to campaign audits, not audits of lobbying firms and their employers. Could you speak to the issue of what's the complexity involved in auditing a lobbying firm?

The complexity can not necessarily related to the lobbyist firms, but it can also be related to the other type workloads. Considering the structure that's behind the scenes of the political action committees and the other special entities that are there. So lobbyist firms typically don't have those so much. However, they're very diverse in what they do as well. They've multiplied in numbers.

The campaign contributions that they take in and that they contribute as well, that are subject to monitoring, have also increased in volumes as well as dollar amounts, all of which are subject to review during the audits. And it just takes the additional time to understand and to dive into those bank accounts, those financial statements, those disclosure statements that say what they're lobbying for, who they're lobbying with, et cetera.

Right now, according to the staff report, over the last 10 years, the number of lobbying firms and employers really hasn't changed much. It's been stagnant, a little over 1,200. So it seems that there hasn't been any growth in those targets for audits. It seems like it's been pretty stable there.

So you can also--agree. So I don't have last 10 years data, but I have the last seven in front of me. And yes, I can see that. However, the documents behind it and the employees of that firm, et cetera, have changed, requiring more extensive diving into understanding what those firms do that have those employees on site as well as other things. So the volumes haven't particularly changed.

But again, how they're interacting with the Legislature, how they're interacting with their clients, et cetera, all have increased in complexity and again, with the increased interest in political issues today, again, we continue to see lobbyists play an important role in that. And you can see that when you start looking behind the books and understanding what that lobbyist firm is doing and how.

How do you prioritize? You mentioned that the staff, you have basically 13 positions, I think you called them 13 resources, but 13 positions in that unit, nine who perform the audits. So how do you prioritize their workload? Because obviously, based on the data and the staff report, seems that few of the audits have been directed towards lobbying firms.

That would be a correct observation. Right. Again, of those 13, nine are actually engaged in audit work. The other three are in some level of review, support, et cetera. So, focusing in on the nine. So again, these nine are applied across the board to all 17 workloads, not just the lobbyist. So as far as how we select our work, we do look at all 17 of the workloads, including the lobbyist.

We look at the hours that we have, we look at the inventory that's trailing into the current year and how much time it's going to take to resolve the cases, how much time we'll have in this particular audit cycle. And then we do our best to try and select audits in each category so that there is no one category that is always ignored, and that every category has some level of presence of an audit in it, even if it's not at the directed level expected.

There is some coverage there to accommodate what it looks like when you start peeling back that layer of the onion. So we have been asked also, do we quantify what we do by dollar value? No, we do not. So what we have found in our normal workloads with audits is the value of the case as per dollars is important to understand, but the non-compliance can be at any level. So we typically do not select cases just at the highest level.

We don't ignore them, but we don't look at and quantify the cases by highest dollar amount. And those are the ones that we audit. We try to spread the resources that we have across all spectrums of the dollar amounts.

So I hear you, Ms. Herriman, in terms of spreading the audits across the spectrum. But in the 2017, 2018 year, even though you were mandated to provide 25% of lobbying firm audits, you provided actually zero. But there was not a single touch in the lobbying area. I'm confused as to how that is spreading your staff over the wide array of responsibilities.

So, once again, can you reference that year you were speaking to?

2017, '18 there were 1,243 lobbying firms and employers. The 25% requirement is over 300 audits were to be performed in that two year cycle. And according to the records here, zero were performed. Is that correct?

Yes, but if I can clarify that a little bit.

Sure.

So '16, '17 was when the draw occurred and we got those 300 plus entities for audit selections. It is correct to say that in fiscal year '16, '17, we did not audit any of those lobbyist firms. However, in the second year of the two year cycle, not a grand number, but we audited 27 of those that I can see on my statistics sheet that I have. So still dramatically less than the expected number, for sure, but there is at least 27 in that field.

All right, well, that doesn't match up with the staff work and the staff communication with your office. Let's go to the 2019 and 2022 year cycle again. Again, my records show that there were only four audits done of lobbying firms and zero audits done of lobbying employers during that two year cycle. Is that correct? Or please let me know if that's not correct.

Number four is correct. My records show that we did two lobbyist employers and two lobbying firms for a total of four.

Okay, so this goes back to my question originally, which is that how do you prioritize? I mean, you talked about the workload that you have, but why are you prioritizing the audits of lobbying firms so low? I mean, even if our numbers are off by one or two, obviously it shows that we're not even close to the mandate under the law.

And I don't know in that period of time, the audits that you've done of campaign work or the other responsibilities that you have, that this unit has. But certainly it appears that you've prioritized lobbying reviews as almost being the lowest priority.

I can understand the observation, certainly. When you look across all of the workloads that we're doing, the percentages of recent audits in all years are dramatically lower than prior years. Right. Because some of those nine resources that we've had, the positions that we have, are not always filled. They're vacant. Right. Everybody across, seems like the nation from the world is having challenges hiring right now. FTV is no exception.

There are recruitment and retention issues that we suffer within the workload that we're talking about today across the board. Not just the lobbyists, but across the board. Right. And so while those nine positions are there, that does not mean they're always filled, and that does not mean that they are experts at what they do yet, because the learning curve, once you hire an employee, is probably at least a good year to get a feel for what they're doing. Right.

And so all of those are taken into consideration. Some of the candidate audits that we do or some of the non-candidate audits that we do could be simpler, could be better for training, could be quicker to do. And so again, all of those factors are used to suggest what workloads that we are able to accommodate, and never with the expectation that we're ignoring a workload or that we are suggesting that a workload is less than another.

We consider all of these workloads important, and all of them should be adequately resourced, as we've asked for over the past decade, to be adequately resourced to do those. But regrettably, we've not yet had success in that, even though we continue those conversations.

And I'm going to ask a follow up question on the resource issue in a moment. But the data that we have on the lack of auditing hasn't been a one or two year issue, and it's not been a pandemic issue. It goes back 10 years. And seems that at least the 10 year record that I have in front of me shows that the FTB has not been able to perform even close to what's required.

And again, we all have staffing issues and challenges in our world, so I'm sensitive to that. But it seems like it's a systemic problem that goes way beyond the issue of staffing. Well, let me go to that issue of resources for a moment. You've mentioned that at least in the last 20 years. I think that your testimony was that you've had 13 resources. And again, I think that references 13 staff positions in this unit over the last 20 years.

Can you tell me what's your view of why? Where do you go to to request funding? Let's just put on the record some of the basic facts. So where does your budget come?

So, good question. I'll just note your observation. This is a systemic issue, is accurate, right. It is not related to Covid. So when, just like any situation, when we or another state entity needs resources, we start with working with Department of Finance to understand, of course, FTB, saying what we need. In many cases, in our prior conversations, we've requested at least double the current staffing levels that we have now to be able to effectively manage the mandate workloads.

In this unit, or you're talking about your agency as a whole?

This unit, within the entire Political Reform Act audits, not just the lobbyists, but within the entire workloads, the 17 workloads. We've estimated when we've crunched those numbers that we likely need to double our staff, if not more. And so the Department of Finance, again, is the entity we approach to say, here's what we're struggling with, here's what our solution is, and conversations go from there. FTB is also a board, as you know, and we also work with our board and let them know those same struggles.

Right. And then they approve in a board meeting, typically in the month of September, that we're moving forward with the BCP, if that's the case, and they support it. So those are the two avenues we work through.

So your budget as an agency is obviously substantially larger. Are you allowed to move resources and positions around within your operation to focus on priority areas?

Yeah. So that's a great question and a very complex answer. So let me lay the groundwork to do that. So Franchise Tax Board has a provision in our budgets called provision one that says that FTB may not move revenue generating resources around without approval from Department of Finance and without approval from the Joint Legislative Budget Committee. So almost 60, 65% of FTB's resources are associated with that provision one classification.

So all of those, of course, are off of the table from moving here because this is not considered a provision one workload. The remainder of the resources FTB does look throughout the year, throughout the day, the issues that present in regards to moving resources around. However, there are many workloads in FTB that are compromised or not able to be done as necessary and have not been able to get those resources.

So there is evaluation within franchise taxport as to where the greatest priority is, whether it's customer service, whether it's collecting accounts, whether it's updating our website, whether it's conducting audits, et cetera. So it's not as easy as one might think to move things around because there is a trade-off that occurs with everything.

But are you saying that you need the permission of the Joint Legislative Audit Committee and the Department of Finance to enhance the resources into this unit?

If we were to move provision one resources there? Yes, that is an absolutely correct.

Have you made any requests to the, in this case, the Joint Legislative Budget Committee to move resources into this area?

We have not taken that route. We have not found the ability to what provision one resources we could and should redirect to this program as it being the highest priority. So that question hasn't really came up in front of FTB. We have been instead pursuing the additional resources through the other budget channels.

I see. And so who at the Department of Finance is your direct report for your budget requests?

Correct.

Who is it in the Department of Finance?

Oh, who are they? So Chris Hill and Dirk Simmons are our budget consultants, and they are under Chris Cook.

Chris Hill and Dirk Simmons. And they're under--the last person is, again?

Chris Cook.

Chris Cook. He's the head of the unit? And of course, the Department of Finance is an agency that is, in essence, the Governor. Is that correct? The Governor's Budget, the Department of Finance is their fiscal agent to advise the governor. So on one hand, you have people within the Department of Finance. Is there somebody in the governor's office that you've worked with on your budget that ultimately make these decisions?

So Jackie Roberts at the governor's office is sometimes involved in discussions on FTB's budget. I do not know the full extent, because a lot of that is hidden, but I do engage in discussions with her on it, so I know that she's informed, et cetera. Yeah, I'll just leave it at that.

Okay. So Chris Hill, Dirk Simmons, Chris Cook, and Jackie Roberts are the people that you deal with in the governor's office in the Department of Finance. And so those are the ones that are there today. You've mentioned that you've been under resourced for the last 10 plus years. It could be even longer than that to get us in this correction that we're in. Okay. All right. I want to turn to my colleagues and see if there's some follow up questions that they may have here. Members, any follow up questions with Ms. Harriman?

I guess my question is to you, Mr. Chair. What is your plan in terms of kind of oversight follow up with the board? We're obviously hearing a lot of the challenges that they have, including budgetary and others. Are you thinking about kind of crafting a strategy for working with the board going forward?

Well, I think part of what we're trying to understand is the problem, the extent of the problem, and whether there are alternatives there might be for addressing it. In response, I'll ask a direct question to Ms. Harriman.

Sure. Yeah, please.

Do you think that this responsibility should remain in the Franchise Tax Board, or should it go to the Fair Political Practice Commission Mr. Stern testified earlier about, maybe directing those responsibilities to the Board of Equalization? Do you have any opinion about that?

So I would basically say wherever this workload is done, and really that's not our ability to engage in those conversations, we support the FPPC. However, resources to do these audits need to be in place wherever the work is. If the work remains at FTB, we need resources to do it. FPPC is not resourced to do these audits either. If we were to lock, stock, and barrel, move our resources, our work over there, neither is SOS. There isn't anybody that is resourced to do this work.

And to me, that's the crux of the issue, not necessarily a lock, stock, and barrel conversation necessary to have with who does the audits. It's whether or not these resources are available to conduct these mandated workloads.

So, Senator Allen, I guess my response is, I hope that the disclosure that we're hearing today will energize Members of the Committee or others to see whether we should find a better way of doing this. I'm certainly concerned that this unit in FTB is like a small part of a very giant operation, and it can get lost and it can become not a priority. Certainly the shameful nature of the facts before us here indicate that it has not been a high priority.

And part of the question is whether or not this should be something that we move those responsibilities to a place where it becomes a more serious priority to bring it to our attention. I'm not aware, this is my 8th year in the Senate, I'm not aware of efforts that have been brought to us to say this is an under-resourced Department during our budget review that says we need to direct resources. So we're hearing about it now.

I don't know during your chairmanship whether you heard about this issue in the past either. So we're going to hear from the Fair Political Practice Commission in a few minutes. My recollection is that there have been proposals on the table to move the campaign audits, again, part of this unit, but different than the lobbying audits, the campaign audits, to the FPPC as a better avenue for more responsive and engaged work in that space. Now that's a little different than what's on the table today, but it's a part of this broader conversation. Senator Nguyen.

This question might be for Mr. Stern. I'm just more curious, what was the intent back then when they gave it to FTB instead of FPPC? I'm just curious why, what was that intention? I mean, what was the intention?

Well, let's invite Mr. Stern to join us again in this conversation. Bob, are you there?

I am, yes. Thank you. The intent at the time, and this was 50 years ago, was we were very concerned about putting all the eggs in one basket, about having one agency in charge of doing all the work we saw at the federal level. This was during Watergate, obviously, that the Department of Justice was refusing to take any action and nobody else was there to do anything.

So the idea was to divide up the responsibilities so that if several agencies fell down on their job, there was one agency maybe that could do something. Looking back on it, I think we made a mistake in terms of certainly the auditing functions. We should have given it to the FPPC to do. But that's looking back on it at this point. Clearly, the Franchise Tax Board is given a responsibility to do it.

And I'm still puzzled why they haven't asked for more resources or even with the resources they have, why they haven't done the work, at least some of the work that they're required to do.

And this will be a question for FBC when they come up, is that do they have enough resources to take on this task? Because it sounds whether the resources question has not been asked of us in the past, we are where we are today and we're looking at this. It sounds like regardless who does it, resources will need to be put in place because I can't imagine FPC is going to come up here and go, oh, we'll take it over and we don't need any more staffing for it.

They're really shaking their head, see? So the idea to change in the middle, and I know it's been 50 years, but to have to start sending something this important to another agency and having to start all over, I think will also now will cause that potential delay as well. So if it is resources, I think we should talk more about resources than where it ought to be. That's just my two cents.

Okay. All right. Any other questions or comments from Members? So, Ms. Chairman, I would like to invite you to stay here at the witness table if you will. You know, you've been put on the spot here. I know that's uncomfortable, but you've handled it quite well and doesn't mean that we're happy with the circumstances we find ourselves in.

I'm not either, but thank you.

I got it. I want to invite the next witness to come up, but if you want to move down a chair and continue this conversation that we're having, because I'm hoping that out of it, some suggestions will be made about how we can do this work better, because obviously none of us are satisfied, I don't believe, with how it's been handled up until now. So let me next invite up Lindsey Nakano. She is the senior legislative counsel for the Fair Political Practice Commission.

For those who are listening, the Fair Political Practice Commission is a five member, independent, nonpartisan commission that has primary responsibility for the impartial and effective Administration of the Political Reform Act. The FPPC aims to ensure that public officials act in a fair and unbiased manner in the governmental decision-making process. They promote transparency in government and obviously, for the very important goal of fostering public trust in the political system. So, Ms. Nakano, we welcome you here and look forward to your testimony.

Thank you and good morning. Again, I'm Lindsey Nakano, Senior Legislative Counsel with the Fair Political Practices Commission. I'd like to highlight now briefly the relevant legal requirements for lobbying audits, the audit numbers as we know them, and the FPPC's perspective on an assessment of the current state of these audits, including challenges and possible solutions. As for the law, both the Franchise Tax Board and the FPPC have mandatory audit duties under the Act.

FTB is responsible for the mandatory lobbyist audits and most campaign audits, and the FPPC is responsible for a small portion of the campaign audits. The FPPC also has broad discretionary authority to conduct audits of any reports or statements under the Political Reform Act, including audits of lobbyist entities. Under that discretionary authority, the FPPC's audit division has conducted four lobbying audits in the last year, which I will talk a bit more about later.

As you know, the PRA mandates that 25% of lobbying firms and employers be selected for audit following every two year election cycle. The commission is required to select entities subject to these mandatory audits by random draw, which occurs in February of every odd year. For the last four 2-year audit periods covering 2013 to 2020. The act has mandated that more than 1,200 lobbying firms and lobbyist employers total be audited for that eight year period.

Based on the data provided by FTB to this Committee, 67 audits total were completed by FTB for that period, 67 out of about 1,200. That's about 5% of the required audits that were completed for that eight year period. The FPPC believes that these audits are crucial for transparency and accountability. Audits operate to monitor compliance with the act and are the main and most consistent vehicles for discovering lobbying violations.

These violations can include failure to file or timely file lobbying reports, failure to accurately report expenses or payments, or omitting expenses or payments on reports, impermissibly giving gifts or contributions to officials or candidates, and record-keeping violations. In fact, Commission staff looked over its records of violations uncovered due to these audits and found that between the years 2000 and 2017, the Commission had 61 enforcement actions based on audit reports conducted by FTB, and undoubtedly, this number would be higher had more audit reports been completed.

Of those that were completed, roughly one in 10 of the audits resulted in either a warning letter or an administrative penalty. While warning letters don't carry a fine, they serve the important functions of putting entities on notice of their violations, and they serve to create transparency to the public about violations that would otherwise likely go unknown. For those audits that resulted in administrative penalties, many of these uncovered serious violations that likely would not have been found absent these audits.

For example, in the year 2000, a lobbying firm was found to have failed to timely file 11 reports or about three years worth of quarterly statements, resulting in a $14,000 fine. In 2012, a lobbyist was fined more than $133,000 for making illegal campaign contributions and arranging for gifts and giving gifts to state legislators that were over the limit, and this was discovered due to an audit.

More recently, in 2016, an audit uncovered that a lobbying firm failed to report another gift to a senator, resulting in a $4,000 fine. The Political Reform Act, as it was originally passed by the voters and as it currently reads, includes in its core purposes that the activities of lobbyists should be regulated and their finances disclosed in order that improper influences will not be directed at public officials and that adequate enforcement mechanisms should be provided in order that this title will be vigorously enforced.

Based on our records from more than 20 years, we see that audits serve a necessary and irreplaceable role in the enforcement of the PRA. The reduction in audits has hindered the ability of the Commission to vigorously enforce the rules relating to lobbying because violations are going undiscovered and we have seen a decline in lobbying enforcement actions in recent years.

The FPPC understands that the main reason these audits are not occurring is due to workload and resource issues, and the Commission would be supportive of solutions that address those workload and resource issues within FTB. The Commission would also be supportive of an alternative solution, also suggested by Mr. Stern, to transfer the mandatory lobbying audit duty to the Commission. And to answer Senator Nguyen's question, this would be in conjunction with additional resources appropriate to complete that audit duty.

As I mentioned before, the Commission's audit division recently exercised its discretionary authority to complete four lobbying audits from the list of lobbying entities that were selected in the 2021 random draw. And the Commission's audit division would be capable of expanding, given appropriate resources. Additionally, the Commission would be open to further discussions about other ways to improve the lobbying and audit a lobbying audit program, such as by tightening rules to improve financial transparency and record keeping. Thank you again for the opportunity to speak today. I'm available for questions.

Thank you, Ms. Nakano, for your testimony. A point of clarification. You said 61 actions, and you gave the time period for those actions. What was that again?

It was a bit broader than what the Committee looked at in its materials. It was 2000 to 2017.

So from 2000 to 2017, even given the limited audits that were being conducted, that you took 61 actions of some sort of violation, either through a warning letter or a penalty?

That's correct.

And those only came about because of the audits themselves?

Yes.

So, in summary, do you think this audit function is pretty important?

Yes, we think it is crucial to the enforcement of the act, and there really is no replacement.

Okay. All right, Members, questions for Ms. Nakano. Any questions? Senator Newman, Senator Allen, Senator Menjivar, nice to see you. Thank you for joining the Committee. Senator Nguyen, any questions? Well, I know this conversation is going to continue. I want to give an opportunity to Ms. Harriman from the Franchise Tax Board to share any thoughts or reflections on the testimony from Ms. Nakano. Any thoughts there?

I would just reiterate that I do believe these audits are necessary, as indicated, to support the authenticity and the veracity of the program, and that it is very important to do. And I also, again, will repeat that just the resources seem to be the problem here. Whether or not there's another entity to do it can certainly be discussed. But resources really seem to be the crux of the problem that we're facing here.

FTB is happy to be resourced for it, and FTB is of course happy to support any recommendations by the FPPC if workloads were to be moved over. I would again continue to watch it from the perspective of the global program. If the lobbyist audits are moved over to FPPC, we are still under resource to address the remainder workloads that we are working on, which are also very important to manage as well.

Thank you, Ms. Harriman. I would note though that I appreciate that this concern about resources, but look, we had $100 billion surplus last year and have we had tough times in the state? We certainly have.

But I don't find it that very compelling to say that where we're spending so much money in so many places, to say that this function of the monitoring and disclosure of this huge enterprise of lobbyists and lobbying firms, somehow that underpins the trust in our democracy, that somehow that, that is a low priority. It doesn't compute for me.

And so it's confusing that we would say that that's the problem over the last decade in trying to make sure that the underpinnings of our democracy are not properly reviewed and monitored at every level. So I appreciate hearing that feedback, but it's not compelling to me because there are a lot of resources out there and choices are being made. Okay. With that, I'm going to go to our next speaker, unless there's further comments or questions. Mr. Stern, did you have anything you wanted to say on this last testimony? I want to make sure you give you a chance if you want to make any comments.

You're very kind, but I second your viewpoint, Mr. Chairman.

All right. Okay. So I want to again invite the speakers to stay if they want at the testimony table. And let's invite up our next speaker, it's Kira Rasmussen. Kira is the compliance manager in the Secretary of State's Political Reform Division. The Secretary of State handles the filing for lobbying forms and posts the audit reports completed by the Franchise Tax Board.

And as Ms. Rasmussen gets settled, I would note that in the staff report for this hearing today, it's noted that these audit reports have not been, if they've been done, they haven't been posted over the last many years. And I hope that your testimony will provide some illumination to that concerning factoid. So, Ms. Rasmutin, thank you for joining us. We welcome your testimony.

Thank you. And thank you for the opportunity to be here. So as you described, our role here is as the filing officer to receive, file, and disclose the audits that we do receive from the FDB.

Those reports are received--I want to address the matter you brought up--and that is that we do receive the reports together, campaign and lobbying audit reports together, and they are posted for public disclosure on our website. I believe we currently have the last 10 years available there. We were asked to provide the number of lobbying audits separate from campaign, and our staff did a manual review because it's a single PDF for the year, cumulative. And you're correct, we have record of receiving zero reports for that time that you mentioned.

Have you been in touch with the fair for the Franchise Tax Board to ask them about that, their concerns that you so note. Since they were brought to our attention in this hearing? No.

All right. Well, let me ask Ms. Harriman, since she's here, this posting requirement, I mean, if you do the audits, that's great, and obviously is a deficiency there. But at a minimum, there's supposed to be disclosure so everybody can see the work that's been done. You note that there have been some audits over the last four or five years, but they don't seem to be posted. Do you know why?

I do not. Off the top of my head. To my knowledge, when we complete the audits, we do follow the protocol. But I can certainly take that as an action item and get back to you with that information because I'm not aware that that is not happening.

Okay. All right. Anything further that you want to say?

That I do feel confident that we've posted everything we have received. But since it was a manual separation of lobbying and campaign entities, it sounds like there's an opportunity for a reconciliation here. If there's a discrepancy.

Okay. Well, four or five years of no posting seems to be perhaps more than a discrepancy but a huge void in our requirements to not only conduct the audits, but to make sure the public has access to the findings. Committee Members, any follow up questions with the Secretary of State's representative? Okay, we thank you for your testimony. Thank you.

All right, next up, I want to invite Tom Hiltak. Mr. Hiltak is representing the Institute of Governmental Advocates to provide the lobbyist's perspective on this whole issue of lobbying audits. Mr. Hiltak, welcome to the Committee. We welcome your testimony.

Thank you, Mr. Chairman and Members.

It's on.

There we go. On behalf of IGA, I commend the work of the Committee to look into this issue. IGA believes that the audit program that has been in existence since the formation of the Political Reform act is an important element of assuring compliance and accuracy of reporting by lobbying firms and lobbyist employers as well as all of us engaged in the political process here in California.

And we'll do whatever we can to help the Committee and the FTB come to a resolution to solve this problem that, frankly, we were not aware of as well. And I think that it's very important that this audit function get corrected.

Do you have any recommendations at this point in terms of where that audit function should be? Do you think it should remain in the Franchise Tax Board or we should examine alternatives.

So we did a brief survey of the board of IGA, and I have personal experience with the Franchise Tax Board and their audit program, not just with respect to lobbyists, but with respect to all entities engaged in political activity. They're very professional. They're very smart, they're very good. They're very thorough. And I have no doubt that the program should remain with them because they have 49 years of experience doing this. What they have is a problem making sure they're getting through the workload.

I will note that it's not really been discussed yet that the statute that requires this audit program divides the political players into sort of two pots. The first pot is mandatory audits, where there is really no discretion on the part of the FDB. Those are principally statewide campaigns. All the people running for statewide office, the statewide ballot measures, of which there are some, sometimes four or five on a ballot. Sometimes there's 25 on a ballot. Sometimes those campaigns are relatively small, a few $1.0 million.

Sometimes those campaigns are enormous, hundreds of millions of dollars. So with respect to looking at ways to solve this problem for the FTB, I think one thing you might consider is looking at the thresholds for the mandatory audits. For example, if you decide to run for Governor in the primary, or maybe in the recall election where we had, what did we have, 60 candidates run for Governor. All of those are subject to mandatory audit.

Some of those campaigns raised almost no money, and so could workload be resolved by maybe looking at the mandatory audit list and changing some of those thresholds? That might be something you want to look at. But again, on behalf of IGA, we support any solution that would allow FTB to regain control over this issue and get all parties involved in the process audited to assure compliance with the Political Reform act.

Thank you. And tell me if you know the answer to this. Are lobbying firms, when they register, are they assessed any type of a fee upon registration?

There is an annual or biannual registration fee for lobbyists, which actually was a proposal by the lobbying community to help the Secretary of State's office in getting the Cal access program up and running, which had been long delayed and is still delayed.

And what is that fee?

I believe it's $50.

$50? And that's for a two year period, or is that a one year period?

It's upon registration. And lobbyists typically register for the two year session. I see political action committees when they file a form 410, which is a statement of organization, also pay a $50 fee.

Okay, questions Senator Nguyen

But that $50 for the candidate is per year, correct?

Well, it's when you register as a Committee, correct. And then annual.

There's an annual fee, correct?

Yeah.

That's right.

I guess my question is if we don't go with keeping it at the Franchise Tax Board, what consequences do you see that can potentially hurt or delay.

This even further without getting in? I think I agree that the resources problem will just carry over to a different agency, whether that's the Board of Equalization or whether it's the FPPC, at least with respect to the FPPC, they have some expertise. I don't know the Board of Equalization really has any expertise in this area at all. The FPPC has its own staffing issues. With the workload it has now enforcement cases drag on for years and years.

And.

So I don't know. You're just sort of kicking the can over to another side of the playing field. I'm not sure you've really solved the problem. I think Franchise Tax Board has an excellent track record of doing a very good job. They're very smart. They just need more people or they need a system to make sure that whatever decision making they're making amongst a limited resource class that everybody's getting covered, that everybody has an opportunity to be drawn for an audit.

Thank you.

I can't help it to bring a point of humor to this serious subject. And note that maybe the Franchise Tax Board needs to hire a lobbyist to get more.

I'm sure I can find one for them.

I knew that would get a laugh. And Mr. Hiltak, thank you for your testimony. I appreciate it. All right, next on our agenda, our final speaker is Laurel Brodzinski. Laurel is the Legislative Director for California Common Cause, and we welcome you. Thank you for creating a space. We welcome you today and look forward to your testimony.

Thank you, chair and Members. Ethics laws are essential to a well functioning democracy. The Political Reform act was championed by common Cause and is a benchmark ethics law regulating campaign finance, lobbying activity and conflicts of interest. In order to prevent corruption and increase public transparency, the PRA was created with robust enforcement statutes and a solid independent enforcement body in the FPPC as well as the oversight with the FTB. But audits are the essential due process and effective enforcement of the PRA.

Randomized audits in particular are necessary to effectuate the intent and purpose of the PRA, which is accountability of the powerful and trust in the democratic system. And the government code even specifically states that the PRA shall be vigorously enforced. Audits can catch anything from rampant intentional corruption to unintentional mistakes due to confusion about the law or filing forms. And it's really important to note that in addition to actually catching mistakes, which the FPPC has testified to, audits can actually help prevent mistakes in the beginning.

In other contexts, such as with tax filings in the US, the perception of robust, consistent chance of an audit has been shown in academic research to increase filers'compliance with the law and honesty. However, like many policies, ethics laws are only as good as their enforcement. Without consistent, randomized audits of lobbying activity, the state's lobbying laws are less effective at preventing both the bad actors and unintentional mistakes. Most lobbying is done outside of the public purview.

Unlike campaign finance reports and statements of economic interest that are easily monitored and scrutinized by the press and the public, who can expose potential violations, lobbying reports are less disputable on their face. For this reason, lobbying activity requires greater institutional oversight by bodies with expertise through regular randomized audits to keep the paid lobbying community honest and accountable. Without robust auditing, we just don't know how many more violations are going unnoticed.

Even if unintended lobbyist employers and firms may be led to believe that because they filed something one way and no one has ever noticed that it's correct, it's crucial that such oversight be consistent and vigorous to engender trust in government and foster the democratic ideal. Thank you.

Thank you very much for your testimony, as well as your engagement in this whole area of open and transparent government. Appreciate that very much. Colleagues, any questions for the representative of common cause, Senator Allen?

Thank you, Laurel. We were having a little bit of a chat here. I guess what I would love to get a sense of is where this falls on the list of problems with PRA enforcement and just good government enforcement in General. We all work hard; we've worked hard together to try to get stronger rules in place. And oftentimes it's a really uphill battle as you're fighting against people who don't want to have more transparency.

Of course, we all want to make sure that the rules that have been passed are well enforced and that there's meat and real teeth to them. Where does this fit on the. I guess I'm trying to get a sense of where this fits on the list of areas of enforcement that are perhaps lacking in various aspects of transparency law.

Yeah, I think the concern about not doing robust auditing is, as we've heard even from the limited auditing that FPPC or FTB are doing. They are catching numerous violations. And so that would imply that there are going to be more violations out there that we don't know about. And especially due to the complexity of filing, that it's very possible that there's more violations in terms of the scale. With everything else, I can't really speak to that. We think everything is deserving of the resources and enforcement.

And then a question for Mr. Hiltak. You're in an interesting place because I can imagine that your Members, you got a real mix of perspectives on this topic, right? There are some Members who are probably assiduous about their filings, very careful. We could spend hours and hours auditing them. They were never going to find a thing. And then there's others that are sloppier, maybe a small but very problematic portion that are openly trying to hide behavior that this legislation sought to shed light on.

What's the dynamics within an organization like IGA on a topic like this? Presumably there are Members that actually want really robust enforcement because they get a competitive disadvantage. They're doing all the work necessary, and there are others that are kind of skating under the radar. And at the same time, we also don't want to be kind of creating make work that's not meaningful for the transparency goals of the PRA and our other related legislation.

I'd love to get a sense from you as to the dynamics within the organization as you try to craft a position on this topic.

So if you decided to become a Member of IGA, you not only are recognizing yourself as a professional, you are actually signing an ethics pledge amongst your coworkers, your co professionals, to engage in ethical activities, and that would include compliance with the political form act. So I would say that everyone who is a Member of IGA seeks compliance, wants compliance, and does the best they can to comply with the act.

In the field of lobbying, the law has been relatively stable over the last decades or so, and that if you are a good record keeper, you should have a good outcome from an audit. Now audits can be. I would say that in the field of auditing, again, based on my own personal experience, because I also represent a lot of committees that are subject to audit, that a lobbying audit is actually relatively easy and is not as time consuming as a 200 $1.0 million statewide campaign.

So I've had Franchise Tax Board people in my office, two or three of them in my office, in my conference room for two or three straight weeks doing a 200 $1.0 million campaign, which is not surprising, right? There's a lot of activity that is a big workload. A lobbyist employer who has one employee lobbyist who is not very active politically. That lobbying audit might take 2 hours.

A lobbying firm that has 10 or 15 clients and has good record keeping, that lobbying audit might take four or five or 6 hours. So that's kind of the spectrum of activity that the Franchise Tax Board is charged with undertaking. It is a big job. There are a lot of people involved. 25% of 1200 lobbyists is a lot of activity. That number changed actually dramatically about 10 or 15 years ago when the Legislature decided that placement agents had to register as lobbyists.

So what used to be probably about a four or 500 number. So 25% of that was one. When we added placement agents, we added a whole slew of folks to the lobbying community that are now subject to the 25% audit. Those audits, I think, would be of the type that I described that are probably done in a couple placement agents are people who help CalPERS stirs the UC retirement system.

So placement agents, there was a big to do at CalPERS a number of years ago, maybe before some of you were even up here, in which folks were engaged with CalPERS and stirrs and were trying to get Fund management contracts from CalPERS. And the Legislature decided that. And those were typically contingency fee based arrangements. And the Legislature decided one way to solve that problem was to declare them all lobbyists, because you cannot have a contingent fee basis, payment basis as a lobbyist.

So we basically doubled the number of lobbyists when we added placement agents. I think that was about 12 or 15 years ago. FBBC might be able to help me on that. In terms of the law, the law hasn't really changed much in the lobbying space, but the numbers changed quite a bit way back then.

So again, in terms of prioritizing, I think there are a lot of different ways to sort of get to where I think you'll want to go, which is to get the FTB back in the business of getting to everybody. And there are ways to look at that. And maybe even within the lobbying space, there could be thresholds, right? So a lot of lobbying firms, or lobbyist employers in particular, may file zero reports, right? They have made no payments. They were not lobbying anything.

There was nothing of interest here. But they were registered as a lobbyist during the two year session. But the report says zero. And it says zero for four consecutive calendar quarters. But they're still in the draw. And if they're drawn, then the FTB would audit a report that says zero. Now confirming that it's actually, zero is important as well. But a monetary threshold might be another way to change the workload and change the priorities of the FTB.

Senator Newman.

Thank you, Mr. Chairman. So question for had, or we've heard from some of the other witnesses as to whether or not the FTB or the FPPC or some other entities the right place to house these functions, I'd be interested in your views. And moreover, what changes might you suggest to get at a not only a more transparent but more efficient system?

California Common Cause hasn't had a chance to do a deep dive on what Department or agency may be the most appropriate in terms of moving it. So I can't really speak to what we would suggest instead of FTB.

Okay.

Thank you.

All right. We're going to now move to public comment. And following that, we'll have some wrap up comments from the panel and from Members on this hearing. But let me first now invite the public who wishes to participate to call in. Now.

The toll free number, as I mentioned at the start, is 877-226-8163 and when prompted, please use this access code, 736-2834 I don't know how many folks are going to be providing testimony on the public line, but let me ask each person to limit their comments to a minute so we can accommodate all that wishes to testify. Moderator are you on the line?

Yes, Mr. Chair.

Okay. Do we have anybody from the public waiting to testify at this time?

We have no comments in queue.

Okay. So as we're wrapping up here. Moderator let me know if there have folks who are now still calling in. But let me maybe for a closing comment. I always like to recognize wisdom from our elders. And Bob Stern, I'm sure you're not going to be happy with me calling you an elder, but we've always appreciated your wisdom and perspective. You've now heard from the full array of panelists here this morning. Again, thank you for participating and for staying on with us.

But any final closing comments you have.

Yes, thank you very much. I don't really mind being elder at this point, I guess. But I thought Tom Hiltak's testimony was very helpful, very useful. I agree with Tom that the thresholds need to be reviewed and probably increased for the campaign filings. And also, I think he had a really interesting suggestion about making a threshold for lobbying organizations, maybe at $25,000 or more. That would, I think, eliminate sort of the small, ticky tacky audits that need to be made at this point.

But all this is not the reason for the lack of auditing of all lobbying groups, the Franchise Tax Board in the last few years has just not audited anybody. So I think we need to put more pressure on the FTB to make it more of an emphasis at their agency. Without that pressure, the FTB is going to continue to make these audits the lowest priority. I agree. Campaign auditing is far more important. We'll find more problems.

And I found that lobbyists were more likely to be in compliance, but we need to have some auditing, and the FTB or somebody needs to do the auditing. So I want to commend you again, particularly Mr. Chairman, in conducting this oversight hearing. And the one recommendation I hope you'll make is you'll schedule a follow up for next year, because without your pressure being put on the FTB, nothing's going to happen.

Thank you, Mr. Stern, for your testimony today and for your long standing work in this area. I'm reminded by the consultants here in the Committee that public comment is also available here in our hearing room. So I didn't mean to exclude anyone here who wishes to provide public comment. If you do, would you come up to the microphone at this point in time? Any public comment here in the room? Moderator is anyone called in on the phone lines?

Thank you, Mr. Chair. We have no comments in queue at this time.

Okay. It's this exciting topic has really gotten people up this morning. All right. I'm going to make some final comments as we close, but I want to make sure my colleagues don't have anything before I do that. All right, well, let me first thank all the folks who have come back.

My only comment is I appreciate the chairs spending time highlighting this issue. And I think ultimately it's going to come down to the, at least from an institutional perspective, it's going to come down to this Committee doing fall on work to take meaningful action to ensure that we're providing the sort of oversight we need to provide. And I just have great deal of confidence in the chair that he'll do that.

And I certainly stand ready to support him in his efforts and the staff's efforts, too, because a lot of issues have been highlighted that need to be addressed, and some of them budgetary and just want to express my support for the chair and the efforts I know are to come on this topic.

Thank you, Senator Allen. Well, let me again thank the panelists for coming and providing testimony, some of it difficult to give and for us to hear. But I appreciate the professionalism of everyone who has stepped up. Let me mention along the lines of Senator Allen's comments that let me thank the pro tem Atkins, who has encouraged this Committee and others to do these oversight hearings and to give us the time and the space to be able to do them.

I think that is worthy of appreciation because we know it's not just about creating new laws. It's making sure the laws that we have are being properly carried out. But look, for me, it's clear that we have a huge and unacceptable breakdown here in an important law to ensure that our lobbying firms and their employers are properly audited. And the failure to audit lobbying firms has a corrosive impact on the functioning of our democracy. We know that audits have important impacts.

One, it influences proper conduct, and number two, that there's a consequence. There's a consequence for wrongdoing. Now, the Franchise Tax Board may or may not be under resourced, and that's a matter of debate. But it's clear to me that it has not been a priority. It just simply has not been a priority, and that needs to change.

I am open to initiatives to remedy this situation through legislation or budget, but it's certainly clear that the powerful influences of lobbying, which our General public is quite familiar with, that there needs to have that oversight. 49 years ago, the wisdom of the political Reform act, it was mandated and it has simply not been carried out. And it's our obligation to ensure that the laws are followed.

And I hope to work with all the Members here on the panel and with my colleagues to ensure that that does occur. Let me close by thanking the individuals here in the room who joined us. We didn't have anybody on our teleconference mind, but we'll continue to appreciate any comments and suggestions that you have going forward. And with that, the Committee on Elections and constitutional amendments is adjourned.