Assembly Budget Subcommittee No. 4 on State Administration

Good afternoon and welcome to our Assembly Budget Subcommitee 4 hearing. This hearing is taking place in room 447. I will ask the members of the Committee to please report to room room 447. With a few exceptions, the panelists listed on the agenda are appearing in person. We will be accepting public comment at the end of this hearing, both in the hearing room and on the phone.

The phone number to connect is on the Committee website and should be displaced on the screen if you're watching this hearing online. The phone number is toll free (877) 692-8957 with the public access code being 1315447. If you encounter any problems, please contact the Assembly Budget Committee at (916) 319-2099 and a staff member will assist you. We encourage the public to provide written testimony before the hearing.

Please send your written testimony to budgetsub4@asm.ca.gov. Before we begin, we would like to note that the Subcommitee will be rescheduling items to be heard related to the Government Operations Agency and Exposition Park at a later date. We will also be moving the California Gambling Control Commission up on the agenda to be taken up right after GO-Biz. And since we don't have all members yet, we will forego the voting calendar at the moment and start with issue one, resources for examination workloads, the Department of Financial Protection and Innovation.

Come on down. And just for housekeeping, when you speak, please introduce yourself as you're being also watched worldwide.

Thank you. Am I ready to begin?

Okay. Good afternoon, Madam Chairwoman and Members. My name is Sophia Smith and I am the Deputy Commissioner of Administration at the Department of Financial Protection and Innovation. With me today are Sheila Oliver, Deputy Commissioner of Escrow and Mortgage Lending, Colleen Monahan, Acting Deputy Commissioner of Legal, George Gaborek, IT manager two of the Information Technology Office and Nicole Hisatomi, our Deputy Commissioner of Legislation. One of the items being heard today is for escrow law examination workload. The DFPI licenses and examines escrow licensees.

These licensees are the hub for real estate and personal property transactions in California. In 2021, escrow companies handled $36 billion in California. The DFPI is experiencing a growing number of licensees, increased complexity with each examination, and new Internet escrow companies that need a more IT focused exam approach. With $1.1 million ongoing funds and adding five positions, the Department will conduct more special examinations to investigate escrow violations, misappropriation of consumer trust funds and fraudulent schemes to protect consumers.

We will develop a new audit program specific to Internet escrow companies and will ensure the backlog of examinations are completed within the 48 month cycle, which is required by statute. Our second item being heard is the California Residential Mortgage Lending Act examination workload. The California Residential Mortgage program protects California mortgage borrowers. Mortgages are the largest class of consumer debt. The financial code requires the Department to examine licensees every 48 months. Some licensees, if they have a history of noncompliance, may be examined more frequently.

DFPI has three drivers of new workload in this program. In 2020, we saw record high numbers of refinances in the mortgage industry. There have also been increases in the number of licensees, branch locations, and branch activities. Workload has grown while program staff levels have remained unchanged. The federal CARES act was implemented to protect homeowners during the pandemic.

Whether mortgage companies followed the antiforeclosure Covid protections will shake out during examinations conducted over the next 48 months, and each examination requires a bit more time to make sure licensees correctly implemented these pandemic related protections.

With $1.8 million ongoing funds and eight positions, the Department will make sure that the mortgage companies complied with the pandemic related antiforeclosure protections and get restitution for harmed consumers in cases where mortgage companies made errors, and we will ensure that examination of the licensees are completed within the 48 month cycle. In addition, we will continue special examinations for licensees which were previously out of compliance. Thank you, members of the Committee for your time and patience. Please let us know if you have any questions.

Jared Sippel with the LAO. We have no comments to add. Thank you.

Amy Ascencio, Department of Finance. No comment.

One moment, please. We are going to establish a quorum at the moment. Can we have roll call, please?

[Roll call]

Thank you. And we will also begin the vote only calendar. We have 28 items for consideration which are listed on the agenda for your reference. We will have two motions for the vote only calendar. Thank you. Well, first, the first motion is on the following vote only issues. That's what I need the motion for, apologies. One through three, five through eight, 10 through 13, 15 through 28. The Chair recommends adopting the staff recommendations. Can I get a motion and a second? Great. Thank you. Roll call, please.

[Roll call]

The second motion is on the following vote only issues: four, nine, and 14. Recommendation is to adapt the staff recommendations. Can I get a motion? Thank you. Roll call please.

[Roll call]

We will come back to that as more Members come back to the Committee. Thank you very much for that indulgence and patience. Let's now go back to the issues. Can the Department comment on how the escrow law program has changed over time and what challenges it faces now? And how has the Department adjusted to these changes?

With me today is Sheila Oliver, the Deputy Commissioner of Escrow and Mortgage Terms.

Hi, and thank you. Before you begin, there's a lot of construction. It's very noisy. This room has the worst challenges when it comes to hearing you, so I'm just going to request that you move the microphones closer. And so, while I don't know if you guys can hear in the back, but it's very echoey here also. So if you just make sure you're speaking directly into the mic, please. Thank you.

Thank you. Again, good afternoon. My name is Sheila Oliver. I'm the Escrow and Mortgage Lending Programs Manager. To answer your question, the escrow program is asking resources to address examination issues for companies that have already been licensed. These resources will be used to address diversification of examination issues that are different types of licensees. As discussed in the BCP, the independent escrow industry provides escrow services to California's diverse economy. This industry services real estate and non real estate customers.

The non real estate customers can be anyone, anywhere, anytime that has a need for escrow services in California. The non real estate customer base has been expanding since the pandemic. Escrow processing for this diverse customer base is unique in each circumstance. Because of the staffing shortage and examination backlogs, the current escrow program has not developed examination programs for these non real estate escrow transactions. Further examination scope, complexity and difficulty vary greatly for this diverse licensee population.

The escrow program will use additional resources to create two separate exam teams. One team will focus on examinations of large corporations, and the other will focus on small to mid size licenses. This restructuring will improve examination efficiency as well as effectiveness. Thank you.

Thank you. Are there additional comments or questions from the Committee? Seeing none, there is a recommendation to approved as budgeted. Is there a motion? Thank you. Roll call, please.

[Roll call]

Thank you for that. We'll add more Members as they come in. They're presenting Committee. I have some additional questions related to the Silicon Valley Bank.

Yes. Thank you so much for that question.

Let me ask the question.

Oh, I'm sorry. My apologies.

It's okay. I know that we have them, but I have to ask them. Yesterday, the Assembly and Senate banking policy committees held a hearing on the collapse of the Silicon Valley Bank, and I wanted to follow up on a few questions. One item that was discussed was DFPI's capacity to supervise a large, complicated bank like Silicon Valley Bank. A few questions related to this issue as follows. Does DFPI think it has enough examiners or supervisory staff to adequately supervise the largest state charter banks?

Does supervising such complex institutions require more personnel than smaller banks? We'll begin there.

So, currently, as you're aware, the Department of Financial Protection and Innovation is undergoing a comprehensive review of Silicon Valley Bank and our oversight over the bank. We have a report that will be coming out in May of 2023, and any additional questions, if you have, if you can please forward it to Nicole Hisatomi, our Deputy Commissioner of Legislation, and we can address those as well.

But to answer the question, do you have enough staff to supervise the largest state chartered bank?

I would not be able to answer that question right at this time. We have to wait for the review.

You have this question. When is the review available?

It will be available in May of 2023.

So next month?

Yes, ma'am.

Okay. How many staff do you have now?

We have 803 budgeted staff.

So in your opinion at this moment, the 803 staff that you have now, is it adequate? How do you compare it to personnel at smaller banks?

So I would not be able to comment to that question at this time because the comprehensive review has not been completed. Once the review is completed, we'll be able to address those questions.

Does DFPI, due to bandwidth concerns, defer to federal supervisor when it works with its federal partners?

I would have to defer that question to Deputy Commissioner Nicole Hisatomi.

Hi, my name is Nicole Hisatomi. I'm the Deputy Commissioner of Legislation. Like Sophia said, we're working on a review to look at how we had oversight over the bank, what recommendations we may have to improve, things we can change to prevent something like this from happening again. And that will all be out in early May, next month as you noticed. I will say that we share oversight authority of our banks with our federal partners.

That's either the Federal Reserve or the FDIC, depending on how the bank is structured and whether it's a member of the Federal Reserve. So we do work with and jointly with our federal regulatory partners, as we did with the oversight of Silicon Valley Bank with the Federal Reserve.

Thank you for just very brief overview on your relationship with your federal partners. We're still very curious in this relationship and with what happened with Silicon Valley Bank. You can't provide us, you can't provide the Legislator or the members of this body an estimation as to what your staffing needs are to determine what happened and how this can be avoided in the future.

I definitely think that's a conversation we're ready and willing to have come May. The bank failed last-- yeah, it's April now-- the bank failed just a few weeks ago. So we're still in the middle of figuring out exactly what happened, what things could change, and whether, was it the circumstances of the Department? Was it the circumstances of outside influences? We're still trying to figure that out. And right now, I am not an expert. I apologize.

I don't think we're comfortable yet to make any serious determinations, but we're ready and willing to have conversations with you and your staff once we put pen to paper and noodle on things a little bit further.

I think we're all curious. Yesterday's hearing was impactful. It was a bicameral hearing with the Assembly and the Senate and trying to determine how the Legislature can work with your agency to determine what is needed. So the report on 803 Members of staff that work on this issue, how many of them are dedicated to this specific-

Sorry, didn't mean to interrupt. To clarify, we have 803 staff at the Department, total. Our banking team is a subsect of that. Unfortunately, I don't have the exact number of our banking staff with me at the time, but I could circle back with you and your staff after that today, because I could just email our banking team and send that over.

Can you call them and make sure that we get that response today? Before the end of this hearing. So in preparation of this hearing, I just want to make sure that there's understanding of what we need, like what the answer to the questions that we need on one of the biggest failures in banking institutions in the State of California. So you're before the Legislature now in this Committee, and we're hoping that you can provide us with some more information.

Are there additional questions or comments from Committee? Assemblymember Lee?

Thank you. I have a simple question. The collapse of Silicon Valley Bank is quite alarming to the entire state, if not the country. At the time, right before its collapse, it was 16th largest bank in the world. And it was, I suppose, is headquartered right next to my district, formerly my district, parts that I represented in. And there was a lot of news coming out early on about that. Our state agencies have reported the failure. Or was it the Fed?

So that's why my question is, did you all catch that it was about to fail, or did the federal authorities alert you first? So who noticed the problem first and sprung into action on that Thursday, Friday afternoon? Was it the federal authorities who flagged it, or was it our state entities?

The details of exactly who flagged what I am unfortunately not aware of. That would require more detailed looking into phone calls and text messages. But as is noted in our public order that we released and we could send over to your office, the Department realized on Thursday that the bank was in a precarious situation. The bank worked all night to try to figure what it could do.

But in the end, the Department, along with our federal partners, realized that the best choice of action was to shut down the bank.

Thank you. We look forward to seeing the report and getting more detailed information as to what happened. Thank you. Before we move on to our second issue, we're going to allow Ms. Wicks to vote. Can we do roll call, please, on the issues?

First motion is to adopt staff recommendation for vote only issues one through three, five through eight, 10 through 13, 15 through 28. [Roll call]. Second motion is to adopt staff recommendation for vote only issues 4, 9, 14. [Roll call]. Last motion is to adopt staff recommendation for issue number one, resources for examination workload. [Roll call]

Thank you. We're going to move on to issue number two, additional staffing, continuing with the Governor's Office of Business and Economic Development. In the interest of time, can we please move forward with this particular panel and get started?

Perfect. Good afternoon, Madam Chair. Thank you for the opportunity to present before the Subcommitee today. The Governor's Office of Business and Economic Development. GO-Biz has three additional staffing requests before you. The first BCP addresses GO-Biz's administrative services.

Again, before you continue, please introduce yourself. I'm going to ask everybody to introduce themselves when they speak. Thank you.

Sure. My name is Lauren Greenwood. I'm the Deputy Director of Legislation for GO-Biz. Our first BCP addresses GO-Biz's Administrative Services division. Due to the increased number of programs, increased program complexity, more funding streams, including federal money, is available. GO-Biz is requesting seven positions and 955,000 ongoing to support the increased workload. As the analysis mentions, GO-Biz is now 67% greater than it was five years ago, with additional limited term programs jumping from one in 2020 to 2021 to 16 in 2022 to 2023.

These additional programs and staff require more coordination and support across the administrative teams. An example of program complexity impact on the Administrative Services Unit is the IBank Venture Capital program, funded by the Federal American Rescue Plan act. These funds support three distinctive investment initiatives, and IBank will need to collaborate with administrative services to set up third party fiscal agents to help administer the Venture Capital program. Finally, federal funding also creates layers of complexity for the Administrative Services unit.

As to administer a federal ward, there's a series of steps that must be undertaken that are quite complicated and require this additional support. The second BCP addresses the California Business Investment Services unit, CalBIS. In order to continue providing businesses concierge services to support companies looking to invest or locate in California, GO-Biz is requesting six positions and 740,000 ongoing general fund to support the unit's workload. Of the six requested positions, three are new positions and the other three are limited term positions that would be made permanent.

CalBIS is also responsible for attracting new businesses to California as well as mitigating potential closures of large employers within California. One of the key tools to business attraction and retention is CalBIS' ability to identify and leverage state and federal resources, including tax incentives, relocation services, workforce development opportunities, and retention strategies. CalBIS' existing staff is managed by the CalBIS Deputy Director and is supported by the assistant Deputy Director.

But given the growth and complexity of projects, additional structure to include an SSM II is needed within the organization to reflect the organization's growing portfolio and support staff retention. Finally, the last BCP included additional resources for our international unit. GO-Biz is requesting 327,000 ongoing general fund in two positions to address the increased workload resulting from the state trade expansion program step and from an increasing number of businesses seeking assistance from the unit.

Existing law also expressly makes it the policy of California for GO-Biz's international affairs and trade unit to increase access to foreign markets, and GO-Biz is able to support small business exporters through administering the Federal Small Business Administration STEP Grant program from CDFA. The grant administrative duties have grown significantly over the years.

With regards to export promotion, the unit has gone from implementation responsibility of just 5% of this total STEP program grant award in 2015 to nearly 60% in 2020, then 100% of the $600,000 award in 2022. Small business exporters are not only key to growth, but key to inclusivity. They're the backbone of the California's economy. In California's roughly 69,000 exporters and small and small medium sized exporters, they make up more than a third of the total export value and more than 95% of all exporters.

This BCP will ensure that small business exporters will continue to receive the attention they deserve. Thank you.

Charles LaSalle, Department of Finance. No additional comment at this time.

Thank you. LAO?

Brian Euler, LAO. We have comments just on the international trade piece, and on that piece, we recognize that the unit has experienced an increase in workload over the last several years, but also point out that the unit received a staffing augmentation in 2019-20.

And based on the information that's been provided to us by the Department, we don't see enough of a justification of an incremental workload since 2019-20 to justify both of the positions requested and so recommend approving only one of the two positions.

Thank you. Just some overall questions. Can GO-Biz discuss how it has grown since 2018? Can you discuss and share how GO-Biz has grown since 2018?

Sure. Well, I'm sure we're all familiar with the pandemic, and there's been a series of number of programs, like we mentioned, growing from, let's see, just one limited term program to 16 in 2020. And then some of these programs you're familiar with are the COVID Small Business Relief Grant, California Venues grant, Nonprofit Performing Arts and Culture Grant, Microbusiness Grant. So there's been a series of grant programs that the Department has been operating in addition to just providing general more support to the business community.

Staff wise, how much has it grown?

I believe we're at 177 authorized positions currently.

Do you recall or know what the number was in 2018?

I will have to get back to you on that. My percentages are not great on the fly.

If you can find out. So I'm trying to determine. My second question was what were the components within GO-Biz that grew, which you answered. But in requesting the additional positions, I'm curious as to where you were as an agency in 2018, when it was much smaller than the growth that we've seen under the Administration and the reasoning behind that. And how will the additional positions for CalBIS address the hiring and retention issues for this unit?

Thank you very much. My name is Kaina Pereira, Senior Advisor for Business Development. I currently oversee the CalBIS unit, the Community and Place based Solutions team, and the Office of Permit Assistance. All of these are central to our ability to provide the concierge service between companies, local jurisdictions, state and federal resources. And as such, we've expanded the team through limited term positions to augment what was a federal responsibility we received a one million dollar grant from the Economic Development Association or Administration federally to provide Covid relief services.

And as part of that, created the limited term positions. Augmented addition to that, we received an EDA grant for additional supportive services on community and local jurisdiction benefits, which are under the community and place based solutions team of $1.35 million. And for that augmented additional staff on a limited term basis. We understand that these resources are of a limited nature. But in order to continue the efforts of moving our predominance of business development from the coastal regions into the inland California territory would require the initial expansion.

And as such, we've seen that the number of deals that have happened in the central parts of California have exploded from nearly 17% to almost 70% of our workflow. And on the coastal range, equivalent reductions in there. So it's as much shifting resources to where they're needed. As well as expanding the local jurisdictional coverage to increase economic development opportunity within the inland parts of the state.

The temporary positions that you're speaking of, were they full time employees of the state or were they brought in in a different capacity?

They're brought in under a limited term capacity. So they are established under a two year provision. We had exercise budgeted authority based on the fact that we had positions that were unable to be filled earlier in the year. And use some of those funds to be able to augment the capacity later on.

The two year provisions for staff, were they brought in the same way that other staff are brought in through like--

The standard state hiring process.

Standard state hiring process. So after the two years, what happens to the individuals?

So those positions will need to be reposted as limited term if we still have the budget availability to do that. And we would then be able to repost and potentially obtain the exact same people. But not necessarily because it would be an open solicitation again.

And forgive me if I'm asking too many questions related to the staffing. So if you are bringing in temporary personnel for a two year contract with the same state hiring provisions, does that impact their ability to retain a pension plan? If you're letting them go and then bringing them back, how does that work?

Should they be able to continue their employment under another state agency or within our agency, they would be able to continue their benefits. I believe that there's a time period with which they are able to be discharged from one and then reobtain. I believe it's six months if it's in the same classification or similar classification.

That's helpful to understand. Thank you. Can GO-Biz comment on the workload justification for international trade unit in response to the LAO recommendations? Thank you.

Thank you for the opportunity, Madam Chair. My name is Emily Desai. I'm the Deputy Director of the International Affairs and Trade Team at GO-Biz. While we appreciate LAO's position on this, the two positions that we are requesting are currently limited term positions that are working within our team. We're asking to make those positions permanent. We have had a limited term AGPA level position supporting this step program in the prior years when it was executed in collaboration with CDFA.

The STEP Director position in those prior years had been at Cal State San Bernardino. In recognition of the state wanting to take full oversight of this STEP program underneath GO-Biz. We worked with those partners to bring that STEP Director position in a limited term to GO-Biz. So we're seeking to make those positions permanent.

We feel like the workload is justified knowing that a Director full time position was at Cal State San Bernardino, and that's what we would ask to bring in house on a permanent basis, along with the AGPA position, who provides support to the grant, recognizing that now we have full oversight Administration of executing the grant.

Thank you for that. Does the LAO have any response?

I think I would need to get a little bit more information from the Department. That's a bit of a different answer than we received when we sent initial questions over. So I might need to have additional conversations with them.

Thank you. Appreciate that. There are no other-- Ms. Majority Leader?

Thank you, Madam Chair. And I appreciate the question about how GO-Biz has grown over the years. So you have now 177 staff members now?

Authorized positions, yes.

Okay. What is GO-Biz doing to help small businesses access information on federal and state resources that support our small businesses?

That's an excellent question. We do have our office of small business advocate here, and she's going to be coming up in the next panel. So if you don't mind, defer your question to that panel.

I may not be here at the next panel.

I'll get back to your office. Absolutely.

No, we can invite her to come up now and answer the Majority Leader's question, please. Thank you.

Good afternoon. Tara Lynn Gray, Director of California's Office of the Small Business Advocate. And just for clarity, do you mind repeating your question so that I make sure that my answer is on point?

How is GO-Biz helping small businesses access information on federal and state resources that are supportive to them?

Absolutely. One of the silver linings of the pandemic was that my office was able to stand up technical assistance partnerships across the state and to establish an outreach and engagement team. We are now providing services to small businesses across the state in more than 40 languages through 102 small business technical assistance centers and six staff members on the OSBA staff that are specifically dedicated to north, central and south regions across the state.

I'm sorry, you have 102 centers?

Yes, we have 102 small business technical assistance centers.

And you have six staff?

No, we have almost twenty staff now, which has grown from five in 2021 to almost twenty now. The six staff I'm referring to are three regional advisors, one assigned to the north, one assigned to the central, one assigned to the southern region. They are accompanied by small business local engagement specialists, also assigned north, central and south. Those six bodies on the OSBA team are dedicated to the specific activities that you are inquiring about, making sure that our small businesses have access to information and resources.

One of the projects, or one of the bills that we're working on is to establish a portal for small businesses so that they can access federal and state resources. Where they go to one site, rather than calling different areas for the State of California, they go to one site and that portal provides them access to everything else. So my question then is, is this something that GO-Biz can help administer through your office, through the Office of Small Business Advocates?

We'd be happy to assist with that. We did a rebrand of our own website, CalOSBA.CA.gov, a year ago, and we are currently looking at software solutions and a way to change the interface for our small businesses. Right now, they can get access to all of the funding opportunities. There's a map, they can find the technical assistance centers.

But I agree wholeheartedly that the access should be a tad bit more intuitive and should correlate with the entrepreneur's journey through the life cycle of the small business. And we have tightly coordinated regarding disaster assistance with federal and other state agencies through the economic RSF activity that my office oversees. So we are attempting to do that, but by no means are we there.

Wonderful. So this is something, then that perhaps we can talk through, as opposed to going through the state library, which is where we've been directed.

Happy to work with you on that.

Wonderful. Thank you. Thank you, Madam Chair.

Thank you for that. I think one thing that we're noticing is that there's an effort for GO-Biz to be able to coordinate all these efforts in a different way and do it internally. And I think that's an important aspect. Instead of going with a third party vendor, there are ways that we can potentially do this in house and also save California taxpayer dollars by doing so.

So the conversations around growth, retention, full time permanent staff coordination with all of the different programs and grant programs that are being established is incredibly important. And we want to be a partner. The Legislature is here to be a partner, but it's difficult and challenging to support and approve budgets when we don't have the answers. So that's a challenge that we're facing.

And I would just encourage, if you're testifying in Committee, please come with prepared answers as to growth, retention, potential opportunities, if the goal is to get the Legislature to approve a budget.

Madam Chair, if I may, just for reference purposes, the Bill is AB258. 258, so we'll be following up. Thank you.

Okay. Thank you.

Thank you. To my previous question on growth of GoBiz in 2018, there were 94 positions in 2018 and currently have 177 new positions. So, again, just information that should be readily available. We were able to just grab it. We were able to obtain it just now. That's potentially a growth of, what, over 50%. And so GO-Biz is one of the largest growing, fast growing agencies under our current Governor. And I always lead this Committee in thinking beyond our ability to be here today.

Whoever is Governor next, the next Administration, will inherit the mission and goals that we are establishing now. And so it is important to us, to me, specifically in my role as chair of this Committee, that when we do talk about expansion, it is an expansion that is long serving. That we're thinking about not just this moment and this legislative cycle, but that we're thinking about long term projections for agencies and departments across the state that impact 40 million people beyond our current moment.

And beyond whoever is in office and whoever is chair of this Committee. And so I want to make sure that we are on the same alignment to that. And I also want to congratulate you, Ms. Greenwood. This is your First Committee testimony, so welcome to sub four and everybody else. We want to encourage our partners in the Administration and everyone who's testifying to know that we're here to partner and to really find the solutions necessary. Thank you. Now I think we're done with this.

If there are no additional comments or questions, we're going to go on to issue number three, legislative resources.

Lauren Greenwood, Deputy Director of Legislation for GO-Biz. Thank you for the opportunity to address the Committee again. GO-Biz has two BCPs related to prior legislation for your consideration. The first BCP is from the Office of the Small Business Advocate, and they're requesting 391,000 ongoing General Fund and three positions to implement Chapter 730 statutes of 2022 AB 2019. OSBA, as we call them, and programs have doubled and the number of limited term CalOSBA programs has effectively grown from zero to 11.

CalOSBA has new procurement responsibilities pursuant to AB 2019 and include additional reporting and management of the small business liaisons in an effort to meet the state's small business procurement goal. In order to fully evaluate and document California's progress in creating and implementing an economic equity first policy, CalOSBA must pursue several new and substantial activities on a year round basis. It would be difficult to request, track and evaluate data from 250 plus small business advocates of CalOSBA sought the data all at once.

CalOSBA thus plans to build out the annual report in phases by working with staggered batches of small business advocates in order to capture a comprehensive annual snapshot of economic equity first plans and outcomes. This requires additional staff to track and evaluate statewide data sets while also accounting for diverse nuances that define specific state agencies.

Recent growth in the programmatic responsibilities has outpaced CalOSBA's permanent staffing resources, making it impossible for CalOSBA to cover the new reporting requirements associated with AB 2019 without redirecting several permanent employees from their existing and ongoing duties. The second BCP is from the Zero Emission Market Development unit, the ZEV unit, and requests four positions and 764,000 air pollution control funds in 2023 to 2024 through 2027 to 2028, and 534,000 in 2028 to 2029 in ongoing air pollution control funds.

To address increased workload and implement the statutes related to SB 1251, we will contract with outside specialists to conduct market research and stakeholder engagement and support a ZEV equity advocate position established in SB 1251. The unit has long supported California's ambitions to aim for 5 million ZEVs by 2030, as well as infrastructure targets of 250,000 chargers and 200 hydrogen stations by 2025 to support vehicle adoption and deployment.

Furthermore, the unit is also supporting the state's call for 100% ZEV for all instate passenger car sales and as many drainage trucks as possible by 2035 and 100% ZEV for medium and heavy duty trucks and buses by 2045. As a result, the state's continued goals and incoming federal funding opportunities, the ZEV unit remains central to California's complex, high stakes response to climate change and works closely with other agency and Department partners. The ZEV unit activities directly impact the activities of over 20 state agencies.

The unit coordinates all of them in creating ZEV related policies, implementing ZEV related programs, and installing ZEV related infrastructure. They work with these agencies to develop and coordinate statewide communications related to ZEVs both within and across agencies outside of state government. To keep up and continue fulfilling its well established role as California's central body for coordinating and promoting ZEV market development, they are requesting this additional capacity to address two distinctive forms of new and ongoing workload pressures.

Significantly, SB 1251 will be a guiding light in the ZEV's unit's works by establishing the ZEV equity advocate that will integrate equity principles and actions into ZEV market development activities.

Department of Finance followed by LAO.

Charles Lasalle, Department of Finance, no additional comments at this time.

Brian Euler, LAO, no comments on this item.

There are several questions that are listed on the agenda. I'm just going to ask Go-Biz if you can just go ahead and answer them all.

Good afternoon, Madam Chair. Thank you for the opportunity to speak. So, just to reiterate, you wanted me to just run down the questions that were listed on the. Okay.

Yes, please. Thank you.

So, I'm the Deputy Director for Zero Emission Vehicle Market Development at GO-Biz, and I took over the role in August. I've been with GO-Biz for seven years on a team. Okay, so how should we do this? Shall I just read the question and then respond? Okay. So on SB 1251, the first question is, does GO-Biz expect to complete the required ZEV Equity Action Plan, and will that require an update to the ZEV market development strategy?

How does Gobiz work with other departments with expertise in ZEVs when creating the market development strategy? And is Gobiz duplicating work already in this space? So thanks so much for this question. I think high level I'll just say that we will be completing the ZEV Equity Action Plan this year. It was part of. And you step back a little bit. So we have the Executive Order 7920 directed GO-Biz to create the zero-emission vehicle market development strategy.

When we were creating that, we felt that it was important to include an element of the equity engagement and implementation plan that wasn't required, but we thought it was an important component. So we produced that and realized that there's a lot more work to be done in the equity space.

And so with this equity position, one of the main tasks will be to create an updated build on what we did in that plan, go deeper, and that will help inform the update that is required every three years by the executive order, which is due in January of 2024. So those will be happening concurrently. And then we aim to publish them at the same time in January of 2024. We work with across.

It's actually nearly 30 other agencies that touch ZEV in one way or another, and we're in constant communication with maybe the top seven that really touch ZEV. We have a number of different communication avenues, including kind of staff level and senior leadership level, regularly occurring meetings. And then we have outreach that we have to numerous external stakeholders, through email listservs, through direct outreach, and those kinds of things. And so we will continue to do that. It was a major component of the ZEV market development strategy.

The update will be the same. And in terms of duplicating work in the space, I would say that this is actually, GO-Biz plays quite a unique space in this role. We have a lot of effort going on in zero-emission vehicles, of course, and we have huge goals. So in terms of the amount of work to be done, there's more than we have, people. One role that GO-Biz plays, kind of a key role, is this coordination component. Right.

So ensuring that we're having cross-communication, ensuring that agencies are talking to one another, ensuring that we're pulling those pieces together to make sure that we're sort of singing off the same song sheet if you will. And so it's quite a unique role that GO-Biz plays, actually. Okay. I'll try to be more brief in my next questions. So let's see.

I'll ask it.

Okay.

GO-Biz is requesting 100,000 for the ZEV unit for external contracting. The Subcommittee is asking GO-Biz how they are currently using external contracting.

Yeah. Thank you. We've actually in the past been incurring costs. We've been very modest. We have never had budget outside of just covering staff costs for our four staff members. So unavoidable costs have generally been covered via GO-Biz General Fund. So those would be things like our resources, our market development strategy, we have guidebooks for zero-emission vehicle infrastructure permitting, those kinds of things we've used for budget for that.

And then in other kinds of areas, we've provided in-kind contributions for things like memberships where other agencies pay fees. So we've just been very modest in how we've done that. And as we see the ZEV market growing, as it has 150% since we last added staff, it would be great to have a little bit of extra money coming up for two things.

The ZEV equity piece for deeper engagement, as I see in near term, and then the other piece would be in helping to capture the billions of dollars available in federal funding for clean energy and zero-emission vehicles. That's going to be a big lift going into number of years going forward.

Question four. Given the role that GO-Biz has assumed as interagency coordinator on the ZEV market development and ZEV equity, when GO-Biz produces the mandatory ZEV Equity Action Plan, how will GO-Biz compare success and identify duplication between actions by different state agencies? You said you're working with multiple agencies as currently reported to GO-Biz in their action plan reports.

Yeah. Thank you. Well, we've really learned that I touched on this in the first question, that regular communication and collaboration across the various agencies and the leadership levels at regularly set meetings and just sort of ad hoc as well, has been really tremendously helpful in daylighting potential duplication and actually leveraging each other's work and complementing each other's work. And so that's been quite successful. We would continue to do that.

And then I'll just say that in some cases, some duplication of effort is unavoidable because of different, maybe legislative requirements or reporting requirements that different agencies have. And so in those circumstances, we really work to meet the requirements that are set forth, but also try to utilize those across agencies and have it not be totally repetitive or redundant, if that makes sense.

That brings up a point of just. I'm really glad that there's collaboration and different responsibilities between different agencies and departments, but that brings up a question of who's in charge. So who is in charge?

Yeah, that's a great. Thank you for asking that. I think that the way that we see it, actually, a colleague of mine, I won't take the credit, described GO-Biz in this way, and I really like it.

If you think of a bicycle wheel and you have GO-Biz at the center and you have all the spokes, right, and you have the agencies, and it's flat when you look at it from the front, if need be, when you turn the bicycle wheel on its side, the center point sticks up a little bit more.

So if there needs to be decision, we find that collaboration typically doesn't have to go that way, but if it needs to be, we can work with the Governor's Office and through GO-Biz to direct the answer and of with the Legislature has something to say about it as well.

Well, we do think we're an equal part of the branch of government.

Yes, absolutely.

Okay, so when you find yourself in situations where there's duplicate work. Right? That's not an effective use of time on anyone's agenda. So are there things that we can change legislatively so that there is collaboration, but also an ability to just understand what's being done duplicatively that can be avoided to get to a quicker solution and a quicker or an expedited way to reach our goals and our mandates?

That's a great question. I'd love to think some more about that and have more conversation about that. I think we should explore that. Just off the top of my head, I think that, one, again, this is a role that GO-Biz can play, and I think we've relied on folks like our Executive fellows to help us track legislation. And there's a lot of ZEV bills, and there are a lot of things happening.

And so having additional capacity, this is a perfect example where we can have a more continued holistic view and be able to see and connect those dots and point out opportunities to leverage work or to point out opportunities where there's duplication. So that's one idea that I have.

Thank you. Let's move on to the next question. When GO-Biz assesses statewide programs towards ZEV equity action plans across so many varying programs by different agencies and departments, how will infrastructure deployment and communities be served when some are administered by third parties, like an example, the utilities, or only indirectly incentivize or induce activity? Likewise, how will GO-Biz assess with their metrics how multi-year funding programs are targeted by DACs with severe air pollution that lack EV infrastructure, EVs, or transit?

Thank you. So GO-Biz itself doesn't really produce the metrics, I would say. I would think of maybe GO-Biz as a bit of kind of tracking metrics, pulling them together, creating greater transparency, finding tools to communicate outwardly and among the agencies together.

And so I think it would be a similar, we would use a similar tool where first, this ZEV equity position will really help us think through what are meaningful metrics, not just what are meaningful metrics like number of vehicles in a disadvantaged community or number of chargers or those kinds of things. Of course, air pollution, types of measurements, those we would pull together and the agencies have that.

But also I think that something that we're really missing is how do we ensure that what we are intending with all of this investment and all of this forward-thinking around equity and our genuine desire to do this is really being felt on the ground by the communities that we're trying to positively affect. And I think that we have some work to do there. And so the ZEV equity position would be focused around what is the definition of ZEV equity. How do we really measure this?

How do we ask communities what is meaningful to you? I'm not going to walk into your community and tell you what you need. And so I think some of it is around how do we identify what the meaningful metrics are, and then how do we go out to our vast network of agencies that are doing all kinds of work and figure out the answers to those questions and where there's gaps.

And so GO-Biz plays that role, and I don't see that in another agency that I'm aware of.

That leads up to the last question. What is GO-Biz's plan in producing the ZEV Equity Action Plan to partner with community organizations, local entities, and other relevant public and private stakeholders?

And quite frankly, do you have the capacity to do so?

Yeah.

Thank you. Well, I think that this is one of the foundations for why we're requesting additional staff. We are doing the best that we can and we've done a pretty darn good job, I would say we're tiny but mighty and we need sustained engagement. The relationships take time to develop and you can't just come in and say, talk with us once, and then we're going to go back and make some decisions for you about your community.

And so this additional capacity, I think we have a really strong framework in place for what we want to do next. And we're excited to do it, and we're doing the best we can now, but it's not enough, in my opinion.

What's the timeline? So we passed several pieces of legislation that lead to wanting more ZEV infrastructure, more ability for communities of color, low-income communities to have access to equity, because in many ways, access to the infrastructure that we're hoping to create. But I'm hearing that you're in initial stages of outreach, you don't have staff. This is what we're here discussing. What does that timeline look like?

Well, I don't want to discount the work that is being done. There certainly are many agency programs and lots of money that's going out to the communities. I think what it will be able to do is this equity action plan will do a lot what the ZEV market development strategy did, which is we were still all doing zero-emission vehicle work.

It will provide a North Star that will align us toward the kinds of goals that we're setting out to, set forth some key objectives, and help us align around those key priorities so that we can focus our work better. So I don't mean to say that this isn't happening. It absolutely is. In fact, we're going to hit the 1.5 million ZEV target 20 months early. I don't know if it's public, but I think we're on track to hit that. So there's a lot being done.

This would just help really solidify and focus the efforts that California says it really wants to accomplish. I'll say one more thing, which is we had a $5 million zero-emission vehicle grant, thanks to the Legislature in 2021. And we've really seen how focused partnership with, we had two grantees, can really impact things on the ground. And so we've had one of the Velos was one of the groups that got money and they did a campaign. Their Electric for All is in 15 languages.

Based on our criteria for the grant was required to have a focus on equity. They had like nine different partners. They have a partnership with Univision. So I think we see all this opportunity around how partnership can really help, sort of from the top down and the bottom up, and come together in the middle. And so I feel really excited about it. I'm looking forward to being able to dig in more and having the capacity to do that. And we'll get there either way.

But if we want to do it faster and stronger, we need some more focused effort.

And one final question on my end. Can you share, again the current status that you shared on what's already been done? You just mentioned it right now.

Oh, sure. With regard to the equity pieces. Yeah.

The infrastructure pieces that have already been developed.

Oh, sure. Yeah. Well, we have. Sorry, just to further clarify. In terms of where we are in terms of our targets? Yeah. So we had a goal under Governor Brown that was 1.5 million ZEVs on the road or purchased by 2025. We're nearly there, I think. 1.5 million. I think, later this month, the numbers take a little while to roll in. So we had a schedule there. Another target was 10,000 DC fast chargers by 2025, as well in the larger bucket of 250,000 chargers.

And it sounds like that may be on track to be about 15 months early. And then we have 200 hydrogen stations by 2025, as well as the other target. And right now, we're at 62 or three-ish. There is funding available, and those are under development, and it looks like we should get close to that. I don't know that we'll be there in 2025. I hope so. There's been some delays. Yeah.

Thank you. Those numbers are super helpful. If we were to overlay the State of California with all of these numbers that you just shared, 1.5 million, 10,000, 200 hydrogen stations, if you were to put that on a map and you were to overlay it with the census track for underserved communities, what would it look like?

Not good.

That's not good. Right. The majority leader and I serve in Utilities and Energy, and as we have seen under Governor Schwarzenegger, the 1 million Solar Household Initiative Plan. Right. The Public Utilities Commission has their own report that stated that the majority of solar has gone to benefit wealthy homeowners and, obviously, wealthy communities at the expense of low-income communities and low-income communities of color. We passed legislation that I authored.

That now the solar program, moving forward has to align with the census data and census track and provide a report to the Legislature as to the overlay so that we get a clear understanding as to where we are investing and why we are investing in certain communities and not others. So to your point, if we were to overlay the work that's been done, which is great, we're moving forward, that's a good thing.

But if we were to overlay it with the census tracks that clearly show us where there's need and where the low-income communities are. Right? And based on income, ethnicity, gender, et cetera, it's not an equitable plan, but yet we're creating an equity mandate that's not going to be met. So I'm putting on your radar that this is something that I deeply care about, that other Members of the Legislature care about.

And we can't continue to fund items and continue to invest in communities that don't invest in the majority of California and in populations that need it the most. Right? Populations that are underserved, underrepresented, and not included. You can't get communities, low-income communities, to buy into a program about the future of energy and getting an electric vehicle when the infrastructure to get them there doesn't exist. So how we get there is a concern that I have that I share, that I think that we all do.

And I would highly encourage that you look at what we've done and other issues related to the future of energy in the State of California and how that overlays with the census track, because I think that will really give us a vision and an understanding on how we create an equitable plan across the state that is serving all communities, not just investing in a few. Just as a note.

May I respond?

Yes, please. Then followed by the majority leader.

Okay, thank you. You're absolutely right. I think we have better focus now on that. Just as a couple of examples. The Energy Commission's recent investment plan for the transportation program expects about 50% at minimum to be in priority populations in disadvantaged communities. The CARB Investment Plan is looking at about 70% there when you think about it. And CPUC has in their transportation electrification program looking at more incentives for building and disadvantaged places.

I think we have a few challenges that we need to solve, which we've been working on. So we need equity, right? Is around affordability, accessibility, both for vehicles and infrastructure, and also thinking through an area around financial inclusion and how do we ensure that people have the means to be able to participate in this. So I totally agree with you. It hasn't been fair in the past and we are looking to do better going forward.

And I think there are the right pillars in place to be able to do that. The other piece that we haven't really talked about, we've been talking about light-duty transportation right now, this is another area where we have so much work ahead of us. And I guess another example of where we could use some more horsepower, pardon the bad pun, but horsepower in GO-Biz. Right.

And this will affect not maybe on daily life of transportation, but as we think about the corridors that are most polluting, we think about the port areas, we think about these kinds of things that really leaning in on the medium and heavy-duty space and long haul trucking will have profound health impacts and improvement of life quality there as well. So I agree with you and would be happy to continue conversations on that.

Thank you. Majority Leader.

Not too long ago, we had the Secretary of State, Dr. Shirley Weber here, and one of the things that she talked about was the fact that there was lots of talk about things that we should do, things that would be good to do, things that we've been asked to do, but there wasn't a person that she could point to and say, did you do it? My question is, who's going to prepare the metrics? Who's going to prepare that report?

And one of the comments, you said, we have a strong framework. Where is that framework? Do you have deadlines that by this date or by this month we should have? This is our goal for this time. If the goals are not written, if we just say by 2025 we expect to do this, then you'll continue. This isn't intended against anybody. We will continue to kick the can down the road until 2025 comes.

Well, we need more people so that we can get the report done, or we need more people so we can deploy where we need to have the infrastructure in. We have to be intentional about this.

I agree.

And we have to set small goals to get to the big goal. So when we talk about 1.5 million ZEVs by 25, we're at a quarter right now. What are we at? What's our number right now?

We're almost at 1.5.

Yeah. And we have a new target of 5 million by 2030. And of course, a north star of 100% by 2035.

Okay.

That's the good one.

Yeah.

On the hydrogen, we're at 62 of 200. But I can tell you that I get lots of calls and lots of visits from the hydrogen industry about providing more funding and giving a greater percentage for hydrogen. Why are they only at 62? Who has the answer?

I have some of the answer. Yeah, great question. Some of it is not now. I think that there's multi-year funding, which has helped. There was a chilling in the market effect some years ago we had about a four-year gap between funding cycles. And so we knew that station developers were on the sidelines saying there's money coming, there's money coming. We're not investing until we can try to see if we can get state money. That's evolved. That's not so much the issue now.

We have multi-year funding and I think the Energy Commission is funded. I think we're looking at about 180 stations. It will get us to 180. And now we're starting to see the private sector. I think there's 20-something, 22 stations that are fully privately funded. This is in the light-duty side. And so I think your point is a good one. We do need more infrastructure. There have been challenges with things like permitting, which our office works on a lot things with slowdowns around utility connection.

And so it's been a very early market and a number of kind of like bumps in the road that we've had to solve along the way. Sometimes it's just, oh, the cars start to come and after the 10th car, guess what? The equipment doesn't work anymore. So there have been a number of different things. I think that something that we will see in the federal investments and the hydrogen hub application that California through Arches just put in last Friday.

A remarkable, I keep joking that hydrogen is the new gold rush in California around the U.S., but we've seen a remarkable investment where I think the arches team asked for 1.25 billion, which was the maximum from the federal. It's looking like it'll be about a $13 billion statewide system. And so I think to your point, these are the kinds of. And that happened through months of collaboration.

I mean like deep collaboration, everybody coming to the table and really focused effort from the ZEV team and from some of our colleagues along with of course the other founders. And the hydrogen side, I think that problem is beginning. It's numerous kinds of different things, but the funding part of it I think is starting to sort itself out. We'll still have to work through permitting, we still have to work through ensuring that the technology is working.

But to be clear, the funding is not the issue right now.

That's right.

Okay. I just want to be clear. The funding is there. We're still at 62.

Yeah. I think if you ask the station developers, they would say, well, natural gas has gone through the roof supply chain, we can't get parts. Right? So you'll hear a lot of different explanations for why we've slowed down. I expect talking with some of the primary developers on the light-duty side, they expect an acceleration here again. But you make a good point. You make a really good point.

California also is concerned about whether we're talking about clean hydrogen. There are different definitions for hydrogen, clean hydrogen, green hydrogen. And I know we're waiting for the feds, then CARB is then going to adopt what the feds say. Okay. There was a question earlier by the Chair about the work that is being done specifically in the disadvantaged communities. Is there a specific plan as opposed to this is what we want to do, we want something that's equitable?

Is there a plan that any of us could go to and say, oh, this is what the plan is and this is what we expect to do in these communities? Have we identified the disadvantaged communities? Are we going by CalEnviroScreen? What will you be using to determine what the disadvantaged communities are?

Thanks for the question. Yeah, I think that there is, as I see it, we've started to really focus in on equity and recognizing that it hasn't been equitable thus far. And we really need to adjust and focus. The agencies, many of the agencies are doing a lot of different kinds of things. And what we lack is sort of this north star in focus.

And this is why we've been talking about the Equity Action Plan, looking at those specific kinds of things, the metrics, yes, CalEnviroScreen is one of them. There are a number of different ways we can do this. Lessons learned from the Arches application. For example, there was a lot of effort that went into identifying the overlay of how to cite things and how the overlay is really nice with disadvantaged communities, with air pollution.

And so I think this illustrates the point that having an action plan that focuses everyone and we align on what the metrics are, we align on what the definition is, we lack that right now. And so we're really well coordinated as a state in the zero-emission vehicle space, but not in the equity space yet, but we can get there because we were here not that long ago where the agencies were doing a bunch of different things and we weren't well coordinated.

I'm not sure if I answered your question but.

The ZEV Equity Action Plan is expected when again?

Well, some of it hinges on having an equity person who has expertise in this right and who is helping us to engage the communities and giving us the capacity to do that. The plan would be to have it published with our updated zero-emission vehicle market development strategy, which the update is due in January of 2024. So the effort is already underway, but would really begin and continue in earnest when we can bring somebody on to kind of focus that.

And that would be a lead product that they would be responsible for, along with the support of our team, of course.

Who at GO-Biz is responsible to make sure that that plan is completed by January of 2024?

Me.

I'm sorry.

Me.

So if you get a person or you don't get a person, you're responsible to get it done?

Yeah. Again, this is not required. We have put this in place because we see the need to do this and we will go forward either way. I think the depth and sort of the rigor, and I think we just have a lot added with somebody who has even deeper expertise. Certainly, we will do it and we can.

Thank you. Thank you, Madam Chair.

Thank you. SB 1251 is a Senator Lena Gonzalez Bill. And it seems there's an opportunity right now to define what that action plan could potentially look like. And I would just suggest, and maybe we can talk about it further, clearly. But the overlay with census tracks the overlay with information on reports that we already do in the Legislature. So that you're not having to start from ground zero. Right?

We think about the Governor's executive order during amid COVID, where the state is reducing the ability to sell gas vehicles by 2035. Right? Limiting and reducing our consumption of natural gas, in general. The most recent extraordinary session on fossil fuels, et cetera. We're moving in a direction in the state. And I think we are concerned that communities that are thought about at the end won't have access. Right? I think about renters. Renters who don't own the roof. Right? So they can't get solar.

Renters who park their cars in a garage that does not have access to a charging station. Right? Renters who don't have access or means as other communities may have. The majority of the State of California are renters, but we focus on communities that often ignore our renting constituents. And so just something that we're all thinking about. We want to get to the appropriate place and move an agenda forward that is inclusive, a green agenda forward that is inclusive of all communities.

And so perhaps there's an opportunity to get something done early here as we develop that moving forward. If there are no additional comments or questions, thank you for the very robust conversation on this panel. We are going to move on to issue number four.

Thank you for the opportunity today.

Thank you. We're moving on to California Competes Grant Program. And again, please introduce yourselves when you begin to speak.

Thank you, Chair Carillo. Members, my name is Scott Dosick. I'm the Deputy Director of the California Competes Program at GO-Biz. I'll keep it brief since you've got a long hearing before you have a proposal. The governor's proposed budget for a one time funding, additional funding for the California Competes Grant Program.

As a reminder, California Competes Tax Credit was created nine years ago in recognition that the state really didn't have tool in its arsenal to compete with the other states that were recruiting California businesses and taking California jobs.

The California Competes Tax Credit has proven remarkably successful over the last nine years, but there was a recognition that it didn't work for businesses that could not take advantage of a nonrefundable credit because they weren't showing a profit, had net operating losses, or R&D credits or other things resulting in little to no tax liability.

The grant program was created two years ago, and we're now requesting one more year of funding specifically for the opportunity before us, a very unique and one-time opportunity. The Federal Government is providing billions of dollars from the Federal Chips Act to encourage, to bring semiconductor manufacturing and research and development in the country. We want to make sure that California gets its fair share of these jobs in these businesses. The federal requirement is that the state provides matching funds.

Simply put, California competes as the best tool that we have to secure potentially billions of dollars in federal funding to support these businesses in the state. Thank you.

Department of Finance, followed by LAO, please.

Peter Abahazi from Department of Finance. We have no additional comments at this time.

Brian Euler from the LAO. An important piece of context for this item is that two relatively well-done academic research papers on the California Competes program have been published over the last year and a half or so. And kind of the upshot of those papers is that there is fairly good evidence that this program does encourage new jobs and investment in California. But there are some kind of important applications to this item.

One is that those studies were of the California Competes Tax Credit program as it existed a few years ago, before the recent expansions with the grants and the augmentations that have been made in recent budgets.

And so one potential application could be that given that program as it existed, has been shown through this rigorous research to have achieved largely its goal, then it might make sense to take steps to align this current proposal as closely as possible with the way that that program that has been evaluated operates. And so, one key difference that we would note between the grant program and the credit program is the focus of the grant program on awarding larger grants to a smaller number of applicants.

So in 2021-22 there were, I believe, about 50 credit awardees and only eight grant recipients. And in prior years, the number of credit awardees was actually much more than 50, I think, in the hundreds in some years. And so there's a difference in sort of the scale with the grant program having this focus on kind of larger scale investments. And so one potential application from that research could be trying to align grants going forward more closely with that credit program.

That appears to have been kind of achieving its goal by increasing the pool, by reducing the size of the awards, and kind of increasing the level of competition. Another thing of notice that the program that was evaluated in these studies, the scope of that was before the recent augmentations, it was the $180 million a year program. We've now added the 120 in grants on top of that.

And so while that research does provide some evidence that the legislature can feel confident that at the scale of 180 million, the program was achieving its goal, there's less certainty that at a $300 million program is continuing to meet those objectives, given the kind of dramatic increase in scale.

And so that is definitely something to consider, given sort of the state's tight budget condition about whether or not that kind of expansion beyond the size of the program it was a few years ago, as proposed here, makes sense, given the kind of scarce budget resources. One potential alternative is recognizing that just the purchasing power of the dollar for these credits and grants has gone down over the last few years, significantly because of inflation.

And so something like cutting this 120 million in half to something around 60 million would continue essentially the program as it existed a few years ago, but allow it to kind of account for inflationary pressures that have occurred over the last few years.

Thank you for that. Let's begin with some questions. Can GO-Biz explain what the benefits to the state are with the grant program versus the tax credit?

Certainly, as I stated earlier, the main difference of the grant program versus the tax credit is who's going to be able to actually utilize the funds. So in the past nine years, companies that don't have tax liability, it could be startups or even companies that are moving from the R&D phase to the manufacturing phase, but they haven't turned a profit yet.

The non-refundable income tax credit will not benefit them at all until whatever point they actually have an income and are paying taxes to the state of California, which is certainly our goal to get them to that point. So that's the main difference between the tax credit and the grant program is who's able to take advantage of it. We specifically look at the grant applicants when they're coming in, and if they have demonstrable tax liability, we'd redirect them to the tax credit program.

The grant program creates a de facto refundable credit, as you mentioned, for Cal Competes by allowing businesses with no tax liability to receive the grants. How does GO-Biz hold companies accountable for five years of what mechanisms? And what mechanisms does GO-Biz have to claw back the grant funding program?

Thank you for the question. So for both the tax credit and the grant programs, companies that are awarded sign a five-year contract with GO-Biz that includes annual reporting, not only for the five years but for three subsequent years to demonstrate that they're maintaining their employment levels. In addition to that, the Franchise Tax Board retains the oversight accountability for both of those programs, conducting periodic books and records review to validate the information that was provided by the businesses.

And as I think you know, the Franchise Tax Board has numerous tools in its arsenal to be able to get the funds back from a business in the event that it either does not achieve its objectives or, through the FTB review, determined that there was misinformation provided.

Do you have information as to how the grants have been distributed statewide? Like in the previous panel, we discussed equity, and we have a question related to the future of equity disbursement.

Yeah, so thank you for that. So, we've only had two years of funding for the grant program versus nine for the tax credit. I think it's also important to recognize that in the early days of the tax credit program, there was a small business set aside. And those were the days when we had potentially over 100 awards per round.

The legislature, when it extended the tax credit for the first time, took away that small business set aside and actually redirected some of those funds to what is now the Office of the Small Business Advocate. And so that's one of the reasons for some of the changes that I think you're seeing.

But in the last two years, the two rounds of grant funding that we've had 15 companies committing to create over 13,900 new jobs over the next five years and make over $5.3 billion of investment have been awarded. While the bulk of those are, and I believe we sent staff over a copy of the map that shows the locations. While the bulk of them are in the major cities, as one would expect, is that where the major employers are, we did see a few awards going to areas like in Calipatria as well as Barstow. We had a manufacturer, it's a quartz manufacturer in Barstow that was being heavily recruited by the state of Texas. And were it not for this grant, we would not only lose the expansion but potentially their existing footprint in Barstow.

Have you collected data on who is receiving the grant? So if I were to ask you what percentage of grants have gone to women owned businesses, what percentage of grants have gone to people of color, would you have that?

I don't, but I could certainly get that information to the extent that it was provided to us as part of the application process.

Is it part of the application process?

Companies sometimes self-identify that information, but it's not required.

So then I would ask the following question: is that out of the percentage of grants that have been awarded, and out of the percentage of companies that have self-identified, let's say 100, what is the percentage of the companies that have self-identified so that the legislature can have a better account and overview as to what that equity process looks like?

I can certainly look for that information and provide it to you expeditiously.

Great. Thank you. We have an issue collecting data overall. Right. And so when we create pieces of legislation related to equity, which we know is incredibly important, we all can agree that it is important. But if we are unable to collect the data, then we are also getting information that is not accurate. So, to my point, if I want to look at the map, we're going to look at the map for this and for other panels. I want to see where those grants have been awarded.

Is there equitable distribution across the state to companies? And is there equitable distribution to the people of the state? Right. How many are owned by women? How many are owned by people of color, et cetera? Those metrics matter, but if we are not able to collect them on the front end, then what we're doing is catching up. Right. We're just trying to get information. So it's a challenge, but an important one. And that leads me to my last question.

What businesses does GO-Biz believe it will bring to California with their objective to promote equity?

Certainly, and so equity is obviously a very important issue and something that we do look at as part of the California Competes evaluation process, using the criteria that the Legislature created with the authorizing statute.

Part of the evaluation process is looking at the training opportunities provided to employees, specifically those training opportunities leading to upward mobility, and looking also at the applicant's commitment to promoting a diverse and inclusive workplace and asking what steps applicants proactively take to recruit a diverse workforce, especially for those fields in which women and people of color tend to be underrepresented.

And we're really looking also at those upward mobility opportunities, especially for low-income, under-educated, entry-level positions, so that we know that whether if they're starting in a low wage position, they don't remain at that lower wage, and that they move up in the promotional opportunities within, especially looking at them at the management ranks, and how much do they promote from within versus from the outside?

That's very helpful. Thank you. No additional. Yes. Majority leader.

Thank you, Madam Chair. Thank you so much for your comments. Because it makes a difference when we are spending so much money on so few companies. Now, is it accurate that the last two grant rounds was a total of 240,000,015 companies were awarded?

Correct.

So, if we ask for metrics, should be a very easy process. We're only looking at 15 companies, right?

Correct.

Okay. So, my questions have to do with, again, going back to equity. If we're not intentional, it's never going to happen. If you don't say we need to be more equitable in the way we distribute this money, I guarantee you it's not going to happen. It's not going to because you're going to have the people who know how to do these grants. They know how to talk to people. They've made the friends. They know how to get the money.

It's those that are disadvantaged that need the most help, that don't even know where to begin because they don't have a friend who can help them, who can lead them. This is where you all come in. You've got to be their friends, but you have to be intentional about it. So my questions are these: how does a program distribute funding and is there a set aside for disadvantaged businesses?

So, there's not currently a set aside for disadvantaged businesses. Again, we have the criteria that were laid out in the statute, but to your specific. One of the things that I discussed intentionally with my staff is there's a difference between a strong applicant and a strong application. And we recognize that those with the resources are obviously going to be able to. They're good creative writers.

They know how to put together what they think we want to hear, which is why our staff are dedicated, providing technical assistance. We also have services in GO-Biz now in multiple languages. So, we have a contract that allows us to have live translation. And so we're working with applicants throughout the application process, identifying potential technical errors. It's a 100% online application. So we have the ability, even while they're preparing the application, to look at it in real time, help them to fix any errors.

We never disqualify anyone for a technical error in the application. We work with them to rectify it because, again, there's a big difference between a strong applicant or a weak applicant versus a strong or weak application. We want to make sure we have the best applications so that we can determine which applicants are the strongest and by strongest, looking at all of our evaluation criteria.

But first and foremost, recognizing our job is to put more Californians back to work in quality jobs, the jobs that are at risk for not happening or leaving the state.

I'm going to use that strong applicant versus strong application.

Thank you.

I really like that. I like that a lot. So, what type of outreach does the grant program conduct?

So for both California Competes programs, we work through our statewide partners. So the email blast goes out to roughly 10,000 people, depending on who's subscribed and unsubscribed on any given day. Included in that are chambers of commerce, trade associations, state, local, county, city, county, economic developers, CALED, various, pretty much anyone that's involved with any kind of business outreach is on that list. And so it gets out pretty extensively throughout the state.

And again, talking about being intentional, do you intentionally conduct outreach in disadvantaged areas?

So, the last three years, we've done little to no outreach. We had a bunch of outreach scheduled, including in disadvantaged areas, in the winter of 2021. Obviously, that was put on hold for a little bit. We had workshops scheduled that we were. And you remember that time? First it was, we're doing the workshop, then it's we're limiting it to -

We were doing them online.

Yeah. For each application period, we do live online webinars. We have recorded webinars on our website, but we also have live webinars that allow for Q&A. And again, those announcements go out to our entire distribution group. And then as part of that, we say, make sure that anyone who's on there is aware that they can call us, that they can email us. We've responded and will continue to respond to every phone call and email within one business day, usually same day.

Wow. Of the 15, again, we're talking about 15 companies receiving $240 million. Could you provide, like, a breakdown, please, of those 15 companies? And I'd also like to know how many employees each one has. Are we talking about the big companies? Are we talking about - clearly, we're not talking about small companies.

So it's a little bit of a mix, and I can highlight some of them for you that give kind of some examples. One of the ones I'm most excited about is a company that was a startup company that's now moving into full production called Rivet. And Rivet is an electric motorcycle manufacturer. They've developed the motorcycle, and they were looking for a home where to manufacture.

As a result of the California Competes Grant, Rivet has committed to creating over 900 jobs and $108 million of capital investments to establish its headquarters in Hawaiian Gardens, its manufacturing facility in San Bernardino. And they're also planning on citing their lithium battery manufacturing facility in El Cajon to be in relative proximity to imperial and the lithium that we hope to be securing from Lithium Valley in the coming years. We also had a couple of semiconductors.

I just want to say I'm glad you mentioned the word San Bernardino because that's the area that I represent. So clearly, I'll be looking for Rivet.

Excellent. And I'm sure they would love to hear from you and visit. They're very excited about what's happening right now and talking about equity. The bike that they're manufacturing has a removable lithium battery. So whether you live in an apartment, a home, work in an office, or a high rise that does or does not have charging, the battery can be removed and brought up to your office, brought up to your apartment, and plugged in on a standard outlet. So that's one example.

I don't know if you wanted me to go into a couple of others.

Tell me. The one with the smallest number of employees.

Certainly, so that would probably be either American Courts in Barstow, the company I mentioned that has currently had about, I think, 200 employees was looking to add another 147 as it added manufacturing capacity. And then we have Veridos, which is a La Jolla-based R&D company that's basically growing algae and turning it into biofuel. And their proposed expansion of 71 jobs was going to be in Calipatra in the Imperial Valley.

Thank you so much for that. But again, I will be using strong advocate versus strong applicant versus strong application. I really like that phrase. Thank you.

Thank you.

Thank you, Madam Chair.

Thank you. I just want to clarify something. So, California Calcompetes started in 2014. The legislature approved the California Calcompete as a tax credit, started in 2014. The legislature approved the California Cal Competes Grant Program in 2021. So it's been in existence for two years. But yet you said that there has been little to no outreach for the past three years. I want to clarify, was this before or during pandemic?

So, the California Calcompetes Grant Program was first authorized. I believe it was the start of the pandemic or that first pandemic year by outreach. I should clarify that there has been no in-person outreach since it started. But extensive networking using our networks, emails, phone calls, again, over 10,000 organizations and individuals on our email distribution list. But there has not been any in person outreach during that time.

That's a big distinction. Just want to clarify. Okay.

Thank you for asking the clarifying question.

Thank you. We're going to hold this item open and move on to issue number five, Made in California. Thank you.

We're doing great on time, everybody. We're on issue five out of 26. Wow. Let's begin.

Good afternoon. Chair Carrillo and Members of the Committee. I'm Tara Lynn Gray, Director of California's Office of the Small Business Advocate and the BCP. Before you requests 1.54 million General Fund dollars 2023-24 to be spent over three years to pilot the implementation of California Made or Made in California Program, and Cal OSBA requests statutory changes to the existing program in order to increase program participation. California Made is not a new program.

It was established 10 years ago with the goal of supporting in-state manufacturing and increasing consumer awareness of California-made products. Due to overly restrictive statute requirements, only two firms to date have qualified for California Made certification. Since the program's launch, GO-Biz and Cal OSBA have spent time working with California manufacturers on what changes could make this program more successful. Through focus groups and surveys, we've been able to pinpoint three specific changes that we think can make the program more successful.

First, is to reduce the costs and complexity of certifying California Made. Right now. All certification requires a third-party verification, which is costly and time-consuming. Second, is to remove the additional made-in-the-USA requirement that prevents the majority of California manufacturers from being able to participate in the program. Global and shifting supply chains make it hard for small businesses to ensure that they are always meeting the 95% requirement that is based in the United States.

Third, is to provide additional value to participating businesses in the form of networking, trade shows, marketing, outreach, and promotion. And we believe that these changes would bring California Made in line with successful made-in programs that are found in other states, including Arkansas, Alaska, Maine, Hawaii, and Montana, to name a few.

Our vision for the program starts with a recognition that manufacturers in California account for 10.36% of the total state output, employing 7.57% of the workforce, and total output from manufacturing was 316 billion in 2020. In addition, there was an average of 1,222,000 manufacturing employees in California in 2020, with an average annual compensation of $112,381.

So when you consider that small businesses provide two-thirds of all net new jobs in our economy, a bump for small manufacturing company competitiveness could very well mean a bump in the small business sector overall, with more jobs and opportunities for continued recovery. So we ask, imagine what small manufacturers could do if California were to stand up a successful state labeling program the same way other states have done.

We envision a program that identifies, uplifts, and recognizes small manufacturers that are producing goods here. With extensive outreach in more than 40 languages throughout the state, OSBA believes that it can increase the benefits to the small business community and ultimately the California economy, underscoring the fact that manufacturing jobs are good jobs, and good jobs spur increases in quality of life, generational wealth building, and obviously an increased GDP for the state. Happy to take questions.

Thank you, Department of Finance, followed by LAO.

Charles LaSalle, Department of Finance. I'll just add that this investment to update the existing California Made Program will allow GO-Biz to increase outreach and education to encourage both producer and consumer awareness of the California Made Program. I'm happy to answer any questions. Thank you.

Brian Uhler with the LAO. As the Department has mentioned, the state's prior efforts with the California Made Program have been unsuccessful, with only two businesses taking advantage of the program.

And in addition, the Administration has pointed out that a handful of other states do have kind of similar programs to this, although we're not aware of any good evidence that California's program or the handful of other states' programs effectively achieve their goals, and we do acknowledge that GO-Biz's proposal to allow self-attestation to the program's requirements may increase the participation. It's not clear that that would provide some sort of meaningful designation to consumers and therefore kind of actually achieve the goal of the program.

And so, therefore, we think that right now, again, given the state's tight budget condition, that this would kind of be a risky bet on sort of an unproven concept, and that we don't think it would be an appropriate time to allocate funding for this purpose.

Thank you for that. I'd like to go back to the production process ensures that 90% to 95% is based in the United States. This is a hurdle. What would be the appropriate change?

I'm sorry?

What would be the appropriate change? If we're not doing 90 to 95, what would it be?

I think given the changes in global supply chain and the unpredictability of where component parts and manufacturing parts and pieces are going to come from, I'm not sure that we could adequately estimate right now. But given that in several years, we've only had two companies that have been able to overcome that hurdle, I think it is safe to say that the hurdle is indeed significant.

Right. But can you give an estimate? Like, would it be, what, 60%, 50%?

I would say sub-50 would be my guess, but I'm not sure that I have all of the appropriate information to make that estimate.

So given that, and that only two firms have been able to take advantage of this program. What is the benefit then? What is the benefit of this program? And why is GO-Biz seeking to relaunch this program at this moment?

Well, I think that when you consider the impact of manufacturing on California's overall economy, and when you also consider that this program would be targeting small manufacturers who we have seen over time not have the same access and ability to participate in trade generating activities, it is appropriate that the Office of the Small Business Advocate would be the home to uplift and to recognize small manufacturers and to really give them the benefit of, frankly, the number of eyeballs that are still on small business recovery and the need for resources for programmatic support for small businesses, in general.

What is the benefit of saying that you're made in California?

I think that we've seen with Grown in California. I think that agriculture has a program that clearly demonstrates the benefit of being made in the Golden State. We dominate the economy in the United States and the world now being the fourth largest economy. We are the Sunshine State. We are the state to emulate. And we strongly believe that having a Made in California label sets apart our manufacturers from other states and other countries, frankly.

Well, growing in California, our agricultural center is very different. Right? We grow it. We see it in the ground. You see it. Manufacturing is different. So to your previous statement that if we reduce 90 to 95% to 50% and it still says the benefit that it's made in California, don't you think that we are potentially not being truthful to consumers that it's not 100% made in California?

I think that it's difficult to prove that anything's 100% made.

Right, but 90% to 95% is a big difference. If I'm a consumer and I appreciate the label that says made in California, only to find out later that only 50% of it is made in California, I think it's disingenuous, don't you?

Well, I think it depends on how you look at manufacturing. And first of all, the 95% is a made-in U.S. requirement. It is not the Made in California requirement. So if we're talking about a part that is coming from someplace else, we care about it being assembled in California, sold in California, taxed in California, and revenue benefits to California.

And I think that that has an economic benefit to the state that is, irrespective of the 95% that is made somewhere else in the United States other than California. Does that make sense?

That makes sense in terms of the United States provides fair wage labor laws. There are protections to workers that we care about. If it's coming from outside of the United States, those protections may not be there. They may be coming from countries that don't align with California values. For it to be assembled in California is not necessarily a truthful objective to the program.

And so if the goal is to say, currently 90% to 95% made in the United States, to be assembled in California is a big difference than lowering that threshold to 50% to be made in the U.S., and the rest can come from anywhere else to be assembled in California. It seems disingenuous to a consumer to now think that you are partaking in a product whose label actually does not equate to that. Just something to think about.

We're going to keep this item open and we're going to go back. Thank you very much. We're going to go to issue 20, please. I'll just get it here. Thank you. Thank you for abandoning us. All right, we're moving on to the California Gambling Control Commission. For this presentation. We are joined by Gambling Control Commission staff and I will, as well as the Department of Finance and the LAO. For this presentation, we are asking the Commission to present their new fee scheduled via regulations. Let's begin.

Yes. Thank you. Good afternoon, Chair. My name is Stacey Luna Baxter. I am the Executive Director for the California Gambling Control Commission. Today, I am joined by Rebecca Kirk, the Commission's Deputy Director of Legislative and Regulatory Affairs Division.

In fiscal year 2018-19 members of the California Cardroom Industry requested an audit be conducted on the Department of Justices, Bureau of Gambling Control, and the California Gambling Control Commission. As later approved by the Joint Legislative Audit Committee, the California State Auditor conducted an extensive audit of the Bureau and the Commission and released its findings of recommendation in May of 2019.

Among the recommendations, the Auditor recommended that the Bureau and the Commission, in part, better align the revenue in the Gambling Control Fund with the cost of the activities that the fund supports by conducting cost analyses of those activities and utilizing such information to reset their regulatory fees to reflect their actual cost.

Subsequently, the Commission contracted with nationally recognized experts in cost of service analysis and revenue recovery, MGT Consulting, to assist the Commission and the Bureau in conducting an extensive cost and fee analysis and to revise the fee structure.

Once the analysis and fee restructuring proposal were finalized and reviewed by the Department of Finance and State Auditor in September of 2021, the Commission immediately began promulgating regulatory packages to modify the various fees under its authority and sought out a statutory change regarding the one fee that was not under the Commission's regulatory authority, which was the cardroom annual fee. The necessary statutory change providing the Commission regulatory authority over the cardroom annual fee was signed into law and trailer bill language with the 2020 Budget Act.

Throughout the process of developing modifications to various fees under the Commission's authority, the Commission conducted extensive stakeholder engagement, including holding 21 opportunities for public comment on fee regulations since September of 2021, in addition to industry meetings and correspondence. To date, all necessary regulatory changes have been implemented and approved by the Office of Administrative Law with the exception of one regulatory package to permanently adopt the modified room annual fee,

The cardroom annual fee regulations are currently in effect on an emergency basis, and the regulatory package to adopt them on a permanent basis is currently pending approval by the Office of Administrative Law. The Commission's fee restructuring included a reduction of the majority of its direct fees, such as application fees, that went into effect in 2021.

Regarding the annual fees, the cost and fee analysis demonstrates that the prior annual fee methodologies were not appropriately charging the cardroom and third-party providers their proportionate share of cost. In short, the prior annual fee methodologies resulted in the third-party providers paying a disproportionate share of the total annual fee cost. The new annual fee methodology includes a detailed analysis of the regulatory oversight work conducted for each part of the industry and charges them proportionately based on their actual work performed.

This has resulted in an overall decrease in annual fees for the majority of third-party providers and an increase in annual fees for the majority of cardrooms. The Commission has committed to reviewing its cost analysis and fee structure on an annual basis and proposing changes through the public regulatory process when necessary to ensure that its fees are appropriately aligned with the cost and the cost of the activities performed. Thank you and we are happy to answer any of those questions that you may have.

Thank you. I also want to note that the Committee staff has worked with the Commission and the LAO to create a data visual showing the percentage changes in fees. This is available as an amendment on the Sub Four website for those interested in taking a look. Any comments from the LAO and the Department of Finance?

Anita Lee with the LAO. Staff indicated that it could be helpful if we walked through the addendum briefly. Okay, so we'll go ahead and do that. So you have two figures on the page before you. The top one represents the cardroom annual fees and the bottom represents the third-party providers. The colors reflect kind of three pools of different types of fees that are being charged.

So there's a set that's being charged to the non-operators and then to active operators who have gross revenues under 1.5, and then to active operators who have gross revenues that are over 1.5 million. And so those are kind of the colors that you see laid out there. So if you start at the top for the cardroom annual fees, if you look at the two columns on the left, those are decreases.

And so of the 84 cardrooms, 12 were about 14% experienced decreases when comparing their current the 2023 fees compared to what they were being charged in 2019-20. The remaining, about 86% experienced increases, and of that 86%, about more than half of them had fees that doubled, effectively. The second figure below you, the second figure on that page, reflects the third-party providers. Similarly, the two columns on the left indicate those that experienced decreases and that represents about 69% of the providers.

The remainder. The remaining columns indicate that about 27% of them experienced increases. And so that just provides a little bit of a frame of reference in terms of the percentage increase that they experienced. Separately from these, in terms of comments for legislative oversight, as the Commission indicated, this is a new fee that has gone into effect and will need to be kind of reviewed as the Legislature conducts its oversight.

There are a few things that are coming down the line that could potentially impact fees and the fee levels in the future. One of those is in looking at the Gambling Control Fund, which is the fund that supports both the Gambling Control Commission as well as DOJ's work in this area. Currently, expenditures exceed revenues, and so that's something that we'll sort of need to keep in mind. On top of that, there is an IT project that is currently in planning stages.

And so once that project sort of moves forward, how we fund that will be something that the Committee will want to monitor. And so those are kind of a few things that we just wanted to mention for the Committee's consideration. Thank you.

And Department of Finance, Kevin Clark. No additional comments.

Thank you. Some questions. A new calculation no longer takes into account the number of tables a cardroom was licensed to operate. Is using a three-year average gross revenue a better metric to determine the Commission's annual fees?

Yes, the annual fee methodology is a very thorough methodology in which we break down the various types of workload that we perform as associated with the annual fee. The overall goal to accomplish with the new annual fee methodology is to better align the cost of the annual fee workload with who is actually driving the workload.

So, yes, we do believe that reviewing the three-year average gross revenue, rather than the authorized table count per cardroom is more appropriate to identify the amount of regulatory work that may be performed. Because the number of authorized tables, as we used in the prior methodology did not provide a direct nexus to the regulatory workload being performed, contributing to discrepancies noted in the state auditors report.

Under the previous methodology, cardroom annual fees were assessed based on the number of authorized tables, regardless of whether the cardroom was actually operating all of those tables for which they are authorized to use. In some cases, two cardrooms with the same number of authorized tables have very different annual revenue. Using a metric that considers revenue takes into account significant differences between the cardrooms that can result in additional regulatory workload, which were not captured in the per-table metrics.

For instance, considering revenue can take into account differences in operating hours, games offered, staffing levels, and geographic locations.

How often will the Commission review and revise its fee schedule?

Yes, the Commission is actually committed to looking and reviewing and actually doing the analysis on an annual basis.

That's the commitment?

I'm sorry?

That's the commitment?

That is the commitment. That is what we're actually doing right now.

Great. Can you describe the fee impact that the new fee methodology will have on cardrooms and third-party, and can you use specific dollar ranges and estimates?

Yes, absolutely. Good afternoon. Rebecca Kirk, as our Executive Director indicated, I'm the Commission's Deputy Director of Legislative and Regulatory Affairs. Referring to the agenda that the LAO provided an overview of previously, one point I wanted to make was that for context, the information on annual fees that were paid in 2019-20 reflects the most recent actual fees that were paid under the previous methodology.

Because in 2020-21 and 2021-22 we actually had annual fees waived for cardrooms and third-party providers when they were experiencing kind of the bulk of the impacts from the COVID-19 pandemic. So, as indicated at the top, the total amount of annual fees invoiced in 2022-23 was approximately 19.2 million. And by comparison, the previous amount for 2019-20 was approximately 19.8 million.

So in total, for some framing, the overall amount of annual fees invoiced for 2022-23 has actually gone down by about $660,000 since the last year that annual fees were charged. However, as indicated in the histograms that the LAO walked us through earlier, the distribution of those fees paid by two parts of the industry, the cardrooms and the third-party providers.

That distribution has shifted, and that is an expected result of the change in methodology and an outcome of the state auditors' findings and our ensuing cost and fee analysis that under the previous fee model, third-party providers bore the majority of the annual fee costs despite the majority of the regulatory workload for the Commission and the Bureau actually being associated with the cardrooms.

So in other words, the third-party providers paid a disproportionate share of annual fee costs previously, which is why under the new methodology, you see them, the cardrooms, in the majority of cases paying additional fees. And in the majority of cases, the third party is paying less.

To quantify specifically some of the cost impacts, there are various categories, as was mentioned, for both cardrooms and third parties, of nonoperational active with a three-year average gross revenue of under 1.5 million, or active with a three-year average gross revenue of 1.5 million or above. And those categories are the same for either cardrooms or third-party providers under the new methodology.

For both parts of the industry, for nonoperational cardrooms and third-party providers, and for those with a three-year average gross revenue under 1.5 million, they're assessed fixed fee amounts. Those amounts are specified in the agenda, but for non-operational cardrooms, it's $5,237. For cardrooms that are active, with an average three-year gross revenue under 1.5 million, they're charged $10,473 under the new methodology.

For those cardrooms, that represents an overall average percentage increase of 127% compared to what they were charged in annual fees in 2019-20. On the third party, or, excuse me, still on the cardroom side. For active cardrooms that have a three-year average gross revenue of $1.5 million or more, they were charged 1.29% of their three-year average gross revenue.

So to put that in dollar terms, depending on the cardroom for 2022-23 that ranges from $33,800 up to approximately $1.8 million, representing an average overall percentage increase of 184% compared to the 2019-20 levels. On the third-party side, nonoperational third-party providers are charged $2,035 under the new methodology. If they are active and they have a three-year average gross revenue of less than 1.5 million, they are charged a fixed amount of $4,069, which is an average overall percentage decrease of 50%.

And active third-party providers that have a three-year average gross revenue of $1.5 million or more are charged 1.54% of their three-year average gross revenue. And to put that in dollar terms, that ranges from $26,499 to approximately $4.1 million, or an average overall percentage decrease of 13% compared to the amounts that they were paying in 2019-20 for annual fees.

Thank you. Would the LAO like to respond?

There are two ways to, when you're thinking about kind of the fee increase and the impact. There are two ways to think about it. There's the actual dollar amount and then there's the percentage increase. So, for example, just using a hypothetical example, if you paid a $1,000 fee in 2019-20 and you were being charged $5,000 in 2023, functionally, from a dollar value perspective, you can argue that that is not that much.

It's not 25,000, but from a percentage base or from a business model, that can have a pretty significant impact. And so we do think that when the Legislature is considering this item and doing its oversight, you kind of want to weigh both. And so, as the Gambling Commission discussed, we agree with those. Our comments are based on the same numbers. So they were talking about kind of the specific numerical sort of differences.

And you are talking about for those with less revenue in the low thousands, but for those who are active and having gross revenues of over 1.5 million, I mean, you're certainly talking about differences in the tens of thousands to potentially even hundreds of thousands of dollars. And so do you want to pair that with what you have in the addendum to basically understand what that percentage increase looks like?

And so what stands out in particular in terms of an operational aspect, is, in that first one related to the cardroom fees. For more than half of those that are experiencing increases, their fees are more than doubling.

And so that's just something to kind of keep in mind, particularly as we sort of referenced in our earlier comments that moving forward, there's a possibility that the fee amounts may still need to be higher if we're going to be addressing things like increased costs, additional obligations, making sure the Gambling Control Fund is stable. And so those are just all things that the Committee might want to keep in mind.

Thank you. One final question. The State Auditor pointed out in 2019 that the Commission had excessive reserves due to the old fee methodology. Is that still the case?

I guess it depends on what fund condition statement you're looking at currently. If you're looking at the Governor's Budget fund condition, it's actually showing that the Gambling Control Fund is projected to have an ending balance in 2324 of approximately $5.3 million. There is an outstanding General Fund loan, however, of $45 million.

Got it. Thank you. Any comments or questions from Committee? Seeing none. We're going to keep this item open. Thank you. Now we're going to move back to. Where were we before? Okay, thank you. You. It is 3:45. 3 hours into Committee, and we are on issue six of 28. 26. We have to go to 20 and then coming back. Just out of order.

Whoever takes longest to sit is buying dinner. All right. We're going to go have fun, they said, right? Okay. Issue six, update on state telework policies. We will now move on to the Department of General Services. Let's begin. Hold on. For our next issue, we will hear an update on the state's workforce telework policy. Joining us from this panel is DGS, as well as Department of Finance and LAO. Please introduce yourself when you begin.

And for this update, we are asking DGS to present on the state's telework policy enacted during the pandemic, how state departments have used this policy and available telework data. Please begin.

Thank you so much, Madam Chair Members. Thank you for having us here today. My name is Jacqueline Campion. I'm the Chief financial officer for the Department of General Services. And with me today, I have Ann Baaten, who is the Chief of the telework compliance program.

And I also have Jim Martone, who is the Chief of the asset management branch of the Real Estate Services Division. And I'm going to switch seats with Jim just in case there are any asset questions. Thank you.

Thank you.

Good afternoon. My name is Ann Baaten. I'm the Chief of the telework program for the State of California with the Department of General Services. I'm present to provide an update on the state's telework policy. The statewide telework program is established pursuant to government code sections 14202 through 14203.

Existing law requires every state Department to incorporate telecommuting as a work option. Government code 14202 states that DGS shall establish a unit for the purpose of overseeing telecommuting programs.

Funding was established beginning with fiscal 2022-23 to implement oversight and review compliance functions to ensure Department's policies are in compliance with statewide policy, not necessarily the implementation of policy at the Department level.

The Department of General Services published the current statewide telework policy in the state administrative manual, Section 0181, in October of 2021. The policy replaced the 2010 DGS model policy and establishes telework outside of any emergency orders resulting from the response to the pandemic.

It may be worth noting that the update to the statewide policy was well underway prior to the pandemic and was the result of collaboration with Government Operations Agency, California Department of Human Resources, and the California Department of Technology.

The policy applies to all State of California agencies, departments, boards, commissions, and offices, which we'll reference here as Departments. The statewide policy provides a framework for Departments to establish their own telework programs.

While departments are directed to determine what positions are eligible to telework and consider all possible positions in which telework can promote effective and efficient business operations.

Departments have leeway to determine eligibility based on the nature of work and operational need. The statewide policy does not prescribe number of days nor what positions are eligible. The state's workforce is incredibly diverse.

The state operates prisons, hospitals, field offices that serve the public, field offices that offer area protection like forestry stations and Highway Patrol offices in labs, on roads and highways on construction sites.

There are a significant number of state workers whose jobs require a physical presence, such as maintaining an office building, repairing a road, or serving patients in mental hospitals. Departments are diverse as well. CAL FIRE has firefighters and they also have accountants. State hospitals employ psychiatrists and they employ clerical staff.

Some departments have multiple missions DGS, for example. We are responsible for procurement and real estate, but we also employ judges responsible for administrative law hearings. Because of this complexity, telework is never going to be a one size fits all situations for state departments.

Given that the statewide policy is flexible, and each Department has to figure out how to operationalize telework in a way that meets their business needs and operations and provides the necessary services to their clients, that is going to look differently across departments and even within departments.

The statewide policy instructed departments to establish a policy within the first 12 months of the statewide policy's publication. As of October 2022, 134 of 142 departments reported implementing their telework programs and supporting policy.

140 departments have submitted their proposed policies to DGS for review to provide guidance to ensure adherence to the statewide policy. Once reviewed, departments work with their own labor relations to be able to implement those policies.

I'd like to address also the questions that were included in the agenda for today's hearings, the first being with respect to long term goals for telework given the end of the Covid-19 emergency. As I noted earlier, the statewide policy is intended to provide a framework for department's own policies.

Government code 14201 states that every state agency shall review its work operations to determine where in its organization telecommuting can be of practical benefit to the agency. The statewide policy further states that each Department shall establish a written policy specific to the Department's business needs.

Departments have latitude to operationalize telework programs in a manner that meets their own business needs. The end of the Covid-19 State of emergency affords Departments an opportunity to reassess their telework programs relative to their own operational needs.

Department leadership is assessing current telework arrangements relative to their operations and taking into consideration impact to their future workspace, culture and support for Employee Development and engagement. We're in uncharted territory.

Given the unprecedented speed and scale of the state's shift to telework, it makes sense for Departments to reevaluate telework arrangements to ensure that these arrangements continue to support our work to provide critical services to Californians, as well as best support workplace culture and employee engagement. We have another question with respect to estimated cost savings.

As an update to the statistics in the Governor's Budget, we're happy to report we've been able to, across 142 leases statewide, reduce one and a quarter million square feet of office space with an annual savings of 37.5 million.

In terms of ongoing efforts, our Real Estate Services Division provided the following we have instituted a moratorium on new leases and lease renewals to ensure that they accommodate space reductions due to telework. Where applicable, we've increased the density of several of our office buildings.

We are also in the process, outside of Sacramento, eliminating a number of office buildings that are no longer necessary in light of telework. Most of these are being redeveloped into housing and include San Diego Office Building, Alquist Building in San Jose, Reading State Office Building, Fresno Office Building. And in Sacramento, we're looking at three office buildings to be adaptively reused into housing. This is just a few of the efforts being taken to reevaluate space due to telework.

That said, 1.2 emphasizes the old architectural adage that form follows function. In other words, the use of a space should always govern what that space looks like and how big it is. That means that space reductions are a function of each department's business and operational needs.

We don't dictate how departments function, so our ability to reduce space is somewhat dependent upon what decisions Departments make related to the degree of telework by each program within that Department and how each program needs to operate to be able to provide services to their clientele.

Finally, I would like to address the question of telework data and whether State Departments and Agencies eventually will report their telework data to DGS.

The expectation set in the statewide policy is that all Departments will report their telework data to DGS. The telework program has an active outreach program to work with Departments and provide support for submitting data. We provide telework coordinator and data submitter forums every two weeks.

We conduct targeted outreach, and we also provide one on one consultation to support Departments. This concludes my presentation. My colleagues and I are happy to address any questions.

Thank you so much for your thorough presentation, for getting ahead of the questions. So you've answered most of the questions presented. I just want to see if there's any comments from LAO.

Jared Sippel with the LAO no comments on this item.

Any comments from Finance?

Natalie Griswold, Department of Finance no comments on this item.

I just have one question, then I'll ask if my colleague has any questions, too. But the Administration updated its telework policy in 2021. Does it anticipate updating the telework policy again for 2023 or the future right now?

No, it's not currently under consideration. And what I would say to that is the telework policy that was enacted in 2021 is fairly flexible and allows Departments to make decisions that are in their best interest, their business needs with respect to telework.

So it actually supports departments that are fully remote, are hybrid or fully in office. It doesn't make a distinction. So it is currently still current and relevant.

Great. Thank you. Any questions from my colleagues or Members? No questions. Then we will be holding this item open for now. Thank you.

Thank you.

We'll now be moving on to issue seven housing initiatives, which is the DGS housing initiatives. For this panel, we are joined by Jim Martone, Chief of Asset Management Branch, Real Estate Services Division at the Department of General Services, as well representatives from our Finance and LAO.

We're asking DGS to present on three budget change proposals and a Trailer Bill related to adaptive reuse, surplus state property and affordable housing development.

Thank you so much. Once again, Jacqueline Campion, Chief financial officer with the Department of General Services. The first proposal we have for your consideration seeks $1 million in one time expenditure authority from the General Fund to implement AB 2592 by Assemblymember Mccarthy.

This requires the Department of General Services to prepare a plan for transitioning underutilized, multistory state buildings into expanded affordable housing development opportunities. DGS would also be required to report this plan to the Legislature by January 1 of 2024.

And with me is Chief Jim Martone of the Asset Management Branch to answer any questions you may have.

So, Jim Martone, Department of General Services just to say a few more words about AB 2592 in order to, and this kind of addresses one of the questions as well. In order to adaptively reuse state building into housing, a few things have to happen. One, the building has to be suitable for housing.

And some of the things on the question is the building has to have the right size floor plates, which refers to the depth of the building from the core to its outer walls.

Buildings should have sufficient amount of exterior light. The building's layout of elevators and exit stairs are also really important as to how they are laid out to make a building more efficient. And the condition of the building is important. If we have to convert a building to housing, we have to bring the building up to current codes. And finally, site utilization plays a big role.

If a given office building maximizes the use of the site, kind of the ratio of the building to the property, that is the best case scenario. If it doesn't, one has to take a look at whether demolition, new construction might actually reduce the cost per unit of housing by allowing for a larger number of units.

And finally, the building actually has to be accessed to state use. So with that, if you have any questions on AB 2592. Happy to take those.

Thank you. Any additional questions for Members of the Committee? Mr. Lee.

I have questions in general about this section. So should I save them to the end or should I ask them now? Because all these topics are very interrelated to one another. So I just seeing which would be most appropriate at the end. Now.

Yeah. So the process you described about the criteria of finding suitable state properties that are adaptive reuse. So I understand that DGS went through and looked at 44,000 different parcels. Right.

And then he came back and he looked and you saw there are 92 parcels suitable. That was the criteria you're talking about. Right. And then right now, as of March 2022, 16 have been offered to be redeveloped as housing. Correct. Including, say, the Aquas building, which is near my district in San Jose, to turn into student housing by the San Jose State University. And that's one of 16. Correct.

The actual adaptive reuse, that's a little bit different. The 92, those were ones that were, we deemed that met the criteria for affordable housing potential sites. So what we're talking about here is adaptive reuse. So we are currently solicited for RFQ here on capital, all for EDG and SPB buildings. So this is just to do. The ask is for $1.0 million to do some additional studies for an additional handful of sites.

Right. Well, first of all, I just want to say that this program of adaptive reuse or reusing our surplus property is incredibly innovative. And I think it's really great to be able to. As we talked about with our telework panel, we just talked about the use of our office space might be changing. We might be able to use them for better suited.

And some of the best assets we have is when we own excess property, especially during the housing crisis, when a lot of them are urban parcels. So some of the questions I had with talking about is of those 92 properties. So you said 16 are being offered development right now, but there's still 76 additional properties that could be offered developers. But you're asking for more resources to basically do the predevelopment aspect of it. Right.

So of those 76, though kind of properties, can you give us a sense of what they are? Are these like urban parking lots, rural fields, like excess office spaces? Because I want to get a sense of basically why I'm asking is what we see here in the Capitol Mall, are those outliers? Like, these are very specific examples that are really attractive to be real dealt, and the rest are just like empty fields or really undesired, not as great locations.

Just want to get a sense of what kind of inventory we're looking at out of the.

I would say it's a little bit of a hybrid. We have real property throughout the state. We looked at various factors. Does it make sense? I mean, some of the filtering is, if it's beach property or uneven terrain, what have you.

Those were sites that we eliminated, but I would say these 92 sites that we came up with, of which 76 are remaining, working closely with our peers at housing community development, have deemed are the best options for the state.

And so the work that DGS is doing is basically the predevelopment phase, the entitlement phase, checking assessments and making sure the building is suitable to be developed. Right. And then you typically offer it to, say, a nonprofit developer or a private developer to make it developed, right?

Yeah, we do a solicitation.

Is there anything preventing DGS from just developing ourselves? Because we also have built plenty of great office buildings over here. DGS has constructed things before. Is there anything that prevents DGS from conducting the development ourselves?

From a staffing perspective, I would say we don't have the appropriate resources for one. But affordable housing, it's kind of a unique animal that requires financing and the funding, what have you. So I think that would be somewhat challenging.

Do you think that in the report that will be coming out to the Legislature in January 2024, will there be kind of analysis to break down? Obviously, we have this process right now where we do the request for bid and do these things. If it could be more efficient in time and would it be cheaper for us to just engage in the production ourselves, do you think that would be something that the report be looking at.

The report for AB 2592. It will highlight the intent was to study an additional five facilities throughout the state. Right now, we don't know what the telework impacts are going to be. So obviously we're looking, anticipating unless everybody comes back into the office five days a week, we're looking at some potential options and come January 1, we'll have the results of these five.

Well, I ask these things because I know you're requesting more money in the budget and a Trailer Bill Language that gives you more resources to do this kind of development. I mean, right now it's kind of small, millions right now. But I wonder, and of course we have a colleague who's requesting a lot more money for these programs. So I just wonder if it would be at least feasible to explore the question of if we did it ourselves.

I mean, it's not unprecedented that we build structures here in downtown and now we're reaping the rewards of these investments years on to adaptively reuse them. But I know that you all are looking at obviously having more resources and more staffing.

So if it's a staffing issue, maybe we can look at 76 buildings on unreasonable inventory of assets to look at. What would it look like if we just built it ourselves instead of having to do a bidding process and everything? So that's just something to keep in mind. I know we have more to cover on this topic, so I'll save that for now and not monopolize time.

Thank you, Majority leader.

I want to join my colleague on that. I think that we should look at all options, because if we're talking about the need for affordable housing, we do have to look at all options. And maybe the staff that we'd be looking at are staff that has experience in construction management or in other areas, as opposed to just looking at the books.

So something to consider of the 44,000, and I know there's talk, I think one of the other items is digital inventory of all of the properties. These are all surplus properties. And of 44,000, only 92, it was determined, that were suitable for affordable housing.

Correct. A lot of our properties, state parks, beach land, forest, what have you, most of the property of the 44,000 aren't really conducive for housing. And we look at is it close to transit and a lot of different factors that we look at. Would it make sense to put housing there?

That makes sense. What you're saying makes sense. And I want to go back to comment that the Chair was making that whatever we do today, it sets us up for years to come. New governors, new legislators, new committees, new staff at each of the departments. But I think being very intentional about putting together that plan that's going to outlive us.

If affordable housing is a big issue, and I assure you that it is, then trying to be as creative as possible so that the legislators can partner with you to find those solutions. It's just something that, it really impressed me, Madam Chair, to have you talk about that, because it is a serious issue and we do have to be creative about ways to do this. Thank you.

Thank you, Mr. Patterson.

Thank you very much. I'm in between mics. Know I appreciate the comments from my colleagues over here. I don't know if I totally agree with the state getting involved in building the developments themselves, although I know that that's a big goal of Assemblymember Lee's and respect that.

But also, when I was on a City Council, we spent a lot of time and resources. Basically, we're trying to give away land for people to come into the market and build housing and things like that.

And I think anything we can do, I think you're going to find agreement here to help dispose of land that is identified by the Department to already be disposed. I mean, if there are resources needed, things like that. Obviously, some of that's here in the budget request, but I'd be supportive of those efforts if there's legislation needed to streamline some things. Whatever is needed, I support those efforts.

And by the way, just as a side note, I used to work at EDD, right down here on Capitol Mall and definitely support efforts to make that housing. Thank you.

Thank you, Mr. Patterson. If there are no additional comments or questions, we're going to hold this item open for the moment, and we're going to allow an opportunity for Mr. Patterson to add on to the votes. In the meantime, the next panel can come up, and that's facilities budget change proposals.

First motion. Adopt staff recommendation for vote only. Issues one through 3. 5 through 8. 10 through 13. 15 through 28.

[Roll Call]

Second motion. Adopt staff recommendation for vote only. Issues 4, 9 and 14.

[Roll Call]

Final motion. Adopt staff recommendation for items to be heard. Issue number one, resources for examination workload.

[Roll Call]

Thank you very much, Madam Chair. I appreciate that.

Thank you, Mr. Patterson. Now, let's go on to issue number eight. Facilities budgets change proposals. You'll stay on this panel. We are asking DGS to present on two proposals related to facilities and the new Richards Boulevard office complex. Let's begin.

Thank you. This proposal is requesting $402,000,000 for a portion of the design-build phase of the Richards Boulevard office complex. And with me, of course, is asset management chief Jim Martone with the Real Estate Services Division to provide more details on this proposal.

So this request, like Jacqueline said, this is for the new Richards Boulevard office complex. Federal tax code for the issue federal tax code for the issuance of tax-exempt bonds requires, among other things, that bonds must be issued within three years of the initial project expenditures. And due to this project, due to nearly four-year construction schedule that's been established for this project, a portion of those expenditures fall outside of this three-year window, and therefore, those project expenditures no longer qualify for tax-exempt financing.

As a result, this would likely result in the need to issue taxable bonds for the project, which could significantly increase the cost of financing. The design-build phase of this project was proposed to be funded with general fund as part of a multi-year investment in 22-23 intended to reduce the long-term debt obligations. However, to address the projected decline in general fund revenues, this proposal was reduced to 402,000,000. So what we are proposing is at this point. So that's kind of my information on the project. Ultimately, projects on schedule to be completed in April 24, and I'll open up for questions.

Thank you. We're going to go for comments from the LAO and followed by the Department of Finance.

Thank you, Madam Chair. Jared Sippel with the LAO. We just have some broader comments related to financing approaches for capital outlay projects that are related to the new Richards Boulevard office complex project. So the governor's budget includes a total of nearly $2 billion in cash from the general fund or lease revenue bonds to support capital outlay projects across the state.

DGS has one such project under consideration right now, the new Richards Boulevard office complex, in which the governor is proposing to shift $402,000,000 in costs from lease revenue bonds to cash from the general fund. As the Department mentioned, this project would otherwise need to use taxable bonds to finance these costs because they exceed the three-year window required for tax-exempt bonds.

We just want to highlight that using bonds or cash can be reasonable ways to finance capital outlay projects, and each approach comes with its own trade-off. So, for example, if the state has a budget deficit, bonds can fund important projects without forcing the state to cut existing programs. But on the other hand, using cash can lower the overall spending for a project because the state doesn't have to make interest payments.

And so given the current budget problem, facing the state, including that the problem may be even larger than the governor is currently projecting. The Legislature could consider switching to lease revenue bonds instead of cash financing for this project. This would free up some of the general fund cash to maintain funding for existing programs that might otherwise need to be cut to address the budget problem. And even though interest rates are relatively high right now, if they do come down in the future, the state always has the option or may have the option to refinance at a lower rate. And I'm happy to answer any questions you may have.

Thank you. Department of Finance.

Zach Lierly, Department of Finance. So financing costs have increased significantly over the past year, both for tax-exempt and taxable financing. For instance, if the state were to finance the 402,000,000, it would result in $400 million in additional costs or twice the principal amount. So as such, we see this as a good fiscal decision that provides long-term benefits to the general fund over the long term.

Thank you. Given the budget shortfall, why has the Administration decided to pay for the remaining Richards Boulevard office complex expenditures with general funds instead of bond financing?

Again, just to reiterate. Zach Leirly, Department of Finance. The higher cost of borrowing associated with the taxable portion of these expenditures that fall outside the three-year window for federal tax code requirements would generate a higher cost of borrowing when we were to take these bonds to the market. So we believe that this is a good fiscal decision that would provide long-term benefits over the long haul.

Understand that. I think in the complexities of a shortfall within the budget, part of the other questions that we are mandated to answer is how do we tell families that we don't have funding for additional childcare centers? How do we make up for potential losses? How do we ensure something that we're pushing quite a bit is creating health care options for all Californians, regardless of immigration status as well as regardless of age? And so a lot of that funding comes from the general fund. How do we tell our constituents, sorry, we couldn't give you health care, but we're building a building?

Well, again, Zach Lierly, Department of Finance. Respectfully, this building again would generate, it already has, outside of the four-year expenditures, a higher cost of borrowing. So we are either looking at higher cost of borrowing over the long haul or an initial investment to make sure that we maintain our costs and maintain a flexibility to the general fund in the multi-year.

Thank you. No additional questions. We're going to keep this item open and move on to issue number nine, Office of Sustainability Budget change proposals for this panel. We will be joined by Matt Henigan with DGS and the Department of Finance and the LAO. We are asking DGS to present on two proposals, one related to transitioning state facilities to use 100% renewable energy and another on continuing performing installations of electric vehicle charging stations in state-owned and leased facilities. Let's begin.

Thank you. Jacqueline Campion, chief financial officer, Department of General Services. The first proposal we have before you is requesting three year, limited-term authority in the amount of $1.7 million expenditure authority from the general fund.

Can you please speak closer to the mic?

I'm sorry. Is that better? Thank you. Requesting three-year, limited-term authority in the amount of 1.7 million from the general fund, 203,000 from the service revolving fund, and one position for three years starting in fiscal year 2324 to accelerate the deployment of clean energy at state facilities and manage the transition to 100% renewable energy at all state facilities. And this is pursuant to SB 1020 by Senator Laird. Would you like me to present the next item as well? Thank you.

The next proposal before you is requesting a one time budget augmentation of $35 million in authority from the general fund spread over three years to support the DGS five-year zero-emission vehicles infrastructure investment plan. And with me, I have Deputy Director Matt Henigan with the Office of Sustainability with the Department of General Services to answer any questions you may have.

Thank you. Hi. Matt Henigan, deputy director, Office of Sustainability.

Thank you. We're going to go with the LAO, followed by the Department of Finance.

Thank you again, Madam Chair. Jared Sippel with the LAO. We have comments on the Second Office of Sustainability proposal for EV infrastructure, which is requesting $35,000,000.01 time from the general fund over three years. In light of the general fund climate, we're recommending that the Legislature consider funding the cost for this proposal from within the existing zero-emissions vehicle package rather than as a new additional general fund expenditure.

As you may be aware, and just to provide a little context about the zero-emissions vehicle package that we're referencing, the previous two budgets committed significant funding for programs intended to promote the purchase and use of zero-emission vehicles. Funding for this package is spread across five years, including $2.1 billion intended for 23-24. We do know that the governor's budget does propose reducing general fund spending on the package, but proposes to backfill some of these reductions using discretionary greenhouse gas reduction fund revenues.

So just to give that context, but to get back to just the proposal itself from DGS, we acknowledge that the state has set ambitious goals for transitioning the state fleet to zero-emission vehicles. And so, as such, the proposal does have merit because it would install charging infrastructure at state facilities at a time that state agencies are adding zero-emission vehicles to their fleet.

However, it would also commit the state to a $35 million new discretionary general fund expenditure at the time that the state is facing a budget problem, as you're aware. So, given the general fund condition and the fact that overseeing the state fleet is a core state responsibility, the Legislature may want to consider whether it could instead fund this proposal from the zero-emissions package. It would require the Legislature to make some reductions to other programs funded by the package. However, we think that this could be justified to enable the state to comply with its zero-emission vehicle requirements and given the general fund constraints right now. So happy to answer any questions you may have. Thank you.

Courtney Massengale, Department of Finance. We have nothing to add at this time.

Thank you. Given the budget shortfall as been described in previous panels as well, has the Administration considered alternative funding sources other than the general fund for its electric vehicle infrastructure proposal?

Yeah. So do you mind repeating that again? Sorry.

So we're in a budget shortfall. Why use the general fund versus other budget proposals?

Thank you. We believe that the ZEV package will result. If we did it inside of the general fund and we moved it to the ZEV package, it would result in an impact to other priority ZEV projects included in the governor's budget. And it would require the Administration to shift existing general fund or greenhouse gas reduction fund dollars because there are only two fund sources within the ZEV package aside from federal funding.

LAO, can you respond to that, please?

Thank you, Madam Chair. I think just again, we're putting this out there as an option. We do recognize that because of all the funds currently are itemized at this point for other programs. So the Legislature would have to weigh whether this particular expenditure is a priority over some of the other programs and make accordingly recommendations. But again, we're just putting this out there as given that this is a core state responsibility in terms of including these charging infrastructure at state facilities, that it may rise to the level of being funded instead of some of the other programs.

Thank you. What is DGS's goals in terms of how many charging stations need to be built for the five-year zero emissions vehicle infrastructure investment plan, and how many stations have been built to date?

That's a good question. Currently we have 2794 charging stations installed at state facilities, and we are in the construction or contracting process for 1827. Additionally, we believe we have funding on hand, that should pay for 560 additional charging stations, bringing us to 5181 charging ports.

And these are in state buildings across California?

That's right.

Okay, great.

Thank you. We're going to leave this item open for now. No further questions. There are no other members.

Thank you.

We're going to move on to issue number 10. Thank you. Deferred maintenance. We are asking DGS to provide an update on DGS's deferred maintenance backlog, including the proposed budget reversion. Reversion. The proposal to update fire, life, and safety alarm systems, as well as the proposal to upgrade digital controls in specified buildings. Let's begin.

Thank you. The first proposal we have before going.

I'm going to ask that you identify yourself every time.

Thank you. Jacqueline Campion, chief financial officer, Department of General Services. The first proposal we have before you is requesting $20.4 million in one-time general fund expenditure authority for the most critical fire life safety projects. And with me is Deputy Director Jemahl Amen with the facilities management division of DGS.

Thank you. Jemahl Amen, deputy director, FMD. It's pretty straightforward for us. The maintenance of our buildings requires us to be in code compliance with the state fire marshal's office. Many of our buildings are dated and have original equipment that are intrinsic to the building's original build-out or construction.

And so being able to modernize these systems in a way that allows us to not only incorporate new technologies with the HVAC systems and other operating systems allows us to also ensure the safety of our building inhabitants over time.

Thank you. We're going to go to comments from the LAO, followed by Finance.

Hi, Madam Chair. Jared Sippel, again with the LAO. We kind of have a broader recommendation that relates to both proposals under consideration now with the deferred maintenance as well as the direct digital control upgrade. So if it's okay, I'll start with just that broader recommendation and then maybe speak more directly to each issue. Is that okay? So cutting across both of the proposals at hand.

We have the broader recommendation that the Legislature require DGS to provide a plan to the Legislature by January 10, 2024, on how it will adjust rental rates to incorporate building maintenance and needs going forward. In our view, building rental rates that are charged to tenant departments in DGS buildings should reflect the cost of operating and maintaining buildings. While the state has provided some general fund support in the past for building maintenance, the state currently is experiencing a budget problem.

As a result, any additional spending posed from the general fund comes at the cost of already funded legislative priorities. Moreover, we find it's not appropriate for DGS to rely on the general fund augmentations on a long-term basis to fund its deferred maintenance needs because it disconnects the rental rates paid by tenant departments from the cost of operating and maintaining its buildings.

And it also places a disproportionate share of the cost on the general fund rather than allocating some of the cost of the special funds that support some of the other DGS tenants. And so that's kind of an overarching recommendation that applies to both. And then just to speak briefly about each proposal so specific to the fire life and safety systems proposal, we're recommending that the Legislature approve the funding.

While ideally, again, these costs would have been covered through rental rates, we recognize that there is an immediate need for these projects, and it would take too long for rental rates to generate sufficient revenue to pay for the projects. And so I'm also happy to go to the direct digital control upgrades, but I don't want to get ahead of the department either.

Thank you. Give me one moment. We'll go to the Department of Finance and then go back to that. Thank you.

Hello. Natalie Griswold, Department of Finance. So the governor's budget includes $20.4 million for the most essential fire life and safety deferred maintenance projects to protect the safety and the integrity of buildings in DGS's portfolios. Rates are determined by portions of the state administrative manual and the government code, but we are happy to consider looking into how those rates determine the general fund allocations in the budget.

Thank you. Let's now hear related to digital control, please.

Thank you. The next proposal we have before you is for direct digital control. This proposal incorporates some lessons learned in the recent extreme heat event incorporated into this proposal. This is representing joint efforts between our facilities management division and our Office of Sustainability. So I will step aside and invite Deputy Director Henigan back up to answer any questions about this one.

This proposal requests $11.8 million in limited-term authority from the general fund for three years, starting in 23-24 and $972,000 in limited-term authority from the service revolving fund and four limited-term positions for three years to upgrade the direct digital control systems in buildings that are managed by DGS to improve the safety and efficiency of building operations and reduce energy use.

We'll return to you now. LAO, please.

Thank you, Madam Chair, Jared Sippel, with the LAO again. So, for this particular proposal, we have a few recommendations for your consideration. First, we're recommending that the legislature will withhold action on the proposed funding and require DGS to report on those projects that are in critical need of replacement. Based on our review of documentation that DGS provided on the condition of the direct digital control systems, some of those being proposed for funding were identified as a low-priority replacement.

So, it's unclear if all of these projects represent an immediate or pressing need for replacement. In addition, the Governor is proposing to revert funds from the 22-23 budget for direct control systems that were identified as high-priority replacements in the documentation that was provided. So, in our view, there's a disconnect between proposing the low-priority projects for funding while reverting funds for high-priority projects. And this ultimately calls into question how these projects are being prioritized.

And so, ultimately, consistent with our recommendation for the fire, life and safety systems, we'd recommend that the legislature only approve funding for those projects that are in high-priority need of replacement at this time. And then finally, our last recommendation related to this proposal is that we'd recommend the legislature adopt provisional language that limits the use of any funding to specific projects it chooses to approve.

In reviewing the DGS documentation that I referenced earlier on the condition of these systems, we found lower cost than what the Governor is requesting as part of the proposal. So, this suggests that the cost could be lower or at a minimum, that there is some uncertainty about the estimated cost of each project, and it's possible that there could be unspent funds that it would be important to have revert to the general fund. With that, I'm happy to answer any questions. Thank you.

Department of Finance

Natalie Griswold, Department of Finance: Budgeted deferred maintenance, including these direct digital control upgrades and fire and life safety upgrades, do prioritize sensitive deferred maintenance upgrades that are needed. But the Department of General Services can speak more to how it prioritizes those projects. Thank you.

Should toss it back to you.

Yep. Thank you, Jamal Amen, Deputy Director of the Facilities Management Division. If you don't mind, I'll divide my response into three certain areas and then whether or not how we prioritize, and also the cost estimates, so I think that covers most of the concerns that were raised. So, DDCs are the way that our buildings can essentially function in a modern era. All of the analytics and all the controls that are associated with our elevators, HVAC systems, building management systems, coordinates.

It's the brain trust that operates the buildings. A lot of our buildings were built in the before. Some of them are even in the 50s. I've spent a great deal of time trying to modernize our processes and drag our processes and our buildings into the 21st century. So this is a part of that initiative.

And not only are we looking, looking at modernizing each of the buildings independently, we're also looking at creating enterprise systems so that we can control them in a modern fashion as well, which requires a significant amount of investment as well. So there's a lot that's going into this discussion where it relates to need in terms of the priority; I think there's been a mix-up because I think a lot of our lists, we have a lot of lists, so that's probably my fault.

We do have highly prioritized buildings that reflect the need greatly. So I'm happy to work with LAO to continue sussing that out. I don't think there's any. At the end of the day, I don't think there'll be a disagreement in terms of the portfolio needs that we have and the buildings that we're pushing to the top when we looked at very common sort of indicators in terms of criteria, size, location, tenant, mission, condition, which the last one is important for us.

And so, as I mentioned before, many of our systems in these buildings that we're talking about fall into that last category of high concerns. These are old systems that we can't find parts for anymore. These are old systems that are not congruent with the newer systems that we're tying into other parts of the building. So that's sort of our brief response, but happy to continue working with LAO if there's a need to continue, I guess, coalescing our lists.

And then lastly, I agree the estimates that are out there, I've mentioned this in other discussions as well. We need to tighten up the way that we look at our estimates and figure out a way to modernize that as well. I've been looking at that, but you have to remember, a lot of our estimates that we put into this particular proposal were based on numbers that were pre the pandemic. I hate to keep throwing out the pandemic because it does impact a lot of things.

So with the construction industry, things are fluid, with delivery, things are fluid, with chips, things are fluid, and all of these systems involve all three of those components.

Appreciate that. Does DGS have a long-term plan to address deferred maintenance issues?

Yes, give us more money. No. In the big picture, we spent a lot of time. So first of all, we start off, when I first started, we had 10-year plans, and that wasn't helpful because 10-year plans get us into people that aren't even there anymore. By the time that 10 years expires, then we whittled it down to, "Okay, give me your five year plans." And we're talking to building managers.

And even that was sort of elongated because we had fires that we had put out that immediately ate into our, I would say, minuscule funding from one year to the next. So we started looking at, we developed an internal group division collaboration meeting where we look at all of our projects congruently and we figure out ways to maximize those dollars.

Whether you're talking about Ada, whether you're talking about all of these landscaping projects or even water conservation ones, energy saving ones, or new construction, we all get around the table. We figure out how to, way to sort of maximize those dollars. Having said that, this group also reviews a lot of our building management.

We asked our building management team to put forward their most urgent needs based on the criteria of immediacy that runs the gamut between the state fire marshal is going to shut our building down, and so we need to replace this system immediately, or we're already getting fined to, this is something that we've been asked by the legislature to do, or this is something that we've been asked over time because regulatorily speaking, it has to happen within x amount of time.

It kind of runs a gamut of importance in that regard. So our long-term plan is to combine all those different viewpoints into a list of projects that we push forward every year and accomplish every year, or at least tick off in terms of beginning to start the projects and finish them as we move along.

Thank you for that. There are no additional comments or questions from the committee. We're going to leave this item open for now. Thank you. We're going to move on to issue 11 procurement budget change proposals for this panel. We are joined by Angela Shell, as well with the State Chief Procurement Officer at DGS, as well as the Department of Finance and LAO. Let's begin. We are asking DGS to present on five budget change proposals related to state procurement.

Thank you. Jacqueline Campion, Chief Financial Officer, Department of General Services. The first proposal we have for your consideration is regarding implementation of AB 2019. We are requesting a one-time expenditure authority increase of 4.109 million from the general fund to conduct a statewide procurement disparity study in fiscal year 23-24.

Let's go through all five, and then we'll hear from LAO and Department of Finance.

The procurement division is additionally requesting one permanent position and 12 year-limited term position, and a one-time retired annuitant starting in fiscal year 23-24 with the associated expenditure authority from the service revolving fund of $425,000 in fiscal year 23-24, $325,000 in fiscal year 24-25 and an ongoing expenditure authority increase of 162,000 in fiscal year 25-26 and again, this is to support the implementation of Assembly Bill 2019.

The next proposal we have for you is implementation of SB 1422, acquisitions of goods and services alternative contracting procedures. We are requesting 481,000 in ongoing expenditure authority from the service revolving Fund and three positions beginning in fiscal year 23-24. SB 1422 enables the procurement division to utilize leveraged procurement agreements to consolidate the needs of multiple state agencies and leverage the state's combined purchasing power for the installation and or purchase of carpet resilient flooring, synthetic turf, or lighting fixtures.

The next proposal we have for your consideration is implementation of the emarketplace. This proposal seeks $2.41.0 million and 2 positions, one for our enterprise technology solutions section and one for fiscal to modernize and improve the vendor and customer experience by implementing a statewide online public facing emarketplace that will interface with the financial information system for California or fiscal. This will also require $2.2 million from the service revolving fund and $224,000 in reimbursement authority.

This proposal will allow state buyers to browse and order directly from approved supplier catalogs online through fiscal and it will be a similar interface to the Amazon shopping environment. The next proposal for your consideration is support for the California Pharmaceutical Collaborative. We're requesting $842,000 in authority from the service revolving fund beginning in fiscal year 23-24. This will continue support for four existing positions that were previously provided as limited-term in a previous BCP for the ongoing workload of the statewide pharmaceutical programs California Pharmaceutical Collaborative. The next proposal we have for you is regarding support for Small Business and Disabled Veterans Business Enterprise Program compliance. This is in response to a few recent combined developments, including implementation of the 2018 state auditor recommendations and recently passed legislation. This is seeking 320,000 from the service revolving Fund and two permanent positions beginning in this fiscal year 23-24 to support the Small Business and Disabled Veteran Business Enterprise Program to support training, communication, compliance, enforcement, and program abuse functions.

Two more: the next proposal we have is Small Business participation on infrastructure Investment and Jobs Act AB 2974. We are seeking 162,000 in ongoing expenditure authority from the service revolving fund and one permanent position to implement AB 2974, which requires state agencies and departments to set a 25% Small Business participation goal and report on Small Business participation on contracts funded by the Federal Infrastructure Investment and Jobs Act.

Finally, the last proposal for your consideration is requesting 672,000 in ongoing authority from the service revolving fund for positions and a one-time expenditure authority increase of $100,000 from the service revolving fund beginning in fiscal year 23-24 to address increasing workload to support the requirements of Assembly Bill 661 and Senate Bill 674. And with me is Deputy Director Angela Shell, the statewide procurement officer, to provide additional details or answer any questions you may have.

Thank you. I appreciate that you went into some items that were on the already done in the vote-only calendar, but we're going to move on to only the five items related to the five budget proposals currently on the agenda. Let's go with LAO and then followed by the Department of Finance. Thank you.

Thank you again, Madam Chair Jared Sippel with the LAO. We just have some brief comments on the procurement division's budget proposal that requests $4.1 million for conducting the statewide procurement disparity study. For this proposal, we're recommending that the legislature approve the funding but adopt provisional language that would require any unspent funds to revert to the general fund. The amount the Department is proposing is notably higher than some of the other disparity studies that the Department references in the proposal.

While the Department explains why it estimates a statewide procurement study in California would cost significantly more than these other studies, the actual costs ultimately are unknown out at this point. And so we think it's prudent, particularly with the current budget environment, to include provisional language that would require any unspent funds to revert just in case cost ends up being lower than expected by the Department. And happy to answer any questions.

Natalie Griswold, Department of Finance. Nothing to add at this time.

Thank you. Department of Finance.

Thank you. What is the current Small Business Disabled Veteran Business Enterprise participation rate into state contracting?

Thank you. Angela Shell, Deputy Director for the Procurement Division at the Department of General Services and also the State Chief Procurement Officer for the last fiscal year 21-22.

Thank you. And when is the projected launch date of the emarketplace solution, should all resources be granted?

Our final report is not yet published, but we do have preliminary numbers to share and they show that the state came in with DVBE participation at 4.82% andSmall Business participation at 24.82%. I do want to add one comment that: as a result of the disasters that we continue to experience here in the state of California, we have begun tracking regular procurement operation spending as well as emergency procurement operation spending.

And so, if we look at the procurement operation without emergency spend included, the state came in at 5.3% DVBE participation and 26.76% Small Business participation.

We are projecting - sorry again. Angela Shell, Deputy Director of Procurement Division. We are anticipating a three-year turnaround time frame from the issuance of the procurement. So, should we receive the funding that we've requested? We're looking around late summer, early fall of 2026.

Thank you. Any other comments or questions from committee? No, seeing none. We're going to leave this item open. Thank you. And move on to issue number 12, modernization and civilization fund reductions. For this update, we are asking CDT to present on the proposed reductions of the modernization and stabilization funds. Mr. Johnson, you may begin. Please introduce yourself.

Yes, my name is Jared Johnson. I'm the Chief Deputy Director of the California Department of Technology. Thank you for the opportunity to be here today and testify. I'll talk a little bit about the program so that you understand. Technology modernization and technology stabilization are two different funds that were established. Modernization looks for low-risk, high-impact efforts that can be expedited through a process where departments can bring their business case forward to us.

We can help them develop that business case and do market research, and as a result, they come back in the form of what we call a pitch day. And that pitch day is where these departments present their ideas and they're approved for funding. So far, we have been able to approve 16 projects using our modernization funding. With stabilization, it's a bit different. We're looking at critical state services that may or may not be unstable.

And what we do is we use a combination of data that's available to the Department of Technology as well as self assessments by these departments to determine the criticality as well as the stability of these services. What we then do is we collaborate with these departments to provide a confidential assessment of these services, and we provide findings in which they can then come back to the stabilization program and seek funding to have those findings remediated.

To date, we have done 11 assessments and provided those assessments confidentially back to those departments. We anticipate with the proposed reduction to these funds that both will run out of funding by June of 2023. For modernization, we expect two to three additional projects that we may be able to afford, and with stabilization, the possibility of four or five more assessments that we would be able to provide funding for.

Thank you. LAO, followed by the Department of Finance.

Brian Metzger, LAO: we recommend the legislature use the fund balance reductions as an opportunity for additional oversight. For example, the legislature could require reporting on the lessons learned from the technology modernization fund to inform its oversight of it projects and associated processes. Also, the legislature could request a list of the critical state it systems that have been identified by the stabilization service, as well as a list of the stabilization issues that have been prioritized for remediation.

This reporting would inform future legislative oversight of budget requests that are related to these efforts.

Thank you. Department of Finance.

Courtney Massengale on Department of Finance: we have nothing additional to add at this time.

Thank you. I want to just go back a bit regarding the stabilization projects. What will be CDT's method to identify and prioritize stabilization issues to be remediated.

So, we have access to data through the Cal-CSIRS. It's the California Cybersecurity Incident Response System, as well as other sources, that allow us to identify critical systems. We would still continue to work with departments to understand their assessment of the criticality as well as the state of their stability. We would continue to do that with our existing resources. What we can't do is fund the remediation steps.

So departments would have to go through either using their existing budget authority or they would have to go through a BCP cycle to seek that funding on their own.

Thank you. Any additional comments or questions? Seeing none, we're going to keep this item open. Thank you. We're going to move on to issue number 13. We are moving on to issues regarding state reassessment, centralized services renewals, and Office of Technology Services. In addition to our previous panelists, we will be joined by Miles Burnett, Chief Administrative Officer at CDT. For this update, we are asking CDT to present on their recently released rate methodology reassessment report and two related budget proposals on centralized services and the Office of Technology Services. Let's begin.

Madam Chair, my name is Miles Burnett, Chief Administrative Officer for the California Department of Technology. In fiscal year 22-23, CDT was granted a single-year conversion of 42.3 million from the Technology Services revolving fund to the general fund to lower its rate structure. CDT requests a continued conversion of that funding authority for fiscal year 23-24 as CDT continues to work with the Department of Finance to reassess its cost recovery model.

CDT expects to raise several of its rates in fiscal year 23-24 but would have to raise them substantially higher without the general fund conversion as required by Government Code 11540.5-f. CDT submitted its first report to the legislature on the rate reassessment process by the April 1, 2023 deadline.

In addition, CDT requests 8.2 million in general fund authority in fiscal year 23-24 and 4.9 million in fiscal year 24-25 to help close the loss of revenue from customers migrating to vendor cloud-based services or, in other words, out of the data center off prem. Since most of CDT's cost structure is fixed in computer hardware, software, and staffing costs, CDT cannot reduce its cost of operations at the same pace that customers reduce the services they consume from CDT.

To close this gap, CDT is working closely with customer departments to analyze service demand, identify additional opportunities to reduce expenses, eliminate cost-efficient services, and develop plans to move customers away from services identified for elimination. And with that, we will take any questions you have.

Thank you. We're going to go to the LAO, followed by the Department of Finance.

Brian Metzger, LAO. We're in the process of reviewing the rate reassessment report, and so we agree with the staff recommendation to hold these proposals open until we've had a chance to more thoroughly look at the report.

Courtney Massengale, Department of Finance, we have nothing additional to add.

Thank you. Based on the rate reassessment methodology report, does CDT have a solid direction to create a more sustainable chargeback model?

So, the rate reassessment study report provided very valuable information on how we compare to our peer group industry in the data center. And so the answer to that is yes, going forward, we are also outside of that, working closely with the Department of Finance to look at the other parts of our cost recovery model. They're outside of the data center as well.

Okay. Does CDT anticipate further requests for general fund support to lower service rates and backfill revenue losses?

So, very similar to the previous answer, we're working very closely with the Department of Finance to look at those areas of our cost structure that are outside of the data center, some of which don't lend themselves well to a cost recovery model. And we are very deep into that process at this point, so I cannot comment on whether there will be further general fund requests.

To the extent there are, they would likely be outside of the data center component of our cost structure and look at areas of the organization, as I said, that don't lend themselves as well to a cost recovery model because they're statewide in nature or there are activities that CDT performs where there isn't really a billable entity involved understood.

Thank you. Any additional comments or questions?

Looking at the comments from LAO, it's very informative. So you do have the report, and now you are reviewing, you're analyzing, as is the committee, and in the notes, it says that after this evaluation, it will help you to determine whether the general fund augmentations in the proposals address, for example, the legislative goals and priorities. If they do not, what is the LAO thinking? What are you recommending?

Sorry. Brian Metzger, LAO: we're not recommending anything at this time as to whether you would modify the amount of general fund or reduce the amount of general fund that is proposed for this particular proposal. But we are, as part of our rate reassessment report review, considering whether the full amount of general fund that is being proposed is necessary to make these changes that are proposed in this BCP.

There could be other ways in which you could do it to reduce rates or reduce rates, but not to the extent that is proposed here. That would allow for general fund to be used in other areas of the budget that the Legislature might deem more important than the state data center.

Very good. Thank you.

Thank you. With no additional comments or question, we are going to leave this item open for now. Thank you very much. We're moving on to issue related to cybersecurity. For this panel, we are asking our witnesses to present on four cybersecurity proposals, including a request for resources for the California Cybersecurity Integration Center. Let's begin.

Good afternoon. Thank you. Chair and distinguished members of the committee, I am Tom Osborne. I'm a Deputy Director at the California Governor's Office of Emergency Services, where I oversee and lead our Homeland Security Division, which oversees the State Threat Assessment Center and California Cybersecurity Integration Center. With me today is Vitaliy Panych, California's Chief Information Security Officer. CISO Panych and the California Department of Technology, along with the California Military Department and the California Highway Patrol, our critical and key state partners within the Cal-CSIC.

I first would like to thank you for your ongoing partnership for the opportunity to address this committee regarding our budget change proposals to help the Cal-CSIC meet its obligations to safeguard state's cybersecurity. Just by way of background, the Cal-CSIC was originally formed in 2015, then by Governor Brown's executive order to bolster California's preparedness and response to destructive cyberattacks.

In 2018, in recognition of the ever-expanding cyber threat landscape or environment and associated risks, the legislature formally codified the Cal-CSIC by statute, displaced it within the California Office of Emergency Services, and charged it with the primary mission of reducing the likelihood and severity of cyber incidents that could damage California's economy, its critical infrastructure, or public and private sector computer networks.

While the Cal-CSIC is doing tremendous work in executing its mission, our sources remain well below what is required for us to meet the intent set forth by the legislature. Given that our statutory responsibilities continue to grow and our three year funding commitment, the legislature made in 2020 is set to expire this June, the need for new budgetary support is that much more critical.

Our current budget proposal for your consideration builds upon that previous funding commitment with minimal increase considering the threat environment and our growing workload and statutory responsibilities.

The four departments that make up the core partners of the Cal-CSIC within this program are jointly requesting 28.7 million general fund ongoing and 17 positions to make permanent the temporary resources authorized in fiscal year 2020 and 2021 and enhance the resources to support the responsibilities of the Cal-CSIC. Permanent resources will continue to establish and continue our established in core staff and organizational structure, which includes three branches.

These three branches include one, a Cyber Operations Branch, which is responsible for incident response and forensics. Two, the Cyber Threat Intelligence Branch, which leverages information sources from our federal and state partners, along with commercial feeds to stay abreast of current and emerging cybersecurity threats; and three, our Mission Support Branch, which provides various professional and unique IT services which enable the other two branches to perform and focus on their core missions.

Along with forming our organizational structure, California has experienced numerous attacks since then, and through lessons learned, we have embarked on several key initiatives to help statewide cybersecurity, and some of these include an operational technology labs that enables us to study and prepare for specific threats that cyber actors are attacking our critical infrastructure. And so, this lab operates in an isolated and protected environment, a cyber forensic computer lab to analyze compromised hardware and maintain the chain of custody.

This forensic lab enables us to process digital evidence in support of ongoing law enforcement investigations and to develop cyber threat intelligence via forensic identification of indicators of compromise and any new malware variants. Also, a robust cybersecurity intelligence capability, allowing us to share cyber threat intelligence with partner agencies and community stakeholders across the state. And also, the Cal-CSIC directly supported our state's election security task force by performing vulnerability assessments for all of our 58 counties and their election computer systems.

California cybersecurity risk continues to grow and our threat environment is getting more complex. Our 2022 data from the California Cybersecurity Incident Reporting System, or Cal Cal-CSIRS, as referenced earlier today, shows that the number of cyber events in 2022 was 2621. That's an increase of 21% from 2021 and an increase of 202% from 2020, and cyber incidents that were received from the Cal-CSIC from other sources of information, they continued to rise 14% year over year.

Ransomware incidents and data breaches were by far the most frequent, accounting for 35% and 34% respective of all cyber incidents in California in 2022, and we anticipate the number of incidents will continue to climb anywhere from five to 12% year over year, given historical trends and the demand for Cal-CSIC services have also vastly outpaced our resourcing. Subscriptions to our cyber threat intelligence service platforms have shown a 54% to 92% average annual increase since 2020, an unprecedented demand which has exhausted our current capabilities in this capacity.

And from 2021 to 2022, our incident response conducted by our cyber Operations Branch have risen 48%. As it stands now, despite having the highest cybersecurity risk profile in the nation, California ranks towards the bottom in the list of terms of its per capita rate of investment in cybersecurity. States like North Carolina, New Jersey, Arizona and New York are all investing significantly higher rates per capita than our state.

The proposal before you provides minimum and prioritized growth essential to perform our services at a level commensurate with California's risk and address critical cybersecurity information security gaps as outlined in this proposal. Chairs and members of this committee, thank you again for this opportunity to share with you the important work that our dedicated team of professionals is doing at the California Cybersecurity Integration Center and how you can assist in our efforts to safeguard our state from cyber attacks. I certainly look forward to any questions.

I know there was a couple of questions that were already posed to us. I can go into those if you would like right now or pause.

We'll wait for those at the end for now, thank you very much. We're going to go to the three additional proposals, please.

Okay, Vitaliy Panych, the Chief Information Security Officer, and I will provide details on the three additional proposals. Assembly Bill 2135 was signed into law on September 29, 2022, as Government Code section 115493-f. So what that does is it introduces national cybersecurity standards to be adopted by non reporting entities or nonreporting state organizations and really be accountable to the legislature. So, reports to the legislature.

The California Department of Technology Office of Information Security requests seven new positions and 1.495 million in general fund authority in fiscal year 23-24 and ongoing to support audits and assessments that will be required by the legislative requirements outlined in the bill. So, these resources will be needed to put in place programs to support pre-audit and post-audit activities. So these are activities surrounding advisory and consultative services to help our organizations be more accountable and adopt these said national frameworks.

With that, I'm open to answer any questions on this proposal, or we can continue.

We'll hear all three and then we'll do questions at the end, followed by the LAO and Department of Finance.

The CDT requests 2.96 million in general fund authority in fiscal year 23-24 to upgrade the state's intrusion detection systems and intrusion prevention systems. In addition, CDT also requests 1.93 million in ongoing general fund to maintain these systems in fiscal year 24-25. These contemporary system upgrades and maintenance are necessary for the state to continue to provide a frontline defense against malicious actors and disruptions against the state.

The last proposal is the CDT request an ongoing general fund authority of 250,000 beginning in fiscal year 23-24 to enhance the state's supply chain security and third-party risk validation methodology. This will enable CDT's Office of Information Security to implement a software as a service security solution that will be available to all state information security officers, their state staff, as well as statewide information security operations teams. With that, I am open to any questions.

Thank you. We'll hear from the Department. I'm sorry, we'll go to LAO first, followed by the Department of Finance.

Brian Metzger, LAO: on the California Cybersecurity Integration Center proposal, we recommend the legislature make permanent the existing positions that were approved for three years in 2020-2021 but for any new funding and positions. While we acknowledge the merit of improving the state's information security posture and improving its cybersecurity defenses, we would recommend that the legislature direct Cal-CSIC and its partners to report back to the legislature on what funding and positions are most critical to its mission. The current budget problem makes this prioritization important should general fund proposed here be needed elsewhere. Furthermore, any new funding or position should be tied to specific and measurable goals and outcomes. The legislature could direct Cal-CSIC and its partners to create and report on these goals and outcomes on an annual basis.

And just for clarification, we have no concerns with BCPs two through four, but we do want to note that we have provided other information security-related recommendations as part of a broader information security post that we published, such as annual reporting on the state's information security maturity roadmap, Cal-Secure, an evaluation of the information that's disclosed as part of the budget process for these types of proposals, as well as an increased use of certain types of contracts for cybersecurity services.

So we'd be happy to work with the Administration or the legislature on those other recommendations.

Courtney Massengale, Department of Finance. Nothing additional to add.

Thank you. We note that the number of cybersecurity incidents are projected to increase over the next few years. How will Cal-CSIC prepare for the future with the limited resources available?

Great.

Thank you. I'll take the first one. If there's any other questions, I'll have my colleague answer it. Certainly appreciate the same analysis that we came to, that the cyber threat is not stopping. It's actually increasing year over year. So appreciate the acknowledgement of that. So this is certainly a challenge for us here, certainly at the Cal-CSIC, and we're balancing our statutory mandate to reduce the likelihood and severity of cyber incidents that could damage California's economy and its critical infrastructure.

Since we have limited resources to address the world's fourth largest economy with nearly 40 million residents, we have been prioritizing our work. So when incoming tips and leads come in, we certainly have to prioritize and triage that. And we do that in a couple of different ways.

Number one, if a tip of lead is coming in that could affect emergency services or protecting of life and limb, we will certainly prioritize those or any sort of assistance needed to protect our critical infrastructure to ensure the lights stay on, the water keeps flowing. Those are certainly high on the prioritization list, as everyone can certainly understand and appreciate.

So, on the front end, prioritizing our workload because we have very limited resources and certainly the growth minimal request of 17 would help address some of those issues. In addition to what we're doing as far as prioritization of our incident response, we're trying to do the best that we can to prevent a cyberattack from occurring. Being proactive in leveraging our cyber threat intelligence team to disseminate advisories, bulletins, and key intelligence to our networks of consumers.

And additionally on the critical infrastructure sector that I referenced earlier, we're in the process of developing this operational technology lab. So the more we can learn from previous attacks against critical infrastructure, like a colonial pipeline type of an attack, we can learn from it. We can better protect our critical infrastructure through this type of environment, obviously with the goal of prevention.

Thank you. Any additional comments or questions? Yes.

The comment by the LAO on the positions to hear from the Administration about which are the most important the budget is very different than what we've had in the past, and I think that it's clear that not everything that's being requested will be given. And when we take the time to figure out, and not just here for your department, but for everyone that comes forward, what is the most important?

And then also key to that, is to tie each staff member that's being requested with a goal. What is the goal of having that person there? What is the outcome expected to determine whether or not this really is somebody who needs to be added to the staff?

Just one response in that. Thank you for the question. Each one of those 17 positions have been mapped to key gaps that we identified in our proposal to help close those. One particular gap we identified, and we talked about prevention. Right. Being the space of cyber threat intelligence and sharing. Cybersecurity is the ultimate team sport, and we must share better.

So, one particular gap is increasing our intelligence sharing capabilities and having analysts do that so that when we will outpace our current resources of what we currently have on staff. So if our goal is to prevent a cyberattack and the destructive nature that could bring down a state network or a private partner being left of boom, as I like to say, those are critical key areas.

And based upon the numbers I just presented, as far as the annualized increase of those services, it's not slowing down. So that's just one key example of one of those positions within the 17, as part of that.

Generally speaking, I think, and I appreciate that that's one of the 17, but generally speaking, and again, not just your department, but all departments. Thank you.

Thank, thank you. We're going to leave this item open for now. Thank you very much. We're going to move on to issue number 15, which is our final CDT issue to cover the remaining budget change proposals requested by the Department for this Panel, we are asking our panelists to present on two BCPs related to California.gov and digital ID initiatives.

Let's begin.

Madam Chair, Members of the Committee, my name is Miles Burnett, chief administrative officer for California Department of Technology, and with me is Jonathan Parat, who is a chief innovation technology officer for the State of California.

CDT requests the renewal of five positions and 1.3 million in General Fund authority in fiscal year 23-24 and ongoing to continue working on the development and evolution of several digital transformation initiatives, including the CA design system, incorporating UX disciplines into our digital efforts, and reimagining the California.gov.CA.gov web portal.

This budget request moves the state toward more reliable, useful, efficient and effective technology intertwined with our public services, and will enable CDT to make major strides in the development and evolution of CA.gov, a critical element of the state's digital infrastructure and the primary digital touch point for residents of California looking to engage with services offered by their state government.

Moving on to digital ID. In fiscal year 21-22 CDT received two positions and 1.1 million in General Fund for two years to deploy a digital ID system for an initial subset of state services that would provide a consistent, secure, privacy enabled, reliable and consent based method to authenticate and verify the identity of California residents when they access specified digital state services.

Since 2021, CDT's digital ID program has engaged a set of pilot partners, evaluated and selected a vendor platform, and launched the first pilot integration into a production environment.

This BCP requests a renewal of two positions and 1.2 million in General Fund authority in fiscal year 23-24 and 24-25 to launch and maintain planned and existing pilot partner integrations evaluate and implement additional request features, requested features, scale the solution to additional state agencies and engage with other public entities and the external developer community to provide a blueprint for privacy centered SSO services. And with that, we are here to answer any questions.

Thank you. We'll hear from the LAO, followed by the Department of Finance.

Brian Metzger, LAO we have no specific concerns with these proposals, but would note relative to the question number two about CDT prioritizing privacy and information security, that as part of the original proposal, there was provisional budget Bill Language included that required the digital ID partners to conform with specific privacy and information security laws and regulations to make sure that there was guidance as to which ones would be selected. So that may be something the Legislature wishes to consider going forward as well.

Thank you, Department of Finance.

Courtney Massingale Department of Finance no additional comments at this time.

Thank you for CDT. What is the CDT's projected timeline for project readiness and rollout for its California.gov and digital ID initiatives?

I'm Jonathan Porat. I'm the chief technology innovation officer for CDT, and I would say that both of those initiatives have already paid off in pretty significant dividends, but they're in about the same place where we are looking at ending a proof of concept pilot exploratory phase and really trying to understand how we can scale these technologies out across the state.

The CA web technology, as Miles mentioned, is technology built into a design system and a web platform to make it easier for state websites to be efficient, effective, accessible. So if I need to build a state website, I can have the information I need to make sure that it's accessible for residents who need a screen reader, for example, already built in, as well as state branding to reduce misinformation or confusion.

Right now we have 74 websites that are on the platform, including one that will be coming next month. And even today we've been speaking with entities who are interested in using the platform. Further, we've had other high profile websites using the design system.

So right now we're continuing to look into how can we provide sustainable service and service that will last into the future to deliver these benefits from beyond just this proof of concept exploratory phase, or how it will work into an actual web platform that's useful across the state. For digital ID, as Miles mentioned, that's technology so that we can verify your identity as a resident once when you're accessing state services.

So you don't need to say and verify who you are every time you need to go to a different state website benefit service. We've intentionally focused on very targeted pilot programs so that we can test how our technology works with verifying identity across different dimensions, such as age, veteran status, student status.

Right now, we are completing many of those pilots, and we're taking the time to look into how can we move from those individual pilots and lessons learned in those individual technology implementations to what's called an identity gateway or basically a larger identity platform that we can make available across the state so that everyone can use the technology.

Thank you. Additional comments or questions? Seeing none, we're going to leave this item open, thank you very much, and move on to the next issue. Issue number 16, the California Privacy Protection Agency.

For this presentation, we are asking our panelists to present on the budget change proposal, as well as provide an update on recent regulatory activities. Let's begin. They're joining remotely. Okay.

Good afternoon, Chair Carrillo and Members of this Committee. Can you hear me all right?

Yes, please begin.

Thank you. My name is Ashkan Soltani. I'm the Executive Director of the California Privacy Protection Agency. Today I'm joined by Maureen Mahoney, our director of policy and legislation, and Nelson Richards, our assistant chief counsel.

CPPA is the first of its kind privacy state privacy agency tasked with implementation and enforcement of the nation's first comprehensive consumer privacy law, the California Consumer Privacy Act, as amended by Proposition 24, the California Privacy Rights Act.

The CCPA gives California consumers important protections, such as the right to access, delete, correct and stop the sale and sharing of their personal information, among other protections, and applies to businesses above a certain threshold. The agency is governed by a five member board appointed by the Governor, the Legislature, and the Attorney General.

I last appeared before the Subcommittee in March of 2023, and since then, the agency finalized its first substantive rulemaking package to further implement the CCPA, which was approved by the Office of Administrative Law on March 29, 2023 and went into effect immediately.

And we recently invited pre rulemaking comments on the topics of cybersecurity, audits, privacy risk assessments, and automated decision making.

Moving on to our budget request, our statute appropriates for the agency 10 million from the General Fund, adjusted for inflation, for operations of the agency. Our BCP requests seven positions in fiscal year 23-24 and ongoing to develop our enforcement and information technology divisions.

Pursuant to our statutory responsibilities, the agency has requested five positions for enforcement activities, which will require expert staff who can understand, interpret, respond and to a constantly changing business, technical and social environment.