Assembly Budget Subcommittee No. 5 on State Administration

Good afternoon and welcome to our Assembly Budget Subcommittee Five hearing. Today this hearing will cover our tax agencies, GoBiz and Department of Financial Protection and Innovation. A few housekeeping notes this is an in-person hearing with all panelists testifying in person. We will take questions from Members of the Subcommitee after each item. Public comment is limited to 1 minute for each person testifying and will be taken in person and what we will do under each issue area is ask for public comments after each issue area.

If you are unable to attend this hearing in person, you may submit your comments via email to asmbudget@sm.ca.gov. We won't be calling the roll right now. Some of you may or may not know this is a three Member Committee. All of, especially our Assemblymember Patterson has three committees at the same time, so he is.

It's hard for him to get here. Assemblymember Chris Ward is presenting bills and will be moving back and forth as I will so be patient with us as we move. We are going to go ahead and start our first issue, tire recycling. We all want to know about that. And we will begin with our panelists. Please join us. Okay, this is weird, but it just reminded me I used to teach elementary school and I was going to start. Singing the wheels on the bus go.

All right, here we go. Please introduce yourself as you make your comments.

Sure. Thank you, chair and esteemed Committee Members, I'm Jason Mallett, CFO of the California Department of Tax and Fee Administration. I'm joined by Michelle Linton, our Legislative Director, and Brad Miller, our head of data analytics. So we have three items today.

So this first one is on tire, so I'll give it an intro here. So, CDTFA requests changing its funding mechanism for the tire recycling fee from an approximately $2.5 million reimbursement to an equivalent budget act appropriation for fiscal year 24-25 and ongoing. This has a net zero budget impact, but it will improve our efficiency of the $60 million revenue program by eliminating the tedious process of billing each quarter between our Department, Cal Recycle, and the Air Resources Board.

Great.

This change would bring the tire program in line with over 90% of our other tax and fee programs the way we are funded. So with that, I'm happy to answer any questions you have.

Any other comments from anybody up here related to this?

Seeing none, and we have no one else but myself. I don't have any questions, so we'll go ahead and move on.

Sounds good. Thank you.

Good afternoon, Madam Chair. Michele Linton, Chief of the Legislation Bureau for CDTFA. Thank you for allowing me to present today on the Historic Venue Restoration and Resiliency Act trailer bill. The Historic Venue Restoration and Resiliency Act, enacted by Senate Bill 96, became operative on January 1, 2024. In general, the act requires retailers to segregate taxable sales made at a confirmed historic venue during qualified events on their sales and use tax returns or on a separate schedule.

CDTFA is required to report gross receipts from those sales to DOF by November 1 of each year. DOF is required to include a percentage of those receipts for the prior fiscal year and the Governor's Budget for deposit into the Historic Venue Restoration and Resiliency Fund for transmission by the controller to cities and counties with identified historic venues.

This trailer bill would clean up various provisions of the act to facilitate this process efficiently, consistent with the authors and sponsors intent. Among its provisions, the trailer bill removes the requirement for local governments to report to CDTFA how revenues are used. This requirement was removed because CDTFA does not oversee how revenues are used and the report is unnecessary to CDTFA's administration. Additionally, the act doesn't require CDTFA to report that information to the Legislature or other external entity.

CDTFA has confirmed that the appropriate committees have no concerns. Thank you and I'm happy to answer any questions.

Thank you. And then I will open it up to actually the DOF or the LAO. If you have any comments, want to introduce yourselves as well?

Chris Silva, Department of Finance, we have no comments, but we're happy to answer any questions the Members may have.

Seth Kerstein, LAO, the staff comments in the agenda raise some very good points for the Committee to consider.

And I'm going to go ahead and ask those two questions, which is, can CDTFA explain why these changes did not move through the policy process and were the proposed amendments run by the policy committees that changed the bill during the policy process?

Chris Silva for finance again, I'd be happy to address that. Without going too deeply into some of the internal administrative processes, I think it's fair to say there was some unclarity surrounding SB 96 and as a consequence, amendments were not timely proposed to the author as the bill is going through the process.

Thank you. And then the other question would be with this proposal, does this mean that CDTFA is going to absorb its costs to implement the bill?

Yes, we will. The bill initially the costed version of the bill, the second amended version of the bill initially required us to directly allocate revenues to cities and counties. Subsequently, it was changed to have us reporting taxable sales from the returns to DOF and limited it to three counties. And that made the cost absorbable.

I like that. Just flat yes. Thank you. Thank you. All right. With that, I have no other questions. So we will go ahead and any last comments on that issue. All right, then. That will take us to issue number three under this, bad debt trailer bill proposal.

Jacob Kern, Department of Finance.

Who will be presenting on this issue?

So, Jacob Kirn, Department of Finance, I'll just start out with some opening remarks here. California is one of only five states that allow lenders and retailers affiliates to claim a sales tax deduction or refund for sales tax liability related to purchases made on credit where the purchaser subsequently fails to repay their loan.

This benefit, the majority of which is claimed by large financial institutions, reimburses lenders who may already make a profit through interest payments and fees and is complex for CDTFA to administer, creating a significant workload for auditors who otherwise could work on revenue-generating activities. Finally, we have seen no evidence that this lender subsidy decreases borrowing costs or increased credit availability for Californians relative to those living in other states.

The Governor's budget proposes that California align with the vast majority of other states and eliminate the bad debt deduction for lenders and retailers affiliates for debt that's written off after January 1, 2025. The administration and the Governor's budget estimated that the proposal would raise general fund revenues by 25 million in 24-25 and 51 million in 25-26 and ongoing. Mentioned by the LAO in the comments, some additional information about the timing.

There's a fairly large claims backlog, and it might affect the timing at which the revenue gain is realized, and we will be updating our revenue forecast at May revision.

Thank you. If you would like to make some comments, please. Thank you.

Yes. Seth Kerstein, Legislative Analyst's Office. So just a few comments to add to the information the administration provided. So, even without this particular benefit, lenders would still have a variety of ways to reduce the losses that they incur from bad debts. Another thing, sort of, I know the administration mentioned sort of an absence of evidence about the effects of the current law, the current policy on lending, and that's a fair point, I guess. Then, the question is, in the absence of such evidence, what should we conclude?

And to us, the structure of the policy does seem to encourage risky lending. And so there are sort of a couple different ways you can look at that. On one hand, probably to a slight degree increase, I should say to a slight degree, the proposal likely would reduce access to credit for some borrowers who are at particularly high risk of default.

And at that point, it's kind of a policy choice to, you know, as to, you could see sort of pros and cons of that, and so that's just something we highlighted. Certainly, if there were evidence one way or another, that would be the main thing driving our conclusion. But absent that, the structure of the policy seems to create those incentives. And the other thing, I think the administration might have touched on this.

I think part of the rationale for the proposal, and one that seems reasonable, is that these refunds are disproportionately costly to administer and so account for, sounds like about half a percent of CDTFA is field audit personnel. Those are all the comments we have.

Thank you, and my question would be, can you explain how this closes the state tax loophole? And how is the state ensuring that conformity is being implemented fairly?

So. Jacob Kirn, Department of Finance. So, this isn't a conformity package. This is a - so on the income tax side, there's the ability for lenders to write off bad debts for the purposes of their income tax liability. This is just on the sales tax side. So there's no federal sales tax. So it's not a conformity item there. But this gives lenders and retailers affiliates the ability on their sales tax. If they've written that debt off on their income tax, then.

So, just like in a practical sense, how this would work is, you know, I have a credit card, and I make purchases on the credit card. Some amount of that credit card balance then is related to sales tax that was paid on the purchases I bought. Could be an auto loan, too. I think that's a common one for this deduction.

But if I fail to pay back my credit card, then my lender could claim a refund for the amount of the balance that's related to the sales tax that was paid on those purchases.

Thank you. That's a good example. Appreciate it. All right. Any other comments from any of our panelists? We appreciate you joining us, and with that, we will open it up to the public to make any comments on these first items we have here. If you come up to the mic, you can move the mic up and down like this, depending on your height.

Thank you.

And speak into the mic.

Thank you, Madam Chair and members, Eduardo Martinez here on behalf of Toyota North America, which provides a lending service as an auto captive finance company. And we're here to raise some concerns with this proposal. The bad debt deduction allows retailers and lenders to receive a refund or deduction of sales tax for finance sales where the customer fails to fully pay. This system ensures taxes are only paid on the actual purchase price received, aligning with tax fairness principles.

Unfortunately, this proposal to eliminate this deduction not only diverges from established tax fairness principles by taxing businesses on uncollected revenues from finance sales but would also effectively result in a tax increase on these businesses. We believe that removing the deduction would likely lead to increased credit costs, particularly impacting customers at the margin of creditworthiness. Higher financing costs or stricter credit approvals could reduce overall auto sales and limit access to credit, particularly affecting low-income and marginal customers.

We think this proposal would exacerbate the disparities between customers who finance vehicles and those who lease. Finance purchases require paying the full sales tax upfront, placing a greater burden on those who choose or need to finance, and we also worry that this could hinder California's environmental goals, especially the transition to zero-emission vehicles by 2035. Increasing the cost of credit for EVs creates unnecessary barriers for consumers wishing to transition from traditional combustion engines.

We appreciate the current fiscal condition we find ourselves in, but believe a permanent elimination of this deduction would not only cause unnecessary financial strain on both the automotive industry and consumers, but also hurt our economic recovery and environmental progress. A car is a big purchasing decision for families. Toyota makes vehicles and offers lending products to meet people's transportation and financial needs. We're here to be a part of the conversation and find solutions that put customers first.

We do take issues with some of the concerns raised in the staff analysis but look forward to continued working the conversation with staff and the administration.

Thank you and we're going to keep our comments pleased to under 1 minute. And if you see me do this, that means we're going to wind it up a little bit. But thank you.

That doesn't mean twirl. You want me just to wind it up? Okay. Madam Chair and members: Theo Pahos, representing Ford. California has one of the largest sales tax in the nation. We also happen to sell more cars anywhere else in the nation, and specifically, we're trying to sell a lot of electric vehicles. We also have a lot of people buying vehicles with less-than-perfect credit.

It seems like this is the wrong state to consider this because of the combination of those factors, and for those reasons, we're opposed.

Thank you.

Good afternoon, Chair. Robert Wilson, California Credit Union League thanks for being here today. We just like to echo the comments that were said before me. Credit unions were started to serve people of modest means and we're really worried that this is taking away another tool in the tool belt. As the LAO noted, on the creditworthiness side, we think that is a legitimate concern and we're concerned that it's going to trickle down to our members.

And like I said, take something away from credit unions that are trying to serve the underserved. So thank you very much.

Thank you.

Good afternoon, Madam Chair, members of the committee, John Moffatt, on behalf of the Alliance for Automotive Innovation, we're the trade association for the automakers, want to associate ourselves with the comments by Ford and Toyota and just note two differences. We are manufacturers. We make the car; we send it to a dealer. The dealer, dealers sell it, they pay us for the car. That money goes right back out the door in financing the loan on that car.

And so, you know, I think we are differently situated than perhaps what the Department of Finance and others are thinking about when they're thinking about a traditional lender because we are also the manufacturer of the vehicle. Secondly, I want to piggyback on the electric vehicle point. The State of California is spending millions of dollars every year subsidizing the purchase of electric vehicles for low and moderate-income folks, and a lot of those programs are down payment assistance.

Making credit harder for those folks through a proposal like this is very short-sighted in our view.

Thank you.

Thank you. Good afternoon, Madam Chair. Margaret Gladstein, Kepler Advocacy, here on behalf of the California Retailers Association.

Can you say which group again?

California Retailers Association. We partner with our lending. We have partnerships with our lenders who take advantage of this deduction, and we believe overall, this will cause an increase in the cost of credit and thereby squeezing out some underserved and people who have trouble accessing credit. Thank you.

Thank you

Madam Chair: Cliff Costa, on behalf of General Motors, I'd like to associate my comments with the comments of the previous automakers as well as the alliance. Again, General Motors is very committed to meeting our zero-emission goals and is attempting to do everything we can to incentivize, whether that is to provide better financing or access to HOV lanes.

But those incentives are becoming harder and harder as we continue to need to build the gap between the $44,000 average price of a gas-powered vehicle and $54,000, which is the average price of a zero-emission vehicle. Thank you.

Thank you. With that, seeing no one else approaching the microphone, do we have any last comments for this group here? Thank you very much. Serious matter, and definitely we'll continue to ask questions in this topic. Thank you. Next, we have Franchise Tax Board.

Good afternoon. My name is Jeanne Harriman, Chief Financial Officer of the Franchise Tax Board. Thank you for your time today and the invitation to discuss the IRS direct file portal. Earlier this year, the IRS launched the pilot program allowing tax filers in certain states to file directly with the IRS for free, a tool also known as the IRS Direct File portal.

California agreed to participate in the pilot, and upon completion of the federal return, California taxpayers were directed to FTB's Cal file portal to file their California return. In general, the IRS Direct File portal allows certain taxpayers an additional tool to file their tax returns for free and directly with the IRS.

For this pilot year, only taxpayers with less complicated returns, typically defined as those with wages, claiming the standard deductions and claiming a few credits such as the Earned Income Tax Credit, are able to use this tool, and of course, they must be a resident within the 12 states that are participating in the pilot.

Taxpayers who were not able to use the portal this year or chose not to for some reason could still choose a free filing option that is available in Vita services, tax filing software services associated with the Free File Alliance, and, of course, multiple options available on the Internet for free filing. Last week, IRS Commissioner Werfel shared the following key information on the IRS Direct File portal effort. The filing pilot program exceeded the expected participation goal of 100,000 federal returns filed by April 15.

With this successful pilot program, the IRS will now engage in further discussions to determine whether the program will continue and, if so, to what extent. Announcements as to the ongoing status of the program and additional stats are expected to be available throughout the spring period. The IRS website also noted that California was the largest participating state in the program, and the IRS staff noted that over 30,000 federal returns were filed in this program for California taxpayers, and those numbers are not yet.

Finally, FTB would also note the following interim observations. Vita returns for the calendar year 2024 to date were down just slightly from a full-year metric for last year. So, I will note and remind you that last year's filing season was a little bit wonky as far as being able to file throughout most of the year. So, we do need to get to the end of the year to truly understand the capacity and the growth capacity that is displayed in Vita.

But so far, we are almost exceeding in the first four months, including the filing season and the stats for a full year of last year with Vita. Some say this could be related to the marketing strategies associated with the IRS Direct Filing portal.

FTB has also seen a market increase in Cal file filings this year, likely related to additional individuals using the tool from being referred from the IRS Direct File portal, and then, as well as perhaps again, some growth associated with increased knowledge of free filing tools, including CalFile. Again, a full year of stats is going to be necessary just to understand how it compares to last year. IRS Commissioner Warfel again suggested that Direct File.

He called it a halo effect that drove up participation in other free filing services, and he noted that the Fee File Alliance had an increase to date of 11% returns coming through their service. As FTB looks forward to the next steps, we continue to work closely with the IRS.

We expect this work to accelerate after the IRS provides information later this spring about the next steps for the portal itself and FTB continues to engage in discussions about the options for full integration of the federal portal and CalFile to provide a more seamless experience to those Californians using these free filing tools, FTB is engaging in costing exercises which are not yet complete and will currently have to rely on critical assumptions as to how the IRS will engage with states to link our various filing tools together.

We are also discussing the critical need for IRS to provide assistance and resources when we do to ensure that we meet in the middle with our various tools. So timing is going to be important from that perspective as well.

Throughout our discussions with the IRS and as the years progresses and moving into next filing season, FTB remains committed to continuing to provide the IRS with a link and request to send Californians to our CalFile portal until we can get into whatever the next generation of this effort will be. At this time, I'm happy to answer any questions that you have.

Thank you. Any comments from DOF or LAO? Well, I find this to be really interesting just because it's a new system and as you said, you don't have all the data for this year, but you did say already you're close to 100,000. Is that what you said?

Commissioner - IRS Commissioner Werfel indicated that the IRS has exceeded their goal across the nation of getting 100,000 individuals to use this tool.

And early indications are that people are responding to it. So going into the next filing season, which we're just in the middle of this, what are some ideas that you have to continue to increase those numbers?

So that's a good question. So, the IRS obviously is a critical component in that they need to commit to extending and continuing this tool. So we'll wait for spring to do that. That being said, we've also got a lot of comments from individuals or we've heard comments in various media posts that this tool at the federal level was very well received. It is extremely intuitive. I've had several demonstrations of how the tool works.

It is very friendly, very easy for its users to use, which is a good thing. CalFile is patterned off of that well, which is also a good thing. And so primarily for California, in the event that the Direct File portal continues on, the issue is getting a tunnel between the two to communicate so that taxpayers and their data can securely come through.

And, of course that we can also continue to support security measures so that bad actors stay out because the last thing we want is a weak system or a weak tunnel of communication that's gonna allow bad actors in. So, we're continuing to focus most of our conversations with the IRS on that level of effort. The IRS is also a very tight group of individuals that qualify, for example, people with healthcare subsidies or people with 1099 to the gig economy.

They are not yet able to use this tool. And the IRS is very interested in expanding. So we're waiting with curiosity to see if the IRS what they choose to expand to for next year, whether they might choose to expand the eligible taxpayers that could qualify, or whether they might focus more with the states to get some more seamless integrations in place that other states could do it.

The IRS is very much recognizing, as do we in the other states, that really, because taxpayers have obligations both at the federal and state level, it's a very challenging process when you just do the federal return, and then they have to go find their own state solution. So we definitely want them to be integrated. So that's probably what I would say are the key areas of focus that we're watching. On the other one, of course, the final one I would just mention is customer service.

We are watching that one very, very closely. The original proposal the IRS submitted to Congress in May of 2023 indicated the expectation the IRS has of it really an extraordinary level of customer service that's not been seen before and certainly exceeds even our levels of service that we have to assist taxpayers to file their returns and to pay their debt obligations.

So that will also be a continued understanding that we are attempting to get an understanding of what the IRS is doing and if the expectation would be that California mirrors that, or if a less than a level of service would be acceptable at the California level, even though that might harm some taxpayers or have them go through a little bit more difficulties in getting filed.

Thank you. I think that the whole customer service access and friendliness of these two systems kind of partnering or being a companion will make a big difference because as we sit here in Budget Committee and contemplate less revenue, the whole idea is to get people moving through their processes so we can get these revenue into the state in a timely manner. But thank you. Appreciate it. Any other comments? Any comments from the public on this item? Right. Well done. Thank you.

Thank you so much.

Oh, you're staying up for the next. Okay, let's see. We have next enterprise data to revenue project two.

Thank you. Good afternoon. My name is Thi Luong. I'm with the Franchise Tax Board, here to discuss issue number five. So issue number five is FTB's BCP that's supporting our enterprise data to revenue phase two, the EDR two project. Before diving into the proposal itself, I'd like to just share a little bit of background since this is a pretty complex project.

In 2007, FTB created a tax systems modernization plan that outlined three large-scale projects over a 30-year period, and each project was and is expected to take about 10 years from planning through implementation, and each project builds upon the previous one. This multi-decade effort really aims to do three things: modernize FTB's aging systems, implement business opportunities and objectives through a better use of data, and improve taxpayer services, effective compliance, and operational excellence.

The first of the three projects, Enterprise Data to Revenue One, EDR, was successfully completed in 2015. EDR one brought a new tax return processing system that automated a lot of manual work and improved data capture and validation for personal income tax. Because of that, it made processing of personal income tax and business entities returns more efficient and faster. The planning for the second phase, EDR two, began in 2016, and implementation work began in July of 2021.

So that means that fiscal year 24-25 will see FTB enter into the fourth year of this project. The project continues to build on the foundations set by EDR one by expanding enterprise case management and modeling services for audit, file enforcement, and accounts receivable functions. It will also expand service tools for our taxpayers through the taxpayer folder, which is externally known as MyFTB. Following the statewide process established to support funding for larger IT projects, an annual BCP is required for new costs related to that year.

So this year's proposal is requesting an augmentation of 127.1 million and includes funding for 28 permanent and 10 limited-term positions. The request includes 112.5 million for payment to our solution partners. Please note that FTB is using a just in time approach to requesting resources. As you can see within our proposal, we are asking for resources across the same functions for different fiscal years, but only as needed and for limited terms.

FTB has noted these ongoing limited-term and one-time costs within the body of the BCP and also the workload measurement document that's included in the proposal itself. For the fourth year of the project, our work will focus on data analytics tools and models, enhanced data capture data management, as well as oversight functions such as independent verification, validation, quality assurance, and an independent security assessment for full transparency.

I would also note that there are two provisional languages in our budget that support the EDR two project. The first provisional language allows for the carryover of vendor compensation. Of the funds appropriated for vendor compensation, any unused amount is allowed as a one-time carryover to the next fiscal year to support vendor payments for services performed.

The second provisional language supports the funding and use of unplanned work funding which is not to exceed 5% of the contract amount to cover costs associated with unplanned work, which does align with the existing scope of the project and is necessary for the successful completion of the EDR two project. Lastly, statewide policy requires a special project report on SPR to be submitted when there's a 10% or more increase in either the schedule or cost or when there's a scope change to the project.

However, due to the size and complexity of the EDR two project, the project has a special condition where it is subject to an SPR if costs increased by 5 million or more. In December of last year, the EDR two project submitted and received approval for its first SPR. While the project schedule and end date remain the same, the total project costs increased by 13.9 million or 1.8%.

These additional costs are the result of working through the detailed requirements and functionalities of the project. While the scope of EDR two remains unchanged as we partner with the vendor to dive into how some of this work is carried out, we did discover additional unfunded work that is needed to support current business operations and to ensure project success. As we move towards the successful completion of the project, the collaboration between FTB and our solution partners remains strong, and we are working well together as issues present.

We are currently at the peak of the project, and while the schedule is tight and there are many moving pieces, we are within scope, schedule, and revised costs as stated within the SPR one. Thank you so much for your time and support and happy to take any questions you have.

Thank you. Any comments from DOF or LAO? I also have no questions. We appreciate your presentation, and do we have anybody from the public that would like to speak on this item? Seeing none. Thank you so much for coming and joining us. And we will be moving to net operating loss item number six. Thank you for joining us. If you want to introduce yourself as you make your comments. Thank you.

Good afternoon, Madam Chair. Nick Thomas, Department of Finance. So, as part of addressing the projected deficit in the 24-25 budget, the administration is proposing to limit the use of net operating losses to 80% of a business's taxable income for tax years beginning on or after January 1, 2024. The limitation would apply to all existing and new NOLs, and the rationale is that it would result in more profitable businesses paying at least some state income taxes.

Businesses that become profitable would still still be able to fully utilize their NOL stocks just over a longer time horizon, and this also does not impact credit usage. The proposal is estimated to increase revenues by $300 million in 24-25 due to the one-and-a-half-year impact and by $200 million annually thereafter. But also note that these estimates will be revised in the May revision. And with that, I'm happy to answer any questions.

I know you have some comments here. Welcome.

So Brian Uhler with the LAO. Our office is recommending, rejecting this proposal on eliminating net operating loss deductions. And the primary factor is that the proposal would lead to less equitable tax treatment of businesses. And let me briefly kind of explain why. So net operating loss deductions, in general allow businesses kind of smooth their profits and losses over time in a way that allows for businesses with similar profits over time to pay similar amounts of taxes.

Without net operating loss deductions, businesses that have larger swings in revenue from year to year would end up paying more tax than businesses with a similar income. But that's more stable over time, and some businesses are just more prone to those kinds of large swings in profits just because of the sector that they work in. They might be in a more riskier, innovative sector, or they might be in a sector that's more dominated by startup activity.

And some examples of those kinds of sectors are ones that are kind of sectors that are generally considered central to the state's economy, including tech, the motion picture industry, and transportation. And so no deductions allow for more equitable treatment of businesses with these larger swings in revenue. As such, limiting the net operating loss deduction as proposed would lead to less equitable treatment of those businesses that experience those larger swings, and because of that, we recommend rejecting this proposal.

All right, I do have a question, DOF. Why does the administration's proposal go beyond federal conformity?

Yeah, so the proposal that we put forth in the Governor's Budget, it differs from federal law in two main ways. So the first is that it doesn't allow older NOLs to be used up to 100% of taxable income, which is something that the federal does because it was enacted in TCJA about six years ago. There's basically two classes of NOLs, ones that are allowed to be used up to 100%, and then a separate one that is limited to 80%.

From our perspective at this point, given the fact that we are six years later, creating a cutoff date in 2018, is a little arbitrary, ignoring the fact that that was when TCJA was passed.

And so, we view it as preferable to only create one class of NOLs, and also the other factors that in creating a class of NOLs that would be able to be used up to 100%, that would limit the potential revenue gain of the solution in the budget window, and then also in the multi-year. The other thing I would note is that. So one other difference is that is the proposal in the Governor's budget, it doesn't allow unlimited carryforwards.

That is one thing that the federal law does. The state allows a fairly long carry-forward period of 20 years, and the real difference between those two, 20 years versus unlimited, is relatively minor. The vast majority of nols that are going to be used at some point would be used within 20 years. And then I think one other point I would bring up with regard to conformity is it doesn't necessarily change the filing process.

So NOLs at the federal level and at the state level, they have to be tracked and calculated separately because of differences in federal income versus state income. And so, this doesn't necessarily create any further administrative hurdle for either the taxpayer or for FTD.

Thank you. LAO. Do you have any response to that?

I think maybe just one thing that I would add on about. You know, I guess the difference on whether or not this proposal applies to net, to null deductions that were created in 2017 or prior, as with the federal law. Department of Finance mentioned that kind of mirroring the federal law might be sort of arbitrary given that we're so far off from when that federal policy was put in place. You know, that's, that's reasonable to a degree.

But also, I think I would, I guess I would suggest that it's not entirely arbitrary, given that it would be aligning us with the federal rules that many of these businesses are already kind of orienting their books to comply with. And so there could be some advantages of aligning our administration with the way that the federal rules work.

Thank you. I appreciate that. With that, do we have anybody from the public that would like to speak on this? See none, which is a tiny bit of a surprise. Then, any last comments here? Then thank you so much for your comments and we will move to our next item. Please join us here. And that is on charitable conservation easements. Welcome.

Good afternoon. Robin Finnestead with the Department of Finance.

A little louder, please.

Of course. Under current federal and state law, property owners who elect to give up rights to develop certain land are allowed a charitable deduction equal to the property's foregone land use value from the land value from the use restriction. However, the deduction has proven easy to abuse, as inflated property appraisals have allowed investors, through syndicated partnerships, to get improperly large tax deductions.

The federal Consolidation Appropriations Act, the CAA of 2023, addressed these abuses by limiting the deduction for owners of pasture entities to two and a half times the value of a taxpayer's investment and disallowed the deductions for participants who had previously engaged in fraud. For example, a partial owner who invested $100 would now be limited to claiming a deduction of up to $250. California law conforms with federal law in allowing deductions for charitable conservation easements.

However, the state has not conformed to those 2023 changes. This proposal would confirm California's treatment of the charitable conservation easements deduction with federal law by adopting these changes made in the Consolidation Appropriations Act beginning in tax year 2024. Conforming California law to federal law in limiting the size of charitable conservation easement deductions will increase administrative efficiency and ensure that the state is aligned with Federal Government in limiting improperly large tax deductions from abusive transactions.

This proposal is estimated to increase revenues by 55 million in 2024-2025, 25-26, and 25 million in 26-27 and ongoing. This estimate will be revised as part of the May revision, and with that, I can answer any questions for you.

Thank you, appreciate that, and -

On this one, we recommend approving the Governor's proposal. We agree that conforming to federal law would help to curb potential misuses of this deduction and could streamline state tax administration.

Thank you, and we will welcome our colleague here, Assembly,ember Chris Ward. Can we take roll here?

[Roll Call].

Great. Again, I appreciate this measure as well. We certainly want to make sure that when people can write something off that it's justified, but not misused. Any comments on this conservation? All right, anybody from the public that would like to speak on this item? All right, we're just going to roll along.

Here we are on issue number eight, eliminate oil and gas direct tax subsidies. Please join us.

Thanks. Madam Chair, JT Creedon, Department of Finance. The Governor's budget proposes eliminating direct tax subsidies that are specific and give preference to the oil and gas industry but are not available to all other small and large businesses in other industries across the state. These include repealing the immediate expensing for intangible drilling cost reduction, the increased percentage mineral depletion allowance, and the enhanced oil recovery cost credit combined. Eliminating these subsidies would save $22 million in budget year and roughly $72 million cumulatively through 2027 to 28.

These estimates will be updated at May revision. These direct tax subsidies were created many decades ago to incentivize domestic oil production and are no longer necessary or consistent with the state's climate and energy goals. While these special tax subsidies are proposed to be eliminated, oil and gas industries can continue to benefit from all the other general business tax incentives that are available to other businesses in the state. We're happy to take questions.

We recommend approving these proposals as well. The proposals would lead to more consistent treatment of both businesses within the oil and gas industry and also across sectors as well. In addition, there does not appear to be a clear policy rationale for continuing these provisions of tax law, given the state's transition towards policies aimed of transitioning away from fossil fuels.

Thank you. Any questions?

I just want to thank the Governor's office for highlighting this as part of the draft. I think that I would agree with, for all the reasons you stated, I think it's time that this be fully revisited and in order to be able to be in alignment with where we're heading with our climate goals is a necessary addition as well. So thank you for that.

And any last comments. Right. Thank you. Anybody from the public?

Michael Jarred, on behalf of - Michael Jarred, on behalf of Climate Resolve, we support this item and thank the Administration for bringing it forward, but we believe we could do even more to find additional subsidies to eliminate during these tough budget times. Thank you.

Thank you for those comments, and appreciate you making comments on that. We'll move to issue number nine. We have other trailer bill proposals. You are just other. Welcome. We appreciate you being here, and please introduce yourself.

Thank you. Any comments from DOF or LAO? I have no questions. No questions. Do we have anybody from the public?

Thank you. Good afternoon, Madam Chair and esteemed committee members. My name is Denis Armstrong, the Legislative Director for the Franchise Tax Board, and I will first be speaking towards the middle-class tax refund technical clarification under current statute; all unexpended or unclaimed middle-class tax refund payments are set to expire on April 30, 2026. Current statute also requires the unused balance of these payments to be returned to the state by May 31 of 2026.

This proposal clarifies that these unused funds will be returned to the Franchise Tax Board, which will then have the monies deposited into the general fund. This technical change looks to avoid confusion as these unused balances are returned to the general fund. I'd be happy to take any comments or questions at this time. Thank you.

ike you are very speedy, and we appreciate that. Thank you so much for your comments. We have also three other items on this. We have terminate transfers to delinquent tax collection fund.

All right, it looks l

Thank you. Thi Luong, Franchise Tax Board. This charitable language is just to clean up the statute and to stop the transfer of the 404,000 that's done annually from the general fund to FDB solinquent tax fund.

Essentially, this fund was previously used to cover costs for interagency collection activities with third-party in-state and out-of-state collections. And with the full implementation of the EDR project, we are no longer outsourcing these collection efforts. So that's been actually suspended for some time. So, these funds are no longer needed. Thank you. Say that again. These funds are no longer needed. Ma'am. Say that another way, really loud, a third time for those in the back. These funds are no longer needed. Thank you.

Say that again.

These funds are no longer needed, Ma'am.

Say that another way, really loud.

A third time for those in the back.

These funds are no longer needed. Wow, you never hear that in government. Can we use those funds for housing? All right, thank you so much. Any comments over here? Then, let's go to repealing the expiration date for electronic notifications to taxpayers trailer bill language.

Thank you, Madam Chair. Dennis Armstrong, Franchise Tax Board. Under current statutory authority, taxpayers can choose to receive notifications from the Franchise Tax Board and send certain notifications electronically. This authority will be repealed on January 1, 2025.

This proposal eliminates the repeal date indefinitely, allowing a taxpayer or their representative the option to choose an electronic method to receive and file certain notifications with the Franchise Tax Board. There are no administrative costs for this proposal, nor impacts to the General Fund. This proposal will benefit taxpayers who have elected to send and receive electronic notifications by not having their preferred method of notification interrupted. Thank you again, and I'd be happy to answer any questions.

Any comments? And Mister Ward, did you hear? He said no general fund. You guys could stay here all day long. All right, then we will go to our last item. Extend exemption from IRS 280 for cannabis businesses.

Thank you, Madam Chair. Colby White, Department of Finance. So, current federal law in Section 280 of the Internal Revenue Code disallows businesses that are involved in the illegal sale of controlled substances from taking tax deductions or using tax credits for the cost of doing business outside of cost of goods sold. Since cannabis remains an unlawful controlled substance under federal law, the state's licensed cannabis operators are unable to take typical federal deductions and credits that are available to other businesses.

Current state law, however, until January 1, 2025, decouples from federal law and section 280 E and allows licensed cannabis operators to fully utilize state tax deductions and credits. So this proposal here would extend the exemption from 280 E for licensed cannabis operators from January 1, 2025 to January 1, 2030. There is no fiscal impact because the current revenue forecast and the budget assumes that licensed cannabis businesses will be able to continue to use the state tax deductions and credits beyond the sunset date.

This is good policy to ensure that properly licensed cannabis businesses in the State of California can continue to utilize the state's tax deductions and credits. And with that, I'm happy to answer any questions.

Thank you. Any comments? Assemblymember Ward? And I have no questions either. We appreciate you being here. Any comments from the public on any of those items? Seeing none. Thank you so much. We appreciate you being here. Next, we have GoBiz and economic development again with issue number 10, California small agriculture business drought and flood relief grant program.

Thank you.

Please introduce yourself as you make your comments. Thank you.

Thank you. My name is Philip Chen. I'm the Budget Officer from the Governor's Office of Business Economic Development. Also GoBiz, and I can't help you with the wheels on the bus, but maybe I can do Rudolph and the Red-nosed Reindeer. So, a couple of highlights from our Governor's Budget. The Governor's Budget for 2024 and 25 reflects a year-over-year decrease of 333.8 million, or about 56% of our 2023-24 budget.

Our General Fund is shrinking from $473.8 million to just under $181 million General Fund. So that's a 62% reduction. These two modest proposals include the $50 million General Fund for a recapitalization of the infrastructure state revolving fund for iBank, and another $60 million for the Cal Competes grant program. And we offset these with $100 million delay of General Fund for the City of Fresno's infrastructure funding.

So we're trying to do a very modest proposal here. To my left is the esteemed Mr. Chris Earle, Deputy Director for our office of Small Business Advocate, and he'll address some of the questions you had with the agricultural business and drought and flood program.

Welcome.

Thank you. Thank you, Madam Chair and Committee Members, and thank you for the opportunity to present on behalf of the California Office of the Small Business Advocate. We are a division within the governor's Office of Business and Economic Development. My name is Christopher Earle, as Philip mentioned, and I'm the Assistant Deputy Director for Innovation and Entrepreneurship, as well as the Southern California regional advisor for the office.

As noted in the Committee agenda, our office was tasked with creating the new grant program called the California Small Agricultural Drought and Flood Relief program. And ultimately we received $95 million to fund drought, which was allocated 75 of that 95, and then flooded flood was allocated separate 20 million, which made up the total 95 million for that program. And so this was used to cover the costs incurred by the businesses that were affected by drought prior to 2022.

And so we used the comparison of 2019 tax returns against 2022 tax returns for the drought program, as well as covering the issues from businesses that were affected by flip in 2023. So we have two essentially programs combined into one for this program. So just really wanted to highlight that, also, this being that this program was developed in such a way, we asked or we went and got a fiscal third party fiscal agent to essentially be tasked with dispersing the funds for this program.

In addition to that, that third party provider was tasked with providing, developing outreach planning as well as communication and marketing to the public to ensure that there was adequate and equitable awareness of the program so that all eligible entities would have the ability to take advantage of the program. We launched the programs, the various drought, the drought and flood groups in August of 2023. And subsequently these drought program 1 and 2, as well as the flood program groups, closed on February 15.

And so at that time, we were able to fund at 100% of the funds available for the flood program. And I'm really trying to be, segment this out for you all. And then for the drought group one, we were able to fund out 93% of the available funds. And in your package you have the exact dollar amounts for those, for those funds. Also for the drought group two, we were able to fund approximately 78% of the available funds for between those both programs.

So we were able to expand all of the flood funds and we were roughly total north of 70 ish percent total for the drought groups combined. So just wanted to highlight that. And also in your package, there's a list of partners that industry also worked with in terms of stakeholders, regional partners, as well as other stakeholders within the agricultural industry.

In addition to that, Cal OSBA and our third party fiscal agent industry held multiple meetings throughout the process to ensure that we could troubleshoot any issues, make sure that we could remedy any type of programmatic issues that may arise during that timeline. Also, Cal OSBA advertised and communicated with various sources of media, including our own social media, also through our contracted partners, to ensure that they had outreach to their constituent groups as well.

As of April 5, we did publish our, as statutorily required, our 30 day reporting of the Senate and Assembly data for this program. So that is live on our website today, but in your packets, I do have that information for you all as well. And so just to give you guys just a quick information here. So for, in addition, so total we had 631 drought awards totaling 49,120,000.

For the drought groups 1 and 2, moving on to flood, we were, as I mentioned, that was 20 million allocated and all available funds were spent out from that. So subsequently we have a drought round three soon to come available here in mid to late May. And so that program is allocated for 6.75 million, which is set aside for late filers. And so this would be the last round of this drought and flood agricultural program.

Subsequently, we will be issuing a 45-day statutory report which will detail the awardees from all of our groups of funding. Sorry. And so we are expecting to, with the flood side of it, just wanted to make one last note. On the flood program side, we were severely oversubscribed. We received a total of 659 applications. Once those funds were exhausted, we still had fundable applications in the queue of about roughly $16 million in eligible businesses from the flood side.

And for this reason, the final awards were determined by the application date as well as the eligibility of those applicants. And so thank you for the opportunity to present today, and happy to take any questions.

Thank you. Any comments here? Go ahead.

I was just going to say. Charles Lasalle, Department of Finance. No comments.

All right, I do have a question on the current status of funding. How much has Lendistry been paid in administrative fees?

This is Philip Chen, again, budget officer. Of the approximately $4.67 billion in overall grant program funds across, I think it was, we had like 13 or 14 contracts, and I think there was six or seven different programs. It was just under 5% of the total was utilized for the administrative costs, about 4.3, totaling $201.7 million.

Thank you. And then you mentioned in your comments that you went to the third party, which is Linda Street, for the applications or to select the applications. Is that typical on our state funding, that we use a third party to select grant awardees, or.

It just depends on the, I'm sorry. Chris Earl, Cal SBA, it just depends on the nature of the program and if that program calls for it or in some cases, there may be a need of expediency in getting the wards out to the intended individuals. And so when it comes to expediency, those third parties can move a little bit quicker in terms of cutting checks and dispersing funds. But we do have the latitude to do that internally if the situation calls for it.

Okay, thank you. Any other questions? See no other questions from here. Do we have any comments from the public? Here? We have somebody coming up quickly.

Hi. Hello. Good afternoon. Jamie Finouse, on behalf of the Community Alliance with Family Farmers, or CAFF, we represent 8000 small and underserved farmers across the State of California and have worked for 46 years to preserve family-scale farming. We're extremely grateful to the Committee for asking questions and bringing up this issue items.

Unfortunately, this program completely failed to serve our farmers with meaningful relief. We were disappointed with the program due to impossibly challenging applications, paperwork, technical issues. In fact, we were one of the technical assistance providers and decided to no longer continue to contract with Legistry due to the challenges with the administrator.

We recommend that any remaining funds go to the CDFA CUSP program, the California Underserved and Small Producer program, which has had a long track record of actually supporting small and underserved farmers with relief from COVID to droughts to floods and climate change is not stopping. We will continue to have these emergencies and we'll need to continue to support small businesses. Thank you very much.

Thank you. Any last comments? Seeing none. Thank you. We appreciate you coming. All right, issue number 11, California Competes tax grant program. Welcome.

Good afternoon, Chair, Members. My name is Scott Dosick. I am the Deputy Director of the California Competes programs at the Governor's Office of Business and Economic Development. Thank you for having us here today. I think this program is not new to the Committee or to the Members. It's been around for a few years. I'll try and keep my comments brief. The proposal is to continue funding for the California Competes grant program for an additional year at a $60 million level.

The California competes grant builds on the success of the California Competes Tax Credit program, which has been recognized by independent researchers at UC Irvine as featured in a PPIC report, as generating documented, quantifiable benefits of job increases. Looking at different census tracts as a direct result of the program. The thing that makes the grant program unique is twofold.

One, there are companies that cannot take advantage of the tax credit because it is a non refundable state income tax credit, meaning if that company does not have income tax liability because it's still in, say, startup phase or experiencing net operating losses, R and D credits, other things of that nature, they'll never be able to take advantage of the tax credit.

And the key reason both of these programs were created was to ensure that California has a tool in its arsenal to keep companies in California, to keep the jobs here, and to incentivize that full time, quality job creation in the state, attracting and keeping businesses and their jobs here in California, there are many companies that cannot take advantage of the nonrefundable credit, and those are the ones for whom the grant was specifically targeted.

Simultaneous with that, over the last few years, we saw the advent of the CHIPS Act and the opportunity to leverage Cal Competes to bring in billions of dollars, potentially of federal funding related to semiconductor research and development and manufacturing here in the state. So for these reasons, we are requesting one year additional funding for the Cal Competes grant program. In the past, it was at 120 million. We're requesting 60 million this year available to answer any questions. Thank you.

Thank you.

In light of the budget problems faced by the state, we think it's prudent to limit any augmentations in the budget to supporting proven means of carrying out the state's core responsibilities or meeting critical health and safety needs. And notwithstanding the potential merits of this proposal, it's our assessment that it doesn't kind of rise to the level of that criteria to support additional funding in the current budget environment.

We do recognize that there has been some fairly good research on the traditional Cal Competes tax credit program that does support, appear to support its efficacy. But we would note that Cal Compeats grant program is a more kind of recent expansion of the traditional tax credit program, and it differs from it in key ways that we think means that you can't necessarily apply that past research on the tax credit program to the grant program and assume it will achieve the same results.

We don't yet have any outcome data on the first three rounds of the grants. And so while over the past few years, given the prior budget environment, it may have made sense to allocate funding to test out that expansion, we think given the change in environment, it's no longer prudent to allocate additional funding in this area. That being said, we do recognize that there could be concern that without the grant funds that the state may potentially miss out on CHIPS Act projects.

We would point out that there are potentially other avenues that the state can, and we know the Administration is exploring to draw those projects in. That could be the traditional Cal Competes tax credit program or potentially R and D credits or the new employment tax credit, among other options. There is some potential that perhaps those won't. There may be a project that could potentially slip through the cracks if we can't put together enough incentives through those existing tools.

One option the Legislature could consider, if it's concerned about that potential, would essentially provide basically a mechanism, potentially through budget bill language for the Administration to come back and request funding for CHIPS Act project for Cal Competes grants if they can demonstrate to the JLBC that they have exhausted all other potential existing opportunities to provide incentives to a project and they really need the grants for that means.

Any other comments? Assemblymember Ward.

Thank you for bringing this item forward and I guess based on some of the LAO's observations, I would share those. Well, maybe two. Point of question three, actually. One, what are some resources? You mentioned independent research. Is there other data that we could research into to sort of understand the effectiveness of the Cal competes programs?

Sure. Again, Scott Dosick with Cal Competes at Gobiz, Assemblymember I would be happy to send you the links. We could send those over to you today.

There was a PPIC report that came out just in the last couple of months and it builds off of a report that was done by the UC Irvine, which published a report, a multi-year study that they performed looking at the direct impacts of Cal Competes on job creation.

Okay. Okay. That would be good to see. And then there was a $10 million in savings from last year. I'm reading that as was not spent. So why. But we want to enhance this with another 50 million on top of that. So what is, how could we be assured if we're putting budget out there that it wouldn't be effectively used?

Thank you so much for that question again. Scott Dosick, GoBiz Cal Competes. The last three years we had $120 million appropriation for the grants program. In each of those years we received billions of dollars, billions with a B, of dollars in grant applications.

We have a very rigorous application review process where we ensure only the most competitive applicants are the ones that move forward throughout the process and eventually are recommended for an award. At the last minute during the last round, we had one company with a recommended $10 million award withdraw its application for consideration.

And as a result, that $10 million was out there instead of having an ineffective application process for, I know it sounds weird to say only $10 million, but for only $10 million, we held it back. And so instead of requesting a $60 million appropriation, it's the $50 million plus the $10 that was not awarded.

Got it. That was kind of an odd circumstance. I'll look forward to those links coming over. But on the fly here, can you sort of articulate some of the metrics that you're using to define success?

Sure. So both the grant and the tax credit have roughly the same evaluation criteria. There are additional criteria for the grant program looking specifically at the company's inability to be able to use the nonrefundable tax credit. If they can use the tax credit, we direct them to apply in that. The metrics for success really build on the evaluation criteria first and foremost.

While we have a lot of criteria looking at the number of full time jobs being created, the wages are going to pay their full time employees, the relevance of those wages to the region and where they're proposing the job growth, the capital investments, the economic benefit, the incentives being offered both in California and from outside competitor states trying to steal our businesses away.

The ultimate success is measured in that each of these companies signs a five-year contract that lays out their milestones over a five-year period and the amount of either tax credit or grant that they will receive each year if they achieve those contractual milestones, which are the number of full-time jobs created, the wages that they committed to in the application, and the capital investments.

If they do not achieve those milestones, they do not get the credit or the correlated amount of credit, excuse me, credits or grants associated with those milestones. We also have the Franchise Tax Board, which is in charge of the enforcement of this program, which for both programs conducts a rigorous. We don't call it an audit, it's a books and records review.

A very rigorous books and records review, where they validate the information provided by the applicant both during the application and during subsequent each of the five years of reporting during the contractual period. But it really comes down to, if you don't create the jobs, you don't get it.

Okay, thank you.

Thank you, sir.

I did ask for some more information. We'll make sure you get this Assemblymember Ward of where these grants were awarded. So as you award these grants, do you have a criteria or metrics that show regionally where they're going, whether it's Northern California, Southern California, or is that a consideration at all?

So one of our primary. One of the many primary things that we look at during the application, first and foremost, are these jobs at risk for not being created in California and did the company actually document, demonstrate that these jobs are truly at risk for leaving the state? We also are looking at the extent of unemployment and poverty in the region where the jobs are being created.

And if those jobs are being created in the area where the unemployment or poverty rate is 150% or more than the statewide average, they receive a priority in the review process.

Thank you. Because just when I'm looking at this, it doesn't necessarily, when you say poverty, I'm not seeing some of the communities on there that I would think that would show that. But again, there's probably more information that I don't have in front of me.

And the challenge, of course, that we have is while we would love to get many businesses moving to areas of the state that could benefit most, there are certain types of businesses that have already decided the general geography of where they're going to be, either in California or outside of California.

But part of the conversation that we have with them throughout the process is the company, say, in a more expensive part of California, the coastal areas, says, we're thinking about leaving because it's cheaper to operate in Arizona, Nevada, or, God forbid, Texas. The conversation we'll have with them is, you don't have to leave California to save on operational costs. You move a little further east, look at the Central Valley, look at the Inland Empire, look at Imperial. You can save significantly on labor and real estate.

And we have the California Competes programs to help level that playing field as well.

Thank you. Any other comments? Any comments from the public?

Madam Chair, Members, Sara Flocks from the California Labor Federation and I just wanted to make clear that we're not commenting on the budget allocation or appropriation, leaving that up for the Legislature. But we did have comments about the California Competes both tax credit and grant program. We were involved in the creation of this program out of the enterprise zone program 10 years ago and do think that it is time for an update.

We do know that there is guardrails for net new job creation and there is transparency into wages. I think maybe now is the time that we look at making sure that these are the highest quality jobs and had more transparency that's available to the public on the metrics that are used. There is information that the public can get before the board meetings.

We would like to get that information more in advance so we have some time to study it to get some more granular information on what wages are actually paid and also an explanation of according to the criteria that is in law and regulations, how were decisions made to make awards of the tax credits and grants according to that criteria. I think those updates would give more transparency, more public participation in both sides of the program. Thank you.

Thank you. Appreciate those comments. Thank you for speaking to us today. Appreciate it. And we're going to our next item, which is item number 12, the infrastructure state revolving fund. Thank you and welcome.

Good afternoon. I'm Clint Kellum. I'm the Chief Deputy Executive Director of the California Infrastructure and Economic Development Bank, or IBank. IBank is part of the governor's business of economic development agency and we serve as the state's only general purpose financing authority. Our mission is to provide financial assistance and support infrastructure and economic development in California. We do this in alignment with our three top priorities, creating jobs, ensuring inclusivity into our programs, and addressing climate change.

Staff did a nice job summarizing a proposal on the agenda, and I'd like to offer a few supplements to that information. One of IBank's flagship financing programs is our municipal lending program, the Infrastructure State Revolving Fund, which was established 25 years ago and received initial state funding of $162 million from the General Fund. This has been the state's only investment in the program to date.

The importance of financing infrastructure is undeniable, and IBank's infrastructure loan program plays an important role in helping municipalities and a range of critical infrastructure projects, including water, sewer, transportation, and energy. Since the program's inception, IBank has issued 146 infrastructure loans across the state, primarily to California's small and medium-sized cities, counties, and special districts, to finance projects ranging from roads and municipal utilities to the improvement of port facilities and airports.

The average loan side is is around $7 million, with our smallest loan at about 500,000 and our largest at 40 million. In the last 25 years, IBank has leveraged the initial $162 million from the state six times to finance more than 1 billion in municipal infrastructure projects. Now, 25 years later, success has led us to the point where the program is approaching the limits of available leverage from the original General Fund allocation.

Consequently, IBank is requesting a $50,000,000 1 time General Fund appropriation in 24-25 to continue funding these projects at affordable interest rates for those municipalities that are unable to self-fund their projects and unable to access the bond markets themselves. Thank you for your time, and I look forward to answering any questions you have.

Thank you.

Brian Euler LAO, our comments on this item are pretty similar to the last item. Notwithstanding some of the potential merits of the proposal, we think given the current budget environment, the augmentation can't be justified. Our understanding is the additional $50 million would allow the program to continue running completely smoothly. But without the 50 million, we understand that IBank would be able to continue running the program, albeit somewhat suboptimally, maybe somewhat less favorable rates for the local participants.

And in our view, that doesn't kind of quite rise to the level of justifying the augmentation again in this tight budget environment.

Okay, thank you.

Charles Lasalle, Department of Finance. I'll just reiterate that this investment will allow the ISRF to continue operations at the existing current service level. This augmentation will provide sufficient resources for IBank to continue providing loans to local municipalities for critical infrastructure projects that may otherwise not have access to capital, as well as providing these at preferred interest rates.

Thank you for that. Are there any members of the public on this item? Seeing none, I wondered if there was any more direct response, I guess. Why the need for additional funding if you're only trying to maintain existing service levels?

So the point has been that the state hasn't invested in the program in about 25 years beyond that 162 million, and we've taken that and leveraged it to a point at which now we've reached where we think we could harm the sort of economies of scale of the program and the beneficial rates we can offer without an additional equity investment in the program. And so we're here today.

It's something we've been monitoring over the years, but we only wanted to come before the Legislature and request additional funds when we truly had a need. The unfortunate part is the timing is not ideal, and so that's consistent with the Department of Finance's comments here.

We're requesting these funds to maintain the service level that allows us to have a AAA bond and have that portfolio that has some bigger high credit counties that help the smaller municipalities that couldn't access the bond market or maybe at unfavorable rates.

Okay, thank you for that. We'll take that under consideration. Appreciate this item today. Thank you. We'll move on to issue number 13. This is the Department of Financial Protection and Innovation. Let everybody reset.

Good afternoon.

Once it everybody gets settled. Good afternoon. When you're ready you can begin.

All right. Thank you. Good afternoon, Chair and Members. My name is Sophia Smith and I am the Deputy Commissioner of Administration at the Department of Financial Protection and Innovation, where we are focused on protecting consumers and fostering responsible innovation in the financial marketplace.

With me today are Khalil Mohseni, Chief Deputy Commissioner, Avi Malik, our general counsel, Nicole Hisatomi, our Deputy Commissioner of Legislation Legislation, Suzanne Martindale, Senior Deputy Commissioner of Consumer Financial Protection, Melinda Lee, Deputy Commissioner of Debt Collectors, and Michael Nelson, our Acting Deputy Commissioner of broker-dealer investment advisors. He's sitting right here next to me. The DFPI is responsible for safeguarding consumer rights and ensuring financial stability. We oversee a variety of financial services, products, and professionals.

The Department regulates state licensed financial institutions such as banks, credit unions, money transmitters, and premium finance companies. By closely monitoring their operations, the DFPI promotes compliance with strict standards, thereby building trust and confidence among consumers. Additionally, the DFPI extends its regulatory reach to include various financial businesses like securities brokers and dealers, investment advisors, and providers of deferred deposit services, commonly known as payday loans. Through licensing and regulation, the Department upholds industry standards, promotes ethical conduct, and protects vulnerable consumers against predatory practices.

The DFPI also plays a crucial role in regulating the offer and sale of securities, franchises and in off-exchange commodities. By enforcing regulations in these areas, the Department ensures investor protection, promotes market integrity, and creates a level playing field for all participants. Lastly, the California Consumer Financial Protection Law represents a landmark expansion of the DFPI's oversight capabilities, aiming to bolster consumer protection, foster responsible financial innovation, and stimulate job growth.

This legislation marks a significant milestone in the history of the DFPI granting it unprecedented authority to regulate previously unregulated sectors by allowing regulation by activity instead of a licensed category. Examples of these industries include debt collection, debt relief services, credit reporting agencies, and credit repair companies. As we navigate the complexities of our financial landscape, the DFPI serves as a beacon of accountability, transparency, and consumer empowerment.

By upholding the highest standards of regulatory oversight, the Department not only protects consumers interests, but also fosters a robust and resilient financial marketplace for the benefit of all stakeholders. We have three BCPs in the Governor's proposed budget, but I'll move to item number 13, which is the broker-dealer investment advisor workload. Under the Corporate Securities Law of 1968, the Broker-Dealer Investment Advisor program is responsible for licensing and regulating broker-dealers, broker-dealer agents, investment advisors, and investment advisor representatives.

DFPI has a driver of a new workload in this program, implementation and monitoring of new annual investment advisor representative continuing education requirements with $456,000 in fiscal year 24-25 and 432,000 in fiscal year 25-26 and two positions, the Department will ensure investment advisor representatives maintain their level of knowledge and competence and comply with the continuing education requirements.

And the program aims to protect consumers by ensuring that investment advisor representatives adhere to the highest standards of knowledge and competence, reducing the risk of misconduct or inadequate financial advice. Thank you Members of the Committee for your time and patience. Please let us know if you have any questions.

Thank you very much. Any comments from LAO?

Jared Sippel with the LAO no comments. Thanks.

Great. Thank you very much.

Amy Ascensio, Department of Finance no comment.

Thank you very much. Any members of the public wishing to comment on this item? Okay, seeing none. Very straightforward. Have no questions.

Thank you.

Next, you also have issue number 14.

Yes, thank you. Joining to my right is Senior Deputy Commissioner Suzanne Martindale. Continuation of California Consumer Financial Protection Assemblywoman Limone's Assembly Bill 1864 passed in 2020, which has significantly broadened the state's capability to safeguard Californians against abusive and predatory financial products and services. With $14 million in expenditure authority for 55 positions, the Department will continue to strengthen the state's ability to oversee and regulate financial products and services to ensure compliance with the California consumer financial protection law.

We will safeguard Californians from abusive and predatory practices within the financial industry and promote consumer protection and financial well being. We will continue robust education and outreach programs aimed at increasing consumer awareness and financial literacy, empowering individuals to make informed decisions and resist predatory practices. By equipping Californians with the knowledge and tools they need to navigate the financial landscape effectively, we can strengthen their ability to protect themselves from exploitation. Thank you, Members of the Committee, for your time and patience.

Please let us know if you have any questions.

Thank you. No comments. Any comments from Members of the public on this item? Okay, seeing none. Just a couple of questions on behalf of our Chair. Let's start with an update on the fee study. Do you have any knowledge of that today?

Thank you, Assemblymember. I can take that question very briefly. We are in the middle of conducting a 360 fee study to ensure that programs across the Department are supporting themselves and that work is ongoing. We're happy to provide an update when that study is done.

Okay. And then we're requesting for a number, 55 additional positions and the funds that it would take to get there. When would you anticipate that CCFPL would be self-sufficient?

Well, I do want to clarify for the room that we are asking for a continuation of the 55 positions that we already have.

Is that an increase?

Not an increase. This is flat headcount. Just a little. By way of brief legislative history. Back in 2020, the Legislature and the Governor agreed on the CCFPL package. It was not just the substantive legislation from Monique Limon, but also included dozens of positions that were approved in 2020 and were phased in over a three-year period. So the fundamental funding was temporary. We are coming back to ask for two more years of funding to retain the same flat headcount for our ongoing implementation of the CCFPL.

Do you feel that within those two years you'll become, you'll meet your goals?

We are well on our way. We have, one of the ways that we get revenue is through registration of these newer industries that are now subject to this law. We have to write a regulation first. So that's in the statute. But once we write a regulation, we can then mandate that certain industries come and register with us. We currently have a package that is pending final approval with the Office of Administrative Law.

We should be hearing back in a number of days, and then that will become our first tranche of registrants, and we will continue to add more in the coming years with that registration authority that's in the CCFPL.

Okay. We'll be monitoring that closely. Thank you. I guess it's all for this item and last issue on the docket today, also in your wheelhouse, issue 15.

All right, thank you. Joining me to my right is Deputy Commissioner Melinda Lee over the debt collector program. We are asking for continuation of debt collector licensing and regulation. The Debt Collector Licensing Act, SB 908 Bill passed in 2020, which allows the Department to license, regulate and examine debt collectors.

With $11.75 million in expenditure authority for 51 positions, the Department will continue to implement and enforce regulations to ensure that debt collectors operate in accordance with the law protecting consumers from unfair or deceptive practices. This includes strict monitoring of collision collection tactics and adherence to guidelines outlined in the consumer protection laws. We will regularly assess the financial health and practices of debt collect collection agencies to protect consumers.

By closely monitoring their activities, we can proactively identify potential risks to protect consumers from harmful practices that may arise within their operations, and we enforce compliance with licensing requirements and take appropriate actions against debt collectors found in violation, such as imposing fines or taking enforcement actions to hold accountable any debt collectors who fail to meet the necessary standards and ensuring that consumers are shielded from predatory behavior. Thank you Members of the Committee for your time and patience, and please let us know if you have any questions.

Thank you very much. No other comments? Any Members of the public wishing to comment on this item? Seeing none, thank you for the presentation today. I have no. Very straightforward, have no questions or comments of my own. So thank you for your time.

Thank you. Have a wonderful evening.

Thank you. I guess I'll give one last call. Are there any Members of the public wishing to comment on any item on today's agenda?

Yes, I'll keep it very brief. My name is Danielle or Dani Kando-Kaiser. I represent the California Low Income Consumer Coalition, which is one of the many groups that are involved in the DFPI advocacy coalition. We meet weekly to discuss legislation and matters related to the DFPI. We are all a part of the group that first worked to establish the DFPI, so we urge your continued support of the critically important work.

Many of our members deal with legislative and legal issues that the DFPI has helped us with regulation. As you just heard, you know, debt collection, debt settlement. We think the work is critically important. We urge your continued support. Thank you.

Thank you very much. And with that, I think we have reached the end of our agenda and our Subcommittee will be adjourned.