Senate Budget and Fiscal Review Subcommittee No. 4 on State Administration and General Government

For purposes of establishing a quorum. Senator Padilla. Senator Niello. Senator Smallwood-Cuevas. Mister chair, you have a quorum.

Thank you and welcome again, everybody. Items on the docket today for discussion, start with the governor's Office of Business and Economic Development issues 12 through 15. Ask our presenters from the Department to please come forward. Make yourselves comfortable and proceed when ready. And welcome.

Good morning, chair Padilla, Senators, my name is Scott Dosick. I'm the Deputy Director of the California Competes program at the governor's Office of Business and Economic Development. I know you've got a big agenda. I'll just keep it really brief. I think you're familiar with the California competes program. At this point, the recommendation from the Administration for this next year is a $60 million allocation for the California Competes grant program. Building off of the success of both the California competes tax credit and grant programs.

The tax credit has been recognized as a very effective program to incentivize businesses that are at risk for leaving California to stay here and grow and create new full time jobs. Building off of that success, the grant program was created about three years ago for those businesses that cannot take advantage of a nonrefundable tax credit, either because of net operating losses or research and development tax credits. They cannot use a non refundable credit or provide no monetary benefit. So the grant program was created.

It has proven so popular that we have received literally billions of dollars in applications each year for the $120 million we had available. So the opportunity we have for this year is we're requesting for $60 million appropriation, and we're also looking to capitalize on the unique opportunities of the federal Chips act funding that does require state and local match.

And the Cal competes program is simply the most effective tool for providing that match to ensure that billions of dollars of potential federal funding could come to California. Thank you.

And then the Department of Finance.

Brian Euler with the LAO on this item, we are recommending rejecting the proposed funding. This recommendation largely is based on the state's fiscal position. Given the projected budget deficits, we think that it's prudent to focus any potential allocations on proven ways to carry out state the state's core responsibilities or meet critical needs. And in this case, while we do recognize that there has been some fairly good research which has appeared to establish the effectiveness of the traditional Cal competes tax credit program.

It is our position that that research doesn't necessarily speak to the effectiveness of the grants program, which is a newer expansion of the program and has some key differences from the tax credit program. We don't yet have any sort of outcome metrics or any evaluation of the effectiveness of the grants themselves.

And for that reason, while it may have been, may have made sense to allocate some funding in recent years when there was kind of more resources available to test out this idea, we think that that's less prudent. Now, all that being said, we do recognize that there could be some concern that without this funding, the state may potentially miss out on federal Chips Act Dollars coming into the state.

We would point out that there are other potential resources that could be used to provide the state incentives for Chips act programs that could include the traditional Cal compete tax credit program, or research and development credits, or the new employment or other options. We understand the Administration is already exploring these options as well.

One potential alternative, if you are concerned about the CHIPS Acts program, could be to set up sort of a contingent funding process where the Administration, upon demonstrating to the JLBC, for example, that they have exhausted all the other potential alternatives for funding for a chip Sachs program, could come and make a request for Cal competes grant funding for that project. With that, I'd be happy to take any questions.

Thank you, Department of Finance.

Thank you. Colby White, Department of Finance. No additional comments, but look forward to any questions.

All right. On the program side, I'd like to hear additional thoughts about the lack of empirical data yet to know whether to be able to adequately measure the impact and effectiveness of the grant program. If you could address those a little more deeply, and again, a little more about putting at risk leveraging of federal dollars.

Thank you, Senator, for the question. So a couple of things. So both the California competes tax credit and grant programs have virtually identical evaluation criteria, virtually identical selection criteria. The biggest difference between the tax credit and the grant program is that the grant program has an additional level of scrutiny where we validate whether that applicant, that business, truly cannot take advantage of the non refundable tax credit.

We want to make sure the companies applying and being selected for the grant need the grant and cannot take advantage of a non refundable tax credit. But as far as the evaluation criteria that are the basis for the awards, they are virtually identical for the grant program as for the tax credit. As far as empirical data is concerned, whenever a company is awarded either a calcompedes tax credit or grant award.

They sign a five year contract that lays out how much they will receive each year over the five year period if they achieve the milestones that they laid out in their application, specifically the number of new full time jobs they're going to create in maintaining their existing employment levels, the minimum and average salaries for their new full time employees and the capital investments that they committed to as part of their application so far.

I mean, it's going kind of difficult to say for a program that's roughly three years old. If the program has proven successful, we can tell you that there are companies that have applied that would not have applied for the tax credit that now have the opportunity to take advantage of the tax credit, the grant program specifically for Chips act.

And I'm thinking about companies like applied materials and Lam that would not have been able to take advantage of the tax credit that applied for the grant and are using that as the basis for their chips awards, their chips, grant applications.

Thank you. I'll bring it to the Subcommitee. Are there questions? Senator Niello?

Thank you, Mister chair. I'm all for economic development activities. I've been involved in economic development locally for 30 years. But to this point it's my assessment that the Administration has been non serious about the budget gap that we have. Hopefully when the may revise comes out, that the Administration will come off of its extremely Low estimate as to what the deficit is, many millions of dollars less than what the LAO has opined as revenues have continued to decrease.

We had early action presented to us that really hasn't even formally been adopted yet, except for the MSO tax. And of that only about 20% of it was actual program reductions, meaning that really the bulk of the deficit in terms of program reductions has to be taken out of the coming budget year. And now these are overall comments because I've been kind of frustrated watching it and I am relegated to watching it.

But again, as much as I favor economic development activity, this is exactly the sort of thing under the budget pressure that we have that we should not be augmenting. We really don't know how well it works and it's not really the core function of state governments. So I have to speak strongly against this augmentation.

Senator Smallwood-Cuevas.

Thank you, Mister chair, and thank you for the presentation. Could you, can you explain a little bit more about the sort of milestones or benchmarks that companies are to receive or reach in order to receive the grants? You mentioned employment, salaries and capital investments. And I just wonder, does that those three, I don't know, if those are the three major milestones. And does it change depending on what the business is?

Just want to know more about the milestones and how our business is sort of measured in terms of the ability to reach those milestones. And does it change by business?

Thank you for the question, Senator. Appreciate it. So for the most part, you're correct. So if the last page of every agreement, every contract, it's about an eight or nine page agreement that, if you boil it down, really says, here's how much credit you can claim or how much grant you can receive if you do what you said you were going to do. And as far as the milestones that are listed, it is the.

So the different rows on there are, the first row is the total full time employment, so the base year, which meaning the year prior to them applying for the grant or the tax credit, and then their projected total full time employment over each of the five years of the grant period. The next row is basically a mathematical formula that shows the net increase of full time jobs compared to the base year. And we do this specifically so that it's not just hiring. Right.

You can't just hire someone on December 15 and lay them off on January 2 and say, oh, look, I created all these jobs. We're measuring the full time employment. The next two rows are the minimum and average salaries that they committed to for each of their new full time employees. So they might say, the lowest paid employee we're going to hire for the new jobs we're creating will make $50,000 a year, but an average of 85,000 or 100,000 or whatever the average happens to be.

And then the capital investments for new real or personal property that is paid for and placed into service after the application deadline. So in other words, there's no retroactivity to the investment. So they report, so companies sign this contract. They report to us annually their progress. If they do not achieve all of the milestones for any given year, they do not get to take the allocation for that year.

But they do have all five years of the agreement to play catch up, because when companies are looking into their crystal ball for five years out, sometimes it gets a little murky when you get more than, say, six months out when you're looking at your projections. Likewise, there's a major accountability provisions built into California competes.

The Franchise Tax Board performs a fairly rigorous books and records review of each of the awardees to validate the information that was provided in the application as far as their base year employment and those employment, salary and investment numbers that were provided to Gobiz.

And I don't know if there's a percent or how you kind of document success, but do most companies, I guess there were there 23 businesses awarded these grants, I think was in the analysis, how many of them actually met the benchmarks, met the goal. What does that success percentage look like?

So we only have three years of grant data so far. I can tell you that each of the businesses that has applied have been awarded a grant is in compliance with their annual reporting requirements. A lot of the times when they're applying for these grants, the projects are 234 years out.

Like if there's a lot of capital investment that has to happen, like, say, for example, building a massive research and development facility for semiconductor R and D, you have to build the facility before you're going to hire the employees. And so you may not see success for 34 or five years. So it's kind of difficult to say whether they will achieve. But one of the nice things about the program is we do have those accountability provisions.

If a company does not achieve the milestones, any of them, or if FTB determines that there was an error in their submission and based on, on their audit books and records review, the company didn't achieve. We get the money back either by recapturing and bringing it back.

And FTB has all the tools in their arsenal for the grant program, as they do for the tax credit, to be able to, for example, file liens and go after, get bank accounts, things of that nature, to ensure that accountability is built into the program.

And you said it's been three years, so we don't have, we can't measure that this is successful yet because we haven't reached the five year.

Correct, yeah. The indications are that most of the companies that have been awarded are making progress towards their milestones. Whether they're going to achieve all five years, achieve some incremental progress, it's too early to say. We are fairly confident at a high success rate.

When we look at the fact that this program was built on the tax credit program that, and there is a recent PPIC report that documents and LAO referenced this, that this program has proven very effective at generating new full time job creation in the areas where the companies have been awarded.

Thank you.

Thank you.

Thank you. Any further questions or comments on this issue? If not that issue be held open, we'll move to thirteen which deals with the savings from unused Cal competes tax credits. I think we'll ask a favor of the Lao to read that title item in it's sort of an unofficial report.

So issue number 13 is for potential savings from unused Cal competes tax credits. So the program under statute is permitted to award $180 million in credits each year. As the Administration described, there is a rigorous process for the businesses documenting that they've met their milestones in order to be able to claim the credit. And when those milestones aren't met, the credits are recaptured and the businesses are not allowed to claim those credits when the credits are recaptured.

Existing law allows the Department to essentially add those to the $180 million to increase the pot of credits that they can award in future years. And Cal competes estimates right now that because of that, they have 492 million available to award in the current year. This item is exploring the possibility of restricting the ability of Gobiz to reaward those recaptured credits in future years and limiting their allocation to the 180 million that is spilled out in statute.

Would you want me to make my comments on this item now or have the Department speak for.

Let's go to the Department and then we'll kind of take additional comment on that before we come in. Please feel free. Does DOF want to read that?

Yeah, Colby White, Department of Finance. So just speaking to the revenue, the revenue impact here. So this is, is when you reduce allocations to the Cal competes tax credit program, there are considerable lags as far as how it ends up resulting in revenue losses. So companies must, first there's the allocation that companies must are awarded. It's over five years. They must meet these milestones and then they must claim these credits on a tax return.

So the actual budgetary savings are relatively small in the near term, and then they grow a bit over time. Lao has an estimate. There's considerable assumptions that go into that. We don't have any problems with that estimate. It gives you kind of the General profile of what the revenue losses would look like.

Thank you. And you want to do comment generally as a program operator or just go right to answering questions, because I have a couple.

Happy to answer any questions you might have.

Well, to both the Department of Laos comments have we thought about, looks like compounding unallocated with no restrictions has some substantial potential budget savings impact in the long run? Have we thought about what that looks like? And are there comments on the preliminary estimates that Lao has given on what that potential savings could be if we put restrictions on that recycling of unallocated credit?

So in addition to the comments from my colleague at fine, I do want to actually emphasize something that he said, which is there is a substantive lag time in when a credit is awarded versus when it's actually claimed on a tax return.

I walked through pretty thoroughly how the five year agreements work out, and then, as finance mentioned, so if a company is approved for a tax credit, say, a milestone, it's a five year contract that runs from, if it's awarded next year, would run from, from 25 through 2627 through 2029. If they achieve their 2025 milestones, they'd be able to claim their 25 credit allocation when they file their 25 return in 2026.

And most of the time when you're filing a tax return, most businesses can't say almost, they file an extension, which means that they're not filing their tax return until the fall, which means you're now projecting out to the next budget year. So there is a significant lag time.

The other point I would just add is, and not disagreeing with Laos analysis, but simply adding to it, that one of the reasons that there is an increased allocation available right now, so it is the accountability provisions of the program, where companies that don't achieve their milestones, those credits are recaptured and brought back in to be made available to other businesses, but also unallocated credits. We are very rigorous in our evaluation of applicants.

And if a company, if we don't have enough quality applications, where companies have thoroughly demonstrated that this credit would be a material factor in their decision or ability to create new full time jobs in California, we won't award the funds. We're very thorough and very rigorous in our evaluation of these applicants.

I understand the mayor had understand the mechanics. I think the question was, is there a dispute with the notation that's been made in the analysis by Lao that if we put a limitation on the reallocation of a credit as it en banc, I mean, that adds up to some potential savings in terms of the expenditure side net cost to the state. And did you have any dispute with their estimate on that?

So the Colby White Department of Finance. So, as I mentioned, there are considerable lags. And the profile, you know, we don't have any dispute with it. I mean, we think it's a little accelerated. It's generally. But the General magnitudes, you know, you're looking at, the LA is estimate has 5 million budgetary savings in 2425 and then ramping up to 45 million ongoing by, outside of the multi year. So, yeah, those are reasonable numbers. I mean, we could.

Thank you, sir, to the Subcommitee questions or follow up to Senator Niello, just.

To clarify, the 492 million that's available, is that, are those funds that have not been allocated or have been not claimed. What's the actual nature of that money?

Sure, Senator, it's a mixture. So it's a combination of the $180 million annual allocation for the program, any credits that were recaptured from the previous fiscal year, and those are companies that did not achieve their milestones and thus that portion of the credit was returned to Gobiz. And then it's any credits that were not allocated from the previous fiscal year because even though we've had, we're always oversubscribed.

As I mentioned earlier, if their application does not pass the rigorous review of demonstrating that this credit's a material factor in their growth decisions in California, we won't just give the money away. As far as not claiming, that's kind of an interesting aspect to it.

If a company achieves its milestones but is unable to use the credit, like some companies think they're going to be profitable in a few years, and for whatever reasons, either their own internal economics or they start reinvesting in a new product or new research, and they end up still having net operating losses or R and D credits.

We have seen those situations where they earn the credit, they do apply it on their tax return, but it never actually gets monetized because they're not paying income taxes in the State of California, at which point that credit is, for intensive purposes, lost. And you could say the state gets the jobs without any financial repercussions.

Hallelujah. With regard to the former of the reverted, those that didn't meet the goal and didn't eventually qualify for the credit, how much of the 492 is that?

I don't have those exact numbers in front of me, but we could get those to you.

Okay, well, it's a curiosity question. It wouldn't make a difference in terms of my recommendation, which you probably won't be surprised, is to revert these funds to the General Fund. I'll call on my previous words and not repeat them again. But with the level of deficit that we have and the nature of this program as worthy as it is, as I said, I'm all for the state and local governments helping in economic development activities, but not when we have this kind of deficit.

Senator Smallwood-Cuevas.

Thank you, Mister chair. And I'm just curious in terms of, and we don't know the percentage of how many companies didn't meet the benchmarks and those were recaptured. But I'm curious, what are the steps to support companies in reaching the benchmarks? Because if it's employment if it's capital investment, if it's, you know, making sure that we are paying living wage salaries and tracking that those are important outcomes for the state.

So I'm curious, we don't know the percentage, but it seems like there's significant credits left over. So there, so it must be a significant portion that are being recaptured. I'm just curious, what are the steps to monitor in real time and to support those industries and reaching the benchmarks? That's one. And then my second question is along the lines of Senator Niello, but I'm just curious, what are you all thinking are the alternative ways that these unused tax credits should be used? Your proximity to business and the goals of Gobiz?

Sure. I'll try to give a short, direct answer. And if you need more information, the California competes program itself does not provide a lot of technical assistance to businesses as they're operating. We do provide an inordinate amount of assistance in the application process and in ensuring that every business of every size has the ability to submit an accurate application so that we have the ability to differentiate between a strong applicant versus a strong application that's not necessarily from a strong applicant or vice versa.

So an inordinate amount of technical assistance on the front end. We also, as requested from businesses, will make referrals to them to other programs within Gobiz. For example, our California Business Investment Services unit, which provides site selection to support connection to other resources, especially at the local level, connecting them to everything from wibs and job training programs to the economic development rates for manufacturing, where they can get discounted utilities, things of that nature.

As far as your second question about how else to use these funds, I can only emphasize, I understand that there's a larger budgetary questions that are beyond my purview as far as specifically for the California competes tax credit, as we've demonstrated, these funds will stay there and not be awarded. And it's interesting, right, because they're not actually funds, right. It's authority to claim a credit on a tax return.

We will not award those credits if the businesses are not truly demonstrating that these credits are going to be a material factor in their decision to stay and grow or come to California and create full time jobs. And if they do, then we have the PPIC report that we can rely on that shows that this program does result in net new jobs in the areas where those credits go out to that have other economic benefits.

They create jobs of people that are paying income tax on a regular basis. For example, the gift that keeps on giving in addition to the upfront economic benefits of the construction costs of their new facility or their upgrades or their tenant improvements, the other potential downside of reducing the allocation is we are by statute limited to awarding to any company at most 20% of the total amount available per fiscal year.

So in theory, with $492 million available this year, we could have awarded a credit up to $98 million.

We have not come anywhere close to, to that $98 million figure, but having that out there, if you think about large projects, the types of companies that we would hope to attract to California and retain in California, having that prospect out there could be significantly beneficial to the state in attracting really large companies to potentially move to California that would not have considered doing so, because if, if you were to compare California, the California competes programs with programs that other states offer.

If you think about just the news articles you've read about what companies have been offered to build semiconductor manufacturing plants, for example, in other states, they dwarf the entire appropriation. The entire allocation for California competes with room to spare.

Thank you for that. And I have one other question, and it kind of maybe goes back to what's both items in the tracking of the jobs and salaries, or positions created in salaries. Is there demographic data and geographic data? I ask that because sometimes in our reporting we're looking, you know, 3000 foot huge aggregate, but we're also dealing with such disparities in the state and trying to think about how these resources are coming back to hardest hit communities.

Is there data to help sort of really look at not just what jobs are being created and what capital investments are being made, but where they're being made? And is it sort of not just helping California build a workforce, but also address.

Of our economic disparities that exist across the state. So I just. That was a question that came to mind, and then I'll close. Thank you.

So every single tax credit and grant award is listed on our website. So the Cal Competes. As you know, I've talked about the accountability provisions. There's also an inordinate amount of transparency with this program. So every company that's been awarded is listed on our website along with their, a list of their commitments, as I described previously, and a link to their actual contracts. So you can see exactly what it is that they committed to and what, if any, amount was eventually recaptured from those businesses.

So that information is out there. We noticed when this program was created a little over a decade ago, we looked at other state programs. There wasn't a lot of reporting about were they successful. And so we made a point of deciding to list the amounts recaptured from each of those businesses. Part of the evaluation criteria is looking at the extent of poverty and unemployment in the region where the jobs are going to be created.

Now we are somewhat constrained as the major employers California tend to be in the more coastal areas. We do have the opportunity as part of the application process when a company for. I'll just make up some theoretical examples from Bay Area, Silicon Valley. You know, Los Angeles is talking about theoretically looking to move or expand in a neighboring state like Arizona, Nevada, because of the decreased labor costs or lower real estate costs. First conversation I have with them is, have you considered the Inland Empire?

Have you considered the Central Valley or Imperial? You can save significantly on labor and real estate costs simply by moving further east in the state. You don't have to leave the state of California. And then we do get companies that they're doing that cost analysis and they realize they can have those savings, but they're still at a cost disadvantage. And an example might be recent awardee Pacific Steel, which is proposing to open the first new steel mill in California in over 50 years.

They're going to be. It's going to be, in all likelihood, the greenest steel manufacturing plant ever built. Massive solar arrays, battery, energy storage, and it's going to be built and maintained by ironworkers. It's one of the most sustainable new iron or the steel mills ever created. It's going to be built in Kern, in the Mojave area, where an extensive amount of population has historically lived and continues to live in poverty with high unemployment rates along with local hire provisions.

Those are the types of companies we love to get. And they even talked in their application and at the committee meeting a week ago about the cost benefits of doing this in one of the neighboring states versus California. But this tax credit was that missing piece that pushed them over the edge to commit to this project in California with massive investments in about 500 new full time quality jobs.

So it sounds like each application has certain criteria that they're, or methods that they're going to use to reach the benchmarks. But it doesn't sound like GO-biz is tracking within that in terms of what gets projected online, in terms of where those high unemployment poverty communities are and how the companies are working and addressing that population. There's nothing tracking in the data, sort of what communities are being called in to the opportunity specifically.

But it sounds like there's some process that's laid out in the application, but not a transparent way of tracking that for the, for the public to see.

I think that's right.

I think it's important for us to think, especially now that we're in deficit and we're having this conversation, every investment has got to be a multiplier in some way. And I think it's really important, particularly when you think about building a green steel mill. This is sort of the work of the future. How do we ensure that this workforce, or the future high road rate, but also is calling in communities that have been historically left out of those opportunities?

So that might be something to consider as we look at the importance of these tax credits, how we are really trying to track the multiplication effect of these dollars in those hardest hit, disadvantaged communities. Thanks.

Thank you, Senator. And I think you can see a theme there that we come back to in all of these hearings, especially in a constrained scenario. Back to the question of analyzing potential savings here. I'm going to give the LAO an opportunity to kind of close with a little broader comment on your analysis for the benefit of everyone attending the hearing and the Committee. So please go ahead.

Certainly. So, as the Department of Finance mentioned, there are estimates from our office, kind of preliminary estimates on potential revenue gains that could be achieved by enacting this policy total, in total agreement with the Administration that there are a number of assumptions that go into these numbers. The timing could be notably different than what we have here, but hopefully this gives you kind of a general sense of the magnitude that could be achieved in terms of the revenue gains.

Just a couple of other comments just about this concept generally. I think that there's, you know, the GO-Biz mentioned the kind of additional flexibility that being able to award these unused funds provides them. I think there's kind of some pros and cons to that. You know, they mentioned some of the pros that potentially allows them to offer larger awards to attract bigger projects, gives them a bigger pool of funds to continue to award past 180 if there are additional good applicants before them.

On the other hand, though, the Legislature created those parameters in law for a reason. You know, they set the 180 in statute for a reason. They said that there was a maximum, you know, annual amount that could go to any one awardee for a reason. There may be reasons to discuss changing those, but that's probably a discussion that should happen with the Legislature in a kind of explicit way.

And one final sort of consideration is that it's been mentioned a number of times that there is some research on the effectiveness of this program. I think one of the mechanisms that that effectiveness is believed to be achieved through is sort of the competitive nature of the program, the fact that not everyone who applies gets it, that there is this competitive, rigorous process, and the larger the pool is in any given year, sort of the less competition there will be to get those credits.

And so you could be, to some extent, blunting that mechanism if the pool becomes too large.

I appreciate that. Any questions for LAO? All right. I would say I'm certainly not a person without opinion about some additional work the Legislature should do on tuning up this program to be much more integrated and strategic. But that said, I appreciate the presentations on the potential revenue gains here. And with that, that item will be held open. We'll move to item issue 14, which is recapitalization of IBank's revolving fund. Those folks come forward, make yourselves comfortable, and please proceed when ready.

Good morning. 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 Office of Business and Economic Development, 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 our proposal on the agenda, and I'd like to offer a little bit of information to supplement that. One of Ibank's flagship financing programs is our municipal lending program, the infrastructure state revolving fund. It was established 25 years ago and received a new initial state funding of $162 million from the general fund.

This has been the state's only investment in the program to date, and it remains an asset to the state by supporting currently outstanding municipal loan portfolio of $530 million and will revolve to support projects well into the future. The importance of financing infrastructure is undeniable, and IBank's infrastructure loan program plays an important role in helping municipalities in a range of critical infrastructure projects ranging from water, sewer, transportation and energy.

Since the program's inception, we've funded 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 port facilities and airports. The average size of the loan is around $7 million. Our smallest is about $500,000. In our largest as $40 million. In the last 25 years, IBank has leveraged the initial $162 million the state provided six times to finance more than $1 billion in municipal infrastructure loans.

Now, 25 years later, success has led to the point where our program is approaching the limits of available leverage from the original General Fund allocation. Consequently, IBank is requesting that the state make its second investment into this successful program with a $50 million, one-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, and I look forward to answering any questions you have.

Additional comments LAO and DOF?

So our overarching comments on this are pretty similar to the CalCompetes grants that, in light of the state's broader budget situation, we recommend against approving this funding. The proposal is not without potential merits, but it's a question of whether or not they kind of reach a critical threshold given the budget environment. Our read of this situation is that the consequence of not allocating this funding is that the program would essentially operate under suboptimal terms.

They might have to kind of increase the interest rates, other kind of lending costs for their partners. The bonds that they issue to support the program may carry higher rates themselves. These are, you know, no doubt these are, these are consequences, you know, real consequences. It's just a question of whether or not, you know, how those stack up against the other kinds of considerations you're making in the broader budget picture.

Charles Lasalle, Department of Finance. I'll just reiterate my comments from my colleague at IBank. We feel that these funds are necessary to maintain the current service levels of the ISRF and continue to provide loans at preferred interest rates to local municipalities.

All right. And just staying there with you, I'll bring it to the Subcommittee and for either one of you. But obviously, the identified analyzed risk here is maybe, maybe on the bond rating side with the passage of time, can you address the suggestions about a freeze in lending activities temporarily, impact on the rating potentially, and then the sufficiency of other bonding or special district or other types of financing mechanisms that may be available to local governments when it comes to infrastructure financing? In other words, who does this serve that can't get anything anywhere else, to put it in layman's language. And if you could address those points, I would appreciate it.

Yeah, good question. So on the first piece related to the immediate effects here, it's not a binary change, and I can't comment with absolute certainty here because there's always sort of changing dynamics in sort of our funding the bond markets and what's happening. What I can say is that over the last few years, if you look at infrastructure financing, it's been hard hit from inflationary costs, and interest rates more than doubling.

Not getting this proposal has the likely effect of making us issue smaller bonds. Most bond costs are fairly fixed, so those will become a greater proportion and less economical. Those effects would be passed down to our borrowers. You could have less institutional bond purchasers that are interested in our bonds, thereby increasing the spread when we go to the market, making those rates higher.

Then there's the issue of do we get to a point at which the state's investment in relation to our debt actually drives a credit rating reduction, which would then further drive rates higher? The pool diversity. This kind of speaks to your last question, too.

The way it's structured is that, you know, we do have some better credit municipalities, like bigger counties that participate, usually because it's a smaller amount than a effective, if they went to the bond market, those are really important to our loan pool diversity because they increase the credit of the portfolio. And that allows us to be able to issue loans to the unrated or lower end borrowers that wouldn't be able to access the bond market.

So that if that those, if our rates go higher, they may not come to us anymore and they might go directly to the bond markets or other sources. And that has the impact of, you know, further degradation, a credit quality of the portfolio, and further impacting the underserved sort of municipalities that really do need our financing as it relates to alternatives. Again, I think folks are fairly aware of the economic environment.

We had bank failures for the first time in a long time and of significant magnitude with inflated credit or interest rates, the sort of credit offerings by banks are more limited. They can invest risk free at 5% versus taking on slightly greater risk for a smaller return. And so those credit crunches are making it more difficult for municipalities to be able to access alternative financing sources.

And really the bread and butter of these smaller medium sized municipalities, they just don't really have the sort of means or complexity to go directly to the bond market. So their alternatives are kind of limited right off the bat. And that's what really one of the main purposes we serve with our program.

All right. If not, I'll bring it to the Subcommittee for questions. Senator Niello.

We can talk a lot about the effectiveness of the programs and I don't question their efficacy.

Both the California Competes items and these. I'm going to start to sound like a broken record here. And by the way, I said that on the floor a couple of months ago and John Laird, one of my fellow elder Members of the institution, walked up to me and he said, you know, probably 80% of the people here don't know what a broken record is. So it just means repeating myself.

But as the staff points out here, measured against other pressing demands for basic health, housing and human services needs, it's difficult to prioritize a more indirectly beneficial budget item. And just by one example, we are deferring very important services to the developmentally disabled. Now, it's significantly more than this, but you add up these little numbers and you get to a bigger number and it's an expression of a priority.

What we're kind of saying is that these expenditures are a higher priority than deferring the compensation for people who provide services to the developmentally disabled. And I would add that it's probably going to end up more than a deferral given over $30 billion in deficits built in, in budget years subsequent to this. So again, I guess to draw upon an old quote, we just more often need to just say no.

Well, I guess I'm going to sound like a broken record too, but for a different purpose and reason. One, I'm curious, clients, how many municipalities come to the IBank? Just curious about that.

And then my other question is, as we are looking again at this whole notion of procurement in the state and how we have a high road procurement process and sort of a competition to the top when it comes to competing, competing for public investments that actually help our communities, I'm curious how, what infrastructure does the IBank have for that?

Do you incentivize family sustaining wages and maybe municipalities that have, you know, PLA's and community benefits agreements and who are again, looking at these precious dollars to do the public's work, but to also again, see it as a multiplier. I'm curious, how has the IBank kind of modernized in the way that we are looking across the state at this question of our public investment and how we can do more with what we have.

Great. On the initial question, we have about 100 loans outstanding today, and some of those are municipalities that are duplicated. But in that neighborhood, it gives you a sense of across the state, you know, up in Shasta County, Butte County, all the way down to San Diego and across the middle. So I think geographic diversity is apparent in our overall portfolio as it relates to sort of your underlying questions here.

The programs, all of our projects do have to be completed with the prevailing wage in the state requirement speaks to that. And as it relates to sort of the underserved, you know, municipalities and how we can support those. We do offer up to 25 basis point interest rate subsidies for communities that meet certain socioeconomic thresholds. And then we also have an additional up to 25 basis point reduction for sort of climate oriented projects that are consistent with the state's climate goals.

But if I could make one comment, too, on the matter of timing here, I think I was asked this actually in the Assembly Subcommitee, and we've received these funds, you know, 25 years ago, and we've built the program and we've revolved it and we've monitored it. And we're here before you today not because it's an optimal time to be requesting money, but because that's the amount we feel like we need to sustain the program that's been successful over the time.

I actually spent 10 years at the state Department of Finance prior to my current employment at IBank. And I think my folks would say I should have timed this a little bit better for us. But, you know, we're here before you because we think this is actually requested funds that we need. And unfortunately, the timing is not great.

So you're saying there are special programs for disadvantaged communities and then there are, did you say tax reductions? Can you repeat that?

Yeah. So when we look at a municipality and we go to approve a loan, we're also improving an interest rate. And that interest rate on a base level is based on sort of the credit quality of the municipality. So, you know, there's, the credit rating agencies have these sort of standards, and you would sort of bucket it into one of those standards. But then also we look at the municipality and see if it sort of has socioeconomic factors that would categorize it as disadvantaged.

And then from there we would actually lower the interest rate up to 25 basis points.

Any other questions? All right, this item will be held. Thank you for your presentations. We'll move to issue 15, which is a partial delay of downtown Fresno's infrastructure funding. Never heard of that part of the budget. Come on up. Make yourself comfortable. Proceed when ready.

Perfect. Good morning, Chair Padilla and Committee Members. My name is Lauren Greenwood and I'm the deputy director of legislation and intergovernmental affairs at Go-Biz. Thanks for the opportunity to provide an update on the funding for downtown Fresno infrastructure. As mentioned in the agenda, the governor's January 2024 budget maintains 250 million in general fund for the infrastructure plan, but proposes to delay disbursement of 100 million of this amount by one year. Go-Biz has issued 50 million to Fresno in accordance with the 2023 budget.

The funding for Fresno serves as a catalyst in downtown Fresno Chinatown, and will support the expansion of its population from 3,000 to 10,000 residents residents. The state's investment, leveraged with others, has the potential to be significantly impactful as it relates to housing. Specifically, the footprint for the investment is already zoned for up to 15 stories. Any density or lot coverage is allowed. There's a hundred day entitlement timeline and no additional CEQA review is required. Downtown Fresno has a zone capacity of nearly 75,000 housing units.

Fresno houses the initial investment to work through various projects such as the enhancement of water distribution and wastewater systems, finalizing site control and demolition of key properties in Chinatown and activating other pre-construction activity on all funding pillars to ensure these projects are shovel-ready by the 2025 fiscal year. Extensive preparatory work, including feasibility studies and design services, are underway.

Fresno is managing the delay in funding, but further delays or reductions in funding could disrupt the transition from pre construction to construction phases, potentially inflating costs due to extended timelines and inflation. Fresno launched a new city department to have staff working as a strike team to ensure efficient and effective delivery of large scale capital program projects. Additional delays could impact the structure, which has taken time to transition and expand.

Lastly, we note for decades the development community has pointed to the lack of infrastructure and inability to finance housing without needing significant funding gap funds resulting in vacancy and empty lots. We're proud to support the city's broader urban development strategy aimed at fostering a sustainable housing for downtown. These 2025-26 funds are essential to capitalize on the ground work lately during this last year, ensuring that projects are not only on schedule, but also cost effective in aligned with the city's strategic urban renewal goals.

Thank you and happy to take any questions.

LAO, have comment?

Yeah, just briefly, I think an important consideration here is given sort of the multi-year outlook for the budget. While these funds are currently slated for delay, there is a significant risk that when we get to next year, the resources may not be available to support the allocation in 25-26.

Yeah. Charles Lasalle, Department of Finance. The administration's proposed spending plan of the Governor's Budget only includes a delay of the resources supporting the Fresno infrastructure plan because it was necessary to close the projected budget shortfall. This delay was part of a broader strategy inclusive of reductions and other delays. We also note that this was only proposed as a delay because the Administration recognizes the value of the investment and the positive benefits of supporting the infrastructure projects in the City of Fresno.

All right, you know, the obvious. Thank you for that. The obvious questions are, even with a delay in allocation, there may be incremental cost impacts, total project cost impacts, cost in jobs. The obvious, and then the other obvious question, I think whether it comes from me or any other Member, is, you know, why just this approach? Or has there been serious consideration given to what would be the impact of no further funding on this on the ground?

I mean, I understand what Fresno has been doing for a number of years, and it's a great plan and it's a great capital improvement project. It's great for jobs and it's a priority. And I supported it in the last budget cycle. But I think it's important for a serious analysis of it, right. To have the conversation. So if you could address those two obvious points, I'd appreciate it, and then I'll bring it to my colleagues.

Sure. Lauren Greenwood with Go-Biz. I think that there would be a significant amount of impact should the Legislature consider a full reduction of the funds. And what I just go back to, what I stated earlier, is we're talking about the potential for 75,000 housing units in an area that's been underinvested over decades. And specifically speaking to the 250 million, we're talking about an increase of 7000 or housing for 7000 residents.

And that would be that intermodal transit center, and it would support all the services that develop infrastructure that developers need to continue to compound on housing.

All right, questions. Senator Niello?

I was going to ask the same question, so I won't repeat that, but I love Fresno. It's a great town has some things in common with my hometown, Sacramento, but is challenged. And it's right that the state focuses on the Central Valley, which has challenges. But I won't repeat my statements before. This is something that I just at this point the state can't afford. But hopefully in future years we'll be able to again.

All right, with that, than you, that item will be held. We will move then to the Secretary of State. Issue 16 is Cal-Access replacement system CARS project. Good morning and welcome. Please proceed when ready.

Thank you. Good morning, Chair Padilla and Members of the Committee. My name is Tamara Johnson, Chief Financial Officer, and on behalf of the Secretary of State, Dr. Shirley N. Weber, I would like to thank you for the opportunity to present the proposals before you here today, but first, if you would allow me to give a brief overview of the agency. Secretary Weber was nominated to serve as California Secretary of State by Governor Gavin Newsom on December 22, 2020, and sworn into office on January 29, 2021.

Subsequently, the voters elected her to a full term on November 8, 2022. The Secretary of State's Office is comprised of over 600 people who are dedicated to making government more transparent and accessible in the areas of elections, business, political campaigning, legislative advocacy, and historical records. The agency is comprised of the following operational divisions: elections, political reform, business programs, archives, information technology, fiscal affairs, and management services.

The Secretary of State's responsibilities include serving as the state's Chief Elections Officer, implementing electronic filing and internet disclosure of campaign and lobbyist financial information, maintaining business filings, commissioning notaries public, operating the Safe at Home Confidential Address Program, maintaining the Domestic Partners and Advanced Health Care Directive Registries, preserving more than 250 million records and artifacts held in the State Archives, and serving as a trustee of the California Museum.

The Secretary of State's strategic initiatives include strengthening California's voting environment, optimizing California's business foundation, providing full exposure to the state's archive collections, and providing transparent access to public resources. The Secretary of State's Office strives to promote inclusivity and accessibility to create an election system designed to allow citizens to perform their most basic civic duty with ease.

Some of the programs the agency has oversight of or administered to further that effort is the new Citizens Program, the Military and Overseas Voters Program, the Student Voter Registration Program, and the California Students Vote Project, which, I might add, is a first of its kind partnership in the nation, where all major institutions of higher education in California have solidified commitments to partner with the Secretary of State's Office and encourage student civic engagement efforts to promote a democracy that is more inclusive of student voices.

Furthermore, the Secretary of State administers California's statewide voter registration system known as VoteCal, which serves as the single system for storing and managing the official list of registered voters in the state. Additionally, the Secretary of State's business services are the first stop for California businesses to register and begin the journey. BizFile California is is the Secretary of State's online portal to help businesses file, search, and order business records quickly and conveniently from a single location.

BizFile California also provides resources related to starting a business, trademarks, Uniform Commercial Code financing statements and other tax liens, and immigration consultants. Finally, the Secretary of State's ongoing objective is to foster trust in our democracy by facilitating the transparent and accurate disclosure of information, resources, and finances. The California Automated Lobbyist and Campaign Contribution and Expenditure Search System, known as Cal-Access, is the public's window into California's campaign disclosure and lobbying financial activity, providing financial information supplied by state candidates, donors, lobbyists, lobbyists' employers, and others.

The Cal-Access Replacement System Project, or known as the CARS Project, will implement a new data-driven system replacing the existing forms-driven system. That concludes my overview of the agency, and now I will quickly go to the proposals that are before the Committee today. The first item is the CARS Project. The objective of the CARS Project is to replace the outdated Cal-Access system for electronic reporting of campaign finance and lobbying activities mandated by the Political Reform Act.

The request before you will provide one-time funding of 16,774,000 General Fund to support the continuation of this effort. Specifically, the request will provide continued funding for 33 prior approved positions to support the second year of planning activities and backfill staff recruited to support ongoing program activities. And we'd just like to note that the total CARS Project cost in 24-25 is 22,163,000, and of that amount approximately 5.4 million is existing and previously authorized ongoing funding.

And then the remaining 16,000,774 is the request before you today to cover the needed remaining costs. With me today is John Heinlein, who is the Assistant CARS Project Director, and we're happy to answer any questions you may have. Thank you.

Thank you very much. Any comment from LAO?

Nick Schroeder. No comments on this issue.

And DOF?

Department of Finance. No comments.

All right, obviously this isn't a compliance issue in terms of the program. Do you have additional comment on the timelines and next steps for implementation?

For CARS? The SOS is projecting to onboard--

Could you just again state your name for the record and make sure we can go into that mic, which may or may not work, but give it a shot.

My name is John Heinlein. I'm the Assistant CARS Project Director. Work for the Secretary of State CARS Project. The SOS is projecting to onboard the prime vendor and begin development activities in summer 2024. Go-Live of the new solution is anticipated to be shortly after the November 2026 elections. This timeline aligns with our original scheduled estimate based on the third party Elian Assessment, and it ensures that we don't create any confusion or risks prior to the 2026 General Election.

Thank you. Any further questions? Senator Niello.

Thank you. If this allocation does not survive the budget process, will you be able to realign duties within the Department to keep the project going?

Well, any reduction of funding or deferring of funding risks further dependency on the legacy Cal-Access, which risks outages and significant loss of services to Cal-Access users, including their ability to submit state-mandated filings and reports in a timely manner.

Additionally, if the CARS funding was deferred, the CARS planning activities would be delayed by 12 months, which would likely result in the system implementation date being extended by 18 months or more. The delay would also increase the project's overall cost by several million dollars based on the estimated project budget.

Without the necessary funding, the project would have to terminate critical consultant contracts, which would have to be re-procured when the funding is reinstated, which would contribute to a loss of time and a loss of momentum caused by pausing all project activities.

I have a feeling you anticipated that question.

Yeah, we did.

I just put that in along with other priorities of our budget. As I've said, is pretty challenged.

Senator? All right. That will be held open. Item 17 is NAP 2.0.

Yes, sir. Thank you. The Notary Automation Program Replacement Project, or also known as NAP 2.0--just a little bit of background on the system. The system is approximately 30 years old. It was developed utilizing an application that in present day makes it very difficult to update and to find qualified information technology staff or vendors to support the application.

Current technology has evolved significantly since the system was created, thus integration of the legacy system with current and future technology and possible a third--possibly a third party--third party systems will be challenging. The request before you today is for one-time funding of 4,018,000 for the continuation of the project. This project, I will note, is supported by the Secretary of State's Business Fees Fund. The total project cost in 24-25 is 5,738,000.

Of that amount, 1,004,077 is for six new positions and continued funding for two existing positions which were approved in 23-24. 800,000 is for continuing vendor and new vendor contracts--costs--excuse me, and 325,000 for planning resources. There's approximately about 890,000 for CDT and DGS services and fees, and then 528,000 for temporary staff to backfill staff positions redirected to the project. And then the remaining 1.72 million will be funded within existing resources. With me today, I have Ed Lacroix, who is the Chief Application Officer for the project. Happy to answer any questions.

Questions from the Subcommittee? Senator Niello.

So this is funded by fees paid by businesses. What's their position with regard to the spending and the program? Do they formally support this?

I would like to ask Shannon Delgado to come to the table. She is the Assistant Chief Business--Assistant Chief of the Business Programs Division. She'll be able to answer that question for you. Thank you.

Good morning. Thank you for the question, Senator. I'm Shannon Delgado, Assistant Chief of the Business Programs Division of the California Secretary of State's Office. So we have not formally solicited feedback from those that pay towards the business fees funds for the services that we provide, however, so we have to take that back and get you better information. We can work with the Committee to provide more tangible information related to that.

I will say the system, as my colleague mentioned, is almost 30 years old, and the notary community in the State of California is definitely, they have expressed that they are looking for innovation, more services, online functionality, and so we do see that we have a duty to provide improvements to that community within the state, especially since we have approximately 147,000 notaries in our state today.

In terms of concluding the budget process, it would be good to know the support by those that are actually paying for it.

Thank you.

All right. Without anything else, then that item is held open. We will then move to the State Treasurer's Office. Thank you very much.

Thank you.

Issue 18 is additional funding for banking operations item processing software service. Welcome, we'll give everybody a minute to sort of exit the hearing room. You can proceed when ready.

Thank you. Good morning, Chair Padilla, Members of the Committee, I'm Natalie Gonzalez, Assistant Director of the Centralized Treasury and Securities Management Division, or CTSMD, at the Treasurer's Office. And with me I have the Director of our Information Technology division, Naim Mohammed, to give you some background on our program. It's the primary responsibility of CTSMD to oversee all banking aspects of the centralized treasury system.

Our goal is to maximize the earning of interest consistent with safe and prudent Treasury management, and to ensure that our depository banks provide the state with proper and adequate security for the deposit of state monies. On a daily basis, we manage the cash liquidity needs of all state agencies and departments and ensure that all EIDL state funds are invested.

To meet these goals, some of the core functions that CTSMD performs are prepare forecasts of revenues and expenditures, which we use to determine the amounts available for daily investments, we ensure banks provide the state accurate and timely agency deposits, administer and execute the wire transfer of funds, reconcile state accounts with depository bank accounts, and we redeem all state-issued items submitted by presenting banks for payment.

The CTSMD is also responsible for executing the clearance and income collection for state investments and securities pledged to the state, excluding PERS and CSRS investments. The clearance and settlement of securities pledges collateral to the state for the time deposit, demand deposit, and other agency programs, and we're responsible for the safekeeping of securities and other property owned by or pledged to the state. So before you today we have two requests.

Our first request is for additional funding due to increased costs associated with the use and support of the FIS image vision item processing software. This software is used to facilitate the STO's daily check processing activities, which allow us to make pay or no-pay decisions on state-issued checks and warrants presented for payment.

The cost increase is due primarily to the shift from an on-premises legacy framework, which will no longer be supported by the vendor, to a cloud-based architecture, and the change from a flat-rate billing model to a volume-based billing model. This upgrade will allow us to continue servicing the needs of all state departments.

Our second request is for budget bill language, which will mitigate the challenges the STO has encountered with newer DGS purchasing requirements, and it will ensure that vendor-associated procurements related to the treasurer's constitutional and legislative banking and investment responsibilities will continue uninterrupted. The proposed language was agreed upon with DGS and is limited to a two-year period. DGS has indicated that they're working on a statewide solution for these types of procurements, which should be implemented within the two-year timeframe we've requested.

I thank you for your time and consideration of our request, and I'm happy to answer any questions you may have.

Thank you very much. We'll bring it to the Committee. Any questions? Senator Niello? All right, thank you. Appreciate your patience. That item will be held open. Then we move to Cal ABLE. Issue 19, administration of California Achieving a Better Life Experience Act bond. That's a mouthful. There has to be, for everything we do. Welcome. Make yourselves comfortable. Proceed when ready.

Good morning. My name is Thomas Martin. I am Executive Director for CalABLE, and yes, it is a mouthful. Hence the acronym. With me is Anne Osborne, the Deputy Executive Director. So very, very briefly about what CalABLE is before getting into the BCP, CalABLE is a savings and investment plan. To be eligible, the beneficiary has to have a disability that began before the age of 26, although that's going to be increasing to 46 at the beginning of 2026. And so this provides two major benefits.

One is that any earnings on these investments are exempt from taxes provided they're used for qualified expenses, which are pretty broad. Those expenses can be anything related to housing or health care, education, or really any sort of quality of life improvements. It's a pretty broad category. The second main benefit that this provides is, is it allows--it's exempt from means testing for state and federal benefits within federal limits.

So, for example, for Social Security, if you're--the requirement could be that you can't have more than 2,000 dollars in assets, but that doesn't count for within the CalABLE account. So this allows people to actually save money and purchase, purchase things like wheelchair accessible vehicles or service dogs or first and last month rent and apartments so they can live independently, you know, major things that are pretty close to impossible to do if you can only have 2,000 dollars at a time. So it's a huge program.

It's a game changer for those with disabilities. Right now, we have a little over 11,000 beneficiaries with accounts in our program. So quite a few people. Quite a few people receiving the benefit of the program. Now, to get the program started as some kind of seed funding for the program, CalABLE has received 4.82 million dollars in General Fund loans, and that's what brings us to the BCP before you.

So this BCP would extend the repayment period for those loans to 2032, and it would waive interest on those loans. So in the meantime, CalABLE would make a 1.2 million dollar payment next year and then would make subsequent payments each year thereafter, depending on the revenue coming in. So with that, I appreciate your support for this bill or for the BCP, and happy to answer any questions you have.

Thank you very much. LAO?

Brian Uhler with the LAO. We have no comments on this item.

Department of Finance?

Greg Bruss. Department of Finance. No further comments.

All right, thank you. Obviously, there's a notation in the report that the repayment will come from a balance in administrative funds. Can you expound on the balance and how it's available?

Sure. Do you want to take that one?

Yes. Yes. My name is Anne Osborne. I'm the Deputy Executive Director at CalABLE. Currently, we have over 800,000 in our trust fund, and we have been collecting funds since the program opened in 2018. And so all our account holders are charged as the administrative fee. It's on 28 basis points, and that's based on the balance of the account. And so as our account holders, they are helping us acquire funds so we can make our loan repayments.

Thank you. Senator Niello, any questions? All right, thank you very much for your patience. We'll hold that item open. Move on to CalSavers Retirement Savings Board, Issue 20. Welcome, and proceed when ready.

Thank you very much, Members of the Committee. My name is David Teykaerts. I'm the Executive Director of CalSavers. Our request today is for $12 million, drawn down in $2 million increments over the next six years so that we can continue to roll out the CalSavers program. CalSavers, formerly known as Secure Choice to those of you who have been around for a while, is a first-of-its-kind program that was signed into law in 2016 and officially rolled out in 2019.

CalSavers exists to address the stark reality that millions of Californians are not on track for a secure retirement. Half of Californians are on a trajectory for financial hardship in retirement, and the problem really compounds for historically marginalized groups. The essential premise of our program is that workers are 15 times more likely to save for retirement if they have access to a savings and investment program through their workplace. And that escalates to even 20 times more likely to save if that process happens automatically.

So that's how CalSavers works. Our workers get access to a simple, IRA-style plan that saves 5% of workers' paychecks on their behalf, increasing 1% per year up to 8%. It's optional, and the participants can cancel at any time. The money is professionally managed and invested on their behalf. For employers, there are no out-of-pocket costs, there's no employer-matching contributions, and there's no fiduciary liability.

Those are all the major barriers that have traditionally prevented mid and smaller-sized employers from offering things like 401ks or even more expensive pensions. However, if the employer does want to offer a 401K or other tax-qualified plan, they're free to do that. We consider that a win as well. The whole purpose of CalSavers is just to have more people saving. Just a quick note on some of our key stats right now for the growing program.

We have over half a million funded saver accounts as the program has been ramped up, $857 million of assets under management, and over $1 billion, just last week, we crossed the $1 billion milestone milestone for contributions made by savers. We have over 50,000 employers that are participating in the program actively as of today, those are folks that are actively moving money from paychecks into savings accounts for their workers, and over 135,000 employers have at least registered and started the process.

The average funded balance for these new accounts is $1,715, but that's up 10% in just the last three months. So the program is growing actively right now. In the budget change request before you today, we are requesting $12 million taken in those $2 million per year increments over six years.

These funds are intended to complete the original loan required to start up the program and will be used to continue to operate and grow the program, including funding for existing staff, employer compliance enforcement services through the Franchise Tax Board, external consultants, and the marketing, administrative and overhead costs of running the program. The faster we grow the program, the more quickly it becomes self-funded and the quicker we can start to pay back this loan. Thank you and happy to take any questions.

The Chair has temporarily left, so I am in charge now. Comments from LAO.

We have no comments on this item.

And Department of Finance.

Good morning. Danielle Brandon with the Department of Finance. I just want to add that CalSavers is a core program that helps many of California's lowest income workers get access to retirement savings, and I'm available to answer questions if needed.

Thanks. I gather the money is for administering the program?

That's correct.

And while you stated its growth and average balance and the like, it does not appear to me to be wildly successful, then Assemblyman DeLeon brought this up initially when I was in the Assembly quite a few years ago, and was enacted, I think, when he was in the Senate. If I have my timing right. And at the time I was somewhat questioning of its, how its true effectiveness would be.

But how would you react to my comment that it really is not performing to the level that would have been expected at its adoption?

Well, the initial projections were hampered by the inconvenient timing of the COVID-19 pandemic, I will say. So the mandate that requires employers to actually effectuate and facilitate the program was delayed by over a year and a half. So that really slowed the timing for this. So I would say, indeed, if we were going back in time and looking at where we thought we would be today, based on those original projections, it's behind schedule.

But I will just point that the program has really doubled in almost every possible metric since just 2022. So really in under a two-year time span, it's really sort of reaching this momentum, exponential type of growth phase where we push past the initial resistance of folks who are trying to understand what this requires that may have some initial resistance that is being slowly overcome.

And the other piece is that the program's mandate is being expanded right now to include employers with as few as even one employee. So that was not originally conceptualized. So what that does is really expand the horizontal horizons for the potential growth in the future. So the program is open for those smaller employers right now to facilitate. But the deadline to say, really, you have to do this if you don't have a proper exemption, doesn't happen until the end of 2025.

So I will certainly grant that the program could be in a more advanced position in this state, but there are reasons for that, and we're really actively addressing those things through our compliance efforts, through our brand awareness efforts, and by tightening up some of the nuts and bolts of the program to make it more effective and efficient, both for employers and for the participants, the savers themselves.

I think it would make sense for the Legislature at some point to take a look at it again and sort of reevaluate the policy perhaps, but that's just my thought. At any rate, thank you very much. There's nobody else here, so no other questions. We will move on to issue 21, Department of Consumer Affairs the BreEze system maintenance and credit card funding.

Good afternoon. My name is Taylor Schick, and I am the Chief Fiscal Officer for the Department of Consumer Affairs, so thank you for having us here today. I'd like to start off by providing a brief overview of the Department and its role. The Department of Consumer Affairs is responsible for promoting and protecting the interests of California consumers by serving as a regulatory agency for their health, safety, and economic well-being and by promoting legal and ethical standards of professional conduct.

This is done through the Department's regulatory boards and bureaus, which set and enforce minimum qualifications for the professionals, establishments, and businesses they regulate, which range from health care professionals to accountants, architects, contractors, automotive repair dealers, and veterinarians, to name a few. There are currently 26 boards, one committee, and one commission under the broad authority of the Department, and seven bureaus and one certification program under the direct oversight of the Department. The Department has approximately 3,500 staff and an overall budget of 749 million.

The budget is comprised of over 40 different items of appropriation and over 60 special funds. These special funds are primarily supported by licensing fees assessed to roughly 3.4 million licensees across 280 license types, permits, certifications, and registrations. The Department has two proposals up for discussion today, and I will provide a summary of each. Additionally, I am joined by representatives from the Department who are available to answer any questions you may have.

Our first proposal is for an information technology related request where the Department is requesting 14.7 million in 2024-25 and ongoing for continued maintenance and operations and credit card functionality for the BreEZe system, which supports 18 of the Department's boards and bureaus. Of this funding, nine million is to support existing staff and software costs and 5.7 million is to support credit cards processing fees. Our next proposal is for the Board of Pharmacy.

The Board is requesting a budget augmentation of 1.265 million in 24-25 and 1.225 million ongoing to fund five positions to address increased workload and sterile compounding renewals and inspections, as well as to address an overall increase in the Board's enforcement program operations. The Board has seen a significant increase in inspections, investigations, and licensees on probations, and these resources would address those. That concludes my overview of the Department and our proposals, and we are happy to take any questions you may have at this time. Thank you.

Looks like it's just me. There is the question about uniformity across all DCA entities with respect to passing on costs--consumer--can you expound on that a little bit more?

So I'm assuming you're talking about the credit card processing fees? So right now, we delegate that authority to each individual board and bureau as a business decision that they currently make that best fits their needs. So right now it's the board and bureau's discretion on whether or not they choose to pass on that fee to the consumer or absorb that fee internally.

Was there additional comment from either the LAO or DOF? All right. Thank you very much for your patience. I appreciate that.

Thank you.

That will take care of Issues 21 and 22, and I think that brings us to the Department of Financial Protection and Innovation. Welcome, and please proceed when ready.

Good morning, Mr. Chairman 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, Nicole Hisatomi, Deputy Commissioner of Legislation, Suzanne Martindale, Senior Deputy Commissioner of the Consumer Financial Protection, Melinda Lee, Deputy Commissioner of Debt Collectors, and Michael Nelson, Acting Deputy Commissioner of broker dealer investment advisors.

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 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 DFPIs oversight capabilities, aiming to bolster consumer protection, foster responsible financial innovation, and stimulate job growth. The 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 license 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 the regulatory oversight, the Department not only protects consumers interests, but also fosters a robust and resilient financial marketplace for the benefit of all stakeholders. The DFPI has three BCPs in the Governor's proposed budget, but only two are up for discussion.

The first one is the continuation of California Consumer Financial Protection. Assemblywoman Limon's AB 1864 bill 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.

Comments from LAO? DOF? All right, this has taken a while. Why?

Implementation of the CCFPL Senator has taken a while, and we indicated as much back in 2020 when the Governor and the Legislature came together to propose as part of the 2020 to 2021 budget, the CCFPL package, which included dozens of positions, phased in over a three year period. We got a tranche in 2021, a tranche in 2022, and then 2023. We indicated that given the size of the expansion, broader supervisory, regulatory, and enforcement powers over the financial industry writ large.

This is going to take some time to build. And so we are now three years in, as promised, returning to the Legislature to ask for a continuation of our current headcount. This is current flat headcount. Back in 2020, we were given only three years of funding authority. So that's why we're back here again to talk about the progress we've had in implementing the law. But quite frankly, as deputy Commissioner Smith admitted or noted, it is unprecedented.

It's modeled after the authorities of the Federal Consumer Financial Protection Bureau. It is a fundamentally different statute from the ones we've historically administered, where it's one industry segment, one licensing program, a lot more detail and statute. There's a lot that we've had to flush out through stakeholder engagement, proposed regulations and the like. And then, of course, you have to follow administrative procedure along the way. I hope that helps.

It does. Yes, Senator Neillo.

So this program was launched during the years that we had flush budgets, additional programs with lots of extra money. Would we have, this is a rhetorical question, and I don't, I'm not looking for an answer. Would we have launched this had that year been like this year? I kind of doubt it.

All right, we'll move then. That issue will be held open. Issue 24 is continuation of debt collector licensing and regulation.

Thank you. 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 collection tactics and adherence to guidelines outlined in the consumer protection laws.

We will regularly assess the financial health and practices of debt 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. We'll also 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. Please let us know if you have any questions.

All right. LAO? DOF? All right. There was a bit of a hiccup on the architecture of the original legislation, which caused a little problem getting access to background information on the checks, and that was remedied from what I read in the report. Where are we with access to that?

You want me to do the legislative history and then you can talk about where recurrent status? Well, I just want to make. Yeah, just another thing, Senator. I wanted to kind of tie these two together. So in 2020, we got the CCFPL package which the Governor and the Legislature worked on at the same time. In parallel, SB 908, the Debt Collection Licensing Act, both are signed at the same, in the same year.

And so we found ourselves needing to pivot to not only start building the CCFPL, but also start building this debt collector licensing program. The original statute had us do criminal background checks through California DOJ to access the FBI records. We've after almost a year of back and forth and trying to get an answer from FBI, FBI denied us. Apparently this is something they have been doing to new state licensing programs. It is not unique to our Department.

So we did amend the statute in 2022 to get conditional licensing authority so that we could issue conditional licenses before getting background checks. Then we amended the statute yet again via trailer bill in 2023 to enable us to, instead of using the CA DOJ route instead as a financial regulator, we can do this use the national multistate licensing system, which itself is run by the conference of state bank supervisors and is pre approved by the FBI. So that's the history of how we got here.

And then deputy Commissioner Lee can tell you the current status of our processing of licensing applications.

So we have approval now, the online licensing system has been updated and it is fully implemented. We let our licensees know as of last week that they have 90 days to complete the background process. So then it will take us within, we have another 90 days on top of that to actually do our part of it. So we expect in the next six months it will be completely done. All of our backlog will be cleared.

And move the mic a little bit closer to you just to be sure we're in there. Now you have to repeat everything. All right. Was that clear to Members? All right. All right, I will bring it to the sub. Any questions? Thank you very much for your patience. Appreciate that, that item will be held open. All right, that'll bring us to the public comment portion of the docket today. This is an opportunity for anyone to address the Subcommitee on a matter on the docket.

The Committee is interested in your comments and welcomes your participation. Please come forward to the microphone. State your name for the record, and in the interest of time, we'll ask you to limit your comments to about a minute. Welcome.

Thank you, Mr. Chair, Senators. Sara Flocks. I'm here from the California Labor Federation. I would like to speak on Items 12 and 13, the Cal Competes Program of GO-Biz. I want to say in advance that I understand, and we are very, very aware that there is a budget deficit and there are core programs that our members both administer and depend on.

So I am not advocating for funding for Cal Competes, but I am here to say that if this funding goes forward and for the existing program, we do advocate for increased transparency and an update to the standards to make sure that this program, because we have to prioritize taxpayer dollars, is creating high quality jobs.

That means not just net job, new net job creation, but that there are living and family sustaining wages with benefits, good working conditions, and that there's the transparency and public participation so that there's thorough vetting. So I thank you for your time.

Thank you, Ms. Flocks. Anybody else like to address the Subcommittee on any item in the docket today? Seeing no one. Very grateful. We have asked Senator Smallwood-Cuevas to make her way to the Committee room. I don't know if we have an ETA on that or not or if we need to proceed and hold open. We can do that in the interest of Senator Niello's time. We'll segregate the items on the vote-only calendar into two groups.

Group Number One will be Issues one through eight and ten through 11. I have an inquiry about the rules for my--it's not possible for a Chair to move, as I understand it, so we may be stuck because of the limited number of Members or--

I can move.

He can move.

You can move this match. All right. We'll entertain a motion. I think the recommendation is to approve as budgeted. Mr. Niello? No, no, make the motion.

I'm sorry. Thought you said Mr. Niello. My ears playing tricks on you. I move those items.

Thank you. The motion is to approve as budgeted. Consultant, call the roll.

[Roll Call].

Thank you, and we'll hold the roll open on that and move to Group Number Two, which is Issue Number Nine. Same question. I think we'll have to wait on that. I think we're going to have--

Courtesy motion, I believe.

Is that--can we confirm that? This is--these are new rules to me, so I want to be sure. All right. Senator Niello?

Courtesy motion.

All right. The motion is to approve as budgeted. Please call the roll.

[Roll Call].

And Group Two will be held open. Thank you, Senator Niello, and we will await the return of Senator Smallwood-Cuevas.

All right, Subcommittee Number Four will reconvene and we will lift the call as to the vote-only items. Group One is Issues one through eight and ten through 11. The motion--go ahead and report, Consultant.

Calling the roll for absent Members. [Roll Call].

All right, we'll lift the call as to Issue Number Nine, Group Two.

Calling absent Members. [Roll Call].

All right, those issues are out with Niello voting no as to Issue Number Nine. And we appreciate everyone's participation. Anyone who would like to provide comment can do so via the website or direct to Committee staff. At this time, the Subcommittee will stand adjourned.