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

Budget Subcommitee Number 4 on State Administration. Government will come to order. Let's go ahead and establish a quorum.

[Roll Call]

Thank you. All right, welcome. For everyone's participation today, we'll be looking at the items docketed under items for discussion, which are issues 13 through 31. Starting off with the Department of Tax and Fee Administration. Please come forward, our presenters. I know we have departments presenting. We're going to have to squeeze everybody at the table, I'm told. And so try to make yourselves comfortable. And when you do, just state your name, department for the record, and proceed when ready. Welcome.

Hi, JT Creedon with the Department of Finance. The Governor's Budget proposes to eliminate the sales and use tax a bad debt deduction and refund for lenders and affiliates beginning in January 2025. Current California law allows retailers, lenders, and retailers' affiliates to claim a refund or deduction for sales and use tax related to transactions financed with loans they issued a required under certain circumstances as long as they expense the bad loan on their income tax filings.

Although California law also allows retailers to claim the sales tax deduction, in the vast majority of cases, consumer loans are offered not by the retailer selling the good, but by lenders such as banks, credit unions, and other financial companies, meaning these entities are ultimately the primary beneficiaries of the bad debt deduction.

According to CDTFA, the bulk of the bad debt deduction refund dollars are claimed by large companies such as credit card companies and or financing banks of auto manufacturers. The deduction gives a double benefit to lenders. Loan offers typically include interest payments and late payment penalties as conditions of the loan.

Lenders evaluate and price the risk of the default to determine the interest rate they charge when they decide to accept the risk. Individuals that are perceived by the lenders as risky borrowers are often charged elevated interest rates, which can be 30% or more, in order to protect and compensate lenders from the cost of a potential default.

Additionally, these interest payments are calculated on the total purchase price of the taxable item, which includes sales taxes, which benefits the lender through higher interest payments. In effect, this law provides an unnecessary subsidy or double benefit to lenders, as lenders are currently able to claim the bad debt deduction even if they received the initial loan amount and made a profit on the loan through interest and penalty payments. To give you an example, two examples.

One, say a borrower accumulates a balance of $1,000 on a credit card with a 30% APR. For five years, the borrower was unable to pay off the credit's balance, but makes payments that only cover the accrued interest, and then the total payments that they've made total $1,500. By the end of the five years, the credit card company has earned $1,500 from their initial loan of $1,000, with the principal still outstanding. The borrower then declares bankruptcy and defaults.

The credit card company is then allowed to claim a sales tax refund of about $85 from the state related to the original $1,000 balance, despite having recovered the entire principal and having made an additional $500 on the loan. Another example, a borrower purchases $33,000 car using 8% APR loan issued by the car manufacturer, paying around $36,000 after the sales tax is applied.

The borrower doesn't miss a payment and pays off the entire loan over five years. Over that period, the borrower pays about $7,000 in interest, including nearly $600 of that being additional interest payments only from the portion related to the sales tax. Given that the lender is earning interest on the portion of the loan related to the sales tax, it's not clear why the sales tax portion of the loan should be subsidized.

The sales tax is not due once the loan is paid off, it is due at the time of purchase, and the loan amount is equal to the total price of the good, including a variety of components such as sales tax, vehicle license fees, registration fees, etcetera. It's unlikely the deduction refund impacts credit markets.

Opponents of the proposal implicitly assume that subsidizing loans for the bad debt deduction increases credit availability and reduces credit costs for consumers, particularly those with bad credit or low income. However, we have seen no evidence that the credit is more available or cheaper in other states that offer this deduction to lenders or that removing this deduction will significantly reduce credit availability. Bad debt refund claims by lenders total roughly about 110 million per year, which relates to roughly $1.3 billion in debt transactions.

By contrast, there is roughly $540 billion in outstanding non-mortgage consumer credit in California at any given time, meaning that the transactions affected by this policy constitute a vanishingly small percent of credit overall and only around 0.2%. Out of the 45 states that charge sales tax, 40 states currently disallow sales tax deductions for all non-retailer lenders for sales tax paid on bad debts. This proposal aligns California with the 40 other states to currently disallow bad debt deductions for non-retail lenders. Costs of the state are likely countercyclical.

The cost of the exemption deduction is countercyclical for the state because credit defaults are likely to rise concurrently with budget shortfalls and expenditure cuts during times of economic weakness, meaning the cost of the deduction to the state increases for the state at times when the state most needs it to continue funding valuable state programs.

Administration of the deduction refund is inconsistent with most sales tax deductions, refunds leading to complexity. The bad debt deduction refund is unusual in that it is allowed to lenders even though the sales tax related to purchases made on credit is paid by the retailer, not the lender.

Administrative complexity resulting from this unusual arrangement creates significant work for CDTFA, which estimates that processing bad debt refund claims takes about 6000 hours per year for their field auditors and additional hours for other audit staff. Ending the policy will likely allow for significant time and resources to be redirected to revenue generating audit activities. And finally, it's likely not the best way to subsidize debt. If subsidizing debt were a policy goal, the deduction is not well targeted because claims can be related to loans made to any borrower, not just those who have trouble obtaining loans.

It's difficult to administer due to aforementioned administrative complexity and does not allow the state a high level of control in who receives the benefit or how much it costs the state per year. Finance became aware that the CDTFA has pending refund claims for prior years, meaning that at any given time, a significant portion of the refunds being issued were related to debt written off in prior years.

Because the proposal only eliminates the deduction for debt written after January 1, 2025, CDTFA will still need to work through these claims in addition to any additional claims received going forward that are for periods prior to January 1, 2025, but still within the three year statute of limitations, pushing a significant portion of the revenue gain out by three years. The proposal would raise 50.6 million in General Fund sales tax revenue per year once the pending claims are processed and no further claims are received due to the expiration of the statute of limitations.

As a result of this backlog, Finance estimates in May Revision that the proposal raises General Fund revenues of 22.5 million in 24-25, 10 million each in 25-26 and 26-27, 30 million in 27-28, and then 50.6 million ongoing beginning no later than 28-29. Another 60 million per year would go to local governments through their sales tax rates once the backlog is cleared in 2029. For the reasons stated previously, the Administration proposes to eliminate the bad debt deduction for lenders and affiliates. Happy to take any questions.

Reporting from LAO.

Seth Kerstein, LAO. Relative to the Administration's thorough treatment of the issues related to these proposal, this proposal, our only additional comment is that in a year full of difficult decisions, a proposal like this warrants serious consideration.

Department... All right. Are there, you know, obviously you addressed it to some extent, the criticism about decreasing accessibility to lending and the impact on cost. Did you want to expound on that any further?

Sure. California is one of the most generous states in the treatment of the bad debt deduction. It's one of only five states that allows it for lenders and retailers affiliates. The vast majority of states that charge sales tax, 40 of the 45 do not.

And there's no evidence between the states that there's greater credit availability or lower interest rates from states that allow it for lenders and retailer affiliates and those that do not. And also, this is such a small part of the broader credit marketplace.

As I mentioned earlier on, we're talking about 1.3 billion of the $540 billion in non-mortgage credit debt. So this is just a small fraction, 0.2%. It's very unlikely that this is going to have a significant impact on the broader credit marketplace.

Majority of the borrowers. All right, I'll bring it to the Subcommitee. Are there additional questions? Comments? All right. Seeing none, thank you very much. I know we'll have a minor substitution that issue 13 will be held open, moves us to FTB and issue 14, which is NOL and business tax credit suspension. So I think we have one switch. Welcome. Your name and title for the record, and proceed when ready.

Good afternoon, Mr. Chair. Nick Thomas, Department of Finance. So, as part of solving the projected deficit and to balance the budget not just for the budget year but also for the following year as well, the May Revision proposes to temporarily suspend net operating loss use for medium and large businesses and to limit business credit usage to $5 million per year.

The solution would be in effect for tax years 2025, 2026, and 2027. Businesses with less than $1 million in taxable income would be exempt from the NOL suspension and all businesses would be able to use their credits up to $5 million per year. Therefore, small businesses would generally not be impacted by this proposal.

The solution is subject to a trigger whereby, if cash receipts through April 2025 come in above expectations such that the solution is no longer needed, such that the solution is no longer needed, the suspension and credit limitation would not take effect. The temporary NOL suspension and credit limitation replaces the ongoing 80% NOL limitation that was included in the Governor's Budget. This NOL suspension and credit limitation largely mirrors the suspension and limitation from 2020 and 2021, including the protection for small businesses, although there are two key differences.

First, it has a much longer lead time to allow businesses to better plan ahead, so it wouldn't take effect in the current tax year. And then second, it includes the aforementioned cash trigger. The state has historically utilized NOL suspensions to help balance the budget during revenue downturns.

This includes during the early 1990s, in the early 2000s following the Great Recession, and then most recently during the COVID-19 pandemic. Additionally, it put in place credit limitations as part of the latter two. So as part of this proposal, the carryforwards for businesses to use their NOLs and credits will be extended by three years, and therefore those credits and NOLs are expected to be used in the long term and generally. And so yeah, overall, there would not be an impact in the total use of NOLs or credits.

The proposal is estimated to generate $900 million in the budget window and also increase revenues through the multi-year, including by $5.5 billion in 25-26. However, it would result in revenue losses after the multi-year as companies are able to fully utilize their NOLs and credits, including any backlogs during the years of the suspension and limitation.

Of note, these revenue estimates are achieved in part because there is a limitation on both NOLs and credits. Because many companies have a stock of both NOLs and credits. Enacting a limitation on just NOLs or just credits credits would significantly reduce revenue gains from the solution, as many companies would be able to avoid the impacts by merely shifting their use from either NOLs or credits. With that, I'm happy to answer any questions.

From the LAO or the board.

Yes, thank you. Brian Uhler from the Legislative Analyst Office. So we have comments on both pieces, the NOL deductions and the credits. And so let me start by actually addressing the last point from the Department of Finance on sort of the interaction between these two policies, since we're sort of suggesting to bifurcate them.

We definitely acknowledge that there is an interaction where you do achieve additional revenue gains by adopting them together. That being said, it is our understanding from past estimates of when these policies were put in place that the majority, you would still maintain the majority of the revenue that you would expect expect to get from doing one or the other.

It would only be a minority of the revenue gains associated with either item that you would be losing by not adding the other component. So turning then to first to the tax credit component of the proposal, it is our position that the business tax credits can and should be evaluated as spending programs.

They're essentially spending that is effectuated through the state's tax system. And from that perspective, we think it's somewhat difficult to justify maintaining those credits in full in the current budget environment where the Legislature is considering making significant spending reductions in many other areas of the budget.

Notwithstanding that these tax credit programs are aiming to achieve many worthwhile goals, there is a question about whether or not those goals really are sort of core state responsibilities or critical needs at this time. And for that reason, we think that the credit portion of this proposal is worth serious consideration.

On the NOL deductions portion, the NOL deductions are somewhat different than the tax credits in that where tax credits are sort of something that are kind of added on to the state's tax system, attempting to achieve a sort of a secondary policy goal, NOLs are actually something that's more fundamental to the way that California sort of defines income for the purpose of taxation.

And the purpose of NOLs is to allow taxpayers to smooth their profits and losses over time so that you don't have a business that earns the same amount of income over time as another business, but because they're in a more cyclical business, or they undertake more riskier, innovative business activities and their income fluctuates more over time.

Without the NOLs, that business that is in that more risky or cyclical business activity will be paying more taxes than one that earns similar income, but does it more steadily. And for that reason, NOLs are sort of a fundamental part of the tax system to provide for more, even treatment of those two types of businesses.

So while NOL deductions have been sort of a go to budget solution for the state in the past, the frequency at which the state is now using this policy is starting to raise a question about whether or not it is undermining the fundamental reason for having NOL deductions in the first place.

If this proposal takes effect as proposed, the state will have suspended NOLs for nearly half of years over the last two decades. And so for that reason, that part of the proposal raises concerns for us, and we would suggest that if the Legislature is in alignment with the Governor in seeking this magnitude of revenue solutions that you consider alternative ways to raise revenue, which I think we'll address on the next item.

Further? All right. As to the triggering process internally, can you give us a little light on what that process looks like internally?

Yeah. So the trigger mechanism would look at cash receipts between May of this year, so the current month we're in, through April of 2025. And the trigger would... So essentially, the suspension and limitation would get turned off if cash receipts exceeded projections from this budget by 3% or more. And that essentially aligns with the expected short term revenue increase of the, of the proposal in the May Revision. And so that would be, that would look at cash receipts through the end of April of next year, which would be known in early May.

I'll bring it to the Subcommitee. Senator Niello.

Question about credits. I would assume that once the limit of 5 million of the credit is met, any expenses over and above that would still be deductible from income for tax purposes as an ordinary and necessary expense?

Colby White, Department of Finance. Yes, absolutely. The credits, credits are one for one offset against your liability, and they're calculated after, you know, you have your taxable income, then you have your... Sorry, you have your credit gross income, then you have deductions, which is what you're talking. None of those are being changed.

And then that leads to your taxable income. You multiply by a tax rate, and you have your liability. That's when credits are applied. Credits are a one for one reduction against liability. So nothing in this proposal affects tax deductions that companies can take.

Okay. I think it's important with regard to the net operating loss carryforward, I think it's important to note the practical effect or reason for that. When a business loses money, their resources are compromised. And a reason to allow for a quick recovery of that once profitability returns is to restore capital.

And if losses are serious enough, regardless of the size of business, and once they start making money and aren't able to offset those profits with the past losses, it could put the business in a serious position relative to restoring their capital after a period of having been significantly compromised. It just seems to me that, in addition to the reasons that the LAO states, that that move would not be good for the economy of the state, given that individual businesses could potentially suffer significantly, having to wait for that recover of the loss.

All right, thank you. That item will be held open, and we'll move to the next issue, which is information item on alternative revenue options. LAO.

So, as the Chair mentioned, this item is to consider a number of alternative revenue options. And I'll start by discussing some options that have been put forward by our office in some of our recent publications, starting with our suggestion that a place to start would be to look at reevaluating some tax expenditures.

And so, to start with, there's four that we've listed. The first one is eliminating the capital gains step-up basis. And this has to do with essentially the tax basis for an asset when it is inherited. So, let me sort of give an example.

If a parent buys a stock for $20, it then goes up in value to $50, and then that stock is passed on to the child. When the child then inherits the stock, it goes up to $60.

When the child finally sells at 60, the capital gains step-up basis says that they're only taxed for their capital gain on the difference between 50 and 60, instead of the original $20 that that the parent paid for it.

The original reason for the step-up basis was primarily to avoid double taxation in the presence of estate taxes, which the state has not had for many years. And for that reason, we think that reconsidering the capital gains step-up basis could be worthwhile.

The second sort of tax expenditure that we would suggest looking at is the mortgage interest deduction, which we would suggest is sort of poorly targeted for achieving its objective of promoting home ownership.

And that the vast majority of the benefits from the deduction go to higher income taxpayers, because it is only available to taxpayers who are, who itemize their taxes, which is a small subset of taxpayers that tends to be higher income.

So, one option for better targeting the mortgage interest reduction could be to convert it into a credit, which would make it available to a larger range of income of taxpayers. And that could be that credit could be designed in a way that it could also simultaneously generate some revenue gains for the state.

There's an example on your agenda that if you set the credit equal to 2% of mortgage interest paid by taxpayers, that the state would likely receive revenue gains of a billion or more per year. A second mortgage interest deduction option would be to reconsider the allowance of mortgage interest deductions for second homes.

The final tax expenditure that we would mention is the exemption from the first-year minimum franchise tax for corporations. And so essentially, all businesses, even if they have no tax liability at all, are required to pay $800 every year, essentially for the privilege of doing business in California and receiving the legal protections associated with being an incorporated business entity.

We think that this tax expenditure is a poorly targeted way of achieving its objective of promoting a small business formation, and therefore suggest revisiting that. In the context of the NOL and credit suspension proposal. We suggested that exploring potentially a temporary corporation tax rate increase in place of doing the null suspension also could be an option.

And our sort of preliminary estimate is that a rate increase of 1.5% would likely yield, would replace the revenue that you would achieve by adopting the NOL suspension in combination with the credits. And a consideration there, it could be a temporary increase followed by a temporary rate deduction in future years.

And that could sort of mirror some of the benefit that you get with the NOL supply pensions and that taxpayers pay more taxes up front and then use those NOLs later to reduce their taxes in out years. A final item has to do with the single sales factor for financial institutions.

And so, the basic idea here is that when you have a business that earns income in multiple states, states have to come up with some way of dividing the income for tax purposes to avoid double taxation. For most businesses, California says that their income is divided based on where their sales occur.

For financial institutions, there's three factors that are considered sales, the amount of their property, and the amount of their payroll. And so, this item would be to consider aligning financial institutions with the tax treatment that applies to most other businesses. And FTB has estimated that could raise $260 million in 24-25.

Colby White, Department of Finance. We don't, I don't have any additional comments on the specific proposals. As the Governor made clear, the May Revision is, the proposal is the first part of the process, and we understand that the Legislature may consider alternatives, and we look forward to working with the Legislature in the coming weeks.

I want to go back to single sales factor for financial institutions and just kind of walk folks who never heard that term before, who may not have. What does that look like for different institutions? Depending on the assets they have and where they're located, where the workforce and payroll are located in or out of California.

Paint a picture for us.

Right, so I think so the, in thinking about, you know, California used to have the three-factor system apply to all businesses, and there was a shift to single sales factor to most businesses under the sort of the justification there is that in some sense you're, by applying the apportionment based on the location of property and payroll, you're in some sense sort of penalizing businesses for locating their offices and jobs in the state.

And so, the concept is that by doing the apportionment based on sales specifically, that you might give an incentive for businesses to locate more of their offices and jobs here and do more of their sales out of the state. There is maybe one additional layer of consideration with financial institutions is the product that they're selling.

In this case, when you increase the amount of weight that is placed on sales for apportionment, you might somewhat reduce their incentive for them to do sales into the state. And for financial institutions, we're primarily talking about loans to businesses and property holders. So, you could, to some degree, create some reduced incentive for providing those loans.

So, on the one hand, perhaps increased incentive to locate their jobs and offices here. On the other hand, maybe some reduced loan activity.

To the sub. Senator Niello.

Back to the single sales factor. The choice that was added to that calculation was an outgrowth of the 2009 budget settlement. From my standpoint, having been involved with that, the choice was not what I had in mind.

And it was to just have the single sales factor so that a business was not punished, if you will, for having a heavy proportion of payroll and property in California. So, what is this change that you're recommending? I'm not sure that I fully understand.

Is it to not allow the choice to have it be just single sales factor for every company?

No, sorry, it's much narrower. And I guess I should actually also clarify. We're just on this item where I'm just sort of describing an option that has been put forward to the Committee. It's not necessarily a formal recommendation of our office. That being said, this option is more narrow than maybe my initial description may have led on.

So, this applies only to financial institutions.

Oh, just financial institutions.

Just financial institutions. Whereas the majority of businesses are on our single sales factor. There are a limited number of sectors, financial institutions being one, that are still on the old three-factor system. This would move just financial institutions to single sales factor.

So that choice has evolved since 2009 because initially it was a choice for every corporation.

That's right. So, there was, after 2009 there was a ballot measure which.

That's right.

Remove the choice and made single sales factor mandatory for all businesses.

Thank you for refreshing my memory. That disappeared when I was termed out before. Thanks.

Thank you, Senator Niello. Senator Smallwood-Cuevas.

Thank you, Mister Chair. I just had a clarifying question on the capital gains step-up basis. Is there like an asset threshold for this? Is it for every level of inheritance? Is it over a certain amount.

I mean, there's. So, there certainly could be some, some merit to considering sort of an asset threshold. One of, you know, I mentioned the primary justification for the policy historically had been to avoid double taxation with estate taxes. Another potential argument might be that it, you know, provides some ease of administration for taxpayers.

It may be that, you know, the parent bought the asset a long time ago. They may not have kept the proper paperwork to allow the children to file the taxes appropriately without step-up basis.

And so, applying some, you know, sort of asset level so that this doesn't apply to, you know, maybe some more middle income, you know, taxpayers who might not have kept that paperwork, might not have the accountant, you know, expertise to allow them to navigate that.

That could be worth considering and likely wouldn't diminish significantly the revenue estimates that are here, because most of the revenue gains are coming, coming from folks who are higher up in the incomes.

All right, this item was information only, so we'll move to the next issue. That's issue 16. Charitable conservation easements conformity.

Good afternoon. Robin Finnestead with the Department of Finance. 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 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 Appropriation Act of 2023 addressed these abuses by doing the following. It limited the deduction for owners of pass-through entities to two and a half times the value of the taxpayer investment and disallowed the deductions for participants who had previously engaged in fraud.

For example, a partial owner who invested $100 is now 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 the 2023 changes.

This proposal would conform California's treatment of the charitable conservation easements deduction with federal law by adopting these changes made in the CAA beginning in tax years 2024.

Conforming California law to federal law and limiting the size of charitable conservation easement deductions will increase administrative efficiency and ensure that the state is aligned with the Federal Government in limiting improperly large tax deductions from abusive transactions.

This proposal is estimated to increase revenues by 70 million in 24-25, $34 million in 25-26, $25 million in 26-27, and $21 million ongoing. And thank you I can answer any questions.

We recommend approving this item.

Members of the Sub? Senator Niello.

And this is a permanent change, not a temporary change?

That's correct.

Thank you very much. We'll move on to issue 17, which is oil and gas subsidy information. That item will be held. And the LAO is going to take this whenever you're ready on a summary. Okay. Who's going to take this?

We'll take it. JT Creedon from the Department of Finance. The Governor's Budget proposes eliminating all direct tax subsidies that are specific and give preference to the oil and gas industry, but are not available to all small and large businesses in all other industries.

These include repealing the intangible drilling cost deduction, the increased percentage mineral depletion allowance, and oil recovery cost credit. Combined, eliminating these subsidies would save $22 million in budget year and roughly $73 million cumulatively through 2027-28.

These direct 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 other General business tax incentives that are available to all the businesses in the state. I'll take any questions.

We recommend approving this item as well. Primarily, we agree with the administration's position that these policies are inconsistent with the state's current goals on climate and also would note that eliminating these provisions would lead to more consistent tax treatment both within these sectors and across these sectors and other sectors of the economy.

Bring it to the Subcommittee. Are there any questions? Senator Smallwood-Cuevas.

You mentioned that this is the only industry that benefits from these kinds of subsidies. Can you share why that is?

Well, each of these were made for different purposes, but mostly to shore up and protect and encourage domestic oil and gas drilling of critical minerals. Some of these are actually originated as a part of the World War I and World War II effort to protect critical minerals.

At the time, they just, this was critical to the war effort and they wanted to preserve them. And also early on, some of the other ones unrelated to that drilling was a very risky business 100 years ago. Right?

There was a much higher risk of there being a dry well or you putting up a lot of upfront money and not, and being standing to lose a lot of investment. That's completely flipped these days. Technology has come a lot so far that that risk isn't quite there anymore.

One other follow up question I have. How do you, let's say this, this gets implemented, how do you prevent these dollars in this gap from being passed on to the consumer? In other words, if the industry doesn't, you know, I don't know what the total is of this package is. Is it 17 million? I'm not sure.

Is there a way to prevent the industry from then turning this into an additional increase in prices at the pump to fill this gap? Is there a way to prevent that from happening?

Sure. Well, from what we've seen, we don't expect there to be a very big impact in terms of gas prices and energy prices directly because this is a very small amount that we're talking about. Most retailers can't actually take these benefits. So, there's a couple steps removed.

And this is, again, it's just a pretty small amount in the grand scheme of the oil and gas market that we don't really see that being an impact. Furthermore, we're not eliminating all subsidies here. Right?

Somebody who takes the mineral depletion, percentage depletion, they can still take cost depletion, they can still take other business credits for these expenses. So, that's why the cost is so marginal, and we don't expect there to be a huge impact to consumers in the aggregate.

Any questions or comments? That item will be held. Thank you very much.

Thank you.

Next is issue 18, which is an information item implementation update on the EITC. There is distinguished panelists here. Proceed when ready.

I'm Mandy Nand and I'm the Associate Director of Economic Mobility with United Ways of California.

Good morning, or I guess it's afternoon now. My name is Susan Maples, and I'm the Director of the Economic and Statistical Research Bureau at Franchise Tax Board.

Good afternoon. Jeanne Harriman, Chief Financial Officer at Franchise Tax Board.

So, I think I'm going to go ahead and get started. Again, my name is Susan Maples, and I'm the Director of the Economic and Statistical Research Bureau at Franchise Tax Board.

Today I'd like to share some stats on the California Earned Income Tax Credit, also known as CalEITC, as well as California's other anti-poverty tax credits, the Young Child Tax Credit, which I'll also refer to as the YCTC, and the Foster Youth Tax Credit.

As you may remember, the CalEITC began with Tax Year 2015 and over the last nine years has had multiple expansions in qualifications, allowing more Californians to be eligible for these valuable credits. For example, in 2017, the program raised income limits to qualify and also allowed Californians with only self-employment income to become eligible.

In 2018, the credit was expanded to allow childless taxpayers to qualify, as well as adding additional age groups such as those over the age of 65. In 2019, income levels were once again expanded as California adopted a young child tax credit for taxpayers who had a child under the age of six years old.

In 2020, the CalEITC was expanded to allow those without Social Security numbers but who did have an individual income or a tax identification number or an ITIN to qualify. In 2022, both CalEITC and the YCTC were indexed for inflation, leading to larger credit amounts, and the YCTC was expanded to those parents with no earned income.

In 2022, we also saw the creation of the Foster Youth Tax Credit to provide $1,000 credit to young adults who were in the foster care system. As you can probably imagine, program expansion and changes in the economy have made comparing year-over-year changes in uptake difficult and very hard to predict.

However, today I want to give you some numbers comparing this filing season to last year. Last year, just shy of 80% of CalEITC returns were filed by April 30. This year, as of April 30, Franchise Tax Board has processed over 2.9 million returns claiming the CalEITC.

That's up 7% from last year, for a total of 812 million, which is also up 11% over last year at the same time. The average credit amount is also up from $268 to $279.

The number of taxpayers claiming the YCTC is also up a more modest 1% from 341,000 returns last year through April 30 to 344,000 returns this year.

The Foster Youth Tax Credit, which is in its second year of operation, has seen a much larger jump of 13% over its first year of nearly 4,100 claimants to nearly 4,600 this year as of April 30.

For ITIN holders specifically, we have also seen a rise in the number of claimants with nearly 174,000 CalEITC claims, a rise of 4% over last year, and nearly 28,000 YCTC claims, up 3% over last year.

Over the years, FTB has also engaged in many different outreach efforts to educate taxpayers on expanded provisions of the anti-poverty tax credits, as well as encourage the uptake.

In our 2022 report on the study to incur study to increase the number of claims for the California and federal EITC, FTB identified an opportunity to outreach to both filers and non-filers appearing to qualify for the CalEITC but failing to claim the credit.

Last summer, FTB sent nearly 200,000 letters to non-filers providing a potential credit amount and letting them know if they thought that they qualified they should file a tax return to claim their refundable credits. Nearly 10,000 taxpayers, or almost 5%, responded by filing a tax return and receiving 1.6 million in CalEITC refunds.

In addition to the taxable year 2022 returns filed in response to the letters that we sent out, these taxpayers also filed another 3,100 returns for tax years that were within the statute of limitations and were allowed an additional $500,000 in CalEITC refunds.

For this outreach program, FTB also looked for taxpayers who filed tax returns with data indicating that they may be eligible for the CalEITC but did not claim it on their return.

For this category, FTB identified almost 150,000 tax returns, letting these individuals and families know if qualified to fill out a CalEITC form 3514 and return it to the FTB.

Approximately 1,500 taxpayers, or just over 1%, provided the CalEITC form and received about $360,000 in CalEITC refunds. Last year, FTB also partnered with our sister agency to provide non-filer flags for those CalFresh program participants who did not file a tax return.

During 2023, the Department of Social Services reached out to over 1.4 million of their program participants via text, email, and voicemail messages. They had a response rate of roughly 2.9%, with around 41,000 people responding.

Due to the lack of data, however, it is unclear whether it is unclear how much how many of these individuals who responded to CDSS went on to both file a tax return and qualify for any of the anti-poverty credits.

Another important thing to note about all of the outreach done by both FTB and the Department of Social Services is the marketing of free filing services such as CalFile and the availability of the Vita program.

This year, Vita statistics show that to date, FTB has received over 246,000 returns prepared by Vita volunteers, which is only about 2000 less than the entire 2023 tax year, making the Vita program on track to exceed the number of Vita returns received over last year.

As FTB gears up for our 2024 summer outreach campaign, we are continuing to work with social services to help identify taxpayers who may qualify. However, federal privacy rules have limited certain data sharing between our agencies.

It is also our intent to continue to market free filing services such as Vita and Calfile, and with that, I'm happy to answer any questions you might have or to turn it over to my fellow.

All right for United Way. Are there particular data that shows most impacting uses of funds programmatically or tactically? What works in terms of making those? What are the most impactful uses.

Yeah. For free filing, specifically?

I'm sorry?

For free filing or capturing tax credits.

Just for community outreach.

Oh, yeah. I mean, we do like to think a little bit of everything works. I mean, really what I think CBOs do best is building community trust. So especially for our ITIN work, that's especially important.

You know, a lot of our ITIN community members, they might be fearful of even applying for an ITIN or even starting that process. So often it takes multiple touches. You might have to go out in the community, do some education, and then go back again. So, I think we're really starting to see an uptick.

I think ours was, we saw 167% increase in our ITIN applications from last year, from 2022 to 2023, which was huge. So, I think considering that that program started in 2020, we saw slow traction. And I really think that we're starting to see more movement. We do everything from.

I think a lot of people think education and outreach, they're like, oh, you guys are just passing out flyers and putting things on social media. But it's really much more than that. We're doing a lot of educational workshops. We're teaching people how to self-file their taxes. We're learning. Teaching them how to learn the lingo of taxes.

What's a W-9? What's a 1099? Things like that. And then we also have a really impactful text messaging program. So, we have about 30,000 people who have opted in to receive text messages from us just for taxes, and that doesn't include any of our other programs.

I apologize, but I know that you sort of have an overview of that present anyway, so please feel free.

Okay, sounds good. So United Ways of California is the statewide grantee for both free tax prep and education and outreach. Over the past couple years, we've had an increase in funding, which has led to a direct increase in impact.

For every $1 of increased funding between 2021 and 2022, it resulted in additional $1.50 of savings for filers across the state. Overall, the funding increase of $5 million resulted in an additional $5,518,000 in savings for filers. The 20 million year-round funding we had over the last two years has helped immensely increase capacity across the state.

A 50% reduction in funding would be devastating. We cannot afford to lose funding right as our operations are recovering from the COVID pandemic, free tax prep funding helps with the actual cost of operating a free tax prep site.

While volunteers help save on costs, there's an immense amount of staff time dedicated to recruiting, training, and managing both volunteers and programming as a whole. As a statewide sub-grantee, free tax prep funding helps us maintain our site, myfreetaxes.org, which connects people to three of our free filing options, an interactive Vitamap, a tax credit calculator, guides, checklists, and resources.

We also help build statewide capacity by building universal tools that streamline processes and increase efficiency across the network. We know firsthand the impact that free filing has in communities, which is why we believe that everyone should have the ability to maximize their refund and file their taxes for free.

Last year, United Way partners in California helped save Californians over $32 million in free tax preparation fees. Besides saving money on free filing, Vita also ensures that clients get every tax credit that belongs to them. While this may seem like something that would happen with every preparer, we have found that this isn't the case.

According to Cal Policy Lab, eligible people who filed taxes and claimed the federal EITC but who did not claim the CalEITC, 92% had used an in-person paid tax preparer. Imagine the impact of every person who qualified for tax credit credits got what belonged to them.

Besides tax credits being one of the greatest anti-poverty measures we have, studies show that for every dollar invested in tax credits targeted at families with low incomes, $1.50 cents to $2 is directly spent in local economies. In 2023, Californians claimed $1.3 billion in tax credits, which means 2.6 billion went back into local economies.

Our education and outreach efforts play a critical role in the success of free tax prep. I would argue that you can't have one without the other. CBOs are at the heart of Vita and free tax prep operations. They do more than just attending community events and passing out flyers, but build trusted relationships in their community.

This includes bringing mobile Vita buses to some of our highest need areas, our text messaging program, local promotorios, interactive community workshops, and building culturally competent educational content. This trusted messenger is critical, particularly for community members looking to apply for an ITIN.

Vita sites are one of two ways to apply for an ITIN for free without mailing in hard copies of your immigration documents. A certified acceptance agent, or a CAA, acts as a notary, ensuring that community members don't have to go months without their passports or other important immigration documents.

Even with the IRS moratorium on CAAs, our network helped process 187% more ITIN applications than in prior years. Our goal is to have a CAA at every single one of our Vita sites so people no longer have to rely on predatory services in their community, which can cost upwards of $500.

While Vita provides these essential services to thousands across the state, there just isn't enough capacity to help everyone. We believe that the IRS Direct File Program will help support more people in filing their taxes for free. We also believe that the free filing option will work well alongside, not in lieu of, Vita.

Vita will still be an essential service for those who have the highest need, for example, people with disabilities, people with language barriers, people with more complex returns, and people applying for or renewing in ITIN. We're immensely grateful for the last two years of expanded funding for free tax prep and education and outreach.

On behalf of United Ways of California, the CalEITC Coalition and CSD grantees, I urge you to support protecting 20 million in funding for free tax prep and education and outreach. Thank you.

Thank you very much for your patience. I'll bring it to the Subcommittee for questions. All right, this information only item. Thank you very much for your presentations and your patience. That will take us to issue 19, IRS Direct File report update also information only. Welcome.

Thank you. Good afternoon again. My name is Jeanne Harriman with the Franchise Tax Board. Thank you for your time and invitation today to discuss the IRS Direct File Portal. Earlier this year, the IRS launched the pilot program which allowed tax filers in certain states to file directly with the IRS for free.

This portal is called the IRS Direct File Portal. California agreed to participate in the pilot, and upon completion of the federal return, California taxpayers were directed to California's existing filing application, called CalFile, to file their California return.

In General, the IRS Direct File Portal allows certain taxpayers an additional tool to file their tax return for free directly with the IRS. For this pilot year, only taxpayers with less complicated returns were eligible to participate.

Those that didn't qualify or those who chose not to use this new service in many instances could still file free returns by searching for a Vita service near them and using online software products or going to a tax professional. I'm sorry, not a tax professional for free.

But they're using tools for the Free File Alliance, which is a tool set listed on the IRS' Direct website that includes other software vendors. In the past several weeks, the IRS has shared the following key information on the IRS Direct File Portal. In the four months it was open, 140,803 federal returns were accepted as filed.

That is exceeding their goal of 100,000 returns through the life of this first year of the pilot, according to the IRS. Of those 140,000, 33,000 of those filers were Californians. So, we had a very we actually had the largest uptake for Californians on the IRS Direct File Portal of any participating state. They noted their cost as well.

The full cost, including a study period for the report that it was due to Congress in May of '23, as well as some minor implementation costs to get the tool open, were 24.6 million to date.

They indicated their operating cost for the portal, which includes about six weeks this year for limited operation for eligibility and duration of taxpayers that could use it, and then six weeks approximately of being at full throttle. Anybody could come in any time of the day and use it.

Those costs for those 12 week periods period was about $2.4 million for them to operate. Most of those costs were associated with customer service as well as data security and data manipulation tools in the cloud. IRS has considered this program to be successful. As I mentioned earlier, it exceeded the expectations and expectations of numbers coming in.

IRS Commissioner Werfel has committed to Congress and many others that during spring of this year, they will announce if they will continue the portal for next year and how they will do so. So, we are continuing to wait for that information to come through so we can determine next steps, if any, that we have as well.

We'd also note the following observations. As my colleague mentioned earlier in the previous item, Friday returns are on track to exceed prior year amounts.

We've also seen that with our CalFile returns are on track to exceed prior year references and Commissioner Werfel, most familiar with the Free File Alliance software products, has indicated they've seen an 11% increase to date.

All of those increases, while not definitively known, are suspected to be because of the marketing of the free file tax return direct portal, encouraging taxpayers to look more into direct filing. As we look forward to next steps, we continue to work closely with the IRS.

We expect this work to accelerate after the IRS provides us information later this spring about their next steps. We continue to engage in discussions with the IRS about options for a fully integrated portal communication channel between the federal portal and CalFile to provide a more seamless experience for those using both of these free filing tools.

FTP has completed initial costing exercises which currently rely on critical assumptions as to how the IR's will engage with the states to link the various programs and tools together.

We are also discussing when the IRS could assist California because critical to any implementation we do, the IRS also has to deploy resources at the same time. We cannot build and link into their system without their assistance.

So, we want to continue to make sure that they are able and willing to help us when we need them to and of course when funding is presented as well. So, at this point, I'm happy to answer any questions that you might have.

Specifically, with regard to alignment with CalFile. What specific things does the UNI, does the Department need to align with Direct File and what are options for how we could roll this out?

Well, I'm sorry, I didn't hear that last part. What are options for?

With respect to aligning CalFile with Direct File, what are some of the hurdles or challenges that the Department faces? What are the needs for that alignment and how could that look?

Yeah, so great question. Thank you for repeating that. I'm sorry, you're losing your voice. So allergies, I would assume everybody has allergies. Yes, I know myself as well. So some of the challenges. So we are in the fortunate position in California that we already have half of this equation built.

We already have our own free filing tool that's been deployed since the early 2000s, which is, of course, Cal Fle, as I mentioned.

So, where our energy needs to focus on to ensure that we are able to hook up, if that is the decision made, is that communication channel that allows taxpayers and their data to transit safely between the IRS portal and California's portal. Right? Bad actors are everywhere.

They will attempt to hijack any data that they can get their hands on. So, security is critical. We need to make sure that the IRS is part of the tunnel per se, is secure. And then we need to make sure our part of the tunnel is secure as well.

And we need to make sure that the data comes over accurately and that when I myself might be doing the IRS, that I myself actually make it successfully over to FTB's portal. I wasn't inadvertently steered to a rogue state website and thinking it's FTB, but it really isn't. So, security is huge on that.

We also need to understand, critically important, how the IRS expects us and all states to hook up to them. Right? There are several different ways the IRS could not sustain 50 different ways to hook up to their system.

So, they really need to indicate how states are expected to hook up to them and when they can deploy resources to assist us in building that tunnel that I'm talking about. As far as allowing for the conduit of data and taxpayers through between the two systems.

So, those are the build part of the applications that we're struggling with now, needing more data, needing some understanding of time frames, etcetera. The other complexity that is important to note is customer service. The IRS has deployed, as they've indicated in their report to Congress in May of 2023.

I'll just call it an extraordinary level of customer service. Not that it is undeserving, but it is extraordinary level when you look at the typical level of service the IRS provides, and even we provide to our existing customers today at FTB.

So that is another comment we are talking about internal to our own organization and look forward to talking with you folks who would fund us to do this. What is the expected level of service that we would do with these taxpayers? They're trying to file the returns. They need to be engaged and kept engaged.

They don't want to wait for an hour to somebody to pick up the phone to help them finish that last bit of their return. So it is a crucial conversation to be having. So those are the things that I would say are probably most relevant to what you're speaking to.

Thank you. All right. That'll bring us to issue 20, apportionment factor fixed.

Good afternoon. Nick Thomas again with the Department of Finance. The May revision includes a proposal which clarifies existing law that when a corporation receives income that is excluded from taxable income, then it must exclude this income from its apportionment factor formula.

Discussed it a little bit earlier with regard to LAOs potential proposals, but an apportionment factor essentially represents the share of business activity a firm conducts in a state divided by its total business activity across the country, and that then determines how much of its income is then apportioned to each state.

Consistent with constitutional principles which seek an equitable and reasonable method for taxing corporations that do business in multiple states and countries. The FTB has previously issued longstanding and consistent guidance to taxpayers that activities that are not subject to taxation, if they generate income, are required to be excluded from the apportionment formula.

However, in recent legal rulings, the Office of Tax Appeals has determined that existing statute is unclear on how certain non taxable income should be treated, and this has led to some refunds being issued to taxpayers related to past tax years.

The issue became particularly relevant following the Federal Tax Cuts and Jobs Act, which provided an incentive for corporations to repatriate large amounts of foreign-source dividends from their international subsidiaries. California law allows 75% of those dividends to be deducted from income, meaning that that portion is not taxed.

However, taxpayers have successfully argued that they should be able to count the entire amount of those dividends in the denominator of their apportionment formula, which obviously should normally represent their total business activity.

However, since 75% of these dividends are not actually taxed in California, that has allowed taxpayers to artificially reduce their calculated California share of overall business activity, which in turn resulted in a reduction of their tax owed simply by having more foreign dividends.

This proposal is declaratory of existing law and seeks to provide clear statutory authority and guidelines to taxpayers on how to determine what income should be included in their apportionment factor. It wouldn't overturn any prior specific taxpayer cases, but would instead be considered in future cases.

Additionally, it prevents a loophole where taxpayers could include non taxable income in their apportionment base to reduce their tax liability. The FTB estimates that there are approximately $1.3 billion in potential refund claims from past years that are at risk if no legislative action is taken to clarify statute.

And then additionally, there's a prospective potential ongoing refund claims of $200 million per year going forward. Finance estimates that without this proposal, about half of those $1.3 billion in past refunds would be issued to taxpayers throughout the multi-year budget window as additional legal cases and refund claims are brought forward by taxpayers.

Of that, the May revision forecast assumes that revenues would be approximately $216 million lower in the budget window, and then there would be additional revenue losses outside the budget window.

And this proposal before the Committee would prevent those losses and would bring corporation revenues back to what they would be without the distortions from the alternative computation of the apportionment factor. With that, we're happy to answer. Any questions.

No concerns on this item. Issue 21.

Thank you. Colby White, Department of Finance. So this is the conformity disaster relief proposal. And so, by way of background, under existing law, the Internal Revenue Service can grant federal tax relief in the form of certain delayed tax filing or payment deadlines to taxpayers who are covered by a disaster that is declared by the Federal Emergency Management Agency.

And under existing law, the state has the option to fully conform, partially conform, or not conform at all to those delayed deadlines. So in recent years, the IR's has extended tax filing and payment deadlines multiple times due to disaster declarations, including last year following a series of winter storms in January 2023.

So in that case, the IR's ended up delaying various tax filing and payment deadlines to November 2023. Some deadlines were extended as long as 10 months, ultimately impacted 55 of 58 counties and over 99% of the state's population.

So this particular extension was overly broad and in both in terms of scope and the length of the delay, as just 15 of those counties were actually were qualified for individual assistance, which means individuals or households were impacted while the remaining counties were public assistance, which means it was only public entities that were impacted by the disaster.

So this particular overly broad and unprecedented extension from last year had significant detrimental impacts to the state. Normally, the bulk of cash data is known at the time the May revision forecast is done.

That wasn't the case last year, and as a result, the majority of the revenue downturn wasn't apparent to us until the collections, the cash collections came in in October and November.

And so this had a significant detrimental impact in the sense that the adjustments to the budget that were required as a result of that, when we were aware of the revenue downturn, occurred much later in the process, we were in the, you know, first in the January proposal, we started to be able to make those adjustments as far as, whereas we could have been making those adjustments in the prior budget for the 23-24 fiscal year.

So this proposal does two things. It shifts the authority from the Franchise Tax Board to the Director of finance to determine whether and to what extent the state will conform to delayed deadlines in the future for the IR's.

It doesn't change existing law in the sense that we still have the ability to either partially conform, fully conform, or not conform at all that exists in current law.

Secondly, what this does is it adds a new individualized process for taxpayers to get relief in the cases where they may have happened to been impacted, but the state decides not to fully conform in that particular in the jurisdiction so that it adds a new process to grant relief to taxpayers.

And overall, this is, you know, we're looking, we think this is in the best interest of all Californians and that it's appropriate for the finance to make this determination, although we envision it being in consultation with FTB and CalOES.

But if such a decision were made, it would be on the basis of fiscal impacts to the state budget planning and things like that. So with that, happy to take any questions.

We certainly appreciate the concerns that the Department of Finance is attempting to address with this proposal. That being said, I think it's important for the Legislature to consider that the state's tax system historically has been sort of, its Administration has been firmly linked to the IR's such that the kind of contemplated decoupling here in this proposal has some risk of raising confusion or frustration among taxpayers.

You know, that potential risk has to be weighed against the potential budget process benefits that could come from allowing this sort of mechanism to be put in place.

I would just say, look, I get the problem. It's been problematic for the Legislature, for the Governor, certainly out of our control to some extent. Excuse me. My concern here is that to the LAO's point, this is a difficult thing to administer potentially, and that incongruence may create other administrative challenges and costs. Can you address that a little bit?

Yeah, I would just first point out that under current law, so we, the state has the ability to partially conform or not conform. So that that's not changing. So this law is not changing. It does shift the authority to make that decision from the Franchise Tax Board to the Department of Finance.

And the priority will always be to provide relief to Californians that need it. And that's why the individualized process is on top. It's just in the sense, and hopefully we never need this. Hopefully, what the IR's did last year was, was overly broad.

It affected, you know, the relief being provided to counties that were not individual assistance counties was really, was really not necessary. So in the sense of, and then I think getting to your final question or point as far as the potential confusion for taxpayers, certainly there will have to be very clear communication, outreach and everything like that.

But I would just point out the taxpayers were very confused anyways this last time. I mean, I have anecdotes where people were given IR's notices that they, you know, they had a payment due in July. I mean, things when, when deadlines get delayed, there's confusion.

So even if the state were to conform fully to deadlines in certain counties in alignment with the IR's, and you're talking about an extension that doesn't cover the whole state, there's going to be confusion. So it'll be, but the Franchise Tax Board will certainly prioritize communications, messaging and trying to limit that confusion as much as possible.

Thank you Mister Chair. And thank you Mister Chair for working through that cold and allergy combination. So my question is about the budget process deadline. So I'm understanding sort of who makes the decision and the termination and those pieces, but how do we get to having a better sort of picture of receipts for our budget making process?

I'm unclear about where the timing happens. I understand who makes the decision in the communication with IR's, but just are we realigning deadlines so that if you're, you are impacted in these communities where there's been a State of emergency that somehow the filing happens? That gives us a sense of what our budget picture will look like. I'm just curious, how does the deadline get affected by this?

Okay, so the first part is generally when we're doing the May revision forecast, the April filing deadline is around mid April. And that's a very important deadline. It concludes the payments that are related to the prior tax year and gives us a good picture of what's going on with that tax year.

So what this proposal is doing is in the case where there is a disaster and the IR's were to extend deadlines, this provides the, well, I mean, existing law already provides this. It provides the ability. So if they extend it past the April deadline, the state has the option to conform or not conform or partially conform.

So the priority here is always to provide relief to people that need it. So the problem that we're trying to solve is when there's an overly broad and there's relief being provided to two thirds of the state, maybe, and that really doesn't need it.

And in that case, those two thirds of those receipts, we don't know what they look like in April. And then it affects budget decisions, programs are negatively impacted, can't right size the budget appropriately, particularly when we're forecasting off of a very volatile time period. So really it's just to put forth a process that enables us potentially to provide more targeted relief.

And the individualized relief that's added to this is to ensure that every taxpayer that is impacted, if there is by chance somebody that doesn't get the extended deadline, that the state doesn't extend their deadlines in a particular county because it determines that county in the aggregate was not significantly negatively impacted.

It still allows people to come forward and provide supporting documentation upon request of the Franchise Tax Board and still get that extended deadline relief if they truly were impacted. So it's just in a situation where we might need to be a little bit more targeted, particularly. And the example from last year is a case in point on that.

I just want to make sure. I'm understanding, you're just saying then that we have a better sense of exactly what percent or number of taxpayers. This gives us an option to sort of be more targeted and understanding who is going to be delayed and what the projected sort of delay in having a. Or more accurate picture.

I guess I'm still not understanding how it, it gives definitely more options and I understand how it helps to support and protect those, those taxpayers. But it doesn't actually change the sense in terms of when those receipts will, will come in.

It just helps us project and know more precisely when we'll have a snapshot of what, when those receipts will come in. I'm trying to see how it helps us not repeat what we just went through in the budget process.

If we go back to last year and if we had provided more targeted relief and it hadn't been 99% of the population had extended deadlines, so it had been some much smaller percentage, then we would have known a lot more.

But when we were preparing the May revision forecast, budget adjustments would have been able to be made much earlier programs, it would have been much less disruptive to programs. The idea that still is to provide would be to provide that relief to the taxpayers that truly needed it as part of those.

But in the case where 99% of the state, you know, and then other examples, in the COVID example, yes, everyone got relief and probably everyone needed it, right? So sometimes you're just not, you're just going to be flying blind. But the idea is not to fly blind. Unless. Unless you have to.

Got it. Thanks. For the most part. In this particular scenario, the receipts are the data. So it's a double in terms of the ability to forecast and plan, but also to have receipts in hand. And I get that.

My concern, just reiterating, was that if we go to individual targeted sort of choosing nonalignment, there's an administrative requirement there that we, you know, taxpayers have a burden to produce documentation. So there's some administrative impact associated with that decoupling, as the LAo termed it earlier, which I don't want to lose track of. Senator Neho.

Referencing the 23-24 budget as it was adopted in June of 2023, what was the difference in the budgets revenue projection versus what the LAO had opined prior in its analysis of probably the May revise? No, Senator, it's a good question that I should have. On top of it was over $15 billion difference. I can't recall the exact number.

15 billion? Yeah. And what was the shortfall discovered in November? It was much larger than that. Well, I understand. I'm just wondering what the number was. I will get you the precise number following this Committee meeting. Well, there's a point to my question. I think it's obvious based upon the answer last year, and I'm concerned this year.

Well, first of all, a really easy way to balance a public sector budget is to just forecast more revenue. And there is a terrible temptation for budget writers to do that. I've been through six budget cycles at the local level and now seven budget cycles at the state level.

And when we fall on hard times for those who are responsible for actually writing the budget, there is a real temptation to try to solve some of the problem by revenue projections. And I don't mean that it's necessarily intentional, but there's a natural tendency, and the LAO, as a budget advisor, doesn't have that kind of pressure.

And so last year, we overestimated revenue. I realized that the unknown factor was unknown, but that's exactly why the projection should have been more conservative, because we didn't know. And if revenues ended up being as we originally thought they were, happy days, then we adjust things in November, but we get to adjust it the other way.

So I would suggest that the problem that the Administration is trying to fix might be at least partially over optimism with regard to budget writing, and I kind of see the same thing happening this year.

All right, thank you, Senator. All right, this item will be held open. Excuse my voice. I'm hanging in there. That'll bring us to government financing issue 22. BLF, Backfill it.

Good morning. Chris Hill good afternoon. Chris Hill Department of Finance, Carolyn Chu, Legislative Analyst Office I'd be happy to lead it off. There's a great deal of background to the issue that's before us today at a high level. We have from three counties in the state, San Mateo, Alpine, and Momono County a request for a total of approximately $72.5 million General Fund to backfill what is known as insufficient ERAF.

And this all has to do with vehicle license fee backfill requirements. And just to try and give a high level quick overview, each county has an educational revenue augmentation Fund or an ERAF.

And county auditor controllers each year shift to specified statutory, specified amount of property tax from cities, counties, and special districts and place that property tax revenue into the ERAF for allocation to the K-14 schools in that county.

One of the rules of the ERAF is that ERAF money cannot go to schools that are called basic aid, that are funded to the revenue limits or their Local Control Funding Formula limits solely with property tax. So if you have a basic aid school and it cannot absorb that ERAF, the ERAF is transferred.

That ERAF money is transferred back to the donor city and county and special district. And that's one thing that's kind of important to bear in mind as we delve into this issue. And in 2003, when Governor Schwarzenegger reduced the vehicle license fee from 2% to 0.65%, statute was subsequently enacted to backfill that lost vehicle license fee revenue for cities and counties. It was a very significant revenue source.

And so how it works is cities and counties can take back from the ERAF the money they put in to backfill their lost vehicle license fee revenue. And then if there's still a need, if that's not enough to fully cover their VLF backfill obligation, what happens is a county Auditor comptroller then takes property tax revenue from non-basic aid schools and gives it to the cities and to the county.

And the $72.5 million at issue, let's pretend we have a county and they have, there's $100 in the educational revenue augmentation Fund. And just for ease of simplicity, for scenario, the vehicle license fee backfill amount owed to cities and counties is also dollar 100.

So what would happen is the county Auditor controller just takes that money from the ERAF, gives it to the cities and the counties. But let's pretend that $10 of that $100 was ERAF that could not be absorbed by basic-age schools. So in that case, the dollar 100 backfill goes to the cities and the counties.

But that dollar 10 under statute cannot count towards backfilling the BLF obligation. So the county Auditor comptroller then shifts another $10 from the county's non basic k 14 schools and gives it to the cities and the counties. And so by, by function of that statute, even though the VLF backfill obligation for the county and for the cities is $100, they're really getting 110. And it is finance's belief that the $72.5 million at issue here is essentially that $10.

So finance understands, particularly in San Mateo county, that the, the county and the cities are being fully backfilled for their VLF obligation, but they are not getting this extra. There's not enough money to take from the non-basic age schools to cover this additional excess ERAF.

And that we understand that is what this $72.5 million request primarily is for the $72.5 million. About $69 million is for San Mateo County. The state. We had a practice of funding this as a best practice in the past, even though it's not statutorily required to do so.

But given recent budget cycles and the increasing fiscal difficulties that we're all aware of, the state had, the Administration has opted to not provide those backfills any longer. And with that, I'd be happy to answer any questions that the Subcommittee has.

That there is an obligation to backfill in the first place. And secondarily, what's the future outlook look like? Are we looking at compromises?

I would just again note that there's not a statutory requirement that this be done. When the statutes were enacted, this scenario apparently was not envisioned. So it's not included in there. So there isn't a requirement that we do so. And the backfill amount just varies from year to year based primarily on how many schools are basic aid.

And that's a factor-driven primarily by assessed value increases for property tax purposes and for, and by enrollment changes in the schools.

We'll move right along. The item of held. Take us to issue 23. Business, consumer services and housing agency. Come on down. Issue 23 is cuts to supplemental funding from round five of HAp.

Hi. Good afternoon, Kaily, Kaily Yap. Department of Finance so the governor's January budget proposed to delay $260 million in HAPP, around five funding from 2023 to 24 to 2025-26. However, the governor's may revision now proposes to eliminate this funding instead. Happy to answer any questions. Thank you.

All right. Thank you. Any comment from LAO or analysis for.

Carolyn Chu LAO this particular may revision proposal means there will be less funding for in the out years. This is a relative to January. This is a 25-26 issue. So a key question I think, for our office is when the Administration anticipates the round five funding would be fully expended as a way to help the Legislature think through this particular reduction proposal.

We did have an audit, but it looked at round one and looked at the question of we need greater reporting and data collection and analysis and how does suspension or delay on this round or eliminations going forward affect the ability to basically meet that standard?

The Administration doesn't believe that this proposed reduction would have an impact on accountability or anything of that nature. We do note that this is funding that hasn't been applied for yet and it hasn't been. No applications have been submitted and the funding was not anticipated to flow in the current year.

And so we don't believe that this proposed reduction would have any impact on current service levels. It's not a reduction the Administration is pleased to propose, but within the context of the overall budget situation, we believe this is a component to achieving a balanced budget.

And also in terms of the audit, I believe the Administration has said on several occasions, and the governor's office has said that the Administration is committed to accepts the findings of the audit and is committed to working to enhance accountability. And we do have some proposals that are along those lines.

Are there specific services you can identify that may be impacted by supplemental funding cut in round five?

We don't believe that the $260 million reduction will have any impact on, again on a current service levels, but happy to Department as well if they have additional information.

Yes, and I think I caught that. So just if I didn't, please ask me more. But the, this 260 million would be the second half of the Hap five that has not gone out yet. So to your first point about, you know, our spend down rate there, we'll be sharing this data with all of your offices very shortly and have sent some of this already. But we have a pretty good sense of how much HAP one, HAP two, HAP three and Hap four is remaining and unobligated.

And what the spend down rate has been there so very much expect Hap five to be able to get us through this time period without issue and that we still will be directing grantees to obligate down their HAP three and HAP $4 as well.

All right. Any other questions to the Committee? All right, thank you. It takes us to issue 24, which is capture of additional savings from Administration of homelessness grant programs. Please proceed.

So the governor's January budget proposed to avert $100.6 million General Fund in administrative set asides for various rounds of HAp and the family homelessness challenge grants as General Fund savings. However, after reevaluating the May revision, now proposes to revert an additional $48.4 million in administrative set asides as these funds are not required by the administrating departments. Happy to answer any questions.

We still need to review additional detail regarding this proposal, but at first glance it seems reasonable. Our main outstanding question is if this recapturing of the administrative funds would jeopardize the oversight by either the Legislature or the Administration.

All right, to the sub any questions that it will be held. Let's move to Item 25, which is new General Fund allocations to support California Emergency Council and homelessness activities.

The May revision budget proposes to provide the California Interagency Council on Homelessness for $14.8 million in 2425, $9.5 million in 2526, $7.8 million in 2627 and ongoing to Fund 23 existing permanent staff and contracts. Cal ACH does not have sufficient budget authority to Fund these positions, which are necessary to support their statutory obligations.

Previously, these positions were funded with homelessness grant administrative set asides. However, as these programs are transitioning to HCD, a new permanent funding source is necessary.

Given the statutory responsibility of CalICH, the administrative funding proposed by the Administration generally seems reasonable. That said, your agenda does raise questions about looking for creative ways to find alternatives to pay for these, which we think are worth pursuing.

Can you break out the administrative functions paid for through set asides already and give us a perspective on where the line blurs between here and separate allocations?

Yes. As part of the Governor's Budget, there is a proposal to transfer the administrative set aside for these programs over to the Department of Housing Community Development, which is the new administrating administrative body for these programs that were previously at Cal ICH.

And statutorily, the Administration doesn't believe it's allowable to use these administrative set-asides to Fund Cal ICH when they're no longer administering those programs. So as a consequence, that's why we have today the need to find other resources to do that to fund their operation.

That would be a much longer discussion, I would imagine, for any other questions, concerns, I don't know. Hopefully, Senator Small Wickes will be rejoining us shortly. Feeling better? All right, thank you. We'll move that item will be held open. TSAC. This will be tax credit allocation Committee issue 26.

It's docketed for discussion, but there is a recommendation on it. State supplement low income housing tax credits. Please state your name for the record and proceed when ready.

Good morning or good afternoon. Sorry. Andrew March with the Department of Finance. As noted in the agenda and by the chair, the May revision proposes an additional year of the enhanced state low-income housing tax credit for a total of five $500 million.

This is in addition to the continuously appropriated amount that would be in calendar year 2025, which would be approximately $120 million for total state investment in Low income housing tax credits of approximately $620 million in 2025.

The low-income housing tax credits we've heard, and as this house has heard testimony on from stakeholders on the ground, is one of the primary ways the state can incentivize construction at the local level. So expanding access to this credit, given the reduction in other one time funding from the state, may make sense. It will come with trade-offs in the out years in terms of decreased revenues however.

For the Department of Finance, four or five consecutive years of funding supplemental. I mean, should this be an ongoing allocation, in your opinion? Are we doing this one segment at a time? And for the Department, what, if any, impact is there with respect to leveraging federal dollars?

So to the point about the ongoing funding. So existing statute requires this funding to be decided in the budget each year. So this was what the Governor's Budget proposed to not include it. And now at may revision, we are including it. So it is a year by year basis.

As noted by the LAO, there are real costs to these tax credits, although they do materialize in the out years, which is generally outside of the concern of the Budget Committee or the budget in general, these are costs that occur, and then my colleague from the tax credit allocation Committee can speak to any additional questions about leveraging federal funds.

Hi, this is Anthony Zeto, Deputy Director at CTCAC. So prior to the state tax credits, the federal tax, 4% tax credits and tax exempt bonds were not fully utilized. And these state tax credits, when they were introduced and allocated to us and made available, that flipped it, where we were oversubscribed and we were able to fully utilize the federal tax credits as well as the tax exempt bonds.

And in the four years prior to the state credit, we funded about 239 new construction projects, equating to about 22,000 units. And then in the four years with the state tax credits, we almost doubled, doubled the number of projects that we awarded, and we more than doubled the number of units at 48 units in those four years. So it's, it's had a huge impact and remains critical piece of affordable housing finance.

Any other questions from Senator Niello?

Comment. I think it would benefit the development of housing generally and affordable housing in particular, if we were, rather than providing tax credits to remove many of the burdens on building that add to the cost of basic buildings in the first place.

All right. Any other questions for the panel on this matter? All right, again, this does have a recommendation. We'll take it up during that component of the vote items. All right, Civil Rights Department, you're up. Thank you. 27. Shift of Department costs from General Fund to civil Rights enforcement and Litigation Fund. Proceed when ready.

Blair Huxman, Department of Finance. The May revision proposes a $10 million Fund shift in 2024 to 25 to shift General Fund expenditures to a special Fund. This one time shift of General Fund expenditures to the Civil Rights Enforcement and Litigation Fund is for the Administration of the Civil Rights Department, which is authorized under current statute.

Seems reasonable. However, we will be looking further to ensure that the fund can support this shift.

Questions from the Subcommittee. Senator. Smallwood-Cuevas

Thank you, Mister Chair. And so my question is, what was the purpose of this funding?

Speaking of the special Fund or.

Yes.

So the purpose in statute, the purpose of the Fund is for the, to offset the costs of the Department.

To offset. That's the purpose of the Fund. Okay. And why wasn't the funding used to address, I know the Department has been working through backlog and trying to get through those cases. Is there a reason why that funding can't be used to also support moving that backlog and lowering it?

Yeah. It's broad use for any activities under the civil rights Department. So given the budget situation, we feel it to be a prudent use of the Fund to provide one time General Fund savings.

But certainly there would come a trade off potentially if the choice was to use that funding to provide additional services at the expense of General Fund savings.

And how have these dollars been used in the past?

So the Department has an existing annual appropriation of $536,000, generally for litigation. In the past, the Fund has been used to support it projects and other activities as well.

Okay, thank you.

Is there any concern that switching the use of the funds might motivate the Department to seek additional or increased awards of cases that are pursued?

So we're not. The Fund is subject to appropriation by the Legislature. So if there were additional funding that came into the Fund, it would still have to be subject to appropriation by the Legislature to be able to be used.

So outside of that $536,000, it's generally included in the budget every year, which still up for the decision of the Legislature. Each budget, it would be up to the Legislature to include any additional expenditures that may arise from additional attorney fees or other funding that's incorporated into the Fund.

But the motivation could be there with the anticipation of an appropriation.

I will turn to the Department to speak generally about their litigation strategy.

And Carmen Gibbs with the California Civil Rights Department, I don't see that happening with us using that as a motivation. We don't use that Fund. It's for shortfalls so we can continue our current litigation. So I don't anticipate and I would not foresee that happening. We would ask for any addition. We would look for any additional fees in that way.

That's good to hear.

I mean, obviously, on one side of the equation, we're supplanting some General Fund. It's freeing up General Fund Dollars here to the two to 10 million. And so the frequency and utility of the special Fund, as it results from some of the actions taken, awards, recovery fees, what does the typical expenditure pattern look like?

In other words, what's the impact to operations on the civil rights division per se, if any, in the context of the overall enforcement budget? Right. I get the savings part. I get that. But I'm looking at the operational end.

So as noted, there's an existing $536,000 annual appropriation. The Fund would still be able, given the projections at Governor's Budget, the Fund would still be able to support those expenditures. However, the Department hasn't utilized those expenditures, this Fund, in the last three years.

I believe that's why I talked about the pattern of expenditures out of the special Fund. Right. Because we created the Fund, and we created for a reason. Right. I mean, it's sort of immaterial whether there's an annual allocation budget for operations. We saw it fit to establish a Fund for a reason, otherwise we would.

Wouldn't have established it. And we also have sought fit in the past to expend from that Fund. And so there is, in fact, a net impact on the Fund if we supplant that, to use that to supplant General Fund Dollars. It's just basic math. Right. And it's.

So, I think, trying to understand the pattern of expenditure out of that Fund. And how is that relevant to the enforcement activities of the Department part, historically, what are we losing by doing this to save $10 million in General Fund Dollars? That's probably the simplest way of asking the question.

So, as noted, over the past three fiscal years, the Fund hasn't been used, but the Department uses their General Fund appropriation generally for litigation and support of the Department. So I don't know if that answers specifically to your question, but we don't expect any programmatic impacts, because we're not. There's no proposed reduction with this item to reduce any general, ongoing General Fund expenditures.

So what are the sorts of things. We expected from the special Fund in the past to support education activities, for example?

I would defer to the Department to support on the specifics, but I believe it's used for some expert witness fees. But that's all within the $536,000. So that's still considered, that's accounted for going forward. Unless the Legislature chose to increase that ongoing appropriation.

We project that there would still be sufficient funding in the Fund to Fund the $536,000. In the past, when the Fund has ran up a large balance, it's been utilized. It was utilized, I believe, in 201617 for an information technology project for a case management system.

Okay, you want to add additional comments?

So I'll just say for the Department, Carmen Gibbs. The only knowledge I have is that in 2016, we used it for a case filing.

That promotes clarity. Obviously, there's some capacity loss, different factors of necessity for special product. Right. Or increasing capacity. So it's important to have that clearance.

I just wanted to clarify, what is the size of the Fund and how much does it accrue annually?

The deposits into the Fund depend on litigation from the Department. So the revenue source for the Fund are attorney fees and other judgments awarded from successful litigation from the Department. So it's difficult to project with any exact science what the revenues will be in the Fund.

But in the most recent past year, in 2223 there's approximately $7 million deposited into the Fund. I believe that's a little bit of an anomaly here, but we're projecting approximately over, I think, 10.5 million. So there's still projected to be a Fund balance which would support this ongoing appropriation of $536,000.

Yes. Blair Huxman, Department of Finance. The civil rights Department is relocating its headquarters facility to the Meili office complex in July 2024, and the Department is not currently funded. To accommodate the higher leased space costs at the new facility, the Department will occupy more square footage at the new building than at its existing Elk Grove headquarters. And May revision proposes approximately 1.2 million General Fund in 24-25 to pay for the increase in rental costs.

All right, so the current ownership is who, what, and are we going to be in a situation where one state entity is being led to another state entity? And how is that? Right? And this is new source. I'm assuming it's part of the financing. Break this down as to why this is structured as it is.

Yeah, certainly. So the Civil Rights Department currently leases a private office space in Elk Grove. They're now moving to a state-owned facility in Sacramento, just nearby in the rail yards, the May Lee Office Complex. It was previously called the Richards Boulevard office complex. As with any other state owned facility, there are lease costs for it and the lease costs pay. These lease costs pay for the operation of the building.

So for the Department of General Services, for their staff in the building and the costs associated with it for maintenance and repairs, the actual costs for the building, I believe, are carried as a lease revenue bond elsewhere in the budget.

So this isn't paying for the actual facility of the building, this is paying for the operation of the building. So with this move, a couple things are happening. Which. One is that it's a newer building. Two is that the civil rights Department is assuming more lease space than they currently occupy in Elk Grove.

So therefore we are not expecting any savings from that. This is where this additional $1.1 million request is coming from, is that the civil rights Department is not able to absorb this within their existing allocation for their lease. So this is a one time proposal.

However, the Department of General Services is restructuring their rates, so we did not include any ongoing funding, but we will be coming back to the Legislature next year for ongoing funding once the Department of General Services has restructured their rates and we have a good sense of what the ongoing costs will be.

Any questions or comments hold that move to housing Committee development issue 29.

Blair Huxman, Department of Finance the May revision includes 500.3 million in new reductions for various housing programs that received investments over the past three years. In addition to the 1.2 billion introductions proposed at Governor's Budget, the May revision proposes a reduction of 75 million in 2324 to the multifamily housing program, in addition to the 250,000 50 million proposed at Governor's Budget.

The foreclosure intervention housing preservation program was included in early action and the Legislature reduced 2024 to 25 funding by 85 million in April. May revision proposes a reduction of 236.5 million and 2324 for the program, in addition to the 247.5 million proposed at Governor's Budget.

The May revision also proposes to revert 25 million appropriated in the 2023 Budget act and 10 million appropriated in the 2022 Budget act, in addition to the 202324 $200 million reversion proposed at Governor's Budget for the Infill Infrastructure grant program for a total reduction of 235 million.

The mayor revision proposes to revert 26.3 million appropriated in 2022 to 23 for the Veterans Housing and Homelessness Prevention program, in addition to the 202324 $50 million reversion proposed at Governor's Budget for a total reduction of $76.3 million.

And finally, the May revision proposes to revert 40 million appropriated in the 2022 Budget act and 87.5 million appropriated in the 2023 Budget act for a total reduction of 127.5 million and 2324 for the adaptive reuse program, and we are happy to take any questions on these matters.

So the proposals in the Mary revision generally pull back, I think, almost all of the remaining one time funding in housing and homelessness, and that's generally consistent with our recommendation that the Legislature look to the one time funding as a way to start to address the budget problem, as these are use or lose solutions.

That said, they do come with significant trade offs. There is some remaining one time money in other areas of the budget, not necessarily within the purview of this particular Subcommitee, but if the Legislature wished to, it could swap out some of those solutions. But we would continue to recommend that the Legislature look to one time funding to pull back as the first step in addressing the budget problem.

Thank you, and to that I'm sorry.

Tyrone Buckley, Deputy Director for Legislation with Department of Housing Community Development. Just here to answer any questions for the Chair and Committee Members.

Are there, what are other remaining unallocated balances and other programmatic funds in HCD?

As stated by the LAO, this the mayor revision, I think the vast majority of the affordable housing funding is generally at the Department of Housing and Community Division. There is other funding that I think it's also lumped in with the homelessness space that is in the health and human Services arena.

But affordable housing funding is generally at the Department of Housing and Community Development. There's been previous allocations to the California Housing Finance Agency specifically for accessory dwelling units. That funding is exhausted. And then, as we previously mentioned, the Low income housing tax credit at the tax credit allocation Committee is the other source of affordable housing funding.

So we did do some preliminary estimations of what the loss would be from these reductions just going through the impacted programs. The multifamily housing program, the May revision has a cut of $75 million, and we estimate that that would result in about 483 units not being funded for production. Adapted reuse reversion program.

That's a reduction of $127.5 million. And our estimate that's a supportive program, and that would probably have about 3315 units not supported. Then we have the Infill infrastructure grant program, and that is a $35 million reduction. And that would approximately leave 910 units unsupported.

The Veterans Housing and Homelessness program, the cut of 26.3 million, that would leave approximately 169 units not funded for production. We've discussed already today the HAPP program, $260 million reduction there. We estimate that approximately 120,000 California is experiencing homelessness, would not be able to access services there.

Overall, we think it'd probably be a reduction of about 5800 to 600,000 units. If you couple that with the January reductions as well, MHP went all the way down from 325. So that's a 29002093 units reduction. The infrastructure infill grant program went down from 235. That's 7000 units.

VHHP all also was a larger reduction from the January budget. So that's 490. The adaptive reuse program stayed the same. That's still at 3000 or so. Ultimately, probably between the January and the May revise, we're seeing probably a reduction in about 12,900 units.

Just one note on that. So two programs, the adaptive reuse program, the infill infrastructure grant program, don't directly Fund units. They Fund infrastructure to assist units. And the numbers quoted are market rate units and affordable housing units. So if we're just talking about affordable housing production, the number is going to be lower than what was just quoted.

Say more about the affordable housing unit reductions. What's the percentage of the 12,900?

Thank you. All right, issue 30.

Blair Huxman, Department of Finance the May revision proposes to provide the Department of Housing and Community Development new position authority for 13 additional positions in 2024 to 25 and ongoing to integrate and administer the Cal I CH homelessness grant programs, as well as build out the governor's proposed housing and homelessness Accountability and results Partnership unit. These 13 positions are in addition to the four positions requested at the Governor's Budget, for a total of 17 positions in 2024 to 25. And ongoing.

Oversight and accountability of the state's housing and homelessness programs has been a key priority for the Legislature. That said, this particular proposal is not yet fully fleshed out, so we would like to see those further details before we get further.

And then for the Department, I think, of course, Mister Chair and Members Matt Schueller so the increase is due to a couple reasons, one of which is the support reason. Sources or Administration programs over at the Interagency Council for Homelessness were administered by other government entities.

So through business, consumer service, housing agency, they engage Department of General Services for a wide range of administrative services, such as contracting human resources. There's another Department that performs information technology support those positions. They don't have positions. They engage in contracts for that work.

So as the program is transferred to HCD, we have to find a way in order to administratively support the program. So given that it was contracting, Cal ICH doesn't have the position. Therefore, we are requesting the positions to come out of the administrative set aside to cover that language of administrative activity.

Part of that is also in response to bolstering the ability of the program to perform specifically increase in legal resources in order to be able to assist the program across a wide range of activity. As you know, we've talked about the fact that we are providing technical assistance in support of program outcomes that sometimes can lead to enforcement. So we see a real need there to bolster that activity in the name of chunky other questions or comments from the steps.

Still a little unclear as to exactly what these folks will do and outcomes that they will produce. But that point aside for a moment, one thing that the recent audit showed was that there is a lack of true accountability, tracking and accountability with regard to homelessness programs. And I've had a few discussions with regard to this point.

It seems to me that since the Legislature established Cal ICH and some of these programs now transferred to another agency, we have two agencies and the incredible amount of money that we have spent on these programs, that we should have a structured way to report back to the Legislature, to an existing Committee, a special Committee on a specified periodic basis, a couple, three times a year. We have lacked that ever since Cal ICH was established, and I think the Legislature has kind of abdicated its responsibility for insisting on feedback of real results.

Hello. My name is Megan Kirkeby, Deputy Director for HCD, and just want to speak to that. Absolutely. You all will be getting data today on all of the four rounds of HAP. Sorry, data that will be putting data on our website tomorrow and briefing all of you on that data.

And I think, to your point, that is very much the intent here, is it took a while to build this data portfolio. The early rounds of HAPP did not require the person served data. And I think we're grateful to the Legislature and for AB 977 to add in that requirement that there be program specific person served reporting going in. We still are seeing some grantees struggle with that person served reporting of who's getting the services directly.

But there's been a massive data effort by the Cal ICH data team to work with grantees directly, and then they did do significant manual reporting entry, as well as bringing in that HMIS data to get a more complete snapshot of what has been going on through HAP one through four, and then we'll be able to move going forward.

You know, hopefully, our grantees will begin to use the HMIS system more effectively, and there'll be ongoing dashboards that have quarterly public. You know, you won't need to wait for us to release data that will just be available data at any time, updated quarterly, both on the person serve side as well as on the fiscal side. But that, that will all be on the website starting tomorrow, and we'll make that directly available to the Legislature and staff as well.

Thank you for that. And that's useful. But want to stress, when I say report back, I mean in a public informational hearing, so that it is public and it can be interactive between the agencies and the legislative oversight.

Absolutely. We'd be happy for that.

I just. I noticed that there isn't a dollar amount associated with this. It looks like we're adding positions. I understand the money is shifting from one, from IHC to AC, but I'm just trying to understand there's not a new additional cost. You're increasing positions?

That's correct. It's coming out of the administrative set aside that comes with the. With the HAP funding. There's a set percentage towards administrative activity, and it's within that, and I would say, too, it's within the reduced amount because that amount has been reduced.

So there's not. So once that shift happens, there's enough funding to cover.

The transfer and the additional staff.

What about the other IHC? Is there an additional cost or impact to that in terms of when that.

Fund is provided, when you shift over to. So, as previously noted on issue 25, there's, the request is for ongoing General Fund for Cal ICH to support their staff that were previously.

That's what this is tied to. That ongoing request is tied to the shifting of these issues?

Yes. Yes. As part of the budget last year, AB 129, it included a shift of HAP from Cal ICH to HCD, and the Governor's Budget implemented the direction from the Legislature. So as part of that, this is all encompassing of the staff that are going for HCD in the Governor's Budget. There is also a proposal to shift staff from, and then this is the second part of that, to provide additional administrative staff for HCD to implement the HAPP grants.

Thanks.

Blair Huxman, Department of Finance. The May revision proposes a total of 17 permanent positions in 2024 to 25 for HCD to implement and administer the Behavioral Health Infrastructural Bond act. Of the 6.38 billion issued in General obligation bonds, HCD will receive approximately 1.9 billion for permanent supportive housing.

The requested resources, using administrative set asides, will enable HCD to achieve the workload resulting from AB 531, including notice of funding availability, development, application materials and program guidelines.

As noted in your agenda. We are still winning the detail on. This proposal.

But it's a pretty good number. And then there's also. I have a question with respect to the cap industry.

So first to the administrative cap. So there's also statutory change, statutory language to limit the administrative cap at 3%, which is in line with what was estimated when the Bill went through the Legislature last year. So currently, the currently statute has no cap on administrative costs, so we feel it's prudent to include that now.

And with respect to the number of positions and the activities that they will perform for the work, there's a ramp up, as you heard, 17 to begin with in 26 at, you know, at full peak. I'm just going to cover what the full peak looks like and understand that there's a ramp up to that.

There'll be 12 positions within our program design and implementation branch, and they're really responsible for crafting of the program while it's based largely on OM key, there are some differences that need to be accounted for within program guidelines, which will make its way then into a notice of funding availability and application, which then is handled by our state's grants management branch.

Eight positions in that area. Another position in loan closing in order to do all of the closing documentation that's associated with these projects. And then a position for asset management and compliance, which is responsible for the longer term accountability and compliance work. And then there are a handful of Administration positions associated with this HR. It both direct and indirect services, not only to support the program, but also to support the basic needs of the employees that we're adding.

Thank you. Are there other questions or comments from Subcommittee Members? Senator Smallwood-Cuevas?

So the 12 positions, he said there's a ramp up. So what's the top, what bar are we getting to or reaching in terms of the numbers? Starting with 1712 positions, 17.

1712 in that area at full rates budget, you're plus one. And then I believe it's three. But I'll have to go back overall.

Yes. In the first year there are 17 positions. And then it ramps up to a total of 27.

27. Okay. Across these different five classifications that you laid out.

Five areas.

Okay. And all covered under the funding that is moving over.

zero, so this is a separate, this separate. So separate from the funding. Although there are, there is administrative costs that come with the bond. So there's approximately $2 billion of Prop one. Prop one had a total of $6.38 billion. Approximately 2 billion of it is HCD to provide generally permanent supportive housing.

And that's what these are for. Okay, thanks.

Public comment portion of the docket, an opportunity for anyone to address the Subcommitee items on the docket today. We'll wait for folks to get settled. Just form a line at the mic when I call you forward. Please state your name for the record. And in the interest of time, we will limit your comments to 1 minute, please. We appreciate your input and participation. Welcome.

Thank you. Mark Stivers with the California Housing Partnership, also speaking today on behalf of House Housing California, the San Diego Housing Federation, Southern California Association of Nonprofit Housing, the Association of Bay Area Governments, and the Metropolitan Transportation Commission.

But we are very thankful to the Governor for restoring the 500 million in Low income housing credits that is the most efficient and quickest way to get the money into affordable housing that is ready, shovel, ready to be constructed. We would be even more thankful if we took up the chair's suggestion of maybe making this relatively permanent or for a longer period of time.

There's actually a lot of benefit to the development community, which spends years putting projects together, knowing that the resources will be there when they get to that line, when they get to that goal line. And then to the extent that the Committee is at all possible, we would love for the Committee to restore any of the MHP reversions as possible. It's a total of 325 million in reversions so far.

You've heard from the staff what that means in terms of the number of units, and those are the most deeply targeted affordable housing that we can produce. Anything that we can do to reverse any of the MHP reversions would be also very grateful. Thank you.

Welcome.

Thank you, madam, Mister Chairman and Members. Moira Topp here on behalf of Mayor Todd Gloria San Diego, as well as the Full Big City Mayor's Coalition, which is the coalition of mayors of the 13 largest cities in California. And we're here concerned about the housing and homelessness issues that are in and not in the budget this year.

Certainly the reap cut is concerning to all 13 mayors, but with respect to Hap, I think that is probably our largest concern that remains out there. The fact that Hap six or round six is not included in the budget is particularly concerning. These are lifeline programs that we provide to constituents. These are not replaceable programs with Prop 1 dollars or any other. Without these dollars, we don't know what we would do with some of these shelters.

And if I can, just because it was asked about data, I can tell you that just the city portion, which we receive about a third of the HAP dollars in total, we have used the dollars to create 15,7200 beds, shelter beds, connect more than 149,000 people with shelter and get 42,215 Californians into temporary and permanent supportive housing. Thank you.

As the Governor's January budget proposal suggested, this program would support the acquisition and rehabilitation of 1626 housing units. In the short term, those stable and affordable homes will benefit nearly 5000 individuals. In the long term, affordability mechanisms with FIP funds mean that each FIP-funded unit would serve multiple families over 99 years and would support the stabilization of 20,000 units of housing and over 60,000 Californians. Affordable housing preservation is more cost-effective at $276,000 to $480,000 per unit versus new construction, which is up $480,000 to $1 million per unit.

We strongly suggest that you uphold the January proposal for the Governor's Budget and not the May revise. Please reject the May revise. Thank you.

Chair and Members. Nick Romo, on behalf of the Southern California Association of Governments, CalCOG, and today, on behalf of MTC, ABAG, we are lifting up the REAP 2.0 program. The Governor May revise continues the cut of 300 million. You heard from the panelists today about the units.

The REAP program has very real projects, hundreds and hundreds of projects with thousands of units that are ready to go. So, we urge the legislature to reject that cut. We stand ready to work with the legislature on innovative solutions to continue the program and make sure that this successful program continues to go in this critical year.

Thank you so much.

Good afternoon. Caroline Grinder, on behalf of the League of California Cities. Our cities are deeply concerned about the proposed reduction of 260 million in HHAP bonus funds and also about the failure to invest in HHAP round six.

As previously mentioned, cities across the state have been investing those funds in successful programs to reduce homelessness, and we feel that not funding HHAP round six is an existential threat to those programs.

So, at this time, we're seeking that the legislature restore funding for HHAP round six at a minimum of $1 billion and then also continue conversations around the need for ongoing funding to support cities in their long-term planning efforts.

A recent survey of Cal City's membership showed that lack of ongoing funding is overwhelmingly agreed to as one of the top barriers in addressing homelessness among our communities. So definitely want to keep those conversations moving forward and look forward to working together to address these concerns around homelessness in our communities. Thank you.

Good afternoon, Chair and members. Kirk Blackburn here on behalf of the San Diego Association of Governments or SANDAG. SANDAG deeply concerned with proposed cuts to REAP 2.0, as doing so will only exacerbate the state's climate and housing crises. SANDAG has already awarded over $12 million to 15 jurisdictions for housing projects, including for capital and planning.

Additionally, they were planning on using refunds for various other housing programs, including to collaborate with tribes and to provide over 600 homes in South County to disadvantaged communities. All said, SANDAG was planning on using these refunds to leverage over 22 million in additional non-state funding. So urge you to preserve this funding amount. Thank you.

Good afternoon, Mister Chair and members of the Committee. John Moffatt, on behalf of the Alliance for Automotive Innovation, here commenting on issue number 13; I think it's important to level set on what this is. This is not a subsidy as it was characterized. This is a refund of overpaid sales tax on a vehicle purchase.

The examples provided by the administration in the committee analysis number two is inapplicable because that was paid in full. There's no tax credit allowable on that transaction. In number three, a vehicle sold at a selling price; full tax is paid when that vehicle is sold.

It used to be with every payment that was made, sales tax was remitted to the state. California and other states came in and said, "No, we want all of our sales tax up front." When that loan is defaulted, the vehicle is resold.

The difference there, it's the overpaid sales tax on that difference that is refunded as part of this credit mechanism.

And it's an important part of the financing transaction of getting folks into new vehicles, getting folks into ZEVs, and all the other reasons that my colleagues behind me are going to tell you about since I think I'm out of time. Thank you.

Thank you, Mister Chair. Eduardo Martinez, here with Toyota North America, also to speak in opposition to the proposal to eliminate the bad dead deduction, which is ultimately a system to ensure that taxes are paid on the actual purchase price received. This proposal would effectively result in a tax increase on these businesses.

We believe that removing this deduction would likely increase lead to increased credit costs, particularly impacting customers at the margins of creditworthiness, oftentimes low income customers. This is going to exacerbate the disparities between customers who finance vehicles and those who lease.

We're also very concerned about how this proposal could impact the state's environmental goals, particularly the transition to zero-emission vehicles by 2035. Increasing the cost of credit for EVs creates unnecessary barriers for these consumers wishing to transition, and we appreciate that the state finds itself in a fiscal predicament here.

We are working on other alternatives that actually could help realize immediate state savings while preserving the ability for business to only pay taxes. On what? On the purchase that was actually made. Thank you

Mister chair and Senators: Cliff Costa. Today, on behalf of General Motors, I want to echo my comments of the previous two speakers, and the only thing I would add to what they have to say is there is not a realized gain presently with this bad debt proposal for this fiscal year.

As the prior speaker mentioned, we are trying to come up with ways and some options to help the state now since the fiscal need is now, and we continue to have conversations about both the auditing side associated with having to review these refunds, as well as hopefully keeping these options going forward.

And so I would thank you for your time.

Good afternoon. Melissa Werner here on behalf of Honda. Today echoing the comments of the three gentlemen before me, also in opposition to the elimination of the bad debt deduction. Thank you.

Good afternoon, Mister Chairman. John Valencia here on behalf of our client Illumina Incorporated. It is a leader in genomic sequencing on a global basis. Some 4000 of our employees work in San Diego out of a global workforce of 8500, and several hundred more work in Senator Wahab's district in Hayward and Senator Becker's district in Foster City.

We urge your rejection of item 14, the suspension of NOL and R&D, for a very simple reason. The moment that this issue was announced and surfaced, contingency planning began inside our corporation.

It is planning on the contingency of enactment via a slow up in hiring, a slow up in capital investment, and a reevaluation of the supportability of its existing employee base. On that basis, we would ask you to consider that item. Thank you.

Good afternoon, Mister Chair and members. Graciela Castillo Krings, on behalf of the California Housing Consortium, all home and also enterprise community partners. Just wanted to say we're very grateful to see the restoration of the 500 million for LIHTC projects.

However, as the staff analysis points out, we are concerned that without additional investment, especially in MHP, we are not going to see the production of affordable units that are so critically needed. And so on one hand, we have.

We are basically seeing all of the general fund investment going away for this budget, and we also don't have a housing bond that is currently proposed to move forward.

We're very concerned that all of the progress that the Legislature has made in the last couple of years in terms of ensuring that additional production of affordable units comes to fruition that it's just going to go by the wayside. So we hope that we either get additional funding through the general fund or hopefully a housing fund.

Thank you.

Good afternoon, Mister Chair and members. Daniel Pearl, on behalf of AFSCME, we just wanted to voice our concern with issue 22 about the omission of funding for the vehicle licensing fee shortfall, which could likely impact the budgets and workforce of local governments across the state, and we look forward to working with the legislature on finding solutions to these issues. Thank you.

Hello, Sam Wilkinson with GRACE and End Child Poverty in California, as well as the Cali ITC coalition in strong support of trailer bill language to match the income thresholds between our state's anti-poverty tax credits, the Cali ITC, the YCTC, and the Foster Youth Tax Credit.

And urge the legislature to restore the full 20 million in funding for free tax preparation, assistance, education, and outreach efforts that ensure the accessibility and effectiveness of those tax credits and, lastly, to pursue revenues that are progressive and equitable, such as those outlined by the LAO. Thank you so much.

Good evening, Mister Chair and senators. My name is Vanessa Orozco, and I am here on behalf of Golden State Opportunity and I'm also a co-lead in the Cali ITC coalition. We're here to strongly urge you to maintain our funding in Cali ITC education and outreach and free tax prep.

It would be really hard for the state to try to replicate the one-on-one support that we give our participants, and that includes educating them on how to claim the tax credits and free tax prep services, which will be scaled back at the expense of these families and the local economy.

So we strongly urge you to maintain the funding. Thank you.

Good afternoon, Committee Chair and members. Ethan Nagler, on behalf of the cities of Belmont, Redwood City, Foster City, and the Town of Hillsborough, the VFL backfill agreement is an essential revenue source for local annual operating budgets that support vital community services. In Belmont, these funds are used to support public safety, including police, fire, and critical infrastructure maintenance.

In Redwood City, a cut of the 3.3 million due translates to a loss of financing for 20% of the city's firefighters.

In Foster City, the in-loop payment represents 7.5% of the general Fund, and failure to provide the funding would have a devastating impact on city operations as they, like the state, face balancing structural deficit against increasing operating costs. In Hillsboro, libraries, parks and recreations, and other parts and other public works represent financing for eight maintenance workers.

We ask that the legislature include funding for VLF in lieu of shortfall for San Mateo County and its 20 cities in this year's budget to ensure these communities continue to be able to prioritize shared priorities of addressing the housing crisis, climate resiliency, and emergency preparedness without a negative impact to other essential and required community services. Thank you.

Good afternoon, Chair and members. I'd like to echo the comments of the previous speaker, but Audrey Ratajczak, I'm here from Cruise Strategies on behalf of San Mateo County, and we're here to request support for funding of the VLF shortfall amount for our county for $70 million in the cities.

Our local governments rely on these funds to deliver critical services to their residents, for which costs are rising. The state ensures that every county and city in California receives their full-in-lieu VLF amount, regardless of the amount. So, the state should not single out San Mateo County in its cities to suffer a loss of essential funding.

By declining to reimburse this shortfall, the in-lieu-VLF payment is a significant core funding source for the county and its cities. For the county, if we didn't receive this money this year, it's approximately 18% of our general fund budget, that is goes to a variety of services for the cities.

These respective percentages vary, but it's still a significant part of the budget for all of these cities. It would also be contrary to the 2004 budget compromise in which these payments were guaranteed by law in exchange for substantial financial contributions by local governments.

So failure to provide that full payment would be devastating to the local budgets that depend on these thank you.

Thank you, Mister Chair and members. Jean Hurst here today on behalf of the Urban Counties of California, as well as the Rural County Representatives of California, also in support of providing funding to offset the losses of VLF backfill that are required by the counties of San Mateo, Alpine, and Mono.

Also, on behalf of the boards of supervisors of the counties of Alpine and Mono. I do think it's really important to point out that these counties aren't generally lumped in with large urban counties like San Mateo. They do not have high wealth residents, they do not have huge assessed valuations.

What they have is very few kids, and that's the reason that they're sort of in this quandary, and their very limited amounts that are owed to them are huge for their budgets because they're so small. So we would respectfully request your consideration of that proposal.

Good afternoon. I'm Eric Lawyer, speaking on behalf of the California State Association of Counties. I'm here to discuss two items. First, I would align my comments with those of San Mateo County, Alpine, and Mono.

Regarding the VLF backfill issue, for us, the issue is not about fixing holes in the budget but about honoring a promise made to local governments decades ago for the impacted counties. The revenue loss is significant and needed to deliver vital services, and we urge you to include the backfill to those affected counties.

Those comments are also on behalf of the League of California Cities. Second, CSAC is strongly opposed to the cuts proposed to the HHAP program. The 260 million cut to round five funding, along with the lack of funding for round six, will have devastating impacts on local homelessness response efforts.

Counties will be forced to reduce housing services and supports for thousands of clients who are utilizing services and rental supports to stay housed. New accountability measures are just being put in effect, and now is not the time to pull back on the commitment to this vital funding that is key to the state's homelessness efforts. Thank you.

Good afternoon, Chair and members. Ross Buckley on behalf of the City of Sacramento, we'd like to align our comments with our colleague from San Diego and the big mayor's coalition around the HHAP money. In particular, we'd like to highlight the legislature maintain the supplemental funding for round five and fund the round six. Thank you.

Thank you. Preston Young from the California Chamber of Commerce and we're here today in opposition to the budget proposals that would suspend the net operating loss deductions for certain employers, as well as a cap on the business tax credit in regards to the NOLs that's most closely synonymous with Silicon Valley.

Typically, these tech companies will operate at a deficit for a couple years before turning a profit. However, given the recent pandemic-induced restrictions and shutdowns, there are certain industries that are just now utilizing the NOLs to offset their losses from those years, particularly the restaurant, hospitality, and lodging industries.

Equally as troubling is the budget proposal to cap business tax credits, in particular the research and development tax credit, which props up our innovation based economy.

California companies performed more than $144.5 billion worth of R&D activities in 2018, which was nearly five times as much as the second-ranked state for industry investment in R&D. That activity took place in large part in California because of the R&D tax credit.

Also important to note, this credit not only applies to R&D activities but also to the wages paid to those engaged in research or directly supervising and supporting the research activities. So jobs in that sector are vital and rely on that. For these reasons, we're opposed. Thank you for your consideration.

Good afternoon, Mister Chairman and members. Lance Hastings, President of the California Manufacturers and Technology Association here to oppose the net operating loss changes that are recommended, as well as the R&D tax credit, among the other business tax credits. The governor recently identified the peaks and valleys of the revenue that comes into the state.

The best way to address that is to have a strong economy, and manufacturing is at the forefront of the economy, so our ability to be able to plan years out as opposed to months out is critical, and by switching tax policies and opportunities really cuts under the tide of California being thought leaders with our innovation, biotech, aerospace, et cetera.

So we'd like to see some more consistency over the years and I think that the economic response from the manufacturing sector would be very beneficial to the state. Thank you.

Lawrence Gayden, on behalf of the Aerospace and Defense Alliance of California, in strong opposition to the suspension of net operating loss deductions as well as the limitation of business tax credits, echoing some of the reasons stated by the manufacturers and the cow chamber as well both key incentives for the growth and production of the aerospace and defense industry in California. Thank you.

Good afternoon, Chair and members. Cameron Demetre with Capital Advocacy. I'm going to speak on two different issues, and the first will be on behalf of the California Life Sciences and Bio Innovation Organization, representing about 13,000 life science companies in California with R&D in all areas of biotechnology, including pharmaceuticals, medical devices, and technology innovations in AG. CLS and BIO are strongly opposed to the Governor's May revised proposal, which suspends the net operating loss in the research and development tax credits for life sciences companies.

Suspending these tax credits for our life science companies will do more to harm our economy than it will to help, and it is actually counterproductive to CA's economic resiliency in the long term. We represent about 441,000 individuals at an average annual wage of about $130,000. These are great jobs.

We would ask that the subcommittee reject the governor's proposal and keep the NOL and R&D tax credit intact. Second, the bad debt settlement. This is on behalf of the California Retailers Association. We'd like to express her strong opposition and concerns with the governor's proposal to eliminate the bad debt deductions from sales tax collections.

This proposal will only increase the cost of credit. CRA would ask the Subcommittee to reject the proposal appreciate your time.

Mister Chair and members. John Winger, on behalf of the Advanced Medical Technology Association. We're the national trade association for the medical device industry. Also opposed to issue 14, the net operating loss and the business tax credit suspension. In the interest of time, I'll just align my comments with the California life sciences.

This is a critical program and tools for the medical device industry in the state, and so we'd ask you to consider rejecting it. Thank you.

Hi. Good afternoon, subcommittee. My name is Tannah Oppliger. I'm with Californians United for a Responsible Budget, or CURB. As we all know, the subcommittee is facing cuts to vital programs like HHAP, which is slated to be cut by $260 million this year. Programs like HHAP that raise people and communities out of crisis are in peril.

Meanwhile, over in sub-five prisons and jails, which exchange, distract from, and degrade communities are remaining largely untouched.

In the May revision, HHAP and other vital programs could be saved if the state followed the LAo's recommendation of closing five prisons, which could save $1 billion per year and could open economic opportunities through repurposing of prison infrastructure, which we appreciate Senator Padilla's past advocacy for.

And we urge you to advocate for the elimination of excess prison capacity in order to protect housing programs, which, as we know, prevent criminalized behavior as well, and prevent increased incarceration and keep our communities safe. Thank you.

Hello. On agenda item 14, I'm Claire Conlon with Biocom California, representing 1800 biotechnology, pharmaceutical, and medical device companies and then research institutions, asking you to preserve the research and development tax credit and net operating loss deductions.

The Governor's proposal dramatically impacts companies ability to invest in California by essentially raising taxes on these businesses by 16 billion over the next three years. As our companies continue to evaluate worldwide investment decisions, the volatility of California's tax incentives over the last several years presents significant concerns.

Entrepreneurs plan years in advance and look for stability with the tax credit limitation in 2020, restoration in 2022, and now this proposed suspension, California needs to stop this yo-yo effect of tax incentives. It's creating uncertainty for investors.

We'd like to thank the members of the Senate, who already have sent a letter supporting the R&D tax credit, recognizing the value of high-quality research and the resulting jobs. There are 1.19 million Californians supported by the life science industry in these jobs. Thank you.

Thank you, Chair Padilla. Senator Niello, my name is Kristina Bas Hamilton, and I'm here today on behalf of Economic Security California Action. So I'm speaking on, hopefully, a very simple but exciting issue area, which is Franchise Tax Board, issue 19, regarding the IR's direct file portal.

So in a year like this, where there are so many budget cuts that impact human services, health programs, education, et cetera, there is a simple change that the state can make that will help low-income people access Earned Income Tax Credit, YCTC, the Child Tax Credit.

And that is literally directing FTB to integrate CalFile with the federal direct file because that means people don't have to go to pay tax preparers to get assistance accessing low-income tax credits that you all appropriate in the budget, but people don't get because A, they don't know it exists and B, they wind up going to a paid tax prep and paying more for the tax prep than the value of the credit that they went there to get it in the first place.

So if we know that the direct file system federally has been so successful and free for people to get this money that's been allocated to them, we want to make sure California simple technology change, minor and absorbable, can mean the difference in terms of access to millions of dollars of tax credits. Thank you.

Kim Lewis with the California Coalition for Youth, and last but not least, to make sure you don't forget about our young people who are experiencing homelessness on the streets.

We were disappointed to see the sweeping of the funds for HHAP and the lack of another round of funding for round six for HHAP, as well as sweeping all the housing funds. Just ask you to consider ensuring that there is dollars to support our young people experiencing homelessness on the streets.

And that if we could proceed with a bond fund, that there is also housing for our young people. Thank you.

Thank you very much. Anybody else wish to address subcommitee on public comments? Seeing no one, thank you for your participation. That'll take us over to the vote document. We will take this in two groups. The first are with respect to issues one through four, issue seven, issue eight, issue 11, issue 12. I think I got those all.

And I will entertain a motion moved by Senator Niello, if we please call the roll.

[Roll Call]

Thank you. The ayes are three; the nos are zero. Those items are out. The second group will consist of issues 5,6,9,10 and issue 26. And I'll entertain a motion moved by Senator Smallwood-Cuevas's consultant. Please call the roll.

[Roll Call]

Thank you. The ayes are two; nos are one. Those items are out. Thanks everyone for your patience and participation. If you wanted to submit comments to the committee, you can do so directly to the committee or on the website at this time. Budget Sub number four on State Administration and Government will stand adjourned.