Assembly Budget Subcommittee No. 5 on State Administration

If an issue does not fit neatly under the jurisdiction of other subcommittees, it is often we are hearing those issues in this committee. That means our work touches on many of the challenges and opportunities facing Californians today.

Today our hearing will cover the Governor's Tax Proposals, Franchise Tax Board, California Department of Fee and Tax Administration, and the State Treasurer's Office. Just as a note, we will be actually having a hearing only on the Film Tax Credit on March 4th, 2025. A few housekeeping notes.

This is an in-person hearing with all panelists testifying in person. We will take questions from members of the subcommittee after each issue. Public comment will be taken after each issue and will be taken in person. So I want to say that again: after each item, we will take public comment in person only.

Today's hearing is an informational hearing. We are joined by additional non-committee members today. Some of them will be coming in and out of the hearing. If you are unable to attend this hearing in person, you may submit your comments via email to assemblybudget@asm.ca.gov, and with that, I'd like to welcome our guests today and our returning member from last year and offer any opening comments.

All right, then, we're going to get right to it and we're going to start with issue number one: military retirement exclusion. And if you don't mind introducing yourself as you make comments. Welcome.

Good afternoon. I'm Robin Finnestead with the Department of Finance. This proposal, effective beginning in tax year 2025, excludes from income for state tax purposes, retirement pay received by a taxpayer from the federal government for services in the uniformed services and annuity payments received by--thank you--via a qualified taxpayer pursuant to a Department of Defense Survivor Benefit Plan.

The income exclusion is available for individuals or heads of household with up to $125,000 in income and joint filers who do not exceed $250,000 in adjusted gross income. The exclusion may not exceed $20,000 in retirement income per taxable year.

Military retirees are personnel who served in the uniformed services for at least 20 qualifying years. The Survivor Benefits Plan is a Department of Defense sponsored program that provides 55% of a service member's retirement pay to an eligible beneficiary upon the death of the service member.

Both federal and California law currently taxes military retirement income and survivor benefits as income. Out of the 41 states that have a personal income tax, California is the only state without a full or partial exemption. Currently, there are 29 states that fully exempt military retirement pay and survivor benefits, while 11 have partial exemptions.

The most common partial exemption is to limit the exemption to a specified dollar amount. The intent of this exemption is to provide tax relief for California families with members who served in the military and to improve the state's competitiveness in attracting and retaining military retirees to the state.

According to the Department of Defense data, California has been losing military retirees over the last decade, with the number dropping from 163,000 in 2012 to 141,000 in 2022. This proposal is estimated to lead to a revenue loss of $130M in 25-26 and 85 million ongoing thereafter. And happy to answer any questions.

Thank you. Did you state your name? I'm sorry, I didn't hear.

Robin Finnestead.

Okay, thank you. And, next.

Madam Chair, Members of the Committee, Chas Alamo with the Legislative Analyst Office. A few brief comments about this, first, tax proposal from the Administration. And to situate, as the Department of Finance mentioned, there are two key goals or objectives of this proposal.

The first is to provide tax relief to military retirees, and the second to make the state a more attractive place for veterans to retire or to stay after their service. I'm going to kind of go through each one of those in turn. But first, a bit of context. There are about 1.4 million veterans residing in California, but only a small share of those, about 10%, or 140,000, receive military retiree benefits because they have those 20 qualifying years of service. And this is largely officers from the armed services.

In our analysis, I mean, first and foremost, we find that the proposal would provide tax relief to the state's military retirees. That's clear. The tax relief would be a relatively small amount. It equates to probably $600 for the average military retiree.

And when we think about this in the broader context of all of the factors that people consider when determining where to retire, it's a relatively minor financial incentive. And so, to the Administration's second goal, making the state a more competitive place for retirees, veteran retirees to retire to, we think it probably doesn't go very far to meet that goal.

We would note, though, as the Department of Finance mentioned, that California is currently the only state without a full or partial exemption. So this proposal would move the state more in line with other states, although under this proposal, the state's exemption would remain relatively limited.

And that's in part because many states fully exempt this income and many states have no state income tax whatsoever. By and large, we think of tax expenditures as achieving some ends that the state hopes to meet, and when we review this one in particular, we don't find a strong economic or fiscal rationale, but we acknowledge that the state might have other interests in pursuing policy.

So, for this subcommittee and the Legislature as a whole, when thinking about this particular item, we think the path forward really depends on what you all hope to achieve. If the goal is simply to provide some tax relief and potentially improve sort of veterans' perceptions of the state as a potential retirement home, then by all means this proposal would do just that.

But if the Legislature is interested instead in tax expenditures that have strong economic justifications--they might lead to spur economic activity or change behavior of some kind--then this proposal is not likely to achieve those outcomes and we would suggest instead rejecting it. Happy to take any questions from the committee on this issue or any others. Thanks.

Thank you. Just real quickly, can you restate the numbers that you said about the veterans living in California? I think you started with those.

It's a--from 2012, we had 163,000 retirees and into 2022 to 141,000 retirees.

All right. Opening up to Assembly Member Ward.

Thank you, Madam Chairwoman. I want to thank the Governor for including this as a proposal in his January draft budget, something I've been, in concept, supportive of many times. I think we've had colleagues that have worked on--particularly Assembly Member Ramos has worked on this issue, leading a few years now and again has reintroduced a bill as well that is, I think, a little bit more inclusive or in the line of a full exemption.

This is the first time that I've been able to see some more concrete numbers and I think a better vetting of analysis and what the options are between a full or a partial exemption, and I'm wondering, I guess I do view it in a way that is sort of the inverse of what the LAO is recommending that, you know, you may not see an economic advantage.

That wouldn't necessarily make us more attractive if we had this, but I do hear, anecdotally, a number of constituents that would be subject to this that are stating that they are seriously considering if they have not already considered to leave the state. And I don't think we have those numbers, you know, adequately in front of us as well, but it's out there.

And so how do we prevent that exodus? You are a part of the California community, you did your service here at one of our institutions, and then you decide to up and do your retirement in Arizona or somewhere else because it's economically advantageous to you as a retiree and so we want to sort of level that playing field.

I'm interested in maybe digging in a little bit more as this conversation does move forward on the specific amounts, if you know, the thresholds that the Governor has proposed were modulated to one degree or another because I think, as you had pointed out, the, this is something that is going to particularly benefit the high-income earners even more so.

And I want to try to be able to be mindful of the budget situation that we're in right now and the budget expenditure that's being proposed here, the tax expenditure, that we are benefiting the most Californians while keeping in perspective the impact to our overall state budget as well. So I'll be digging into that a little bit more, but I just wanted, again, thank the Governor for introducing this and look to see how this is modulated going forward.

And I would concur with that. If we could look at numbers that might go further than what this benefit does now, as was stated, it could have a minimal effect, about $600 more. But is there--I know it would cost more--but having more of an impact on those retired veterans. Any other comments before we move on?

All right, thank you so much, and if we have anybody speaking on this item, you are welcome to approach the microphone. And please note the microphones go up and down like this, so you can just put it right up. There you go.

Good afternoon, Madam Chair. Yolanda Benson, representing the California Association of County Veterans Service Officers in support of this proposal and certainly agree with some of the comments already made and by you of maybe even augmenting it further. We are one of the few states in the United States that does not offer this, so we need--we have a lot of catching up to do. We support it.

Thank you.

Good afternoon, Chair and members. Ross Buckley, on behalf of Vetsin Tech. They're a nonprofit helping our veteran community get connected to the tech industry. We'd like to thank the Governor for including tax relief for veterans' pensions in his budget proposal.

This reflects a strong commitment to supporting those who have served our country, ensuring that they can retire here in California. We appreciate the Legislature and the administration's leadership in honoring and assisting California's veteran community, and we look forward to continuing our work on this issue this year.

Thank you.

Good afternoon, Chair and members. My name is Seth Reeb with Reeb Government Relations, representing American Legion, Department of California, California State Commanders Veterans Council, Military Officers Association of America, California Council of Chapters, and the Vietnam Veterans of America California State Council.

We support the Governor's proposal as a crucial step towards aligning California with other states that offer similar exemptions, helping us retain skilled workforce in California to strengthen our middle class and our overall economy. We recognize the modest nature of the proposal--proposed benefit, and are hopeful that the Legislature and veterans can work together over time to strengthen its proposal to better achieve its goals.

We have identified key areas of improvement including future exemption increases, higher income limits to reflect California's higher cost of living, and extend the study period to ensure comprehensive data collection. These adjustments will enhance the proposal's effectiveness, making California more attractive to military retirees while supporting economic growth and workforce development.

We look forward to collaboration with the committee and the Governor's Office to discuss these suggestions in more detail. Our goal is to ensure that California benefits the tax exemptions while providing meaningful support to those who have dedicated 20 plus years of service to our country. Thank you for your time and consideration.

Thank you.

Madam Chair, committee members, my name is David Kuta. I am a retiree of the United States Army after almost 30 years of service to this country. I'm also a member of the Veterans of Foreign Wars of the United States.

One of the things I'd like to state about this is I appreciate that the Governor did take this upon his budget as a budget item and it has more intangible effects than what we're presenting with the facts and I understand numbers do bring forward that, but I would like to say also, majority in 2010--I retired 2012--the numbers were that in DOD from Department of Defense that 65% of the retirees were actually non-commissioned officers which are enlisted members of retirees. The rest were the officers. So the thing about that is I'm also an import to California.

I decided to stay here as a retiree and spend my money here in this great State of California, but I will say that this has a benefit in the fact that it's not just the money or it's just not the fact of the small number you say maybe the hundreds of thousands of members that are affected, but more so the fact that I choose to stay here and spend the rest of my income as well as attracting my friends and my comrades who I'm also trying to convince that this is a great state for them to be in.

So when you serve here, as I did for five years, I decided to stay here and contribute to this economy because I saw a benefit to it. And this would greatly enhance that for the spreading of the word. So the intangibles are the other folks that get this promoted. Thank you for your time.

Thank you. Thank you so much.

Good afternoon. My name is Josh Baker, and I represent the California Enlisted Association of the National Guard of the United States. So I represent your state's National Guard, and I'm telling you, your state's national guardsmen, your homegrown guardsmen, when they hit that retirement age, and if they're eligible to collect their pensions, they rarely stay here.

They go to your other states that are more favorable. And I love to share my Army Echoes Magazine, and there's an article in this 2003 magazine that highlights all of the states that have military pension benefits, and at the bottom of the article says, 'no benefit California.'

So the army is telling people where to retire to, and California is not on that list. It's at the bottom of the list. And something I want to highlight is you have to think of your frame of reference for your retirees. We're talking about retirees, military retirees. That's going to be 38 years old, right? So we get them to stay in California. With this incentive, they'll stay here and they'll retire at another job in California. Tax that pension. Thank you for your time.

Thank you. And to those veterans who have served, we want to thank you for your service. It, of course, means so much to our state and our country. Any comments on this or questions? All right, then we are going to move to our next panel. Thank you so much.

All right, our next topic is wildfire settlement exclusions, certainly is a very heavy topic, as we started our year here in California impacted, but we know it is not our only impact. Again, we welcome our panelists here from the Department of Finance, Robin Finnestead?

Finnestead. That's correct.

Finnestead. Chas Alamo, which is LAO. And I'm sorry, you didn't introduce yourself.

Colby White, Department of Finance.

Yes. And I recall all of you from last year. I just don't have all the names all the time, but thank you. All right, go ahead and--to proceed.

Thank you. As background, current federal and state tax treatment of settlement claims, absent a specific legislative exception, depends on the type of settlement. Settlements for personal physical injuries or physical sickness are generally not taxable. Settlements for property loss or damages to property are also generally not taxable up to the adjusted cost basis of the property.

On the other hand, settlements for emotional distress or mental anguish and settlements for lost wages or lost profits are generally taxable. Whether settlement claims or portions of settlement claims from a wildfire trust fund are taxable depends on the type of settlement and facts and circumstances of the case.

The state has provided income exclusions for certain wildfire settlements on a case-by-case basis, including payments from the 2017 Thomas Fire, 2018 Camp and Woolsey Fires, the 2019 Kincade Fire, the 2020 Zogg Fire, and the Fire Victims Trust Fund, which covered the 2015 Butte, 2017 North Bay, and 2018 Camp Fires.

This this proposal excludes all wildfire settlements from taxation that are paid January 1st, 2025 or later through tax year 2029, regardless of when the fire occurred. The exclusion applies to the extent that losses, expenses, or damages compensated by the settlement payment are not compensated for by insurance or otherwise.

This proposal would provide certainty on the taxation of wildfire settlements paid between 2025 and 2029 for California families experiencing hardship after a wildfire disaster instead of requiring separate legislation for each fire. No fiscal impact is currently budgetarily scored because this bill is prospective, and future wildfire settlements are generally not included in the state's revenue forecasts due to the unpredictability and volatility of disasters. And we're happy to answer any questions.

All right.

Chas Alamogen with the Ledge Analyst Office. No specific comments about this proposal except to clearly point out that the Legislature has been clear in its directive to exclude settlements from taxation in the form of the passage of legislation, including two pieces of legislation recently that were vetoed by the Governor, including one of yours, Assembly Member Lackey, and so that context sort of shapes this conversation between the Legislature and the Administration this year. Thank you.

All right. With that, I'm going to open it up. Members, if you have question? Assembly Member Lackey.

Yeah, and it kind of falls on the heels of what was just mentioned. The state has historically provided gross income exclusions for wildfire settlements through one-off bills. Why is this Administration deviating from that precedent by excluding certain fires that I mentioned before: the Bobcat Fire, the Mill Fire, the Dixie Fire, and the Slater Fires? Help me understand why those those claims are being excluded.

Our proposal does not discriminate between any fires and provides relief based on the timing of the pay--the settlement payment only. Therefore, settlements related to the Bobcat, Dixie, and Mill Fires paid in 2025 or later will be excluded from taxation.

What about 2024?

Settlements can trail so that it might be a few years before those settlement payments are made. While the state's fiscal position has improved and the proposed budget is balanced for 25-26, the state faces many fiscal pressures and at the time of the budget development, it was unclear what the fiscal cost would be for providing retroactive tax relief for wildfire settlements.

The Administration continues to look into the fiscal impact of providing that retroactive tax relief for settlement issues and looks forward to ongoing conversations with the Legislature on this issue.

I too, look forward to those conversations because it seems very inconsistent.

Any other questions from the panel? Assembly Member Hadwick.

Hi. I am also wondering the same thing. So Dixie Fire was the single, single fire, single-most damaging fire, right? The other one was a complex--just under a million acres and it's been exempted. It was most, most of my district. Our district is plagued with fires.

Three of those fires are in our district that were excluded. I have constituents calling me every day. They call our office every day asking why is this not changed? Why have they been excluded? Is the Governor--it feels like the Governor is making some victims less equal than others. Is there a reason behind this or are you going to give me the same answer?

Just to reassure you, this proposal does not intend to discriminate between fires and we are certainly open to conversations throughout the spring with the Legislature.

Okay. Because his veto letter specifically said he wholeheartedly supports the intent of these bills and said it needed to be included in the budget, so we've requested that. We thought it would be in the budget and it was not.

Yeah. Colby White, Department of Finance. So I think the Governor is committed to providing relief for wildfire settlements. As my colleague noted, there are fiscal implications with providing retroactive relief, and when you're thinking about fiscal estimates related to providing that retroactive relief, there are complications as far as a lot of these settlements are not publicly disclosed, and even when they are publicly disclosed, as we laid out, there are, there's a, it's not known what portion is subject to tax under current law.

So clearly, you're getting calls from your constituents. Clearly they feel that some of them are being subject to tax, so I think when we were developing the budget, it really is a complicated issue to try to tease out that fiscal impact and we are working with the FTB to better understand that and we do look forward to continuing to work with the Legislature on this issue.

So it really feels like a rural/urban divide and I wish I had a better way to explain it to my constituents. I don't understand why they're being exempted and I don't feel like that was a real answer of the why.

I can assure you it wasn't--I mean, the proposal put forth here demonstrates the Governor's commitment to provide relief. It was a timing and a fiscal issue, so this, this covers payments that are made in 2025 or later, recognizing that there are payments that would be made prior to that related to other fires, but also recognizing, for example, the Bobcat Fire, and these settlements do trail, so there will be settlements that are paid in 2025 or later.

But really this proposal was put forward with regard to the timing and the, and this not being included in the budget itself as far as our revenue forecasts don't recognize income from these types of settlements so there was no additional fiscal impact from the timing related to 2025, and so with regard to retroactive relief, we need to work on that fiscal estimate.

Okay, so, you don't have the impact of what that would be to include those fires? That was going to be my next question.

So with regard to that, there's, you know, you have to, there's different permutations. So there's 2024, there's 2023. Okay, so yeah, that's a different--and so there's different fiscal implications, and depending on what the timing is, depending on what fires you're covering, if it's blanket or if it's specific to the Dixie Fire, for example--we have looked at the Dixie Fire.

We did have a public analysis for SB 542. We have--and that estimate was done in mid 2024, and at that time, we estimated that it was 36 million. We are looking at it again. We've learned new things as far as what--and there would be potentially additional settlements that would have been paid made since that, since that time. PG&E has some publicly available data as far as the settlements related to the Dixie Fire, which is how we were able to triangulate that.

Can you get to that, get, get us the information for that on the four fires that we mentioned?

Did you say four fires?

Yes, the Dixie, Bobcat, Slater, and Mill Fires. Those are the four that we requested in our legislation. We have a bill, too.

Okay.

You said those won't be heard, so--

Yeah, we are working, working on that. Yeah. And we will, we will get that to the committee.

Thank you, Assembly Member. I see that you have some comments or no? Okay, then Assembly Member Ward.

Thank you. I'll just build on that as well, too. I appreciate that we're thinking prospectively, I guess, of the years 2025 through 29 for incidences that occurred retroactively, but I would be in support of maybe using this moment to try to codify this policy once and for all knowing that these wildfire threats are going to continue to some degree in years to come. That prospective fire events that sort of meet a certain standard, was a state of emergency declared? Was there a loss of property?

If all the conditions are essentially the same as those for which we are having to do these one-off bills, I would rather stop having to do these one-off bills. It adds uncertainty, it adds stress to many of these individuals in their communities, and knowing that this is the new era that we're in right now, I would prefer that this sort of improve and morph into something that was a little bit more all-encompassing of the situations that are going to be coming at us going forward.

And that's coming from an urban district as well, but I feel like that's kind of the fair response to be able to maybe sort of level the field for what, what communities and individuals should expect in these instances going forward. I think this is certainly worthy of further conversation, I think that we'll enjoy throughout the springtime, but that's something I'd love to be able to see, a direction that it could go.

So just a quick comment on that. So the bill that--I'm sorry--the proposal that we put forward is all-encompassing in the sense that you're describing, in the sense that it covers any fire that is a settlement is paid in 2025 through 2029.

For payments paid--oh for any fire?

Yes.

So not for fires that occurred up through 2024?

It makes no distinction between when the fire occurred. The only distinction is the timing of the settlement payment itself.

So would that then also be eligible to the the fire incidences that Assembly Member Hadwick had mentioned as well?

It could be, but it depends on the timing of the settlement payment. So if the settlement payment is made in 2024 or prior, retroactively--

We're still going to have to do legislation to include that as well and you could maybe that--include that here too. I would be supportive of that. Thank you.

Thank you. Assembly Member Lackey.

Yeah. I just want to make a clarifying point that first of all, last year this request was vetoed, which means it made it to the Governor's desk with full legislative support to address this issue in a favorable way. We were told we need to pursue it through a different process. That was basically the explanation for the veto.

It's come back and it's still not in the process. So now it seems like this is a negotiation point, which is unfair to these people that are suffering from this condition, and others are getting the benefit and they are not. It's unfair.

And I just wanted to let you know that I'm going to be very aggressive in trying to get an answer why. And I haven't been satisfied so far. So this is very critical to these people. Very critical. They've gone through devastation, absolute devastation, and they're being treated differently than other constituents. It's unfair.

Thank you for comments. As you can see from our panel, this equity, if you want to say it--and that term means a lot. I had the opportunity last June to visit Chico and Paradise on a tour, and so much that you can learn from these tours, particularly when we met with some of the professional firefighters talking to us about how fast the Chico Fire in June--well, I think it was actually May that it happened--but we were there in June.

And of course, everything we've seen since then with them saying that the ground has been so hot that none of their modeling can predict how fast these fires could spread, and indeed they did, yet there were some good examples of hardening where some properties were protected.

So that's a whole other conversation, but when we made our way to Paradise, again, there was some optimism of some rebuilding, some individuals moving back from really an area that was devastated, and yet there still remains huge impact as far as not only building, but bringing people back, hospital not rebuilt, which means many seniors are not coming back.

This is all more in context of what really happens after, and that's why us really doubling down on equity as far as the future goes, whether it's in repayment or in supporting, because we know whether it's in your area or somebody else, very well, we have seen as of January, it could be in anybody's area, and we want to make sure that we're not having winners and losers, especially when people lose so much in these fires.

Thank you so much. We appreciate your hard work. Next, we are going to move to our third item, which is pass-through entity elective tax. And we will be welcoming Nicholas Thomas, Department of Finance, and--welcome.

Good afternoon. Nick Thomas with the Department of Finance. So, as part of the Governor's Budget, the Administration is proposing to extend the pass-through entity elective tax for tax years 2026 through 2030, and that's subject to a trigger if the federal SALT cap is extended.

And additionally, the proposal is also to allow--to newly allow--late payments or late prepayments for the extended program. Just by way of background, under current law as adopted in the 2017 federal Tax Cuts and Jobs Act, California personal income taxpayers are limited to deducting no more than $10,000 of state and local tax SALT payments on their federal returns.

However, business entities can still fully deduct state and local income taxes paid under federal law. In response, the 2021-22 budget enacted the PTET, which is a tax workaround that generally allows taxpayers who have income from pass-through entities such as partnerships, LLCs or S corporations to electively pay a tax at the business entity level and receive a personal income tax credit for the same amount.

In doing so, tax liability is shifted from the individual's personal income tax to the business entity and therefore the SALT limitation is avoided. The PTET is currently scheduled to sunset after 2025 along with the federal SALT cap. Our finances estimate is that the PTET has so far saved California taxpayers approximately three and a half to $4B per year on their federal taxes.

While the PTED is scheduled to end after tax year 2025 along with the federal SALT cap, negotiations are currently ongoing at the federal level and that's expected to result in the SALT cap being retained in some form. Therefore, this proposal provides a five-year extension subject to a trigger depending on the outcome of those negotiations.

Additionally, if it goes into effect, the Administration's proposal allows taxpayers to make a late prepayment beginning in tax year 2026, subject to a 12.5% reduction in the credit generated for the amount of the underpayment.

Under the current program, taxpayers are required to make a prepayment in June equal to either 50% of their prior year's liability or $1,000, whichever is less or whichever is greater. However, the taxpayers who pay late or who underpay their June prepayment by any amount are disqualified and unable to participate in the PTET program for that year.

Allowing late prepayments gives those taxpayers an avenue to participate when they inadvertently underpay, while the 12 and a half percent reduction in the credit amount still provides a sufficient incentive for taxpayers to pay timely and therefore protects the fiscal interests of the state. With that, happy to answer any questions.

Thank you. I was just noting that I forgot to do public comments on the wildfire, but we will do that after this and add those in, so if you wanted to make comments on that. All right, do we have any questions from our panel? Assembly Member Ward?

Just very quickly, if--do we estimate that if extended by the Feds, the impact to the budget will be the same, and what is our prediction about the federal atmosphere as far as how the timeline is going to work for us or if we expect any holdups on this or so forth?

Holdups in terms of the timeline for the negotiations or are you--

On the extension.

Yeah. So it's subject to a trigger depending on what happens federally. Can't necessarily speculate as to what that extension at the federal level might look like or what the contours of an agreement would be.

Generally speaking, if the PTET or if the SALT cap is extended and PTET is also extended under this proposal, PTET is largely revenue-neutral for the state. There is a small gain to the extent that credits aren't used over the--over the lifetime, which credits are currently allowed to be carried forward for approximately five years.

But regardless, that's very small in comparison to the overall size of the PTET program. But yeah, in terms of the, in terms of the what, what the outcome of the federal negotiations would be, can't necessarily speculate on what that'll look like.

All right, appreciate that. With that, if you are here to speak publicly related to either the wildfire item or this pass-through entity tax, please come up.

Hi. Good afternoon. Jason Fox of the California Society of CPA, speaking on the PTET provisions. We're currently reviewing the proposed trailer bill language, but we're appreciative that it was included as part of the budget package. We think these are practical changes that will ensure the PTET is accessible and as beneficial as it is designed to help the taxpayers for.

While we don't know what's going to happen, how Congress may or may not act and when they may or may not act, we think it's important to give the California taxpayers at least some level of certainty. So we look forward to working with the Legislature and the Administration as this moves forward. Thank you.

Thank you. Welcome.

Good afternoon. Pat Joyce, on behalf of the National Accounting Firms. I want to thank the Governor for his proposal. It's extremely important to the accounting firms as taxpayers and tax practitioners, and we're closely monitoring what's happening with Congress. We are hearing from sources that it's likely to be retained, maybe increased slightly, but nevertheless, we'll still need the PTET work around here in California.

But look forward to--we do have some comments for the budget trailer proposal and some additional language with further improvements that we look forward to sharing with this committee staff and the Department of Finance in the near term. Thank you.

Thank you. Appreciate it. All right. With that we're going to move to item number four, issue number four: mandatory single-sales factor apportionment for financial institutions. Nicholas Thomas is staying with us and it looks like Rowan--it's Rowan is here with the LAO--Rowan Isaaks, and welcome.

Okay, so the Administration is proposing to require financial institutions and savings and loan businesses to use single-sales factor apportionment beginning in tax year 2025. As background, an apportionment factor represents the share of business activity that a firm conducts in a state divided by its total business activity in either the U.S. or the world to determine the share of its income subject to tax in each state. Apportionment factors can define business activity in different ways.

Single-sales factor apportionment, for example, is calculated using the ratio of a company's sales within the state to its sales in either the U.S. or the world. Another formula is three-factor apportionment, which is calculated using the ratio of a company's property, payroll, and sales within the state relative to its--or as a share of its property, payroll, and sales in either the U.S. or the world. So it includes two additional factors.

Since the passage of Prop 39 in 2012, nearly all businesses have been required to use single-sales factor, the single-sales factor formula for apportioning income to category California for tax purposes. However, financial institutions as well as savings and loan businesses were not affected by Prop 39 and they continued to use three-factor apportionment which has been the case since the mid-1990s.

The Governor's proposal brings the taxation of multi-state financial institutions and savings and loan businesses into alignment with how nearly all other businesses are are taxed currently in California and further how these businesses are also generally taxed in other states as well. As a result, the taxation of these firms will be more equitable and not disadvantaged firms that invest property and payroll in California, which the Administration views as encouraging economic development in the state.

Single-sales factor apportionment is generally more beneficial in three-factor apportionment to multi-state firms with a larger physical presence in the state as they can exclude their property and payroll from the apportionment calculation. As a result of the change, some taxpayers will pay more in state taxes while others will pay less. On net, the proposal is estimated to increase revenues by $330M in 25-26 and by more than $250M annually thereafter. Happy to answer any questions.

Thank you. Do we have any comments?

Yes. Thank you, Madam Chair, members of the committee. Rowan Isaaks, LAO. Our recommendation is that the Legislature should approve the Governor's proposal and switch financial institutions to the single-sales factor. The primary reason for our recommendation is that we just do not view there as being a clear justification for financial institutions to receive an exception to the single-sales factor. There are, in our consideration, two possible justifications for providing an exemption in general.

The first is that some firms have their labor and capital fixed in location, but they make sales throughout the U.S. or potentially the world. An example of this might be a mining operation that has a mine in California, and therefore most of its employees will also be in California, but they then sell their product throughout the world.

In this case, it's possibly more appropriate for an apportionment formula to take into consideration the fact of the location of the employees and the land owned by the company. However, for financial institutions, this is not the case. They can provide their services or products pretty much regardless of where they are physically located.

So this possible justification does not apply to them. The second potential justification is that sometimes states can use or offer alternative apportionment methods as a way of sort of conferring favorable tax treatment to certain industries. However, we're not aware of the Legislature indicating that they would like to do this for financial institutions.

In fact, financial institutions largely pay a higher base corporate tax rate than firms in other industries because neither of these possible exemption--potential justifications apply to financial institutions. That motivates our proposal to approve the Governor's proposal. Finally, we don't think the Legislature should really consider this as an effective vehicle for economic development in general.

There's definitely a theoretical justification, but our assessment of the empirical evidence suggests that, you know, there's not a strong motive there. Although as the Administration mentioned, and we concur with them, that because the majority of multi-state financial firms are located outside of California, there will be a positive revenue effect, even though there's maybe some uncertainty about the size of that effect in the long run. Thank you. Happy to take any questions.

Thank you. I think I'm going to be asking a question here to Department of Finance. The LAO discusses winners and losers in their analysis. Does the Administration also account for winners and losers? And can you explain who they are?

Yeah. So in terms of winners and losers from the proposal, multi-state companies with relatively more property and payroll in the state would, generally speaking, see their tax liability decrease, whereas on the other hand, companies with less payroll and property in California relative to their sales would generally see their tax liability increase.

Okay, I'm going to open it up for--we don't have any more panel members here, so if the public would like to weigh in, please. All right. Not seeing anybody come to the microphone. Thank you so much for your presentation. Moving to item--issue number five: AB 518: data sharing for CalFresh.

We will be welcoming up Thi Long from the Franchise Tax Board. Rowan Izaks is staying with us and Cynthia Elmore. Elmore from the Department of Finance. Welcome.

Thank you. Good afternoon. Taylor Wall from the Franchise Tax Board. Issue 5, AB518. The data sharing for CalFresh is requesting 161,001 permanent physician for the FTB to support the implementation of AB518. CalFresh is a supplemental Nutrition Assistance program that provides monthly benefits to individuals and families with Low income.

The Bill authorizes the FTB to share data with the California Department of Social Services for the purpose of developing targeted outreach strategies to maximize federal funding for CalFresh and to also to improve the Administration of the program. The requested resource will partner with CDSS to analyze, design and develop the interface.

Additionally, the resource will also support the ongoing gathering and sharing of the data and the ongoing maintenance. Thank you for your time. Happy to take any questions.

Is this my page? All right, I'm getting lost here. Just hang on a second. Can you just explain AB518?

Just give us context here. So AB518 is. So there is CalFresh, which is there's the federally mandated program. Right. Of SNAP and CalFresh is the California Administration of the program.

And the intent of AB 518 is to really for the California Department of Social Services to acquire some additional data so that they can increase the uptake of CalFresh so that more families who are in need of the support can be receiving it.

And our role in it is on the departments that could be potentially providing the data.

And I didn't see it in the analysis, but can you give us a context of what type of data, percentages or numbers you're looking at? That of individuals that may qualify but aren't. And are you seeing individuals right now, again, with the atmosphere with the Federal Government not accepting benefits or pulling out of benefits?

Any context of what's happening right now?

Yeah, unfortunately I'm not able to provide that context. CDSS is the administrator of the CalFresh program. So really, from a Franchise Tax Board perspective, our requested resource is really to look at the data that we have in house and really partner with CDSS to see what may be helpful to them to increase the uptake.

Do we have any estimate of percentages that would increase with this new effort? I do not. If we could get some of that, that could be helpful, I think. Do you have any comments?

Just very quickly? Rohan Isaacs Lao again. So, yeah, the Senate Appropriations Committee last year did recognize some ongoing but unknown. Costs to The Department of Social Services, some of that activity and increased activity. Will apply to ftb. So there will be some expected workload increase. So we'd view this request as reasonable.

All right, anybody from the public wishing to speak on this item. All right, with that, thank you so much. Appreciate it.

And I'm staying for item six. All right, so hello again, Taeh Won Franchise Tax Board. So issue number six is the Asset Forfeiture Account spending authority increase. And this is to increase the FTB spending authority for the Asset Forfeiture Account. There are no additional funds being requested with this proposal.

So FTB's current spending authority from this account is 740,000 annually. And we are seeking to increase that authority to 2.5 million for the upcoming 2526 fiscal year to allow our we have a Criminal Investigation Bureau to acquire some additional permissible resources. The Criminal Investigation Bureau the same. We participate in what is known as the Asset Forfeiture Program.

So really are this group partners alongside local, state and federal law enforcement to investigate tax issues that have a criminal component? So as part of the participation in these task forces, FTB is allowed to receive an equitable share of the assets. And these equitable share assets, there is a parameter for usage.

We, we are able to use these funds to really supplement the program, but not to supplant any local or state funding that's associated and over the years, but really primarily of one large one time payout that happened in 1819. FTB's current balance is a little bit over 21 million.

And in October of 2024 we were unfortunately notified by the Department of Justice and Department of Treasury that because we're not an independent law enforcement agency, we live within the Franchise Tax Board that we are no longer eligible to participate in the program moving forward.

So meaning that in the future no additional funds will be deposited deposited into the account. But in the meantime, the dollars that we do have in there are accessible to us until June 30th of 2026.

So we kind of went about and did our business and see, you know, how can we really maximize these funds while we have access to them. And with this approved increase in spending authority, FTB can really work to improve officer safety and also to secure some additional training and tactical equipment for investigators.

Thank you for your time and happy to take questions.

And Mr. Isaacs, would you like to weigh in?

Yeah, just very quickly. You know, as mentioned by the Department, this is kind of a use it or lose it situation. And you know, we've looked, we've reviewed all the proposed use of the requested funds, and they're all allowable under the rules of equitable sharing. So we have no additional concerns.

One of the questions I have is do you expect that you'll be able to expend the funding by June 302026?

No, with the large balance, we won't be able to expend that. And really, because there's a couple parameters that limit it, first is really the permissible use. But more importantly, as we worked to look to spend the money, we were also very mindful of ongoing costs.

So it didn't make sense to expend the funds, but only to take on additional liability for the state in the long term. So those two reasons really limit our ability to expend.

And the specific use of those funds are, as you said, officer safety.

And yes, we can use it for law enforcement training. We can also use it for equipment as well as software. But there are also impermissible uses of the funds, and that would be including transferring to other funds or starting a separate account.

So, because we don't want to send money back.

I know we don't want to either, but we also didn't want to take on additional liabilities in the long term.

No, I hear you. Thank you. Thank you. Anybody wishing to speak on this item, thank you very much for your presentation. Are you staying with us in support of Roger Latias? All right, now we are. All right, we are on Enterprise Data to Revenue Project Phase two. We have Roger Lackey here. Thank you for being with us.

And Mr. Isaacs and Cynthia Elmore. Welcome.

Thank you. Good afternoon, Assembly Members. I'm Roger Lackey with Franchise Tax Board. I'm here to present on item number seven. Item number seven is FTP's BCP supporting the enterprise data to Revenue 2 project, known as EDR2. Before diving into the proposal itself, I'm going to provide a little bit of background.

In 2007, FTP created its tax system modernization plan, which outlined three large projects over 30 years, each of the projects taking about 10 years from planning through implementation.

The goals of those or objectives of those projects was to modernize FTB's aging IT systems, improve business opportunities and objectives through better use of data, and improve taxpayer services, effective compliance and operational excellence. The first of the three projects, Enterprise Data Revenue 1 EDR, was successfully completed in 2015.

EDR1 brought new tax processing systems that automated a lot of our manual work and improved data capture and validation for our personal income tax returns. It also made processing personal income tax returns and business entity tax returns faster and more efficient. The Planning for the second project began in 2016 and implementation began in July of 2021.

The start of the fiscal year 2526 will see FTB enter the fifth year of the EDR2 project. The project continues to build on the foundation set by EDR1 by expanding enterprise case management and modeling services for audit, filing, enforcement and our accounts receivable expanding on customer service tools including the Taxpayer Folder and externally what's known as MyFTB.

Following the statewide process established to support funding larger IT projects, an annual BCEP is required for new costs related to that year. This year's proposal requests an augmentation of $107,075,000 and includes funding for the equivalent of 42 permanent positions and four limited term positions. The request includes $90.39 million for the solution partners.

So please note FTB is using a time approach to requesting resources. We are asking for resources for the same functions across the years as they are needed. We have noted the ongoing limited term or one time cost within the BCP documents that you have for the fifth year.

Project work includes the following data analytic tools and models for our compliance systems enhanced data capture oversight functions including independent verification and validation, quality assurance and independent security assessments. There are also two provisional languages in our budget plan to support the EDR2 project.

The first language allows for the carryover of vendor compensation of the funds appropriated for the vendor compensation. Any unused amount is allowed a one year, one time carryover to the next fiscal year to support the vendor payment for services performed. The second provisional support funding is the use of unplanned work.

Unplanned work funding not to exceed 5% of the contract amount to cover costs associated with the unplanned work, which aligns with the existing scope of the project and necessary for the successful implementation of the EDR2 project.

Lastly, statewide policy requires a special project report to be submitted when there is a 10% or more increase in scheduler cost when there is scope change.

However, due to the size of the EDR2 project, the project is also subject to a special command special condition where an SPR must be completed if the cost increased by 5 million or more. In January of this year, the EDRT project submitted and received approval for its second SPR of this project.

While the project schedule and end date remain the same, the total projects increased by $18.4 million, or approximately 2.4% of the cost of the project. These additional costs are necessary due to the highly complex technical environments being implemented in the EDR2.

Project success is independent of FTB's IT staff ability to manage, maintain and operate these highly complex technical environments. So as we move forward towards completion of this project, the collaboration between FTB and our solution partners remains strong and we're working well together as issues present themselves.

We are currently at the peak of the project and while the schedule is tight and there are a lot of meeting pieces, we are within scope, schedule and the revised cost of the SBR2. So I thank you for your time and support and available to ask any question, answer any questions.

Thank you. That was comprehensive. Mr. Isaacs, any comments? Nothing. I think we have quite a bit of information here. You did said say 18% increase?

No. 18 million. Zero, 18 million. Yeah. The increase for this SPR is 2.4%.

Okay. That's a big difference. Thank you. Any comments on this item? See? None. Thank you so much. We're just rolling along here. All right, where are we? All right. We are moving to California Department of Tax and Fee Administration, issue number eight, unflavored tobacco list AB3218. Looks like we have Nick Maduros, Director of CDTFA.

A mouthful. Yes.

Yes. Jason Mallet, Chief Financial Officer. Hello. From the Financial Management Division of CDTFA. Seth Kirstein from the LIO. Hello. Nice to see you. And Cynthia Elmore, Department of Finance. All right, welcome.

Good morning, Chair, and it's a pleasure to be with you today. I just wanted to start by providing a little bit of overview of the Department of Tax and Fee Administration. We administer 42 tax and fee programs for the state. The largest of those is the Sales and Use program.

Last year we collected almost just shy of $100 billion in revenue for the state and the cities and counties. About 80 billion of that is the state sales and use tax. Our aim is to be as fair and efficient as possible.

Since CDTFA was created, we try and measure our efficiency by the amount it costs to collect to administer $100 in revenue. Since CDTFA was created, we've cut that cost almost by 30%. So I just ask you to keep that in mind as we go through these two BCPs, both of which are essential.

And with that, let me turn it over to Jason Mallet, our CFO, to get into the details. Then we'd be happy to answer any questions.

Thank you, Nick. Good afternoon. I'm Jason Mallet, CFO of CDTFA. I'm joined by a few colleagues in the audience as well. So we have two requests today. The first one is the Cigarette and Tobacco Licensing Program. So as background California's tobacco flavor ban that started in fiscal year 2223 did not authorize CDTFA to seize flavored tobacco.

Starting on January 1st of this year, AB3218 and SB1230 authorize CDTFA to seize flavored tobacco from retailers who are violating the flavor ban.

CDTFA's request is for one year funding of $3.5 million in budget year 2526 from the Cigarette and Tobacco Compliance Fund to implement AB3218 and SB 1230, which enables CDTFA to seize, destroy and assess penalties on flavored tobacco products.

We're requesting just one year funding because the volume of seized product is not yet known and on the revenue side of the ledger it's uncertain how much and penalties we'll collect because we'll be seizing a legal product that would otherwise have been sold.

Once we have better visibility of costs and revenues, we will return next year with an ongoing funding recommendation. I also want to note that the Cigarette and Tobacco Compliance Fund supports the existing cigarette licensing fee program as well as now the seizure authority from AB3218 and SB 1230.

This request gives CDTFA sufficient authority to administer both requirements, and with that I'm happy to answer any questions.

Would you like to go ahead?

Thank you. Yes. Seth Kirstein with the LAO since the flavor ban went into effect, tobacco tax revenues have declined much faster than usual. So based on those declines, we think the annual revenue loss from the flavor ban might be on the order of around 3 to $400 million.

And so of that amount, we don't know how much is due to greater tax avoidance and how much is due to to lower actual consumption and consumption of tobacco. So another notable trend is that spending on CDTFA's tobacco programs has declined over time.

So in 202324 the department's tobacco programs had 32% fewer filled positions than they did in 2018-19. So some of that decline is likely due to efficiency improvements. But the Department also has struggled to hire and retain inspectors who perform in person tobacco enforcement activities.

And so over the last few years, the number of tobacco inspections dropped by 52% and the number of citations dropped by 24%, while the number of product seizures grew by 3%. So turning to the BCP in a strictly budgetary sense, the this proposal to Fund CDTFA's implementation of the new unflavored tobacco list statutes is Reasonable.

But since CDTFA has struggled to fill tobacco enforcement positions, even provided just under its existing appropriations, it's unclear to us how much of that proposed spending actually will ultimately materialize. And we're concerned that these new responsibilities could spread existing tobacco enforcement resources even more thinly.

Can you address some of those questions?

Yes, it'd be my pleasure. So, a few things. The tobacco inspectors that we have out there, and they do a fantastic job. It's a big state, and we have struggled to hire, largely because, I think, two reasons.

One, during the pandemic in particular, while lots of people were working at home, our tobacco inspectors were out every day in the field inspecting smoke shops and mini marts and liquor stores and other places where tobacco is sold. Also, in the old days at CDTFA and prior to that at Boeing, the tobacco inspectors were.

It was a promotional opportunity for a lot of our sales tax collectors. And so that was the path forward for a lot of people to be promoted.

It turns out that it doesn't make a lot of sense from a tax Administration perspective to take your best collectors and then have them trained for a whole new job going out in the field and looking to make sure that tobacco is sold at a tax level.

And so we've had a transition, and I think we're through that and are now hiring people into the tobacco inspection program directly, which I think will ease those vacancies. The other piece, two other pieces I just mentioned briefly. One, it's not really new work because our inspectors are out there anyway.

So while they're out there, they are seizing now at smoke shops, untaxed tobacco now flavored tobacco, cannabis products, and illegal hemp products. We have them out there. It doesn't make sense for us to not do those things. The team has also gotten much more strategic about where we're inspecting.

In the old days, we did perform more inspections, but we were inspecting places that, you know, if you inspect a large supermarket chain that is compliant, it would count as an inspection. It doesn't really. It's not an efficient use of state resources. Now we're going to the businesses where we. Where we suspect non compliance.

And in fact, that's what we're doing. That's why we're finding. Doing fewer inspections, but finding a lot more illegal product that we're seizing. And when we do seize it, it takes three times longer once you do a seizure, because you need to account for all of that.

And so I think those are some of the factors that are at play. But the resources are needed and the other big piece of this is it funds the destruction of the product because flavored tobacco juice, the nicotine liquid that's in vape products is a toxic substance.

And the toxic destruction which we're doing not only for the state but will also do for locals as they enforce incredibly expensive. And that's really part of what's driving this as well, I think.

Thank you. I appreciate that. You answered one of the questions I have, which is what do you do with the product once you seize it? So you do have steps you take and you mentioned that you're in addition seizing other products, cannabis and so forth.

You don't need to do it now, but could we get some information on exactly, exactly how you dispose and so forth?

I did have an opportunity to go out on a cannabis enforcement last year and in Fullerton of all places, and it was almost a year ago to this date, Valentine's Day morning at seven in the morning and there was a huge amount of product and I was not only shocked, but we were told that, that it was well over $1.0 million of product but it included everything from mushrooms to of course cannabis, but many products that looked like items that many young adults would Cheetos, juice boxes, all of these.

So for those of you who don't know about this, it certainly is eye wearing. But your questions did clarify. And then one other question on the hiring of these inspectors. What are the, what kind of qualifications do they need to have?

Well, so now we'll hire them as our level is, it's called business taxes representative, which is one of our entry level qualifications. You do have to have a certain number of specified courses to meet that classification under state laws. You need to have some sort of accounting business background.

And then when we promote them into a business taxes compliance specialist, this gets a little weedy at that point. We'll also make them limited peace. We'll put them through the training for to become limited peace officers. But that's the, that's the sort of pathway into this work because last year.

In our hearing it did come up about the cannabis officers enforcement and their, how they were, what categories they were being put into and I'm not sure if that will be coming up.

Yeah, ours are not full peace officers. We don't, they're. We're accountants. So people are. Have pocket protectors rather than guns. So we often. And part of the funding actually goes to pay CHP to go out with our teams where they're going to unlicensed businesses.

So are you finding a lot of this product in like tobacco shops, Is that what it will kind of liquor stores slash tobacco shops?

Exactly.

Okay, I appreciate it. Any public comments, questions? All right, thank you so much. Appreciate it. All right, we are going to our last item.

Zero, we have one more.

Sorry, where are we? Yeah.

Yeah. And if I could just supplement Nick's comments with a couple of figures. And I think this gets to your question, Seth. Although our inspections have gone down, our batting average has gone up significantly. So our total number of seizures has been in line from where it was in 1920.

But the wholesale value of the seizures has tripled from around $600,000 per seizure to about $1,800,000 last year. So I think that that shows a higher rate of success.

Thank you.

Sure.

All right, so issue number nine. It looks like we have the same team here. We have the CROs, maintenance and operation. We have Jason Mellet and Seth. Seth. Sorry, Seth and Cynthia.

Yes. So as background, the Centralized Revenue Opportunity System, or cross, is the department's tax collection and distribution system for all 42 programs that Nick had mentioned that generate over $96 billion per year for the state. The request is for $9.3 million in fiscal year 2526 and 2627, which falls under two buckets.

The first bucket for 6.1 million is for maintenance and operations and the second bucket for 3.2 million is for the software license. The rationale is that Cross is a proprietary system that requires ongoing maintenance and operations to onboard new legislation and also maintain customized reporting for existing legislation. And with that we can answer any questions. Thank you.

Any comments? And I do not have any questions at this time. Thank you so much.

Anybody from the public wanting to speak on this item? Seeing none, we will go to Item issue number 10. The Jesse Aru Building relocation costs. UNRA. Sorry, Jesse. UNRA Building location cost or the Treasurers.

Thank you.

Yes, the Jesse UNRA Building.

The Jesse Unruh Treasurer's building. Yes, Relocation. All right, we have. You can go ahead and introduce yourself.

Yes, my name is Karma Mani. I'm the chief of fiscal services in our Administration division at the state Treasurer's office. And today I'll briefly just go over what the request is.

So the state Treasurer's office is requesting one time General Fund augmentation of $735,000 for relocation costs associated with its move back to its headquarters and 915 Capitol Mall. Provisional language was also also requested to allow for additional costs IF required. The STO will manage approximately moving 516 employees in this transition.

And we will move staff Members, equipment, office furniture, and we will as this. There was no funding included in the DGS's costs in their BCPs for any of our moving costs. So that's why we're coming forward today. Lastly, the renovation is on schedule.

STO staff is expected to be moving back to the Jesse Unra Building in the fall of 2025. Happy to answer any questions. Mr.

Bentz, do you have any comments?

Thank you, Chair. Alexander Bentz Lao. No major comments. We do note that the Department anticipates future funding requests related to lease payments in their new building. So there will be future requests in next year's. Thank you.

What is the timeline? You mentioned that in the fall, but what happens if the timeline is pushed out before the budget year?

Well, we're supposed to be on staff. Our business services Department Department is in communication with them. They have consistent meetings. So as far as we know right now it is on schedule. The goal is to get us in the building before Thanksgiving. Of course, there are. There are, you know, things that could change. That's our goal is.

Is fall of 2025. So we're hoping that is what happens. Of course, we'll always look to our colleagues at finance if things change, but right now, this is kind of where we're hoping to be.

Is that DGS that you're working with for the move? We are, yes. They can do it. I know they can. We need that seven. Well, I know you need the moving money, but we don't want to add more money in this climate.

No, no. And I don't think we. I mean, I think this is a very modest request. It's more of just moving and having boxes moves. So we're hoping to stay. We had our previous look for. Our previous request was also very modest. And it's again, moving staff equipment.

So the majority of all the requests for the building and everything is dgs. This is just our little small request.

No, I appreciate it. As we moved from this building to that building, and it does take cost and time. We just want you guys to be on time and in your new place. Yes. Thank you. All right. Any questions on this item? Seeing none, we will move to issue 11.

Expenses and equipment, true up, personal services, true up and support application development. This is all for the people in the weeds now. So anybody who's watching this is like, what are they talking about? All right. Welcome.

Good afternoon. My name is Niraz Sardana. I am a manager in the STO's Information Technology Division. We have submitted three budget chain proposals. One is the personal services expenditure draw up, second is the operating expenses and equipment true up and the third one is the support in application development.

With regards to the two true up requests, the IT division currently has 42.5 authorized positions requiring an annual expenditure of about 7.75 million and another 2.67 million towards the operating cost which includes the software licenses, subscriptions and hardware maintenance. Over the years, IT Division has faced increasing personal and operational costs due to several factors.

One, because of the statewide IT classification concern consolidation which has increased the composition cost. Second, the IT also had to make classification adjustments in order to remain competitive in the market.

Number three, IT also had to absorb rising operation costs due to due to the pandemic induced inflation and fourth, in 2021amilitary audit was done as a result of which IT had to make substantial security investments which took the overall operating cost to about 2.67 million whereas we had a budget of only about 2.1 million thereby resulting in a shortfall of about 520k.

Till date, it has been able to absorb most of the cost by relying on the Department wide savings, a practice which is not sustainable. Therefore, ITD division is requesting for a funding augmentation of 530 36k towards the personal cost and 520k towards the operating expenses.

In addition to these two requests, there is a third request for the Expenditure Authority and corresponding reimbursement to support the application development, modernization and the hosting needs of about 12 BCAs that we support.

Most of the BCLs have been approaching ITD for modernization effort of their business business processes, but because of the authority not being there, it is not in a position to enter into an interagency agreement with them.

One such example is the CalSAvers which approached the IT Division to build up a conversational assistant for savers as well as our data lake and a reporting solution. Another example was the CDIAC which is looking for the IT Division to migrate its legacy data collection and distribution system to cloud.

Hence, we are requesting based on the estimates and the draft agreements with both CalSavers and CD act, we are requesting for a funding for about 869k towards this in the current budget year of which about 444k is towards the reimbursement authority. Happy to answer any questions.

Thank you. I'd like to hear from the lao.

Yeah, thank you. Chair Alexander Benzion, Lao first, we just want to recognize that the IT services. Provided by STO are vital to State operations, but we do want to note, in these three proposals, there are no. New services that they did not provide last year. As the Department notice notes, they were previously funded through internal savings.

And so our recommendation is just that the Committee seeks additional transparency on those services to understand if this proposal is not approved, what services wouldn't be funded going forward. Thank you.

Would you like to speak to that question?

Sure. Over the last three years, it has made several investment on the security front because of the military audit in 21. These includes on the website, on the secret server side, on the tenable and on the sentinel side. Right.

If the funding were not to come, then we might have to scale back on the investments that you that we have made, thereby exposing STO to several security vulnerabilities.

Can I just add something to that as well? So we also. Our new IT Director is fairly new, and so he's come in and kind of evaluated the services and requirements that are needed for our it. Being the state banker, you know, we want to make sure that all of our information is kept safe.

And so I think that's a big part of why we're here today is to be able to get additional resources that were not requested in previous years. I know there was an Executive order in years past for cybersecurity, and at that point there was $300,000, I believe, doing this off the top of my head here.

That was requested, which was insufficient at the time. And so our resources that we're requested really is essential for our Department as a state bank, but also for the 516 employees that we currently have at the state Treasurer's office. Thank you.

All right. Thank you. I have no additional questions. We have any public that would like to speak. Welcome.

Thank you. No, it's all right. I'm just waking everybody. I do have a request to make a comment that doesn't fall under these two issue items, but does under the STL. My name is Rachel Mohler, and I'm here on behalf of the California Coalition for Community Investment. We are a statewide coalition of community development financial institutions.

And I speak on behalf today to encourage the Legislature Fund a really wonderful, innovative program under the sto. That was that the Legislature, through the budget process three years ago created known as the California Investment and Innovation Program, or Cal Iip. Under the sto, the program has seen huge success through two initial rounds of funding.

And I'm here today to ask for a $50 million allocation in this budget to continue the program and provide at least three more additional years of funding. CDFIs directly support many of the legislators Legislature's critical priorities. As mission driven lenders, they finance small businesses that don't have access to mainstream capital.

They help preserve and develop affordable housing and ensure Low income Californians have access to stable homes. In short, CDFIs are part of the financial system that meets community needs and supports local economic growth. Just a key reason this request is so powerful, I believe is the leverage aspect of CDFIs.

According to the US Treasury Department, CDFIs leverage $8 in private sector investment for every $1 in public funds, which is a multiplier that could unlock hundreds of millions of dollars across California's most underserved communities. These investments go well beyond just dollars. They drive entrepreneurship, create jobs and strengthen neighborhood stability.

So this targeted outcomes based investment is why we respectfully urge you to to support the $50 million allocation to Cal IP. Your commitment will empower CDFIs to transform public dollars into lasting community benefits. Thank you so much for your time.

Thank you. I see no one else coming up and that will end this issue area. Thank you so much. All right, we are now going to issue number 12, position authority augmentation.

It.

Welcome. I see. Christina. Yes. Christina Saron. Saron. C, A, E, F, T, F, A CAPE. Princess soup. Princess Kate soup. All right, and then we have Matthew Westbrook, Department of Finance. Good to see you. And Alexander Bentz still with us. Lao and welcome.

Thank you. Hi. I'm the Executive Director for CAEPA. We administer a sales and use tax program benefiting qualified manufacturers, promoting alternative energy and advanced transportation, and Go Green financing a residential business and multifamily credit support program for customers implementing energy efficiency upgrades in their home or business.

And that's the program that we're talking about now, the chief program. They're seeking to switch existing appropriation authority from an external contract and bring those tasks in house. With seven positions. We currently have 31 positions and so this would be an additional seven.

All right, going to the LAO.

Yes, thank you, chair. Alexander Bentz, LAO we just note that this program has temporary funding through 2627 and this these permanent positions would extend beyond that. And so given that that year is coming up, we recommend that the Committee consider the long term future of the program before. Before approving this. Thank you.

Yeah, that came up as I looked at the note. So the question was how can we understand the true number of staff at a Department if permanent positions are categorized under temporary help? So how can we get an accurate picture? Because we don't want to tie ourselves in the future to permanent if they're under temporary.

So I'll go ahead and try to take that question for you. Carmeni, State Treasurer's Office. So the chief program was authorized by budget authority in 2014. And sorry, I'm going to read my notes here a little bit. And so these were ratepayer funds.

And because the funding was kind of contingent on CPUC and the budget process and CPU decisions that were made, the the way that it was funded was called was limited term funding. And so we have to go back every so often.

We'll be going back in, you Know201617 excuse me202627 to re to renew or to ask for a new BCP to Fund for multiple years. And so that's why the positions are the way they are.

So back in 201718 we had administratively established these positions in order to retain staff because as you know, a lot of positions that are limited term are two years for two years. So CAFE was experiencing a lot of staff turnover.

So in order to retain staff, we administratively established the positions and put and we were directed to include them in a temporary help blanket.

So I'd like to Say that to say though that we do reconcile these positions every year with the Department of Finance and we actually, you know, they see our full 31 positions that have been authorized. It's just that these are treated a little bit differently because the uniqueness of the program and because the funding is limited. Term.

Hope that helps answer your question.

So how many staff does k. How do you say that? How many staff permanent?

So it has 10. Currently has 10 permanent positions and temporary and then temporary it has 19 and. You want to move the 19 to permanent. So we're asking for an additional seven positions. So of total temporary positions we would be at 25 I believe. So it'd be 19 plus 26.

Sorry, my math it would be 26 total temporary positions.

And as we have people viewing this, can you explain what these positions do?

So what we have is a loan loss Reserve program and we encourage residential, business and multifamily to implement energy efficiency projects. And our relationship is generally with the lender who goes and we incentivize them to lend the money to get them to make changes. Give me an example.

So like if you want to get a new hot water heater.

So we would incentivize put money into a loan loss Reserve account for the lender, the lender puts a little bit of money in there also and then they go ahead and go out and lend money to the borrower, the residential and they get their new water heater and if they happen to default then it will pay them back a proportion of the loan loss.

And how does the public know about this program?

Zero we have a great big website called Go Green Financing. Really it's out there. Most people know about it. We've right now everything is done through ratepayer funds with the IOUS and so we're kind of stuck in working with just that, those service areas.

But recently we were given $30 million from the CEC so we're going to be going into other areas of non ratepayer and also increasing our reach into rate payer and getting more in your. We're trying to get into the LIHDAT communities, your Low income disadvantaged communities because right now you're.

When we do what we do, we're asking them to take on debt and so being able to have. We were going to be giving money to a interest rate buy down program and going and going out doing more outreach into those areas which is kind of what we want the positions for. What we want is to bring.

We have a contractor that's doing it for us now. And we feel like we can do a better job in reaching those commun communities and getting into the people who actually meet with them. Which is the contractor.

The contractor is the one who sits at your kitchen table and talks to you about making that change and implementing those energy efficiencies. And we feel like we can have a better opportunity to do that and meet those people if we're doing it.

It also gives an opportunity for staff to learn about the program and do those things. Because. Because when you've got an external contractor, they have turnover, they lose somebody, and then you've got to go out and retrain them again.

If we're doing it in house, my staff can learn them, we can train them more easily, and they also have skin in the game and care more about what they're doing. And so they can be better. Better served doing what we need them to do.

Any comments from the lao? All right. Yeah, if you can get us more information on exactly what you were just talking about, I think that would be helpful. Thank you. Any questions from the public seeing? None. Thank you so much. Appreciate your comments. Thank you.

All right, it looks like we are at the last item of the day. That is eligibility expansion outreach. And this will be Thomas Martin speaking about Calable. Greg Bruss, the Department of Finance. Francisco Motto, Department of Finance, and Alexander Bentz Lao. Welcome.

Thank you. Yes, good afternoon. My name is Thomas Martin. I'm the Executive Director of Calable. A bit about me. I'm autistic and so are both of my kids. So all three of us have calable accounts. So it's very near and dear to me.

Thank you.

And so before getting to the bcp, I can give a bit of explanation for how Calable works, if that's okay with you. So Calable is the state savings and investment program for people with disabilities. It's an. It's California's implementation of federal law which allows states to create these programs.

So in order to open a calable account, you have to have a disability that begins before the age of 26. So it doesn't matter how old you are. As long as the disability started before the age of 26, then you're eligible.

So my disability started at birth so I can have an account now that's going to be expanding next year to disabilities that start before the age of 46. And that's the. That's the purpose of the BCP. So I'll get into that in just a moment. So why.

Why would someone want to open up a calable account and save money in there. So there's, there's a handful of benefits that come from, from having a calable account. The two main benefits are. One is that any savings in the account, any earnings, I should say in, in those accounts, are tax free.

So it's a great benefit, particularly when you consider having a disability generally means higher costs, you know, short term, but certainly long term, just standard cost of living. The second benefit, which is even bigger, is for our account holders who receive other benefits. So in particular that ties to ssi, Supplemental Security Income from the Social Security Administration.

So SSI is the main source of income or the only source of income for hundreds of thousands of people in California with disabilities. Right. So there, it's very important that they continue to be able to receive that money coming in each month. The problem is that SSI has a very, very strict limit.

Well, they handle strict limits, one of them being on how much money you can have. So if you have more than $2,000 at a time, you can lose your SSI benefits. So you just stop getting money in until you spend down.

So, you know, just imagine if you know your paycheck didn't come in next month because you have more than $2,000 in a bank account. How could you possibly plan for anything in life? You can, you can't save for anything. You can't, you can't get an apartment.

There's nowhere you can get an apartment for $2,000 with first and last month's rents and everything. So it's, it's a huge limitation on ability to be independent and, and self advocate for someone with a disability. But that's where calable comes in. So we're exempt up to $100,000.

So someone with a Calable account who is receiving SSI can save up to $100,000 instead of $2,000 and still keep their SSI benefits coming in. So it's really the only vehicle that really exists for someone to be able to save in their own name any substantial amounts and still maintain benefits coming in.

So again, this is stemming from federal law. And so federal law changed to expand eligibility starting next year. So like I mentioned, right now it's for disabilities that start before the age of 26.

Next year it's going to expand to include disabilities that start before the age of 46, which means there's that window of people with disabilities from 26 to 45 who will now become eligible for a calable account. So it's great, it's this huge expansion of who can have the account, who can benefit from it.

The limitation from our perspective is just a programmatic limitation, is that outreach to that community, to people with disabilities that start in that range as adults, is very different from who we typically deal with. So right now most of our outreach is to people like my kids who are receiving services from a very young age.

They're kind of in a pipeline. And our goal is to kind of tap into various points along that pipeline and inform people about these counts and encourage them to open them.

So what's different for an adult with a disability is that a lot of them, they're not really in a service pipeline or at least not in one of the most traditional ones you might have from like you might have from birth, like a Developmental Services Regional Center, for example.

So this would include people with disabilities stemming from either later onset conditions like multiple sclerosis or vehicular accidents, workplace accidents, disabled veterans, things like that, that, you know, something that happens as an adult as opposed to like development disability like mine. And so the outreach to them then means it's very different.

So there isn't one place we can go to to find all adults with a disability stemming from adulthood. Right.

So what we're talking about is we'd have to do outreach to veterans groups, to organizations that focus on specific conditions like multiple sclerosis, to rehabilitative service providers, kind of this broad network of people who some of them we have connections to now, but a lot of them, they aren't really people we focus on because their nexus to calable right today is very small.

So the BCP requests one position to be able to focus on that outreach, expand our resources. We're a small team, we have four people. So be able to expand and do that outreach that otherwise we would be extremely limited in our ability to do given resources. So with that, I'd be happy to answer any questions.

I appreciate your consideration.

Thank you. Well done. Any remarks? This is definitely worthy in the sense of we know at some of our most vulnerable community that any support they can get, as we know, $2,000, it does not going to pay very much as far as car repair or any type of health emergency or so forth. So I definitely support this.

Does this apply to adults that would qualify under like say mental health issues as far as this benefit?

Yes. So it's. So the disabilities are established by the Social Security Administration. So it's the list of disabilities that they recognize effectively. So yes, it does include. It's a broad range of physical, developmental, mental disabilities. It is a pretty broad range of people.

And that's part of, that's what part of makes it complex because now we would need to reach out to, for example, mental health organizations in a way that while we do currently, it'd be much more targeted and a bigger focus for us.

All right, thank you. No other questions. Do we have anybody wanting to speak publicly on this? That will Finish our issue 13.

Appreciate all of you being here and for those of you who I worked with last year, I don't remember every single name, but I do remember the faces and appreciate you being back and all the hard work you're doing.

I know it is a precarious time as we're still trying to figure lots of federal issues, how that's going to affect the state. But certainly everything we do here in California as far as budget, I think it's not now my second year here and we know every dollar counts.

And whether it's augmenting a program or holding off as we had to last year, it's. They're all difficult decisions. I will just end my comments with a little theme for me last year, and I certainly think it will be this year, is I'm an advocate of access to programs.

I'm an advocate of for many of our vulnerable communities getting the support they need. But my constant question is going to be is how does the public know, is how do we know that the programs that we have at the state are getting down?

So whether it's small business, we talked about that last year, small business advocates, how do we know that their models are actually getting to that young entrepreneur or working mom who wants to start a business?

So I would implore you all to be able to discuss that when the state is funding programs, how the average Californian either knows about the program gets access. You're asking for, in essence, an advocate for outreach. That's important, but also getting out of our traditional boxes of being in the state.

I think last year I responded quite a bit to some pop up access services where some of the resources were being taken out of government. And when I say that, I mean out of the government offices and actually out into the field.

I think last year we talked about, I believe it was a farm worker program that we're actually out in the farm workers program right there with a pop up because we have to realize people are working extremely hard, sometimes two jobs, taking kids to school, picking up kids and they can't get into government offices or take a half day off or be on the phones for an hour.

All of us have been frustrated when we call an agency, whether it's state or private, and we're put on hold or it takes 30 minutes to get an appointment and you're waiting six weeks. So that would be my message. You'll hear it many times during these budget hearings. Thank you so much for what you all do.

Thank you.