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

Right. Subcommittee 4 of the Senate Budget and Fiscal Review Committee will come to order. We're holding our committee hearing in person here at the State Capitol in room 113, asking all members of the subcommittee to join us in 113. So we're now going to begin. We're. We will. Let's first establish a quorum and ask for the roll to be called.

[Roll Call]

Right. A quorum is present. I know. Senator Smallwood-Cuevas is on her way as well. So we have two items for vote only, which we'll take up at the end of the hearing, and then we have our set of discussion items.

And I just want to note a couple of our discussion items do have recommended actions associated with them, but we're taking them for presentation, discussion, and action vote only. So we'll proceed then to item three, which is the Milton Marks Little Hoover Commission.

So we have no budget change proposal from the administration or the Department of Finance on the Hoover Commission, but this is an opportunity for an informational update, overview on the commission's budget and on the commission's actions with respect to the overall state agency orders on positions and other cost reductions.

Thank you, Mr. Chairman. Senator Niello, I'm Ethan Rarick. I'm the Executive Director of the Little Hoover Commission. As you know, you both serve on the commission. I want to thank you for allowing us to go first today.

We have a hearing going on across town, and we moved up on the agenda, and I thank you for that flexibility, senators. The commission has 13 members, nine public members appointed by a mix of the governor and legislative leadership, four sitting legislators at any one time.

We're charged in statute with reviewing state operations and making recommendations for policy change that foster efficiency, economy, or improved service in state government. We do that through public hearings, extensive research, stakeholder outreach, and so forth. And we issue about seven or eight reports a year that contain roughly 65 or 70 recommend.

I'm sorry, 65 or 70 recommendations per biennium. About 35 recommendations per year, more or less. The commission sets its own agenda, and the topics are wide. Within the last year, we've done reports on the adoption of AI in state government, on CEQA reform, on any number of topics. The Master Plan for Aging.

So we have many, many different topics. We have a budget of about 1.4 million. Just a little under that, and we have seven authorized positions. I'm happy to answer any questions or provide additional information as the committee wishes.

So I know right now the commission is taking up the governor's proposed reorganization plan.

That is correct. We do have a role in the reorganization plan by statute. So the governor submits a reorganization plan to the commission 30 days before formally submitting it to the Legislature. We then have essentially 60 days to hold hearings. The statute calls upon us to engage in study and recommendation regarding the reorganization plan.

The governor, once the governor sends the plan to the Legislature, technically speaking, we have 30 days after the plan goes to you all to to issue our report, which goes to you and to the governor, including a recommendation.

And the Legislature, as you know, after submission to the plan, has 60 days to effectively reject it or allow it to take effect. So we're in that process right now. We received the governor's reorganization plan 19 days ago. Actually, 20 days ago, as of today. 20 days ago. We held the first of two hearings yesterday.

We're holding a second hearing on that plan today. We then will hold another meeting of the commission to take the commission's instruction to the staff about what the report should say. And eventually we will approve that report. We hope to get that to you before our deadline expires. We want to get that report to the Legislature as quickly as we can.

So when would you anticipate that? I'm asking you this. I know along with Senator Niello, I serve on the commission, but because the commission's been on unwilling to modify its meeting schedule in recognition of the subcommittee's long standing, decades long meeting schedule on Thursdays, I'm not familiar with all the details.

When do you anticipate then, as this subcommittee is going to be taking up the budgets for either the reorganized agencies, potentially before the deadline. When do you anticipate specifically that we will get commission's report?

I don't, Senator, I apologize. I don't have a specific date for you, but assuming that the governor submits the plan formally to the Legislature 30 days after submitting it to us, that's the soonest he can submit it to the Legislature. That would be May 4th. He submitted it to us on April 4th.

So that would be May 4th. Then we would have 30 days after that to get the report to you. But I would think we would try to get it to you. I'm guessing around mid May, May 15th, 20th, something along that line. The chair has asked that we push forward as fast as we can to get you the report as soon as we can. So I don't have an exact date for you, but that's the approximate date.

Okay. All right. Appreciate that. I mean, obviously here we have these two concurrent processes, also the formal consideration of the plan and then the adoption of the budget that needs to align with whatever the agency organization will look like. So the being able to act with consideration of the plan as we're taking up the may revise will be critical, I think, for this committee as well. Senator Niello.

Just a quick comment. I attended a part of the hearing yesterday. Our Senator Cabaldon's and my participation is compromised by obligations we have over here. This week and next week are probably the two busiest weeks we have other than the House of Origin deadline.

So for this issue, our participation is kind of compromised, and that's unfortunate. But I did attend yesterday until about noon, and I would observe it was the commission was very engaged with a lot of probing questions that reflected great preparation on their part. And so my little experience now with the commission, I commend it, and I think it's a great resource for the state for what is in the overall scheme of the budget, not very much money.

Thank you for attending yesterday, Senator. We appreciate it very much.

Senator Smallwood-Cuevas.

I just have one question. How many of these reorganizations has the Little Hoover Commission looked at, and how does that influence the current meaning are we recreating and recreating and then, you know, so to what extent sort of criteria, questions, sort of past reorganizations. But what do you take into account when you do this?

And, you know, I we have heard from a number of departments who've come to us, and quite frankly, some of the positioning and the relocating is, for me, challenging. You know, I think about the Civil Rights Department, for example, and it sort of gets shuffled into this sort of shell game and it ends up in these places where you wonder how does it have the fullest capacity to do the level of enforcement necessary?

And then also thinking about just the time that we're in in terms of, you know, the Federal Government and, you know, all of the new sort of responsibilities and capacities that these departments will need, and we don't have the resources. So the organization is really where some of that capacity can come from in terms of really centralizing resources, particularly when I think about workforce and work place and civil rights enforcement.

So could you just share a little bit about, you know, how many of these reviews have been done and how does that factor into your decision making and seems like a very short amount of time to deliver what will essentially be a new operative plan for the state that will have to come online fairly soon. So if you could just share a little bit of that. I appreciate it.

Certainly, Senator. Thank you for the question. So in terms of the number of plans, since 1968, the commission has reviewed 31 plans. There have been 37 proposals, but some of those occurred during a period when the commission wasn't involved. So there have been 31 plans. However, most of those are well in the past.

The last time the reorganization, the formal reorganization process was used was 2012, when Governor Brown proposed a major reorganization, among other things, pulling transportation out of what was then the Business Transportation and Housing Agency, what became BCSH today, and transportation became a separate agency.

So since 2012, though, there have been many reorganizations, many changes in state government structure. Those have been accomplished either through legislation or through trailer. Well, trailer bills are legislation, but through regular legislation or through trailer bills. Those don't involve the commission.

So we have a long history of analyzing these reorganizations, but they are generally well in the past in terms of the sorts of things that the commission takes into account or is taking into account in looking at this plan, we produced about 200 pages of background material for the commission that takes into account the governor's proposal, the roles of the various agencies. We produced a specific section about the Civil Rights Department and where it should or shouldn't go. We looked at reorganizations in other states and even in other countries.

We looked at the timing of reorganizations. Do they generally occur at the end of a governor's time or closer to the beginning? And then we take input, obviously, from stakeholder groups. That's what we're doing across town yesterday and today, with a wide variety of stakeholder groups giving us testimony.

All of that will then go into the commission's final report, which will make a recommendation to the Legislature about what should happen. Obviously, I can't comment on what the commission will conclude, but those are the kinds of inputs that have gone into our process or are going into our process. I hope that answers your question.

Yes. Thank you.

Thank you.

All right. Thank you, Mr. Rarick.

Thank you very much, Senators.

All right, next we're going to proceed to the California Alternative Energy and Advanced Transportation Financing Authority. Will representatives of the authority please join us at the table, if you would. Please begin by giving us an overview of your core functions and a status report on major programs, as well as a presentation on the proposal that's before us in item four. Welcome. Yes.

Hi. My name is Christina Sarron. I'm the Executive Director for the California Alternative Energy and Advanced Transportation Financing Authority. We affectionately call it CAEATFA, like princess Kate in pho the soup.

I think you might be a bit far from the microphone for folks to be able to hear you.

Okay, CAEATFA, what we the treasurer is the chair and we have four other board members, the controller, the Department of Finance. The PUC has their President on the board and also the Chair of the Energy Commission.

We have several different programs, but the two main ones are a sales and use tax exclusion program that is for advanced manufacturing, alternative energy, advanced transportation, and recycled feedstock manufacturers. And then we have what we're here to talk about today, which is our Go Green program.

It's Go Green financing and it it's a program that uses a loan loss Reserve mechanism in order to incentivize lending to customers in the residential business and multifamily markets wanting to go green for their either equipment or, you know, sometimes when you've got a huge facility and you're trying to replace LED lights, that could be a significant expense.

And so you can do that through our program and get reduced terms and reduced interest rates. And so that's what we do. We have approximately 35 positions for all of these other programs. And today we're here to ask to switch from we have several outreach efforts that we do and one of them involves contractors because they're the ones who actually go and talk to the person and get them involved in doing, you know, implementing.

And so we have a contract that does it right now, but we think we can do it better in house. That contract expires in about a year and so we'd like to switch that money over and use it for in house to have our staff do these this outreach.

We think we can do it better because what happens is you have the contractor going out and talking to we give them initial, let them know what we want, what we're looking for. They have turnover, they kind of lose that and then we have to go back and educate them again. We feel we can do that. We also have our people are more invested in our programs and we think we can do that better.

All right, thank you. Department of Finance. Any comments?

Matthew Westbrook, Department of Finance. No additional comments.

Legislative Analyst Office.

Alexander Bentz, LAO. No, no concern.

All right. Are there questions for Members of the Committee? Senator Niello.

A quick question. Do these funds come from funds that are raised from ratepayers?

They are. They are ratepayer funds. It comes through a decision from the PUC directing the IOUs, Investor Owned Utilities, to provide funds to us.

Thank you.

I do want to make one comment. I just talked to my staff yesterday and I did not know this, but there have been several decisions by the PUC to direct the IOUs to create programs like ours. And they said there have been like 10 plus programs and ours is the only one that's still going. They had many pilot programs. They all failed or didn't do as well. And ours is still running and it's been running since 2016.

All right. LAO, I know you said you had no comments, but I had questions about your prior comments elsewhere and online and Instagram and what have you. Because this is a request for position authority, not for new cash. So maybe it's sort of the twin questions is... Because I think, I know I'm very supportive of, where possible, insourcing these kinds of this kind of work. We're trying to contract everything out. And I think the experience that you're, that the, that the authority is showing us indicates one of the reasons why contracting out is not always, you know, it's not always as cost effective as it might appear. So that's a positive direction.

But the question for me is, in the context of the federal support for the program, the time when federal funding might be at its most uncertain is maybe not the best time to make permanent commitments on staffing positions. So I'm wondering if you can shed some light on that tension between the value of insourcing these positions and adding these additional positions and in the light of the federal funding context as well.

Thank you. Thank you for the question. I have no specific comments on the federal funding for this program. As you do note, we made some comments in a prior hearing about the difference between the permanence of these positions and the funding authority for the specific program expiring in 26-27. It's not a major concern of ours though. But I have no details for you on the federal funding for this program in particular.

So on the first issue, have you changed your mind or the winds were blowing the wrong way or? When you say you don't have concerns about that issue any longer, I just want to nail down what your best analysis is here.

Sure. So this program has had quite a few temporary positions that don't get approved ahead of time. And those get, those show up as the program goes on, and so this is just shifting it to permanent positions. And so we don't have any strong concerns. We just wanted to point that out as you guys, as you consider the future of this program.

And then back to the Authority.

Yeah, I'm sorry. I will say that the Authority was working with CPCFA and IBank to obtain NCIF funds. I don't know if any of you know about what's going on with that, but the federal government has put a froze on that and there's a huge back and forth on that.

IBank is currently still, with the Attorney General, they've sued and they're in the middle of that. Should they actually receive the funds, we are in, we have, we have asked for $53 million for our programs for Go Green specifically so. But we weren't counting on those funds.

The other funds that we have have also come from the California Energy Commission. They recently gave us last year $30 million to run a specific program directed towards the low income disadvantaged communities. So we'll be focusing on getting in particular heat pump water pumps and heat pump HVAC and we'll be focusing it on the LIDAC communities. So that's where that we do have funding outside of just ratepayer funding.

Okay. All right, any other questions or comments? All right, thank you very much. So we're going to hold that item open and move on to the California Secured Choice Retirement Savings Board for CalSavers. So will representatives of CalSavers please join us at the table. We don't have a proposal before us, but this is a key program, and so we've asked for an informational update. Please proceed.

Good morning, I'm David Teykaerts. I'm the Executive Director of CalSavers, formerly known as Secure Choice, but it is officially CalSavers Retirement Savings Board now. Pleasure to be here. If it please the Committee, I'd be happy to give a brief overview of the program and then talk about our current performance and what our steps are going forward to continue to grow this program for Californians.

So CalSavers, at its basic core is based on the principle, a very simple but powerful principle that most people save for retirement through deductions from their paycheck and it will work only and exclusively if that is done without a volitional decision making every single time they get paid.

So the core thought here is that access to retirement savings programs through work is one of the top ways that people can begin to access wealth accumulation strategies that could lead to them aging into their retirement years with enough wealth accumulated to live a decent and dignified retirement life. The program really was a manifestation of all that.

The way this works is that if you are a worker in California, essentially if you are a wage earner and your current employer does not provide access to a tax qualified retirement plan, commonly like a 401k, then that employer is required to facilitate your access to the CalSavers program, which is a very basic auto enrolling IRA program.

So it allows employers then to for free, at no cost to the employer, or I should say, no fee to the employer. It allows them to facilitate access for their workers and allows those workers to then begin to accumulate. This is based on five sort of like core principles, five ways, five pieces of the program design here that allow this to be successful. Number one is that it is, as I mentioned, it's a payroll deduction program.

The employee is not confronted with the decision every time that it get paid, should I save this or should I spend this on my life circumstances. And the second principle would be that this is an auto enrolling program. The employee really, if the employee decides not to do anything, if they just simply passively allow this to happen, then the savings does occur for them. So the process will happen automatically. They can always opt out.

Of course, it's not mandatory, but it does nudge them in the right direction of saving for their own retirement and their own future. Other key principles here are that every year the amount of the deduction will increase by 1%. So at the start of the program, it's 5% of the paycheck and then it goes up to 6, 7, and then finally at 8 where it caps out. The employee, of course, can make decisions within that context. They can always adjust this any way they want, but it will automatically escalate as they go.

The fourth principle that makes the program successful in terms of program design is that there are no fees for the employer and no fiduciary liability. So a major thing that we heard from the business community when this program was being stood up about a decade ago was that this places too much administrative burden on the employer.

They are now fiduciaries. They have to engage with the 401k companies to make sure that the menu of offerings are appropriate. Otherwise they are subject to litigation, which is a real problem in this space. All of that is taken away with the CalSavers program. The employer bears no fiduciary responsibility.

There is no fee to facilitate, There is no employer matching. Not only is there not an employer matching requirement. It's simply not an available option. So it truly is just really a pass through program from employers paychecks right into their workers savings accounts which are in the form of a Roth IRA.

The last thing, and really a key component of CalSavers, is that it does come with a mandate. Employers are required to fulfill their obligations under this. So the vast majority of the work that we do at CalSavers is really communicating with that business community, informing them of their obligations under the law, educating them on how they can comply with this.

It really takes about 15 minutes to get set up and to run this and then to make it as frictionless and easy as possible for employers to comply. And we recognize that many business owners are like another thing, another thing that I have to do. But we really try to stress that this is really simple in terms of the process and really just a net positive for everybody really. Most business owners understand that it's a good thing to be able to offer a retirement program for their employees and would like to do that.

All things being equal. Here we have now a way administered through the state for them to be able to do that easily and at no direct legal exposure, fiduciary exposure to them. I'll wrap up here with some key stats and then happy to take any questions. So currently, after about five and a half years of actual operation here, in terms of running the program, actually having this live in the field, we have now 550,000 plus funded saver accounts. So that's over half a million employees that previously had no access to workplace savings that are saving, that have saved at least something.

We have accumulated $1.2 billion in assets under management. That sort of $1.0 billion threshold was a big psychological barrier and really a proof of concept for this work. So it's working. We are accumulating balances for these savers, as we call them. The average balance in these counts is still modest. Again, this is a young program.

Most of our participants are in the low to middle income area. These are not wealthy six figure earners. These the average salary for our people is between $32,000 and $45,000 per year. So the average balance right now is a little bit over $2,000. And we have almost 58,000 participating employers.

So this is employers that are not just registered, which was sort of like the first step, register. Come to our website and register was the early messaging. They were able to do that. Register no problem. But to actually upload their employee rosters and effectuate the transfer of money, actually moving money into savings accounts.

We have now 58,000 businesses that are doing that in the state. So these are large numbers compared to the 12 other states that have a similar CalSavers type program. We represent 65% of the entire pie compared to these other states, just vastly larger. Way out ahead in terms of our the assertiveness of this program.

One thing to note here is that, currently, as of today, the minimum threshold for the employer size is five employees or more. Beginning December 31st of this year, that's the registration and facilitation deadline for an expansion that will nearly triple the size of our funnel of employers.

That will now extend to employees, employers with as few as one single employee who is not the business owner or that owner's spouse. So think about that. I mean, that's going to be just a huge swath of employers that likely have not administered anything like a retirement program before.

So our big work right now for sure this year is getting in contact with those tiny micro employers, as we call them, letting them know about what they need to do, how to do it, how to get in contact with us, how to make sure that they get in position early in order to make this program work for them and for their employees. So happy to take any questions or get into any details.

All right, thank you. Finance.

Good morning. Ryan Weinberg, Department of Finance. We have nothing to add, but happy to answer any questions.

Okay. I think I offended LAO on the last one, so...

Chas Alamo. I'm a different analyst, so I'm not offended. We have nothing to add on CalSavers. Happy to take any questions.

Every analyst for themselves. Thank you. All right, for Members of the Subcommittee, are there questions or comments? Senator Niello.

What exactly is the mandate and how do you enforce that?

So the mandate requires employers to register and facilitate. Again, that's kind of an odd verb. It means to effectuate the pass through of money from the paycheck into the Roth IRA on behalf of their employees. The mandate says if they don't do that, then we move them into what's called our enforcement pool.

And that's where the tenor of our marketing, our outreach changes from we need you to do this. This is the right thing. This is aspirational. It gets it a little bit into the pure human nature of it, which is motivating people who have missed a deadline to come into compliance quick.

Otherwise there's going to be a financial consequence. So for sure there is a financial stake in this game. And so as the registration deadline is missed. We then compile those employers and we begin to send them essentially due process notices. Hey, we see that you've missed your deadline. You have 90 days to comply.

Otherwise your information will be submitted to the Franchise Tax Board. Okay, so that's our enforcement partner in this. And then if you don't comply by then, then the Franchise Tax Board will send you a penalty notice. The penalties are $250 per eligible employee for whom the employer failed to facilitate the program. 250 per employee. So that can add up. It is a, it has teeth to it.

For what time period?

That would be, if they just fail to register, if they fail to come into compliance by their deadline. No, that penalty is, that's the first penalty. If they continue in non-compliance, then that penalty actually doubles up to $500, and then it is an annual penalty after that as well. So the pressure continues to move them into compliance.

And how do you identify the employers? I mean, you're talking about employers that you're calling on to enroll in the program. Is that all employers in the state?

It's all employers that are not exempted. So exempt employer categories include religious organizations, tribal organizations, state and local government organizations, and for the longest and certainly the biggest one is do they already offer a qualified tax retirement program for their folks. So a big work for us is getting a list of these employers in the first place. We source that from EDD. They have the most reliable source of like who are the businesses, and they also can include data that gives us information about whether or not that employer is signaling and certifying that they do already have a 401k.

That is a big part of the puzzle, Senator, is figuring out which employers are already doing what the legislation requires them to do. Which I'll just say is we are agnostic as to whether they utilize the CalSavers program properly itself or if they sponsor a 401k. Both are a win. In fact, I would vouchsafe that the 401k is actually better because it does often come with matching for the workers. So more power to them. But us figuring out who is under the mandate is a big piece of the puzzle.

So you've got 58,000 employers in the plan, and if I read the write up correctly, there's in 2023 there were 432 employers that were out of compliance and in 24 there were 534. So it's obviously it's a very small percentage of the total that are signed up. Have you done any work either in advance or in looking at these employers, whether their employees have savings programs on their own?

Senator, we would not have access to that. We don't know whether or not the individual employees have set up their own IRA independently. If they had, the employer can take easy steps to facilitate and go through the correct motions. Not the correct motions, but the correct process.

And if an employee opts out, that's perfectly fine. We have many employers who do facilitate for all eligible employees who do not opt out and that number is zero. They just have a few employees and all of them said I prefer not to participate for whatever reason. And we honestly don't know.

We do solicit that when the person opts out, but they don't have to tell us, oh, it's because I already saved through my E Trade account or I just don't want to be involved. It's optional for them. So yeah, a big part of our work is certainly doing outreach to those employers who get into penalty status.

Those are our top outreach priority is getting in contact with them and working with them to take the correct action to get out of compliance. If somebody ends up paying that penalty, we want that to be the first and last time. So that's like the absolute top of the priority list in terms of outreach.

And do you take into account other fringe benefits that might not be exactly a savings plan but be perhaps the virtual equivalent of it, like stock options, ownership option?

We do not. That is not part of the exemption process that's laid out in statute. The really it has to be a certain type of qualifying tax qualified plan like a 401k, a SEP, a simple 401k, a pension certainly. There's a specific list. It wouldn't be any other fringe benefits that kind of like accrete towards being a positive financial thing. That's really just not within the scope of how the program was framed.

And if I understand the report that we have, the program, while it was intended to be self sufficient at the outset, it has not been. Is that correct?

It was intended to be self sufficient more quickly than it will be. I will say that. Certainly though, since the revenue from the program comes from a very small 5 basis points of saver accounts, so it's money within the saver accounts. That's 0.05% of that goes to fund the program.

Absent many millions of people participating in this in day one, that's not possible. Like you can't take a percentage of savings accounts if there's no savings yet. And the way that ultimately the program was rolled out was by sort of yearly waves. So we started in year one of this program with employers with 100 and more employees, and then year 2, 50 and more employees, and then five and more.

So it really ended up being, Senator, as in reality, in lived reality, it was rolled out much more gradually than that original study that I suspect that you are referencing here. It has gone slower, and we do think we expect based on our projections, based on our growth. While it is still an art and not a science, because this is such a first of its kind program, we do expect to break even here in fiscal year 2030. So about 10 year runway.

And what was the original projected runway?

About three years.

Okay. Senator Smallwood-Cuevas.

Well, thank you. And I think Senator from Fair Oaks, Fair Oaks asked a lot of the questions that I had. Do you have a sense, you say 10 years, is there a bench like how many folks need to be enrolled in order to meet that self sustainability? And then the other question I have, I just put them both out. Just geographically, where are these 55,000 employers who have begun payroll this deductions across the state and what is the demographics of those folks who are participating in the program?

I'll begin with that second question first. It is very much just equally distributed based on sort of like the population centers of the state. So by far, like Los Angeles County accounts for 24 I believe percent of the facilitating employers. And it's roughly, I want to say it's roughly that much of the population of California as well.

So of course the smaller, less populated counties have less, but it is roughly spread out, and that's to be expected. I mean the programs, it is a broad and sweeping program. It does not delineate between employer types other than those three exclusions I mentioned, which are tribal, religious, and government entities.

I mean it really encapsulates retail, agriculture, every bar and restaurant, every food truck, every household employer, every brand new, every new now mom and pop shop that employs even a single cousin part time is part of the program. I mean it is vast, and hence it's roughly evenly distributed across the state in proportion to the populations.

And then the sustainability question, what's the goal? What do you need to reach in terms of enrollees to be self sufficient?

That's a great question. It's less about the number of enrollees than the assets under management. So for us $6 billion AUM is the magic number for us. Whether that is a million savers or 2 million savers, we focus like that AUM is the big one there. We would love to get to 1 million savers.

I believe that that will be accomplished before the 6 million. But that's really, it's the assets under management that will get us to that break even point. Because again, the program only receives funding through percentages of assets. We don't receive anything for just adding more human beings.

So in, in my district, and I'm 24,000 of the 55, this seems also like a very low number. We have over 800,000 low wage workers. I'm curious, what are your outreach strategies? How are you reaching? Because I would assume there's a language, when you think about the demographics in those sectors, there's a language, there's a fiscal.

Just not familiar with banking. There's, you know, employers that maybe, you know, operate more informally. So I can't see bankers as the ones who are out there building these relationships with these. So I'm curious, what are your strategy? Who does this outreach? Who are your partners?

Certainly, terrific questions. So there's a number of different strategies. We have no ego about enlisting any and all stakeholder partners who are supportive of the mission of CalSavers to provide access to retirement security through work. We've worked heavily through the small business development process.

The corporations, we worked through the Chambers of Commerce, we've worked with our union partners to support this. SEIU in particular in outreach to in home health providers. We have the top 10 languages spoken in California. We have all of our materials translated into that. And we work through these partners to help blast this information out through any and all channels. Social media, paid marketing, getting our staff, such as myself and my team out there, just speaking at local events and everything in between.

I will say the most effective thing though is us getting accurate data about the employer and both emailing and mailing the employer clear, compelling material that explains what the program is, that it is the law, and that here's how you do it and here's the benefit for your employees.

So that crystal pure data from EDD is really worth gold for us. That's what we want. And so we spend quite a bit of money doing these mailings, doing these marketings, getting in contact with those employers because, frankly, nothing will happen unless the employer takes the action. This is really about getting to that, the person who is in control of the paychecks, doing what they need to do in order to support their workforce.

I know that the state invests quite a bit in reaching low wage working populations in a number of sectors. And you know, sometimes if you educate the worker, they can inform their employer. And in many cases there's very familiar, in some of these industries. There's a lot of familiar relationships in some of these social networks around various locals low wage occupations. I would suggest that there be a way to do more outreach on the worker who would benefit the most from this plan.

I just, you know, to be at this point and at 55,000 enrollees. And I think it's a very admirable and important and necessary function, but it just doesn't seem to be reaching enough people. And if we're talking about a 10 year and we need to get to I think you said 2 million enrollees for 6 billion. 6 billion sort of in assets. I don't see how this pans out at this, at this rate.

So I'm just curious, you know, the strategy, and I understand the focus on the employer, but I think there are, you know, maybe other models to look at in terms of how we are informing, you know, how we're doing Know Your Rights, for example. Who and how we're reaching those organizations that are in touch with those populations. But yeah, I thank you for clarifying that. But I feel that we are somewhat behind in investing in getting more of our working families in these kinds of programs.

All right. Senator Niello.

The, I was never a... Full disclosure. I was never a fan of this program to begin with. You're talking about what appear to be big numbers, but in proportion to the state itself, they really aren't. 58, I think you said 58,000 employers and going back to one employee could be perhaps 150,000. You said it could triple. I don't really know. But how many employers are there in the state private sector? And I'm sure that all of these are private sector.

I would suspect. And it is probably an infinitesimal percentage point of total private sector employers because most of them, the vast, vast majority of employers offer retirement plans to their employees, 401k plans or otherwise. And so with regard to the existing employees, this program has been operational for about a dozen years.

In terms of actual operation, in terms of actual enrollments, about six years now.

Six years. Do you track turnover?

Meaning employers that participate and then don't or savers...

No, employees that sign up and they leave that job and go to another one.

That is a challenge for us. We can certainly track them if they move from one employer in the CalSavers program to another employer that facilitates CalSavers, say from one restaurant to another restaurant. But if they take a job in a company that does offer a 401k, they essentially leave our nexus of understanding. They're out of our program.

But you know that they're, that they're gone?

We know that they're gone. There's no more contributions coming in.

To what frequency does that happen?

It's very common. This is a highly mobile workforce. The types of employers that we're working with here are the types that have jobs where people do frequently move between the jobs. To your point, the types of employers that have 401ks, I will tell you that the research does show that more than half of employers in California do not offer any type of 401k whatsoever. And that's because most employers are the very small businesses. Like there's.

For every large company or corporation with 50 or more employees, there are dozens of very tiny employers across all types of industries. So that's really where we're going. Like that's where this program has growth potential, Senators, is in accessing those folks who are working at the types of jobs where there has never been any thought of when I work here, when I work at this, the shop that, you know, at this escape room or if I work at this Gymboree.

Like I never thought that working there would enable me to start saving for my future. That's really our sweet spot. It is not really competing with larger private sector firms. Although I will say the data shows that there's been a 20% bump in larger businesses that offer private sector plans since CalSavers came up.

So Senator Niello will remember that there was a lot of concern from the private sector financial advisor firms that would say, whoa, whoa, whoa, you're going to like essentially gut the 401k industry, the financial industry, which is very important. That very much has not happened. In fact, the opposite. There has been a 20% increase.

We can look at the data that shows that businesses that prior to CalSavers mandate coming out offered no kind of of retirement plan whatsoever, 20% of those are now offering a plan. And it's not CalSavers, it's not our plan. So we are sort of like a rising tide raising all ships type of thing here, which has been good.

So you said that half of private sector employers offer nothing. Well, then I got to wonder about your enforcement program. You've got 58,000 employers enrolled now, and you say if you bring it down to one, it'll be like 150 or 160,000. You said it would triple. That's half of the employers in California?

We will get there. This is for sure a long term play. The enforcement of the mandate needs to be done with the correct balance of firmness. However, our goal is not to penalize employers out of existence. What we want to do is nudge them into compliance. We want them to actually facilitate savings for actual human beings. That's the whole goal.

And so yes, while we have 58,000 employers that are actually doing this, they're actually running CalSavers. There are 150,000 that have at least they've registered and they've even uploaded their rosters. They're so close. They're so close. They're on the one yard line. Punch it in. That's where our focus is as well.

You took the action, you registered, you're right there. Let's go ahead and facilitate for your employees. Let's get this done. Here's the tools to make that happen. We've worked out arrangements to make sure that we can provide automatic connections to most of the payroll providers out there.

One thing that we do hear back from employers is I use QuickBooks, I use ADP for payroll provider. I use this. Anyone who runs a business, like I used some kind of service, it wasn't easy enough to integrate. We are working really hard and pushing all of our resources through our vendors to make that as easy and frictionless as possible. So major priority for us, make it easy for the employer to do the right thing.

The funds will go into the savers accounts, and then the focus will definitely expand to be more about financial education, behavioral economics for the savers, and getting that combination of the two happening simultaneously. That's when we'll see the big growth.

I have to confess, I'm a little skeptical of your statistic that half of private sector employers don't offer retirement plans, but perhaps you could provide that source.

Great, thank you. Thank you, Senator Niello. This was, is a profound innovation. This concept at an incredibly audacious scale. Ambition for scale. And based on my limited experience so far, well executed and well implemented. You can have all those things and still not win.

So I think the question that's been coming up is how will we know if our original, if that original theory, as powerful as it was, is still real, that's still where we're headed or not. And to me, I appreciate the testimony and your frank engagement of the questions that are real here. Because the account balance issue I think is one of the most significant ones because that's at a dollar per account, we're not going to be able to sustain the program.

And also raised the question of whether that's worth it, you know, at that half a basis, or did you say half a percentage of a basis point. Yeah, one half. 1%. So on a $2,000 account, you're not, you're not getting that much.

But also, you know, in terms of, you know, the original name of the, of the program for secure retirement, we're not on track at those, at those savings levels and recognizing the purpose here is to encourage and facilitate savings for retirement for the workers with the lowest wages and compensation.

So we shouldn't have expected a quarter million dollar balances, but there's something in between a quarter million dollars and $2,000, particularly if it causes you to think then, hey, our family is, we are preparing for retirement and at this rate we will have $8,000. You know, we want to make sure that we're being real about what the, what we're doing, what we're accomplishing here.

So I'm encouraged by what's happening, but I think that's the, you know, paying attention to these key metrics as we, as we celebrate the milestones along the way. I have to say I am worried about the move next to the smallest of the employers because I think, you know, as I understand it, the point of that trigger, you know, we're starting at the, at the already small employers 10 and up, and we'll go to the micro employers next.

The point of that, of that scheduling was let's make, let's get it right. You know, let's figure out the kinks and let's figure out how we're doing enforcement and outreach and all of that. And then once we've done that, we'll move on to the smallest, the smallest of the employers.

And while you've made a lot of progress, it's clear that we haven't figured all that out yet. And so it raises the question for me whether that's whether we're ready to do right by the, by those, because the employer of one person doesn't have all the, you know, all the expertise.

And so, you know, especially when, if the materials are all in language for the worker but not for the employer of two people. I mean, it's a big. Given tariffs and the economy and so much uncertainty in the world, it's like a lot to add on to people if we're not completely ready as well.

And so is it your sense that in terms of building towards the 6 million and the larger accounts and all of that, that our very best next marginal play is going to the micro employers? Or are there other things that we could be doing with the set of employers that we are already aspiring to, but not reaching at the scale that we want that will get us more rapidly to our goal than reaching down to the most micro of employers?

Terrific question. I appreciate it. I do think it is the right step to expand the scope of the mandate to employers with as few as one employee. What we're doing differently in this wave, as you deftly pointed out, it is probably the most difficult wave, not just in terms of size, but in that level of likely, you know, financial sophistication around administering a program, is we're doing a first ever of its kind early employer incentive campaign for these tiny businesses.

So we are taking a portion of penalty funds collected, and we are saying if you participate early, connect with us now before the deadline, which is December 31st, just the worst time to like be doing difficult financial transactions.

You know, if you can facilitate early, then you're entered into an opportunity to win a $500 incentive for doing that. We're also laying out, we're also laying out a, as I alluded to before, an option where employers can do this essentially automatically.

They can set up one time, be connected with their payroll provider, and be able to set up an automatic 360 degree payroll integration, as it's called in the jargon, to where you do this one time and the employer almost never needs to think about the phrase CalSavers again. It all happens automatically.

An employee gets hired, they're automatically put in. If the employee decides to opt out, the employer literally does not even need to be aware of that fact. It's all just done as part of the process. I just think that's so key to this for these small business employers that do everything already, I think just making it as frictionless and simple is so key. So those are two innovative things that we're trying to do there.

We're also looking to set up a more robust kind of like a chatbot feature on our website that would utilize general information pulled from various large language models that could speak in any language to anybody who goes to our website and answer general information questions, both for the saver and for the employers. So we're trying to do what we can to access stuff for this huge wave in advance. That's new. All that's new.

Will the chat bots be answering, giving correct answers or?

It will be. That's the number one thing. So like we've been trying to break it, we've been trying to stump it. Yes.

Okay. Well, fortunately we have the Chair of the Labor Committee as well is here. I mean, I think the, you know, the, the original schedule was, we thought we would be, we would be at fully ramped up and self sufficient and we'd have our program designed at three years or so and then we would be moving on to this change.

It's really a policy question, I think, to be grappled with as to whether or not the conditions that the Legislature envisioned when it set that time frame for reaching to the micro employers are still the right ones. That's not for us.

But the folks who lead on this, on this issue more generally, I think that's important to be considered. One other question. So you mentioned by 2030, are you accounting in that, in that projection, the repayment of the, of this, of this, of the state startup loan in that, in that calculation?

No, that is not considered in that. This is truly just a break even in terms of revenue versus expenses. We will definitely have to grapple with what's the best repayment structure for the General Fund loan that was used to start this up.

Okay, there's nothing further. Then we're gonna... This item is for information only, but it sounds like we'll be back as well, so thank you very much. All right, next we're gonna turn to the California Department of Tax and Fee Administration. Will representatives of the Department please come up. Begin with a brief overview of the status report, including your progress on the state operations and vacant positions goals.

All right. Good morning, Mr. Chair and committee members. I'm Trista Gonzalez, Director of the California Department of Tax and Fee Administration. Thank you for giving me the opportunity today to share an overview of our Department. CDTFA administers 42 tax and fee programs, including the sales and use tax, the Bradley-Burns uniform local sales and use tax, and local district taxes. Some of our largest special tax programs include fuel taxes, the cigarette and tobacco excise tax, and the cannabis tax. We also are responsible for the flavored tobacco ban enforcement activities.

CDTFA has over 1.3 million active taxpayers. Of those accounts, over 1 million are sales and use tax taxpayers and nearly 340,000 special tax taxpayers. Our revenues are distributed into 46 funds. And fiscal year 23-24, CDTFA collected revenue totaling $96.6 billion at a cost of just 66 cents for every $100 collected. These costs have decreased 28% since fiscal year 2016 and to 2017. Thank you. And I will now turn it over to our Chief Financial Officer, Jason Mallet.

Thank you, Trista. Good morning, Chair and esteemed committee members. Would you like to jump into the BCPS first?

First, any questions on the overview from members of the subcommittee?

What percentage of the taxes come from cannabis?

That's a great question. Let me.

Yeah, so last year, cannabis generated $674 million, I believe, out of the 96 billion. So that's less than 1%.

Got it. So overarching, the most of the funds come through sales and use tax. Sales and use tax. Got it.

The basic split is of the 96 billion, 80 billion is sales and use tax, and the remainder is all of the, you know, 41 other tax programs. Yep.

All right, then let's proceed to item six, which is tobacco programs, and AB 3218. SB 1230 implementation.

Thank you. So we have just one BCP up for discussion. It's on the Cigarette and Tobacco Products Licensing Program. As background, California's tobacco flavor ban that started in fiscal year 22-23 did not authorize CDTFA to seize flavored tobacco.

So starting this January 1st of this year, 25, AB 3218 and SB 1230 authorized CDTFA to seize flavored tobaccos from retailers. Our request is for one year funding of $3.5 million in fiscal year 25-26 from the Cigarette and Tobacco Compliance Fund to implement AB 3218 and SB 1230, which enable us to seize, destroy, and assess penalties on flavored tobacco.

We're requesting limited term one year funding because the value of seized product is not yet known. And also on the revenue side of the ledger, it's unclear how much money and penalties we will be collecting because we'll be seizing illegal product that would otherwise would have been sold. So we're essentially taking inventory away from illegal retailers.

Once we have better visibility on costs and revenues, we will return with an ongoing funding recommendation. And one note is that the Cigarette Tobacco Compliance Special Fund also supports the existing cigarette licensing fee program and now the new seizure authority from AB 3218 and SB 1230. So this request gives CDTFA sufficient authority to administer both requirements. And with that, we'd be happy to answer any questions.

All right. Thank you. Department of Finance.

Cynthia Elmore, Department of Finance. Nothing to add.

Legislative Analyst.

Thank you. Seth Kerstein with the LAO. The agenda covers our analysis in a fair amount of detail. So I'll just provide a brief summary. Based on recent trends, we think the annual tobacco revenue loss from the flavor ban might be around 3 to $400 million.

But of that amount, we don't know how much is due to greater tax avoidance versus lower actual tobacco consumption. So that's sort of just one thing to keep in mind here. Another thing we note in our analysis is over the last few years, spending on CDTFAs tobacco programs has declined.

So to make that a bit concrete, in the 23-24 fiscal year, CDTFA's tobacco programs had 32% fewer filled positions than in 2018-19. So some of that decline in positions likely is due to efficiency improvements, and of course we welcome that. But the department also has struggled to hire and retain inspectors.

And so over the last few years, the number of tobacco inspections dropped by 52% and the number of citations dropped by 24%. But at the same time, the number of product seizures grew by 3% and the total value of product seized grew very substantially. And so those are sort of some trends we're looking at.

And so in a strictly budgetary sense, in our view, the proposal to fund CDTFA's implementation of these unflavored tobacco list laws is reasonable. But since CDTFA has struggled to fill tobacco enforcement positions provided even under its existing appropriations, it's unclear to us how much of the proposed spending actually will even ultimately materialize. And so we're concerned that these new responsibilities that CDTFA is attempting to fulfill under this new legislation could spread existing enforcement resources even more thinly.

Thank you. Does the department have any comments in response to the LAO's observations and analysis?

Sure, absolutely. Thank you, Mr. Kersetin. Yes. So first, on the revenue, our numbers aren't consistent with yours with the flavor ban. For reference, the flavor ban started in December of 2022. The full fiscal year prior, our tobacco revenues were $1.8 billion. This last fiscal year, they were 1.4 billion.

So a decrease of 400 million, which is in line with Mr. Kerstein's estimates. On the vacancy front, we have had historical challenges, and fortunately, we've actually made excellent recent strides in hiring, particularly from the IRS given what's happening at the Federal Government.

One fact is that while our vacancy rate was 40% in this program, it is currently just 10%. We had not related specifically to this tax program. We had a mass hiring event in Los Angeles where we gave out 85 offers.

That doesn't mean 85 acceptances, but we gave out a lot of offers, and we're getting far more interest on the hiring front. So the IRS troubles are actually a great opportunity for us to get quality people in the door and collect more revenues for the state.

And then on the last point on inspections and the dollar value of seizures, I think Mr. Kerstein captured it very well. The number of inspections has decreased significantly in the last few years, but that is actually a result of us doing a much better job of targeting retailers who are selling illegal product.

What we have found is that big box retailers often comply, and so it's not a good use of there's not a good return on investment of inspecting, you know, the large retailers that we all know. Most of the illegal product is found at smaller retailers. And so we've directed our efforts there.

And as Mr. Kerstein pointed out, the value of that seized product has increased. For reference, this is prior to this flavor ban, which is just starting this January 1st of 25. The number of cigarette sticks that we seized four years ago was roughly 600,000 sticks.

And that is now, as of the end of last fiscal year, that has grown more than 3x, over 2 million sticks. And on the other tobacco products, that also has tripled in the total value. One update for you and Mr. Kerstein on the seizure front. So since January 1st of this year, when we're allowed to seize legal product, a flavored product, We've conducted over 100 inspections and have seized over 300,000 illegal packages of flavored product.

All right, thank you. Thank you both. Members of the subcommittee, questions or comments? Senator Smallwood-Cuevas.

So I guess my question is, what's the backup plan if the Compliance Fund is not sustained given the flavored tobacco enforcement sort of challenge. And what happens after 2026?

Yeah, that's a big question mark for us too. The reason why is that this new flavor ban that lets us seize and destroy product is drawing is putting money into and taking money out of the existing cigarette licensing fund. That fund currently, as of the end of last fiscal year, had roughly $12 million.

That cigarette licensing program itself generates roughly $10.5 million. So that's sustaining. But the big question mark is both for this new program is both on the revenue side of the ledger. We do not know how much penalties we're going to collect because again, we're going to be taking product away from people that would have sold the product illegally. So that's a big question mark. So we've assumed to be conservative zero. And that's why we're only asking for one year funding, because we just don't know.

And then on the expense side of the ledger too, we've had a lot of success in seizing illegal products so far. If that continues, we do expect those expenses to ramp down over time as less illegal product is out there. And retailers who are selling these illegal products recognize that there is enforcement.

There is a police officer in the room that's going to, you know, stop someone from selling, from breaking the rules. So. But there's also a question mark on the expense side of the ledger. To answer your question, if it turns out that this fund is too squeezed, then there will likely need to be an increase in the licensing fee. I think the licensing fee is $265 per year per retailer. If I'm not mistaken, that might need to that might need to increase.

Thank you.

Thank you. Appreciate the analysis, the questions by LAO and also the thoughtful and comprehensive answers. We are going to hold this open. It would be helpful also between now and when we take this up, this item for final action to get from the department the data set or the metrics that you'll be using in order to evaluate at the end of this year or as this year proceeds if the item is approved. So that we.

So we have an agreement about where it is that we're headed for the evaluation needed to make decisions for the permanent budget following the upcoming year. So thank you. All right. We'll now return to the Franchise Tax Board.

Will representatives of that department please come up? Again with a brief overview of the core functions and status report and then also a brief report on the progress towards meeting the state's operations. The state operations vacant positions goals. Is FTB with us?

Do you want to start?

Just for clarification, it was a little bit loud back there so I wanted to make sure that we're the staff report that you're.

Yeah. So we, we're inviting you to first provide just an overview of the agency and progress on the state operations and vacant positions goals and then we'll turn to the other items.

Thank you so much for clarification. So just to overview the Franchise Tax Board. So the Franchise Tax has just over 6,000 employees. Our main charge is personal, the processing or the intake of personal income tax and corporation income tax. We through those activities approximately $163 billion goes into the general fund.

The breakdown of that is approximately $133 million for personal income tax and about 37 million or a billion for corp. We talk about what is that the Franchise Tax Board actually pushes through. We process about 23.4 million tax returns each year, about 55 million payments, about 2.5 million phone calls and about 55 million visits to our website which includes several million substitutes self service requests using our MyFTB account. So that's the overview of what our responsibilities are. And then I'm going to push it over to Thi who will answer the specifics on the. I think because the other part of this was the efficiencies, right?

Correct. State operations and vacant positions efficiencies.

Okay. Yeah. So I think we were talking about the impacts of the state ops on FTB. Is the question.

Yes. How you responded to the administration's.

Sure. We actually partner really closely with the administration in order to make sure that FTB is part of the budget solution. But really at the same time really being able to protect the revenue. Right. As Roger mentioned, in 23-24 FTB brought in about 162 billion which is about 80% of the general fund.

So all of that really went into our analysis of our ability to contribute. And the way we really approach the drill is to look at our ops across the board and say what is it that we can save on while being able to continue to protect the revenue?

And in that aspect we did work with finance and FTB's current year contribution is 40 million and we achieved that really by looking at continuing to manage. We are actually very lean in our operational expenses. But throughout the fiscal year, right, w looked at and said hey, what is it that we truly, truly need now versus things that can be deferred potentially to next fiscal year?

And the other aspect of that, when we think about the impact of the drill, is that we've actually been able to mitigate that for the most part, because these the savings that we're getting is primarily through our current vacancy rate. So as you kind of heard to CDTFA. Right.

We have struggled in the last couple years with certain parts of our hiring process just from a timing and the candidate pool. Right. But within the last this current fiscal year, our actual vacancies have continued to reduce. So because of that, our contribution is just for the current year.

Questions or comments from the subcommittee members? All right. Thank you. Next, we're going to then turn to the specific item, specific FTB items. First is items, issue seven, which is the pass-through entity elective tax extension. Yes, you're liberated.

Good morning. Nick Thomas with the Department of Finance. So, as part of the governor's budget, the Administration is proposing to extend the pass-through any elective tax, PTET for short. For tax years 2026 through 2030, subject to a trigger if the federal SALT cap is extended. And additionally, the proposal would newly allow late prepayments for the extended program.

By way of background, under current federal 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 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 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 so doing, 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.

Currently, Finance estimates that PTET has so far saved California taxpayers approximately $3.5 billion to $4 billion per year on their federal taxes. While the PTET is scheduled to end after tax year 2025 along with the federal SALT cap, negotiations are currently ongoing at the federal level and the expectation is that they will result in the SALT cap being retained in some form.

Therefore, what this proposal does is it provides a five-year extension subject to a trigger depending on the outcome of those negotiations. Additionally, if the proposal goes into effect, it 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 liability or $1,000, whichever is greater. However, 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.

So allowing a late prepayment gives those taxpayers an avenue to participate when they inadvertently underpay, while the 12.5% reduction in the credit amount still provides, in the Administration's view, a sufficient incentive for taxpayers to pay timely and therefore protects the fiscal position of the state. With that, happy to answer any questions.

Keeping in mind that Mr. Thomas is my former student and a great one, Mr. Alamo, any comments on his proposal?

Let me reassess. No. In all seriousness, Chas Alamo with the Ledge Analyst's Office. This trailer bill is a relatively straightforward sort of contingency plan to allow the state to adjust its tax policies according to tax policy changes at the federal level that we won't know about for some time. We've looked at it pretty closely. We have no issues with it. Happy to take any questions.

All right. Questions or comments from members of the subcommittee? Senator Smallwood-Cuevas.

I just have a question. Do you have a little history of why was the PTET program started? What was the origin story of this policy?

The PTET originated in 2021. It was a response to the Tax Cuts and Jobs Act, which passed at the federal level. I think it was 2018, if I'm getting my year right, so under the first Trump Administration. TCJA, the Tax Cuts and Jobs Act, it did a number of different policies in the tax world.

One of those was the limitation on the state and local tax deduction, which was a revenue raiser at the federal level. And so what it did was, previously, there was no limit on state and local taxes that could be deducted at the federal level.

They put a $10,000 limit, which resulted in taxpayers not being able to fully deduct their state taxes. And so the way that the pass-through entity elective tax works is it allows essentially--so one key of the limitation at the federal level is it only applied to individual taxpayers, not business entities, and so by paying an elective tax at the business entity level, those taxpayers who have pass-through income are essentially allowed to fully deduct state and local taxes.

And so this provides a significant tax benefit to California taxpayers. I will also note that many other states also have similar programs that offer kind of a commensurate federal tax benefit.

And does the PTET primarily benefit high-income business owners? What percent--?

So the $10,000 limit, it could apply to high-income earners, but you know, $10,000 in state and local taxes covers a broad swath of taxpayers as well. So there's kind of a broad range of taxpayers and it's specifically for business owners in this case because they have pass-through income. For wage income that based on the IRS's guidelines, that doesn't apply for this.

Okay. And then my other question is, is the proposed 12.5% penalty on the late payments sufficient, you think, to encourage timely payments? And I guess the whole goal is that we want to offer relief, too, to those taxpayers, but--

Under the current program, if a taxpayer pays late by a day--so they are required to do a prepayment in June of the current tax year--if they pay late by a day or if they underpay by a single dollar, they are not able to participate in the program that year at all.

And so potentially they miss out on a significant federal tax benefit by being shut out. And so what the late prepayment proposal allows is for more taxpayers to participate.

When we're thinking about the overall fiscal impact of this, there needs to be some sort of incentive for them to still pay on time because if they don't pay in June, if instead they pay, let's say, a year later, then that shifts revenue later and so that's a revenue loss to the state.

And the whole idea of the prepayment, it's really intended to be somewhat similar to estimated payments. So taxation is kind of pay as you go. People pay withholding or employers pay withholding on behalf of employees, other taxpayers make estimated payments, and so the prepayment is really modeled after that estimated payment framework.

Okay. Thank you.

All right, thank you. So this item we do have for recommended vote today, and that, the recommendation is that we approve the proposal and adopt placeholder trailer bill language. So if there's no further discussion, is there a motion? Oh, sorry. Okay. Okay.

We're going to take public comment at the end, and therefore, we're going to vote on everything at the end as well. Thank you to the consultant. Okay, so we'll move on and we'll return to this item when we take our votes up at the end. Thank you both. Now we're going to move to Item Eight, which is the single sales factor apportionment for financial institutions. You up again, Mr. Thomas.

I'm staying with you.

All right. You can proceed.

Nick Thomas again. Department of Finance. So, as part of the Governor's Budget, 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 a firm conducts in a state divided by its total business activity either in 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 is calculated using the ratio of a company's sales within the state to its sales in either the U.S. or the world while three-factor apportionment is calculated using the ratio of a company's property, payroll, and sales within the state to its property, payroll, and sales in either the U.S. or the world.

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

This proposal will bring the taxation of multi-state financial institutions and savings and loan businesses into alignment with how nearly all other businesses are taxed in California, and further, how these businesses are 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 the state and therefore, in the Administration's view, this encourages state economic development.

Single sales factor apportionment is generally more beneficial than 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 tax while others will pay less, and on net, the proposal is estimated to increase revenues by $330 million in the budget year 25-26 and by more than $250 million annually thereafter. With that, happy to answer any questions.

All right, first we'll turn to the Legislative Analyst's Office. Mr. Issaks, welcome back.

Thank you, Chair and Senators. Rowan Isaaks, LAO. Our recommendation is that the Legislature approve this proposal and shift financial institutions to the single sales factor. Our primary reason for making this recommendation is just we view there as being a lack of a clear justification for financial institutions to have an exemption in the first place.

We view there as being broadly two potential reasons that you might want to give an exemption. The first is that some firms have labor and capital that is fixed in place, but they make sales across the U.S. or across the world. So an example of that might be a mining operation in California.

In this case, apportionment that takes into account the property and payroll when determining the tax is often seen as more appropriate or fair given the use--given the reliance of the operation on the state's natural resources and infrastructure. In the case of financial institutions, this is not the case. They can largely provide their services wherever they are located.

The second potential reason is that sometimes alternative apportionment measures are used to confer some sort of preferential tax treatment to certain industries as an incentive. The Legislature, though, has not given any indication that it wants to do this for financial institutions. In fact, they pay a higher base corporate tax rate than other corporations.

So because neither of these potential reasons apply, that is what drives our ultimate recommendation. Just to make a point about, you know--there is a theoretical reason to think that there might be economic development effects, you know, lower tax burden for being physically located in the state.

However, you know, being a non-targeted approach--and we do think that in general the evidence suggests that this is going to be a very minor or not, you know, significant, you know, contributor to economic development--we would largely think the Legislature should view it as more of a revenue generation, you know, change, and because the majority of multi-state financial institutions are not in California, that is what drives the positive revenue effect. Thanks.

All right, thank you. Are there questions or comments from members of the subcommittee?

A quick comment. Prior to 2010, the system basically penalized corporations that had payroll and investment in California versus others, and that was changed initially in the tax--excuse me--the Budget Act that was passed in February of 2009, further modified by a Proposition, but basically what this does is it gives a relative advantage to corporations that invest in the State of California as opposed to others, which was well explained and I think that makes good sense.

Agreed, and this was in the--this has been a priority of the Senate for a bit, so including in last year's budget, the Senate included this item and hopefully this will be the year that the Administration and the Assembly agree, and sounds like at least we're, we're half the way there, so appreciate it.

We will--this is an item that we are also recommended to take up for vote later in the hearing after public comment. Thank you both. All right. Now, Item Nine is the military retirement exclusion.

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

The income exclusion is available for individuals or heads of households with income up to $125,000 and joint filers who do not exceed $250,000 in adjusted gross income, and they 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 years.

The Survivor Benefit 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 impose an income tax, California is currently the only state without a full or partial exemption. 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--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 retelling--excuse me--retaining military retirees to the state.

According to 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 $130 million in 25-26 and $85 million ongoing thereafter. And we're happy to take any questions.

Thank you. Mr. Alamo. Legislative Analyst's Office.

A few brief comments, Mr. Chair.

I mean a student?

No, there's, there's always one in the room that's not a former student.

Our office produced a quick analysis of the Administration's proposal here several months ago and I'll just include some highlights. It is in the committee's agenda. As noted by the Administration, the proposal has two stated objectives. The first is to provide some tax relief to military retired veterans who live in the state and the second is to improve the state's sort of attractiveness to recent retirees from the armed services.

And we think on the first basis, clearly, the proposal would provide some tax relief to military veterans who are retired. But our main concerns have to do with the second stated goal. And so genuinely, we want to make sure that the subcommittee and the Legislature as a whole is clear-eyed about what the state gets from this tax proposal.

We know that individuals and families make decisions about where to live and retire based on a complex set of factors, and including all of the sort of factors, the benefits, and the costs of living in California, we think the income tax treatment in this proposal is a relatively minor contribution to that set of factors.

So it's not likely to influence very many retirees' decisions about where to live or retire to. And so we think that if--going forward--if the Legislature simply wants to provide tax relief to retired military veterans, by all means. This proposal would do so.

But if it wants to set a sort of higher bar for its tax expenditures to ensure that there's a behavioral response or to spur economic activity, some other stated goal, including making the state more attractive to retirees, that this proposal itself is not likely to meet that goal, and it could either pursue a more ambitious option or altogether reject the proposal if its sort of objective is to hold the state's tax expenditures to sort of a high bar for evidence in what outcomes the Legislature gets from those tax expenditures. Happy to take any questions. Thank you.

All right. Thank you. Are there questions or comments for members of the subcommittee? Senator Niello?

Our area here, Sacramento, used to be one of the highest concentration of retired military personnel in the entire country. We had three military installations here that--the largest of which closed in 1995 under the BRAC process, and that population has declined.

The reason that we had such a high concentration--and by the way, in California with San Diego and Sacramento--because military people were stationed here and they discovered what a wonderful place this is or that San Diego is, and they stayed here. That's not been so much the case because we haven't had them stationed here to begin with.

And I appreciate the points that LAO made, and I would view this as kind of a nose under the tent, if you will, because I don't think it's anywhere near generous enough. I would go for a higher exemption, and I think the case could be made that it would benefit us economically and so I think that it is worthy of approval.

Senator Seyarto has a bill that I guess is going through the process currently that's almost identical except it extends it further, and if that passes then it will go further than this proposal does, but I think it's good sense, good policy as a good first step to incentivize military people to discover what a great place this is and the financial benefit, and I think with a higher incentive, it would provide economic development benefit to the state.

I'll just--let me, let me say first, because we are getting, as we barrel closer and closer to the May Revision, that for all of the significant budget proposals that are before the Legislature and the governor for 25-26, we're going to be facing extreme measures and very, very substantial pressures for reductions and for cuts, and so just want to put the--put in context all these proposals.

Having said that, I live adjacent to the region that Senator Niello's talking about, but I also represent Travis Air Force Base, the honorary commander of which is here or prior honorary commander is here. And so to me, the issue is I'm not trying to tee up a proposal or a program that's going to--where we're going to send folks out from GO-Biz to South Carolina trying to recruit military retirees to California as our economic salvation.

That's--to me that's not the point of the proposal, and if it were, I agree with both LAO and my colleague that that's not likely to be effective. But that isn't a purpose for me. It is--you're in--maybe have come to Travis as an example from somewhere else and you see the weather, but also you're in the Little League. You're a volunteer at the Chamber.

You're the--you're at 60, you're the youngest member of the Rotary Club. I mean, you are a foundation of the community and it is your home and your people.

And as you approach retirement and your family members elsewhere saying, 'hey, but you know, you could come here to Alabama and pay less taxes or you could literally go to any other place in the country and not have the same taxes' that it erodes the--it erodes the whole community and the sense of commitment and attachment that both retirees but also folks that are at the base now serving their country and serving our communities are developing a sense of attachment and community to the place.

And so I agree 100% with the analysis that we've been provided and certainly with my colleague, but I do think it's really about the people, the folks who are already Californians who are serving their country here and that we want them to continue to be a part of the community, the communities in which they inhabit, in which they contribute here as well.

So I'm supportive of the proposal as well, given the--in the context of the overall budget fiscal situation that we're facing, and so appreciate, appreciate the Administration bringing this forward and we're going to--this one--we're not--we will hold open because it's a major item for when the May Revise comes, but appreciate the presentation.

With that, we're going to proceed to Item Ten, which is related to the wildlife--sorry--Wildfire Settlement Tax Relief, and so Department of Finance.

I'm Robin Finnestead once again with the Department of Finance. As background, current federal and state treatment of settlement claims absent a specific legislative exception depend 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 the facts and circumstances of the case.

The state has previously 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 the 2018 Camp Fires.

This proposal excludes all wildfire settlements from taxation that are paid January 1, 2025 and through tax year 2029, regardless of when the fire occurred. The exclusion applies to the extent that losses, expenses, or damages are compensated by the settlement payment are not--excuse me--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 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 happy to take any questions.

Thank you. Legislative Analyst?

No specific comments--I'm Chas Alamo with the LAO--about the trailer bill language. As a general rule, we believe that it's worthwhile that the state apply the same tax provisions to each of these instances, and to the degree that this trailer bill moves in that direction, it would be viewed favorably by our office.

Thank you. Thank you. Are there questions or comments from members of the subcommittee? Senator Smallwood-Cuevas.

I just wanted to follow up on the comment that the LAO made. Wouldn't a standing framework just provide some sort of more equitable and timely relief if we could ensure that every fire is treated the same and there's one process instead of fire by fire by fire that the state just has a protocol and a process. It seems--even staffing--just intensive to sort of look at these as individuals. Why has that not been the case? Why is it fire by fire?

Colby White, Department of Finance. So I think when you're talking about the legislative history, there has been a history of there's been a disaster, and then it's come to the attention of the Legislature and the Administration and there's been action to provide relief related to that fire. So that's the legislative history.

The reason why we are proposing this on a blanket basis is to address that. So if a fire, you know, Los Angeles fires that occurred in 2025, settlements will, you know, may go out in 25, 26, 27, but if there's other fires that are--another wildfire disaster that happens, then that would also be covered.

So this trailer bill does address that in the sense that we won't be here addressing the same issue next year for settlements that are paid between 2025 and 2029.

Okay. Yeah. I just was trying to figure out why they're treated--it's strange to me that there just isn't a standard for this and you wait for the disaster and then you sort of have a process for making sure that families affected get relief. But I--okay. I'm just going to--I might have more questions.

I will follow up with you on that just to understand that process a little bit better. The other question I wanted to find out about is, is there a way of committing to working with the Legislature to ensure that our wildfire victims in Los Angeles are not left behind simply because their disaster occurred before the framework takes place?

Well, this trailer bill will cover settlements paid after 2025. So settlements tend to kind of lag by several years. So settlement payments might not go out till 2026 or 2027.

There won't be any--you don't suspect that some of these things will move more quickly, the sort of smaller amounts that might happen? Or is it typically always a one year?

It's, it's typically lagging, usually by several years, but smaller payments could go out. But because this bill starts at--beginning at January 1, 2025, those would be covered by this bill as well.

Okay. Got it. Got it. Okay. And no questions. I think I was confused by the, by the dates. Thank you.

All right. I hope Mr. Hill was here listening to you for a later item about the importance, about some of these clarifications about things that are perspective that are exogenous and out of the control of either us or the, or the local agency, so when we get to the local government issue, we bring some of these issues back up again. But--so I agree with the--I very strongly agree with the concept here and the proposal of moving from the bill by bill by bill, everybody got to do one for each of the fires to this system.

But as I understand it--and correct me if I'm wrong--that there's still going to be a couple fires that get caught in the middle or the settlements will be caught in the middle where their bills were, I think, vetoed because the governor said it should be part of the bigger framework. Now we have the bigger framework but the dates don't jibe, so those couple of fires don't get covered at all in either the old patchwork system or the new one.

So since the 2020 Bobcat Fire, the 2021 Dixie Fire, and the 2022 Mill Fire, could you speak to those three fires and whether, whether and how their victims that have settlements are covered here?

Absolutely. First of all, our proposal does not discriminate between any fires and provides relief for any settlement payments paid after--excuse me--January 1, 2025. So any settlements that are resulting of the Bobcat, Dixie, and Mill Fires that are paid after that date will be covered by this bill.

Second, the state's fiscal situation has improved, and at the time of the governor's budget, it was a little more balanced, but the state is, of course, facing a lot of fiscal pressures, and at the time of budget development, it was unclear what the fiscal cost would be for any retroactivity for wildfire settlements.

The Administration is generally very supportive of the intent of those types of proposals, but unfortunately, we are open--excuse me--we are open to discussion with the Legislature during budget development on that idea.

Okay. To me, that's--it's a basic question of fairness so we ought to do that. I mean, because the response back was, we're working on a framework so we don't need these bills and now the framework's out, and as you say, we'll cover really, really late payments, but for a fire in 2020, a lot of those settlements have already been paid or will be paid before this framework takes effect.

So they are caught in a gap entirely of our own making and the solution for which is also entirely of our own making and get the General Fund pressures that we're under and that are going to be extremely severe. But I think in this particular case, we've recognized that it's not right, it's not equitable, and even in the veto message, I think that's--the framework will be the answer to your problems if you were in the Bobcat, Dixie, or Mill Fire, and now the framework's out, and for many of those victims, it will not be. And so it isn't. To me, it's an important issue for us to address in the coming weeks as the negotiations proceed.

That was my point. And so Dixie Fire doesn't fall into to that category either. It will not have any retroactive sort of support for those survivors?

Depending on when their settlements are paid. Absolutely.

But if it was before January, no.

No. That would not be covered by this trailer bill at this point in time.

Is there some thought on how that could happen or what, what, what is the way to, to ensure that Bobcat and Dixie--is there, is there--do we need to do a bill to do that or is it some changes on your end that could be made to ensure that happens?

I think we look forward to working with the Legislature and coming to a final agreement in the budget.

Yeah. So procedurally we could add it when we take this item up for action as well and force the question. All right, so we're going to hold this item open. We're now going to pause in order to take public comment on Items One through Ten, so everything that we've heard up to this point, including the vote-only items up to Item Ten. So if anyone wishes to to address the subcommittee on any of those items, please come forward to the stand up microphone.

Good afternoon. I'm Steve Vancil from Solano MOAA. I'd like to address Item Nine. That's military retirement tax exemption. We very much support SB 1 from Senator Seyarto and also AB 53 from Assembly Member Ramos. As was mentioned, California is the only state that doesn't give any retiree military retirement pay tax exemption. There's a reason the other states do.

That's because they want the federal dollars that are attached to retirees and also the workforce; not just the retiree, but also the spouse. It was correctly mentioned that there are 38 states that fully exempt retirement pay either through specific exemption or in fact they have no income tax. Eleven states are partial. We're the only state that doesn't.

Of the 11 states that partial--little update to Legislative Analyst--there are four states right now that are partial that have current legislation in progress to go to full exemption. There's a fifth state, our neighbor Oregon to the north. That has legislation process to improve their partial exemption.

I realize the budget stresses that we currently have right now. We can't leap to the head of the pack and I think the veterans in this state realize that, but it would mean a lot to have some initial start at tax exemption. So we very much appreciate support for that, and again, thank you very much.

It is an issue that is important to the heart of the veterans, especially the retirees and their spouses also. We need to keep the military retiree families in California and also attract new ones to come to California as well. Thank you.

All right. Thank you for being here.

Good afternoon, chair and members. My name is Seth Reeb with Reeb Government Relations. I'm a combat veteran with two combat deployments with the U.S. Army as an infantryman. I'm here representing American Legion, AMVETS, California State Commanders Veterans Council, Military Officers Association of America, and the Vietnam Veterans of America.

We thank the governor for including a partial military tax exemption in this year's budget proposal. This proposal is a significant step forward honoring service members, military retirees, and their surviving spouses. However, I want to address a couple of key facts that are misconceptions and have surfaced in recent analysis and reports.

From 2020 to 2024, our state has lost 10% of its military retirees. This represents a loss of skilled and mid-career talent that our workforce needs. In California, 64% of retirees are enlisted members, 20% are officers, and the other 15% are surviving spouses. At most--and most, if not all retirees require second careers to support their families.

The current budget projections do not account for secondary tax revenue from second careers that these veterans and spouses take up, nor do they consider the billions in federal dollars that flow into our communities.

We are thankful for the committee and the Governor's Office for working directly with veteran organizations to ensure that highly skilled military retirees and their surviving spouses have real incentive to remain in California where they continue contributing to our workforce, economy, and communities.

We urge you to support our military retirees by providing meaningful relief, but also strengthening California's ability to retain leadership, expertise, and federal resources that our veterans and their families bring to the state. Thank you.

Thank you very much. Does anyone else wish to address the committee on any of the Items One through Ten?

Sorry. Making a lot of noise back there. Camille Wagner, representing the National Accounting Firms. We are supportive of the extension of the PTET and the language allowing for late payments. Importantly, this program is a way to keep dollars in the hands of California taxpayers as a result of the SALT cap at the federal level.

We would suggest a few tweaks to the program to address an issue of overpayment of tax and stranded tax credits as a result of that overpay. We would note that this tweak is cost-neutral because unlike other tax credit programs, taxpayers electing into this program are required to pay tax first and collect a credit afterward.

We're currently in discussion with Department of Finance and Budget Committee staff on a solution and look forward to continuing those discussions.

All right, thank you. All right, seeing no one else, we're going to proceed to the items we have for a vote today. First is item...our vote. Okay, on items 2 and 8, the Central Revenue- Centralized Revenue Opportunity System, item 2 and the issue 8, the Single Sales Factor Apportionment for financial institutions.

Is there a motion on those items?

So moved.

There is. Senator Niello moves those two items. Would you please call the roll.

[ROLL CALL]

Thank you. That motion carries. Item one. Then there's item one, which is the AB518, data sharing for CalFresh. Is there a motion on that item?

Moved.

Moved by Senator Smallwood-Cuevas. Please call the roll.

[ROLL CALL]

Next up, we have item seven, which is the pass-through entity elective tax extension. And Senator Niello is...

Out of an abundance of caution, I am abstaining.

All right. So it's been moved by Senator Smallwood-Cuevas. Please call the roll.

[ROLL CALL]

All right, and that concludes our vote Items. Thank you for that. We're going to move back to our agenda to item 11, which is Enterprise Data to Revenue, the EDtoR2 project. You both seem happier than last time. Welcome back.

Good afternoon, Senators. I am Roger Lackey with the Franchise Tax Board, here to represent or present on item 11. Item 11 is FTB's BCEP supporting the enterprise data to revenue project known as EDR2. Before diving into the proposal itself, I'd like to share a little bit of background.

In 2007, FTP created Tax System Modernization Plan that outlined three large scale projects over a 30 year period. Each project was expected to take approximately 10 years to complete from planning through implementation and each builds upon the previous project.

The multi-decades effort aims to modernize FTB's aging IT systems, implement business opportunities and objectives through better use of data, improve taxpayer service, effective compliance and operational excellence and the first of the three projects, Enterprise Data Revenue 1, was successfully completed in 2015.

EDR1 brought a new tax return processing system that automated a lot of our manual work and improved data capture and validation for personal income tax returns. EDR1 made processing personal income tax and business entity returns faster and more efficient. The Planning for the second project, EDR2, began in 2016 and implementation efforts began in July of 21.

The start of fiscal year 25-26 will see FTB enter into the fifth year of the EDR 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 accounts receivable functions, as well as expanding customer service tools including the Taxpayer Folder, our Taxpayer Folder, externally known as MyFTB.

Following the statewide process established to support funding for larger projects, an annual BCP 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. Sorry. The request includes 90.39 million for the payment to the solution partners.

Please note, FTB is using just in time approach to requesting resources. We're asking for resources for the same functions across the years as they are needed. We have noted these ongoing limited term or one time costs with the BCP documents.

For the fifth year of EDR2 project work includes efforts related to data analytic tools and models, enhanced data capture and oversight functions including independent verification and validation and quality assurance, and an independent security assessment.

I would note the following there are two provisional languages in our budget to support the EDR2 project. The first provisional language allows for the carryover of vendor compensation of the funds appropriated for vendor compensation. Any unused amounts is allowed as a one time carryover to the next fiscal year to support the vendor payment for services performed.

The second provisional language supports the funding and use of unplanned work, not to exceed 5% of the contract amount, to cover costs associated with unplanned work, which aligns with the existing scope of the project and is 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 or when there is a scope change.

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

While the project schedule and end date remain the same, the total project cost increased by 18.4 million, or 2.4% of the total of 766 million total cost for the project. These additional costs are necessary due to the highly complex technical environment being implemented.

EDR2 success is dependent on FTB staff's ability to manage, maintain and operate these highly complex technical environments. As we move towards the successful completion of the project, the collaboration between FTB and our solution partner remains strong and we are working well together as issues present.

We are currently three quarters away through the project, and while schedule is tight and there are a lot of moving pieces, we are within scope, schedule and revised costing as stated in the SPR2. And so I'd like to thank you for your time and support and I'm happy to answer any questions that you might have.

All right, thank you. Legislative Analyst Office.

Rowan Isaaks, LAO. We have no concerns with this proposal.

Finance.

Cynthia Elmore, Department of Finance. Nothing to add.

Members of the Subcommitee. Senator Niello? I have nothing, I have no questions, ust note the project oversight report, which also, as you know, confirmed that you're on track. And although you're over budget slightly, in the domain of these kinds of projects, not substantially so. So the completion, just to one final question, what's the completion end date that you anticipate for phase three?

Yeah, so the end date of the project, like deliveries, are in 26, and then we'll move, and then it's halfway through 26 where we move into full acceptance and then maintenance and operations.

Okay. All right, then we will hold this one open, but thank you for the presentation and the update.

I, I have issue 12.

Yeah, okay. Issue 12, which is the Asset Forfeiture Spending Authority increase.

Okay, thank you. Good afternoon. Toy Wong, Franchise Tax Board. Issue 12, Asset Forfeiture Account spending authority increase. This request is to increase the FTB spending authority for the Asset Forfeiture Account. There are no additional funds that are being requested as part of this proposal.

Our current spending authority is 740,000, and the request is to increase the spending authority to 2.5 million in fiscal year 25-26 to purchase permissible resources for our Criminal Investigation Bureau. And there is a note within the write up that for the current fiscal year we did request and secure approval for increase to 1.5 million.

Our CIB participates in the Asset Forfeiture program alongside local, state, and federal law enforcement to investigate criminal financial crimes. Participation in these task force has allowed FTB to receive an equitable share of the assets are seized during these investigations.

These equitable share funds must be used to increase or supplement the resources for the program and cannot supplant any resources that are provided by the state or local government. Over the years and primarily because of a result of a large one-time payout, our current account balance is about 21.5 million.

On October 30th of 2024, FTB was notified by the Department of Justice and the Department of Treasury that because the FTB is not an independently funded law enforcement agency, we will no longer be able to participate in this equitable sharing program.

And we actually have up until June 30th of 2026 to expend any of these federal share funds. So with the approved increase in a spending authority, if approved here, FTB can improve officer safety, we can efficiently secure, store, and transport evidence as well as enhance our tactical and technological training for investigators.

And that is all I have and happy to take any questions.

Department of Finance.

Nothing to add.

LAO?

Nothing to add.

Senator Niello.

Why don't you just declare yourself a law enforcement agency, give everybody a badge and a gun and away we go.

We'll take that under advisement. Thank you.

Is this, does this in any way change future plans for you? Since that's been rather significant funding in the past, I guess. How does it alter your future?

Yeah, so the CIB actually already receives a current fund as part of our appropriations, so we've always been using these funds. Actually up until 22-23, we were only using about 150k of it. So it does alter our ability to perhaps purchase some ongoing software limits and reduce some of our training.

You know, one of the things that why we're asking for this 2.5 million spending authority is we're trying to maximize it today. So we're trying to purchase some new cargo vans, install video walls, so in the future that would be definitely more challenging because we'd have to fit that within our current budget.

Thank you.

Thank you for the question.

All right. That sounds wise. All right, I have no further questions either. So we will hold this item open. Thank you. Now we're going to proceed to item 13, which is a vehicle licensee- license fee backfill. And it's very simple. This one we are going to resolve today.

Sorry, didn't want to send our consultant to the hospital. And I also want to, in addition to Mr. Hill and LAO, we're going to invite some of our delegation from Napa who is here as well. We're joined by Members of the Napa County Board of Supervisors and councilmember from the City of Napa. In fact, if you wouldn't mind coming to the front table. You too, also.

Good afternoon, Senator.

Thank you for being here. I don't want to, I don't want to reinforce any stereotypes about Napa. There are a few males in leadership in Napa, but very few. The full Board of Supervisors, all women. But thank you for joining us. And we know this is an important issue. So we'll turn to you in a moment to...

Is that where Senator Dodd was a supervisor.

Yes. In the, in the, in the past. Yes.

No, we did have one. We had two left. But we have had a turnover on our board.

Yes. Okay, so let's begin. First, Mr. Hill. Oh, sorry, where is....

I'm Chris, partner with Finance. But I believe the Legislative Analyst Office is going to lead us off.

Thank you and good afternoon, Chair and Vice Chair. Ken Kapphahn with the Analyst's Office here for my final exam in local government finance. The brief historical recap here.

20 years ago, the state adopted a series of revenue shifts that reduced vehicle license fee revenue for cities and counties and increased property tax revenue for cities and counties by redirecting some revenues that would have otherwise gone to school districts with property tax revenues below a specific threshold.

And then there were some further adjustments to try to hold schools harmless for all of those shifts. That shift occurs through a local account in each county that's known as the Educational Revenue Augmentation Fund, ERAF, largely for historical reasons.

So the issue before you is that in a few counties, there are not enough school districts with property tax revenue below this threshold to complete the shift, which means that the cities and counties in those areas are receiving less funding than the law otherwise would provide.

And that gap is usually known either as insufficient ERAF after the name of the account or a Vehicle License fee Shortfall after the name of the original shift that happened more than 20 years ago. So state law provides no automatic backfill in the affected counties.

In previous years, the state has provided a general fund appropriation to the affected counties to make up for the difference. That's typically funded two years and arrears. So the Governor's Budget has no proposal here. There's no funding proposed. But we understand that three counties are reporting a shortfall of about 118 million related to the 23-24 year.

Nearly all of that amount pertains to San Mateo. And it's possible that within a couple years this could be an issue that affects Napa County. Kind of depends on how fast property tax is growing and some other factors at the local level.

We're here to answer any questions after we give the Department of Finance an opportunity to add any comments.

Good afternoon. Chris Hill at the Department of Finance. As the Legislative Analyst Office noted, the Governor's Budget proposes no funding for the insufficiency situation. And first, I want to note that it's not statutorily required. So this is a discretionary appropriation the Legislature has been making.

And second, I want to note that San Mateo County is a county most impacted by this. And just to put things in a little bit of perspective, according to data on the Auditor Controller's website in San Mateo County for the 23-24 fiscal year, which is a year for which the backfill is being requested in this budget cycle, according to data on their website, coupled with our estimate derived from what the county is requesting, they're requesting $114 million.

We believe that the VLF swap amount owed to the county in the cities is $268 million. Now, the amount of excess ERAF that could not be absorbed by the school, so it was returned to the cities and the counties.

That was $323 million in excess ERAF that was returned to the county and the cities because the schools couldn't absorb it. That's already $55 million more than the VLF swap amount that's owed to the cities and the counties.

So what then happened was the county Auditor Controller, pursuant to statute, took another $159 million, $154 million from the non-basic aid schools and provided it to the county and to the cities.

So they're owed $268 million for BLS swap and they've already received $477 million in funding, and now they're requesting $114 million more to account for the fact that none of that 323 million in excess ERAF counted towards offsetting their VLF spending law. So that is the genesis, that $114 million number.

And the Administration has proposed to San Mateo County in recent years to try and about three years ago to come to a statutory mechanism to provide statutory backfills for these shortfalls, while also trying to contain the growth in this obligation that's being very impactful to the state. And those negotiations didn't bear fruit.

And so the county has been coming to the Legislature on an annual basis seeking this funding, and it's usually been added as a legislative ad in the budget process. And so that's some background on why, where, here the Administration sees the situation from.

All right, Appreciate, appreciate the LAO and the, and the Finance filling in the color as well. When you say way back when this was done, I experienced this a lot here. I was here when it was done.

Because this sometimes gets characterized as a benefit that was created for cities and counties sort of out of the blue by the Legislature's good graces in order to provide these funds. And then separately, that. Because the conundrum that we're in is caused largely by districts moving in, school districts moving into basic aid status.

So then we pull out our other set of prejudices that basic aid means that suddenly you've become. Everybody in your community is billionaires. That this issue often gets described in a way that is not the reality on the ground. This whole process. I'm the center.

Niello may have been here as well, but when Governor Schwarzenegger proposed the significant reductions in the VLF, this mechanism was created simply to grapple with the consequences that would be so severe statewide if every city and county lost all of their Vehicle License Fee revenue. And I was a staffer.

Everyone was scrambling trying to figure out how to mitigate that. The state couldn't solve it. But how do we make sure that cities and counties across the state don't collapse as the result of the Legislature and the governor's desire to provide a substantial cut in the Vehicle License Fee?

This mechanism was developed because, you know, some mechanism had to be developed by Thursday in order to do that, you know, when the vehicle license Bill was going to be coming up.

It isn't as though, you know, months of hearings were done and Stanford and Berkeley and Sac State economists all came together and figured out, like, what's the very best way to set the system up?

And so I think now when we talk about, like, well, you know, you better have a great plan for how to fix this thing that comes out of the, out of the Bible or off of some stone tablet. It really was a simply an effort by very, very clever, very committed staffers in LAO and finance and in the Legislature to figure out how to backstop what would have been a disaster from the customers and the Vehicle License Fee that the public was demanding.

And we had no communities that were in the situation that we have now. So this wasn't just a gift that, sorry, some people don't get to get anymore. It was really a statewide response to an objective that the Governor and Legislature wanted with respect to VLF.

We're in this situation today because San Mateo County, Napa County and potentially a few others have had no longer receive any, either no longer or won't any longer soon receive a stream of funds that come as you've described, that would go to school districts in their counties, except for the fact that property taxes per student essentially are too high for them to receive that.

But let's be clear, that's not because a bunch of, everybody in Napa County or San Mateo county or Alpine County suddenly became billionaires overnight. That's not what has occurred. If that had occurred, that would be fine because then probably the cities and the counties would be okay too. But that's not what happened.

What has happened is the state housing crisis has driven up the value of housing by an enormous amount. And particularly in communities like this. But also very importantly, maybe very relatedly, school enrollment has been declining and so the funding per student provided by property taxes has been increasing. That is what's pushed these communities into basic aid status.

And basic aid status simply means your property taxes per student are higher than a threshold at which the state would make sure everybody gets a minimum level. So more school districts are moving into basic aid status. And as a result there isn't.

This mechanism no longer works as a means to complete the state's absolute commitment to, to make sure that that VLF change didn't hurt cities and counties in the essential public services that they provide. But even worse than that, the basic aid status is districts are going in and out of it. If it were billionaires, no problem. Then maybe next year you're not a billionaire, but you're still a multi hundred dollar millionaire. So no big deal. But here.

And the reason why we don't like this year, Napa doesn't need the resources as I understand it, is because these fluctuations in the housing market and in school enrollment, they are completely out of the control of the local communities. They are as exogenous as the wildfire issue that we took up earlier.

There's absolutely nothing that Calistoga or American Canyon or the communities in San Mateo can do about it. It's not like they could plan better, they could take some policy to fix it. They are at the mercy of these much bigger trends. And so districts are changing, going in and out.

How do you plan a budget if year to year you have no idea what 20% of your resources are, what $20 million are in your community. And so it isn't just the total amount of dollars. It's also this massive uncertainty that are in issues.

And so I was hoping to provide some color, to hear some color about what this really translates into on the ground in the community by inviting some of our community leaders in the county to come and share with us.

So we're joined now by Belia Ramos from the Board of Supervisors in Napa County, Beth Painter from the City Council in the City of Napa and their colleagues from the City of Calistoga and and the Board of Supervisors as well.

And so I'd like just to invite you to share with us how this gets operationalized and what the impacts are in the community.

Thank you so much, Senator Cabaldon. Good afternoon, Senator Niello and I really appreciate the opportunity to really bring what happens on the ground level. You know, I really do appreciate the background that we heard from Director Hill.

But I want to emphasize to this Committee that over the last 21 years, at every single annual budget, the State of California has met its Vehicle Licensing Fee obligation to all 58 counties. You have never reneged on that obligation because in fact, it is an obligation, as Senator Cabaldon shared.

But as it stands with three counties right now that are at the mercy of your legislative action at what is a discretionary budgetary action, but yet it is a fundamental and important financing source for every county. The Vehicle Licensing Fee is not guaranteed to the counties of Mono, San Mateo and Alpine at this moment.

And when we think about what really happens, I love Senator Caimbolden, you shared like we can't do anything. Well, we could have more kids, but that's not policy. Right. And so what I really like to turn the attention to is what is happening in jurisdictions San Mateo and Napa are not dissimilar.

The cost of housing is so incredibly high that there is not entry level housing for families to begin there. And so the families that are coming over either have already older children, have the opportunity to send their children to private school, or already aged out of school. And so the enrollment is declining at a rate that our.

And it's separating itself from the increases in our property taxes and widening that gap that each year when the only thing that really saved us was the three year average during the COVID pandemic that the Department of Education allowed and the Department of Finance allowed in being able to assess basic aid and actual average daily attendance enrollment.

That three year average is what allowed us to breathe for a little, to get a good handle on when this would happen to Napa. Because it's not a question of if, it's a when.

And so we do stand here in solidarity with these three counties and to shed light on the fact that we are going to be the next county. And what does that mean for us?

You know, when we look at the total cost of what the Vehicle Licensing Fee is for the County of Napa and our municipalities, it would stand this fiscal year at $46.9 million. Might not be significant to you, but when you turn to the County of Napa, that's $29.3 million. That is 15% of our discretionary general fund. 15%.

And I need not remind this Committee that when the Federal Government is not coming in and supporting county services that are vital for our vulnerable populations, we need that discretionary funding to be able to continue to deliver the services that counties are responsible for. We're responsible for the roads, we're responsible for correctional facilities. But most of all, we're responsible for taking care of our most vulnerable populations.

So when you think a basic aid school district and you think about public education, we are responsible as a county to be able to deliver services to those very children that are likely in those public schools, that are going to be receiving fresh food, that are going to be receiving wraparound services, mental health services from their county.

We want to make sure that we, you know, as I sat here, I've been in this room before with the Department of Finance before. On your prior item asking for property tax backfilled. When the 2017 fires broke out in the County of Napa, and they were absolutely devastating.

And so to hear that a solution is being brought to uniform the structure of making sure that jurisdictions are made whole, that is in fact what we are asking.

We are asking not only that, you honor the VLF swap for these three counties that are in jeopardy right now of not being made whole, but that at the same time, you simultaneously work on a solution.

Because right now, the only thing we have left, and we would join these counties is to have the annual pay pilgrimage here to Sacramento with only hopes and pleas in our hands, to ask you, in your discretion, to make us whole. And we in government have to provide consistency, stability and safety.

That is what we need to provide. And if we do not know what that number is from year to year, we cannot do it. And while I do recognize that a two year back carrying legislation that would allow the counties to be paid back within two years, let's be real.

If you're giving me $46 million of today's dollars in two years, you haven't made me whole. And what really the legislative fix would be able to do is to honor all 58 counties equally. Excess ERAF counties are the ones that are affected here.

And this is money that the state did in fact forego and agreed to make the counties whole. And so what we are asking at this time is for your consideration, lean upon us, ask us how we can help you in this.

But to actually commit to making these three counties whole and to make sure that Napa County doesn't join in that annual pilgrimage to have the discussions with the Department of Finance every single year of what is rightfully owed for us so that we can continue to deliver vital services to all our residents.

Thank you, Supervisor. Councilmember Painter.

Thank you. Yes, I'm a Council Member from the City of Napa, Beth Painter. And Supervisor Ramos has really laid the groundwork, so I'm not going to repeat that. But you have asked what this means to us locally and I'll just give you some numbers and statistics from the City of Napa.

The funding that we rely on is somewhere in the range of 10 to 12 million dollars a year. That represents 9% of our general fund. I know the City of Calistoga is also here by our side. The funding for them represents 15% of their general fund.

These are real dollars that make it very difficult for us to do the local work that we want to do. The complicated formula that was described, I make efforts all the time to explain this to people. It's next to impossible.

But that indicates to me that this is really ripe for a legislative fix that makes it fair and equitable for every county. We're here proactively looking at what the future brings. We like to plan and know what we can plan.

So I would just echo the request that Supervisor Ramos made in looking at a long term fix for this so that we don't have to continue to worry about this on a year to year basis. Thank you.

Thank you. Thank you both. Any comments by Department of Finance or LAO at this stage or Senator Niello? Guys, come on up. You could take the seat.

Yes, thank you. Thank you so much for working on this. My name is Irais Lopez-Ortega, Vice Mayor of the City of Calistoga, we are a very small rural community with less than 6,000 people. The majority of our workers are farm workers and workers that they work, work in the tourist industry.

And we depend on this money to provide the services to our community. So I really, really support, you know, asking you for, at your mercy that we really need to get this money. As Beth Painter mentioned, 15% of our budget budget depends on this.

And if we lose this money, we lose about over one million dollars that we really need to keep working in our communities. Thank you.

Thank you. I'm so glad that you are here because, with no say to my colleagues and friends, because we appreciate the tourism dollars. I think Calistoga like Napa, but Calistoga in particular is renowned here in the capital region for its spas and its wine and its relaxation. And that conjures up an image of what the place is.

And the place is exactly as the Vice Mayor described. Who the people of Calistoga are, what their struggles are, and why our obligation is just as strong to the people of Calistoga as it is to the people of Beverly Hills who benefit from a full VLF backfill.

There's no policy basis whatsoever for American Canyon, Calistoga, unincorporated Napa, Napa itself, you be treated any differently from every other community in the state based on the policy choice the Legislature and the government made years ago to dramatically cut revenues. And we've got to solve this.

So I'm very encouraged to hear Finance agree that we need a permanent solution that does not require the annual trek just like we. It looks like we're moving in that direction for the victims of wildfires in terms of their tax exclusion. This is an incredibly high priority for me to try to resolve in this cycle.

And so I'm grateful to the delegation from Napa County for being here. We have a few weeks to try to figure out answers in terms of solving this challenge on a going forward basis. Share your interest in doing so and not on a year-to-year.

But this is a matter of basic equity with substantial impacts in the communities that can least afford it. So thank you very much. With that, we're going to open up public comment on items 11, 12, and 13. If you would please come to the stand up microphone if you have any comments on any of those three items.

Good afternoon. Audrey Ratajczak from Cruz Strategies. On behalf of San Mateo County and all of our cities, we're here to echo the concerns raised by Napa and by Senator Cabaldon. Our VLF shortfall amount this year is 114 million owed to our counties and cities. And as stated, I don't need to restate everything because that was done perfectly.

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

For us, this is 18% of the county's budget. And then I know we have some cities here and for them, their respective budgets, it varies just depending on what the number is. But 18% is something that we can't just absorb. Without it, public safety, health, housing and other critical services would be at risk.

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 we respectfully ask that it be included in this year's budget. And we are also supportive of a permanent solution. We just want to make sure.

We've been talking with Chris and Department of Finance over the last couple years. We just want to make sure that the solution does not cause us to be treated differently than anyone else would. But thank you.

Thank you. Yes, we're on all public comment for the entire hearing. But with the office, our focus is 11, 12, and 13.

Thank you. Good afternoon. My name is Claire Sullivan and I'm here on behalf of the cities of Belmont, Foster City, Redwood City, San Mateo and the town of Hillsborough requesting fulfillment of the VLF in lieu shortfall funds to the county and its cities.

The VLF funds constitute a significant portion of local government's operation operating budgets for these cities mentioned specifically between 4 and 12 percent. Denial of these funds could result in deficits for the cities that may result in layoffs of public safety for public safety servants.

We respectfully request your support to fulfill the state's 2004 commitment to reimburse the cities in San Mateo county with the vehicle licensing fees. Thank you.

Thanks. Yes. Just a general comment and thank you so much for your time today. Rachel Mueller with the California Coalition for Community Investment. We're a statewide coalition of more than 50 CDFIs, community development financial institutions. And I just wanted to update you on a budget request that, that we've been championing or working on that.

That's the, for the California Investment and Innovation Program under the State Treasurer's Office, California Pollution Control Authority, Financing Authority. Previously, we came to this Committee to ask for $50 million.

But of course, as the budget forecast just gets worse, we've adjusted that amount and are now seeking $25 million which still maintains the state's commitment to strengthening the CDFI sector for our low income communities across the state. I just wanted to highlight a couple of data points for you.

Between 2005 and 2023, CDFI has invested nearly $400 million in District 6, $1.3 billion in District 3, and an impressive 1.5 billion in in District 28. And just wanted to provide a concrete example of what that looks like on the ground in the City of Vallejo.

For instance, CDFI called Community Vision spent, invested $9 million into La Clinica which they were able to then grow their health clinic and serve, it used to serve 8,000 residents a year and their they've been able to increase that to 13,000 residents a year.

And those residents, nearly half of that, half of Vallejo, those low-income residents use that clinic. So just wanted to highlight a couple of examples. These are the kinds of investments that CDFIs really prioritize in our communities.

And the CalIIP program helps them grow their loan pools, strengthen their operations and makes these kinds of needed investments possible. Thank you so much.

Thank you.

Thank you Mr. Chair, Members. Jean Hurst here today, also was here 20 years ago when we did the infamous VLF swap.

And so I'm here today on behalf of a couple of county clients and wanted to just reiterate a couple of points that you and your colleagues and constituents in Napa County already had had raised on behalf of the Mono and Alpine County Board of Supervisors. Supervisors obviously were very in support of any backfills.

I just think it's really important to recognize how tiny these counties are. Alpine doesn't have a high school. So this, I don't think anybody thinks of Alpine and Mono in the same manner in which they think of San Mateo and Napa.

But these folks are as impacted as the larger communities that they find themselves in the same boat with. As Supervisor Ramos mentioned, there's no kids there. People just need to have more kids. Declining enrollment has resulted in basic aid schools in both of these very rural, very small communities.

Also, just to mention because, you know, I'm old enough to have been there when we did the VLF backfill, the excess EREF was explicitly protected or the basic aid schools were explicitly protected in the statute. And that's why we're in the situation that we're in. We never anticipated that there would be so many basic aid schools that counties would find themselves in this situation.

So on behalf of the Urban Counties of California, the California State Association of Counties, the Rural County Representatives of California, the League of California Cities, and the Mono and Alpine County Board of Supervisors, we all are in support of fixing this issue of providing backfill that these local agencies have experienced.

And I will acknowledge our participation in coming up with solutions that at the time seemed like the right thing to do, but eventually resulted in unintended consequences. That this is why you all have a job. Right. This is why we all do this work.

So I'm committed to, on behalf of my clients, to purchase participating in any solution driven discussions that can go forward. So appreciate you very much. Thanks.

Thanks. It was a clever solution and it worked for a while. That's, that's better than a lot of other ones. So thanks.

Good afternoon, Mr. Chair. I wasn't going to speak. I was just here to cheer for the Napa County delegation that's here. But I did want to jump to the microphone with the invocation of the excess ERAF problem.

While there are a small number of county, I think two that are in the center of that Venn diagram of issues, they're actually separate. They were done as part of separate budgets.

And if there is to be solution related to the VLF shortfall, we would strenuously discourage trying to incorporate or conflate the excess ERAF issue since it is a separate set of counties that is affected by that. It's taking it out of one pocket or the other for the counties that are affected by both.

And certainly on the excess ERAF piece, it's been through the courts and the counties have prevailed. So we would discourage those two things being conflated. Thank you.

Hi, my name is Kerry West. I'm here with Townsend Public Affairs representing the cities of Millbrae, Pacifica and South San Francisco. VLF backfill funds are crucial to these cities.

As such, the cities of South San Francisco, Millbrae and Pacifica absolutely are so very grateful to the state Legislature for your ongoing support in previous years in backfilling these funds. We very much look forward to your support again.

And to reiterate what everyone has said here, without these funds, cities are going to have a very hard time keeping very crucial services that our citizens depend on in their daily lives open and running. Thank you so much.

Thank you.

Hi. Julie Orem, concerned citizen that works with animal shelters. This year's budget has a request for $30 million for spay and neuter funding. I'm here to express my strong support for this funding alongside 108 animal shelters and nonprofits that also support it. Gavin Newsom has said that he wants to make California a no-kill state.

But right now, California has a pet population crisis. We have one of the highest euthanasia rates of any state in the country, almost double the national average. The national database Shelter Animals count reports that 105,000 cats and dogs were euthanized in California last year.

I checked the West LA Animal Shelter website today and they have 910 animals, but their capacity is 730. And five dogs have to leave the shelter today one way or another. The Sacramento SPCA has a wait list for space surgeries. Shelters have been begging the public for relief.

The last three years, I have fostered 18 dogs in my home. Yet still I watch as shelters post weekly photos of the dogs that they will be euthanizing, not because they're dangerous, but simply because there's no space. This is a problem with a solution. The proposed funding could sterilize 75,000 cats and dogs in a year.

Remember that one pregnant dog on average has five puppies. So you could realistically save 30 dogs over a lifetime with one surgery. Almost half of California citizens have a pet as part of their family. This is an issue that matters to 10 million people in our state, Democrat and Republican. And it's not just animals who suffer.

Humans up and down the state have to walk into work each day. And their job is to kill dogs and cats. Doing this is emotionally traumatizing for many of them. Spay and neuter funding is preventative. It's proven to reduce shelter intake numbers.

In closing, please fight for this $30 million an ear market for spay and neuter surgeries to save thousands of cats and dogs from being in a cage for weeks waiting to be killed. Thank you so much for your time.

Thank you. Thanks for being here. All right, is there anyone else that wishes to provide public comment? Seeing none. We've completed our agenda for this week. Thanks everyone again and Mr. Hill. Looking forward to collaborating. And budget Subcommitee number four is adjourned.