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

The Senate Committee on Budget and Fiscal Review, Subcommittee for State Administration General Government will begin in sixty seconds. Okay. The Senate budget and fiscal reviews of subcommittee four will come to order. We are holding our subcommittee hearing here at the State Capitol Room 113. I ask all members of the subcommittee to present themselves here to Room 113 so we can establish a quorum and begin our hearing.

In the meantime, we will go ahead and move to all public comment on the agenda items will be at the conclusion of our hearing, and we will hold off on establishing a quorum until we have additional members on the committee. Today, the focus will be on tax related proposals. But before we begin, vice chair Niello, would you like to provide any comments?

Thank you for the opportunity, but given, the length of our session, just concluded and this agenda, let's get going.

Okay. That sounds to me like a hint hint, everybody. And so we are going to start us off today. We will be receiving program updates and conducting oversight regarding the programs at the governor's office of service and community engagement, also known as GO Serve. I now ask the representatives of Go Serve to come forward to the witness table.

Thank you for being here. Should we invite the LAO as well? And the LAO and Department of Finance, please also come on up. Thank you all for being here, and we'll proceed when you're ready.

Thank you, madam chair and members of the committee. My name is Anthony Chavez, and I'm the chief deputy director of the governor's office of service and community engagement, also known as GOServe. Joining me is Aubrey Fong. She's the acting executive director of the Office of Community Partnerships and Strategic Communications. GoServe is established in 2024 by the legislature to elevate paid service and volunteerism in the state, promote youth and community engagement, and advance public awareness and outreach.

I'm I'm sorry. Can you speak up a little bit more? I can't hear you.

Sorry about that. And advance public awareness and outreach campaigns to tackle the state's California's most pressing challenges. Go serve consists of California volunteers, the office of community partners, strategic communications, also known as OCPSC, and the youth empowerment commission. We are happy to provide updates to our programs which aim to create economic opportunity and career pathways, develop future leaders, and foster social connection. Under California volunteers, for California Service Corps, in 2526, we received over 36,000 applications for more than 11,000 positions.

Four years into College core program, we've expanded the number of people who can participate and the number of campuses. 53 campuses will begin in the 26-27 academic year, adding eight campuses from the current 25-26 academic year. These campuses are awarded through a competitive request for application process based off a robust criteria. We had over 74 campuses apply. In 25-26, over 3,600 fellows have enrolled in the program.

We track enrollment, retention, and completion. For this current academic year, we have a 98% enrollment rate. The highest enrollment rate since the inception of the program. Over for the last completed this year, we had the following outcomes. Enrollment for last year was 96%, retention was 92%, and completion was 78%.

College Corps continues to provide opportunities for AB 540 eligible students. The outcomes for a b 540 fellows are consistent with the non a b 540 students. In response to comments that college core operates with high administrative costs and is more expensive to run than other similar volunteer and financial aid programs. We want to clarify, this is not a financial aid program. It's very much a service and workforce development program to create an experience for a student that helps them launch their career, and requires programming costs and support.

A lot of the administrative costs identified by the LAO are associated with program design, evaluation of the program, education outreach, several categories that are categorized as administrative cost but are actually program delivery cost. We have created efficiencies, and the cost per student has been reduced since the first year of the program. To address concerns raised by the committee, we have made changes. For the 2026 cohort, we are reducing the administrative budget by 6% to fund additional college core fellows. The program is structured to make college core more affordable to those who need it most, while also giving them a brand new experience that are going to help them the rest of their lives.

The youth service core program has created over 4,000 positions last year, nearly 25,000 applications were received. The program is tracking outcomes including enrollment and completion. For the 24-25 service year, enrollment hit a 100% for that youth service core program. Benefits to the program include job readiness, mentorship, and skill development. The current cohort of the Climate Action Corps is over 400 fellows.

The program tracks outcomes including enrollment, retention, and completion, and the program has reached a completion rate of 87 percent. The California Climate Action Corps is distinct from the California Conservation Corps, primarily due to the focus on community and volunteer engagement, climb climate engagement. Fellows creating new opportunities for Californians to take climate action in their community, which helps build an awareness and ethic of collective climate action. While the CCC serves youth ages 18 to 25 and focuses on field work and an environmental projects and response to natural and man made disasters. The California Climate Action Corps is open to anyone age 18 and over and focuses specifically on community climate engagement in urban greening, organic waste, and edible food recovery, and wildfire resiliency, as well as workforce development for emerging climate leaders.

California volunteers conduct internal monitoring for all of its programs. We do annual risk assessments, fiscal desk reviews, site visits, provide ongoing monitoring to identify issues early and maintain program integrity, and the organization also participates in federal payment integrity information assessment audits to strengthen oversight and safeguard public funds. The Office of Community Partnerships and Strategic Communications, known as OCPSC, uses a data driven decision making to coordinate some of California's most important statewide public awareness and community outreach initiatives to help the state realize more inclusive and effective outcomes. Since 2022, OCPSC has supported nine state initiatives, which have evolved along the state's priorities. OCPSC has realized the following results for the state.

Facilitated over 10,000,000 COVID nineteen vaccination appointments, drove a 6% increase in notification of the dangers associated with extreme heat in a matter of weeks, connected over 1,000,000 Californians to rebates and best practices for water conservation, had over 1,500,000 direct conversations with Californians about what an individual taxpayer identification number is and its benefits, and connected over 1,300,000 Californias to Brightlife Kids and Soluna applications. Since the 2022, OCPSC has released two rounds of grant funding for the trusted messenger network. These cohorts of a 129 and a 147 grantees delivered over 4,000,000 direct conversations, referrals, and assisted enrollment for California programs. OCPSC was created in Statue in 2022, and has provided four years of funding from 07/01/2022 to 06/30/2026. The legislature did not extend its funding beyond this June.

The funding for the trusted messenger network grant program was ultimately only funded for two years. In the current budget year, OCPSC has been able to fund a smaller trusted messenger network grant cohort of 50 grantees by identifying efficiencies within its meeting remaining budget. This cohort started work at the January 2026, and will include activities on 06/01/2026, and thus far has supported over 4,500 students in claiming their Cal kid scholarships totaling over $2,600,000, enrolled more than 1,300 Californians in critical state programs found on OCPSC's California community resource guide with the top enrollment enrollments being Soluna, CalFresh, and Cal jobs. The 2526 budget included $5,000,1 time general fund for the OCPSC to launch a belonging initiative. 4,000,000 has been committed and OCPSC launched the California love, California strong in January 2026, in alignment with the time frame outlined in the BCP.

The outcomes for this initiative have not changed, and is helping communities identify pathways to social connection by developing and launching the California Love, California Strong brand, engaging community partners to increase awareness of the state's programs that foster social connection through community engagement events, and has been supporting service opportunities by uplifting California service core Results are being measured through engagement numbers, enrollment in state programs, and enrollment in the California service core. While the initiative has just recently launched, it has already hosted two community engagement events with over a 100% attendance at each event, and enrolled 1,300 Californians in state programs. The results for the initiative are on track. We are happy to answer any questions that you have. Thank you.

Do we have any questions from or comments from the Department of Finance?

Hi. Henry Ng, Department of Finance. Just wanted to know that these programs are a high priority for the administration and the administration appreciates the legislative support and the creation of GoServe and for the ongoing funding for some of these programs. And these these these programs are critical for elevating volunteerism and service throughout the state and promoting youth and community engagement. As we heard from GoServe, these these investments has led to meaningful and and and tangible impacts on the ground providing thousands year after year with these opportunities to to better their their communities and the administration has been mindful of the budget deficit and and and has included significant general fund solutions in recent budget acts to provide general fund with some relief while also scaling down GOSIR's operations and this includes the $50,000,000 in reductions to OCPSC in 2024-25 and again in 2025-26 and also there is a $10,000,000 ongoing reduction to the youth core and then a one time $10,000,000 reduction to college core in 2025-26.

So we believe what we have in in this budget, achieves a balanced budget while also preserving the core elements of GoServe, and upholding that commitment to volunteerism and service.

Thank you. Do we have any, comments from the LAO?

Good morning. Woah. Excuse me. Ross Brown with the LAO. There are no new proposals as part of this year budget, so we don't have any, comments or recommendations, but we're here for to answer any questions.

Thank you. So bringing it back to the committee, any questions, comments from committee members? Senator Smallwood Cuevas?

Thank you, and thank you for that that overview. I always want to support programs that focus on community outreach and particularly, with our youth where we're competing with technology, where socialization, the opportunity to build those human relations skills and also put that into action and practices is is very important. I did have a question about the Climate Action Corps in particular, And I did wanna get a sense of could you give me a little bit of the diversity of the core, both geographically and racial and ethnically? And I also wanted to get a little bit more of a sense of how we're tracking participants' success. What are some of the results in terms of impacts specific impacts on the ground of this work?

Thanks for your question. Yeah. So Climate Action Corps is a statewide program run through one intermediary, and they are placed in host sites where there could be two to 10 to 15 members in each host site. It is across the state. There's our obviously, we're trying to place them in geographic areas where there's needs, and it's and we have members all across the state from the North Coast doing water, helping in the watershed areas, all all the way down to San Diego area.

In terms of diversity itself, you know, one of the one of the challenges that we have in in all the service programs and and and why we've launched a men's service challenge is is primarily those that serve our of our female. And so we're trying to increase the men in as part of that through the men's service challenges. One of one of the things that we're trying to increase in terms of diversity. I can't speak off the top with regards to the the demographics. I can follow-up with that.

And then additionally, the Climate Action Corps is part of an AmeriCorps model. So there's, like, performance metrics that are required as a part of that for outcomes based on the specific regions that they're serving. So I can follow-up more on details on those, regional impacts.

Yeah. I would like that. One of the challenges we have in Los Angeles is that we are not designated a wildfire zone. We are an area where we don't have a lot of activities and programs that deal with ways to mitigate, protect, strengthen our community's connection to our open spaces, and we do have quite a few. I I represent Baldwin Hills, and we have the largest urban oil field in the country.

You know, right in the middle, is an amazing mustard covered open space, and then about 7,000 wood frame homes from the mid century. Right? And so, you know, it's so important for us to have an opportunity for youth in our communities to understand climate, to understand ways to mitigate climate, to understand ways to protect community. And unfortunately, we don't see a lot of black youth in those spaces or even access to those spaces, particularly those from places like South Central Los Angeles where we have a black and brown youth community that we need to be an army for the future protection of our community. So I would look forward to seeing the demographics, to understanding who has access, and ways that we may be able to strengthen in terms of our diversity, making sure that all of our young folks get access to these programs.

Senator Cabaldon?

Yeah. Thank you, madam chair. I I wanna under underline the remarks that that my colleague just made about the importance of of volunteerism and particularly just doing anything in the in the analog world, the real world, and the rationale for why this program and the sets of programs were created. I know we don't have budget for both before us, but in terms of the programmatic issues in evaluation, there are couple of things I'm particularly interested in reviewing and learning more about. I guess first is the comments that

were part of the testimony regarding the engagement metrics in terms of connecting folks to a variety of programmatic opportunities for which they may be eligible. And the raw numbers are a first line indicator, but I think it's it would be more it would be useful for us to have a sense of over time, is that in communities where the core is engaged, are we seeing significant increases in the actual utilization of those programs by folks who were eligible but not otherwise? Or cross sectionally across the state to communities in which the Corps particularly active have higher rates of improvement in actual, not just awareness of the programs, but actually signing up for them and being able to derive the benefits from them. So to understand what the actual impact is in terms of improving not just knowledge of or access to, but actual connection to those programs would be very important and useful to know. And I guess the second one is just with respect to I mean, I I when when this all was was launched in a period where the state had a very, aspirational agenda about all the things that state government could be doing, and obviously, given the state's condition, we've got to we have to take a look at the various activities that we're engaged in.

But I think for me at least part of the the what was attractive about the concept was that we'd be developing something something like Peace Corps like that was at a very broad scale, statewide and and engaged in solving the problems. And so I I guess I this is not so much a question, but just like a series of increasingly boutique programs isn't really what I was signing up for, one for belonging, one for climate, one for this, one for that, none of which can achieve the scale to really change. And part of the reason I mentioned this is that even though the watershed work was because we've been doing California Coastal Cleanup Day and other activities for a long time. And by coast, that means including Little Creek's and SLU's and Senator Niello's district and in mine as well. I'm sure in Senator Hurtado's the coast is very broadly defined for Coastal Cleanup Week.

But we're trying to dramatically expand volunteerism and these opportunities and not crowd out existing opportunities. And I'm not suggesting that's what's happening in that instance, but the challenge with boutique programs is when they don't achieve that scale, it seems potentially it seems possible that folks who might otherwise, who were volunteer minded, or in college students or others, would might choose this program, but they may have been prepared to volunteer in other capacities in their communities in, previously to there's a there's a disposition, and and an ability to do so, to some extent. That's obviously offset by the by the substantial financial commitments we make through the program. But just to understand the the design of the program and it just seems every year it's a little bit more fractal. I mean, this year we don't have a new proposal, but it's in a variety of domains that don't seem any of them capable of achieving the level of scale that I think was the original hope.

So maybe maybe you could respond to to that notion. Then if we have if we have or can get data or find some academic or LAO partners that can take a look at the actual effectiveness at the engagement in in in in the real world, increasing and improving utilization of the programs that we're trying to connect folks to. That would be great.

Yeah. I'll briefly respond to that. In terms of one of one of the things with California Service Corps is to bring a general over over umbrella brand with regards to the effort. Obviously, there would be concerns with on scale because there's cost associated with scaling. But we are continually, looking for opportunities for individuals that do not, are are not accepted in our programs to provide other opportunities for them.

So there's several instances where our members come and wanna do a climate action core program, they're not able to get that application filled and and receive that that fellowship. We we are looking to have another opportunity for that in if they're in LA, working with the city of LA, if you use service core, or another opportunity. So we are constantly looking to kind of encourage folks that want opportunities about the opportunities that at least we have available. And then also through the there's a volunteer network too that we do can refer them to as well for other volunteer opportunities. Those opportunities may not have a service component that is paid.

However, there there would be, you know, some opportunity to serve and give back through that through the volunteer channels.

And do so in the design of that approach, did the administration consider flipping it so that our first priority is to connect folks that are interested in volunteering to volunteer opportunities that already exist? And then secondarily, for those that can't for financial other reasons can't engage in those activities to provide a state option to try to grapple with this crowding out issue, like the most the most excited highly disposed to volunteerism Californians. If if our current approach is we try to place them through through the the California core and then if we can't, then we turn to the existing volunteer opportunities exist in nonprofits and in public agencies throughout the state. I just wonder, was that design choice, was it consideration of flipping that part of the original design, or have you looked at that since in order to use our resources first and foremost to to connect volunteer potential volunteers with the with opportunities that are so that already exist and that are desperately needed at the science center or in my district cleaning up waterways or or elsewhere in the state.

I will speak historically, for the office. In that, when the office was, California volunteers was initially established, that was the original model of volunteer opportunities first, and hence, the office was named, California volunteers. It was previously a different name before that. And so, yes, that was that was a model that was, and it was funded previously. And then there were some general funds that that cut the volunteer model over previous administrations. I think that was at the end of the Schwarzenegger administration.

Comments from our vice chair?

Question first of all for LAO. In the past, you've been critical of these programs in terms of not being wise investments, I think the wording is, and that they're duplicative of other programs, so competing with them and less cost effective than alternative programs. Could you speak to that?

Sure, Senator. Ross Brown again with the LAO. So there are yeah. There are various programs here that we have looked at in in the past as part of past budget proposals. I'll maybe highlight a a couple of the bigger ones that, in recent budgets have, gotten ongoing funding.

Both of which sort of began as just a sort of historical context, began as sort of temporary funding, and then sort of were recently switched into ongoing budget proposals. And at the time when we analyzed them, we did raise some issues and concerns for the legislature. So the first I'll just highlight is the youth job core program, as part of the 202324 budget. When federal COVID relief funding was running out, the states made that an ongoing program with ongoing general fund. And at that time, I think some of the issues we raised were around that not really being sort of a traditionally core state responsibility that there you know, it's funding for municipal governments to to hire underserved use on a temporary basis.

And that's not typically a core state responsibility. And that there are a variety of other federal, state, and local opportunities for those types of things. And that the evidence on program effectiveness was was not really clear at that time. The other one I'll flag is the college core program, which you might remember was heard as part of last year's budget, and ongoing funding was adopted for that program. Our the issues we raised at that time were that the we do recognize there are some benefits to the program, but that it largely operates outside of sort of an existing structure that the state has as part of its higher education system for both providing financial aid, as well as community service opportunities that are oftentimes offered through the campuses themselves.

And that the the program has relatively high administrative costs as you mentioned. Over half of the funding or less than half of the funding was going to financial aid itself. The rest was going to administrative and and operational costs. So higher administrative costs compared to some of our other, at least, financial aid programs.

Thank you for that. And not as an admonishment, because as you know, I have great respect for the work that the lege analyst office does and always have. I wish you would have gone into those details when you made your initial comment, perhaps because you've said that in the past, but I think it's very important in terms of today's consideration. I have been actually following the lead of the lege analysts for the last three years, saying the only way we're going to cure this structural deficit is well, there's two ways. We can raise revenue or cut back programs, obviously.

There are various proposals with regard to the former, but my sense is I don't think that there's unanimous, at least two thirds support in the legislature to do that. So I'm concentrating on the expenditure side of it. Expenditures with rising revenues, expenditure costs rising even more creating the structural deficit. And and as the LAO recommended fully 23 years ago now, the only way really to get at that is to analyze programs to see whether or not they are accomplishing what they were expected to accomplish when they were established or programs that have been enhanced in recent years, whether or not they're even sustainable if costs are growing that quickly. I'm not gonna ask all those questions for with regard to these programs because I think, quite frankly, they are totally indefensible for reasons of duplicative of other efforts, higher overhead as was stated, and we could do so much more in other areas.

As an example, the disadvantaged youth program. Wouldn't it be much better off if we raise the achievement of our k through 12 system, where we are below average relative to the rest of the country. But even especially in disadvantaged areas, particularly when we have the glaring shortcoming of our schools where black students are the lowest performing cohort, by far, that is such a disservice to disadvantaged communities. Wouldn't it make more sense to concentrate on those weaknesses rather than hiring a few disadvantaged use to encourage volunteerism? That's good, but the other is so much more systemically effective.

In my opinion, the legislature made a mistake in taking a pilot program and making it permanent. That should not have been done. And especially given our structural deficit, this is a perfect example except for the fact that the numbers aren't quite high enough that we'd be looking forward to really do something about the structural deficit, but we got to get started somewhere. And I just don't see the benefit of these programs and the fact that we can have a better impact in other areas of that that these various programs touch on. So just to sum up so I haven't so that everybody gets my point, I don't think we should continue these programs at all.

Thank you, mister vice chair. Well, on my end, in terms of my comments and questions, they're not necessarily so much focused on being critical, but rather asking questions about what safeguards are in place in regards to to these programs. But I guess I'll start off with a with a happy note. Right? I I will say that, I hope the governor's listening somewhere out there because I'm about to give him a compliment.

But I'm really it's my understanding that the men's service program is part of the Cal volunteers. And when I heard first heard about this push that he's hoping to move forward, I was like, oh my god. This is desperately needed in the state. I mean, I we and he said it in the state of the state address. Right?

He pointed to how, you know, men across the state are, you know, struggling, and this is an opportunity to, create some to create a program that that, you know, provides mentorship. And I'd I'd love to hear a little bit more about what work you've done so far, what you have in mind, what does that look like, and what, you know, what particular issues are you looking to address.

Really oh, jeez. We're really excited about the work that we have done with men's service challenge. And so over over the last several months, we've we've created over 20 partnerships with the YMCAs, Big Big Brothers and Big Sisters, Mentor California, and others to create all of these opportunities for men to serve and volunteer and give back in their communities. And and this this this is a issue in which people are stepping up. We've seen already over 2,000 men step up to this challenge, and we've just started.

And it is one in which we are encouraged by folks that are reaching out to us to be a part of it. And so we would encourage your offices if you're interested in promoting and and encouraging this, we will definitely work with your offices to set something up.

Yeah. I mean, I think that this could be potentially a great program. Right? But I wanna see all the positive benefits that are coming out of it. Right?

I wanna see that there's there's progress there, because there's urgency behind, you know, focusing in and providing a program for, you know, for men across the state of California that that would benefit from a program of this sort. And I guess, moving on to to an actual question, is is really around how does OCPSC monitor its grantees and subcontractors to ensure that state funds are being used as expected?

Good morning, chair Hurtado and members. Thank you so much, Aubrey Fong, acting executive director for OCPSC. So we developed, over the course from the infrastructure and lessons learned we were built, the office was created from the census 2020 and vaccinate all 58 work. And through those years and those efforts of working with grantees, we developed a system called CORD. It's an accountability system, a grant management system where we not only use to make sure that we are targeting and investing in the right communities, but that we're also tracking and monitoring the grantees' activities and reports so that they're meeting the requirements of the grant.

My next question, if the legislature were to revert to the Cal the Cal Volunteers program back to limited term funding to help address the structural deficit, would that have what, you know, what would you like to add on what the impacts would be, if any, on the current program participants?

Yeah. So depending on the the timing of that, there's issues with regards to recruitment. Specifically, these programs have a work on a program year. They're not working on a state fiscal year specifically. So depending on the funding, there could be a break in in some of these programs, in

terms of the cohorts. So we have a program year, or a member serves for a year, and depending on the funding being one time, if it's not continuous, then there could be a lapse in the program. And so if there's a lapse in program, sometimes, the organization that it's funded through a host site, they may have to, do some operational, decisions to ensure that, they could still launch that program.

Thank you. That's all I have for you all. Thank you for your presentation, and, this item was for information only. We'll be moving on to agenda item number two. Let's take a chance to And at this moment, before we proceed, we're gonna establish quorum. If consultant, can you please call the roll?

[Roll Call]

Thank you. Quorum established. Okay. Agenda item two. We will take up matters involving the board of equalization. I'd now ask the representatives of the BOE to come forward to the witness table, for a department overview. Thank you for being here. And of course, LAO and Department of Finance as well is welcomed. And BOE, when you're ready to present, feel free. Do again.

Okay. Okay. Now.

Here. Here. You take this.

Good morning, chair and members of the committee. I'm Yvette Stowers, executive director for the State Board of Equalization. Thank you for the opportunity to participate in today's hearing joining me today is David Young, Deputy director for the Property Tax Department and Jack Nicole Chief State Property Tax Division Since BOE's reorganization in 2017, these are the first budget change proposals that we have presented to this subcommittee. Because of that, I would like to take a moment to provide a bit background and context on how we are structured today. In 1879, the BOE was established under the California constitution to regulate county assessments practices, equalize county assessments ratios, and assess properties of intercompany railroads.

Subsequently, constitutional and statutory amendments directed the BOE to administer tax, fee, and appellate programs in support of state and local government. Today, the DOE focuses on its constitutional responsibilities, oversight and administration of California's $13,000,000,000,000 property tax system, an administration of the alcoholic beverage tax and tax on insurers. Today's BOE operates as a small agency with about a 190 staff, a flat organizational structure consisting mostly of property tax program staff in support of our constitutional functions. The property tax program is organized in three divisions, county assessed division, assessments practice surveys division, and state assessed division. The county assess division co administers the welfare exemption with the county assessors.

The division also administers the legal entity ownership program and in support of our 58 county assessors to accurately assess property tax. They provide guidance to county assessors to promote uniformity and consistencies and assessment throughout the state. This guidance includes forms for property tax developing property tax rules, letters to assessors, county assessors only letters, and an assessors assessors handbooks. In addition to implementing various law changes, they also prescribe property tax forms that are required to be used by all county assessors and provide training and certification to individuals performing the duties of small, duties of appraisers and analysts. The assessors practice survey division.

This division conducts assessments practice surveys or compliance audits to ensure that the county assessors practices and procedures comply with all statutory and regulatory provisions and they are utilizing appraisals or proper appraisal practices. These audits are critical because county assessors produce an assessment role for local assess properties and that reach for the 58 county assessors. The state assessed property division. This division is responsible for valuing state assessed public utilities and railroad properties. In 2025, the BOE determined the value of state assessed properties at $167,200,000,000.

This was a 100 this was a $15,000,000,000 increase from 2024. The state assessed properties produced $2,800,000,000 in local property tax revenues for our state 58 counties in 20242025. This division also administers the private railroad tax program. Thank you for the opportunity to provide a brief overview of BOE. I BOE's operations. I'm available to answer any questions that you may have.

Thank you. Do we have any comments on this item or on the overview from the LAO?

Alex Benz, legislative analyst office. We have no comments on this informational item. Thanks.

And Department of Finance, any?

Chris Hill, Department of Finance. We have no comments either.

Okay. We'll move for a quest for comments or questions from our committee. Mister vice chair, none? Do we have a comment from our from senator Smallwood-Cuevas?

Thank you. Appreciated the overview and the really beautiful packet. I don't think we've had such a nice packet of all the information. I I just had a question about the CD- CDTFA's sort of special district style funding. I'm I'm curious if there are mechanisms that function within the state level that supports communities where we have neighborhoods who are losing residents, small businesses, due to all of the different sort of development that's happening in communities.

I'm seeing a lot of this in in parts of South Central LA. And I'm just curious, are do we work with local jurisdictions on local revenue assessment tools? Are there any that exist that could help those businesses and those kinds of communities sustain economic corridors?

Senator, thank you for the question. Alright. So that's why yeah. I think I think that's outside of our program scope.

Sorry. I was looking at CDTFA. That was not for you. That was for a different that was for a different a different a different group of folks. Sorry about that.

Thank you.

Do we have no? Okay. I would like to ask just to in terms of your overview and the work that you do. I know that BOE works closely at the county government level And, you know, how does the BOE interact and support other levels of government cities or individuals with questions about property taxes?

I mean, property, rising property taxes is something that I frequently hear, you know, constituents talk about. And I I just wanted to do get an understanding to see if that that's something that if there's a trend or anything of that sort that that's been noticeable there or any type of, like, more reassessments occurring or or two or 218 notices that are going out. Can do you have any comment or on that?

Let mister Young comment on that.

Thank you, madam chair, for the question. For the record, my name is David Young. I'm the deputy director of the property tax department of the BOE. We do work with the counties on on several levels. Our the closest level we work with the counties is actually with the county assessors.

We have direct oversight functions over over them, so we deal with them on a daily basis. And we do get a lot of inquiries from the county assessors when they when they get inquiries from their from their constituents and their stakeholders and their property owners. A lot of technical questions are referred to us. Either we we answer them, it could be as simple as a phone call, or it could be as simple as a phone call or or even perhaps a a written letter of opinion. We also work on on a county level with the county auditors and and the tax collectors.

It's it's not as a direct relationship with with with with them on that level. But we actually do have a unit in our in our property tax department that deals with the stakeholders in general. They actually do call us directly and ask many questions on on property tax reassessments, how it's done, how should it be done on assessment appeals. The two main topics that has been where we have the most volume and and and and inquiries recently has been to change in how property is transferred from from a parent to a child, and how they get to keep their tax bases. That was affected by prop 19.

And of course, we get a lot of phone calls too on issues of how do I get property tax relief if there's a disaster, my house is damaged or destroyed. So we we work with the counties. We work with taxpayers directly. And we also have a TRA, a Taxpayer's Rights Advocates Office, that does interact on on on more on a problem solving issue and our property tax more on a technical level.

But I mean, is is that, like, something that you're seeing in terms of the calls and and comments that are being provided to you to that particular office in terms of rising property values? Property taxes? Not not values but taxes.

The rising property taxes in general, I mean, most folks are protected by proposition 13. So their property tax if you if you've owned your home for a while, the increase is is is two year 2% a year to cap at 2% a year. So that is typically it's less of an issue. It's more of an issue when when somebody inherits a family home or is transferred to family home, and they get a reassessment, and they don't realize that there is a provision on which they can basically get their parents, old tax base.

Okay. And what about 218 notices that is that something that you all that your office follows or tracks?

So you have to excuse me. Can you I'm not familiar with 218 notices. What what what is what is that?

So I understand 218 notices. So just an example, in my in in Bakersfield, there's a 218 notice that's going out to constituents for a surcharge in, you know, I think, wastewater or garbage, that kind of thing, and then it it's it's something that is

Yeah.

Added cost to them.

Yeah. We we typically do not get we're not really involved in that end part of it. That is a that's usually a benefit district or somebody, whether it's mosquito vector or or or a library district that that is adding an increment to the tax base. So that's that's more of a more of a local issue, and the people in general do not inquire with the board on on on that type of Okay.

Alright. I appreciate that.

Of course.

Thank you so much. Okay. So then we will go ahead and this this item was for information only, and we will go ahead and move to agenda item number three. Continuing with BOE, item number three on our agenda is intergeneration real property transfers. So please proceed with your initial remarks that you would like to make on this item.

Once again, thank you, madam chair, and members of the committee. For the record, again, my name is David Young, and I'm the property tax deputy director for the BOE. So thank you for this opportunity to present the Board of Equalization's budget change proposal related to the implementation of Senate bill 293 which provides additional time to claim the intergenerational transfer of an advantageous prop 13 property tax base. During the wildfires of 2025 as the as the county assessor discovered was providing disaster relief to those homes that were either damaged or destroyed by the by the disaster, the assessor discovered that some of the homes were transferred between a parent and a child without some of the required deed recordings. This bill allows those affected by the wildfire additional time to claim this favorable base year transfer due to claim the intergenerational transfer.

As the state entity charged with issuing guidance to the 58 county assessors and promoting uniformity statewide property tax administration, the board must ensure legislative changes are implemented consistently, accurately, and in a manner that provides clarity to taxpayers. Our request is straightforward. We are seeking a $154,000 to support core responsibilities. These core responsibilities are first, to develop and issue formal guidance and technical instruction to all 58 counties impacted by the statutory change. Second, to update public information materials so taxpayers, practitioners, and stakeholders can clearly understand how the law applies to the intergenerational transfer and to wildfire related, damaged property.

And third, to respond to the expected increase in public and stakeholder inquiries and to conduct the necessary administrative and legal review to ensure consistent implementation. I want to underscore the scale of our request relative to our capacity. The program responsible for this work consists of seven dedicated property tax professionals and experts. When Prop 19, which fundamentally changed the intergenerational transfer and the base year value transfer rules, the board did not receive additional funding to implement those historic reforms. We absorbed the workload.

We have done more with less for several years. At this point, we cannot responsibly take the additional statutory workload without limited and targeted support. This proposal does not expand programs. It does not create new initiatives. What it does do is that it allows us to fulfill our existing statutory responsibilities, implement the changes in law, and to do so in a way that maintains statewide consistency and protects taxpayers from confusion and uneven application.

We respectfully request your support of this a $154,000 budget change proposal to ensure that SB 293 is implemented effectively, transparently, and with the uniformity. Thank you, and I'm happy to answer any questions you may have.

Thank you. Do we have comments from the Department of Finance?

Chris Hill, finance again. No comments.

LAO.

Alex Bentz, LAO. We have no concerns with this particular proposal. Thanks.

Any questions or comments from our vice chair? Committee? Senator Calbadon?

Thank you, madam chair. So the principal question for me, when I when I when I there are budget items that that, for the implementation of legislation that passed the legislature and that was on by the governor, is is it is your request consistent with what we forecast at that time, what the understanding was what is this kind of cost, which this is. The that analysis though anticipated some small amount of funding in the in the current year, this exact amount in the budget year and then declining money in the future years. This is a proposal for one time funding at exactly the number that was analyzed for 26-27. Is this sufficient then once once these one time funds are expended for the for the execution of the program, or or should we expect additional budget requests in the in the subsequent years?

Thank you for the question, if

I may if I may answer it. What I you are correct. You're absolutely correct. This this is the past year, we didn't we didn't ask for, we absorbed some of the work. But this what we wanted to do was actually really focus this ask on this one year.

Because this one year, the bill that passed and the laws that changed has a five year sunset date, and there is some real urgency in implementing it. It's a five year urgency. It's a five year sunset date. It's three years from a certain act of a of the assessor that starts the the the time frame as an extension for three years. But there's actually one more trigger in there from from a certain action of the assessor when they issue either an escape assessment or supplemental, they only have a year in which to perfect this claim.

They have to file something. So for us, we felt it was imperative that we ask for something that we'd absolutely get for one year, so we can make sure the folks that were affected by the wildfire and has already started getting the disaster relief, that that one year period time frame, they were able to get the information they need, and we were able to implement it, get the forms out, so they can actually take advantage of this of of the intent of the of the law change. To be quite frank with you, I think I may be in front of you again in next year to ask for more money for for follow-up implementation, but we wanted to absolutely make sure that this is a clear, sorry, a clear and concise and a targeted ask. Thank you.

And any other questions or comments from committee? Okay. So in regards to my questions, given now that we are in spring of 2026, does BOE have any estimates on how many cases property transfers will fall under the flexibility provided under, SB 239?

Right right now, our our numbers are based are from what we have from the LA County assessor's office.

Mhmm.

So right now, they are in their process of actually going. There's a couple of triggers. You have to basically get this disaster relief. They have to work it. LA County is working it right now. I believe their total number estimate is in the 20 thousands of homes that were affected as to how many of these had these unrecorded transfers.

It it it will have to they they will discover them as they work them. So the the the whole universe of homes, it it it it it could be pretty high, but we really don't know that yet. These transfers are unrecorded. We have no way of finding them just yet until they actually do the work.

Mhmm.

Okay. Well, thank you. Did you have a question? Okay.

Go ahead. Yes. I do. So well, one, I'm appreciating that update. That's a little concerning Yes. Just because, as you know, our communities have been devastated by wildfires. And though we are providing resources, we're doing all that we can. It's not enough, and it's not moving

As fast as as families needed to. I I think about the community of Altadena. It is a sister community of South LA

Right.

Yes.

Where families have just met devastating loss, but in a community that already had tremendous disparity in terms of loss of wealth, in terms of being under insured, in terms of, you know, the home being the only source of of of housing and shelter for multi generations. And so, you know, I want you to just a little bit more in terms of what is being done, how it's being done, and what is the way in which we can help expedite this process.

Yvette Sowers, executive director. I understand your concern and SB 293 is really targeting the families in Altadena. That's really the target audience where you have the son moved into the grandmother's house and and did not do the title transfer and assessor Prang recognize that and that's why he pushed for the bill and that's why we understand as well and we're we're devoted to making sure that we implement this law and not only implement it, but we do an outreach education outreach so those affected by it will know that they have relief.

I appreciate that. And and can you say a little bit more about how many families you've actually engaged and how you're working with the assessor's office?

We're we're working directly with the assessor's office. We try not to step on their toes. They they come to us. They ask for help. They come to us. They ask for publications and we push it out to them. But they have tracking mechanism and and I know they know the difference to how many homes were destroyed in Altadena. And I'm sure there's 2,800. And probably 95% of those homes did not get the right recording. Newer family homes.

I I was raised in this home. What do you mean I don't own this home now? Mhmm. So it's an education and I we really appreciate assessor Prang for recognizing this. And we're just here to work in partnership with the assessor to make sure we get the tools out there.

Yeah. Well, I I appreciate the the understanding. I think the intention is where we start when we're in these kinds of endeavors, and it sounds like the intention is to address the needs of a community that for many years have been redlined, many years have been under invested in, many years under insured, many years no homeowner education, and that now we see this as a moment of equity to be able to provide and to do the necessary protocols and steps to bring bring people back. So I'm appreciating that and and wanna just make sure that we stay in connection on the ways in which we support that community. I talked about on an earlier panel about the Baldwin Hills area, very similar community situated in this really precarious

area behind an urban situated in this really precarious area behind an urban oil field. A lot of open space, a lot of older homes, folks not having the resources, those homes that have been redlined, so not getting the equity needed to do the necessary work to have the insurance, that that they should and deserve. So I I appreciate that we understand the the dangers, unintended, but real consequences of racial discrimination in housing that's generational, and I appreciate the work that you shared with us today.

Thank you.

Thank you for your presentation, and we'll hold this item open. We will be moving on to agenda item four, continuing with BOE. On our agenda is the information technology modernization project, and please please proceed when you're ready with your remarks.

Thank you. Good afternoon, madam chair and members of the committee. My name is Jack McCool. I'm the chief of the state assessed properties division, which is part of the BOE's property tax department. The BOE's technology proposal before you today is intended to modernize the technology platform used specifically for the administration of the state assessed properties program, which involves valuing the property of public utilities and railroad companies, and allocating the assessed values among the counties where the properties are located.

BOE determined the values of state assessed properties at $167,200,000,000, resulting in approximately $2,800,000,000 in local property tax revenue. These tax revenues benefit local government services, such as police and fire protection, and funding for local schools. The budget change proposal is a request for $3,200,000 in 26-27, and $3,100,000.0 in 27-28.

This request represents an urgent and immediate need for the agency in the administration of California's complex property tax system. We're pursuing this project now because our patchwork of technologies is designed around a system that is more than 30 years old and is functionally obsolete. The legacy mainframe system can no longer be updated to improve agency efficiencies, maintain data integrity, strengthen cybersecurity protocols, streamline workflows, or otherwise enhance how this agency manages highly technical valuation information. We have pursued and exhausted enhancements to our existing patchwork of programs and systems, and have reached a point where the only path forward is a comprehensive modernization.

The BOE state assessed properties program is responsible for valuing companies that include telephone companies, cellular, railroads, electric and gas companies, and beginning this year, voice over internet protocol or VoIP companies. The current outdated system requires these companies to submit complex property tax filings primarily via email. These filings often exceed hundreds of pages and contain detailed financial and asset information. Limiting taxpayer submissions to US mail or email in today's digital environment creates avoidable risk for our taxpayers. It increases the potential for processing errors, delays confirmation of assessments, and slows the resolution of questions or corrections.

Due in part to the mainframe systems age, BOE BOE processes are heavily reliant on manual data manual data entry, paper based documentation, and inefficient coding practices. Together, these create an even greater risk of human error and could cause excessive delays in generating the annual board assessment role. BOE's professional appraiser and auditor appraiser staff spend about half of their time each filing season manually entering data from property tax returns into a system incapable of basic operations such as property searches, automated data processing, and entering property values above a certain dollar value. The mainframe lacks essential functions required for interactive electronic storage of assessment data, and the only way to review the final computation amounts is to print the reports and manually compare the data for accuracy. The inefficiency the inefficiencies of our current business processes as a result of our outdated technologies threaten our ability to meet our constitutional and statutory deadlines.

In addition, these inefficiencies redirect BOE staff away from the performance of property tax audits and essential valuation studies. The new system will replace outdated and failing systems, improve data integrity, strengthen cybersecurity protections, streamline workflows, and enhance our ability to analyze and manage highly technical valuation information. I also want to emphasize that this IT project is being actively developed and managed by the same staff and managers who carry out this work every day. These staff understand the operational realities, the compliance requirements, and the risks. They have the understanding because they are directly invested in making sure it is delivered successfully on time in a way that truly supports the program.

We respectfully request your support for this IT modernization proposal, and we're happy to answer any questions that you may have. Thank you.

Do we have any, comments from the Department of Finance and the LAO?

Yes. Alex Bentz, LAO. So the BOE has identified a need to upgrade their existing processes to make more efficient use of their staff as you've heard and to improve the experience for for taxpayers. In coordination with the Department of Technology, they've come up with a IT, an IT system that could achieve these goals. And so we raised no concerns with the proposal itself.

However, we do we do wanna note that given the budget situation, we suggest that the legislature set a higher bar for new IT projects at this time. And so in particular, we suggest only prioritizing projects that, that need to go forward now. That would have dire consequences if they if we delay it until until future budgets. And so how to help make this determination, we suggest that the committee ask the department to outline the consequences of delaying the project until future budgets, and so the legislature can make can make an informed decision. So happy to answer any questions.

Thank you. We'll take it back to the committee. Do we have any questions or comments from our vice chair?

Does the Department of Finance have any comment?

No.

Chris Hill, with finance. Just I would just note that we do think this project does meet the threshold of of necessity at this point in time.

Just to make the comment. I'm really surprised that we'd have a long in the tooth outdated computer system. That's so unusual here in California.

Thank you, Mr. Vice Chair. We'll move to Senator Cabaldon.

Thank you. I mean, I actually think in the 35 year old system, we've gotten our, we got our money out of it. We've seen plenty of other systems that failed in 35 minutes. So I think this, it's good news. I share that LAO's long term concern, but as LAO has noted, we're not expecting the structural deficit to turn around on its own anytime soon.

So while I don't know this is an absolute 26-27 priority, it is a near term priority regardless, and so I'm glad to see it. I think also the comments by Chief McCool about the involvement of this has been led by the folks that do the work and understand exactly what it's going to take.

And as we look at more automated decisions, more automated data processing, this is the, that's the model that we should be deploying so that no one's getting their hours cut back or losing their jobs. They're being able now to do exactly the job they trained for, that's their passion, that they signed up to serve the people of California at BOE in doing.

And I think it's, I hope we see more of this from the administration because we need to be improving our services given the fiscal constraints, and we need to maximize the essential work that we do as human beings at its maximum potential.

To that point, I'm both excited and almost stupefied at how like the outcomes that you're describing in the table in the report. Because, which I very much appreciate the data that's here, but it is pretty remarkable to reduce the amount of time spent on manual entries, as you described, from 18,750 hours down to 375 hours.

Which I understand for a 35 year old system, and I would absolutely be frustrated myself if I was a staffer trying to do all of that paperwork. And then shifting those hours, the resources for the staff to be able to do more appraisals of noncompliant taxpayers by 4,500 hours and doubling the amount of time spent on financial and statistical studies needed to be able to conduct those appraisals.

But then the other one that really pops out is just it's tripling the number of audits. And so I guess my first question was, are there 6,000 hours worth of audits, triple the audit hours that we currently have out there waiting to be done that we haven't been able to get to as a result of the staff doing manual entries?

Thank you for the question, and the short answer is yes. We have a greater need of doing large comprehensive audits of our larger assesses. Our multi year audits are the area that we believe most of these hours would be spent and are most likely to result in the largest changes in value recommendation.

So, yes, there's absolutely an appetite for our audit staff to be conducting audits of the larger state assesses that would be multi year in nature, and we just don't have the capacity to do that currently.

And I didn't see it in the staff background, and perhaps it's also noted in the BCP, other than to note that the staff report says that historically audits have impacted the net change value of the assessed properties, and we would hope that that would be the case.

Do we have any, like, ballpark order of magnitude sense of, like, what the value to the people of California in terms of improved tax compliance by some of the largest state assessed properties might look like?

We haven't been able to do an analysis. It's fairly comprehensive to get to a number for that. But I would say that our assessment role tends to increase in the 7-8% range annually, and I think, conservatively speaking, we would probably have something in that neighborhood.

So you probably told us to the Department of Finance, but didn't want to write it down. Like, how, over how many, how long do you think it would take for us to remake the cost of this appropriation in terms of increased General Fund revenue and property taxes?

That's, we'd have to do some analysis on that. Certainly, the state assessed rule is an important part of the property tax rule overall, and it does fund a host of a city, county, special district, k-14 activities. But in terms of what the opportunity cost is to the tax rule of not doing this.

I'm afraid we, Department of Finance couldn't say today. But we do think, again, this is a project that should go forward because of it's just necessary because of the antiquated nature of the existing system and all the time that it takes to manually upload all this data.

Yeah. I'm inclined to agree with you. I just, you know, like the Vice Chair, I always have, you know, an angel over here, an LAO on my other shoulder. So I'm trying to understand, not to the decimal point, but I think would we, is this something that will increase the audits, the stronger technical studies that will back it up?

Are we looking at the, is this worth the cost because over the period of time that it's going to take us fully solve the structural deficit, we will have already made back the cost of this new system in increased tax collections or is that a fifty year horizon or is that a five year horizon?

I'm supportive of either way. I think this makes a great deal of sense and appreciate it coming forward. And again, I hope we look for more opportunities in partnership with the folks doing the work to achieve these kinds of efficiencies.

And I just wanna say for the record, the LAO is is the other angel on the other shoulder. Just for the record.

Okay. Seeing no other questions or comments. I wanna thank Senator Cabaldon, and I think he pretty much asked, you know, the questions that I had in mind. I mean, I just wanted to, again, point out that, just reading the BCP. 18,000 entered manually, I mean, that's... Yeah. But I also wanna just kind of warn and caution, right, that a new system could also...

I know that you're putting the new system in to reduce risk, but I also think that in by putting in a new system, it also has some risks as well. And we wanna make sure that, you know, we're diligent in this process and that it's one that tries to really minimize any kind of risk that there could be by implementing a new system.

That's all I have on my end for this item. Okay. So we'll go ahead and thank you so much for your presentation. And we'll go ahead and we'll hold this item open. We'll move to agenda item number five. We now turn to agenda items involving the Department of Tax and Fee Administration.

So we begin with agenda item five on our agenda, which is a department overview. So I'd like to ask the representatives, I believe they're all here, to come forward to the table if you're not. Thank you for being here today and please proceed with your initial remarks.

Hi. Good afternoon, Madam Chair and Members of the Committee. I'm Trista Gonzalez, Director of the California Department of Tax and Fee Administration, otherwise known as CDTFA. Thank you for allowing my colleagues and me the opportunity to appear before you. I'll provide a brief overview and turn it over for any questions.

CDTFA administers 42 tax and fee programs, the largest being the sales and use tax program. In fiscal year 2024-25, $98 billion in revenue was collected, which supports public services across the state. Of this amount, more than 30 billion was distributed to local governments, including California's 58 counties, 483 cities, and as of April 1, 2026, 486 special taxing jurisdictions. Let's see.

We have just under 4,000 team members with offices throughout California and in Chicago, Houston, and New York. Our focus is fair and efficient revenue collection and enforcement activities that protect compliant businesses and the public.

We have steadily improved our efficiency by reducing the cost to administer every $100 of revenue from 81 cents in fiscal year 2019-20 to approximately 65 cents in fiscal year 2024-25. This year's proposals that we'll address shortly strengthen our ability to enforce new laws involving flavored tobacco, intoxicating hemp and cannabis, and maintain the systems that support California's revenue infrastructure.

These resources allow CDTFA to continue removing illegal products from the market, protect our communities, and ensure tax fairness across industries. We remain committed to modernization, transparency, and responsible administration of tax programs, of state tax programs. And I'm happy to answer any questions that you might have.

Thank you. Do we have any comments from the Department of Finance?

David Ton with the Department of Finance. We have no comments at this point.

And comments from the LAO? No? Okay. Questions or comments from Committee Members? Mr. Vice Chair?

This is the conversation that I jumped the gun on earlier, so I'm gonna dive right in. So I'm really curious about the different ways that you are are looking at these taxes. And I'm really thinking about communities right now in my district that are facing some intensive displacement of cultural assets, small businesses, long time residents, and families.

And trying to understand if you all have seen or in past or present mechanisms that you may put in place to work with local communities to really preserve some of the social and cultural and historic identity in terms of space and place and institutions. Are there any kind of you know, we often hear of at the local level BIDs. We hear of some cultural preservation fees.

I know the state has a very robust culture and arts program. We were in South LA just designated as a historic black cultural district. So I'm just curious what mechanisms or tools are in place that can help assist communities that are going through that kind of a transition. Have they worked in the past? Is it something we need to explore policy wise?

So I'm not sure if I have exactly the answer to your question, but let me provide you a little bit of, you know, some of our taxes and how it gets filtered back to the to the locals. So the sales and use tax, one and a quarter percent goes, quarter percent goes back to the counties and 1% goes to the cities and then those additional add on district taxes I mentioned are voter approved taxes.

While we administer those taxes on behalf of the local jurisdictions, the locals themselves decide how the money is spent. We don't oversee that. So often times those district add on taxes are for a certain purpose that is approved by the voters. I'm gonna look at my colleagues here to see if you have anything. Seth. Thanks.

Seth Kerstein, LAO. Thanks for the question, Senator. So in terms of things, I don't think, I just have maybe a brief comment on something that is perhaps a little bit related to what you're getting at, not related to those types of districts specifically.

But if your interest is in sort of things administered by CDTFA that are sort of within the range of tools that local governments use to manage their finances. One key one is these sort of district sales taxes that sales and use taxes are sometimes called transactions and use taxes when they're in that form.

That are administered by CDTFA that are enacted by individual local jurisdictions as sort of add ons to the other parts of the sales and use tax rates. So one of the, sort of the one key piece of the statutory structure governing how local governments can do that is a statutory 2 cent or 2 percentage point cap on the total amount of transactions and use taxes that can be enacted in a particular local area.

So that's something that is on the books statutorily. However, it's very, very common for legislation to be enacted that authorizes specific local areas to exceed that cap. And so in many cases, there are rates that are higher than that.

But so it sort of raises a question for the legislature whether to consider whether to continue with that approach or if you're concerned about sort of the ability of local communities sort of in a more systemic or equitable way to sort of have that flexibility, it's conceivable that the cap itself could be revisited or adjusted.

In fact, the legislature passed a bill to do so. It was either in 2015 or 2016 that was vetoed by Governor Brown. So this is a conversation that's been going on for a while and is something you may wish to consider.

Any other questions from Committee Members? Senator Cabaldon? No. Alright. I wanna just to to kind of just give a little bit of a long comment. So I know that CDTFA has a, you know, complex set of responsibilities and, you know, really I wanna begin by thanking the director for taking some time and having a discussion with me.

I really appreciate that. And I know you're also a fairly new in in your role. And again, I just wanna really stress and emphasize the time you took to, you know, kinda go over some of the some of the work that you do.

And I and I wanna be clear that many of the of the concerns that I address in my comments today, I'm raising them because they stem from decisions and interpretations that really, you know, predate your leadership.

And so my goal in raising these concerns is not to suggest that anything improper is occurring today, rather bringing to light and or highlighting how rapidly evolving technology and data availability are creating challenges that agencies may not have fully anticipated, creating gaps that could, you know, fill things like fraud and or burden taxpayers.

As more information becomes publicly available, we need to consider not just the intent behind transparency, but how that information can be used in practice. So one issue that has emerged is whether publicly available tax sharing agreements could allow consultants or, you know, private actors to analyze patterns across jurisdictions and use that information to gain leverage in negotiations with local governments.

And in effect, data intended to promote transparency could unintentionally create a competitive bidding dynamic between jurisdictions, one that may disadvantage public agencies. I know that I also have mentioned in the past trends...

Or asked about trends that the department has seen, an increase in these agreements, if there's a significant rise in sales tax revenues across the state. I know we've requested additional information on those types of patterns, especially as, you know, I think that this is an issue Californians are increasingly bringing to our attention.

From my perspective, these are signals that something broader may be shifting, and we may not yet know, like, all the drivers. But it raises important questions about data governance, market behavior, and emerging dynamics that the legislature should be paying attention to.

At the same time, you know, some of these agreements are increasingly becoming targets for third party consultants who, again, contract with jurisdictions to challenge and redirect tax allocations. In some cases, those challenges rely on interpretations of existing regulations that were never formally changed, at least from what I've heard from from folks, not codified in statute and have been questioned under administrative law standards.

What's particularly concerning is the shifting standard that has been applied over time. In some instances, there is now an expectation that transactions might be must be physically handled at a location to qualify for tax allocation. An interpretation that was not previously enforced when many of these agreements were originally executed.

We've also seen decisions that have been reversed years later under different administrative structure. Again, I wanna emphasize that, you know, some of this stuff is it predates your leadership. Leading to major financial consequences for some governments including sudden revenue losses that forced cuts to essential services.

And yet similar agreements continue to exist elsewhere without the same level of enforcement or scrutiny. And so, you know, to me that inconsistency raises some serious concerns. Ultimately, my focus is ensuring that transparency achieves its intended purpose while protecting taxpayers safeguarding sensitive information and maintaining, you know, fair competition in the state.

And also if preventing or avoiding the weaponization of publicly released, you know, data. I know that, you know, these comments here today are some would say local issues, but they're really impacted by some state, you know, policies and regulations and that could really have statewide fiscal impacts.

And again, I wanna emphasize the conversations that we had and really just if you wanted... I'm not gonna give any particular question, but if there's anything that you want to comment or reply to, you know, some of the those concerns that I've that I have mentioned to you or if there's any particular trends that you think would be of important for the committee to know.

Thank you for those comments. And we have seen, you know, the more revenue sharing agreements and we have that information on our website. Happy to share if anyone needs that data. But, you know, things are shifting. I really don't have any specific comments to add, but I appreciate your comments, and our team is always available to help answer any questions that you might have in any of those scenarios.

Well, can you speak a little bit to some of the the dynamics in, like, sales tax across the state? I know we just hit the... What was it? March, April 1st is when they'll be implemented? Is that is that right?

Yes. We are reaching more and more. Let me... I have a few comments prepared. I can mention too the highest rate, I believe, is for sales and use tax purposes is 11.25% at this at this time, and that's in the cities of Palmdale and Lancaster. Taxable sales definitely has been growing steadily, but sort of hit a plateau in 2022.

I can give a little bit of information. In 2017-18, our sales and use tax revenue was just over $57 billion and has increased to approximately $80 billion in fiscal year 24-25. So that is quite a significant increase. In 2020, there were 341 of those special taxing jurisdictions.

And as mentioned, in April there will be 486. So we have seen quite a shift in the tax rate based on those add on taxes And I think, you know, we've seen some changes in laws as well, you know, with the online sales being a significant portion of, you know, retail sales nowadays.

Some of our focus has changed with respect to our workload and how we conduct business, addressing those online sales. And, you know, you mentioned some of the local tax implications when there's warehouses in different locations and where those sales are made.

We've also tried to make things more efficient at CDTFA, and thanks to the legislature, some of the bills that have passed. One of another recent bill to mention is the... Gosh, what was the... AB, AB 85, which created the accelerated remittance program, and that was dealing with the used car dealers, where now they make...

They pay their sales and use tax in many of their transactions directly to the DMV upon registration of the vehicles, so that was another effort to really help streamline our processes and just make collection of that tax, which is a big source of California sales and use tax revenue, more efficient.

Those are a couple of the trends. I know we're gonna talk a little bit more through our proposals in the cigarette and or cigarette tobacco and cannabis space, where our CFO Jason Mallet will provide more details in all of those areas.

Senator Cabaldon.

Yeah, Madam Chair, I just wanted to, I don't have a question, but just to really appreciate the line of questions and the points that you were making. And particularly with respect to the incidence of local of the local of the sales taxes locally for warehouses and other transactions.

And I mean, it is obvious it's a problem for all the reasons that you mentioned in the legislature, and particularly the governor have been unwilling to deal with this in a systematic way. And the challenges becoming with increasing automation and this phenomenon, there's there are vanishingly small reasons for any local jurisdictions to zone for this kind of economic activity.

When we were both members of the local governments here in the Sacramento region, we had to fight over some of these industrial and commercial facilities because they would produce good paying jobs in our communities, and they would produce a reliable source of tax revenue.

But today, many of these facilities, they have four people working in them and then instead of 400, and you never know at what moment some other city will sign an agreement for a race to the bottom where all or 80% of your tax revenue is snatched away in one second.

So there's, if we want to have a stronger economy statewide, we need to have communities have an incentive to allocate their land use decisions in a way that supports housing and other forms of economic development and particularly this sector. I don't know what we'll do about the robots.

But we can do something about tax policy. And simply allowing companies to make that decision in their end upon advice of consultants, as you've indicated, game the system is not in the interest of the state's overall economy and is certainly, you know, dangerous to our local communities. And we do need a state level policy solution to this. Appreciate you leading on this.

Thank you. Appreciate the the comments, Senator Cabaldon. Any other before we move on? Okay. Alright. Well, thank you for the presentation, and that item was for information only. We're gonna be moving on to agenda item number six. We're continuing on with the CDTFA on the delivery network company sales tax collections. Feel free to begin your remarks when you're ready.

Good afternoon. I'm Brad Miller with the Department of Tax and Fee Administration, and I will be talking about a proposal where we want to address a compliance issue that's a result of confusion under existing law. So under the Marketplace Facilitator Act, a person that makes sales of $500,000 or more to California customers in a year and operates a marketplace to facilitate sales for other sellers is a marketplace facilitator. The law makes the marketplace facilitator the retailer for sales made through the marketplace and requires the marketplace facilitator to collect and remit the tax due on each sale. The law also provides an exemption for delivery network companies under the Marketplace Facilitator Act.

However, a delivery network company may make an election to be a marketplace facilitator. Some delivery network companies have made the election, most have not. Sellers utilizing delivery network companies are primarily restaurants, but other types of sellers utilize these DNCs as well. Audits conducted by CDTFA of restaurants have discovered many taxpayers are failing to report sales made through DNCs. This is likely due to confusion about the responsibility to report tax.

Since some DNCs collect and report the tax, the restaurant operator believes that all DNCs report the tax. This can be a very costly mistake. This proposal would make all DNCs a marketplace facilitator, alleviating the confusion and improving compliance. It would also shift the reporting requirement from thousands of small taxpayers to a limited number of larger taxpayers. We estimate that shifting the reporting requirements to the DNCs rules will will result in approximately $44,000,000 in sales tax revenue over a full fiscal year, 20,000,000 of which would be general fund.

This is money that customers are already paying to the retailer, which will now be paid to the state as required. California is unique by having a DNC carve out under the Marketplace Facilitator Act. Most other states that have a Marketplace Facilitator Act include a delivery network company within the definition of a marketplace facilitator. This proposal would make California consistent with other states' treatment of DNCs, and I'm happy to answer any questions you may have.

Thank you. Do we have any comments from the Department of Finance?

Madam chair, JT Creedon, Department of Finance. No further comments. Just here for questions. Thank you.

Thank you. LAO? No? Okay. Questions, comments from our vice chair?

I wanna make sure I understand.

The marketplace facilitator is like Amazon. Right? Correct. The delivery network companies is like, Uber Eats.

Right? Uber Eats, DoorDash, Instacart, Grubhub, those kind of folks, those are delivery network companies.

In the marketplace facilitator case, it is a platform that is providing ability to transact with retailers that are part of their network and the product is delivered as part of the part and parcel of the as if you ordered it through the mail. Correct. The network delivery companies actually they actually pick up the product from the restaurant or the grocery store or whatever and deliver it to the customer. Whereas in the Amazon case, it's a contractor. There can be any number of Amazon's not delivering it.

It can be UPS or USPS or whatever. But in in the delivery network company case, it's that company that's doing the delivery.

The company facilitates the sale. Right? So for example, DoorDash would facilitate a sale through their platform for a customer and a restaurant. And the person that actually delivers is typically an independent contractor for DoorDash or Uber Eats or whoever. So it is a little bit different than the Amazon scenario.

I get the point. But those contractors are like those that work for

Yeah. So currently, the sales tax is supposed to be collected by the restaurant or the grocery store and paid accordingly, not the delivery company themselves who charges a service charge for the customer that's receiving the goods. Is that how it's intended to work currently?

Correct.

Uber as the taxi comer company kind of Uber.

So when the Marketplace Facilitator Act was first created in 2019, It was set up to address scenarios similar to the Amazon, Ebay, and other types of companies like that that facilitate sales through a platform for multiple sellers. Under the definition of of what a marketplace facilitator is and what a marketplace is, the delivery network companies technically fall within that definition. However, there is a carve out in the statute that says you don't you're not a marketplace facilitator unless you make an election. And so and we have seen some have made the election, and so they do act as a marketplace facilitator, and they collect and report the tax instead of the restaurants. And and it's because of this election that they have that they can make that it's created confusion for the restaurant retailers, in the sense that because some have, they believe they're they're not aware that there's this opportunity to make an election, and so they're they're confused by the fact that some are collecting the tax and others aren't.

And so that again, that's that's the reason with that we are we have this proposal. We wanna address that confusion issue.

So the, compliance issue is just to make all delivery network companies, the marketplace facilitator.

That is correct.

So the sales tax is collected on the goods delivered plus the service fee?

So under existing sales tax laws, service fees that are related to sales of tangible property by any other type of retailer, DNC, a marketplace, or whatever, those service fees typically are taxable.

But in this case, they have not been?

They have not been typically because of the carve out under the marketplace facilitator act that they have currently.

So we're clearing up the confusion by increasing the tax obligation of consumers.

And JT Creighton, Department of Finance. This isn't a tax increase. This is applying Sorry.

This isn't a tax increase. This is, we're applying the tax laws as they currently exist consistently across the marketplace. Currently, the tax on services related to a taxable sale is true in, all other cases. It's true for the retailers on their platforms. It's true for other marketplace facilitators.

What was that?

And it's also what DNCs some DNCs do currently in the state of California and what all DNCs do currently in in other states. So what we're talking about here, like, let's be clear, just like the specific talking about a specific exemption, a specific carve out for just a few, large DNC's that no other business has. And, we think in the net, by shifting, by focusing on tax compliance and shifting the burden from many tens of thousands of small businesses and restaurants to the large, large, DNCs, they'll be saving the burden of collecting and remitting the sales tax as it currently is. So, really, they're kind of picking up the that burden on that end, and we think the actual cost to consumer that you're suggesting, if you follow that logic, it's it's really what's the business response to that, those couple large DNC's. How do they, respond to, you know, playing by the same rules as everybody else?

Do they collect an additional cost and pass it on to consumers? You could also argue that, by the same logic, the small businesses, the tens of thousands that no longer have to collect and remit the sales tax in their place, which currently do collect taxes on service fees relating specifically to the taxable charge, then you could also say that they could there could be savings realized there that they pass along to the consumers. So we think at the end of the day, this really is a question of of policy and whether this one particular carve out really makes any policies rationale, right, to continue.

I think we've collided up against an impassable wall of semantics, if you don't mind. Because explicitly, currently, the delivery network company that is not a market facilitator, their service fees are explicitly and allowably not subject to sales tax. You could suggest that that's a a oversight of the code because of the allowance that maybe it was never intended, but that's the way it is explicitly allowed. And to change that arrangement so that those delivery network companies that were not market facilitators now by definition become and their service fees are subject to sales tax where they weren't before. You say that's not a tax increase.

Well, again, that's where we collide up against that impassable wall of semantics. If it's increasing the tax revenue, it's a tax increase. So that's my concern about this. It increases cost to consumers.

Yeah. We respect that, senator. And and again, we would say that by shifting the burden from the tens of thousands of small businesses to the, the large DNCs, you could argue that that ends up being a a savings for them and a tax decrease because

In in terms of processing

Mhmm.

Yeah, but not not the tax. I understand your point. That's why I say we've collided against up against an impassable wall of semantics. It it is increasing tax revenue to the state as to what it was before, which increases cost to consumers. And we have this affordability thing that we're talking a lot about now.

Okay. Moving on from semantics. I joke. We have senator Cabaldon then followed by senator Smallwood-Cuevas.

Thank you. My view is when we hit an impassable wall, we go over it. Grab a lot grab a lot on on top of it. So I'm a single guy that doesn't enjoy the approbation of couples and families who look at somebody eating by themselves in a restaurant. So I I'm not a I'm not an infrequent user of any of these services, and I wanted to, like, move to them more specific by name just to it's easier for me to understand.

So if I if I order from Fishface on Uber Eats, then I'm currently Uber Eats, when when they when when I when I the the dollar figure comes up and I'm paying that amount, it includes the the service fee, with the with the taxation on the service fee currently, and that and then all that all that money is paid directly to or the taxes are all paid directly to to to government? Is that how it works for Uber Eats?

We prefer not to discuss publicly specific taxpayers, but I I will answer your question in a general sense.

If Okay. Well, I'm I'm asking about Uber Eats. You're welcome to answer for anyone who has voluntarily registered for the marketplace facilitators.

If a delivery network company has made an election to be a marketplace facilitator, then they would be collecting and reporting tax on the sale of the food and the service fee, and they would be remitting that money directly to, the Department of Tax and Fee Administration.

And then in that case, the the restaurant officials would be receiving, the the price of the of the of the meal net of taxes.

Correct.

So let's say instead I order that on what I will say is DoorDash, but for you, I'll say as a as a DNC that has not elected to be a be designated as a marketplace facilitator. So now I I pay, but the amount is let's assume their structure is otherwise the same. So now I pay I pay the same delivery fee, but I'm not taxed on the on the delivery fee.

Well, I think it's important to understand there are two components there. There's a delivery fee and there's a service charge.

Mhmm. I'm sorry. I did mean service charge. Okay. Sorry.

Serve serve delivery fees are exempt. Yeah. Right? They're they're passed on to the driver. That's an exempt transportation charge. The service fee in that scenario, since they've not made the election to be a marketplace facilitator, is currently not subject to sales tax.

Okay. So I so okay. So I am now paying say the say the service charges is $8 I'm now or $4 I'm now paying whatever 40¢ less for the exact same for the exact same product and delivery in the by by using a DoorDash or a non non designated marketplace facilitator as opposed to Uber Eats or a any other market designated marketplace facilitator for the same for the same product?

That is generally true. However, there are scenarios where a delivery network company may even though they've not made an election to be a marketplace facilitator, depending on their business model and how they operate, they may be still regarded as a retailer. And and if they are, then that service fee would still be subject to tax. Okay.

Then for the for for Fishface, for the restaurant, I have not pre coordinate with the with the two people that are working there at any one time. So they they don't have an accounting department behind the behind the scenes. It's like looking at each one of these, they don't have an attorney sitting in the restaurant evaluating each of these. So in the in the first example, the market the the Uber Eats or other DNC that is registered as a marketplace facilitator, they're receiving the price of the meal net of the tax and not including the service charge because the service charge was a

That's correct.

It's covered by. In the second instance, are they they're receiving the whole amount that the consumer paid minus the service charge?

Generally, that's true.

It And the delivery fee or other other costs that are borne by the DNC?

Yeah. There could be agreements with regards to, you know, they maybe they get a lesser amount that that's per contract with each of those restaurants.

Okay. But they are but they are but but I guess the the the the embedded in my question is they are receiving the amount equivalent to the taxes?

They should be, yes.

Okay. And so part of the issue that you noted at the beginning was some of them don't they don't know the difference between the two because they're and there's obviously, there are more than just two delivery network companies out there. And so there's confusion there, which I understand. But then so under this proposal then, the the restaurant would would no they would no longer get that the the the tax the tax amount that they they they shouldn't have gotten in the first place, if the if the DNC had registered. So did they I mean, will restaurants on a significant scale under this proposal, even though they're obligated to remit that as taxes, will they will less expect less cash to be entering their accounts?

Their cash flows would be different because, yes, the the amounts that the DNCs would be remitting back to them would be less, but those are amounts that would be I mean, those are tax amounts that are due to the state.

They're due to the state, but if if there is the confusion that you were describing, then they're not being paid to the state, at least in some instances, and they're being booked as income, essentially, to their to their restaurant. And so under this under the BCP or under the Trailer bill language that's proposed, they would the ones who were unaware and were confused would would would would experience the same effect as having less income? They would also now be in full compliance with the law? Yes. Yes.

They would they would receive less cash flow, and they would also no longer have a tax obligation related to that.

Okay. Alright. Thanks, Madame Chair.

Smallwood-Cuevas.

Okay. So now I'm banging my head against the insurmountable.

What? Wait. Wait. Okay.

So I'm gonna I'm I wanna make sure I'm understanding. So if should this proposal move forward, should consumers expect to pay more for the items that they are ordering through these delivery platforms?

If assuming everything stays the same as it is, and the only thing that changes is the law, yes.

They would. I mean, we're talking about a tax rate of 7.25% to 11.25% on a service charge. An average service charge, there's different ways that they charge service charges that it's variable, but we're probably talking 30 to 50¢ a transaction that they may pay more. But again, there's also ways to save on that, and the business models could change for the delivery network companies to result in savings. You know, they may offer membership fees where you pay a membership fee a month or instead of paying a per transaction charge.

And so there's different ways that, that can come about. So it's if we change the law, the market may change to, a different model. We we we don't we can't say for sure.

Senator, can I just add to that to JT Creedon, Department of Finance. That that again, as mentioned earlier, that makes an assumption that there's an increased cost to these we're talking about just a few DNCs here that then pass along that cost to consumers. You could also as I mentioned earlier, you could make the same argument that any savings on on their small business and restaurant side gets passed along with consumers as well as additional savings. And we haven't seen, any evidence really from other states where most other states, these DNCs are currently marketplace facilitators and collect and remit sales tax already, and we haven't seen evidence of increasing prices or decreased business or any of that.

So California is an outlier in terms of

That exemption.

not having this sort of tax structure in place. Is that what you're saying? Okay. And can you say what is the incentive for becoming a marketplace facilitator versus not? You're saying it's sort of like they volunteer, but what what what is the incentive for that?

I'm not exactly sure their incentive. I mean, it it it may be related to their ability to make the transactions easier for their their restaurant customers that they partner with. I I it that's really a better question for those that have made the election.

When you look at other states, do the majority is it sort of a competition if one does it, everybody does it sort of thing? Like, what what is the I'm curious what what's the even more confused system where we're gonna have five you know, 15% who are, the rest are not, and we're just gonna and and the small businesses are just gonna have to, like, transaction by transaction trap to figure this all out.

Well, that that's what they're dealing with now,

because the confusion because some have made the election, most have not. Okay. And so they're again, they're confused about when do they need to report the tax or not. And and again, this would eliminate that confusion.

Okay.

Okay. Yeah. What you're talking about is exactly the intent of the proposal. It's to simplify and create fair and consistent application of the tax law for all

But it's voluntary?

Well, it's voluntary now.

Right. Yeah. Okay. Got it.

Thank you. Can't say it's any clearer, but I think I I think I get the the I get the gist of what what the opportunity is. But at the end of the day, it's a higher cost to consumers. It's a simpler, more unified standard for small businesses, and it's a an election process for these companies to decide one way or the other of how they will move forward.

There's an election currently. If if our proposal passes, then there's no more election.

Got it. Thank you.

Senator Cabaldon?

To to to follow-up and and maybe not for you, but if there's testimony later from from the DNC's to to to to senator Smallwood-Cuevas' question and to just follow-up on the incentives that are here. As I understand it, I'll just go back to by name. DoorDash is designated as marketplace facilitator in two thirds of the states, but not in several others, including California. And I'm curious as to why that is and whether or not the sort of the consequences that we've heard about in terms of costs and service fees and what have you, whether those have come true in the other states or not. Part of the policy question here is just the reason I was asking, well, what's the impact on my bill?

And if state law is creating a system in which we are causing prices through one delivery network company to be higher than at another one for exactly the same product and the restaurant is not getting any of that and neither is the driver that that does pose a question as to our role in a competitive capitalist environment for Senator Niello as well, which I know is also an impassable wall. So this question is California putting our weight on the scale for one or more per of the DNCs. I think it's still alive when I'm hoping again, it's not a question for you, but as we hear testimony, you know, how how folks think that's that's an appropriate outcome.

Senator, if I can just, you know, add to that. The, that that is a legitimate policy question that we've considered. The intention was just broader tax compliance. But, in in regards to the the exemption for the few DNCs, it really is giving them a comparative advantage that other businesses don't have. So as you said, it's it is, it is definitely a policy question of whether we're putting our hand on the scale policy wise, giving them an incentive and whether that there's a strong policy rationale or justification why those industries versus not.

We don't think we don't think so. We think it would make more sense to just have a broad, consistent application of the tax for all businesses across the board. And one of the reasons for the the variance you see from state to state is because these are relatively new industries. These are really dealing with these sort of platforms. Right?

And so tax policy and treatment of them has evolved over time. So we've seen different things in different states, but what we have not seen is we've not seen any data to your point about significant impact impacts on business and consumers. These businesses are continuing to grow. They're continuing to expand and, businesses access new customers. Customers enjoy using the platforms. Nothing about this proposal, we think, hinders that.

Has there been any evidence it it just made me think of another question. Is there any evidence where states are putting some language in place to shield the consumer from high prices? How what? Is there, you know because it is, in some ways, making things easier for smaller businesses. It's creating, you know, one standard for the delivery delivery firms.

Is is is there any states that have figured out ways to make sure that those costs don't get passed on to the consumer, especially given the affordability challenge that we have?

I think we'd have to we'd probably have to take a look and get back to you specifically because it varies quite a lot from state to state in the in the treatment, and a lot of it is sometimes done on a business by business basis as opposed to, how California does it with, like, the the statutory exemption. But I saw Seth jump and I I think LAO might have a more information.

Seth Kerstein, LAO. So, I I'm not sure I have something specifically along those lines, but to the extent that the legislature wanted to sort of strike a balance between some of the administrative and compliance benefits that the administration mentions as well as balancing that against affordability for consumers, there's always the option to pair something like this with a very modest reduction in the general fund sales tax rate that would could make it revenue neutral and not on net increased cost to consumers.

Thank you. Okay. So I guess I don't have any questions. I know that we got a lot into the semantics. I'm gonna say that sometimes these so these proposals seems like we get into the weeds quite a bit, but, that's that's just my Central Valley, talk.

But I I you know, for me, I don't wanna I don't have a question. I for me, it's it's just a it's it's a lot more simple, and I think that for when I'm thinking about, you know, Californians that use this, that that they don't wanna get into the weeds or the semantics of the proposals. Right? They wanna they wanna know that this is that that it's not gonna burden them. Right?

And so at the forefront of of of this proposal, I'm I'm thinking about the taxpayers, and there's a lot of great questions and comments provided by my by my colleagues here today. But I wanted to end with just kind of giving you an example. And again, I think that when it comes to taxpayers, there's some that the way that this ends up playing out burdens some more than others. Right? Not everyone's in the same income bracket.

But I I mean, I did, in order just not too long ago, three items, and my total was 49.7 $49.17. And that was with a subtotal of $37. So it went from $37 and it added $3.62 of tax, $1.49 on a delivery fee, and then there was a marketplace fee for $6.40, and that brought it, you know, to $49. So I think that when, you know, when it comes to proposals, I'm thinking that it, you know, how do we make this simple, so that it it's not a burden on on on the on the individuals that are using it because, again, it's Californians that are doesn't matter, I think, right now, that what, income bracket you're in, people are feeling the weight of of of the economy at the moment. And I think that, you know, to put ease to ease to ease the situation for us all, we we gotta be able to, you know, find the right approach that works for everybody.

So I wanna thank you all for being, for the presentation. And I think that the CDTFA is still on the hook with us in moving to agenda item six. But, of course, this is an item that's going to remain agenda item number five is going to remain it's an information only item. Oh, I'm sorry. We're gonna hold open six and move to agenda agenda item number seven. Sorry. I haven't had lunch yet. So I need energy. I had chocolate, but it wasn't enough. Yeah.

Because we just finished six. Right? I'm I'm out of it. We're moving to agenda yeah. Agenda item number seven, the sustainable aviation fuel tax. I'm really behind. So please proceed with your your with your remarks when you're ready. Thank you.

Good afternoon, chair and and members. My name is Andrew March with the Department of Finance. So as the agenda notes, the governor's budget includes a $1 to $2 tax credit against the state diesel excise tax for sustainable aviation fuel, which for ease of, just time, I'll refer to as SAF, from now on. Sold for use in California, from 2026 to 2036. The value of the tax credit is 1 to $2 per gallon of SAF, depending on the carbon intensity as determined through the low carbon fuel standard, by the California Air Resources Board.

I'm joined by my colleagues from the California Department of Tax and Fee Administration and the California Air Resources Board, and we're happy to answer any questions or clarify any, statements made by the LAO.

Do we have any, comments from the, Department of Finance?

I I believe that was the Department of Finance. I'm sorry. LAO. Helen Kerstein with the Legislative Analyst's Office. Good afternoon, chair and senator.

We're recommending rejecting this proposal. There are five main reasons for that we're recommending rejection. I'll go over them briefly and then we'll have plenty of time hopefully for questions. So the first is that we think this fundamentally represents a pretty expensive means of decarbonizing the state and we think in general, the state should focus first on the most cost effective approaches to decarbonization before proceeding to the more expensive approaches. The second reason that we're recommending rejection rejection is that we think the environmental benefits of this proposal, which is really the stated the main stated goal by from the administration, we think those environmental benefits are subject to quite a bit of uncertainty and might be substantially less than estimated.

There are a couple reasons for that. One of which is that one possible, effect of this proposal is that we might basically switch out, renewable diesel with sustainable aviation fuel. So basically swapping, to some extent at least, swapping one renewable fuel with another. To the extent that occurs, your overall net benefit, environmental benefit, wouldn't be very large. Also, we note that in the research, there is quite a bit of disagreement about the level of environmental benefits that these fuels provide.

The third main point that we wanted to highlight is we think there's a huge amount of uncertainty about the magnitude of the potential loss of diesel excise tax revenue. So we think, for example, it could be that the losses are less than the Department of Finance estimates, kind of is their, max amount. So they've estimated between $165,000,000 a year to $300,000,000 a year. We think that it's possible it's significantly less than that, but we also think the revenue losses for the diesel excise tax could be quite a bit larger too, potentially a billion dollars or even potentially more. So there's a lot of uncertainty there and there's a lot of potential risk to diesel excise tax revenues.

Then fourth, we wanted to highlight that every dollar of that tax credit is one fewer dollar for our transportation programs. So these diesel excise tax revenues currently go to, by formula to a few different programs. They go to Caltrans' shop program, which is highway maintenance and rehabilitation. They go to local streets and roads to so to the communities, the cities and counties that wanna maintain their own roads, and they also go to a transportation or the trade corridor enhancement program. So again, depending on the size of the tax credit that's ultimately realized, we'll see different you know, a different amount of reductions to those programs, but they could be real reductions to communities.

Fifth, we wanted to highlight that we think the proposal deviates from the spirit, not necessarily the letter, but the spirit of voter approved restrictions on these transportation revenues. So voters have passed constitutional restrictions on diesel and sales tax on fuels and basically said, we want them to go to streets, roads, and certain mass transit activities. This proposal in effect would divert those revenues instead to the aviation sector, and we think that's not consistent with the spirit. So happy to take questions at the appropriate time.

Thank you. We will go ahead and now open the discussion to questions from members of the committee. Do we have any questions or there's only it's just you and I left.

There's a small question. We'll be right back. I don't I don't

have any questions, but I but I but I very much appreciate LAO's analysis of this and at least my my initial that's my initial thinking and I'm hoping to hear from from others about about it. But and I wish we'd had this level of attention to to when Valero was on the chopping block as well. But I think the analysis has been made and the impacts on the transportation fund and on what the voters approved for that and other decarbonization efforts are well taken. So open to continue to talk about it. But I think L.

A. Would everyone the administration would be wise to consider the comments and the observation and the analysis by the legislative analyst office.

Do you have any questions?

Sorry. I missed the very quick presentation. You know, I understand the impact on local, I represent Los Angeles. Streets are very important to us. Freeways are extremely important to us. Can you talk a little bit about what we think the impacts are going to be quantifiably on the ground as a result of this change?

Yes. Andrew March with the Department of Finance. So some of it depends. I think the LAO is noting that it could be as much as a billion dollars, which we at the administration thinks is highly unlikely. That would imply that every gallon of sustainable aviation fuel produced in the country would be coming into California, which is not something that we think is very likely.

There are other sales or there are other tax credits in other states. We haven't seen sustainable aviation fuel sort of flood into those states and sort of create that issue. So our estimate is around $165,000,000 That would be removed sort of from diesel excise tax revenue. Depending on the program, it amounts to maybe a 1% to 2% decrease in the various programs and the total amounts that go to the various programs for Caltrans and for locals.

And if I, might just provide a little bit of extra context. So the 165,000,000, again, it's it's currently allocated by statute to the to the three programs that I mentioned. So if it's a 165,000,000, and again, a lot of uncertainty about that, it would be a reduction annually of $70,000,000 to Caltrans' SHOP program, that's state highway maintenance and rehabilitation, $49,000,000 annual annual reduction to local streets and roads, and a $46,000,000 annual reduction to the trade corridor enhancement program. But, of course, you know, should that be higher or lower, those numbers would would be changed proportionally.

And I appreciate and thank thank you for that. And just I know sometimes we these estimates, we we start here and then next year, year after, like, wow. So such a big difference in fiscal impact. Is there is there a sense of what will we do should the projections be greater than what we are estimating? How will we

Yeah. So the proposal in front of you has no cap. I think it's something that's been discussed about whether there's a way to sort of cap the total amount of the credit. It it would be difficult to to sort of implement a cap. We would have to think about a good structure to do that.

You know, sort of setting an overall cap would create a first come, first serve sort of situation where which may not be beneficial. But it's something that, you know, there could be reporting requirements included to provide additional information to the legislature. There are other tax credits where there is annual reporting to see the value of it. We have another tax credit that's sort of in the same vein as the manufacturing tax credit, which is sales and use tax exemption. And it's so general fund losses, but we backfill it with Greenhouse Gas Reduction Fund.

And that's sort of an annual report to the legislature that's done. So there could be other mechanisms that could be in play to sort of limit the total amount, but as it stands right now with the proposal that the administration has put forward, there is no cap on it. And it's really just capped by the total diesel excise tax liability of a particular firm. So for example, if a firm were to create 200,000,000 gallons of sustainable aviation fuel, but their diesel excise tax liability was only $100,000,000, the value of their tax credit in that year would only be a $100,000,000.

Can I add maybe just a couple of things? There is a so one, I guess, there's a there's a carry forward. So even if they don't have liability in that year, they can they can transfer it at least to some degree. Also, I think one of the the potential outcomes of this could be that if this is this is a pretty substantial tax credit potentially, so it could induce entities this isn't just limited to California refiners. They do have to have deselect size tax liability in the state, but you could imagine if it's if there is a lot of money at stake, there could be an incentive, for example, for a California based refinery to purchase a renewable facility out of state that would qualify for this tax credit.

So you could see a whole host of things. So there, I think, is this concern about potentially providing that I've heard at least about potentially providing tax credits to, you know, production out of state, as well as the potential that this tax credit could be larger than we anticipate. And so just to throw out there, I think one of the concerns I've heard while this is really stated as being about reducing our carbon emissions, it seems that one of the concerns that I've heard a lot is about jobs and about these jobs that these that these refineries bring, good quality jobs in many cases. And that, I think, is a legitimate potential concern because for these well, it's refineries aren't a huge employer statewide for these individual local communities. Of course, they can be very important.

But the state has other types of programs that we can and do use related to trying to attract or retain in some cases certain employers or industries. And in some cases, those are capped at certain amounts. Right? There's a certain amount we put aside for those types of programs. So I'm so while this type of proposal doesn't as the admin as the department of finance mentioned, doesn't really lend itself very easily to a cap, but there are other types of programs we could consider if we wanted to achieve some of these goals that might might be better suited to a cap.

So I think that's the kind of thing the legislature could consider if it wanted to sort of achieve these goals, but wanted to do it in a different way.

Mhmm. No. That's that's helpful because I'm, you know, I'm concerned about the increase amount of revenue that could be lost on the transportation side as we may see the sort of the need for more and more and more of the the tax credits to move into this this area. And I absolutely agree this is about maintaining good quality jobs in the state of California at the same time. It's the tension, right, always between these two things.

I I wonder if if there is if part of this rationale is to support the refinery operations in state production. How does the administration ensure the state is receiving clear environmental benefits in return for this new investment?

Yeah. So, as part of this proposal, in order to verify the carbon intensity of the sustainable aviation fuel, it it has to qualify for the low carbon fuel standard, which includes sort of a life cycle analysis of of, the carbon intensity of the fuel. I'll let my colleague from the Air Resources Board, clarify anything if there are any other questions.

Yeah. That that's probably correct. Matthew Botill from the California Air Resources Board. Thanks for the the question. So we do do a thorough analysis on the fuel.

The the life cycle analysis includes how it's produced, the the feed stocks that are used, how it's transported, and the ultimate emissions that come from the use of that fuel. And I did wanna make a point too that, you know, SAF as a strategy is the primary strategy that we have to decarbonize the aviation sector. It's the a drop in fuel that can replace fossil fuel use in jet fuel. We don't really have many viable other alternative options for for jet fuel decarbonization. So when we think about the kind of alternatives, the alternative is really fossil fuel or sustainable aviation fuel.

SAF has demonstrable greenhouse gas benefits, but also particulate matter and sulfur dioxide emission benefits as well for communities that live and work near airports. And, we've heard consistently from, particularly from labor as well that, you know, for airport workers and this is an important strategy to help reduce, exposure to emissions as well. So on the environmental side, both greenhouse gas and localized, air quality benefits.

Appreciate the answers. I think it's, recognizing we want to keep good jobs in California. We wanna continue our environmental standards at the level that they're at. We also don't wanna reduce workforce when it comes to repairing our roads and highways and streets, and and certainly we know we need those things. So it's it's a lot to consider as we we move forward with this, and I I hope we can think about, you know, should there be a need to utilize more of these tax incentives and taking them out of the transportation side that there's a strategy for ensuring, that there will be adequate funding to do the work that we need to do, especially, at our local level.

Go ahead, Senator Cabaldon.

I just wanted to follow-up, because I think the and you mentioned the Filman tax credit and its general fund relationship. And I think that for me, that's the one of the major problems with this proposal is its reliance on the tax credit, on the diesel excise revenues, which I think has yet to be really addressed, why we're doing it that way in a year where we have substantial short term general fund revenues and given the fact that we are then spreading the cost of this across the entire state. The other dimension to that is I wanted to be I wanted to understand, I know the at least one of the SAF refineries in California does have diesel excise tax obligations that are worth it in this. Is that true for all of the producers, for all of the jobs generating producers of SAF in the state? Do they all have diesel excise revenue that would offset?

So I'll take the first question. So the reason why we chose the diesel excise tax is because we don't believe that these firms are particularly profitable. So it's unlikely that they have corporate tax to claim their credit against. So without creating a refundable tax credit, the diesel excise tax is one of their largest tax liabilities for these firms. So in order to provide relief to these firms and and and make sure that there is actually an incentive, that's the reason why we chose a diesel excise tax.

As it as the way that the proposal is written, there are only four firms that have that currently under the low carbon fuel standard have certified pathways to bring or to sell sustainable aviation fuel in the state. Our understanding is that at least one of those firms has no diesel excise tax liability. One of them may have some amount of diesel excise tax liability, and another firm has substantial amounts of diesel excise tax liability. But there are only at this time, there is, to our knowledge, there's only one producer of sustainable aviation fuel in California.

Okay. I mean, I'm trying to understand this part of it because we've been framing this up as a jobs issue. Obviously, that is which is different from a SAF usage issue exclusively, right? So

Yes. And if I may just provide a little more context on why the proposal is structured in such a way that it's for sustainable aviation fuel sold into the state. Because in 1988, the US Supreme Court ruled that there is a similar tax credit for ethanol produced in Ohio that the US Supreme Court ruled was was in violation of the commerce clause because it disadvantaged out of state producers. So given that this is a similar fact pattern as far as the the the way that this tax credit is structured, we feel that we can't just sort of simply limit it to in state produced sustainable aviation fuel. However, there may be other ways to limit the eligible entities that we would be happy to discuss with the legislature.

Is that challenge principally the consequence of using a tax policy approach here or if we were a tax policy approach, I would just note that Culver City would lose money for streets and roads, that it had nothing to do with this decision. It will have no benefit from it. I mean, this is one of the threshold tax budget problems with this proposal from my perspective is that it has other consequences that it shouldn't have. Like if we want to do this, we should be considering the funding that we have available through the general fund or not. But we should be making those choices as opposed to forcing them on others.

But we could also have because we could have a grant program or some other approach that may not be permanent but then may not also raise some of the commerce clause or issues, as the differential tax treatment might?

We think that if there were a grant program that we may run into issues sort of a gift to public funds, which could also be a barrier. But to the lost revenue, one option could be that it's the lost diesel excise tax revenue is backfilled with some other fund source, greenhouse gas reduction fund or general fund if it being to to hold harmless the, you know, the local entities that receive that benefit.

If I might, I think one potential option to consider is, again, you can I think you may be able to do this through a tax, you know, a tax credit that's a different type of tax credit? I throw it out there and I know my colleague who who has a tax assignment may know more, but I believe, like, for example, we have the California competes program, which I believe this committee is very familiar with, that provides tax credits. So it's through the tax system again, but it's, you know, their agreements with, you know, with employ with entities, and it's focused on just California jobs. And so it's possible that that program or something similar to that program could be could be a type of model that could be used and you could make it refundable potentially or other things if there are other concerns. Again, we haven't recommended that.

We're we're, you know, but it's one option. If the legislature wanted to approach this, and you then you could have some like, for for example, for California competes, my understanding is that the state can claw back money and has clawed back money if the agreements with those, you know, those companies are not fulfilled. And so that would be another advantage. I mean, one of the, I think, other concerns that I've heard about is, okay, well, we provide this because we're really intending to target trying to keep one maybe one or a few refineries in in operation in the state. Well, maybe they close anyway because there are a lot of global factors that are affecting these refineries.

And then what recourse does the state have? So this mechanism doesn't seem particularly well suited to addressing those types of concerns either. And so, the legislature, if it wanted to go down this route, maybe could consider other types of approaches as well where they might be able to work that into a specific agreement. Anyway, just an idea.

I very much appreciate all the LAO, the CARB, finance, I mean, all the perspectives on this. I think the objective with SAF, for all the reasons that have been outlined, is the right one. And we want to have a healthy SAF market. We want to replace these fuels. We want to have cleaner air and contribute our climate goals for sure.

So the objective is right. I think there's still work to be done on how to get there because these are some significant shortcomings, I think, in this particular proposal, but it's worth continuing to work together.

Thank you. I'll try to keep it short. I'll I'll just start by saying that I I'm really uncomfortable with where we're at in terms of our situation and and energy security in the state. And I know many know that I've been very vocal about, you know, certain policies and regulations, especially those that are, you know, no offense, they're coming out of, you know, CARB. And I guess one of the things I wanna ask here today is, would you say that it's fair to say that, you know, LCFS and the changes that had occurred earlier on kind of created pressure for some of these refiner well, refineries or a refinery to convert or repurpose them?

So thank you for the question. So we we've been on a multi decade energy transition that is gonna take a few more to to see to completion. And a part of that is moving away from from fossil fuels and working to ensure that there's a reliable and affordable supply of alternatives and fuels in general for California. And in the early part of this decade in 2020-2021 time frame, coming out of the pandemic, there was kind of a historic drop in fuel demand. There was also a recognition from the international community, from California, from the California legislature that we needed to achieve emission reductions, greenhouse gas reductions, and carbon neutrality by 2045.

And funding coming in from the Federal Government in the form of incentives, tax credits, and other grants, you know, from the Inflation Reduction Act and other opportunities that opened up a window for a number of states' refiners to make this business decision to transition to lower carbon fuel production. With demand dropping, they had a small window to be able to close those refineries, invest billions in refurbishment and refi and changes to those refinery configurations to then switch to alternative fuel production. So I wouldn't say it was one policy. It was a combination of things that happened in the early part of this decade to get that investment into those renewable fuel production facilities to happen. Now we're seeing

But the policy changed to happen in what? 2019 before the pandemic?

So so if you're are you referring to specific

The LCFS.

The LCFS. The more recent update that happened for the low carbon fuel standard came out of the in response to legislation, specifically AB 1279 and the scoping plan. And that update happened in 2025, you know, last year that the update became effective. So this this it was after the refineries made the decision to to to convert to renewable fuel production.

But didn't some of those conversions happen, like, in 2020? Or they began in 2020?

It did. Yes. And

But the and the first change that happened with LCFS that would, I would say, sent a major market signal was, what, 2019?

Earlier than That. 2013-2017 Okay. Was when the low carbon fuel standard started to take effect, and then over time has become more stringent.

Okay. And, you know, I I just you know, I'm also believer that I don't think that conventional fuels I mean, I just think we're gonna be relying on them for some time, and I think especially with what's kind of going on, that's gonna be the case. And I think that we have our goals, but we also have the the hard realities. Right? And I think that there's, you know, all these things that occurred that now puts us in a situation of where people are worried.

People are worried about refineries closing. They're worried about the cost of your gas going up. They're worried about losing their jobs. They're worried, and they're relying on us to take the appropriate, steps and actions and do what's best for them. And so when it comes to this proposal, when it comes in general to the work that you do in in in your in your board and beyond, right, we gotta do right by the people because at at the end of the day, it impacts us all.

Energy security is something that that we all need that that we need it we need to have it. We need to have it here in the state of California. We need to provide that security to to Californians, and I just don't think that they're feeling it right now. I the other thing I also just wanted to point out and and or ask is, there was mention about tax liabilities and incentives. I mean, do you kinda see this this proposal as an incentive to to to move more so towards meeting our our decarbonization goals?

Yeah. And and I and I want to just kind of, you know, reemphasize and layering to exactly what what you said. And that is, you know, a big part of the strategy for for California is to bring in more supply of fuels that are both affordable and then meet our environmental goals. And so, policies like this tax credit, like our low carbon fuel standard, and others are creating the environment where you're getting this investment in renewable fuel production, and you're getting additional supply. What we've seen over the last few years is a really a pretty significant expansion in the number of firms that are able to bring alternative energy into California for our transportation energy needs, whether it's biofuels or electricity or hydrogen.

We went from a small number of refiners in California to over 200 fuel suppliers. And so it's strategies like these that create the investment environment for those fuel producers to convert a refinery or to open up a or refurbish an existing refinery that was shut down to be able to produce renewable fuels and bring more supply and diversify the overall fuel markets. What what happened, in the last year, was those tax credits that I mentioned from the Federal Government, the Inflation Reduction Act tax credits, there was a a promise of a higher tax credit on sustainable aviation fuel. So a number of, producers, made investments to switch to production of SAF. And then last year, the Federal Government decided to cut those tax incentives basically in half, which created a challenging investment and economic, situation for some of these firms who had kind of banked on those federal tax credits to be there.

So, you know, for us, it's how do you make sure that that supply of fuel is available in California and that helps meet our energy needs and also isn't continuing to rely on on a fossil fuel infrastructure that is, you know, against our environmental ultimately, our environmental objectives.

Right. But that was a risk that would could possibly happen. Right? I mean, I think there's with change in administrations, there's change in policies. Right?

Change in credits and grants and all sorts of things. And it's a risk, I guess, that that comes along with change in new administrations. Right? I don't have a whole lot more to to to ask or comment at this at this point. I appreciate your response and I guess that I we don't have any additional questions or comments on this item.

I wanna thank you for for coming up and answering our questions and and making a presentation, and we'll hold this item open. Thank you. So I know we're continuing with CDTFA, and I'm going to ask in the interest of time if we can merge items 89 and 10 altogether to discuss them as a group. Is that okay with everyone? Thank you.

Hello, madam chair. Yes. Alright.

Do you want me to be here with you?

Sure. Thank you. I'm Jason Mallett, CFO of the Department of Tax and Fees. I'm joined by Trista Gonzalez, our director, and a few colleagues, behind us. So I'll just introduce these three together and then we'll do some q and a.

Okay. So first up is the flavor ban. As background, California's flavor ban on tobacco that started in fiscal year 2023 did not authorize CDTFA to seize flavored tobacco unless the excise tax wasn't paid. Last January in 2025, AB 3218 and SB 1230 enabled CDTFA to seize flavored tobacco. Last year, we requested one year limited term funding from the Tobacco Compliance Fund because the volume of seized product wasn't yet known.

Now that we have better visibility on volumes and related costs to seize and destroy illicit flavored product, we're comfortable requesting ongoing funding of 3,800,000.0 in 26273.7 in 2728, and 1.2 thereafter from the cigarette and tobacco compliance special fund. Our request, ratchets down from 3,800,000.0 in 2627 to 1.2 in 2930 because we've had a lot of success in seizing illicit flavored products so far. So we expect our expenses to ramp down as less illegal product exists and retailers recognize, that there's enforcement. So that's the introduction to the first one. Next is cannabis.

As background, cannabis was legalized in 2016 through Prop 64 with official retail sales beginning in 2018. Policy was structured so the Department of Cannabis Control issues the licenses to cannabis operators while CDTFA collects the tax. Originally, there were three taxes. There was the cultivation tax on on harvested cannabis. There was the excise tax on the product and sales tax on the product.

From the outset, there was a steep learning curve for taxpayers because of the three taxes. Also, there were challenges to bring previously elicited sales into the legal system. To encourage compliance, in 2022, a b 195 was passed and simplified the tax code by eliminating the cultivation tax and shifting the excise taxpayer from the distributor to the retailer. A b 195 helped address the learning curve for taxpayers, but our team members are still seeing a significant amount of illicit product. CDTFA's goal has been and continues to be to bring sellers of illicit product into the legal market through education, outreach, and enforcement, and also to collect the right amount of tax as per the law.

This BCP requests 5.6 million from the cannabis tax special fund, which would increase funding to the level of actual spend last fiscal year 2425. The proposal effectively removes the annual shortfall in the cannabis tax fund that the general fund had covered. So that's the intro to cannabis. And finally, I'm on to AB 8.

So last year, AB 8 was passed, which strictly prohibits tobacco licensees from possessing or selling cannabis or intoxicating hemp at their business, And it integrates intoxicating hemp into the state's cannabis framework. The bill is implemented in stages. In phase one, which started this January '26, it banned tobacco licensees from selling cannabis or intoxicating hemp, and requires CDTFA to seize cannabis and intoxicating hemp from tobacco shops, and also issue penalties and suspend and revoke a tobacco license for licensee for having cannabis or intoxicating hemp under, an escalating, penalty mechanism, which we can talk about. And then the second phase starts in January '28, and that expands the definition of cannabis product to include intoxicating hemp and brings intoxicating hemp into the cannabis tax program. To implement a b eight, CDTFA requests $3,3 million in '26, '27, and ongoing.

Based on the two implementation stages, the $3.3 million is split in the budget year 85/15 between the compliance fund and the cannabis tax fund based on our seizure volumes. After the budget year, the split is 80/20 as the as intoxicating hemp is integrated into the cannabis tax program. Those are the introductions for the three tobacco and cannabis requests. We're happy to or, Seth, over to you.

Alright. Thank you. Department of Finance, any further comments?

David Ton with the Department of Finance. No comments so far, but we're happy to contribute to any responses or discussion that may, happen in this discussion.

Alright. Thank you. Legislative Analyst's office.

Thank you. Seth Kerstein, LAO. So we don't have any concerns with the real sort of nitty gritty specifics of the costs that the administration has identified to engage in a particular level of enforcement. So our comments and recommendations really just focus on sort of a couple of the bigger picture questions for the legislature to consider. Two key questions.

Number one, how much the department just in general should be spending and devoting to cannabis and tobacco enforcement and two, how to fund those efforts. And so regarding that first question, subject to some constraints such as the master settlement agreement, we view the degree of enforcement as fundamentally a policy choice and so we recommend that you approach these proposals in that way, not as sort of one time adjustments to strictly to workload, but as part of a broad sustained effort to address these very serious compliance challenges. And so in the area of tobacco licensing, to support this sustained effort, we recommend that you set up opportunities to revisit resources for that program, the tobacco licensing cigarette and tobacco licensing program in either the 2027 or 2028 budget process. That's sort of our first key recommendation. The second, our second set of recommendations relates to this issue that, that the department mentioned of having this, sort of structural issue in the cannabis in their allocation from the cannabis tax fund and making up the difference with general fund for a while now.

They certainly, just to clear one thing up that we don't dispute, they have the legal authority to do that kind of thing. But rather than doing that, they alternatively could have provided the same amount of support in a way that in our view would have been more consistent with legislative intent and would have offered you all more budgetary flexibility. And so to address this issue, we recommend that the legislature adopt the administration's proposal with a few key modifications. So the first one is as the administration is making this continuously appropriated augmentation from the cannabis tax fund to CDTFA, this we recommend that you reduce the department's general fund appropriation by the same offsetting amount. So in general, there is a legitimate concern that cutting spending on revenue departments can run the risk of being penny wise and pound foolish.

And that's why we're highlighting this particular opportunity because the administration's choice to redirect this specific amount of general fund resources in this way is difficult for us to reconcile with the notion that cutting those resources would leave a lot of revenues on the table. Second, we recommend that you direct the administration to switch over all funding for the cannabis tax program from the general fund to the cannabis tax fund not on July 1 as proposed, but rather as close to immediately as is practical. And third, we recommend that you consider, given this issue of what we consider to be an unwarranted use of general fund, whether new provisional language is needed to prevent this type of problem from recurring in the future. Thank you.

If you don't mind, if you can jump in really quick as a response. So I just wanted to add some clarification that Department of Finance does believe that departments have always had the latitude to redirect staff to address workload needs. As we mentioned in clarification earlier, in this case, CDTFA redirected general fund staff to work on special fund projects. From the administration's perspective, this is business as usual. And kind of to the reason why that administration was choosing to fund this from the cannabis tax fund, or from general fund instead of our cannabis tax fund allocation is because of the potential for downstream effects towards allocation two and three programs.

So allocation one programs are usually just administration. It's departments that deal with cannabis administration and such. Allocation two programs go to UCs in education and some research, and allocation three programs go to education. And so taking a certain level of revenues that they were expecting to come from that could create some negative downstream effects that could result in revenue shortfalls.

If I may respond to the, comment, mister Kirsty made about the general fund, a bit more. So he had asked, or recommended to cut our general fund budget by the 5,600,000.0. I'd like to shed some light, as to why we did not do a negative BCP for that. So so first, just to frame this a bit. First, our revenues have increased 30% from 74,000,000,000 in fiscal year 1920 to 98,000,000,000 last year.

In addition to that revenue increase, our efficiency has improved by 20%. In 1920, it cost us $60.82 cents to collect every $100 of revenue. That has since dropped to 66¢. So our efficiency has also grown. As you as you know, there have been some pretty big budget cuts over the last couple of years.

At CDTFA, we relinquished over 300 positions, which we believe is the largest of any tax department, and that resulted in a $50,000,000 haircut to our budget. 30 of that 50,000,000 was directly to the general fund. So we believe our general fund is appropriately sized. It's important to recognize that, you know, when we hire, it's very accretive to the state. So for example, every sales tax auditor generates 650,000 per year to the state.

In addition, last fiscal year, our audit activities alone, generated $850,000,000, and our collection actions generated a billion 3. Each of those individual buckets by themselves is greater than our entire department's annual budget. So, putting this to get putting this together, you know, we need the ability we need the budget to advertise and hire, and we think it makes much more sense to give us that budget to make more money for the state rather than prematurely impede our ability to advertise and hire and make, and make the revenues for the state. We think that is a bad trade off, and that's the reason why we did not do a negative BCP here.

Cobaltin?

Thank you, Madam Chair. So just on a couple of these streams, I'm trying to because the business as usual statement about we can move the administration's position as it has the ability to move staff resources around at will, including between general fund and non general fund activities or between general fund and enterprise activities essentially. And I just want to explore that a little bit because that's it's not clear to me that that is as business as usual and is taken for granted as might have been said, which is that if the choice if the decision is to you to redirect general fund resources to a special fund for the purpose of assuring that the special fund can have additional resources for downstream effects, That's very much a policy decision. That is not I've I've been a deputy director of a state agency before. That's not an administrative choice.

That is a budgetary choice about what our priorities are as a state. And and I and I think that has to be taken into consideration with the following comments. If we took that same general fund resources and put it into more auditors, then we could have potentially, given the testimony that we just heard, dramatically increased the state's general fund resources. So this is a policy and budget choice that's involved here. So I just wanted to go back to this question of why does the agency or finance believe that that should be the choice?

And if there were surplus general fund staffing general fund supported staff, then why not deploy them to auditors if we're not going to do a negative b c p rather than choose to deploy them, to backstop the cannabis fund?

Chris Hill, Department of Finance. I'd be happy to take the first stab at that. The administration believes that, like, as my colleague said, we didn't want to redirect resources in such a way that's gonna impact the downstream allocations two and three. And also, we don't believe this was leaving general fund on the table. It was just freeing resources to assist with other workloads, and we don't think this had a detrimental impact on the general fund revenue created by generated by the Department of Tax and Fee Administration.

So so what what where where were these general fund resources? General fund supported staff resources going before they were deployed for I'll

certainly defer to the department on the details. But from a holistic perspective, we believe that CDTFA was able to operate in this way and not impact the general fund you know, the total general fund generated revenue for the state.

I can add a little bit here. So when we hire someone, if we hire an inspector to do inspections, they may go to tobacco shops or cannabis dispensaries. Or if we hire an accountant, they will reconcile various funds. We hire people to do a responsibility. And then the demands of the they allocate their time based on the demands of the job.

In this case, for cannabis, you know, as, as you know, there are there are a lot of challenge with challenges with cannabis. And, you know, when we go to do an inspection of a tobacco licensee, for example, and we find, cannabis is being sold there illegally, we cannot just leave illicit product on the on the shelves. So we so we seize that product. And in this case so that inspection would then become not only a tobacco inspection, but also a cannabis inspection. In this case, cannabis required more time, and so that is where we spent that time as needed.

These are the same folks allocating their time as the demand of the market, you know, necessitates. With regards to funding, so first, as as mister Kirstein said, the cannabis tax fund is continuously appropriated up to 4% of revenues, or roughly $25,000,000 So we had ample room there. The the thing is we are lim as a department, we're limited to how much money is actually transferred into that special fund. And also, we have this public BCP process where we request an annual appropriation. In this case, for cannabis, that's been 10 to 10 and a half million dollars a year.

So we try to stay within our annual appropriation. But again, in this case, there was just so much illicit product out there. We cannot leave it on the shelves, not only for financial reasons, but also non financial reasons, you know, fair competition, public health, etcetera. And so we needed to spend the money to to seize the product for enforcement. So that's we consult you know, each year, we consult with Department of Finance very closely on our plan our budget plan and also potential shortfalls.

So we work together with our partners, and it was decided to use the general fund to fill that shortfall.

Thank you, senator, for the the questions. So I think partly getting to your your question about is this should we consider this more of a of a policy choice versus something that's more strictly sort of operational. I think that that's dovetails in some ways with the some of the points we're trying to make in our analysis in terms of having used general fund for this versus the continuous appropriation authority from the cannabis tax fund because the Department of Finance's stated rationale for avoiding the use of those cannabis tax fund dollars was to protect spending to protect resources for these other programs. But of course, if they had used Canvas tax fund and reduced that money and let those general fund resources revert to the general fund instead of spending them for this purpose, those same general fund dollars could be used by the legislature to support those same programs in the exact same way if that were the legislature's priority or it could be used for myriad other purposes. And so that same outcome could have been achieved, but in a way that would have allowed the legislature to have some say in how that were done.

So yes, this is exactly the point. This is why this is the essence of what legislative oversight is about, which is the explanation that we heard two explanations for why this happened, one of which made sense to me, sort of, which is that, you know, we're already on-site. We need to do you know, we need to we need to meet our statutory obligation to to enforce, although we still should be billing the appropriate the appropriate account, whether they were, you know, whether they're principally general fund staff, if they're engaged in the cannabis activities, and they should that they should that should be properly accounted for. But then the other explanation was that we wanted to protect the downstream other other uses and as LAO said more elegantly than I did, that is that is not an administrative decision. That is a legislative and gubernatorial decision very clearly, and it is not appropriate for departments to be to be to be making these kind of allocation decisions, which are within their legal power, but they're in their legal power in order to administer the law, not to make policy choices about whether or not we want to protect downstream users of the cannabis fund by not billing that fund.

So I just I want I want to say that very clearly because it's the kind of oversight that this budget subcommittee has been focused on, and I appreciate the chair's attention to and focus on doing this, but those are those aren't easy choices, and I wish we didn't have to make them. But we do have to make those calls, and I look forward to trying to resolve these going on a going forward basis. I wanted to follow-up also on the hemp side of the equation, and that is with respect to and maybe this also applies on the cannabis side, which is to the extent to which these a couple or all three of these proposals will improve enforcement, which we desperately need, and hopefully also to help balance the to achieve the right fund balance here. When what's the trajectory, the magnitude and the indicators of how we're succeeding in those domains? How will we know when and and at what level of outcome can we can we expect?

Sure. I'll take a first crack. We'll need to look at each program, discreetly. So for the tobacco flavor ban, there, we can we look at our, seizure rate and seizure volumes. And, you know, last year, that was the start of when we had the authority to seize illegal flavored product.

We didn't know what the volume was going to be, and so that's why we asked for one year limited term funding. Now we have a pretty good idea, and we've got, we've got a lot of traction. And and there's a lot of flavored product out there, first off. And that flavored product actually became illegal in December 2022. Only recently did we have the authority to seize it.

So we're finding a lot of that. And our team believes, that, you know, as we're able to seize the all that product, there will be less of it out there. And retailers will know that, you know, there's there's real enforcement going. And that's exactly why our request ramps down from 3.8 million to a 1.2million in the out years. So that's the indicator there.

With respect to, with respect to cannabis, as Mr. Kirstein said, part of this is a policy choice of how much do we want to invest. And, you know, there again, there are financial and the nonfinancial reasons. What we've requested is to maintain our spend from last fiscal year, 2425. And there, we are still finding, you know, a lot of illicit product. I can give you some numbers if that's helpful. I'll just give you one number that's, I think, particularly relevant.

Okay. So, last fiscal year 2425, this is for cannabis only, we conducted five ninety inspections. Of those five ninety inspections, we seized we did five forty seizures, so roughly 90%, five forty. Of those five forty seizures, four forty were at tobacco retailers, and the other 100 seizures were at cannabis dispensaries.

Of those a 100 at cannabis dispensaries, all 100 were from unlicensed dispensaries. And so I think, you know, we will know we are successful in, you know, closing the enforcement loophole as our yield on enforcement actions goes down. Hemp? With hemp, that's, it's similar to cannabis. So so hemp, you know, has only recently become intoxicating hemp has only recently become, illegal.

There's not a lot of good reliable data out there, which is why our revenue estimate is very wide. As we get better data, we'll be able to inform you so you can make choices on our on funding. But, you know, in the meantime, we do think this a b eight, adds a lot of teeth to to intoxicating hemp because in the past, even though it was illegal to sell cannabis and some of these gummies, delta eight type gummies that are intoxicating hemp, even though that was illegal, we didn't have the ability to to to cite, find, and seize the product. Now that we can, we're finding quite a lot of it. And, for a tobacco licensee, where they make a lot of money on selling their product, this has real teeth in terms of enforcement because there's a, there's a waterfall chart of, violations.

Upon the first violation, if you, you know, if you're a retailer selling, intoxicating hamper canvas at your tobacco shop. The first violation is we seize site and fine 1 to $2,000 Then we go back, and if there's another violation, we seize site fine 2 to $5,000 and suspend your license, tobacco license. And then upon the third violation, we see site and fine 5 to $10,000 and we revoke the violation. So this is, we think this will be effective, at, at addressing the intoxicating at tobacco licensees.

If I could just say add one more thing to just, I wanna clarify that CDTFA did, in fact, coordinate with Finance on the use of the general fund versus the cannabis tax fund. They didn't just do that unilaterally. They did go through proper channels.

Well, I really appreciate your guys' presentation here today, and I know you we have one more item with CDTFA, and we'll go ahead, leave this one leave these items open, and we'll move on to the next one, which is agenda item number 12.

Great.

I'm sorry. 11.

Okay.

I got a little ahead of myself.

No worries. Okay. So as background, decentralized revenue opportunity system or CROS, is the department's tax distribution system that covers all of the 42 programs that miss Gonzalo mentioned that generate over 96 billion a year for the state. It was implemented in 2019, so we've had it for for some time now. Our request is, for a re appropriation of 3,800,000.0 from this fiscal year, 2526, to next fiscal year, 2627 to deploy a significant upgrade.

The upgrade will do a few things. One, it will enhance taxpayer services. For example, there will be a single sign on and a face ID. So it's easier to log on, and improve navigation. Second, there's stronger security.

For example, there's automatic masking of confidential taxpayer information and faster restoration in a disaster. And third, it updates the program programming language to current standards, enabling easier programming and improvements in the future. And just for the avoidance of doubt, this request is for no incremental funds. This is a timing shift from this year to next year.

Thank you. Any, comments from Department of Finance?

No comments at this time.

Okay. Great. LAO? None? Okay. I I will have no questions for you at the moment. Thank you so much for that presentation.

Thank you.

And we'll hold this item open as well and move and thank you again. I know it was a lengthy one for you all, but we'll move on now actually to item number 12. Now we turn our attention to agenda items involving the franchise tax board. So item number 12 is an overview of the department. And just begin when you're ready.

Is that close enough?

Yeah. You're good.

I first, I did have a question for you. If you would like us to go through all three items and then ask questions at the end, or

works. Okay.

if you wanna That

Great. I'm okay with that. Okay.

Alright.

I'm Roger Lackey. I'm the chief financial officer at the franchise tax board. With me today is Abel Escobar. He is our director of our Financial Management Bureau. Today, I'll be covering item 12, the overview of the franchise tax board, as well as item 13, which is the EDR2 BCP.

And Abel will handle our mainframe BCP. So for the overview, mission of the franchise tax board. Our our mission is to help taxpayers to file timely and accurate tax returns and pay the correct amount to excuse me. Correct amount to fund services important to Californians. To accomplish this mission, we develop knowledgeable and engaged employees, administer and enforce the laws with fairness and integrity, and responsible responsibly manage the resources allocated to us.

We administer two of California's major tax programs, personal income tax and corporation tax. We are also unique because we also collect funds for several non tax programs. Delinquent debt for, delinquent debt collection funds include vehicle registration, court ordered debt, and we conduct audits for the for the political reform act. The franchise tax board helps administer programs responsible for approximately 78% of California's general fund, which is approximately a 166,000,000,000 for both personal income tax and business entities. Key items of interest, we have approximately 6,500 permanent employees, and we bump up closer to 7,000 with our temporary staff during peak season.

We maintain offices in New York, Chicago, and Houston. Within California, we also maintain offices in Southern California and the Bay Area. In 2025, we received and processed 2323.1 tax returns. That was 21.5 for personal income tax and 2.6 for business entity, which is our corporations and our pass through entities. We also received and processed 15,000,000 payments totaling over $102,000,000,000.

Take note that withholding is remitted through the EDD, and then the records are moved to us, so that we use that during tax processing to ensure taxpayers are credited. We also issued 15,000,000 refunds to taxpayers totaling 28 excuse me, $28,200,000,000 of which 3,500,000.0 of those were refunds for Cal EIT. We provided direct customer service to taxpayers for phone and chat of approximately 2,700,000 taxpayers. And with that, that's a brief overview of our programs. And I'll do you wanna ask questions now, or would you like me to go through the BCPs or come back?

It's I'm are you sure? You seem I'm ready to answer if you wanna go.

Okay.

Item 13. The EDR 2 BCP. This is our final BCP supporting the enterprise data to revenue phase two EDR project. Before diving into the proposal itself, I'd like to share a little bit of background. In 2007, FTB introduced the tax system modernization plan.

A 30 strategic vision comprising three major initiatives. Each initiative spends approximately ten years from planning through implementation with each phase building upon the foundation established in the previous. Phase one, the initial EDR project established our foundational enterprise platform and modernized both tax return and payment processing and correspondence workflows. Phase two, the project that we're here for today, EDR two, has moved our compliance workloads, audit, legal, collection, and filing enforcement under the shared enterprise platform created in EDR one. The planning for this project EDR two began in 2016 and implementation efforts began in July 2021.

Implementation releases were carried out through a phased approach that allowed us to take small measured steps and to scale up reducing risk of negative impacts to FTB operations and most importantly taxpayers. We call it our crawl, walk, run approach. Also referred to as CWR. In 2023, we introduced the personal income tax audit and protest workloads to the enterprise platform. In early 2024 we incorporated the pick collections workloads.

And later that year, the remaining audit and protest workloads for pass through entity and business entity cases. In 2025, we transitioned to BE collection and legal workloads, and later that year implemented both the personal income tax and BE filing enforcement workloads. Each implementation also brought new self- services, expanded our modeling capabilities, added data visualizations, and the ability to leverage additional data capture both for state and federal.

its final implementation release and we entered the warranty period, which extends through the end of the 2026 calendar year. During the warranty period, we will continue to focus on maturing the functionality and completing project close out activities. Following the statewide process established to support funding for larger projects and annual BCP is required for new costs related to the year. This year's proposal is the final proposal for this project and the request and augmentation is as follows. 59,857,000.000 in 262723.975 in 272817.635 in 282917.64 in 293017.637 in 3031 and ongoing, and the full time equivalent of 20 permanent positions.

January, the project successfully completed

The 2627 fiscal year, the payment which is larger includes $30.2032,800,000.0 for the payment to the solution partners. In addition, the proposal includes 12,000,012 million for annually IT asset transition software. And then please note throughout this project, FTB has used a just in time approach to requesting resources. We're asking for resources for the same functions across the years as they have been needed. We have noted these ongoing limited term or one time cost in our BCP documentation.

Lastly, the statewide policy requires a special project report to be submitted when there is a 10% more increase in schedule or a draw when there is a scope change. However, due to the size and magnitude of the EDR two project, the project is subject to the special condition where an SPR is also triggered if costs increase by 5,000,000 or more. The EDRT project project submitted and received approval for its third SPR for this project. While the project scope, schedule, and date remain the same, the total project cost increased by approximately 17,000,000 or 2.2% of the total draw. These additional costs are necessary as the project is 99% complete.

It's entering its first year of implement our final year of implementation from development to the warranty period and operational support. Solutions, targeted updates to staffing and and support contracts are required to support maintenance and As mentioned, the project is 99% complete and with a strong effort by our FTB staff and our solution partner, this project is a success and we look forward to finishing the project in the 2627 fiscal year. And with that, I'll pass it over to Abel to cover our mainframe.

Good afternoon, Senate members. I am Abel Escobar, Director of Financial Management for the Franchise Tax Board, here to present Item 14. Item 14 is FTB's BCP titled Mainframe Workload Growth, and it requests 13.1 million in fiscal year 26-27 to replace primary and disaster recovery mainframe servers and 389,000 in fiscal year 27-28 and ongoing for the maintenance. The Financial Tax Board's mainframe primary and disaster recovery mainframe servers have reached end of This necessitates a critical refresh to ensure continued system reliabilitymarket, meaning that these servers models are no longer being sold., performance, and security.

A mainframe server is a high performance computer equipped with vast memory and powerful processors capable of handling billions of transactions and calculations in real time. It is a mission critical system known for its exceptional resiliency, security, agility, and which are essential qualities for FTB that demand reliability at scale. These mainframe servers process data essential to FTB's mission critical tax and non tax applications that support filing, collections, audit, non filer processes, as well as web self-service. A timely refresh of these critical hardware and software components allows FTB to maintain operational stability, current and future mainframe needs, backup data, and mitigate risks associated with running a system past end of market such as network constraints, software compatibility risks, performance degradation, and limited new component availability. If the mainframe servers are not refreshed before they reach end of market, FTB may not be able to timely process tax returns, payments, and issue tax refunds impacting Californians.

Additionally, FTB may experience failures in the systems that house vital and confidential information and risk the ability to recover mainframe services and applications in the event of a disaster or ransomware attack. These risks may lead to the loss of revenue and critical information, inhibit recovery from an unplanned disruption, and prevent taxpayers from filing their taxes in a timely and accurate manner. As Roger mentioned, FTB is responsible for administering the income and franchise tax laws for the state of California. FTB's data center, which hosts the mainframe environment, provides the necessary operating and storage capacity for FTB to administer its program successfully. As a result of FTB's efforts, in fiscal year 2425 these servers helped FTB process more than 22,800,000 tax returns, over 9,900,000 payments, responded to more than 3,100,000 telephone calls, serviced over 59,800,000 Internet contacts, and collected about $166,000,000,000 in revenue.

This represents approximately 78 percent of California's general revenue general fund revenue, which is critical to fund programs and services for Californians. And with that, we'd like to thank you for your time and support, and happy to answer any questions you may have.

Thank you, for presenting on those three items. Do we have any comments from the Department of Finance?

David Ton with the Department of Finance. No comments at this time, but happy to answer any questions or concerns that may come up in this discussion. Great.

And LAO?

Roland Isaacs from the LAO. We're not raising any specific concerns with either of these proposals. Thank you.

Okay. Great. And any questions, comments from my colleague to the right?

One more now.

Me too.

So I'd take that as a no. Okay. Well, I'm gonna I'm gonna try to take a shot at it. Well, first and foremost, thank you so much for your patience, and also for presenting all three on all three items. I guess anyone that really wants to kind of answer some I mean, it just I'm concerned about, I think it's a the number 13, the enterprise data to revenue project phase two.

It's a 17,000,000 increase, and it's been going on, you said, since 2016 at the start of the project?

The planning began in 2016. And so then the active project itself began in 2021. And so the so the planned cost of the project at the beginning where there are what we understand at the time related to the am I am I close enough?

Yeah. Go ahead.

To the the technology I am talking about the yeah. You're yeah. You're too busy. So the the planning at the time related to the project in terms of what we estimated the cost to be, and then working with the vendor. Looking at tax software, hardware, all of those things.

Those things are estimated out at that time. And then as you move through the project, you learn more details about the implementation, the infrastructure, what's required, changes in technology that are taking place. And so those adjustments have taken or have occurred over the life of the project, including the additional costs here for this the SDR.

Okay. And and so how long so can you say that again? How long is has it the planning piece been? Like, how long did that take?

So the planning of the the beginning of the print the planning, so working on through the r f the RFI, the RFP, process, the business problem analysis, all of that began in 2016. And then for the 2021 BCP, so the first one, so that's the cycle ahead. So 1819 would be when the the cost and the the estimates were being actually determined to put the project together to make our requests. And then each year as we've gone through the development of the project, there's been small adjustments to the scope, cost. There has not been any change to the scope.

So the delivery of what we anticipated from the beginning remains the same. The schedule itself remains the same. It's just adjustments to the cost. The overall project itself is $802,000,000 And so as a as a percentage of that, it's 22 and a half percent. So it's somewhat, small when you look at the scope of the overall project and the cost associated to the project. But I do understand, you know, $17,000,000 is a lot.

Well and you said that well, that's just for one year. And you said there's been also add ons over the time of the project. Right? And and it's implementation, and that's what's the total so far?

So the first SPR adjustment was 13.9. The second adjustment was 18.4, and then this adjustment is 17. So the total is 49,300,000.0 over the project.

Over the 800. And what were the the reasons for

Similar. Very similar. So I mean, what I see in the in in the, BCP is FTP will not be able to meet contractual obligations associated with the EDRT project. So I don't know if I missed it in terms of why there's an increase, the 17,000,000 increase this year. So is that is that a similar reason for the increase than previous?

Yeah. Each year that the what's taken place is there's been a when I when I say adjustments, it's really estimate. So when we started out you started out a project and you're putting it together, you're identifying, like, this is what we expected to take. This is this is the number of the pieces of hardware we might need. This is the software licenses that we might need.

And so then as you get closer and you're actually implementing some of these different phases, then you're making adjustments to those. And so that's through those adjustments that the costs continue to increase over time.

Okay. And what is the the the the lifetime of the of the product that that we purchased, once it's been implemented.

So the the m and o, I think, goes out five years. And so we'll go through the maintenance and operations to maintain the the software hardware services, the inter vendor related services. And so that there in terms of end of life, there isn't an end of life at this point. I think one of the things that we're talking about when we move forward to modernize Do

we know that for sure though? That there is no end of life?

The methodology is what I'm talking about. Okay.

He's approaching is that, you know, we also have our mainframe BCP that that we're talking about as well. Right? So the the life of those systems when they're over, like, they were and then those things were in 1993, '94 when they're put together. Our accounting systems that haven't been replaced at which will actually be part of our EDR three project. Ninety's.

And need to be replaced. So those are kind of it could be end of life. The collections, platform is over twenty years old. Our filing enforcement platform over twenty years. Yeah.

Our audit platform over twenty years. Service for the soft the the vendors not supporting some of the software, getting more difficult for us to actually be able to maintain, putting our our our compliance revenue streams at risk. Maintain? It's given over You're you're somewhat one of the constraints, if you want, for to give you like a very firm answer. We're also going to be dependent on software as well.

How do they maintain that? You know, Pega is one of the How long do they go ahead and they continue? So I can't give you a definite date, but one of the reasons that we moved to being a more modern platform is that it is much more software cloud based. And so the ability to be agile and move forward and not have to build a very large mainframe accounting system, return processing system, that's the strategy that we were approaching. I know that was kind of long No.

No. I the answer to that. I could get you there. But I was I was trying to provide context.

No. I really appreciate that. And and I think that you with the answer that you provided, I feel like there's definitely concern there because I mean, what I'm understanding is that you started planning for something in 2016. Is, I mean, is there any way that that you could speed this up to, like, from the start to the end? Right?

Because I mean, I just feel at this point, it's 800 over $800,000,000 on something that's already at a ten year mark. And then we don't know what the, you know, the the end of what is it? End of life? Is that what they call it? We we don't know that. I mean, what if it's, like, two years or three years after that?

Not likely. I mean, it's so I but I under I understand your point is

But it's unclear at the moment. Right?

Accelerate the planning. So for our third project, we actually already internally are starting to work on that business problem analysis, in this next fiscal year, so that we can work through that and then lay it out for a so I do appreciate I think we'd all would like to to move a bit quicker in terms of implementation. We are very deliberate about things. Part of that has to do with with what it is that we're changing, and that we're actually also set on a cycle when everything is actually focused on return processing. Specific hard dates that we have to work through.

So that we take all of those things into account. Also have to take into account the dependency on the state, for what we do in terms of business and how we support Californian citizens. Through it, but I will take it back and talk with my executive officer, our team, about how can we accelerate our planning for our third project. So to avoid this conversation.

Yeah. I mean, look. I'll what I'll just say is that, you know, know, what some some of the things I noticed is, like, trends. Right? And so I hear from folks and others, and I think this is kinda one of those trends right here, end of life, end of life.

And we need to come up with a new system, and it's, like, millions and millions of dollars. And it's not just, you know, you know, and you're in here with the franchise tax board, it's across everything. Right? Even even at the local and county level. And so I I think that that it's something that we'll probably have to scrutinize a little bit more across, you know, government, not just here at the state level or with you, but this is something that I think we definitely need to be thinking and talking about more openly.

And I'm just surprised that there was no really nothing on from the DOF or LAO to kind of I don't know if that's something that you guys captured or not. I'm just a little shocked, to be honest. But, you know, it's it's, again, it's something that I've I've been noticing, and I'm hoping that we can have some conversations. Because, again, I think, I mean, try to explain that to someone outside of this building, and I'm sure they'll be really upset about, you know, something lasting this long and still adding cost to it. Right?