Assembly Budget Subcommittee No. 5 on State Administration

Good afternoon, and welcome to your favorite budget committee, budget sub five. Did you all miss me yesterday? Well, today is our last hearing of the year, and I might be my very last hearing ever depending on how the budget goes in August, but it could be. Anyhow, we know that this work is done by many, and we are thankful for those individuals who spend all their nights and weekends pouring over numbers just to present us with the information we have.

So sometimes we can be extra grouchy or extra happy.

Depends on the issue that you support. But I do wanna acknowledge our friends from the department of finance. Where are you? Department of finance. Raise your hand.

Really, really big. Really big. Department of finance.

They're they're very shy.

Don't act so shy. And, of course, our nonpartisan legislative analysis office. There they are in the front row. Super super. Alright. And, of course, we have committee consultants that really are the ones that are doing so much of this work to present to myself and the members of our committee, the members of our committee.

With that, we have our chief consultant, Christian Griffith, and he is so smart at what he does. He actually goes into the district and checks out what we fund through the state to make sure it's happening. And I know that because I had a budget win a few years back, and he can actually tell me if it's progressing.

We have our, wonderful Genevieve Morelos, who you know works tirelessly on some of the issues I'm passionate about, but all of the issues under this committee, Guy Stroll, who will be joining us, and, of course, Bernie Orozco, whose birthday it is today. So let's say happy birthday to Bernie.

And, of course, who can forget over here, mister Brett Finkel? Let's give them all a round of applause. Our counterpart, the Senate, is also having a hearing on some of the May revision items at the same time, And, we will be having our some of our members going between committees, as they are keeping an eye on what's happening in the Senate, and we are too. This is an in person hearing with all panelists testifying in person.

We will take questions from members of the subcommittee after each panel and public comments.

Bear with me. I'm gonna say thirty seconds because I know we have a lot of people coming in on public comments. If you want to speak on items that are on, not on today's agenda, they're not on today's agenda, but maybe they were from yesterday and you didn't get your comment in, we will take them, but it will be at the end of the hearing. Otherwise, we'll take public comments in the order of the item on the agenda. We got that?

Alright. If you are unable to attend this hearing in person, you may submit your comments via email to [email protected]. And with that, we will begin issue number one, our state controller's office May revision proposals. And then if you could please, introduce yourself as you speak and which group you're from because even though we know who you're from, the public doesn't always know that. Thank you.

Madam chair and members, my name is An-Vi Ching. I am the budget officer at the state controller's office. We thank you for the opportunity to discuss the 2026-27 requests before you. As the chief fiscal officer of the world's fourth largest economy, SEO holds primary responsibility for the state's financial accounting, reporting, disbursement, and auditing of financial resources. The state's credit rating, access to capital, and ability of our various government jurisdictions to issue bonds is reliant on the work that we do.

The first item before you is the SCO fiscal book of record post go live support stabilization and legacy retirement. SCO is requesting $11,610,000 for consulting services to support these efforts. The second item before you is the Broadcom Computer Associates Integrated Database Management System or IDMS. This is for software license licensing cost technical adjustment. This reduces funding by $351,000 in 2026-27 to reflect the actual executed contract renewal amount of $9,612,000 from the estimated amount of $9,963,000 that was included in the governor's budget.

For the third and fourth items regarding the California State payroll system or CSPS project, SCO was preliminarily approved in the governor's proposed budget for a $117,000,000. Item four is an adjustment to reduce this preliminary funding by the $117,000,000, and item three replaces this funding in the May revise with a request for 14 permanent positions and $96,000,000.

This is to support CSPs as it begins design, development, configuration, and implementation of the new personnel payroll and travel expense management system for the state civil services and exempt employees, state court, and California State University employees. The fifth item before you is the annual comprehensive financial report or ACFR. This is financial reporting automation and engagement support.

SCO requests $2,355,000 for consulting services needed to provide generally accepted accounting principles financial reporting assistance to various state departments and sustain on time publication of the state's ACFR. The final item before you, SCO is requesting $3,000,000 in unclaimed property fund in 2026-27, and ongoing to support the unclaimed property program public awareness efforts. This will be used to educate Californians on the 15 plus billion dollars being held by the unclaimed property program.

How much did she say?

On behalf of the California state controller, Malia M Cohen ask her. We appreciate the staff analysis, acknowledging the significant progress made by SCO, including the dramatic improvement in the timeliness of the ACFR, our significant progress on CSPS, and the state's movement toward fully implementing the fiscal book of record.

The staff analysis specifically noted that the most recent effort was only forty seven days late after years, eight to be exact, of delays exceeding a year, calling it an incredible improvement by the controller, Department of Finance, and the Department Accounting teams. The analysis also recognizes that the legislature and this subcommittee in particular have championed our modernization efforts and that the controller has responded excuse me. It responded with meaningful operational progress.

More importantly, it also identified a major gap around audit capacity and accountability oversight, noting that SCO currently lacks resource capacity and appropriate funding to support strategically targeted audits despite increasing legislative demand for fraud, waste, and abuse, and mismanagement oversight. The analysis further stated that having this additional audit capacity is critical part of any effort to find fraud, waste, abuse, or mismanagement. The controller welcomes the opportunity to explore how our office is properly invested in to fulfill this constitutional responsibility.

As for the proposals before you today, we have worked closely with the department of finance and we have staff available for each item to answer any questions you may have.

Thank you. We will go to the Department of Finance.

Xin Li, Department of Finance, we had no concern with the proposals.

K. And LAO?

Xin Ma with the Legislative Analyst's Office, We have no concerns to raise on, the items that the state controller presented on, but just one thing to note for the, California state payroll system project. The level of funding that was requested is less than what we expected just based on the most recently approved project documents. Thank you.

What? Can you say that again? Please. What you just said.

Yes. The request is less than what we expected from the most recent approved project documents.

Okay. Less. Yay. We have to have a little fun, budget friends. Alright.

I do have some questions.

So, generally, I don't have any issues. We just didn't have some of this information presented in January. So that would be one comment, not really a question. But, secondly, I do see FI$Cal on here, and I've heard a lot about this program for quite a long time. Can you just give us a background and when do you expect it to be completed?

Good afternoon, madam chair and assembly members. My name is Laura Taylor Kerbachek. I'm the acting chief of SCO's FI$Cal division. As far as when we expect fiscal to be completed, our our next and final milestone is this July 2026, where FI$Cal will become the state's accounting book of record.

And can you explain what that means? What will it do?

Yes. All departments will be required to transact in FI$Cal general ledger. We will no longer be utilizing SCO's legacy general ledger system as the book of record, and so FI$Cal will actually become the book of record. That includes both what we call FI$Cal departments and deferred and exempt departments.

And this is how we pay the bills, basically? Yes. And are there any unique features that we're gonna be so excited in July about?

Yes. I'll be very brief. We will no longer be required to run parallel systems or a number of interfaces go back and forth between FI$Cal and legacy. And so you'll see automation, efficiencies in auto approvals, better response times, and also transparency of data because the data will all be in fiscal.

So if you are a budget person or an accountant or anybody who gets paid by the state, you're gonna be really excited in July. I see some smiles out there. Yes. We will be so excited. And how long did this take us to complete?

The SCO has been a partner on Fiskell since the beginning, and we have been doing what we call the integrated solution since 2017, where we started to slowly increment pieces of SCO control functionality. And this is the last phase where we are ending reliance on legacy for the most part and transitioning to fiscal.

So we should be extremely excited. Right? Assembly member Caloza? We're very excited. Chief consultant is very excited here.

I know he can tell. We have to get excited about the budget, friends. Alright. I like that. Alright.

Let's go to item number three. Oh, no. Not item number three. Three under this item. Let's see.

Another noteworthy note in this, item is that you you completed, a report, and you were only forty seven days late. Can you explain that?

I apologize. Could you please repeat the question?

Under, the annual comprehensive fiscal report, it's noted, that the report was much more timely than it has been in the past, being late only forty seven dates compared to can you compare it to how late it was before and why we're excited about that?

Yeah. This is Ted Lambert from the state controller's office. We're very excited. This we're just grateful for the investment that was made in us. And one of the reasons why we have been able to do this is the partnership with all of the agencies, department of finance, and a lot of efficiencies that we've created internally.

The last cycle only took eight months to do, which is the fastest we've ever done it. The expectation in the future is that we will be similar to that. And so, we're just really excited about that and, you know, continuing it.

Alright. Well, good job. We appreciate that. Thank you. Everybody give them a little cheer.

Alright. Thank you. So my last question would be on our unclaimed, property, which I appreciate you need more individuals to help process that. Can you tell me how much total unclaimed property there is?

Yeah. So, Ted Lambert, I also oversee unclaimed property. Right now, there's about $15,000,000,000 that we're holding in the program. Coming up June 1, June 1 through June June 15 is the big remit period where holders of unclaimed property remit to the state of California. And we're expecting probably, you know, based off prior years, we're expecting another 1.5 or $2,000,000,000 to come into the state.

So, you know, one of the things I wanna note is a couple years ago, we we received investment to go from paper to electronic. This is the first year this fiscal year is the first year that we've gone fully into that system with it was around September 2025. And obviously there was, you know, training that we had to do, get staff up to speed, all of that.

As of right now, we've really worked in it for about eight months, and we've already received more claims from Californians and processed more claims than we have in any other fiscal year. So we're really excited about the success and the efficiencies that it's created.

But we still know that there's people that we need to reach, and that is the reason for this proposal.

Alright. Well, I appreciate people getting, their unclaimed, property quicker due to electronic. Can you I should know this, but I don't, and I apologize because I don't think I've asked the question. What happens with the money? How long does it sit there, before you would start to turn it over or just because $15,000,000,000 is a lot of money.

In a period where we're looking for money. So how long does it stay in this account, before it can be moved?

Can you be more, be moved?

Like, moved to the general fund, or can it?

It's usually we hold enough in that actual fund to pay open claims. The rest is transferred into the general fund.

How often is that transferred?

It is. We do an evaluation on a monthly basis, but typically, the big month is June. That's when we get in our roughly $2,000,000,000. And so it probably only sits in the unclaimed property fund for maybe a week.

Just to add, Anne Hollingshead from legislative analyst office. So the state does maintain, sort of, a permanent, obligation to any citizen that would come forward for their unclaimed property. But, the unclaimed property fund is transferring funds to the general fund regularly, and in fact, it's the general fund's fourth largest revenue source.

Alright. And most of the claims are somewhat small, $200, $500. What but what would be some of the large claims people might be missing?

There's million dollar claims, but like you said, probably 80% of the claims are under $500. And so, you know, they are, I guess, to some people you know, depending on who, it's significant to some, different to others. But I think it's somewhere around 80% of the properties that we have are are under that amount.

So the this additional funding will help you do education so we can get people to claim their un claimed dollars.

Correct.

Alright. Great job. Assembly member, do you have any questions on this whole first we did items issue one.

Sure. Thank you, madam chair. Welcome back. Thanks for your presentation. Just to follow-up, I just had some additional questions on this item, item six.

Can you just share what $3,000,000 will be used for specifically? It's a lot of money for, broadly speaking, outreach. Can you describe what activities you're planning to spend money on?

Yeah. So one of the things that we've done recently is proactive outreach where because we're now an electronic system, we can look at the information of individuals who are in our system but haven't claimed the dollars. So one of the things that we've done recently is send out letters to them to let them know that this is here for you. We have their best address through LexisNexis. And then, we in order to not generate more work for our staff, the claims are preloaded in the system.

And so all they have to do is come on, acknowledge that it's them, and hit submit, and then they will get a check-in the mail in about a week. So that is one of the efforts. We're also doing bilingual ads either in social media, potentially high visible, whether it's airports or or places where it will attract attention.

Thanks for sharing that. If you can maybe have your team work on outreach materials, it would be helpful to share with assembly members. We all have newsletters. We do outreach. I think it's a really important program because we're always trying to figure out how do we, put money back in our constituent's pockets, if there's unclaimed properties there.

It's on, claimit.ca.gov. There's your first PSA today. So folks can look up their name and you may or may not have money waiting for you. So, yeah, we'd love to work with your office on any outreach materials that you may have so we can distribute.

And so just to add to that, one of the benefits we have right now is we can actually identify the people in your district. So if that's something that. You're interested in, we have that information. And we have been more proactive working with counties and cities in identifying people in certain areas and getting the word out that way. So if there's anything that your office wants to do with unclaimed property, we're we have the ability to do it now.

Okay. That's super helpful. We'll definitely follow-up.

Alright. Thanks.

Thank you so much.

Alright. Can you say that that claimit dot

Sure. At claimit.ca.gov, madam chair.

Alright. Claimit.ca.gov.

Thank you.

Go get it.

Thank you.

Alright. Thank you. Alright. We're going to take this to the public. Anybody wishing to speak on this item, our first item, state controller's office?

Anybody wanting to speak on item number one? Seeing no one running, we will close this item. Thank you to our chief consultant, Christian Griffith. Alright. We are going to our next item.

Item number two, California Department of Tax and Fee Administration.

Good morning.

Good morning, madam chair, members. Colby White, Department of Finance. So I'll be presenting issue number two here on the agenda. So taxation of pre pre prewritten digital software. This is one of three solutions, three revenue solutions that the administration is proposing as part of a balanced approach to restore structural balance.

Beginning on 01/01/2027, the administration proposes to align California with the majority of other states with the sales tax and extend sales tax to sales of electronically delivered pre written software regardless of how the product is delivered to the purchaser. Pre written computer software refers to computers programs not designed to the specifications of any single user.

Electronically delivered pre written software can be transferred through the purchaser through a download or other means or or where the purchaser takes, possession either with a copy or persistent access to the software. Software as a service is also prewritten software, hence it will be subject to sales tax under the administration's proposal.

But unlike pre written software delivered electronically for installation on a customer's device, SaaS is hosted on a platform controlled by the vendor, and the customer obtains a right of access rather than a copy of the program.

California sales tax law generally only applies to sales of tangible goods, but not to their digital equivalents. As a result of this historical practice, California currently taxes software only if delivered on a physical disk or drive, and not if it is downloaded or accessed remotely.

In recent years, many states have updated their sales tax laws by applying sales tax to electronically delivered pre written software with a large majority taxing downloadable and locally hosted pre written software and an increasing number taxing, software as a service or SaaS. Of the 45 states with the sales tax, 35 states now fully taxed, pre written software when electronically delivered and run locally on the customer's computer, and 24 states tax, software as a service, which represents a growing share of the software market.

This proposal will simply extend equitable sales taxation to pre written software regardless of how it is delivered consistent with what is occurring in the majority of other states.

As far as the fiscal impact, the proposal will is estimated to increase general fund revenues by 450,000,000 in 2627 and 900,000,000 thereafter. And it's also projected to increase, revenues for local jurisdictions by 560,000,000 in 26-27 and 1,100,000,000 thereafter. Thank you.

Any additional comments?

Not yet. No. Alright.

No.

Thank you. Seth Kerstein, LAO. I'll start briefly with the broader budget context. So the state has a structural deficit, and the May revision would make some progress towards addressing that. And so we've recommended that the legislature enact a budget with at least the amount of ongoing budget solutions that the administration has proposed.

And so we've analyzed these revenue proposals, keeping in mind that the alternatives would be some other type of revenue increase or spending cut. So as for this particular proposal, we see merit in the general idea of modernizing the state's sales tax and eliminating some of the arbitrary distinctions between taxed and untaxed sales. If the legislature wants to address these issues, we recommend that you consider a modified version of the governor's proposal that lines up more closely with those sort of overarching policy goals.

And relative to the May Revision Proposal, that would involve two major modifications. The first one is to extend the sales tax, not just to software, but also to other digital goods such as text, audio and video.

And so like pre written software, many of these products have close analogs that already are subject to sales tax in California. And so taxing them would eliminate additional arbitrary distinctions between taxed and untaxed products. And the second, modification would be to create an exemption or reduced rate for software purchased by businesses for business purposes. So taxes on business to business sales might seem appealing because the resulting costs to consumers are indirect and maybe not very salient.

But taxing business purchases can raise costs for consumers even more than a direct tax on consumption because they favor certain types of production, like vertically integrated businesses over others, which can lead to inefficient business operations and higher costs.

Can you repeat number one? You said extend sales tax to the software and you said audio and

Sure. So digital products broadly. So that could include so in addition to software, which is being proposed by the administration, some examples of other types of digital products would include audio, video, photos, text, things of that nature.

Alright. Anything else? Assembly member, any questions here?

Thank you, chair. Thanks for your presentation. Can do you have an estimate of when the trail trailer bill language will be available?

Yes. At the latest, it will be up tomorrow. We're we're but, hope hopeful tonight.

Okay. Yeah.

And can you just broadly explain how some of the transfer agreements would be handled?

I can Chris Schutz, I'm the Chief Counsel at CDTFA, Madam Chair, members. So you're addressing the technology transfer agreements. So technology transfer agreements, they're housed in our measure of tax statute. And when a technology transfer agreement exists, it allows for the specified intangible to be not subject to tax on the transaction, but the tangible portion is still subject to tax.

If we make in the this legislation would make the software tangible, and so it would move over basically to the other side of the ledger and be subject to tax.

You could still have a technology transfer agreement, and the intangible portions of that technology transfer agreement would be not subject to tax, but no longer software would no longer be considered an intangible.

Okay. Thanks for sharing that. You know, I look forward to reading the trailer bill language. You know, I wish we had it before so we could actually get to discuss and ask you some questions on what the the details entail. I do think the LAO raises some really important concerns.

I don't know if you had a reaction to anything that they raised for their two suggested modifications.

I can take that. So, I'll just point out with regard to the, with regard to the tax itself, the differential rate for businesses. This is, something a few states do do, but the the majority do not. Businesses do pay tax, sales tax on goods generally. Think of, you know, goods that are consumed in the in the process of creating products.

So if you have a if you're creating a chair, for example, and you you know, the glue you'd be by in order to create that chair is is subject is subject to tax. So, this is just an extension of existing principles. And, and so we are again following the majority of other states that do do do tax these goods and, like I said, only a few offer exceptions for for business to business.

No. I think in the LAO's concern was whether or not we would extend some of these beyond software. Did you wanna respond to that? And then their other one was whether or not we wanted an exemption for b to b sales.

Yeah. So I addressed the the first or the the last one that you mentioned. So with regard to expansion, the this proposal here, the scope of the proposal was for for software. It it it's it's, it can be viewed as it's not an overhaul of the sales tax system. It's not an overhaul modernization of the tax system.

It's a narrow it's a narrow broadening of the sales tax base in line with the the goal, the overarching budget goal in order to help restore restore the structural balance in the budget. I will point out that, you know, there are significant economic uncertainties with regard to the the the reality right now and inflation. And when you think about products like streaming media services and digital goods, those are, you know, almost entirely purchased by consumers.

Streaming media is actually usually a significant portion of a of a consumer's budget. That's what we see what we see in the data.

So so there was some some concern there with regard to the with regard to the economic realities and those and those products that are, predominantly purchased by consumers.

Okay. Thank you. And I think, you know, you all raise a really important issue that, you know, and brought it to the forefront, in terms of consumer protection. You know, whether or not someone was purchasing something in person with a tangible product versus, digitally, you know, are they paying the same price? Right?

And the answer right now is no. So I think it's a question of parity, and so thank you for bringing this forward.

Yeah. Thank you.

I had a question on how this will affect AI products and services.

Yeah. So if the, AI and you're paying for access to software, software is AI, then that revenue stream would be subject to tax.

And your estimate, again, is this would raise to the general fund revenue by 150,000,000 in local sales tax and revenue and 560,000,000 in 2026-27. How do you get those figures?

Well, we looked at it from a couple different angles, but the main approach that we used was looking at New York. And so the state of New York has a similar similar approach to taxing software. They they tax pre written software. They tax they tax software as a service. They don't tax digital infrastructure type products and and they don't so so we looked at their they have data by industry.

So we looked at their data, their taxable sales data by by the 5132 NAICS code, which is software publishers. And then there's certain sales that will fall outside of that. There's some sales in there that won't be taxable, not a perfect match. But ultimately, we looked at their taxable sales data. We we adjusted for California's roughly double consumption.

California's consume roughly double. What New York do does, the greater population and all that. And then and then multiply it by the tax rates.

Thank you. I appreciate that answer. Any other questions, Assemblymember Rohany? Alright. No other questions.

Let's go to the public. Just a reminder, we will have thirty second remarks at the podium.

Good afternoon. JC Lee on behalf of the California Taxpayers Association. We are in opposition to the May revised proposal to tax digital prewritten software. The expansion of a sales and use tax to all sales of digital prewritten software and software as a service sets a dangerous precedent for taxing services, which would significantly increase prices for consumer consumers at a time when Californians struggle with affordability. For these reasons, Cal-Tax respectfully opposes this proposal.

Thank you.

Thank you. Appreciate the anybody else coming to the mic?

Good afternoon, chair members. Jose Torres with TechNet. Respectfully opposition to the governor's proposal to impose sales tax on, digital software and SaaS products. The proposal would increase costs on digital tools that California consumers, startups, and businesses rely on every day. These are tools that include cybersecurity services, payroll systems, cloud computing, productivity software, AI tools, and e commerce platforms.

They are no longer luxury products. They are essential infrastructure for operating in the modern economy. Small and medium businesses will feel these tax increases immediately, and those added costs will ultimately be passed on through higher prices for consumers at a time when affordability remains one of California's biggest challenges. We respectfully urge the committee to reject the proposal.

Thank you. Any other comments, final comments on this? Go ahead.

Okay.

And and I think, you know, we're again, we're waiting for the trailer bill language. We understand that, you know, yesterday's hearing, you know, we talked about, you know, the state's own use of digital software. Right? Poppy, obviously, in the public market and common use of chat GBT and other AI is being used. Can you just describe how this would impact that?

Are you have you guys talked about it? How how this proposal would impact those types of...

Well, so just to start, are you speaking to state government specifically or

just I'm speaking about products Yeah. And platforms like chat GBT, how would this impact that?

Yeah. So if it fits the definition of pre written software, which means it's not, modified or customized for, for a given customer, it's sort of sold on a mass basis, so to speak, I think, then it would be it has to fit that definition and then it would be subject to tax. So just generally a chat GPT, if it was off the shelf and, you know, it was it would not be subject to tax.

Now, if you had a consulting company that had embedded chat g p t into their products and they were providing, lots of services in addition to the, in addition to the product, those services themselves could be separately generally separately itemized and and would not be subject to tax. There's nothing in this proposal that is, taxing, services.

So there's no...

Okay. Thank you for the additional information and look forward to reading the trailer bill language.

Thank you. And, yes, if you can make sure we can get that trailer bill. I know, Genevieve will be looking it up. But we appreciate your comments, and we will be closing that item. Thank you.

Next, we're gonna go to issue number three, the May revision letter. California Department of Tax and Fee Administration is going to provide us an overview of their May revision proposals.

Good afternoon. Cheryl Thomas, Budget Officer, Department of Tax and Fee Administration. I'm inclined to begin with number two because it ties to the trailer bill, but I can Alright.

Talk about number one.

Is that fine?

That's fine. Sure.

So this request is in alignment with the trailer bill that you just heard, on the pre written the the sales and use tax on the pre written digital software. If approved, this would increase the workload in the sales and use tax program. We're CDTFA is requesting $750,000 annually. That's $4.50 general fund, 300,000 reimbursements for the implementation and administration of this expanded tax in the sales and use tax program.

The funding in the first year would fund startup cost, which would include programming in our revenue system, regulations, the development of regulations, outreach to tax payers, and then customer service, and updating forms, and publications.

And then ongoing, it would be the compliance, the collection, the customer service, and the appeals related to, the tax.

Alright. Any questions on item number two, the admin part? Nope. Nope. Any other comments up here?

Comments? Seeing none, let's go to number one. This is one you guys should be like

I'm excited. Alright.

Let me see it. Let me see it, Shryl. Yay.

This is a $10,000,000 budget reduction. $10,000,000 budget reduction that the Department of Tax and Fee Administration worked in coordination with the Department of Finance on.

And because we're in this committee, you're telling us because it's a reduction, then we can use that that 10,000,000 as we see fit? Yeah. I I guess. I know. I'm teasing you.

I'm teasing you, Shryl. I'm teasing you. Okay. Tell us more about it because we wanna hear about it.

So historically, we've had about $40,000,000 savings as the agenda points out. And last year, we did take a reduction of about $30,000,000 that aligned with the position and the efficiency reductions. We still have some savings, and so, we've estimated that after this deduction, we will be able to, continue to deliver the same level of service, and meet our operational needs and statutory obligations.

We just wanna note that as our budget contracts, that we may be limited to the unanticipated cost that we can absorb in the future, and we would have to come forward with requests.

I'm actually a little stunned right now because I'm hearing in real language, you don't feel like you need the entire amount of your budget. So you're going to, in essence, gracefully give it back. Is that what you said? Yes. What other comments do we have over here?

Crystal, Department of Finance. I appreciate, Shryl's comments. I just do wanna know that this was an administration proposal, and that, it's intended to realign, CDTFA's operational needs operational funding with their actual operational needs. And, as Shryl indicated, we believe this will allow them to, perform other, current duties without any interference. And, again, we appreciate their cooperation.

But then you have to have a big smile. There you go. Yep.

Yeah.

I think that's the first time I've seen you smile on this committee. There you go. It's I wanna see that smile more. I'm gonna start putting those little things like a smile and say, hey.

Really smile inducing. So

Alright. Mr. Seth.

Seth Kerstein, LAO. We're excited about this item.

My face show me the excitement. There we go. Alright. Any questions up here? Nope.

We're all excited. We are really excited. Alright. Public, any comments? Oh, here we go.

Hello. Pat Joyce on behalf of the National Accounting Firms. Quick comment on an item that's not or that's on an item that's not currently on the agenda, but I briefed your staff on it. It's the past due entity tax. We're proposing a slight change to the expiring tax credits with the PTT.

We're encouraging the legislature and governor's office in the budget to make the change to eliminate the expiration. It's gonna improve the program and help more taxpayers, stay in the program. So I just wanted to flag that for you, and that's all. Thank you.

Thank you. And you you did a great job of jumping in when it was it your turn? But it's okay because if if you have an item that is not on the agenda or it's from before, you have to come at the end. But we like you so much, we're accepting that comment. Alright.

With that, no other comments, and we're closing that item.

And you guys should all have bright smiling faces because it may not continue that way. Well, because we gotta get to housing. Right, mister Haney? Alright. We are now on the franchise tax board, item number four.

Thank you.

Owen always comes up with a smile on his face. Alright. Welcome.

Good afternoon again, Madam Chair and members. Colby White, Department of Finance. So I'll be presenting item four, federal conformity trailer bill language. The administration proposes effective tax year 2026 to conform state law to the federal tax treatment of Section five thirty a accounts commonly referred to as Trump accounts. These are tax deferred accounts established for children under the age of 18 that transition to traditional individual retirement accounts when the child reaches adulthood.

These section five thirty a accounts were created under the federal HR 1 enacted in July 2025, And the Internal Revenue Service has announced at the end of March that more than 4,000,000 children have signed up for the accounts nationally, so there are likely hundreds of thousands. We don't have California specific data, but there's likely hundreds of thousands of children that have these accounts in California.

This proposal is consistent with the state's practice of conforming to most federal tax advantaged accounts such as traditional IRAs, a Roth IRAs, four zero one k plans, and the Achieving a Better Life Experience or ABLE accounts. Without it it will also provide tax relief to families with children without conformity due to the difference in the federal state tax treatment of these accounts.

The child will could potentially pay tax annually on the account's earnings even though they can't access the fund and would have to track a separate California only record of those, of those already taxed amounts across several decades, so that California does not tax the earnings twice.

Basically, it's just a tracking tracking, burden on the taxpayer. So, the fiscal impact is minus 1,000,000 in '26-'27, minus 900,000 in 2027-'28, and then increasing to 3,000,000 by '28-'29. Thank you.

Thank you.

Rowan Isaacs, LAO. We have no concerns, and we're recommending approval. You know, conformity will prevent taxpayer burden and confusion among taxpayers, and the revenue effects are very minor.

Alright. We'll take it to the members, but I I'm gonna start just on this one because I think it's can you give us a context of we now have the Federal Government, with the savings account, but I thought the state had one for children as well. Or am I wrong about that?

We do. I will have to get back to you with more information on how they specifically the the the one works here in California. I will just point out that that there are a lot of different savings accounts, in retirement accounts, you know, even at the at the federal level, there's, like, 12 or or 13 different kinds. It's not ideal, honestly, from a from a, perspective, but that's well beyond the scope of what what

So with this language, then the individual family who has the child that wants to take advantage of these accounts, you're saying they will not have to do any follow-up if this language is put in? It won't the burden won't put it beyond them.

Yeah. Well, there's when you think about a tax deferred savings account, it's basically you're you're able to accumulate tax in in the account tax free over a period of time. And to account for those diff if if if the state were to treat it differently than the Federal Government and think about a child maybe that's two years old and they wouldn't be withdrawing until they're at least 18 years old, you you would have to keep track of sort of what was going on in the account.

Potentially, any tax, like, while children may may not generally be sub subject to filing tax returns, there are there are exceptions. And then someday when they withdraw, when they're 18 or older, they would have to have all that of those records, of potentially having accumulated tax and paid tax in California, whereas they would be different at the federal level.

They would just pay tax when it was withdrawn. So it would just be much simpler. So we're just conforming to this simpler treatment. But, basically, when there's differences between the two, between federal and state and these types of accounts, it's very problematic from a track tracking perspective.

Right. Alright. Members, any questions on this? Seeing no questions on this. Anybody from the public wanting to speak on this item?

Seeing no one, we will close this item. Alright. We are going to item number five, reduce the 800 annual business tax trailer bill language.

Thank you, Madam Chair. Colby White, Department of Finance again. So, this proposal that is the, the administration proposes for tax years 2027, '28, and '29 to reduce from $800 to $400 the annual tax paid by limited liability companies, limited partnerships, and limited liability partnerships in their first year of existence. LLCs are an important business entity for small businesses that they use to receive limited liability protections similar to corporations, but with much simpler tax treatment.

LLCs, LPs and LPs are all passed through business entities, meaning business income flows through to the owners and is taxed under the personal income tax, and each business entity form generally provides a limited liability protection for its owners.

LLCs represent about 85 of the total number of those three entities I described, the LLCs, LPs, and LLPs in California and are much more commonly used by small businesses. This proposal will reduce startup costs for entrepreneurs and small business owners and therefore help more Californians launch new businesses supporting job creation and economic growth. Over half of all LLCs are formed as sole proprietors, meaning they only have one owner and sole proprietorships tend to be dominated by small businesses.

The state enacted a similar policy during the pandemic, when the $800 annual tax was eliminated entirely between 2021 2023. During that time, LLC registrations increased substantially, averaging 318,000 per year compared to a 185,000 in the three years leading up to that time.

And additionally, what we've seen from 2021 through 2024 is that the number of LLC returns that are paying the $800 fee actually increased from 725,000 to 883,000, despite the first year exemption. And that suggests that the exemption, likely did spur new business formations, and many businesses that formed with the first year exemption continue to operate and pay the tax in subsequent years.

And the revenue estimate assumes, revenue losses of 25,000,000 in 2627 and 100,000,000 in the following two fiscal years and minus 75,000,000 in fiscal year '29, '30. And this is based on a projection of 250,000 new registrations per year.

Rowan Isaacs, LAO. While we recognize that there are some small businesses and start ups that could benefit from this reduction in tax burden, our view is that the proposal lacks a strong policy justification. You know, a primary concern is that the proposed exemption isn't specifically well targeted towards these small businesses and these new businesses because the exemption would apply to any new registration, that is eligible.

And so many of the benefits would likely go through, new registrants that don't don't reflect, you know, genuine new economic activity or genuine new business activity, such as, LLCs owned by larger companies, entities that are formed primarily simply to hold assets and other investments, or registrations that are created for legal liability purposes would also get that windfall benefit.

And so because many of these LLCs, for example, would have formed regardless of the exemption, you know, the state could incur, you know, relatively high revenue losses compared to the amount of genuine benefit it creates for these small businesses.

We do wanna note that in the administration's proposal, it noted in the agenda today, it noted that, limited liability registrations increased in California when a previous temporary exemption was put into place. And, you know, while we're not ruling out some modest effect that this proposal could have, we would note that over that same time period.

Registrations in The US as a whole also went through a similar increase, and so we would just caution the legislature not to, you know, attribute that previous rise to the previous policy. And this is especially true since the current proposal is only proposing to cut in half the minimum franchise tax to 400 as opposed to completely eliminating it as it did in the previous exemption.

And then finally, we just wanted to note that, you know, generally speaking, good tax policy seeks to treat similar taxpayers similarly unless there's a clear policy reason to do so.

And so, therefore, in addition to recommending the legislature to reject this proposal, it may wish to consider whether maintaining a different first year minimum tax treatment for corporations versus these LLCs and LPs, you know, is continuing to serve a clear policy purpose. Thank you.

Thank you. Members?

Thanks, madam chair. Thanks for your presentation. You know, I think this was, an important proposal put forth, in the governor's budget and also, wanna be mindful of some of the concerns that the LAO raised of some of the bigger businesses applying for and using this when it's meant for small businesses.

I don't know if you had any reaction to that or any thoughts on how we can make sure that this is tailored for who it's intended to be for, which is the small businesses that we're we're all wanting to help.

Thank you. I would say, certainly, there are some larger businesses that use LLCs and we acknowledge that. But when you look at the the filing data, for example, and there's certain subsets of LLCs that you don't have access data, but we have information on a on a fair number. But, like, for example, in tax year 2023, roughly 3,500,000 out of out of probably seven to 9,000,000 total in in nationwide, we're filing as sole proprietors.

And so if you look at data on sole proprietorships, they are they are predominantly owned by by small businesses.

Now, of course, there are there are exceptions. And then when we look at the data that we do have at the IRS website with regard to, what they call, multi member LLCs or or LLCs that file as a partnership. So this means they just have more than one owner. And so those would tend to be bigger than the sole proprietors more likely. But even in that area, we find we find that their the average number of members is four.

So four owners doesn't suggest necessarily a large business, but also that the average income of that of that LLC is roughly 200,000 over that entire spectrum. Now there are certain industries, I think, one, you know, that that do have higher average average income and things like that. And then with regard to, like, potentially trying to, you know, the targeting on it, it's it there is limited information on the tax return itself.

And then the way these taxpayers file is they actually pay the tax in April for the current year, and then they file the return the next year. So any attempt to try to try to tailor tailor it is difficult because they're paying upfront.

It would require some sort of self certification and and, like, they don't identify themselves as a small business or or or a large business on on the tax return itself.

No. Thanks for sharing that. I think that's really helpful context, in terms of, your team pulling some of that data. You know, I I know that some of the work that, many of us have done is trying to figure out how do we cut cost for folks trying to start, a new business here in California. And so cutting, the filing fee in half by 50% is gonna make a tremendous difference.

And thanks for sharing some of those numbers that you pulled.

Assembly member Haney.

Thank you. I appreciate it. What is the cost of this? What what's the estimated impact?

Well, the, you know, the it's scored on a on a static revenue basis, which means we estimate the number of new registrations that are occurring every year, and we multiply that by $400. So the assumption is that if 250,000 new registrations, which is in line with sort of the trend from pre pandemic levels and assuming growth, there was the kind of a surge in the pandemic. And so that's that's the that's how the cost is scored.

So but, obviously, the time period of the pandemic was kind of unique in some ways. Is there any how are you identifying that it was because of the cut in the the the fee as opposed to what it sounds like from the LAO's analysis, a broader increase in LLCs being, filed across the country? Did you look at data? I mean, did did California, have have a much greater increase during that time than other parts of the country or the country as a whole?

I don't know. I think I think, my colleague makes a a fair point. There was absolutely a pandemic effect, and there was a lot of a lot of, surge in businesses during that time. What I will point out is, what we also saw is, you know, we saw revenues continue to increase. The revenues from this source continue to increase each year despite the despite the exemption being in place.

But our yeah. Our conclusion is that the that some of it would have been due to the pandemic and some of it would have been due to the the registration fee dropping from $800 to 0.

Can I ask the representative from LAO if if you looked at that in terms of the difference between California and other parts of the country, the country as a whole, and whether the the fee itself was a driving factor?

Yeah. It's quite difficult to completely disentangle, you know, whether there was an additional effect of the of the exemption in California. California saw a slightly higher raw raw increase in in LLCs percentage wise, but it's difficult to we we can't say with precision whether it's statistically higher than The US as a whole. It's sort of certainly in raw numbers. In percentage terms, California's, you know, new LLC registrations, you know, increased slightly higher than, The US average, but not by a lot.

Do you in your analysis, do you what is your take on the the the the assertion that this is gonna be essentially neutral because the even though we're cutting it in half, we're gonna see so much so many more registrations that it will have no no impact on the budget?

No. I don't think we would expect it to be revenue neutral if that's what

Did I get that did I get that wrong?

To to be clear, we're we're scoring this as a revenue revenue loss and, you know, the the figures I cited, they're included in the in the in the budget framework and, minus 25,000,000 in '26-'27. Okay. Minus a 100,000,000 for each of these two subsequent years, and then minus 75,000,000 in the last year of the multiyear.

It's 25 and 100 each.

Assuming 250,000 new registrations. Yeah.

Got it. So some increase in the registrations, but not enough still gonna cost us a $100,000,000 a year in for two years and 75 after that. Okay. But just the last thing. What is the goal of this?

Is the goal of this to increase the the number of registrations of these types of companies, or is it to alleviate the, you know, the burden on them in terms of or both? Or or and is there a sense of sort of the data that we have that shows that it will accomplish that for the folks that we're trying to target here?

It would be both. I mean, we as with any tax benefit, you have, it's some of it won't be in the form of tax relief for a business that would have formed anyway. We have businesses forming California as a as a as a place for a lot of businesses form. So it's gonna be tax relief for some, you know, $400.

And for others, we expect some modest tipping into someone perhaps thinking of starting a new business and perhaps even a business that was wanting to get, you know, limited liability.

Because if you operate as a sole proprietor, you don't have that limited liability protection. So, again, it could provide it could provide that sole proprietor an easier, a slight, you know, slightly less expensive method for getting that limited liability protection.

Okay. Thank you.

Thank you. Any other questions up here? Seeing none. I do appreciate this.

I think it's definitely a pro and con. As you said, the pro is that we're, I think, listening to many who have criticized California as being a state that it's difficult to do business in, and this certainly could be incentive for, you know, 400 compared to 800 is quite a bit. On the other hand, the loss of revenue is certainly difficult as we're looking at finding revenue.

So it's pro and con, but I do appreciate the thought of how do we, if you wanna say, incentivize new business in California. With that, do we have anybody from the public that would like to speak on this item?

Seeing no one, we will close this item. Thank you so much. Alright. We are going to item number six, permanent credit limitation trailer bill language.

Thank you, madam chair, members. Colby White, Department of Finance. So this is another revenue solution of the three I referenced earlier that the administration is proposing as of a as part of a balanced approach to restore structural balance. The administration proposes beginning in tax year 2027, a permanent business tax credit limit limitation that is the greater of $5,000,000 per corporation per year or 50% of the pre credit liability. The proposal only, impacts business tax credits.

There is an exception for the low income housing tax credit, which will not be impacted, and the credit limitation does not affect any personal income tax credits such as the California earned income tax, the renter's credit or the pass through entity elective tax credit. This proposal does not affect the ability for taxpayers to, claim refundable tax credits generated under the temporary credit limitation that is in effect for tax years 2024 through 2026.

And it also does not affect the calculation of refundability, or the sales tax offsets that are allowed under the film tax credit program. And unlike prior temporary credit limitations, this proposal does not include a suspension of net operating losses. So, this proposal does not affect smaller businesses.

We have a $5,000,000 threshold that ends that protects smaller businesses from the limitations since most companies do not have 5,000,000 or more in tax liability to offset. Tax data indicate that fewer than 100 companies take $55,000,000 or more in tax credits each year out of a total of one one point two million corporations that file a return with California. Therefore, this proposal impacts less than one in 10,000 corporations.

And for for at the bare minimum, for a corporation to generate 5,000,000 in tax liability, it would need at least $57,000,000 in profits. So some large profitable corporations pay no corporation tax in California beyond the $800 minimum tax.

For example, tax year 2023 data indicate that of the 342 corporations with net income above 100,000,000, about 80 reduced their tax liability by at least 50% and about twenty zero nearly zeroed out their tax liability entirely.

This credit limitation is a more modest version of prior credit limitations that have historically been implemented on a temporary basis in response to budget crises to ensure that and the purpose of this proposal is to ensure that large profitable corporations pay at least some minimum level of tax rather than offsetting all their tax liability with tax credits.

And it still preserves the impact of the the tax credit programs themselves by allowing that 50%, having that 50% threshold where larger corporations still can still can significantly offset their liability. The revenue gains from this proposal are estimated at 850,000,000 in '26, '27, 1,600,000 in '27, '28, and 1,800,000 in the following years.

Thank you.

Rowan Isaac, LAO. So we've heard, you know, from our colleagues at finance and some of my fellow colleagues at LAO about the state's structural deficit, and the need to address that. And so this proposal presents a reasonable option for increasing corporation tax revenues and therefore warrants consideration, and an additional justification from the administration sort of regards concerning, like, the ability of these corporations to effectively reduce their tech corporate tax liability to zero or to the minimum amount.

And so to the extent that the legislature views that as a as a valid concern, this would also do a fairly effective job of addressing that. Just to note, this proposal's fiscal effect mostly operates or entirely operates through the research and development tax credit.

85 roughly 85% of all business credits claims are through the r and d tax credit, and the majority of those are claimed by quite large firms. So about 90% of the value of those r and d tax credits are claimed by firms with over a billion dollars in gross receipts. So these are, like like my colleague at Finance said, these are very large businesses largely claiming r and d credits.

And like I like other business credits, the r and d program should be evaluated as a spending program too, like other tax expenditures. And so this current proposal does raise immediate tax revenues, but it also has the effect to the possible effect of, you know, decreasing or affecting the incentive value of the r and d credit to some of these larger taxpayers.

So, you know, in the case of the legislature approving this proposal, it may want to look in the future additional modifications to the r and d tax credit, you know, so that we can, you know, appropriately make sure the program is targeting, you know, incremental research activity. And although the proposal is largely affecting the r and d tax credit in terms of its fiscal effect, We wanted to point out that, you know, the limitation does apply broadly to other business tax credits as well.

And it could it could affect the marginal incentive that these programs provide. So two we wanted to bring up that could be viewed as legislative priorities are the low income housing tax credit and California competes. So, you know, that housing production and economic development are things that legislature has previously stated as priorities.

And to the extent that this limit could hit some taxpayers who are accumulating credits in those two programs. It could somewhat blunt the effectiveness of those two programs. So legislature and the committee might want to inquire about those two programs being affected, if they if they choose to do so. We can cut we wanna emphasize the point that this, proposal, unlike previous temporary limitations, doesn't include net operating losses, and we would emphasize that that, we think that that that piece should stay.

And then very finally, our office recently published a report on various options to raise and lower taxes just in the context of raising revenue specifically.

And so purely thinking about that, you know, this proposal should be considered in tandem with other possible ways that we could raise corporation tax revenue. For example, simply just raising the corporation tax base rate, and also the elimination of the water's edge, election, could raise similar amounts of revenue as this proposal, and and so they should be viewed as alternatives to this proposal. Thank you.

Thank you. Members? No no comments? No. Go ahead.

Thank you so much, madam chair. Thanks for your presentation. Can you just respond to some of the concerns that the LAO just raised specific to the low income tax credit, which is gonna be one of my questions as well as the California competes tax credit.

So we are we are excluding the low income housing tax credit. So that's that language should be up today. So that's that's, that is, not going to be affected by this. And with regard to the, cal competes California competes tax credit, we would expect very limited impact. The companies that go through there and apply for the credits, they generally, they are granted credits over a five year period.

And so, and they must meet milestones and jobs and things like that. And so they well, if they receive, say, for example, a $20,000,000, tax credit, it might be $4,000,000 per year over the five years. So what we see in the data is that very few fall would fall over that $5,000,000, that $5,000,000 threshold. And I would just, yeah, I would just point out again that the $5,000,000 threshold like, there's certain other states that have these types of credit limitations.

None of them have this $5,000,000 protection for small businesses, which is truly unique to the to the California proposal because that really allows the vast majority of businesses to claim all of their credits.

And the last piece is the 50% is is a new threshold. In other in other limitations, we have just had the 5,000,000. And so a large taxpayer that say had a 100,000,000 in tax credits and liability would have to only take 5,000,000 of their of their 100,000,000 in liability, can only reduce down by 5,000,000. So under this proposal, if they can take they can still offset their liability by 50,000,000.

Okay. Thanks for sharing that. Did you wanna respond?

Yeah. I just wanted to provide some extra clarification on the CAL competes. So, you know, like my colleague says, currently, a lot of the risk current recipients would probably not largely be, you know, going over this 50% cap or this $5,000,000 cap every year. But this committee has heard, you know, proven, like, earlier this year that CAL Compete has accumulated a credit pool of $923,000,000.

And, you know, one of the arguments made for allowing them to keep that credit pool is that they could make, you know, larger awards or, you know, bigger awards to firms in in the future, you know, maybe when economic conditions are favorable.

And so to the extent that we might expect, you know, large awards in the future to occur, you know, they maybe are more likely to be affected by this limitation.

So even though, you know, maybe current recipients of CAL competes are unlikely to be affected, certainly, if the legislature is is electing to, you know, keep the structure of CAL competes the same and have this opportunity for these very large awards to be made out of this very almost a billion dollar pool, then those credits and incentives could be affected in the future.

How much did you say is in the CAL competes?

I believe it's $923,000,000.

Maybe we can ask if the scope is later.

Right. Right. Well, this item did come up, but I'm trying to remember under Cal competes, there was additional money asked for in this budget cycle. Is that correct?

It was an extension. It was a request to extend the program in its current form without any changes.

But why do they have 923,000,000 in their account?

Historically, in the over the last several years, some years, they have not allocated the full value of the credits that they're allowed they're allowed to. Their baseline amount is 180,000,000. Additionally, historically, roughly half of all credits that are awarded are then not used. They're essentially what they call recaptured. So if the business doesn't follow through and so they are unable to use those tax credits.

And on the current statute, those credits that are not used are essentially recycled back into the pot of available of available credits, and that pot has grown over time, essentially, because there have been a lot of credits unused.

And

Yeah. I'll just add on the add to that on the California. It is truly a feature of the program where the tax credits are allocated, and you must meet certain specific milestones that are laid out. And, of course, companies can have the best of attention and set the times and not not meet those milestones. But the recapture provisions are built in to protect the state from not allocating tax credits unless until they see the actual evidence of this being performed.

And so what what we have seen is that certain companies have not met the milestones and the and the credits have been recaptured as as you expected. And then with allocations, there is some you know, there can be economic cyclicality to it. So the the the Cal compete California competes program has been very selective on which programs it it takes.

And so, it hasn't, even though it has had the the the capacity, it hasn't necessarily allocated, the full amounts or even even even close to it in prior years.

That's a large amount to not be getting out. I mean, I understand the the precautions that you want to and wanna make sure that you bring the back money back into the funding pool if it's not, you don't see a pathway for it. But as has been mentioned, and we're gonna be getting to very quickly, like, every dollar we can find in the state is really important in this type of budget. But any other questions? See none.

Do we have anybody wanting to speak publicly? This is a thirty second and under thirty seconds and under.

Good afternoon, Jennifer Snyder on behalf of the California Life Sciences. And we're opposed to the governor's May revision proposal to place a permanent cap on business tax credits. This proposal will undermine what has made California a leader in innovation and significantly impact the ability of the state to attract and retain companies that heavily invest in the state's economy, its workforce, and its infrastructure.

California, as we all know, is home to the largest life sciences cluster in the nation with over 17,000 biopharma establishments that generate $395,000,000,000 and 1,500,000 Californians in the workforce. We would urge that the committee reject, the governor's, proposal.

We think it's shortsighted and will have a long term detrimental impact on California's economy. Thank you.

Thank you.

Hello. Sam Wilkinson with GRACE and then Child Poverty in California Coalition.

There you go.

Thank you. And also representing Western Center on Law and Poverty as well as the John Burton Advocates for Youth. We were thrilled to see and are very supportive of the governor's proposal to cap tax credits to generate revenues in order to begin rightsizing the massive tax breaks given to corporations after the passage of HR 1 last summer. Corporations are profiting off of the sweeping cuts to health care, food assistance, and their safety net systems.

California must fight back to ensure these dollars are recouped at the state level and invested back in our people and our communities.

We urge the legislature to adopt progressive revenue solutions such as the governor's cap corporate tax credit proposal, the Senate's fair share contribution fund proposal, or closing the water's edge loophole and so that budget leaders can protect Californians, stabilize the budget, and ensure corporations generating profits off of California's workforce infrastructure and consumers pay their fair share. Thank you.

Hi. Claire Conlon on behalf of Biocom. We represent more than 1,800 biotech and medtech companies in California, and we ask the legislature to reject short term revenue gains achieved by permanently limiting the R&D credit which will come at the expense of long term economic growth. This proposal sends a deeply troubling message to the large research intensive employers who account for the majority of the state's high wage jobs and for the economic output that generates state revenues.

At the precise moment, California should be rejecting the Federal Government's retreat from science and innovation by doubling down on policies that encourage r and D.

California should not remove one of our most important incentives offered by more than 40 other states. Thank you.

So my daughter could watch it.

Good afternoon. JC Lee with the California Taxpayers Association in opposition. Thank you.

No. Madam chair members, John Wenger on behalf of the Advanced Medical Technology Association, AvaMed. We're the National Trade Association for the medical device industry. Would in the interest of time, would just align my comments with, CLS and Biocom. Thank you.

Thank you.

Good afternoon, Chair and members. Jose Torres, with TechNet. In the interest of time, also aligning our comments with the previous speakers.

Thank you. Members, any last comments on this item? Seeing none, we are going to close this item. Thank you. Alright.

That will take us to under this side, this heading France franchise tax board item number seven, May revision letter proposal.

Good afternoon, madam chair and assembly members. I am Abel Escobar, director of the financial management, with franchise tax board here to present item seven. Item seven is FTB's May revised letter proposal titled, CalFile Resources Realignment.

This request, in the spirit of giving, gives returns funds back to the general fund, but it also is requesting to retain a portion of the 30 resources received beginning in fiscal year twenty four twenty five as part of efforts to support and sync FTB's CalFile system with the federal IRS direct file program.

This proposal requests to retain OE and E funding and eight positions in fiscal year twenty six twenty seven, five of which are limited limited term positions that expire on 12/31/2026, and three permanent positions, to keep them ongoing.

And this is to complete CalFile enhancements and support ongoing maintenance and customer service. Recently, the US Treasury and the Internal Revenue Service announced that they are not planning to provide the IRS direct file as a service in 2026. Although there are no plans for direct file, FTB has already completed work on enhancements that will benefit CalFile and has in development additional enhancements focusing on two things. One, improving the customer experience of CalFile to be more similar to modern tax filing systems.

And two, implementing new authentication and security services to protect taxpayers and the state to to allow first time California filers to utilize this free CalFile service, therefore expanding the use of the free service.

An update to the CalFile application will allow FTB to refresh marketing of this service as an easy to use and improved free filing service. In addition, FTB will be able to offer the service to new filers, which are presently excluded. Currently, Cal EITC for the earned income tax credit filers are a small segment of CalFile users. This update will enable new Cal EITC filers to leverage this re service, making it easier for eligible filers to benefit from this credit.

Amongst amongst other efforts to increase Cal EITC filing and to provide free filing services, FTB annually does outreach to non filers that are eligible for Cal EITC.

Additionally, if the IRS reintroduces the direct file service in future tax years, FTB will be more agile and efficiently reengage in the collaboration and offer the ability to upload federal information into CAF file in a swift manner.

As a result of this realignment proposal, FTB is giving back 27 of the 30 positions to the general fund, resulting in $921,000 back for fiscal year twenty twenty six twenty seven, 2,300,000 back to the general fund in 2728, and $2,700,000 back to the general fund in 2829, resulting in ongoing savings to the state.

The opportunity to complete these enhancements will yield a return on investment to the state by continuing to help serve our lower income taxpayers with a modernized free service to claim valuable credits including EITC. With that, I'd like to thank you for your time and support and happy to answer any questions you may have.

Thank you. Any additional comments up here?

David Tong with the Department of Finance. No comments at this time. Ron Isaac Salio. Given the termination of the federal direct file system, you know, the Department Administration have appropriately reduced the scale of the proposal, resulting in savings. And, you know, there is merit to maintaining this sort of bare bones skeleton staff for the CalFile platform that will continue to improve the service and, you know, was mentioned, that our first time pilots use the the CalFile program.

But, you know, consistent with our broader comments on the budget situation, there are still three ongoing positions that are gonna be maintained. And so, you while there's definitely merit to keeping them on board, it still has to be considered within the broader budget context, you know, committing to new spending.

Thank you. Members? I don't have any issues with this, but I am a little perplexed. And it seems like we do have some departments who are finding, dollars to bring back into the general fund or for cost savings, and then we have others that have quite a lot of dollars sitting there as with our, last proposal on Cal competes with almost $1,000,000,000.

I know each department has their own mandates and, focus, but it does seem I think the word perplexed is a good word of how you have these differences, and I'm just bringing that to light.

Again, please don't infer that I don't like Cal competes. I like Cal competes. I'm just wondering about these differences in departments, so I think it's worthy to note. That being said, do we have anybody who would like to speak on this item? See, no nobody coming.

We will close that item. Alright. We are moving through this, and now we are going to California Arts Council.

We will close that item. Alright. We are moving through this, and now we are going to California Arts Council.

Oh, I skipped you. Sorry. I did ask if people wanted to speak on it. Okay. Where are we now? We are on number, item number eight, California Arts Council. Welcome.

Thank you. Good afternoon, Madam Chair and Members of the Committee. It's nice to see you all again so soon. Chief Deputy Director Michelle Radmand of the California Arts Council. And today, we're here to discuss the reauthorization of the Keep Arts in School Voluntary Contribution Fund.

As you know, we are the only statewide funder of the arts and support over 16,000 nonprofit arts organizations in this state. And so I just wanna share a little bit of impact. In this committee alone, in your respective districts, in this past year, we supported nearly 400,000 youth that participated in or directly benefited from arts and youth programming. And that programming is supported by the funds that are donated through the Keep Arts in School Voluntary Contribution Fund.

That also supports workforce employment with teacher stipends, excuse me, for those that deliver the arts programming and be local schools for students zero through 25. So I yield the floor for any questions that you may have. Thank you. And to my right, I have my Deputy Director, Sylmia Britt.

Alright. Additional comments?

And just to explain what's in the May Revision. The May Revision proposed statutory changes to reauthorize the Keep Arts in Schools Fund to accept contributions during the tax filing process in 2027 for the 2026 tax year. And so the Keep Arts Fund supports the administration of art grant programs in schools across the state.

Appreciate. No comments there? Questions? Comments?

Just two quick questions. How much did the fund bring in maybe, like, last three years on average?

Thank you for that question. So in the last filing year, there was a donation of 221,232. The prior year, 266,429. And then in 2022, 250,443.

And where is that sort of on the range of some of the other voluntary contribution funds?

It's pretty low.

Pretty low?

Yeah. It's pretty low. We have a cap of 250,000 per the statute, so that's why we're we're just raising what we're allowed to raise, per the legislation. So others have, you know, obviously, a larger bandwidth of what they can collect and distribute.

And is there any reason we didn't think about this through policy earlier this year?

So the there's a budget nexus given the statutory changes allowed for the contributions to be made and is consistent with the TBL process thus far. And so this past year, we barely missed the threshold, but we have a very complex strategy in place for marketing, promotion, and outreach with state agency partners. All 58 partners in the state are SLPs and working directly with our publicist to ensure we have paid, earned, and in kind media related to the promotion of the fund.

I guess, more specifically, did you not know, like, say, in the February time frame that this was falling short?

We were not informed that it was falling short.

Got it. Okay. Okay. I'm supportive of it. I'm just trying to sort of map out, like, why we're why we're bringing in this way, but, you know, would love to be able to see this continue.

And if I could mention, one of the key pieces, it was nice to be in space with a lot of our other state agencies. There seems to be somewhat of a lapse of the data exchange between the organizations as well. So we need to get back on track with that so we're monitoring it on a flow basis in the upcoming tax years so we have a better accounting of how many folks are actually taking that and getting us to that 250 mark.

Any other questions from Members? And I'm sorry. I think you said it when you opened your comments, but can you repeat what what is this 250,000 about a year used for?

So the $250,000 is part of our local assistance budget that goes directly into grants throughout the state for arts programming. Specifically, we have arts and youth programming, and this goes directly towards those grants. It helps to provide stipends for teaching artists to support those youth throughout the state to participate in very diverse and complex arts, media, theater, music, just to support their development. And also there are pathways for workforce for these students as well.

Thank you. Appreciate that. Seeing no other comments, anybody from the public wanting to speak on this item?

Thank you, Chair and Committee Members. I'm Tracy Hudak with California Arts Advocates, and we support reauthorizing the Keep Arts in the Schools Fund. We need our local assistance funding through our state arts agency increased. We're also requesting that the committee recommend increasing the general fund allocation to 50 million. California needs to change its disinvestment in arts and culture, the core of its creative economy.

And the current agencies, the agencies current budget for local assistance at 24 million is lower than it was 25 years ago and has stayed stagnant since 2018 while the state's budget has doubled. We think California should direct its AI revenues to fund what is best about being human. Our creativity and desire to bring joy and connection to each other through culture. Thank you.

Good afternoon, Chair Quirk-Silva and Members of the Subcommittee. My name is Justina Martino. I am an artist and Director of Projects and Partnerships at an organization called Art Tonic. State arts funding directly empowers creative Californians to live their passions. With California Arts Council support, we were able to eliminate workshop fees and saw our attendance jump from six to 60 artists per workshop.

For many, this is their first time receiving business education, inspiring them to continue investing in their professional growth. This vital workforce drives nearly 8% of our state's economy. We urge you to protect this sector by including 50 million for the Arts Council's 50th year and 40 million for the Performing Arts Equitable Payroll Funds. Thank you.

Thank you. Alright. I think that is going to... Any last comments? Alright. Last comment.

My, I will stand in line and for a public comment. No. I just wanted to add, thanks for your testimony. We had a hearing yesterday as well, and there were two artists that waited almost four hours to give public comment. And so I just wanted to share that, if you hadn't had a chance to listen to their testimony, that they were at yesterday's hearing thinking that the Arts Council was on the budget line item.

And then I did also just want to add my support for this item. I understand you missed the minimum contribution to do this through the normal process and not through the budget process. But I know I would be remiss if I also didn't mention that today's Nonprofit of the Year ceremony. And my honoree is an arts nonprofit, Silverlake Conservatory of Music. So I know that they badly need this funding. So thanks, and I support this item. Thank you.

And thank you for that tidbit. We will very much reach back out to those advocates and thank them for their time. So thank you for sharing that. We appreciate it.

I would just like to echo the Assembly Member's statement. I received many calls coming in today's hearing from our Art Council. So, you know, I wanna encourage you to take a look at that because it's a big deal.

Thank you so much, Member. We appreciate that. Honestly, thank you.

Thank you. We appreciate you coming, and that's gonna close that item. Alright. Members, just to give you a little where we are, we are about halfway through this. We are on number nine, and we actually have 18 items. Just to let you know, the housing individuals that will be giving testimony are actually in the Senate.

So we'll move through our items, and hopefully, by the time they're done with the Senate, we'll be ready for them. But we're gonna start to move pretty quickly here. Alright. Here we go with item number nine, Governor's Office of Business and Economic Development, May Revision letter proposals. Welcome.

Good afternoon, Madam Chair and Committee Members. My name is Kristi Cortez, and I serve as a Legislative Analyst for the Governor's Office of Business and Economic Development, or GO-Biz. Thank you for the opportunity to present an overview of our May Revision proposals.

To start, GO-Biz is statutorily required to administer the California Civic Media Program, which was established via Senate Bill 155 last year and is supported by a $10 million general fund appropriation. The Civic Media Program is a public private partnership designed to support the work of California's newsrooms, increase access to information and strengthen community engagement.

As we prepare to launch the first round of the program next month, we are hopeful that state and private investments will deliver measurable impacts to news organizations across the state. We also recognize that additional funds are necessary to carry this program past its pilot stage and meet the goals specified in statute.

Today, we are respectfully seeking an annual $10 million general fund appropriation in fiscal years 26-27 and 27-28 to support continued implementation of the program and provide certainty to news organizations looking to use these grant dollars to invest in their workforce and operations over multiple years.

Our next request is for a re-appropriation of 1 million originally appropriated in the 2022 Budget Act for the California Regional Initiative for Social Enterprise Program, or CA RISE, with an encumbrance period through June 30, 2027. The purpose of CA RISE is to provide funding and technical assistance to employment social enterprises.

We also call them ESEs, which expand employment opportunities for people who are typically not served through traditional workforce systems. The CA RISE program received a $25 million appropriation via the Budget Act of 2022, launched in 2023, and awarded the first round of grants to 61 ESEs in 2024.

If approved, the re-appropriation of the $1 million remaining from the 2022 appropriation will be added to the pool of funds that are available as grants to eligible employment social enterprises through CA RISE 2.0, which will launch later this year.

Our final proposal is technical in nature and is a request for a reversion of the $25 million appropriation for the from the 2025 Budget Act, which was intended to reimburse capital expenditure costs for the construction of the CHIPS for America Design and Collaboration Facility in Sunnyvale, California.

When the Department of Commerce shut down Natcast in August of last year, plans for this facility were no longer possible. While we are grateful for the appropriation and remain committed to advancing the semiconductor industry within California, we are requesting that the funds be reverted back to the general fund in light of recent federal actions.

Thank you for your consideration. I'm joined by multiple GO-Biz colleagues to answer any follow-up questions. Joining me to my right is Clair Whitmer, Deputy Director of the California Office of the Small Business Advocate. She can answer any CA RISE related questions. And then we also have other members here to answer Civic Media. So happy to do musical chairs as needed. Thank you.

Thank you. Appreciate. Any comments there?

Victoria Chin, Department of Finance. No comment.

Rowan Isaaks, LAO. On the Civic Media Program, you know, we certainly acknowledge the potential benefits of increasing funding for local journalism, especially when, you know, the program is structured to be paired with matching funds from the private sector.

However, our office's general recommendation is that legislatures should reject new spending proposals unless they are deemed to be of particularly high priority or urgency. On the re-appropriation of CA RISE funding, we don't have any concerns with that proposal.

Spending on technical assistance was lower than anticipated, and so it's a reasonable option to redirect that money into making additional grants. And then we also have no concerns with the reversion related to the Sunnyvale semiconductor facility.

Thank you.

Thank you, Madam Chair. Thank you for the presentation here today. Totally, no questions on California RISE or the Natcast, funding. So get let those two off the hook. But on the California Civic Media Program, I just wanted to sort of overview kind of some of the decision making on on this proposal.

I'm sure you appreciate that every day we're seeing a lot of our newsrooms, if not full on shutter, then reduce a lot of really critical staff right now. So we know the need is urgent. But when would you see the money being replaced, dispersed? And if the $10 million is included in this year's budget, then when you think that would get out the door, it's urgent?

Happy to start answering the question, but I would also love my colleague Blake to jump up and join me. We'll be opening the first application round in July of this year. And I know Blake can speak more to when the funds would be deployed themselves and actually also how many, how much is supplied in state dollars as well as private investment. So I'll hand it to you.

Yeah. I appreciate the question. My name is Blake Kaiser-Lack from the Governor's Office of Business and Economic Development. And as my colleague mentioned, applications are gonna be opening up in early July, and then funds will start to be dispersed in early fall. All $20 million will be dispersed at that time, and we would imagine any future funds to be kind of dispersed in a similar kind of manner in any year as we kind of develop feedback from the initial program.

Okay. Thank you. You might be aware we're promoting right now a tax credit program because I think while we need to find support in any way that we can, it's a model I would prefer. I just don't want to see a grant program start to be able to pick winners and losers, right, you know, through.

But having some broad standards that anybody could be eligible for under a tax credit model, you know, might be also something we want to seriously consider. As we're thinking about this in the budget process right now, obviously, if I am successful on the policy front and everything, we're going to be able to accommodate that in the budget somewhere too.

How... And we all know that money is tight in this year's budget. How did you come to arrive on a commitment level of $10 million I guess given that the need is as dire as it is right now? We're looking at a total need of something far north of that. So would we just pull $10 million?

Oh, for the future, for the future funds? Yeah. So, this is through our partner. Google has been a private partner here, and so they have agreed to match that level of funding.

Up to 10 million.

Yeah. And then future iterations. So that would be matching those funds. And next year, in the following year, they would match $10 million each of those years.

One thing that also I had a concern with, if I'm reading some of the background on this correctly, you can tell me if I'm not. Is your current year one proposal specifically including broadcast?

In this iteration, no. It does not include broadcast.

It would be eligible. No. That's that's relieving.

Oh, or I was sorry. It would not include broadcast in this first round of the program.

It would?

It wouldn't. It would not. Sorry.

Not. Okay. So that is a concern because I know they are definitely at the forefront of, like, a lot of the stress, stressors that, you know, we're seeing out there right now. And certainly, as you know, certain stations have closed. And would your distribution formula also apply for year two?

So the in the first iteration of this, you know, we've been working with our advisory board, which is defined by statute. We have been working with a nine member board of news industry leaders. And so from the first year of the program, we would take feedback based on how the program actually works out. This is a pretty novel program, as you know. And so we would take feedback to be able to adjust the program in future years as as needed.

Okay. I love continued collaboration on this issue because, like I said, we have a lot of different ideas that I think are don't wanna compete with each other, I guess, and we wanna be make sure that we're meeting exactly where the need is out there, and that any program would be efficient in getting the dollars out and as broadly effective as meeting those that need it the most. Great. Thank you.

Any other Members? Comment?

Thank you, Chair. Thanks for your presentation. I also had questions on the California Civic Media Program. I was looking through the minutes from the April 3 advisory committee hearing. And just to add to what Assembly Member Ward already raised. I know it sounds like there's two ways in which you're trying to allocate the monies. Is that correct? The Pro Rata Journalist Fund and the Needs Based Bonus Pool. Is that correct?

Yeah. That's correct.

I think in reading through some of the minutes, I think what I didn't see and what I would love to hear from your team is whether or not there's going to be any set aside or outreach specific to ethnic media, which we know is critically important.

Especially with our communities facing things like ICE raids, things that happened during COVID. We saw the need for language access and the importance of ethnic media really being trusted messengers to disperse information.

And also just specifically given what's happened at the federal level and how specifically public radio has been cut and gutted, whether or not there's gonna be any specific allocation for public broadcasting, specifically public radio.

Yeah. Thank you, Assembly Member. I appreciate that question because it's something that we've thought a lot about as well. On our advisory board are the three largest ethnic media networks, California Black Media and California. At least California Black Media, American Community Media, and Latino Media Collaborative.

And so we've been working pretty closely to make sure that as we are about to launch the program, next month is our goal to publish our website and publish our guidelines, that those folks are kind of well in touch on that and able to spread the news to their specific networks.

And so we have a really robust program through those networks as well, but then also technical assistance, outreach strategy through our community foundation partners throughout the state. And so we're really focused on making sure that we have inclusive outreach for this program.

So right now, there's not like a specific set aside for ethnic media or public radio necessarily?

In terms of funding, there is not a specific set aside for those groups, but we feel like the way that we have structured the program to be inclusive of smaller organizations will make sure in order to reach the a lot of those organizations will be reached by by this program. And then to your to your other point, you know, clarifying Assembly Member Ward's comments, the program currently is not inclusive of broadcast at this time.

You know, initially, in our thinking, the program had 20 million, has $20 million, and there's a lot of news organizations and journalists in the state of California. And you know, as we have evolved through this process, some of those funding cuts have emerged.

And so it's something that obviously we can consider in future years, but just given the level of funding we have right now in the program, we have chosen to exclude them just to make sure that the money isn't spread too thin across the state.

Thanks for sharing that. And thanks for sharing some of the ethnic media organizations that you're working with. I didn't hear, but was there any Asian American ethnic media that is on this advisory board or that you're working with?

Yeah. Julian Do, who sits on American Community Media, has been our lead point on a lot of those organizations, and he's he's well in touch on on this one.

Okay. I'm not sure, I'm sure he's connected with AAPI ethnic media as a Member of the AAPI Caucus. We highly recommend. There's a broad network of folks in the AAPI ethnic media. We have a number of different languages in the Asian American community. Happy to work with you on that and follow-up.

Yeah. That sounds great.

Okay. Thank you.

Any other comments? Alright. Yeah. I concur with my colleagues, particularly related to ethnic media. I know that we've been approached more than a few times about not only the need. I know that broadcast is not in your plan this year, but it's certainly something I think that should be at the top of the list in the future.

As we know, many of our underserved communities, that's exactly where they are getting their information, whether it's radio, whether it's TV. We don't have all of them on the platforms that we may use. But appreciate the work on it, and it's definitely needed at this time. With that, do we... Sorry. Go ahead.

Apologies. Can I ask about the Performing Arts Equitable Payroll Fund? Is there somebody who can take that on? You know, this is, I think, something that we've heard a lot about from folks. It's a hugely, hugely important program that has been incredibly oversubscribed in terms of the demand and and supports very important small arts organizations.

I wonder if, if you could speak at all towards why it was not funded in this year's budget, and particularly a program that clearly has such huge demand. I think the numbers that I have is that there was 41 million in demand against 11.6 million available and closed that for a few days.

So clearly, it's a huge need. These organizations were really struggling. They've been cut also at the federal level and other challenges around funding. Seems like something that is a is a hugely important need for us to be able to fund it and and clearly has a lot of demand.

That program just closed about a month ago. We ended up funding 100 small nonprofits through that program. And as to why it was not included in this budget, I think the governor had other priorities as to how to support the creative community, creative economy.

There is the stakeholder who is in California for the Arts is still involved in making proposals for that program. So I don't know the status of that at this time, but it is not impossible that they would put together a proposal.

And I think that the numbers that I had were that over 80% of those that received the funds were, or applicants that were for that have under $1 million in revenue. And so I definitely have concerns that of those 100 organizations that were funded, if they are not receiving any ongoing funding beyond this year, that we could this could result in the loss of thousands of jobs and even some of these organizations closing entirely. Is that something that you all have looked at in terms of...

Well, there is that is certainly a risk in the performing arts sector generally. Many organizations have closed since COVID. So I think that there is always a concern about the stability and the health of that sector. Whether or not the particular organizations that are that are, and the list is available from our website of all of the recipient organizations. We have not been, received any news that any of them are at risk.

As for ongoing funding, that would be a decision that would be made at the legislature and the governor's level. But certainly, I think that the program was designed to focus on the smaller organizations in order to demonstrate the efficacy of the funding in support of their fiscal stability. So we deliberately designed the eligibility and the administrative criteria in order to make sure that the bulk of the money went to smaller organizations.

You mentioned that are other priorities or other ways in which, within the budget, the governor is supporting the creative economy. Are there other ways in which these organizations are receiving or eligible for new or ongoing types of funds? And was this, was this particular payroll fund designed to be temporary? Was it, was it envisioned as temporary or was there some sort of way that they were intended to have a purpose?

I believe the stakeholder intended it to be a proof point of and since we just closed the program and just released the performance data associated with the program, I think that there's certainly an intent for them to reopen that discussion.

What it was a proof point that it worked or?

That it worked. Yes.

So we have a program that was intended as a proof point and the proof point was that it worked and that there was huge demand for it and our response to that is to end the program.

I don't, I don't know that it will be a permanent end. I can't speak as to why it's not included in this May Revise.

Thank you. I appreciate that. I know this is not entirely on you or anybody else. It does seem like it was a proof point in terms of how critical and essential this type of funding is for these organizations, how needed it is, how much demand there is, how impactful it is. And it's just frustrating and a bit bewildering to me that we would do something that is stated to be a proof point for something.

It clearly proved it and some. And the response to that is to eliminate it. I think that should should probably if a proof point shows that there's huge demand for it, we should be expanding it, not eliminating it. So I hope that we can continue the conversation about, how we can support these critical organizations. They have an exponential impact, not only, of course, on the people who they serve and the people who have these jobs.

But you imagine these millions and millions and millions of people, including many young people, who benefit from the access to the performing arts and to be able to participate and witness and learn and inspired and all of that. So I hope we can continue the conversation about how to take this proof point and build on it rather than cut it out completely. Thank you.

I'm happy to provide other performance data that we just reported on. So to the committee staff for distribution to the Members.

Thank you. Appreciate it.

Any other questions for... Any other questions? Alright. Anybody from the public that would like to speak on this item? 30 seconds or under, please.

Madam... Excuse me. Madam Chair and Members. Rand Martin here on behalf of the Coalition of Public Media. I just wanna address some potential confusion about the Civic Media Fund, which I think is partially been addressed by the witnesses here.

But we have had questions about whether this affects the wonderful proposal that Mr. Ward has before this committee, the $70 million public media stabilization fund that was would be created to respond to the federal cutbacks on public media from last year. This does not, the Civic Media Fund does not affect that at all.

In fact, as it's been cleared now, especially after Ms. Caloza's question, that it does not apply to broadcasters. It does not apply to public media. So the loss of funding to public media will in no way be resolved by any of the money being addressed to the Civic Media Program. So we hope that will encourage you to address more serious, to address seriously Mr. Ward's proposal. Thank you very much.

Thank you, Madam Chair. Eduardo Martinez here on behalf of Actors' Equity. We're the national labor union representing professional actors and stage managers across California. I did wanna thank Assembly Member Haney for the questions. We were also disappointed to not to see a new investment in the Performing Arts Equitable Payroll Fund. We're very supportive of a request by Assembly Member Haney to reallocate dollars to this program.

In the inaugural round, which closed after a week, it funded 4,748 direct jobs and 700 and 7,400 additional downstream jobs, which helped performing arts organizations keep artists, stage managers, technicians, and staff employed across California. So we urge you to support this vital investment in our stage creative workforce and cultural institutions. Thank you.

Thank you.

Good afternoon. Deanna LaTour-Jarquin on behalf of Rebuild Local News. We wanna thank the governor for including the $10 million for the California Civic Media Fund, and also wanna ask the legislature, along with 24 other news and news adjacent organizations, to increase that fund by $10 million to a total of 20 million. As we've heard, we need as much investment in supported trust fact based local reporting, ever now than before. So thank you.

Thank you, Chair and Committee. Tracy Hudak again with California Arts Advocates and the theater artist. I just wanna express our support for Assembly Member Haney's request to allocate funding to continue the critical Performing Arts Equitable Payroll Fund programming.

It was designed to meet and ensure that small... Small nonprofit performing arts organizations could address rising costs and losses of other funding as well as keep their ticket costs down for members of their communities.

As we know, vast majority of California communities do not have access to any other form of private or even local arts funding. So these are the incubators of youth voice where neighbors find their purpose, folks find pipelines to creative careers, and really encourage the committee recommends supporting the continuation of the fund. Thank you.

Thank you. Any last comments from Members? I'll just, again, re-echo that we make sure we understand that there is, I believe, an $80 million request for public media by Assembly Member Ward and that this 10 million under GO-Biz is a different type of media award.

I too will vocally say that both of them are actually needed at this time when we see so much defunding from the federal government related to our public media. Related to the performing arts equitable programming, I too know that this definitely is serving those smaller venues, and it is disappointing to see it wind down if that's in case there is no additional funds being put in.

I know last year, I believe we had to fight for that quite a bit, so hoping you'll give it another relook on that. With that, we will close that item or this item, and we appreciate you. Thank you, GO-Biz. What? Alright. We are with the State Treasurer that we had the privilege of hearing, Madam Secretary of...

Wait. I'm sorry. Not the Treasurer. That was Secretary. Oh, no. Okay. Treasurer's Office. Please join us. State Treasurer, item number 10. Hello. There's Madam Kasey. Hi, Kasey. Kasey started working with me way back in 2012, and now you're at the Treasurer's Office.

I am. Happy to... Thank you. Happy to be here, Madam Chair. Excited to be here, should I say, on behalf of the Treasurer's Office. I'm Kasey O’Connor. I'm the Executive Director of the CalAccount Blue Ribbon Commission.

So I'm here to answer any questions about item one under item 10. And this is just the request for re-appropriation of $360,000 from the 1 million we received last year to continue the evaluation and policy implementation for this program.

Before we go on, what is the Blue Ribbon Commission?

Sure. So in 2022, I was the Legislative Director. We did technical assistance with Assembly Member Santiago and his staff to create an implementation study for the fee-less banking options to be that are out there.

So beyond Bank On, which is one system that's we've seen several cities and counties, we're looking for a statewide option of a federal depository program that doesn't have fees or minimum thresholds to have money in banks. So we understand there is a large unbanked and underbanked population in California.

The Treasurer has always been a big champion of equitable programs to bring more folks into the economic, the robust economics that California has. So we did that first study. It recommended a further, more practical implementation road map be assessed.

And then there was an additional 1 million appropriated last year. So we have utilized a portion of that fund, and this would be to reappropriate the remainder of the dollars so we can continue to work on it.

Thank you. Appreciate. Any other comments?

... Department of Finance. We don't have any concern on this proposal.

Alex Bentz, LAO. We have no concerns.

No concerns. No concerns. Members, comments, concerns, questions?

Thank you, Madam Chair. Thanks for your presentation. Can you just share what some of the numbers look like for just the actual number of bank accounts that have been created? I know, obviously, this is a really important program to make sure that our unbanked community, you know, gets financial products that they can trust and, you know, this is a really great program, if you could just share.

Sure. And so just to clarify, we are still doing the implementation road map, so it hasn't been stood up. What this study is for is to bring more practical next steps to the legislature. So it'll have programmatic recommendations, any regulatory or legislative items that need to be addressed.

And then it will lay out hopefully implementation roadmap that could potentially lead to a pilot or heavier utilization. And we can actually start getting those measurements for you. But it is a, it's been a highly, highly discussed issue for several years now, bringing more folks into the banking sector.

Thanks for sharing that and for clarifying. I guess, what's one, what can you share what some of the the delay is and when do you anticipate actually implementing and opening some of the first bank accounts?

Sure. And so there hasn't necessarily been a delay because there was no implementation date in the first report. There were some big questions and considerations around brick and mortar establishments, where the uptake would be, and some key barriers to this process as in trust with government and the banks.

So we've been honing in with stakeholders on some of these items and how to address those in this next report. So we're currently working on that implementation study. We've contracted with someone to move forward, and we're excited to get this next bit of the study done for you all by the end of this year, hopefully leading to any policy needs in the next legislative cycle.

So right now, there's no target deadline from when to make this program go live to the public?

There's no date in legislation, but it is a priority for the Treasurer and I know the stakeholders as well. So we are moving quickly. For estimate, we did a similar type program with the HOPE accounts, and that took about three years from implementation to their launching this year and have been starting to enroll.

Okay. Well, look forward to the report at the end of the year, and hopefully, we hear when this will launch. Thanks.

Alright. Do we have anybody who'd like to speak on this item?

Hi. Yesenia with End Child Poverty California. Unsure if it's under this item, but because it's under the State Treasurer's Office, just recognizing the inclusion of Trump accounts in the Governor's May Revision. We wanna ensure that there are no harms as a result of including Trump accounts in our state statute. So, just a consideration to rename the program under our state statute because that might be—cause some harm in terms of community enrolling into those programs that are, are going live.

And in addition to that, we did a lot of great work thanks to the State Treasurer's Office on ensuring that Hope accounts were not subject to any test to public benefit programs. So, we wanna ensure that those same changes are adapted to Trump account as well. Thank you.

Thank you. Appreciate that. And also appreciate the thoughts behind the name, and this is not being overly partisan, but with the name "Trump Federal Saving Accounts" or "Federal Trump Saving Accounts," whichever the title is, it is going to deter some individuals from taking part, as there's a lot of fear out there. So, I'm not sure that we can solve the name changing here. That's a future time, but I certainly can see how that could be an issue.

I do think at a later date, perhaps for the next budget session is coming back with more of analysis of what are the accounts out there that families can take advantage of, what are the steps they have to—because I guarantee there's families out there that really do not know what is available for them and having it in a very concise way that, again, as members, they can get that out to their constituents.

Kind of like the unclaimed property, making sure parents know you have access to this, and this is what you can and can't do. But with that, appreciate the this, and that will close item number 10.

We have one more item.

Understood. Another one.

Yes. So, thank you. I'll move for my colleague. But madam chair, I'd just like to say the Treasurer would love to work with you on letting folks know what accounts are out there for their constituents because we have several in our office. So, I'll follow-up with your staff. Thank you.

Thank you. Okay. Where are we?

Good afternoon, Chair and members. My name is Blake Fowler, and I serve as the Director of the Public Finance Division in the State Treasurer's Office.

Move that mic up, up, please.

...With a canceled bond sale, should it ever be needed in the future. The STO has never failed to close a bond sale, and we have not used this authority since it was established in the 2011 fiscal year, and last increased in the 2017-'18 year. The proposed increase would allow the STO to evaluate and potentially pursue alternative financing strategies that may lower borrowing costs and improve flexibility in managing the state's debt issuance.

Specifically, it would provide coverage for a potential termination fee under a direct placement financing arrangement that has a forward delivery component. Banks require this fee if the state did not close the transaction under agreed upon terms.

Although a failed bond closing is extremely unlikely and has never occurred for bonds issued by the state, the increase is needed to protect against potential fee exposure. Approval of this increase does not commit the state to make any expenditure unless the STO were to utilize a financing approach that included a termination fee, a highly unlikely termination event was to occur, and there were no other funds available to pay the fee.

Instead, it preserves the optionality so the SCO can consider potentially cost saving and flexible financing strategies. Happy to answer any questions you might have.

Thank you. Any additional comments?

...Department of Finance. Yes, I would like to make one comment. The bond program have become so large and complex, so any bond cancellation will quickly consume that 1,700,000 buffer. We had no concern with the buffer got up to 8,000,000.

Thank you. None. Members? None. No questions from me. Any members from the public?

Seeing none, that will close that item number two, under the Treasurer. Thank you for being here. We appreciate it. And we are gonna be jumping around now a little bit, folks, because we have, individuals who are testifying down in the Senate that we need to get back and forth. So, we are going to jump to number 19, California Tax Credit Allocation Committee, as this witness has to go back to the Senate.

Thank you so much.

Hello there. We know you're running back and forth. Welcome.

Members, we're on Item Number 19, California Tax Credit Allocation Committee.

Thank you, Chair, members. Marina Wiant. I am the Executive Director for the California Tax Credit Allocation Committee. You may recall a couple of weeks ago I was here, and I had mentioned about our swift implementation of the 25% test, which was in HR 1. Today, I'm here requesting an addition of a Supervisor I position and six analysts in the Development Section to help offset this workload.

As I had mentioned, we have received twice the number of—we've been doing twice the number of application reviews since round three. We just completed round one of this year and had awards of 75 projects, compared to 35 Prop 34 projects from last year. So, really significant workload increase for that.

I'm also here requesting an addition of with Supervisor I position and two Analyst II positions in the compliance section to accommodate ongoing workload created by an expansion of the program and our duties under implementation of the AHPL, the Affordable Housing Preservation Law, as well as AB 86—846—which was chaptered in 2024.

Our program is specially funded, and so, there is no general fund impact for this request. Thank you.

Thank you. Mr. Steenhausen.

Thank you. Good afternoon. Paul Steeenhausen with the Analyst's Office. The Tax Credit Allocation Committee, TCAC, is undoubtedly experiencing greater workload as a result of HR 1, which is a good thing, and recent legislation as well that extends a statewide limit on rent increases to all projects receiving a Low-Income Housing Tax Credit.

So, the, the workload is definitely there. We would just point out that at this subcommittee's hearing last month, that Ms. Wiant just mentioned, legislature heard a proposal by the administration to require the California Debt Allocation Committee, CDLAC, which Ms. Wiant is also the Executive Director of, to provide an automatic award to affordable housing projects funded by the Housing Development and Finance Committee. So, that would mean that CDLAC staff would not have to score applications as they do now.

So, there could be a reduction in workload for CDLAC, the, the other committee, the other hat that Ms. Wiant wears. So, we're the legislature to adopt this set aside, this automatic year award proposal.

Potentially, some staff and resources at CDLAC could be transferred to TCAC, still under the State Treasurer's Office. And this could reduce the need for as many new resources at, at TCAC. Just end by saying the legislature might want to understand as well whether any fees would need to be increased. We understand there were fee increases about two years ago and whether any increases would need to take place in order to fund additional positions. Thank you.

Thank you. Appreciate that. Members, do you wanna respond to that?

Sure. Yes. So, as Mr. Steenhausen said, I'm also the Executive Director of the California Debt Limit Allocation Committee. We've been working on streamlining the application reviews for these types of projects.

So, for a project to receive a 4% tax rate allocation, they also need to receive a sit-like bond allocation. And so, in order to compliment this effort and this and to offset the workload that has been created by HR 1, we are streamlining to do a single review process for all of these applications where we share staff already between TCAC and CDLAC.

So, the reason we are requesting this augmentation on the TCAC side, it's actually because CDLAC does not have the fees or the funds to be able to increase staff at this time, whereas TCAC, just based on the way the fee structure is, TCAC can. And we were quite modest in our, our request for six analysts and one manager or one Supervisor I.

If there is, in fact, a reduction in workload, TCAC has back-end staffing needs that might be coming before you down the road. After projects placed in service, we have projects have to be reviewed by staff, and once the project's placed in service, we have compliance needs where our compliance staff have to monitor the projects for 55 years. So, should there be a reduction in workload or demand on the front end, this staff at TCAC could be re out—reset to others, TCAC staff.

As far as the impact by the Governor's proposal and the creation of HDFC and a set aside at CDLAC, while that might reduce some workload and application reviews for scoring, CDLAC and TCAC staff would still be doing threshold reviews for all of those projects to ensure compliance with the federal requirements.

Alright. A lot going on, especially with this kind of moving back and forth, new administration coming in, all of those things. So, a lot to think about. Yes. You just joined us.

Do you have any comments? I know you just are running back and forth.

Yeah. Susan Wakanda, Department of Finance. I'm available to answer any questions.

Members, just so you know, they're hearing some of the same items that we are hearing in the Senate. Any questions then? Nope? Alright. Anybody from public wanting to speak on this item?

Purva Bhattacharjee with Housing.

Oh, yeah.

Sorry. Purva Bhattacharjee with Housing California. We support additional funding for TCAC staffing, which is necessary to ensure that it can process applications in a timely manner in light of the implementation of the 25% test.

Thank you so much. Alright. Seeing no other questions, we will be closing that item. And now, where are we going? Thank you.

We're gonna go back to item number 11, Department of Financial Protection and Innovation. Item number 11. Welcome. Please introduce yourself.

Good afternoon, madam chair and members. My name is Suzanne Martindale. I'm the Chief Deputy Commissioner for the Department of Financial Protection and Innovation. With me today is my colleague, Sarah Hamilton, who's the Chief of our Fiscal Management Office. We were just here a few weeks ago, so the legislature and you, this committee, is very aware of, all the hard work that we've been doing to implement several pieces of legislation that have expanded our authority to protect consumers and investors.

The DFPI has gone from a regulator of traditional financial institutions and lenders to a regulator with a consumer protection mission and broad authority over also emerging financial products and services. One salient example from earlier this week, we have been very active in shutting down bad practices with crypto kiosks that have facilitated fraud and in some cases, money laundering. The company we shut down on Monday was called Hermes Bitcoin.

It violated multiple of our laws and was indeed lacking the compilot kind of compliance procedures one needs to prevent fraud and money laundering. We shut them down, and that's a great result. So, we have expanded our authority and our remit to protect consumers and investors. So, in line with our investor protection mandate, we are here today to discuss another piece of legislation we have been tasked with implementing. So, now we have, in the Governor's proposed May Revision, a proposal to give us one time increase in our expenditure authority of $125,000.

This will be paid out of our Financial Protection Fund, and this will give us the necessary appropriation to implement IT enhancements that are required to implement SB 919.

This is a recent piece of legislation that now requires that third party franchise brokers that conduct business in California come and register with our department. We have long registered—we have long regulated franchise offerings, but this law explicitly requires the third party brokers to not become registered with our department. The purpose of the legislation is to allow prospective franchisees the ability to better evaluate and make investment choices among a wide range of franchise business opportunities.

It would require franchise presale disclosures to help prospective franchisees understand the role of the broker in the transaction and the incentives they may receive for referring prospective franchisees to one opportunity over another. So, we are requesting this one-time resource, again, an expenditure authority that is required by the statute because the statute only becomes effective contingent upon an appropriation.

And this would enable us to create a new module building on our existing system that already regulates and registers franchise and securities offerings. It's a system we call Francis. And this would facilitate the capture of third party franchise broker registration information to implement this law. The allocation supports the law's implementation and our mission to promote fair and honest business practices and protect investors on preventing marketplace risks, fraud, and abuse. And with that, we are happy to take any questions.

Thank you for that explanation. Do we have any comments here?

Taylor McGraw from the Department of Finance. We have no comments at this time.

You have a really large binder there, though. And I like that because I like big binders. Alright.

Alexander Mantell. Yeah, we have no concerns.

Alright. Any questions or comments from our body here? Assemblymember Caloza.