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

Subcommittee four on the Senate Budget and Fiscal Review Committee will come to order. We are holding our committee hearing here in the State Capitol Room 113. I ask also all members of the subcommittee to come to, Room 113. We can establish a quorum. And we will provide an opportunity for public comment before any votes are taken, generally following the conclusion of the calendar.

Our agenda today involves the following proposals, including the May revision for various departments. It includes items set for discussion and items not being heard. All items in the agenda will be held open. We will take public comment on the entire agenda at the conclusion of the discussion items. We will first turn to the proposals from the Department of Food and Ag, and we will now start until we we will now start with the Department of Food and Agriculture's May revision proposal.

So will the representatives please come forward and present when you are ready? Good morning. And we can begin with the ongoing animal care program resources.

Alright. Thank you, Chair and member of the committee for for allowing us to present our May revision proposals today. My name is Arma Cozina. I am our Deputy Secretary for Finance and Administration. So first, the animal care program resources.

The May revision includes a one time transfer of $5,200,000 general fund to the AG fund and $2,800,000 general fund ongoing to implement the animal care program and comply with proposition 12. Proposition 12, passed by the voters in 2018, established the animal care program to enforce new minimum space standards on housing per calves raised for veal, breeding pigs, and egg laying hens.

The proposition also prohibited businesses in California from knowingly engaging in the sale of products that came from animals housed in a manner that does not comply with the new requirements. This includes products from animals raised and maintained at facilities located both in California and out of state. A portion of this program was intended to be supported by fees.

However, given multiple ongoing legal challenges, including from the Federal Government, CDFA has held off from setting these fees. The one time general fund transfer will allow CDFA to repay a loan incurred to establish the animal care program and support the ongoing operations of the program until a fee based funding structure can be implemented. I'm happy to take any questions the committee might have.

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

Ahmed Saum, Department of Finance. Nothing further to add.

Any comments from the LAU?

Good morning, chair and members of the subcommittee. Brian Metzger from the Legislative Analyst's Office. We recommend the legislature approve this proposal. Ongoing litigation challenging Prop 12 means that there is still legal uncertainty around the ability of the state to charge fees to fund this program. And there's also provisional budget bill language that allows the general fund to be used to cover program costs if program fee revenue is insufficient, to cover them.

Covering the program costs that were initially incurred by the Ag Fund, which receives revenue from a variety of agricultural producers and not just the ones that are covered by Prop 12, also reduces the potential risk of future litigation. We also do recommend, however, that the legislature revisit this funding in future years, once the litigation is resolved, and more is known about Federal Government efforts to preempt Prop 12, including the 2026 Federal Farm Bill.

Thank you. Do we have any questions or comments from committee members? So when I so my question is really around, prop 12 and the legal challenges. Are there obviously, it's still going through through the process, but do you expect this being kind of settled in in in anytime soon in the farm bill? What what what what are what are we looking at here?

There are two ongoing there are two ongoing active lawsuits to against prop 12, and then there is also language in the farm bill. The current version of the Farm Bill preempts certain activities around Prop 12. So specifically, the provisions applicable to the raising of breeding pigs or veal calves at operations outside of California. I can't comment on what might happen with the farm bill. That's unknown at this time.

In terms of the ongoing litigation, I don't have any details regarding when those will be resolved.

So if we don't have a clear understanding of what's gonna potentially happen, what does that mean in regards to the department when it comes to potential additional needs in the, you know, in the near future?

We have, prioritized the overarching implementation regulations for proposition 12 in accordance with, what was requested of us by the voters. We will continue to operate the program as it was outlined in proposition 12. We do continue to evaluate the most appropriate path forward for fee structures as these matters resolve at the federal level and and with the ongoing litigation.

We wanna evaluate a fee structure that is equitable, legally durable, administratively workable, and consistent with the long term operational needs of the animal care program as it was envisioned by voters.

Great. Thank you. Well, that's all I have. I appreciate the presentation on the ongoing animal care program resources. Agenda item number one.

At this moment, we we can move on to item two. Thank you.

Alright. Still me. When the California hemp program, we're speaking about the industrial hemp program support and transition. So when the California hemp program was established in 2017, there was significant interest in growing hemp throughout the state. Since then, the industry has faced a few major changes.

The first is really market based. So demand for Hemp has not kept up with the initial explosion of production and processing facilities needed to support the industry have not materialized. The second is related to the federal Hemp program. In the 2018 farm bill, USDA was authorized to operate an industrial Hemp program on a national level, and CDFA harmonized our regulations to match the stringent federal requirements in 2022.

While we initially expected approximately 600 to 700 growers, after the supply shocks and federal changes, the remaining industry is approximately 70 growers, which is insufficient to financially support a state run program.

The program has worked diligently with the Industrial Hemp Advisory Board to establish fees that would support the program, but such fees would necessitate an increase from about $900 per grower per year from about 1,100 or $1,200 to $212,100,000 dollars annually, depending on growth of the size of the operation. Those fees, understandably, are untenable for the industry. 11 states facing similar constraints have transitioned to USDA's licensure authority.

These transitions have proven beneficial in reducing costs for registrants while maintaining the same level of testing, oversight, and enforcement of hemp regulations. Several of these states have comparable medical and adult use cannabis programs whose regulatory and law enforcement bodies coordinate successfully with USDA to ensure compliance.

CDFA proposes to follow suit, requesting trailer bill language to end its oversight of industrial hemp beginning 01/01/2028. This timeline will allow CDFA to coordinate with existing licensees and USDA to ensure a smooth transition to the federal program. CDFA also request the transfer of $8,300,000 general fund to the Ag Fund to cover the deficit incurred by CDFA to date to start up the program and pay for the operating cost of the program during the transition period.

Comments from the Department of Finance?

Nothing further to add.

LAO?

Brian Metzger, LAO. We recommend the legislature approve this proposal as well as associated trailer bill language that would implement the transition. Similar to the previous item, there were program costs that were initially incurred by the Ag Fund, and repaying the fund would reduce the risk of future litigation. The declining number of state program participants also means that less fee revenue will be gathered and will be unable to cover program costs in the medium and long term.

And as such, the transition to a federal program with minimal state costs would be the most cost effective option.

Great. Thank you. Questions from committee members on agenda item number two? Senator Smallwood Cuevas.

Thank you. Good morning, madam chair. Thank you for that overview. I just have a question about at what point will we sort of have a sense of the scale here on the hemp side? I know that this sort of regulation around hemp exploded as we were looking at the legalization and expansion of our CBD policies and and also at some point thinking about federal legalization.

But looking back, did the administration overestimate the long term sort of transition of this of this industry? And at some point, will we decide that the scale is just not there for, you know, what we need to fund in terms of regulation.

In terms of the production estimates, we the initial estimates of 600 to 700 growers were growers expressing interest in the program, many of whom carried through with initial plantings in those first years of registration. However and that's that's a trench that we saw nationally. There was a very large boom in production after the passage of the 2018 farm bill. And I believe I will defer to my colleagues if they wanna come up and yell at me.

But I believe that nationally, we've also seen the same trend that we've seen in California, which is a reduction of acreage as as demand has not kept pace with the initial productions.

Okay. And and what's the forecast in terms of projections of how we address this? Because, in some ways, it's we're subsidizing this industry now, and it's not growing to scale to help us see some returns. So is is there a sense of reassessing? Is there some evaluation?

Is there a timetable that's being put together Absolutely. For for the for at least the legislature to understand what choices we have to make.

Absolutely. So the the industry has remained fairly stable between sixty and eighty growers for the past few years. We don't expect without significant changes in demand, without significant changes in processing infrastructure, that that would change. And that's why we're really looking at this after protracted analysis and conversations with the industry about what fees would take to run this program. We looked at cost reductions.

Truly, the program has to be implemented in partnership with our county agricultural commissioners. So those 70 growers are located across, I don't wanna misspeak, I believe about 37 counties in the state of California. Each county needs to have their own program to work with growers in their county. So you can imagine it's very hard to reduce costs for a program like that.

And so looking at that math, we've seen that we don't foresee a situation in which the fee base will be large enough to support this program, which we can't reduce much below $1,100,000 per year.

And that's why we propose shifting the program to the USDA, federal hemp program. At the end of that transition, there will no longer be a state program that requires funding, and it will be fully supported. USDA will essentially take on the role that CDFA and the county ag commissioners are currently playing.

And tell me again the timeline. I'm sorry. Maybe I missed

No. No problem. We we are basing our timeline for transition based on other states with comparable adult use and medical cannabis programs. And based on that timeline, we estimate that we can fully transition and include all registrants in that transition by 01/01/2028.

Senator Cabello, do you have any questions? Okay. Okay. So no additional questions or comments on this item. We'll go ahead and move on to, agenda item number three.

Absolutely. Thank you. So regarding our agricultural statistics and reporting work at the Department of Food and Agriculture, the May revision requests $204,000 general fund ongoing and one position to allow CDFA to continue production and publication of statutorily mandated agricultural statistics reports. CDFA's agricultural statistics branch prepares and distributes statistics on California agriculture. The branch has, to date, operated under a cooperative agreement with the United States Department of Agriculture's National Agricultural Statistics Service or USDA NASS.

CDFA and NASS work together to provide relevant, accurate, and unbiased agricultural statistical information. This information includes estimates of planted and harvested acreage, production, stocks, and crop use, providing critical information for each reportable industry. For example, the grape crush report is a mandated report that serves as the primary statewide and regional price reference tool for the wine grape industry, detailing tonnage and pricing both by district and variety. This report serves as the foundation for annual pricing contract negotiations for growers and processors.

The Grape Crush Report also supports the concurrent collection of assessments for the Pierce's Disease Control Program at CDFA.

In July 2025, the Trump administration announced their intent to reorganize the USDA, including relocating NASS staff, to five hubs across the country. None of which is located in California. In April of this year, CDFA was made aware that NASA's programmatic changes were now imminent and would result in the loss of extensive institutional knowledge regarding the surveys, reports, and forecasts produced in cooperation with CDFA.

We were also made aware that due to constraints within the remaining staff, NASS will be prioritizing USDA reporting over external projects such as the contracted reporting for the state of California. The intent of this proposal is to allow CDFA to maintain continuity of its statutory reporting obligations despite the instability created by NASA's reorganization.

Securing a statistical expert at CDFA will not only strengthen our ability to meet statutory requirements, but also provides the expertise needed to maintain continuity, protect industry confidence, and maintain compliance.

Questions or comments from Department of Finance?

Ahmed Seyam. No. Nothing further to add.

Okay. Questions or comments from LAO?

Brian Metzger, LAO. We reviewed this proposal and have no concerns.

Okay. Questions from committee members? Okay. I don't have any questions on this topic. We can go ahead and move on to agenda item number four.

Alright. Thank you. So this, as part of the May revise, CDFA proposes trailer bill language, that includes three technical changes to align a 5% cap on department indirect in the food and agricultural code section two forty two with the initial intent of the language. The current law enacted in 1967 specifies that indirect charges for administering industry funds may not exceed 5% of revenues. Many of these services such as IT and the Office of Civil Rights did not exist when the cap was enacted.

Other expenses, such as human resources and legal services, were decentralized throughout the department at the time of enactment and have since been centralized, which adds them under the cap. Because of this, CDFA struggles with compliance with this cap. Currently, costs for the four CDFA programs that we proposed to be excluded, human resources, IT, legal services, and civil rights, account for nearly 48% of CDFA's indirect costs.

The requested language will authorize an amount specified in the annual budget act for transparency for these functions to be included from the inter to be excluded from the indirect cap. This will ensure that CDFA keeps the administrative costs initially imagined by the code below the mandated percentage.

Second, the language clarifies that the indirect cap applies to 5% of total department wide expenditures as opposed to 5% of revenues collected. This accounts for the fact that some of our fees are collected on a biannual basis, causing our revenues to fluctuate in a way that our program budgets do not. Finally, the language clarifies that the indirect cap applies to the department wide expenditures and not individual program level expenditures as the percentage indirect varies by program, making compliance difficult across 63 industry funded programs.

These technical changes only impact CDFA's compliance with food and ag code and do not represent an increase in indirect charges to program.

Comments from Department of Finance?

Ahmed Seyam, Department of Finance. Nothing further to add.

Okay. Comments from the Aleo?

Brian Metzger, Aleo. We reviewed this proposal and have no concerns.

Alright. Questions for committee members? Alright. I don't don't have any questions on, my end either. Thank you for your presentation on these items, and we'll hold these items open.

Thank you. Thank you. We will now hear proposals from the government operations agency. Will representatives of the department please come forward and present when you are ready? And at the same before we, begin the presentation, actually, I would like to accept establish a quorum.

So consultant, can you please call the roll?

Senator Hurtado? Here. Senator Cabaldon? Here. Senator Smallwood Cuevas?

Quorum is established, madam chair.

Okay. Thank you. Quorum established. You may proceed.

Thank you Madam Chair. Anita Lee with the Department of Finance. So we're gonna be taking two issues up together, because they both involve the new federal, workforce Pell program. We thought it would be helpful to provide a little bit of context, for the administration's approach to the package. The package includes a couple components and includes trailer bill language that I'll briefly walk you through shortly, as well as one time funding for two entities.

One is for Cradle to Career and that will be heard today before this committee. And then the other funding is for the California Student Aid Commission which will be heard in sub one actually concurrently. So specifically related to the administration's package, federal workforce Pell is a evolving, program. The rules, final rules were literally I mean that, I do mean that literally, earlier this week. We are still in the process of reviewing them, but that gives an indication of how things, are changing.

There are also still quite a bit of uncertainties. And so for the administration's proposal, how we approached it is we really focused on what are the key activities that are needed to get the program off the ground and providing sufficient resources in the short run to kind of get those activities going. And so specifically related to the trailer bill, it has a few components.

First, it generally follows the requirements that we were aware of in federal regulations and rules before the before the finalization, as I mentioned, of the federal rules earlier this week. We are in the process of reviewing the final rules and we'll update the trailer bill language, if necessary.

Second, in looking at the trailer bill, it does establish the state's process for determining program eligibility. It does identify the California Student Aid Commission as the authorizing entity that will be responsible for making those eligibility determinations, but it does require consultation with California Workforce Development Board. A third piece of the trailer bill is that it provides a framework for outlining how institutions who are interested in seeking workforce pal eligibility, will go about doing that.

And it does, include requiring that they justify that they meet the federal standards. The fourth component is that it requires institutions that are seeking eligibility to provide, certain data, to demonstrate that eligibility to the Office of Cradle two Career Data.

And then finally, as I mentioned before, you know, we're really focusing on those key activities that are necessary. And so the current trailer bill language focuses on public institutions first, and it focuses on leveraging those existing, data and legal sharing agreements that the state currently has in place, in order to implement the program as cost effectively, in the short run given sort of the uncertainties, that we are aware of. We are open to conversations, about further details, etcetera.

But, again, the administration's package focuses on sort of those key activities that are necessary in the interim. I'm gonna pass it on to my colleague who's gonna focus specifically on the proposed funding level for C2C.

Hi, Kayla Lam in Department of Finance and I'll be presenting on item seven. So in conjunction with the TBL, the May revision provides $1,300,000 general fund one time in twenty twenty six, twenty seven for c two c to implement the federal workforce Pell Grant program. This funding is contingent upon finances review and approval of an expenditure plan detailing the workload related to establishing new workforce and earnings data linkages pursuant to workforce power.

This request will provide c two c with initial resources to leverage the existing data infrastructure, legal agreements, and governance of the data system to provide linked data the state can use in determining program eligibility for workforce Pell. And happy to answer any questions.

Thank you.

Okay. Do we have any additional comments, from the Department of Finance on items five and seven? No? Okay. The LAO.

Good morning, madam chair and senators. Natalie Gonzales with the LAO. We have some issues for consideration regarding these mayor vision proposals, both related to the trailer bill language as well as the one time funding. Regarding the trailer bill language to implement the federal workforce Pell Grant program, Given the state has not implemented this type of program before, there are many state entities involved, and as mentioned, federal rules were just finalized this week.

We encourage the legislature to be careful in developing the associated trailer bill language to ensure that the processes sat in place are efficient, clear, and reasonable for all involved parties.

We'd be glad to work with legislative and department staff over the next few weeks as they finalize this language. Additionally, regarding the May revision proposal for related to the $1,300,000 in one time funding for cradle to career in 2627, to implement the workforce Pell grant program, We have some issues for consideration. First, as noted, Cradle to Career would need to present an expenditure plan to the Department of Finance in order for funds to be dispersed. Under the proposal, no JLBC notification is required.

We also wanted to share that the administration is providing one time funding, though the federal program is ongoing, and much of the associated administrative and data related workload will also likely be ongoing.

Second, it is not entirely clear to the extent in which Cradle to Career's existing data collections can be leveraged versus it needing to set up new data collections and processes. Without more clarity in this area, it's difficult to determine whether Cradle to Career requires all four requested positions or if it might be able to accomplish the required tasks with fewer positions. Also, the administration is taking an unusual approach by asking the legislature to appropriate funding before it has received a specific associated expenditure plan.

Given these concerns, we recommend the legislature take the next couple of weeks to get some more information about the new workload, the associated cost, and the timing, then take action. Finally, we wanted to note that there appears to be, some urgency in resolving some of the remaining budget and trailer bill issues related to the workforce Pell Grant program, given the Federal Government is set to launch the program in July.

Thank you, and happy to take any questions.

Thank you. Do we have, questions from committee members? Senator Smallwood Cuevas?

Just have one question. Thank you for the overview. How will the new data linkages help with access and outcomes for workers? I'm curious.

Thank you for the question. This is Mary Ann Beets, executive director at Cradle to Career Data System. One of the key provisions in the new workforce, Pell, is that program graduates need to have their value added earnings measure, with seventy percent of completers being placed in a related job with value added earnings calculation.

What what is challenging about the implementation of workforce power is that it requires the linkage of information that the local program providers have with information that's available at the state level, specifically earnings from the base wage file at the employment development department. And so that's the work that c two c will be focused on in providing that data linkage so that can be made available.

More broadly, the workforce Pell program is envisioned federally. I think it was intended to try to open up opportunities and resources for people who are completing short term programs for workforce training, as compared to a full four year degree, for example.

And

by connecting this data with the state and the local providers, it what what will it give workers a sense of, we'll see their trajectory, we'll see their earnings, and how it compares to other states? Or just I'm trying to understand the the the the the benefit of this data for workers having better outcomes.

Yes. So I I think that there's kind of two components as as we're thinking about it. So the first is, this is an expansion of existing Pell, which provides grants to lower income individuals, and it it expands it to short term career programs. And so I think the intent is to make those programs available and more accessible to students. And I think that that's one of the issues, stemming from your question.

And then in terms of sort of the data linkages, the new federal program has particular requirements that need to be met. It includes things like job placement rates. It includes other things related to completion, you know, in terms of a certain amount of time. And so the Federal Government will be reviewing. And they've been kind of pretty clear that they're gonna be reviewing that states meet all of those standards.

And so it is very important that we have this data. And that's one of the reasons why the trailer bill focuses on kind of where it's being collected and how it's housed. And so I think going to the second part of your question, the administration's proposal currently focuses on the existing, you know, using our existing structure first and public institutions because for example, the community colleges already have a data sharing agreement with c two c.

That data sharing agreement from conversations that we've had is not sufficient right now for the requirements under workforce power. So there will need to be some adjustments.

But because there's that existing agreement already, it gives us a good starting point to leverage and and you're really talking about kind of modifications. And we can have that conversation about what is being collected locally and then what makes its way up to c two c. And so that's one of the reasons why we're kind of focusing on the public institutions first. There are other institutions that we're absolutely aware of.

They don't necessarily have the same connections right now to c two c, and I think the administration continues to have conversations related to that in, you know, in the coming weeks to figure out, you know, what that path might look forward look like for them.

Thank you.

Madam Chair, and I appreciate the question by the Labor Committee Chair as well on this because the versus a technical piece, I don't know if we're doing this in other trailer bills. I would certainly urge our committee staff and chair to consider not to just referencing the public law number in statute and not put propaganda in the statute by referring for all time putting phrases like one big beautiful bill into law into California state law. We don't need to there's no reason to do that.

So just as a technical question as a technical matter. Obviously, this is a very big deal, this program, and although it is called Pell for the reasons that have been outlined in the presentation, it isn't intended to simply be an extension of Pell to workforce programs offered by institutions that already are eligible for the existing PELP program.

And so this proposal is a very big deal. And so I think LAO's admonition that we really dig into the not even to the details, to the basic policy choices that are being made here is very well taken. And whether we try to wrap all of that up by the passage of the budget or this is the one that needs a trailer in August, we need to get this as close to right as we can. And this is no shade on the administration.

Obviously, these guidelines and things just came out.

So we're trying to we're all trying to react. We don't want to leave money on the table. At the same time, I'm the Senate one of the Senate representatives to the Cradle to Career board and Cradle to Career is a it's mainly a family of educational institutions with a few friends. And so I guess I'm not surprised, but I'm not sure I'm ready to buy into the notion that we should start with colleges and public sector public sector colleges essentially.

One workforce, Pell, is intended to to to be accessed through a variety of institutions, which may or may not be those kinds of institutions and other workforce development programs as an example.

And starting with PEL or and so the language in the trailer bill that to qual at least if I'm reading this correctly, that that that the short term programs that would be covered under California's instant, you know, instance of workforce Pell would have to lead to the post secondary credential that's stackable and portable and have to prepare for one or more degrees at a post secondary ed institution. They have to receive academic have to be prepared to receive academic credit subsequently.

I mean, these are policy choices about work about

to serve. And so that conversation, obviously, educational institutions and all that, but the workforce system, our labor and workforce partners, we need to be having a conversation in this building about what is it we want to do, what can we do, what are we prevented from doing in this space. And so I would certainly encourage us to devote the time to this and not let it become sort of a trailer bill.

what we as California means as workforce development and who we're trying

So hey, the authorized state entity, which shall not be named, but we've named it, has now the authority to make all these choices, and we've decided on a random Thursday in May that this is going to be the new main workforce development federal program in California. So I just think it's worth us spending the time on the policy design here.

We don't have unfettered degrees of freedom, but we do have some, and we should be assuring that we're we're accomplishing that right. And we'll raise some uncomfortable questions, which the federal this federal law and several others have. You know, there there are quite a few community college programs that are public that don't have a 70% completion rate or 70% placement rate. On average, community college programs have a completion rate that's half that.

So it will raise questions for us too, but also what this means for non public institutions and some of the BPVVE authorized schools as well.

So there's a lot here, and we should be taking the time in the coming weeks and maybe through to August to make sure that we're getting this as close to right as possible or and or setting the stage so that we can do have put something in place that we need to now to move forward with the expressed understanding that we're going to do full legislation on this in January.

The other thing I point out, I know the administration is aware that we have legislation moving through the process.

It's passed through the Senate, first through Senator Small Cravings Committee, SB 1054, which I'm the author of, and it relates to both this, but principally to the next item, but I'm just flagging it, that as we're looking at the data sources, data sharing and occupation and the SB 1054 is in the same exact space and so we should be trying to align what we're doing here to advance the overall system while we're opening up these statutes and making sure that the data elements, the processes, the agreements, the privacy protections and everything also match up between these different approaches because they're both necessary and both for the same purpose, but we wanna make sure we get that we get that right.

So thanks, Madam Chair.

With no additional questions or comments on this, I will go ahead we'll go ahead and move to item number six. Thank you for your presentation.

Alright. Kayla Landman, Department of Finance. The California Cradle to Career Data System passed by legislation in 2019 is a statewide longitudinal data system that provides tools to help students reach their goals and delivers information on education and workforce outcomes. The May revision includes Trailer bill language that requests the UC and requires other C2C data providers to sign the participation agreement for the purpose of data sharing with the C2C data system.

This language reinstates repealed language from the former education code section ten eight five eight and clarifies that this does not impose a new requirement on providers and available for any questions.

Thank you.

Comments from the LAO.

Thank you. Natalie Gonzales with the LAO. We have reviewed the trailer bill language and have no concerns with the proposal.

K. Thank you. Questions or comments from committee members? Okay. Easy item.

Well, I appreciate your presentation on these items, and we'll hold these items open and move on to the next item. Oh, I'm sorry. We have a comment from Senator Baldwin. Go ahead.

Thanks, madam manager. So I had a quick an overall question for GovOps. So not not for a gradual to career in this in this space, although maybe it's a project you wanna take on too, which is where where are we where do we stand with respect to Cal Compute? And I well, I have a a separate question on SB 53 as well.

Good morning, committee members. My name is Justin Howard. Deputy Secretary for Fiscal Policy and Administration at the Government Operations Agency. Specifically related to SB 53 which dealt with large language models, and generative AI. That legislation imposed several new workload requirements on a variety of departments including the Department of Technology, OES, and the Department of Justice.

As it relates to the workload associated with the government operations agency, it required us, and it was a contingent requirement to develop a consortium, establishment consortium of 14 members to develop a plan, essentially a framework for developing a public cloud compute system that would be available for people to use. There's a section in the language itself that specifically says that that section is only operative upon an appropriation in the budget act.

And to date, we have yet to receive an appropriation, and we do not have the resources to implement the consortium and do the work associated with developing the framework. So to answer your question, we haven't done anything at this time. We did have preliminary discussions about who would be consortium members, because there are several appointees that would need to be made by the secretary of the government operations agency, as well as the Center Rule Committee Assembly, etcetera.

They all have roles to play to the extent that this section becomes operative.

Maybe maybe I could ask for Nancy the same question and part and this is in part because I was listening to this is Guy Van Newsom podcast in the last couple of days and the subject was an hour and a half on AI and the governor was was highlighting and celebrating SB 53 as one of California's leading accomplishments in the area of artificial intelligence, both in California and globally. And so I'm curious I mean, you haven't received an appropriation because you didn't ask for one.

This is what the process is for. And so it's from the Department of Finance, like why do we not see, if this is one of California's signature leadership efforts by the governor in artificial intelligence regulation, why do why why do we not see a a a a modest request to implement the bill that he signed last year?

Yeah. Kayla Layman, Department of Finance. Given the current fiscal stage situation and the discretionary nature of the consortium, The administration is not proposing funding for gov ops' workload related to the bill at this time. However, you know, if that's a priority for the legislature, we're happy to have those discussions.

It is definitely a priority for the legislature, but I perhaps it's a conversation to be had with the governor because the governor has specifically, by bill number, identified this as a priority for the state. And so it it it just seems odd that the budget doesn't doesn't match that when the when the cost of implementation is is less than some of the proposals that we will have here later that are also discretionary.

For example, the governor, the living governor's legacy fund for $20,000,000 So we have proposals here for purely discretionary things that are not in statute, not in law and are no haven't been identified as anybody's top priorities.

And yet this this particular issue, which is, you know, leads the world in this space as the governor has said and is the is, you know, the in some sense, the first step in the world's best hope that somebody will get their arms around the frontier models that we don't have the basic baseline funding for the staff to implement the bill that was signed just, just in the fall.

Just one more quick comment. I do wanna note that it's not that nothing's being done on SB 53. I know the Department of Technology, which our agency oversees, is also implementing their piece of the legislation because that is a mandate for them to do, which involves, you know, the definitions and things of that nature, and they're gonna update it frequently. So they are moving forward with that, And I know OES and the DOJ as well as implementing their pieces of it as well.

It's just this discretionary piece that has yet to be funded.

Okay. It'll be a conversation to be had with the the governor about his his his priorities on this issue, but appreciate that. Thank you, madam chair.

Thank you. Thank you, Senator Kavaldan. Okay. That wraps up, government operations agency and moving on to the Department of Technology and the proposals starting with the middle mile broadband initiative and moving, thereafter to Poppy digital assistant afterwards. So when you're ready to present, please please proceed.

Alright. Good morning. Mark Monroe, Deputy Director for the Middle Mile Broadband Initiative. As I think we're all tracking, we're developing an 8,000 plus mile network across the state to connect the state's unserved communities. And we are going to be operational on the first segment in July of this year.

So to that end, we have asked for provisional authority in the May revision. It's kind of a backstop, as we look at how we plan to fund the first year of operations. We are expecting $30,000,000 in revenues from the Golden State Net, the third party administrator, and so we're those are what we're how we're expect or we're planning to cover the costs.

We currently have contracts in place for operation of the network, and so if we get the revenues as planned, we should not need this authority. But if we, if, you know, as the project moves on, we know we expect to have between four and five thousand miles done by the end of this year.

But GSN has noted that their ability to set to sell access to the network is being delayed somewhat until more of the network is completed. And so we're just asking for a backstop just in case, you know, to to be able just in case we don't collect all of the revenues in in time to be able to cover the the cost that we have for operating the network. Any questions?

Do we have any comments from the Department of Finance?

Ryan Bender, Department of Finance. Nothing to add at this moment.

Okay. Any from the LAU?

Thank you, Madam Chair. Xin Mah with the Legislative Analyst Office. As reflected in the agenda, our initial recommendation was to reject this proposal because we were concerned that the proposed language would provide broad spending authority without, sufficient legislative oversight, and those concerns still remain. So accordingly, we would still recommend rejecting the proposal as currently drafted.

However, our office has since received additional information indicating that relying solely on the annual budget act process could create timing challenges, should the department require additional operational funding before the next budget cycle.

And in light of that information, we're offering the legislature an alternative approach for consideration. Specifically, rather than outright rejection, the legislature could amend a proposal to include stronger reporting requirements, a defined legislative review period before funds are augmented, and clear statutory parameters governing the use of contingency funding. So while our concerns regarding oversight and broad augmentation authority remain unchanged, our revised recommendation reflects a possible path forward should the legislature wish to accommodate the department's timing concerns, while preserving stronger legislative oversight.

And our office would be happy to work with the committee and legislative staff, on potential amendments should the legislature wish to pursue that approach. Thank you.

Thank you. Do we have questions from committee members? Senator Smallwood-Cuevas?

I remember we had a lot of discussion on this when, you all did your initial presentation and and request and shared with us the third party operator out of state, and there were very few guidelines in terms of, you know, what services they would provide, how would they provide them, what is sort of liability, responsibility. You know, there were a lot of questions about the agreement. And so, you know, the state is now looking at another 30,000,000 backstop for operations.

I don't you know, that was I don't I don't even think there was a message that said we may come back for this when we had that very long discussion. So I'm just wondering at what point do we, you know, acknowledge that some of the financial forecasts, projections, estimates estimates, assumptions underlying the project, either we are being very optimistic or we are sadly way off in terms of our fundamental sort of accuracy of how much we expect to generate and what it will cost.

Can you help me understand which of it which is it? And at what point will we have some estimates that can give us a fairly realistic view so that we aren't sort of, like, thinking one moment where we are we have a third party operator and we're gonna have revenue, and now, oh, wait, maybe not. We may need a backstop. Where when will we know, and what is preventing us from knowing?

Sure. Sure. So just as a, you know, kind of a reminder, when we started this five years ago, you know, this is not something the state had ever done before in terms of developing it and certainly operating such a network. And so we have, you know, been focused very much on developing it and trying to get as much of it done by the end of twenty twenty six as possible.

And so, when we talk about having a fully operational 8,000 mile network, our revenue estimates are based on that.

And so we produced a business plan beginning of last year. For example, highlighted that we expect once, you know, by year four or five when we're up and running, It's it's very reasonable that we would be able to we'd be looking at about $85,000,000 a year in costs, and $85,000,000 or more a year in revenues. So that's high level where we've been. It really comes down to the number of miles.

And so my team has been working with our partners to do everything we could to get as much of the network done by the end of twenty twenty six as possible.

Because, you know, we when we go to or when Golden State Net goes out to to sell access to the network, it's really down to miles and locations. And so, as we learned earlier this year, there's some miles that are going to slip into 2027. We're still trying to work on how we can speed some of those up and, and be strategic. Right now, our our primary focus is to reach the federal funding account grant awardees.

There's 65 of them that said they would connect to us.

So that's really our focus by trying to to make sure that we're ready to meet them by the end of this calendar year. So in answer to your question, when we'll know more, we're gonna know as once we have the net the full 8,000 miles in 2027, we're gonna have a much better understanding, and and then we're gonna be able to be in a position where we can sell access to much larger segments of the network. And so we can we're developing the network.

Our highest priority obviously is reaching the FFA awardees and other communities around the state that have historically unserved or underserved. That's why we're building the network.

Once we have more mileage ready, we're going to be able to look at we call them enterprise customers. That's really gonna be what's important, because that's what's gonna ultimately fund the operation of the network. Does that make sense?

It it does. It just I'm I'm still struggling with why the contingency funds are being used for ongoing operational uncertainty. You know, I think there could also be unforeseen emergencies as well, and I'm unclear if what is if if the formula that we're using to define how much is needed is enough if we're basing it only on what miles aren't completed and therefore what revenue we're not generating. But are there other costs?

What because I guess my concern is this request could come again and again as we realize that there's more and more that's needed in terms of the just the operations and dealing with this new third party.

And so Aye, you know, I I I just wonder why we are now being asked to provide this sort of broad additional spending, but we don't have, I think, enough concrete information that makes me feel comfortable with this dollar amount because there may be other things that will come up that will require additional funding. And that that's concerning given our budget constraints and, and and funding gaps. So, that that's my my concern here.

If there is more detail that can be provided, I appreciated the LAO's recommendation in terms of really laying out more of a plan for this, because at this point, it feels like the the request and the need are not quite matching up because there may be other factors we are not considering. And just, again, not wanting to be back here in a few more months with a with another request.

Cabaldon?

madam chair. So I agree with the original LAO recommendation, not the revised one. And it's part because as LAO noted in the analysis that there should be statutory parameters and an opportunity for legislative review and oversight. I think what I have noticed compared to my childhood spent in this building is that we see more and more and more trailer bill proposals that are broad, unfettered authority. And then LAO says, well, we should add a JLBC review, which none of us I've been a member of JLBC.

We don't review it. I mean, the LAO does and the staff does, but it's sort of you see what, okay, this is how it turned out. But that's not our job. Our job is to establish the policy parameters in the first place. And so and I appreciate the challenges of the uncertainties, but and it's a bit ironic you mentioned the business plan from, as you say, you produced at the beginning of last year, but in the spring of last year, we couldn't get a copy.

And so there's just the level of transparency and trust that is necessary to be able to approve the sort of broad as LAO describes as a broad spending authority without sufficient oversight. We do do that sometimes and we do that because there are operational exigencies and needs that have to happen, But those only are effective when you build a record of transparency and trust along the way. And I'm not this is not to be accusatory, but that takes work to do.

And in the alternative, if we don't have that to rest on, then we need to have in the statute, in the trailer bill or in the budget act itself, more parameters about what this is for and what it's not for, including review afterwards. But before the as the appropriation has happened, we need to have some parameters in there as well.

So I appreciate the problem, not close minded about should we do something about it. But I do think the trailer bill language as it's proposed is too broad and does not provide for sufficient policy parameters at the front end by the legislature and the administration.

Thank you, Senator Cabaldon. I just like a little bit more. You said that there's gonna be—I forget the number of, of miles completed this year. How many of those miles are going to be completed in the Central Valley? Do you have that at hand?

I would have—yeah, that's a good question. I would have to get back to you. We—when we developed the network back in 2021, GSN, when they, they, they kinda broke the state into five different regions. And so, when you go to our website, you kinda see those different regions.

It kinda goes broadly north to south. Doesn't include, like, the, you know, the Central Valley proper. So, my team could take a look at that and get back to you, but I don't have I don't have that information here.

So, what areas have been prioritized from?

So.

What you recall.

Oh, yeah. Sir, when we look at the. the initial segment that will be operationalized in, in July, that will start in the Bay Area. It will go down the coast into Los Angeles. It will go out to the Eastern portion of the state, up digital 395, and all the way up to, I think, Siskiyou County. So, it's, it's, kind of a—almost a, a fishhook-shaped segment that's about 1,300 miles.

Okay. Sounds like all around my district, but not in it. Exactly. Thank you so much.

I, I promise you, we are, we are moving all segments of this network as quickly as possible. And when I mentioned, you know, I mentioned 1,300 miles being operationalized in July, we're looking at a 43, 4,500 miles operationalized by the end by December. And why that's key is that, you know, we've always been targeting SB, SB 156. It provided funding for last mile projects in the federal funding account that CPUC has been allocating. And so, we're targeting those locations.

There's 65 of them that said they'll connect.

So, we are working with them, so that when they are ready, we have, we have a middle mile to connect them to.

Okay.

And that includes some in the Central Valley.

Okay. Sounds good. Thank you so much for your presentation. And I see no other questions or comments from committee members. We'll move on to the next item.

Item number 10, the, the, the Poppy digital assistant. Thank you.

Madam Chair, members of the committee, my name is Miles Burnett. I'm the Chief Administrative Officer for the California Department of Technology. We want to present Poppy, California's digital assistant. CDT requests a $1,000,000 budget augmentation in the Technology Services Revolving Fund for fiscal year 2026-'27 to support the scale-up and ongoing operation of Poppy, California's digital assistant, as a shared statewide platform for broader adoption across state departments.

Poppy is a secure, centrally managed gen AI service provided by CDT to support state of California employees.

It will allow staff to access approved large language models through a state managed environment with uniform security, compliance, and integrations. Built by state staff for state staff, Poppy acts as an intelligent assistant to automate routine tasks, support information discovery, and enable secure collaboration while internal and approved ex—using internal and approved external data sources.

By centralizing the infrastructure, configuration, security, governance, and ongoing model management that individual departments would otherwise need to build their on their own, Poppy substantially reduces the high initial and ongoing implementation costs that currently impede Gen AI adoption. This platform will create an efficient, effective, and secure Gen AI environment for state departments, aimed at significantly enhancing government operations while protecting state data and avoiding duplicative efforts and expenses.

Finally, it directs—it directly—mitigates data-related risks by operating on the state's network under enterprise security standards with governance, logging, and privacy controls already established for participating departments.

And with that, I'm here to answer any questions.

Do we have comments from Department of Finance?

Ryan Bender, Department of Finance. Nothing to add at this moment.

And LAO?

Xin Ma with the LAO. We have reviewed this proposal, and it's requesting 1,000,000 from the department's revolving funds. We have no concerns to raise at this time. Thank you.

Questions from committee members? Senator, Senator Cabaldon?

Just I love this project. Don't tell HED because this is the first thing I've loved this week in this committee, but I love this, this, this pilot, both the way it's been deployed and, and, and built and tested and with the deep engagement of both experts in the technology side and the government side and with the staff of all the agencies and everyone else who have been kind of collaborating to build this.

So, I think it's been, the development cycle, the rollout has been very solid, and the reviews have been very good as well from the users. I, I guess the only question I have about this is that so, the, as we build our own—as Poppy is our as California's own system is the, and I know it's just state, state, state standards about security and privacy and, and egress and all of that, but where does the—where does the compute sit for this?

Is it, or, or is all the data and the compute power for this LLM inside state government directly or is it through contractors that are meeting state standards?

I'm going to invite up, to answer that question, Chaeny Emanavin, who is our Deputy Chief State Technology Officer.

Bad news, nobody's coming up. Oh, there he is. Hiding. You're on your own, sir.

I was hiding. Yeah. Good morning. Chaeny Emanavin, Deputy State CTO.

To answer your question, the compute is in the state-built cloud environment. So, it is hosted in one of those vendor environments, but it's an environment that we completely control, and we've created all of the guardrails around it. So, it's using the power of our partners, but the standards and control that the state has mandated are necessary.

And can and then, can that scale to all, I mean, once it leaves the pilot, if, if, assuming once it leaves the pilot and it scales up to all of state government and perhaps, you know, we, we develop another something similar for local agency or what have you, can it scale in that environment?

That is a 100% what we're doing right now and moving from this early access. The goal of July 1st is we are putting it in new infrastructure that is instantly scalable using the power of the cloud. So, it's—to get really nerdy—its code is infrastructure. So, if demand goes up, the compute power goes up instantly, so it covers that. So, yes, we're designing this with that absolutely in mind, with the hope of scaling quickly as more people want to use it.

New York, as an example, the state government there is, is building its own compute capacity and data capacity, in part to assure that long term, regardless of our standards and our protections, that, that it, that not only is it controlled by, but completely owned by, entirely within the state government's box. We don't—I think we heard earlier—we're not moving very fast on CAL Compute.

What is the future of these, both this and other Gen AI approaches that require both lots of data and lots of compute? Do we—are you envisioning an environment where we're principally reliant on vendors, or is—or do you see the state moving in a direction of building at least some native capacity ourselves?

That is an excellent question. And that's actually the vision is for us to be multi cloud, so we can use all the major cloud vendors. But also, we have that gorgeous data center where my office sits, and we would love to use more of that internal capacity. It's all use-case driven. So, as the use-case says, yes, there is a really strong need for hybrid, is what we're calling it, we will build that out.

We've already done some very early research on that, so that's absolutely a thread that we would love to pull on.

And I mentioned earlier, in, in local governments or, you know, our, our local government partners, for, for whom the, the tools could potentially be even more useful. If you are the, if you're a city planner in Culver City or you're the sanitation manager in Dixon, where you're experiencing, you're grappling with some of these procedures and policies, or you need to understand local code requirements matched up against State Water Board or what have you, but you don't do it every day like the staffers at the State Water Board or DSS might be doing.

Do you—are you envisioning, or, and do you have a sense of timing about where the—and, by the way, Dixon is not big enough to ever develop its own Gen AI LLM capacity. So, do you see—is there a path where we can make not only ourselves, but our, the instrumentalities of the state, our local agencies also have access to the power of this tool?

Yeah. Absolutely. That is part of the road map. Post July, when we do have this new environment, we can create instances that would be set up for a different entity. So, for example, for a, a county, if certain counties wanted to be able to work together, they could.

But the power of Poppy is that it uses definitive government sources like ca.gov, so, if a county had a particular set of data policies, websites, we can make sure that their instance also looked there, so it would be more tuned to their particular needs. And the cool thing about the way we've also designed it is it's what we call elastic, so you pay for usage. So, when you're not using it, like you said, you're not paying for it.

You pay for what you actually use. So, it's flexible in that sense.

So, is all, all the training data boring regulations and guidelines, documents, and bill analysis, and that sort of thing? Or is it—or does the LLM have access beyond, beyond just the state's own documents?

We've told it to stay within ca.gov. By use case, if it needs to jump to another .gov or to a .edu, it can. But right now, we've said, please stay in ca.gov because that's for state work where the definitive source source of data is. But based on the use case, we can let it go further out. We just don't want it to go to Reddit to find data.

Right?

Yep. Yeah. Yeah. And then, I guess, last question. And thanks for the indulgence on this, madam chair.

This is a much bigger deal than I think folks recognize for $1,000,000. Just one other protection question. So, given what's happened at a couple of platform companies, there's no capacity—like what are the protection to assure that a future Deputy Director does not capture keystrokes and using the work product and the workflow of, of state employees to train the model to replace them?

Yeah. Absolutely. That's another definite concern that we've designed into this. No part of the data is used for training at all. This does not send data out.

Data does not leave our boundaries. So, it cannot capture things like keystrokes, and we have tools, we call them data loss and prevention tools, that would stop that inside of Poppy for any cloud application. So, if you want more information, I'd be happy to give you more information on that, I don't—if I'm not understanding or answering your question enough. But the way it's designed is it does not let the owner of the LLM, the vendor, use any of our data for training or tuning.

It is only for the response to our particular query and then it's gone.

Alright. Thanks. Thanks, madam chair.

Okay. Well, seeing no other—okay.

I'm sorry. I just wanna—I appreciate that. I'm just curious about the issue of bias because we are using—users are training it. So, there's, and, and so, I'm, my question is, how do we limit that risk? How do we stop that from becoming sort of part of the, the tool or creating a situation where not the inaccurate or not the right information is getting out. How do—what is there?

Kills—I don't know what the term is. Is there a kill switch? Is—does it go under repair? Does it take a nap and someone can work on it while it's asleep? I don't know.

But, yeah. The big, big red one. But how—I, I'm just curious, how do we prevent that from happening as we're using this?

Yeah. Absolutely. So, all of the Poppy LLMs use what's called "grounding." So, basically, when a state employee gives it a particular set of information or documents, that employee and the LLM for that moment are the only entities on earth that have access to that. Now, that employee can choose to share that with other coworkers or even with other people in the department, but they have the ability to share that.

At no time can that information be shared with the vendor or the creator of the LLM. It's only to get the response back, and then, it's forgotten. We don't use it to what we call "train." We also have an extra safeguard if—in regards to bias. Poppy doesn't always get the newest model right when they release it.

We put the models in quarantine. Our engineers look at it. It's a different team, but very closely related to who are looking at bias and how we measure that. Once we know that the LLM is above board and proper compliant for our state needs, then we bring it into Poppy. So, we use that extra layer of protection to make sure that this thing is doing what we need it to do.

How long—what's, what's that time period of quarantine?

Yeah. The quarantine depends on how much changes are in there and how busy the engineers are. But typically, we get them within a week or two. If it's a really big update, it can take up to three weeks. But the engineers—because we have a lot of experience with the sandboxes and now with Poppy, they're getting really fast at it.

So, yeah.

Thank you.

On my end, I just wanted to ask, how many tax filings do—does FTB typically get filed here in the state of California?

So, through CalFile or just in general?

In general.

I—based on the information I have, I—hold on.

And if you don't have the information, that's okay. I just wanted to get an, an idea of what we look at.

I'll get back to you on, on that information, but I do have the data for the actual CalFile users.

Okay. So, what's the data for the CalFile?

So, for the past three years, we've been averaging about 100,000 CalFile users and we believe with these enhancements, we'll be able to greatly expand that usage.

Okay. So, 100,000 and that—do you know if that's, like, you know, 1% of total file liens? Is it two? Or?

I would have to get back to you on that.

Okay. Alright. And do you expect that number to go down in the near future, given what's happening at the federal level?

No. There would be no impact. We would actually expect more filings if more, more taxpayers are aware of the service. We would expect for more of them to take advantage and file it electronically.

Okay. Thank you. Senator Cabaldon.

This is a longer-term question, but do you, do you—do you see a path whereby we build a—we evolve our system so that employers are, you know, filing—my employer files my monthly wage statement with the state and everyone else, the banks are filing their forms every year or what have you—where Californians can log into the system and the information that the government already has, is prepopulated in the system, and they can just add in their charitable donations if they have any, or their childcare credits and what have you.

Do you see us on, on the path towards a system where Californians aren't expected to reenter information that they've, or that some, they or their intermediaries have already provided to the, the IRS and to FTP?

We, as a department, we're, we're always aware of—looking for those opportunities and efficiencies, and, and that is something that we're taking into consideration for any future efforts. But as far as any more detail on that, I would have to get back to you.

Okay. Yeah. I'm not talking about this specific proposal, but really, where we're headed with this and, and, and maybe Poppy can help, but yeah.

But how can we build a system where, where, where we recognize through the data that we already—that we're already receiving from employers in particular, but also, from financial institutions and others, that we can dramatically—and we have last year's tax returns as well—so that we can dramatically reduce the amount of work that everyday Californians, that may not have an H&R Block account or a Quicken account, can—we can reduce the amount of effort that they have to go and friction that they have to go through, and errors, by, by, by using that information natively.

So, anyway, thanks, Madam Chair.

Okay. Seeing no additional comments or questions. Thank you for your presentation on agenda item number 12. We will be moving over to—and we'll hold this item open, but we'll move over to agenda item number 13, the permanent credit limitation. So, the representatives for the FDB, DOF, and LAO can come forward. And please present when you're ready.

Thank you, madam chair, members. Colby White, Department of Finance. So, this is another of the three revenue solutions that the administration is proposing as part of a balanced approach to restore structural balance. The administration proposes, beginning tax year 2027, a permanent business tax credit limitation that is the greater of five—greater of 5,000,000 or 50% of a corporation's pre-credit tax liability.

The proposal only affects business tax credits, except for the Low-Income Housing Tax Credit, and the credit limitation therefore does not affect any personal income tax credits, such as the Earned Income Tax Credit or the Pass-Through Entity Elective Tax Credit.

The proposal also does not affect the ability for taxpayers to claim refundable tax credits, both under the temporary credit limitation that was in effect from 2024 through 2026, and it also does not affect refundable tax credits that are generated under the Film Tax Credit Program or sales tax offsets under that program. And, unlike prior temporary limitations, this proposal does not include a suspension of net operating losses. So, this proposal does not affect smaller businesses.

It has a $5,000,000 threshold that protects small companies from limitation because most small companies do not have $5,000,000 or more tax liability to offset. Tax data indicate that fewer than 100 companies each year take more than $5,000,000 in tax credits out of over 1,200,000 corporations that file a tax return each year.

And for a corporation to generate $5,000,000 in tax liability, it would need at least $57,000,000 in net income. Some large profitable corporations pay no corporation tax in California beyond the $800 minimum tax, due to large backlogs of tax credits. For example, tax year 2023 indicate that of the 342 corporations with net income above $100,000,000, about 80 reduced their tax liability by at least 50% with about 20 nearly zeroing out their tax liability entirely.

This credit limitation is a more modest version of prior credit limitations that were put in effect to deal with budget crises, and it's really intended to ensure that large profitable corporations pay at least some minimum level of tax while preserving the impact of tax credits. The revenue gains from the proposal are estimated at $850,000,000 in '26-'27, and 1,700,000 in '27-'28, and then 1,800,000,000 ongoing.

Thank you.

Do we have any comments from the LAO?

Rowan Isaacs, LAO. So, just going back to the comments that my colleague made on the proposal for this pre—prewritten—software sales tax, you know, that we're recommending generally the, the, the, the legislature adopts at least the amount of solutions that the legislation—that the administration proposed. I think this proposal represents a reasonable option to increase corporation tax revenues and therefore warrants consideration.

And an additional justification that was pointed out by my colleague of Finance, you know, concerns the ability of some corporations to effectively eliminate their tax liability by generating large numbers of credits.

And to the extent that this is viewed as a valid concern by the legislature, this proposal would certainly address that partially. On that note, we wanna say that the exclusion of net operating loss deductions is definitely an improvement from our perspective over previous temporary limitations that have been enacted, and we would recommend retaining that feature, even though the net operating loss deduction does result also in some large corporations paying little or no tax liability in certain years.

On the proposal itself, the fiscal effect mostly, predominantly operates through the Research and Development Tax Credit, because 85% of all business tax credits are from the Research and Development, or R&D, Tax Credit, and the vast majority of those credits are claimed by very large firms. So, 90% of those R&D credits are claimed by firms with over $1,000,000,000 in gross receipts, and 70% are claimed by firms with over $10,000,000,000 in gross receipts.

And, you know, like any other business credits, you know, the R and D credits should be evaluated as a spending program and so, therefore, is an area to consider for structural changes as well to help address the ongoing budget problem, you know, in addition to or instead of, you know, adopting this proposal.

You know, on one hand, this current proposal would diminish the R and D credits incentive structure for certain taxpayers once, you know, any taxpayer that is affected by this 50% or $5,000,000 cap. So, you know, one possible alternative is to think about other reforms that would reduce the total cost of the R and D Credit, but also try to maintain the incentive associated with the R and D Credit better.

The main drawback with any, with that, with that alternative approach, as opposed to the administration's proposal, is that under this proposal, we get revenue gains immediately, whereas under maybe a more structural reform of the R&D Credit itself, the revenues would take a long time to materialize. So, the immediacy of this proposal, in terms of revenue gains, is appealing. And then, just finally, as was mentioned before as well, but our office had recently published a report evaluating various options for raising and lowering taxes.

And so, thinking purely about revenue raising from the corporation tax, there are a couple of other proposals that maybe should be considered as alternatives or competing proposals to the current one, and that would include simply raising the base corporate tax rate by some amount, or the elimination of the water's edge election, both of which could raise, you know, pretty similar amounts as this proposal.

But maybe there are different drawbacks associated with, you know, the—affecting the incentives associated with the R and D Credit versus other tradeoffs. Thank you.

Thank you so much. Do we have comments or questions from committee members?

Yeah. I just, again, appreciating a response from the administration on revenue, given our fiscal constraints and structural deficit, and particularly as we're looking at providing health care for Californians here in California and the impact of HR 1.

I think the, you know, it's important that we look at particularly large corporations and, and really think about what that fair share tax looks like and ensuring that, you know, we're not in any way disadvantaging our smaller businesses, but really trying to look at ways to have a responsible revenue strategy. I guess my, my, you know, my question about this proposal is, you know, one, it's, it's one of a fairness, of, for sure.

But I also am wondering about the goal of establishing a minimum level corporate tax responsibility. I guess my, my main question is what is the safeguard that we have to prevent large corporations from some accounting maneuvers that maybe they restructure, that they may shift some of their liability. They might look for and find other tax loopholes. You know, we must have, obviously, an estimate of who these—what, what these companies are and, and, and what they will produce in revenue.

How do we ensure that when it's time to collect, that we don't see a lot of changes and shifts that, you know, make this whole proposal obsolete.

Are we—do we have a way of, of, of trying to look at those potential gaps and, and plugging them before companies try to skirt the, the responsibility?

Well, that, that question is actually very layered as far as—I mean, when you're calculating tax liability, corporate tax liability in California, there's a whole suite of rules. It starts with, from multistate or multinational firm, how do they apportion their income to California. And we've adopted reforms back in 2012 that we do that based on sales, so it's not based on where the company is located. So, that's an example of a change that was made to address an issue in that area.

The state does have a myriad of various—well, and most of it is in conformity with federal law, but not always, with regard to what can be deducted and things like that.

So, there's a whole list of things that go into calculating a corporation's tax liability once they get to that. And then, once you get to that, and so, what we see here in the data is that corporations do report tax liability in California in, in a fair amount, but this this is at the back end.

So, a credit is applied after all of those calculations have been made, and we feel that this is an appropriate mechanism to ensure that large profitable corporations pay at least some minimum tax to California. The state has what's called a tentative minimum tax that was enacted many, many years ago, that was intended to serve this purpose, but tax credits have all been—have all been put in place that basically are exempt from that. So, then, that that doesn't work, that doesn't work anymore.

So, this is, this is just a, a reasonable middle ground proposal in a sense, compared to prior limit, because it does allow them to use 50%—up to 50%. Right?

So, it's not, it's not nearly as austere as the prior temporary credit limitations where it was just $5,000,000, and then, it has real protection for small businesses because there's you know, to be as—to, to generate $5,000,000 in liability, you're, you're gonna, you're gonna generally be, you know, a, a, a mid or larger size—a larger size business.

And how is the administration—I appreciate that, and I, I guess we'll have—sorry. My mic is going on and off. Oh, and then this pops off. Okay. It's tired.

We're almost done. We're—you can hang in there, Mike. We only have a few more items. You know, I, I appreciate that answer. I, you know, I just—I know we said that five threshold is, you know, was, was well thought out.

I just wanna make sure there's no sort of shifting around that keeps folks below that, and then, we're not able to, to capture those resources. But I guess we will, we will see how this rolls out, and, and we'll understand what have been the opportunities and some of the challenges of this. But my other question is how is the administration ensuring that large corporations still pay their fair share, rather than using the tax credits to reduce their liability to zero?

Because there have been some examples of very large corporations nationally and others, and even, you know, our president figuring out ways where, you know, we just have a, you know, a liability that's, that's set at near zero. How do, how do we prevent that in, in—here in the state?

Well, I think this this proposal is actually attempting to address that. So, by—one of the ways that corporations reduce their liability to zero is with is with the use of tax credits and, and, and maybe tax credits that they earned many, many years ago. So, that, that, that that is what this proposal is addressing.

This proposal doesn't address more broadly, like, if there were corporate tax deductions that, that, that a company was using or some sort of some sort of expensing or something like that, that would reduce their, their liability to zero. This is, this is after that.

But I think, you know, what we see in the data, you know, is that, that they're—they are reporting liability and that they're using that, you know, the credit offsets is a significant portion of that. So, I feel—we feel that this addresses, you know, at least addresses a significant portion of that problem, with regard to California specifically.

I appreciate that. I, I know that, you know, there's been a lot of conversation, at least in in my district, particularly from working people about the level of tax rate that they are paying on very low wages, and then, very large profitable corporations somehow have no tax liability. And so, I'm appreciating that we are, one, shining some light on this process, even though we're talking more about the tax credit side of it.

But I think it's important that, you know, we keep that level of fairness in our taxing system and thinking about ways that we generate revenue, not just on the backs of, you know, lower wage, middle class families, but also on those very large and profitable corporations. So, I appreciate, again, the administration's commitment to trying to solve our structural deficit issues, to try to look at ways to bring revenues, and that helps us provide the basic safety nets that our, our constituents and our neighbors need.

And this is definitely a step forward in, in the right direction. Thank you.

Senator Cabaldon?

Thank you. Thank you, Madam Chair. And I agree wholeheartedly. I'm very encouraged to see the proposal here, both for the revenue reasons, but more principally for the larger policy reason that for a free society to function, everybody needs to pay something, and it should not be the case that folks in my district should be paying, individual people—just school teachers or sanitation workers—should not be paying more taxes than Amazon. That's not right.

And so, I think the fundamental proposition here is the right one. I'm glad to see the administration tackling it. I think also the data that you've shared with us around how many—how few—companies that we're really talking about here in terms of 20 or so that are driving their tax liability down to zero or near zero, and 80 that would—are over the 50%, it would be, are paying less than 50% of their tax liability. Those are helpful.

And just a reminder, this is not an economy-wide problem.

I mean, the vast majority of businesses are, and companies, large and small, are doing—they're investing in R and D and pushing back the frontiers of knowledge and creating new therapies and new solutions in society and still paying some taxes, just like you can't do both things. And we all have to.

I mean, when the, when the—California was an early state level leader in creating an R and D tax credit, this was though before we were the home of a set of industries, related technology industries, who have plenty of incentives for investment in R and D on their own. We're not trying to convert the ag industry through the R and D tax credit into a more I mean, that—originally, we were.

We want to make sure our manufacturing, agriculture, are investing in R and D and that we remain in a, you know, leaders' innovation.

No one, you know, anthropic does not need any incentive from the state of California to keep investing in our—I wish they would invest a little less in R and D. Maybe we could use a little—could we just take Thursdays off from innovation and just live with what we had for a day?

We don't need to be paying for that as a tax expenditure in today's California economy as we thought we needed to do back in 1999 or in 2003 when LAO said there was no evidence that this was an appropriate—the R and D tax credit now I'm talking about—that, that was necessary.

I would have quarreled with them then, but I think today...this is very clear that—because our R and D tax credit is not as fine grained as it should be and we don't see the differences between like, well, what kind of R and D and would you do it anyway? And those should be—we should be examining those over the long run, and I agree, I certainly agree with LAO.

But we need to get the fundamental problem under control right now. And so, I think the administration's proposal is both measured and bold at the same time. Appreciate the administration's willingness to tackle this. And there's certainly remaining questions about the specifics and the details, but I think the broad outlines of what's being proposed here is the simple proposition that everyone needs to pay something in their taxes, regardless of all the credits that are out there.

And that should apply no less to the biggest, wealthiest corporations in California than it does to the small businesses or to individual families.

So, I don't have any questions, but thank you, Madam Chair.

Well, thank you. Having seen no other comments or questions from the dais, thank you for your presentation. We'll hold that item open, and we'll go ahead and move on to item number 16, the contract—sorry. Excuse me.

Item 14.

Item number 14, reduction of new business tax credits. Item number 14, and please, please begin when you're ready.

Colby White, Department of Finance. So, the administration proposes for tax years 2027 through 2029 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 existences. LLCs are an important business entity for small businesses to use to receive limited liability protections similar to corporations but with a much simpler tax treatment.

These LLCs, LPs, and LLPs are all passed through business entities, meaning business income flows through to the owners and it's taxed at the under the personal income tax, and each business entity form generally provides limited liability protection for its owners. LLCs represent about 85% of the total number of these 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 have only 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 between 2021 and 2023. LLC registrations increased substantially, averaging about $318,000 per year through 2024.

And additionally, from 2021 through 2024, the number of LLC returns paying the $800 tax increased from 725,000 to 883,000, despite the first-year exemption, suggesting that the exemption likely spurred new business formations and many businesses that formed with the first-year exemption continue to operate and pay the tax in subsequent years.

The fiscal estimate is minus 25,000,000 in '26-'27 and a 100,000,000 in each of the two following fiscal years and 75—minus 75,000,000 in '29-'30, and this is based on an assumption of 250,000 new, new registrations. Thank you.

Thank you so much for your presentation at this moment. I'm good—my district calls, so I'm gonna hand over the, the gavel to Senator Cabaldon.

Madam Chair, LAO?

Rowan Isaacs, LAO. Our view is that this proposal lacks a strong policy justification. So, a primary concern we have is that the proposed exemption is not especially well targeted towards the intended purpose, which is to incentivize and provide relief to new small businesses.

Since this exemption would apply to any new limited liability registration, some or much of the benefit would go to registrations that aren't really associated with new economic activity, such as LLCs owned by larger companies or entities that are formed to simply hold assets and investments or other registrations that are simply for legal or liability purposes, rather than representing some business expansion or business creation. This is something we often refer to as a windfall problem in these sort of expenditure programs.

Because many recipients likely would have formed regardless of the exemption, you know, we think that the revenue loss relative to the amount of actual business activity it generates is likely to be, you know, not, not too, not too favorable. In the administration's proposal, it notes that limited liability registrations increased in California when the minimum tax was temporarily eliminated in a pre—in previous years.

However, just we just do wanna note that during that period, the United States, as a whole, experienced quite a similar trend and pattern in limited liability registrations. And while we're not ruling out some modest effect of this proposal on incentivizing additional registrations, you know, we would urge this legislation not to expect this proposal itself to cause, like, to causally, you know, increase registrations by a lot, especially since that the current proposal only reduces the fee by half, rather than fully eliminated as the previous exemption did.

And more generally, you know, for many businesses, a one time $400 tax reduction is certainly welcomed by small startups, but is relatively minor, relative to, you know, all the other startup and operating costs and, therefore, we think is unlikely to significantly affect the decision to form a new small business. And one final point we wanna make is that, you know, good tax policy generally seeks to treat similar taxpayers similarly unless there is a clear policy rationale for giving them different treatment.

And so, in addition to recommending the legislature reject this proposal, you know, it may wish to consider whether maintaining the existing different treatment of first year minimum tax for corporations, you know, continues to serve a clear policy purpose as well. Thank you.

Alright. Thank you. You're supposed to say, Senator Smallwood-Cuevas, no, for no comments. We can all cosplay Department of Finance today.

But, anyway, thank you. So, I'm going to ask you a completely off the ball question, but it was relevant to an issue that we had up yesterday. Do you know what Montana's LLC registration fee is by chance? For the month for purposes of the Montana loophole, with respect to the purchase of luxury vehicles, aircraft, and yachts?

It's been a while since I looked at that at the headlines, so I'm not familiar enough to talk about it at this particular juncture. I can't recall what was driving that—what was driving that loophole. I think they were, they were certainly forming the LLC in Montana, somehow evading tax as a result by free—can't recall the details.

Evading the sales tax. Okay. I'm trying to understand that.

Okay. So, I am sympathetic and share the LAO analysis on this.

I do also understand that this, the package of these three proposals together, I'm assuring that the biggest corporations pay some share, even if it's not their fair share and is married with this proposal essentially to say, and for small ones, despite all of the issues that have been raised, which I think are right on target, that those are—I understand that they are there together in order to convey a clear message about our the policy objectives here.

So, I've shared those concerns, but also not necessarily opposed to this proposal either. Alright.

With that, then we're going to move to item 15, which is tax conformity for the Trump accounts. Department of Finance.

Thank you. Colby White, Department of Finance. The administration proposes, effective beginning tax year 2026, to conform state law to the federal tax treatment of Section 530A accounts, commonly referred to as Trump accounts, which 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 530A accounts were created under the federal HR 1, enacted in July 2025.

The Internal Revenue Service has announced on March 31st that about 4,000,000 children have signed up for the accounts nationally.

We don't have California-specific data, but that suggests that there's likely hundreds of thousands of accounts already in, in—signed up for in California. This proposal is consistent with the state's practice of conforming to most federal tax advantaged accounts, such as traditional IRAs, Roth IRAs, 401K plans, and the Achieving a Better Life Experience, or ABLE, accounts.

Without conformity, due to the difference in federal and state tax treatment of these accounts, the child—the child or the beneficiary will pay tax annually on the account's earnings even though they can't access the funds, and will then have to track a separate California-only record of these already taxed amounts across potentially several decades, so, so that California does not tax the income a second time when withdrawals are made, which is when they're taxed at the federal level.

So, additionally, nonconformity could, in limited instances, require the filing of the state tax return by the by the child. So, the fiscal impact here is minus 1,000,000 in '26-'27 and increasing to minus 3,000,000 by fiscal year '29-'30.

Thank you.

Thank you. LAO.

Rowan Isaacs, LAO. We have no concerns and recommend approval. We concur with the administration that conformity prevents taxpayer burden and confusion.

Alright. Appreciate that. I think I concur that the, we—this is not an issue of us saying yes or agreeing with the Trump accounts or certainly that conception of them, but it is the case, we obviously don't want children to have tax liability that they can't pay and also to have all taxpayers have to deal with one more difference between the two forms, the two processes and the two documentation requirements.

So, it is in the interest of Californians of all kinds to, to not have to bear that burden. We do typically conform unless there's a really, really important disagreement.

And here, the support of these accounts is, despite their origin, isn't one of those. So, thank you for that. We're going to then move to item 16, which is Contractor and Procurement Services. Now, we're with the Department of General Services.

Good morning, chair, members. Heather Carlson. I'm the CFO for the Department of General Services. The May revision includes several proposed trailer bill amendments to create some operational efficiencies across procurement and real estate services. The first one is to modernize payments for routine software licensing purchases.

This proposal would create a clear statutory allowance for advanced payments for software contracts that meet specific conditions to speed the acquisition time and streamline the pen payments for vendors, which could result in super volume discounts. It's it's like if we were to pay a yearly subscription to a streaming service rather than a monthly. It may have discounts that are associated with it. So for certain circumstances, we feel this would allow for some achieved savings across the state.

Do you want me to go through all of them, okay.

The next one is the authorized electronic submission of state procurements. When California procurement laws were written, they were generally written assuming that it was a paper based system. We're no longer in that paper age, and so we're seeking to create availability for modernizing statute to reflect the support of mod modern digital online procurement practices. Without legislative action, state agencies will be at risk for potential legal action and remain reliant on outdated manual workarounds that slow down purchasing, increase administrative costs, and create audit risks.

Final for procurement is to reduce required certification.

This proposal streamlines the procurement process by consolidating certification submissions. Currently, certifications are individual forms, which can lead to disqualified bid or bidders due to failure to submit a certification. By eliminating the need for separate certification forms, the state could prevent potentially paying higher pay prices for those disqualified bids.

So in essence, we're basically saying, we'd like to create one form where all certifications, rather than each individual certification requirement is a separate form, and to align across programmatic areas to make sure that the certifications are in line with each program consistently. And finally, an increase in departmental access to agriculture and environmental services.

Current statute allows for all departments to contract for agriculture and engineering services when regulations are established through the formal regulation process. This process has led to an over reliance on DGS to contract on their behalf. The reliance creates backlog greater greatly slows the ability for similar projects to be completed and forces DGS to undertake simpler projects instead of focusing on more complex ones. This statutory change would allow departments to use DGS established tested procedures until such time that they could implement their own regulations.

We respectfully request your support on these measures, and with that, I'm happy to answer any questions.

Before we turn to LA, I just wanna convert the the the trailer bill itself, is that is that not even posted yet? Or I know we have it at the staff level, but has that been posted on the trailer bill site?

Andrea Scharffer, Department of Finance. We are working with ledge counsel right now. We do have an RN number and it should be posted within the next day or two.

Okay. Okay. Department of finance?

No further comments. Just a quick correction is it's architectural and engineering for the regs changes at the end. So we're talking about what we call A and E, design.

Legislative analyst.

Hi. Heather Gonzales with the legislative analyst. We, circling to your comment, we recommend waiting to make a final decision until we have the actual trailer bill language. We do have a proposal, but not the final TBL. Our initial view is that the intention or direction of the proposed changes appears reasonable. But in order to ensure that we fully assess for unintended consequences, we need a clear view of the statutory changes.

We will be reviewing those when we get the language and will at that point communicate any concerns to the committee.

Alright. Questions? None. Alright. The chair Hurtado wanted me to note that she she's very encouraged by the by the work in this space.

She in terms of both efficiency and accountability in terms of contracting, particularly on the software side. I I I do agree very much with LAO.

This this this this area is within the policy committee that I chair as well, and so it is we we really should have the trailer bills at the at the release of the May revise and certainly prior to our subcommittee hearings if we're not able to really interrogate them, in their detail, but I'm very interested in making sure that we get those right. We wanna make sure we have the the the maximum amount of streamlining.

We also wanna make sure we don't have policies that, drive us towards, you know, larger vendors and, you know, the longer term contracts.

We wanna continue to have innovation. So just wanna be you know, just signal that we are gonna wanna pay attention to the details of the of the actual trailer, but when it's out and that's one one more reason why we're holding this item open. So alright. Thank you. Next, we'll move to item 17, which is control Section 7.20, the governor's legacies proposal.

Department of finance.

Good morning. Amy Jarvis with the Department of Finance. The May revision proposes the addition of control section 7.20 to appropriate $20,000,000 general fund to recognize the history and legacy of California's living governors who are not serving in the office of the governor as the effective date of this budget act.

The specific use of the funds has not yet been identified, but the appropriation of $20,000,000 in a control section provides the administration flexibility to determine how the funds will be used to honor the accomplishments and contributions of prior governors, and which department will administer the funds.

Sorry. LAO.

Good. Almost noon. Nick Schroeder from LAO. Given the structural deficit with the state budget, our office has an overarching recommendation that the legislature not approve new discretionary spending. And so according to that recommendation, we are recommending a rejection.

Senator Smallwood-Cuevas?

Yeah. I absolutely believe in California's history and its leadership deserve to be recognized and preserved. I just have a question about priority. I have a question also about equity. I mean, as the LAO is saying, the structural deficit, we are trying to figure out homelessness, we are trying to figure out health care.

And, you know, we had a not too long ago, a huge surplus for these kind of projects. And so just I don' t know if Californians will agree that this is a priority while we can' t meet the basic needs of our communities.

So, I also think what' s important with these projects when we think about elevating history and how we institutionalize our story and look at our stories when we' re especially if we're investing public dollars in in helping to, to think about, you know, California's leadership and what it looks like. I I I would hope that we could think about a legacy that doesn't put more floor to ceiling paintings of of white men across the state of California. I mean, California has seen many firsts.

We had our first black speaker. We had the first woman speaker, the first black woman speaker. We've got the first Latina pro tem. I think when I've gone to other countries, what I've appreciated about their state houses is that they have a much broader story to tell, a more modern story, a story that is more reflective, a story that really recognizes the advancement of what and who can lead and how we represent that in the state of California.

I think when I walk these halls, certainly there is a museum on the ground floor, but the whole building does not have to be draped in a in a very narrow and and racist and misogynist history where we just have no women, no people of color reflected in this building, in the main hallways in a grand way.

I appreciate that we I' m a big culture person. I think it' s important because it tells our story. But we have to be really clear about what's the story we're telling. And especially if we're talking about the leadership and and of the state, that is a much broader conversation.

And so, you know, I have a real challenges about the timing of this request and where we are financially, but I have also an overarching concern about how many more stories do we need to tell, that don't reflect folks like me or folks like Senator Cabaldon in this building when it comes to leadership.

I hope the administration rethinks that and leaves a legacy that is a real legacy of what has happened over these modern decades where we have worked very, very hard to build a legislature that looks like, feels like, and really represents the values and who the state really is.

Understood.

I I I I was gonna say I don't have a question, but I mostly do have questions, but not not for you today, which is but but then then that's only because we don't have a real proposal here. It's not an appropriate to control section item. It doesn't we're we give give up to $20,000,000 to any any state agency, I suppose. We don't know who that is, what it's what it is.

There's no description of the program, the objectives, the accountability, the timeline for spending, no report, not even a JLB JLBC report.

So there's really nothing here there's no proposal here to be responsive to, and, you know, I I I I don't know if I'm unique, but I'm one of the few people in the state that's been an appointee of all of all of them. Pete Wilson, Gray Davis, Arnold Schwarzenegger, Jerry Brown, and Gray Davis at various capacities. So I know I've served in all their administrations in one form or another. This isn't the I I do absolutely agree.

This isn't it's not really the time for looking backwards and celebrating legacies and building ballrooms, that sort of thing.

We we have a story to tell in California, both to ourselves and to the world, and I know the governor's been committed to doing that as well. To me, that's far more important, to be to be pushed you know, to be assuring that California's cultural and political and economic influence in the rest of the country and the world is is sustained. That's more important than looking backwards on on on the legacy.

So there's no there's there's no there's no background here about what we would be doing. Are we are we building monuments?

Are we renaming the aqueduct? Like, what are what's happening as part of this proposal? So there's not nothing to respond to, but it's hard to imagine there being some sort of historical legacy that would be more important to us than than funding the SP 53, you know, getting arms around AIs and its potential threats to to the world and to the state.

And and for congresswoman Jackie Speier, who was here a couple weeks ago and just meeting the basic needs of on the vehicle license fee in a couple of counties, you know, funding some of some of some affordable housing, the arts districts. I mean, there's so many other needs, not even counting the challenges that we're facing from HR 1, that we don't have we have no detail here, but it's hard to imagine a legacies proposal that would rise to that level.

So looking forward to the administration's, you know, more detailed proposal, but that you're you have a very high bar to get over to at least for me, to convince the the legislature that of all of the expenditures, pressures that we have in California right now, and and also the opportunities that we have, that this is at the top of the this is at the top of the list. Alright. There's nothing further on this item. Thank you very much. Alright.

Great. We're now gonna proceed to public comment, and we'll be taking public comment on all items on the agenda, both the discussion items that we've just completed taking presentations and questions on, but also all of the items that are noted on our agenda as not for presentation. So if you wish to make a public comment, please make your way to the stand up microphone and begin by stating your name and and affiliation. We very much appreciate everyone's participation.

We wanna make sure everybody gets a chance to be heard.

And to that end, we do ask that all the comments be limited to no more than, one minute each. If you're not able or, or have to go and are not able to testify today, you're absolutely welcome to submit comments and suggestions in writing to the budget and fiscal review committee or visit our website as well. So why don't we begin with public comments. Welcome.

Good afternoon. My name is Josh Assink with Urban Village Farmers Market Association. I wanna express my deep gratitude to committee members who've shown their support for the CNP, the California Nutrition Incentive program, especially Senator Senator Cabaldon for signing the letter that Senator Becker authored. I wanna speak specifically to the need to draw down federal dollars here and multiyear funding being essential for that.

The federal guss net funds, there's an RFP every year, but CDFA can only apply if they have funds allocated to match the grant.

Guss net funding allows for up to four year allocations. So if the state demonstrates an ongoing commitment, then the feds can reciprocate. Thanks so much.

Thank you.

Samantha Singh with NextGen California. I'm gonna speak very briefly on three items, relative to CDFA. Just gonna align my comments with the previous speaker in strong support of and respectfully request the legislature include the same funding for the California Nutrition Incentive Program or CNEP.

Relative to GovOps and Workforce Pell, as a member of the financial aid big table coalition, we ask the legislature to support and build upon the implementation funding for Workforce Pell as proposed in the governors may revise, specifically retaining the program implementation under the student aid commission and to fully leverage new dollars, we also ask that Cal Grant C be updated to capture Workforce Pell program.

Finally, relative to DFPI, as a coleader of the campaign for California Barrows Rights Coalition and also on behalf of SoCalCan, USPIRE, and TICAS, we urge the legislature to provide a one time 20,000,000 investment in the student loan empowerment network to keep this critical already built infrastructure serving California borrowers.

The network works. It saves 14,000 in monthly savings for borrowers resulting in over 4,600,000 in student debt canceled or discharged for Californians already. Thank you.

Thank you.

Hi. Good afternoon. Judith Gutierrez with the American Heart Association. We are in strong support, and hear backing my colleagues to urge the legislature and governor's office to fund CNP or the California Nutrition Incentive Program, specifically for the market match program. It allows beneficiaries and families with CalFresh and WIC to stretch their grocery budget when they shop at farmers markets by matching their dollars.

And so I also want to thank Senator Kibaltan for signing on and Senator Becker's letter, and we urge your support and continue to look forward to the conversations. Thank you.

Thank you.

Good afternoon. Katrina Linden on behalf of Young Invincibles, Protect Borrowers, and the Student Debt Crisis Center. Here today to request inclusion of a $20,000,000 one time allocation to preserve the student loan empowerment network under the DFPI. This program has been proven to be a critical resource for Californians navigating an ever complicated federal loan system, and especially for partners like the Koreatown youth and community center who rely on this funding to do important work in their community.

Also, relative to the Workforce Pell, on behalf of Young Invincibles and the Institute for College Access and Success, We strongly support the governor's proposed funding allocation to implement Workforce Pell and support its housing under both CSAC and the allocated funding for the cradle to career data system.

We're encouraged by the proactive approach and ask for an intentional, collaborative, and responsible program eligibility process, that includes the voices of young folks and the community members who will be using this program. Thank you.

Good afternoon. Thank you, everyone. My name is Portia Bramble. I'm the Food and Farming Program Director for the Ecology Center. I'm here to speak on behalf of the CNIP program, the California Nutrition Incentive program.

I'm here on behalf of our partners at Roots of Change as well as the California Alliance of Farmers' Markets supporting this budget request for CNIP. We're representing all of California's farmers markets and all of California's small and midsized farmers. I also serve as the chair of CDFA certified farmers market advisory committee. I'm here to request your support and thank you, Senator Cabaldon, for expressing your support already for CNIP.

Loss of CNIP funding will result in not just the loss of those CNIP dollars, but the loss of the snap CalFresh dollars spent with farmers at farmers markets.

I've been an operator of farmers markets for eighteen years, and prior to market match, CalFresh spending at farmers markets was very low. Last year alone, CalFresh and market match represented only over $25,000,000 of income to farmers. If we do not see funding for CENIP, we will lose farms, we will lose farm income, and we will see farmers' markets close in the state of California. So we appreciate the urgency of this issue, and thank you for your support.

Thank you. Thanks.

Hi. My name is Erin Tormey. I'm a farmer out from Half Moon Bay. I am extremely nervous because this is not usually what I do, but I'm here also to

This is this is your house.

Thank you. And my phone died, so here we go. But I'm here to to Gwen, thank you for your support and ask for your continued support to ensure that the California Nutrition Incentive Program, that funding is restored and extended. So, we I represent 17 farmers from my particular market that I also run and operate in Half Moon Bay. And I think that's something that's really important to be clear on is where that money goes.

It's spent in the urban communities, in the more densely populated places, but that money goes to everyone's district from as far north as all tourists all the way down to San Diego and beyond. It's an incredibly important program and a huge economic development engine, particularly for rural areas, because it's not just the farmers that benefit from that.

People can spend their EBT dollars on very small cottage, micro food producers who are also attending those markets, so it's available for, to spend on their EBT dollars on any EBT eligible food, so that, and the third thing that gets lost a lot is that this with the state has money through CNIP to draw down those federal dollars, that's two thirds of what it takes to run those to run that program.

The other third is coming from people like me and the rest of farmers' market operators who we provide that other third match. And so we're just really counting on your support to keep that funding going. Thank you.

Thank you.

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

California is home to the largest life sciences cluster in the nation with over 17,000 biopharma establishments generates that generate about $395,000,000,000 and 1,150,000 California jobs. The predictability and the use of that re research and development tax credit is is a critical factor in decision making about these companies and whether or not they choose to invest, expand operations, hire workers, or conduct long term research activities. We encourage the committee to reject the governor's proposal.

We think it's short sighted and could have long term detrimental impacts on the California's innovation economy. Thank you.

Good afternoon. Jeff Neal here today representing Protect Democracy United, a nationwide nonprofit promoting free and fair elections and and opposing authoritarianism. We're here to, we've been working for the last year with California Voter Foundation, to try and address the threats, that we see to November's election. To that end, we're requesting $91,100,000, to do some things to combat those threats. Part of the context for this is the Supreme Court case that's pending right now.

We expect a decision in the coming weeks that could very well strike down the grace period for ballots that are vote by mail ballots that are received after election day. We might even see that decision come down while we are counting ballots for the June election.

And to that end, we are $91,100,000 request, is, $600,000 for the secretary of state to implement, these programs, $35,000,000 outreach campaign, voter education outreach campaign to make sure that voters know, you know, if they do have to get their ballots in to so they're received before election day instead of simply mailed before election day, that'll be a massive effort, and also 55 and a half million dollars to counties to provide, you know, whatever they need most. In some counties, that's equipment. Some places, it'll be staff.

Some places, it could be space. So, we're hoping that the subcommittee and the legislature can, can provide that funding. Thank you.

Good afternoon. Danny Kendall Kaiser. I'm here on behalf of two different items. Firstly, on behalf of the California Low Income Consumer Coalition, National Consumer Law Center, and Consumer Reports, all members of the coal campaign for California borrowers rights coalition. We respectfully urge the legislature to provide a one time $20,000,000 investment in the student loan empowerment network under the DFPI.

Separately, here on behalf of the California Tax Reform Association, as it relates to the tax policies in the May revise, the credit limitation of $5,000,000 or half of taxable income resolves a looming future budget problem. In 2024, the budget proposed to limit tax credits but refund unused tax credits after 2027. This proposal not only raises $1,800,000,000 by 2930, but also eliminates the specter of the state paying refunds of hundreds of millions of dollars to each of the world's largest companies.

Relating to software sales tax, in addition to the nearly $1,000,000,000 in ongoing and increasing revenues for the state, this proposal benefits local governments by over $1,000,000,000 yearly. Related to lowering the minimum tax minimum franchise tax, we question the inclusion of LLCs and LPs in the break for, quotes, new small businesses, unless tightly drawn to exclude the many

thousands of subsidiary LLCs and LPs created as exclude the many thousands of subsidiary LLCs and LPs created as pastors for larger companies. Missing from the revise are the following three items. Worldwide combined reporting, as we see in AB 1790, which eliminates the choice of water's edge reporting for multinational corporations, this should have been a part of the May revise proposal and should be part of the tax package in the budget.

Secondly, in January, the governor said they would address he would address, tax benefits to large corporate owners of single family homes. We urge the governor to revive AB 1611 Haney, which would eliminate the exclusion of tax on capital gains on sale of those homes.

And lastly, related to federal conformity, there are a number of provisions in the federal tax bill, such as reforms to use, offshore tax havens or NCTI's, which would benefit California's tax system. This discussion, which has happened in years past, should be convened for this session by the governor and the legislature. Thank you.

Good morning. My name is Samantha Gordon. I'm here with Tech Equity, and just want to thank you all for the discussion you had around and some of the questions that Senator Cabaldon and others raised around the importance of this.

The legislature's already done the hard work of passing SB 53 and one of the components that we believe was so amazing and innovative within that bill was the establishment of public computing that the state would own and run and that would allow researchers, start ups, and folks that don't have the resources like Google and Amazon and others to innovate and build these models.

And the one thing the bill calls for us to do this year is not fund the whole thing, but to make sure that there's an appropriation to establish a commission of experts that could outline what it takes for us to stand this up in California. So we just urge the legislature to dedicate that small amount of funding to make that happen, and that commission under law is supposed to deliver a report to the legislature by 01/01/2027.

So we're hopeful that there can be a small dedication and just wanna underscore, New York is the only other state that has done this. They're ahead of us. There are economic estimates that say for every dollar put into New York's Cal compute equivalent, $5 are returning to the New York State economy.

In addition, they already have a 140 research projects from universities in motion on things like climate change, developments in medicine and health, and so we don't want to miss this opportunity and continue to have California lag behind. So thank you all.

Hello. Thank you all for having me. Caitlin Herring on behalf of the California Taxpayers Association, and we respectfully oppose items eleven and thirteen. The proposal to tax digital prewritten software and software as a service would set a dangerous precedent for taxing services and would increase prices for consumers and businesses at a time when California already faces serious affordability challenges.

We also oppose the permanent credit limitation because it would weaken California's R&D tax credit, discouraging the investment, innovation, and job creation that is critical to the state's economy.

Taken together, these proposals undermine California's innovation economy from both sides, taxing the tools businesses use to grow while limiting the credits that encourage them to innovate. For these reasons, Caltax respectfully opposes both.

Good afternoon, members and staff. My name is Oscar Sandoval. I'm with the Center for Healthy Communities at Chico State University. My organization is a prime contractor and helps every CSU, UC, and community college in the state with SNAP and WIC applications, as well as helps with troubleshooting. But I'm actually here today to discuss CNET four market match.

As you all know, this was not included in the May revise and we're actually here to advocate for it.

I know a lot of my coalition colleagues have spoken very highly of the benefits, but I just want to add in, at a time when the Federal Government is destroying, for lack of a better word, SNAP and access to it, market match serves as a big, I would say, a way for students in particular who are, you know, so many of them are living in their cars, so many of them are barely getting by, so many of them just have to decide between paying rent or working extra hours or using that time to study, or if they have kids of their own or other family responsibilities, they're just juggling a lot.

Programs like market match actually open up farmers' markets to them, actually give them the ability to have access to healthy food. And right now, it's only available in about 40% of farmers markets statewide. So we need to not only support it, but actually expand it and go bigger and help these students and anyone that's on SNAP actually have access to healthy and farm to fork food.

So thank you so much for your consideration and the discussion today.

Alright. Thank you. I'm I'm not sure we we need a time check, but just a reminder. So we we ask folks to make to limit their comments to one minute.

I'll be brief.

You will notice that we give more leeway appropriately for folks who are here to testify about seventeen different items. So you can't do that in one minute. But if you're here for a single item, please please try to limit your comments to no more than one minute.

Thank you very much. My name is Gilbert Laurie here on behalf of BioComm California, representing over 1,800 biotech and medtech companies in California. And we we respectfully urge the state legislature to reject any short term gains achieved by permanently capping the R&D tax credit. This proposal sends a troubling message to the research intensive employers who account for a significant share of the state's high wage jobs and the economic output that generates state revenues.

At the precise moment, California should be countering the federal government's retreat from science and innovation.

By doubling down on policies and encourage R&D, the state should not walk away from one of the most important incentives already offered by 40 other states. We have also submitted a public comment to or letters to your office and staff. And for if you have any other information, please let us know. Thank you.

I do actually do have a a a a request. So I appreciate you, both you and Life Sciences Association being here. For me, it'd be very helpful to understand because that you just the it was sent a a bad message.

I get the vibes issue here, but I'm if if and we can't ask our state tax agencies which companies are in the 20 that aren't paying any taxes at all or the 80 that are paying less than half of the taxes that they that are due from them. So we can't ask them who they are.

So we don't know we don't know are any of them in bio in the bio or life sciences sectors or not, or are they. And so Dixon so at least for me, as a member of the subcommittee, like, I I'm sympathetic to the issues that that have been raised by the by the biosciences industry, but I but I but it it hasn't been clear from the evidence that we've seen so far that there are that many life science companies that are using tax credits in order to pay no taxes at all.

I can't speak to that at the moment, but I could Yeah.

If you if you and if there's information that you can share with us, it would show a a real an actual impact in the world, you know, given the small numbers of companies that are affected. I understand the vibes issue, but there's also some really bad vibes from folks from the largest companies in the entire planet not paying any taxes at all.

Those are also bad vibes, but for if we can get to the data and the evidence about the specific impact on the sector, in reality, it would be very helpful for our consideration.

Thank you very much.

Thank you.

Good afternoon, mister chair and members. Camille Wagner representing the big four accounting firms, PWC, Deloitte, and KPMG. I'd like to flag a program that's not on the agenda today, but is one that FTB oversees, and that's the pass through entity tax credit program, which was created solely for the purpose of giving taxpayers in California relief from the salt, federal soft cap at no cost to the state. Unlike other tax credit programs, tech taxpayers pay $1 in and get a dollar out in credits.

We believe that the removal of the carry forward period for these tax credits would encourage more taxpayers to participate in the program and for existing taxpayers to continue paying into the program.

It's a win win win for taxpayers and the state budget. We urge the legislature to include this proposal in the budget. Thank you.

Good afternoon, chair members. My name is Cindy Lee, a student of UC San Barbara. On behalf of the UC Student Association, who is a member of the Campaign for California Borrower's Rights Coalition, I'm here to urge you to fund a one time 20,000,000 investment in the student loan empowerment network, which has created a critical infrastructure for California borrower borrowers. This network runs out of funding this month, leaving nearly 800,000 Californians who are in default without help.

The unprecedented federal policy changes will also drive hundreds of thousands more into crisis. Thank you, and we look forward to working with the governor and legislature to fund the student loan empowerment network.

Thank you.

Good afternoon. Just echoing my colleague. My name is Adalegrat Torres. I'm a second year student at UC Berkeley and a board member of UCSA. We're proud members of the campaign for California borrowers rights coalition.

We're here to respectfully urge the legislature to provide a one time 20,000,000 investment in the student loan empowerment network under DFPI. The network has secured over $14,000 in monthly payment savings for borrowers, resulting in over $4,600,000 in debt discharge or canceled. We hope that the legislature will continue consider including this funding in the budget and continuing to fund students' futures. Thank you so much.

Thank you.

Good afternoon. I'm Michael Miller with California Association of Wine Grape Growers. CDFA is dealing with a couple of challenges we'd like to address.

One is their E fund is some heavy demands on that relative to suburban urban infestations that have to be dealt with and we support their efforts to try to address our problem and also with the closure of the NASS office, the reorganization of NASS is creating some specific challenges relative to production of the crush report or the acreage report, and and we know that they're actively working on that.

And we appreciate the committee's efforts in trying to help CDFA deal with those substantial challenges. And thank you for your day, and enjoy your lunch. Thank you.

Alright. Thank you. Well, thanks to to everyone for their for the public comment and for sharing your perspectives. Again, if if you didn't have a chance or you're watching this remotely, we we absolutely do welcome your comments in writing submitted to the budget and fiscal review committee on the website. Also, thank you to our colleagues at the Department of Finance, the Legislative Analyst Office, and the departments for your participation in today's discussion.

Thank you for your patience and cooperation to all. We've concluded the agenda for today's hearing. This next subcommittee hearing is will be next week. And, with that, senate budget subcommittee number four is adjourned.