1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 MARCH 30, 2016 10 11 12 ITEM P 13 OTHER ADMINISTRATIVE MATTERS 14 ITEM P1 15 EXECUTIVE DIRECTOR'S REPORT 16 1. UPDATE ON RESOLUTION OF 17 STATE CONTROLLER'S OFFICE (SCO) 18 BOARD OF EQUALIZATION REVIEW 19 20 21 22 23 24 25 26 27 REPORTED BY: Kathleen Skidgel 28 CSR NO. 9039 1 1 P R E S E N T 2 3 For the Board of Equalization: Fiona Ma, CPA 4 Chairwoman 5 Diane L. Harkey Vice Chair 6 Jerome E. Horton 7 Member 8 Sen. George Runner (Ret.) Member 9 Yvette Stowers 10 Appearing for Betty T. Yee, State Controller 11 (per Government Code Section 7.9) 12 Joann Richmond 13 Chief Board Proceedings 14 Division 15 For Board of 16 Equalization Staff: Cynthia Bridges Executive Director 17 Julia Findley 18 Acting Chief Financial Management 19 Division 20 21 ---oOo--- 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 MARCH 30, 2016 4 ---oOo--- 5 MS. MA: Okay. Next matter? 6 MS. RICHMOND: So our next matter is Item P 7 Other Administrative Matters. P1 is our Executive 8 Director's Report. P1.1 is the Update on Resolution 9 of State Controller's Office Board of Equalization 10 Review. 11 MS. MA: Okay. Ms. Bridges, welcome. And 12 please introduce yourself for the record and 13 commence with your presentation. 14 MS. BRIDGES: Good afternoon, Madam 15 Chairwoman, Members. My name is Cynthia Bridges, 16 Executive Director. 17 I am here today to provide an update on our 18 efforts to resolve findings in the SCO's Review 19 Report and on actions taken to resolve the BOE's 20 internal accounting administration controls in 21 coordination with the SCO. 22 At the outset, regrettably, the BOE 23 received no bids in response to our solicitation of 24 the CPA consulting firm to review BOE's corrective 25 actions under the SCO's review and make 26 recommendations for improving the BOE's financial 27 management practices. 28 Although 24 firms viewed the IFB, no bids 3 1 were received. But we are in the process of 2 contacting these firms to determine if there are any 3 common issues which contributed to their decision 4 not to submit bids. 5 Upon review of these responses and in 6 consultation with the Board Member Review Committee, 7 Chairwoman Ma and Deputy Controller Stowers, a 8 decision can be made regarding the recent submission 9 of the IFB for any other alternatives. 10 We are pleased to report that significant 11 progress continues to be made in resolution of the 12 issues identified by the State Controller's Office. 13 We briefed Board Members individually regarding our 14 progress on the work done and the issues and 15 challenges that remain. Some challenges are rooted 16 in IRIS, efile and process limitations. The 17 problems continue because of IRIS and other systems. 18 We identified the revenue accounting gaps for the 19 development of solutions upon the implementation of 20 CROS. Until that time, our teams have put in place 21 some temporary work-arounds and we continue to 22 explore more. 23 Regarding the RSTF allocation challenge, 24 since the majority of the returns are filed 25 quarterly, a daily allocation to the various funds 26 is accomplished via statistical factors which are 27 based on previous filing period reports and 28 payments. Our teams have, therefore, increased the 4 1 frequency of remittance reconciliations, modified 2 the quarterly allocation reconciliation process, and 3 identified new reports to monitor trend deviations 4 to enhance accuracy. 5 Regarding daily remittances including funds 6 received from other agencies charged with collecting 7 portions of the retail sales and use taxes, such as 8 the Department of Motor Vehicles and the Franchise 9 Tax Board, we are accounting for these and 10 incorporating them into the quarterly reconciliation 11 process. 12 To address the challenges of silos, data 13 gaps, and other deficiencies identified in the SCO 14 review, we've established the following four county 15 process improvement teams to recommend solutions and 16 draft the Corrective Action Plan and proposed 17 timeline. And they are the Retail Sales Tax Fund 18 Accounting and Allocation, Office Revolving Fund 19 Management, Internal Controls, and Business Systems. 20 As a result of the team's efforts, an 21 adjustment was identified to correctly allocate the 22 additional sales tax on diesel fuel and the use tax 23 collected by the DMV and FTB for the period of 24 July 1, 2011 through June 30th, 2015. 25 Upon approval of the Board Members, the 26 Board Member Review Committee, we will recommend 27 this adjustment at the Board's Culver City meeting 28 in April so that monies can be timely reallocated to 5 1 the various state and local funds in consideration 2 of local government's next budget cycle. 3 Any refinements of this adjustment can be 4 made upon a further review by a CPA firm that is 5 ultimately procured or by any other alternative 6 that's pursued. 7 Regarding other corrective actions, the 8 BOE's Internal Audit Division is serving in a 9 consultative role to the Financial Management 10 Division in developing and implementing internal 11 control and monitoring processes. 12 Now, Ms. Julia Findley will briefly walk 13 you through an informational PowerPoint. 14 MS. FINDLEY: Good afternoon. Let's see, 15 get up to our first slide here. 16 There we go. 17 I just kind of wanted to walk through very 18 briefly about the sales and use tax rates and the 19 factor funding. 20 As you can see from this diagram, on the 21 left you have the tax rates and the various 22 allocations, the funds that they would go into. 23 And on the right-hand side is just the 24 factor-funded allocation. As Ms. Bridges just 25 mentioned, that factor-funded allocation is based on 26 historical reporting. It is prepared by Research 27 and Statistics and submitted to Accounting to enter 28 into the IRIS, our computer system, on a quarterly 6 1 basis. 2 As you can see, the factors pretty much 3 emulate what the tax rate is. The allocation's very 4 consistent with the associated tax rate. 5 On the next slide I just kind of wanted to 6 briefly go through our daily collection and 7 allocation process. On the left you'll see that 8 daily we receive various forms of payments. We 9 receive pre-payments for the fuel tax returns, 10 pre-payments on sales tax returns. We receive 11 returns and return payments. We have audits that 12 come through and associated payments. We have 13 payments on accounts receivable. 14 All of those come into the Board of 15 Equalization and they're deposited into the State 16 Treasurer's Office, into our account in the State 17 Treasurer's Office. 18 By 2:00 p.m. every day our team in the 19 accounting area puts together a TC-47, a form that 20 goes over to the State Controller's Office, and it 21 says this is how the funds should be allocated. And 22 you'll see those are the buckets on the bottom is 23 how they're allocated based on the factor funding 24 that we just went through in the previous slide. So 25 a portion of it goes into the General Fund, some of 26 it goes to State Local Revenue Fund, the Local 27 Public Safety Fund, the Local Revenue 2011. 28 And then on the right-hand side is the 7 1 Bradley-Burns and the special taxing jurisdictions. 2 The ERBA, which was called the triple flip, 3 expired on 12/31 of '15, so it's no longer part of 4 our allocation process. 5 Then at the end of the quarter what we do 6 is take all of those cash receipts that we just went 7 through and the allocations that were funded based 8 on factor funding and we compare those or we 9 reconcile those to what was reported. And the 10 reported includes the DMV, the FTB, everything that 11 came in, audits, accounts receivable, payments on 12 returns. Everything that came in during that 13 quarter is included in a report that comes out from 14 our computer system, and we compare that report to 15 what was remitted to the State Controller's Office. 16 Ms. Bridges had mentioned that we still 17 have some IRIS report issues. And some of our 18 issues with the reconciliation have to do with 19 trying to true-up this IRIS report with what 20 actually came in on the remittance advices. They're 21 not exactly apples and apples, and that's the 22 processes that we're trying to work through to get 23 these reports from our system that would make us -- 24 would allow us to compare those appropriately. 25 So what we -- what we do have is the fund 26 allocation corrections. As she indicated, we've 27 reviewed the periods of July 1 of 2011 to June 30 of 28 2015. We can -- we have a solid number relative to 8 1 the diesel fuel since inception, for the 2 misallocation there. And that's just the additional 3 sales tax on diesel that needed to go to the General 4 Fund. 5 We've determined what the DMV 6 misallocations are and the Franchise Tax Board 7 misallocations. We're very confident in those 8 numbers, and that's what will be going forward to 9 the Culver City meeting in April. 10 In addition to the actual allocation, we've 11 also instilled some of our own corrective actions 12 and we're working on others. We have, as I 13 indicated, we've -- we daily reconcile the BOE, what 14 came into the BOE with the State Treasurer's Office, 15 with the State Controller's Office, make sure they 16 all match. We have segregation of duties. We 17 have made -- we've instilled managerial approvals so 18 there's a sign-off before things move forward to the 19 Controller's Office. 20 We have regular communications with all the 21 units involved in the revenue process. We have 22 management reports where we're taking a look at the 23 past and forecasted so that if there's anything 24 unusual, it should stand out. We've ensured that we 25 have a solid audit trail so it'd be easily, if 26 someone wants to look at a number, be able to go 27 right to the backup and what that is. 28 We've documented many of our procedures and 9 1 processes. We ensure that we timely remit to the 2 State Controller's Office on a daily basis. We have 3 cross training going on in some of the areas so we 4 can ensure that if someone's out, another person can 5 pick up and take -- continue on with those 6 functions. 7 We've -- we have an annual training plan in 8 place for the first time; I'm very excited about 9 that. We've documented many of our processes and 10 have process maps. And we make sure we have regular 11 meetings to keep a status on how we're doing and 12 where we're going next. 13 Some of the other controls that we're 14 working on or are in progress is: 15 Of course the redesigning and the creation 16 of some of the IRIS reports; 17 A workforce and succession plan. We're 18 working on that right now; 19 Clearly defining the roles and 20 responsibilities and accountabilities of staff; 21 We have the Internal Audit Division that's 22 helping us in a consulting process, and we have our 23 first training on that on April 6th; 24 Developing reports that we think are 25 accurate and relevant, make it more useful; 26 Instilling regular communications with 27 control agencies; 28 Ensuring that our staff knows to let 10 1 someone know if there's any dishonesty or fraud that 2 they may notice; 3 Identifying processes that require 4 management approval and making sure that we instill 5 those approvals in place; 6 Involve internal and external parties in 7 the periodic review of our records to make sure that 8 we're doing a good job; 9 Establishing performance matrix and 10 monitoring those matrixes to see how we're doing; 11 Making sure we fill our vacancies, making 12 sure our staff understands that they need to 13 constantly look at ways to improve efficiencies; 14 Evaluating whether or not we need to add 15 some components to our accounting package so that we 16 have a whole accounting system in place; 17 Making sure that we're involved in CROS and 18 that we fix CROS so that it can do some of these 19 things for us; 20 And then just making sure that we are 21 constantly analyzing and reconciling our accounting 22 data through multiple sources so you have more than 23 one verification or means of making sure that we 24 have it right. 25 MS. BRIDGES: And to supplement Ms. 26 Findley's comments, I'd also like to mention that 27 there are other solutions that are also being 28 considered that do have impact to stakeholders. And 11 1 I am requesting that there be a more in-depth 2 meeting with the Reviewing Committee Members, 3 Chairwoman Ma and Yvette Stowers, so that we can 4 provide a little bit more information and details 5 about that in the near future. 6 The draft Corrective Action Plan to address 7 all underlying issues in the SCO review will be 8 distributed to the Board Members for review by April 9 15th, 2016. Once final, this report will be 10 transmitted to the State Controller's Office by May 11 18th to complete the six-month review process. 12 I'd like to commend staff for their 13 excellent and diligent work in response to the SCO 14 review. And we look forward to communicating with 15 you on further updates as additional corrective 16 actions are implemented. 17 Thank you. 18 MS. HARKEY: Thank you. 19 MS. MA: Thank you. 20 Ms. Stowers? 21 MS. STOWERS: Okay, thank you. 22 Halfway there. You completed a lot as far 23 as your tasks on this side. So congratulations. 24 MS. FINDLEY: Thank you. 25 MS. STOWERS: I'm very pleased with the 26 annual training plan, cross training, timely 27 remittance to SCO. And, most important, daily 28 reconciliations. But we still have a lot to do -- 12 1 MS. FINDLEY: We do, yes. 2 MS. STOWERS: -- on the other side. 3 MS. FINDLEY: Yes, we do. 4 MS. STOWERS: With respect to the fund 5 allocation, if I understand, you're going to be 6 meeting with myself and Chairwoman Ma about it and 7 then would like to come to the Board in April for 8 our approval. 9 Is there another step in there where you'll 10 be communicating with the Department of Finance? 11 MS. BRIDGES: Yes, we will be communicating 12 with DOF and also with SCO. 13 MS. STOWERS: Would that be before April -- 14 before or after April? 15 MS. BRIDGES: We will be doing it before. 16 Between now and the April Board meeting, yes. 17 MS. STOWERS: Okay. That was it. 18 MS. MA: Okay. I have a couple questions. 19 On page 3 it says, "BOE deposits all money 20 with the State Treasurer's Office"? 21 MS. FINDLEY: Yes. 22 MS. HARKEY: Right. 23 MS. FINDLEY: That's our -- 24 MS. MA: Versus the State Controller's 25 Office? 26 MS. FINDLEY: That's our bank. The State 27 Treasurer's Office is our bank. 28 MS. MA: And then the Controller? 13 1 MS. FINDLEY: So then the -- 2 MS. MA: Oh, and then the Controller. So 3 it looks like it just goes to the State Treasurer's 4 Office and then it doesn't come back out, so -- 5 MS. FINDLEY: The State Treasurer's Office 6 has access to the program that we use with the State 7 Controller's Office. So once we've made that 8 allocation, then they move the funds to the 9 appropriate place. 10 MS. MA: Okay. Got it. So SCO's someplace 11 in here. 12 And then on page 6, in the "in 13 progress/planned" column, "instill regular 14 communications with control agencies"? What does 15 that mean or what do you propose? 16 MS. FINDLEY: I -- I'm -- I'm hoping that I 17 can set up maybe monthly meetings with the State 18 Controller's Office, Department of Finance. 19 Currently, we do communicate with them on 20 an ongoing basis, but we don't have a structured 21 communication plan in place. And since Fi$Cal's 22 coming on board and we're going to be making changes 23 to our reports, it just seems like it would be a 24 good opportunity for us to sit down with these 25 agencies, and CROS, because we're going to be 26 building in some new things to try to make sure that 27 we are all efficient in our processes together and 28 that we just have good communications with each 14 1 other. 2 MS. MA: That would be great, because I 3 think that that hasn't been happening and I would 4 encourage you to reach out to more agencies -- 5 MS. FINDLEY: Thank you. 6 MS. MA: -- in a more collaborative 7 process. I think it would make it easier in terms 8 of all of our, you know -- 9 MS. FINDLEY: Complexities. 10 MS. MA: -- our complexities and dealings 11 with so many of these different control agencies. 12 When you say "fill vacancies timely," I am 13 also concerned that, you know, there is personnel 14 that is hired that's able to do fund accounting, 15 that understands, you know, how to -- what amount 16 we're supposed to be collecting, what amount we're 17 supposed to be allocating, and to make sure there's 18 checks and balances to make sure that we're 19 allocating correctly. 20 So when you're talking about vacancies, you 21 know not just anybody, but you know specific people 22 perhaps who understand how to do the fund accounting 23 that's necessary. 24 MS. FINDLEY: Absolutely. And I think 25 you'll see on the left-hand side where it says we 26 completed a -- an accounting staff classification 27 study, we have 35 people in the accounting realm in 28 our area, and of those 35, 29 of them are degreed in 15 1 accounting. 2 MS. MA: Okay. 3 MS. FINDLEY: So I'm very proud of that 4 statistic. So now it just tells me that we just 5 need to really work on our training efforts, and the 6 fund accounting's a large component of that. 7 Although they really do a stellar job of working 8 around and they've -- they've had to do work-arounds 9 with a system that's not an accounting system or 10 revenue system to try to make this all work. So 11 we've done a great job in that area. 12 MS. MA: And I guess on the RFP level, the 13 fact that 24 firms actually opened it and looked at 14 it but didn't apply, there's probably some issue 15 around this. And if we can't get firms to submit an 16 RFP, perhaps we have to go internally to people who 17 can do this check and balance, people who, you know, 18 have been doing it for many years, who understand, 19 you know, fund accounting, making sure that all of 20 these completed tasks as well as, you know, the ones 21 in progress and planned is what's going to get us to 22 better accounting records in management. 23 So, you know, we have a lot of different 24 agencies. They're all set up differently. They all 25 have, you know, accounting personnel. They're 26 making sure that all of their fund balances are 27 correct. And so that may have to be a possibility 28 to try to draw the best and the brightest from 16 1 within State Government to kind of do this 2 third-party independent outside review. 3 MS. BRIDGES: Actually, I am requesting -- 4 I think I sent some communication requesting a 5 meeting with the subcommittee or reviewing committee 6 sometime next week so that I can review more 7 in-depth some of the results from the surveys that 8 we received and discuss some possible options. 9 MS. MA: Okay. Ms. Harkey. 10 MS. HARKEY: I would just like to commend 11 you and your staff. Julia, you've just done a 12 fabulous job on this. I'm very, very confident with 13 what you provided to me. I think you've -- you 14 speak affirmatively that you have -- you have 15 managed to weed through and find out where some of 16 the areas were. 17 One of the items that came to light is 18 though we had this -- we had funds, of course, that 19 we had not transmitted that we thought that were 20 automatically being transmitted. And what I thought 21 was interesting about that is that the agency that 22 we were supposed to transmit them to didn't actually 23 even know they weren't there either. 24 So, you know, it's not -- it's not 25 necessarily a BOE problem. I think that statewide 26 we need to be sure that if one's supposed to receive 27 something, that the other one is remitting, and vice 28 versa, it can go both ways. 17 1 I'm just really happy that we had this 2 audit and that these things are coming to light 3 because I think we do have good, competent staff. 4 Now we have a roadmap to get this resolved, and it 5 sounds like they've gotten most of it resolved. 6 So I want to thank you very, very much for 7 what you've done and the hornets nest you flew into. 8 And I do appreciate the fact that you've got 29, you 9 know, accredited or degreed people. And so I think 10 it might behoove us to, you know, encourage those 11 people, as you are trying to do, to, you know, get 12 positions filled, allow for the promotions and get 13 everybody on board in a professional manner. 14 I thank you very much. 15 MS. FINDLEY: Thank you. 16 MS. MA: Any other? 17 MR. HORTON: Yes, Madam Chair. 18 MS. MA: Mr. Horton. 19 MR. HORTON: Let me add my congratulations 20 as well for addressing this issue and bringing it to 21 the point that we are currently at and to encourage 22 us to continue to move it forward. 23 I concur with Member Ma relative to us 24 taking a look at whether or not we return to the 25 original recommendation of looking at the State 26 Auditor, and I think there were a number of other 27 options that -- that the staff provided, for the 28 purpose of just expediting the review and analysis 18 1 to bring a level of confidence to whoever may lack 2 confidence, I don't know who they are, but to bring 3 that to bear. 4 The other thing that I think is quite 5 interesting and much appreciative is that your 6 review seems to imply that much of the issues that 7 we face are mechanical, systematic, and 8 institutional. So we look forward to the CROS 9 Project being -- sort of supports a necessity for 10 CROS in order to be able to address many of these 11 issues that we have disclosed, as well as the 12 institutional cultural issues of reconciliation, 13 glad you brought that forward. 14 And so, if we get the systems in place, and 15 the staffing trained, I think we'll be able to get 16 there. 17 So thank you very much. Very much 18 appreciate it. 19 MS. MA: Thank you. 20 Okay. Seeing no further comments, thank 21 you for your presentation, Ms. Bridges. 22 MS. BRIDGES: Thank you. 23 MS. MA: Ms. Findley, thank you. 24 ---oOo--- 25 26 27 28 19 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, Kathleen Skidgel, Hearing Reporter for 8 the California State Board of Equalization certify 9 that on March 30, 2016 I recorded verbatim, in 10 shorthand, to the best of my ability, the 11 proceedings in the above-entitled hearing; that I 12 transcribed the shorthand writing into typewriting; 13 and that the preceding pages 1 through 19 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: May 11, 2016 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 20