1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 OCTOBER 25, 2016 10 11 12 ITEM P 13 OTHER ADMINISTRATIVE MATTERS 14 ITEM P6 15 ADMINISTRATION DEPUTY DIRECTOR'S REPORT 16 1. 2017-18 BUDGET CHANGE PROPOSALS 17 18 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: Edna Murphy Deputy Director 17 Administration Department 18 Chris Holtz Chief 19 Business Management Division 20 21 ---oOo--- 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 OCTOBER 25, 2016 4 ---oOo--- 5 MS. MA: Ms. Richmond, next item, please. 6 MS. RICHMOND: Our next item is P6 the 7 Administration Deputy Director's Report; Item P6.1 8 2017-18 Budget Change Proposals. 9 MS. MURPHY: Good afternoon, Honorable 10 Members. I'm Edna Murphy, Deputy Director of the 11 Administration Department. With me today is Chris 12 Holtz, Chief of the Business, um -- Chief of the 13 Business Services Division, who will be presenting 14 BCPs for your approval. 15 MR. HOLTZ: Thank you, Chair Ma and 16 Members. I'm Chris Holtz, the Chief of the Business 17 Management Division. 18 We have two Budget Change Proposals that we 19 wish to move forward with your vote today. The 20 first one is for CROS. The BOE requests 21 31.4 million, of which 17.7 million is General Fund, 22 for the next fiscal year 2017-18, and 68.8 ongoing 23 and temporary help positions to fund the 24 implementation phase of CROS, the Centralized 25 Revenue Opportunity System. 26 Over the five years of the implementation 27 phase, CROS will transform BOE's business structure, 28 expand tax and feepayer services, and enhance its 3 1 collection capabilities through greater efficiency. 2 As you're very aware, CROS is the BOE's 3 largest effort to date to enhance customer service 4 and re-engineer program processes. 5 One million businesses, nearly 5,000 6 employees, and multiple government agencies interact 7 with the BOE business services on a daily basis. 8 The goal of CROS will be to replace outdated IT 9 legacy systems with a more flexible, comprehensive, 10 customer-oriented product. 11 In the current year, the Legislature 12 approved one year CROS funding of 17.5 million and 13 43.1 positions. What this proposal does is moves 14 the BOE forward with ongoing project resources over 15 the implementation phase. 16 The second BCP that we have is for the lead 17 acid battery fee. BOE requests $1.2 million and 2.6 18 positions for the current year, and 833,000 and 4.8 19 positions for the budget year to administer the 20 provisions of AB 2153, the Lead Acid Battery 21 Recycling Act of 2016. 22 This act imposes a new fee on consumers and 23 manufacturers of lead acid batteries, basically car 24 batteries, and requires the BOE to collect these 25 fees and deposit revenue into the Lead Acid Battery 26 Cleanup Fund for use by the Department of Toxic 27 Substances Control. 28 Current year costs are paid through a 4 1 $1.2 million special fund loan from the California 2 Tire Recycling Management Fund. And this loan must 3 be repaid by the BOE by October 1st, 2017. The act 4 provides BOE with authority to develop emergency 5 regulations for registering feepayers, collecting 6 fees, and processing returns, audits, and appeals. 7 The BOE will be responsible for registering 8 approximately 20,000 new feepayers. We estimate 9 that 13 million lead acid batteries will be sold in 10 2017 with an annual sales growth rate of 1.6 11 percent. Fees will be collected starting April 1st, 12 2017 with annual revenue growing to 26.4 million in 13 calendar year 2018. 14 Finally, I just want to note that with both 15 BCPs, they would make no changes to existing BOE 16 employee classification or return rights. In 17 addition, the BOE continues to work with the 18 Department of Finance to manage long-term vacancies 19 and reduce vacancy rates. 20 A comprehensive proposal to the Board in 21 conjunction with current audits and facility 22 planning will provide a set of specific action items 23 and control processes that will guide future 24 position decisions, vacancy elimination, 25 reclassifications, and program growth. 26 And with that, I'd be happy to answer any 27 questions on the Budget Change Proposals. And we do 28 have representatives here from the CROS Program and 5 1 other program representatives to answer any sort of 2 detailed program questions that you might have. 3 MS. MA: Thank you. 4 Mr. Runner. 5 MR. RUNNER: Yeah, I just wanted to ask, 6 are these -- when we make the, um, the Budget Change 7 Proposals, um, are we pretty clear that they're 8 consistent with what our analysis was as we were 9 dealing with the bills? 10 MR. HOLTZ: That's correct. The analysis 11 on the lead acid battery, uh, fee -- 12 MR. RUNNER: Mm-hmm. 13 MR. HOLTZ: -- I believe was 1.6 million in 14 ongoing costs. The initial startup costs are coming 15 in a little less than that. 16 MR. RUNNER: Okay. Well, I know. And, 17 again, our analysis at that time can be a lot 18 different than what we actually go into when the 19 bill is passed and we end up doing a little more, 20 um -- greater research in regards that. And, of 21 course, the bills can change as it moves through 22 anyhow. 23 MR. HOLTZ: That's correct. 24 MR. RUNNER: But I mean I think it's just 25 important so that we be consistent -- as consistent 26 as we can be. That, as the bill moves forward and 27 moves out of Appropriations, with those kinds of 28 costs to them that they understand that we are then 6 1 going to be consistent coming back and asking for 2 those approp- -- for the -- for those Budget Change 3 Proposals. 4 MR. HOLTZ: Yes. 5 MR. RUNNER: Thanks. 6 MR. HOLTZ: And they are consistent. 7 MS. MA: So I do have a question also. Um, 8 I understand this bill, AB 2153, is a limited term 9 bill. April 1st, 2017 until March 31st, 2022. 10 MR. HOLTZ: What the bill does is it enacts 11 two different fees: A manufacturer's fee of $1 and 12 a consumer fee of $1. 13 After five years, the manufacturer's fee 14 sunsets. And at that point the consumer fee 15 increases to $2. And that is ongoing. 16 So the workload is -- is ongoing, and the 17 program is ongoing, but portions of it sunset. 18 MS. MA: Okay. So the program continues 19 after April 1st, 2022. 20 MR. HOLTZ: Yes. 21 MS. MA: Okay. 22 Mr. Horton. 23 MR. HORTON: Thank you, Madam Chair. 24 Um, the temporary positions, that these all 25 classified as temporary positions, I presume that's 26 similar to limited term positions? 27 MR. HOLTZ: There are limited term and also 28 temporary positions. 7 1 MR. HORTON: What's the distinction? 2 MR. HOLTZ: The limited term are funded 3 just for a particular time. For temporary 4 positions, they may also be included as part-time or 5 fractional positions. But very similar in the way 6 they're treated budgetarily. 7 MR. HORTON: Are -- are these positions 8 classified as Unit 1 positions, or are they tied 9 to -- are they members of the union? How does that 10 work? 11 MS. MURPHY: Just for clarification, the 12 way we're using some of the temporary positions is 13 that we've asked for the funding in BCP -- in the 14 BCP, but what we're using it for is that we're going 15 to redirect staff from existing programs to add 16 their expertise as we bring up, for instance, the 17 CROS Project. And so those dollars will be used for 18 those respective programs to either backfill by 19 hiring students, by hiring limited terms, by doing 20 overtime or out-of-class, to cover the workload that 21 won't be able to be covered while we're moving into 22 the implementation of the CROS Project. 23 So ideally what we're trying to do is 24 manage not only the resources that we need and the 25 skillsets that we need to ensure that CROS is being 26 done, but also making sure that we have funds 27 available for the workload to backfill behind those 28 activities that they won't be able to do while 8 1 they're participating on that project. 2 MR. HORTON: So backfilling with the 3 limited term positions, when the term has expired, 4 are we -- are we assuming that the individuals -- 5 let's presume that this is a promotion for them, uh, 6 or a salary change. The individuals revert back to 7 their original position? 8 MS. MURPHY: It would depend on what the 9 scenario is. But in a situation where someone was 10 working out-of-class, for instance -- 11 MR. HORTON: Right. 12 MS. MURPHY: -- they would work 13 out-of-class, they would be paid for that 14 out-of-class. Once the assignment is over, then 15 they would go back to their original assignment. 16 If it's overtime, it would just be covering 17 all those overtime for staff to come in on weekends 18 or to work late or to cover it. 19 We also considered bringing in retired 20 annuitants who already have a skillset in the area 21 to come in and kind of help supplement that. But 22 all of that is based on kind of the decisions for 23 the, um -- the actual operation. But there's a 24 variety of different strategies that we're doing to 25 do that. 26 MR. HORTON: Yeah. I mean I appreciate the 27 effort to close the intellectual void that will 28 exist as, you know, with so many different part -- 9 1 limited term -- I'm going to call it limited term. 2 MS. MURPHY: Mm-hmm. 3 MR. HORTON: Just a method of financing. 4 But by the nature of having so many limited term 5 positions, it creates an inherent challenge, uh, if 6 the program goes away. Uh, we're creating all of 7 these, out of these activities, in some cases 8 positions, that are limited. And when those 9 positions are evolving, either as a promotional 10 opportunity or working out-of-class, backfilling so 11 many different positions could very well -- 12 I'm just curious how that will 13 ultimately -- could -- affect the organization. 14 So I think what I'd like to see is the 15 overall management plan, how we intend to -- to 16 manage these positions, how many part-time 17 positions, and how many retired annuitants we plan 18 on. And then at the end of the day, how all this 19 actually works out. 20 And I would like to know if we are 21 anticipating the positions that are limited term, 22 that are not individuals that are matriculating 23 through the organization in these new positions, how 24 they are treated as it relates to the union 25 contract. 26 Otherwise, I'm -- I mean I'm supportive of 27 the effort, of course. I mean I think it's a 28 wonderful thing, but -- 10 1 MS. MA: And I do have one more question. 2 How many vacancies do we have right now? 3 MR. HOLTZ: With the -- with the CROS 4 Program or as a whole? 5 MS. MA: As a whole. 6 MR. HOLTZ: As a whole, we have 623 7 vacancies, of which 330 are either in recruitment or 8 are on leave of absence. 9 MS. STOWERS: Okay. 10 MS. HARKEY: That's working down, a little 11 bit, it seems. 12 MS. STOWERS: Is that a -- is that a change 13 from last time you reported? 14 MR. HOLTZ: The number of vacancies are -- 15 are fairly level. They've been right at around 620 16 for -- 17 MS. STOWERS: So we -- 18 MR. HOLTZ: -- the Department as a whole. 19 MS. STOWERS: We haven't reduced any 20 since -- I believe you put it last month, or two 21 months ago; there hasn't be a reduction since then? 22 MR. HOLTZ: No. There has been a reduction 23 in some of the vacancies that are in recruitment 24 that have been opened for approximately six months. 25 But as a whole, we do have vacancies coming in and 26 out of these various categories and it's stayed 27 pretty stable at about the 620 level. 28 MS. MA: So how do we, um -- you know, 11 1 obviously we're not the final body who approves 2 these. But how do we explain that we have still 3 significant vacancies yet we're asking for more 4 positions? 5 MR. HOLTZ: Okay. With the vacancy plan, 6 we've been working very close with Department of 7 Finance in order to coordinate, not only the efforts 8 with bringing our vacancy level down to a manageable 9 level, but also, together with other types of audits 10 and reports that we have due in the spring. 11 When we come forward with new positions 12 such as for the CROS BCP, the Department of Finance 13 recognizes that this is a -- a baseline business 14 change for the BOE. And CROS and the vacancy plan 15 are going on separate paths. 16 But for some of the other BCPs where we're 17 asking for two, three, four positions, we continue 18 to work with Finance in order to meet that workload 19 and develop a plan going forward where we can take 20 some of these chronic vacancies and bring those down 21 to a level where we can either reclassify positions 22 to fill known, existing, or new workload in the case 23 of things like the Lead Acid Battery Fee Program. 24 But these types of talks are ongoing. When 25 we do have specific proposals to -- to bring forth 26 to you, we will definitely detail those and -- and 27 bring those to the Board for a vote. 28 MS. MA: So which agency is auditing, um, 12 1 our vacancy list? 2 MR. HOLTZ: Well, right now there -- there 3 is not an agency auditing the vacancy list. We do 4 have DGS that is auditing our contract and 5 procurement functions. They do that every two 6 years. And that report is due by approximately 7 March of next year. 8 We have OSAE, which is the auditing arm of 9 Department of Finance and they are auditing our 10 accounting functions and some of our programmatic 11 functions. And that should be due right about the 12 same timeframe. 13 At the same time we're making a physical 14 office study that has been requested by the 15 Legislature. And that's due in February of next 16 year. 17 So all -- all of these issues are coming 18 together at one time in the spring. And we're 19 working together with all of these different 20 agencies to make sure that we present a 21 comprehensive plan really, having to do with the way 22 that -- that we are filling vacancies, the way that 23 we manage vacancies, the way that we house and make 24 decisions in our physical offices and the like. 25 MS. MA: Okay. And so I know the 26 Legislature also asked for -- about this vacancy 27 list -- 28 MR. HOLTZ: Mm-hmm. 13 1 MS. MA: -- and people in the blanket. 2 MR. HOLTZ: Yes. 3 MS. MA: So I assume that you're working on 4 the report to give to the Legislature -- 5 MR. HOLTZ: Right. 6 MS. MA: -- when they come back next 7 session. 8 MR. HOLTZ: And there's provisional 9 language in the budget that requires us to report on 10 a monthly basis to the Legislature, to Finance, the 11 LAO on our -- on our vacancies. 12 MS. MA: Okay. 13 MR. HOLTZ: And -- and that has been given 14 on a monthly basis for the last four months. 15 MS. MA: Okay. 16 MR. HORTON: Madam Chair. 17 MS. MA: Mr. Horton. 18 MR. HORTON: Thank you, Madam Chair. 19 What, um -- I think it's -- I think it's 20 important that we also discuss in this process the 21 methodology in which our budget is computed as it 22 relates to these vacancies. Some of the vacancies 23 just don't exist. They just -- they're vacancies as 24 a result of the method of financing, uh, the 25 positions. Financing 'em based on this mid-range 26 philosophy that if you have so many people over the 27 mid-range and so you have to, uh, absorb your budget 28 based on the fact that you have employees that have 14 1 been here over a long term and they're getting paid 2 more than this mid-range and that just offsets your 3 budget. 4 And so, therefore, the funding for 5 positions are used in order to pay that differential 6 between the mid-range and the high employees. Which 7 I mentioned earlier is going to be affected -- if 8 these employees decide to retire, we're going to be 9 upside down where we're going to have a larger 10 budget -- and I don't think Department of Finance is 11 going to let us keep it -- but a larger budget 12 because all the high-paid employees have retired and 13 we've replaced them with mid -- lower than mid-range 14 employees. 15 And so when we have these discussions about 16 the number of vacancies, in this case 600-plus, I 17 think it's important to -- to sort of articulate 18 that -- that part of this is attributed solely to 19 the method of computing our budget and the overall 20 financing method. At the same time, I think that 21 presents an opportunity for us to begin to have 22 discussions about the Board of Equalization and 23 other revenue-generating agencies just being 24 distinctly different from -- from other agencies. 25 We are a revenue-generating agency, so 26 every vacancy in the Board of Equalization equates 27 to a loss of revenue to the State of California. So 28 we're desirous of filling these vacancies, but at 15 1 some point they need to provide the funding, the 2 actual funding necessary in order for us to fill the 3 vacancies and to appropriately compensate our 4 employees for the work that they do. 5 And I just want to encourage you to include 6 that in your discussion about these issues. Because 7 it can be misleading to believe that there are 8 actually physical vacancies that this agency doesn't 9 want to fill, you know. I'm sure that, you know, 10 our HR people are doing everything they can to fill 11 these positions and would be desirous to do so. 12 And, quite frankly, all the numbers that 13 I've seen says that, hey, they should double the 14 amount of money they're giving the Board of 15 Equalization, hire -- hire more folks to provide 16 increased compliance and provide the employees with 17 a parity as it relates to their salary and their 18 benefits, if they were paid based on the benefit to 19 the state. 20 But that's a whole nother conversation, but 21 I don't think we ought to be remiss in not having 22 that conversation whenever we present these budgets 23 or have those opportunities. 24 MS. MA: Mr. Runner. 25 MR. RUNNER: Yeah. I kind of thought 26 that's what we were doing. Aren't we? 27 We're working with them right now in trying 28 to reset, right? 16 1 MR. HOLTZ: That's correct. 2 MR. RUNNER: In terms of helping them 3 understand what our vacancies are and why we -- why 4 we have to maintain a certain amount of vacancies 5 because of the over the -- over the -- the center 6 point of the salaries, in order to help them agree 7 with us to reset that so we could -- so that we can 8 kind of true it up, right? 9 MR. HOLTZ: Mm-hmm. 10 MR. RUNNER: That's -- is that part of the 11 conversations that are going on right now? 12 MR. HOLTZ: Right. The conversations, 13 there -- there are many different factors that lead 14 to our vacancy rate. And part of that conversation 15 is the fact that we do pay seventy -- 71 percent of 16 our employees over the mid-range. So that -- that 17 is a budgeting issue. 18 But there are also other issues involved in 19 that. And when we come forward with specific 20 proposals for you to vote on, we want to make sure 21 we have as much information at hand as -- as we can 22 so that we can demonstrate to -- to you and to the 23 Legislature and Department of Finance exactly why 24 these vacancies exist, what vacancies need to -- to 25 be addressed, what is the proper vacancy rate -- 26 MR. RUNNER: Right. 27 MR. HOLTZ: -- for this Department, being 28 as large an agency as it is. 17 1 MR. RUNNER: Yeah, and I just think it's 2 important as -- as -- as, um, the Members have 3 pointed out, that we really try to get a handle on 4 that this year with Finance. 5 MR. HOLTZ: Yes. 6 MR. RUNNER: So I appreciate you trying -- 7 working through that in these -- in those issues. 8 MR. HOLTZ: Thank you. 9 MS. HARKEY: In essence, work through the 10 holiday. No. 11 I move staff recommendation. 12 MR. HORTON: Second. 13 MS. MA: Okay. Thank you. 14 Ms. Harkey moves staff recommendation, Mr. 15 Horton seconds, on items -- 16 MR. HORTON: All. 17 MS. MA: On all items. I know, it's P6.1a 18 and P6.1b. Is there more? 19 MS. RICHMOND: Yes. 20 MS. MA: That's it, right? 21 Okay, good. 22 All right. Without objection, motion 23 carries. 24 ---oOo--- 25 26 27 28 18 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 October 25, 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 18 constitute 14 a complete and accurate transcription of the 15 shorthand writing. 16 17 Dated: November 8, 2016 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 19