1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 FEBRUARY 23, 2011 9 ITEM P 10 OTHER ADMINISTRATIVE MATTERS 11 ITEM P3 12 SALES AND USE TAX DEPUTY DIRECTOR'S REPORT 13 CROS PROJECT UPDATE AND ACTIONS 14 15 16 17 18 19 20 21 22 23 Reported by: Juli Price Jackson 24 No. CSR 5214 25 26 27 28 1 1 P R E S E N T 2 3 For the Board Jerome E. Horton of Equalization: Chairman 4 Michelle Steel 5 Vice-Chair 6 Betty T. Yee 7 Member 8 George Runner 9 Member 10 Marcy Jo Mandel 11 Appearing for John Chiang, State 12 Controller (per Government Code 13 Section 7.9) 14 Diane G. Olson 15 Chief, Board Proceedings Division 16 17 18 Jeff McGuire Deputy Director 19 Sales & Use Tax Department 20 21 David Gau Deputy Director 22 Property and Special Taxes Department 23 24 Randy Ferris Acting Chief Counsel 25 26 ---oOo--- 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 FEBRUARY 23, 2011 4 ---oOo--- 5 MR. HORTON: Ms. Olson, what is the next 6 scheduled matter? 7 MS. OLSON: Our next scheduled item is P3, 8 Sales and Use Tax Deputy Directors' Reports. 9 They request a five minute break. They have an 10 update to their power point presentation and they'd like 11 to be able to load it on the computer, if that's 12 possible. 13 MR. HORTON: No -- just kidding. So, be it. 14 Thank you, gives us a break as well. 15 (Whereupon a recess was had.) 16 MR. HORTON: We'll reconvene. Please commence 17 with the presentation. 18 MR. MC GUIRE: Okay. 19 MR. HORTON: Mr. McGuire? 20 MR. MC GUIRE: Good afternoon, Chairman Horton 21 and Members. 22 Today we will be providing an update on the 23 status of our Centralized Revenue Opportunities System 24 or CROS project, an update since our last meeting in 25 January. 26 With me today is David Gau, of our Property and 27 Special Taxes Department. 28 We have a short power point to guide through 3 1 our update. And, as you noticed, we had a few little 2 technical difficulties, kind of ironic on a technology 3 project update. 4 But also in keeping with our theme -- 5 MS. MANDEL: The only one you're allowed. 6 MR. MC GUIRE: Yeah, we hope it's the only one 7 and we hope it's just the power points. 8 In keeping with our theme, we're kind of 9 highlighting some of the staff visions on this project 10 and our staff out in our field offices have created some 11 short videos. And we played one kind of montage last 12 time and we're going to play one just really quickly 13 today and we'll kind to try to make that habit and go 14 through each of the offices as we provide updates to the 15 Board in the future. 16 So, we'll go ahead and do them. 17 (Whereupon a video presentation was done.) 18 MR. MC GUIRE: We told them to make them short. 19 Okay. So, basically, we have a -- kind of a 20 power point to lead us through kind of just to provide 21 again, kind of clarify for the record, kind of the 22 background of the project. 23 The CROS project will replace our BOE's legacy 24 systems, which include our IRIS and our ACMS systems. 25 It will expand online services for our customers. It 26 will improve and simplify business processes for 27 business owners. It'll provide a data warehouse. And 28 it'll streamline BOE's internal business processes. 4 1 The type of contract that's being pursued is a 2 performance-based, benefits funded contract. This 3 contract has been used successfully in California and in 4 other State revenue departments. 5 Basically, this type of contract approach will 6 have BOE identify business and program problems that we 7 currently have with current technology. Vendors will 8 then propose solutions to address those problems. 9 Vendors, as part of that process, will include 10 projected increases in revenues as a result of their 11 proposed solutions. And then a vendor will ultimately 12 be selected based on an evaluation of their overall 13 solution. 14 And the benefits funded project, it doesn't 15 require any upfront money from the State. The vendor 16 only gets paid if the new system meets or exceeds the 17 business and program requirements of the contract and it 18 attains the projected revenues. 19 Revenues must be attributed to the new system. 20 Vendor costs are capped. It's actually a fixed price 21 contract. It defines baseline revenues. So, basically, 22 first you establish your baseline revenues and then 23 anything that's exceeded, on top of that, is 24 attributable to the new system. 25 And then there is a detailed compensation model 26 that will be developed that will provide the criterion 27 and framework for payment to the vendor. 28 Do you want to -- 5 1 MR. GAU: Yes. So, I'm am going to take off 2 here now and talk about what we've been doing since we 3 met last, some of the efforts that we've have been going 4 through and give you a progress report there. 5 So, some of our continuing efforts, obviously, 6 is we've been working on finalizing the feasibility 7 study report, also known as an FSR. 8 And part of that is really describing -- a 9 better description of the cost and revenue estimates in 10 that FSR. So, we are continuing to work on that and 11 look at the revenue implications of what does this mean? 12 What are the revenue implications -- whether they be new 13 or accelerated? 14 We're also in the process of seeking 15 procurement delegation. We've had some efforts -- I'll 16 talk a little bit further in slides about where we are 17 with that -- and what we are doing with our continuing 18 discussions with some of the control agencies. 19 Again, first of all, the FSR, this is really to 20 obtain that formal approval of a project from the 21 control agencies and it identifies the business and our 22 technology problems. So, that's what we're defining in 23 the FSR. 24 So, what have we have done? We've -- since we 25 met last, according to the Board direction, we have 26 had -- staff has met with the Department of General 27 Services at a high level. 28 And we have been seeking that delegation 6 1 authority. We went in with a proposal. They heard that 2 proposal. They responded -- responded back. We had a 3 telephone conference call with them and then they put 4 something back in writing to us on February 16th that we 5 are currently evaluating that response to see how 6 significant it is and if there's more to -- discussion 7 to be had. 8 We've also -- Margaret Shedd has had some 9 preliminary discussions with the legislative staff to 10 talk about the project and the thought of maybe getting 11 delegation. Obviously, they've been busy with budget 12 issues and would like to know more and see more about 13 the project, but they interested in hearing more for. 14 The Department of Finance, there's been a 15 couple of discussions. There was a meeting last week 16 with them to talk about what are some of the efforts 17 that we need to go through. Department of Finance staff 18 conceptually has indicated support for the project. 19 They've also requested that the project cost and revenue 20 estimates kind of be described better for them. And 21 then, obviously, we will continue to meet and provide 22 them with information as requested as well. 23 So, the next steps are, obviously, we are 24 continuing to develop the -- well, we will -- the draft 25 procurement plan, including a scope of work. We're 26 looking at drafting a '12-'13 BCP to authorize payment 27 from the vendor -- or excuse me, to the vendor, and then 28 also what resources there are necessary to implement the 7 1 project. 2 So, it's been a busy effort and there's -- on 3 multiple fronts -- efforts that are going on to try to 4 not only educate control agencies about our project, but 5 to seek approvals and authorities where necessary. 6 MR. MC GUIRE: Is that it? 7 MR. GAU: Well, I think at this time I think 8 what we're really looking to do is -- was really to 9 provide you with an update. 10 If there is any Board direction or if there's 11 any questions that you may of have of us, we'd certainly 12 be glad to entertain them. 13 MR. HORTON: Member Yee? 14 MS. YEE: Thank you very much, Mr. Chairman. 15 I appreciate the update, Mr. McGuire, Mr. Gau, 16 thank you. 17 I wanted to see if I could get some more detail 18 with respect to some of these slides. We last received, 19 I think, the overview of the project about a month ago. 20 And I thought where we had left off was really to kind 21 of go on, I guess, a dual track with respect to trying 22 to secure the procurement delegation. 23 And you've made some mention as to some of the 24 back and forth with the Department of General Services, 25 but the dual track being, obviously, if we could work 26 directly with the administration to secure that 27 delegation, that would be great. But we had also talked 28 about the need for legislation if it looked like that 8 1 was necessary. 2 And I guess a month later I'm a little kind of 3 disappointed that we don't have more -- more to report 4 in this area. 5 But could you maybe just fill me in on what the 6 proposal was that we brought forth to General Services? 7 MR. GAU: Yes. The proposal that was brought 8 forth was for as full a delegation to the Board as 9 possible. 10 The thought was that if we could -- if we could 11 control the project in the delegation ourselves, you 12 know, that was what we were intending to accomplish 13 that. General Services has countered that with some 14 cautionary or what they see is approvals that they still 15 want to have ownership of. 16 MS. YEE: Okay. Let me just ask one more 17 question with respect to what we presented to General 18 Services. 19 Did we put forth our proposal for full 20 delegation with the assertion that they had the 21 authority to grant that delegation? 22 MR. FERRIS: Yes, we did. 23 MS. YEE: Okay. 24 MR. FERRIS: And I don't think they're actively 25 disputing that it's possible under the statute for them 26 to give us a complete delegation. But with the size of 27 the project, from their point of view, it would be 28 unprecedented to delegate something that huge. 9 1 And, so, what they've counterproposed is a 2 partial delegation. 3 MS. YEE: Which includes? 4 MR. FERRIS: They still want to have an 5 approval check point with us before the request for 6 proposal is released. And they also want to have 7 another approval check-in before the release of the 8 intent to award. 9 So, basically, it would be exercising an 10 approval function with respect to the Evaluation and 11 Selection Report, which is part of the procurement 12 process. 13 Also if there needs to be any negotiations 14 directly with any of the -- with the person selected for 15 the contract that they would, by statute, be actively 16 involved in coordinating that negotiation. 17 MS. YEE: Okay. 18 MR. FERRIS: So, they believe that it's 19 important for them to perform some control functions 20 with us. They're delegating many of the other duties 21 that lead up to these check-in points. 22 And they're also promising us that they're 23 going to give us enhanced customer service with respect 24 to turnaround times and things like that. 25 The discussions have been very -- 26 MS. YEE: Their track record has been lacking 27 in that regard. 28 MR. FERRIS: Right, but the conversations have 10 1 been constructive and we believe that they are coming to 2 us with an open hand and in good faith. 3 MS. YEE: Okay. I guess I want to re-visit the 4 question, Members, if we could, as to whether we want 5 this partial delegation or whether we really want to 6 seek the full delegation. 7 And I'm -- I mean, my point of reference is 8 really -- and what I thought we had discussed earlier in 9 terms of this procurement delegation experience related 10 to the Franchise Tax Board's child support system -- and 11 I think one of the reasons that particular effort was so 12 successful was because the full delegation allowed the 13 Franchise Tax Board to really enter into a very 14 constructive partnership with the vendor and the ability 15 to just, you know, really move on the project, without, 16 obviously, General Services even having any kind of 17 intermittent steps in terms of approvals or signoffs. 18 And I don't want to forego that opportunity for 19 us here at the Board with this important project if 20 it's -- if it's possible to get full delegation. 21 And if it's not possible to get it, in terms of 22 negotiating with General Services, I thought the other 23 track that we had talked about was to actually get 24 legislation to expressly authorize full procurement 25 delegation. 26 So, I guess, Mr. Chairman, I want to reopen 27 that discussion. 28 MR. HORTON: Sure. 11 1 MS. YEE: Okay. 2 MR. HORTON: Any further discussion, and 3 particularly relative to Madam Yee's concerns? 4 MR. RUNNER: Let me just quickly -- you know, 5 what might be helpful would be if we actually had more 6 of a matrix that would show us what the normal DGS 7 involvement would have to be, what we asked for, and 8 then what it is that we can summarize then they're 9 willing to do so that we can actually see exactly what's 10 before us at that point. So, a decision can be made 11 whether or not this goes to the extent to which we need. 12 I think that would be a little more clear than 13 just, you know, the letter that lists out, because we're 14 not sure exactly what we may have totally -- what points 15 we're negotiating and what we've got them to give on, I 16 guess, is more the issue that I have, what their 17 involvement is under this limited agreement versus what 18 it would be normally. 19 And, again, I think it's a valid question 20 saying, "Is this enough?" But I think that comparison 21 could be very helpful to see the three of those side by 22 side. 23 Doable? 24 MR. GAU: Certainly, that makes sense. 25 MR. MC GUIRE: We can do that. 26 MR. RUNNER: Okay. 27 MR. GAU: Yes. 28 MR. HORTON: Let me speak to Mrs. Yee's 12 1 concerns and just start out by saying that I concur with 2 her concerns. 3 And I want to -- to elaborate on the staff's 4 presentation, if you will, relative to the progress. I 5 believe a month ago we started out with the desire to 6 have complete control, as articulated by Ms. Yee, 7 relative to the Franchise Tax Board matter. 8 And, so, at the time the discussions took 9 place, I personally had discussions with the Speaker and 10 with the Pro Tem, who both indicated a willingness to 11 consider it, but they also cautioned us relative to the 12 internal control mechanism, the accountability and who 13 would be -- where the checks and balances would be. 14 What's the actual revenue? What's the actual cost 15 associated with it and having to be able to articulate 16 that or delineate those particular variables. 17 And, so, I would say that -- we're still going 18 to have to, eventually, have that conversation with the 19 legislature -- and the sooner the better from a timing 20 perspective. 21 But staff was -- it does not appear from the 22 presentation prepared to disclose what the actual cost 23 is and what the actual revenue that will be generated. 24 The cost has been a moving target of concern to 25 myself. And the revenue has been an undefined target, 26 if you will, to be able to articulate to the legislature 27 whether or not the anticipated revenue will actually be 28 new revenue or will it be revenue that is just simply 13 1 accelerated? And -- or will we be recapturing revenue 2 and what kind of policy changes will be necessary in 3 order to capture those revenues? 4 On the cost side, we have gone from a cost 5 figure -- I think when I was first engaged -- of 74 6 million. Then we went to 100 million. And then we went 7 to 200 million. 8 So, to begin to have those kinds of 9 conversations with the legislature said that we had to 10 sort of have some continuity in our communications and 11 we had to sort of develop that information before going 12 forward. 13 Even though -- and I believe that information 14 was derived as a result of an accelerated process as a 15 result of the Members simply saying that we want to 16 accelerate this, we want to go before the legislature, 17 so, let's -- let's drill down on these issues and make 18 sure that we have got it right. 19 And, so, in that process and staff's process, 20 to their credit of drilling down on the issues, looking 21 at all the different variables that was proposed or 22 anticipated from the legislature, we got -- the end 23 results and numbers are -- have been a little more 24 purified. Whether we're there now or not, I really, 25 honestly can't say. 26 And, so, it became a little difficult for me to 27 go to the legislature and have that discussion without 28 having that information in hand to be able to have that 14 1 debate. 2 The Governor, in providing the -- or, at least, 3 the thought process -- I have not talked to the 4 Governor's office -- but the thought process in having 5 the Governor go against its department, which doesn't 6 have a Department head now, so, it's not really 7 represented by this Governor, but certainly the 8 technical, analytical folks are, and the Department is 9 saying a -- a transaction this magnitude requires some 10 checks and balance, some accountability and some 11 transparency, is basically what they're saying. 12 But, however, Board of Equalization, we have 13 reliance. We are prepared to rely on your legal staff 14 and your expertise as you've been able to accumulate 15 over a short period of time, and we believe your 16 expertise and your legal staff is sufficient enough to 17 be able to go out and begin the negotiations yourselves 18 and begin to implement that process. 19 However, we want to serve as a check and 20 balance. We want to assure that transparency. 21 And the difference between what we're proposing 22 versus what the Franchise Tax Board did, there was a 23 social policy that the legislature said they wanted to 24 collect these deadbeat dollars, if you can refer. 25 And the deadbeat dollars were identified. The 26 social element was identified. And the Franchise Tax 27 Board had the upper hand by basically saying, 28 "If you want us to do it and you want it done 15 1 efficiently, then we don't want to go through 2 DGS. We want to be able to expedite this and 3 get it up and get it going, get it rolling." 4 And the legislature, in identifying the 5 revenue, was able to do that. 6 I would speculate that if we could tell the 7 legislature that if we could expedite this and generate 8 a billion dollars in revenue over a five-year period, 9 that we probably would be -- we might -- our proposal 10 might be equally receptive. 11 The unfortunate thing is that we are not at 12 that point and we weren't at that juncture a month ago, 13 but we're much closer now than we ever were. 14 MS. YEE: May I respond? 15 MR. HORTON: Ms. Yee? 16 MS. YEE: Thank you. 17 I appreciate the clarification, Mr. Chairman. 18 And I know there a lot of moving parts to this 19 initiative. It's a big initiative. It really is 20 essentially rebuilding our support and infrastructure 21 for our business needs going forward. So, I appreciate 22 the enormity of the project. 23 I guess I want to just kind of maybe put some 24 context to it to see if -- in my mind, I can kind of 25 cabin off certain issues that we can actually decide on 26 independently of the ongoing work that the staff is 27 continuing to do relative to really firming up the 28 revenue estimates, as well as the cost estimate. 16 1 And that is, just as we previously heard about 2 the Southern California Appeals and Settlements Unit 3 being established, I mean, that is something in the near 4 term that is going to bring in additional revenues to 5 the State of California. And I'm pleased about that. 6 We're working down a backlog and we'll have that 7 capacity to continue to deal with the cases that 8 continue to come in. 9 I look at this effort as our long term response 10 to how we're going to continue to bring revenues into 11 California. We're not talking about a tax increase. 12 It's about revenues that are out there for us to get. 13 And this a major tool that can help our field staff and, 14 certainly, the headquarters staff in that effort. 15 I guess with respect to the procurement 16 delegation issue alone, I really want to focus on this 17 and I appreciate the uniqueness of the Franchise Tax 18 Board's proposal. I remember that. I was in the 19 legislature at the time and there was a lot of really 20 momentum to try to get that project going. And there 21 were -- the delegation authority, I remember, was quite 22 clear as to how that happened. 23 But I think of the things that we're selling 24 ourselves short about is the reason that I thought we 25 were pursuing the procurement delegation is because we 26 have the expertise housed in this agency, in this 27 organization, to make this project work. 28 And I get a little -- I get a little worried 17 1 and concerned if we're are going to turn over any 2 negotiations over to General Services, which has had a 3 horrible track record with this agency, about how to 4 negotiate to contract. 5 And I don't mind trying to put in checks and 6 balances and I think there are a number of ways that we 7 can do that -- by way of ongoing, continuing regular 8 reports to the legislature. We can certainly -- this 9 body, when it meets publicly is certainly a 10 documentation of our status. We can document status in 11 a public setting in that regard. 12 But the procurement delegation, I think, is 13 very, very key with respect to where the expertise for 14 this project will be housed. And it appropriately 15 should be housed here. 16 And if we're not going for full procurement 17 delegation, I don't know what that says with respect to 18 what we're saying publicly about the expertise that 19 exists in this organization. 20 So, that's my feeling about it. 21 MR. HORTON: So, if I was interpreting and 22 trying to -- 23 MS. YEE: I guess, here's -- 24 MR. HORTON: -- trying to formulate a 25 consensus, the decision might be for -- for the Board to 26 direct staff to seek legislation to allow us to have 27 full procurement. 28 And in doing so, it may actually provide us a 18 1 little leverage unless DGS is of a mind that they can 2 ultimately undermine our efforts, which is the political 3 world sort of works. 4 I doubt, but certainly -- so, I mean, I would 5 be very, very comfortable with a three-prong approach to 6 dealing with this. There are a number of things that we 7 -- I mean, there are two things that we need legislation 8 for: One is the authorization to negotiate ourselves, 9 unilaterally, for us to be able to do that; the next 10 thing that we need their approval for is the 11 authorization to spend the money. 12 Even if we are redirecting existing funds or 13 redirecting new funds, we're still going to have to do 14 that. 15 So, I would encourage staff to do the research, 16 come up with a number that we can give the LA Times, 17 that we can give every major observer of what we do -- I 18 mean, I believe Ms. Yee is right -- by the virtue of 19 we're the only elected taxing agency and accountable to 20 the public, we embody transparency and so forth. 21 And the skill sets that are here at our agency 22 I have found to be significant as it relates to this 23 process. But -- so, but in going to the legislature, we 24 need to get those numbers correct. 25 And a month ago, a week ago, we weren't 26 prepared. A week from now or two weeks from now we may 27 very well be prepared and can, in fact, proceed to the 28 legislature and make that request. 19 1 MS. YEE: Yeah, I appreciate that, 2 Mr. Chairman. 3 I think the -- and I'm not saying that there is 4 any intentional undermining by the Department of General 5 Services, I'm just saying that if you look across all of 6 State government, you have particular expertise that is 7 housed in particular -- you know, departments and 8 agencies. 9 We have ours here. And the way that we are 10 going to expedite this project and be sure that we enter 11 into a contract with the appropriate vendor is really 12 being sure that the people who are doing the 13 negotiations really understand what the business need is 14 in this organization and I think that expertise is 15 housed here. 16 I would agree with you. I think that -- I am 17 not interested in having back and forth with General 18 Services. I'm interested in full procurement 19 delegation. 20 I fully understand that we can't have this 21 conversation with the legislature until we have the cost 22 and revenue estimates nailed down, but I also think that 23 the revenue estimate is going to start to get 24 compromised the longer we wait to get this procurement 25 delegation. 26 So, it's a timing issue here. And, so, I would 27 like to see, in addition to -- and maybe it's not the 28 dual track any more, we kind of cut the conversation 20 1 with the administration off, we continue on the 2 legislative track and begin to put together a time line 3 of when we believe we can get that delegation, which 4 then will affect -- I mean, I think we have to make some 5 assumptions with respect to the revenue estimate based 6 to how quickly we think we can get the contract in 7 place. 8 MR. RUNNER: Mr. Chair? 9 MR. HORTON: Mr. Runner? 10 MR. RUNNER: Yeah, just a couple. 11 I would totally agree that that -- that that -- 12 that this project and the expertise for this project 13 resides within the BOE for numerous reasons, including 14 the expertise of staff and also in regards to just 15 the -- the separateness of a constitutionally formed 16 body with lots of public exposure. 17 So, I think that that's certainly our reason as 18 to why I believe it is -- it is the right and best way 19 to go. 20 And I certainly believe that that is something 21 we should be looking at as we move this project forward. 22 My concern right now is that -- and I think I'm 23 am hearing that and I just want to clarify that -- is 24 that we've got to do it when we are ready to go to the 25 legislature. 26 My greater concern would be in trying to do 27 something premature with the legislature that we end up 28 creating a greater problem for us, either with DGS, if 21 1 that's where we end up, or trying to move something 2 forward on our own within the legislature. 3 So, I think there's some unanswered questions. 4 I think clearly we've got to deal with the issue. You 5 know, we don't even -- we haven't even bought off on an 6 FSR yet. So, there's clearly some issues that we've got 7 to be able to get clarified before we do that. 8 Because I think it's important. I think we 9 need to go -- when we go to the legislature, I think we 10 go -- we go to the legislature with -- arm in arm with 11 all of us, with the -- with the employees of the BOE, 12 with the business community and that we do it with 13 everybody together saying, "This is the right and best 14 way to go." 15 And I think that's going to help it in terms of 16 succeeding. And I do believe that it is where we should 17 end up and -- in this process. 18 MR. HORTON: Thank you. 19 Members, I don't know if it's -- strategically, 20 I would suggest that we continue our discussions with 21 DGS. 22 There's nothing -- certainly not finalizing it, 23 we -- at some point we want to be able to have -- to be 24 in a position to say that we've exhausted that. 25 Because the -- the legislature and the Governor 26 are going to somehow -- they're going to seek DGS's 27 input. 28 And, so, what I think we will get out of DGS 22 1 now relative to their input is, the Board of 2 Equalization, by virtue of its elected body has the 3 transparency, they have the skill sets, they have the 4 ability, they have all of these things. The only thing 5 that is holding us up is our own internal historical way 6 of dealing with that. 7 If you can get to that point -- and you only 8 get to that point by having those discussions and making 9 sure that that's clear and it doesn't cost us anything 10 relative to time -- if you can get that communicated to 11 that position -- and I think we're real close to that, 12 it's just a matter of disagreeing on the terms -- then I 13 think you are in a winnable position relative to the 14 legislature. 15 And the staff has approached the legislature. 16 Margaret Shedd has approached them. I've approached 17 them. And they, basically, have pushed back in saying, 18 "Horton, make sure those numbers are right. 19 Our experience with these types of contracts -- 20 there are sentiments in the legislature that 21 this should be -- portions of this should be 22 contracted out, such as the warehousing of the 23 matter, and there should be some centralized 24 warehousing." 25 And, so, you've got -- and others are very 26 much concerned about the revenue component and saying -- 27 you've got to be able to justify those revenues. 28 And I can tell you, based on experience and 23 1 knowledge with this agency, two weeks ago I would not 2 have been able to stand in front of the legislature and 3 justify the revenues that were presented. 4 And, hopefully, we will be able to get there 5 down the road. 6 Now, I would also share that as a result of 7 kind of looking at this and studying this, that I'm real 8 comfortable that this project is extremely valuable to 9 the State of California, will increase the efficiency of 10 our organization, will require some behavior 11 modifications on the part of the staff, will require 12 some adjustments in our policy and direction of the 13 efforts that we're doing. 14 But if we couple all that together, then we're 15 going to have to some increased revenue. And that 16 increased revenue, at a minimum, will debt service 17 whatever liability that we're going in and I -- so, at a 18 minimum, I think we can be successful in a discussion. 19 If we can get to a point where we can actually 20 argue that is going to be a huge revenue enhancement, to 21 the tune of 200 million a year, that's even better. 22 But I believe the lesser argument is sufficient 23 enough for us move to expeditiously and sufficient 24 enough for the legislature to -- to approve, but we have 25 to at least have the intellectual data to be able to 26 defend the hypotheticals that we've had thus far. 27 And I only say hypotheticals because they've 28 been ever evolving and to go from a $74 million cost to 24 1 a $200 million cost is going to be concerning. But when 2 you're engaged in the process, you realize that it 3 really isn't and it's really a process of drilling down 4 on the numbers. 5 As there's always this stop gap of a benefit 6 based contract negotiations to say that the Board -- I 7 think Mr. McGuire brought this up once before -- that 8 the Board generated last year $1.3 billion, our agency. 9 So, if we don't generate any more than that, then the 10 contractor doesn't get paid. 11 MS. MANDEL: Right. And it's a benefits based, 12 which is -- 13 MR. HORTON: But the drill down effort that 14 we're doing, the contractor's going to do it as well, 15 and particularly, if you that exit clause in that 16 contract, it's going to want to make sure that what 17 they're projecting as far as revenue is going to be 18 real. 19 So, we might as well do it up front. Everyone 20 is going to ask us for it. 21 So, with that -- I mean, that would be my only 22 caveat to -- 23 MS. YEE: May I make -- 24 MR. HORTON: Sure. 25 MS. YEE: -- a response? 26 MR. HORTON: Madam Yee? 27 MS. YEE: I appreciate the thought, 28 Mr. Chairman, about exhausting our -- the avenue with -- 25 1 with respect to our discussions with the Department of 2 General Services. I do appreciate that. And we ought 3 to do that, I guess. 4 I don't know what it is. And if the staff is 5 clear in terms of the direction about what they're going 6 in to General Services now with -- given that we may be 7 looking at a legislative avenue. 8 But what I didn't want to have happen was to 9 have us lose time whereby we went down one path with 10 General Services. We don't end up getting anything that 11 resembles full procurement delegation and then we start 12 the legislative track. And then all this time has 13 lapsed. That's unacceptable. 14 And part of why I wanted the dual track -- and 15 I understand the pieces that have to be in place for 16 these discussions to happen with the legislature. And 17 it sounds like the staff is trying to get those 18 estimates firmed up. 19 But I don't know, at this point, in terms of 20 exhausting our avenue with General Services and our 21 discussions with them there, is the staff clear about 22 what we're going back to them with? 23 I mean, I'd like to know. 24 MR. FERRIS: I know that there have been 25 internal discussions where -- 26 MS. YEE: And we need to bring these 27 discussions publicly. 28 MR. FERRIS: Yeah. 26 1 MS. YEE: I mean, at least, internal 2 discussions don't work for me, not on a big project like 3 this. 4 MR. FERRIS: Right. 5 MS. YEE: I mean transparency is transparency, 6 then I expect this to be on the agenda at every Board 7 meeting, Mr. Chairman. 8 I think the direction to staff has to be very, 9 very clear from this Board about what it is that we're 10 asking them to pursue, both with the legislature and the 11 administration. 12 MR. FERRIS: Yeah, if you're asking do we think 13 it's likely that further back and forth with DGS will 14 result in them delegating to us approval of the request 15 for proposal and approval of the evaluation and 16 selection report and complete authority over the 17 negotiation process to the extent that needs to happen. 18 I don't believe that further back and forth 19 will accomplish concessions on any of those major check 20 points that -- you know, I think noise those are their 21 -- their key things. 22 They're basically delegating everything else to 23 us, but they want those check in points and I don't see 24 them negotiating those three points. 25 MS. YEE: Okay. So, then -- 26 MR. HORTON: Madam Chair -- Madam Yee? 27 MS. YEE: Yes? 28 MR. HORTON: Here's what I would recommend: I 27 1 mean, there's an old theory, how do you -- how do you 2 eat an elephant? You eat it one bite at a time. And, 3 so -- and the same thing from a strategic perspective, 4 you're not really trying to get -- I'm very conscious of 5 the fact that DGS is a little nervous, you know, I think 6 that's what it is, they are a little nervous -- 7 understandably so. 8 I mean, I can -- we all can probably cite some 9 historical reasons why they should be nervous. And why 10 the legislature is going be nervous and so forth. 11 We have to assure them that -- that, 1, that 12 the intellectual capacity is there to deal with this 13 issue. And, so, once you pass that debate and DGS 14 acknowledges that the folks that we have on our team, 15 that will be negotiating this contract, is equal, if not 16 superior, to the folks on their team. Our legal team is 17 very competent, our executive team and so forth. 18 And I believe we win in that discussion with 19 DGS. I believe we win with that discussion in the 20 legislature. 21 Being mindful that the legislature's going to 22 look for ratification from someone other than what they 23 might perceive to be self-serving. And, so, where that 24 ratification is going to come from is going to be the 25 Department that they rely on historically to address 26 these types of contracts. 27 And, so, if you can -- if the staff can prepare 28 a document that sort of describes or delineates our 28 1 capacity, our intellectual capacity, to deal with this 2 issue, I think that will be extremely helpful. 3 I think if staff can do the same thing as it 4 relates to our anticipated negotiated terms, where we 5 anticipate the thresholds will be and so forth, and when 6 they ask the question about transparency, as Member Yee 7 has indicated, Mr. Runner has indicated, I think the 8 mere fact that you have constitutional officers and it's 9 already on our agenda to be discussed every -- every -- 10 every hearing, I mean, we've asked that that be the 11 case, that transparency is there and that addresses 12 those relative -- those issues. 13 And then we formulate a concept as to how we 14 will address the concern as it relates to accountability 15 and how would this be accountable. I mean, who -- who 16 will we be accountable to? 17 Member Yee has made an excellent recommendation 18 that we'll report back to staff and the legislature 19 on -- on occasions, historically, has said, "We want the 20 agency that report back to someone." 21 And to have that discussion, theoretically, 22 could be part of the legislative efforts. 23 Those same issues and those same questions are 24 going to have to be answered in the legislative process. 25 So, we can draft legislation, seek an author, 26 get the process going, but staff has got to -- we've -- 27 not staff, but we as an organization have to, at least, 28 come to an agreement internally what our best figures, 29 1 our best ideas, our best concept -- that concept paper, 2 whatever you call it -- has evolve and get us to as soon 3 as possible. And that's something we can't do as 4 Members, staff has to do it. 5 And the sooner you do it, the sooner we can 6 have continuity in our -- in our communication. We can 7 have synergy in our strategy and we can begin to move 8 this forward expeditiously. 9 And I'm there on both tracks, but I don't want 10 to ignore the staff component anticipated for the 11 legislature. And the staff component for the 12 legislature is DGS -- you know, good, bad or 13 indifferent. 14 MS. YEE: May I make one more request? 15 MR. HORTON: Sure. 16 MS. YEE: I think it would be helpful to have a 17 time line developed so that we can understand what are 18 appropriate benchmarks leading up to the contract and 19 certainly with respect to the project itself, when we're 20 down that road. 21 But I'm beginning to feel like this is slipping 22 away from us a little bit and I just want to be sure 23 that we are clear about what we want to accomplish by 24 when. 25 MR. RUNNER? Mr. Chairman? 26 MR. HORTON: Okay, well, I think you've heard 27 from the Board. 28 Is there any other input, Members? 30 1 Discussions? Possibly you can report back to 2 the Members -- let me ask the question, how long will it 3 take staff to develop this -- these -- let's call it a 4 concept papers, if you will, so that you can clearly 5 communicate, not only to us, but certainly to anyone 6 else of interest where we are on these various different 7 matters? 8 Ms. Mandel? 9 MS. MANDEL: Are we -- are we having reports 10 when we're in Culver City too or just when we're in 11 Sacramento. 12 MS. YEE: I think we need to. 13 MR. HORTON: In this case we'll have reports 14 every week -- every Board meeting. 15 MS. MANDEL: Okay, thank you. 16 MR. RUNNER: Okay, very good. 17 MR. GAU: I don't think we're that far away. I 18 mean, we've -- we know the cost and revenue concerns. 19 We've been working on them. 20 I think we're only a couple -- a couple weeks 21 out on trying to refine that and come back to the 22 Members and make you all comfortable with those numbers 23 before we go external. 24 MR. HORTON: So, why don't we agree to 25 submitting a report to the Members, the entire body, 26 within a couple of weeks for our consideration, for our 27 input, with a follow-up discussion at the next Board 28 meeting. 31 1 MR. GAU: Certainly. 2 MR. HORTON: Okay, all right. 3 MS. YEE: Thank you very much. 4 MR. HORTON: Thank you. 5 MR. GAU: Thank you. 6 MR. HORTON: Thank you for your presentation, 7 we appreciate it. 8 ---o0o--- 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 32 1 REPORTER'S CERTIFICATE. 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 FEBRUARY 23, 2011 I recorded verbatim, in shorthand, to 10 the best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding pages 1 13 through 32 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: MARCH 2, 2011 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 33