1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 MARCH 20, 2012 9 10 LEGISLATIVE COMMITTEE 11 12 13 14 15 16 17 18 19 Reported by: Juli Price Jackson 20 No. CSR 5214 21 22 23 24 25 26 27 28 1 1 2 P R E S E N T 3 4 For the Board Jerome E. Horton of Equalization: Chairman 5 6 Betty T. Yee Member 7 8 George Runner Member 9 Michelle Steel 10 Member 11 Marcy Jo Mandel Appearing for John 12 Chiang, State Controller (per Government Code 13 Section 7.9) 14 Diane G. Olson Chief, Board 15 Proceedings Division 16 ---oOo--- 17 For Staff: Margaret Shedd Chief, Legislative and 18 Research Division 19 Sheila Waters Business Taxes 20 Specialist III 21 Larry Bergkamp Business Taxes 22 Administrator III 23 Eric Steen CROS Director 24 25 For FTB: Jeanne Harriman Director, Financial 26 Management Bureau 27 28 ---o0o--- 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 MARCH 20, 2012 4 ---oOo--- 5 MR. HORTON: Good morning. Let us call the 6 meeting of the Board of Equalization to order. 7 Ms. Olson, what's our first matter? 8 MS. OLSON: Our first matter for today is the 9 Legislative Committee. Mr. Horton is the Chair of that 10 committee. 11 Mr. Horton. 12 MR. HORTON: Thank you very much. 13 Members, Ms. Shedd and her team are here to 14 give us information hearing on the status of the various 15 legislations dealing with the consolidation of the tax 16 agencies. 17 Ms. Shedd. 18 MS. SHEDD: Thank you, Mr. Chair and Members of 19 the Committee. My name is Margaret Shedd with the 20 Legislative and Research Division. I will be giving you 21 a staff update on the tax agency consolidation bills and 22 proposals. This is a discussion only item. 23 I have provided your office with some 24 background material that goes through the studies and 25 the bills and proposals that that have been put forward 26 since 1989. Very briefly, California's three main tax 27 agencies, the BOE, the FTB and the EDD, are responsible 28 for different taxes and provide somewhat different 3 1 services but they do share similarities with respect to 2 tax and activities. Because of these similarities and a 3 perceived potential for eliminating duplication and 4 benefiting from economics of -- or economies of scale, 5 these agencies frequently have been the subject of 6 studies regarding the budgetary and efficiency impacts 7 of consolidation. And, in addition, there have been 8 numerous statutory proposals and constitutional 9 amendments directed towards various types of 10 consolidation that have been introduced in the 11 legislature. The past studies have ranged from 12 relatively minor analyses to full-blown consolidation of 13 all three agencies, sometimes bringing in Department of 14 Insurance and Department of Motor Vehicles. 15 They began to appear in the 1930s, after the 16 introduction of the sales tax in '33 and personal income 17 tax in 1935. In addition, there have been a lot of 18 bills introduced over the last 25 years. I have 19 provided your offices with a listing of those studies 20 and bills. But the past legislation mainly -- there are 21 several variations. There are ones that abolish the FTB 22 and the BOE and establish a unified Department of 23 Revenue under the executive branch. Proposals that 24 abolish FTB and BOE and then establish another uni -- a 25 unified Department of Revenue as a separate, independent 26 entity, which can have elected Board officials, combine 27 the three agencies -- the FTB, the BOE and EDD -- under 28 a restructured Board of Equalization and, lastly, 4 1 combine the three tax agencies while separating the 2 administration of the taxes with the adjudicatory 3 responsibilities. 4 It's notable that there was only one bill since 5 1989 that made it to the Governor. That was AB 15, 6 lays -- the model it had was to blend the EDD, FTB into 7 the BOE. The Governor vetoed it, saying that he would 8 rather have it under the executive branch and would like 9 to see the administration and the adjudicatory functions 10 separated. 11 I'd now like to turn to the recent 12 consolidation proposals. The first one is the 13 Governor's -- the Governor's budget calls for a 14 Department of Revenue consolidating the EDD Department's 15 tax functions, mainly personal income tax withholding 16 and payroll tax administration with the FTB in a new 17 Department of Revenue. The two agencies, it's my 18 understanding, have been meeting to plan for eventual 19 consolidation as part of the Governor's reorganization 20 proposal. 21 And I have with me from the FTB, Jeanne 22 Harriman, who will give us an update on the status of 23 that. 24 ---o0o--- 25 JEANNE HARRIMAN 26 ---o0o--- 27 MS. HARRIMAN: Thank you. Good morning, my 28 name is Jeanne Harriman from the Franchise Tax Board. 5 1 As Ms. Shedd indicated, we are currently 2 studying the Governor's proposal that is noted in the 3 Governor's budget summary. EDD and FTB have both come 4 together to join cutting subject matter experts to 5 working teams to analyze the various methods of proposed 6 consolidation. At this time there is no absolute 7 proposal for consideration. The working team has been 8 allowed to take a look at the various opportunities that 9 would come with the consolidation, based on the payroll 10 tax functions and our functions and we are working from 11 that point forward. 12 We are studying the benefits and the risks and 13 looking to the benefits to the overall State level, as 14 well as the taxpayers and employers of the State of 15 California. We're focusing on the processing functions, 16 customer service functions, as well as audit and 17 collection functions. 18 To manage this project, FTB and EDD have agreed 19 to break the project into three distinct phases. That 20 first phase, which is ongoing right now, is looking and 21 understanding the potential scope to start further 22 discussions with the administration and within our 23 working team. 24 As that is ongoing, we also will incorporate a 25 second phase, which is what we're calling a visioning 26 phase, and that is -- what we're doing is we're taking 27 what presumed scope and we're factoring that out post 28 consolidation and ongoing years to determine what we 6 1 would actually look like after consolidation of whatever 2 scope has actually been accomplished. 3 Once that visioning is done, we go into the 4 third and final phase of the project, which is an 5 implementation plan phase, where we actually say, "Well, 6 now we know what we're going to look like when the 7 consolidation occurs, now how do we get there?" And 8 that implementation plan will address how we get there. 9 So, we are continuing to work closely with the 10 administration on this issue. At this point, processes 11 and dates have not been clearly determined by the 12 administration, so -- but we are doing the best we can 13 and getting going on what we think our potential scope 14 would be. 15 MR. HORTON: Okay. Any questions, Members? 16 MR. RUNNER: Yeah, I have a question. 17 THE COURT: Mr. Runner. 18 MR. RUNNER: With that proposal is there a 19 timeline attached to getting to the end of the 20 consolidation? Is there is any kind of thought in 21 regards to -- 22 MS. HARRIMAN: The administration, at this 23 point, has stated that they are looking for a Department 24 of Revenue presence on July 1st of 2013. However, we -- 25 as we are moving towards what a consolidation looks 26 like, there may be an opportunity to flex that date. 27 But we're looking at within the project team, there 28 are -- there are several ways to do a consolidation. 7 1 One, that would be probably a very unfortunate way, 2 which is to consolidate everything and be ready to roll 3 on January -- on, excuse me, on July 1st of 2013 with a 4 consolidated entity. The other one is phase in, 5 actually, the consolidation activities. We bring the 6 low hanging fruit, per se, together first and 7 consolidate it and then we tackle the harder issues, 8 like the consolidations of our facilities and the 9 consolidation of our IT application in the years 10 subsequent, down the road. 11 So, the project team itself is, as we're going 12 into what we call a road mapping phase, which is related 13 to the vision, is we're probably looking at about a 14 seven year phase, where we would create a single entity. 15 Department of Revenue could exist before then and 16 provide a seamless experience for taxpayers and 17 employers in California. But behind the scenes we would 18 continue different consolidation activities as the costs 19 and the benefits -- 20 MR. RUNNER: How do you -- how do you do that 21 seamlessly, appear to be seamlessly, and consolidate if, 22 for instance, the IT portion is something you do later? 23 MS. HARRIMAN: I think from the perspective is 24 the taxpayer and employer presence deals with the 25 Department of Revenue. The forms they get are 26 Department of Revenue. The addresses and phone numbers 27 could -- would still be to the subject matter experts 28 associated with the unique tax that we're dealing with, 8 1 whether it's payroll or income tax, but the -- the mail 2 and the websites and all of our stationery would be 3 Department of Revenue. 4 And, so, there would be -- you almost create 5 like an interface at the very front of it that the 6 taxpayers deal with as the Department of Revenue and 7 then that interface streams the work out, wherever it 8 needs to go. 9 MR. RUNNER: So, you're actually talking about 10 more of a -- the first phase, I guess you'd call it a 11 virtual consolidation. 12 MS. HARRIMAN: Yes. 13 MR. HORTON: As opposed to a real physical 14 consolidation? 15 MS. HARRIMAN: Yes. And the project team is in 16 the very infant stages of what we're doing. So, a 17 virtual consolidation is probably a best scriptor of 18 that initial phase when a Department of Revenue is 19 created, but we're also looking for other opportunities 20 that we could hit the ground running with more of -- 21 more of a physical consolidation in some of the business 22 areas. 23 But much of the physical consolidation, 24 particularly in regards to IT is probably going to be in 25 the later years, not immediate. 26 MR. RUNNER: Has there -- has there been a -- 27 has there been a rev -- or a cost savings attached to 28 that -- to the consolidation? 9 1 MS. HARRIMAN: The project team, at this point, 2 providing that to Finance. Finance has not -- 3 Department of Finance, excuse me, has not stated a 4 definitive savings that is to be attributed to 5 consolidation at this time. 6 MR. RUNNER: Okay. 7 MR. HORTON: Ms. Steel. 8 MS. STEEL: I think this is kind of like 9 perfect timing because Governor even recognized that, 10 you know, try to put two tax agencies together that, you 11 know, we are working on centralized intelligence 12 partnership that, you know, we are sharing all of the 13 informations and we are moving actually forward. 14 And then technology for CROS team are actually 15 here that -- I think it's going to much easier to put 16 these agencies together that when we get these cases on 17 the Board hearing that, you know, sometimes it takes 18 just forever, sometimes I ask that the taxpayer's still 19 alive because, you know, coming from Franchise Tax Board 20 to our Board, it just takes forever to be here. 21 So, it's very, very efficient and that Governor 22 and other legislators, especially under the deficit, 23 that they were very concerned about underground economy. 24 This is going to be really lower that -- that we can 25 find, you know, those people that -- who are not paying 26 taxes and we can just really easily recognize those 27 people. 28 Having said that, the -- I asked Chair to put 10 1 this one discussions only because I need a lot of input 2 from the Members here, from BOE, but at the same time 3 that -- is that any way possible that we can do some 4 interested parties for, you know, this matter for -- and 5 if we do, how long it's going to take? 6 And because I really want to move forward. 7 This is going to be really big step. Ms. Shedd was 8 talking about that there is a lot of bills out there 9 before since 1980s, only thing is it couldn't go through 10 because technology was not there and then we were very 11 much behind, especially Board of Equalization was so 12 much behind from the technology. 13 So, maybe, you know, we can use something that 14 CROS project together or that, you know, we can share 15 the centralized intelligence partnership then, you know, 16 we can put together -- then, you know, we can really 17 move forward here. 18 So, first, you know, I want to ask Ms. Shedd 19 that, you know, ask all the Board Members to put their 20 ideas in, their input. 21 And second thing is, if we do the interested 22 parties meeting, then what's the timeline and how we 23 going to study this? 24 And then third one is there is a Tom Harmon 25 bill, it's out there, that they tried to put that one 26 stop, you know, solution for the taxpayers when they go 27 into room and they can, you know, pull out with one tax 28 ID number. That's going to be much easier for taxpayers 11 1 working on it. As we just opened last week, we just 2 opened the San Diego office with totally pro technology 3 that we don't even have receptionists there. You going 4 in and then you can just put the, you know, your number 5 in. Then, you know, I mean you get the number, I was 6 pulling too many those little numbers, I got into 7 trouble because it was so much fun to -- they direct you 8 which, you know, window to go. So, it was just the 9 fascinating that, you know, I think we can really move 10 forward this. 11 So, if you can give me timeline if we do 12 interest parties, how long it's going to take and then, 13 you know, what's the best way to approach this? 14 MS. SHEDD: Well, we could -- we certainly 15 could set up an interested parties process, but I'd like 16 to, if I may, go through the other two proposals and the 17 next one is the Harmon bill. 18 MS. STEEL: Right. 19 MS. SHEDD: And that is SB 1326. 20 MR. HORTON: Ms. Shedd, one second. 21 Any questions, Members, on this? 22 MS. YEE: Let her finish. 23 MR. HORTON: Okay, please continue. 24 MS. SHEDD: And rather than looking at actual 25 physical consolidation, this looks at it from the 26 perspective that Ms. Steel stated, from the customer's 27 point of view and what is more efficient. 28 So, it provides a single -- a single sign on 12 1 and one stop shop for all tax paying matters. It 2 requires the FTB, the EDD and the BOE to collaborate and 3 focus the agencies, current and future, information 4 technology efforts on developing a single internet 5 website portal that virtually consolidates the agencies 6 and then requires, as far as it's operationally 7 feasible, these agencies to consolidate their forms, 8 their applications and other documents to reduce the 9 number of multiple submissions that is required from 10 each taxpayer. 11 And I have here Eric Steen, the Board's CROS 12 Project Manager to give the Board some idea of how he 13 envisions this. 14 MR. STEEN: Mr. Chairman, honorable Members, 15 Eric Steen, CROS Project Director. 16 Senator Harmon's bill, SB 1326, its objectives 17 are consistent with the -- our own objectives, CROS 18 objectives, which really are to improve the taxpayer 19 experience, improve internal operations, provide our 20 customers, the taxpayer, the best bang for their buck, 21 as well as foster interagency collaboration. 22 So, we have very common objectives. What I 23 would say is that the design of CROS is such that it 24 helps achieves -- achieve us -- achieve those objectives 25 and really would, at some point, enable or better enable 26 virtual consolidation. 27 So, there's a picture that's -- that is behind 28 you, where you can see -- I think it's in front of you 13 1 as well. And what this does is graphically depict the 2 vision as it's expressed in SB 1326. 3 And, so, if I can just speak to that graphic 4 briefly, hopefully, it'll convey the way this might be 5 implemented. On the left-hand side you see the taxpayer 6 and the taxpayer's delegate interacting with a single 7 one stop shop, a portal, if you will, through a mobile 8 device, through the internet or actually going and 9 speaking to a customer service representative, who would 10 have access to the portal. 11 The portal would do a number of things. The 12 first thing would be a single sign on. So, an 13 individual could log on to the portal and they're 14 authenticated with all of the different revenue agencies 15 and their systems. It would also provide a common user 16 experience. So, same look and feel, irrespective of 17 whether the individual was interacting with Franchise 18 Tax, EDD, BOE. 19 Customer service would provide some ability to 20 research. We could push notifications, maybe subscribe 21 to feeds. 22 And then, lastly, we have process work flow. 23 And what we really envision there is coordination across 24 the different systems. So, for example, let's say I 25 want to change my mailing address. I change it via the 26 portal. The portal insures that that's changed in all 27 of the underlying systems. 28 And then as we move further to the right, we 14 1 see a number of example functions that would be exposed 2 through a intermediary, what we call a service bus, 3 things like registering a business entity, authorizing a 4 delegate, you know, your accountant, being able to 5 change your address, file and pay your returns, check 6 balances, and so on and so forth. 7 And, really, what I'd kind of like to convey 8 regarding this picture, this is a simple picture, but 9 this is a complex problem. So, it's not something we 10 are going to achieve overnight at no cost, but it can be 11 done. It is feasible. 12 But I think the takeaway is that the design of 13 CROS would facilitate such a vision. And I would also 14 say that this would certainly be more feasible once CROS 15 is implemented, as well as Franchise Tax's EDR and, no 16 doubt, EDD would also have updates that they would need 17 to make as well to facilitate this vision becoming a 18 reality. 19 MR. HORTON: Thank you. 20 MS. SHEDD: The final measure that's before the 21 legislature now is SB 1554, Strickland. And it's more 22 of the Klehs model which abolishes the Franchise Tax 23 Board, transfers the FTB duties and powers to the BOE 24 operative January 1, 2014 and also merges in the EDD tax 25 branch with the Board of Equalization. 26 And if there's any other question, that 27 concludes what's out there and I welcome any other 28 discussion or questions. 15 1 MR. HORTON: Member Yee. 2 MS. YEE: Thank you very much, Mr. Chairman. I 3 wanted to see if there was a way to really provide a bit 4 more of a logical context for how to consider these 5 proposals rather then just what's been tried and failed. 6 And I think really, first off, to think about 7 what our ultimate goal is when we talk about 8 consolidation. I think Ms. Steel has certainly one of 9 the most important goals in mind and that is experience 10 of the taxpayer. And -- but I also want to be sensitive 11 to what is able to be delivered to the taxpayer, given 12 the state of our infrastructure across the three tax 13 agencies. And I've been of the mind -- and I think 14 we've had this debated to great lengths in the 15 legislature, whether it's during the budget process or 16 otherwise, but, that in order to really have a true 17 consolidation, we're going to need to be prepared as a 18 state to make a major, major investment. It's going to 19 cost a lot of money before we get to a point where we're 20 going to be a single point of touch for a taxpayer 21 across all of the different tax programs. 22 Having said that, one of the things that I 23 didn't see here was really a compilation of what's been 24 achieved to date relative to consolidation. I think 25 we've had some functional consolidation proposals that 26 have really started to bear fruit across the tax 27 agencies. They've been small, but I think they're 28 things that we can build on that really make sense when 16 1 we look at processes that could be streamlined such that 2 we can achieve some efficiencies. But it's almost like 3 we're starting from kind of the largest overarching 4 goal, which is to have a single tax agency under 5 consolidation and then we've started really at this 6 others end where we've looked at functions. And we've 7 had some successes there. I'd like to see us continue 8 to build on those, whether it's, you know, processing 9 functions, whether it's looking at how we have a single 10 application for the Offers-In-Compromise program, 11 whether it's -- I mean, there are things that we've done 12 that I'd like to at least acknowledge that we have 13 looked at how to make the experience for the taxpayer 14 much more user friendly. 15 Having said that, I'm wondering if the way to 16 look at this proposal may be -- and part of this is how 17 we've going to offer input relative to the pending 18 legislative proposals. And I -- I think that the 19 discussion that has been -- that has taken place prior 20 to this time, particularly through the budget process, 21 because I do remember this whole notion of a single 22 taxpayer ID really come up and it was -- it was 23 discussed, I thought, at some on great length but 24 because of the cost was tossed out. 25 And, so, I think there are certain kernels of 26 this that we can really try to put some emphasis in to 27 certainly give the Governor's proposal this year, which 28 I think is really a return to kind of how it once was, 17 1 was it the EDD tax function and FTB tax function and -- 2 MS. HARRIMAN: I don't recall that. 3 MS. YEE: -- consolidated and got split out for 4 some reason beyond my knowledge and understanding. 5 But -- but that that seems to make sense. But 6 this is going to have to be a matter of like building 7 blocks. And I think we're going to have to come at it 8 from both ends with respect to other things that we can 9 do from an operational standpoint, the things we can do 10 a higher level problematic standpoint, and then I think 11 Ms. Steel hit the nail on the head, the technology is 12 really going to drive what's possible. 13 And I'm not ready, at this point, to jettison 14 the path that we're on, at least here at the BOE, 15 relative to CROS, because we just have a pretty 16 fundamental effort going on right now to replace our 17 legacy systems and that has to be done. 18 And I think anything that we try to put on top 19 of that now is going to, 1, become more costly; 2, 20 really minimize our ability to have some of the revenue 21 accelerations that we've been counting on; and, 3, 22 really will, I think, compromise our having a system 23 that will maintain integrity with respect to the revenue 24 programs that we currently have at this agency. 25 So, I mean a lot of moving parts, but I don't 26 want to throw out the objective, I think the objective's 27 a really good objective, but I want to see it approached 28 from both ends. 18 1 And I think some of the analysis that should be 2 done is going back to some of the prior legislative 3 discussion about whether it's a single taxpayer ID 4 number, looking at what that cost was and seeing at what 5 point if, it's feasible, you know, during the process of 6 whether it's CROS or what's happening at the FTB, that 7 that may make some sense to entertain. But I think an 8 overall consolidation proposal is just going to -- I 9 don't want it to -- I really don't want the outcome to 10 be, basically, DOA at the legislature. I want us to be 11 thoughtful about it in terms of the pieces that we can 12 advance. And the ones that have cost, to really be able 13 to analyze this to see if they make sense across the 14 three agencies and advance a proposal where we all feel 15 that that is really the logical next step to go. 16 So, I was a little remiss to not see some of 17 things that we've already accomplished. They're small, 18 but I think they make a lot of sense and they really 19 have enhanced the taxpayer's experience. 20 MR. HORTON: Thank you, Member Yee. 21 Further discussion, Members? 22 MS. STEEL: Just a question. 23 MR. HORTON: Ms. Steel. 24 MS. STEEL: For the cost, the Tom Harmon bill 25 came out the cost for over a million dollars, but we 26 didn't see any cost or revenue analysis for the other 27 bill. 28 MS. SHEDD: For the Strickland bill? 19 1 MS. STEEL: Right. 2 MS. SHEDD: Well, that is a much -- I think 3 that's unknown at this time because we don't really know 4 what the blueprint is, either the timeline or exactly 5 what it's going to look like, whether it's, you know, 6 are they going to build a new building, are we all going 7 to be physically in one place? 8 I think there's a lot of unknowns. There was 9 some -- the latest study by the LAO in 2005 said a 10 consolidation would be a savings in the low millions 11 based on the current filing and processing methods, but 12 in the short term the savings would be offset many times 13 over by the costs for re-engineering existing software 14 to insure compatibility, purchasing new or renovating 15 existing capital equipment for shared deployment, 16 reformatting existing remittance and nonremittance 17 forms, as whether -- as well as other changes. Such 18 costs are likely to be in lows tens of millions of 19 dollars over a multi-year period. 20 So, I think their point from that study was, 21 there are probably going to be some savings down the 22 road, but in the near future it would be practical or 23 probably beneficial to focus on our electronic 24 processing, things that we can do to be integrated in 25 that point and functional consolidation -- virtual 26 consolidation rather than looking at doing that because 27 it will be very costly in the short run. 28 MS. STEEL: Okay. Then I hear that, you know, 20 1 from one single tax ID number and all other stuffs, so 2 that's the reason that, you know, we are not voting here 3 that -- you know, we are discussing about these issues. 4 But I asked the question regarding the 5 interested parties or we tried to get more -- gathering 6 more informations because this time that really I want 7 it to be successful to help, you know, State deficit. 8 So, if we do that, how long it's going to take and 9 what's going to be the timeline here. 10 MS. SHEDD: Well, we could certainly -- I could 11 work with the Chair's office and set up interested 12 parties meetings and we can set them up, oh, in the next 13 couple weeks, if -- 14 MR. HORTON: Well -- 15 MS. STEEL: Get more informations. 16 MR. HORTON: -- not within the next couple 17 weeks, but we can certainly accommodate and get it set 18 up in a timely manner to insure that all of the 19 interested parties have an opportunity to weigh in and 20 participate. That, in and of itself, is going to take 21 us a while. 22 It's good to hear that the Governor has pushed 23 back his timeline somewhat to 2013 and is entertaining 24 potential pilot programs in order to evaluate the 25 consolidation in various different areas and to identify 26 where the efficiency is, as well as the effectiveness of 27 these proposals. 28 There is a saying that efficiency is doing 21 1 things right and being effective is doing the right 2 thing right. And that's where the rubber sort of meets 3 the road, I think, in challenging us. 4 I concur with Member Yee's analysis relative to 5 the cost. It is extremely expensive to be able to 6 consolidate all three agencies and do it effectively and 7 efficiently and that the challenge that we have is the 8 fact that you do have three different, distinct subject 9 experts that have been developed over the years and that 10 the training and the development of those particular 11 employees and the payroll area over the years and that 12 expertise that has been developed and historical 13 knowledge. Now to have them capable of actually 14 performing Internal Revenue -- I mean, Franchise Tax 15 Board audits and then Board of Equalization audits. So, 16 if you have to keep the subject matter experts separate, 17 then is that real consolidation? 18 And then when you look at the IT system, we had 19 an opportunity to take a look at consolidation and -- of 20 the IT system and that occurred when EDD was first 21 venturing on their new computer system. And then when 22 FTB began to look at its new computer system, we had 23 another opportunity. 24 And then now as BOE begins to look at CROS and 25 its computer system, there is another opportunity. 26 Unfortunately, those three systems don't communicate 27 with each other. They're not designed, they're not the 28 same system, they can't interact with each other. And, 22 1 so, the challenge of getting consolidation, other than 2 being able to put on a good front, which I think is 3 beneficial to the taxpayer because the taxpayer can go 4 to one place, but actually being able to communicate 5 these various different systems, being able to 6 communicate, all of a sudden you have to shut them all 7 down and start all over and I don't necessarily see any 8 of the agencies accomplishing that unless there is some 9 type of technology that can allow them to communicate, 10 which I'm not necessarily aware of. But therein lies 11 part of the challenge. 12 And then the -- the overall administration of 13 the various different agencies trying to establish an 14 administration that is consolidated -- the Board of 15 Equalization has its district offices and we have our 16 administrative structure that is set there. FTB has 17 theirs. And, so, is the taxpayer going to go to the FTB 18 or go to the BOE or are you going to put them all in one 19 spot? And them -- or are you going to consolidate the 20 virtual reality aspect of it where they go to a place 21 that doesn't necessarily have the support within the 22 same housing facility presents a challenge in and of 23 itself. 24 But with that said, I believe that there are 25 some -- there are some efficiencies because there is 26 some redundancy within the three agencies. There are 27 things that we all do that we could have some 28 consolidation. 23 1 As I shared before, I am very, very, very much 2 concerned about consolidation that ends up with 3 eliminating jobs. And, so, in order to consolidate, in 4 order to eliminate redundancy, theoretically, some 5 people have got to go. I have shared this before as 6 well is that my mother once told me in order to make a 7 good omelette, you got to crack few eggs. And, 8 typically, those eggs are on the top shelf. So, do we 9 really need three administrators? Do we really need 10 three Chief Counsels and so forth and so on. And how do 11 we consolidate that? 12 And, at the same time, how do we -- how do 13 we -- how do we capitalize or what's the loss factor 14 that we lose as far as historical knowledge that exists 15 that is embodied in those particular individuals over 16 the years becomes a huge challenge for the agency. And, 17 ultimately, at least the studies that I've seen over the 18 years, it says keep all three and hire another one. So, 19 you end up expanding and you end up having to hire 20 another one to oversee those three so that you have the 21 centralization that occurs at the top. 22 And, there again, you have increased redundancy 23 and duplicity. So, in itself, creates a challenge as 24 well. 25 And I share all that to say that let's be -- we 26 should be very cautious as we approach and very honest 27 with the decisionmakers as -- which I know we will be, 28 I'm not questioning that -- and take a really, really 24 1 good look at the cost associated with it. 2 There is enough historical analysis and review 3 that will tell us what the cost is of consolidating the 4 agencies. And then -- and then take a look at the -- 5 the practical, functional expects where we can 6 consolidate, with or without the bill, as under the 7 leadership of Member Yee, there was quite a bit of 8 consolidation that occurred. And I believe that we can 9 continue to work together, the agencies, to accomplish 10 certain objectives and particularly virtual reality. I 11 think we can do it now. I don't know that we need 12 legislation in order for the agencies to come together 13 and work out a Memorandum of Understanding of some type 14 of agreement that we're going to have -- that we're 15 going to work together in that respect or share 16 information and so I forth. 17 I believe we can do it. I believe the existing 18 technology that we can do it -- may not have the bells 19 and whistles, but you're not going to get them anyway 20 because the systems don't communicate in the first 21 place. So, you can never get there to a real virtual 22 reality because you've got three systems -- the EDR 23 system, the CROS system and the EDD system -- that just 24 can't communicate. So, how do you ultimately be able to 25 get something out of the back end when you can't get 26 past the gate or the firewalls that are established 27 within the various systems by the nature of their 28 technological formation? And, so, therein becomes part 25 1 of the challenge. 2 We said a lot to say, but what we said in the 3 beginning is that, you know, I believe there are 4 efficiencies that we can reach, but the question is can 5 we be effective and actually have a true consolidation? 6 To the extent that we can be efficient, let's do it. 7 Let's take a look at it. 8 Being effective -- let's also move in that 9 direction. The consolidation, I think it's in our 10 history, Members, I think -- I mean it's in our future. 11 I think ultimately California should have a consolidated 12 Department of Revenue -- very supportive of that. 13 And whenever the legislature is in the position 14 to -- to spend a few billion dollars to accomplish that 15 effectively, where the subject experts are adequately 16 trained so that that they can -- they can interact in 17 all different agencies and share information, I think 18 that would be a fabulous thing. 19 But until we get there, there are a number of 20 measures that we can address and let's begin to address 21 those, with or without the legislation. 22 Ms. Mandel 23 MS. MANDEL: Thank you, Mr. Horton. 24 First, I want to thank Jeanne for the courtesy 25 of coming over to Board of Equalization. She did make a 26 presentation at our recent Franchise Tax Board meeting 27 and I appreciate that you came over to -- to give that 28 presentation here for the people who were not able to 26 1 attend the FTB meeting or listen in the audiocast, which 2 I understand had a few issues. But the audiocast that's 3 posted on the FTB website is very clear and very good, 4 so, we'll just have to work harder on the mikes when 5 we're actually in the Board room. 6 And there -- there have long been discussions 7 about the issues with IT. IT is always an obstacle at 8 some level. But the the EDR system, as I understand it, 9 which is also something that everyone can come hear 10 about because we do hear about it at all the FTB 11 meetings, is -- it's not a replace of the FTB legacy 12 systems the way CROS is a replace of the legacy systems 13 here, but it's -- it's -- FTB has a number of systems 14 and it's a way to better enable those internal systems 15 to talk to each other and to -- to allow FTB to better 16 utilize the information that it already has within its 17 various systems. And, so, for people who are interested 18 generally in the EDR and in any kind of additional 19 information that might be forthcoming on -- on the work 20 between EDD and FTB, I encourage them to come to the FTB 21 meetings. The next one's June 7th. Thank you. 22 MR. HORTON: Okay. Mr. Runner. 23 MR. RUNNER: Yeah, just a couple quick 24 observations. I think we're going to get schooled a 25 little bit here and as we watch the discussions going on 26 between FTB and EDD in regards to consolidation. Again 27 it's probably the easiest thing to do is to print the 28 letterhead and, you know, then have a Department of 27 1 Revenue. Everything else becomes a lot harder after 2 that. 3 So, it'll be interesting to see exactly what 4 takes place in terms of how that goes. And -- and I -- 5 and again, it's -- if anything, some of the dynamics are 6 at least a little easier in trying to do that, given the 7 politics of it, let me say, that becomes a little bit 8 easier with that particular function. 9 It gets more difficult when you start going 10 beyond that. Clearly, the attempts historically that 11 we've had of trying to fold in tax collection agencies, 12 all these agencies under the -- under the BOE have 13 always hit resistance when it came to the executive 14 branch. I anticipate that will also be the future of 15 those efforts. And, so, we'll -- I think that the 16 thought in regards to seeing some kind of -- of, you 17 know, ease toward what you can bring together to benefit 18 both the agencies and also then the taxpayer within EDD 19 and FTB is going to be interesting to watch and see what 20 actually happens. 21 Again, it's interesting that there is no saving 22 attached to that right now. So, it's kind of like who 23 knows what this is actually going to benefit in terms of 24 the taxpayer at that point, not so much the taxpayer 25 dealing with them, but, I mean, in terms of the cost. 26 I think if anything too, the thing that I would 27 see, no matter what takes place with that, it seems to 28 me there is still an open good discussion that can take 28 1 place in the legislature in regards to the concept in 2 the Harmon bill and that is, even if you go all of the 3 way down through that and it works out well between EDD 4 and FTB, you still have the BOE lying out there. And I 5 think at that point we're still -- one of our goals 6 should be, how do we help the taxpayer who has to 7 interact with these agencies? 8 Because I think we all realize that the best 9 way to get compliance from taxpayers is to have a simple 10 system -- a simple -- a system that they understand, a 11 simple -- a system that it's easy for them to navigate. 12 And, so, I think to me whether or not right now 13 the Harmon bill talks about the FTB and the EDD and the 14 BOE and the -- maybe the Harmon bill ought to be open 15 enough to concede that there could be Department of 16 Revenue out in there in the future that consolidates EDD 17 and FTB and then that virtual re -- or that virtual 18 consolidation then is a -- bridges over then to the BOE. 19 So, again, we can help taxpayers with -- with how they 20 interface with us as agencies. 21 So, I think there's room for both -- for the -- 22 for that concept moving forward. I don't necessarily 23 see the Harmon bill and the Governor's proposal in 24 conflict. I think no matter what takes place, both of 25 those could move forward for ease of understanding of 26 the taxpayer. But I think we well understand the 27 hurdles and again I think that the hurdles are going to 28 be well laid out for us as the discussions go on in your 29 1 work group between EDD and the FTB. Thanks. 2 MR. HORTON: Okay. Further discussion, 3 Members? 4 I too want to commend the FTB for the work that 5 they're doing. If there is a -- if there is a -- a 6 location where we can actually work through this 7 process, that is the appropriate place. So, I am glad 8 to see that it is going on and that the Governor's 9 allowing you time, to 2013, to come up with some 10 recommendations. 11 I would encourage is -- is there -- is there a 12 way to project what the cost might be or to project what 13 the revenue savings might be and kind -- and in a 14 virtual reality environment where you kind of look at 15 what might happen, what could happen and what the cost 16 association with strategy might be? 17 Say, for example, we took the subject area 18 experts and thought about how we would consolidate that 19 aspect of it; the collection activities, how we would 20 consolidate and how would that look like and what are 21 the various different alternatives and what the costs 22 might be associated with that, as well as what the 23 benefit, the revenue -- the additional revenue that 24 could be generated. And then the various different 25 components of any consolidation might be informative 26 for, I think, for the decisionmakers as we go through 27 this process. 28 Is there a way to accomplish that? 30 1 MS. HARRIMAN: Yes, Mr. Chair. Actually, what 2 the project team is doing over the next several weeks, 3 potentially the next three months -- 4 MR. HORTON: I was actually asking a leading 5 question -- 6 MS. HARRIMAN: Yes. 7 MR. HORTON: -- so you could do that. 8 MS. HARRIMAN: Yes. We're getting together -- 9 MR. HORTON: Okay. 10 MR. RUNNER: Well done. 11 MS. HARRIMAN: -- we're getting together this 12 week, actually, and starting the road map that I 13 mentioned earlier where we're talking about when certain 14 things would be consolidated, when we would start that 15 consolidation effort and when we would hope to have that 16 done. 17 That road map that we're doing will beat us 18 immediately in discussion, okay, if we're going to do 19 this in our collection environment, what are the costs 20 to do that? 21 And if we expend those costs, what are the 22 benefits that going to be derived -- whether it's cost 23 efficiencies, better tools for the taxpayers or 24 increased revenue or all of the above? 25 So, the project team, probably at this point, 26 without the administration coming forward and giving us 27 a more definitive time frame, over the next three months 28 we'll be doing a data extract process to do. Finance 31 1 has asked that. We have some very robust documentation 2 tools that we're using within the project team. And 3 those documents will have that information and Finance 4 has asked us to keep them informed of -- of those 5 discussions and documentation efforts. And it has gone 6 so far as to say that, "We even want to see what you say 7 doesn't work," because they have given the project team 8 the latitude to come forward and make that initial 9 recommendation. 10 It's like, you know, this really isn't an area 11 where you're going to get any efficiencies. It's just 12 going to be all costs or it's going make the 13 taxpayer-employer experience more detrimental than it 14 already is. So, the project team might recommend not to 15 go there. Finance wants to see those opportunities as 16 well as the ones that we suggest might actually increase 17 the efficiencies or revenues or decrease costs. 18 So, yes over the next three months I think we 19 are going to do exactly what you're speaking of. 20 MR. HORTON: Okay. Members, is there any -- 21 any benefit of the BOE, Board of Equalization, 22 participating in that process? 23 Or -- I would on the natural say no, but other 24 than being observant from afar as far as the process is 25 concerned, but as we entertain an interested parties 26 meeting, I'd like to have the Members sort of input, 27 either now or later, on what that interest parties 28 meeting would look like and what we would be discussing 32 1 and whether or not the BOE should be, to some degree, 2 participating even as an observer, if possible, makes 3 practical sense and it can be done. 4 Ms. Mandel. 5 MS. MANDEL: Sorry. 6 The EDD FTB proposal in the Governor's budget 7 summary doesn't really impact -- it doesn't impact BOE. 8 So, I think that's a discussion between FTB and EDD. 9 MS. STEEL: Even -- 10 MR. HORTON: Members, I -- I've kind of been at 11 this like 30 years and if you think what's going at EDD 12 and FTB doesn't impact -- 13 MS. MANDEL: Well, in terms of -- in terms of 14 their consolidating the tax branch into FTB, that's 15 not -- 16 MR. HORTON: I agree with -- 17 MS. MANDEL: -- and that's what they're really 18 discussing. 19 MR. HORTON: -- but the ultimate goal is to 20 have one revenue agency, that's the ultimate goal. And 21 it has to be the ultimate goal because that's where the 22 efficiency is. 23 And, so, if we identify redundancies and 24 efficiencies as it relates to the EDD and FTB, those 25 similar -- it's going to be -- it's going to be very 26 similar as it relates to the BOE. 27 And, so, we -- let me -- I think it's just a 28 cautionary statement that we should be conscious of 33 1 that. 2 MS. MANDEL: Well -- 3 MR. HORTON: It's a reality. 4 MS. MANDEL: It seems to me then that that -- 5 that if you run an interested parties process here at 6 BOE, then any -- then -- then the other agencies are, at 7 some level, interested parties in that -- 8 MR. HORTON: Process. 9 MS. MANDEL: -- discussion should they -- 10 MR. HORTON: I agree. 11 MS. MANDEL: -- you know, choose to. And, so, 12 if they have lessons learned of things that they see 13 that would be, you know, potentially crossover, those -- 14 I would anticipate that that would be mentioned in that 15 that -- that process if you're running an interested 16 parties process here on a general overall. 17 MR. HORTON: Okay. Mr. Runner. 18 MR. RUNNER: I was just going to say, in one 19 sense, I would -- I would I think, Mr. Chair, and maybe 20 you can help me if I -- if I'm not observing this 21 correctly, but your role in the FTB can help guide that 22 a bit, can't it? 23 In the sense that I'm trying to figure out how 24 we would have a duplicate process or involvement on a -- 25 on a process that right now we're not involved in. 26 It's -- it's not -- we're not in that matrix. 27 I understand and I agree with you in that 28 whenever there's a discussion of consolidation, BOE 34 1 cannot be far behind in that discussion and in 2 somebody's mind. But I'm not sure how we -- how we 3 force ourselves into that discussion right now. 4 And that's why, I guess, I would kind of rely 5 in your role in the BOE to help guide that or give us 6 direction in terms of when it is or how it is that we 7 might engage. We might -- does that make sense? 8 I'm trying -- a lot of this, you know, just 9 trying to figure out what we would actually do. 10 MR. HORTON: Both the Controller and I sit on 11 the -- 12 MR. RUNNER: Right. 13 MR. HORTON: -- the Franchise Tax Board. And, 14 so, as we look at the consolidation between FTB and EDD 15 and attempting to accomplish the objectives of the 16 Governor and as set forth, particularly with the service 17 to the -- to the -- enhancing the experience for 18 California taxpayers and creating a level of efficiency, 19 I think there are, as Ms. Mandel indicated, that we will 20 learn a series of lessons in that process. And the 21 interested parties meeting, to evaluate that would only 22 serve to -- to provide input from the general public in 23 the process, which I think is part of -- it will be 24 ultimately part of the FTB's effort at the appropriate 25 time when they've actually done their due diligence and 26 they've had an opportunity to -- to -- to develop some 27 framework in which they can articulate what is going 28 forth. 35 1 See, right now we don't have a product. We're 2 in the process of developing that. And, so, any 3 discussions at this point would be purely 4 hypothetical -- if this occurred and if that occurred 5 and conscious of the -- of the history as it relates to 6 FTB, EDD and BOE, that all three agencies seek to have 7 public input at the appropriate time when we have 8 something for them to discuss. I believe that will 9 happen. 10 So, the BOE's role would be the existing go 11 legislation that is out there certainly would be 12 appropriate for us to, I think, to have an interested 13 party discussion on the legislation so that we, as 14 policy makers, can have the benefit of the input on the 15 various legislative concepts that are out there. 16 The consolidation of the FTB and EDD is not a 17 legislative proposal yet. 18 MS. YEE: Mr. Chairman 19 MR. HORTON: Member Yee. 20 MS. YEE: I'm feeling as though we should 21 provide a little bit more direction and structure for 22 this interested parties process, otherwise, we're not 23 going to be moving this discussion forward. 24 And, perhaps, the focus of the interested 25 parties process could be some formalization of -- I know 26 some of the work groups that Senator Runner, your 27 predecessor, Mr. Leonard, had really a rise in 28 leadership and with respect to the three tax agencies 36 1 and coming at functional consolidation. 2 And I'm focused on Senator Harmon's bill for a 3 couple of reasons. One, I think think there is some 4 value in looking at how to facilitate additional areas 5 for functional consolidation with the use of technology. 6 And I'm not suggesting that we upend anything that's 7 currently moving forward, like our CROS project. But 8 really if there are functions that are identified that 9 look like areas that could be streamlined for the 10 taxpayer's experience and if new technology could play a 11 role in that, then certainly identifying that. 12 But my sense of this is that the -- is that 13 this large -- this large proposal, the end all, be all 14 proposal of consolidating into one tax agency is going 15 to require all of these steps to kind of take place 16 precedent to it. 17 And, so, I just -- I want to be logical about 18 this and not try to bite off something that's so big 19 that it becomes kind of the same proposal the 20 legislature's considered in the past that ends up being 21 very costly, not workable. And I think we've been kind 22 of on a path to try to identify areas that are workable. 23 The Governor's proposal -- this Governor's proposal, it 24 will be considered and deliberated within the budget 25 process -- context of the budget process. 26 I think Mr. -- Senator Strickland's bill is 27 probably going to being affected by the outcome of the 28 Governor's proposal, so, I'm kind of putting that piece 37 1 aside. 2 But just really again kind of going back and 3 looking at, are their functions that we can continue to 4 look at, perhaps streamlining, that make it a more 5 positive experience for the taxpayer. Because I think 6 that's all of our goal, that really is all of our goal. 7 And if we can have this interested parties 8 process essentially be a formalization of what had been, 9 I think, staff discussions across all three agencies. I 10 know at my office I had a designated person involved in 11 that -- we'd be able -- we've been able to identify some 12 of those areas. I think stopped after Mr. Leonard left 13 the Board, but there were some areas that were 14 identified I think could be picked up and reevaluated 15 again, particularly if we add this dimension of whether 16 technology could really be helpful in terms of 17 facilitating that type of functional consolidation. 18 So, I would suggest that maybe the interested 19 parties process at least take that initial step. So, 20 that's not reinventing the wheel, but that if we're ever 21 going to get to the place of having a single tax agency 22 in California, these are the steps that we're going to 23 have to take anyway and why work backwards? Let's just 24 kind of build on where -- you know, moving towards that 25 goal. 26 MR. HORTON: I agree. 27 Further discussion, Members? 28 MS. STEEL: Just comment. 38 1 MR. HORTON: Member Steel. 2 MS. STEEL: That ultimate goal that, you know, 3 we all agree that we going to have Department of Revenue 4 under one Department and then everything's go under and 5 then interested parties I think we need, as Ms. Yee 6 said, we need more constructive guidelines, so, you 7 know, make sure that we going to have a very positive 8 and good outcome. 9 But at the same time, it will be really big, as 10 you all mentioned. But it has to go to the full. And, 11 so, when we are looking at that, Franchise Tax Board and 12 EDD consolidation, that, you know, if we participate and 13 we look at it and then we can see that what's going to 14 positive and what's not and then how we can move 15 forward. 16 So, I think participation is very, very 17 important. If Chairman is going be okay, then, you know 18 our office can participate and we can just go sit there 19 and, you know, observe the first time. And then if we 20 can put some more -- some guidelines or ideas in, I 21 think that's going to be very good learning experience. 22 So, love to do that. Thank you. 23 MR. HORTON: Member Mandel. 24 MS. MANDEL: Sure. Since everybody's saying 25 that we all support, I have to say that I -- I -- I 26 haven't had the specific discussion in my office, so, I 27 can't say anything one way or another about a single tax 28 agency. We just haven't had that discussion. 39 1 MR. HORTON: Okay. 2 MS. MANDEL: Okay. And, so -- 3 MR. HORTON: Okay. 4 MS. MANDEL: -- and, you know, Controller 5 has -- the Controller, as Chair of FTB, I'm -- I just -- 6 you know, what I said before, I don't know about, you 7 know, getting involved in the staff level discussions 8 that are going on between EDD and FTB, even with respect 9 to the Member offices at FTB, we are constrained about 10 participating in those staff level discussions because 11 of Bagley Keene. 12 So, I just mentioned that as well in terms of 13 our being able to or how those would be run. So, it's a 14 constraint at FTB. So, anyway -- 15 MS. STEEL. Totally understand that we can just 16 observe and then we can bring it back, the ideas that, 17 you know, how their process works. And then we can 18 bring it in to interested parties and then, you know, 19 we're going to move forward. 20 So, I think that's going to be very great, you 21 know, learning experience. 22 MR. HORTON: Okay. I'm going to go to Margaret 23 Shedd, but, first, Members, we heard you. And we will 24 take all of the comments under consideration and see if 25 we can formulate a recommendation and bring it back to 26 you and possibly not only in the Leg Committee, there 27 may be discussions that should take place in the 28 Customer Service Committee as well. 40 1 And we may want to -- in order to insure that 2 it doesn't get too far out of hand we may want to frame 3 it up in a way that we're looking at the ultimate 4 objective of what can we do to make the agencies more 5 efficiency -- more efficient and effective. 6 So, we will come back to you with some 7 recommendations. 8 Ms. Shedd. 9 MS. SHEDD: Yes. Ms. Harriman just informed me 10 that they are going to start their interested parties 11 process this summer and we're certainly invited as staff 12 to observe. 13 MR. HORTON: Yes, okay. 14 Further discussion, Members? Hearing none, 15 thank you so very much for coming over today and sharing 16 your presentation. And to Margaret Shedd and her team, 17 thank you as well. 18 ---o0o--- 19 20 21 22 23 24 25 26 27 28 41 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 MARCH 20, 2012 I recorded verbatim, in shorthand, to the 10 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 41 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: MAY 7, 2012 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 42