1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 MAY 31, 2012 9 10 11 ITEM P 12 OTHER ADMINISTRATIVE MATTERS 13 ITEM P1.3 14 CROS PROJECT UPDATE AND ACTIONS 15 16 17 18 19 20 Reported by: Juli Price Jackson 21 No. CSR 5214 22 23 24 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 5 Michelle Steel Vice-Chairwoman 6 7 Betty T. Yee Member 8 9 George Runner Member 10 11 Marcy Jo Mandel Appearing for John 12 Chiang, State Controller (per 13 Government Code Section 7.9) 14 15 Joann Richmond Chief, Board 16 Proceedings Division 17 18 19 ---oOo--- 20 For Staff: Eric Steen CROS Project 21 Director 22 23 24 25 26 27 ---o0o--- 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 MAY 31, 2012 4 ---oOo--- 5 MR. HORTON: Ms. Richmond. 6 MS. RICHMOND: Our next item is P1.3, CROS 7 project update and actions. 8 MR. STEEN: Mr. Chairman, honorable Members, 9 Eric Steen, CROS Project Director. It's a privilege for 10 me to provide you an update on the CROS project this 11 afternoon. 12 I want to speak briefly on the schedule. The 13 request for proposal stands at 88 percent complete. And 14 I understand the Research and Statistics section has 15 been placing wagers on that percentage complete. So, I 16 don't know who won the pool today, but 88 percent 17 complete. 18 And we will have submitted seven of nine of the 19 sections of the R. F. P. to Department of General 20 Services and BOE Legal by mid-June. 21 And we anticipate delivering the entire 22 R. F. P. to General Services on or before July 20th of 23 this year. So, we're making very good progress there. 24 Regarding our interactions with the control 25 agencies, or CIO, Brenda Fleming, and I had an 26 opportunity to meet with the State CIO, Carlos Ramos, 27 earlier this month and I'm certain that Brenda will 28 report more on this. But he was very complimentary of 3 1 our intention to move forward with the parallel 2 initiatives, data conversion interfaces, business rules 3 in advance of our -- or during the procurement rather. 4 And he even suggested -- he encouraged us, 5 actually, to share our lessons learned and our progress 6 with other State agencies considering a similar 7 undertaking. So, that was very good news. And we, in 8 fact, have a monthly meeting with him to talk about 9 CROS, among other things. 10 On June 5th we'll be meeting with General 11 Services to go over the compensation model, which is 12 fundamental to how the vendor will be compensated based 13 on this project. 14 And I have some very good news regarding the 15 B. C. P., the budget change proposal. As you are likely 16 aware, we received approval from the legislature on 17 May 23rd from the Assembly and then the Senate approved 18 it the following day, the 24th. 19 And I'd like to thank the project team as well 20 as the Financial Management Division and TSD and others 21 who helped us with those efforts. And, no doubt, Liz 22 Houser will provide greater detail on the B. C. P. when 23 she gives her report. But, essentially, it represents 24 $18.1 million for fiscal year '12-'13. That reflects a 25 28 percent reduction based on feedback we received from 26 the Senate consultants, 113 positions, 24 of which are 27 CROS. And it will represent 38.8 million in new 28 revenue. 4 1 And we're just glad that this phase of the 2 effort is over. So, know we can get back to focusing on 3 the R. F. P. and the project, as well, the parallel 4 initiatives. So, it's a significant project milestone. 5 I would like to also talk about the revenue 6 projections related to CROS. I think at every Board 7 hearing it's been mentioned. The revenue lift has been 8 mentioned and I think it began to sink in that maybe I 9 should address them. So, I'm going to address them 10 today. 11 I'll draw your attention to a power point 12 presentation. I believe you have it in front of you and 13 I'll bring it up. 14 Apparently I have technology problems -- there 15 we go. There are five questions that typically emerge 16 when we talk about the -- the revenue, revenues related 17 to CROS. And I need to figure out what button to push 18 here. I am a technologist, so -- there we go. 19 Those five questions are: what are the 20 estimated revenues? Where will the receive come from? 21 How do we -- can we be certain the revenue is there? 22 How do we measure the increases in revenue against the 23 solution itself? And will CROS result in any sort of 24 staff reductions? 25 So, one of the estimated revenues -- we -- we 26 estimate that CROS will generate roughly $200 million. 27 And what -- what we did -- what the Board of 28 Equalization did is we brought in an outside consultant, 5 1 an expert in statistic and parametric modeling. And 2 he's projected estimates for many different government 3 agencies, including the Franchise Tax Board. He's 4 testified before the legislature. And he uses a model 5 based on revenues realized by other organizations to 6 generate his estimates. And is -- on average, the 7 estimates -- the estimates that he's put together have 8 been less than a 10 percent margin of error. 9 And based on BOE's revenues, total taxes 10 collected, what's estimated is that we'll bring $200 11 million annually at avout an 85 percent confidence 12 level. 13 And, so, that's really a top down analysis. 14 We've also undertaken an bottom up analysis where some 15 of our resources have examined activities that could 16 automate and recapture time and focus those -- that time 17 and energy on revenue generating activities. And we've 18 come up with a similar figure. So, we feel pretty 19 confident in that figure. 20 So, what are these estimated revenues? Why 21 don't we -- sorry -- okay, where do the revenues come 22 from -- two places, automation and data analysis. 23 So, again, as I mentioned previously, by 24 automating various activities we can reclaim time and 25 focus on activities that generate revenue. 26 And then data analysis, we'll be able to create 27 more and higher quality audit leads based on being able 28 to mine the data through the use of an enterprise data 6 1 warehouse and business intelligence. 2 We'll be able to perform more accurate 3 collectibility scoring, conduct asset matching for 4 collections and then identify differences in figures 5 that taxpayers present to other revenue agencies and the 6 Board of Equalization. 7 So, is the revenue really there? And this ties 8 back into really the first question. And we've looked 9 at a number of different implementations at other 10 revenue agencies throughout the nation and California 11 and we see that other revenue agencies have achieved 12 similar -- similar results that we anticipate. And a 13 couple of examples here are Arizona BRITS, 338 million 14 over a five-year implementation. South Carolina 15 Department of Revenue generated 113 million over a 16 five-year implementation and then California's 17 Employment Development Department, their ACES project 18 has generated 154 million in new revenue in, I think, 19 just two years of implementation. 20 So, how are we going to measure the revenue? 21 Why is that important? It's important because we don't 22 want to end up paying the vendor for revenues that 23 aren't rightly attributed to the system. 24 And, so, what we do is we establish a baseline 25 and then we take a baseline year and then we -- once the 26 system is implemented, we measure the new revenues 27 against that baseline and we take into account variables 28 that night distort the actual measurement -- an accurate 7 1 measurement. 2 Things like do we change the tax rate or has 3 the tax rate been changed? Or has there been a 4 significant difference in umber of resources. 5 So, we take those into account, really, to 6 protect the Board of Equalization, as well as the 7 vendor. So, we compensate them fairly for the work that 8 they do, 9 And then, lastly, will CROS result in staff 10 reductions? So, whem we look at automation, clearly 11 that reduces some activities, but that does not mean a 12 reduction in State staff. 13 In fact, I think personally and professionally 14 we have all sorts of things that automate our lives -- 15 cell phone, e-mail, faxes. I am not awash in free time. 16 I don't think any of you are. It seems like the more 17 automating -- technology advances we have, the more 18 things we have to do, we will have -- as I mentioned 19 earlier, additional and better audit and collection 20 cases. That's just going to result in need for more 21 resources. 22 So, we don't see a reduction in staff on 23 horizon at all. And, in fact, you know, I go back to 24 the parallel intiatives. One of the things that we're 25 taking on is activities that would traditionally be done 26 by your system integrator, the winning bidder. We're 27 bringing those in and doing them ourselves. And, so, 28 we're insourcing. It creates more work and that's one 8 1 of the reasons why the S. E. I. U. stood up for us at 2 the legislature when we presented the B. C. P., because 3 we're really relying more on internal staff, like I 4 said, insourcing. And it's just an example of greater 5 need for more staff, not a lesser need. 6 So, that's pretty much the -- distilling down 7 the questions related to revenue realization, if there's 8 any questions about that and the answer -- if there's 9 any questions about that, I'd be happy to answer them. 10 MR. HORTON: Member Yee. 11 MS. YEE: Thank you, Mr. Chairman. Thank you, 12 Mr. Steen for putting a lot more texture onto this 13 discussion. 14 MR. STEEN: Really. 15 MS. YEE: I appreciate it. I may have not 16 heard you when you mentioned it, if you did mention it, 17 but the vendor's actually going to be selected based on 18 the new revenues, right? 19 I mean, is that -- is -- 20 MR. STEEN: Right, we -- right, they'll 21 project -- what they're going to do -- well, they're 22 really selected based on the solution. 23 MS. YEE: Right. 24 MR. STEEN: The solution, yeah. 25 MS. YEE: Yeah. 26 MR. STEEN: And we will evaluate -- I believe 27 we're going to evaluate the revenues that they project, 28 but that's -- that's also subject to what's realistic. 9 1 So, you don't get more points just because you 2 say you're going to generate $3 billion. 3 MS. YEE: Right, right, exactly. 4 MR. STEEN: Yeah, right. 5 MS. YEE: Okay. And then I know we had spoken 6 about earlier -- when we first took on this project with 7 subject to the timeline. 8 This 200 million annually isn't subject to any 9 timeline considerations, is it? 10 MR. STEEN: We do have a timeline associated TO 11 when the -- those monies come in. And I think we -- and 12 if memory serves me, it was 75 million the first year 13 and then 90 and then it ramps up. And I think it's 200 14 million the third or fourth year. 15 But I can get those -- those numbers exactly. 16 I can get those numbers to your office. 17 MS. YEE: Okay. But the ramp up to that hasn't 18 changed? 19 MR. STEEN: No, it has not. 20 MS. YEE: Okay, all right. thank you. 21 MR. HORTON: Further discussion, Members? 22 Quick question, just a general question, as it 23 relates to the time savings, the automation which allows 24 us to -- or the Department or team members to save time, 25 does the Board anticipate expanding the universe as -- 26 using that time to expand the universe of the number of 27 audits that we perform? 28 And will this help in reducing the outstanding 10 1 accounts receivable? 2 Seems to me those are two areas that we can 3 certainly account for revenue. Is that anticipated that 4 the CROS will be beneficial in that area? 5 MR. STEEN: Yes, we do anticipate conducting 6 more audits as a result of CROS. In fact, part of the 7 B. C. P. being -- we increased the number of auditors 8 and collectors to address the -- what's been 9 traditionally called the backlog. 10 MR. HORTON: Okay. 11 Thank you very much. 12 MR. STEEN: Thank you. 13 ---o0o--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 11 1 . 2 REPORTER'S CERTIFICATE 3 4 State of California ) 5 ) ss 6 County of Sacramento ) 7 8 I, JULI PRICE JACKSON, Hearing Reporter for the 9 California State Board of Equalization certify that on 10 MAY 31, 2012 I recorded verbatim, in shorthand, to the 11 best of my ability, the proceedings in the 12 above-entitled hearing; that I transcribed the shorthand 13 writing into typewriting; and that the preceding pages 1 14 through 11 constitute a complete and accurate 15 transcription of the shorthand writing. 16 17 Dated: July 13, 2012 18 19 20 21 ____________________________ 22 JULI PRICE JACKSON 23 Hearing Reporter 24 25 26 27 28 12