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 P OTHER ADMINISTRATIVE MATTERS 10 P5 ADMINSTRATION DEPUTY DIRECTOR'S REPORT 11 P5.3 2012/13 BUDGET UPDATE 12 13 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 5 Michelle Steel Vice-Chairwoman 6 7 Betty T. Yee Member 8 9 George Runner Member 10 11 John Chiang State Controller 12 13 Joann Richmond Chief, Board 14 Proceedings Division 15 16 For the Staff: Liz Houser Deputy Director 17 Administration Department 18 Edna Murphy 19 Chief, Financial Management Division 20 Administration Department 21 Brenda Fisher 22 Staff Manager III Human Resources 23 Division 24 ---oOo--- 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 MAY 31, 2012 4 ---oOo--- 5 MS. HOUSER: I would like to introduce the 6 newest member of our executive team, Ms. Edna Murphy, 7 who will provide an update on the budget. 8 MS. MURPHY: Good afternoon, Chairman Horton 9 and Members. 10 On May 14th, the Governor released his May 11 revision for the 2012-13 budget. Items of interest to 12 BOE includes tax increase resulting in $5.3 billion 13 additional revenues, including a seven-year income tax 14 increase on joint filers with taxable income in excess 15 of $500,000 and a four-year sales tax increase 16 one-quarter percent effective January 1st, 2013, which 17 is scheduled to go before the voters in November. If 18 the ballot initiative fails, additional trigger cuts of 19 $6.1 billion will be enacted. 20 The May revision also proposes changes to the 21 State work force that includes reduced reliance on 22 external State contracts, elimination of nonessential 23 retired annuitants, permanent reduction of the State 24 work force by 11,000 positions, which is to be achieved 25 by abolishing vacant positions that were previously 26 identified and reducing employee compensation by 5 27 percent, which proposes a savings of $839 million. 28 In the coming weeks the administration will 3 1 work with labor organizations to achieve these savings. 2 The administration intends to avoid furlough 3 programs and mitigate any layoffs, instead it is 4 suggesting a four day, 38-hour work week. In addition, 5 the administration will continue to pursue changes to 6 health care coverage for employees and retirees arrest 7 to reduce the cost for both employees and the State. 8 Absent changes, the health care costs are expected to be 9 increased by 10 percent in the coming year. 10 BOE's executive team have been discussing the 11 impact of the proposed four day, 38-hour work week. We 12 have determined that the eight hour per month reduction 13 in work will save approximately $13.5 million and result 14 in an estimated revenue loss or delay of $88 million, 15 plus an estimated $3.5 million in interest forfeiture. 16 The interest loss are due to checks, cash and electronic 17 funds transfers that are received on Friday not being 18 deposited until Monday. 19 We are working on logistics for the best means 20 to notify our taxpayers of the office closures on Friday 21 and extended offers and phone hours during the four core 22 work days. 23 We understand that employees will have to 24 schedule -- will have scheduling issues with day care, 25 school and public transportation. And we will urge 26 supervisors to do their best to accommodate them. 27 We have been notified that several of the 28 commuter buses in the downtown Sacramento area are not 4 1 certain that they can handle the volume of the 2 passengers expected during the new commute hours. And 3 they have advised our employees to explore alternatives. 4 The target date for implementation is July 1, 5 2012. We will keep your offices apprised as we receive 6 additional information. 7 Before I continue, are there any questions 8 regarding the proposed changes to the employee 9 compensation? 10 MS. STEEL: I have a question. 11 MR. HORTON: Member Steel. 12 MS. STEEL: You know, it's 38 hour -- 30 how 13 many hours? 14 MS. MURPHY: It's 38 hours. 15 MS. STEEL: 38 hours, so, it's going to be 16 overtime, has to be counted. It has to be eight hours 17 per day right now by the State law, isn't it eight hours 18 per day and after over eight hours it has to be overtime 19 counted? 20 MS. HOUSER: That's for all employers in the 21 State except the State of California. 22 MS. STEEL: Really? 23 MS. HOUSER: Yeah, we're a 40-hour work week. 24 MS. STEEL: Why don't we do that for other 25 private companies too? 26 That's interesting. 27 MS. HOUSER: It's a 40-hour work week. 28 MS. STEEL: So, that's the way we save $13.5 5 1 million? 2 MS. HOUSER: Yeah, the 5 percent pay cut -- 3 MS. STEEL: The 5 percent cut? 4 MS. HOUSER: -- is the 13.5. 5 MS. STEEL: Wow, okay. Thank you. 6 MR. RUNNER: Question on -- follow up on that. 7 MR. HORTON: Ms. Yee, then Mr. Runner. 8 MS. YEE: The impacts that you've identified 9 relative to transportation and day care, school, all 10 that, is that an analysis that we've done in isolation 11 of the rest of the State or is there an is overall 12 assessment being done of that now? 13 MS. HOUSER: There is -- there is an overall. 14 We have been in dialogue with Department of Finance and 15 Cal HR, the right name this time, and we're actually 16 inviting them to come to our admin ad hoc meeting on 17 June 7th to go over these issues. 18 We've been sending issues into them. They have 19 kind of a master list they're working from. So -- and 20 they've been dialoguing with a lot of departments to 21 kind of figure out what the logistic challenges are 22 going to be. 23 In addition to these we also have some Fair 24 Standards Act concerns on charging incremental hours for 25 salaried employees if they're off. So, we've prepared a 26 list, a lot of other departments have prepared a list 27 and we're forwarding that information to Cal HR. They 28 are reaching out to departments to make sure hat they're 6 1 aware of the issues. We're hopeful they can have a lot 2 of them addressed by July 1. 3 I think for the transportation portion, it 4 could be a challenge. I know they Yuba Sutter buses 5 have said that they only have a finite number of buses 6 to bring people down here and they're full. And they 7 run them over three hours in and out on the front and 8 back end and they don't have the funds or the time to 9 buy additional buses if we compress that to an hour and 10 a half on each end. 11 So, some of these things I'm -- I'm not sure 12 that we'll get them resolved by July 1. 13 MS. YEE: Okay, thank you. 14 MR. HORTON: Mr. Runner. 15 MR. RUNNER: Just to clarify on the estimated 16 loss. What -- give us -- highlight some of the factors 17 that helped come up with that -- that estimate. 18 MS. HOUSER: 88 million -- what we look at -- 19 this is the same number that we used for the furlough, 20 the one day furlough, because it's an eight hour or 5 21 percent loss of productive work time. And we didn't -- 22 so, we didn't factor in, you know, how much work more 23 productive are you on an eight-hour day versus a nine 24 and a half-hour day? We just went -- our people will 25 work 5 percent less hours. So, we looked at our revenue 26 that's generated through nonvoluntary means. So, 5 27 percent of our revenues generated through nonvoluntary 28 means, which means it requires an employee to do 7 1 something -- to audit an account, to call someone, to 2 take some sort of human-generated action to make that 3 money come in. So, that's about 5 percent of our 4 income. 5 So, we reduced that by the 5 percent of 6 estimated loss in hours. And that's how we came up with 7 the 88 million. 8 For the interest, we actually looked at average 9 daily deposits over the past four months and calculated 10 what the daily interest would be and that's how we came 11 up with the 3.5 million, because if lose Friday, 12 Saturday and Sunday interest on those. 13 MR. RUNNER: And, so -- so, we did it on kind 14 of the nonvoluntary, therefore, the collection aspect of 15 what it is -- 16 MS. HOUSER: Well, audits also. It's -- 17 MR. RUNNER: Okay, and audits. 18 MS. HOUSER: But, basically, what our employees 19 do is work towards not -- to help address the 20 nonvoluntary. 21 MR. RUNNER: But, in essence, we also have an 22 issue in terms of the voluntary payments because we 23 basically then are closed for 20 percent of the days 24 that people could have come into office before? 25 MS. HOUSER: Correct. 26 MR. RUNNER: Correct? 27 So, I mean in the -- in one -- in one aspect 28 then for the -- for the -- for the voluntary taxpayer 8 1 who has an issue or a question or a payment, they're not 2 going to get helped? 3 MS. HOUSER: That's correct. And there's -- 4 MR. RUNNER: Do we have any estimate what that 5 cost could be? 6 MS. HOUSER: We haven't estimated that. Our 88 7 million number was not popular when we sent it over 8 anyway. 9 MR. RUNNER: Uh-huh. 10 MS. HOUSER: So, I wanted something that we 11 could really defend. 12 MR. RUNNER: Yeah. 13 MS. HOUSER: We do think there are going to be 14 other things just -- 15 MR. RUNNER: I mean -- 16 MS. HOUSER: -- as you described. Because, you 17 know, you send someone an invoice and they take -- 18 they're going to call you. 19 And let's say Friday is the day they've got a 20 little load down time to call you. They call you and 21 there is no one here to answer the phone. It's hard to 22 say how long before that person is going to call us back 23 again. 24 MR. RUNNER: I think somewhere along the line 25 we need to also factor in not only the loss, but also 26 the burden on taxpayer dealing with their tax issues. 27 Now, I know that that's no different than the 28 burden on other folks that are using other State 9 1 agencies, the difference is, in that sense the burden, 2 potentially, has a savings attached to it. In the BOE's 3 situation specifically that we're talking about could 4 certainly be applied to other revenue generating 5 agencies. 6 Not only is -- not only is the burden higher on 7 taxpayers, but, indeed, the revenue is even less. So, 8 it sounds like -- again, I would hope there'll be -- 9 there will be some thoughtful application of this by the 10 legislature and by the Governor not just some kind of an 11 optics decision in regards to this. 12 Thanks. 13 MR. HORTON: The -- now, just think about it 14 for a minute, though. 15 If you -- if we are not accepting cash on 16 Thursday and we're closed on Friday, that adds another 17 day. 18 MR. RUNNER: Cash Mondays. 19 MR. HORTON: So -- but the one thing that does 20 concern me is the impact on employee morale as a result 21 of an agency that generates billions of dollars for 22 education, public safety and the other badly needed 23 services and all of the -- all of our team members are 24 very conscious of their positive impact of the work they 25 do, extremely prideful of that work as well, a 26 continuously reduction in salary and benefits, they're 27 not going to -- the employee morale -- we're going to 28 have -- it's going to have a negative impact on employee 10 1 morale. 2 And when you -- when you interject the low 3 employee morale in the equation, as it occurred here at 4 Board of Equalization, I believe, some 25 years ago, we 5 acknowledged -- less than that -- we acknowledged the 6 employee morale issue and brought in individuals in 7 order to be able to address that. 8 It's concerning. So -- I don't know how you 9 measure that, but it is a reality that we have to deal 10 with. And, so, let's do what we can to recognize those 11 who are working harder for less. 12 Further discussion, Members? 13 Member Chiang. 14 MR. CHIANG: Thank you, Mr. Chairman. 15 Can you give me a sense -- following up on to 16 he question posed by Member Runner and Chairman Horton 17 -- or the comments posed by Chairman Horton, on the 18 nature of the distribution of collections, timing of 19 those collections for the people who walk into one of 20 our offices, do we see a heavier concentration of 21 payments made during a -- ending of a tax period or is 22 it -- is it evenly distributed? Will we see in on the 23 days that the offices will be, in essence, in short -- I 24 am trying to get a better sense of what we collect on 25 average on those days that the office may be closed. 26 And then second question involves the nature of 27 our audits. So, if we go to a 38-day (verbatim) work 28 week, if we go to four days, what is the sense of the 11 1 people who review the audits, the timing of those as how 2 they may be impacted and what type of change in field 3 activity may result? 4 MS. HOUSER: Yeah, I'm going to ask Mr. McGuire 5 to come up because he'll have more details on the 6 audits. But we did speak with Mr. McGuire and Mr. Gau 7 on the impact for the audit. 8 And I'll come -- we'll come back to the volume 9 of when people come in. But for the audits, it was felt 10 that if we were on nine and a half hour-days, we would 11 have a bit more travel time out there to get the people 12 to the audit and more time to actually work on the 13 audit. And then they could work in their hotel room 14 after hours. So, they thought they could get close to 15 completing the same number of audits during this 16 four-day work week, realizing we may accrue some 17 overtime trying to get everybody home because we're -- 18 you know, we're going to try to have them finish a begin 19 long audit while they're there. So, we may accrue some 20 overtime on that last day to get them back -- back to 21 where we need to bring them back. But we'll have to 22 work around that. 23 But as far as the rush traffic, I know we 24 haven't looked to see -- since this is being bargained, 25 we're not 100 percent sure that it's going to be a 26 Friday or Monday or if we're going to have flexibility 27 to -- to pick a day or flexibility to maybe keep our 28 offices open five hours -- five days week and flex our 12 1 the employees' days off. 2 And we have submitted all of those alternatives 3 to the administration for consideration, but we don't if 4 they're going -- if it's going to be bargained that way. 5 So, we're not exactly sure, you know, how much wiggle 6 room we'll have to try to miti -- to build and mitigate 7 some of this. But I will have Mr. McGuire talk about 8 foot traffic on -- during the end of certain rush 9 periods into the field offices. 10 MR. HORTON: Thank you. 11 MR. MC GUIRE: We, for sure, during our four 12 quarterly periods, which are January 31st, April 30th, 13 July 31st and October 31st, we, by far, have more 14 traffic in those last days of the quarter and way more 15 payments coming into our offices in those periods. 16 And it would be critical that if we were 17 actually closed during those periods of time, that would 18 significantly impact our taxpayers and, potentially, 19 some of them who do come in for assistance with returns 20 and stuff could -- if we were closed and it was the due 21 date and they didn't realize that, you know, then they 22 might be in a late situation. 23 And, again, we do receive a significant amount 24 of payments, though, at the end of every quarter and our 25 volume of walk-in traffic is, by far, the highest under 26 those periods. 27 MR. CHIANG: Just to fill in the picture, do we 28 get more inquiries over the phone, in the office -- 13 1 MR. MC GUIRE: Yeah. 2 MR. CHIANG: -- what is that picture. 3 MR. MC GUIRE: Our call volume in the call 4 center is -- absolutely goes up at the end of each 5 quarter as well because 90 percent of our taxpayers are 6 e-filing now and, so, a lot of time as they're preparing 7 their returns, they call for some assistance or 8 questions just to help answer their call. 9 So, we have a number of additional people on 10 our -- on our phones during the end of each quarter, the 11 last two weeks, to assist people with return questions 12 in particular. 13 MR. CHIANG: And, so, how much do we see in an 14 increase in volume, especially on the day that we may I 15 impacted if we -- if it was a set day instead of 16 having -- 17 MR. MC GUIRE: I don't have the exact numbers, 18 but it's significantly higher. I mean it's -- we 19 definitely have these huge peaks just during the very 20 short window of time, usually the last month of each 21 quarter -- or the last week of each quarter, excuse me. 22 So -- 23 MS. HOUSER: And when we sent our briefing, our 24 -- kind of our impact sheet forward to the 25 administration, we made them aware of this. 26 We also recommended that if they're going to 27 move forward with this, they would need to put something 28 in statute that if there was a due date that fell on a 14 1 Friday and we were going to be closed on that Friday, 2 that they would need to give some statutory relief to 3 move it to the following open day of business. 4 So, we have sent that recommendation forward. 5 MR. CHIANG: Okay. So, understanding the 6 nature of the timing of payments, let me just pose a 7 query that we can think about -- I am not necessarily 8 asking you to have the answer now. 9 If people have different practices in different 10 states, different taxing agencies -- the Japanese, for 11 instance, have some offices that are open 24 hours on 12 days so that if people want to walk in, it's easier for 13 them to comply with, right. 14 I'm not saying we go there, but if we're going 15 to have to change the nature of some of this, we ought 16 to think about what's the best practices for the people 17 that we serve? 18 MS. HOUSER: Thank you, sir. 19 MR. MC GUIRE: Thank you. 20 MR. HORTON: Mr. Runner. 21 MR. RUNNER: I was going to say the other issue 22 then is we -- as we sought for that kind of adjustment, 23 which certainly would be right if all of a sudden one of 24 those ending dates ended up on a day that we were closed 25 and, therefore, they extended, that's additional revenue 26 loss. 27 MS. HOUSER: Correct. 28 MR. RUNNER: That would happen as a result of 15 1 that extension. 2 Thank you. 3 MR. HORTON: Just another point on the human 4 behavior -- my experience as a Board of Equalization 5 employee for some 22 years, when you take these cuts, 6 what you -- what it is translated into, what you 7 actually hear is, "You're asking me to work less." And 8 then when the compensation comes back, if it does come 9 back, I've modified my behavior and it's going to take 10 a while in order for me to adjust back to what you're 11 requesting me to do. 12 You're not just taking money and -- although we 13 certainly encourage to -- our team members to take less 14 and work more, but the reality is it's not going to 15 happen, in my mind. 16 So, maybe there is an -- and I don't know if 17 we've take that into consideration as -- as we sort of 18 anticipate what the financial impact will be. 19 I just shared that for your consideration. 20 Further discussion, Members? 21 MS. HOUSER: We have another item. 22 MS. MURPHY: Okay. There are two initiatives 23 that were included in the May revise which resulted in 24 Budget Change Proposals that we are sharing with you 25 today. 26 The first is the CROS Revenue Opportunity 27 System Project, which requested an increase of $23.7 28 million and 157 positions in fiscal year '12-'13 and 16 1 $29.1 million and 242.1 positions in fiscal year 2 '13-'14. 3 Due to the serious budget situation, we were 4 asked by legislative consultants to reduce our first 5 year cost by 25 to 30 percent. We have before you 6 today an amended proposal for 113 positions and $18.1 7 million in fiscal year '12-'13, representing a 28 8 percent reduction in first year costs. 9 Our revised plan calls for delaying 44 10 positions until fiscal year '13-'14, without impacting 11 the original first year revenues of $38.8 million. 12 These reductions will be accomplished by 13 delaying the documentation of business rules for fiscal 14 year '13-'14, addressing only the highest priority 15 interfaces that are tied to revenue in fiscal year 16 '12-'13 and delaying the remainder interfaces until 17 later in the project and relying on nonrevenue generated 18 subject matter experts to assist with this data claim. 19 This amended proposal was approved in both the Assembly 20 and the Senate last week. 21 The second BCP is a timber regulation and 22 forest restoration fee, which is a new assessment 23 proposed to be applied to retail sales of certain wood 24 products sold in California and will be collected by the 25 BOE. 26 We have been working with the administration 27 and was successful in clarifying their definition of 28 wood products. 17 1 As a result, we were able to reduce our 2 estimated costs to administer this program to 3 approximately $2 million and 13.3 positions in fiscal 4 year '12-'13 and $2.5 million and 17.3 positions 5 ongoing. 6 The BCP before you today reflects those 7 changes. Since these proposals were part of the May 8 revision process, there is limited ability for our Board 9 to make further modification. 10 In direction given to us earlier this year, you 11 have asked that these types of BCP's be included in the 12 next available Board meeting ensure the Board is fully 13 briefed. 14 Are there any questions on the budget or the 15 May revision? 16 MR. HORTON: Member Yee. 17 MS. YEE: On this proposal -- thank you. 18 Here we go again. There's a lot of ambiguity 19 still with this proposal, I take it, right, with respect 20 to definitions and we're not going to be the policy 21 making body with respect to the fee? 22 MS. HOUSER: The -- the timber fee -- in our 23 discussions, CalFire will be the body that sets the 24 regulations to define what will be wood products and 25 what will be the fee assessed. 26 We'll simply be collecting it. 27 MS. YEE: And will those regs be in place by 28 January 1st? 18 1 MS. HOUSER: They're planning to do -- our 2 understanding is they're planning to do emergency 3 regulations, emergency temporary regulations and then 4 follow up with the permanent ones through the full 5 process. 6 MS. YEE: Okay. But I guess we're not 7 anticipating -- or we're anticipating that the fee will 8 be collected by, probably, entities that are already 9 permanent with us? Is that -- 10 MS. HOUSER: Yes, yes, it would be retailers. 11 MS. YEE: Okay. 12 MS. HOUSER: Retailers who are already 13 permitted or already have a sales permit. 14 MS. YEE: All right, thanks. 15 MS. STEEL: Chairman? 16 MR. HORTON: Member Steel? 17 MS. STEEL: This is a new tax they just 18 created. 19 MS. HOUSER: That's -- 20 MS. STEEL: Haven't yet? 21 MS. HOUSER: They are going -- it's going 22 through the process right now and it's -- 23 MS. STEEL: The bill is not passed yet? 24 MS. HOUSER: And our standing is they're 25 treating it as a tax and it would be a two-thirds vote. 26 Now, that's our understanding from discussions 27 we've had. 28 MS. STEEL: That's improvement there. So, this 19 1 is a tax? 2 MS. HOUSER: I can only read what they call it 3 here, Ms. Steel. They call it a timber regulation and 4 forest restoration fee. 5 But our understanding from dialogue with them 6 is that they're going to be going through the process 7 for a tax increase which is two-thirds -- 8 MS. STEEL: If it does not pass, then what 9 happens? 10 MS. HOUSER: -- then we wouldn't be funded for 11 our positions and the fee would not be assessed. 12 MS. STEEL: Okay, thank you. 13 MR. HORTON: Further discussion, Members? 14 Let me make sure I got this right. We're going 15 to be closed a day, cash only, more red tape, less 16 staff. 17 MS. HOUSER: And the windows are breaking. 18 MR. HORTON: And the -- yeah, that's -- 19 MS. FISHER: And the windows are falling out. 20 MR. HORTON: I got it. 21 MR. RUNNER: And you're going to make less 22 money. 23 MR. HORTON: Well, I'm okay with that. It's 24 just -- and we're improving the economic climate in the 25 State of California. 26 All right, okay, I got it. 27 ---o0o--- 28 20 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 MAY 31, 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 20 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: June 8, 2012 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 21