BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 1839 HEARING: 6/25/14
AUTHOR: Gatto FISCAL: Yes
VERSION: 6/17/14 TAX LEVY: Yes
CONSULTANT: Grinnell
QUALIFIED MOTION PICTURE TAX CREDIT
Enacts a tax credit for qualified motion picture and
television production.
Background and Existing Law
California law allows various income tax credits,
deductions, and sales and use tax exemptions to provide
incentives to compensate taxpayers that incur certain
expenses, such as child adoption, or to influence behavior,
including business practices and decisions, such as
research and development credits. The Legislature
typically enacts such tax incentives to encourage taxpayers
to do something that but for the tax credit, they would not
do. The Department of Finance is required to annually
publish a list of tax expenditures, currently totaling
around $50 billion per year.
In 1985, the Legislature established the California Film
Commission (CFC) to co-ordinate state and local
governments' efforts at providing an environment conducive
for the film industry. 21 members of the film industry,
private sector, and state and local governments are
appointed by the Governor, Senate Pro Tem, and Speaker of
the Assembly to sit on the CFC board.
In 2009, the Legislature enacted a tax credit for qualified
motion picture production in California as part of the
State Budget Agreement, directing CFC to allocate $100
million in credits annually (SBx3 15 (Calderon)/ABX3 15
(Krekorian) 2009). Any unallocated credit from the
previous year may be carried over to the next year.
Feature films with budgets between $1 million and $75
million, movies of the week with a minimum budget of
$500,000, and new television series with a minimum $1
million budget could apply to CFC for the credit. 75% of
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the motion picture shooting days must take place in
California, or 75% of the motion production budget must pay
for services or the purchase or rental or property within
the state. Both bills enacting the credit directed CFC to
allocate two years of credits in the first year, so each
year's allocation is for the next fiscal year's credits.
For example, when CFC allocated credits in July 1, 2014, it
is for credits in FY 2015-16. In 2011, the Legislature
extended the program for one year to 2014-15 (AB 1069,
Fuentes, 2011), then extended it for two years until
2016-17 (AB 2026 Fuentes and SB 1197, Calderon). Because
of the front-loading in the initial bills, CFC cannot
currently allocate credits after the planned July 1, 2015
date.
Commercial advertising, music videos, motion pictures for
non-commercial use, news and public events programs, talk
shows, game shows, reality programming, documentaries, or
sexually explicit films are not eligible. Any 5% owner of
the qualified taxpayer, defined as a taxpayer who has paid
qualified expenditures and has received a credit
certificate by the California Film Commission, or any
individual related to the taxpayer is ineligible for the
credit.
CFC must set aside $10 million credits each year, for
independent films, defined as a motion picture with a
minimum budget of $1 million and maximum budget of $10
million and is not publicly traded. The CFC must provide
FTB an annual list of qualified taxpayers and the tax
credit amounts allocated to each qualified taxpayer. The
amount of the tax credit is equal to either:
20% of the qualified production expenditures of a
motion picture; or
25% of the qualified expenditures of an independent
film or a television series that relocated to
California.
Taxpayers apply to the CFC for the allocation and submit
the following information:
The motion picture production budget,
Number of production days,
A financing plan for the production,
The production's financing plan,
Total wages paid and the amount of qualified wages
paid to each qualified individual,
The diversity of the workforce employed by the
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applicant, and
Any other information the CFC or Franchise Tax
Board deems relevant.
CFC establishes criteria for allocating tax credits, then
determines and designates applicant eligibility. CFC
processes and approves, or rejects, applications on a
first-come, first-serve basis. Because of high demand for
credits, CFC has instituted a lottery, where lottery
winners receive credit reservations, and losers don't. If
a project is approved for a credit, the project must shoot
within 6 months and be completed within 30 months from the
date when the application was approved by the CFC.
Before CFC issues a taxpayer a credit certificate for an
amount not to exceed the original credit allocated, the
taxpayer must provide CFC with verified completion and
documentation of actual qualifying expenditures. Qualified
expenditures are amounts paid or incurred to purchase, or
lease, tangible personal property, wages, or services
performed in the state, during the motion picture
production in California.
Before CFC issues a credit certificate, it must establish a
procedure for a qualified taxpayer to report to the
Commission the following information:
If readily available, a list of the states,
provinces, or other jurisdictions in which any member
of the applicant's combined reporting group in the
same business unit as the qualified taxpayer that, in
the preceding calendar year, has produced a qualified
motion picture intended for release in the United
States market.
Whether a qualified motion picture was awarded any
financial incentive by the state, province, or other
jurisdiction that was predicated on the performance of
primary principal photography or postproduction in
that location
CFC must obtain, when possible, the following information
from applicants that do not receive an allocation of
credit:
Whether the qualified motion picture that was the
subject of the application was completed.
If an application was completed, which state or
foreign jurisdiction was the primary principal
photography completed.
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Whether the applicant received any financial
incentives from the state or foreign jurisdiction to
make the qualified motion picture in that location.
CFC must provide the Legislative Analyst's Office, upon its
request, any or all application materials or any other
materials received from, or submitted by the, applicants,
in electronic format when available. CFC also must
annually provide the LAO a list of qualified taxpayers and
the tax credit amounts allocated to each qualified taxpayer
by the California Film Commission. The list shall include
the names and taxpayer identification numbers, including
taxpayer identification numbers of each partner or
shareholder, as applicable, of the qualified taxpayer.
The California Film Office must annually post on its
website and make available for public release:
A table, which includes all of the
following information:
o A list of qualified taxpayers
and the tax credit amounts allocated to each
qualified taxpayer by the California Film
Commission,
o The number of production days
in California the qualified taxpayer
represented in its application would occur,
o The number of California jobs
that the qualified taxpayer represented in
its application would be directly created by
the production, and
o The total amount of qualified
expenditures expected to be spent by the
production.
A narrative staff summary describing the
production of the qualified taxpayer as well as
background information regarding the qualified
taxpayer contained in the qualified taxpayer's
application for the credit.
SB 1197 and AB 2026 required CFC to provide specified
information to the Legislative Analyst's Office (LAO)
necessary to enable it to report to the Legislature on or
before January 1, 2016 evaluating the economic effects and
administration of the tax credits. The measures specified
that information received by the Legislative Analyst's
Office pursuant to this section must be considered
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confidential taxpayer information and subject to the
appropriate confidentiality requirements of the
participating state agency.
Since 2009, other states have also enacted tax credits for
motion picture production, including New York, which
allocates nearly half-a-billion annually. Motion picture
studios want the state to increase the amount and scope of
the current credit to maximize the number of motion
pictures produced in California.
Proposed Law
Assembly Bill 1839 enacts a new motion picture production
credit to replace the current credit, commencing in the
2016 taxable year, largely similar to the current credit.
The bill precludes taxpayers from claiming both credits for
the same expenses. The measure does not specify the total
amount CFC allocates annually, but does authorize it to
start allocating credits in the 2016-17 fiscal year until
July 1, 2021. CFC can add the amount of unallocated from
the previous year to the next year's allocation.
The credit is substantially similar to the current one,
with the following differences:
The credit is equal to 20% of qualified
expenditures of a feature up to $100 million.
A television series that relocated to California
must have filmed at least its first two years outside
California to receive a tax credit allocation.
The credit is equal to 25% of qualified
expenditures if it's an independent film.
CFC must add 5% to the applicable percentage up to
25% when the film pays or incurs original photography
expenses outside of the Los Angeles zone, as defined.
The measure allows 25% of the expenditures relating
to music scoring and music track recording
attributable to motion picture production in
California, and 25% of the expenditures relating to
qualified visual effects to qualify for the credit, so
long as 75% or a minimum of $10 million in
expenditures is paid or incurred in California.
Allows production of pilots longer than 40 minutes,
exclusive of commercials, shot in California to
qualify for the credit,
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Removes the current credit's cap of $75 million on
production budgets, making larger-budget movies
eligible.
Modifies the definition for eligible television
series to include only new, television series of
longer than 40 minutes, exclusive of commercials, with
minimum production budgets of $1 million per episode;
the previous credit only allowed for new television
series licensed for distribution on basic cable with
total production budgets of $1 million.
The bill makes allowances for not commencing principal
photography within 180 days of CFC's credit award to
include death, disability, and disfigurement to the
Director, acts of God as defined. AB 1839 allows CFC to
issue emergency regulations, and states that implementing
the bill is an emergency and necessary for the immediate
preservation of the public peace, health, and safety, or
general welfare. The measure also directs CFC to allocate
the new credit more than once per year; CFC only allocated
the old credit once per year.
The new credit is allocated in the same first-come,
first-served order as the current credit, except that any
new one-hour television series that CFC has approved for a
credit is placed at the top of the queue in each subsequent
year in the life of the television series, as well as any
television series based on a pilot that received the
credit. Additionally, CFC shall set aside the lesser of
10% of its total amount allocated or $20 million for
independent films, and $30 million per fiscal year for
television series relocating to California.
The measure allows taxpayers to use the new motion picture
production tax credit to reduce tentative minimum tax, and
to apply the credit against any liability under the sales
and use tax law.
State Revenue Impact
FTB notes that without an aggregate credit amount, it
doesn't have enough information to estimate AB 1839's
revenue effects.
Comments
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1. Purpose of the bill . According to the authors,
"Hollywood is internationally celebrated as home of the
entertainment industry, having established itself as a
film-making locale by the early 1900s. The entertainment
industry creates hundreds of thousands of good paying
middle class jobs and billions in economic activity
throughout California each year, and hopefuls still flock
to the area with dreams of being 'discovered.'
Unfortunately, the film industry's last big peak occurred
in 1997, and the steady, local jobs offered by the industry
have been under constant attack. Since the late 90s, film
production has been lured across state lines to other
states and nations that have sought to attract the
notoriety, tax revenues, and workforce. There are now more
than 40 states and numerous other countries that offer
incentives, almost all of which are substantially larger
than California's. In the last 15 years, film production
has dropped nearly 50% in California. In 2013, 21 of the
23 new prime time series were filmed outside of California.
When production leaves California, those left jobless are
not the top-tier talent, such as the actors and producers,
who are often shipped to the filming locations. Instead,
the below the line and behind the scenes workers take a
hit, as do the ancillary businesses that serve the
production sites and teams, such as the caterers, hotels,
set construction companies, restaurants, etc. In an effort
to combat production flight, in 2009, the Legislature
passed the California Film and Television Tax Credit
Program to promote film production and create and retain
jobs in California. Since 2009, California has allocated
$100 million a year to eligible film and TV productions
that meet specific criteria. To date, more than 270
projects, contributing more than $4.75 billion in economic
activity and creating more than 51,000 jobs, have
benefitted from the program. Tax revenue generated from
filming helps to pay for teachers, police officers and
infrastructure throughout California. Since its
inception, California's incentive program has been fully
subscribed to. During the 2014 application period alone,
497 productions applied for the program-a thirty percent
increase over 2013. Only 23 projects were able to be
selected, and the remaining 474 projects were placed on a
wait list. With at least 43 other states and international
governments offer tax incentives for film and TV
production, those projects have been driven to other
competing locales. As more and more states create
AB 1839 - 6/17/14 -- PageH
attractive production incentive programs, filming in
California becomes less and less attractive, and when the
production goes elsewhere, so do the jobs, tax revenue,
local spending, and tourism that accompany it. By creating
a more robust and better targeted incentive program, the
California Film and Television Job Retention and Promotion
Act will help keep more feature and television production
in the state, guaranteeing thousands of well-paid,
highly-skilled jobs in our local economies."
2. Sure, but will it work ? Tax benefits directed at
specific industries do two things: First, they reward
behavior that would have occurred without the subsidy,
so-called "deadweight loss." Some movie producers will
make movies or television shows in California without a tax
credit. In these instances, the state receives no marginal
benefit, and transfers wealth from purposes it would
otherwise spend money on for government purposes to the
motion picture or television producer. Second, the bill
may generate additional employment, wage payments, and
economic activity resulting from movies and television
shows produced in California that wouldn't have without the
credit; the incentive will lower production costs at the
margin in amounts necessary for producers to choose
California instead of somewhere else. A successful tax
credit would lead to more economic activity at the margin
than its deadweight loss, but no tax credit has yet
conclusively demonstrated that its benefits outweigh its
costs.
The film industry is more mobile than many other
industries, and more responsive to incentives: the current
credit doesn't allow for large films and television series
distributed through a broadcast or premium cable network,
which have shifted significantly to other states and
countries that offered incentives for these kinds of
projects, which generally have larger economic impacts than
others. AB 1839 allows CFC to allocate its new credit to
both of these kinds of projects in the hopes of reversing
this trend. However, the UCLA Institute for Research and
Labor Employment noted in its evaluation that many who
applied for the current credit but didn't receive it made
the movie here anyway. The Committee may wish to consider
how much additional economic activity AB 1839 will spur
versus its deadweight loss.
Additionally, enacting a new tax exemption requires cuts in
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spending or higher taxes to match the amount of foregone
revenue resulting from AB 1839. Tax credits do not pay for
themselves: the state's last effort of "dynamic revenue
analysis" indicates that while dynamic effects are
definitely present and visible, their effects are generally
relatively modest.<1> The Legislative Analyst's Office
(LAO), the Tax Foundation, Eileen Norcross from the
Mercatus Center at George Mason University , and the Center
on Budget and Policy Priorities confirm this point.
Proponents point to studies from the Los Angeles Economic
Development Corporation, Southern California Association of
Governments, and the University of California Los Angeles
that indicate combined state and local revenues created by
the credit exceed its costs to the state, but LAO states
that the LAEDC and UCLA studies overstate economic
benefits, putting the return to the state at 65 cents for
each dollar foregone in tax credits. In 2010, Louisiana
spent $196.8 million on film tax credits. But according to
an analysis by the BaxStarr Consulting Group, film
production generated just $27 million in state tax revenues
and $17.3 million in local revenues. The Committee may
wish to consider whether the benefits resulting from this
incentive are worth the tradeoff of cuts in spending or
taxes on other activities.
3. Options . 94% of motion picture jobs, and 84% of
postproduction jobs are in the Los Angeles area, so the
economic impacts of the credit are most likely to be felt
in Southern California. However, the cost will be felt
statewide, as foregone revenue are paid for by increased
taxes, or reductions in programs statewide. The bill
could require as a condition of being eligible for the
credit that it also receive a local agency incentive, such
as a business license tax cut or grant. That way, local
agencies that receive the economic activity from the credit
also bear some of the cost.
4. Blanks . AB 1839 doesn't have an amount for CFC to
annually allocate. As such, it's hard to evaluate either
its potential economic impact or its cost to the state.
5. Jumping the gun ? As required by AB 2026, LAO will
publish its comprehensive study of the current program in
-------------------------
<1>
"Whatever Happened to Dynamic Revenue Analysis in
California?" John David Vasche, prepared for the
Federation of Tax Administrators, September, 2006.
AB 1839 - 6/17/14 -- PageJ
late 2015, after the last authorized allocation date July
1, 2015. AB 2026 compelled more taxpayer-specific
information to study the current credit than any study the
Legislature has ever required, but AB 1839 presumes that
the current credit is a success, and more is needed.
Shouldn't the Legislature extend the current credit for a
year, wait for the study, then decide whether an expansion
is merited? If not, it could still require the same
information and study requirement into AB 1839 to enable
LAO to advise a future Legislature.
6. Benefits . The economic impact of the motion picture
and television industry in California is immense: more
than 200,000 direct jobs with a national average wages of
$89,000 for production, and $106,000 for postproduction.
According to LAEDC, California has a large existing
industry base and substantial infrastructure concentrated
in Los Angeles, including major studios and independent
production companies, stage rental facilities, as well as
post-production facilities and support services. However,
a recent study from the Milken Institute shows that
employment is shifting from California to other states.<2>
While employment is shifting, tax benefits don't often lead
to job growth: California's Manufacturers' Investment
Credit sunset when manufacturing jobs didn't meet
employment targets, the home purchase tax credit didn't
lead to more construction employment, and the Legislature
recently repealed geographically-targeted economic
development areas, like enterprise zones, after years of
failing to boost employment. The Committee may wish to
consider whether tax credits are the best tool to maintain
and expand employment in the motion picture and television
production industry.
7. Tax competition . LAO states that California is the
current leader in motion picture employment, with 107,400
jobs, or 52% of the national total, and another 62% of
postproduction jobs. However, LAO identifies $1.4 billion
in tax benefits other states offer to shift employment away
from California, usually at the urging of the same motion
picture and television producers calling for AB 1839. For
these states, it makes sense to enact aggressive incentives
because the risk of deadweight loss doesn't exist; they
don't have industries with a robust labor pool and
-------------------------
<2> "A Hollywood Exit: What California Must Do to Remain
Competitive in Entertainment, and Keep Jobs." Milken
Insitute, California Center. February, 2014.
AB 1839 - 6/17/14 -- PageK
production infrastructure developed over decades similar to
California. LAO's states:
"When government does not offer industry subsidies,
businesses in those industries generally locate their
economic activities where they would best be suited.
For example, agriculture generally plants crops where
they are most productive and manufacturing generally
locates where it has the best access to inputs, labor,
and markets. State film and television subsidies
shift activity from where it would otherwise locate to
somewhere else without necessarily improving the
output or yielding any greater social benefit. At the
same time, these subsidies reduce funds for other
state priorities, including spending on programs or
reductions in tax rates that would benefit all
taxpayers equally."
LAO offsets this warning by stating that it's hard for
California to maintain its leadership position without
incentives. However, engaging in tax competition is a
dangerous game: should California expand its incentives,
other states may be compelled to follow, necessitating
another expansion in California to keep pace in a so-called
"race to the bottom." The Committee may wish to consider
the merits and risks of engaging in tax competition
generally, and motion picture and television production
specifically.
8. Model citizen . California's current film tax credit
provides a more modest incentive than many other states,
and unlike Massachusetts, Michigan, Pennsylvania, or New
Mexico, it's not an open-ended subsidy. California's film
credit requires that 75% of the shooting or the production
budget must be spent in-state, which directly benefits the
state's economy and businesses. Additionally, the model
for the film credit is much better than other credits.
Instead of applying to a broad class of activities or
investments, or to economic activity already created
without the credit like the Research and Development
credit, taxpayers must apply to CFC for a credit
reservation. CFC only certifies the credit once the
shooting and production have been completed, and the
project submits audited cost reports to verify credit
amounts. CFC also requires that the project to meet
specific timelines to ensure immediate benefits. AB 1839
retains all of these features. However, the credit
AB 1839 - 6/17/14 -- PageL
uniquely allowing sales of movie credits attributable to
independent films, which gave rise to an industry that
brokers tax credits to high-wealth individuals who buy tax
credits to offset other income at a discount for a fee.
9. Why not us ? The Committee considers proposals for tax
incentives for many different industries. When considering
competing claims for finite tax benefits, one way to assess
each proposal is to consider what the state is buying with
the foregone revenue of tax credits. The state's
low-income housing tax credit buys needed housing that must
be affordable for up to 50 years. Research and Development
tax credits can lead to superior consumer products, or
cures and remedies for illnesses. Manufacturing incentives
can result in factories and other forms of capital stock.
Movies and televisions shows can be entertaining, and may
lead to additional employment in the state, but these
credits don't buy as much physical infrastructure as other
tax credits, as movie productions set up, shoot, and leave
quickly. The Committee may wish to consider the merits of
subsidizing the motion picture and television production
industry instead of competing claims.
Assembly Actions
Assembly Floor 76-0
Assembly Appropriations 17-0
Assembly Revenue and Taxation 8-0
Assembly Arts, Entertainment, Sports, Tourism, and
Internet7-0
Support and Opposition (06/19/14)
Support : Academy of Television Arts & Science; AFSCME
District Council 57; American Federation of Musicians Local
47; Annapurna Pictures; Antelope Valley Film Office;
Association of Talent Agents; Beverly Hills Chamber of
Commerce; Brawley Chamber of Commerce; Bring Hollywood Home
Foundation; California Attractions and Park Association;
California Chamber of Commerce; California Energy
Efficiency Industry Council; California Federation of
Teachers; California Film Institute; California Film &
Television Production Alliance; California Hotel & Lodging
Association; California Labor Federation; California League
of Latin American Citizens; California Teamsters Public
Affairs Council; California Travel Association; California
AB 1839 - 6/17/14 -- PageM
Urban Partnership; Castillo Construction Company; CBS
Television Studios; Central City Association; Chef Robert
Catering, Inc.; Cheryl Viegas-Walker, City of El Centro
Mayor; City and County of San Francisco; City of Agoura
Hills; City of Arcata; City of Beverly Hills; City of
Burbank; City of Camarillo; City of Cerritos; City of
Culver City; City of Glendale; City of Hemet; City of
Hermosa Beach; City of Irvine; City of Long Beach; City of
Los Angeles; City of Malibu; City of Monterey Park; City of
Palmdale; City of Pasadena; City of San Dimas; City of
Santa Clarita; City of Walnut Creek; City of West
Hollywood; Costume Designers Guild; Costume Rentals
Corporation; County of Los Angeles Board of Supervisors;
County of Nevada; County of San Bernardino; County of San
Diego; Directors Guild of America, Inc.; Don Campbell, City
of Brawley Mayor; Downtown Sacramento Partnership; El
Centro Chamber of Commerce &Visitors Bureau; El Dorado
County Chamber of Commerce; Entertainment Union Coalition;
Film L.A.; Film Liaisons in California Statewide; Fox
Entertainment Group, Inc.; Friends of the San Francisco
Film Commission; G.A.P. International Satellite
Broadcasting & News Inc.; Gerard Ange Productions
International Inc.; Goodnight & Company; Greater Palm
Springs Convention & Visitors Bureau; HBO; Imperial County
Board of Supervisors; Imperial Irrigation District;
Independent Studio Services; Indio Chamber of Commerce;
Inland Empire Film Commission; International Alliance of
Theatrical Stage Employees; International Alliance of
Theatrical Stage Employees, Local No. 16; IATSE Local 839;
International Brotherhood of Teamsters, Local 399; JCX
Expendables; Jeff Olan Casting, Inc.; John E. Deasy,
Superintendent of Los Angeles School District; Laborers'
International Union of North America, LIVE-WEB Mobile
Broadcasting; Local 724; Lakeshore Entertainment; League of
California Cities; Los Angeles Asian and Pacific Film
Festival; Los Angeles Coalition for the Economy and Jobs;
Marin County Film Liaison; Monterey County Film Commission;
Motion Picture Association of America, Inc.; Motion Picture
& Television Mobile Catering Association; Movie Makers,
Inc.; National Association of Theatre Owners of
California/Nevada; OddLot Entertainment; NBCUniversal; Palm
Springs Bureau of Tourism, Paramount Pictures; Placer
County Board of Supervisors; Placer-Lake Film Tahoe Film
Office; Producers Guild of America; Quixote Studios; Real
Coalition; Rebel Entertainment Partners, Inc.; Recording
Musicians Association; Roger George Rentals; Sacramento
Film Commission; Sacramento Hotel Association; San Diego
AB 1839 - 6/17/14 -- PageN
Regional Chamber of Commerce; San Francisco Chamber of
Commerce; San Francisco Center for Economic Development;
San Francisco Film Centre; San Francisco Film Commission;
San Francisco Film Society; San Francisco Travel
Association; San Gabriel Valley Economic Partnership; San
Jose Silicon Valley Chamber; Screen Actors Guild-American
Federation of Television and Radio Artists; San Mateo
County/Silicon Valley Film Commissioner; Santa Barbara Film
Commissioner; Southwest California Legislative Council;
South Bay Association of Chamber of Commerce; Star
Waggons, Inc; State Building and Construction Trade
Council; Stephen P. Pougnet, City of Palm Springs Major;
Sunland-Tujunga Chamber of Commerce; Teamsters Local 399;
The Walt Disney Company; Torrance Chamber of Commerce;
Transmedia, SF; United Teachers of Los Angeles; United
Chamber of Commerce, San Fernando Valley & Region; Valley
Industry and Commerce Association; Visual Communications
Media; West Hollywood Film Office; Warner Bros.
Entertainment Inc.; WIN-TV Corporation; 1387 Individuals.
Opposition : California School Employees Association;
California Teachers Association; 1 Individual.