Mayors from around the State have been in Sacramento advocating for the Enterprise Zone Program in the wake of the loss of Redevelopment.

The Los Angeles Daily News, for example reports:

In Sacramento, Villaraigosa will also explore legislation to spur development in the absence of CRA/LA funds, said [Deputy Mayor Sarah] Sheahan.

“We are advocating for the tools L.A. will need to create jobs, such as state enterprise zones,” Sheahan said, cautioning that the mayor isn’t advocating for a “new CRA.”

In Watsonville, however, the situation is more urgent. The Mercury News explains:

WATSONVILLE – For nearly 15 years, Watsonville has dangled tax breaks as a lure to businesses looking for a new home or an incentive for existing companies to expand.

But in April, the city’s state-approved enterprise zone expires, leaving the city with few tools to stimulate the local economy at a time when more than one in five workers is out of a job, officials say.

“It’s very tough, especially on the back of losing redevelopment,” said Jan Davison, interim redevelopment and housing director. “We’re losing the only other form of economic development assistance we had. It’s a double whammy.”

The state Supreme Court ordered the elimination of redevelopment agencies statewide in a late December ruling. The City Council on Tuesday will take the first step toward dismantling the local agency by designating a successor to distribute assets and ensure obligations are met.

On Monday, city leaders advocated for help on the redevelopment front as well as for an extension of the enterprise zone during meetings with legislators in Sacramento.

Mayor Eduardo Montesino said leaders came away without a clear answer.

“We’re pushing everybody,” he said, “but it’s a fluid situation.”

California established enterprise zones in 1984 to spark economic investment in depressed areas of the state. Watsonville’s enterprise zone, one of 42 in the state, was established in 1997.
The program aims to jump-start private investment by providing tax credits for hiring and equipment purchases.

According to the California Association of Enterprise Zones, the program was responsible for creating or retaining more than 118,000 jobs in California in 2010.

Critics, however, say the program costs too much and merely shifts jobs from one region to another.

Last year, Gov. Jerry Brown proposed to eliminate the program, a move the state Department of Finance said would save $343 million in 2010-11 and $581 million in 2011-12.

The program was spared, but the state Department of Housing and Community Development, which oversees the program, is not currently accepting renewal applications.

Julie Lambert, director of finance and human resources for S. Martinelli & Co. in Watsonville, said her company uses the program and called it a “valuable” resource for business as well as the city. She said it could use some tinkering to help businesses plan better. For example, legislators have changed the timing on when tax credits on equipment purchases can be used from year to year.
But she said the enterprise zone does spur economic development.

“It’s very valuable for the city for attracting new business, whether they’re in startup mode or expansion mode,” Lambert said. “It’s another gold star on the evaluation sheet as they decide where to locate their business.”

The Governor moved up the release of his 2012-2013 budget proposal from Jan. 10 to today. Under the heading “Supporting Job Creation,” the budget summary document says:

The resulting stability from a balanced budget will give businesses the certainty and the reassurance they need to invest in California. In addition, the Administration will propose legislation to reform the enterprise zone program and move to a mandatory single sales factor for apportioning multistate business income. Such changes will allow the state to afford investments in manufacturing, business incentives, and other tax relief.

Details of these reforms will follow in specific legislation.

The California Supreme Court has ruled today that the elimination of Redevelopment Agencies by the Legislature was legal.

Here is a PDF of the Court’s decision.

The decision is a mixed bag in terms of its implications for the Enterprise Zone program. On the one hand, there was $1.7 billion dollars of budget deficit solutions riding on the elimination. To the extent that the budget deficit is smaller, there is less pressure to attempt elimination of Enterprise Zones. On the other hand, had the Court ruled that the elimination was illegal, it would have bolstered the argument that elimination of the EZs would also be illegal. Furthermore, many jurisdictions use their Redevelopment agency funding to fund the operation of their zone programs as well.

The following is the Sacramento Bee article immediately following the Court decision:

In a significant budget win for Gov. Jerry Brown and lawmakers, the California Supreme Court ruled Thursday the state can eliminate the local agencies that subsidize construction in blighted areas.

The decision strengthens the state’s ability to take $1.7 billion from redevelopment agencies for the current budget. It also provides leverage for state leaders to continue using redevelopment property tax dollars to balance future budgets.

The court ruled invalid a second bill that would have reconstituted redevelopment agencies in a different form.

The court called the elimination of redevelopment “a proper exercise of the legislative power vested in the Legislature by the state Constitution.”

State leaders axed redevelopment agencies in the June as they closed a deficit once projected at $26 billion. As part of the plan, cities could reorganize the agencies only if they agreed to use their money to pay for state obligations this fiscal year and make smaller contributions in future years.

Cities and redevelopment agencies sued the state in August to block the plan, saying it was akin to the state demanding a “ransom payment.” Critics in the Legislature said the state could ill afford to subsidize private developers, pointing to venues such as “Dive Bar,” a watering hole steps from the Capitol that features a mermaid tank.

The state’s high court agreed to fast-track the case. By issuing a decision today, the court gave state leaders guidance before Brown proposes his 2012-13 budget in less than two weeks.

From the Hesperia Star:

Brown would also shut down enterprise zones across the state, including the one recently declared for much of Hesperia. Businesses can generate millions of dollars of tax credits for operating in an enterprise zone. Hesperia’s enterprise zone covers the location of more than 90 percent of current businesses.

“We had a workshop this morning. We had two speakers come in and talk about ways of taking advantage of enterprise zone benefits,” Deputy Economic Development Director Steve Lantsberger said Wednesday. “We know that threat is there … but we have an enterprise zone that’s valid and we have to move forward with our initiatives, as per our agreement with the state of California.”

Although the Hesperia Enterprise Zone was only declared in April, Lantsberger said it’s already paid dividends for existing businesses and has raised Hesperia’s profile for businesses planning on locating in the area.

“We have a few projects that we’re working with and we’ll definitely see tremendous benefits,” he said. “Even [recently opened businesses] Golden Corral and Ross and Marshall’s, they’re seeing the benefit as well.”

Political analysts have suggested that Brown’s announcement Monday was merely the opening position in a negotiation, and both Johnson and Lantsberger hope that the redevelopment agency and enterprise zone survive the budgetary process.

“We absolutely want to make sure we keep the economic opportunities we have in the city,” Lantsberger said. “I view both of them as vital.”

The State of Illinois just passed a massive tax increase to deal with its budget deficit. Californians should pay close attention to the reaction. The AP reports:

While many states consider boosting their economies with tax cuts, Illinois officials are betting on the opposite tactic: dramatically raising taxes to resolve a budget crisis that threatened to cripple state government.

Neighboring states gleefully plotted Wednesday to take advantage of what they consider a major economic blunder and lure business away from Illinois.

Chicago Mayor Daley makes a point that should send a chill down California’s spine:

There was even some carping from Illinois Democrats. Chicago Mayor Richard Daley predicted jobs will start trickling out of Illinois with little fanfare.

“Businesses don’t have press conferences like this and announce they’re moving 50 people out, 60 people out, 70 people,” Daley said at an event in Chicago.

The editorial board of the Desert Sun is not happy with the proposal to eliminate Enterprise Zones and also got a reaction from Assembly Jobs Committee Chair V. Manuel Perez:

Perhaps the most disturbing idea is Brown’s proposal to eliminate redevelopment agencies and enterprise zones.

Assemblyman V. Manuel Pérez, whose 80th District includes the Coachella Enterprise Zone, said he would fight to preserve them.

“I think the governor has provided us with a starting point in developing a responsible fiscal plan,” the Coachella Democrat said. “But it’s a starting point.”

The City of Oroville is concerned:

Because Oroville is an enterprise zone, that is also a concern for the city, [City Administrator G. Harold] Duffey said. He said enterprise zones were created to allow economic development. It allows some tax benefits to businesses.

“The fear is that if it goes away, we will have less of a tool to entice businesses to locate to our jurisdiction,” Duffey said.

Duffey said the city will look for guidance from the League of California Cities, which will meet next week.

From the Mayor of Santa Clarita:

McLean also noted the success of enterprise zones in the Santa Clarita Valley. On December 15, the California Department of Housing and Community Development announced the valley would receive an expanded enterprise zone in 2011 that would combine the city’s existing zone with selected areas in unincorporated Santa Clarita Valley. This extends the city’s zone benefits until 2026 and adds approximately 6,000 acres to qualifying area in the valley.

“Our enterprise zones have been a tremendous boon,” said McLean. “(Brown) wants to abolish those as well. We know the budget has to be balanced but this isn’t the way to go.”

The California Association of Enterprise Zones issued a press release:

The proposal outlined by Governor Brown to eliminate Enterprise Zones is inconsistent with policies promoting economic development, job growth and community investment. Each Enterprise Zone is created for a limited time and represents a commitment from the state and a significant investment from local governments. Eliminating Enterprise Zones would send the wrong message to businesses that create jobs, in essence that California is an unreliable partner not to be counted on to keep its commitments.

…

“Tax increases and the elimination of these important economic development programs will only worsen California’s unemployment rate and cause more businesses to flee to states with healthier economies and friendlier business policies,” stressed [CAEZ President Craig] Johnson.

From the San Jose Mercury News:

He said after his speech that he has concerns about Brown’s proposal to eliminate funding for enterprise zones and local redevelopment agencies, which he credited for helping to build up Mission Bay and Treasure Island in San Francisco. He said enterprise zones helped the city lure Virgin America airline.

“I honor his willingness to put it up but I also honor his willingness to keep an open mind,” Newsom said.

As reported in the Los Angeles Times:

Los Angeles is “prepared to shoulder its fair share of the responsibility” for balancing the budget, said Mayor Antonio Villaraigosa. But, “any scenario that would completely eliminate the redevelopment zones and state enterprise zones is a non-starter.”

The following is the full text of Governor Brown’s proposal for the Enterprise Zone in the upcoming budget. It is important to keep in mind that final budgets never look the same as January proposals, and that these proposals will need to pass the legislature as bills that will go through the rigorous legislative process:

Consistent with the new model for funding economic development (See Tax Relief and Local Government Chapter), the Budget proposes to eliminate all enterprise zone (EZ) tax incentives and similar tax incentives for specific areas for tax years beginning on or after January 1, 2011. These areas include EZs, Targeted Tax Areas, Manufacturing Enhancement Areas, and Local Agency Military Base Recovery Areas. The tax benefits provided for most of these areas include; a hiring credit, a credit for sales tax paid, a credit for employees who earn wages within the area, and a deduction for interest received from businesses in an area. This proposal would eliminate these tax benefits, both for newly earned credits and deductions and for credits that had been earned in prior years, but had not yet been used. Local agencies that want to keep any local incentives could continue to do so.

This proposal is expected to generate additional revenues of $343 million in 2010 11 and $581 million in 2011 12.

Within the context of a budget that proposes deep spending reductions across state government, all spending must be scrutinized. The EZ program is a tax expenditure — an expenditure program for local economic development run through the tax system. The Budget proposes to make significant changes in the way funding of local development efforts is handled. These changes are intended to move the responsibility and the authority for local development efforts to the local jurisdictions and their voters. Eliminating state tax benefits for EZs is a fundamental part of this change. Because the primary benefit of these zones is to shift economic activity from one geographic region within California to another geographic region within California, they are not of statewide interest.

The Legislative Analyst’s Office “California’s Enterprise Zone Programs” – 2005 found that EZs have little if any impact on the creation of new economic activity or employment. They also found that EZs appear to be somewhat effective in increasing economic activity within smaller geographic areas – such as within metropolitan regions. However, these increases are not generally a result of new activity, but, instead, from the shift of activity into a zone that otherwise would have occurred elsewhere.

According to a report by the W.E. Upjohn Institute for Employment Research (State Enterprise Zones: Have they Worked – 2002), “most enterprise zone incentives are too small to materially affect the investment and location behavior of most firms.” The jobs created in many zones are filled by people who are not economically disadvantaged or do not live in the targeted area. They also conclude that since many of the benefits will be jobs that would have been created anyway, state and local government will see a net loss of $60,000 for every job created in a zone.

The Public Policy Institute of California found “Do California Enterprise Zones Create Jobs?” – 2009 that there was “no statistically significant effect on either employment levels or employment growth rates” within enterprise zones as compared to neighboring areas.

There is some evidence that benefits from the EZ programs go to taxpayers whose behavior has not been affected at all by the EZ program. There are firms that specialize in finding businesses that could benefit from an EZ program and offering to prepare the taxpayer’s return on a percent of benefit basis. This is done for both current year and back year tax returns. Clearly taxpayer’s behavior to relocate or expand is not being driven by the existence of the EZ program if they have to be told that the program exists after they have already relocated or expanded.

Even though there are no specific details on any budget proposals, and we have seen many false alarms in the past, local officials are starting to react to hints reported in the media. This article in the Appeal-Democrat discusses the reactions of officials in Yubba and Sutter Counties:

A possible 2011-12 state budget item to cut enterprise zones and redevelopment agencies has Yuba-Sutter officials concerned that doing so would kill local economic growth.

The proposal is rumored to be part of new Gov. Jerry Brown’s initial state budget, which is scheduled to be released Monday. But many local officials working to bring jobs to the area said the notion is poorly considered.

“Losing the program would be a huge detriment to our existing businesses as well as potential businesses considering the region for location,” said Brynda Stranix, the Yuba-Sutter Economic Development Corporation’s chief executive officer, in an e-mail.

She referred to the enterprise zone in both counties, offering tax credits and other incentives for businesses who locate and expand. Enterprise zones were originally established to give businesses a reason to locate in more economically downtrodden areas.

Redevelopment areas, too, have been beneficial, said Marysville City Manager Steve Casey. Redevelopment created downtown enhancements such as the archways over intersections, as well as housing for lower income people, he said.

“Most of those projects, they’re bonded to get those things done,” Casey said, explaining redevelopment money, which comes from the state, pays those bonds off.

“If you do away with the debt service that goes with them, you might put some financial institutions in jeopardy,” he said, adding in recent years all redevelopment money his city has received has gone to repaying bonds.

Officials with the governor’s office haven’t offered an estimate of how much eliminating enterprise zones and redevelopment agencies would save the state, which faces a deficit of $28 billion over the next 18 months.

But Stranix said she would argue enterprise zones pay for themselves.

In fiscal 2009-10, she said, the Yuba-Sutter Enterprise Zone created $24.4 million of tax credits for vouchered, full-time employees.

Businesses receiving those credits put the savings back into their operations, she said, both in capital improvements and hiring more employees, resulting in more money going into the local economy.

Both enterprise zones and redevelopment agencies have been criticized by government watchdogs, who suggest they are a form of corporate welfare.

Assemblyman Dan Logue, R-Linda, who opposes eliminating enterprise zones, said the state needs to do more to create jobs, not less.

“The governor has to realize that to create wealth and revenue, you have to give businesses a reason to develop in an area,” said Logue.

He added in the last decade, the majority of new jobs created in California came in areas where there were enterprise zones.

But because the initial budget proposal from the governor often undergoes several revisions before it’s passed and signed, Logue said, Brown may be including the cuts as a negotiating tactic.

“The first thing he’s talked about is asking Californians to raise their taxes,” Logue said. “He might be holding out certain things right now to see how people feel.”

As reported in Vaughn Hromiko’s WOTC Planet blog, the newly elected Assemblyman of the 28th District representing the Salinas Valley, Luis Alejo, recently defended the Enterprise Zone Program. Writing for the Salinas Californian, he said:

Preserving our state Enterprise Zone program is one such effort as it has come under attack under tough budgetary times with calls for its elimination. There are 42 enterprise zones across the state, which provide critical tax credits and job-creation incentives for companies to invest or expand in our communities and hire local workers. Salinas Valley and Watsonville have been able to attract companies, such as Green Vehicles and Fox Racing Shox, using the zones. The Enterprise Zone program should be strengthened rather than eliminated.

Mr. Alejo is a former mayor of Watsonville, home to another Enterprise Zone, and was appointed vice chairman of the Assembly Local Government Committee by Speaker John Perez.

According to the Los Angeles Times, Enterprise Zones will be a target of incoming Governor Brown’s budget proposal:

The blueprint Brown will unveil when he takes office early next month also is expected to take aim at several tax breaks and subsidies that have been fiercely guarded by the business lobby in Sacramento, according to people involved in budget discussions with the incoming administration.

Among the breaks are multibillion-dollar incentives for redevelopment projects and hundreds of millions of dollars of “enterprise zone” credits meant to encourage investment in blighted neighborhoods. Also targeted is a recent change to state business tax formulas that has saved corporate California roughly $1 billion.

There are no specifics yet on what might be proposed.

The League of California Cities is encouraging local officials to begin dialogs with their legislators about the importance of Enterprise Zones.

Governor elect Jerry Brown held a two-hour meeting today in Sacramento to discuss the State’s budget with lawmakers and policymakers. Video of the entire event can be seen here.

Toward the end of the meeting, Assemblyman Bob Blumenfield asked Mac Taylor of the Legislative Analyst’s Office about how tax expenditures could be part of the budget solution. Mr. Taylor explained that the LAO has long viewed a variety of expenditures as problematic, such as the Enterprise Zone. He said:

We’ve put other tax expenditures that we should look at on the table including Enterprise Zones is one where we think the evidence has not been strong in suggesting that they do a whole lot.

Here is a video clip of that brief exchange:

Here are the stories:

The Sacramento Bee

Los Angeles Times

San Francisco Chronicle

Wall Street Journal