EZ Policy Blog

At yesterday’s meeting, the CAEZ Board received an update from HCD’s John Nunn. The first piece of good news is that HCD has added one new staff member to work with the Enterprise Zones, they are still looking at candidates to fill two more positions.

Mr. Nunn reported that they are receiving a fair number of applications from zone for expansions, and that some of these applications are pushing the envelope of acceptability. He said that we should expect to see a management memo detailing the guidelines for expansions. He also said that there are another four management memos on a variety of policy issues in the works to be released in the near future.

There are two zones that will be expiring over the next year. HCD is placing a significant focus on releasing a new application to streamline the next round of new zone applications. Based on feedback they have received, Mr. Nunn anticipates that with only two slots open, there will be intense competition. The new application is scheduled to be released on Feb. 15 and they will be due on Aug. 15 with new zone announcements some time in October or November 2010. HCD anticipates that there will be a series of workshops about the application at locations around the State.

Vouchering workshops in the the works as well as “new zone orientations” for the four new zones that will be receiving designation shortly. In fact, Mr. Nunn explained that Hesperia is very close to receiving its final designation and the others will follow close behind.

A complete overhaul to the management of the Enterprise Zone Program at HCD were announced this week at the CAEZ Board meeting in Sacramento.  After the departure of Frank Luera, Rebecca Matt took over as an interim manager; on Wednesday she announced that she would be changing positions within HCD and would no longer be working on the EZ Program.

Frank held the position of Section Chief for the State Enterprise and Economic Development Section which had broad responsibilities in addition to the EZ Program, especially the CDBG Program.  The Department is still seeking a replacement for the Section Chief position, however they have appointed John Nunn as the Program Manager for Enterprise Zones, a position which has not been filled for some years. Hopefully the Program will benefit greatly from having a dedicated manager.

In addition to the above, a new position has been added to he hierarchy, the Federal Programs Branch Chief which has oversight over the Section Chief’s programs as well as the Home Program.  This position has been filled by Tom Bettencourt who has many years of experience with the Department overseeing the Home Program.

Frank Luera, who has been Chief of the State Enterprise & Economic Development Section which oversees the Enterprise Zone Program has announced his retirement from HCD in an email, “After several years as Chief of the State’s Enterprise Zone Program, I have decided to pursue other interests. My last day will be June 19, 2009.”

Frank was officially appointed to lead the Program in November of 2006 replacing Mark Maldonado, but had been working with the Program for some time before that. During his tenure, Frank oversaw the most sweeping and significant changes in the Program’s twenty-plus year history including the implementation of regulations, the expiration of the majority of zones and the designation of new zones to replace them.

I would like to personally thank Frank for all of the hard work he has put in, his extraordinary patience, and openness to new ideas. I wish him all the best in his future endeavors.

At yesterday’s CAEZ Board meeting we were once again treated to an update from Frank Luera at HCD.

• Of the 31 zones designated in 2006-2008, 16 remain only conditionally designated.
• The deadline for applications in the 2009 round is March 27.  There are four slots available and HCD expects the round to be “highly competitive;” they have received close to 30 serious inquiries.
• There will be a 2010 application round with two open slots.
• A process has been initiated to amend the vouchering regulations.  The primary issue is to replace the I-9 form as acceptable documentation for TEA with the W-4 form.  There is also a process underway to develop regulations for the establishment of TEAs and for the expansion of zones.
• There have been some staff changes at HCD, and due to a general hiring freeze, open positions remain unfilled.

As in past years, the CAEZ Conference had the benefit of receiving updates from Frank Luera of HCD and Jeannie Harriman of FTB.

HCD expects the final application for the next round of zone designations to be released as early as the week of Oct. 27.  Those applications would then be due sometime next March or April.

As noted before, HCD is still working with the LAMBRAs to reexamine what ought to be the correct designation dates of those zones.

In addition, we should expect HCD to begin a process of modifying the vouchering regulations.  While the main impetus for doing so is to codify the allowance of the W4 form, there will likely be an opportunity to revisit many of the issues dealt with in the regulations.  That should be fun.

How does the current economic climate effect the program?  HCD feels that the Governor is actually embracing the program to an even greater degree than in the past and views it as an important part of an economic stimulus.

Most of the discussion with FTB centered around trying to understand the technical implications of the new budget and AB 1452 with SBX1 28.  Both the NOL suspension and the 50% usage limitation will not apply to taxpayers with “net business income” less than $500,000.  FTB is still not entirely certain how to define “net business income,” and will hopefully have some guidence out for us in the near future.

The requirement to file IRS forms 8886 and 8918 were reiterated (see also FTB Notice 2008-1).

When asked if the current budget troubles are resulting in an increase in FTB audits of credits, Jeannie answered that in fact the FTB is “winding down” their heightened interest in hiring credits.  FTB is operating with increased confidence in vouchers issued since the implementation of vouchering regulations in January 2007.  As more and more returns are filed based on vouchers issued subsequent to the regulations, FTB is reducing its audit activity with regard to the credits.

HCD has posted an update to their website announcing the impending launch of the next round of Enterprise Zone expirations and applications:

Update on the 2008/2009 Designation Round — The Department is currently drafting the Application Guidebook for the next designation round. For this round, there will be four slots available. At this time, the Department expects to release the guidebook by September 30 with a due date of late January or early February. If you need more information on a release date, please call Lesley James at (916) 322-1112.

Someone turned on the memo spigot at HCD.  Today HCD issued Memorandum 8-07 dealing with some ambiguity in determining the correct effective dates of the LAMBRAs. As the memo describes the problem:

AB 2875 changed the effective date of each LAMBRA’s eight-year period. Because AB 2875 stated that a LAMBRA would begin its eight-year period after it fulfilled the later of two conditions, the legislation in effect changed the designation period stated or implied in the MOUs executed by the State Agency and signed by the LAMBRAs. This change occurred because most, if not all, of the LAMBRAs in 2002 had not met the later of the two conditions. Therefore, according to AB 2875, their eight-year period had not begun.

The conditions set forth in AB 2875 indicated that the State had to modify the terms of the original MOUs. However, based on our research, it appears that the State did not fully or accurately implement these modifications. For example, we found only two instances in which the State executed new memoranda of understanding. In both instances, the State concluded that the LAMBRAs had met the later of the two conditions specified in AB 2875 and, therefore, had begun their eight-year designation period. Upon further review, we found that at least one of these LAMBRAs had not transferred its economic development parcels as required by one of the conditions and, therefore, should not have started its designation period.

HCD has just issued a much anticipated memorandum addressing some of the most interesting dynamics of TEAs.  As stated in the memo it addresses:

• New enterprise zones must apply for a Targeted Employment Area.
• A TEA may include a census tract that overlaps with the boundaries of a jurisdiction that is not participating in the enterprise zone.
• Enterprise zones that previously attempted to include a census tract that overlapped the boundaries of a non-participating jurisdiction may re-apply to include this census tract.
• New enterprise zones may use their former TEAs during their conditional stage.
• The use of a former TEA is not impacted by the absence of former enterprise zone partners unless the TEA expired prior to 2006.
• Once approved, a new TEA will become effective on the enterprise zone’s designation date.
• Because of the Department’s policy of allowing former zones to use their former TEAs during their conditional stages, these zones will have their former and new TEAs coincide for the conditional period.

And finally, CAEZ received an update from Frank Luera of HCD.

• The Department is in the process of auditing the zones.  Frank was very careful to emphasize that the goal of these audits is to strengthen the zones and provide constructive guidence; they are not out there looking for ways to dedesignate zones.
• He told us to expect two policy memos very shortly: 1. regarding how LAMBRAs should calculate their designation periods, and 2. how to treat the TEA in cases where a new TEA is replacing an old TEA.
• There are four zones expiring in 2009 (Los Angeles Harbor, Madera, Sacramento Army Depot, and Sacramento Florin Perkins).  HCD intends to begin the application process for those four slots in early August with applications due in late January.  The application process is expected to be even more streamlined than the last round.  For those four slots, HCD has already received 16 informal indications of interest.

The next CAEZ board meeting will be in Sacramento on July 24th.  Here is the agenda.

That meeting will be followed by a workshop by HCD for those zones that are still in a conditionally approved state on how to complete the MOU phase and obtain final designation.  The workshop is only open to jurisdictions that have not yet completed MOUs for new zones.  Hopefully this will result in a more rapid completion of those designations.

It’s hard to believe, but is has been over 19 months since 23 new Enterprise Zones received conditional designations back in November 2006. All but four of the new zones were able to enjoy immediate implementation because of AB 1550. Santa Clarita, Fresno County, and Compton were all brand new to the EZ program and have all since received their final designations and are now fully functioning zones. Arvin, however remains in a state of limbo.

Some have been wondering if Arvin will ever complete their conditions for becoming an Enterprise Zone. In the mean time, they occupy one of California’s 42 EZ slots preventing any other jurisdiction from attaining that designation until some other zone expires.

But just last week Arvin Mayor Tim Tarver published an Op-Ed in The Bakersfield Californian supporting the Enterprise Zone program in general, and the Arvin EZ in particular, against any attempt to limit the program in the current budget cycle:

Faced with a budget crisis that is set to impact every Californian, tough choices will have to be made to bring order and stability for the years ahead.

The governor and our state Legislature are looking for programs they can cut without too much political backlash. But these choices must not be made in haste. We need to consider the unintended consequences of cutting statewide programs that truly make a difference in cities like Arvin, far away from the Sacramento budget epicenter.

As mayor of the City of Arvin, I know that one of these programs the Enterprise Zone program will help create needed employment opportunities for our city. Yet today this program is under serious threat of being phased out.

The EZ program will bring jobs to Arvin. And it will keep them here. One of the biggest challenges facing our area is being able to recruit local business investment and keep a healthy amount of employees working in our area.

The EZ program, with its attractive mix of incentives and credits, will aid our city in building a stronger base of local businesses and employees. This means a more financially secure and bright future for Arvin.

I spoke with a representative of the City working on the Enterprise Zone and I was told that Arvin has just completed their EIR process which will be presented to the City Council for ratification on June 24th and their intention is to send that last piece to HCD the following day. They have a letter from HCD giving them until July 18th to complete their EIR, so their hope is to be ahead of schedule. After that the ball falls into HCD’s court to compose the Memorandum of Understanding required to assign the final designation date.

As far as Arvin is concerned, they are moving their zone full steam ahead.

The Assembly and Senate Budget subcommittees this week approved the proposed reduction of $59,000 from the Enterprise Zone program within HCD’s budget. According to the Assembly fiscal analysis, “it is staff’s understanding that this cut will primarily be achieved through reduced outreach/advertising efforts.”

Hat tip – Chris Micheli.

HCD released a memo today which reads, in part:

Effective immediately, employers applying for a hiring tax credit certificate or voucher may temporarily use an Employee’s Withholding Allowance Certificate, Form W-4 (“W-4”), to verify that an employee resided in a Targeted Employment Area (TEA) immediately preceding the commencement of employment for purposes of eligibility for the TEA category. This change indicates the Department of Housing and Community’s (Department) intention to permanently add the W-4, subject to regulatory approval, as an acceptable document for TEA eligibility. It also signals the Department’s plan to delete the Form I-9, U.S. Department of Justice, Immigration and Naturalization Service, from the list of acceptable documents. The following sections describe these changes.

A new press release posted on the HCD website explains:

The State of California’s Department of Housing and Community Development (HCD) was presented with the “Above and Beyond Excellence Award” at the California Association for Local Economic Development’s (CALED) Annual Conference in Anaheim last week. Staff from HCD’s Division of Financial Assistance received the honor, recognizing their hard work in providing excellent service to California communities, specifically regarding the Community Development Block Grant – Economic Development program (CDBG-ED). The program provides communities with resources to address a wide range of unique economic development issues.

“It’s an honor to be recognized by CALED for the work that the Department of Housing and Community Development does every day to expand safe and affordable housing opportunities and promote strong communities, “ said Lynn L. Jacobs, Director of HCD. “I’m proud that employees of the State of California are being recognized as leaders in service for communities throughout the state.”

The City of Fresno issued a press release today stating that HCD will announce the final designation of the new Fresno City Enterprise Zone at an event in Fresno today.

Long Beach received their final designation on April 9th bringing the total number of conditionally designated zones to receive final designation to 7 out of 23.  They are:

Compton, Fresno City, Fresno County, Long Beach, Oroville, Pasadena, and Santa Clarita.

Today’s Los Angeles Daily News features a front page article by Brandon Lowrey discussing the Enterprise Zone program. The article is one of the more in depth I have read and contains many interesting quotations from policymakers and experts. The subtitle to the article, “Although tax-credit areas cost $400 million, no one can prove they work” and the lead sentence display some bias, but the article covers a lot of ground.

During the past two decades, state officials have thrown billions of dollars in tax credits and other incentives at a program designed to revitalize poor areas such as Pacoima with little way of measuring its effectiveness.

No evidence is provided for the assertion of “billions” of dollars. Even the highly critical California Budget Project report, “California’s Enterprise Zones Miss the Mark,” only claims that the program has cost a cumulative $1.5 billion since 1986. Also the idea that these funds have been “thrown at” the EZ program is a little more editorializing than I care for in news stories.

Earlier this year, budget- strapped California extended the nearly $400 million-a-year program through 2021 – and the governor even expanded it by adding eight enterprise zones designed to create jobs and boost the economy.

Here too, we find the same common misconception that there was an extension made to existing zones or to the program in general. The notion that there were eight additional zones added to the program is also a byproduct of this misunderstanding.

The zones provide tax credits for businesses that hire eligible employees – including the disabled, veterans, American Indians, those laid off in a poor economy and those with criminal records. The money also can be used to buy machinery and machine parts.

But while business leaders and politicians defend the 42 enterprise zones as economic boosters, experts concede there is no definitive way to calculate how many jobs they actually have created or how effective they have been.

“We’re stuck with a program that can’t prove it works,” said Jean Ross, executive director for the California Budget Project, a nonprofit, nonpartisan economic watchdog group.

“We’re cutting back on payments to health-care providers. We’re talking about cutting state parks and beaches. We’re talking about cutting $4.8 billion out of schools.

“We can’t afford a program that can’t prove without a doubt it’s cost-effective.”

While the state awaits new data on the programs amid a budget crunch, the nonpartisan California Legislative Analyst’s Office is urging lawmakers to eliminate most of the zones in the program.

“(Enterprise Zones are) certainly politically popular at some level, but there isn’t compelling evidence they do everything they’d like them to do,” said Allen Prohofsky, senior economist for the Legislative Analyst’s Office.

“We know there’s a person that’s been hired, (but) how do we know if that person wouldn’t have been hired if the credit didn’t exist?”

If all the enterprise zones renewed in 2006 were canceled as the LAO has suggested, it could save the state about $220 million over the next two years as benefits gradually run out.

In making its recommendation, the LAO said that since the zones were created in 1986, some have seen successes while others have faltered. And too many other factors are at play to tell where credit or blame lies.

Still, enterprise zones have enjoyed bipartisan political support and in many areas local leaders defend them vehemently.

When Pacoima’s enterprise status was threatened in 2006, Valley leaders lobbied the governor to save the zone, and business owners threatened to lay off employees or move their companies.

A spokesman for Gov. Arnold Schwarzenegger deferred questions about the expansion of the program last week to Chris Westlake, a financial director at the state department of Housing and Community Development that oversees the zones.

In 2006, the housing department completed a study defending enterprise zones.

“There was more economic prosperity in the areas that have enterprise zones, which just further emphasizes the importance of the enterprise zones throughout the state as a vital economic tool for businesses,” Westlake said, noting critics should wait until new data are in before demanding any drastic action.

“It’s also important for the state, as well, for an economic stimulus.”

Schwarzenegger hasn’t taken a position on the proposal to cancel the renewed zones, but he said he is open to discussion.

That’s an interesting way to put it.

Still, the possibility has many concerned, even as they acknowledge more needs to be done to track job creation, sales tax receipts and other measures in the zones.

“There are points of view in Sacramento that correctly argue we need to better assess the performance of the enterprise zones,” said Los Angeles Councilman Richard Alarcon, who spent eight years as a state senator and whose district includes Pacoima.

Long a staunch defender of Pacoima’s enterprise zone, Alarcon said he bases his support on anecdotal evidence during his time in the state and city governments.

“But I am telling you that the Pacoima and the Northeast Valley enterprise zone is not only a productive trigger to a more positive economy, it is a positive figure of generating revenue for the state of California.”

Economists acknowledge the zones likely provide some benefits for businesses and workers, but they are less sure that job creation is one of them.

“(The zones) can be a stabilizing force,” said Raphael Bostic, a professor at the University of Southern California’s School of Planning, Policy and Development.

“These incentives can make it easier for existing businesses, if they know about the credits, to survive and produce. So I wouldn’t say that just because they’re not inducing a whole lot of new jobs, that it’s necessarily a failure.”

Now here is a new perspective and I think the Daily News should get credit for seeking it out.

Bostic said it’s likely the benefits are reaching their intended targets – businesses and workers in poor areas – but perhaps not efficiently.

“Many of the jobs are being taken advantage of by McDonald’s and other fast-food places,” Bostic said. “I don’t know if those are exactly the kind of jobs that are envisioned. But at some level, employment is employment.”

The Public Policy Institute of California expects to release a study of the zones using new statistics from a business credit firm. But officials there said it is too early to tell what the research would show.

Economists who have studied California’s enterprise zones agree it would take a massive amount of research to show whether the zones are effective – far beyond the statistical sketches released in the 2006 housing department study.

That report used U.S. Census data from 1980, 1990 and 2000 to estimate and compare wages and the unemployment, poverty and vacancy rates within enterprise zones to other areas within the state.

Many of the areas demonstrated a higher rate of improvement in the categories than the rest of the state, although all of the areas still lagged behind the state average.

The report says “a definitive cost-benefit analysis cannot be done” for enterprise zones because of limited data and several complicating factors.

The housing department took over the enterprise zone program in 2003 from the now-defunct California Technology and Commerce Agency.

The agency soon noticed few records had been kept on the zones. And legislation in 2006 championed by state Assemblyman Juan Arambula, D-Fresno, gave the department more auditing power.

But the first official reports on the zones after that legislation still have not been completed. And while the program’s success remains murky, Arambula said he hopes future data reveal more about how the zones are working.

“They do help distressed communities to improve themselves economically,” Arambula said. “I think the reforms will be able to track which areas are doing a good job and which ones aren’t, and over time the bad ones will be weeded out and, hopefully, the good ones will prosper.”

But state Senate Minority Leader Dick Ackerman said it isn’t a matter of making the zones more efficient.

“I would favor making the entire state of California an enterprise zone,” the Irvine Republican said.

And Ackerman said he would battle any attempt to cut existing zones.

“It would be a tax increase for all of the businesses in that particular zone,” he said. “The more you regulate or the more you tax business in California, the more they will leave.”

Bruce Ackerman, president of the Economic Alliance of the San Fernando Valley and no relation to the senator, said losing the enterprise zones would remove one of the few tools left in the area’s arsenal to lure and retain business.

Though the program’s impact is unclear, Ackerman said pulling the benefits from existing businesses could be dangerous.

“That’s like saying, `I don’t know if this brand of poison is going to kill me, so I’ll just take it and see if it happens,”‘ Ackerman said. “Do you want to run that risk?”

Pacoima was among one of the first areas to gain enterprise zone status in 1986, with the zones set to expire in 2001. That year, the program received a five-year extension.

As the 2006 sunset date approached, the governor approved tacking another 15 years onto all the enterprise-zone areas except for Pacoima.

That’s not exactly right. Why is it so complicated to understand the process of zone expiration and subsequent application for new designations? Where did the Santa Clarita, Compton, Fresno County and Arvin zones come from if the Governor simply extended all zones. It’s a bit mystifying to me why this process is so befuddling.

The reason: Pacoima had too high a percentage of nonindustrial areas to qualify.

But outcry from local businesses and leaders convinced the governor to attach Pacoima to a downtown Los Angeles enterprise zone via a sliver of land that crosses from Hollywood over the Santa Monica Mountains, through Studio City.

The close call drew ire and anxiety from many Pacoima business owners.

MOC Products co-owner Nadelin Waco said she thought about firing some of her 250 workers and moving her auto-parts manufacturing business to Mexico.

“These legislators and these politicians are just driving these jobs out of our country,” Waco said. “To dare to take Pacoima out as an enterprise zone – it is just horrific. … We need businesses here to bring income, to bring jobs.”

On the other hand, I can’t see any justification for this sense of entitlement when it comes to Enterprise Zones. Since the designations are competitive, this kind of a reaction is unwarranted.

Still, even some business owners say the zones are only a small consolation amid the high costs of doing business in the state.

“It helps a little bit,” said Freddy Vidal, CEO of QMP Inc., which manufactures home and commercial drinking water systems in Pacoima.

“Either way, in California, it’s kind of difficult.”

As if HCD didn’t have enough on its plate in its attempt to catch up on Enterprise Zone tasks, the Sacramento Bee reports:

About 350 employees of the California Department of Housing and Community Development were told to stay home Thursday as a precaution because mold has been found in the downtown building where they work.

And according to the HCD website, offices are closed Friday as well.

In its March 2008 “Tax News,” FTB is extolling the virtues of Enterprise Zones in an article called “Possible boost to California’s economy“:

Governor Arnold Schwarzenegger recently announced the conditional designation for eight Enterprise Zones statewide. The zones are East Los Angeles, Kings County, Oakland, Salinas Valley, San Joaquin County, Santa Ana, Siskiyou County, and West Sacramento.

The new designations will take the place of the eight zones set out in statute that are expiring over the next several months. Each zone designation is in effect for 15 years.

In his announcement, the Governor noted, “Enterprise Zones play a key role in revitalizing economically challenged parts of our state. By helping businesses create well-paying jobs, we empower communities to climb the economic ladder and build the state’s overall economy.”
…
In 2006, a report commissioned by the Department of Housing and Community Development (HCD) evaluated the success of Enterprise Zones in spurring economic recovery. The report showed that, on average, within Enterprise Zones between 1990-2000:

* Poverty rates declined 7.35 percent more than the rest of the state.
* Unemployment rates declined 1.2 percent more than the rest of the state.
* Household incomes increased 7.1 percent more than the rest of the state.
* Wage and salary income increased 3.5 percent more than the rest of the state.

In the next step in the designation process, the HCD will issue a conditional designation letter to each of the new zones, outlining conditions that must be met before final designation can be granted. Examples of conditions include a signed memorandum of understanding with HCD, which includes performance measures and benchmarks.

The text of the article quotes the governor as stating rather clearly that Enterprise Zones “play a key role” in boosting the economy, yet the FTB’s title uses the word “possible” in describing the economic benefit.  Interesting.

Pasadena has become the fifth of the 23 Enterprise Zones conditionally designated in 2007 to receive its final designation.  They have also received approval for their new TEA, both the zone and the TEA have an effective date of 4/10/2007.

There is a $50,000 budget reduction for the Enterprise Zone program in ABX3_3, part of the emergency budget reduction package signed  by the Govenor on Saturday.  According to the Los Angeles Times:

The Legislature passed a package of emergency budget measures Friday, which lawmakers touted as swift, responsible bipartisan action that averts a cash crisis and erases nearly half the state’s $14.5-billion deficit.

But their move would not actually reduce spending on that scale; rather, it would push most of the red ink forward with accounting maneuvers and borrowing.