From the San Bernardino Sun:

It is no secret this is one of the most challenging budget years for California. It is understandable that a thorough review of the state’s expenditures is taking place.
One such expenditure under review – the California Enterprise Zone Program – is directly tied to the success of many of our small and medium-sized businesses. The changes in policy being discussed could increase the cost of doing business for many local companies and put jobs at risk.

The San Bernardino Valley Enterprise Zone is our local zone in this program. It is a 42-square-mile region that includes the cities of San Bernardino and Colton plus portions of county property, and contains 4,000 businesses. These businesses are eligible for tax credits and business incentives if they meet certain specifications. These incentives not only serve to attract businesses to locate to the zone, but also allow companies to reduce the cost of doing business. This leads to greater and more stable employment in the enterprise zone.

California’s Assembly Committee on Jobs, Economic Development and the Economy is reviewing and considering revisions to the California Enterprise Zone Program statewide, and recently completed a series of pubic hearings in the process.

These hearings, held in San Diego and San Jose, were attended by a number of businesses from enterprise zone areas that shared and identified ways the program is helping to stimulate their local economy and keep their businesses stable.

The Assembly Committee heard them and I hope their testimony will be considered.

Some of the feedback received from businesses in the San Bernardino Valley Enterprise Zone also makes a strong case in support of this zone and its impact to help our local employers continue to thrive and employ residents.

It is difficult to argue with evidence of an employer that is not just surviving, but thriving in this difficult economy.

For example, Brithinee Electric, a manufacturer of industrial electric motors, wind generators and custom motor control centers, has utilized the enterprise zone program for nine years, and as a result, has doubled its work force. The tax credits allowed Brithinee Electric to hire local residents, and the savings produced by the tax credits funded additional technical skills training for these new hires.

According to Tom Lund, director of operations for Isolatek International, a leading manufacturer of passive-fire resistive materials for commercial construction, the enterprise zone was an additional incentive to move to San Bernardino in 2007. The company has filed hiring tax credits and will file for sales and use tax credits on equipment purchased, which will increase their savings. Now in the process of hiring an additional 20 employees, the incentives are helping make the company more competitive and employ more people.

These are two examples of how effectively this program is working in our local economy, and there are many more similar stories.

Unfortunately, not all the businesses located in the zone are taking advantage of these incentives. In an economy like this, no company should be leaving money on the table.

Businesses located in the San Bernardino Valley Enterprise Zone may reduce state income tax by more than $35,000 per qualified employee over a five-year period. Another incentive helps enterprise zone businesses by allowing a tax reduction for property and equipment that is purchased and used within the boundaries of the zone. For our small and medium-sized businesses, these incentives can make a difference between profit and loss.

I urge all businesses located in the enterprise zone to take advantage of these incentives that will reduce their business costs. The process is not complicated and more information can be found at www.sbvez.com.

I also encourage legislators considering revisions to the enterprise zone program to avoid removing any incentives that may increase the cost of doing business for our local employers. This program is helping to sustain our struggling businesses and keeping our residents employed during these challenging times.

The first speaker of the fourth panel from the 10/19/09 JEDE hearing was Professor Samuel Bornstein, Professor, Kean University, School of Business, Union, NJ. While most of the discussion surrounding the Enterprise Zone program has always focused on the hiring credit, Professor Bornstein has a focus on the NID component of the program. He has done research which has found that many small business owners have used their homes as collateral to obtain loans to fund their businesses. Many of these loans are the very same toxic loans which have played such a significant role in the country’s economic troubles over the last two years. Professor Bornstein has a proposal for modifying the NID benefit of the Enterprise Zone program to help these small business owners and help prevent many of them from losing their homes.

Here is a repeat of Professor Bornstein’s testimony to the panel:

JEDE Committee Hearing 10-19-09: Professor Bornstein from Max Shenker on Vimeo.

Professor Bornstein also provided me with the transcript of his remarks, as well as a much more detailed written version of the proposal. The following is the transcript as provided to me by the professor:

Introduction:

Good afternoon Chairman Perez, and Members of the Committee. Thank you for inviting me to discuss the California Enterprise Zone Program.

I would like to propose a Refinement of the Net Interest Deduction for Lenders that addresses the main concerns of California’s present economic crisis—to stimulate economic recovery, enhance small business survival, save and create jobs, and provide small business owners a means for effective loan modification which will prevent foreclosures.
My name is Samuel Bornstein. For the past 33 years, I have been a Professor of Accounting and Taxation, — as well as a CPA and Consultant in public practice.

Since 2000, I and my partner Jung Song, of Bornstein and Song CPAs & Consultants, have conducted small business research.

We discovered a Link between the Mortgage Crisis— and Small Business Owners. We found that small business owners often took out mortgages on their homes to get cash for their newly created or existing businesses, but the main problem was that they used toxic mortgages. In fact, small business owners were targeted by the lending community for these toxic mortgages.

Our research prompted an invitation to testify before Senator John Kerry’s U.S. Senate Committee on Small Business and Entrepreneurship on April 16, 2008. In my testimony, I presented our research that during the Subprime Era and Housing Boom, a significant number of small business owners fell prey to these toxic mortgages.

In order to confirm our research, we authored three Small Business Toxic Mortgage Surveys: The National survey in November 2008, the California survey in April 2009 and the California Hispanic survey in June 2009.

These surveys provide compelling evidence that a significant number of California, and especially California Hispanic small-business owners, fell prey to the toxic mortgages, such as Alt-A, Alt-A ARMs, Option ARMs, Interest-Only, and Subprime. These business owners are at-risk as their toxic mortgages reset and skyrocket to unexpected and unsustainable amounts. The resulting financial distress will lead to job loss. These resets will precipitate the 2nd Tsunami Wave of Foreclosures that will strike in 2009 and will continue to intensify through 2012. California leads the nation with 58 % of these toxic mortgages and will be hardest hit.

Most shocking is that 51.8% of California and 52.6% of California Hispanic small business owners used toxic mortgages. These findings clearly indicate that California’s small business usage of toxic mortgages far exceeds the National average of 31.9%.

Our, Bornstein & Song, California Hispanic Small Business Toxic Mortgage Survey in June 2009, provides further evidence for concern.…
1 out of every 2 ( 49.3% ) Are “very worried” about their monthly payment due at reset and 1 in 5 ( 21.1% ) Are already delinquent, having missed 1 to 3 or more monthly payments.

Our, Bornstein & Song, California Small Business Toxic Mortgage Survey in April 2009 found that— More than 1.5 million Californians are Now at Immediate Risk of Job Loss, and More than 2.1 million California Small Business Jobs may be Lost in the 2nd “Tsunami” Wave of Foreclosures in 2009 through 2012.

It is a tragedy– when an individual homeowner defaults on the mortgage and loses the home. The tragedy is magnified when the homeowner is also a small business owner employing from 1 to 21+ employees. The loss of jobs due to financial distress related to mortgage delinquency and default and the resulting possible business failure, will further weaken California’s economy.

Today’s hearing on California Enterprise Zones, is a natural outgrowth of my testimony before this Committee on May 5, 2009, wherein I sounded an alarm– that among California’s homeowners there are a significant number of small business owners who were drawn into these toxic mortgages. They are at-risk of failure, and their employees will lose their jobs.

Small businesses in California Enterprise Zones are the weakest link and are most vulnerable, especially Hispanic small businesses. Through This Hearing, it may be worthwhile for this Committee to explore– new and innovative programs.

I would like to suggest a Solution— A Refined Net Interest Deduction for Lenders —– (which I will refer to as an NID) — provides a solution to the toxic mortgage crisis— by preventing foreclosures — saving and creating jobs — reducing unemployment — enhancing small business lending — and saving California’s small businesses.
In its present form, the NID provides tax savings for Lenders, who make loans directly to Enterprise Zone businesses. This effectively gives the Lenders tax-free treatment on the interest income earned on these loans.

The current NID should be extended to include Lender loans made to small business owners, who took out mortgages on their homes, whether they were toxic or conventional fixed-rate mortgages, and invested the cash into their newly created or existing businesses, within Enterprise Zones. The tax savings, both current and retroactive, should be mandated to benefit these small business owners by lowering their monthly payments— and by principal reduction on their mortgages.

This Committee has a unique opportunity to target Enterprise Zone small business owners with toxic mortgages, and save them and their employees in the next 5 critical years as these mortgages reset.

There should be no difference, between a loan which was made directly to a business within an EZ, and a loan that was made to a small business owner, who mortgaged the home to fund the business, within the EZ. This should apply regardless of whether the small business owner’s home is located within or outside of an EZ.

The normal Lender-to-Small Business type of financing is not the only means by which businesses access cash for their business operations. Studies show that small business owners often got mortgages on their homes to fund their newly created or existing businesses. Bankers estimated that at least 90% of first-time small business owners used their homes as collateral, and 54.2% used their home as collateral for the business’s subsequent cash flow needs.

The results of these studies are not so surprising if you consider that a new business often does not have a track record nor sufficient assets to serve as collateral to get a business loan. Any subsequent financing requires cumbersome paperwork, including financial statements, income documentation, and an established credit history. Refinancing the home is the easiest way to meet the small business cash flow needs.

The Refined NID will provide tax savings for Lenders, which should be mandated to help small business owners, to reduce the current and future monthly mortgage payments to affordable amounts.

The retroactive application to prior years, will provide a windfall of tax refunds for Lenders through amended tax returns for the past 4 years. This tax refund windfall should be used for mortgage principal reduction. By reducing Principal, the equity in the home will increase and provide an opportunity for the small business owner to acquire additional cash for the business through refinancing.

Since California leads the nation with in excess of 1.9 million underwater borrowers, who are in negative equity, this principal reduction will mitigate the negative equity problem for these small business owners by increasing their equity in their homes.

The Principal pay-down will stimulate small business lending. The tax refund windfall will provide an inflow of cash to the Lender which can be used to make more loans to small businesses. Today, banks are not lending to small businesses due to the Lender’s lack of liquidity which is restricting economic growth.

This is a win-win for small business owners and Lenders. Small business owners will benefit by lower monthly mortgage payments, avoid the expected spike at the resetting of their toxic mortgages, and additional Home Equity for refinancing. This will benefit all small business owners, including those with conventional, fixed-rate mortgages. The reduction in financing costs on these mortgages will improve the small business chances of survival in this economic downturn.

Lenders will benefit by providing loan modifications to comply with the Obama Administration’s push for loan modifications to prevent foreclosures. The tax savings will lower the small business owner’s monthly mortgage payment and will not cost the Lender a dime as other loan modifications require Lenders to recognize a loss on the reduced monthly payment.

The lender will benefit in another way. Since the foreclosure rate in California is among the highest in the nation, these loan modifications will prevent foreclosures and save lenders,- as the average cost of a foreclosure is as much as $50,000.

The Net Cost to California Should Be Zero. The cost of the Refined NID program should not only be borne by the State of California alone. The Obama Administration may view the Refined NID as a complementary program to Treasury’s “Making Home Affordable” (MHA) program to enhance loan modifications and foreclosure prevention. President Obama has allotted $75 Billion from the TARP for this purpose, but it has fallen short of its goals. MHA was intended to save 8 to 9 million foreclosures, but instead only 487,000 are in the trial period, and a few thousand have succeeded in converting their trial modifications into longer term modifications.

The MHA program is failing !!! According to the Congressional Oversight Panel’s October 9, 2009 report, the MHA program must be reworked to address the most important aspects of the foreclosure crisis, which is the Resetting of toxic mortgages, Principle Reduction, and Negative Equity. The Refined NID can be part of that rework. MHA’s efforts which ignore these factors will doom the success of the loan modification program.

The good news, is that the Refined NID will mandate Principal Reduction, which is a cure for Underwater small business owners with Negative Equity.

It can be suggested that both the Refined NID and MHA program can be coordinated to enhance loan modifications for foreclosure prevention. California may be entitled to reimbursement from Washington. Another approach would be to suggest reimbursement under the Federal Government Economic Stimulus program.

For California, employee layoffs and furloughs now appear to be among the main causes of foreclosures. With rising unemployment leading to higher rates of mortgage defaults, California will be locked-into a Self-Perpetuating Cycle. As the toxic mortgages reset in 2009 through 2012 and spark the 2nd Tsunami Wave of Foreclosures, small business owners will suffer financial distress, —-lose their homes to foreclosure, —and precipitate employee unemployment —which will lead to more foreclosures !!!.

In Conclusion

My Proposed Refined NID for Lenders will target California Enterprise Zone small business owners, with toxic or conventional fixed-rate mortgages, and save them and their employees.

A Refined NID for Lenders will address the major concerns for California’s economic recovery:

• Preventing Foreclosures
• Saving Jobs and Reducing Unemployment
• Enhancing Small Business Lending
• Providing additional Home Equity for Small Business Owners and
• Saving Small Business from failure and bankruptcy.

California has the highest rate of business bankruptcies, according to an Equifax Report, with 10 Metropolitan Areas among the 15 areas with the most commercial bankruptcy filings during June, 2009.

Toxic mortgages are beginning to take their toll on California’s economy !!!

On October 10, 2009, H.D. Palmer, the Governor’s budget spokesman, announced that there was a 5.3 percent drop in the budgeted income tax receipts for the 3 months ended Sept.30, 2009. This can be blamed on the drop in Estimated Quarterly Personal Income Tax Payments.

These personal estimated tax payments are made by small business owners to pay their taxes, on a quarterly basis, for their personal income tax returns. This may be a sign that the toxic mortgages, held by small business owners, are taking their toll as these toxic mortgages are beginning to reset in 2009 and will continue to intensify through 2012.

I and my partner, Jung Song, of Bornstein and Song CPAs & Consultants, would be happy to work with the Committee to develop the Refinement of the Net Interest Deduction for Lenders.

I welcome any questions that you may have.

Part four of the hearing included the following speakers:

IV. Business Activity within G-TEDAs: Focus on Small Business Development

• Samuel D. Bornstein, Professor, Kean University School of Business, Union NJ
• Daniel Fitzgerald, Executive Director, Calexico-County Enterprise Zone
• Matthew Gordon, Owner, Aztec Appliance
• Carlton Hargrave, Owner, Hargrave Restaurant Group, Hometown Buffet, and Imperial Catering
• Manuel Quintero, Director, Knight and Carver Wind Group
• Pamela Kvitli, Director, Laing Technologies, Inc.

Here is the first part of the fourth panel:

JEDE Committee Hearing 10-19-09 Clip 5 from Max Shenker on Vimeo.

And the remainder of the fourth panel along with answers to the Chairman’s questions:

JEDE Committee Hearing 10-19-09 Clip 5 from Max Shenker on Vimeo.

The final clip are the public comments:

JEDE Committee Hearing 10-19-09 Clip 7 from Max Shenker on Vimeo.

The following video segment covers part III of the agenda, however part of the panel was not recorded.  This clip begins in the middle of some comments by Senator Denise Ducheny and then continues the third and fourth presenters.  The agenda listed for this panel:

III. Measuring Success

• Lydia Moreno, Business Incentives Program Manager, City of San Diego, Office of the Mayor, Economic Growth Services
• Michael Bolden, Political and Legislative Advocate, American Federation of State, County and Municipal Employees
• Darren Solomon, Regional Director, Pacific Community Ventures
• Jim Euphrat, Tax Manager, Government Relations & Business Planning, National Steel and Shipbuilding Company (NASSCO).

JEDE Committee Hearing 10-19-09 Clip 4 from Max Shenker on Vimeo.

The following two video segments cover the first panel from the 10/19/2009 hearing in San Diego.  Here is the link to the final agenda, and the first panel of presenters were:

• Brian McMahon, Executive Director, Employment Training Panel
• Murtaza Baxamusa, Research Director, Center on Policy Initiatives
• Carrie Portis, Executive Director, San Francisco Works
• Vicky Lovell, Senior Policy Analysts, California Budget Project
• Ramon Valdez, Accountant, E&E Industries

JEDE Committee Hearing 10-19-09 Clip 2 from Max Shenker on Vimeo.

JEDE Committee Hearing 10-19-09 Clip 3 from Max Shenker on Vimeo.

We have had some technical difficulties getting the video from the 10/19/09 JEDE hearing in San Diego, but the initial bit is in.  This first clip includes all of the introductory remarks before the first panel of presenters.  It includes remarks by the Chairman, Manuel Perez; Jennifer Vanica, President of the Jacobs Foundation; Assemblymember Marty Block; and Assemblymember Mary Salas, and Committee consultant Toni Symonds. Here is the final agenda from that meeting.

At the very end of the clip Mary Salas makes what I find a critical comment:

There were certain points of legislation that were introduced last year that would have significantly changed the way Enterprise Zones operate. So this hearing is very, very important to make sure there are no unintended consequences in what we do, and that the Enterprise Zones continue to operate in a manner that are conducive for job development and job growth and the success of our business community.

Too often the legislative process fails to fully consider these “unintended consequences.”

Here is the video:

JEDE Committee Hearing 10-19-09 Clip 1 from Max Shenker on Vimeo.

The office of Assemblyman V. Manuel Perez just released the following press release:

(CALEXICO) – Today, Chair of the Assembly Committee on Jobs, Economic Development, and the Economy, V. Manuel Pérez (D-Coachella) held a roundtable meeting to discuss proposed changes to the California Enterprise Zone Program and other Geographically-Targeted Economic Development Area (G-TEDA) programs. Roughly 35 people attended, including leaders from the Calexico County, Imperial Valley, and Coachella Valley Enterprise Zones, city council members, and business owners who either operate businesses in the zones or are interested in relocating to one.

“We have spent many months developing a varied set of recommendations, gathering them through a public process that included hearings held in Sacramento, San Diego, and San Jose,” said Pérez. “Before we head into the next legislative year, I wanted to hear directly from local business and zone staff in the 80th District to gain their perspectives about the many different proposals we have in front of us.”

The meeting was held at the Hometown Buffet, located in the Calexico County Enterprise Zone. About the meeting, owner Carlton Hargrave remarked, “As a member of the Calexico community I was extremely proud to have Assemblymember Pérez host an Enterprise Zone roundtable here in our region. The economic benefits of this program are very important to our city and county and I appreciate the opportunity to have direct input on legislation and policy being worked on in Sacramento.”

Imperial Valley Enterprise Zone Manager Diane Cason also expressed enthusiasm for the event: “It is extremely beneficial to have the Assemblymember meet directly with the locals and ask them for their input. The roundtable was a great opportunity to speak with him one-on-one.”

The roundtable caps off a series of meetings and hearings conducted over the last several months by the Committee to thoroughly examine the state’s Enterprise Zone program to ensure it is meeting the needs of local communities during this time of recession.

The Assembly Committee on Jobs, Economic Development and the Economy is the policy committee within the California State Assembly responsible for reviewing policies and legislation related to small business development, international trade, G-TEDAs and other economic development related issues. The committee regularly publishes reports on these areas of interest. Copies of these reports are available online at www.assembly.ca.gov.

FOR MORE INFORMATION, please contact Antonio Ortega at 916-319-2080 or Amy L. Wilson at 916-319-2080.

Here is another updated agenda for Monday’s hearing in San Diego.

Here is an updated draft agenda for Monday’s hearing in San Diego.

Here is some more of the resource material presented at the hearing:

1. The white paper prepared by Toni Symonds, chief consultant for the JEDE Committee, and updated for the hearing. (77 page PDF)

2. The white paper prepared by Blake Christian, CPA of Holthouse, Carlin & Van Trigt covering important topics such as the limitations on the use of EZ tax credits.

Update: The San Jose Redevelopment Agency was kind enough to share a couple of photos from the hearing:

 Left to right: Toni Symonds, Assemblyman V. Manuel Perez, Assemblyman Jim Beall Jr.

San Jose Mayor Chuck Reed

Here is the final version of the agenda from last week’s hearing with the actual list of speakers.  This hearing predominantly featured the perspectives of businesses that utilize the program and the local governments who administer it.

It was notable that AB 1139 author Assemblyman John Perez was present for most of the meeting and engaged the presenters in serious dialogue highlighting some differences in understanding the actual purpose of the program.

On the second panel, John Weiss, Assistant Executive Director, San Jose Redevelopment Agency, gave a Power Point presentation which provided a very good perspective on how the program is being utilized in San Jose. The City was kind enough to provide me with a copy of the presentation here.

Arguably, the highlight of the hearing came at the very end of the public comment section when Andrew Myrick, manager of the new Salinas Valley Enterprise Zone, gave an impassioned presentation on the perspective from his zone.  The Committee Chair was clearly moved and invited Myrick to present again in a forum which woud have a larger audience.  I asked Andy if he happened to have his remarks in writing, and he provided me with the following notes:

Although the TEA is the most used criterion for claiming hiring credits, this is because it is the easiest one procedurally for businesses.

o Because an employee is claimed under the TEA does not mean they could not have been claimed under another criterion. For example, an employee residing in a TEA could also be eligible for CalWORKS. This information does not show up in the statistics.

o We are working with the Monterey County OneStop Career Center (the local CalWORKS, WIA, and WIB Administrator) and they have agreed to review all of the TEA vouchers we approve and see if they can determine if they would qualify under another criterion. Hopefully, this will provide information about the use of the TEA.

o OneStop is also pre-screening job-seekers to see if they qualify them for credits. If they qualify, they are giving them “Gold Cards” with information on the Enterprise Zone that they can show to potential employers. Employers can contact OneStop for more Zone information and to get the documentation necessary to obtain the Credits. This helps employers identify potential employees at the hiring phase, rather than simply claiming the credit after the fact.

Even if every person living in a TEA may not be individually disadvantaged, the true value of the TEA lies in rehabilitating suffering communities.

o Unemployment in the Salinas Valley is (and has been) double-digit for years…some communities already unemployment of 20%-25%.

o If past trends continue, some communities in the Salinas Valley could see unemployment rates of 35%-40% in the coming months when the ag jobs heads south for the winter.

o The unemployed and their families are attractive targets to criminal gangs looking to recruit new members.

o We have implemented a new program in Salinas known as Operation Ceasefire. It involves offering gang members a chance to get out of the gang lifestyle through incentives of job training and support services.

o The Enterprise Zone has partnered with Operation Ceasefire to help them in their efforts. We can help convince the targeted youths that getting a job is a real possibility because their first-year wages will be cut in half through EZ tax credits. Similarly, businesses will be more willing to take a chance on these youths if there is a financial incentive to do so (for this reason, tax credits should remain high during the first year of employment…providing low credits during the first year provides little incentive for a business to take a chance on that employee).

o The TEA is vital in helping us to make sure that every at-risk youth would qualify for tax credits.

The threshold for the Employee Tax Credit should be increased

o We will be making efforts to publicize this benefit by putting information on our website and training VITA program volunteers in how to claim the Credit.

o However, the threshold is too low – a full-time minimum wage worker would make too much to qualify for the credit.

o This limits its effectiveness. We don’t know where the threshold should be, but we believe it is too low if even minimum wage workers cannot take advantage of this program.

Here is the updated agenda for the next hearing to be held in San Diego on the 19th.

Yesterday was the second of three hearings being held by the Assembly Jobs, Economic Development and the Economy Committee.  Unfortunately, there was no recording of the meeting, so I will have to try to use some of my notes to reconstruct the event.

For starters, here is a video news report from San Francisco ABC affiliate channel 7 which has some footage from the hearing.

Here is the latest version of the draft agenda for the next JEDE Committee hearing on October 8th.  Now we have a schedule and a location:  From 10:30 am to 2:00 pm at the Roosevelt Community Center, 901 East Santa Clara Street, San Jose, CA 95116.

Thank you for the feedback on my poll, based on the results I’ve reverted to linking the document in good old fashioned PDF.

The following document is a table of all proposed changes thus far to the Enterprise Zone program being considered in the JEDE Committee hearings. The next hearing is currently scheduled for October 8th in San Jose.

JEDE Committee Summary List of Reform Issues (DRAFT) –

Find all related blog posts on the JEDE hearings here.