BILL ANALYSIS SENATE LOCAL GOVERNMENT COMMITTEE Senator Gloria Negrete McLeod, Chair BILL NO: SB 1103 HEARING: 2/20/08 AUTHOR: Cedillo FISCAL: No VERSION: 1/15/08 CONSULTANT: Ali-Sullivan Local Economic Development Subsidies Background and Existing Law Counties, cities, and their redevelopment agencies engage in a wide variety of economic development activities to build their tax bases. Local officials use their regulatory powers, direct spending, and tax policies to influence where, when, and how the private sector invests capital and improves real property: Regulatory tools include general plans, zoning, and subdivision standards. Direct spending includes building public works projects like dams, water systems, sewers, levees, and roads. Spending also includes grants, loans, and site preparation. Tax policies include lower tax rates for selected taxpayers and tax abatements where officials return the revenues to the taxpayers. Local officials sometimes use their economic development powers to induce businesses to relocate to their communities. State law bans counties, cities, and redevelopment agencies from subsidizing the relocation of big box retailers and auto malls within the same market area (SB 114, Torlakson, 2003). How local officials use their regulatory powers is relatively transparent because state law requires public notice, public hearings, and environmental reviews. State requirements for local budgets, annual financial reports, and regular audits allow constituents to review most of the direct fiscal decisions. Some groups worry that local economic development subsidies don't get the same public scrutiny as budgets and regulatory decisions. They want local officials to require "community benefit agreements" in which private developers provide job training, local hiring and supplier SB 1103 -- 1/15/08 -- Page 2 preferences, community services, and affordable housing in return for the local subsidies. Groups used this process successfully in downtown Los Angeles for recent redevelopment projects (1999-2001). To promote these agreements, they want local officials to report more information about local economic development subsidies. Proposed Law Starting on January 1, 2009, Senate Bill 1103 requires a city, county, or redevelopment agency to provide information before it approves any economic development subsidy within its jurisdiction. The following information must be available to the public in writing and through the local agency's internet website: The name and address of the beneficiary. The start and end dates, along with the schedule for the subsidy. A description of the subsidy, including an estimate of the total expenditure of public funds or revenue lost to the local agency. A statement of the subsidy's public purpose. Projected tax revenue to the local agency as a result of the subsidy. Estimated number of jobs created by the subsidy, broken down by full, part time, and temporary positions. SB 1103 defines an "economic development subsidy" as any expenditure of funds or loss of revenue to a local agency of $100,000 or more for stimulating economic development. The bill provides a non-exclusive list of examples, including: Bonds Grants Loans Loan guarantees Enterprise zones Empowerment zone incentives Tax-increment financingFee waivers Land price subsidiesMatching funds Tax abatements Tax exemptions Tax credits The bill excludes spending on --- or revenue losses from --- affordable housing from this definition. SB 1103 -- 1/15/08 -- Page 3 Before a city, county, or redevelopment agency grants a subsidy, SB 1103 requires the local agency to hold a public hearing unless another law already requires a hearing. The information must remain available to the public during the term of the subsidy. Starting October 1, 2010 and every odd year thereafter, local officials must provide a report on these subsidies. For subsidies that last 40 years or more, there is a six year reporting requirement. Every two years, starting November 1, 2010, local officials must hold a public hearing to consider comments on these reports. When a subsidy ends, the local agency must file a final report. Comments 1.Shedding light . Economic development subsidies are among the most widely used tools that cities have to redevelop underperforming areas and stimulate local economies. While residents benefit from better economic conditions, it is typically private developers who directly benefit from these subsidies. SB 1103 provides transparency and accountability for these decisions. By providing detailed information at the inception of a project, local communities will have the necessary information to see the proposed subsidy's actual costs and benefits. Further, SB 1103 provides the public with biennial reports about a subsidy's effects, along with a final report at the completion of a subsidy. SB 1103 does not stop local officials from giving subsidies for economic development; instead, the bill gives the public insight into costs and benefits they might not otherwise understand. 2.Mind your own business . City council members and county supervisors are local elected officials, directly responsible to their own constituents. How they promote local economic development --- regulations, budgets, taxes --- are questions that should be asked and answered within each community. Unless there is a compelling statewide interest in protecting individual rights and property rights, the Legislature should honor the concepts of home rule and local control. The Committee may wish to consider whether state-mandated disclosure reports on economic development are an unwarranted intrusion into local SB 1103 -- 1/15/08 -- Page 4 affairs. 3.What the Governor said . Governor Schwarzenegger vetoed SB 103 (Cedillo 2007), a bill that was nearly identical to this year's SB 1103. His veto message affirmed the Administration's commitment to open government, but claimed that the bill did not offer any significant additional information. The Governor said that "existing procedures already ensure that the public is informed about all decisions made by their local government representatives." He further argued that new local reports would cost the State General Fund millions of dollars and result in delaying economic assistance. Given the Governor's opposition to a nearly identical bill, the Committee may wish to consider whether SB 1103 will fare better this year. 4. Successful community involvement . Community benefit agreements are a recent innovation in which interest groups, public officials, and developers identify how proposed projects may benefit local residents. Just as developers ask for particular concessions --- fee waivers, tax rebates, public works --- community groups ask for hiring preferences, job training, and health care benefits. Communities could use future economic development subsidies to leverage community benefit agreements. SB 1103 begins to build the data base for these discussions, but no one really knows how well the practice will work in a wider context. Rather than create a permanent program, the Committee may wish to consider putting a sunset on this new mandate. After two biennial reporting cycles, legislators could reassess the statute's usefulness. Should SB 1103 require an evaluation in 2014 and a potential sunset in 2015? 5.State-level attempts . For nearly 25 years, state law has required the State Department of Finance to give legislators an annual report on state tax expenditures (SB 1379, Alquist, 1984). The Legislative Analyst's Office produces its own evaluation of tax expenditures which is more detailed than Finance's annual report. The Franchise Tax Board has looked into a wide range of tax expenditures for state income and corporate taxes. The California Budget Project report has offered, Maximizing Returns: A Proposal For Improving The Accountability Of California's SB 1103 -- 1/15/08 -- Page 5 Investments In Economic Development (2002). State officials have started to ask questions about tax expenditures, but legislators have yet to ask the same tough questions about the state's direct subsidies. 6.Legislative history . SB 1103 is very similar to SB 103 (Cedillo, 2007) and SB 1268 (Cedillo, 2006); both passed this Committee on 3-2 votes. SB 1268 died in the Senate Appropriations Committee. Although SB 103 passed both houses, Governor Schwarzenegger vetoed last year's bill. Support and Opposition (2/14/08) Support : American Federation of State, County and Municipal Employees AFL-CIO, Affordable Housing Coalition of San Diego, The California Alliance for Consumer Protection, California Tax Reform Association, Center for Policy Initiatives, East Bay Alliance for a Sustainable Economy, Los Angeles Alliance for a New Economy. Opposition : California Redevelopment Association, California Association for Local Economic Development, California Taxpayers Association, League of California Cities.