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  




           
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          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. 






          
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          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  





           
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          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  





           
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          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.