BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 1069 HEARING: 7/6/11
AUTHOR: Fuentes FISCAL: Yes
VERSION: 5/18/11 TAX LEVY: Yes
CONSULTANT: Lui
FILM TAX CREDIT
Extends the California Motion Picture Tax Credit to July 1,
2019.
Background and Existing Law
In 1985, the Legislature established the California Film
Commission (CFC) to coordinate state and local governments'
efforts at providing an environment conducive for the film
industry. 21 members of the film industry, private sector,
and state and local governments are appointed by the
Governor, Senate Pro Tem, and Speaker of the Assembly to
sit on the CFC board.
In 2009, Governor Schwarzenegger signed the California Film
& Television Tax Credit Program (Film Tax Credit Program)
as a part of the 2009 Budget plan to promote film
production and create and retain jobs in California (SBX3
15, Calderon, 2009, and ABX3 15, Krekorian, 2009).
Qualified motion pictures, defined as: a) feature films
with budgets between $1 million and $75 million; b) movies
of the week with a minimum budget of $500,000; and c) new
television series with a minimum $1 million budget, may
apply for the credit. Also, 75% of the motion picture
shooting days must take place in California, or 75% of the
motion production budget pays for services or the purchase
or rental or property within the state.
Commercial advertising, music videos, motion pictures for
non-commercial use, news and public events programs, talk
shows, game shows, reality programming, documentaries, or
sexually explicit films are not eligible. Any 5% owner of
the qualified taxpayer, defined as a taxpayer who has paid
qualified expenditures and has received a credit
certificate by the California Film Commission, or any
individual related to the taxpayer is ineligible for the
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credit.
The CFC allocates $500 million -- $100 million in tax
credits annually -- from fiscal years (FY) 2009-10 to FY
2013-2014. The CFC must set aside $10 million credits each
FY for independent films, defined as a motion picture with
a minimum budget of $1 million and maximum budget of $10
million and is not publicly traded. The CFC must provide
FTB an annual list of qualified taxpayers and the tax
credit amounts allocated to each qualified taxpayer. The
amount of the tax credit is equal to either:
20% of the qualified production expenditures of a
motion picture; or
25% of the qualified expenditures of an independent
film or a television series that relocated to
California.
Any unallocated credit from the previous FY may be carried
over and reallocated by the CFC. The recipients began
claiming credits on January 1, 2011. The process for
applying and receiving the tax credit follows:
Taxpayers apply to the CFC for the allocation and
submit the following information:
o The motion picture production budget,
o Number of production days,
o A financing plan for the production,
o The production's financing plan,
o Total wages paid and the amount of
qualified wages paid to each qualified
individual,
o The diversity of the workforce employed
by the applicant, and
o Any other information the CFC or
Franchise Tax Board deems relevant.
The CFC establishes criteria for allocating tax
credits, then it determines and designates applicant
eligibility.
The CFC processes and approves, or rejects,
applications on a first-come, first-serve basis.
If a project is approved for a credit, the project
must shoot within 6 months and be completed within 30
months from the date when the application was approved
by the CFC.
Before the CFC issues a taxpayer a credit
certificate for an amount not to exceed the original
credit allocated, the taxpayer must provide the CFC
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with verified completion and documentation of actual
qualifying expenditures. Qualified expenditures are
amounts paid or incurred to purchase, or lease,
tangible personal property, wages, or services
performed in the state, during the motion picture
production in California.
CFC awards the credit after the production is completed and
the project certifies its expenditures with a CPA. The
credit allows the taxpayer to claim the credit on their
file tax return with the Franchise Tax Board (FTB) under
the personal income tax or the corporate tax law. If the
project is awarded a tax credit, taxpayers may:
Claim the credit directly,
Assign the credit to another member of their
unitary group,
Independent taxpayers may sell the credits to other
taxpayers, or
Apply the credit against their sales and use tax
liability.
If there is any unused credit, it may be carried forward to
each of future six taxable years, or until the credit is
exhausted. If the credit exceeds a qualified corporate
taxpayer's liability, the taxpayer may elect to have any
portion of the credit assigned to one or more of its
affiliated corporations.
Proposed Law
I. Extension. Assembly Bill 1069 authorizes the California
Film Commission to allocate $100 million film tax credits
annually for five fiscal years, starting July 1, 2009 until
July 2019.
II. Technical. When the original film tax credit measure
was enacted into law in 2009, there were two bills which
carried the same provisions: ABX3 15 (Krekorian) and SBX3
15 (Calderon). Both bills were signed into law and
codified.
Assembly Bill 1069 repeals provisions of the Revenue and
Taxation Code as Section 4 of Chapter 10 of the 3rd
Extraordinary Session of the Statutes of 2009, while
extending the sunset provisions of Chapter 17 for five
AB 1069 - 5/18/11 -- Page 4
additional years.
III. Clarification. Assembly Bill 1069 makes several
clarifications to resolve the FTB's technical
considerations.
1. Any unrelated party or parties to the film project
that purchases a tax credit must be treated as a
qualified taxpayer.
2. An affiliated corporation or corporations assigned
a credit must be treated as a qualified taxpayer.
3. Limitations on taxpayers' amount of credit or
carryforward credit do not apply to the film tax
credit. This exclusion applies for taxpayers that
that directly, or indirectly, own an interest in a
corporation.
4. Limitations on the amount of any credit, including
carryover credit from prior years, that may be applied
to reduce the taxpayer's "tax" - taxable income,
S-corporation taxes (a corporation that elects to be
taxed under the S chapter of the Internal Revenue Code
and passes along the corporation's income gains or
losses to its shareholders), corporation franchise
taxes, or corporation income taxes -- also do not
apply for the film tax credit.
State Revenue Impact
The Franchise Tax Board estimates AB 1069 to incur
escalating annual revenue losses: $11 million in FY
2012-13, $49 million FY 2014-15, $83 million in FY 2015-16,
and $357 million for the fiscal years thereafter.
Comments
1. Purpose of the bill . When 43 other U.S. states and
overseas production companies offer enticing tax subsidies
for film and TV productions, California loses big. A 2011
Los Angeles Economic Development Council (LAEDC) economic
impact study puts nearly 39% of national motion picture and
video industry employment and 60% of labor industry in
California. That amounts to around 20 million jobs. The
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study further states that the industry purchased $6.4
billion in goods and service, $1.7 billion in advertising,
and $1.5 billion in rental or real estate services-an
aggregate amount of $15.4 billion spent on goods and
services in California. The productions that leave the
state to pursue other state or international incentives -
"runaway productions" -- translate to significant job and
economic losses. The same economic study found that in the
first two years of the California Motion Picture tax credit
program, the credit generated more than $3.8 billion in
economic output, supports 20, 040 union labor jobs in
California, and will return $200 million to state and local
governments. Film L.A., the permitting agency for Los
Angeles, reports that in 2010, feature film production
posted a 28.1% fourth quarter gain and a year-over-year
gain of 8.1%, which can be wholly attributed to the film
tax credit. California has a historical comparative
advantage over other states, because of the
long-established film industry and the high-paying talent
pool that resides in state. Coupling the state's natural
beauty, clement weather, and high-tech media studios with
the tax incentive retains and attracts production to
California. However, if the film credit is left to expire
next summer, proponents of AB 1069 argue that California's
film industry will steadily become uncompetitive, as other
locations invest in and develop their own infrastructure
and talent pools. Moreover, the state will no longer draw
ancillary economic benefits from tourism. AB 1069's tax
credit extension provides the necessary economic stability
to retain and attract film industry productions back to
California.
2. Quiet on the set . Proponents of tax credits argue that
subsidies pay for themselves, but the Center on Budget and
Policy Priorities, the Legislative Analyst's Office, and
the California Budget Project tackle three of the
proponent's most common assertions-- that the entertainment
industry attracts jobs and creates substantive ancillary
effects-caterers, florists, housing for crewmembers or to
the projects-for the state.
First, tax credits reward behavior that would have
occurred without the subsidy. Some productions that
receive the tax credit may have filmed in California
regardless of a credit because of technological
demands that are only available in California studios
or because certain film talent demands filming in
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California. In these instances, the state receives no
benefit attributable to the subsidy. According to an
economic study by the Massachusetts Department of
Revenue on the Commonwealth's film tax program, it
concluded that 7% of Massachusetts' film productions
would have taken place even if these subsidies had
never been enacted. AB 1069 fails to address these
circumstances.
Second, extending the credit an additional five
years means that Californians must take up front cuts
in education, public safety, or other health and human
service programs that benefit the public at large.
Film subsidies are costly to the state but generous to
a highly mobile industry that can leave to take
advantage of different tax incentives, lower labor
costs, and growing technological studios. When
seeking to balance difficult budgets, long-term
economic development funds should target specific
programs that would be more likely at producing
long-term economic benefits, like investment in human
capital. The Committee may wish to consider if AB 1069
is an appropriate investment given that the state is
already undergoing painful spending cuts.
Third, economic analyses of film tax credits vary
greatly. Some studies attest to the credit's large
potential benefit to the state, while others consider
the credit a boon to state coffers. Other than the
Massachusetts Department of Revenue, there have been
few other independent, in-depth empirical studies to
evaluate a film subsidy. According to the Center on
Budget and Policy Priorities, the Ernst & Young study
on New Mexico's film tax subsidy relied on exaggerated
tourism impacts, failed to provide a complete
explanation of methodology, and inaccurately depicts
film's expenses. Do the studies count how many new
jobs are actually created, or is it a measurement of
shifting jobs? The LAEDC study, like the Ernst & Young
study, does not disclose any detailed budget data, but
instead samples only nine of the 77 productions to
complete their study. How many of the nine films were
feature films, televisions series, or a
movie-of-the-week? How many of the employment figures
reflect "new" jobs that would have otherwise not been
in the state? How many of those employed on one
project were re-employed on another project? At this
point it is too early to discredit the LAEDC study,
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but the study works under many questionable
assumptions, like that all rank and file workers are
California residents or that it fails to take into
account the tax revenue that could be generate from
income taxes on the sales of tax credits to other
persons or corporations.
The Committee may wish to consider the validity of the
proponent's assertion that the film industry creates
long-term economic development-stable jobs and income -- if
the industry itself is inherently mobile and provides
"stable" jobs that are contingent upon hiring for a new
project. The proponent's offering of ancillary benefits
may be entirely insufficient to cover the cost of
incentives. Before authorizing a $500 million credit, the
Committee may wish to request additional empirical data on
the utilization of the existing credit.
3. Creative talent . Perhaps the highest level of
creativity in Hollywood is the creative accounting, where
high worth studios show no profit. For example, Forrest
Gump, one of the highest grossing movie productions, showed
no profit. As a result, the film tax credit is not
actually a credit against the "net tax" because there is no
profit from which to write off the credit. Hollywood
studios use opaque accounting methods to budget and record
profits for film projects. Expenditures can be inflated to
reduce or eliminate the profit of the project thereby
reducing the amount which the corporation must pay in
royalties or other profit-sharing agreements based on the
net profit. Further, studios create LLC's -limited
liability corporations -- so that no profit shows in the
corporation itself but instead, profit is attributed only
to the LLC. Also, the fact that independent projects can
sell the credit to another group further exacerbates the
creative accounting. The Committee may wish to consider an
amendment that disallows the credit sharing, credit sales,
and the sales tax rollover.
4. Positive upticks . According to Film LA, Los Angeles
suffered the lowest record for on-location feature filming
- 4,976 permitted production days - in 2009, 64% below its
historical peak, 13,980 permitted production days, in 1996.
But in January 2011, Film L.A. announced that on-location
filming for feature films, television, and commercials
increased nearly 15% in 2010 compared to 2009-37,979
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permitted production days (2009) compared to 43,646
production days. Film L.A. specifically and wholly
attributes the tax credit to increasing on-location feature
filming. The CFC estimates that over $697 million in wages
have been paid to below-the-line workers who, according to
the LAEDC's assumptions, are all California residents. As
a result of the tax credit, dozens of new feature film
projects were responsible for 26% of the local feature
production for the year.
5. You're gonna be a star . California's film tax credit
provides one of most modest incentives compared to other
states. Unlike Massachusetts, Michigan, Pennsylvania, or
New Mexico, California's film tax credit is not an
open-ended subsidy or is it as generous as New York's $420
million per year film incentive. California's film credit
requires that 75% of the shooting or the production budget
must be spent in-state, directly benefitting the state's
economy and businesses. The CFC will only distribute the
credit once the shooting and production have been invested
in the state, and the project submits CPA audited cost
reports. Because some talent stays in California, those
individuals' incomes contribute to the state's revenue
streams. Labor remains employed, and there is a $10
million set-aside for independent projects, assuring
equitable distribution of credit between large and small
projects. Moreover, the CFC requires that the project
remains accountable to specific timelines, and it is
structured in a manner to show immediate benefits. Doesn't
a responsible tax credit - one that is capped, allocated,
and has a sunset - like the film tax credit, provide a
positive, stable, and reliable business environment to
attract and retain entertainment projects and jobs? To
further the positive impact for the state, the Committee
may wish to consider an amendment that would allow only
wages paid to California residents to qualify for tax
credit.
6. Lackluster performance . According to the Center on
Budget and Policy Priorities, the 43 states that offer tax
subsidies spent around $15 billion on film tax subsidies.
In 2009, those funds would have paid for the salaries of
23,500 middle school teachers, 26,600 firefighters, and
22,800 policy patrol officers. Did those subsidies pay
off? Other states, like Kentucky and Michigan have since
rescinded or scaled back their offerings, after lackluster
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performances. Yet, California's entertainment industry
advocates point that if California fails to enact an
extension, the film industry will runaway to other states,
citing New Mexico's and Louisiana's generous tax credits.
Were those states' forays successful? Film and video
production employment fell in both states-20% in New
Mexico, and 50% in Louisiana, compared to the national
average of 10%. In July 2010, New Mexico's largest sound
studio, Albuquerque Studios, Inc. filed for bankruptcy. If
AB 1069 is about staying competitive, the Committee may
wish to consider weighing the state's priorities in
creating a competitive film industry versus investing in
other state programs, like education or public safety,
which would make California competitive in different
respect.
7. Race to the bottom . Numerous factors have led U.S.
film productions to move abroad-worldwide demand for
entertainment, new high-tech studios, different media
technologies, and international tax incentives. There are
other influences that facilitate runaway productions.
Asserting that California's lack of tax incentives is the
sole reason film productions decide against coming, or
staying in, California disingenuously pits the state
against the industry. AB 1069's solutions to runaway
production narrowly focuses on allocating a generous tax
incentive, but it may be inadequate to counter the movement
and production abroad. The Committee may wish to consider
how a "race to the bottom" with taxpayer funds adequately
addresses outside globalizing forces.
8. Stuff that dreams are made of . The CFC reports that in
its first year, the aggregate direct spending by the 70
approved projects was $1.2 billion: $453 million in
qualified wages for actors, directors, writers, and
producers; $430 in additional expenditures. Around 18,200
crewmembers and 4,000 cast member have been, or will be,
hired by approved projects. An estimated 113,000
individuals will receive daily employment as background
players. For the FY 2010-11, CFC reports that 43
applications exhausted the $100 million allocated in
available funding for the fiscal year on the first day of
the application period. For the FY 2010-11's 43 projects,
that's an estimated aggregate spending of $969 million,
7,500 crew and 2,100 cast member to be hired by the
project, and an additional 59,000 background players.
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Since the film credit's inception in 2009, around $300
million have been allocated for projects, which amount to
$2.2 billion in aggregate direct spending and $728 million
in total wages paid in-state. The credit was designed to
target productions most at-risk: basic cable TV series,
mid-size feature films, and made for TV movies. As a
result, the film credit was limited to only these projects,
and still demand exceeds supply. According to proponents,
if California fails to enact a film credit extension,
California will lose direct spending or tax revenues
generated from the program. According to the CFC report,
TV series producers are unlikely to film in a location
without the expectation that tax credits will be available
for the future. Yet, high technological productions and
infrastructure must remain in state, and other state's
projects come to California to take advantage of the
state's talent pool. The Committee may wish to consider
the credit's high demand, job figures, and clear success at
drawing projects to file for the credit as reasons to
retain and improve California's signature entertainment
industry.
9. Making an Oscar . Is there a better way to protect the
state's long-term economic interest and financial
investment than a film tax credit? Currently, renewing a
$500 million credit every three to four years is
unsustainable, particularly without any non-industry,
independent economic analysis. Given that the CFC operates
the credit by having projects submit their applications,
and then are placed in a lottery to determine an
application's file order, the Committee may wish to develop
a better mechanism to determine and target which projects
get approved. Though CFC roughly estimates half of the
approved projects to larger studios, and the other half to
independent companies, do large studios have an unfair
advantage over small independent film projects? Larger
studios have the ability to apply queued projects for the
credit while more staff-time in small independent film
projects must be dedicated to file the CFC application.
There could be the possibility that larger studios submit
more project plans than smaller projects and inundate the
lottery pool. Moreover, though the original intent of the
film tax credit was to retain at-risk production, is there
a way to ensure that these at-risk productions, which are
usually the most mobile, don't leave? The Committee may
wish to consider creating standards to approve a project
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based on a project's potential long-term economic impact
and a project's risk of leaving, or return to, California
in the application process.
10. Block-busted ? As part of the 2009 Budget deal, the
multistate formula that multistate firms use to determine
the share of its total income taxable in California changed
(ABx3 15, Krekorian and SBx3 15, Calderon) to a "single
sales factor." Previously, firms used a weighted average
of their California sales, property, and payroll compared
to its totals. Starting in 2011, firms may elect to
apportion using only the sales factor, with the intent to
encourage firms to locate payroll and property in
California. In May, 2010, the Legislative Analyst's Office
(LAO) found that that an elective single sales factor does
nothing for the state's competitiveness. Firms can choose
the formula that will yield a lower tax than the other.
This elective treatment gives no competitive advantage to
companies with large payroll and property footprints in the
state. The film industry was a strong proponent of the
elective single sales factor. At what cost does the state
further subsidize an industry that benefits both from the
elected single sales formula and an additional tax credit?
The Committee may wish to consider an amendment that allows
a choice between this credit or the single sales factor,
but not both.
11. Lights, camera, action . If the state approves the tax
credit extension, the California Budget Project's raised
the question, "should the state subsidize graphic sex or
violence?" Certain states that award tax credits prohibit
projects from negatively portraying the state or including
other compromising content. If California is awarding tax
credit to films, does it have a say in how its funds are
used in the film and content? The credit is not applicable
for news, documentary, and public affairs but may subsidize
movies that can contain graphic violence. Content
provision restrictions clearly raise serious First
Amendment Constitutional issues, but allocating taxpayer
supported assistance to non-edifying films raises the
question on how the general public benefits from a credit
that commits tax dollars to securing film jobs.
12. If you build it, he will come . California already has
large talent pools and existing quality
infrastructure-studios, stage rental facilities, visual
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effects houses, recording and scoring facilities, and
equipment services. In-state educational institutions with
highly-respected industry-specific programs cultivate
future workforce tools and skills to remain in-state. Yet,
despite all these strengths, the LAEDC study, "What's the
cost of runaway production?" points to California's
workforce uncertainties (collective bargaining agreements
must be renegotiated every 3 years) and high cost for
businesses as deterrence for productions from staying or
coming to California. On top of that, the lack of a
competitive film credit pushes potential industry projects
to other states or overseas. The Committee may wish to
weigh the fact that the film industry employs thousands of
unionized labor groups and the industry's positive economic
benefits to the state.
13. This is the beginning of a beautiful friendship . This
bill proposes to extend the existing film tax credit
program for an additional five years, from FY 2013-14 until
FY 2018-19. Given that the existing program is not due to
expire for another two years and that there is only one
study, which bases its results on only 9 out of 77
productions' budgets and makes unquantifiable assumptions,
what's the rush? The Committee may wish postpone the
consideration of the extension until transparent economic
studies conducted by impartial, non-industry experts
determine the program's efficacy.
14. Sunshine and rainbows . To ensure that tax credits are
effective, the Committee has promoted performance based
measures and metrics tied to clear goals and outcomes. AB
1069 meets some of these criteria with a somewhat limited
credit, or grant-like program, because it is capped and
allocated. Although the industry has worked to document
the impact of these tax credits, there isn't agreement on
how best to develop valid and reliable measures of their
impact. Existing economic reports document expenditures,
not necessarily the impact of the credit on the industry or
the long-term effect on the state's economy. To ensure
that the program achieves its stated goals of "enhancing
the economic climate in California," the Committee may wish
to consider amending the bill to provide the following:
Prior to the tax credit's sunset, the program and
its efficacy must be reviewed by the Legislature's
Joint Sunset Review Committee.
Coordinate a taskforce of economists, public
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officials, and industry professionals to submit an
economic analysis for review by the LAO.
Require the CFC to post on its website which
projects have been approved for the upcoming fiscal
years. This amendment seeks to highlight which
studios and agencies have benefitted from their
projects receiving the credit.
15. Glitz and glamour legislation . AB 1069 is not the
first film industry related bill.
SB 1197 and SBx8 55(Calderon, 2009) would have
deleted the fiscal year limitation of the existing
film production tax credit. Both were held in the
Senate Revenue & Taxation Committee.
AB 15 3x (Krekorian, 2009) established a $500
million tax credit for specific expenditures on
qualified productions. The bill limited allocations
to $100 million credit each year. It was signed by
Governor Schwarzenegger.
AB 1696 (Bass, 2007) would have established a
financial assistance program within the California
Film Commission to encourage filming motion picture
and commercials in California. The bill failed
passage on the Senate Floor.
SB 359 (Runner, 2007), as part of the State Budget
negotiations, would have created a credit for a
percentage of the wages paid of amounts paid to
purchase or lease tangible personal property in
conjunction with the production of a qualified motion
picture. The bill would have allowed the credit to be
claimed against the sales and use tax liability of the
company in lieu of the franchise or income tax
liability. The bill would have allowed credits to be
carried over until exhausted. The Senate Revenue and
Taxation Committee held the bill.
AB 832 (Bass, 2007) would have created an unfunded
grant program, as administered by the California Film
Commission, to encourage filming in California. This
bill was held in the Assembly Appropriations Suspense
File.
SB 740 (Calderon), of the 2007-08 Legislative
Session, created a film production credit equal to
100% of the direct revenues attributable to the
production or 125% of the revenues of the productions
in a TV series that relocated to California or an
independent film as defined. Held in Senate Revenue &
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Taxation Committee without a hearing.
AB 777 (Nunez), of the 2005-06 Legislative Session,
authorized qualified motion picture tax credit in an
amount equal to 12% of the qualified production for
qualified wages paid with an additional 3% for
qualified motion pictures. Created refundable credit.
Held in Senate Revenue & Taxation Committee without a
hearing.
The Committee may wish to ask how this bill's policy or
approach is any different from any of its predecessors that
failed passage in the Senate Revenue and Taxation
Committee.
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Assembly Actions
Assembly Arts, Entertainment, Sports, Tourism,
and Internet Media Committee: 9-0
Assembly Revenue & Taxation Committee: 8-0
Assembly Appropriations Committee: 16-1
Assembly Floor: 77-1
Support and Opposition (6/30/11)
Support : American Federation of Television and Radio
Artists; California Labor Federation; California Teamsters
Public Affairs Council; California Taxpayers Association;
Directors Guild of America; Film Liaisons in California
Statewide; Film Musicians Secondary Markets Fund; IATSE
Local 44, 80, 600, 695, 700, 705, 706, 728, 729, 767, 800,
871, 884, 892; International Brotherhood of Teamsters,
Local 399; Motion Picture Association of America, Inc.;
Professional Musicians, Local 47; Recording Musicians
Association; Screen Actors Guild; Sony Pictures
Entertainment; Stu Segall Productions; Unite Here!; City of
Santa Clarita; County of Tulare; Cathy Anderson; Duncan
Crabtree-Ireland; Lucy Steffens, Sacramento Film
Commission.
Opposition : Unknown.