BILL ANALYSIS Ó SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: SB 133 SENATOR MARK DESAULNIER, CHAIRMAN AUTHOR: DeSaulnier VERSION: 1/28/13 Analysis by: Alison Dinmore FISCAL: no Hearing date: April 2, 2013 SUBJECT: Enterprise Zone Act: limiting enterprise zone expansions at reapplication DESCRIPTION: This bill applies to enterprise zone applications submitted on or after January 1, 2014 and prohibits the expansion or aggregation of two existing enterprise zones by more than 15 percent. ANALYSIS: The legislature created the enterprise zone program three decades ago to help grow jobs and businesses in the most economically distressed areas of the state. The program intends to help disadvantaged groups, such as veterans and public benefit recipients, receive those jobs. The Department of Housing and Community Development (HCD) designates geographic areas as enterprise. HCD may designate up to 42 zones and each zone is designated for 15 years. Geographic areas are eligible based on factors such as unemployment rates, free-lunch program participation, median income, plant closures, or history of gang-related activity. HCD selects enterprise zones through a competitive process based on the appropriateness of the applicant's proposed economic development strategy and implementation plan. Additionally, HCD awards bonus points for the most economically challenged areas. Within an enterprise zone, cities, and counties can relax government controls such as permit and development fees, provide tax incentives, expand infrastructure, and target federal grants for education, health and welfare, economic development, vocational education, transportation, and housing. The state provides a number of tax credits and deductions for businesses, including credits for sales and use tax paid on manufacturing SB 133 (DESAULNIER) Page 2 equipment purchased, hiring credits for qualified employees, 100% net operating loss carryover for losses associated with operations within the enterprise zone businesses, and election to expense rather than amortize equipment used within the enterprise zone. The most significant of these tax credits is the hiring credit. Employers within an enterprise zone may claim a credit of 50% of the wages paid to a qualified employee in the first year, 40% in the second year, 30% in the third year, 20% in the fourth year, and 10% in the fifth year. In order to claim a hiring credit, a business must obtain a voucher from the enterprise zone. Current law places a restriction on the expansion of an existing enterprise zone during its 15 year term. An enterprise zone may not expand more than 15% in size from its size on the date of original designation, unless the zone is no greater than 13 square miles. In the latter case, the zone may increase no more than 20% in size from its size on the date of original designation. There is no limit on expansion when a zone applies for redesignation at the end of its 15-year term. This bill , for applications submitted on or after January 1, 2014, limits the ability to expand enterprise zones at reapplication. The bill states that if any portion of the proposed zone is within, or previously was within, the boundaries of a previously-designated enterprise zone, then the aggregate size of the proposed zone cannot exceed the size of the previously-designated zone by 15%. This bill also states that if any portions of the proposed zones are within, or previously were within, the boundaries of two or more previously-designated zones, the aggregate size of the proposed zone cannot exceed the size of the largest single previously-designated zone by more than 15%. COMMENTS: 1.Purpose of the bill . The author states that these changes seek to ensure that the goals of the Enterprise Zone Act are realized by targeting the most economically distressed areas of California. When zones combine, the zone area increases. This makes the zone less valuable and runs counter to the intent of the program to serve distinct communities. Placing limits on increases in zone growth helps to secure scarce state funding for targeted areas to create jobs for SB 133 (DESAULNIER) Page 3 disadvantaged groups and grow businesses. 2.Increasing zone sizes . Data on enterprise zone re-approval has shown that, as of June 1, 2010, HCD reapproved 28 enterprise zones for 15 years. Of those, 12 zones have grown by more than 15%. Over the last decade, the average size of an enterprise zone has increased almost 500%. Most of the increase is driven by the expansion or combination of zones when they apply for re-designation at the end of their original 15-year lifespan. For example, the San Joaquin County zone has grown to 19 times its original size. Additionally, San Diego, Los Angeles, and Sacramento have increased in area by 11, 12, and 22 times, respectively because in the reapplication, these cities aggregated previously designated zones. Los Angeles decreased from five to two zones, Sacramento decreased from three to one zone, and San Diego decreased from two to one zone. Aggregating zones allows for the increase in the cap on the number of zones without legislative authorization. POSITIONS: (Communicated to the committee before noon on Wednesday, March 27, 2013.) SUPPORT: City of Pittsburg OPPOSED: None received.