BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: SB 673 HEARING: 4/3/13 AUTHOR: DeSaulnier FISCAL: Yes VERSION: 2/22/13 TAX LEVY: No CONSULTANT: Lui COST-BENEFIT ANALYSIS OF PROPOSED DEVELOPMENT PROJECTS Requires a city or county to have a cost-benefit analysis prepared for any proposed retail or commercial facility that receives over $1 million in subsidies. Background and Existing Law Cities and counties compete to attract land uses that generate local revenues and shun land uses that need expensive public services. This fiscalization of land use distorts local land use decisions by emphasizing sales tax revenues but discounting traffic problems, air quality, open space, and affordable housing. Some retailers ask local officials for subsidies as inducements to locate in their communities. Placing fewer demands on public services compared to the resulting sales tax revenues, these companies ask local officials to spend public dollars to gain more sales tax revenues. Some companies are aggressive, playing one community off of another, hoping to attract higher subsidies. State law bans counties and cities from subsidizing big box retailers or vehicle dealers to relocate within the same market area (SB 114, Torlakson, 2003). Many local governments rely on analyses to allocate scarce public resources to promote economic development. A cost-benefit analysis quantifies the cost effectiveness of different alternatives to see whether the benefits outweigh the costs. A fiscal impact analysis compares a proposed development's estimated and projected tax revenues with its projected service demands. Although some local governments require fiscal studies from project applicants, state law does not specify criteria to be included in a cost-benefit analysis. SB 673 -- 2/22/13 -- Page 2 Proposed Law Senate Bill 673 requires a city, county, and city and county, including a charter city or charter city and county, to cause a cost benefit analysis to be prepared, before approving or disapproving a permit for construction of a retail or other commercial facility project estimated to receive over $1 million in subsidies. The bill contains provisions related to: I. The Governor's Office of Planning and Research. II. What a cost-benefit analysis must include. III. Findings and declarations. I. Office of Planning and Research (OPR) . Created in 1970, the Governor's Office of Planning and Research (OPR) serves as the state's comprehensive planning agency. OPR researches growth and development, manages state planning grants and coordinates federal grants, and publishes advisory reports, like the "General Plan Guidelines," which advise cities and counties on how to prepare local plans. SB 673 authorizes OPR to prepare the cost-benefit analysis or contract for its preparation with a private entity -- other than the permit applicant -- or another public agency. The bill provides that the private entity or public agency must be qualified by education, training, and experience. II. The cost-benefit analysis . Currently, state law does not require a local government to cause a project applicant to provide a cost-benefit analysis of the proposed development. SB 673 provides that the development project applicant must pay OPR or the state agency, or the city, county, or city and county, for the costs of preparing the cost-benefit analysis. Under SB 673, the cost-benefit analysis must include: A projection of public services and public facilities' cost, resulting from the proposed development's construction and operation, and the incidence of those revenues; A projection of the public revenues from the proposed development's construction and operation, and the incidence of those revenues; An assessment of a city, county, or city and county's cost of incentives; SB 673 -- 2/22/13 -- Page 3 An assessment of how the proposed development's construction and operation will have on the city, county, or city and county's ability to implement its seven general plan goals, including local policies and standards pertaining to land use patterns, traffic circulation, affordable housing, natural resources, open-space lands, noise problems, and safety risks. An assessment of whether the development would require housing demolition, or would decrease or negatively impact extremely low, very low, low-, or moderate-income housing creation. An assessment of whether the development would destroy or demolish parks, green space, playgrounds, child care facilities, or community centers. An assessment on whether the development would create adverse or positive economic impact or blight. An assessment of any available measures to mitigate any material adverse economic impact, as identified by the applicant. III. Findings and declarations . Legislators sometimes insert formal findings and declarations in their bills as signals to the public, other officials, and the courts about the Legislature's intent. Senate Bill 673 contains three legislative findings and declarations to support its purpose. The bill also provides that the review and regulation of retail and commercial facilities is a matter of statewide concern, so charter cities must also comply with requirements set forth in the bill. State Revenue Impact No estimate. Comments 1. Purpose of the bill . State law does not require local governments to ask a developer for a cost-benefit analysis of a proposed project. If they do, the analysis may contain inflated financial projections, and some local governments may make decisions based on unreliable promises of increased tax revenue. Traffic, open-space, and environmental impacts may be given less consideration. SB 673 helps communities and local decision-makers understand SB 673 -- 2/22/13 -- Page 4 the costs and benefits of incoming businesses. By providing local officials with an independent cost-benefit analysis for commercial and retail projects that will receive $1 million or more in subsidies, the bill protects taxpayer funds and ensures that cities and counties have the appropriate information to make informed planning decisions. 2. Local discretion or state mandate ? Local officials can already negotiate with a project applicant to pay for an independent financial analysis. Cities and counties also can adopt ordinances requiring fiscal or cost benefit analysis for specified types of projects. Should the Legislature impose uniform criteria on financial analyses for all 482 cities and 58 counties, given that cities and counties have existing authority to require preparation of a financial analysis in a manner that reflects local needs? 3. Why OPR ? In authorizing OPR or a state agency to conduct the analysis, the bill signals a departure from the agency's traditional planning jurisdiction. Although OPR provides planning guidance through technical advisories, it does not have a role in discretionary local planning decisions. The bill seems to grant OPR a voice in assessing proposed local projects. Absent state funding for local projects, does it make sense for the state to intervene in local retail or commercial development? The Committee may wish to consider amending SB 673 to remove any state role in preparing cost-benefit analyses. 4. Yes, but . Although OPR may not be the appropriate agency to conduct a cost benefit analysis, it can provide technical guidance to local agencies. In 1984, OPR penned the Economic Practices Manual, a handbook for local governments preparing economic impact assessments. The manual details what must be included in an analysis and how to calculate employment projections, income, housing needs, land use/environmental costs and benefits, and population impacts. However, the document has not been updated in the last 29 years. Rather than codify existing local government practice, the Committee may wish to have OPR update its manual. 5. The devil is in the details . What does a project that receives a $1 million in subsidies look like? Is it a big box retailer, an automotive dealer, or an arena? Under SB SB 673 -- 2/22/13 -- Page 5 673, it's hard to tell. In general, subsidies include land acquisitions or donations, infrastructure improvements, cleanup or remediation, or securitized parking revenues, but the bill fails to define "subsidy." Does "subsidy" include funding or assistance from the state? What about Federal funds? The bill also uses the term "incentive." Are the terms "subsidy" and "incentive" interchangeable? The Committee may wish to clarify the meaning of "subsidy." 6. Uncertainty . Almost no one disputes the wisdom of knowing about a project's environmental effects before local officials make a decision. That's why CEQA requires public officials to prepare EIRs on projects that may have significant, adverse environmental effects. But many builders complain about CEQA and EIRs. They say that opponents who can't convince public officials to deny projects turn around and file lawsuits over procedural problems. Could there be increased litigation targeting the prepared cost-benefit analysis? It remains unclear whether SB 673 results in better information or more lawsuits. 7. Proposed amendments . The Committee may wish to amend the bill for clarity: On page 2, line 13, after "agency," strike out "or the" On page 3, line 11, after "impact" insert "," 8. Related bills . SB 673 is not the first bill seeking to require local governments to conduct analyses on specific types of proposed developments. SB 469 (Vargas, 2011) would have required cities and counties to have economic impact reports on permits for superstores. Governor Brown vetoed the measure, citing local governments existing ability to assess whether these projects are in a community's best interests. Governor Schwarzenegger vetoed SB 1056 (Alarcón, 2004) and SB 1523 (Alarcón, 2006), which would have required a city or county, including a charter city, to have an economic impact report prepared, prior to approving a superstore development. SB 1641 (Alarcón, 2004) would have required a city or county to contract with a private entity or public agency to prepare a business impact report on a proposed big box retail development. The bill died in SB 673 -- 2/22/13 -- Page 6 the Senate Local Government Committee. Support and Opposition (3/28/13) Support : Unknown. Opposition : League of California Cities.