Made public yesterday is a list of the members comprising a coalition formed in support of the Enterprise Zone Program.  The group includes many diverse and other times divergent groups who have come together to support the EZ program.  View the Joint EZ coalition list.

California’s budget problems dominate today’s political arena.   Without question, the biggest systemic problem draining the budget is one that most politicians are afraid to even approach.  Of course it’s the pension system.  No one seems willing to call out the patent iniquity in the public versus private workforce.  Jerry Brown on Friday did his part to quell the opposition to true pension reform by removing someone who championed for reform.

No, it’s not the events in Wisconsin (although that should serve as a wake up call).  Rather it’s the legal memo detailing why repeal of the EZ is illegal.  Essentially, repeal of the EZ violates the Contracts and Due Process clause of the California and U.S. Constitutions.  The memo’s conclusions are that repeal:

• Constitutes “bait and switch” taxation
• Violates the U.S. and state Constitutions
• Would subject the state to refund claims that nullify the proposed budget savings
• Invites legal action to enjoin repeal
• Subjects local governments to taxpayer lawsuits; and
• Endangers California’s bond rating which could be downgraded

The memo is well researched and convincing.  I hope Brown’s camp is enjoying reading it as well.

The Senate hearing just wrapped up.  As usual, there was spirited debate about the effectiveness of the EZ.  Businesses testified that they use the EZ credits to remain competitive against other states (e.g. Foster Farms).  The Black Chamber of Commerce testified that the EZ program helps minorities find jobs.  City leaders, chambers, and mayors testified about the EZ program creating jobs and the loss of jobs since the governor’s proposal to eliminate them.  

The unions response — each time — was the same:  ”VWR” moved union jobs into an EZ in Visalia and took the union jobs away.  Implicit in the union’s response was two important hidden insecurities:  First, once a union job, always a union job, i.e. an employer does not have the right to take away union jobs even if it means decreased productivity and increased prices, as long as the union dues are paid.  Second, reality doesn’t matter.   As Yolanda Benson pointed out, VWR merged with another company that chose to manufacture in an EZ because it could compete and not have to move those jobs out of state.  This was the same comment that Senator Huff made.  The unions are clinging to VWR, but that lifeboat is taking on water.

The other talking point that was distributed to all the union speakers was that the research proves beyond a shadow of a doubt that the EZ program doesn’t work.  I won’t rehash this argument here and now, but the PPIC study was based on data that was predetermined to show no job growth and the CBP report swallowed whole the flawed PPIC report.  Despite no one being able to refute the criticisms of these reports, the unions continue to parrot the same ineffective, monotone idioms and tag lines.  If that’s the best they can come up with in the face of the overwhelming and true doses of reality handed to them by the businesses, city leaders, chambers and minority groups, not to mention the USC study, then it makes this debate that much clearer.

As reported today by Californians for Jobs and Safe Communities, Assemblyman Cameron Smyth has called the Governor’s proposal to eliminate the Enterprise Zones exactly what it is – a $1b tax increase.   While the Governor has been trying to claim the high road, he’s skirting the real issues, i.e. that he is raising taxes on businesses and not taking it to the voters.

At the February 7, Assembly hearing, someone asked the LAO representatives why the Governor refuses to take his $1 billion tax increase to the voters.  The response was that because the tax increase doesn’t affect all the voters and it therefore doesn’t need to go to the voters.  Without commenting on the wisdom (or legality) of that response, I suggest that the reason why Brown doesn’t want voters to decide on whether the EZ program continues is because of what Max Shenker reported about the public’s opinion on EZs:

Asked if they favored or opposed continuation of this program, 66 percent of survey respondents indicated they favored continuation while only 26 percent opposed, with the remaining eight percent saying “don’t know” or “not sure.” A look at the demographics shows broad support that runs across gender, party and ideology lines, and irrespective of geography and ethnicity.

With less support in the public, perhaps Brown felt he had a better chance by letting the unions try to convince legislators to eliminate the EZ.  So far, his plan is not working with many legislators publicly lining up behind the program.  Brown needs a two third majority to prevail, which from what I’ve heard at the Capital, he isn’t anywhere near.

In a press conference yesterday, Mayor Antonio Villaraigosa welcomed financial software provider BlackLine Systems to the City of Los Angeles.

As part of its relocation, BlackLine will receive the benefits of the ‘State Enterprise Zone Program’ and the ‘Business Tax Holiday’ which entitles the company to a rate discount from the Los Angeles Department of Water and Power, hiring tax credits and a 3-year exemption from the gross receipts tax, respectively.

“Blackline Systems’ move to Los Angeles highlights the larger trend of businesses moving to our city to take advantage of our competitive business policies such as the State Enterprise Zone Program and the Business Tax Holiday,” said Mayor Villaraigosa.

Read the full arrticle.

Ever since Governor Brown proposed to eliminate the Enterprise Zone program, everyone seems to be focused on the “data” behind the program in an effort to determine the program’s value and future.  At yesterday’s Budget Subcommittee hearing, the same two reports squared off:  Professor Swenson and his USC report versus Jed Kolko and his PPIC report.

On the same day, the California Budget Project released what it claims is a new report with new data and concludes that the EZ program should be cut.  The conclusion, of course, is not surprising.  However, I did review the footnotes to see on what the CBP based its finding.  Over half of the footnotes that reference any sort of underlying data come either from the PPIC report or the CBP’s own prior report.  Now it may seem benign, but if quoting oneself can be deemed research, then Don King deserves to be king.  The CBP quotes its own report, its own research and its own findings as grounds for its new findings. 

The CBP also criticizes the program because the tax credits go to large corporations.  I’m not sure how to make the obvious point more obvious:  who do these companies hire?  I would be so bold as to say that they hire employees.  I would also repeat what Chris Micheli said:  the only way these corporations get the credit is if they hire someone who qualifies, e.g. veterans, disabled, unemployed or those who live in impoverished areas.  You only get the credit if you hire the type of people who deserve to get these jobs.  Keep in mind that a zone is designated by taking an impoverished residential community and designating the commercial area around it in order to help those residents find work.  The CBP report seems to ignore these fundamental aspects of the analysis.    

For its part, the PPIC report contains a fatal flaw that was exposed at yesterday’s hearing.  The PPIC report is based on Dun & Bradstreet data which is compiled by asking companies how many employees they have.  Kolko used this data noting the change in employment over time and concluded that there was no positive effect on employment in EZs.  However, as Professor Swenson pointed out, D&B asks employers to check a box declaring how many employees they have.  An employer can check the “1-5 employees” box if they have three employees.  If they hire two more employees, they will still check the “1-5 employees” box and hence one could conclude (and report to the legislature) that the EZ program has no positive effect on employment.  Kolko had no meaningful response to this criticism other than to say that the data searches are repeated millions of times and thus account for any margin of error (assuming I heard him right).  Dr. Swenson responded that repeating a data error two million times only confounds, not corrects the error.

Given the dueling reports, Swenson’s USC report has to be considered the more reliable of the two.  Regardless, there were two events that ruled the day at yesterday’s hearing both of which came after the academics cleared the mike.

1.  An attorney who seemed to have come prepared for this specific issue testified that the proposal to eliminate the credit carryover was indeed illegal, violating the Due Process clause and the Contracts clause of the Constitution.  He affirmed that there will be legal challenge to this part of the Governor’s proposal.  Importantly, the effect of this is to significantly reduce the amount Brown claims there is to be gained by eliminating the EZ program.  If the carryover credits cannot be legally eliminated, then the cost of the legal challenge, the uncertainty of resolution and the likely ultimate defeat of the proposal effectively eliminate any putative gains from cutting the program.  As Chris Micheli pointed out, there is also a wage add-back that taxpayers will certainly ask to be refunded if the carryover credits are eliminated.  Taxpayers pay for the credits when claimed on a current year return by adding the credits to income and thus paying more taxes in exchange for claiming the full amount of the credits and having the excess available for subsequent years.  Again, there is very little net gain even if the Governor gets his way.

2.  Statistics and econometrics models aside, the taxpayers ruled the day with their own testimony.  Cries to preserve the EZ program came from two divergent sectors that rarely coincide when it comes to public policy:  the business world and minority groups.  They were joined by representatives from small and large cities, chambers and individuals.   Everyone (except for Lenny Goldberg who said the same thing he says every year) echoed their support and reliance on the EZ program as a means to stay competitive, not against neighboring cities, but against neighboring states.  As one businessman put it, he’s getting calls weekly from other states with promises of tax breaks if he leaves California.  Many said that if the EZ program is cut, they will take other states up on their offer.  My favorite line of the night came from a businessman who said that he located in California and hired many employees because of the EZ program.  He emphasized that it would be unfair, unjust and unwise to cut the program and then concluded by telling the Committee that he gave his business card to the attorney who testified that there will be a legal challenge if the program is cut.

It was powerful hearing and a strong testament to the fact the California can only be competitive by keeping, if not expanding the EZ to lure and maintain businesses. The result would be to reduce unemployment, increase revenue and send a strong signal to businesses and other states that California is reversing its anti-business sentiment and commencing on a long term path to prosperity and independence.  One legislator (I think it was Manuel Perez) testified that Illinois enacted huge tax gains but left its Enterprise Zone program intact.   In fact, many Republican and Democratic legislators questioned why in the face of such unemployment figures would California further damage its ability to create jobs.  The representatives from the LAO could only look to the PPIC study and repeat what they were told to repeat, i.e. that we must make tough choices and the PPIC says that the program is not effective.  This is after they acknowledged that the data was outdated and that cutting the program would likely result in legal challenges.   Craig Johnson, on the other hand, stood firmly and declared to the Committee that CAEZ has the current data which proves conclusively that the EZ program creates jobs.  Professor Swenson added that on average, a qualified EZ employee costs the state roughly $5,000, whereas the cost to the state of paying unemployment benefits to the same employee if he or she can’t find work is over $20,000.  For myriad reasons, the EZ program benefits from such widespread support from minority and business leaders and the legislators on both sides of the aisle who represent these divergent groups as was evident at yesterday’s hearing.

A long time supporter of the EZ program, Assemblyman Perez, head of the JEDE committee had this to say at a press conference Friday:

“California has to get serious about making this state a more business friendly place,” said Pérez. “Eliminating the Enterprise Zone program is not going to help the California economy or California communities. Let’s seize this opportunity to improve the program so that it is more transparent and accountable to the public, and more closely linked to our community and workforce development objectives.”

Read the entire piece here.

At the press conference, Ernie Ball, owner of Ernie Ball, Inc. had some harsh words for the governor’s proposal to eliminate the EZ:

The CEO of Ernie Ball Inc., an internationally-known guitar string making plant that’s been in California 49 years, on Friday likened the governor’s threat to abolish Enterprise Zones to a call to Dr. Kevorkian.

“This is the last straw in California” that will break a businesses’ back, Sterling Ball said, as he threw his support to reform legislation that’s been introduced by state Assemblyman V. Manuel Pérez to keep the California Enterprise Zone Program in place.

“California has to get serious about making this state a more business-friendly place,” Pérez said during a rally at Ernie Ball Inc., which settled into the Coachella Valley Enterprise Zone in 2004.

Pérez said 2,000 jobs were created and retained in this enterprise zone, alone.

“The governor’s proposal is a step backward,” he said, before calling attention to reform legislation he’s introduced to improve the state economic development tool.

“Government does not create jobs,” Pérez said. “People like Ernie Ball do.”

Ernie Ball Inc. gives 300 people — 80 percent of whom came in as laborers from the farm fields — a “living wage’,” solid insurance plans and perks, said Ball.

Ball said he spent $8 million of his family’s money to move the company to the Coachella Valley, and has enjoyed 7 percent growth since. “We’ve never had a layoff,” and never taken out a bank loan, he said, of the company that supplies guitar strings to 5,500 music stores in the nation and 100 foreign countries.

“If you pull the Enterprise Zone, there will not be one more job added here,” Ball said.

Read it here.

The attached Fact Sheet highlights how many jobs have been created by the EZ program.  These are numbers that seem to be missing from the debate and certainly from the PPIC analysis.  For example, the EZ program put into the workforce 18,317 Californians who were previously on public assistance.

Here’s what Bill Allen had to say today about the Governor’s proposal to eliminate the EZ program:

If anything, the Governor should strengthen his commitment to the Enterprise Zone Program in these difficult economic times as a key mechanism to revitalize economically-challenged areas by providing incentives that create high-wage jobs and investment in these communities. By responsibly doing so, he would not only strengthen local economies, but strengthen the state’s long-term economic foundation as well.

Too many of our state and local residents desperately need jobs. Until such time when this is no longer the case, there will always be a critical role for Enterprise Zones. This is one program our elected officials cannot afford to eliminate.

Read the entire Fox & Hounds editorial here.