Let's Do Better With Economic Development Incentives

by Jim Simon

by Jim Simon

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Yesterday, I was fortunate to be the instructor of CALED’s Advanced Certificate course on Business Retention and Expansion, where we spent a full day diving into the purpose, structure, and best practices for retaining businesses.  Studies have demonstrated that roughly 4 out of every 5 new jobs created in a city are a result of existing business growth.  The overwhelming number of businesses that close are not a result of failure, but rather a result of acquisitions, consolidations or other corporate decisions.  Yet, we continue to hear about incentives for new businesses as critical to economic development success.  

I get that, after all, you don’t break out the “big scissors” when a business stays in town for another year, and it would be hardly exciting to run for city council on the record that during your tenure, 99% of the businesses stayed around.  So incentives, particularly financial in terms of rebates, continue to be the area of effort and investment.  Few EDOs talk about the amount spent on business retention versus incentives for recruitment.  From Amazon HQ2 to Foxconn and others, throwing tax dollars at a project seem to be the measure of impact.

As evidenced by the Brookings March 2018 study, these incentives are missing the greater need beyond the project they aim to benefit.  For example, the study found that poor Latino and Black residents were left out of any benefit from the resulting project, that workforce investments for the existing community were rare, and the existing workforce rarely benefited from incentives. Meanwhile, nearly billions are being spent annually by communities across the country under the banner of necessary economic development. 

These sobering realities were startling for our group of 3 dozen economic developers, but rather than simply feeling incentives are not good policy, we need to be seeking much better parity between these incentives and the fundamental purpose for economic development to begin with.  Certainly it’s difficult, particularly where tax revenue growth is often central to the focus for California communities, but I see an opportunity for California to do better.  Irlanda Martinez and I will be back at Fresno State for CALED’s Keys to Local Economic Development course on October 21-24, 2019 where we will look into how communities are getting more results and the best practices that can be employed in your communities.  Hope to see you there!

Investing In Ourselves So We Can Invest In You: RSG’s June Partner Retreat

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RSG Partners Hitta Mosesman, Tara Matthews, and Jim Simon recently embarked on a weekend of brainstorming, contemplation and reflection for the semi-annual partner retreat.  Under the guidance of Henson Consulting Group, three brilliant minds spent the weekend thinking of new and innovative ways to continue to provide clients with the quality services they have come to expect from RSG.

Our partner retreats have truly become a valuable tool in the management and growth of our firm, as well as what we seek to offer clients.  During their time at the retreat, our partners focused on the overall vision for the firm looking ahead to 2023 and assess what our client’s needs might be in the future. RSG prides itself on not only being able to address current issues our clients face, but also identify those on the horizon.  We aim to take a proactive approach to identifying the best solution to meet the unique needs of each client. 

As important as these retreats are for the customer service side of our firm, they have become equally important for the internal development of our staff.  We have a highly developed team of individuals who are not only great at what they do but enjoy what they do as well.  Insight, thoughts and action plans regarding the training of current staff play a large role at these retreats as well as recruitment of new team members to add to the firm.  We have found that by reinvesting in the firm through these retreats, amongst other team building exercises practiced by our company, our clients receive the greatest benefit.

CA Governor Newsom is set to sign the 2019-20 budget any day now!

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With California’s new fiscal year set to begin July 1st, Governor Newsom is expected to sign into effect the $214.8-billion state budget by the end of the week.  Highlights of the budget include the following:

  • Putting safeguards in place for the next recession – The budget will set aside $15 billion to build reserves and pay off unfunded liabilities, with $1.2 billion of this being placed in the Rainy-Day Fund.

  •  Addressing the cost of living in California – The housing crisis will be addressed through a $1.75 billion allocation used to help stimulate housing development via planning and production grants for local governments, expand state’s housing tax credit program and loan program for mixed-income housing, and help provide opportunities for innovative housing projects on excess state property.  $500 million of the $1.75 billion will be directed at eliminating impediments to mixed-income housing development

    The budget addresses healthcare costs by expanding subsidies for middle-income earners to aid in the cost of obtaining healthcare through Covered California; and expanding Medi-Cal coverage eligibility to young adults ages 19-25. The budget will also look to extend paid family leave, increasing it to 4- month of leave for parents after the birth of a child.

    Education is addressed via a larger investment in K-12 schools, expanding the Earned Income Tax credit, providing funding to cover 2 -year community college tuition for first time full time college students, and providing additional funding to Cal State and UC schools to prevent future tuition hikes. 

  •  The fight against homelessness – The budget will allocate $1 billion in funds to provide additional aid, services, advocacy and programs to the homeless population.  This also includes a $400 million increase in grant for families enrolled in the CalWORKS program.

  •  Emergency preparation – The budget will allocate $769.6 million, providing funding for California Office of Emergency Services, California Department of Forestry and Fire Protection, California Conservation Corps, and the General fund for various updates and improvements. The budget will also provide $39.9 million to disaster preparedness, response and recovery efforts.

This budget seeks to enhance the quality of life for all Californians by preparing for the possibility of a recession repeat from the past, resolving the current problems that exist, and strategically investing to ensure a better future.

RSG’s Legislative Bill Spotlight!

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In this installment of RSG’s legislative bill spotlight, we take a look at the current state of three important bills:  SB 50, AB 11 & SB 5.

SB 50 (Wiener; Planning and Zoning: Housing Development Incentives) – The bill that seeks to allow for more housing development near jobs and transit rich areas, has become a two-year bill and will not come up for vote again until at least January 2020.  The proposed reduction in local zoning standards has created a clear division between supporters who feel overruling local zoning ordinances is a necessity to address the housing crisis and opponents, who feel neighborhoods would suffer at the increased density, mitigating any benefit more housing might have.  Recognizing the complexity of the matter and the division of support, the Senate Appropriations Committee decided in late May to place the proposal on hold.  The bill’s author, Senator Scott Weiner (D-San Francisco), has asserted his plan to continue drumming up support for the bill to help move it forward.

AB 11 (Chiu; Community Redevelopment Law of 2019) – This bill would result in more funding for various programs acquired through tax increment financing obtained from city and county created agencies.  While AB 11 is reminiscent of the approach to use of tax increment financing before the dissolution of redevelopment agencies, it places a present-day emphasis on balanced growth, including affordable housing.  In late April of this year the bill was passed through the Assembly Committee on local government but re-referred to the Assembly Committee on Appropriations, resulting in it becoming a two-year bill.

SB 5 (Beall/McGuire; Affordable Housing and Community Development Investment Program) – This bill would create an Affordable Housing and Community Development Investment Committee for cities, counties and joint power authorities to apply to receive funding to be used for projects in which they are financially committed to.  As of June 17th, the bill has been re-referred to the Assembly Committee on Housing and Community Development.  With AB 11 and SB 5 focusing on the allocation of funds specifically to build affordable housing, the cessation of AB 11 has left SB 5 the crowd favorite of those in support of securing ongoing funding for affordable housing efforts.

Eye Opening Numbers on California’s Housing Crisis

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Last month the California Housing Partnership in collaboration with the Southern California Association of Non-Profit Housing released reports detailing the number of affordable homes needed by counties in Southern California.  Some key findings of these reports include:

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In addition to these three Counties, the California Housing Partnership also partnered with other agencies and coalitions to produce similar reports for counties located in Northern California.  The main takeaway is that all counties across California are experiencing a housing crisis in conjunction with a cost of living crisis.  Not only is there not enough affordable housing but many residents who rent struggle to meet the median hourly wage to afford rental housing.  RSG is proud to be helping some of the communities/regions address the affordable housing crisis.  For ways we might be able to help out your county or city, contact RSG Principal Tara Matthews.

Are your Development Impact Fees Compliant?

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By Dima Galkin

With constraints on tax revenue growth and overwhelming pension obligations, how can cities and counties ensure they have the financial capacity to fund the capital improvements necessary to accommodate new development? One way is by imposing development impact fees (DIFs). This option does not require a public vote (a sales or transient occupancy tax increase does) but involves a series of qualifications and reporting requirements not associated with standard tax revenues. Fees can be applied to a wide range of physical infrastructure, from parks and police facilities to streets and sewers.

The guidelines for DIFs were established with the Mitigation Fee Act (MFA), passed in 1987 as AB 1600 and filed in Government Code Section 66000 et seq. As amended, the MFA reflects the requirements established by the influential US Supreme Court decisions Nollan v. California Coastal Commission (1987) and Dolan v. City of Tigard (1994).

The fee must be “‘roughly proportional’… both in nature and extent to the impact of the proposed development.” For example, a park impact fee could only be applied to a development that increases the need for parks and in an amount that equals the cost of building that additional park space. Despite this limitation, DIFs are a critical financial resource for jurisdictions looking to match new development with new infrastructure to serve it, without impacting the availability of other City funds for ongoing public services.

The MFA requires agencies file Annual and 5-year Reports. The Annual Report cover amounts collected and spent, what projects were funded, and whether any loans were made between funds. The 5-Year Report provide continued justification for the fee amounts.

According to State Senator Jeff Stone, almost one-third of localities have not kept up with these reporting requirements. In response, Senator Stone sponsored Senate Bill 1202, passed and signed into law in 2018. Under SB 1202, agencies that fail to keep up with MFA reporting can be subjected to an independent audit at their own expense and if they fail to make findings for the fee’s necessity, agencies may be forced to pay back unused impact fees.

In addition, several pieces of pending legislation focusing on transparency and promoting housing affordability would affect DIFs.

AB 1484

This bill would require each city (including charter cities) and county to post its fee information for housing development on its website and to provide that website address to development applicants.

AB 831

Existing law requires the State’s Housing and Community Development Department (HCD) to complete a study evaluating the reasonableness of local DIFs and to make recommendations on potential amendments to the MFA to reduce fees for residential development by June 30, 2019.

AB 831 would add the following requirements for HCD:

·         Post this study on its website,

·         Complete a separate study by June 30, 2020 that identifies the category of all fees for residential development and the average amount thereof in each of the State’s 47 Councils of Governments and post on its website, and

·         Issue a report to the State Legislature by January 1, 2024 on the progress of cities and counties in adopting the recommendations made in the first study.

AB 1483 would enhance the requirements of the Annual Progress Reports to include more detailed information on permitting and development applications and would require agencies to post a schedule of fees on their websites.

This recent and pending legislation points to increased scrutiny applied to development impact fees of all kinds, but especially those that apply to residential development, as the State puts in place sticks (also carrots, but mostly sticks) to address the statewide housing crisis. This makes it more important than ever to meet the reporting requirements and be aware of new requirements as they arise.

RSG is available to help you keep up with reporting and other requirements for DIFs, as well as for housing and economic development.

Legislative Bill Spotlight: ACA 1 (lower voter approval threshold for housing and infrastructure bonds) and AB 213 (VLF to cities)

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by Julia Cogan

Assembly Constitutional Amendment (ACA) 1, also known as the Community Say for Community Needs Act, would place a measure on the 2019 ballot to amend the California constitution to lower the voter approval threshold from two-thirds to 55 percent for affordable housing and infrastructure revenue measures, namely local general obligation (GO) bonds and certain special taxes. It has been a growing concern at the state level that local governments do not have enough tools to address the housing crisis and the ever-growing local infrastructure need. A way to tackle this is to increase localities’ access to GO bonds and certain special taxes by lowering the threshold to a more easily reached 55 percent approval rate.

ACA 1 was heard in the Assembly Appropriations committee on May 16th and is expected to go the floor for final reading and vote before being sent over to the Senate. If your locality is for this legislation, submit comments to the author on the California Legislative Information site, or at the California Legislature Position Letter Portal.

AB 213, is passed, will revise the formula for allocating annual “vehicle license fee (VLF) adjustment amounts” to restore revenues to 143 cities that annexed inhabited territory after 2004 in reliance on the financial incentives that were removed by the passage of SB 89 in 2011, and are thus unable to take advantage of VLF revenues. The bill also provides this revenue source for future annexations of inhabited territory, now using the same rules applied to other cities.

Did your locality annex an area after 2004 that could now be eligible to receive VLF under the same formula as other cities? If so, you can voice your support to the author on the California Legislative Information site, or at the California Legislature Position Letter Portal. AB 213 was heard in the Assembly Appropriations committee on May 16th and is expected to go the floor for final reading and vote before being sent over to the Senate.

Up to $3 Billion in New Community Development Grant Funds Proposed by SB 5 and 15

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by Suzy Kim

The State legislature is considering two bills, Senate Bills (SB) 5 and 15, that would create up to $3 billion in one-time funding for housing, public improvements, and community revitalization projects by reallocating Educational Revenue Augmentation Funds (ERAF).  Local agencies could apply for funding on an area-wide basis through SB 5, or a project-basis through SB 15.  Both bills require matching resources (financial, land dedication, public-private funds, etc.). 

At this point, SB 5 has a broader range of eligible projects and allows bonding but comes with more restrictions.  The following table provides a brief comparison of the application process, financing, eligible process, and other requirements.  For a more detailed comparison, click here.

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Assembly Bill 147 - Increased Sales Taxes to California Cities and Counties

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As if one was even needed, there is now another reason to shop local.  Smaller and local retailers used to find themselves at a disadvantage when it came to the issue of sales tax and consumers.  While they found themselves in a position of having to charge sales and use tax on their goods, online and out of state retailers were not required to do the same.  This resulted in online and out of state retailers being able to charge less for their goods and ultimately entice more consumers to shop with them. 

Recognizing the imbalance of the situation this created for local businesses, California decided to enact legislation that will place the majority of businesses on a level playing field when it comes to the application of sales and use tax.  On April 25, 2019, California Governor Gavin Newsom signed into effect AB 147.  This bill requires all retailers who exceed $500,000 a year in sales from deliveries made to California, regardless of that retailer’s location, charge sales and use tax on consumer purchases.

This legislation is good news for cities, counties, and the state for a few reasons.  With the playing field now leveled, small businesses and local merchants may see an increase in revenue from shoppers, helping to provide a boost in local economy.  In addition to this, local and state government could see an increase in available funding for budget items including critical infrastructure.  Now in effect, it will be interesting to see the impact this legislation has on both the marketplace and local economy.  An in depth analysis of AB 147 can be found here.

RSG's Housing Right Now Workshop (April 24th, 2019)

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Last Wednesday, RSG collaborated with law firm Rutan and Tucker, LLP to host a workshop ambitiously titled “Everything You Need to Know about Housing Now.” The event quickly sold out, illustrating just how eager city and county staff are to learn more about recent housing legislation and how it affects their communities. Held in RSG’s Irvine office, the event was attended by city and county staff from the counties of Los Angeles, Orange, Riverside, San Diego, and Ventura.

The workshop presenters were attorneys Bill Ihrke and Kathy Jenson and RSG principals Tara Matthews and Hitta Mosesman, which allowed workshop attendees to hear about both the legal and practical implications of recent housing bills:

  • Bill delved into the nuances of several pieces of legislation, focusing primarily on Senate Bill (SB) 35, which streamlines the approval process for infill developments in local communities that failed to meet their Regional Housing Needs Allocation (RHNA).

  • Hitta provided several case studies of cities that have already received applications for projects from developers looking to take advantage of the streamlined approval process allowed by SB 35.

  • Kathy explained how recent housing legislation and the California Coastal Commission’s new focus on “no net loss” affects coastal communities.

  • Tara guided attendees through strategic steps to take to ensure compliance with the new housing legislation, including getting involved early in the RHNA process, updating local planning and zoning policies as needed, applying for SB 2 technical assistance grants by the November 30th deadline, maintaining a current inventory of existing affordable units and staying up to date on compliance monitoring, and filing the required annual reports.

In light of California’s housing crisis and the need for 100,000 new housing units each year, State legislators are looking to hold communities responsible for doing their part in creating more housing in California. For better or for worse, the recent Legislative Housing Package created several new requirements and implications for every California community. If you’re interested in learning more about how your community is impacted, please contact us at RSG today. We’re happy to help!