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City Council Approves Berkeley’s First Enterprise Zone

By Riya Bhattacharjee
Thursday September 24, 2009 - 09:17:00 AM

The Berkeley City Council’s decision Tuesday to expand Oakland’s Enterprise Zone into the city may have signaled a new era of tax incentives for companies in West Berkeley, but some city councilmembers remain cautiously optimistic. 

Berkeley’s Economic Develop-ment Manager Michael Caplan told the council in a report  

that the city had already held preliminary talks with Oakland  

city officials about possibly adding West Berkeley to Oakland’s Enterprise Zone in May, when they became aware that Bayer Healthcare might be relocating from their facility next to the Aquatic Park campus if they found a cheaper alternative for manufacturing a portion of their hemophilia drug Kogenate. 

Caplan said that while Bayer would have “almost certainly” kept research and other activities in Berkeley, up to 500 unionized jobs could have been at risk. 

Faced with the prospect of losing Berkeley’s largest private sector employer, Oakland and Berkeley rushed to approve the Enterprise Zone expansion into West Berkeley. Bayer announced Sept. 16 that it had decided to stay and invest $100 million in Berkeley because it would get $10 million in tax incentives from the Enterprise Zone for over two years, including a reduction in PG&E bills. 

Bayer will also be qualified to receive about $36,000 in tax credits for each new employee hired who fits certain categories, such as Native Americans, veterans and low income individuals. Cities issue a hiring tax credit voucher to businesses in its Enterprise Zones for each qualified employee they hire. 

But some councilmembers said that although they understood that Berkeley’s first Enterprise Zone had been created primarily to keep Bayer from leaving, there were still a number of unanswered questions about the program itself. 

Several studies have found that Enterprise Zones have done little to create new jobs—one of their goals—and some state legislators have questioned whether the zones are actually initiating economic development or are simply catering to corporate interests. 

Most recently, the first of a series of hearings titled “California Enterprise Zone: A Review and Analysis” was held in Sacramento by the Assembly Committee on Jobs, Economic Development, and the Economy, where representatives from low income and women’s advocacy groups called for tighter regulation of the zones so that they benefit low and middle income residents. 

“I haven’t found any way that the city can do what the state failed to do, that is, link tax benefits to actual social benefits,” said Berkeley Councilmember Kriss Worthington. “The goal should not be to hire just anybody, it should be to help job creation and to revive the local economy. The way state law currently exists, you don’t have to do these things to get tax credits. Today, you can get as much tax credit for hiring a wealthy executive as you would for hiring four low income laborers. It doesn’t prioritize social equity issues.” 

The reports criticizing Enterprise Zones are also a matter of concern for another Councilmember—Jesse Arreguin, who said he wasn’t sure if the city could legally do something to mandate that companies hire low income workers to get incentives. 

“I guess we’ll have to wait and see what happens at the state level,” he said. 

Worthington said that most labor groups would like the hiring credits to help workers who are disadvantaged or poverty-stricken—economic conditions that prompted the creation of the program. 

Councilmember Darryl Moore, in whose district the Bayer facility is located, called the new enterprise zone in Berkeley “a great asset for the city,” at the meeting. 

Councilmember Linda Maio stressed that although most people in the city were unaware of the weight of the council’s decision, the Enterprise Zone was important for the economic vitality of the city. 

Caplan said he was aware of the controversies surrounding Enterprise Zones. 

“There are some critics who have claimed that as a state policy Enterprise Zones aren't really worth their cost,” he said. “That is a matter of some debate—would the investment and hiring activity have happened anyway even without the Zone designation? One thing is clear though—for businesses located in an Enterprise Zone, particularly industrial businesses that intend to purchase new machinery and equipment, the zone can provide a huge cost reduction and incentive to stay and grow in the area.” 

Critics of Enterprise Zones have also complained about the lack of oversight in Enterprise Zones, which have often resulted in undesirable practises such as cross-vouchering, vouchers processed outside a firm’s Enterprise Zone district.  

“Those problems are less significant,” Worthington said. “They are not as important as the failure to address poverty. A lot of veterans are coming back from Iraq and Afghanistan and can’t find jobs. There’s a rise in unemployment. If we are going to use taxpayer money in tax credits, then it’s important to address these issues.” 

Oakland’s Redevelopment Area Manager Al Auletta told that Planet that the city had established an Enterprise Zone in 1993 because it seemed like a great opportunity to attract and retain businesses in low income areas. Oakland’s Enterprise Zone covers much if not most of its industrial land. 

There are currently 950 businesses in the Oakland zone with more than 10 employees and a total of 7000 additional businesses in the same zone which have between one and nine employees. 

Auletta said that the city regulated its program according to the California Department of Housing and Community Development (HCD) guidelines. 

A 2006 report on Enterprise Zones from Nonprofit Management Solutions and Tax Technology Research issued to HCD states that “employment impact estimates by enterprise zones were understated for some enterprise zones due to unusual vouchering practices in one enterprise zone—Oakland.” 

According to the report, in 2003, Oakland processed 54,065 cross-vouchers—98 percent of all cross-vouchers for the state and nearly equal to the 57,471 non-cross-vouchers for the entire state in 2003—for firms located outside Oakland. 

The practice appeared to shift to the Richmond Enterprise Zone in 2004, which processed 7,028 cross-vouchers, 65 percent of all cross-vouchers for the State, and 9 percent as much as the non-cross-vouchers for the entire State. 

Describing cross-vouchering as “inefficient in terms of spreading workload and speeding of mail time,” the report recommended the establishment of a centralized data collection system which is used by every Enterprise Zone when vouchering employees. 

Auletta said that although the number of companies that had used the Enterprise Zone programs in Oakland had fluctuated over the years, it is currently on the rise because the city had made a more concerted effort to introduce the program to businesses through ongoing 

business development and assistance efforts. 

Last year Oakland served roughly 400 companies, and processed 3,682 vouchers. 

  “We are reaching out to small businesses, which stand to benefit most from Enterprise Zones and which tend to hire locally,” Auletta said. “Roughly 80 percent of all employees claimed for hiring tax credits in Oakland reside within our Enterprise Zone area which tells us that the program is an incentive for businesses to provide employment opportunities for residents from low-income communities. For a city that is experiencing a 16 percent unemployment rate due to the worst market downturn since the Depression, we need incentives to attract and retain businesses that hire locally. It’s about quality of life for Oakland residents.” 

Caplan told the Planet that once a zone is established, much of the work shifts to marketing and vouchering of qualified workers. 

“I do know that budget problems have made it hard for Oakland to provide adequate staffing to their zone,” he said. “This is one reason why expansion of the zone into Berkeley and Emeryville will assist them as both of these cities will provide some funds to support the overhead costs.” 

Once the Emeryville City Council votes on the expansion, a formal application to extend the zone will be submitted to the state. 

“The state is pushing on their end for a quick turnaround so we are hoping that the zone becomes active in the next few months,” Caplan said. 

As for regulating Berkeley’s part of the zone, Caplan said the city intended to develop and disseminate marketing materials about the zone and its tax and hiring benefits, working with Oakland to make sure that the worker vouchering function is maintained and that Berkeley workers are well served.  

“The interesting thing about Enterprise Zones is that individual businesses track their own tax benefits and receive them through filling out the appropriate forms when they pay their taxes,” said Caplan, who managed the Bay Area’s first Enterprise Zone in San Jose in the 1980s. “The city doesn't have to be involved in this —all the business needs is an address in the zone. Of course, the city will work to arrange a series of workshops for West Berkeley businesses to assist them in learning about the benefits and in seeking out qualified local workers.” 

Caplan said his experience in San Jose had shown that a number of industrial businesses had made location and expansion decisions just on the basis of the zone location. 

  “I think for a city like Berkeley, it’s a very nice incentive to have in our toolbox—at a very low cost,” he said.  

Worthington said Berkeley should focus its Enterprise Zones on disadvantaged and unemployed veterans. “We can’t change what the state incentives are. But we do have a power to prioritize what we do within our local incentives,” he said. 

Caplan said that hiring decisions were ultimately made by the businesses themselves and not the city. 

“But the good news is that the people who can be vouchered to provide their employers with tax credits can be targeted,” he said. “So one of the great things about Enterprise Zones is that businesses actually have an incentive to hire people who are low income.”