Governor’s Office of Business and
Economic Development

Summary

The Governor’s budget includes two proposals for new General Fund spending within the Governor’s Office of Business and Economic Development (GO-Biz): $60 million for California Competes grants and $50 million to supplement the Infrastructure State Revolving Fund (ISRF). While both proposals offer some potential benefits, these benefits are insufficient to warrant new General Fund spending at a time when the state faces a significant budget problem and may need to consider consequential spending cuts in other areas of the budget. We recommend rejecting both proposals.

Background

California Competes Provides Incentives to Attract Business Investment. California Competes is an economic development tax incentive program that allows GO-Biz to negotiate agreements to provide financial incentives to companies that agree to meet hiring and investment targets. Companies that meet their targets can claim tax credits against their corporation or income taxes. On the other hand, the state “recaptures” tax credits from companies that fail to meet their targets. GO-Biz is permitted to make agreements committing $180 million plus amounts recaptured from prior agreements in tax credits each year. In each of the last three years, the state has made one-time allocations of $120 million to allow California Competes to award grants in addition to tax credits.

ISRF Provides Low-Cost Financing for Infrastructure Projects. The ISRF, administered by the California Infrastructure and Economic Development Bank (IBank), provides low-cost loans to public agencies to support infrastructure projects. ISRF loans typically offer lower interest rates and longer repayment periods than public agencies could receive from other financing sources. Loans are made to public agencies on a first-come, first-served basis. To fund its loans, ISRF sells revenue bonds which are repaid from loan payments from public agencies. Over the last five years, ISRF has made, on average, around $50 million in loans per year.

Governor’s Proposal

$60 Million for California Competes Grants. The Governor’s budget proposes a one-time General Fund allocation of $60 million in 2024-25 for a fourth round of California Competes grants. $10 million of the $60 million would come from unspent funds from the 2023-24 allocation for California Competes grants. Among other objectives, the new round of grants would aim to encourage CHIPS Act projects to locate in California. The 2022 CHIPS Act provides financial incentives for semiconductor companies to expand their operations in the U.S.

$50 Million to Supplement ISRF Loans. The Governor’s budget also proposes a one-time General Fund allocation of $50 million to supplement ISRF’s existing resources to provide loans to public agencies. The administration’s stated purpose for the proposal is to add to ISRF’s cash on hand, which they say would allow them to sell more revenue bonds with favorable terms.

LAO Analysis

Fiscal Situation Necessitates New Spending Clear a High Bar. We estimate the Governor’s budget predicts the state’s 2024-25 budget will need to address a $58 billion deficit. In December, our office predicted a somewhat large deficit of $68 billion. Since then, recent data has continued to point to the budget problem being larger than the Governor’s budget assumes. In this environment, any new spending requires dollar-for-dollar reductions to existing spending. As such, any new commitments should clear a very high bar of need. For example, in such an environment it could make sense to limit new funding to proven ways of (1) addressing critical health and safety issues or (2) preventing serious deterioration of core state responsibilities.

GO-Biz Spending Proposals Do Not Clear High Bar. While both of these spending proposals could have some benefits, our assessment is that these benefits do not clear the high bar that should be set for new spending in the current fiscal environment. We discuss why in more detail below.

California Competes Grants Remain a New, Unproven Model. Last spring, we discussed how recent research had shown promising results for the effectiveness of the traditional California Competes tax credit program. At the same time, we also noted that these results should not be extended to the newer grant program because the grant program differs from the tax credit program in key ways. One key difference is the grant program’s focus on businesses making big investment promises, which has led it to make significantly larger awards to a smaller number of businesses. Given these differences, the grant program should be evaluated separately from the tax credit program. To date, GO-Biz has not reported any final results from grant awards, nor are we aware of any rigorous research on the effectiveness of the grants. Testing an expansion of the traditional California Competes model may have been reasonable a few years ago when the state was flush with resources. In today’s environment, however, it is not prudent.

Other Options to Support Potential Semiconductor Investments. A primary argument for continuing California Competes grants for a fourth year is the need for state incentives to encourage CHIPS Act projects to locate in California. The CHIPS Act requires projects to demonstrate they have been offered incentives from state or local governments. California Competes has been the state’s primary tool in this area the last couple of years. Around one-third of California Competes grants across 2022-23 ($30 million) and 2023-24 ($51 million) went to semiconductor companies. However, given the state’s current fiscal situation, it makes sense for the state to look to other existing programs to provide incentives to CHIPS Act projects. Some options include: California Competes tax credits, New Employment tax credits, Research and Development tax credits, and the California Alternative Energy and Advanced Transportation Financing Authority’s sales and use tax exclusion program. These alternatives may not be as straightforward as grants, but also would be less likely to exacerbate the current budget problem.

ISRF Could Continue Normal Operations in 2024-25 Without Additional $50 Million. Without this proposal, IBank currently anticipates having around $60 million in ISRF funds available to loan to public agencies in 2024-25. ISRF loans have exceeded $60 million multiple times in recent years ($95 million in 2018-19 and $86 million in 2022-23), which points to a need for additional cash, perhaps around $50 million, should they wish to avoid turning away eligible borrowers in 2024-25. Traditionally, IBank would meet this need by selling revenue bonds. IBank, however, has expressed reservations about selling revenues bonds at this time. They are concerned that their low cash on hand will prevent them for receiving the lowest possible borrowing costs on their bonds and, therefore, have requested $50 million General Fund to boost their cash on hand and ensure favorable borrowing terms. The extent to which IBank’s concerns about selling revenue bonds are well founded is unclear to us. Regardless, taking the concerns as given, the primary consequence of selling revenue bonds without an additional $50 million General Fund cash cushion likely would be modestly higher borrowing costs. This, in turn, would result in slightly less favorable terms on ISRF loans to public agencies. In light of the state’s fiscal situation, we do not view this consequence as significant enough to warrant a General Fund allocation in 2024-25.

LAO Recommendation

In Light of Fiscal Situation, Reject GO-Biz Funding Proposals. While both proposals offer some potential benefits, these benefits are insufficient to warrant new General Fund spending at a time when the state faces a significant budget problem and may need to consider consequential spending cuts in other areas of the budget. We recommend rejecting both GO-Biz proposals.

If Concerned About CHIPS Act Projects, Consider Providing Contingent Funding. If the Legislature is concerned that existing incentives could be insufficient to attract CHIPS Act projects to California, it could consider setting up a contingent funding mechanism for California Competes grants. For example, if at some point over the next year GO-Biz has exhausted all other options to attract a particular CHIPS Act project to California, they could submit a request for grant funds to the Joint Legislative Budget Committee (JLBC). This request would describe the project, the amount of grant funding requested, and GO-Biz’s efforts to exhaust all alternatives. Grants funds could then be made available upon JLBC approval. Such contingent funding could be capped at $30 million, which is enough to support two projects based on recent award amounts.