Legislative Analyst's Office Analysis of the 2003-04 Budget Bill

Technology, Trade, and Commerce Agency (2920)

The Technology, Trade, and Commerce Agency, created in 1992, is the state's primary economic development entity for promoting the establishment, retention, and expansion of business, employment, infrastructure, and international trade in California. It promotes tourism as well as foreign investment. The agency also has been designated as the entity leading the state's efforts in defense conversion.

Agency Budget Greatly Reduced Since 2001-02

The agency's 2003-04 proposed budget is substantially lower than in 2001-02. As displayed in Figure 1 (see next page), the Infrastructure Bank is the mainstay of agency spending, remaining fairly constant over the period. On the other hand, under the Governor's proposal, all other expenditures drop 70 percent (all funds). Below, we highlight the year-to-year reductions over this period.

Current-Year Reductions. The current-year budget included elimination of the agency's regional offices as well as grants for local defense adjustment, development of small business software applications, and rural E-commerce programs. In addition, the 2002-03 budget reduced spending for the foreign trade offices, consulting services for small manufacturers, and small business grants for product development and generating electricity from biomass. This resulted in a 15 percent decline in total expenditures (37 percent for General Fund-supported activities) from 2001-02 to the current year.

Proposed Budget-Year Reductions. The administration proposes further reductions in 2003-04 from (1) substantially reducing most General Fund support and (2) eliminating consulting and technology grants for small businesses, defense retention activities, marketing and communications, economic research, and state-funded tourism promotion. This amounts to a 31 percent reduction from total current-year spending (53 percent for the General Fund).

Special Fund Local Assistance Spared the Deepest Cuts. Most of the decline in agency spending is due to General Fund reductions—actions designed to address the state's fiscal shortfall. The proposed budget maintains special fund local assistance of $87 million in 2003-04—$76 million from the Infrastructure Bank, which provides low-interest loans to local governments for infrastructure projects. The remaining special fund local assistance (which also includes support from some federal funds) is for various grant and loan programs such as replacement of underground gasoline storage tanks, rural economic development, and disaster assistance. 

What General Fund Support Remains?

The reductions proposed by the administration leave General Fund support for the programs shown in Figure 2. The budget proposes $21 million for these purposes in 2003-04. This request preserves small business loan guarantees, film permit subsidies, and foreign trade offices at or near current-year levels. Below, we raise concerns regarding the effectiveness of film permit subsidies and the state's trade offices in particular.

Film Permit Subsidy Program

We recommend elimination of the film permit subsidy program and three related positions in the Film Commission because the program has an unclear rationale and a questionable impact on film location decisions. We further recommend that remaining monies in the fund be reverted. (Reduce Item 2920-111-0001 by $8.2 million and Item 2920-001-0001 by $0.3 million. Revert $2 million in Item 2920-101-3005.)

Started in 2000-01, the Film California First program subsidizes filming-related fees that movie and television production crews pay to local and other levels of governments for on-site filming in California. Reimbursements are capped at $300,000 per project (with some costs also capped on a per-day basis) and cover costs such as public safety expenses and public property use fees. The program has provided approximately $8 million per year for this purpose. The Governor's budget proposes $8.2 million for 2003-04 to keep the program at the current-year level. 

Unclear Program Rationale. It is not clear what the rationale is for this particular subsidy. These film-related fees are part of the cost of doing business, and we have no information suggesting that they are either inappropriate or unreasonably high in California. Furthermore, it is unclear why the state provides a subsidy to this particular industry, thereby favoring it over others.

Subsidy Covers a Fraction of a Percent of Total Film Costs. According to our analysis of 2001 program data on reimbursements and total reported filming costs, Film California First's reimbursements covered on average 0.2 percent of total production costs. Looking at feature films in particular, the program reimbursed 2.7 percent of total costs for productions under $100,000 and 0.1 percent of production costs for $50 million-plus blockbusters. Given this small share of production costs, it appears unlikely that the program would have a significant impact on retaining film productions in California. Currency exchange rates and labor cost differences would appear to have greater impacts on film location decisions.

Recommend Elimination of Program. Given these concerns, we recommend elimination of the program and three related positions in the Film Commission for $8.5 million in General Fund savings. Furthermore, over the course of the program's operation, there have been significant delays in the use of the program funds. As a result, we further recommend that the Legislature revert remaining monies in the fund (chiefly from the current-year appropriation). The agency can report at budget hearings on the amount of remaining funds, but we anticipate it would be in the range of $2 million.

Foreign Trade Offices

We recommend that the Legislature eliminate all trade offices—five contract offices and seven state-staffed foreign trade offices—because they have questionable effectiveness. (Reduce Item 2920-012-0001 by $3.4 million.)

Governor Proposes Continued Operation of All Trade Offices. The state operates trade offices in 12 locations around the world. Seven foreign trade offices are staffed by state employees, while five other offices are staffed by contracted consultants. Although the Governor originally proposed the closure of the contract offices effective January 1, 2003 as part of the mid-year spending reductions, the administration now supports the continued operation of all 12 offices. Figure 3 displays current-year and proposed budget-year funding for these offices. 

Offices Have Questionable Effectiveness. In our view, these offices have not demonstrated a clear impact on state exports or foreign investment in California. In past assessments, the agency has claimed that the offices have been cost-effective. In these assessments, however, the agency counted the entire value of export and foreign investment agreements in which they played some role as attributable to the offices' efforts—regardless of how much involvement the offices had. For instance, an office may only have provided a list of foreign companies potentially interested in a product developed by a California business. However, the agency counted the total value of a subsequent export agreement as attributable to the office's assistance.

Other Resources Exist. To the extent that companies cannot successfully transact business in foreign markets on their own, the federal government and local trade organizations generally provide opportunities and assistance. As a result, we recommend that the Legislature eliminate all trade offices—five contract offices, as the administration originally proposed, and seven state-staffed foreign trade offices—for an additional savings of $3.4 million General Fund (less any shut-down costs).

Agency Size Warrants Department Status

We recommend that the Legislature adopt trailer bill language returning the agency to department status, given the agency's small size relative to the state's other agencies and its department-like duties.

As noted above, the agency was created in 1992. Previously, this entity had been the Department of Commerce in the Business, Transportation, and Housing Agency. Given recent sizeable cuts, we believe the agency's current-year budget—with an estimated $156 million in expenditures (including $78 million in loans from the Infrastructure Bank) and 259 personnel-years (PYs)—warrants a return to department status. The Governor's proposed reductions for 2003-04 would further reduce the agency's size to $109 million and 104 PYs. By comparison, with approximately 2,600 employees, the Labor and Workforce Development Agency has the fewest number of employees of the state's other agencies. In addition, the agency does not perform the same functions as other agencies, such as providing policy guidance to constituent departments. In this case, the agency does not oversee other departments.

Consequently, we recommend that the Legislature adopt trailer bill legislation that moves the agency back into the Business, Transportation, and Housing Agency as a department. We would expect some minor administrative efficiencies associated with department status, such as reduced executive salaries and overhead costs.

CalTIP Grant Program Not Cost-Effective

Grant Program for Technology Developed by Small Businesses

CalTIP Grants. Established in 1993-94, the California Technology Investment Partnership (CalTIP) program provides state funds to increase the speed of technologically innovative products development by small businesses. The grant program was designed to serve two primary purposes: 

• Promote defense conversion by creating new jobs for defense workers affected by cutbacks in the early 1990s.
• Help secure federal research and development grants by providing state matching funds.

Recent projects have included lower-cost water purification, reducing computer network downtime due to crashes and upgrades, and developing a coating for commercial furnace tubes to improve heating.

State Program Supplements Existing Federal Funds. Federal funding drives the state's CalTIP program. That is, businesses must secure federal funding to receive a CalTIP grant. On the other hand, state funds are not required to receive federal funds.

From 1997-98 through 2001-02, $25 million from the General Fund has supported 145 CalTIP projects. The typical CalTIP award is about $200,000. Businesses awarded state funding have also received $108 million in federal grants and $100 million from private sources (including the businesses themselves) to support their projects—for a total of $233 million in project funding. Thus, on average, the state has provided 11 percent of funds, compared to 46 percent from the federal government and the remaining 43 percent from private funds. Figure 4 shows the funding split over the previous five years. 

Program Administered by Regional Technology Alliances. The state created nonprofit regional technology alliances (RTAs) to administer the CalTIP grants and to support technology development and commercialization. Current law requires RTAs to raise funds from many sources, assist in the formation of new businesses, provide industry networking forums, and identify emerging industries. There are currently six RTAs serving San Diego, Los Angeles, the Bay Area, the Inland Empire, the San Joaquin Valley, and the Sacramento region.

From 1997-98 through 2001-02, RTAs received $7 million in state support and $16 million from private sponsors. In other words, the state has provided 32 percent of RTA funding on average, while private sources have provided the remaining 68 percent. Figure 5 shows the funding split over the previous five years. 

Governor's Budget. The agency's current-year budget provides $1 million for CalTIP grants and $2 million to support activities of the six RTAs. However, the Governor's proposed 2003-04 budget eliminates funding for both the grants and the RTAs.

Survey Results

Recently, the agency surveyed 94 businesses that received CalTIP grants from 1993-94 to 1999-00 to assess the impact of the program. Figure 6 shows some of the survey questions and the responses. This survey provides data that we use below to evaluate the effectiveness of the program. Self-reported data carry an inherent risk that those surveyed will report more favorable outcomes than is the case, thereby skewing results of program effectiveness. Even accepting this risk, the survey results discussed below demonstrate serious shortcomings with the CalTIP program. 

Outcomes and Job Creation. As noted above, CalTIP grants are intended to support the commercialization of products that use new technologies. Two-thirds of grant recipients, however, did not get a new product to market as a result of the CalTIP projects. Across all surveyed companies, the total number of ongoing jobs created was 169, representing an average of under 2 jobs per company. For the one-third of recipients that did get their products to market, these businesses reported an average of about 5.5 new ongoing jobs within the company because of the new product. This means that on average companies without products did not generate any new project-related jobs.

What If CalTIP Grants Had Not Been Available? The agency also asked businesses if the CalTIP grant was necessary for the project to occur. Although three-quarters responded affirmatively, only 31 percent said their projects would have died without CalTIP funds. Nearly half said the lack of CalTIP funds would have hindered product development. At the same time though, more than 60 percent of businesses responded that they did not need CalTIP grants to get federal or private funds.

Has CalTIP Been Worth the Cost?

The agency often evaluates the effectiveness of a program by using estimates of jobs created or retained and tax revenue generated. But evaluating a program's effectiveness must also determine whether these benefits attributed to the program were worth the cost incurred to achieve them.

Reported Job Creation Small and Costly. As noted above, surveyed businesses reported fewer than two ongoing jobs created on average due to CalTIP-supported projects. (These jobs paid $63,525 annually on average.) Given that the typical CalTIP award has been about $200,000, this translates to the state paying around $100,000 for each project-related job created. With $400,000 each from the federal government and private investors and $100,000 from the state per job, the typical CalTIP-related job has cost approximately $900,000 to create.

State Not Responsible for All Job Creation. Because state funding represents a small portion of total support for projects awarded CalTIP grants, we do not believe the agency can attribute sole or even primary responsibility for the existence of these jobs to the program. In fact, as discussed previously, a majority of businesses indicated that their CalTIP grants were not critical for project development to continue or to get federal or private funding. Some portion, if not most, of these jobs, therefore, would have been created even absent state funds.

Tax Revenue Attributable to State Support Is Small. As an offset to the state costs identified above, the state receives some increased revenues from new product development and sales. As with job creation though, the agency could only attribute at most a small portion of this revenue to the state program. This is because of (1) the relatively small share of state funding and (2) the noncritical nature of CalTIP grants for securing the majority of funding or developing the products. Thus, based on survey data, we estimate that the actual annual "new" revenue to the state as a result of having the CalTIP grants is likely well under $1 million—a minimal amount compared to program spending. It would, therefore, take many years to recoup in tax revenues the funding provided for CalTIP grants to date.

Stated Purposes Not Clearly Met

The program began in part as a defense conversion effort to provide jobs for unemployed defense industry workers. The agency has not collected data on who recipient businesses hired to work on CalTIP-funded projects. So we cannot determine whether the program met this goal. At this point, however, the state is several years removed from the 1990s military base closures. The California economy and these workers probably have adjusted by now to those events (notwithstanding the current state of the economy, which arose from economic issues unrelated to the defense industry).

The other stated purpose of the grant program was to help secure federal research and development funding. Yet, as noted above, most businesses responded that their CalTIP grants were not critical factors in getting federal or private support.

CalTIP Is Not a Cost-Effective Use of General Fund Resources

We recommend that the Legislature approve the proposed deletion of funding for CalTIP grants and the regional technology alliances (RTAs) in the 2003-04 budget. We further recommend enactment of legislation to eliminate the grant program and the RTAs as state-created entities because the program's job and tax revenue impact does not justify its state costs.

Based on this analysis of the agency's survey of recipient businesses, we conclude that the CalTIP grant program has not been a cost-effective use of General Fund resources to promote economic growth through job creation and product development. Our conclusion is primarily based on three factors: (1) the high cost paid by the state per project-related position created, (2) the small amount of tax revenue (relative to program spending) the agency could reasonably attribute to the program, and (3) the program has not met its stated purposes. 

With respect to the RTAs that administer the CalTIP program, a majority of their funding comes from private sources. In addition, many of their industry networking events are cosponsored with private organizations. It is not clear that state involvement significantly adds to the business opportunities afforded by the private marketplace.

Recommend Eliminating CalTIP and the RTAs. Consequently, we recommend that the Legislature approve the proposed deletion of funding for CalTIP and the RTAs in the 2003-04 budget. We further recommend enactment of legislation to eliminate the grant program and the RTAs as state-created entities. We believe this funding is better used to address the General Fund shortfall. The RTAs could continue to exist with the financial assistance of the private companies that currently support them, to the extent businesses find their services of value.