SHARED PROSPERITY AND INCLUSION

The purpose of this report is to re-evaluate San JoseÕs economic development programs from the perspective of two basic values. The first of these is the belief that economic programs should be inclusive and open. A wide variety of people with diverse interests should be involved in designing the structures, plans, and operational guidelines for these efforts. Ongoing economic development activities should be accessible to public review and susceptible to public participation. The days in which city officials allow only a small group of handpicked "stakeholders" to shape decisions involving millions of dollars in taxpayer funds must come to an immediate and permanent end.

Secondly, economic development strategies should pursue the goal of shared prosperity. All types of economic growth are not of equal value to the people of a city. Most San Jose residents are now familiar with the distinction environmental organizations have drawn between "smart growth" and sprawling development that destroys open space and imposes massive costs on the taxpayers. Similarly, it is possible to choose between developments that produce quality jobs with benefits, increase housing opportunities for residents from varying income levels, and improve the quality of life in nearby neighborhoods and those that leave a few interests extremely well off and the rest of the community with ongoing billsÑfor clinics to treat low wage workers and for subsidized housing to prevent homelessness. When economic development emphasizes shared prosperity, it means that the community as a whole receives a fair return on the investment that the whole community funds.

In order to examine the cityÕs approach to economic development from the point of view of these values, Shared Prosperity and Inclusion is divided into three sections: the problem, the challenge, and the solution. The problem discusses why free market dynamics are failing to meet numerous economic needs and why existing social and political models are proving increasingly outdated and ineffective. The challenge investigates the potential of economic development strategies to remedy these problems. The solution section offers a new policy frameworkÑthe Community Benefits InitiativeÑthat can enable economic development to do a better jobÑfor working families, for businesses, and for taxpayers. Each of these elements of the report will be described briefly below.

THE PROBLEM
If a pundit wanted to describe income distribution in the economy of the 1950Õs, he might remark Ñ it looks like Santa Claus. A small circle of the very rich on top, a huge and expanding mid-section, and two short legs representing those struggling to escape from poverty. The metaphor for the New Economy of Silicon Valley is utterly different; itÕs an hourglass. There are more high paid, high skill jobs than ever before. The middle class is shrinking away. Massive numbers of workers are trapped in low wage, no benefit, dead-end service jobs. The gap between the affluent and the working poor is larger than ever before.

Life in this hourglass economy presents extraordinary problems for working families. Despite the impressive growth of the state economy in the 1990s, real wages for average workers stagnated. In Santa Clara County, from 1979-1999 the top 20% of wage earners experienced wage increases of more than 10%, but the bottom 20% saw their wages fall by 15%. Moreover, a higher percentage of workers in California lack health insurance than in most other states. The difficulties of coping with low wages and inadequate benefits are compounded by economic insecurity. In 1999, 45% of all California employees had less than two years of tenure with their current employer, and median job tenure was only three years. In addition, new forms of contingent and temporary work forced numerous individuals to take short term "jobs" with no assurances of income once an assignment had been completed.

For most of the last century, the American populace has agreed that the government should step in when economic or technological changes cause undue levels of hardship. However, the current mechanisms of government intervention, many of which were developed during the "New Deal," are no longer useful in the hourglass economy. Unemployment insurance, for example, was designed to assist workers who had stable employment, experienced layoffs during a recession, and were re-hired when the times improved. The systemÕs creators never envisioned the conditions facing modern temporary workers- having a job for six days, being out of work for three days, having a job for another day, etc. For the government to effectively respond to the critical problems of the new economy, it must re-design its policies or create alternative models to restore a situation in which economic growth leads to widespread community well being.

THE CHALLENGE
One common type of government policy that may prove capable of responding to the flaws of the hourglass economy is the use of public subsidies to leverage private development. Increasingly, state and local governments have attempted to intervene in the market to achieve outcomes that would not likely result from investment decisions by firms or individuals. The cumulative scale of these subsidies is massive, costing state and local governments as much as $49 billion nationally. In 2000-2001, California spent $7.8 billion on subsidized development projects. Over the last 25 years, the San Jose Redevelopment Agency spent $2.3 billion.

Whether these expenditures historically have generated outcomes of value to working families is open to question. In some cases, the objectives of subsidies may be limited to increases in tax revenues without regard to other community effects, such as impacts on the quality of available jobs or on the demand for, or supply of, affordable housing. In other situations, the firm benefiting from the subsidy may fail to deliver the promised results. One Connecticut study showed that companies that received subsidies produced only 47% of the jobs that they promised to create. In California, the outcomes from subsidies may be largely unknown and unknowable. The California Budget ProjectÕs study of economic development programs, Maximizing Returns, concluded it is difficult, if not impossible, for policymakers to determine whether the $39.3 billion spent since 1995-96 has had any measurable impact on the well being of the stateÕs residents.

In order to determine the potential value of employing public subsidies in Silicon Valley, this report has examined the record of the Redevelopment Agency of the City of San Jose (RDA), the largest grantor of subsidies in Santa Clara County. On balance, there is no question that the RDA has accomplished objectives of value to the people of the city. It has played a primary role in the revitalization of a downtown that had been largely abandoned by private investors. It helped create a convention center/ hotel industry in the city. It funded numerous public facilities or quasi-public facilities including the HP Pavilion (arena), the Tech Museum, The San Jose Repertory Theatre, and the soon-to-be-opened City of San Jose-San Jose State Joint Library. Its resources assisted in financing major transportation projects, such as Route 87. Through the Neighborhood Business District Program, it improved the prospects for small firms in virtually every district in the city.

However, a thorough analysis of the RDAÕs performance also reveals significant flaws in its activities.

INADEQUATE RETURN ON INVESTMENT

The RDA focused on an excessively narrow concept of a community return on investment. Specifically, the Agency failed to actively evaluate or seek returns in the following areas:

Jobs Minimal efforts were paid to determine the quality of jobs that would be generated in subsidized firms or to require that high wage, high benefit jobs would be generated.

Housing The RDA did not calculate the affordable housing units that would be needed to shelter workers holding low wage jobs at subsidized projects, nor did it examine the effects of its subsidies on demand for housing in the valley and on housing price increases.

Family Needs Services that low-income families require, such as childcare and health clinics, were not included in the RDAÕs analyses or requirements.

Small Businesses With the exception of the Neighborhood Business District program, the Agency did not make the growth of existing small businesses in San Jose a priority.

LOSS OF COUNTY SERVICES

The growth of the RDA redirected property taxes from county government to the Agency. This shift prevented tens of millions of dollars from being available for health services and other social services. Also, the RDA has received a disproportionate share of its revenues from the industrial project areas, which arguably would have been developed without the AgencyÕs intervention. Therefore, it cannot credibly be argued that most of the property taxes lost to the county resulted from growth that the Agency had engendered.

LACK OF OPEN PUBLIC INVOLVEMENT

Often Agency negotiations with firms regarding subsidies have taken place behind closed doors. The AgencyÕs Board would then bring complex development and disposition agreements forward for approval. Serious input by community members or organizations would be limited to brief testimony at these public hearings.

INSUFFICIENT ACCOUNTABILITY

Although the RDA did take some action to protect the publicÕs investment, the language employed in Agency agreements was often insufficient to prevent significant losses. The office building at 303 Almaden that had planned to showcase the IBM logo but was never occupied by that major corporation and the still vacant United Artist Theatre buildings are concrete monuments to this inadequacy.

In conclusion, it appears that public subsidies, through the RDA or some other agency, can accomplish valuable objectives for the people of a city and may have the capacity to help alleviate the kinds of challenges a community experiences in the New Economy. To play that positive role, however, the RDA must be reformed. It must modify its practices in order to avoid the failings noted in the past and improve its outcomes for the future.

THE SOLUTION
The use of public subsidies in San Jose can be transformed through the implementation of a Community Benefits Initiative. Essentially, this innovative program would retain the strengths of the past economic development strategies while preventing its limitations and failures. It would seek to generate a system that encourages economic growth, provides developers with predictability and efficient procedures, encourages deliberations in the open with widespread public involvement, and produces a return on the taxpayersÕ investments that genuinely serve the broad interests of the community.

Several aspects of the existing approach to economic development should be continued. The city should maintain a strong redevelopment program. The RDA should focus on a pump-priming mission. Its investments should be those that the private sector is unwilling to undertake today but which will lead to substantial private financial commitments in the future. To accomplish this goal, the RDA should continue to think and act in an entrepreneurial fashion.

However, the RDA will have to changeÑin a number of significant ways. These include:

Openness The public must be allowed full involvement in the determination of Agency goals and the planning of projects to meet those objectives. Obviously, that new direction means wresting decision-making away from handpicked stakeholders and creating mechanisms for more people to play a genuinely meaningful role in setting policy and defining project objectives. More than that, it requires creating systems that provide people with information they need to make informed choicesÑinformation about Agency budgets, about project finances, and about the extent to which developments can meet community needs.

Return on Investment A new principle will have to guide Agency priorities. When it invests community resources, it must generate returns that improve the communityÕs well being. Development agreements would no longer be proposed that create poverty level jobs, leaving tax-funded programs the responsibility of sustaining suffering families. Project proposals that increase demand for housing would have to discuss the supply of housing. Investments in San Jose neighborhoods would no longer routinely ignore the needs of working families. Accountability The outcomes expected from developments should be realistic and feasible. Their actual accomplishment should also be assured with strong measures imposing accountability on the recipients of public funds. If a developer commits to the creation of quality jobs, that commitment must be honoredÑor sanctions need to be imposed.

Describing a new strategy in concept is only an initial step in the design of a city policy that will effectively function as intended. If possible, the innovative ideas should first be tested in practice on a limited scale. Such a preliminary effort took place when the RDA advocated a $36 million dollar subsidy for a mixed-use project on three sites in downtown San Jose to be developed by the CIM group.

At first, this development proceeded in accordance with the AgencyÕs traditional aversion to public involvement. As a column in the Business Journal noted, Ò Ms. Shick (RDAÕs Executive Director) says she wants [CIM] officials to meet with City Council members, the San Jose Silicon Valley Chamber of Commerce and the Downtown Residents Association. If all goes well, a final agreement could come in two months.Ó As usual, handpicked stakeholders would be at the table; everyone else would watch from the outside.

On this occasion, however, a labor/community coalition intervened. CIM had to meet with other groupsÑaffordable housing advocates, unions, and small business representatives. The project was re-analyzed from a community perspective, a perspective that questioned the pay scale for the jobs of janitors and parking lot attendants, the extent to which housing would be affordable to projected retail employees, the impact on local small businesses. A new set of Community Benefit proposals was placed before the City Council. When the final development agreement was adopted, the project included commitments for living wage jobs, additional affordable housing, and a reservation of space for potential small business tenants.

The CIM experience led to two conclusions. First, the change in RDA practices should be accomplished through a modification of policy rather than on a case-by-case basis. Secondly, the procedures for determining community benefits should be known to prospective developers at the earliest possible stages of their interaction with the RDA. The process should be comprehensive and systematic, designed to avoid any delays in a projectÕs timetable.

Based on the experience from the CIM case and from attempts to increase the community return from developments in other regions, a new policy for public subsidies in San Jose can be outlined. The policy involves a two-part strategy. The first stage, the Community Information Report (CIR), institutes a process that increases public involvement in the evaluation of a project. Essential to informed participation is information. The CIR provides the public with data on the way in which a project affects community needs, either positively or negatively. The second stage, the Community Benefits Agreement (CBA), is a process to modify the characteristics of a project to produce a more optimal return. The information generated through the CIR can be used to determine what changes in the development will enhance the well being of working families and neighborhoods in San Jose.

The CIR would present socio-economic and planning data about a project to the full spectrum of interested parties in the city. Six specific areas would be highlighted: employment, housing, financial analysis, smart growth, environmental quality, and neighborhood and family services. When completed, it would help answer the following kinds of questions:

  • To what extent does a project contribute to the local tax base? Does it add to the tax base or simply move parts of the tax base from one site to another?
  • What are the total public costsÑsuch as the costs of subsidies, infrastructure or servicesÑthat will be required for the completion of the project?
  • Does the project add jobs to the community? If so, what kind of jobs in terms of wages and benefits?
  • Does the project increase the need for additional housing in the region? Is that need for market rate or affordable housing?
  • Does the project help provide community infrastructure of value to working families, such as subsidized child care centers or health clinics?

Use of the CIR has potential advantages for decision-makers, community leaders, developers, and residents. By aggregating needed information in one document, it avoids the needless delays associated with late requests for additional data. By requiring a comprehensive overview of the project, it assures the community that decision-makers will have full information when they exercise their judgment. By providing a solid base of facts, it helps to focus debate on concrete issues for which win-win solutions can be formulated.

In the second stage of this overall process, a Community Benefits Agreement is drafted. The CBA can revise the original plan for the development, incorporating insights from the CIR and emphasizing the priorities made evident through public involvement. For example, a CBA might require that jobs generated by the project pay a living wage or that the needs of small businesses be incorporated into the design. Modifications of the project must meet the test of economic feasibility. One of the advantages of a more open process is that the community will have access to data regarding the fiscal limitations on the development and, thereby, be able to generate more practical recommendations for change. Once the contents of a CBA have been negotiated, these commitments can be incorporated into the DDA.

Revising economic development strategies that have been in place for decades should be done with care and due diligence, even when it is clear those past practices have serious flaws. One approach towards moving forward could include a number of distinct steps. First, the City Council could endorse the Community Benefits Initiative in concept and refer the CIR procedure to staff for analysis and for the organization of a public review process. Second, some months later a formal CIR policy could be returned to the Council for approval. Third, the CIR policy alone could be implemented for a six month period, providing interested parties time to improve it as needed. Fourth, the CBA stage could be presented to the Council for adoption in concept and for referral to staff and public participation. Fifth, the CBA, the final stage of the initiative, could be adopted as formal policy.

By engaging in the effort to implement a Community Benefits Initiative, the residents of San Jose, their civic and business organizations, and their elected leaders can begin to transform the cityÕs economic development programs. The outcome of these efforts can be a higher level of public participation and public support for publicly subsidized projects as well as a growing confidence that the investment of public funds is producing returns that benefit the community as a whole.

CONTACT INFORMATION Working Partnerships USA
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