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California’s Budget Gap Dooms Incentive Packages Sought by Bay Area Bio Group

A prominent California lawmaker last week said that the state legislature’s scramble to close a $14.5 billion budget gap for 2007 and 2008 all but dooms a package of tax breaks and economic-development programs sought by the San Francisco Bay Area’s life sciences industry group.
Assemblyman Gene Mullin (D-South San Francisco), who chairs the education committee and select subcommittee on biotechnology in California’s lower house, told BioRegion News that lawmakers want to avoid adding to the state’s red ink and will therefore not likely pass new economic incentives for the life sciences or other industries.
“While a number of the suggestions make perfect sense in a period of time when there is either a positive balance in the state treasury, or we’re in a neutral position, and while we think that they will help to grow the industry dramatically, the reality is that when a state is facing an 18-month deficit of $14.5 billion, it’s unlikely that we’re going to see any significant measures go forward that at least initially reduce revenue to the state,” Mullin told BioRegion News last week.
“Anything that has some fiscal overtones has to be put on the proverbial back burner,” Mullin added.
However, Mullin said that the lower house, known as the Assembly, and the Senate view BayBio’s proposals more favorably than others’ because it would not take money from the state Treasury.
“Certainly they have the highest prospect [of passage],” Mullin said. “The non-fiscal side of their program, we’re going to work to advance that as best as we can.”
Those proposals — all yet to be translated into formal legislation — include:
  • Creating incentives for local communities to zone for biotech campuses within their land-use guidelines and “in close proximity to growing housing areas;
  • Setting benchmarks that align state and federal environmental laws; and
  • Creating a “science fellows” program to train students to advise all branches of state government on science issues. While the level of students has yet to be spelled out. The program would be modeled on a similar program for recent PhD graduates created by the American Association for the Advancement of Science.
Mullin said the science fellows program “sounds like a good idea and said unifying state and federal environmental regulations “make a lot of sense.” In addition, he said the zoning proposal “is a great example of something that has no fiscal implications yet.”
“When you have either biotech-overlay zones or things of that nature that make the movement of companies into those zones much more efficient, that’s exactly the kind of activity that has a positively result and relatively modest cost,” said Mullin.
Creating zoning for biotech campuses, Mullin said, is a key reason why his district of South San Francisco has transformed itself over the past generation from a struggling industrial town into a thriving life-sciences giant.
Mullin spoke with BioRegion News on Jan. 16, one day after BayBio presented its 2008 legislative wish list to lawmakers and others in the state capital, the second of three such talks.
A final version of the agenda — BayBio Impact 2008: Translating Science Into Better Health Twelve Point Plan — can be read here.
Nine of the proposals involve creating new life-science economic-development incentives or expanding existing ones. Among these proposals, all yet to be translated into legislation, are requests to:
  • Spend $150 million over 10 years to create Pennsylvania-style life-science incubators linked to the University of California system;
  • Set aside $150 million over 10 years to create “training centers of excellence” that, in concert with the CalState system, will train undergraduates for life-science careers;
  • Allow companies making major investments in California to select an adjusted corporate income tax-apportionment formula;
  • Fully exempt from capital gains taxes investment in startup companies focused on information technology systems for healthcare and life-sciences purposes;
  • Convert California’s R&D tax credit into a tax rebate;
  • Expand the activity of the California Infrastructure and Economic Development Bank to include loans for pre-environmental report work and infrastructure preparation on “sites of high potential for life-science expansion;” and
  • Craft a package to subsidize the bioprocessing and biomanufacturing operations of life science businesses, including production-plant investments, capital-equipment purchases, facility construction and infrastructure upkeep, and long-term employee training,.
Another BayBio wish, which the Assembly has passed, is a proposal to double from 10 to 20 years the amount of time that biotech companies can carry forward tax deductions on their net operating losses. The bill, AB 1370, remains stuck in the state Senate’s revenue and taxation committee, the first stop of all legislation that would change the state’s balance sheet.
AB 1370 would not cost the state any money until fiscal year 2019, when California would lose a projected $300,000 assuming that $6 million in net operating losses set to expire that year would instead be carried forward.

“There’s going to be cuts, and I think education is certainly gong to have its share. … “

“It’s the least impactful [of BayBio’s measures], but it is going to have rocky sledding,” Mullin said.
BayBio issued its 12-point plan on Jan. 10, the same day Gov. Arnold Schwarzenegger submitted to lawmakers his plans to eliminate both the $3.3 billion budget shortfall for the fiscal year ending June 30, 2008, and the $11.2 billion shortfall for the fiscal year that ends June 30, 2009 [BioRegion News, Jan. 14].
Earlier this month, BayBio CEO Matthew Gardner said the proposals would help California’s life-sciences industry remain competitive with emerging clusters overseas, though he acknowledged the difficulty of asking lawmakers for more money at a time when most are intent on containing costs.
“It’s going to be a tremendously challenging year for the state government here,” Gardner told BRN. “I think this gives us a couple of concerns in this industry. In essence, we’re taking the long-term view here.”
The alternative, he said, would be California companies relocating and expanding outside of the state.
‘Long Process’
Although cuts to life science economic incentives have not been discussed publicly, such reductions were offered as possible policy options by the state’s Legislative Analyst's Office, a nonpartisan policy-analysis offshoot of the legislature overseen by the 16-member Joint legislative Budget Committee.
The California legislature “should identify additional revenue solutions, including tax expenditures (such as tax credits or deductions) that can be modified or eliminated, and/or costs that can appropriately be supported by user and regulatory fees,” LAO head Elizabeth Hill wrote in 2008-09: Overview of the Governor’s Budget, posted on the group’s web site.
Hill’s office did not recommend modifying or eliminating tax credits, but said it will release on Feb. 20 a more detailed analysis of Gov. Arnold Schwarzenegger’s proposed budget. Similarly, a nonprofit budget watchdog group said it was too early to say how the budget issue would play out.
“We’re at the beginning of a long process,” said Jean Ross, executive director of the California Budget Project, which advocates for policies intended to benefit low- and moderate-income residents.
Lawmakers are considering how to balance the two budgets under a 45-day deadline imposed by Schwarzenegger when he proclaimed a “fiscal emergency” when he submitted his budget.
One area of consensus by legislators, Mullin said, was that they would work to avoid cuts proposed by Schwarzenegger for two state-funded, multi-campus university systems, the University of California and California State University.
The governor’s proposed fiscal 2009 budget applies a 10-percent across-the-board cut to all state programs, which would more than offset the spending gains budgeted for both university systems for the period.
The cuts would mean that in fiscal 2009, the UC system would lose 3.4 percent, or $109 million, from the $3.3 billion in state funding it received in fiscal 2008. UC’s total fiscal 2008 budget was $18 billion. That cut nearly quadruples to $400 million when compared to the budget proposed by the university’s Board of Regents. Absent the 10-percent cut, UC would have seen its overall budget grow by about 5.3 percent, or $1 billion, to $19 billion in fiscal 2009.
For CalState, the cuts would trim 9 percent, or $312.9 million, from the slightly more than $3.6 billion Sacramento contributed in fiscal 2008. State funding will make up more than half of the school system’s total projected budget of $7.6 billion in fiscal 2009. Absent the cut, CalState’s overall budget would have grown 4.4 percent to nearly $7.3 billion in fiscal 2009.
As for research spending, UC’s outlay would have grown 2.8 percent to $618.6 million in fiscal 2009. CalState’s research spending in fiscal 2009, meantime, was set to climb 3.8 percent to $4.8 million over this year.

“We’re looking at a per-pupil loss of maybe in the $700-a-year bracket. The education coalition will be very staunch in doing what they can in the [kindergarten]-through-university level to mitigate those cuts,” Mullin said. “There’s going to be cuts, and I think education is certainly gong to have its share, but the level of cuts proposed by the governor is going to find resistance.”

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