In the Matter of Morris Builders, LP, et al., Respondents,v.Empire Zone Designation Board et al., Appellants.BriefN.Y.April 23, 2013To be argued by: OWEN DEMUTH Time Requested: 20 minutes (Court of tppiat of the 'tatc of j1ctu 19ork In the Matter of the Application of MORRIS BUILDERS, LP, AND MORRIS INDUSTRIAL BUILDERS, LP, Petitioners-Plaintiffs-Respondents, -AGAINST- NEW YORK STATE EMPIRE ZONE DESIGNATION BOARD, NEW YORK STATE COMMISSIONER OF ECONOMIC DEVELOPMENT, NEW YORK STATE DEPARTMENT OF ECONOMIC DEVELOPMENT, COMMISSIONER OF NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE, AND NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE, Respondents-Defendants -Appellants. BRIEF FOR RESPONDENTS-DEFENDANTS-APPELLANTS BARBARA D. UNDERWOOD Solicitor General ANDREW D. BING Deputy Solicitor General OWEN DEMUTH Assistant Solicitor General of Counsel ERIC T. SCHNEIDERMAN Attorney General of the State of New York Attorney for Respondents- Defendants- Appellants The Capitol Albany, New York 12224 Telephone: (518) 474-6639 Facsimile: (518) 473-8963 Dated: September 26, 2012 Reproduced on Recycled Paper TABLE OF CONTENTS PAGE TABLE OF AUTHORITIES...............................................................................iii PRELIMINARY STATEMENT............................................................................1 ISSUES PRESENTED .........................................................................................3 JURISDICTIONAL STATEMENT......................................................................4 STATUTORY BACKGROUND AND PRIOR LITIGATION..............................5 Overview of the Empire Zones Program ...................................................5 Compliance With Program Requirements.................................................6 The April 2009 Amendments .....................................................................9 The Board's Role in Deciding Administrative Appeals from the Commissioner's Non-Final Revocation Decisions.............................11 The August 2010 Amendments ................................................................ 12 The Decisions in James Square Associates, Matter of J-P Group, WL and Matter of Hague Corporation..................................................... 13 THE FACTS AND THE PROCEEDINGS BELOW..........................................17 The Commissioner's Revocation of Petitioner's Certificate ofEligibility.....................................................................................17 This Hybrid C.P.L.R. Article 78 Proceeding and Action for Declaratory Judgment ..................................................21 The Decisions Below.......................................................................23 Table of Contents (cont'd) PAGE ARGUMENT.......................................................................................................24 POINT I THE LEGISLATURE INTENDED THE APRIL 2009 AMENDMENTS TO APPLY TO DECERTIFIED BUSINESSES AS OF JANUARY 1, 2008...............................................26 POINT II THE LIMITED RETROACTIVE APPLICATION OF THE APRIL 2009 AMENDMENTS DOES NOT VIOLATE THE DUE PROCESS CLAUSE........................................................................33 Petitioner Had Sufficient Forewarning of Amendments to General Municipal Law § 959........................................................38 The Retroactivity Period Was Not Excessive................................44 The Amendments Serve Valid Public Purposes............................47 CONCLUSION.............................................................................. ....................... 51 ADDENDUM.....................................................................................................Al LII TABLE OF AUTHORITIES CASES PAGE Astoria Fed. Savings & Loan Ass 'n v. State of New York, 222 A.D.2d 36 (2d Dep't 1996), appeal dismissed, 88 N.Y.2d 1064 (1996), iv. denied, 89 N.Y.2d 87 (1997), cert. denied, 522 U.S. 808 (1997)....................................................31-32,46 Canisius Coil. v. United States of Am., 799 F.2d 18 (2d Cir. 1986) ........................................................................ 46 Capital Fin. Corp., Matter of v. Commissioner of Tax. & Fin., 218 A.D.2d 230 (3d Dep't), appeal dismissed, 88 N.Y.2d 874 (1996) . . .40n Clarendon Trust v. State Tax Commission, 43 N.Y.2d 933 (1978) ................................................................................50 Duell, Matter of v. Condon, 84 N.Y.2d 773 (1995) ................................................................................29 Furlong v. Commissioner of Internal Rev., 36 F.3d 25 (7th Cir. 1994).....................................................................42,48 Gleason [Michael Vee, Ltd.], Matter of, 96 N.Y.2d 117 (2001) ................................................................................31 Grace, Matter of v. New York State Tax Comm 'n, 37 N.Y.2d 193 (1975) ..............................................................................40n Grand Jury Subpoena Duces Tecum [Museum of Modern Art], Matter of, 93 N.Y.2d 729 (1999) ................................................................................31 Hague Corp., Matter of v. Empire Zone Designation Bd. 96 A.D.3d 1144 (3d Dep't 2012)...........................................................17,33 James Square Associates, LP, et al. v. Mullen, et al., 91 A.D.3d 164 (4th Dep't 2011) ..........................................................passim 111 TABLE OF AUTHORITIES (cont'd) CASES (cont'd) PAGE J-P Group, Matter of v. New York State Dep 't of Economic Dev., 91 A.D.3d 1363 (4th Dep't 2012) .......................................................passim Lacidem Realty Corp., Matter of v. Graves, 288 N.Y. 354 (1942) ..................................................................................45 Long v. State of New York, 7 N.Y.3d 269 (2006) ..................................................................................28 Majewski v. Broadal bin Perth Cent. School Dist., 91 N.Y.2d 577 (1998) ...........................................................................26,3 1 Moran Towing Corp., Matter of v. Urbach, 1 A.D.3d 722 (3d Dep't 2003) .................................................................. 4511 Neuner, Matter of v. Weyant, 63 A.D.2d 290 (2d Dep't 1978), appeal dismissed, 48 N.Y.2d 975 (1979).............................................38,49 North, Matter of v. Board of Examiners of Sex Offenders of State of N.Y, 8 N.Y.3d 745 (2007) ..................................................................................31 Onbank & Trust, Co., Matter of, 90 N.Y.2d 725 (1997) ...........................................................................28,29 Outlet Embroidery Co. v. Derwent Mills, 254 N.Y. 179 (1930) ...................................................................................8n Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467 U.S. 717 (1984)..............................................................................34,40 TABLE OF AUTHORITIES (cont'd) CASES (cont'd) PAGE People ex rel. Beck v. Graves, 280 N.Y. 405 (1939) ..................................................................................32 Replan Development, Inc., et al., Matter of v. Department of Housing & Preservation and Development, et al. of City of N.Y, 70 N.Y.2d 451 (1987) .............................................. .......................... passim Rocanova v. United States of Am., 955 F.Supp. 27 (S.D.N.Y. 1996), aff'd, 109 F.3d 127 (2d Cir. 1997), cert. denied, 522 U.S. 821 (1997)................................48-49 Roosevelt Raceway, Inc., Matter of v. Monaghan, 9 N.Y.2d 293 (1961) ..................................................................................39 St. Clair Nation, Matter of v. City of New York, 14 N.Y.3d 452 (2010) ................................................................................26 State v. Green, 96 N.Y.2d 403 (2001) ................................................................................8n Tate & Lyle, Inc. v. Commissioner of Internal Revenue, 87 F.3d 99 (3d Cir. 1999)..........................................................................46 United States v. Canton, 512 U.S. 26 (1994).............................................................................passim United States v. Darusmont, 449 U.S. 292 (1981)............................................................................40n,43 Usery v. Turner Elkhorn Mining Co., 428 U.S. 1 (1976).......................................................................................40 Varrington Corp., Matter of v. City of New York Dept. of Finance, 85 N.Y.2d 28 (1995) ........................................................................35,38,45 V TABLE OF AUTHORITIES (cont'd) CASES (cont'd) PAGE Venable v. Commissioner of Internal Revenue, 2003 WL 21921052 (U.S. Tax Ct. 2003), aff'd, 110 Fed. Appx. 421, 2004 WL 2297334 (5th Cir. 2004) .............................................................................49 Welch v. Henry, 305 U.S. 134 (1938).........................................................................35,36,46 Wiggins v. Commissioner of Internal Rev., 904 F.2d 311 (5th Cir. 1990)....................................................................40n WL, LLC v. Department of Economic Development, 97 A.D.3d 24 (3d Dep't 2012) ............................................................. passim NEW YORK CONSTITUTION articleXVI, § 1 ....................................................................................................39 STATE STATUTES C.P.L.R. article78.................................................................................................4,21 5601(b)(1) ...............................................................................................4,17 General Municipal Law article18-B.................................................................................................. 5 § 959 ........................... . ..................................................................... passim § 959(a) .............................................................................................. passim § 959(a)(v).................................................................................................. 13 § 959(a)(v)(5) ........................................................................................ 10,27 § 959(a)(v)(6) ........................................................................................ 27,30 § 959(w) ............................................................................................. passim §960 ......................................................................................................... 12 § 960(a) ...................................................................................................... 11 L. 2005, ch. 63, Part A (sub-part W), § 2 .........................................................8,42 TABLE OF AUTHORITIES (cont'd) STATE STATUTES (cont'd) PAGE L. 2609, ch. 57, Part S-i §3 ...........................................................................................................9 §10 ...........................................................................................................9 § 11-22 ..................................................................................................10,27 §44 .........................................................................................................10 § 44(a) ........................................................................................................27 L. 2010, ch. 57, Part R 1 .........................................................................................................13 2 .........................................................................................................13 Tax Law §210 .........................................................................................................27 § 210(12-B) ...................................................................................................6 § 210(12-C) ..................................................................................................6 § 210(19) ......................................................................................................6 § 210(20) ......................................................................................................6 §606 .........................................................................................................27 §606(j-1) ...................................................................................................... 6 § 606(k)........................................................................................................6 § 606(1).........................................................................................................6 §1456 ........................................................................................................27 § 1456(d) ......................................................................................................6 § 1456(e) ......................................................................................................6 §1511 ........................................................................................................27 § 1511(g) ......................................................................................................6 § 1511(h)......................................................................................................6 STATE RULES AND REGULATIONS 5 N.Y.C.R.R. § 1L9(c) .....................................................................................................11 § 11.9(c)(1).................................................................................................10 § 11.9(c)(2).................................................................................................10 § 14.2(b) ................................................................................................12,17 vii TABLE OF AUTHORITIES (cont'd) MISCELLANEOUS PAGE Joint Budget Hearing of the Assembly Ways and Means Committee and the Senate Finance Committee on the Economic Development and Taxes Budget for Fiscal Year 2008-09....................7,42 Office of the State Comptroller, Assessing the Empire Zones Program- Reforms Needed to Improve Program Evaluation and Effectiveness, Report 3-2005 (April 2004), available at www.osc.state.ny.us/reports/empirezone3-2005.pdf ............................ 5,47 Office of the State Comptroller-Division of Local Government and School Accountability, The Effectiveness of Empire Zones: Follow-up Report, 2007-MS-2 (2007), available at www.osc.state.ny.us/localgov/audits/swr/empirezones.pdf ................. 7,47 Press Release, Governor Patterson Submits Legislation Creating The Excelsior Jobs Program (June 18, 2010), available at http://www.governor.ny.gov/archive/paterson/press/ O6l8l0ExcelsiorJobsProgram.html ...................................................... 9,48 Tax Department Technical Services Memorandum http://www.tax.ny.gov/pdf/memos/multitax/m09-5c-4i.pdf ................... 11 viii PRELIMINARY STATEMENT The Empire Zone Program is a set of legislatively created tax incentives for economic development in certain regions of New York. In April 2009, the Legislature amended the Empire Zone Program statutes in order to rein in long- documented abuses in the Empire Zone Program and to raise immediately much- needed revenue for the 2009-2010 fiscal year. The amendments added two criteria that businesses were required to meet as of January 2008 in order to claim state tax credits available to Program participants for 2008. Petitioner- plaintiff-respondent Morris Builders, L.P. ("petitioner") is a company that failed to meet those criteria and thus was decertified from the Program and denied its 2008 tax credits.' Petitioner brought this proceeding claiming, among other things, that the retroactive revocation of its eligibility for the tax credits denied it due process of law. Supreme Court and the Appellate Division agreed, and respondents, all State entities, appealed as of right to this Court. This appeal raises the same issue as the State's appeals in this Court in James Square Associates v. Mullen, Matter of J-P Group v. New York State Department of Economic Development, Hague Corporation v. Empire Zone Designation Board and WL, LLC v. Department of Economic Development: I Morris Industrial Builders, LP was also named as a petitioner, but this company was never certified under the Empire Zone Program (456). Accordingly, references in this brief to "petitioner" are to Morris Builders, LP. whether the limited retroactive application of the 2009 amendments violates the due process rights of a company that has been decertified from the Program pursuant to those amendments. In both James Square and J-P Group, the Fourth Department found that it did. The Third Department has now joined the Fourth Department, holding in WL, Hague Corporation and this case that retroactive application of the amendments was unconstitutional. In each case, however, the Third Department disagreed with the Fourth Department's holding that the Legislature intended that the April 2009 amendments to the Empire Zones Act would apply retroactively to January 1, 2008. The Third Department held, without analysis, that the Legislature did not make the April 2009 amendments retroactive until August 2010, when it enacted additional amendments to the Program clarifying that the April 2009 amendments were retroactive. The Third Department erred in both holdings. The Legislature intended that the April 2009 amendments were to be retroactive to January 1, 2008. Moreover, the Legislature's limited retroactive denial of the Program tax credits to companies that failed to satisfy the two statutory criteria did not violate petitioner's due process rights. Both the Supreme Court of the United States and this Court have repeatedly upheld retroactive tax legislation against due process challenges, and this case fits squarely within the pattern the Courts 2 have approved. In particular, this Court's analysis in Matter of Replan Development, Inc., et al. v. Department of Housing. & Preservation & Development, et al. of City of N. Y, 70 N.Y.2d 451 (1987), demonstrates that the April 2009 amendments are constitutional because (1) petitioner was forewarned of the possibility of Program changes and thus could not reasonably rely on the continued availability of the tax credits, (2) the period of retroactivity, slightly more than 15 months, to the beginning of the year before the year of enactment, has been routinely upheld and is not excessive, and (3) the amendments serve two legitimate public purposes by curing abuses of the Program and providing essential budget savings for the State and its taxpayers. Accordingly, the limited retroactive effect of the April 2009 amendments is constitutional because the retroactive effect is supported by legitimate legislative purposes furthered by rational means. This Court should reverse so much of the Third Department's order as found retroactive application of the April 2009 amendments unconstitutional and dismiss the petition. ISSUES PRESENTED 1. Whether the Third Department erred in holding that the period of retroactivity for the April 2009 Program amendments was to be measured from August 2010 rather then April 2009. 3 2. Whether the limited period of retroactivity satisfies the requirements of the Due Process Clause for retroactive tax legislation. JURISDICTIONAL STATEMENT This Court has jurisdiction of this appeal pursuant to C.P.L.R. 5601(b)(1). This action originated in Supreme Court, Albany County, which dismissed the combined C.P.L.R. article 78 proceeding and action for declaratory judgment and declared that the decertification of petitioner retroactive to January 1, 2008, was constitutional (613).2 Citing its previous decision in WL, LLC v. Department of Economic Development, the Third Department affirmed in a memorandum and order, holding that the April 2009 amendments were unconstitutionally retroactive and that the period of retroactivity was to be measured from August 2010; that order finally determined this action (601-607). Accordingly, the question whether the retroactivity of the April 2009 amendments unconstitutionally denied petitioner due process of law is a substantial constitutional question that is directly involved in this appeal. The issues presented in this appeal are preserved for this Court's review because, as reflected in the decisions of Supreme Court and the Appellate Division (11-12, 2 Numbers in parentheses refer to pages in the Record on Appeal. 11 605-606), and in our briefs filed in those courts, the State argued in both courts that the April 2009 amendments were constitutional. STATUTORY BACKGROUND AND PRIOR LITIGATION Overview of the Empire Zones Program An overview of the Empire Zones Program and the April 2009 amendments giving rise to this case demonstrates that, from its inception, the Program has been subject to review and oversight by the Department of Economic Development ("DED"), the Legislature and the Comptroller to ensure that it was accomplishing its goals in a cost-effective manner. New York State adopted the Empire Zones Program in 2000 as a successor to the Economic Development Zones Program to encourage economic development in disadvantaged areas of the State. Benefits available to Program participants included, among other things, tax credits for investment and job creation. See generally Office of the State Comptroller, Assessing the Empire Zones Program- Reforms Needed to Improve Program Evaluation and Effectiveness, Report 3- 2005 (April 2004), available at www.osc.state.ny.us/reports/empirezone3 - 200 5.pdf. The Commissioner of Economic Development (the "Commissioner") administers the Program pursuant to General Municipal Law Article 18-B. 5 Businesses that build in qualifying Empire Zone areas and otherwise meet the statute's criteria may apply to the Commissioner for "Certificates of Eligibility," which they may then submit to the Tax Department in support of their claim for tax credits. See General Municipal Law § 959(a). Among the tax credits generally available to qualified businesses are the Empire Zone Wage Tax Credit, permitting certified Program participants to claim a credit of $1,500 to $3,000 per new job created against their New York State tax liability. See Tax Law §§ 210(19), 606(k). For the wage tax credit and other tax credits, the Tax Law provided that certified Program participants may carry over unused portions of the credit to the following tax year. See Tax Law § 210(12-B), (12-C), (19), (20); § 6060-1), (k), (1); § 1456(d), (e); § 1511(g), (h). Compliance With Program Requirements Since its creation in 2000, the Program has provided that a company's continued eligibility for Program benefits requires it to meet the Program's wage, employment, and investment goals. Before the Legislature's enactment of the April 2009 amendments involved here, the Commissioner was authorized to revoke the Program certification of any business that, among other things, made misrepresentations or failed to disclose information in its application for certification, "failed to construct, expand, rehabilitate or operate or invest in its facility substantially in accordance with the representations contained in its application for certification," or that, for reasons not beyond its control, "failed to create new employment or prevent a loss of employment" in their designated Empire Zone. General Municipal Law § 9 59(a). The Commissioner was directed to decertify and remove from the Program any business that failed to satisfy these criteria; the decertification would take effect on "the date determined to be the earliest event constituting grounds for revoking certification." Id. In reports issued in 2004 and 2007, the State Comptroller noted problems with verifying that Program participants were meeting the job creation and investment goals that were the reason for the Program's existence. See id.; see also Office of the State Comptroller-Division of Local Government and School Accountability, The Effectiveness of Empire Zones: Follow-up Report, 2007-MS-2 (2007), available at www.osc.state.ny.us/localgov/audits/swr/empirezones.pdf In particular, there was growing concern that some firms participating in the Program had received more in tax benefits than the economic returns they were providing and that some firms were claiming benefits for existing jobs, and counting them as new jobs (450).Recognizing these concerns, the Legislature and DED began to audit Program participants and to explore ways to the improve the Program's effectiveness. See Joint Budget Hearing of the Assembly Ways and Means Committee and the Senate Finance Committee on the Economic Development and Taxes Budget for Fiscal Year 2008-09, at pp. 11-12, 55-56, 79- 7 82 (describing letters that were sent to Program participants in 2007, informing them that the Commissioner's audits of these companies' Program performance revealed that they were not meeting at least 60% of their job creation and investment goals under the Program, and that the companies might therefore be subject to Program decertification unless their performance improved). 3 In 2005, the Legislature tightened the Program requirements, mandating that companies entering the Program meet a cost-benefit test in order to be certified, but this requirement was not applied to companies already in the Program. See L. 2005, ch. 63, Part A (sub-part W), § 2. And in April 2009, the Legislature adopted the amendments at issue here, which are described below, and made them applicable to all Program participants. Also in 2009, the Legislature closed the Program to new participants. L. 2009, ch. 57, Part S-i, § 10, effective as of June 30, 2010. In 2010, when Governor Paterson proposed legislation to replace the Empire Zones Program with a new economic development incentive, he explained, "[t]he Empire Zone program was continually hampered by abuses, lack of results and skyrocketing costs. Despite annual Empire Zone expenditures in excess of $550 million the State's returns of The transcript of this legislative hearing has been attached to our brief as an addendum. Although the transcript is not in the Record on Appeal, this Court may take judicial notice of it as a legislative proceeding. State V. Green, 96 N.Y.2d 403, 408 n.2 (2001); Outlet Embroidery Co. v. Derwent Mills, 254 N.Y. 179, 183 (1930). N. investment have been difficult to quantify, and businesses participating in the programs have not been held accountable." Press Release, Governor Paterson submits legislation creating the Excelsior Jobs Program (June 18, 2010), available at http://www. governor.ny.gov/archive/Paterson/press/0618IOExcelsior JobsProgram .html ("Press Release"). The April 2009 Amendments On April 7, 2009, the Legislature enacted amendments to General Municipal Law § 959, L. 2009, ch. 57, part S-i, § 3, introducing two new criteria that businesses must meet to retain their certificates of eligibility (477-496). The impetus for the amendments was the Governor's Enacted Budget Financial Plan, which identified a series of revenue-saving actions for the 2009-2010 fiscal year (475). The Governor's plan stated that the new criteria and other reforms were necessary to "rein in long-documented abuses in the Empire Zone program" (475). The Governor projected that the amendments would "provide savings of $90 million in 2009-10" (475). The April 2009 amendments required the Commissioner to verify during 2009 that Program participants met the following criteria: (1) the businesses must not have simply reincorporated or transferred employees or assets among related entities in order to appear have created new jobs or made new investments to maximize Program benefits, a practice known in agency parlance we as "shirt-changing," see General Municipal Law § 959(a)(v)(5); and (2) the businesses must have "provide[d] economic returns to the state . . . greater in value to the tax benefits the business enterprise used and had refunded to it," also referred to as the "1:1 benefit-cost standard" (481-482). General Municipal Law § 959(a)(v)(6). A business that failed to meet either of these standards would be subject to Program decertification; Id.; see also 5 N.Y.C.R.R. § 11.9(c)(1), (2). A business that met both criteria would be issued a retention certificate. See General Municipal Law § 959(w). The April 2009 amendments also amended twelve separate provisions of the Tax Law regarding Program tax credits. The amendments to each of these statutes was similar, directing that a carryover of the credit from a prior taxable year would not be allowed if the company was not issued a retention certificate pursuant to General Municipal Law § 9 59(w) (487-489). L. 2009, ch. 57, Part S- 1, §§ 11-22. The April 2009 amendments provided that the sections amending General Municipal Law § 959 would "take effect immediately, provided, however," that the corresponding amendments to the Tax Law "shall apply to taxable years beginning on and after January 1, 2008" (495). L. 2009, ch. 57, Part S-i, § 44. Both the Commissioner of Economic Development and the Department of Taxation and Finance (the "Tax Department") announced that the amendments 10 to the General Municipal Law regarding revocation of certification applied to tax years beginning on and after January 1, 2008. The Commissioner's regulations mirror language from the 2009 amendments and provide that "[t]he effective date of decertification . . . shall be January 1, 2008." 5 N.Y.C.R.R. § 11.9(c). Additionally, in a Technical Services Bureau Memorandum, the Tax Department advised Program participants that they must "obtain the [Empire Zone] retention certificate to receive any Empire Zone benefits for tax years beginning on or after January 1, 2008" (433-436). See http://www.tax.ny.gov/pdf/memos/multitax/m09-5c_4i.pdf The Tax Department further advised that "when filing a tax return claiming any [Program] credits (including carryovers) for a tax year that begins on or after January 1, 2008, you must attach an Empire Zone retention certificate to your tax return" (id.). Claims for such credits for this period without an accompanying retention certificate would be denied (id.). The Board's Role in Deciding Administrative Appeals from the Commissioner's Non-Final Revocation Decisions A business whose certificate of eligibility is revoked by the Commissioner pursuant to the 2009 Program amendments may appeal the Commissioner's initial determination to the respondent Empire Zones Designation Board ("Board"). See General Municipal Law § 960(a). The Board is a separate legal entity from the Commissioner's office and makes the final administrative determination whether or not to revoke a company's certificate of Program eligibility. Compare General Municipal Law § 959 with General Municipal Law § 960. The company may provide the Board with.written submissions explaining why its Program certification should be continued. Such submissions "must contain specific factual information (along with documentation establishing that information)" explaining why the Commissioner's notice of revocation was erroneous. 5 N.Y.CR.R. § 14.2(b). A business's appeal submissions must be presented to the Board within 60 days of the Commissioner's notice of revocation. See id. If the appeal is not submitted during this period, the Board will not consider the appeal and the Commissioner's revocation becomes final. The Board is authorized to reverse the Commissioner's notice of revocation only if the Board unanimously finds that there was sufficient evidence presented that the Commissioner's decision was in error. Id. If the Board upholds the Commissioner's revocation, the company's decertification from the Program is final at that point. Id. The August 2010 Amendments In August 2010, in response to Supreme Court's first decision in James Square Associates, described below, the Legislature amended the Program statutes to confirm that decertifications pursuant to the April 2009 amendments 12 were effective as of January 1, 2008. As relevant here, the August 2010 amendments stated: [i]t is the intent of the legislature to clarify and confirm that the [April 2009] amendments ... are deemed to be in effect for the taxable year commencing on or after January 1, 2008 and before January 1,2009. See L. 2010, ch. 57, Part R, § I. The Legislature additionally amended General Municipal Law § 959(a)(v) to provide that "with respect to any business enterprise whose certification has been revoked pursuant to subparagraph five or six of this paragraph revocation ... will be effective for a taxable year beginning on or after January first, two thousand eight and before January first, two thousand nine and for subsequent taxable years, unless the business enterprise is subsequently re- certified." See id. at § 2. The Decisions in James Square Associates, Matter of J-P Group, WL and Matter of Hague Corporation James Square Associates et al. v. Mullen et al., was the first appellate court decision to review the Commissioner's construction of the April 2009 amendments; as noted previously, that decision is now on appeal to this Court. See James Square Associates, LP, et al. V. Mullen, et al., 91 A.D.3d 164(4th Dep't 2011). The plaintiffs in that case were five private companies who brought an action for declaratory judgment against the Commissioner and the 13 Commissioner of the Department of Taxation and Finance to challenge their Program decertifications pursuant to the April 2009 amendments. Plaintiffs argued that the Legislature could not have intended for these amendments to operate retroactively as of January 1, 2008, but even if such operation was intended, it was unconstitutional because it effected a deprivation of property without due process of law, namely, their right to claim Program tax credits for the 2008 tax year. In its first decision, Supreme Court, Onondaga County (Cherundolo, J.) granted plaintiffs' motion for summary judgment and denied defendants' cross-motion for summary judgment, holding that there was insufficient evidence in the language and legislative history of the April 2009 amendments to indicate that the Legislature intended for Program decertification to take effect as of January 1, 2008 (54 49). Defendants subsequently moved to renew their cross-motion, citing the August 2010 amendments that were enacted after the court's first decision in James Square Associates, and that clarified that the April 2009 amendments were indeed effective as of January 1, 2008. In its second decision, Supreme Court granted defendants' motion to renew, but again denied them summary judgment. The court held that the Legislature had not indicated its intent to make the April 2009 amendments retroactive until the August 2010 amendments. In the court's view, the period of retroactivity between the 14 amendment's enactment in August 2010 and January 1, 2008 caused an unconstitutional deprivation of plaintiffs' property interest in the 2008 Program tax credits they might have otherwise been able to claim. Accordingly, Supreme Court declared that the amendments were null and void to the extent they made plaintiffs' decertification effective as of January 1, 2008. By opinion and order entered November 18, 2011, the Fourth Department affirmed. See James Square Associates, LP, et al. v. Mullen, et al., 91 A.D.3d 164 (4th Dep't 2011). The court disagreed with Supreme Court that the April 2009 amendments were not meant to be retroactive to January 1, 2008. Id. at 171-72. Instead, the court held that the legislative history of the April 2009 amendments and the related Tax Law provisions that were expressly given retroactive effect supported the State's construction of the statute. See id. However, the court found that the retroactivity of the April 2009 amendments was unconstitutional. See id. at 172-74. In the court's view, the retroactive denial of the Program tax credits for 2008 violated plaintiffs' due process rights. Id. Citing this Court's decision in Matter of Replan Development, the Fourth Department concluded that retroactive application of the April 2009 amendments was unconstitutional because (1) "[t]here is no indication in the record that plaintiffs had any warning that the criteria [for Program certification] were going to change, prospectively or retroactively, prior to April 15 2009"; (2) plaintiffs "were induced to conduct their businesses in a particular way in specified disadvantaged areas in reliance upon the availability of [Program] tax credits"; and (3) defendants failed to provide a "legitimate public purpose" for retroactive application of the April 2009 amendments. Id. at 173- 74. Accordingly, the Fourth Department held that "the revocations of plaintiffs' certifications, to the extent they were made retroactive to January 1, 2008, are null and void" Id. at 174. Matter of J-P Group concerned another company's Program decertiflcation, which was upheld by Supreme Court, Erie County. On J-P Group's appeal, the Fourth Department affirmed Supreme Court only "to the extent that it determined that the amendments to General Municipal Law § 959 are prospective only," citing, without further discussion, its previous ruling in James Square Associates. See Matter of J-P Group v. New York State Dep't of Economic Dev., 91 A.D.3d 1363, 1364 (4th Dep't 2012). The Fourth Department also affirmed the dismissal of all other causes of action stated in J-P Group's petition, including a claim that the decertification was arbitrary and capricious and a challenge to the emergency regulations filed by the Commissioner pursuant to the amendments. See id. at 1364-67. The State appealed the Fourth Department's constitutional holding to this Court. The State's appeals in James Square and J-P Group are fully briefed. 16 In May 2012, the Third Department decided WL, LLC v. Department of Economic Development. 97 A.D.3d 24 (3d Dep't 2012). That court agreed with the Fourth Department that the retroactive decertification of the petitioner pursuant to the April 2009 amendments violated petitioner's due process rights.. Contrary to the Fourth Department's holdings in James Square Associates and Matter of J-P Group, the Court held, without analysis, that the period of retroactivity should be measured between January 1, 2008 and the August 11, 2010 enactment of the Legislature's clarifying amendments. See id. at 32. The Third Department summarily followed its holding in WL in this case (60 1-607) and in Matter of Hague Corporation v. Empire Zone Designation Board. 96 A.D.3d 1144, 1147 (3d Dep't 2012). The State has appealed as of right pursuant to C.P.L.R. 5601(b)(1) from each of these decisions, and the appeals are pending in this Court. THE FACTS AND THE PROCEEDINGS BELOW A. The Commissioner's Revocation of Petitioner's Certificate of Eligibility Petitioner Morris Builders, LP is a private company that was issued a certificate of Program eligibility by the Commissioner, effective on July 29, 2004 (456). Petitioner's certificate provides that it "shall continue in effect until terminated by operation of law or by action taken pursuant to such laws, rules 17 and regulations as may be applicable" (id.). Petitioner began receiving Program tax credits in 2005 (id.). As directed by the April 2009 amendments to General Municipal Law § 959(w), the Commissioner conducted a review of Program accounts in 2009. This review, based upon BARs petitioner submitted for 2004, 2005, 2006 and 2007 (79-363), indicated that petitioner could not meet the 1:1 test because it had received $3,870,911 in Program tax credits and returned only $124,109 in the form of wages and investments (456-457). In other words, for every dollar petitioner received in Program tax credits, it put 3 cents back into the community (456). After the Commissioner completed his review, he revoked petitioner's Program certification. In a letter dated June 29, 2009, the Commissioner explained that petitioner had failed the 1:1 criterion, that is, it had "failed to provide economic returns to the state in the form of total remuneration to its employees (i.e. wages and benefits) and investments in its facility greater in value to the tax benefits [petitioner] used and had refunded to it" (395-396). The Commissioner's letter also informed petitioner of its appeal rights and cautioned that if no appeal was taken, the revocation would be implemented after 15 days, effective January 1, 2008 (id.). 18 After petitioner received the Commissioner's notice of revocation, it sent the Board a letter dated July 1, 2009, appealing the Commissioner's revocation of its Program certification (397). However, petitioner did not present any written submissions in support of its administrative appeal until September 30, 2009, despite the fact that General Municipal Law § 959(w) and the Commissioner's June 29, 2009 notice of revocation required these submissions to have been presented to the Board within 60 days after that notice, or by Friday, August 28, 2009. Petitioner's untimely administrative appeal submission(398-402) consisted of a five-page document in which its representatives conceded that it could not meet the 1:1 criterion based on its BARs, and agreed with the Commissioner that these reports indicated that it had received $3,870,911 in Program tax benefits while returning only approximately $124,110 in capital investments wages and benefits (399). Petitioner's submission did not contain supporting documentation, as required by the Commissioner's regulations. 5 N.Y.C.R.R. § 14.2(b). Petitioner argued that information in the BARs was incorrect, and that the Board should now consider a significant investment it was making in a 100-acre site that had been purchased by the Westchester County Industrial Development Agency ("IDA") and in which petitioner held a leasehold interest for 80 acres. Petitioner claimed that this investment was being used to 19 remediate environmental contamination at the site, and that if these investments -- admittedly not included in the BARs it had filed with the Commissioner -- were considered, it would be able to satisfy the 1:1 standard (399). Petitioner asked the Commissioner to exercise his discretion to count this investment toward the 1:1 standard (399-400). The Board met on March 11, 2010 to review and consider the timely filed administrative appeals of businesses whose Program certificates of eligibility had been revoked (459). The Board's staff had prepared a summary memo analyzing petitioner's administrative appeal, which concluded that the additional investments petitioner described in the IDA site could not be counted because petitioner "had provided no evidence to substantiate any of their claims other than the written response" (523). However, the Board did not consider the summary memo or petitioner's appeal documents because petitioner had not submitted its appeal documents within the 60-day period (458). The Board unanimously upheld the revocation of petitioner's Program certification in Resolution No. 3 of 2010 (524-526). 4 The Board indicated that it 4 The Board initially adopted Resolution No. 1 of 2010 in February 2010 (45-48), but this determination was nullified after the Board determined that there were not a sufficient number of Board members at the meeting to constitute a quorum (459). Resolution No. 3 of 2010 is therefore the final determination and any challenges that petitioner raises to Resolution No. 1 of 2010 are moot (33-38). Resolution No. 3 20 had reviewed the administrative appeals of petitioner and other companies "where provided" (524). The Board's resolution further stated that the Board had determined that petitioner had "failed to provide sufficient evidence to demonstrate that the Commissioner's finding which resulted in the revocation of [petitioner's] business certification under General Municipal Law § 959(a)(v)(6), was in error" (524). Accordingly, the resolution stated that Board was upholding the Commissioner's June 2009 revocation. B. This Hybrid C.P.L.R. Article 78 Proceeding and Action for Declaratory Judgment Petitioner and Morris Industrial Builders, LP, commenced this hybrid C.P.L.R. article 78 proceeding and declaratory judgment action in July 2010, arguing that petitioner's Program decertification was arbitrary and capricious, affected by an error of law and in violation of lawful procedure (16-43). As relevant to the State's appeal, petitioner argued that the retroactive operation of the April 2009 amendments to January 1, 2008 was unconstitutional and illegal because it "deprive [d petitioner] of a reasonable expectation that they will secure includes petitioner and 90 other companies whose certifications were revoked (524- 526). 21 repose from the taxation of transactions which have been long forgotten" (31- 32). Respondents opposed the petition/complaint with an answer, a memorandum of law and an affidavit submitted by Randal D. Coburn, DED's Director of the Program (444-53 1). Mr. Coburn explained that the Program "has been under increasing scrutiny for several years" because there was "growing concern that some firms participating in the Program have received more in tax benefits than they have produced in economic returns in the form of wages paid to workers and capital investments in their facilities" (450). Mr. Coburn noted that the April 2009 amendments were also precipitated by "increasing concern" about "businesses exploiting loopholes in the law," allowing them "to claim tax benefits for existing jobs by counting them as new jobs" (id.). Mr. Coburn stated that retroactive operation of the April 2009 amendments to January 1, 2008 was "the only rational way" for the 5 Petitioner also asserted that respondents' determination lacked a rational basis in the record because respondents did not consider "the considerable investment by [petitioner] in the environmental remediation of the property" in which it held a leasehold interest, as well as additional investments (23). In addition, petitioner raised procedural due process arguments based on two minor drafting errors in the April 2009 amendments to General Municipal Law § 959(w) -- later corrected by the Legislature's August 2010 amendments -- and the procedures followed by the Commissioner and the Board (26-27, 29-30, 33-34). The Third Department rejected each of these arguments. On September 13, 2012, this Court denied petitioner's motion for leave to appeal from these issues. 22 Commissioner to implement the reforms mandated by the statute, which directed that the review of the Program certifications occur in 2009 in order to realize "the legislative purpose of achieving savings during the 2009-2010 fiscal year by reforming the [Program]" (453). C. The Decisions Below Supreme Court dismissed the petition/complaint (6-13). Supreme Court rejected petitioner's claims attacking the constitutionality of the April 2009 amendments. The court concluded that the amendments "[were] not imposed retroactively" because they "rendered [petitioner] ineligible to receive future tax benefits and credits based on their failure to satisfy the 1:1 benefit-cost . standard in the past" (11). The Third Department reversed Supreme Court only to the extent that it found that retroactive operation of the April 2009 amendments was unconstitutional (601-606). The court followed its previous decision in WL and held that petitioner's Program revocation "cannot be made retroactive to January 1, 2008" because "like [the company in WL, petitioner] could not have anticipated that the program rules governing certification would be changed and 'had every reason to assume that it would continue to enjoy the benefits of certification so long as it continued to comply with the provisions in the [then] existing statutory enactments." (606, quoting WL, 97 A.D.3d at 32). 23 The Third Department otherwise found that the Board properly declined to consider petitioner's administrative appeal because it was untimely, having been submitted well beyond the 60-day period set forth in General Municipal Law § 959(w). The court explained that "[i]n the absence of a timely perfected appeal, there was no additional documentation, explanation or evidence for the Board to consider beyond the business annual reports previously reviewed by the Commissioner," which established that petitioner did not satisfy the 1:1 benefit- cost test (603). Finally, the court rejected petitioner's remaining arguments, including its claim that its due process rights were violated by procedures followed by the Commissioner and the Board and by minor drafting errors in the April 2009 amendments (604-605) ARGUMENT The Third Department's memorandum and order should be reversed because the court erred in two respects. First, the court incorrectly held that the period of retroactivity should be measured from the enactment of the August 2010 amendments. The court's conclusion, which was not supported by any analysis, failed to recognize that there was sufficient evidence within the text and legislative history of the April 2009 amendments themselves to establish that they were meant to take effect as of January 1, 2008. The court overlooked 24 the fact that the April 2009 legislation also amended the Program tax credits contained in the Tax Law and made those amendments effective as of January 1, 2008. Additionally, a common-sense reading of the amendments to General Municipal Law § 959(w), which directed the Commissioner to complete the review and any decertification during 2009 based on petitioner's financial information from earlier years, and the stated legislative goal of realizing Program savings during the current (2009-20 10) fiscal year, further support the conclusion that the Legislature always intended the 2009 decertifications to be effective on January 1, 2008. The August 2010 amendments merely clarified and confirmed that revocations of certifications pursuant to the April 2009 amendments to General Municipal Law § 959 were intended to be effective for the taxable year commencing on January 1, 2008 (331). For all of these reasons, the Appellate Division erred in holding that the period of retroactivity exceeded two years and was unconstitutional, when in fact the actual period of retroactive operation was approximately 15 months between the April 7, 2009 enactment date of the 2009 amendments and January 1, 2008. Second, the Appellate Division erred in holding that this limited period of retroactivity deprived petitioner of due process. The retroactive denial of the tax credits here satisfied the analysis set forth by this Court in upholding the constitutionality of retroactive tax legislation. See Matter of Replan Dev. v. Nil Department of Hous. & Preservation of City of N.Y, 70 N.Y.2d 451, 455-57 (1987). In addition, under the circumstances of this case, even the period between the August 11, 2010 enactment date of the clarifying statute and January 1, 2008 did not subject petitioner to any constitutional deprivation. For all of these reasons, explained further below, this Court should reverse the Third Department and dismiss petitioner's petition/complaint. POINT I THE LEGISLATURE INTENDED THE APRIL 2009 AMENDMENTS TO APPLY TO DECERTIFIED BUSINESSES AS OF JANUARY 1, 2008 The period of retroactivity for the April 2009 amendments is slightly more than 15 months, measured from their enactment on April 7, 2009 back to January 1, 2008. Legislation is retroactive in effect where "the language expressly or by necessary implication requires it." Matter of St. Clair Nation v. City of New York, 14 N.Y.3d 452, 457 (2010), quoting Majewski v. Broadal bin Perth Cent. School Dist., 91 N.Y.2d 577, 584 (1998). In this case, two points in particular demonstrate that the Legislature intended that the April 2009 amendments were to be effective on January 1, 2008. First, the January 1, 2008 effective date is necessary to synchronize the timing of the amendments to General Municipal Law § 959(a) and (w) with the 26 portions of the 2009 amendments that made corresponding changes to the Tax Law. The Legislature expressly made the Tax Law amendments to the Empire Zone tax credits effective retroactively to January 1, 2008 (487-489, 495). See Tax Law §§ 210, 606, 1456, 1511; L. 2009, ch. 57, Part S-i, §§ 11-22, 44(a). The Legislature necessarily intended that decertifications issued pursuant to the April 2009 amendments to General Municipal Law § 959(a) and(w) were to take effect on January 1, 2008, because the 2009 amendments also changed the corresponding provisions of the Tax Law to disallow carry-over credits for companies that were decertified by the Commissioner following its required 2009 review. Only businesses that satisfied the criteria set forth in General Municipal Law § 959(w), as amended, would be issued a retention certificate, a prerequisite to claiming the carryover credits. Each of the Tax Law amendments refers to the retention certificate required by the amended section 959(w). The effective date of the tax credit amendments, i.e., January 1, 2008, would be rendered meaningless if the substantive provisions to which they refer, namely General Municipal Law §§ 959(a)(v)(5), (a)(v)(6) and (w), were not also effective on the same date. In other words, construing the statute to mean that the Department of Taxation and Finance could disallow credits based on the Commissioner's decertification as of January 1, 2008, but that the Commissioner 27 could not actually make the decertification effective until April 2009, would produce a conflict that the Legislature could not have intended. Under the Tax Law amendments, the carryover credits from the pre-2008 years could only be claimed for 2008 if the taxpayer had a retention certificate, but under the Third Department's interpretation of the amendments to General Municipal Law § 959(a) and (w), the Commissioner could not issue a retention certificate effective for periods before April 2009. "Although statutes will ordinarily be accorded their plain meaning, it is well settled that courts should construe them to avoid objectionable, unreasonable or absurd consequences." Long v. State of New York, 7 N.Y.3d 269, 273 (2006); see Matter of Onban/e & Trust Co., 90 N.Y.2d 725, 731 (1997) (declining to read amended statute as prospective-only because such a construction would render some of its terms meaningless). In order to eliminate this conflict, the amendments to General Municipal Law § 959(a) and (w) must be effective at the same time as the tax credit amendments, i.e., January 1, 2008. Second, the history of the 2009 amendments shows that the Legislature intended the January 1, 2008, effective date to govern, because the Legislature's 2009-10 financial plan projected realizing $90 million in savings from the decertifications during the then-current 2009-10 fiscal year (296). As a result, the denial of the tax credits for the decertified companies had to be effective for 28 2008 because if it were not, the decertified companies could claim their tax credits for qualifying expenditures incurred in 2008 (as opposed to their credit carryovers for earlier years' expenditures, which were barred by the 2009 amendments in the absence of a retention certificate) during the 2009-10 fiscal year, and the full amount of the intended savings would then not be realized in the 2009-10 fiscal year. The fact that the Legislature intended the savings to be realized in the then-current fiscal year is further shown by the fact that the Legislature directed the Commissioner to perform the Program review called for by the 2009 amendments in 2009. Since the most recent financial information available at that time were the BARs for the period ended December 31, 2007, it was reasonable for the Legislature to make the decertifications effective on January 1, 2008. See General Municipal Law § 959(a) (decertification would take effect on "the date determined to be the earliest event constituting grounds for revoking certification"). A common-sense reading of the April 2009 amendments to General Municipal Law § 959(w) supports this argument. "[T]he reach of the statue ultimately becomes a matter of judgment made upon review of the legislative goal." Matter of Onbank & Trust Co., 90 N.Y.2d at 730, quoting Matter of Duell v. Condon, 84 N.Y.2d 773, 783 (1995). There can be no dispute that the legislative goal behind the April 2009 amendments was immediately to generate 29 significant revenues for the state by restricting tax credits to businesses that were not fulfilling the Program's ultimate purposes of creating new job and investment opportunities in the State (185, 367). As amended, General Municipal Law § 959(w) required the Commissioner to conduct a review of all Program participants during 2009 and to determine whether any should be decertified. As noted in the affidavit of Randal Coburn, DED's director of the Empire Zone Program, the Commissioner could not fulfill this statutory mandate unless it reviewed those participants' BARs for 2007, the latest documents then available (455). For businesses decertified under General Municipal Law § 959(a)(v)(6) (the 1:1 benefit-cost standard), the Commissioner was required to review "at least three [BARs] filed by the business enterprise." General Municipal Law § 959(w). The Third Department's construction would presumably require the Commissioner to wait until BARs were generated at some point after April 7, 2009, a period that would likely take years, thereby frustrating the amendments' legislative purpose of realizing immediate savings to the State during the 2009-2010 fiscal year. Moreover, the Appellate Division's holding derives no support from the fact that the Legislature did not enact a proposed version of the April 2009 legislation that expressly provided that the amendments to General Municipal Law § 959 were to be effective on January 1, 2008. The failure to enact 30 proposed statutory provisions is an unreliable guide to legislative intent. Although "legislative intent may be inferred from the omission of proposed substantive changes in the final legislative enactment," the deleted language on which petitioner relies falls far short of "demonstrat[ing] a clear mandate from the Legislature" that the decertification of Program participants was to be prospective from April 2009. Matter of Grand Jury Subpoena Duces Tecum [Museum of Modern Art], 93 N.Y.2d 729, 738 (1999). Further, the fact that the amendments to General Municipal Law § 959 as enacted were to take effect "immediately" does not by itself establish an exclusively prospective operation. It may alternatively be supportive of retroactive operation, see Matter of Gleason [Michael Vee, Ltd.], 96 N.Y.2d 117, 122 (2001) and, at worst, is not dispositive. See Majewski, 91 N.Y.2d at 583-84. Thus, the April 2009 amendments set forth the only substantive changes to the Program, including its intended effective date of January 1, 2008. In contrast, the August 2010 amendments merely reaffirmed what the scope of those changes was. See Matter of North v. Board of Examiners of Sex Offenders of State of N.Y, 8 N.Y.3d 745, 753-54 (2007) (2002 amendments to New York's Sex Offender Registration Act were a clarification of existing law, not a substantive change); Astoria Fed. Savings & Loan Ass 'n v. State of New York, 222 A.D.2d 36, 36 (2d Dep't 1996), appeal dismissed, 88 N.Y.2d 1064 (1996), 31 lv. denied, 89 N.Y.2d 87 (1997), cert. denied, 522 U.S. 808 (1997) (rejecting plaintiffs argument that 1991 amendments to 1984 statute was impermissibly retroactive: "we believe it to be worthy of underscoring that the challenged amendment was promulgated to clarify the 1984 enactment and not to change it") (emphasis in original); cf. People ex rel. Beck v. Graves, 280 N.Y. 405, 410 (1939) (striking as unconstitutional an amended statute imposing a new tax assessment with a retroactive period of 16 years, and rejecting the Tax Commission's argument that the amendment was merely a clarifying statute; the Court noted that prior to the amendment, the income in question was free from taxation). Accordingly, the Appellate Division's determination that the retroactive period ran from January 1, 2008 to August 11, 2010, was mistaken. Petitioner was on notice as of April 2009 that it was subject to decertification retroactive to January 1, 2008. Thus, the period of retroactivity here is measured from the April 7, 2009 enactment date to the amendments back to January 1, 2008, a period of slightly more than 15 months. As explained in Point II below, that limited degree of retroactivity is consistent with the requirements of due process. 32 POINT II THE LIMITED RETROACTIVE APPLICATION OF THE APRIL 2009 AMENDMENTS DOES NOT VIOLATE THE DUE PROCESS CLAUSE In this case, as well as in James Square, Matter of J-P Group, WL and Hague Corporation, the Appellate Divisions erred in holding that the retroactive operation of the April 2009 amendments was unconstitutional. The effect of the amendments was to deny companies their Program tax credits for 2008 if they did not satisfy the 1:1 and shirt-changer criteria for the period before 2008. Petitioner's claim, which concerns the retroactive removal of tax credits, is properly analyzed under the due process standards for retroactive amendment of tax statutes provided by United States v. Canton, 512 U.S. 26 (1994), Matter of Replan Dev. v. Department of Hous. Preservation and Dev. of City of N.Y, 70 N.Y.2d 451 (1987), and other cases. Under those standards, the limited retroactive denial of the tax credits involved here was constitutional and did not violate petitioner's due process rights. The Supreme Court of the United States has repeatedly upheld retroactive tax legislation against due process challenges. See Canton, 512 U.S. at 30 (collecting cases). Canton upheld a retroactive tax law change, and the decision illustrates the judicial deference accorded to legislative judgments in this area. In that case, Congress retroactively limited eligibility for an estate tax deduction 33 by adding a new requirement 14 months after the deduction was enacted. In the interim, the taxpayer, to qualify for the pre-amendment version of the deduction, had engaged in a stock transaction that cost it over $600,000 but would have allowed the taxpayer to save over $2,500,000 in estate tax. The transaction did not qualify for the deduction under the statute as amended, and Congress made the amended statute effective back to the date of the deduction's original enactment, with the result that the taxpayer lost its eligibility for the deduction. The Supreme Court found that the retroactive amendment satisfied the requirements of due process. See id. at 32-34. The Court explained that, although some of its precedents had stated that due process prohibits retroactive tax statutes that are "harsh and oppressive," that standard is the same due process standard applicable to retroactive economic legislation generally, namely, whether "the retroactive application of a statute is supported by a legitimate legislative purpose furthered by rational means." Id. at 30-31- (quoting Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467 U.S. 717, 729-30 (1984)). Applying that standard, the Court observed that the purpose of the amendment, to correct a mistake in the original deduction statute, "was neither illegitimate nor arbitrary." Id. at 32. In addition, the Court found that the 14- month-period between the enactment of the deduction and its amendment was "only a modest period of retroactivity." Id. The Court explained, id. at 33, that 34 in Welch v. Henry, 305 U.S. 134 (1938), it had upheld a Wisconsin income tax adopted in 1935 on dividends received in 1933, concluding in Welch that a permissible period of retroactivity included "the receipt of income during the year of the legislative session preceding that of its enactment." Welch, 305 U.S. at 150 (emphasis added). Finally, the Canton Court held that neither the taxpayer's reliance on the deduction as in effect before its amendment (at a cost of over $600,000 in addition to the imposition of over $2,5000,000 in additional estate tax) nor the taxpayer's lack of notice regarding the amendment, established a due process violation. Canton, 512 U.S. at 33-34. This Court's decisions are in accord with Canton and Welch. "Retroactive tax legislation may be treated as valid, unless it reaches so far into the past or so unfairly as to constitute a deprivation of property without due process." Matter of Varrington Corp. v. City of New York Dept. of Finance, 85 N.Y.2d 28, 32 (1995). Such legislation will be upheld unless its retroactivity is "so harsh and oppressive as to transgress the constitutional limitation." Replan, 70 N.Y.2d at 455, quoting Welch, 305 U.S. at 147. And, as noted above, Canton confirms that the "harsh and oppressive" standard is simply another way of phrasing due process rational basis review. See Canton, 512 U.S. at 30-3 1. 35 As the Third Department recognized (606), Rep lan is this Court's leading decision regarding retroactive tax amendments. In Replan, this Court upheld the retroactive repeal of a real property tax exemption after the taxpayer, a developer, had incurred significant expenses in reliance on the availability of the exemption. The taxpayer purchased and began to restore two buildings formerly used for single room occupancy (SRO). The taxpayer planned to use the buildings for non-SRO multiple occupancy, and at the time it purchased the. buildings and began renovation, a provision of the city code exempted from taxation increases in value resulting from the conversion of a building from SRO to non-SRO multiple occupancy. The city code provided that this program would be in effect until 1984. See Replan, 70 N.Y.2d at 454. Thereafter, pursuant to a repeal of the enabling provision of state law, the city code exemption was repealed, effective retroactively to conversions, including the taxpayer's, commenced in the year before the repeal. Id. Relying in part on United States Supreme Court decisions including Welch v. Henry, this Court in Replan rejected the taxpayer's due process challenge to the retroactive repeal of the tax exemption. This Court explained that the determination of whether a retroactively applied tax statute is "harsh and oppressive" requires a balancing of three factors: (1) the taxpayer's forewarning of a change in the legislation and the reasonableness of his reliance on the old 36 statute "under all the circumstances"; (2) the length of the retroactive period, and (3) the public purpose advanced by the retroactive legislation. Id. at 456 (citation omitted). Applying those factors in Replan, this Court first noted that the taxpayer agreed "that the period of retroactivity - one year - is not excessive" and that the purposes of the retroactive application - to forestall the loss of SRO housing and discourage the eviction of tenants - were valid public purposes. Id. at 457. The Court concluded that the taxpayer could not have justifiably relied on the tax exemption as in effect when it bought the buildings, because the city code provision was subject to changes in the state enabling legislation which authorized the exemption in the first instance. Id. In the present case, the analyses in Replan and Canton compel the conclusion that the limited retroactive effect of the April 2009 amendments satisfies due process because it is supported by legitimate legislative purposes furthered by rational means and thus is not harsh and oppressive. Replan and Canton upheld retroactive revocations of tax benefits that taxpayers indisputably relied on to their substantial financial detriment, because, as here, the revocation was reasonably foreseeable, was of limited duration (there, 12 and 14 months, respectively, compared to just over 15 months here), and was justified by legitimate governmental purposes, which in this case included 37 ensuring that the Program served its intended economic development purposes at a reasonable cost and raising the revenues necessary to address the State's 2009 budget shortfalls. The Appellate Divisions misapplied Replan's three factors and came to the erroneous conclusion that the 2009 amendments were unconstitutional. We demonstrate below that the retroactivity here is well within due process limits. A. Petitioner Had Sufficient Forewarning of Amendments to General Municipal Law § 959. The mere fact of petitioner's reliance is not sufficient to establish a constitutional violation, because "[t]ax legislation is not a promise, and a taxpayer has no vested right in the" Tax Law. Canton, 512 U.S. at 33; see also Matter of Varrington Corp., 85 N.Y.2d at 33 (same); Matter of Neuner v. Weyant, 63 A.D.2d 290, 300 (2d Dep't 1978) ("almost all new laws upset some expectations, and frequently changes are made in the legal consequence of prior conduct"). Petitioner could not reasonably rely on the pre-April 2009 version of General Municipal Law § 959 as an assurance that its tax credit eligibility could never be altered, and thus, its expectations as to taxation have not been unreasonably disappointed. Replan, 70 N.Y.2d at 456-57. As an initial matter, it is settled that New York's constitutional restrictions on tax exemptions preclude taxpayers from claiming any vested 38 right in the continuation of tax credits, exemptions or beneficial rates. Under article XVI, § 1, subject to narrow exceptions not relevant here, "[t]he power of taxation shall never be surrendered, suspended or contracted away" and "[e]xemptions may be altered or repealed." N.Y. Const., art. XVI, § 1. As this Court held in Matter of Roosevelt Raceway, Inc. v. Monaghan, 9 N.Y.2d 293, 307 (1961), under article XVI, § 1, "the State may not be said to have breached any contract or agreement with Roosevelt to maintain its state tax at the level provided for in 1956 for the reason that no one was empowered to enter into such an agreement on behalf of the State" (emphasis added). In addition, an Empire Zone Program recertification did not entitle petitioner to greater protection than that accorded to other taxpayers who relied on the continuing benefit of a tax statute. Accordingly, the Third Department erred by concluding that petitioner had a stronger reliance claim because it "had every reason to assume that it would continue to enjoy the benefits of certification so long as it continued to comply with the provisions in the existing statutory enactments" (606, quoting WL, 97 A.D.3d at 32). Program certification was simply a pre-requisite to the right to claim the tax benefits, and was explicitly subject to termination "by operation of law" (456). Thus, the due process claim petitioner asserts here is no different from the taxpayer's argument in Rep lan that it "acted in reliance on the inducement" of the tax 39 exemption to participate in the SRO conversion program, 70 N.Y.2d at 455, or in Canton that it "specifically and detrimentally relied on the preamendment version" of the estate tax deduction statute when it engaged in the stock transaction. 512 U.S. at 33. Indeed, similar inducements and reliance are the hallmarks of all tax incentives, which exist to encourage taxpayers to engage in the tax-favored transactions. The Legislature's retroactive readjustment of the qualifications necessary for the continued tax credits "is not unlawful solely because it upsets otherwise settled expectations." Pension Benefit Guar. Corp., 467 U.S. at 729, quoting Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 15-16 (1976). In any event, as the Fourth Department recognized in James Square Associates, the April 2009 amendments "alter [the decertified company's] eligibility for tax credits, and the cases addressing the retroactive application of tax statutes are therefore instructive." James Square Assoc., 91 A.D.3d at 173.6 6 In addition, retroactive tax credit legislation presents fewer constitutional notice and reliance issues than legislation that "create[s] a new tax" and seeks to apply it retroactively. United States v. Darusmont, 449 U.S. 292, 300 (1981); cf. Wiggins v. Commissioner of Internal Rev., 904 F.2d 311, 314 (5th Cir. 1990) ("[t}here is no new tax here" because the taxpayers "were already subject to tax from recapture of the investment tax credit and to the alternative minimum tax"); Matter of Capital Fin. Corp. v. Commissioner of Tax. & Fin., 218 A.D.2d 230, 233 (3d Dep't), appeal dismissed, 88 N.Y.2d 874 (1996) (rejecting taxpayer's argument that it had a vested property right to carryovers of mortgage recording tax credits it had earned prior to the disputed amendment). And tax credits are, like exemptions, "a matter of legislative grace." Matter of Grace v. New York State Tax Comm'n, 37 N.Y.2d 193, 196 (1975) (tax exemptions "are allowed only as a matter of legislative grace"). Accordingly, the reliance claim here is the same one the taxpayers advanced in Canton and Replan, and it should be similarly rejected. Thus, petitioner knew that the Legislature could repeal the Empire Zone Program tax credits at any time, and that petitioner could have no claim against the State for continued tax benefits, regardless of the extent of any investment that it might have been induced to make by the Program. Indeed, petitioner's certificate of eligibility explicitly provided that eligibility would continue "until terminated by operation of law or by action taken pursuant to such laws, rules and regulations as may be applicable" (456). Similarly, in Replan, this Court relied specifically on the fact that the city code provision "was subject to such changes as may have been made in the State enabling legislation itself." 70 N.Y. 2d at 457. Here too, the likelihood of further statutory amendments was manifest. Accordingly, the Third Department was wrong to hold that petitioner "could not have anticipated" that the Program's eligibility rules would change (606). Since the Program's inception in 2001, petitioner and all other businesses that were enrolled in the Program were on notice that their eligibility for tax benefits depended on their ability to create new jobs and investment opportunities in the State, the reason for the Program's existence. Indeed, the Legislature amended the statutory eligibility requirements several times prior to 41 April 2009, including in 2005, when it enacted a cost-benefit standard similar to the one at issue and directed that it would apply to new Program participants. See L. 2005, ch. 63, Part A (sub-part W), § 2. As Mr. Coburn explained, the April 2009 amendments did not appear without warning, but resulted from "increasing scrutiny" over "several years," based on concerns that "some firms participating in the Program have received more in tax benefits than economic returns they are returning in the form of wages paid to workers and capital investment in their facilities" (450). The April 2009 amendments were also foreshadowed by legislative hearings held a year before their enactment, during which legislators and agency officials publicly discussed efforts to audit companies who were not meeting Program goals, see Joint Budget Hearing of the Assembly Ways and Means Committee and the Senate Finance Committee on the Economic Development and Taxes Budget for Fiscal Year 2008-09, at pp. 11-12, 55-56, 79-82, and by the 2004 and 2007 public reports of the Comptroller, who found that the Program, based on the then- existing statutory eligibility criteria, was not meeting its job creation and investment objectives. Thus, it was "reasonably foreseeable" that the Program's eligibility criteria would change to address these concerns, particularly since petitioner's own certificates of eligibility warned it that this could happen. See, e.g., Furlong v. Commissioner of Internal Rev., 36 F.3d 25, 28 (7th Cir. 1994) (tax 42 on loans from certain pension plans was reasonably foreseeable because it was not a "wholly new tax"). Petitioner's reliance claim is further undermined by the fact that it did not demonstrate in the BARs that it submitted to the Commissioner that it engaged in any particular activities during 2008, the period of retroactivity, in reliance on the Program tax credits it expected to claim for 2008. To the extent that petitioner cited certain investments it made in real property in reliance on the 2008 Program tax credits (32), this claim was not made until its administrative appeal to the Board (398-402). Since, as the Third Department properly found, the administrative appeal was untimely, the Board could not consider this additional documentation but was compelled to affirm the Commissioner on the ground that the previously submitted BARs conclusively demonstrated that petitioner failed the 1:1 test (603). See General Municipal Law § 959(w) (the Board "shall only reverse" the Commissioner's revocation of a company's Program certification if it unanimously finds that there was sufficient evidence demonstrating that the Commissioner erred). Nor did petitioner present any proof that it had already completed and filed its 2009 returns claiming the credits before the April 2009 amendments were enacted. In the absence of any evidence that petitioner would have "altered [its] behavior to avoid the [loss of tax credits for 2008]," United States v. Darusmont, 449 U.S. 292, 299 (1981), and 43 in light of petitioner's burden to demonstrate its entitlement to the tax credits at issue, there is no basis to presume that that petitioner was "induced to conduct [its] business[ ] in a particular way . . . in reliance I upon the availability of [Program] tax credits" for 2008. James Square Assoc., 91 A.D.3d at 174. For all of these reasons, the Appellate Division mistakenly concluded that petitioner did not have any warning before April 2009 that the eligibility criteria could change. Thus, the first Replan factor favors the constitutionality of the limited period of retroactivity here. B. The Retroactivity Period Was Not Excessive. Consistent with the second factor considered in Replan, the 15-month retroactivity period of the April 2009 amendments is not constitutionally excessive. The Third Department did not discuss this factor, but its due process analysis rested on the erroneous conclusion that the period of retroactivity is measured from the Legislature's August 2010 enactment of its clarifying amendments back to January 1, 2008, a 32-month period. As we explained in Point I above, August 2010 amendments simply clarified what had always been the Legislature's intention regarding the effective date of the April 2009 amendments. 7 Even if measured from the enactment of the August 2010 amendment (rather than from April 2009, as the Fourth Department correctly held in James Square 44 Viewed correctly as adopting a 15-month period of retroactivity, the April 2009 amendments satisfy the second Replan factor because 15 months is not excessive. Both the United State Supreme Court and the New York Court of Appeals have declared that even tax legislation that imposes new tax liabilities (rather than simply limiting credits for existing taxes) may constitutionally be applied to the beginning of the year preceding the legislation's enactment, as the Legislature did here with the disputed tax credit amendments. See United States v. Canton, 512 U.S. at 33 (tax laws may be retroactively applied "to include the receipt of income during the year of the legislative session preceding that of its enactment" (quoting Welch, 305 U.S. at 150); Matter of Lacidem Realty Corp. v. Graves, 288 N.Y. 354, 357 (1942) (upholding 14-month retroactive period to the beginning of the year before enactment for statute imposing tax on sales of sub-metered electric current); see also Matter of Varrington Corp., 85 N.Y.2d at 33 (retroactive period of nearly two years for tax regulation that Associates and Matter of J-P Group), the resulting retroactivity period is nevertheless constitutional for the reasons stated in this section and because the August 2010 amendment was a "curative measure." United States v. Canton, 512 U.S. at 3 1-32 (upholding retroactive application of statute limiting estate tax deductions because the amendment was rationally adopted in order to stem "a significant and unanticipated revenue loss"); Matter of Moran Towing Corp. v. Urbach 1 A.D.3d 722, 724 (3d Dep't 2003) ("when legislation is curative, retroactivity may be liberally construed"). Accordingly, the 2009 amendments are constitutional whether their period of retroactivity is measured from April 2009 or August 2010. 45 required the taxpayer to return a refund previously issued was not unconstitutional). Indeed, courts regularly uphold tax legislation and regulations with far greater retroactive periods of operation than the 15 months here. See, e.g., Welch, 305 U.S. at 144-49 (retroactivity period of two years for statute levying emergency tax relief on dividends did not violate taxpayer's due process or equal protection rights); Tate & Lyle, Inc. v. Commissioner of Internal Revenue, 87 F.3d 99, 107 (3d Cir. 1996) (upholding six-year retroactivity period of a Treasury Regulation requiring the taxpayer to use a cash method of accounting); Canisius Coil. v. United States of Am., 799 F.2d 18, 27 (2d Cir. 1986) (holding that four-year retroactivity period for a FICA tax amendment did not violate due process in light of its curative purpose); Astoria Fed. Savings & Loan Ass'n, 222 A.D.2d at 46 (2d Dep't) (retroactivity period of more than six years for amendment changing tax exemption eligibility was not harsh and oppressive). These decisions have even greater force here because, as explained above at note 7, the Legislature did not impose a new tax but simply limited the use of credits against existing taxes. Thus, the second Replan factor also supports the validity of the modest period of retroactivity provided by the 2009 amendments. we C. The Amendments Serve Valid Public Purposes. Finally, the Third Department mistakenly followed its conclusion in WL that "[w]hile depriving petitioner and other entities similarly situated -- of tax credits and benefits legitimately earned would undoubtedly generate additional revenue for the state," this purpose "standing alone cannot justify governmental appropriation of private property" (606). See WL, 97 A.D.3d at 33. In fact, the April 2009 amendments furthered two valid public purposes: to correct "long- documented abuses" by Program participants who were not making good on their promises to create new investments and jobs in New York in return for Program tax credits, and to provide the State approximately $90 million in much needed savings for the 2009-20 10 fiscal year (98). See Office of the State Comptroller-Division of Local Government and School Accountability, The Effectiveness of Empire Zones: Follow-up Report, 2007-MS-2 (2007), available at www.osc.state.ny.us/localgov/audits/s -wr/empirezones.pdf . (noting the difficulty of obtaining reliable data to confirm whether the benefits of the Program outweigh its costs, and the lack of progress in getting municipalities to identify performance shortfalls within their respective Empire Zones); Office of the State Comptroller, Assessing Empire Zones Program-Reforms Needed to Improve Program Evaluation and Effectiveness, Report 3-2005 (2004), available at www.osc.state.ny.us/reports/empirezone3-2005.pdf . (same). The Governor 47 specifically criticized the Program's "abuses, lack of results and skyrocketing costs," as well as its lack of accountability. Press Release, available at http ://www/governor . ny. gov/archive/paterson/press/06 181 OExcelsiorJobsProgram html. The Third Department improperly disregarded the legitimate and uncontested remedial purpose of the April 2009 amendments, namely, to increase the Program's "cost-effectiveness, strategic focus and accountability" by ensuring that Program participants return more to the community "in the form of wages paid to workers and capital investments in their facilities" than they received in tax benefits (450). Petitioner does not dispute that it was not meeting these Program goals based on all of its applicable BARs and thus, could not satisfy the 1:1 benefit-cost test. Accordingly, the Third Department should have taken this valid legislative goal into account when considering the third Replan factor. In addition to the Third Department's failure sufficiently to consider the remedial goals of the April 2009 amendments, that court erred in holding that the revenue-raising purpose of the April 2009 amendments was not a valid public purpose. The Legislature may rationally retroactively amend a statute to stem "a significant and unanticipated revenue loss." Carlton, 512 U.S. at 32; accord Furlong, 36 F.3d at 28; see Rocanova v. United State of Am., 955 F. Supp. 27, 29-30 (S.D.N.Y. 1996), aff'd, 109 F.3d 127 (2d Cir. 1997), cert. denied, 522 U.S. 821 (1997) (Congress's intent in enacting a retroactive amendment to the Internal Revenue Code - - "to raise revenue without raising taxes or imposing a new tax" -- was "rational and reasonable"); Venable v. Commissioner of Internal Revenue, 2003 WL 21921052, *7 (U.S. Tax Ct. 2003), aff'd, 110 Fed. Appx. 421, 2004 WL 2297334 (5th Cir. 2004) (Congress's retroactive application of statute that narrowed income tax exclusion was "rationally linked to the legitimate objective of raising revenue"). Here, the Legislature recognized that the State was losing a substantial sum of money from the Program in its current state, and reasonably acted "to provide savings of $90 million" that the State and its taxpayers could realize during fiscal year 2009-20 10 (475). Each of these purposes amply justifies the short retroactive period of the April 2009 amendments and outweighs petitioner's limited claim to the 2008 Program tax credits it might have claimed had it not been decertified. See Matter of Neuner v. Weyant, 63 A.D.2d 290, 304 (2d Dep't 1978), appeal dismissed, 48 N.Y.2d 975 (1979) (retroactive application of tax legislation "served an important public purpose by delaying the effective date of a 'loosely drawn' tax exemption which would, in all probability, have permitted large-scale tax avoidance by land owners who were not intended to be benefitted"). For these reasons, the Third Department's reliance, WL, 97 A.D.3d at 33, on this Court's pre-Replan decision in Clarendon Trust v. State Tax Commission, 43 N.Y.2d 933 (1978), is misplaced; in that case, unlike this one, there was no "persuasive reason for retroactivity." Id. at 935. In conclusion, all three of the factors identified by this Court in Rep lan support the constitutionality of the retroactive tax statutes at issue here. Accordingly, the limited retroactive effect of the April 2009 amendments satisfies / due process because it is supported by legitimate legislative purposes furthered by rational means. This Court should reverse that portion of the order of the Third Department that held that retroactive operation of the April 2009 amendments was unconstitutional, and the petition should be dismissed. 50 CONCLUSION The Third Department's memorandum and order should be reversed insofar as it held that retroactive application of the April 2009 amendments to General Municipal Law § 959 to January 1, 2008, violated petitioner's due process rights, and the petition/complaint should be dismissed in its entirety. Dated: Albany, New York September 26, 2012 Respectfully submitted, ERIC T. SCHNEIDERMAN Attorney General of the State of New York Attorney for Respondents- Defendants-Appellants By: 04~ OWEN DEMUTH Assistant Solicitor General Office of the Attorney General The Capitol Albany, New York 12224 (518) 474-6639 BARBARA D. UNDERWOOD Solicitor General ANDREW D. BING Deputy Solicitor General OWEN DEMUTH Assistant Solicitor General of Counsel Reproduced on Recycled Paper 51 ORIGINAL INFO CENTER JOiNT BUDGET HEARING OFtHE MAR 1 ASSEMBLY WAYS AND MEANS ASSEMBLY COMMITTEE ANDTHB WAYS AND SENATE FINANCE COMMITTEE ON THE ECONOMIC DEVELOPMENT AND TAXES BUDGET FOR FISCAL YEAR 2008-09 Hearing Room W Legislative Office Building Albany, New York February 11,2008 • 10:00A.M. ADDENDUM Al JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 APPEARANCES: ASSEMBLYMAN HERMAN D. FARRELL, JR., Chairman, New York State Assembly Ways and Means Committee SENATOR OWEN H. JOHNSON, Chairman, New York State Senate Finance Committee ASSEMBLYMAN JAMES P. HAYES, Ranking Minority Member, New York State Assembly Ways and Means Committee SENATOR WILLIAM T. STACHOWSKI, Ranking Minority Member, Senate Finance Committee ASSEMBLYMAN ROBIN SCHEMMINGER, Chair, Assembly Committee on 'Economic Development, Job Creation, Commerce and Industry ASSEMBLYMAN MARK WEPR[N, Chair, Assembly Small Business Committee SENATOR JOHN J. FLANAGAN, Chair, Senate Committee on Corporations, Authorities and Commissions. ASSEMBLYMAN STEVE ENGLEBRIGHT,' Chair, Assembly Committee on Tourism, Arts and Sports Development ASSEMBLYMAN RICHARD BRODSKY, Chair, Assembly Committees on Corporations, Authorities and Commissions SENATOR GEORGE WINNER, JR. ASSEMBLYMAN JOSEPH LENTOL SENATOR ANTOINE THOMPSON ASSEMBLYMAN SAM HOYT SENATOR VELMANETTE MONTGOMERY ASSEMBLYMAN JEFFRION AUBRY SENATOR BILL PERKINS ASSEMBLYMAN MIKE SPANO ASSEMBLYMAN CLIFFORD CROUCH , SENATOR ANDREA STEWART-COUSINS 2 A2 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11, 2008 . SENATOR EFRAINGONZALEZ, JR. - ASSEMBLYMAN JOSEPH MORELLE ASSEMBLYMAN MARC BUTLER ALSO APPEARING: PATRICK J. FOYE, Chairman, Downstate, Empire State Development Corporation DANIEL GUNDERSEN, Chairman, Upstate, Empire State Development Corporation ROBERT MEGNA, Commissioner, New York State Department of Taxation & Finance EDWARD REINFURT, Executive Director, NYS Foundation for Science Technology & Innovation ED HAMILTON, Executive Deputy, NYS Foundation for Science Technology & Innovation •KENNETH ADAMS, President, The Business Council of New York State, Inc. KEN POKALSKY, The Business Council of New York State, Inc. TOM O'DONNELL, President - Local 817 Teamsters, Motion Picture Association of America JOHN FORD, President - IATSE Local 52, Motion Picture Association of America VAN STEVENSON, SVP State Legislative Affairs, Motion Picture Association of America MICHAEL WALBRECHT, VP Studio & Production Affairs, WB Entertainment Inc., Motion Picture Association of America BRIAN O'LEARY, SVP, Tax Counsel - NBC Universal, Motion Picture Association of America NANCY FOX, National Director, Policy and Strategic Planning, Screen Actors Guild, Motion Picture Association of • America HAL G. ROSENBLUH, President, Kaufman Astoria Studios - A3 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 JEAN FROST, Assistant Executive Director, Directors Guild of America 0 STUART MATCH SUNA, President, Silvercup Studios KATHRYN WYLDE, President, Partnership for New York City BRIAN MCMAHON, President, NYS Economic Development Council RON DEUTCH, Executive Director, New Yorkers for Fiscal Fairness DANIEL C. MURPHY, President, NYS Hospitality and Tourism Association KRISTEN KEEFE, Staff Attorney, Empire Justice Center DAVID HOCHMAN, Executive Director, Business Incubator Association of NYS SCOTT BRANDI, President, Ski Areas of New York, Inc. SUSAN WIELER, Senior Policy Associate, Citizens Committee for Children 0 ANNE ACKERSON, Executive Director, Museum Association of New York DAVID CULBERTSON, Member & President of National Pipe & Plastic Inc. JAMES COLVIN, President, New York State Association of Convenience Stores AMY KRAMER, Vice President of Government Affairs, Credit Union League JOHN HENDERSON, President & CEO, High Falls Brewery MARK SORINI, Flavor Malt Beverage Coalition 4 A4 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 ' CHAIRMAN FARRELL: Good morning. Today we begin the ninth in a series of hearings conducted by the joint fiscal committees of the Legislature regarding the Governor's proposed budget for fiscal year 2008-2009. The hearings are conducted pursuant to Article 7, Section 3, of the New York State Constitution and the State Finance Law. Today, with my colleague Senator Owen Johnson, the Assembly Ways and Means Committee and the Senate Finance Committee will hear testimony concerning the budget proposals for economic development and tax issues. 1 would like to now introduce colleagues from the Assembly that are with us today. Ranking member of the Ways and Means Committee, Assemblyman Hayes, Chairman Sam Hoyt, Chairman Robin Schimminger, and Chairman Englebright. Senator, will you introduce your Senators? CHAIRMAN JOHNSON: Thank you, Denny. To my right is Senator Bill Stachowski, ranking member of the Finance Committee; Senator Winner, $enator Perkins, Senator Flanagan, and Senator Gonzalez. Thank you. CHAIRMAN FARRELL: Our first witnesses are the Empire State Development Corporation, Patrick Foye, chairman downstate, Daniel Gundersen, chairman upstate. Gentlemen. And we've also been joined by Assemblyman Crouch. DOWNSTATE CHAIRMAN FOYE: Good morning. 5. A5. .. • JOINT BUDGET HEARING - ECO. DEV.ITAXES FEBRUARY 11,2008 UPSTATE CHAIRMAN GUNDERSEN: Good morning, Chairman Farrell, Chairman Johnson, distinguished members of the Senate and the Assembly. My colleague Downstate Chairman Pat Foye and I are looking forward to the opportunity today to discuss the economic development prior priorities of Governor Spitzer's Executive Budget proposal. I, Joining us at the table today is my colleague Ken Schoetz, the COO for upstate, and Avi Schick, the president of the Empire State Development Corporation. 2007 was a year of transition, and the organization that Pat and I co-manage has been restructured. We now have an upstate and a downstate headquarters that are better able to address the economic challenges unique to their respective areas while unified by one goal: As the Governor sà succinctly puts it, "One New York." Before we get into the budget details, I'd like to provide a brief update of our 2007 accomplishments, accomplishments that would not have been possible without the support and the resources that you provided. The businesses we helped support with the public. resources provided by the Legislature last year helped retain over 41,000 jobs and secured pledges for another 11,900 jobs. These results benefited communities across the state, both up and down, to provide the support needed so they can flourish and helped leverage hundreds of millions in private investment. Let's review some of the significant accomplishments 6 A6 JOiNT BUDGET HEARING - ECO..DEV./TAXES FEBRUARY 11, 20 08 of our subsidiary agencies and regional offices, as through them each of us are responsible for the development of some of the most transformational projects in New York State. Downstate, with Pat Foye's leadership, we have made - substantial progress in advancing the Moynihan Station project through the purchase of Farley Post Officç. Working in conjunction with the joint venture -- New York City, Madison Square Garden, the Postal Service, the MTA and the three rail lines which converge into the current Penn Station -- this project exemplifies the spirit of collaboration that Pat and his team have fostered in order to make the Moynihan Station a public treasure. ESD has broken ground for the first new state park in Brooklyn in more than 100 years. We've selected a developer and signed an MOU for the development of the Victoria Theater on 125th Street through the Harlem Community Development Corporation, and we've decided upon a convention center developer for the Javits Convention Center. Here in Albany, we received 16 responses for our RFQ to develop 85 acres of vacant state land known as the Harriman Campus. The project includes an additional 300,000 square feet of empty building space ready for adaptive reuse and offers, transportation, power, water and sewer infrastructure. In Western New York, through the Erie Canal Harbor Development Corporation, we are undertaking the redevelopment of 12.5 acres of inner harbor property. This profect will transform 7 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 Buffalo's waterfront into a vibrant gathering place for Western New Yorkers and visitors alike. Also in upstate, Niagara Falls saw the completion of the Old Falls Street reconstruction Initiative, through the USA Niagara Development Initiative, In addition, consultants were selected for the reconfiguration of the Robert Moses Parkway for better waterfront access. And through the Governor's City-by-City initiative, we committed ftinds to better link the oldest state park in the nation to the downtown area, from the water through the heart of a rebuilt downtown to the new casino. In upstate, the companies the state assisted retained more than 24,000 jobs and secured pledges for more than 8,500 new jobs. Just a couple of examples of some of the more significant deals made throughout upstate: GE Energy's world headquarters for wind energy pledged 500 new jobs in Schenectady. Carestream in Rochester, a medical imaging company, pledged 500 new jobs. Corning Glass, an international research development center, pledged 300 new jobs in the Southern Tier. International Paper upgraded its paper mill in the North Country, retaining 618 employees and jobs of 700 truckers and loggers in Ticonderoga And in the Capital Region, International SEMATECH pledged 450 new jobs at its nanotech headquarters in Albany. The story in downstate is similar, where Pat's team helped secure pledges to create more than 3,400 newjobs and retain 8 A8 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 more than 16,000 jobs. The efforts of our downstate office stretched well beyond the New York City boundaries, up to Westchester, the Hudson Valley and Long Island. Some of the highlights include Broadbridge Capital, who consolidated operations in Suffolk County, retaining 1,251 existing jobs and pledging 300 new jobs. J.P. Morgan, the financial servióes company, will relocate its headquarters to Lower Manhattan to the Wqrld Trade Center site, retaining up to 7,500 jobs. ITT, a global engineering and manufacturing firm, has pledged to retain 119 existing jobs and create96 new jobs at its White Plains headquarters. As you can see, we have been very busy, and as a newly reconfigured organization we've worked together effectively to bring about significant results both upstate and downstate. We've focused our energies on the need for New York to augment its role in the innovation economy, which is based on intellectual capital and the ability to translate ideas into new technologies, products and services faster and better than the competition. Pat and I recognizethat ESD cannot workin a vacuum but, rather, we need to collaborate with other state agencies where responsibilities overlap so that we can all achieve the desired results. Now, that would seem commonsensical, but past years have shown that this kind of collaboration has been elusive. That's changing. Our partnerships with other state agencies include Ag and Markets, where we are working on our agribusiness sector and 9 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 together are looking to hire a new director to focus on this industry; DEC, where we're working . on brownfields reform; and Small Cities, Parks and Recreation, and others on the Interagency Main Street Workgroup, which is working to leverage programs and target resources that can revitalize core main streets across upstate. Now Pat will walk you through some of our internal operational accomplishments. - DOWNSTATE CHAIRMAN FOYE: Thank you, Dan. And good morning, Chairmen Johnson and Farrell, committee members and members of the Legislature. As you have already heard from Dan, thanks to support from the Governor and the Legislature, over the past year we • have realized a number of successes. We continue to focus on improving the state's competitiveness as well as on ESD's ability to attract and retain jobs, investment and growth. Dan has outlined some of our most public achievements and accomplishments. Before highlighting sections of the Governor's budget proposal, I'd like to walk you through some of - the internal changes of this past year and detail the new direction that Dan and I have set at Empire State Development. Last year at this hearing we spoke about how ESD was largely unstrategic, unfocusedand reactive. We found an agency lacking the central theme or internal processes necessary to pursue potential economic opportunities. . 10 AlO JOiNT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • Dan and I have worked diligently, together with our colleagues Avi Schick and Ken Schoetz,'to help create better internal processes, taken a hard look at programs administered by the • organization, and instituted a clearer vision. Namely, we are One New York, and the business of ESD is jobs and investment. To achieve those goals, we've had to think more strategically and efficiently. We've altered the way we look at funding decisions to see how we can best leverage limited state resources for maximum private investment, and we've also begun to infuse our operations with a determination to be smarter, faster and nimbler, so we can identify and seize opportunities quickly. Let me take a moment to highlight a few of our key changes. As all of you know, the Empire Zone program is the largest economic development tool the state possesses. The original intent of the program was to strengthen the economies of the state's most distressed areas. Today there are more than 9800 certified businesses in the Empire Zone program employing more than 380,000 people in 82 Empire Zones statewide. But this program in its current incarnation is neither equitable, strategic nor cost-effective. Last summer we audited about 3,000 of these Empire Zone businesses. Two weeks ago we sent letters to 180 of them, upstate and down, informing them of pending decertification based on the information provided inihe business annual reports furnished to us unless these companies could provide 11 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 proof that they had fulfilled their end of the bargain. And that's essentially what it was, a bargain. We promised to support those businesses in the Empire Zone program as long as they would support their local communities. But unfortunately, some ofthese businesses have been taking advantage of a system that needs to be fixed. These decertification efforts, along with recently enacted regulatory and administrative reforms, will save the taxpayers approximately $50 million in the coming fiscal year. And this is just the beginning. In an effort to fulfill Governor Spitzer's call for greater governmental transparency, as well as our own mission of\ attracting more attention to our programs in the state, all ESDC board meetings are now held at various statewide locations, which helps to bring increased attention to other regions of the state. We've opened up our meetings to the public, both in person and via live broadcasting on the Internet, and we welcome public comments. Additionally, we've dramatically increased our strategic outreach by contacting over 500 technology companies, the true benefit of which has been establishing relationships with these organizations, something that had never happened before. In fact, many of these companies had never before heard from ESDC and were pleased to receive a call. With the establishment of a business marketing fund of $3.5 million in the proposed 2008 budget, we'll . encourage more businesses to stay and grow in New York State. r 12 L Al2 JOINT BUDGET HEARiNG - ECO. DEV./TAXES FEBRUARY 11,2008 • Moreover, we've also established a business deveiopnient function to improve origination and business outreach, and have replaced most of the regional office heads with professional economic leaders chosen from the area. Each regional office is involved in a strategic overview of its operations and engaged in, proactive communication with local businesses. This greater coordination and outreach will help New York adapt to the innovation economy -- the knowledge-based economy of new businesses and new ideas that has become the driving force of job creation in the world today -- and we are asking in a proposed budget for $400 million in various economic deve1opment and regional initiatives to pursue this goal. In 2007, we held the first-ever. Tourism Promotions Agency Summit with First Lady Silda Wall Spitzer. We, also hired ESD's first-ever chief marketing officer, who has been actively working to increase the value of our brand, "I Love New York." And we also recently hired Saatchi & Saatchi, the international advertising agency, to reinvigorate our "1 Love New York" campaigns. Last year the Legislature approved an additional $5 million for the "I Love New York" campaign, and the state saw a 14.5 percent increase across the entire state in hotel room revenue, with a full 134percent jump in online bookings. As a result of our new web campaigns, we're now seeing an average of 200,000 site visits to ILoveNewYorlc,com per month, and our current web traffic ranking is higher thanany'of our 13 JOINT BUDGET HEARING - ECO DEVJTAXES FEBRUARY 11,2008 neighboring competitor states. This year we ask for an additional $4 million and hope td Continue our trend of success. As you all know, tourism plays a crucial role in the New York State economy, and we want to build on Year One successes and continue to expand our effbrts. Another success in 2007 was the launch of the "1 Live New York" campaign with the First Lady. As you all know, one of the challenges we all face is the exodus of our educated young people, ourfuture workforce, leaving all regiOns of the state for more promising professional and social opportunities elsewhere. The First Lady's "I Live NewYork" initiative will explore ways to attract and retain the next generation of New Yorkers, both upstate and down. • We are working closely with the First Lady, and our upstate headquarters will soon house the newly formed Young Leaders Congress, designed to enlist regional support to ensure young peopi have viable futures right here in our state. We look forward to supporting the First Lady's continued efforts to resolve this challenging problem. Dan has already touched on manyof the successes of some of our larger subsidiaries. Many of those are due to reevaluating our working relationships with key stakeholders and constituency groups and creating consensus among all those involved. For instance, the Harriman Campus has both new leadership and a new master plan, while Atlantic Yards saw the hiring of an ombudsperson and new construction manager. We have reinvigorated Brooklyn 14 - A14 JOINTBUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • Bridge Park, Queens West and the Javits Convention Center subsidiaries with new leadership, while achieving a great deal of progress at LMDC and Moynihan Station. We are searching for those partnerships, both with private industry and with our own state and private university systems, that will help New York State adapt to the innovation economy. There are a number of proposed expenditures that will help us do that, and I'd like to take a few moments to highlight them. The Executive Budget recommends $981 million for Empire State Development in 2008-2009, an increase of approximately $545 million from the prior year. This net change primarily reflects the resources necessary to implement the $1 billion Upstate Revitalization Fund. Seventy-seven million dollars of our requested budget will support economic development initiatives, including the Empire State Economic Development Fund, minority- and women-owned business development and lending programs, the Urban and Community Development Program, the Entrepreneurial Assistance Program, and the operation and development of the Centers of Excellence and other high-technology resource centers around the state. Major highlights of this proposed funding include, first, the implementation of a new Venture Capital Program to provide seed-stage assistance to entrepreneurs and start-up firms in targeted industries. We are asking for $5 million to establish thisfund. 15 • JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 Second, the efforts to support minority- and women-owned businesses include a proposed increase of$l .5 million to provide grants and loans to eligible companies. We are also seeking an additional $1 1.5 million for our EDF fund to support businesses and projects that create or retain needed jobs. Four hundred million dollars will be used for various economic development and regional initiatives, consisting of a statewide competitive grant program to be administered by ESD, specific downstate regional initiatives, and upstate City-by-City projects. Portions of these funds shall be made available to support the $1 billion Upstate Revitalization Fund. Two hundred fifty million dollars will be used to enable ESD to work with upstate stakeholders to identify targeted investments that capitalize on each regions unique assets and potential to spur economic development. An additional $100 million will be made available through the sale of surplus state property. Finally, $200 million will be used to support investments in distressed communities in the downstate region to encourage businesses and community development. Let me now turn it back to Dan, who will walk us through the Upstate Revitalization Fund. UPSTATE CHAIRMAN GLJNDERSEN: Thanks again, Pat. The centerpiece of the Governor's proposed $1 billion Upstate Revitalization Fund is the $350 million designated to address 16 LI A16 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11, 2008 • the priorities that we identified in our regional blueprint sessions. These sessions helped us to prioritize the urgent needs, with bottom-up input from those who know these regions better than anyone else. Let me give you two examples. First, we heard time and again that we needed to invest in the construction and enhancement of development-ready sites in industrial parks. Nobody, wants to tell a business looking to expand or to move to an upstate community that there are not adequate sites for them. But New York State currently tacks the shovel-ready sites in business parks, stand-alone locations, and in our urban areas that we need to compete. The Governor's budget would allow us to invest much-needed resources to bring existing sites up to standard and to move forward those that are just on the drawing board. This investment will have significant returns. A couple of years ago, Pennsylvania faced a similar situation with a lack of sites. Their governor and legislature moved quickly to create a shovel-ready program, and within 18 months of passage, over 100 projects were approved, and most are now housing new businesses. S That state is marketing to New York firms. We cannot allow even one business to leave because we failed to.invest in our communities, leaving them with no other options. We also need to help our communities with their aging infrastructures, inclUding water and sewer systems, roads and 17 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 telecommunication networks. That's why the Governor's $1 billion upstate proposal also includes dedicated funding to address a variety of infrastructure issues, from rail to bridges to broadband. Second, access to capital is something else that we heard loud and clear across upstate. Small businesses are the backbone of upstate's economy and the folks who, with the right help, could become upstate's next big employers. The Governor's budget includes targeted assistance to help small businesses and start-ups with loans for equipment, working capital and real estate. It would also provide loans and grants to help existing upstate companies invest in R&D facilities and laboratories, a • critical step if we want to help existing businesses, in your districts survive globalization and adapt to and thrive in the innovation economy. ESD is committed to targeting its resources to bring about not only successful businesses but the maximum community benefit. Much likethe Restore program, the Governor's proposed investment Opportunity Fund will allow the neediest communities to apply for funding to execute projects that they feel are important to bringing about transformational change in their communities This past year, the Governor asked us to define projects in our major cities across upstate, those projects that could break the gridlock and put communities on the path to economic turnaround. The result of those efforts became the Governor's City-by-City initiative, for which $115 million in funding is proposed: 18 A18 JOINT BUDGET HEARING - ECO. DEV.ITAXES FEBRUARY 11,2008 Consider the Bresee's Building redevelopment project in Oneonta, one which Senator Seward and Assemblymember Magee are certainly familiar with and I'm sure will agree is a perfect example of what City-by-City is meant to achieve. The state stepped in and committed $1 million to assist the city to restore and rehabilitate this former 100,000 square- foot department store in the heart of downtown. You can well imagine that the reuse of combined retail, office and residential space is going to breathe new life into Oneonta, These projects capitalize on each region's unique assets and are selected based upon their potential to spur additional investment and greater economic development: When you consider the economic impact of projects like a 14-block section of a downtown area of Rochester, the transformation of a pedestrian mall in Niagara Falls 1 or the investment of a completely shovel-ready site in Binghamton, you can clearly see the need for City-by-City funding. • The Governor also recognizes that the same need exists in our smaller communities across upstate, and in 2008 we need to consider th6se cities, towns and villages like Salarnanca, Auburn, and Canajoharie that face the same challenges as our larger cities and where a City-by-City focus can bring real benefit. 2007 was a year of change, a year of accomplishments for both upstate and downstate. With the Governor's 2008 Upstate Revitalization Fund and targeted downstate programs, we can continue to build on the momentum established in communities all across New York. On behalf of all of our economic 19 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 stockholders throughout New York who have helped to develop this year's budget, I ask for your continued support so that together we can produce results and capitalize on the momentum that we have started in 2007. Pat and I thank you for your time, and we want to close by emphasizing that during the past year we've hit our'stride in working together for one common goal, for One New York. And we'll be more than happy to answer any questions that you may have. CHAIRMAN FARRELL: Thank you vety much. The first question will be Robin Schimminger. But before he does, we've been joined by Assemblyman Richard Brodsky, Assemblyman Jeff Aubry, and Assemblyman Mike Spano. CHAIRMAN JOHNSON: We've been joined by Senator Stewart-Cousins, Senator Thompson, and Senator S Montgomery. CHAIRMAN FARRELL: Robin. ASSEMBLYMAN SCHIMMINGER: Thank you very much, Patrick Foye and Dan Gundersen. When I was a young fellow growing up, I would watch the nightly news. And I am reminded of "The Huntley-Brinkley Report," with your excellent back-and-forth presentation. When the Governor was in upstate and gave the State of the Upstate address, he called out the names of Senator Alesi and Assemblyman Schimminger as having it on their shoulders to carry forward, in the Legislature, the revitalization-of-upstate plan. • 20 A20 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 . There are some who look with envy at this plan, some who feel that it does too much for upstate. And I wanted to ask a couple of questions to help me justii' this program and to create a sense of proportionality for the program. I found in the Governor's Executive Budget briefing materials a very nice pie chart which describes a billion dollars of funding for the revitalization of upstate. Most of these elements were touched on by Dan Gundersen. As I think about this pie chart and! think about these • appropriations, I am cognizant that somewhere outside this pie are other very substantial appropriations in the areas outside of upstate. And I wondered if we could just walk through each of these and you • could identify for me countervailing or counterpart appropriations which are not dedicated to upstate but which go elsewhere, so as to help me in justifying the $1 billion. - You provide $350 million for a regional blueprint fund. What's the counterbalance there? DOWNSTATE CHAIRMAN FOYE; Well, Senator -- Assemblyman -- ASSEMBLYMAN SCHIMMINGER: I'm not running for the Senate, let meclarify. (Laughter.) DOWNSTATE CHAIRMAN FOYE: The Governor's downstate capital plan includes the following components, and aggregates $1.2 billion. That includes $555 million for projects 21 A21 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 focused primarily on the City of New York and the Hudson Valley. That comprises downstate commuter transit.. The City of New York includes the Moynihan project on the West Side of Manhattan and transit enhancements in the Hudson Valley. The second major piece is a $300 million Housing Opportunity Fund, which will -- ASSEMBLYMAN SCHIMMINGER: A counterbalance to the $100 million upstate housing -- DOWNSTATE CHAIRMAN FOYE: That's right. And maybe Fve jumped ahead. ASSEMBLYMAN SCHIMMINGER: Continue. DOWNSTATE CHAIRMAN FOYE: Let me go through the $1.2 billion list for downstate. The second piece, in a declining ordr of size, would be a $300 million Housing Opportunity Fund to support development of affordable supportive and workforCe housing initiatives in the downstate region. - Clearly, as the Governor, has stated, one of the leading impediments to economic development downstate is the availability of affordable housing. The next piece, Assemblyman Schimminger, would be the Downstate Revitalization Fund, which is $200 million, which is designed to support distressed community revitalization in distressed communities downstate, especially to encourage business and community development; a$45 million waterfront park development 22 1 t 0 A22 .. I' JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • in the City of New York; $20 million to' support and complete the Hudson RiverPark; and $25 million in support of Governors Island. I think it's'importantto note that there would also be a $50 million piece related to the Investment Opportunity Fund that Dan and I testified on before the Division of Budget several months ago. There's also $35 million for regional initiatives focused on Long island and the Hudson Valley, and various other pieces. Those pieces aggregate $1.2 billion in the aggregate. ASSEMBLYMAN SCHIMMINGER: Thank you. • ' And there are other elements, of course, to the upstate revitalization billion-dollar package -- $80 million for parks. I assume that's where most of the parks are, in upstate. DOWNSTATE CHAIRMAN FOYE: Yes. ASSEMBLYMAN SCHIMMINGER: But there is some expenditure for parks outside of upstate, I take it. DOWNSTATE CHAIRMAN FOYE: There is indeed, I think, $28 milliOn for downstate, a good part of that dedicated to Long Island. There's a $40 million arts and cultural fund, which I believe is proposed to be split $12 million upstate, $28 million downstate. And the aggregate of those funding streams is $1.2 billion in the aggregate. ASSEMBLYMAN SCHIMMINGER: Thank you. Can we focus for a minute on the City-by-City initiatives? Many of these were announced last year. Some of them 23 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 are funded in the Executive Budget. What is the status of the initiatives that were not funded? DOWNSTATE CHAIRMAN FOYE: I'd defer to Dan on it. UPSTATE CHAIRMANGUNDERSEN: Fm going' to turn to my COO, Ken Schoetz, to assist. There were two primary projects that were announced with the full intention that. we would be coming before you and asking for support. The two primary initiatives that did not have the funding associated with them, the full funding, was PAETEC -- this is the midtown redevelopment in Rochester and the relocation of PAETEC to that site -- and the connective corridor in Syracuse. Those were the two big projects. - MR. SCHOETZ: Mr. Schimminger, as Dan says, of the $115 million, there is money for five projects. As Dan mentioned, Midtown Plaza, $55 million. The status of that is that we are in the planning process. It is an enormous project. it seeks to have a shovel-ready site for PAETEC by the spring of 2009. In order to do that, first is aggressive remediation of that site for asbestos and then ultimately demolition. It will bea very active 18 months from now, between now and next summer, when we have committed to PAETEC to turn that site over to them for development. We don't actually know which part of the 8.5 acres PAETEC is going to use, nor do we know what the PAETEC building 24 A24 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • is going to look like at this time. it's still too early in the process But -- so that process is still in planning. On the Syracuse connective corridor, again, in the planning process but expecting activity this year, during the current budget year. Same with the Fort Drum infrastruciure improvements, $15 million. • And then City of Buffalo revitalization efforts largely go to waterfront development and property acquisition for city-owned property that the state will buy and use as part of the inner harbor. ASSEMBLYMAN SCI-{IMMTh1GER: in terms of projects that will receive funding going forward, speak to me about the relationship between ESDC and upstate ESDC in terms of their roles in selecting who will receive funding. And also, would there be a role for a separate upstate ESDC board in this process? UPSTATE CHAIRMAN GIJNDERSEN: The upstate ESD is fully empowered to provide guidance and the governance to be able to moye forward in determining which projects ought to receive funding. We would consult with -- as we did with the flrst round -- with local municipal officials, yourselves and others to determine which projects are best suited to be transformational. ASSEMBLYMAN SCHJMMINGER: But a role of an upstate ESDC board? UPSTATE CHAIRMAN GUNDERSEN: That could be something we might consider. There is a board for upstate ESDC that is not fully 25 / JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11, 2008 constituted yet. We have been building the organization and receiving very good support from the parent ESD board as we move forward. ASSEMBLYMAN SCHIMMINGER: In regard to the $350 million regional blueprint fund, we know that a quarter-million is capital and $100 million comes from the sale of certain property in the City of New York, an OMRDD facility and a mental health facility. Will the funds that are generated through the sate of those two properties going to be solely dedicated to fund these investments upstate? Or will there be a diversion of some of the funds? DOWNSTATE CHAIRMAN FOYE: No, our expectation, Assemblyman Schimminger, is that the sale of those two properties, both in the City of New York, will occur. They're quite valuable properties, and they are excess at this point. Our expectation is that they will'be sold and will provide a sufficient source of funding to fully fund that program. ASSEMBLYMAN SCHIMMINGER: Thank you. Couldyou differentiate for me between the Upstate Regional Blueprint Fund and the Investment Opportunity Fund? Could you compare and contrast those two funds for me? DOWNSTATE CHAIRMAN FOYE: Sure. Let me take a shot at the Investment Opportunity Fund and then I'll turn it over to Dan on the upstate fund. Dan and I testified before the Division of Budget 26 A26 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • several months ago. And the Investment Opportunity Fund is intended to be a $50 million program in the aggregate, of which $50 million would be dedicated and focused on downstate projects, with the remainder focused on upstate projects. Like the Restore New York funding, which we recently announced last month, this would be a competitive program available to municipalities, businesses and not-for-profits throughout the entire state. And it is contemplated that the leaders of the Legislature, along with the Governor, would have a role in approving the processes or specific projects as we go forward. Dan and I think that it's particularly important in terms of being able to make capital available both upstate and downstate, to help energize economic 0 development. One of the characteristics of this program, we believe, like much of the programs that we do both from an operating and capital point of view, is that it would leverage significant private investment. And as we all in this room know, it's ultimately the ability to attract and retain private investment that will ensure the state's prosperity going forward. And we believe the Investment Opportunity Fund will be an important part of achieving that. ASSEMBLYMAN SCHIMMINGER: Tell me this. How will upstate and downstate be defined in your approach to the split? DOWNSTATE CHAIRMAN FOYE: You're asking geographically? 27 A'V7 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 ASSEMBLYMAN SCHIMMINGER: I'm asking how you define it. DOWNSTATE CHAIRMAN FOYE: Geographically? ASSEMBLYMAN SCHIMMINGER: Yeah, DOWNSTATE CHAIRMAN FOYE: As we've said before, downstate is comprised of Long Island, the City of New York, Westchester, the Hudson Valley. And Dan and I share the Capital Region, which is forma fly part of upstate. But as a management day-to-day matter, downstate is responsible for the four southern counties and upstate'for management of the four northern counties and the Capital Region. ASSEMBLYMAN SCHIMMINGER: So expenditures from the Upstate Revitalization Fund ofSl billion could be expended, then, on the Capital District? DOWNSTATE CHAIRMAN FOYE: Yes. UPSTATE CHAIRMAN GUNDERSEN: Yes. And let me add that in this construct there are 48 counties that would be considered upstate. All of those counties particIpated in the regional blueprint process that we initiated last summer and fall. This initiative brought together 500 leaders from across upstate -- economic development practitioners, civil professionals, public leaders and others, arts and culture and academia. They came together in seven different sessions in seven different regions. One of those 'was the Capital Region, which 28 S A28 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • included the eight counties of the Capital Region. And what we did was something very different. We said let's focus on the root issues here, the root causes of the problems that we face today, and let's look at it in terms of the fundamentals. And when we did that, it was the infrastructure, it was the investment, it was intellectual capital and innovation, and it was international, what I call the five Is. We came together and we looked at what the issues were, as well as what the proposed responses had been up until that point, and said, What do we need to do in addition, what isn't occurring nbw? And that input became the basis for the Regional - Blueprint Fund. It was not of our doing, it was of everyone's contributions through those blueprint sessions. And we had very good participation, and that was true in the Capital Region as well. So the Capital Region, all eight counties of it, would certainly be beneficiaries of the blueprint fund. ASSEMBLYMAN SCHIMMINGER: I think you know that my longstanding thought had been that the way to differentiate and draw a line would be to do retroactive analyses of economic metrics -• job loss, job gain, local economy by local economy. And those local economies that performed well historically are on one side of the line, those that didn'tperform well are on the other side of the line. I always thought that was a very precise and objective 29 - JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 and defensible way to draw the line. UPSTATE CHAIRMAN GIJNDERSEN: In some respects, maybe that is true. Certainly the 48 counties are not doing as well as the 14 when you look at in the aggregate. That doesn't mean that there aren't needs, and some of those needs are quite serious in some areas of downstate. Collectively and in an aggregate, we all know the upstate is not faring very well. The regional boundaries, the regional districts that we inherited are very good representations of economic activity if you look at the labor area. And for most businesses, they're going to look at it that way. They're going to say, Where can I get my workforce? So if you consider Albany as the core of that Capital Region, that labor-draw area would extend 40, 45 minutes out, and that would pick up the eight counties. And if you look at it in that way, each one of the seven regional areas of upstate are very well defined, we think. ASSEMBLYMAN SCHIMMINGER: Could I shift gears just a little bit and go to another area, not necessarily yours: NYSTAR. A couple of years ago a program was created, the Regional Partnership Program, in which on the statutes of New York State still exists. There were to be some grassroots coming up, regional partnerships established in various economic development regions of the state which would then be the objects of substantial state funding, to assist in programs and programming that the local 30 A30 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • folks believed would make the most sense. / That Regional Partnership Program is not funded in this budget. What is the view of ESDC and upstate ESDC on that Regional Partnership Program? It's on the books, but it's not substantially funded. UPSTATE CHAIRMAN GUNDERSEN: That's right. That's right. Clearly, the approach, there in bringing together professionals on a regional basis was the right approach. And that is the basis for our Spitzer-led agenda in terms of a revitalization of upstate: Let's do it regionally. But what we're saying here is that ESD, as the primary economic development entity for the state, needs to be involved in the innovation economy. This was not ground that was staked out prior to our arrival, and that, quite frankly, was unfortunate. NYSTAR and the regional partnerships were headed in that direction. We see great benefit in aligning both what NYSTAR is doing with what we're doing. I believe that the regional partnership effort in most areas was productive, and I think that's yielding some benefits. 1 think it can be b'ended with what we're doing and have a greater gain. Again, the regional blueprint process brought us in other areas -- not just in the commercialization and in the research and development, but also into the infrastnic'ture and other investment tools that we were lacking. We need to bring these together. And that is why we've made a determination that NYSTAR and ESD will work 31 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 together, not have separate regional initiatives. ASSEMBLYMAN SCHIMMINGER: Okay. Another gear shift, your letter-writing campaign. In Commissioner Foye's testimony you indicated that two weeks we sent 180 letters to 180 companies informing them -- Empire Zone-certified cOmpanies -- of pending decertification based upon their own business annual reports unless they could provide proof that they had fulfilled their own end of the bargain. And that's essentially what it is, a bargain. Could you describe for me what that bargain was, Commissioner? DOWNSTATE CHAIRMAN FOYE: Sure. Companies tiled and made job and investment commitments, in return for which they received, in some cases, refunds of previously paid taxes; in other cases, waivers of taxes. In the aggregate, that's a $600 million claim on the state taxpayer. That program is growing at approximately 10 to 12 percent a year, and at that rate of growth will soon be a billion-dollar program. Companies have an obligation to file business annual reports with ESD. One of the things that Dan and I did last year, together with staff, was really for the first time review those business annual reports in some detail. And you may recall that last summer, I think August, it was, we sent letters to over 2,000 companies around the state just noti1,ing them that, based on our review of the 32 A32 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • information they had previously furnished pursuant to business annual reports, we did not believethat the job and investment levels had been achieved. We had dialogue with a number of those companies, and what we've done now is taken 180 companies -- neatly divided, as it turns out, 90 upstate and 90 downstate -- and sent decertification letters, not decertiQ,'ing those companies but putting them on notice that based on the information they've previously furnished us that unless they're able to make a case that our information, our data is wrong -- and again, this is information and data that's been furnished by the companies -- that we intend to review each on a case-by-case basis to see whether decertification is the appropriate remedy. I note that this would be the first time that ESDC would have decertiuied a company for failure to meet job and investment commitments previously made for the tax refunds and tax waivers that these companies and other, Empire Zone- participating companies had received. ASSEMBLYMAN SCHIMMINGER: The zone's program is a performance-based program. You create jobs, you get tax benefits; you don't create jobs, you don't get tax jenefits. You have repeatedly used the word "commitment." You used it at the beginning and at the end of your answer. Where does a company make the commitment? Where did the company make the commitment? DOWNSTATE CHAIRMAN FOYE: In applications 33 A33 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 filed with ESDC prior to participating in the program or applying to join the program. ASSEMBLYMAN SCHIMMINGER: So you're saying that you baseyour letter writing on a difference between the commitment which was embodied in the application to get into the program -- you're caHing it a commitment, I would call it a projection, okay -- the difference between the commitment, slash, projection at the beginning to get into the program and what actually happened in the course of their lifespan as a company within the program as represented in their BAR report? Is that essentially what you're doing, you're looking at the original commitment, slash, projection and comparing it to what happened down the road? DOWNSTATE CHAIRMAN FOYE: Well, one of the things we're looking at is the original application. On a case-by-case basis, we're looking at the amount of the tax refund, in some cases -- waiver in all cases -- that's been provided, the amount of state tax dollars involved to date in the tax refund and tax waiver provision, and the number of jobs and investment, both new and retained jobs. And our focus in terms of the 2,000 companies that we notified last summer and the 180 companies that we have sent letters to last month is those companies in which there has been the greatest divergence between the benefits bestowed by the State of New York in trms of these tax refunds and tax waivers and the number of jobs and the amount of the investment provided. 34 A34 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11, 2008 • . ASSEMBLYMAN SCHIMMINGER: Again, and Fm wrapping up, the Empire Zone program is a performance-based program. You create jobs, you get benefits; you don't create jobs, you don't get benefits. What I think you're looking at is the original application to get into the program to get certified. In that application, a company had to project -- you say "commit," I say "project" -- what might happen down the rpad if they were in the program. Take two different companies. One company, call it the Great Expectations Company. The Great Expectations Company says "We get into this program, ESDC, we're going to create a hundred jobs, we expect." That's just a projection. That's not what triggers the benefit. What triggers the benefit is the jobs actually created. So the Great Expectations Company projected a hundred jobs. Another company called Expectations, they project, "Well, we'll create maybe five jobs." That's their projection. At the end of the day, now, Great Expectations gets a letter from you; the Expectations company doesn't. What's the difference? DOWNSTATE CHAIRMAN FOYE: Well, the difference, first of all, the initial application is but one of a number of things that we lOok at. The analysis will be based, at the end of the day, on the amount of tax dollars in terms of tax refunds and tax credits that have been provided compared to the number of jobs, both .35 A35 . ..- . JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 retained and new, andthe amount of the investment made. And w&re focusing first, as you might suspect, on the situations in which there's the greatest divergence between the.state benefit bestowed in terms of tax refunds and tax waivers against the number of jobs delivered, both retained and new, and the amount of investment made ASSEMBLYMAN SCHIMMINGER: And is the • State Tax Department involved in this analysis with you? DOWNSTATE CHAIRMAN FOYE: We are talking to our colleagues in Tax and Finance, obviously subject to taxpayer confidentiality provisions. But given the fact that they're involved in the ultimate administration of the program from a compliance point of view, yes, we've been in close contact with our colleagues in Tax and Finance. ASSEMBLYMAN SCHIMMINGER: Okay. I'll come back later. CHAIRMAN FARRELL: Yeah. (Laughter.) CHAIRMAN FARRELL: We've been joined by Assemblyman Morelle and Assemblyman Butler. Senator. CHAIRMAN JOHNSON: We have some questions on this side from Senator George Winner. SENATOR WINNER; Thank you, Senator, Good morning. I want to follow up in the area of the 36 WM JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • Empire Zone, and particularly the change in regulations that the department has put out on an emergency basis on January 16th. It's my understanding that those emergency regulations fiindamentallychanged the ratio that was currently in existence from 15-to-ito 20-to- I for the cost-benefit analysis under the 2005 legislation. Is that fair? Among other things. DOWNSTATE CHAIRMAN FOYE: Among other things, that's correct. That's one of a number of changes that were made, yes. SENATOR WINNER: Now, in the specific reasons and the finding of necessity and the filing those regulations, you indicated that the impact in particular of the regulations that you are changing would immediately reduce the number-of eligible applicants by about 30 percent. What will be the impact on the number of jobs that will not be created as a result of that new regulatory change? DOWNSTATE CHAIRMAN FOYE: Well, Senator, if our analysis is correct, that there have been a number of companies in the program -- and first, we ought to begin by noting that there have been a number of successes in the Empire Zone program. Which is why the approach we've taken has been amended and -not ended, as some have urged. So clearly the Empire Zone program, both in its prior form and in its current incarnation, has accounted for some jOb creation and investment in the State of New York. 37 A37 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 If our analysis, however, is correct that there have been a number of companies participating in the program that have gotten tax refund and waiver benefits that have been significantly. disproportionate to the number of jobs created and maintained and the amount of investment made, we believe that the trade-off will be favorable from the point of view of the state and the state taxpayer. SENATOR WINNER: Well, Pat, I understand that argument.. However, that belies the language that's in your regulatory justification section. You're saying, under your section, that you currently have a I 5-to-i ratio. Therefore, those people are creating jobs, obviously, with a significant benefitof an amount of private capital investment and a number of jobs and are eligible under the current 15.-to-I ratio, . . By raising it from what would be a successful -- and is not reflective of those bad actors in the past that were not performing to the I S-to- 1 -- you're saying now, just to raise it from 15-to-I to 20-to-I, you're going to decrease the number of, in your language, eligible applicants by 30 percent. Those good businesses just now that are going to fall between the 15 and the 20, how many jobs are going to be lost as a result of that? DOWNSTATE CHAIRMAN FOYE: Well, Senator, I think if we're effective custodians of the program, the answer ought to be zero or very little. And the reason for that is that we've retained the flexibility to make evaluations on a case-by-case basis and apply a • 38 A38 . . JOiNT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 . lower cost-benefit analysis in areas of economic distress. And the commissioner is authorized to make that determination. So while the 15-to-I cost benefit analysisratio has bëen raised to 20-to- 1, which I think increases the amount of investment and the number of both retained and new jobs that are required to get the benefit, we're also allpwed to make the case and to allow expectations, to use Assemblyman Schimminger's example, to participate, if we think that's the right thing to do, on a case-by-case basis. SENATOR WINNER: You're not going to reduce the number of eligible applicants by 30 percent, then? Is that what we're saying? What's going to happen with those otherwise 30 percent people or businesses that would be creating jobs at a ratio of at least I 5-to-I prior to your changing the regulations? Where are they going to go? What states are they going to go to now? UPSTATE CHAIRMAN GUNDERSEN: You know, it's very possible that many of those businesses may create the jobs, but they may not need benefits. It could be the law firms, the accounting firms, the car washes, the auto dealers. So in that case they may in fact have some high cost-benefit, but they're captive. And in my book, that may not be the best place to put your public resource if what you're trying to do is encourage businesses that are going to have a higher value, are going to export more of their product out ofthe region, out of the state, and thereby help the entire state economy. And by bringing this -- not only the 39 A39 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 cost-benefit, but by saying, Look, we want more reasonable assurance; not just five-years, but three years. Tell us what you're going to do in three years. Because five years, well, hey, you know: I'm going to put X, Y, Z job, and maybe I'll hit it, maybe I won't. It's pretty far out there. Let's be a littlebit tighter and realistic on what the expectations are for the program and for the public benefit, the public dollar. SENATOR WINNER: Well, in following up on another area, I mean, I clearly realize that the real purpose in raising the ratio is really to cut down on the number of people that are going to be able to take advantage of the Empire Zone program, which you acknowledge is the number-one economic development tool that we have, particularly in upstate areas. One problem that I have with regard to the types of the calculators are it doesn't take into consideration the types of - businesses that you're creating when you use those ratios. For instance, a manufacturing job that's created, or in a manufacturing business -- which is something that we all dream for, particularly in upstate New York, is creating more manufacturing jobs -- by its nature is going to create a lower ratio, by virtue of fact that there are going to be higher credits on the other side, investment tax credits and the like, that may in many instances, as you probably are aware, not be able to be used in any event, but nonetheless they're available benefits. 40 A40 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • Now, how are you going to create a differential with regard to the multipliers that exist as a result of manufacturing jobs when you make those calculations? Because a hundred retail jobs or a hundred commercial or service type of jobs, call centers or whatever, the like, are not going to produce the same benefits as a hundred manufacturing jobs. UPSTATE CHAIRMAN G1JNDERSEN; Senator, somehow I knew you'd ask this question, so I looked at all the applications in your area since the reforms of 2005. And there were 39 applications. All of those were approved. And then we looked at the new changes that we have put in place, and all but a few of those -- and those would have fallen • into the category of non-manufacturer and service-oriented. But the manufacturers that might have had a lower cost-benefit still would have been at that point where we could have used discretion, such as ESpace Solutions, SB Fabricators, Fennel Spring, Gray Manufacturing Industries -- these are all businesses that would meet the test in our book of businesses that ought to be approved as regionally significant. SENATOR WINNER: They're all under 15-to- l. UPSTATE CHAIRMAN GUNDERSEN: That's what)'m saying. We have the discretion for manufacturing and for certain distressed areas to be able to say, yes, it doesn't meet the 20-to-I, it may not meet the 15-to-1, but it at least meets the 5-to-I, and it is something that ought to move forward because manufacturing is critical to the state economy. Or it's in a distressed area or a rural 41 I A41 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 area that, you know, needs this is kind of economic activity. So it's not going to bias those areas. DOWNSTATE CHAIRMAN FOYE The other thing, Senator, I just would add is that the way the formula is written -- and the formula is obviously set forth by the Legislature in the statute -- is manufacturing actually has an advantage in many cases under the Empire Zone program, as it should. And the reason for that is because the program is salary of retained jobs, salary of new jobs, plus investment, divided by the amount of the tax credit. Given the fact that the amount of capital required for the typical manufacturing job is usually greater -- significantly greater, in many cases -- than the amount of capital required for a service or a law-firm job, as the Legislature intended, manufacturing actually enjoys advantages and preferences under the Empire Zone program. And we've been very focused on that as w&ve been considering these changes. SENATOR WINNER: Is there any differential in your regulations or in your determinations going forward as to where that manufacturing job is going to be located? Obviously, a manufacturing job located in a rural area is going to have a significantly higher multiplier factor and impact than a manufacturing job that's created in a more urban setting. DOWNSTATE CHAIRMAN FOYE: Senator, that is a great point. And actually, one of the things we did in adjusting the cost-benefit analysis was to allow a significantly lower ratio in areas 42 is LA . JOINT BUDGET HEARING -ECO. DEVJTAXES FEBRUARY 11,2008 of economic distress. So ESD has the ability to make those judgments on a case-by-case basis. SENATOR WINNER: Are those judgment calls reduced to writing anywhere? Because they're not present in the current regulatory filing that was just made, those differentials. DOWNSTATE CHAIRMAN FOYE: Well, two things, Senator. One is the commissioner, in enforcing the program -- or administering the program, rather, has the ability to make case-by-case judgments. And then in areas of economic distress, there's a 5-to-I ratio which is available for particularly distressed parts . . of the state. So we've anticipated and we believe addressed the very legitimate concerns that you're raising. UPSTATE CHAIRMAN G1JNDERSEN: And we will, in these cases, look to the justification of the local boards that are bringing them to us. SENATOR WINNER: Are you going to give them some administrative money to administer it so they can make those judgments? UPSTATE CHAIRMAN GUNDERSEN: That is not included in this year's budget. (Laughter.) SENATOR WINNER: Just one further question on the significant regional -- significantly-- I guess its definition is the 43 A43 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 significantly regional -- UPSTATE CHAIRMAN GUNDERSEN: Regionally significant. SENATOR WINNER: Regionally significant projects, thank you. The change in that area with regard to the exporting focus and the like, how do you respond to areas such as the Southern Tier that are now developing a strategic type of niche ofaviation manufacturing assistance, Sikorsky and Lockheed? And now that I'm informed that the ability to create spin-off businesses that would service, as suppliers, those activities in that strategic cluster of manufacturing, wouldn't that be eligible, under your definition of regionally significant businesses, due to the fact that they would be servicing a business within the state and not be exporting their product? UPSTATE CHAIRMAN GUNDERSEN: But their service and their product is part of a supply chain, it's part of the industry cluster that is being exported. What we're trying to curtail is providing economic benefit to activity that's going to remain in the region and just have no net positive effect but, rather, produce more. So in that case that you just used, I would say it would be a perfect example of assisting the entire cluster. And if it's Sikorsky is the one who's providing helicopters, it's critical to their success. So that would be a part of the criteria that we would - 44 A44 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • consider. SENAtOR W1TN1ER: Thank you.: CHAIRMAN FARRELL: Thank you. We've been joined by Assemblyman Weprin. Next, Assemblyman Hayes, to question. ASSEMBLYMANHAYES;. Thank you, Mr. Chairman. Good morning. According to a report in this morning's Buffalo News, the Legislature will receive the Governor's 21-day amendments in which he's projecting a decrease of $384 million in revenue to the state budget. That's $384 million less than just three weeks ago, when he submitted his original budget to the Legislature. The Governor's economists are now projecting a growth in corporate profits in the state down from an estimated 3.1 percent to less than haIfa percent. The response of the Governor in his amendments is to increase taxes again -- the tax on the covered-lives assessment on insurance policies in this state by an additional $50 million-- for over $1 billion of new taxes that will almost assuredly be put on the backs of employers and consumers in this state. Just last week in Western New York, in Buffalo, there was another shiver sent down the spine of Western New York residents when Ralph Wilson, the owner of the Buffalo Bills announced the team's affiliation with Toronto. And there's a lot of 45 A45 • . ' JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 discussion this morning in the newspaper and in restaurants and on Street corners and in homes and in businesses around the water cooler about the chilling effect of what would happen to the Buffalo economy, to the upstate economy, should the Buffalo Bills have to move to another venue. r'm interested in your opinion, as economic development advisors to the Governor. Which is better, $1 billion in new spending, changing the letterhead on the economic development programs that have been changed many times over the last 50 years in this state, or $1 billion of tax cuts to help stimulate the upstate economy? In your view, which is better? UPSTATE CHAIRMAN GUNDERSEN: I believe that any public dollar ought to be strategically deployed and targeted. I believe that programs that -- or policies that are put in place that benefit all have to be done so very, very carefully. In this case, at this time, what we believe is that the right kind of investment will yield the biggest results for us. We believe clearly that the $1 billion fund is strategic, it is targeting the resdurces where they need to be deployed. And moreover,it is the result of 500 leaders from across upstate who said enough is enough, this is what we need to do and this is how we need to do it. So we are very, very convinced that this is the right time and the right approach. I'm going to let -- and I think Pat will agree -- we're going to let the Tax and Finance commissioner address your specific . 46 A46 JOINT BUDGET HEARiNG - ECO. DEV./TAXES FEBRUARY 11,2008 • questions about the taxes and the fees. With regard to the Bills, there's no doubt, there's no doubt that the Bills are an institution that we all love and we want them to remain. What Ralph Wilson has noted is that the fan base needs to increase. And by marketing in Toronto and encouraging some games to be played there, it's going to increase the likelihood that the Bills will be around Buffalo for many more years to come. ASSEMBLYMAN HAYES: Well, just in response to that, I would say that the problem here is that it seems to me there's a fundamental disconnect between what the Governor has proposed in terms of the tax structure and the spending in the state budget and your role as economic development advisors. What has happened, clearly - the reason why the fan base has to increase -- is what everybody in Western New York knows first off. When you talk about economic development, I don't care if you're selling newspapers, tires, groceries, or tickets to sporting events, Western New York is losing population. That's why we don't have the fan base. That's why Mr. Wilson is talking about selling more tickets. What 1 want to know is what are you doing as economic development advisors right now to help protect jobs in Western New York. Not a three-to-five-year plan that -- we've heard three-to-five-year plans before for the past 50 years, quite frankly. I want to know what are you doing right now to change the circumstance and stop the bleeding in Western New York of jobs and 47 A47 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 people and outward migration. UPSTATE CHAIRMAN GUNDERSEN: We're focusing on the fundamentals,sir. We are focusing on making smart investments in infrastructure that will encourage existing businesses to grow and new businesses, to locate in these areas. We're focusing on the role of the universities and our colleges, being able to transfer the product of the research into the commercial space. We are focusing On our workforce and trying to align our workforce development effàrts with our economic development efforts. That is being done through the "I Live New York" and through other partnerships that we're establishing with DOL. We're looking at new investment products that are absolutely needed so that our businesses can find the support when they need it and not have to go to other states to find it. And we're globalizing, we're becoming more engaged internationally. This budget is proposing to increase our international activities to $3.5 million from $1.2 million. Quite frankly, $1.2 million is a travesty for this great State of New York, to only have a million dollars for international activity. What we need to do in the budget, if you all agree and will provide us the wherewithal, we need to help counsel our businesses so that they knOw how to export the products into the fastest-growing markets around the world. We need to have representatives in those markets around the world so that they can identify investments that are occurring, so we can direct it into our 48 A48 JOINT BUDGET HEARING - ECO. DEV.ITAXES FEBRUARY 11,2008 • communities that need it. Or meet with chief decision-makers of companies that are based here, but the chief decision-makers are based elsewhere. We need to be able to get in front of them. And that's part of the marketing resources. We've had zero money for that. And so if we're not able to get in front of the chief decision-makers that are making the decisions as to whether to close Utica to go to Lincoln, Nebraska, then, you know, shame on us. We're deploying the resources where we think they're needed the most right now, and that has to be targeted. Because if you try to do everything, you'll end updoing nothing. Do a few things and do it right, and that's what thisrevitalization fund intends to do. ASSEMBLYMAN HAYES: Please understand my point about the fundamental disconnect. The increase that the Governor proposes in the budget for the Department of Economic Development is a total of $8.5 million. Of that, $7.5 million is an increase in marketing and advertising. All of the marketing and advertising in the world is not going to overcome what business leaders in Western New York and upstate New York know, and that is that New York State has one of the highest tax rates of any other state in the nation. And so we can try to market our way out of that sorry fact all we want, but I'm telling you the people in Western New York are fed up with watching that kind of play happen without any real results. UPSTATE CHAIRMAN GIJNDERSEN: Let me -- 49 A49 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 ASSEMBLYMAN HAYES: So I'm trying to bring your attention to what I believe is the fundamental disconnect. All the marketing in the world is not going to change that fact. 1 would appreciate it if both of you as cochairs would raise your level of profile in discussions with the Governor's office and with Tax and Finance and bring to the table.your opinion and information that would help turn the tide in terms of the state's tax policy and spending policy so that we can more easily attract those decision-màkërs who will create the jobs in this state. I would appreciate your help on that. UPSTATE CHAIRMAN GUNDERSEN: Assemblymember, I would like to take one more pass at this. I respectfully agree with you that the taxes for businesses are high, they're too high, the regulatory environment is too burdensome. And we need to continuously focus on this. And this is the Governor's number-one objective when it comes to the strategy for economic development: Reduce the costs for doing business. And in the first budget, that was done. A step was taken in the right direction. It's not the only step that's going to be taken along this journey, but a step was taken to reduce the cost from 7.5 percent to 7.1 percent corporate. The workers' compensation reform, that is a good step. This year the focus is on property taxes and strategic investments. We have to take it all together. But we have to - realize it's one step on a journey. We're not going to turn around the 50 A50 JOINT BUDGET HEARING - ECO. DEV.ITAXES FEBRUARY 11,2008 • upstate economy in one budget cycle. And so I agree with you in many respects. I do have to push back on your comment about the marketing. In a billion-dollar revitalization fund, the small amount for marketing, $3.5 million, is not for advertising. We are not talking about advertising. We're talking about marketing that is empirically based, the research to get in front ofthe investors, to know where they are around the world so that we can make our case. And to be able to promote the great businesses that we do have. Nobody is promoting these businesses that are operating in our upstate communities and all around New York. We feel it's incumbent upon us at this time to say it's • not as bad as it may seem, there are success stories here and we're darn proud of these success stories and we want the world to know about it. We can't continue to have our competing states spend tens of millions of dollars trying to convince the world that we are as bad as they think we are. We have to fight back. And if we can do that not through TV, not through magazine ads, but by scooting around the country and around the world to be ableto say, Look, invest in XYZ community, and here's why, then we think that's a wise investment. ASSEMBLYMAN HAYES: So on the threshold question of cut taxes by a billion or spend a billion, you're decidedly on the side of spend a billion. UPSTATE CHAIRMAN GUNDERSEN: Today I'm on the side of using our resources strategically and targeting where 51 A51 JOINT. BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 they can have the most immediate impact. ASSEMBLYMAN HAYES: Spend a billion. That's what I heard you say. UPSTATE CHAIRMAN GUNDERSEN: Invest a billion dollars. CHAIRMAN JOHNSON: Senator Stewart-Cousins. SENATOR STEWART-COUSINS: Yes, good morning. I was certainly waiting to talk to you about the Empire Zone, because clearly there's been a lot of conversation, a lot of discussion. And I think a lot of my questions have been answered. I did want to thank you for the responsiveness that you've shown since you've both been in this position. It's clearly a difficult position. And certainly when we talk about the upstate, the downstate, I think that the reality is is that we are moving, hopefully, as one state. And the things that you are trying toaddress as upstate and downstate are necessary and will benefit all of us. The Hudson Valley, I know that, Pat, you came to Westchester County to talk about the river towns and developing not only the tourism but the opportunity to sort of create a flow of information, a flow of resources for all of the cities, the towns,, the villages on the river. And I'm wondering whether or not that is still very / much part of the focus, that there be some entity that addresses the revitalization, the development. Because clearly,the Hudson River and all that's along.that river is a source of great, Ithink, revenue for 52 A52 JOiNT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • the state. DOWNSTATE CHAIRMAN FOYE: Senator, first, thank you for the kind words and for the question. Let me describe some of the things in this year's proposed Executive Budget for the mid-Hudson area and then some of the things we're proud of talk about in terms of the current year. In terms of capital for the mid-Hudson area, the Governor's budget has $20 million dedicated to projects in the Hudson River area. Following up on that meeting that you were kind enough to sponsor with some of the elected officials from some of the Hudson River towns in your district and surrounding districts, of the $20 million, $10 million is for Hudson River infrastructure and waterfront development. An additional $10 million is for other projects in the Hudson Valley. Beyond that, the'Executive Budget calls for $8 million for the Hudson Walkway, the bridge in the Poughkeepsie area over the Hudson. And the Governor -- it's not your district, Senator, but the Governor has also dedicated $6.5 million to the Belleayre state-owned ski facility. Beyond that, the Hudson Quadricentennial has a $3 million funding and itself has an additional million dollars to market the 400th anniversary of Henry Hudson's voyage into the Hudson. In terms of things that we did for the Hudson Valley last year, Restore New York, Senator, I think you know that over 53 A53 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 $7 million, about 25 percent of the downstate funding, went to eight projects in the mid-Hudson area. ESDC last year invested, for job retention and attraction, nearly $7 million, and that leveraged an extraordinary $165 million of private investment. One of the questions that was asked this morning related to our request for additional funding for economic development. And I think there are two points that I just want to amplify on what Dan said. One is in obviously potentially troubled economic times, as those that we may be experiencing, the ability to put economic development dollars to work and the leveraging factor in terms of leveraging private investment Across our programs, and it varies from year to year and program to program, but the amount of leverage in terms of public doUars leveraging private dollars can range from 10 tjmes to 12 times to 15 times. And I think that's extraordinarily important. The other thing that I think is important to note, finally, Senator, in terms of this year's proposed Executive Budget is that the Governor has dedicated an amount of about $30 million as part of the transportation piece that I spoke earlier about that will be dedicated to mass transit and transportation infrastructure upgrades in the Hudson Valley. 2 Again, to summarize, we're very focused on the opportunities -- both from an investment point of view, an environmental point of view, and a personal enjoyment point of view, 54 -' A54 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 in terms of quality of life -- related to making investments along the Hudson River in your district and throughout the entire state. SENATOR STEWART-COUSINS: Thank you very much. Before we end this conversation, I just wanted to say in terms of the Empire Zones I personally am happy that there is some aggressive outreach in terms of commitments, whatever, however we want to call it. I mean, the reality is certainly in an area like mine, which is experiencing a renaissance, there are many, many businesses that are coming in and making claims. And there are many residents, - frankly, who have been there for quite a long time waiting to have the claims met, waiting to have opportunities, waiting to have doors opened. And if we are talking about revenue or we're talking about taxes and we're talking about strategic use of these taxes as certainly incentives, then there's no reason to do that without actually extracting some benefits and making sure that people indeed are living up to whatever it is they've signed off on when they decided to get the revenue benefits. From what I understand, of the 9,000 businesses that are in the Empire Zones, really there's about 3,000 that are meeting 60 percent or less of their commitment. So presumably this 180 is the beginning. And I see that you'vesaid it's 90 upstate and 90 downstate. I hope that as you move forward there is some continued follow-up. • And I guess the question is, are the other businesses going to be 55 A55 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 receiving letters as we!!? DOWNSTATE CHAIRMAN FOYF: Senator, Dan and I and staff will go through the entire list. We're going to do it on a case-by-case basis. The 180 letters that we sent last month isthe first stage of this. We're going to consider seriously the arguments and the issues that those 180 companies raise. And we will meet with every one of those who's interested in a meeting before we go on to Phase 2. We think that as custodians of this program, and as custodians of the significant amount of tax dollars, that Dan and I have a responsibility to do that diligence and to go through that exercise. And the approach you've described is exactly the one we have been taking and intend to take going forward. SENATOR STEWART-COUSINS: Okay, very last. And I know that other Senators on this side -- my cochair, certainly, in terms of MWBE, the Democratic task force -- we do have questions. How are we faring with our minority- and women-owned business enterprise development? We clearlyhave not used the talent that has been available to us over the years. I know that less than 1 percent of women and minorities do business with New York State. I know that we're moving towards a disparity study. I'm wondering how we are doing in terms of our day-to-day certification, how we are doing in tems of making sure that as we do our operations, whether it's "I Love New York" and beyond, whether we are actually using women and minorities. How are we doing as we are waiting for the disparity study to happen? 56 A56 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 MR. SCHICK: Senator Ste'art-Cousins, I'll be glad to address that. We're doing well. We're doing better than we were doing previously in prior administrations, but ther&s more work to do. In terms of certifications, the statistics show that we're processing about a third more applications than we did in the comparable period in 2006 or 2007. We're at a clipof about a third more, and we'll get better. We continue to increase staff in that regard. And so our goal is to do this quickly and efficiently so that any MWBE that wants to be certified will get that process done -, quickly. We've in the last couple of weeks added more staff. We've undertaken in 2008 to see how we can use technology to streamline that, to allow companies to file things online and to review it online so that it is not a cumbersome, paper-laden process. In terms of agency utilization across the administration, again, the story is good. We've gone from under 4 percent in the fiscal year 2006-2007 to almost 9.5 percent utilization rate in the second quarter, the last quarter for which we have full statistics, in 2007-2008. So we're clearly doing much better, but it's something that we focus on every day. And as I said, we've brought on senior staff to address this. In terms of the disparity study, again, we devoted significant resources to cast a very wide net with the disparity study. We took out ads in national publications, such as the Wall Street 57 - A57 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 Journal, to attract the best firms that operate in this field. We got a large number of responses. It was a process that was handled by the career professionals. A panel was put together to review all the applications and then, after the first cut was made, to have the finalists in for in-person interviews. The firm that was chosen, NERA, has a long and distinguished history of completing such studies across the country. We have signed a contract with them. I think it's currently just undergoing the standard review in the Attorney General and Comptroller's office. But we've signed it and they've signed the contract as well. SENATOR STEWART-COUSINS: What is the normal period for certification now? I mean, how long does a company usually -- from beginning to end, all things being - considered, how long does it take? MR. SCHICK: I think we try to get it done in a couple of months. And the reason it's taken us that long is because we inherited a very large backlog. So I think the statistics that you. saw for the past year are somewhat skewed, because we came in with just an enormous backlog. And so as folks made their way through the backlog, it took longer than we would have desired to process the new applications that came in. As 1 said, we've made good headway into that, but 2008 is I think the year where we're really going to wipe out that . 58 A58 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 backlog and use technology. As I said, we brought in senior staff just a couple of weeks'ago to really spearhead a technology upgrade for this. And we'll get it down from even a couple of months to something shorter. SENATOR STEWART-COUSINS: Thank you very much. CHAIRMAN FARRELL: Thank you. Assemblyman Englebright. ASSEMBLYMAN ENGLEBRIGHT: Thank you, Mr. Chairman. Good morning, it's wonderful to listen to the accomplishmeñts of your efforts over this past year. And most particularly, I'm interested in [earning a little bit more through this questioning process about the "I Love New York" campaign and its impact on tourism. Tourism and agriculture are the two largest industries in the state. When 9/11 occurred, it was tourism, largely, and arts activities that largely saved New York City and the state's economy. We're now heading toward a possible recession. Some say we've been in it for a while. Tourism, it seems to me, is very promising as something to go to to once again stabilize the state's economic vitality. Your reference to the Legislature's investment last year of $5 million in the "I Love New York" campaign, with a 14.5 percent increase across the entire state, was very heartening to 59 A59 JOINT BUDGET HEARING * ECO. DEV./TAXES FEBRUARY 11,2008 hear about. And so I just wanted to ask a couple of questions. What was the multiplier of that investment? Would we gain more if we made a larger investment? That's relatively small dollars, relative to some of the numbers we've been hearing this morning, with a huge impact. So that's my first question. DOWNSTATE CHAIRMAN FOYE: Chairman Englebright, I would answer that question this way. I think that when we arrived here 13 or 14 months ago that New York was dramatically behind some of our competing states from a travel and tourism viewpoint. And the case we made to the Legislature last year was we're not going to ask, because we didn't think it was a reasonable request, that the funding be doubled or tripled orquadrupled, because • we didn't think that was reasonable in light of the other demands on the state budget. So what we asked for was a significant increase on a percentage basis, 45 percent. And this year we're asking for 25 percent, on the theory that let's try to bridge this over a period of years, let the travel and tourism part of ESDC. be able to demonstrate that we will put that money to'good use, that we will professionalize the "1 Love New York" operation and that we'll show economic returns to the travel and tourism sector in the State of New York. I believe that sitting here a year later, we can make that case. I think that the "I Love New York" brand is clearly one of the most valuable in the world. I think that we're very foèused on both 60, A60 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • guarding it but also exploiting it, in a positive sense, for the economic benefit of the State of New York. W&ve hired the first chief marketing officer at ESDC to be the custodian of the brand and have brought in one of the world's leading international advertising and marketing agencies. I think that the dramatic increase in online bookings, the significant increase in hotel revenue in the state -- frankly, the ongoing campaigns 'fdcused on the ski industry this winter and cOzy inns around the state, and I think a dramatically more effective advertising campaign. The travel and tourism sector in the State of New York is a $43 billion industry that I agree with you was a significant component in the recovery of the city and the state following 9/11. It is an industry, as people's incomes across the world increase, New York City and New York State ought to be beneficiaries of that, because everybody ultimately wants to cOme to New York City and see it and see the other splendors, from a travel and tourism point of view, across the entire state. And I think, also, travel and tourism employs 700,000 people directly and indirectly across the State of New York. And frankly, many of those jobs are entry-level jobs, they represent the first step on the economic ladder for many members of communities across the state. And not only will the investments we're making benefit the hotel and restaurant and service sectors around the state, but they ought to also result in an increase in employment, including many of 61 A61 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 those entry-level jobs. ASSEMBLYMAN ENGLEBRIGHT: Thank you. I would like to go for a moment to the arts and cultural capital grants program. I'm encouraged to hear of this approach, and I'd just like to hear a little bit more about what your thought processes are. For example, what criteria would be used to determine which cultural facilities are in need of capital improvements, and what entities would be eligible? And would the Council on the Arts or some other state entity be involved in selecting which projects might receive funding? DOWNSTATE CHAIRMAN FOYE: Chairman Englebright, we're working very closely with our colleagues at the New York State Council of the Arts. Obviously they are experts on the arts and cultural sector in ways that we are not. Our focus is on economic development and really the business side of making sure that we get an appropriate return on the tax dollars that we put into the sector. Our focus is going to primarily be on the economic and investment and job creation returns that we can get. While it's only a portion of the not-for-profit sector, I'll note that the not-for-profit sector across the State of New York accounts for about 15 to 16 percent of economic activity. That's a sizeable number given the fact that the state gross domestic product is pretty close to a trillion - dollars. So that's $150 billion to $160 billion, and the arts and cultural 62 A62 - JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11, 2008 • component is a significant portion of that. So the types of things that we're going to be funding both upstate and downstate -- and I'll also note the inclusion in the Governor's Executive Budget of the $140 million for arts and cultural activities both upstate and downstate -- will be generally focused on capital projects and on projects in which our dollars make the difference between a project going forward or not, with a heavy emphasis on the number of jobs being created and the investment that will accrue, the investment that will be leveraged. ASSEMBLYMAN ENGLEBRIGHT: I wonder if you could also talk just a little bit about the economic and community development program as it might affect tourism and educational activities. And again, I'm interested in whether or not there is sort of a profile of eligibility or an expectation of what types of projects might receive funding and how the review process and eligibility would be considered. DOWNSTATE CHAIRMAN FOYE: Well, I think our programs will be twofold. One is the travel and tourism piece, "I Love New York," is obviously focused on driving business to existing hotels and restaurants and attractions throughout the entire State of New York. I think the State of New York and the City of New York as well have been successful in drawing millions of visitors from the rest of the country and around the world, and we've got to continue to grow that number. And that's the focus of"I Love New York." 63 A63 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 From a capital funding point of view, we're open to both for-profit and not-for-profit institutions: Many competitors, many participants in the travel and tourism business will be small businesses of various sorts across the entire state. One of the things Dan and I are committed to -- and I expect to discuss this with Assemblymember. Weprin' later in the hearing, I'm sure -- is our focus on small businesses. And we look forward to discussing that. I think that's a particular characteristic of companies -- not always the case, obviously. There are some quite large companies, which is good. But there are many small businesses, and we're focused on making capital available and operating support available where we can. Beyond that, Thomas Ranese, who's our chief marketing officer, has various programs -- Explore New York. The travel agency promotion program, we had our first-ever summit in December, in Schenectady. And providing technical support, operating support, making sure that travel and tourism industry participants are briefed on ongoing trends has been a particular focus and will continue to be going forward. ASSEMBLYMAN ENGLEBRIGHT: I have one last question. I want just to share with you a perspective. I had a chance to participate in a Canadian consulate/New York State sort of discussion about the implications of border security along the Canadian border back in the fall. It is my impression that we have a really serious problem in terms of the choke points that in some cases cause, during 64 .' Ll N A64 . 6i . JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 the height of the tourist season, backup and a waiting period of up to two hours to cross the border. It was mentioned before about the importance of the Buffalo Bills to Buffalo. Forty percent, I learned, of the ticketholders are Canadians. So to come to a game in Buffalo, they have to get on line and wait two hours, in some cases, to cross the border. This is a problem. And'I just wonder if you're aware of that problem and if you have any thougbts as to how we might make some investments to speed up the processing and shorten the time that it takes for tourists or ticketholders to cross the border so that we not be working against ourselves as we make investments just on our side of the border without taking into account the new realities of the border security choke points. DOWNSTATE CHAIRMAN FOYE: I'm going to ask my colleague Ken Schoetz to speak to that question. MR. SCHOETZ: Thank you. One of the other hats that I wearis to serve as director of the Peace Bridge Authority, and so I'm very familiar over the last five years of the impact of this border-security tighteningon Western New York but also the bridges in the North Country as well. We've been working very closely with Secretary Balboni on coordinating with Washington. And I really think as you look to what's the answer, what can we do either locally in Western New York or as North Country officials, or as state officials, the reality is that this is a problem that has been created by the 65 A65 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 fits-and-starts efforts of the federal government with respect to passports, NEXUS, FAST passes, et cetera. And I think we have taken, the Governor and his staff, we've conducted a very comprehensive attack on the federal government to try and say you have to pay attention to what you're doing here. The traffic numbers on the Peace Bridge and every bridge from Detroit to the North Country are down significantly. And I think, you know, we're reaching a critical time in the next six months. And we are right now at a time when the Border Patrol is now saying, well, a driver's license-isn't good enough anymore, you need a driver's license and a birth certificate. You can't just say "I'm from the United States" anymore. So we are aware of the problem. And we have worked closely with Peace Bridge authorities, with federal authorities, to try and work through this problem. But the reality of it is unless we can get the federal government to change or at least to push back some of its requirements, we are in a very difficult time with respect to cross-border traffic. ASSEMBLYMAN ENGLEBRIGHT: Sontething's going to change soon in the federal government, so perhaps we'll have a chance to dialogue with a different administration. Thank you, Mr. Chairman. CHAIRMAN FARRELL: Thank you. CHAIRMAN JOHNSON: Next, calling up Senator 66 A66 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • Flanagan. SENATOR FLANAGAN: Thank you, Mr. Chairman. Appreciate your patience and indulgence. I do have a number of questions. And, Pat, I don't want to disappoint you in any way, so I'll start off by asking the question that I've now asked last year and at the confirmation hearings and still don't have an answer to it, I would like to have the organizational chart, because I listened to some of the questions from my colleagues, and We still don't have an updated organizational chart which would delineate who's in charge of what, who reports to whom and how the boards are constructed or not. So we have been waiting, frankly, way too long to get that. And I would assume that it could be produced today for any member who's interested in seeing what the composition of the corporation and the department are. DOWNSTATE CHAIRMAN FOYE: Senator, we'll get that to you promptly. SENATOR FLANAGAN: In relation to that, and it's sort of on the same point, Mr. Gundersen, you referenced 41,000 jobs secured and pledges for another 11,900 jobs. Last JuJy right after session -- really in June -- the Governor traveled around the state with a PowerPoint presentation and outlined some of the achievements to • date, at least in his mind, of what was done in terms of economic 67 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 development. And at the time I had asked for that information, assuming that it would be available in an instant, inasmuch as it had been prepared for a statewide tour by the Governor. And it took seven weeks to get information that should have been available in about seven minutes. I'm assuming that if we were to ask for the complete breakout of all those jobs retained and secured, that that too would be available today, because I'm sure it was compiled in preparation or in anticipation of today's hearing. UPSTATE CHAIRMAN GUNDERSEN: That's correct. And that is for ESD-assisted retention. There may in fact be other state departments that are also, through their efforts, helping to create jobs. But we can produce that list for you. SENATOR FLANAGAN: The Javits sale. I won't focus on the money for the moment, but there's a change in the proposed language that would allow for the proceeds of that sale to be, quote, unquote, used for any other lawful purpose. Which in my estimation gives complete and unfettered discretion to the corporation to use the proceeds as they see fit. I won't even get into the question about the viability or the wisdom of a sale like that. But is that accurate? DOWNSTATE CHAIRMAN FOYE: Senator, I believe that theGovernor's Executive Budet indicates particular uses for the funds from the sale of the Javits assets, which include a portion 68 A68 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • of the $525 million for Moynihan -- aid to New York -- capital construction on New York subways and approximately $30 million for the Hudson Valley. A second component would be $300 million for the Housing Opportunity Fund for affordable suppOrtive and workforce housing, and approximately $45 million in the aggregate for Hudson River Park and Governors Island. The Governor's Executive Budget indicates that sales of excess land at Javits could account for up to $900 million. That relates to the sale of two or perhaps three parcels at Javits. And those are some of the proposed uses of the net proceeds of the sale of excess land at Javits. SENATOR FLANAGAN: I understand everything you just said, but you didn't answer my question. Does it still give you the authority to make changes to that? For example, I can look at this one of two ways. One, it would give you unfettered discretion, but that may inure to the advantage of some regional projects. I see money, in here for Hudson, for the state park in New York City. I would love to see some potential money coming Out to that little park that I have a keen interest in out on Long Island. So just for clarity, because it ties into some other issues, is it accurate that this money could be used and moved for any other lawui.il purpose? Because that's the proposed language in the Governor's budget. DOWNSTATE CHAIRMAN FOYE: Yeah, Senator, M. A69 JOINT BUDGET HEARING -ECO. DEV.ITAXES FEBRUARY 11,2008 I believe that the proposed uses are not lined out in the Executive Budget, that they're deemed to be off-budget.. And the description of proposed uses that I just described is available in supplemental documents only. And the Legislature's concern that there be specific uses for proceeds of the Javits sale is I think is reasonable and understandable. SENATOR FLANAGAN: Speaking of Javits, you mentioned that a developer has been chosen, or Mr. Gundersen mentioned it in his remarks. Who is that? DOWNSTATE CHAIRMAN FOYE: Yeah, I think that Dan's -- the state of play at Javits is that, as has been reported in the papers, we have done an exhaustive review over the last 12 months and have determined that the previous proposed plan, general project plan that had been approved with respect to Javits cannot be justified from a financial or an economic point of view or, frankly, from the returns that would generate to the city and the state and the hotel industry, which is the industry most directly affected. No developer at Javits, Senator, has been chosen. But we are at a point where the two alternatives on the table involve a renovation or a renovation and a modest expansion, both of which we believe can be accomplished within the existing appropriations by the Legislature. Same with respect to the money that the city has committed and the funds that have been obtained from the hotel tax. SENATOR FLANAGAN: I'm just going to be 70 E S A70 : JOiNT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • specific, then. I'm reading on the first page of testimony, where it says: "We've decided upon a convention center developer for the Javits Convention Center." I don't think it's unreasonable for me to' ask, if you have it in a prepared statement, who is the developer? DOWNSTATE CHAIRMAN FOYE: Senator, I think that the statement should have been amended to read that as a result of having gone through the Javits planning process -- no developer has been chosen for. Javits, nor is there a search for one - underway. A development plan has been arrived at. UPSTATE CHAIRMAN GUNDERSEN: That's my errOr. I apologize for that. A development plan. SENATOR FLANAGAN: Any there any other errors in here that we should be aware of? UPSTATE CHAIRMAN GUNDERSEN: I'm not aware of any. I'm not aware of any. SENATOR FLANAGAN: Following up on Assemblyman Hayes's question about the $1 billion in spending versus taxes, are there any -- in the $1 billion proposal, are there any business tax cuts at all? UPSTATE CHAIRMAN GUNDERSEN: There are none. SENATOR FLANAGAN: I would concur with the Assemblyman, that is problematic. But just a couple of other quick things, iflmight. ' 71 A71 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11 i 2008 Mr. Gundersen, you mentioned about a number of different programs and the Legislature being involved, and you talked about working with local municipal officials and in a reference tous as "yourselves." How exactly do you do that? Because in speaking with my colleagues inthe Senate majority, we don't seem to see any involvement or any outreach of any kind in relation to local projects. Now, in fairness, I have gotten some calls from Pat Foye about announcements. But a lot of those things are at the back end of the process. I'm interested to know how exactly you interact with (_ our colleagues here in both houses. UPSTATE CHAIRMAN GUNDERSEN: Sure. Sure. My comments, I think, were in two areas. One, participation with the regional blueprint process in which'Senators and Assemblymembers were invited to be part of the blueprint process; And, two, for the City-by-City projects. If we're considering a project in a particular area or a district, we did reach out and ask for feedback. Thiswas upstate. SENATOR FLANAGAN: Not downstate. UPSTATE CHAIRMAN GUNDERSEN: I'll let Pat address downstate projects. DOWNSTATE CHAIRMAN FOYE: Senator, I think what I've tried to do, I hope effectively, is to reach out to members of both the Senate and the Assembly without regard to party, 72 A72 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY II, 2008 • solicit their, views and whether it's on things like Empire Zones or some of our loan and grant programs or specific projects. And I commit to continuing to do that going forward. SENATOR FLANAGAN: th relation to the parks announcement, the Governor went and made a speech upstate and referenced a $100 million plan in theState of the State, and then as he moved around upstate -. and let me be absolutely crystal-clear. I want to see investment in upstate New York. I come from Suffolk County, I want to see that money spent, it's a wise investment. My colleagues in that region of the state certainly need that. But on the flip side of that, sometimes it's challenging for us to go back and rationalize, as Assemblyman Schimminger said, the allocation. You know, we have a $100 million fund, and $80 million goes from Albany west and north. How was that determination made? ' And please don't tell me it came from the Parks Department, becausethis is economic development, as you tout it. So I'd like to know the rationalization for making that type of split. UPSTATE CHAIRMAN GUNDERSEN: That was -- I'm soxry to disappoint you, that was a decision that Parks and Rec, together with the Executive staff, determined was appropriate given the preponderance of the number of state parks located upstate. DOWNSTATE CHAIRMAN FOYE: Senator, I think the other way to look at it is actually that the total amount of park funding available in the Governor's budget is actually 73 A73 JOINT BUDGET HEARING - ECO. DEVJTAXES FEBRUARY 11,2008 $1 55 million. Because I think it's right to include the $45 million for Hudson River Park and Governors Island. And that looking at it on that basis, of the $155 million, $75 million will go to downstate and remainder to upstate. So the split with respect to parks funding -- and clearly our colleagues at Parks, Commissioner Ash and Commissioner Grannis at DEC have had a great deal of input in terms of how that money is allocated. SENATOR FLANAGAN: Well, Pat, since you brought up the details, I'll just provide a couple myself. 1 thought the number was 147. But let's kick it up to 155. I know in the allocation to Long Is land, which was $28.5 million, there was an appropriation for Brentwood State Park that Senator Johnson had worked on. And frankly, I don't consider that new money at all, and I don't think it should be counted in the allocation, because that's something that Governor Pataki vetoed that we overrode, and that was existing funding. That was a $5 million allocation for a Neptune project that was to rectify environmental concerns that related to an energy project. That has nothing to do with parks, and no one should be misled that somehow that is adding to or enhancing the value of our parks funding. So the devil is in the details. And, you know, for the Parks Department it will be interesting to see what their rationalization is. 74 A74 JOINT BUDGET HEARING - ECO. DEV.ITAXES FEBRUARY 11,2008 • But one other thing, please. And that is following a number of the things that the Governor has talked about in a broad sense about how he views government - and there's been a lot of touting of public input and disclosure and all kinds of things of that nature -- somehow it seems incredibly convenient for the Executive to feel that everything that the Legislature does should be lined out with unbelievable specificity -- which frankly I have no problem with -- everything that we contemplate, projects all across the State of New York, somehow that should be clearly delineated for the whole world to see. And yet when I look at this economic development funding, a major problem I have is that everything seems to be sort of sweeping towards ESDC. NYSTAR is having some of its authority taken away, and ESDC gets these beautiful lump sums that get to be allocated, frankly, as you see fit without any legislative input. Why are we going to that type of scenario when it would be more prudent, frankly, and would provide direct involvement with the Legislature, why are we moving towards massive lump sums as opposed to specific projects? DOWNSTATE CHAiRMAN FOYE: Senator, I'd respectfully suggest that we're not. I think that when one goes through it on a project-by-project basis -- I mean, for instance, start with the Investment Opportunity Fund, which is $150 million, which will involve the Governor and the leaders of the Legislature in a substantive role -- a veto role, frankly -- with respect to the overall 75 A75 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 direction of the program. Secondly, I'd respectftilly suggest that both upstate and downstate that the amount of detail in terms of where monies will be spent both upstate and downstate in this year's budget -- and obviously we understand that the purpose of this hearing is begin a dialogue with the Legislature on legislative priorities and concerns and issues. And that's why Dan and I and Ken and Avi are here and why we're committed to answering your questions and concerns as we go forward over the weeks and months to come -- that a significant amount of detail has been furnished. I think the questions that are being asked with respect to particular programs and particular parts of the Governor's Executive Budget are absolutely appropriate and reasOnable. And I think that having even greater clarity in the Legislature's input is an extraordinarily important part of the process. SENATOR FLANAGAN: Well, I'll just use the downstate number. There's a $220 million fund. Are you suggesting in that fund and in others that there will be legislative veto over that? In other words, it's got to be unanimous, the Senate, the Assembly and the Executive, on any projects? DOWNSTATE CHAIRMAN FOYE Well, no, Senator, what I was suggesting in particular was the Investment Opportunity Fund. But obviously, for instance, the pickup on the. $200'million Downstate Revitalization Fund that you just mentioned, 76 A76 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • that will be passed and the funds appropriated only if the Senate and • the Assembly and the Governor agree on its ultimate disposition. And having the Legislature's input into how those funds ought to be spent and particular priorities that are important to leadership and members of both the Senate and the Assembly I think is why we're here this morning and what we hoped to -- the dialogue we hope to have with you over the next number of weeks. SENATOR FLANAGAN: Well, let me ask it more directly. Is it your position and the position of the administration that those allocations, as they are lined out, whether now or in the future, should be subject to an MOIJ which includes sign-off by the Legislature -- Senate and Assembly -- along with the Executive on all projects? DOWNSTATE CHAIRMAN FOYE: No, Senator; I think with respect to -- and the example that I'd use is last month we announced Round 2 of Restore New York funding, $100 million of funding up from $50 million last year. We had demands or requests for the money of about $300 million, so we were oversubscribed three times. That was of course a legislatively created program. The current Round 3 will be $150 million on a statewide basis. That was, in my mind, a comprehensive, exhaustive staff-driven review process of that competitive process. And I think that the municipalities around the state that were recipients of that money were, frankly, proud of the process that was undertaken and the decisions that were reached and happy to explain and advocate for 77 / A77 • JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 it. And I believe that ESDC can demonstrate that we can take the same approach with respect to other programs that the Governor and the Legislature are able to agree on. SENATOR FLANAGAN: But I would make a clear distinction, and I'll close on this point.. I listened very carefully to my colleagues' questions and comments and in particular to Mr. Gundersen's responses as it relates to announcements., Where I have a problem and I think some of my colleagues have a problem is when projects are announced, full well knowing that there is no appropriation or existing authority to back them up, the Governor goes around and makes announcements -- while they may be laudable, he then makes them without having the imprimatur or the blessing of the Legislature through the budgetary process. And given the financial picture that's been laid out here today, I can see a scenario where some of these projects could be at risk. And frankly, what will happen is everybody will turn and blame the Legislature if we have to make modifications to that, because the Governor went out precipitously and made announcements that should have had more of the legislative input throughout the whole thing. Thank you, Mr. Chairman. CHAIRMAN FARRELL: Thank you. Assemblyman Brodsky. ASSEMBLYMAN BRODSKY: Thank you, 78 A78 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • Mr. Chairman. Let's start with Empire Zones. Can we have a list of the 180, please? DOWNSTATE CHAIRMAN FOYE: Assemblyman Brodsky, what we would like to do is to furnish that to the Legislature and furnish it, frankly, to all interested parties that request it after companies that have received the letters have been able to respond and make any arguments they wish. So the commitment is yes, we will furnish it. We'd like that process, which we believe will take a matter of weeks, to unfold first. ASSEMBLYMAN. BRODSKY: Why should we wait for the responses to get the list of who you sent them to? What's the public interest in that process? DOWNSTATE CHAIRMAN FOYE: Forgive me, ask the question -- ASSEMBLYMAN BRODSKY: What's the public interest in waiting for the responses? I didn't ask for the responses. I just asked for the letter saying we have an issue. What's the public interest in withholding that data? DOWNSTATE CHAIRMAN FOYE: Here's the public interest. Dan and I and Ken and Avi are focused on retaining and attracting businesses to the State Of New York. We have sent letters to 180 companies, and we do believe that the response process ought to unfold over the next weeks before we publicly release that -- 79 A79 JOINT BUDGET HEARING - ECO DEV./TAXES FEBRUARY 11,2008 ASSEMBLYMAN BRODSKY: Why? What's the public interest in withholding the list? DOWNSTATE CHAIRMAN FOYE: The reason is our job is to attract and retain businesses to the State of New York. We have done an exhaustive review of the 180 companies on that list. But in the event that One company ought not to be on that list, we don't think it's fair to that company or its employees that the list be released until that process, which we're talking about a number of weeks, be allowed to unfold. ASSEMBLYMAN BRODSKY: Since the data is public anyway, and all you did was compile what's on a public document, I'm not persuaded. I'm asking for the list, and I'm sure other members want it as well. DOWNSTATE CHAIRMAN FOYE: Assemblyman Brodsky, two points. Obviously a legislative request is different than a Freedom of Information request. And we take very serious any requests from the Legislature. And I hope you and your colleagues would agree that we have been responsive to information requests. The Freedom of Information position I'll leave to learned counsel at ESD, having given up practicing law over ten years ago. - But we do believe that with the objective of attracting and retaining businesses, that the right thing to do is to allow the next couple of weeks to unfold before that list is -- ASSEMBLYMAN BRODSKY: I'm not persuaded. 80 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • I'm still asking for it. Let's see what happens. DOWNSTATE CHAIRMAN FOYE: Yes, sir. ASSEMBLYMAN BRODSKY: I think you did very, well by sending out the letters. This is the first concrete step towards reform of a failed program. And although it's a very modest step, it's a very important message and it shows, I think, that you are intending to make fundamental changes of a kind that you've promised in the past, and I think it ought to be noted and appreciated. DOWNSTATE CHAIRMAN FOYE: Chairman Brodsky, I appreciate that. And on behalf of Dan and me, I think we'd be remiss if we didn't note your leadership on the issue and your urging to look at this important program.. Having said that, I do respectfully disagree with you,. as I think I did this time last year, that the right thing to do with this extraordinarily important program is to mend it, and not end it. But I think the issues that you and your colleagues on the panel and others in the Legislature have identified have been extraordinarily important to us in looking at this program. ASSEMBLYMAN BRODSKY: Are you familiar with shirt-changers, the concept of shirt-changers? DOWNSTATE CHAIRMAN FOYE: Yes, sir. ASSEMBLYMAN BRODSKY: Okay. Are you going after them to see why we should be paying them for having created no jobs? DOWNSTATE CHAIRMAN FOYE: Assemblyman 81 A81 / JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 Brodsky, in this process we intend to be reviewing shirt-changers and others. ASSEMBLYMAN BRODSKY: When do you expect to complete your review of shirt-changers? DOWNSTATE CHAIRMAN FOYE: That process is ongoing. And I think rather than making up a date, I will commit to come back to you on that. ASSEMBLYMAN BRODSKY: Months, weeks, years? DOWNSTATE CHAIRMAN FOYE: No, it's neither weeks nor years. LI ASSEMBLYMAN BRODSKY: Months? DOWNSTATE CHAIRMAN FOYE: Yes, sir. ASSEMBLYMAN BRODSKY: You underestimated me again. (Laughter.) ASSEMBLYMAN BRODSKY: Faster, more. Okay? I think you're headed in the right direction. You're familiar with the A.J. Keainey report? DOWNSTATE CHAIRMAN FOYE: AT. Kearney, yes, sir. ASSEMBLYMAN BRODSKY: A.T. Kearney, excuse me. DOWNSTATE CHAIRMAN FOYE: Yes. ASSEMBLYMAN BRODSKY: It criticized the 82 A82 H JOINT BUDGET HEARING - ECO. DEV.ITAXES FEBRUARY 11,2008 • Centers for Excellence as essentially, not meeting the economic development goals of job creation and economic investment. Is that not accurate? DOWNSTATE CHAIRMAN FOYE: I think that may be slightly overstated, but I think the sentiment is correct. ASSEMBLYMAN BRODSKY: Why are we continuing, then,:to find them? Are you going to apply the same standards to them as you apply to anyone else? DOWNSTATE CHAIRMAN FOYE: We are. One of the things that Dan and I are focused on, and w&re going to be working with our colleagues at NYSTAR on this as well, the State of New York has invested a significant amount of money in Centers of Excellence. I think frankly in any environment it behooves us to make sure the state is getting a significant return on that money and -- ASSEMBLYMAN BRODSKY: When will that review be completed? DOWNSTATE CHAIRMAN FOVE: That review is ongoing and will neither be weeks nor years. ASSEMBLYMAN BRODSKY: I'd like copies of both as soon as they're available, and I'd like to know when it's completed. DOWNSTATE CHAIRMAN FOYE: Yes, sir. Yes, sir. ASSEMBLYMAN BRODSKY: If these were programs for poor people, they'd have been shot down long ago. We 83 A83 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 have wasted billions of dollars here. I believe the annual cost of Empire Zones is approaching a billion dollars a year? DOWNSTATE CHAIRMAN FOYE: It's $600 million. At its current rate of growth, it will be a billion dollars in two or three years. ASSEMBLYMAN BRODSKY: We're not creating jobs, we're not creating investment proportionate to that. You yourself called the program not equitable, not strategic, and not cost-effective. That sounds to me like a reason to do something more serious and dramatic. But you're heading in the right direction, you've kept your commitments of last year, and I appreciate it. DOWNSTATE CHAIRMAN FOYE: Assemblyman Brodsky, let me just thank you for those kind words. Let me just note one other thing -- ASSEMBLYMAN BRODSKY: You viewed those as kind words? (Laughter.) DOWNSTATE CHAIRMAN FOYE:. Relatively speaking. (Laughter.) DOWNSTATE CHAIRMAN FOYE: The / Legislature amended the Empire Zone program in 2005 and directed ESD to come back in 2009 with a report. I think that there are two points worth noting. One of the things that Dan and I have done as 84 A84 n JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • w&ve gone around the state, upstate and downstate, is to listen to businesspeople, economic development professionals, people at IDAs, but especially people whose capital is at risk, either as investors or businesspeople. W&ve been very focused on doing that. I think that the deadline, secondly, that the Legislature set with respect to a report in 2009 underlines an important point, which is that Empire Zone changes need a certain amount of time to percolate through the system.before investors and businesspeople are able to respond to them. The changes that the Legislature made in 2005 really went into effect for the first full year in 2006. And obviously beyond that there's a lag -- a natural lag, a legal lag -- with respect to the filing of tax returns and the ability of Tax and Finance to analyze that. And I think we ought not to jump to momentary conclusions but ought to allow both the Legislature's changes in 2005 and some of the things that Dan and I have done in 2007 and 2008 to take effect. ASSEMBLYMAN BRODSKY: Let's switch to Moynihan. What's the total cost of the Moynihan project? DOWNSTATE CHAIRMAN FOYE: The total cost of the Moynihan project from the point of view of the public with respect to the train station on the east side of 8th Avenue is - latest estimate, which is being refined -- is approximately $2.2 billion to $2.3 billion. ASSEMBLYMAN BRODSKY: How much do you have? 85 A85 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 fl(VMSTATPCUA!RMA'NJPflVP Wr seeking -- S ASSEMBLYMAN BRODSKY: How much do you have? DOWNSTATE CHAIRMAN FOYE: Okay. We have a commitment from the joint venture of $550 million. We believe that's -- andjust to be clear, that's $550 million of private developer money being used for the public. Often a criticism that's made of these projects is that these projects involve public subsidy of private interests. And exactly the opposite is happening here. Beyond that, the Governor's Executive Budget indicates funding for approximately $300 million of state money over a period of years for Moynihan. We would expect that that commitment would be matched by the City of New York -- ASSEMBLYMAN BRODSKY: How much do you have? You have the 550 in a committable form, you have 300 from the Governor. That's 850. DOWNSTATE CHAIRMAN FOYE: Subject to approval by the Legislature. ASSEMBLYMAN BRODSKY: How much do you have from the city? DOWNSTATE CHAIRMAN FO\E: We would expect that the city would fund -- we are, from a financial point of view, we are fifty-fifty partners with -- ASSEMBLYMAN BRODSKY: Does the city know 5 86 A86 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 that? W DOWNSTATE CHAIRMAN FOYE: Oh, absolutely. Of course. ASSEMBLYMAN BRODSKY: Have they agreed? DOWNSTATE CHAIRMAN FOYE: Absolutely.. The city has been intimately involved on a daily basis in the project. ASSEMBLYMAN BRODSKY: That gets you to 1.15. DOWNSTATE CHAIRMAN FOYE: Yes, it does. ASSEMBLYMAN BRODSKY: So you're short a billion. Where are you going to get it? DOWNSTATE CHAIRMAN FOYE: From three • sources, I would suggest. One is we believe that the city and state, acting together, can make a case for the developers that it is appropriate that they contribute more than the 550 that has already been committed. One. Just a footnote to that, I think it's important to note, and I know it's been a priority of many in the Legislature on some of these deals, that we align the interests of the public and the private parties. And we have done that on Moynihan, and will do it on some of our other deals, by the state and city sharing in the success of the ultimate project on a fifty-fifty basis. So we have negotiated a sharing -- it's still being negotiated -- but the concept and the numbers are being agreed. So 87 A87 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 the first answer is more money from the private developers. Second is we have been meeting and the Governor has met with our partners in the federal government in Washington, specificallythe New York State U.S. Senators and our Congressional delegation. And there has been great support both from Senator Schumer, Senator Clinton, Senator Lautenberg and other senators from around the nation, many of whom worked with the late Senator Moynihan during his Senate career. We've also had great help from Chairman Range) and all the members of the congressional delegation. We would expect and believe that a project of this national significance is deserving of a significant amount of federal aid ASSEMBLYMAN BRODSKY: What's the third area? DOWNSTATE CHAIRMAN FOYE: We hope to be able to make the case to our governmental partners in New Jersey and New Jersey Transit that a project like this is also, because of its regional significance and its importance to the growing number of commuters from the great state of New Jersey into existing Penn Station, ultimately Moynihan Station -- ASSEMBLYMAN BRODSKY: When do you expect answers from those three parties? DOWNSTATE CHAIRMAN FOYE: We're very focused on answers to those questions in the next several months. 88 A88 L JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 . ASSEMBLYMAN BRODSKY: Somewhere between weeks and years? DOWNSTATE CHAIRMAN FOYE: Yes, sir. You've seen the theme. ASSEMBLYMAN BRODSKY: Are you familiar with an interest of some of the private developers in shifting prime responsibility for Moynihan away from ESDC to the Port Authority? DOWNSTATE CHAIRMAN FOYE: I have heard rumors on that. I don't happen to think it's a sound idea. ASSEMBLYMAN BRODSKY: If you hear any more about it, I'd like to know, because I agree with you that it's not a sound idea. DOWNSTATE CHAIRMAN FOYE; I commit to doing that. - ASSEMBLYMAN BRODSKY: And I do suggest that your strategy of getting the public long-term economic benefits is a substantial and important and valuable change, and I commend you for it. DOWNSTATE CHAIRMAN FOYE: I thank you for those kind words. ASSEMBLYMAN BRODSKY: Javits. You can stop worrying about the kind words. • • (Laughter.) ASSEMBLYMAN BRODSKY: You've spent -• $109 million, and we have, as we say in Italian, gomicht? 89 JOiNT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 DOWNSTATE CHAIRMAN FOYE: No. We have -- most of those dollars were actually spend by the prior administration. Part of that includes a small acquisition of a parcel of land. What we have been doing since last January, when we arrived, and particularly April, when we were able to attract Barbara Lampen -- who comes to us from the Atlantic City Convention Center, the New'Jersey Sports and Exhibition Authority, where she was involved with the construction and other issues at the Meadowlands redevelopment and the Port Authority -- was to do an exhaustive comprehensive review of all the options at Javits. Those included 15 major options and all sorts of variations on the theme, if youwill. - And the conclusion we came to was that the plan which had been billed as $1.6 billion was actually a $5 billion plan. Working closely with the city and with the hotel association and with the hotel unions, the conclusion that we came to was that that was unjustifiable from an economic point of view to the state, the city and, frankly, the hotel industry. Both of those parties, the City of New York and the hotel industry, agreed with that decision. And we are, Chairman Brodsky, now pursuing, as I think you know, a renovation which is much needed -- ASSEMBLYMAN BRODSKY: W&lI get to that in a second. But you did spend $109 million? DOWNSTATE CHAIRMAN FOYE; No, I think the 90 A90. - JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • amount that's been spent over the last 12 months or 13 months is on the order of $20 million, more or less. ASSEMBLYMAN BRODSKY: Over the last five years, on the project of the Javits Convention Center expansion, how much have .you spent? DOWNSTATE CHAIRMAN FOYE: Over the last five years, about a hundred million dollars has been spent. ASSEMBLYMAN BRODSKY: Okay. And we have nothing to show for it. Fair enough? DOWNSTATE CHAIRMAN FOYE: Well, I think the answer is we have now come to a point where the right economic decision and real estate development decision and economic development decision for the city and the state has been made, and we're going to be proceeding -- ASSEMBLYMAN BRODSKY: I take that as a yes, that we have nothing to show for it. DOWNSTATE CHAIRMAN FOVE: No, I respectfully -- ASSEMBLYMANBRODSKY: Well, what do we have? DO WNSTATE CHAIRMAN FOYE: I respectfully disagree. Look, the monies that were spent by the prior administration I am not here this morning to defend. I think the thing that -- the reality is this. Javits is an important economic development and employment engine for the city, the region, and the state. Wetve been, 91 A91 JOINT BUDGET HEARING - ECO. DEVJTAXES FEBRUARY 11,2008 quite properly, intensely focused on it since we arrived. We're now at a point in time where what we believe would have been ultimately a disastrous project that would have involved ultimately $5 billion or more has been abandoned. That was the right decision. And we're going forward with a much-needed renovation; see today's New York Posi ASSEMBLYMAN BRODSKY: That's in addition to the 109; is that not the case? The cost of the renovation would be in addition to the 109. DOWNSTATE CHAiRMAN FCiYE: That is correct, yes. ASSEMBLYMAN BRODSKY: Look. As best as I can see it -- I shareyour sense that'we need a renovation and expansion; we'll get to that in a second. But what you guys have done with the city is put a bullet in the head of the large, fundamentally world-class expansion, and you've made that clear by the sale of the property. You can't go forward with the big plan if you sell that piece of property; right? DOWNSTATE CHAIRMAN FOYE: Well, I would not adopt the Sopranos analogy, Chairman Brodsky, but (do think that the decision that's been made to sell the southern and the northern parcels indicates our beliet and I believe the city shares that belief, that a multi-billion-dollar investment at Javits is not prudent today. We don't believe the result would be any different 92 A92 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 . five or 10 or 15 years from now. If anything, the cost of construction will have increased. And ultimately the city and the state and - interested stakeholders will pursue, on a systematic basis, bther options for a convention center in the city. ASSEMBLYMAN BRODSKY: As best as I can tell from your earlier testimony in front of my committee, Mr. Foye, no one is looking at, in an authoritative, across-the-board, comprehensive way, what we need to do to get a world-class convention center built in New York City, be it at Sunnyside, be it elsewhere in Manhattan, be it there. We'll deal with that in another forum. But I just want you to know that I view the sale of the property as a final, irrevocable decision to walk away from the Javits expansion at that site that would yield a world-class convention center. You also want to spend money on the 7 Line; right? Is that part of the proceeds of the -- DOWNSTATE CHAIRMAN FOYE: Well,of course, the 7 Line is part of the MTA, which is run by our colleague Lee Sander. The Governors Executive Budget does indicate funding for the 7 Train. ASSEMBLYMAN BRODSKY: That's a terrible idea. That 7 Line is a city put -- it is not part of the MTA capital plan, it is not a transit priority. And the decision to sell assets and put them to that project -- that isn't coming out of your budget, is it? DOWNSTATE CHAIRMAN FOYE: No, sir. 93 - A93. JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 ASSEMBLYMAN BRODSKY: Well -- and Senator Flanagan's comment that you're now able to become involved in any area you want because you can sell property and spend it on everything will be something I will resist quite strongly. DOWNSTATE CHAIRMAN FOYE: I understand, Chaitman Brodsky. And just to be clear, that's not what we're advocating for or the position that we're taking. The Governor's Executive Budget indicates that with respect to the excess land at Javits, first, as a matter of prudent financial planning, those assets will - the Javits land is a longlived capital asset, an extraordinarily invaluable one. ThOse assets will be deployed in other long-lived capital assets in the City of New York and downstate, first. Second, it goes without saying that, while those amounts are off-budget right now, that the dialogue we're having with respect to the ultimate disposition of the net Javits proceeds will be subject to approval of the Legislature. ASSEMBLYMAN BRODSKY: I'm all for dialogue. 1 prefer statutes. Now, let me conclude with the following. I'm a big believer in economic growth and development and job creation, and I will support public funds. I view you four gentlemen as the leading socialists in the State of New York You believe firmly in government participation, government ownership of the meanS of production and distribution. 94 A94 JOINT BUDGET HEARING - ECO. DEV.ITAXES FEBRUARY 11,2008 • Life is strange that way, I understand. But when it works, we o,ught to go forward with it. The problem is if you go back and look at these programs, I think they have fundamentally failed. I recall the testimony of your predecessors in yeal's past, which had more resemblance to an infomercial than it did to testimony before committees of the Legislature. The fact of the matter is if everything we were told in years past was anywhere near true, we wouldn't be sitting here lamenting the state of the upstate economy. We just haven't been able to do it. Maybe we can. I don't challenge anybody's good faith. But I'll give you something to think about. We have adopted without thinking the notion that economic development is a supply-side mechanism, that the way you do it is by giving corporations and businesses money, public money, and they will yield this public benefit. That is what's broken down in Empire Zones, that's what's broken down in Centers for Excellence and elsewhere. Last year Senator Young and Assemblyman Magee came up with an idea for economic development and improvement for the dairy industry. And what they did is they moved to a demandside mechanism where they gave the money essentially to the dairy farmers, who spent it in town, and its multipliers were enormous. If you really want to improve economic health for working people across the state, why don't you just pay prevailing wage on all your projects? Get money into the hands of average 95 . . A95 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY .11, 2008 people, not corporations, let them go out and spend it in their home communities, and see what happens. It's a big idea. Sooner or later, Mr. Foye -- because you're capable and your colleagues are capable of big ideas -- I would urge you to go back and take a very hard look at increasing wage rates as a goal, not just increasing subsidies to corporations. DOWNSTATE CHAIRMAN FOYE: Chairman Brodsky, that is a broad topic. that you and I have discussed, not at the length it deserves, and I think your colleagues probably would not welcome a lengthy response on that. I do want to say the following. I think it important to note that the state's ultimate economic success both upstate and downstate will be dependent on the state's ability to attract and retain private capital. One of the things • that I think we're happy to report in terms of successes this year is that in our programs across the board -- and'the leverage varies. But we have invested a million dollars in,a particular deal or program and been able to leverage $10 million or $11 million or $15 million of private investment in return. I think that one of the most important economic development things that has happened in the Spitzer administration, frankly, is the bipartisan agreement that the Governor and the Legislature were able to reach last session to reduce workers' comp rates, because that showed that what the Governor called .a "perfect storm of unaffordability" in last year's State of the State-- and again used those words in this year's State Of the State -- could be 96 A96 . JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARYIl, 2008 successfully attacked. And that bipartisan agreement of the Governor and the Senate and the Assembly reduced a significant cost item for businesses both upstate and downstate. I think the comment that was made by Assemblymember Hayes earlier and Senator Flanagan and echoed by others, many of you on the panel, that we've got to address the cost of doing business in this state, I think is exactly right. I think a short-term stimulus like the stimulus package being debated and I guess passed in Washington, and the dairy program, I think on an emergency basis may be appropriate. But ultimately, the state's economic development success will be driven by our ability to attract and retain private capital. And the thing that you ought to be asking Dan and I going forward is our ability to do that, which over the long term will be reflected in increased investment and increased -- ASSEMBLYMAN BRODSKY: I will close -- I'ni sorry, Mr. Gundersen. UPSTATE CHAIRMAN GU1DERSEN: And we believe that the way to attract that capital is by focusing on the fundamentals and having the infrastructure in place. If you don't have the infrastructure in place, if you don't have the capital when the businesses need it, then you're not going to be able to keep the fastest growing and most competitive businesses, nor are you going to be able to have the ability to -- 97 - A97 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 ASSEMBLYMAN BRODSKY: I point out two things in closing. • One, respectfully, I've heard the same theoretical argument for the last 15 years. It doesn't seem to be working. Second of all, it just seems to me that at some point we're going to have to confront realities. The highest-taxed areas of our state have the highest level of economic opportunity. And if you were todo a coordination between high-tax areas and economic activity, they would show a pretty good correlation. The lower the tax rate and the cost of doing business, the lesser the economic activity. That's just a fact. And it may be explainable -- and it may be not an answer, because we need and I support subsidies of the kind we're talking about for the upstate economy. They're a good thing; 1 would just suggest to you that the truisms which we repeat.on an annual basis here are not nearly the kind of economic growth, development, job creation that we all want. UPSTATE CHAIRMAN GUNDERSEN: And that's because they've been treated as subsidies. We're not looking at this as subsidies for businesses, we're looking at it as investments in communities to establish the environment that will be conducive to businesses. 1 And that, I think, has been the problem that the state has had for too long, is that we've had such high costs for doing business and we have a response to that with subsidies to somehow 98 A98 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 level the playing field. That doesn't work when you're ignoring the fundamentals of the problem. You just don't have the environment in many of these communities to keep, attract, retain the businesses. And that's what is so different about this. It's not subsidy whatsoever. It's targeted, focused investments in strategic industries. DOWNSTATE CHAIRMAN FOYE: Can I just add one word to my partner's comments, which I agree with and I think is important. I think it's -- CHAIRMAN FARRELL: We're getting into the discussion you really didn't want to get into a couple of words ago. I think Richard has gotten us into a discussion that could go on for hours. So I would say that, Richard, thank you very much. • We've been joined by Assemblyman Lentol. Senator? CHAIRMAN JOHNSON: We'll call upon, at this time, Senator Perkins for a question. SENATOR PERKINS-Thank you very much, Mr. Chairman. And thanks to the panel also. - First I want to extend my appreciation to Mr. Foye for the opportunity we had to discuss some of the concerns that I have with regard to my own specific district, especially the economic development taking place around Columbia University. And I know we don't agree on some aspects of it, especially the questions around 99 A99 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 eminent domain and the aggressiveness that Columbia is using with regard to taking people's property, including some of the residential / property, though not through eminent domain but through other ways that are equally as inappropriate. And I hopethat you will follow up and intervene when necessary to prevent that from happening with regard to those buildings. But again, I appreciate the opportunity to have that discussion and hope that we don't have to use eminent domain even for the so-called commercials. Because 1 think that using that is a bully tactic that is not the role that I think government should be playing with regard to people's private property. But I wanted to also talk a little bit about the tourism initiative and the interest in seeing that we recognize that there are tourism opportunities with regard to not simply the upstate areas, which we very much support, and what we find in some of our communities is what's happening upstate is also happening downstate. And there are tourism opportunities there that could help, especially when we look at the idea of small entrepreneurs and small cultural institutions. And I'm wondering how we're using our dollars to sort of encourage that type of tourism, those kinds of opportunities in New York City, for instance. DOWNSTATE CHAIRMAN FOYE: Yeah, Senator, we've been very focused, and you and I met in your office a couple of - 100 A100 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • months ago, maybe three months ago, on this issue. The increase in funding that we're asking for this year, which is 25 percent over the prior year's funding, is available both upstate and downstate. And 1 agree thatthere are -- 43 million people came to the City of New York last year, including international visitors. One of the things that we're committed to doing is making sure that those people see more than Midtown Manhattan, that they see Harlem, that they see the outer boroughs, that they see Long Island and the Hudson Valley, Westchester and upstate. And frankly, if we're successful in convincing these visitors to stay, on average, an average of an extra day or to increase their spend outside Midtown Manhattan by $25, on average -- and obviously our goal ultimately ought to be higher. But multiply that by 43 million people, and the economic impact for the entire city and the entire state will be dramatic. I believe we've been effective custodians and have gotten a high return on the additional funds that the Legislature entrusted to us last year, and we're committed to doing that going forward. SENATOR PERKINS: So, for instance, the small sort of like neighborhood-based cultural institutions that are not just in Harlem but, you know, throughout the city are very, very vibrant and could use help, could use the kind of support that will enable them to be more attractive not only to tourists but also to folks in the city in 101 A101 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 general. I think when there was this recent strike on Broadway, they discovered a lot of these places. And I'm wondering, are we focusing on trying to develop those types of opportunities? DOWNSTATE CHAIRMAN FOYE: Senator, we are. And we've been working with the leaders of the arts and cultural institutions throughout the entire state, upstate and down, to come up with a list, to put it on our website, and to make sure that visitors to New York and frankly New York residents themselves are aware of these opportunities. I think that the Broadway theater is an incredibly important economic engine, attracts lots of tourists. But these community-based and grassroots arts and cultural institutions are in many ways the future, and especially residents of the city and the state, and with respect to people who live outside New York State, people who are making second or third or fourth visit to New York will want to expand their horizons and to go into communities both upstate and downstate that they haven't had the ability to experience before. SENATOR PERKINS: How much have we been putting into itup to now? DOWNSTATE CHAIRMAN FOYF: Senator, last year there was a $5 million increase from $11 million and change to $16 million and change. And this year the Executive Budget asked for a $4 million increase to $20 million and change for all of New 102 A102 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 . York. SENATOR PERKINS: So this $1 million to fund the second round of Explore New York, what is that? Is that related to what you're talking about now? DOWNSTATE CHAIRMAN FOYE: That's additional funding, Senator. Explore New York is a million dollars in the aggregate. The Governor's Executive Budget asks for a similar amount, a million dollars. And it is for thematic or particularly local-basedtrável and tourism opportunities. SENATOR PERKINS: And are those types of organizations that I'm talking about a part of this? DOWNSTATE CHAIRMAN FOYE: Yes, sir, absolutely. SENATOR PERKINS: Do you have a listing of the ones that -- DOWNSTATE CHAIRMAN FOYE: I do indeed. And I can leave a copy of that with you at the end of the hearing. SENATOR PERKINS: One other question. Saatchi & Saatchi, world-renowned -- I guess it'S the top of the line. But there are others that do the same thing iii a more localized way that may be useful as well, that are not like Saatchi & Saatchi but are -- that can be a part of the MWBE program. Are we looking at that? DOWNSTATE CHAIRMAN FOYE: We are, Senator. Just to go back to your prior question, the amount for 103 A103 JOINT BUDGET REARING - ECO. DEVJTAXES FEBRUARY 11,2008 New York City and tourism matching funds last year I think was about $611,000. And I'll get you a list of the Explore New York funding, which is the million-dollar pot. And I'll either leave that with you at the end of the hearing or send it over to your office. SENATOR PERKINS: Six hundred thousand seems kind of small forNew York. DOWNSTATE CHAIRMAN FOYE: Well, its part of a pot for the entire state of about $5 million. That's the tourism matching funds. Explore New York was a million dollars in the aggregate. To answer your question, Saatchi & Saatchi is a large nationai and international firm. The headquarters is based in New York. They've also got a significant presence in London. And -- SENATOR PERKINS: They're actually based in London, but they have an office in New York. -' DOWNSTATE CHAIRMAN FOYE: I think they've acquired a number of U.S. firms, and their headquarters is-- SENATOR PERKINS: Hudson Street. DOWNSTATE CHAIRMAN FOYE: Yes, exactly. And they've got a significant -- the firm began in London. SENATOR PERKINS: But can we get more localized efforts to help with the promotion? DOWNSTATE CHAIRMAN FOYE: Sure, Senator. What we can do, and we've already had these discussions with Saatchi, is to explore possible ways for other advertising finns to help 104 A104 . .., . JOINT BUDGET HEARiNG - ECO. DEV./TAXES FEBRUARY 11,2008 with the "1 Love New York" program as we go forward this year. SENATOR PERKINS: Thank you so much. And Hook forward to the list of what groups and cultural institutions of the type that Fm interested in have gotten funds. DOWNSTATE CHAIRMAN FOYE: Yes, sir. CHAIRMAN FARRELL: Thank you, Senator. And next to speak is Assemblyman Crouch for a question. ASSEMBLYMAN C1OUCH: Thank you, Mr. Chairman. Chairman Foye, Chairman Gundersen, thanks for your diligence today. It's getting to be rather lengthy, and I'll try to be very brief. It's been noted that there's about 200,000 manufacturing jobs that have left the state in the last, say, .10 years. I'd be interested in your opinion of why we've lost the -- the biggest reason why we've lost those 200,000 manufacturing jobs. UPSTATE CHAIRMAN GUNDERSEN: Well, there' are multiple reasons. This is something that has been occurring over decades, as you well know, due largely to changes in the manufacturing process and consumer patterns .and worldwide trends. The fact that so much commodity-based manufacturing has been under assault has been due largely to the fact that we have other countries that are producing the product at abetter price, and of course we have markets around the world that are 105 A105 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 growing much faster than ours. And so manufacturing has moved into those markets to meet those needs. That's the big reason. But I think we will exacerbate this if we are not in a position to help our manufacturers compete. And that is to help them find those markets, help them innovate their products and find efficiencies in every waypossible. We're doing this through NYSERDA in terms of energy improvements, we're doing this through new techiologies that could be implemented within the manufacturing companies as well as process improvements, through a program we call the MAP program, which has been very successful here. Can we say that the bleeding of manufacturing has ended statewide? No. But I do believe that we've reached a situation where we can now take competitive advantage in niche areas. And I believe it's going to be with the introduction of newer technologies, and this is where we do have a competitive edge Over many of the countries around the world. ASSEMBLYMAN CROUCH: You commented earlier that taxes is probably one of the bigger causes of businesses shutting down And you're still with that comment, I would assume, even though you didn't mention taxes. UPSTATE CHAIRMAN GUNDERSEN: I don't recall saying that directly. I said that the tax situation and the high regulatory environment is a problem that we need to address. I've said many a time that if you look at the costs for 106 A106 JOINT BUDGET HEARiNG - ECO. DEV./TAXES FEBRUARY!!, 2008 • doing business, in any given business the largest cost is going to be labor, by far -- 50 percent. Followed by, oftentimes, facility costs. Unless these are high manufacturers or industrial companies in which the utility costs might be the next factor. But for most businesses, it's labor, it's real estate, it is utilities, and then taxes. But taxes are not the number-one driver for the fact that businesses (a) do not choose New York or(b) leave New York. It can be a contributing factor, but it's not the number-one major factor. ASSEMBLYMAN CROUCH: Appreciate your opinion on that. Recently, about three or four months ago, I attended a forum that was well over 30 manufacturers in the same room. And basically one of the biggest things that they talked about is they do get hammered with some real estate tax, but one of the biggest things that they were concernedabout is the lack of a strong energy policy for the manufacturing community. They've been getting some economic development power. They'd prefer to talk about it as competitive power. They need a five-year, six-year, seven-year plan that they can sign onto so they can put their contracts out there and be able to reasonably be assured that there are cettain things that will not change drastically in their, cost structure of manufacturing, energy playing a very important role in some of our Central New York State industries. And they've advocated for competitive power -- they 107 A107 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 don't like to talk about it as cheap power, they want to talk about competitive power -- but a good allocation of hydropower earmarked for manufacturing. UPSTATE CHAIRMAN GIJNDERSEN: Yes, we've heard that as well and agree and have responded. Those subsidy programs have a one-year extender for all the participants. During this year we will develop new policies with NYPA and others to determine how best to allocate the programs. The new program, after the year period, will be for seven years. And I believe what you were referencing the community would reference as an "evergreen" policy, something that is longer-term so that they have the confidence to invest, they know the price is going to be steady. And that is exactly what is being proposed S here, and we would hope for your support. - For those companies that during that one year, if it's a determination that they ought not to continue in the program, there would be a soft landing, if you will, a three-year phaseout. But we 100 percent believe that we're in alignment with the manufacturers and other businesses that say that this year-to-year approach is not good business practice ASSEMBLYMAN CROUCH: Thank you for saying that. Your decertificatión process for certain companies in Empire Zones that have not met their commitment, I've been experienced with two or three different companies as they've chatted 5 108 A108 JOINT BUDGET HEARING - ECO. DEVJTAXES FEBRUARY 11,2008 with me. Some ofthereasons that they are not able to make their , projections is that there are certain segments of the economy that flourish, and there are certain segments that -- sometimes there are external factors that they can't meet their projections. And in your decertification process you've indicated that you will be, on a case-by-case basis, revIewing some of those reasons. I'm glad to hear that it's not just a standard cookie-cutter approach, because there are sometimes things beyond the company's control that is a cause for why they couldn't make their projection in jobs or whatever. But given the fact that what they had to deal with, you know, they're lucky to still have the same number of jobs there, or within a certain bracket. So I applaud your comments about that you're going to do it on a case-by-case basis. I think that's going to be very, very important, this coming year especially. Just one other thing -- well, two things, just very quickly. I want to make my case as a former member of the agricultural community that we tried to develop accessibility fOr some of the programs. For agriculture, oftentimes it doesn't qOite fit the formula, for whatever reason, and I think we need to pay attention to that. Strong agricultural communities have been the economic engine in a Jot of 'rural areas in upstate New York. The other thing is I mentioned that forum that i was at. Basically, to a person in that room they talked about the necessity 109 A109 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 of employee training, getting good people, being able to have access to good people, whether a high school graduate or somebody coming out of a two-year college program, but having training and the skills that they need. And they need to have partnership with our economic development people to develop those training programs, which are oftentimes changing. The needs are oftentimes changing. So we need to be constantly vigilant of that. One of the things also that was mentioned, and I know specifically of one business that worked -- and it's not on your watch, but they worked with Economic Development for a year and a • half to be able to access a grant for their equipment. Every time they met with somebody, there was more questions. And had it not been for the support of.a local lending institution, they probably -- they may not have still opened their doors at this point in time. But they've opened, they're successful. And I've heard that a couple of times, that Economic Development is too slow. One business, as a matter of fact, was expanding. I asked if he was utilizing some of the programs through Economic Development. He said, "No, we don't have the luxury of time. Because we have demand for our product, we need to go ahead and not wait for the state to get their act together." • Sol'rn throwing that out for constructive criticism, if you will. We need to pay attention to .that. And the manufacturing forum that I attended, one of 110 AllO 7 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • the biggest things they kept bringing back is "stop taxing us to death, and get out of the way so we can do our job and grow our companies and create jobs." So I'm going leave you with that thought,. And again, thank you for your time today. UPSTATE CHAIRMAN GUNDERSEN: Thank you. Just a very quick response to that. Obviously, we're listening to the very same people. And if there's one word to describe what you think is needed, it's responsiveness. And that is exactly what we're doing, we believe, with the new structures we have in place. You mentioned agriculture. It is one of the largest if not the largest industry upstate, and yet our programs have not been friendly to that sector. And so we're looking at all of our programs upside-downto see how we might be able to be of assistance. The $50 million that's included in the billion-dollar package for agri-bus will help with the food production and the processing as well as the research of our agricultural assets throughout upstate. And with energy that might be produced from agriculture products. But we need to have coordination, and I addressed this in the opening remarks, that what is so difierent -- I think I mentioned it was commonsensical and yet elusive -- is the fact that we're working with other departments. We will be hiring a director of ag-business This is the first time such an individual has been in place. Both 111 Alit JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11, 2008 Commissioner Hooker of Ag and Markets and myself are interviewing candidates. That person will be within the upstate ESD organization to help. With regard to workforce, there too is a great need to align what we do with the Department of Labor. And we're working closely with Commissioner Smith, Pat Smith, to do this. But here too it's good to have an advocate on the inside. And so for the first time, ESD has a director of workforce development initiatives. This person is helping the First Lady with the "I Live New York" outcomes but is also helping businesses access training resources and better tying these together. On the responsiveness, in the third category you mentioned about the overall business view of economic development programs, we knew that on Day One, so to speak. And that's why we set out to hire economic development professionals to lead our - regional offices. And if there is one thing that is expected of them over anything else, it is that very principle, to be responsive. And so we hope that you're beginning to see a change all throughout the state in the level of service and delivery of our economic development programs. Thank you. CHAIRMAN FARRELL: Thank you. / Senator? CHAiRMAN JOHNSON: Senator Thompson. SENATOR THOMPSON: Thank you. ll'2 A112 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • First, let me just start by saying that I think it's very good, the proposal, at least the concepts of the proposals that the Governor has put forward as relates to upstate New York, providing economic stimulus forupstate. We are one state. We know that upstate is losing people -- that's been clearly stated today -- and also is losing jobs. But I think that is very important to note that it's very good that the Governor has put a laser focus on the needs of upstate New York Let me first start by asking the question of whether or not ESD has assigned a person to work on the upcoming problem or situation with the Buffalo Bills. Have you all looked at assigning a person to work with the situation that's developing with the ability to keep the Bills in Western New York? Or is that something that you ought to look at doing as well? UPSTATE CHAIRMAN GUNDERSEN: Both Ken Schoetz and I have met with Ralph Wilson over the past year, and Ken would be the point person within ESD to work with the organization as we move forward. There is no question about our responsiveness in that regard. SENATOR THOMPSON: Thank you. As many of - you are aware, many of us are concerned. In the past, there was a bipartisan effort to support efforts to renovate the stadium in the past. And I think that this needs to be handled in a very critical and careful way. It would be not only an economic setback but an 113 A113 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 extreme psychological setback to the region to lose the Bills. And it's something that we have to take extremely seriously. And I wanted to emphasize that and hopefully remind you all -- Ken is the one, and yourself, are minding that shop -- we really want to make sure that we don't lose the Bills under any of our watch under any circumstances. Just a couple of other things that 1 think are important. Assemblymember Schirnminger earlier talked about a board for upstate development. I think that you should have one board throughout the state, because we are one state, and perhaps look at having an advisory board that could impact on policy that's representative of business interests throughout small businesses, big industry, academia for upstate. I wanted to emphasize that. We should have one board for all the state, but have an advisory board that can deal with downstate issues and one that can deal with upstate issues and should be reflective of the smaller businesses but also the bigger industries as well. I did also want to talk about Empire Zone reform and IDA reform. I wanted to get some sense of where you all are with that initiative right now and vill there be a program bill coming from the Governor that deals with Empire Zone reform and also IDA reform. UPSTATE CHAIRMAN GUN DERSEN: With regard to the IDA reform, we are actively, within the administration -- ESD is part of those discussions looking at the changes that have been proposed by both the Assembly and the Senate. We are very much in 114 A114 - ( JOINT BUDGET HEARiNG - ECO. DEV./TAXES FEBRUARY 11,2008 • support of more transparency and accountability in this whole process and look forward to having an improved environment soon. SENATOR THOMPSON: Do you anticipate something coming forward the next 30 or 45 days or anything of that nature? Or what's the -- what is the strategy that you all are looking at right now? UPSTATE cHAIRMAN GUNDERSEN: Well, this one could be where we're talking weeks, not months, not years. SENATOR THOMPSON: Great. Great. Many groups are excited about that. I also want to commend you all on your efforts to listen to many people upstate as relates to the brownfields redevelopment. I'm not sure, before you put forward a final proposal on IDA and on Empire Zones, if you would all consider having some hearings or at least a hearing in a couple of the upstate cities on Empire Zones and IDA reform so that at least people on both sides of • the issue will be able to weigh in on it. I don't think it has to be a long, drawn-out process. But I think you could have a couple of hearings, spend a couple of days. I know that you've met with a number of interests, but I think also a public process to give people a chance to come in on both sides of the issue, weigh it on it, I think would be also something that could be meaningful as you move during these last couple of weeks. And if you all would consider that, • Just a last couple of questions for you, a couple of 115 AilS JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 things that are important. I know that there's an amount of money that's going to be allocated for upstate, and I hope that the whole Legislature will get behind Investing in upstate. I didn't know if the Niagara Falls train station was something that you all are looking at as part of the appropriations for Western New York. That's something that's, very important, the Niagara Falls train station, in addition to the Niagara Falls airport. If someone could get back to me on those two particular projects, that would be extremely helpful. Unless you already have an answer for that. UPSTATE CHAIRMAN GUNDERSEN: Well, I think some of the programs that we've proposed, it's conceivable that an application could come from a municipality or an organization to request funds that might be of assistance. The way in which we approach this is competitive. And if it has merit, then it might be a candidate. SENATOR THOMPSON: Okay, two other things. And I don't need a response now, if you could just get it back to me. One is about the MWBE allocation, I think it's going to be $1.5 million in this budget proposal. I'd like to see that amount increased. 1 don't think that is going to go far, enough to assist some of the most hard-to-serve groups and constituencies. I'd really like to see that, as we move through this process, to get the administration's assistance in trying to up that number. I think it's a good start, but we really need to increase that amount. 116 A116 3OINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 I wanted to get a response back on how do you all envision accelerating the Empire Zone certification process. Many busiresspeopIe complain about that process taking too long. As you all move forward with this issue, how do you all envision that process being accelerated for businesses? DOWNSTATE CHAiRMAN FOYE: Senator, the certification process is actually largely done at the local level. One thing that the leader of the Empire Zone initiative at ESDC has done recently is training with the local Empire Zone certification and other staff. And we believe that greater communication, more training -- we've had training specifically focused on some of the administrative and regulatory changes that we've j ust made. And I think, frankly, better communication all around will ensure that there aren't certification delays. And we're obviously very focused on doing everything we can to make sure that doesn't occur. SENATOR THOMPSON: I have a company, for example, that's done some work in Buffalo, it's been waiting over 1 1 months for a certification. And I know that many of the local -- from formerly sitting on the Empire Zone board before, you know, that the city council approves it or the local town board approves it and then it comes to the state. And that the businesspeople all -- you know, the city sometimes will say it's in Albany's hands, and Albany will say it's 0 in the city's hands. 117 A117 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 The businesspeople just want to get the assistance that they need. So if you all can work out that, come up with some benchmarks on how long people should expect to wait so once that time happens, then that's when people should know they can begin to panic The last thing just deals with the ability to expand MWBE staff in some of the regional offices, like Buffalo. I wanted to just get my last question on what's the strategy to increase that staff. Right now there's one person in the Buffalo office who does like three to four jobs beyond MWBE. And I know that a lot of the focus is well, it appears there's so much focus, on New York City. But cities like Rochester, Buffalo, Syracuse, and Albany also need resources for MWBE initiatives. It should not stop at Westchester County. The focus for MWBE needs to be a statewide focus, not just in Manhattan, the Bronx, Brooklyn, Queens, Yonkers. We need resources and projects and products committed to the upstate cities as well. Because a lot of times you talk with state agencies , and they give you all those beautiful statistics, but 85 percent of the goals are being met in Metro New York. And that's unfair to upstate communities. And I get pounded at meetings when people say, "Well, Antoine, what are you doing to make sure that these resources for women businesses, for minority businesses, what are you doing to make sure that happens in our part of the state, not just in Metro New York?" .. 118 -, , M18 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 . MR. SCHICK: Senator, your point is well-taken And as I noted earlier, there is a plan to increase the staff during this coming year, and I will work with Dan and Ken to make sure that we deploy that staff thost wisely in terms of covering the entire geographic region of the state. SENATOR THOMPSON: Thank you, sir. CHAIRMAN FARRELL: Thank you. Assemblyman Weprin. ASSEMBLYMAN WEPRIN: Thank you, Mr. Chairman. Fit try to be quick; it's been a long morning. I want to compliment you gentleman on your temperament and your ability not to rise to any bait today, or baiting, as the case may be. And I really have been very impressed with that. A couple of issues I want to bring up, one local, one for me in particular. The 7 Train that was mentioned before, I want to go the other direction onit and talk about Willets Point briefly. I don't 7 know what involvethentESDC has had on Willets Point, but for those of you who don't know in the room and around the table, the Iron 1 riangte, as it's called, is a rundown -- it's chop shops and other businesses with no sewer systems underneath, and a real problem in the area. It's next door to anothe sporting location, Shea Stadium, soon to be Citi Field, and really could become a real economic engine for so many of the things we talked about, whether it's tourism -- because although the World's Fair grounds people know 119 A119- JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 as just the old World's Fair grounds,, it's currently home to a lot of huge cultural institutions in the area -- theaters, Queens Theater in the Park, and the Hall of Science and the Queens Botanical Garden, Queens Museum of Art and more. Underused. There's a zoo there that's as nice as the Central Park Zoo that nobody goes to. It's really a shame. And I think Willets Point could be a real turnkey moment to help increase the tourism and the use of that area. The inner Harbor in Baltimore was a disaster area before they really fixed that up, and now it has become a very big tourist area, beautiful shopping area, restaurants. What involvement has the state had in that? I know the mayor has been pushing on it in the City of New York. I think it could be a very big linchpin for the area and for a lot of economic / development activity in Queens. DOWNSTATE CHAIRMAN. FOYE: I agree with your characterization. I grew up in Queens not far from Shea Stadium, soon to be Citi Field. Willets Point is primarily a city project. The city has proposed to rezone the area, as you know. I agree with your characterization that it could be an extraordinarily important both economic development engine, given the location near Citi Field, near the 7 Train, near the Long Island Railroad, the U.S. Open tennis stadium, literally five minutes from LaGuardia and literally 60 seconds from the Van Wyck, the Cross Island, Grand Central Parkway, et cetera, . 120 Al 20 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008. • And we've been working with the city. As I said, it's primarily a city project and could have a huge benefit on that part of Queens. MR. SCHICK: May I just add one thing? ASSEMBLYMAN WEPRIN: Sure, Mr. Schick. MR. SCHICK: With respect to Willets Point proper, as Pat pointed out, it's largely a city-driven effort. But with respect to the redevelopment of Shea, the state has invested $74 million to make it happen. Obviously, you're familiar with the area. You know, the new Citi Field is going to have an entrance onto Willets Point to get into, so they're anticipating redevelopment there. And I think the state, with $74 million, is helping make that possible. ASSEMBLYMAN WEPRIN: I'm aware of that, and I wasn't being critical of your investment in the past. But I do think you don't want to drop the -- you want to do whatever you can to help bring the ball across the goal there. And 126th Street, which divides Willets Point and Shea Stadium -- Rob is -- we're driving him crazy with Jocal references. But 126th Street can really be turned into a pedestrian thoroughfare on game days. It really could be a great area. . Currently, there's nothing to do before or after a game - or a tennis match in that area. And it really needs -- it's a long walk to / get to anywhere else, and I think it could really bring a lot of / communities together, Flushing and Corona and the whole area. - 121 A121 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 But let me switch gears for a second, since Chairman Foye mentioned before that I'd be raising the idea of smailbusinesses. Al! this talk about manufacturing jobs leaving is happening, and these big businesses. And talking about keeping the Bills is a very important part of economic development in this state. But one thing we have to do is sow the seeds for the future. And currently, across this state, there are small businesses being set up, ideas, people alone, microbusinésses, less than five people -- someone with an idea and a computer, a product or a service that they have, and all they need is the assistance to sort of get that business going and to grow into what the Governor used to always talk about, where the next iPod is coming from. And these businesses are often ignored and have been ignored in the past by not having people specifically working on small-business issues. And we were a little disappointed in the budget to see the Entrepreneurial Assistance Program, EAP, was cut by $800,000, the CDFI programs were cut. And I know last year we sat here and you talked about EAPs and how successful you believe they are. 1 think those are important financial resources and other things for businesses In addition -- and IT make it a long question, and I'll let you answer and we'll be done -- I had a bill last year, Assembly 2766, which established a microenterprise business outreach center network. Business outreach centers have been very successful in New York City, especially where we have a lot of new immigrants, a lot of .122 Al 22 . . JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 minority- and women-owned businesses, where people didn't know where to go, they didn't know where to turn to get a business plan, to get funding, to do advertising that Senator Perkins talked about before. And local businesses, sort of working together through these networks, are able to help build these businesses and turn them into very successful businesses. And the success stories are inspiring, and I think we can continue and continue to grow businesses throughout the state by putting some focus onto these small businesses. And. I know you have talked a lot to me privately about small businesses. I'd like to hear publicly what's being done. DOWNSTATE CHAIRMAN FOYE: Small businessesare extraordinarily important. Fully over 50 percent of the businesses in the state are smallbusinesses, you know, commonly defined as 50 or fewer or 100 or fewer employees. Let's begin with Empire Zones, which as we've noted a number of times during this hearing is the largest economic development program that we have. About 90 percent of the participating companies in the Empire Zone program are themselves small businesses. Looking at the downstate economic development projects that we announced during the year, and that's about 70 projects just in the downstate area, 28 of those projects are small • businesses with 100 or fewer employees. So not quite half, but roughly half. One. • 123 A123 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 Two, the major initiative that Dan and I have pursued this year that has and will continue to benefit small businesses is the significant investment in personnel and resources that we've made in regional offices. Our regional offices, especially for small businesses, are going to be the primary contact of small-business men and women with ESDC and our programs and the things that we can do. And I think by both upgrading the men and women who run the regional offices -- and almost all of those senior staffing changes at the regional offices have been made -- and by focusing attention on the regional offices and small businesses, I thinkihat we've already made significant headway. And there's much more that we can do as those new leaders mature in their new roles. Beyond that, one thing that we've been doing is making sure that small businesses thought the state, upstate and downstate, are focused on the things that ESD and our sister agencies in state government can do to assist small agencies. And that educational and technical assistance process will continue. So both Dan and 1 have done, in our respective regions, small business forums. I last did one about a month ago with Senator Smith in Jamaica, Queens. Dan has done a number of those in the upstate area. And we're going to continue to do that. I think one piece that we're very focused on is getting the resources to upgrade our website, which has been upgraded in the travel and tourism area but still needs work in the basic ESD website. And I think that what we want to do is to be able to make contacting 124 A124 JOINT BUDGET HEARING - ECO. DEY./TAXES FEBRUARY 11,2008 • and dealing with the ESD as simple as possible for small business people who are engaged in the struggle to make payroll and keep the business moving forward. And that by having more robust online resources, we'll be able to do that. The other thing we've done internally is to simplify some of our application forms to move closer to a universal form that will cover all our programs, to streamline the application process. And that work will continue. Frankly, the other thing we've been doing in the downstate region is taking advantage of the experience and success of the New York City Small Business Service, where I think the city does a dramaticall>' better job than the city government did five or six years ago. And I think we've learned much from Bob Walsh and his colleagues and are in the process of putting that to work. UPSTATE CHAIRMAN GUNDERSEN: Just a footnote to that -- Pat covered all of the bases -- which is a shared interest. Those businesses with fewer than a hundred employees represent 98.2 percent of all businesses in New York. So clearly this is something that Pat and I are intently focused on, as is the Governor and the billion-dollar fund for upstate. As he said in the State of the Upstate, hisgoal is to create the best business loan program in the country. And so some of the resources will go toward that. And clearly, as we're developing this, this going to have a statewide benefit, as we look to see how it can be replicated in 125 A125 JOINT BUDGET HEARING - ECO. DEV.ITAXES FEBRUARY 11,2008 all areas. MR. SCHICK: If I could just expand briefly on something Pat mentioned with respect to the website, one of the things that we're hopingto do going forward for small businesses is not merely to have our website be simpler to navigate and have more information about ESDC programs but, frankly, to build what we think small businesses need,' which is one-stop shopping for their entire relationship with the state. Right now, if you're a small business with few resources, you don't have the time or necessarily the abi[ity to navigate, you know, the Department of Labor, the Department of Taxation and Finance, Banking, Insurance. There are probably a dozen or more, perhaps, agencies or forums that you need. What we want to do is build a single portaFwhere businesses can go and find what they need, not only from ESDC but from the entire scope of state government. You know, the city has been very successful with 311, building both a website and a phone system where people can access city government. And what we want to do is to have a 311 for small businesses statewide so that we dramatically decrease the burden on them of complying with the regulations and accessing the resources and the approvals that they need. ASSEMBLYMAN WEPRIN: That's great. We have talked about that, and I really think that would make a lot of sense. Let me just go back, because a couple of things I 126 A126 JOINT BUDGET HEARING - ECO. DEV.JTAXES FEBRUARY 11,2008 • mentioned weren't addressed. The Entrepreneurial Assistance Program and CDFIs, what was the thinking in those cuts? Because we had talked last year, and I thought we were all lovingeach other. MR. SCHICK: I do think that we have the ability. EAP has been successful. Last year it served about 1200 budding or fledgling entrepreneurs. We do have the flexibility from our other economic development funding to increase the funding to both EAP and CDFI. So I think to the extent we see the demand for the program and the call to pull on the dollars we've invested, we do have the flexibility internally to add to it through some of the other funding pots that exist atESDC. So I think -- and the cuts in these programs are relatively minor compared to the scope of the larger programs. So should we need, you know, the additional half.a million or so dollars, whatever it is, it's available. I mean, as both Pat and Dan noted, with respect to our core great amount of programs, our EDF money, probably the largest part of that money goes in one form or another to small businesses. SoJ think we agree with your assessment, Assemb'yman, of the value of these programs, and we do have the flexibility to increase the funding if needed. ASSEMBLYMAN WEPRIN: Terrjfic. Thank you. CHAIRMAN FARRELL: Thank you very much. Have a good day. 127 A127 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 DOWNSTATE CHAIRMAN FOYE: Thank you, Mr. Chairman. UPSTATE CHAIRMAN GUNDERSEN: Thank you; appreciate it. CHAIRMAN FARRELL: We are two hours and 20 minutes late, but that's no big thing for us. We will come back in 10 minutes and start again. Next to testify will be the New York State Department of Taxation and Finance. (Brief recess taken.) CHAIRMAN.FARRELL: Good afternoon. New York State Department of Taxation and Finance, Robert Megna, commissioner. You were supposed to testify in the morning. COMMiSSiONER MEGNA: That's okay, Mr. Chairman. It's morning in some parts of the world, Chairman Johnson,, Chairman Farrell, and members of the committee, I'm Bob Megna, commissioner of the State Department of Tax and Finance. On behalf of Governor Spitzer and the department's dedicated employees, it's an honor to appear before you today to present the 2008-2009 tax expenditure report and discuss other important Tax Department matters. Joining me are members of the department's executive staff, including Jamie Woodward, the deputy commissioner for processing and taxpayer services; Robert Plattner, deputy commissioner for tax policy analysis; William Comisky, deputy 128 A128 .. .. JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 commissioner for tax enforcement; and Daniel Smirlock, deputy commissioner and counsel. Let me just say I think this is one of the strongest management teams in the state. It is a pleasure to go to work each day because of them. Let me just take a moment to thank someone who is not here, former Acting Commissioner Barbara Billet. Barbara was a wonderful public servant who recently retired. She made a huge contribution to state government in general and the Tax Department in particular, and certainly made my job easier coming into the Tax Department. With respect to the tax expenditure report, I would like to point the members of the committee to the section on the history and application of economic development- related tax credits. I know that was an issue that got a lot of discussion this morning. I think it provides useful historical context and data for understanding the rapid growth in the use of those instruments. Now I would like to continue by discussing two items I know of are of interest to the members of the joint legislative committee. The first is STAR. As you are all aware, the department recently completed the task of implementing the 2007 Middle-Class STAR Rebate Program enacted as part of last year's budget, the largest real property tax cut program in the histor'y of the state, that resulted in the department issuing about 3 million property tax rebate checks to 129 Al 29 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 qualified New York homeowners. I would again like to thank my predecessor, Commissioner Billet, who worked closely with the Office of Real Property Tax Services, for the work she did deploying necessary staff and resources needed for this program at breakneck speed. The results are impressive. We issued close to 2.3 million basic STAR checks, representing a value of almost $889 million in rebates to taxpayers. We issued 634,000 enhanced STAR checks, with a total value of $207 million. On average, the department issued basic STAR checks within 16 days of receipt of an on line application and 32 days of receipt of paper applications. Importantly for us, and I think for members of the joint committee, almost 75 percent of all applications have come to us over the internet, using our secure online application. The heavy use of the Internet has come as a very positive development, as we plan to build much of our future interactions with taxpayers on our web-based technology as a means of providing the best taxpayer service possible. We have an attachment which shows -- I think which you can look at at your leisure -- which shows the application rates and the amounts of STAR issued by county. And I know folks have had a particular interest in the countywide distribution of the checks, so that is there for folks to see. I know that a second item of particular interest to the Legislature is the collection of sales and excise taxes on cigarettes and motor fuels sold on Indian reservations. On Indian cigarette and fuels 130 A130 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • sales tax collections, it is important to point out that we are currently enjoined by the courts from enforcing the applicable Tax Law provisions. As we at Tax and the Governor's special counsel assigned to this issue proceed with ongoing negotiations, we will keep your committees informed. The administration is working hard to reach a reasonable solution with Native 'Americans on this complex issue. Let me move on and talk about a few budget issues, because there was a significant amount of revenue-related material included in the Governor's Executive Budget. The proposals are designed to increase property tax relief for seniors, eliminate tax loopholes, promote tax fairness, simpli& the tax code and provide the department the necessary tools to more effectively curtail fraudulent tax practices. Let me just mention a few of the notable proposals. One significant proposal would fundamentally reform New York State's method of taxing motor fuel and diesel motor fuel. The current tax system imposes multiple taxes on a gallon of fuel and requires taxpayers such as fuel distributors to complete multiple tax returns. We plan to combine the motor fuel excise tax, the petroleum business tax and sales tax into one per-gallon excise tax on 'motor fuels. The counties and New York City would then impose a local excise tax on motor fuels at a fixed per-gallon rate. This local tax is intended to preserve current local sales tax revenues from the sale of motor fuels, as the local sales tax on these fuels would be eliminated with this legislation. 131 A131 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY11, 2008 Petroleum industry distributors would then pay one state tax rate, comply with one tax base, and file only one mOnthly tax return for motor fuels. That's instead of three right now. Similarly, motor-fuel retailers would file one quarterly local tax return and report taxable gallons at one fixed rate in each county and New York City. This proposal is part of a broader effort to streamline the reporting of New York State taxes, ease the compliance burden for taxpayers and, as always, diminish opportunities for tax evasion. Another important proposal in the Executive Budget dealing with revenue, the Executive Budget contains legislation to enhance sales tax collections by out-of-state retail businesses over the Internet. It does not impose a new tax. Sales tax and the compensating use tax, as everyone here knows, have been in existence since 1965. Products sold to New Yorkers by out-of-state retailers have always been subject to sales tax. However, some out-of-state retailers refuse to collect the sales tax. This gives unregistered, out-of-state retailers an unfair competitive price advantage over in-state retailers. This legislation proposes to close this compliance loophole and provide a level playing field between large out-of-state retailers and Ne'' York's own main-street retail businesses. The proposal provides a clear standard for sellers doing business over the Internet and their obligation to register as New York sales tax vendors and collect state and local sales tax when they use commissioned sales 132 A132 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • representatives located in New York State. On another matter which I know is important to members of the committee, the Brownfield Cleanup Program has been the subject of reform discussions since it was discovered that a majority of the benefits from the current program do not go to pay for. remediation. Rather,.the majority of the payments appear to go to real estate developers who performed relatively little site remediation. Further, many of these sites are located in areas where it is likely they would have been redeveloped in the absence of tax credits. This year's Executive Budget contains two alternatives for brownfield reform that would allow the state to better control costs associated with the credits as well as promote better cleanups. The first proposal places a cap on the tangible property component of the redevelopment credit, regulates transfers of certificates of completion, and gives the Department of Environmental Conservation more administrative control over the program. The second, more comprehensive proposal contains provisions similar to the first but goes further by establishing new separate rates for the site preparation, groundwater remediation, and tangible property components of the redevelopment credit, and requires an annual report of taxpayers claiming the credits. Regardless of which alternative is enacted, the state's Brownfield Cleanup Program will still be among the most generous • remediation prpgraths in the nation. • Also in the Executive Budget it is proposed that New • 133 • A133 JOINT BUDGET HEARING- ECO. DEV.ITAXES FEBRUARY 11,2008 York follow the lead of other states with regard to the taxation of out-of-state credit card companies. The budget provides that these companies will be subject to New York taxation under Article 32 of theTax Law -- that's the bank tax -- when their operations in the state go beyond mere presence and exceed certain receipts and/or customer thresholds. I think i'll skip ahead a little bit, in the effort of time, and move on to some other issues. We're in the midst, as most of the members know, of the personal income tax season. Our call center, is fielding about 7,000 agent-assisted telephone calls every day. Since the beginning of year, we have processed over 1.1 million personal income tax returns. When the tax season ends, we expect to have processed 10.3 million personal, corporate and miscellaneous income tax returns. To date, we have sent out over 350,000 refunds totaling close to $297 million. Refunds should reach $1.5 billion by the close of the fiscal year. We expect that 5.4 million of our tax returns will be e-filed this year, or ab.out 48 percent of the total. Another attachment on the testimony includes a chart which shows the growth of e-fihing over time, which again some of the members migtit find interesting to look at at some point. Our e- Li le program for corporate tax filers was recognized with the Rockefeller Institute of Government's Best Practices Award. Many corporations took advantage of this new capability and significant growth is expected in this filing season. 134 A134 LI JOINT BUDGETHEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • Electronically filed returns are much less costly to process as compared to traditional paper filings. We continue to enhance and improve service delivery in returns processing, taxpayer guidance, and collections. Our e-MPIRE program is the new custom-designed integrated tax system being developed by the department to replace all major tax processing systems currently in use. When fully implemented, the system will • provide a single, more efficient method for capturing, storing and retrieving taxpayer data. A very important new project which we're very interested in at the Tax Department is called Enterprise Communications. This newly created office is responsible for clear-language taxpayer communication such as correspondence, bills, forms and publications, and simple how-to guides, as well as overhauling the content, navigations and intuitiveness of our public Internet site. This initiative creates the opportunity to communicate with individual taxpayers in a simple, straightforward way. Obviously, one of the things people complain most about in dealing with taxes is it's sometimes very complicated to read through the instructions on the forms. And what we're trying to do is to simplif' that process. We've strengthened our audit and enforcement programs and hope to reach a record $3 billion in audit production this fiscal year. This achievement is related in large part to meeting the • 135 - A135 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 department's strategic goal of administering the law so that all taxpayers voluntarily pay the right amount of tax at the right time. Again, there's a third attachment which shows the pretty rapid increase in audit collections that have been experienced over the past six years. And again, it's something I think you can look at at your leisure. The department's 2007-2009 strategic plan established a multifaceted framework to increase taxpayer compliance through a variety of actions, including increased and coordinated - criminal and civil enforcement activity, technological solutions, and targeted taxpayer education initiatives. importantly, part of the budget that we'll talk abOut very briefly now, we have submitted a multipronged proposal, the Tax Enforcement and Compliance Initiative of 2008, to generate revenues and increase voluntary compliance now and in the future. Speaking of compliance, the department continuously strives to strengthen fraud-fighting capabilities, curtail evasion, deter abuse, and instill greater confidence in our tax system. The primary focus of this enforcement strategy is on those who attempt to cheat, defraud or otherwise avoid paying taxes that they have a responsibility to pay. We want taxpayers and tax practitioners to know that tax fraud and illegal activity will not be tolerated. Thanks for the opportunity to appear before the panel today. I'll be happy to answer your questions and invite yoU to follow up with me or my staff on any matter concerning the Tax Department. is 136 A136 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 CHAIRMAN FARRELL: Thank you very much, Commissioner. Question, Assemblyman Hayes. ASSEMBLYMAN HAYES: Thankyou very much. Commissioner, earlier this morning and I think just about everybody at the State Capitol read about the Governor's proposed 21-day amendments that are going to predict an enormous drop in revenue just three weeks after his submission of the budget. .1 want to ask you for your pledge this day that personal income tax refunds will not be held up as a result of that drop in income to the state. Can we have your pledge on that? COMMISSIONER MEGNA: Well, you can. And there's a good reason as well. As. You probably are well aware, the way the financial plan of the state is established, we have set a target to pay $1 .5 billion in refunds by March 3 1st. We will hit that goal. And after that, again, the law currently states that we have to get refunds out in a timely fashion or we will have to pay interest on those refunds. So we are committed to getting those refunds out in as timely a fashion as we can. ASSEMBLYMAN HAYES: Thankyou very much. Another question involves the STAR program. I want to say a special word of thanks to your legislative liaison and the people in your office who did a tremendous amount of work over the past several months and received lots of phone calls from my office,. 137 A137 JOINT BUDGET HEARING - ECO. DEVJTAXES FEBRUARY 11,2008 and I'm sure from other colleagues who had questions on behalf of their constituents, trying to chase down STAR rebate checks. You did a great job of being positive to us in that effort, and I appreciate that. In Erie County, 93 percent of eligible homeowners did receive a check as part of. the Middle-Class STAR Rebate Program. But 93 percent, while that's a good number, means 7 percent of the people did not. And given the change in the legislation this year, with the new system, I'm concerned about where the money that did not go into the pockets of the property taxpayers -- what is that total amount, is there an estimate of the total amount, and where is that going to be spent? Does that just get transferred and swept into the GeneraL Fund? COMMISSIONER MEGNA: Actually, as it turns out, I think we ended up, on the basic STAR rebate program, actually spending a little bit more than what was originally estimated. And how do those two things go together, I think what happened was 93 percent -- I think that's exactly right -- of folks that were eligible to apply, applied. I think there's always a small expectation that some proportion of eligible taxpayers that are eligible for a program won't apply. I think when the original STAR program was put in place, for example, I think through the first two or three years of the program we were significantly below a 90 percent participation rate. So a 93 percent participation rate is actually very good 138 Al 38 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 . 1 Then the second part of that, of how we got to actually hitting the number and going a little bit above what was expected, is that the average payout was actually a little bit higher than what we anticipated. And so in the end, 1 think the number that I mentioned in the beginning for the basic STAR payout, which was about $889 million, was pretty close to what was expected when the budget was put together last year. ASSEMBLYMAN HAYES: But I'm talking specifically about the rebate check. So what happened prior to Governor Spitzer's proposal last year to tie it to a means test, the checks went out to everybne, there was no application process that • was necessary. If you had already applied and were receiving the underlying basic STAR exemption, you automatically received a rebate check. - And lots of constituents told us they liked that. They didn't have to fill out another form, they didn't haveto go through more bureaucracy to get that rebate check. This year, that didn't happen. And 7 percent of the people in my county didn't get a check. So we know what happens when we complicate the process with an application and with more bureaucracy. So I'm just wondering, even though the tax rates may have been different, there's 7 percent of the people out there that didn't get it because they couldn't fill out the form or they found it difficult to fill out the form or there was bureaucratic red tape orwhatever it 139 • A139 1. JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 was, 7 percent less homeowners received a check this year than last year. I would ask you to just keep an eye on that in the future, and if there are ways for us to streamline that program to get to 100 percent participation, that should be our shared goal. Finally, I want to ask you a question about the motor fuel tax merger that you spoke about in your testimony. I'm a little bit confused, so I hope you can help me straighten this out. You know that the Legislature, back in 2006, capped the sales tax on gasoline at $2 per gallon, the underlying figure Of $2 per gallon. Now the Governor proposes, in the name of simplifying the taxes that are collected on motor fuel, something that will generate $13.2 million in additional sales tax revenue to the state this year .and a whopping $55.9 million in fiscal year 2009-20 10. Now, in the name of simplification, you're telling me that the state is anticipating collecting $13 million more in sales tax revenue on gasoline this year and $55 million, almost $56 million in the following fiscal year. How is that possible if it's not avoiding the cap that the Legislature put on gasoline sales tax? COMMISSIONER MEGNA: It's an excellent question. I think I'll try to be as concise as I can in the answer. You're absolutely correct, two years ago the Legislature imposed a cap on the sales tax portion of tax on motor fuel at $2, which ends up being 8 cçnts per gallon of state tax at the 4 percent rate. The state also imposes two other taxes on motor fuel: 140 - - A140 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY H, 2098 The petroleum business tax, which is over 14 cents per gallon currently, and also an 8-cent excise tax. So there's three taxes imposed on motor fuel, the capped sales tax portion and those other two pieces. The PBT piece, the 14-cent piece, is indexed in current law. That was done many years ago. It's indexed to petroleum prices. It can increase or decrease by no more than 5 percent in a given year, and it's capped. What was done in this proposal was to take all three taxes -- the sales tax component piece, the motor fuel component piece, and the petroleum business tax piece -- and collapse them into a single tax under the petroleum business tax, and to keep the indexing • component. So the indexing component, the $13 million that you're talking about and the $45 million number or thereabouts for next year, is based on that indexing piece. The expectation -- and it's just that, within the budget -- the expectation based on current fuel prices is that the index will increase next January, that extra 5 percent will generate the $13 million in the last three months of 2008-2009 and then the additional revenue in the year after that. That forecast could be wrong. For example;this January the index that is tied to PBT actually decreased, and so actually the PBT rate actually went down. S But to answer your question,, the way that that extra revenue is generated is by applying, that indexing piece that's in the 141 . JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 current petroleum business tax to the combined tax. ASSEMBLYMAN HAYES: 'So again, just how does 'that combination of those three mechanisms not run counter to what the ,Legislature did in 2006 in capping the sales tax portion of that tax at $2 if they all will be combined now and they all will be indexed? COMMISSiONER MEGNA: Well, again, I think the feeling was that the indexing was an efficient -- that 'it already applied to the bulk of how the tax was applied or atleast to half of it, and that the index can both go up and go down. And so that there were years in the recent past where'the index actually' went down. I think that was the logic that was applied, but I understand your concern about the sales tax piece A'SSEMBLYMAN HAYES: Just so we're clear, this proposal, if enacted, will undo the 2006 cap that the Legislature put on the sales tax portion of gasoline? COMMISSIONER MEGNA: Well, it eliminates the sales tax on gasoline.' This proposal actually eliminates the sales tax on gasoline and moves it into the petroleum business tax. But I understand your point. ASSEMBLYMAN HAYES: Right. And I'm not trying to be cute -- COMMISSIONER MEGNA: i'm not either. ASSEMBLYMAN HAYES: -- I'm just trying to make sure we understand very carefully about what's happening here. By combining those three, that is undoing what the 142 A142'., JOINT BUDGET HEARiNG - ECO. DEY./TAXES FEBRUARY 11,2008 W . Legislature did in terms of capping the sales tax, the state portion of the sales tax at $2 per gallon. That's correct? COMMISSIONER MEGNA: Again, I'm not trying to be cute either, Mr. Hayes. I think that technically we're eliminating - the tax, combining it into a single tax that is indexed. So can that portion of the 8 cents actually increase? Yes, it can. ASSEMBLYMAN HAYES: Okay. And in addition, since you're projecting a dramatic increase in the amount of tax collected coming into the General Fund of the state -- $13 million more this year and $56 million next year -- that means people who use petroleum products are going to pay higher taxes to the State of New York as a result of that. How does that reconcile with the Governor's pledge not to raise taxes in the budget this year? COMMISSIONER MEGNA: Again, I would say two things. One, while that is a lot of money, and it's an estimate that folks will have to pay a little bit more on those, the base of the motor fuel tax under these three components that folks are paying now is well over a billion dollars. And so these are very, very small marginal increases. And the second thing 1 would say -- and more important, because I used to be in the estimating business -- is that this is based on an estimate that petroleum taxes will go up next year. They could actually go down, in which case taxpayers could actually see a cut. 143 Al 43 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 ASSEMBLYMAN HAYES: Right. And I don't think anybody expects that to happen. I don't think anybody expects New Yorkers to be paying less at the pump, because of what the past history of the Legislature has been in enacting these taxes. However, one of the real concerns that I have is that on the other side of the balance ledger we're hearing from the Thruway Authority that the behavior of motorists is such, with higher gasoline prices, that they're actually driving less. And the Thruway Authority has made the argument that the need for higher tolls is because of less revenue because people are driving less. So here you are raising the tax on a consumption -- you know, raising the consumption tax or indexing it for future increase on a commodity that people are using less of because of the high price. Will we be looking next year at a budget hole because of the way that you've gone about this in such a circuitous way to not only avoid the cap that the Legislature put on in 2006 but also, given- what the economics are of families who are pinched at the gas pump and are having to pay higher and higher taxes and so may be driving less? COMMISSIONER MEGNA: Again, certainly the effort here was to reform the structure. And folks thought that one of the best ways to do that was to apply, the index. Again, another point that I would make -- although I understand the points that you're making. The only other point I would make is the 14.5-cent P131 portion and the excise-tax portion, • 144 A144, JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • all of the funds from those portions of the tax go back into the highway system. They're dedicated to transportation funds within the state. Most of them are dedicated to then financing bonding for capital improvements. So while if the index does go up, drivers would have to pay more, the overwhelming majority of those extra dollars would go directly back into the transportation system. ASSEMBLYMAN HAYES: Final question on personal income tax, can you give me an estimate, a date specific by which taxpayers who pay their income tax on April 1 5th or who file their income tax onApril 15th can expect to get their refund check, those that are looking for a refund? How long will it take if they fileS on April 15th? COMMiSSIONER MEGNA: I think if you file on April 15th, we're pretty good. Jamie Woodward, who handles the processing side of stuff, says by June 1st, folks who file on April 15th. Though I think folks would even -- many would get them before that. ASSEMBLYMAN HAYES: Thank you. CHAIRMAN FARRELL: Thank you. Robin Schimminger. ASSEMBLYMAN SCHIMNINGER: Commissioner, congratulations on your recent appointment. It's good to see a one-time former long-ago Ways and Means staffer rising to this high level of responsibility in our state. Congratulations. COMMiSSIONER MEGNA: Thank you. 145 A145 - JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 ASSEMBLYMAN SCHIMMINGER: Mr. Hayes asked about some broad taxes, gasoline and others -- gasoline tax paid by a whole lot of people in upstate New York in particular. I wanted to ask about one or two other taxes that aren't paid by a whole of lot of people. AndI guess in the eyes of one fellow over in the Capitol, maybe that makes them not taxes if a lot of people don't pay them. But in particular, the aircraft tax is of concern to me, and the proposal that this budget makes in regard to it. In 2004, Senator Larkin and I and others worked to provide sales tax relief for the maintenance and repair of aircraft that goes on general aviation aircraft -- not the United or American, but smaller aircraft -- sales tax relief for maintenance and repair services that occur on those planes when they are in New York. Aircraft, by their nature, can move around. And other states have been reducing their sales taxes so as to encourage that work be done in those states, and the work was done if those states. New York State got smart in 2004, gave tax relief, the ervicing came back. Coincidentally, this year is the year that Senator Larkin and I are attempting to get sales tax relief for the purchase of such aircraft. But then we saw the budget. And the budget proposes a recapture of some of the benefit that we gave in 2004 for the sales and maintenance of these aircraft. Tell me what is the thinking behind this proposal. 146 Al 46 / JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • And do you not concur with me 1 that this will drive this work back out of New York State? Or are you one of those, as is the case with the gentleman from Westchester who sat at the end of the table earlier, who opined that higher taxes mean healthier economies? COMMISSIONER MEGNA: On this specific issue, I think the attempt was not to retrench from what was done in the past. And, you know, if we've moved in that direction or aren't understanding the implications of it correctly, we'll certainly go back and look at it. But the attempt here, I think, was to look at folks -- there'sa commercial -- and again, counsel will correct me where I'm wrong here -- there's a commercial sales tax exemption for aircraft already in place in New York, and then we've put the repair piece in place. What we've noticed is happening, however, is that companies are occasionally placing planes that they are purchasing for their own corporate use in a separate subsidiary, which they are calling a commercial aircraft company, and then pUrchasing the plane tax-free and using it in New York and largely just carrying their employees on the plane. I think we thought, while we don't want to go back on the positive things that were done, I think people thought that that was, you know, stretching the intent of what the commercial aircraft exemption was intended to do, and that we should try to eliminate that opportunity. I think that's all we're trying to accomplish with this. 147 A147 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 And again, that may be too much for what the committee members think. But it wasn't an attempt to go back or to remove any benefit that was in current law, it was to eliminate this opportunity to avoid tax that we believe that tax was never intended. ASSEMBLYMAN SCHIMMINGER: A question • about another proposed tax expansion. The Economic Development • Committee, which r chair, has oversight responsibility in regard to the ABC law, Alcoholic Beverage Control. And we have in New York a very nice structure, a three-tier system, and we have a segregation of products. We have beer products, which come about as a result of fermentation, we have liquor products, which come about as a result of distillation. There, is a product, the FMB product, fermented malt beverage product, which -- flavored malt beverage product, which is also fermented. This product has no more than a 7 percent alcohol content. It's a beer. 1 consider it to be a beer, a inalt product. 'But yet in the budget proposal, the proposal is made to tax this as though it were a hard liquor. Can you speak to this dramatic change in how we handle an alcohOlic beverage taxwise? COMMISSIONER MEGNA: Again, I would ask Dan to get into the specifics of the definitions. And if you want, that, I think we can do it. But I think the attempt was that this was seen as something that didn't fit nicely within the three categories. And people, after looking at it closely over a period of time, thought that it 148 - Al 48 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • was more appropriate because of the mix of-- I'm certainly not an expert on this, but because of the mix of alcohol content and where that alcohol came from, that this could be -- this product should be taxed more like an alcohol product and less like a beer product. We can spend, time talking about the definitions and how they work, and we're certainly open to talking to folks. And we know that the industry has come back with issues on this, and we're talking to them about it. So we're certainly. Open to continuingthat discussion. ASSEMBLYMAN SCHIMMINGER: And in those conversations Fm sure you will hear that New York would be the only state to tax this product at this higher level, and that federal regulations describe flavored malt beverages as not being liquor or, distilled products. . Thank you. CHAIRMAN FARRELL: Thank you very much. Mr. Aubry, Assemblyman Aubry. ASSEMBLYMAN AUBRY: Good afternoon, Commissioner. My line of questioning follows the proposal that we saw to levy a tax on drugs. Illegal drugs, I presume. And I wondered, one, how you came to the conclusion that this was a policy that we ought to follow. Would you describe that? And then we'll get into the specifics. • COMMiSSIONER MEGNA: Well, again, I think 149 A149 • JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 - one of the things we have been trying to do is look at what other states have been doing with respect to how they tax certain products. And I • think our research showed us that somewhere between 25 and 29 other states impose some form Of tax on illegal drug sales. We looked specifically, Ican tell you, at the North Carolina experience, where they seem to have raised a relatively large amount of money fràm a system pretty similar to the one that we've proposed here in New York; And I think that's more or less the genesis of the proposal. ASSEMBLYMAN.AUBRY: Did you have conversations with the criminal justice agencies within the state before you proposed this? COMMISSIONER MEGNA: I think we had some preliminary discussions with them about this. I was not at the Tax Department, actually, when that happened, but I think we have had some discussions. But I can certainly check and find out specifically if we have. ASSEMBLYMAN AUBRY: Yeah, I'd be particularly interested in that. And I raise that particularly in regard to the amount of money that we're expending to assist individuals in reentry and to help them manage to reestablish their lives. At least my understanding is this particular component would add another financial hit on individuals who relatively don't have money. lalso would like to know how this is done in 150 Al 50 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11, 2008 . relationship to the forfeiture laws that we already use to divest individuals who are arrested in drugs of property, houses, money. And so how does this relate to that? COMMISSIONER MEGNA: Now I am going to turn to the counsel, who hopefully can answer that question, Bill Corn isky. DEP. COMM.. COMISKY: Forfeiture would attach the proceeds or substituted proceeds or profits of the criminal enterprise. This would be a tax On the transaction, just as there are taxes on other products. It would be in addition to the forfeiture dollars. ASSEMBLYMAN AUBRY: And one assumes that there's money available after forfeiture? DEP. COMM. COMISKY: I think that's the concept, yes. ASSEMBLYMAN AUBRY: And what would lead you to that assumption? I mean, did we do a study to determine that somebody who gets busted in the streets of New York for holding a little marijuana is going to have enough resources after he gets out of jail to burden this plus the fees that he has to pay the court? I'm only iryiiig to understand the impact that you're trying to create. If you're creating another class of individuals who can't escapethe process and have to go back out and sell drugs, then you're costing us money as opposed to saving us money. • . COMMISSIONER MEGNA: Right. Well, again, 151 A151 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 w&lI go back and certainly see if we have talked to law enforcement folks and what they have said to us. Again, we did the revenue estimates based largely on the experience of states that we thought were in a similar position in terms of the law they put in place. Certainly it was not our intent to, you know, burden a particular portion of the population in terms Of income strata or anything like that. But, you know, we will certainly go back and take a look at that. ASSEMBLYMAN AUBRY: Were any of those states states that had the kind of decrease in the prison population that we have had? COMMISSIONER MEGNA: That's an excellent question, and we'll go back and look. We Jooked at several states. We looked at North Carolina, Tennessee, and some other states -- - Wisconsin, I believe -- some other states that have imposed similar kinds of taxes. ASSEMBLYMAN AUBRY: I'm much more concerned with the long-term effect, obviously, than -- COMMISSIONER MEGNA: Absolutely ASSEMBLYMAN AUBRY: And I believe the value of that, as you estimated, was somewhere in the neighborhood of $13 million, $14 million? COMMISSiONER MEGNA: That's correct. ASSEMBLYMAN AUBRY: Now, would you describe how this -- as I understood, the basis of being charged this -- 152 A152 . . JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 and I presume charged the tax as well as fined for not payingthe tax -- would be that you would be required or should have gone and got an illegal-drug stamp? COMMISSIONER MEGNA: That is correct. ASSEMBLYMAN AUBRY: Who would one get that from? CHAIRMAN FARRELL: If you go down to Jamaica, they'll give itto you there. (Laughter.) COMMISSIONER MEGNA: I believe the Tax Department will have to come up with a stamp. ASSEMBLYMAN AUBRY: Would have to come up with a stamp. And that stamp would be sold where? COMMISSIONER MEGNA: I don't know that we have worked out all of the details. Our assumption, of course, as you know -- not to be flippant, but our assumption is in most of the other states that have applied this law, that there aren't a lot of purchasers of theactual stamps. S ASSEMBLYMAN AUBRY: I wonder why. COMMISSIONER MEGNA: Exactly; And so we would, of course, have to work out the administrative detail of how we would produce the stamp and where we would make it available. ASSEMBLYMAN AUBRY: Why would we not just enhance the forfeiture processes if there was a piece Of money that we 153 A153 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 wanted? As opposed to creating a shell game, essentially, in order to / get the dollars, if there are dollars. And I also wonder why we would not choose to do it only on criminal enterprises, people who have substantial resources and are benefiting the most. Because under the drug laws in this state, you're held responsible for that amount of drugs you're caught with. It may have nothing to do with whether or not they were drugs that you were going to' benefit from. Somebody could have given you $20 to take 2 and 3 kilos down the block and deliver them. And that individual, if caught, would then be responsible for the taxes on that, which could be astronomical, and may have no ability or would have had no ability to gain from them. So it seems that we might want to refine this thought a little bit more than it has been refined, if it is in fact something that you consider pursuing. Thank you. COMMISSIONER MEGNA: Well, we'll certainly go back and look at it. CHAIRMAN FARRELL: Thank you. I'm going to resist the temptation Excepting if you can find one state where it's legal -- the concept many years ago started with the gambling stamp back in the '40s, and all the gamblers would run over to Nevada and get the stamp, so at least it would stop them from getting a federal fine for not having the stamp. But unless 154 / A154 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • Jamaica is willing to give you a stamp, I'm not sure what youre going to do. Thank you very much. COMMISSIONER MEGNA: Thanks very much. CHAIRMAN JOHNSON: One more question. Senator Thompson. SENATOR THOMPSON: Just a couple of quick qué stions for you. One, I'm sure you spoke earlier about the STAR rebate program. COMMISSIONER MEGNA: We did. SENATOR THOMPSON: Our office had a good working relationship with your office in Buffalo on the rebate program. But -I wanted to ask you just two things as it relates to the program. One was how many people who apply -- actually, how many people who were eligible did not actually receive a rebate this year in terms of people who would have been eligible. And the second thing is, with the upcoming program, do you think that the program should be automatic? And I say that in the context that I found that there were a lot of people who owned a property but may not have applied -- may not have been in the STAR program, so they , didn't get a tax benefit even though they owned a property in the city. And they may even have been a low-income senior, or they just may have been a traditional property owner. So 155 A155 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 they got absolutely no tax relief this year. What do we.do to help those individuals as well in the state who own a property who are not a member of the STAR program and this year they got no property tax relief? COMMISSIONER MEGNA: On the first part of your question, Senator, I think about 93 percent, we estimate roughly in that area, of the folks who are eligible to apply did apply. And we •have a very, very, very small number of folks that w&re still resolving some details with before they get their check. Buti think that worked pretty smoothly. The enhanced program, as all of you probably know, for seniors is automatic. So as soon as we get the list from ORPS, the Office of Real Property Services, of who's eligible for the elderly • benefit, we send that refund check out. And I think we sent most of those checks out by the end of July. So I think that we were pretty good with that. With respect to your broader question, I think the question of outreach becomes important. Last year, the year prior to this, I think there was an effort. made to make sure that folks who were eligible for STAR were getting STAR. And we set up, I think, an extension period where folks who were not in the STAR program could join the STAR program so that they could be eligible to get the rebate. And we think that next year the process will work in a much more efficient fashion, because we do have a lot of the 156 A156 JOINT BUDGET HEARiNG - ECO. DEV./TAXES FEBRUARY 11,2008 - • information now that we need to match up the person's income to their STAR benefit and to do that calculation. So we think next year the process will work even better. But I think the easiest way to answer yourbroader question is that, in the current system, is to increase STAR participation and then we'll beable to reach these people with a rebate. SENATOR THOMPSON: So for this coming program, if you're not certified as a STAR prograxnparticipant, you still won't get any property tax relief from New York State? COMMISSIONER MEGNA: You're not eligible, unless you're a STAR beneficiary, for the existing rebate program. SENATOR THOMPSON: So have you all thought about any additional ways to give peOple property tax relief outside of that program? COMMISSIONER MEGNA: Well, again, not particularly my area, but, you know, the Governor has appointed the commission to look at the whole issue of property taxes in New York State and the whole question of the feasibility and applicability of a property tax cap. And I know that those folks are talking about what the right delivery mechanism is for property tax benefits throughout the state. So, Senator, I think that conversation is being had within the confines of the commission. SENATOR THOMPSON: My last question deals with another tax issue, and 1 know it seems weird because I'm a 157 A157 JOINT BUDGET HEARING - ECO. DEVJTAXES FEBRUARY 11,2008 Democrat over here asking about it, but it's something that's very important. What do you think about a -- there's a whole lot of discussion about a federal rebate program. Have you all even considered, in terms of some of the things that people are talking about, some type of rebate program for income tax payers, particularly working people, in New York State? COMMISSIONER MEGNA: Well, Senator, I think the federal government is in the unique position of being able to run deficits. And so actually running a rebate program for them is a little bit, I think, easier. In the context of the state kind of financial plan right now, I think -- I'm sure you're going to have conversations with the Division of the Budget and folks 'like that. Within the parameters of the budget that's being negotiated, I'm sure all sorts of proposals • would arise as to providing relief for folks. SENATOR THONSON: But if somebody came up with a concept like that, would you all be in a position to provide some -- be able to administer a program like that? COMMISSIONER MEGNA: Well, every time I think that this department is overburdened by its ability to do those kinds of administrative things, the folks around this table seem able to pull it off. Again, we're an administrative agency. So if folks have a plan or a program that they want implemented, hopefully they 158 A158 n JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 would give us the time and the resources to go out and implement it effectively. SENATOR THOMPSON: All right, thank you. CHAIRMAN FARRELL: Thank you very much. COMMISSIONER MEGNA: Thank you. CHAIRMAN FARRELL: Edward Reinfurt, Executive Director, New York State Foundation of Science and . Technology and Innovation, the 12 o'clock person. MR. EDWARD REINFURT: Chairman Farrell, Chairman Johnson, Assemblymen -- let's see, Mr. Hayes, Mr. Schimminger, Mr. Weprin and Senator Thompson, thank you so much for the opportunity to appear again before the fiscal hearings. I will note for the record that I testified two weeks ago before the fiscal hearing on Higher Education and I will not repeat the testimony from that date. 1 am joined at the table by my Executive Deputy, Ed Hamilton, and we are pleased to report on a number of new initiatives that we have undertaken and those that are included in the budget. But first, let me say how appreciative we are for the support the Legislature and the Governor has given to our agency. If you look back over the last seven, eight years, in good times and in bad, the Legislature and the Executive have given a commitment to technology advancement that has positioned this State very well as we go ahead. And the State is better off for that. And I think that is important because the consistency of funding is very important to the planning that is taking place. 159 A159 JOINT BUDGET HEARING ECO. DEV./TAXES FEBRUARY 11,2008 Today, I would like to concentrate on two areas of the budget that involve NYSTAR and new funding. The first involves $4 million of new aid for our efforts with a consortium of universities that are involved in the cutting edge computational research that we have in this State and are very proud of. I will also comment on our regional partnership program, and unless you have questions on the extensive testimony that we have submitted, I will concentrate on those two. The first is the issie of the consortium for supercomputing, and what this State can do to position itself to be a national leader. As you are aware, the State has invested significant tens of millions of dollars in two new supercomputers located at Stony Brook, Brookhaven and at RN. We have also supercomputers that previous administrations have invested in in Buffalo and in Cornell. In addition to that, we have a tremendous array of computational scientists that reside at a host of facilitiesstretching from Buffalo to New York City to Long Island. Earlier in the fall when the State was approached with a plan by a consortium of universities who said that with a small amount of dollars we can really tap the computational assets that this State has The computational assets being both our big machines, our supercomputers, but equally important, our people and our programs that we have in place. Last week, I was at RIT for instance, and most people don't realize there are 3,000 students in the Golisano School of Computational Science that are ready to work with experts in other 160 A160 !1 . . . JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY II, 2008 areas of science to leverage the supercomputing capacity of this State. I emphasize the consortium because one of the goals of NYSTAR and the investments made over the years was to get our universities working together to see what each other's talents are and how they can work together. And the fact that these universities came together on their own and then approached the State with a request for how the State, with a small amount of investment, can leverage that, I think they are to be applaud, and it also symbolizes the type of activity that is going on in many, many other areas, and I can cite many of those. This proposal for $4 million comes at a time when the Federal government, just last week, announced its research budget. And you will see a complimentary program within the National Science Foundation for over $186 million, and in the Department of Energy for $3 69 million, representing additional dollars going towards computational science and research of supercomputers. And certainly, the strategic plan of the National Science Foundation is premised on the fact that the discovery in almost every area of science will be driven by the computing capacity that we have. 1 was advised by the head of the RIT School of Computational Science that he is doing a study which suggests that since 1952, there has not been an award to a Nobel scientist in the sciences that did not involve computational research and the addition that that brings to a researcher's field. And so, that is a program that we feel very strongly about, that we look forward to discussing with you and your staffs about how it relates to institutions in your field. 161 A161 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 Importantly, it is tightly involved with the research and the development that is taking place in the private sector. The emphasis on some previous questions, particularly as it relates to economic development, about are we getting enough commercialization from the technology investments that have been made is a question we take very seriously. And one of the charges that we are bringing to our partners, both in the private and public universities is the fact that we need to do more to bring economic growth and technology development to the forefront. And we believe there are many areas of research and private sector aid that this program will assist. Specifically, for the first time we intend tobé having a relationship with the financial sector in New York City. One of the primary hirers of mathematicians using algorithms is Wall Street. And the use of the supercomputers are being applied today to risk management, to currency exchange, to many areas that .can benefit Wall Street. And so, the research that we have talked aboutin other areas is going to be extended. We know what it can do in the biosciences, we know what it can do in advanced material management, we know , what it can do in nano-tech and we intend to exploit the investments that this State has made to date. The second area that Isaid I would like to emphasize relates to a program that this Legislature imposed and had given to NYSTAR, and that was the Regional Partnership Program. This year, as you know, the Executive Budget did not provide continued fupding 162 Al 62 JOINT BUDGET HEARING - ECO. DEV.ITAXES FEBRUARY 11,2008 for NYSTAR's Regional Partnership Program. Rather, it proposed the most significant infusion of regional funds ever into the State's regional economies and Chairman Gunderson and Chairman Foye discussed that earlier today. This came after extensive hearings and regional meetings and regional blueprints that were developed. At our NYSTAR board meeting just last month, our board decided to take no further action on the Regional Partnership Program, pending resolution of the budget and programatic issues that you will be addressing. We advised the regional applicants of this decision that this is the deferral of a decision. We still believe strongly in the importance of the regional economic development program. It is our understanding when this was first proposed, there was some dissatisfaction with the emphasis given to regional economic development. And we certainly understand that. We take our role for regional economic development, through all our programs, very seriously. And we believe the commitment that the Administration has made in this budget is unsurpassed. And we hope that through the next few weeks in the budget-making process to cJarify our responsibilities. But to have acted at this point with no funding would simply add confusion to the economic development community and we did not want to do that. We are also pleased that this year we carried out some new programs that were given to NYSTAR. For the first time we had a rote in community colleges -- a curriculum development -- 163 A163 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 again, showing the relationship of àur technology efforts to go from community colleges all the way up to our university centers. And specifically, we can tell you today that we are well along the way with two out of three of those programs, the Onondaga Community College Sutainability Program, the Hudson Valley Community College Program on Smart-Tech and we are about to finalize our program with the Monroe County Community College. We thank you for that program and that opportunity to participate, as well as the responsibilities you gave us in the debt restructuring proposals as they related to Syracuse University and RPI, which are underway and we have two smaller programs we are working on. But, again, in looking at the array of programs that NYSTAR has, we thank you for the commitment that you have made over the years in funding. We appreciate the opportunity. We do see and we do sense a tremendous opportunity ahead of us and we are beginning to see the fruits of many of the investments that have taken years to matçria!ize. I have the good fortune of having been asked by Chairman Schirnminger to join his Committee tomorrow, and I will expand upon those efforts -- and particularly, as regards the way we measure the new economy, in the knowledge jobs that are said by others to be the drivers of the future economy and some thoughts we have on how we measure ourselves and how we hold oirselves accountable, But I recognize the fact that you are running late and 164 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • I have had the opportunity at the previous Higher, Education Committee hearing to speak and so I will stop now and answer any - questions you might have. CHAIRMAN FARRELL: Thank you very much. Questions? Thank you. MR. REINFURT: Thank you. CHAIRMAN FARRELL: Kenneth Adams, President, The Business Council of New York State, Inc. MR. KENNETH ADAMS: Good afternoon. My name is Kenneth Adams. I am president of the Business Council of New York State and to my right is my colleague whom you know, Ken Pokaisky. On behalf of our more than 3,000 members, businesses large and small all across the State, 1 would like to thank both the Senate and Assembly for this opportunity to provide you with our comments on the Executive Budget and to offer you our input. As the State's leading business organization, we begin our testimony this year, as we do every year, with a reminder that our State's fiscal policy must achieve that delicate balance between a healthy private sector economy and government's need to raise revenue to provide services. And with a struggling national economy and the slowdown in financial services and real estate sectors right here in New York-State, that balance is now especially precarious. Let us remember a basic economic fact: That it is the private sector economy that creates wealth, drives the economy and 165 A165 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 enables government to function in the first place. New York's business community of 553,000 private sector employers and their 7.3 million workers is undeniably the core of our economy. The Governor's announcement, just yesterday, that he was revising his proposed budget in light of new forecasts that show a reduction in revenue of about a haifa billion dollars each year is one clear reminder of this delicate balance. The mission of the Business Council is to create• economic growth, good jobs in strong communities across New York State. In our view, this should also be a major goal in creating the State's budget for 2009. To promote economic development and job creation, especially Upstate, we have to find ways toreduce obstacles to private sector growth, especially the high cost of health insurance, energy and taxes. We need to promote new investment in existing businesses and in.the emerging industries of our innovation economy. And we need to avoid budget actions that add to our cost structure and further erode our attractiveness and competitiveness as a state. With these assumptions in mind, let's take a closer look at the Governor's proposed budget for fiscal year 2009. Even with the recent revisions, State spending is still projected to rise by 4.8 percent. In our view, this is still too much. It is too much because this growth in spending requires raising taxes and fees on private sector employers by some $1 .3 billion during an economic downturn. This will increase costs for businesses large and small at a time when they can least afford it. Add this new burden to the 166 A166 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • growing obstacles already faced by business owners in New York State and consider its effect on economic development. Raising taxes and fees at a time like this sends the wrong message to those who might think of starting or investing in a business here. Let's face it: The problem is spending. Per capita government spending in New York, state and local spending combined, was almost $12,000 per person; it was $11,836 in 2005. That's the highest in the nation, as you all know, with the sole exception of the State of Alaska. Clearly, we have a spending problem. But we do not actually have, in our view, a revenue problem. After all, State tax revenues are not down, they are up; significantly up. The latest projections fromihe Division of Budget show that iotal State tax receipts are up $2.2 billion for this fiscal year, and will grow another $2.4 billion in 2008-09 without any changes in our tax code or regulatory fees. The Executive Budget would allow State spending to grow at about the rate of long-term growth in personal income, which is now about 5.3 percent. We don't think that is a sufficiently aggressive spending target. We strongly prefer a limit in spending growth that is more closely in line with the projected rate of inflation, which is measured by the CPI, which is now about 2.8 percent. To achieve this limit, it is essential that weidentify and enact new controls on State spending. I will suggest some in a moment. Fornow, let's focus on these new proposed taxes and fees 167 A167 JOINT BUDGET HEARING - ECO. DEV.ITAXES FEBRUARY 11,2008 and the-jr potential impact on the economy. New York should have a tax code that supports a competitive economic climate, provides for fair tax administration and stable tax revenues and that avoidssignificant unintended consequences, like loopholes. However, we believe that a number of proposed revenue measures fail to advance these objectives and instead would damage the State's fragile economic climate by imposing significant new liabilities on key sectors. Let me cite several of these examples that we oppose. Number one: Employee health insurance is the most significant cost of doing business faced by our members; therefore, we are very concerned that the Executive Budget includes two significant tax increases-on health care coverage. First, an increase in the HCRA covered lives assessment, which would raise this overall levy by $190 million per year, from $850 million•where it was last year, to $ 1.040 billion in this proposal. And also a change in the taxation of for-proflt HMOs, which would result-in another $300 million in annual health insurance taxes. - Now, this health insurance tax increase will increase premiums and are likely to force many small business owners to reduce or eliminate coverage for their workers, thereby driving up the ranks of the State's uninsured. The Executive Budget would eliminate the current $1 million cap on corporate franchise tax liability, based on a taxpayer's in-state capital. This $100 million or more in new tax liability - -- 168 - - A168 - JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • imposed by this change would hit sectors such as financial services that may have significant cyclical changes in their net income but not in their in-state capital. The budget proposes to establish a financial nexus for out-of-state credit card operations where no physical in-state nexus exists. This proposal would impact several major in-state financial sector employers that happen to have out-of-state credit card operations -- entities that were also adversely impacted by the State's revenue actions in last year's budget agreement. The Executive Budget also includes several significant non-tax energy-related revenue measures that we believe will have adverse economic effects. For example, the Executive Budget proposes to increase the cap on Title V air permit fees to $80 a ton and to eliminate the current 6,000 ton fee cap per containment class. These changes couldimpose an additional $19 million per year in additional costs, primarily on the State's energy and manufacturing sectors. The budget would also impose two other fees that target the State's energy sector: NYSERDA assessments on gas and electric utilities and new charges on nuclear power plants that together would add another $30 million to State energy costs. We are concerned that the combined impact of the regional greenhouse gas initiative emission allowance costs, existing energy taxes, increased • permit fees'and now these new assessmentswill make already uncompetitive energy costs even more so, further eroding our economic competitiveness, especially in energy-intensive sectors of • 169 Al 69 JOINT BUDGET HEARING - ECO. DEVITAXES FEBRUARY 11,2008 our economy. Instead of raising taxes, we urge the Legislature to champion tax reforms that promote capital investment, job growth and retention. Recent experience with targeted tax credits - such as the film production tax credit and the emerging technology company credit - clearly illustrate their positive impact on business investment, the creation and retention of jobs, increased economic activity and ultimately, increased State and Iocl tax revenues. To continue to promote new investments, the Business Council makes the following recommendations for your consideration: Number one, let businesses realize their full valve of investment tax credits, ITCs, that are nearing expiration, by using them to offset new capital investment in the State Under this approach, old ITCs could be used to offset 50 percent of the cost of new investments and 90 percent of the cost of new R&D spending in the State. To increase the value of this incentive, unusable credits would be treated as refundable overpayment of taxes. This proposal, which I am sure you are familiar with -- called ERIC, for those fond of acronyms -- has been identifiedas a priority issue by our Business Council's innovation Committee. We appreciate that the Senate has passed this economic resurgence, or ERIC credit, both in 2007 and 2008, and that we understand similar legislation has been introduced in the Assembly. Number two: Extend the investment tax credit for 170 11 A170 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • the securities industry and security-related investments in the banking - industry. The investment tax credit for security and commodity brokers and dealers, investment advisory services, investment-related lending activity and security exchanges, as well as the Article 32 ITC for banking corporations, are all set to expire in October of this year. The Business Council believes that the State needs to continue to support new investment in the financial services sector and recommends the extension of these important investment incentives. Number three: Expand eligibility for and increase the value of the qualified emerging technology company investment credit. Number four: Provide telecommunication providers • - with an exemption from real property taxes for equipment installed for the purpose of distributing broadband technology. On the subject of economic development initiatives, more broadly, it is encouraging to see support for new significant investments in economic development, both in the Executive Budget and in the Senate's Upstate Now package. Both proposals would provide a significant increase in the State's economic development resources and wouid provide funding for regional investment priorities. The Business Council continues to assess the Governor's investment Opportunity fund and omnibus economic development act, and we will,be providing both the Administration and the Legislature with additional detailed comments in the very near future. Today, however, I would like to provide several 171 A171 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 comments on economic development proposals included in the Executive Budget itself. First, we are encouraged by a proposal for a multi-year program to deliver economic development power to energy-intensive businesses. The recent one-year extensions and a diminished Power for Jobs benefit for many program participants have significantly lessened the value of this economic development tool. The Business Council supports a new program with longer-term contracts and with broadened program eligibility that looks at both the creation and retention of jobs, new investments and other key measures of business commitment to New York State, We are also concerned about the budget's implications for our State's unique pharmaceutical sector. Efforts to achieve savings from the pharmaceutical industry through administrative actions undermine the State's ability to support New York's pharmaceutical and biotech industries and to attract new investment. Our concern here is that the more constraints we put on these industries, such as the proposal to expand bulk purchasing opportunities, the less likely these companies are to invest in New York. These industries are economic and intellectual engines for New York's future and we should work to support them as much as we can. And although it's not a budget issue, I feel compelled to comment on recent legislative activities on another important economic development tool, local industrial development agencies, IDAs. The Business Council is concerned that recent proposals to impose significant new costs on IDA-financed projects, such as 172 A172 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • prevailing wages for construction labor and to impose new restrictions on actual IDA activities, will limit the State's economic development efforts. Many significant private sector investments receive IDA support, as you know. We urge the Legislature to move forward with an' IDA reform package that promotes increased accountability and transparency of IDA activities, without significantly weakening their economic deveJopment incentives. Now, how to make all of this work. Let's be fair. It would not be reasonable for me to come before you today and ask that you, join us in imposing these new taxes and fees on New York State's businesses included in the Governor's Budget, and also support • economic development through targeted tax credits and other incentives needed to drive our innovation economy, without, suggesting ways to make the budget math work. We know that we' have a deficit and that the money, even if spending growth is reduced, has to come from somewhere. To that end, we propose reforming STAR, reducing the State workforce and further reductions in health care spending. And there are some new revenue sources proposed, such as new Internet sales taxes with which we have no quarrel. In the interest of time I just want to mention our thoughts on STAR and property taxes. I also want to note our support for the Governor's new Commission, chaired by Tom Suozzi, that is studying a property tax cap for New . York State. 173 A173 K- JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 As I stated earlier, improving the State's economic climate is our top objective. We can think of no area more in need of significant reform than real property taxation. And letvs remember, the biggest tax on most businesses in New York State is, of course, the property tax. While STAR sends tax dollars - State tax dollars - back to lower- and middle-income New Yorkers, it imposes no cOntrols on the growth of school taxes: The Comptroller's office says property taxes increased an average of 3, percent a year from 1995 to 2000, and then an average of 7.1 percent a year from 2000 to 2005, more than double the rate of inflation and more than double the rate of the previous five years. Property taxes are a major economic burden and a major drag on our economic competitiveness. And as a reminder, New York's local property taxes hit $37 billion in 2005, and outside of New York City, which levies a local income tax, property taxes averaged $2,303 per capita which 'is the highest in the country and more than double the national average. In addition, New York State's businesses, which pay 30 percent of school property taxes, get no benefit from STAR. The effect of tax burden on business property is about $1 billion higher than it would be if businesses were taxed the same as residential property. One alternative would be to both cap STAR and local property, taxes. STAR could be capped in its 2006-2007 level, for example, and local property taxes capped at 2.5 percent, about the rate of inflation. 174 • Al 74 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • A property tax cap would offset the impact of the STAR cap. Freezing STAR at its 2006-07 level of $4 billion could save the State $1 billion in FY '09 and eliminate allconsideration of these tax increases in the new budget. However, the key to a permanent solution is to adopt real mandate relief and downsizing reforms that will enable local governments to get by on less. The Legislature needs to roll back costly State mandates on local governments and then help them consolidate, share services, downsize and realign their workforces to save taxpayer dollars. These reforms could include elimination of the Wicks Law, requiring municipal governments to issue multiple contracts for construction projects that drive up local construction cQsts by as much as 30 percent. • My comments this afternoon touch on several of the most significant issues and recommendations we have concerning the Executive Budget for fiscal year 2009. We look forward to continuing this discussion with both the Administration and the members of the State Legislature, and I look forward to responding to any questions you have now. Thank you very much for your time and attention this afternoon. CHAIRMAN FARRELL: Thank you. Questions? • Thank you very much. MR. ADAMS: Thank you. 175 • A175 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 CHAIRMAN FARRELL: The Motion Picture Association of America, the 1:30 p.m. group, and it consists of Tom ODonnell, President, Local 817 Teamsters; John Ford, President, IATSE, Local 52; Van Stevenson, SVP State Legislative Affairs, MPAA; Michael Walbrecht, Vice President, Studio and Production Affairs, WB Entertainment, Inc.; Brian O'Leary, SVP, Tax Counsel, NBC Universal; Nancy Fox, National Director, Policy and Strategic Planning, Screen Actors Gtiild. I used up their time calling their names. Now, folks, I know, you all work, and a large amount of you have to dd with movies and you probably know timing. And you know radio and you know timing, and I shouldn't mention it knowing the Academy Awards have never made their time yet. But not withstanding that, I really must point out to you that we have given you 15 minutes, so that breaks down to about two and a half minutes apiece. And I hear there are two people who did not give us written testimony and I am going to ask them to control themselves because I have learned that when people speak off the top they tendto speak much longer, okay? Tom O'Donnell. MR. TOM O'DONNELL: Yes CHAIRMAN FARRELL: And would each of you give your name so the Stenographer will get it, because they should. MR. O'DONNELL: My name is Tom O'Donnell. I am Secretary Treasurer Of Theatrical Teamsters Local 817. Our office 176 0 A176 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,. 2008 • is in Lake Success, New York. We represent 700 transportation workers and casting directors in the motion picture and TV industry. I am here to urge you to preserve the proposed increase in the State's film incentive. In the mid and late '90's, lucrative film incentives from Canada and foreign countries effectively drained production from New York and the U.S. Modest incentives from the State enabled New York to be put back into budget runs and help us remain a major player in the flimmaking world. Now, U.S. states with no tradition of filmmaking have entered the arena with extremely appealing incentives, ranging from 25 to 30 percent of above and below the line. I have witnessed this effect firsthand as Teamsters Local 817 holds film jurisdiction over the States of Connecticutand Rhode Island. In 2007, there were five featurefilms shot inThe State of Rhode Island, which was a 50 percent decline from the proceeding year because it was perceived that there were better and newer incentives in the States of Massachusetts and Connecticut. Last year there were 15 feature films shot in the State of Connecticut and this spring alone, there are nine feature films proposed to be shooting in the State of Massachusetts. In Connecticut alone, it was not uncommon before the last two years that there would have been no features over the budget of $10 million that have shot there. This truly is a field of dreams; "Build it and theywill come." A 15 percent above and below the line incentive will hardly match the other states and foreigr 177 A177 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 countries, but will effectively bridge the gap. With such an incentive combined with the infrastructure, studios' ta'ent base and the best technical crews in the world, I believe New York would not only recapture lost production but exponentially grow more film and TV, more jobs and more enterprises needed to support expanding productions. Furthermore, I believe neglected cities such as Albany, Rochester and Buffalo would be discovered by the film world. Whenever wework outside of the metropojitan area, we incorporate labor from the other Teamster Locals, so we would be - growing jobs Upstate as well. Finally, I believe it would be foolish to increase the incentive and leave the gap where it is at. Four years of an incentive would be used in one to two years under the current plan. The Hollywood studios will be hesitant to budget what might not be there a year a from now. This proposed incentive, which would be a guaranteed success, would pay for itself and would be a boon to the State of New York. Thank you for this opportunity. CHAIRMAN FARRELL: Next. MR. JOFIN FORD: Good afternoon. My name is John Ford. I'm President and Business Manager of Motion Picture Studio Mechanics Local 52. CHAIRMAN FARRELL Any relation to the other John Ford? MR. FORD: I wish. I wish, yes. Local 52, along 178 A178 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • with Teamsters Local 817, represents a majority of unionized jobs in the motion picture and television production in New York. These are good, solid middle-class jobs that provide medical benefits and retirement benefits, as well. I am a third generation film worker. My grandfather worked on silent movies in New York over 80 years ago. I am here this afternoon to urge your cooperation in expanding the tax incentive legislation, including the eliminatioh of the cap. While the current program has been successful since its inception, other states, most notably Connecticut, Massachusetts and Pennsylvania have passed us by. Connecticut has virtually no infrastructure or equipment, yet saw over a dozen films shot there last •year. Many of them were scripted for New York and California. Prior to passage of the incentives, there was no production of consequence in Connecticut. California has lost almost all motion picture production to states with incentives. To date, and luckily for us, California has refused to pass such tax incentive legislation, essentially abandoning that segment of the business and costing its economy thousands of good, middle-class jobs in production, as well as all Of the ancillary businesses. I am here to beg you, please do not make the same mistake. Whatever our personal feelings are on incentives, the facts are that, at least for this industry, they work. States with significant incentives are booming, including New Mexico, Louisiana, Connecticut and Massachusetts: New York has far more 179 A179 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 infrastruciure in terms of qualified crew, studios and all other support industries than any of these states. Please help us keep these good jobs and businesses in New York. Thank you'very much. MR. HAL ROSENBLUTH: Good afternoon. My name is Hal Rosenbiuth and I am President of Kaufman Astoria 'Studios, the facility in Queens, New York. I am here to tell you that in 2004 you gentlemen passed a tax incentive credit that not just helped an industry grow, it saved an industry. We have seen a continuation of-- through the use of that incentive'-- the growth of this industry continue to happen. Unfortunately, I also sit here and tell you that as of right now there is a line to get into the surrounding neighboring states and it is our job 'to come to you and say we are looking for you to continue the incentive program and to take the cap off in order to bring these jobs back into New York. A model in which we had created as a tax incentive program is working, but it is working at different levels in other states. And it is my opinion that the tax incentives are a necessary economic model in order to keep the film industry here in New York. MS. JEAN FROST: Good afternoon. My name is Jean Frost. I am Assistant Executive Director of the Directors Guild of America and I would like to thank you, Chairmen and members of the Committee, for inviting me to appear before you today to discuss the proposed improvements to the New York film production tax credit to promote film and television production in New York. I am 180 A180 . JOINT BUDGET HEARING ECO. DEVJTAXES FEBRUARY 11,2008 here on behalf of the Directors Guild. Founded in 1936 by the then most prominent directors, the Directors Guild today represents directors and members of the directorial team who work in feature film, television, commercials, documentaries, news and sports. The DGA's mission is to protect the creative and economic rights of directors and the directoriai team, working to advance our artistic freedom and to ensure fair compensation for their work. I am here to express the Guild's enthusiastic support for the proposed changes. While we at the Directors Guild of America are keenly aware that film is an art form, we do not overlook its value as commerce. We represent the kind of industry that every county and every state wants, an environmentally clean industry with union jobs that offer health and pension benefits. Our industry has an enormous impact on revenues, not just through production costs, but also through the small businesses and others who gain from our presence -- hotels, dry cleaners, restaurants and many other vendors., In other words, this is an industry that is about jobs, well-paying jobs which build careers and economic development. We are an engine that drives other industries in the City and in the State. Prior to 2004, domestic film and television production was on a substantial decline, in large part due to incentives offered by foreign countries, particularly Canada, to lure domestic production. New York bore the brunt of this decline. Films that were set in New York were routinely being shot in Canada and Eastern 181 A181 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 Europe where foreign governments provide substantial subsidies to lure film and television production. Films that did shoot in New York, moreover, limited their actual New York shooting to establishing shots and/or exterior location shots and did the majority of their shooting on stages outside of the United States. In 2004, this Legislature had the foresight to pass one of the most comprehensive tax incentives for the film and television industry. The impact of those incentives was immediate and astounding. New York, once again, became a dominant production center. During the first nine months of the year after the incentives went into effect, we witnessed a 56 percent increase in the number of production days worked by DGA members on feature films, and a 44 percent increase in the number of days worked on television productions. These employment figures continued to increase• throughout 2005 and 2006. The DGA and our members in New York were and continue to be grateful to the Legislature for passing this incentive package and we are enthusiastic about its impact. Beginning in 2006, however, another trend began to develop. Having witnessed the success of New York's incentives, a number of neighboring states, particularly Connecticut, Massachusetts and Rhode Island, enacted their own incentives and in an effort to. best New York, these incentives offer a larger tax credit and are often uncapped. As a result of those newly-created incentives, we have witnessed a dramatic reduction in the number of feature films that shoot in New York and 182 A182 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 . • unprecedented activity in Connecticut and Massachusetts. This trend translates into fewer jobs in New York and lower economic growth. I am here today to thank you for your past support and ask that you support the Governor's proposal to bring New York's incentive more in line with those of the neighboring states. In particular, we ask you to approve increasing the tax credit from 10 to 15 percent to include production costs similar to those included by neighboring states, and most importantly, to lift the annual cap. so New York State can be competitive in encouraging film and television production. I thank you you very much for your time. MR. STUART MATCH S1JNA: I am Stuart Match Suna, President of Silvercup Studios and I want to thank the Governor and all of you for the film tax credits, because they have really grown this industry and as manufacturing jobs have really left this State, film • and television is the new manufacturing. It's our greatest export, certainly out of this country and New York is just behind California in creating great entertainment and that great entertainment also bring back great tourism. As I was quoted in Crane's Businessweek this week, The Bronx is Burning, about the New York Yankees, was shot in Connecticut. If they can fake the Yankee Stadium and the Yankees in the Bronx in Connecticut, think what else they could do to us. Al Pacino and Robert DeNiro, two serious New Yorkers, just finished shooting a $60 million film-about New York in Connecticut. Confessions of a Shopaholic, right now they are doing their shopping 183 A183 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11, 2008 in New York and they are taking all, of the clothes up to ConnecticUt and they are shooting as if they are in New York City. So, they are taking these jobs. away from us right now. One of our competitors from Brooklyn is actually invited by Connecticut to convert an old industrial complex into new studios. Right now, the films that are going up to Connecticut are mostly feature films. We are home to $ex in the City, The Sopranos, 30 Rock, Cashmere Mafia, Gossip Girls, on and on; great TV shows. Those jobs, once they actually have the infrastructure built there, because Connecticut not only has a 30 percent tax credit, they also have a 20 percent investment tax credit to build new studios, to buy' new trucks and to have new equipment. So, we not only want you to support the Governor's billof 15 percent, but we believe the Governor's cap of only a $15 million increase won't be enough because we believe with this new tax credit, we will have new jobs coming back. We lost $750 million worth of new business last year because of surrounding states. Those are good blue collar jobs. We want those jobs back and we need you to have no cap to really allow this business to grow. MR. VAN STEVENSON: Mr. Chairman, Van Stevenson, Senior Vice President for Governmental Affairs to the Motion Picture Association. We represent Disney, Fox, Sony, Paramount, Universal, Warner Brothers; BS is also an assOciate member. We also appreciate the opportunity to be here to lend our total support to the Governor's recommendation. We also support 184 A184 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • everything our colleagues have said about lifting the cap. We also believe the program should be made permanent to fully realize the opportunity we believe the State of New York has to attract even more film production. I always say there are the three C's: Cost, convenience and creativity. New York people love to come here and shoot. Convenience, there is a tremendous infrastructure. Cost is the only thingihat needs to be brought up to be competitive, we believe, with other states. Just a couple of figures real quick. There has been a lot of talk about motion pictures going to Connecticut, Massachusetts, Rhode Island. We understand that in the first ] 8 months that Connecticut had their production tax credit, they realized roughly $750 million worth of economic activity, mostly on feature films. Now, in terms of New York, that translates, at least according to the figures that we've seen, roughly 5,000 lost jobs to the New York economy. We are convinced the proposal brings more to the incentive. We also believe, again, that the cap should be lifted and we appreciate the opportunity to answer questions when we are all finished. MR. BRIAN O'LEARY: Mr. Chairman, members of the Committee, my name is Brian O'Leary. I am tax counsel for NBC Universal. As Mr. Stevenson noted, NBC Universal is one of the member companies of the Motion Picture Association. Among other 185 A185 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 things, we produce films and television shows. And I just wanted to offer you some context for how that decision-making about locations is arrived at. For every project, with few exceptions, we look at three different locations, - perhaps even as many as four - and among the considerations are cost. In addition to having the needs of your script met, in addition to having the availability and the abilities of your crews, one key consideration is cost. As.part of that evaluation, for any location, incentives play a critical role, and in two components: One is cost savings; but equally valuable, as you look at any incentive and apply it to your budget, is predictability. From a cost perspective, the fact that feature films, for example, over the last five years have almost doubled in cost in marketing and production, approaching the $100 million figure per average show. A meaningful incentive that has real opportunities for cost savings is going to be a powerful inducement for any jurisdiction, but it is irrelevant without certainty. And certainty means as you evaluate any project and you look at the estimated savings associated with the credit, knowing that credit will be there to hold your budget together at the end of the production is critical. That is why caps can have a chilling effect on decision-making. I'll just talk about television for a second. Television series look beyond just ihe current year. They are looking to the next season. If you have an incentive that isn't available in the second or the third season, what you've done for your production is you've 186 A186 I JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 • positioned yourself to have to make a very difficult decision. In your second season you could face a shutdown, you could face a relocation, but the negatives associated with not being able to meet your budget because the cap has limited your ability to access credits, essentially is bad for business, but it is also bad for the State. The New York credit - what the Governor has proposed - is building on the success that this Legislature helped create in 2004 that restored New York to its rightful place as one of the leading production locations in the country. The Governor has now built on that. The opportunity with sufficient credit funding is to give New York a disproportionate advantage in attracting and growing its industry. MR. MICHAEL WALBRECHT: Thank you, Chairman and members of the Committee, for the opportunity to • speak to you today about the Empire State Production Tax Credit. By name is it Michael Walbrecht. I am Vice President of Studio and Production Affairs at Warner Brothers Entertainment in Burbank, California. In 2004, a dozen states in the U.S. joined a multitude of foreign locations in offering production tax incentivesto the motion picture andtelevisión industry. New York responded early, very quickly, and put an incentive in place at both the State and local Level. We've already heard today the initial results were impressive; $ I billion in production expenditures in 2005 and 2006. Unfortunately, being early to the game also sometimes means that you give your 187 JOINT BUDGET HEARING - ECO. DEV./TAXES FEBRUARY 11,2008 competition an ability to craft an incentive after you are done with your work, an incentive that is more lucrative or more competitive than what you have put in place. And that is what happened in New York. I pulled some information on Warner Brothers productions: In '03-04, before the incentive, Warner Brothers had one production in New York and spent about $30 million on our show. In '06-07, we had seven productions spending $310'million, a tenfold increase. About half of that, $150 million, was directly spent on payroll in New York with about 6,000 people hired, 1,600 full-time equivalents. In '07-08, we expect, at this point, projections would be three productions in New York for about $70 million. So you can see that the competition from the neighboring states has clearly had an effect on New York's ability to draw production in. Fortunately, New York is in a rather unique position. If you pass the current incentive as proposed, it will, in most cases, bring the State into parity with other competing states. If you couple that with other variables important to production, you will be providing New York a distinctive edge. New York is blessed with an abundance of highly-trained crews, competitive vendors and terrific-looking locations. Most other states are lucky to have just one of those variables going for them. To illustrate this on a practical level, I asked our budgeting department to take an actual film budget, medium-sized film budget, which is in the $60 million range, give or take, and show 188 A188 . JOINT BUDGET HEARING - ECO. DEV.ITAXES FEBRUARY 11,2008 the difference between the New York credit now and the proposed New York enhancements against some of those competing states. In my testimony, you'll seethe chart. But in brief, with the current New York incentive, New York is about 6 to 12 percent more expensive than Connecticut, Massachusetts and Rhode Island; somewhere in that range, 6 to 12 percent depending on the state. Under the proposed incentive, New York would be 3.5 percent less than Connecticut, 3 percent less than Rhode island and within 2 percent of the cost in Massachusetts. So, you can see that the proposed incentive would bring you right in line with those states you compete with. One last thought regarding the proposal, and it has been heard already today, consider removing the impediment of an annual cap on the program. The cap serves only to cloud the long-term planning for our productions, both TV and features. As Brian mentioned, from NBC, TV is looking two to three, sometimes five years out. Feature films anywhere from a year to two years out, and without being able to rely on the cap, it makes it difficult for us to do the budgeting and puts New York at a disadvantage when there are states that don't have a cap. If there are any questions, I would be more than, happy to answer them. Thank you for your time today. CHAIRMAN FARRELL: Thank you. Questions? Thank you very much and you were right on time. Brian McMahon, New York State Economic 189 A189 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 Development Council. MR. BRIAN MCMAHON: Good afternoon, Chairman Farrell,Chairman Johnson, Chairman Schimminger, members of the Committee. I am Brian McMahon, President of the New York State Economic Development Council. It is a pleasure to be here and be given the opportunity to testif'. Aristotle said, "Well begun is half done" The Governor's budget represents a good beginning for adopting a budget that would place New York State on improved economic footing; There are two parts of the economic revitalization equation: Strategic investment and improving business Cost factors. Both are important, the latter more so. We must make progress in both areas, however, or risk becoming even more uncompetitive. The Governor has made a significant commitment to economic development in his budget. Investment would increase from $435 million to $951 million. We support most of these investments. For too long, investments and economic development have been made on a project-by-project, non-strategic basis. Most of the new economic development investments in the Governor's budget are targeted to priorities identified in regional blueprint development sessions, coordinated by ESD, cooperation with business and economic development organizations.. Some of these programs will fund projects, while others will be invested in communities to build capacity for future growth. Both are needed. While the Governor's budget d6es well on the 190 A190 JOINT BUDGET HEARING - ECO.DEV.ITAXES FEBRUARY 11,2008 • investment side of the equation, it does poorly on improving business climate cost factors. Those of us on the front lines every day trying to convince businesses to locate or expand in New York know that the biggest hurdle we have to overcome is the high cost of doing business in New York. And you have seen all of the comparisons from the Chief Executive's magazine to the Mi/kin Institute, Tax Foundation, Forbes and many, many others that rank New York's business climate either 48th or worse. The Governor's budget does little to address the cost issues; in fact, it compounds some. By raising taxes and fees on businesses and consumers by nearly $2 billion, the budget adds to the cost of living, working and doing business in New York State, costs which are already too high. New York does not need to reduce costs for employers dramatically overnight, but it does need to make steady, sustained progress immediately and now is the time to start. There are three important actions the State could take to begin to mitigate and reduce these costs. I First, don't make things worse. For four decades, it seems that New York has taken two steps backwards for every positive step it takes forward to improve its business climate. Without a long-term commitment to reduce employer costs, progress will not be possible. Increasing taxes 'on businesses, people and consumers will make things worse. Adding wage, undue regulatory mandates and other costly requirements to key economic development programs makes things worse as well. Two: Adopt a meaningful cap on real property taxes. New York's real 191 A191 JOINT BUD ET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 property tax burden is the second highest in the country. The STAR program has failed to reduce property taxes, in fact, the rate at which property taxes have increased has been greater since the STAR program was created and that is why we support the Governor's recommendation to create a commission to look at the real property tax and hopefully conclude that a meaningful cap is needed. Three: Phase out corporate income tax for manufacturers. Eliminating the corporate income tax on manufacturers would implement the most itnportant job retention initiative the State has ever taken. It wouki also be perceived by potential global investors as an important sign that not only has New York not given up on manufacturing, but it is redoubling its commitment to compete for high value, advanced manufacturing investment and jobs. I would like to offer some brief comments on some specific points that are in the Governor's budget. New York State has underfunded economic development for decades, and while we have invested heavily in incentives for specific projects, we have invested relatively little in building local capacity to support future economic growth. That is why we support the $1 billion Upstate Revitalization Fund. The investments are strategic and well targeted. Programs such as the Upstate Regional Blueprint Fund, for example, would invest in infrastructure, site preparation, brownfield remediation development and would make Upstate communities more attractive for expansion of location projects. We support the $3.5 million in funding for business 192 Al 92 . f JOINT BUDGET HEARINC - ECO.DEV./TAXES FEBRUARY 11,2008 marketing. For more than a decade, the State has failed to invest anything for this purpose. Consequently, we marginalize the economic development value of technology, university and business strengths that we do have, which are considerable. We oppose the $5 million tax on lOAs to recover costs for services provided by the State. IDAs already have to pay the bond issuance charge, which was instituted six years ago for exactly the same purpose. Consequently, we think this provision would amount to an unfair form of double taxation and simply would 'add more cost to businesses that want to invest in our communities. We are disappointed that the Governor failed to include in his budget administrative funding for Empire Zones. The program is incredibly complex, it's process laden and relies heavily on -local administration to implement the program. Assemblyman Schimminger has introduced legislation which has passed the AssembLy last year and would commit $8.5 million for Empire Zone administration. We support that legislation and we urge your support and hope that is adopted. In respect to new initiatives, one: Tax increment financing. New York should make changes to its tax increment finance law so it can become a useful tool for helping municipalities redevelop distressed areas in their urban core. The major obstacle with New York's TIF statute is that it does not allow school district property taxes to be included in the tax increment calculation. Since school district taxes are usually the largest portion of the total local 193 A193 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 property tax, the absence of that portion significantly reduces the amount of TIF debt which can be leveraged. Assemblyman Schimminger and Senator Young have introduced legislation which would allow school taxes to be used for this purpose, with the approval of the school district. We support that legislation. I would just like to briefly mention the New York Bioscience Council, which 1s a consortium of Statewide and regional bioscience businesses and economic development groups, has developed a comprehensive legislative agenda for advancing the biotech industry in New York State. We are a member of that council. We urge your support of their initiatives and I won't go through those now; we will make sure that you have copies of all of those. And lastly, marketing New York's biotech assets. Last year, the Senate Majority provided our subsidiary, New York Loves Bio, with a $300,000 grant to support our efforts to market New York's bioscience strengths and assets nationally and internationally, and those strengths are considerable. New York is ranked number one in drug and pharmaceutical employment; third in medical device employment; third in NiH funding; second in Science Doctorates awarded; second in life science R&D expenditures and we are ranked number one in biotech growth. This grant has allowed us to make investments that will serve the industry for years to come. The opportunities to attract bioscience investment and jobs are considerable and I look forward to discussing with you how we have invested these funds and how the 194 Al 94 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 . Legislature can help in the future. In closing, while New York has many obstacles it must overcome, it also has many great assets on which to build its future economy. For example, our workforce is 29 percent more productive than the national average. Many studies have ranked New York first or second in the nation for bioscience. We are first in the . nation in photonics employment; we are third in the nation in high-tech manufacturing employment and first in the nation having the most top 100 colleges and universities. We must build on these strengths and mitigate our obstacles and we look forward to working with you to do just that. Thank you for the opportunity to testifj. CHAIRMAN FARRELL: Thank you very much. Questions? Thank you. MR. MCMAHON: Thank you. CHAIRMAN FAR2RELL: Partnership for New York City, Kathryn Wylde, President. MS. KATHRYN WYL[YE: Thank you. I know it's. late. I appreciate the opportunity to testify. 1 have submitted written testimony and I wanted to ask if you prefer. that I summarize rather than read it? ASSEMBLYMAN SCHIMMINGER: Yes. Magic words to our Chairman. You make a lot of points that way. MS. WYLDE: Well, I'm into points, thankyou. The 195 A195 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 Partnership for New York City represents New York's major leading companies, business executives and investment firms.. We are dedicated to working with governmenton policies and projects that support the growth of our economy. I think today I am really here to say that we are very concerned about the economy of New York State and New York City. We were relieved to see today The New York Times report that the Governor is revising revenue estimates, projections down, because we think that is a realistic assessment. I think there is great concern among our membership which represents, really, the economic engine for the entire State that, in fact, the uncertainty, the volatility and the deterioration in our economy and its impact on our anticipated tax revenues are significant and, importantly, have an impact on our economic development strategies, as well. We think it is important to take this into consideration during the budget process, obviously. The Executive Budget that the Governor has laid out does not anticipate the same kind of steep decline that we are concerned about, particularly in the area of the financial services industry, which is responsible for 20 percent of the tax revenues of the entire State. It lays out some proposals involving taxation that we think are not well timed. Some of the proposals, in these terms the so-called "loophole closing proposals," we think can, in fact, be know enacted. For example, making sure that non-residents pay real estate taxes on transactions and we would even suggest taking a further step that non-residents should not be able to avoid estate taxes. 196 A196 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 PAV . On the other hand, there are a couple of proposals in the budget that I call to your attention that we think represent a strategy that is anti our economic development goals for the City and the State. The first is the elimination of the $1 million ceiling that is in place on the taxes that non-manufacturers - in other words, the service sector - the taxes that they pay on assets. This is raising the tax on assets over and above the taxes on corporate profits that these businesses are already paying, would really encourage companies to take their assets out of New York. This is at a time when the United Kingdom, for the benefit of London's ôompetitiveness with New York, is reducing their corporate taxes. Their corporate taxes are being reduced from 30 percent to 28 percent. And so, at a time when they are competitively reducing taxes and New York has an allin federal tax rate on corporate profits of 50 percent - federal, state and city - we think that we are ma position where eliminating this ceiling on the tax on assets, on capital, is totally inappropriate. A second proposal would dramatically increase taxes on New York-based financial services companies that have credit card affiliates. This has been positioned as a tax on out-of-state credit companies. The fact is, those states that have imposed this tax are not headquarters states; they are small states that are trying to reach into headquarters operations in other states and tax on the basis of the credit cards that they issue in their state. In New York,we have the reverse situation. And the effect under our Tax Law of imposing this 197 A197 - JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 tax simply adds to the tax burden of our headquarters operations, and it means that a company that has property and large amounts of jobs in New York State will be paying higher taxes than a corn pañy based in Charlotte and selling credit cards into New York, which obviously is not in our economic development interests. The third proposal is the proposal to force out-of-state businesses to collect and remit the State sales tax on purchases New Yorkers make over the Internet. This not only raises taxes on consumers in New York but it also, because the ability to tax depends on making a connection with New York affiliates, it would mean that for businesses in New York, the businesses from outside that are selling into New York would shun those affiliations. It is bad for New York business as well an additional burden on the consumer. Finally, the Executive Budget basically calls for using the Investment Tax Credit that has been available to encourage financial services to invest and expand in New York. The companies that have come back to lower Manhattan, for example, and been investing around the State, it removes the investment tax credit that the Legislature has had in place since 1998, and we believe that it is exactly the wrong time to do that. This is an important incentive for encouraging the expansionof facilities. As I said before, financial services is an industry that is really going toface a difficult time right now, and this is something that, if we want to maintain New York City and State as the financial capital of the world, we can't afford to be sending this message. 198 Al 98 / ,1 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 . There are other changes in the budget where projected revenues, again, do not justify the negative message that will be sent to New York's most important companies and we are happy to have our tax committee work with you to identify those and also to find other ways to raise revenues. I will skip to just saying something about economic development. We worked last year on a report that A.T. Kearney, the international consulting firm, prepared for the Empire State Development Corporation We engaged more than 100 companies and economic development executives from around the State in thinking through how New York could better capitalize on its assets, including leveraging the business assets and corporations, multi-national corporations in New York City to support Statewide economic development. We think that much more needs to be done on this front and we don't think that the programs and the structure that New York State currently has in place maximizes those opportunities. So, we again would urge working together to figure out how to create more proactive programs, how to take big bets, like the one that you all took on the Albany NanoTech operation in partnership with IBM, where you have seen a return to the Capita] District and to the State. That is really significant and that is because it was part of a strategic and thoughtful effort between the Legislature and Executive to invest alongside a company that is an international leader in its field. We have a number of those companies in New York. 199 A199 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 We should be doing much more to work with them to identify where are the opportunities and how do we invest together to realize those. That isn't the way the budget process or the traditional programs have worked. Programs like Empire Zones are passive. We need more proactive, more strategic and more highly-targeted programs and 'we are happy to discuss more on that later. I think the only other thing I would like to mention is we were concerned that in the area of trying to get control of our health care costs and our Medicaid costs, that we are not being as aggressive as we should be. The only major budget proposal really increases impositions on the health insurance industry, and that is going to be passed along to employers and individual consumers. We think we have to think harder and take more daring steps in that. We think that the other piece in the budget proposal, in the health care area, which reduces what the State would pay for drugs, while that sounds like an efficiency and a spending cut initiative at a time when our economic development strategy is to try and attract pharmaceutical investment, biotech investment into the Stateof New York to encourage it, it is veiy definitely a mixed message. And again, we would urge that we sit down with industry to figure out how to maximize their overall commitment to separate tax policy, or to have tax policy that is directly contradictory with our economic development goals is not a good thing. And we see that reflected in the budget. We think there is an opportunity in New York for business and government to work together to figure out 200 A200 JOINT BUDGET HEARING - ECO.DEV.ITAXES FEBRUARY 11 9 2008 • policies that are mutually reenforcing, that meet the revenue needs of the State and, at the same time, encourage continued economic growth. Thank you. CHAIRMAN FARRELL: Thank you very much, Kathy. ASSEMBLYMAN WEPRIN: 1 have a question, actually. CHAIRMAN FARRELL: Question. ASSEMBLYMAN WEPRIN: Sorry about that. CHAIRMAN FARRELL: Nothing you've said, but we have a Committee meeting, so three of us are going to get upand walk away. It is not a protest. ASSEMBLYMAN WEPRIN: You are going to leave me all alone. CHAIRMAN FARRELL: Yes. ASSEMBLYMAN SCHIMMINGER: We are going to leave you with the gavel. ASSEMBLYMAN WEPRIN: Ms. Wylde, I was curious, in the past you had been very vocal about need for an expanded convention center in New York City and you didn't mention the Governor's proposal about selling the property north and south Of the Jacob Javits Center. I was curious if you had any opinions on that. MS. WYLDE: Well, I think our conclusion is that the proposal to use the budgeted $1 .76 billion to add 100,000 square feet of exhibition and meeting room space within the footprint of the 201 A20.1 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 existing property is the right one for this time. We do not think the State is in a financial position to invest $5 billion in a new convention center. We also think the talk about moving and developing a convention center in anót!ler borough is something that is worth pursuing. I think that that is something that we would like to see explored. A lot of information is coming in, in the last five years -- and you are right, historically, in the 1990's we were big proponents of expansion of the convention center but there is a lot of information coming in that suggests it may not be the highest and best use for that property on Manhattan's West Side, ASSEMBLYMAN WEPRIN: When you mention other counties about a convention center, you are talking about Queens or anywhere in particular? MS. WYLDE: Queens in particular, since it has two airports, is logical. ASSEMBLYMAN WEPRIN: Right. Earlier when the economic, development team was here, we talked a little bit about Willets Point and how important a piece of land that is to develop and develop economic activity out there. Do you have opinions on Wiliets Point? 1 know you have been speaking on that, as well. MS. WYLDE: I have an opinion, not an official one. I think that it is both a location and assemblage that could make a lot of sense. ASSEMBLYMAN WEPRIN: One last question. On 202 1 * A202 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 • the film tax credit, don't know if you were in the room for that, but I assume you are supportive of their position of trying to become more competitive with the other states on the film production tax credit? MS. WYLDE: Yes. I think that the investment the State has made in the film production tax credit is the example of the kind of incentive, like the financial services investment tax credit, that has proven that it builds an industry here, that it reinforces an industry cluster and is a smart economic development investment from the State, in contrast with some of our passive investments where everybody who happens to move in gets rid of their taxes. ASSEMBLYMAN WEPRIN: Okay. Thank you. Thank you, Senator. CHAIRMAN JOHNSON: Thank you. We will proceed at this time by calling up Ron Deutsch, New Yorkers for Fiscal Fairness, MR. RON DEUTSCH: Should I start off reassuring Ms. Wylde that the departure might have had more to do with me being present than her coming up? No. I want to thank the members of the Committee that are left for allowing me to speak here today. I thank you very much. Again, my name is Ron Deutsch. I am the Director of New Yorkers For Fiscal Fairness and I am hear today representing the Better Choice Budget Campaign, a coalition of organizations representing hundreds of thousands of New Yorkers from the faith-based, non-profit and labor areas around the State. 203 A203 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 I am really here today to talk about a number of different factors within the Governor's budget. I will spare you the reading of my testimony - since it's 18 pages in ten-point font- and just hit the highlights for your benefit. But we are here today because we support the creation of a fair tax system. We support strengthening local economies and we support strengthening and supporting assistance for working families throughout the State. So, how do we go about doing this? One of the things that we are proposing to do is restore revenue sharing. Another way is for having the State to pay for a greater share of health care and education funding. We want to reform the STAR Program to make it more reflective of income and restore overall tax fairness in New York State. So, some of the mechanisms that we proposed over the years, some of which have been adopted last year in the budget session, but still need some work. One of the things we want to do is close corporate tax loopholes. Obviously, that is something that the Governor has proposed. We are in full agreement and support with the Governor on that issue. Another one that is less in the public spotlight, certainly, .is stopping many of the sweetheart deals that are occurring right now, where the State is hiring pricey, private consultants to do the work that State workers can and should be doing. We should have a cost benefit analysis done before we contract out much of this work that can be done by our State work force, since we have been hearing 204 A204 JOINT BUDGET HEARiNG - ECO.DEY.ITAXES FEBRUARY 11,2008 • from others that the State workforce is too bloated, if you will, but yet we are still contracting out work. It makes no sense. Lowering prescription drug prices, the Governor took a step with this with the preferred drug list. One of things we would like to see happen is having the State use its purchasing power. New Yorkers spend some $20 billion a year on prescription drugs, about $4- to $5 billion of that in the Medicaid system. We need to use that purchasing power to force lower prescription drug prices. We want to see the enactment of the Bigger Better Bottle Bill. That, we think, makes a lot of sense in increasing revenue in New York State. We also think that we should reclaim the unclaimed bottle deposits from the beverage bolting industry, which keeps about $200 million in unclaimed bottle .deposits every year. That would be a good source of revenue to help a bit of our ailing economy. And making New York's tax system more fair and equitable, which is something I wanted to spent a lit bit of time on. Right now, as you can see from the chart on page 2 in my testimony, if you look at the incidents of who pays taxes and how much in New York, you will see as a percentage of income, the richest one percent are, in fact, paying about half of what the bottom 80 percent are in terms of a percentage of their income in overall State taxes. That includes the sales tax, the income tax and the property tax. One of the problems, as we see it, is that the property tax debate seems to be occurring in a vacuum. We talk about property tax as if there is no relationship between property taxes, sales taxes and income 205 A205 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 taxes. Well, yes, we agree that the property taxes have, in . fact, been going up over the last two decades without question, but what we have seen at the same time, is that the income tax rates at the same time have basically been cut in half. The top marginal rates have gone from a high of about 15 percent to now a low of 6.85 percent for the top wage earners in New York State. So, that is to say the top rates kick in for families earning over $40,000 a year and singles earning over $20,000 a year. So, effectively, you have a first year-teacher paying the same effective tax rate as Donald Trump pays in terms of their income. We don't think that that's fair. In 2003, the Legislature enacted, over the veto of Governor Pataki, a temporary increase in the top marginal rates of the income tax. This helped get us through a bad recessionary time, a large budget deficit. And as of 2006, those increases have, in fact, been phased out. Now, despite what the Governor said at that time, which was that you were goingto see mass exodus of millionaires leaving New York. Quite the opposite was, in fact, true. That did not occur and the number of high-wealth earners and filers actually increased. So, the doom and gloom scenario about increasing the top marginal rates of the personal income tax were unwarranted. We have to realize that the property tax is a problem without a doubt. I have no question about that. The thing that we have to realize, though, is that the personal income tax, as it's been cut overtime, can be a solution to this problem. We need to relieve the 206 ; 1 0 A206 JOiNT BUDGET HEARING - ECO.DEVJTAXES FEBRUARY 11,2008 • pressure on property tax and put the pressure back on the income tax, because it's directly related to an individual's ability to pay. Furthermore, I would also say that the Empire Zon.e program, the Industrial Development Agency's program and the Brownfield cleanup program all are in desperate need of reform. We are spending billions and billions on these programs with very little impact and very little success. The Comptroller's report found that -. some 23 percent of businesses in the Empire Zone program were cutting jobs. That is not good economic development. So, that poses a significant problem as well and it is certainly something that needs to be addressed. The Governor has. made some inroads on this in his emergency regulations that he released East Wednesday around the Empire Zone program. We are in ll support of those and believe, as you can see in my testimony, more needs to be done and we have an eight-point reform plan that needs to be put in place in order to make these programs more accountable and transparent. And finally, I want to end by talking a little bit about something that was said a little earlier by ESDC Chairmen Foye and Gunderson in relation to some of the questioning that Assemblyman Weprin put on the table regarding the Entrepreneurial Assistance Program and the Communiiy Development Financial Institutions Program. The Governor has, unfortunately, chosen to eliminate about $800,000 from the Entrepreneurial Assistance Program budget 207 A207 JO! NT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 of$1.3 million. It's a program that helps people start and create their own businesses, everything from the inception of that business idea, on through getting that business financed. It is an extremely successful program averaging about $1,600 per job created. When you compare that to some of our other job creation programs, you can see that that's a really good bang for your buck. It also generates about $2 in tax revenue for every $1 that the State is spending on it. So, itis true win-win program. And much the same can also be said about the CDFI program. Last year, the Legislature createda stand-alone CDFI program which I thought made a lot of sense, but, unfortunately, didn't attach an appropriation to that. Again, that program funding also looks like it is going to be cut and or flatfunded,. So, I would strongly urge you to reconsi4er putting money back into these programs and, in effect, increasing the funding for these programs because they have proven to be so effective. And while folks have been here talking about small businesses, a business with fewer than 100 employees, not exactly what I would classif' as a small business, per Se, but I think we need to realize that businesses with fewer than ten employees make up about 95 percent of all the businesses in this State. They have a significant impact on the State economy and I don't think that we can ignore them within our economic development policies. So, thank you. CHAIRMAN JOHNSON: Thank you very much. 208 A208 JOINT BUDGET HEARiNG - ECO.DEV./TAXES FEBRUARY 11,2008 • ASSEMBLYMAN WEPRIN: That was a mouthful. MR. DEUTSCH I talk fast. CHAIRMAN JOHNSON: Questions? ASSEMBLYMAN WEPRIN: No questions. CHAIRMAN JOHNSON: We have about 11 more people to testify, so we ask everyone to follow the example of Mr. Deutsch and take three or four minutes and then present your statement. Daniel Murphy, President of New York City Hospitality and Tourism Association. MR. DANIEL C. MURPHY: Thank you, Chairman Johnson and members of the Committee, in the spirit of the hospitality and tourism industry, I shall, too, keep my remarks brief. I am the President of the New York State Hospitality and Tourism Association. Equally as important, I also serve as the administer for Tourism Industry Coalition, a group of 19 organizations throughout the State that have tourism as the core product of their reasons for being. For instance, the Convention of Visitor Bureaus, the Tourism Promotion Agencies, Restaurant Association, NYC & Company and those kinds of folks that all participate in tourism at the State level. So, first off I'd like to thank Governor Spitzer and the Empire State Development Team, led by Downstate Chair Pat Foye and Chairman Dan Gunderson, for allocating an additional $4 million for "I Love New York" tourism marketing fund in this year's 209 A209 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 Executive State budget. The additional funding brings a total allocation for the "I Love New York" program to total of $20 million. We urge the Legislature to maintain this increased funding level and make it a final part of the 2008-09 State budget. This increased funding is a necessary second step in building upon the $5 million increase for "I Love New York" in last year's budget. It will help New York to better compete with neighboring states that have been outperforming us when it comes to attracting that all-important leisure traveler. For example, Pennsylvania is currently spending more than $60 million on tourism promotion. So, most importantly, this request for additional funding comes with a return on investment for the State that no other industry can offer. This past December, the Governor announced the results of a new study on tourism done by the Philadelphia-based research firm Tourism Economics. This study shows just how significant tourism is to bringing dollars, economic activity and jobs into the state's economy. The results of the Spitzer Administration study showed tourism was a $46.6 billion industry, which was a 7.2 percent increase over 2005, and showing such strong economic growth for the third straight year, and accounted for 740,000 direct and indirect jobs, and contributed $2.7 billion in taxesat both the State and local level. Prior to the Governor's-study in 2006 we, the private industry sector, commissioned a research document that really verified the same results that the Governor made comment upon. And 210 A210 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 S the same results is that investing in tourism leads to an immediate increase in economic activity in all regions of the State. In copies of my testimony here today, youil see that all regions benefit from tourism. New York City, Long Island and the Hudson Valley together compromise nearly 80 percent of the New York State tourism sales. However, an important part of our research Was that our study was of the "I Love New York" budget portion. The study, which is attributed to the "I Love New York" portion, based on 2005 when "I Love New York" had a $15 million budget, that generated $1.6 billion in incremental spending, which in turn generated $107 million in State and local taxes. So, for every $1 spent promoting travel to New York, •. approximately $7 is returned to the State in the form of local and State taxes. The important part here is that all regions do benefit from "1 Love New York" efforts. In fact, 2.1 percent of all visitors spending in New York was driven by the "I Love New York" promotion. But the greatest impact - and this, I think, is an important part of our study - the greatest impact of"I Love New York" marketing is seen in the Upstate regions of the Adirondacks and the Thousand Islands. Nearly 12 percent of their tourism market is driven by the "I Love New York" marketing campaign. So, the studies have shown few industries benefit fastçr for consumer marketing than tourism. Fewer create more jobs per $1 million of economic activity and produce tax revenues at a higher rate. Therefore tourism marketing is truly a revenue generator 211 A211 JOINT BUDGET HEARING - ECO.DEV.IFAXES FEBRUARY 11,2008 for our great State and it's ultimately a consumer product Increased awareness of our rich and varied destinations will entice people to come here. Advertising and marketing, however, are the critical means to create the awareness and demand for our destinations. So, the tourism industry; through the efforts of this Administration, in cooperation with the Legislature, has gotten the ball rolling, once again, on pumping up tourism in our great State and restoring the heart in "I Love New York." Each county and region, we would also recommend that the matching funds program be reconsidered and increased so that each county and region draws different visitors from different regions of the U.S. because of product diversity and the matching funds program increases the opportunity to reach those visitor segments that compliments the "ILove New YOrk" program. 0 So in closing, New York State Hospitality and Tourism Association and the entire tourism industry is calling on the Executive and Legislature to fully support this increased funding request and allow the industry to grow and to better compete in the Northeast for that all-important leisure traveler and restore New York to its preeminent position as the number one destination in the United States while contributing an additional $28 million to our State's tax coffers this year. Thank you very much, CHAIRMAN JOHNSON: Thank you. We have a question at this time from Senator Stachowski. 212 . A212 - JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 [_M SENATOR STACFIOWSKI: I just wanted to ask you if you thought the reason that program worked so well in 2005, "I Love New York," was because Governor Pataki was in every single commercial? ASSEMBLYMAN WEPRIN: That was a rhetorical question, Mr. Murphy, MR. MURPHY; Senator, I appreciatethe question; however, I muss say that with the current administration putting $5 million last year and another $4 million this year, we have almost doubled what was out there. In the meantime, our competitors have outspent us and they are out-hustling us. So, I again, I thank you very much for your time today. ASSEMBLYMAN WEPRIN; Senator, could I ask one question? CHAIRMAN JOHNSON: One further question. ASSEMBLYMAN WEPR1N; Fm just curious, Mr. Murphy, how do you think that money should be spent? Do you think TV advertising is the key component, or is it print advertising? What do you think is the most successful? You talked about how successful the advertising campaign could be. MR. MURPHY: Thank you. I am impressed. I have been the President of our Association now going on 13 years and I have been actively involved in the hospitality industry here in this State for 25 years. This is first time that I have seen professionals, who are marketing professionals, that are running our agency that are 213 A2 13 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 responsible, and I would leave those decisions up to them. They, too, have reached out, though, to the industry starting back in this past winter where they went ahead and asked for industry input. We were there for the selection process for the new ad agency. So, we leave the marketing and where -- whether it be print advertising, TV, digitally, whatever, we leave that up to the professionals nOw. There is no learning curve there for these people because they have brought in, to their credit, professional marketing people. ASSEMBLYMAN WEPRIN: Thank you. CHAIRMAN JOHNSON: Thank you very much. The next person to speak to us is Duncan MacKenzie, New York State Association of Relators. ASSEMBLYMAN WEPRIN: I think they canceled, someone said. CHAIRMAN JOHNSON: They canceled? SENATOR STACHOWSKI Yes. CHAIRMAN JOHNSON: Okay. Michael Kelly, - Director of Governmental Affairs, is he here? No, good. Kirsten Keefe, Empire Justice Center. - ASSEMBLYMAN WEPRrN: Yes, we have a winner. MS. KIRSTEN KEEFE: Good afternoon. Thank you for the opportunity to testifi at today's hearing. My name is Kirsten - 214 A214 - JOiNT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 • Keefe and I am a senior attorney with the Empire Justice Center. Empire Justice is a non-profit legal services organization with offices in Albany, Rochester, White Plains and on Long Island. Our lawyers have been involved in the subprime mortgage lending crisis for over a decade. We represent individual homeowners who are targeted in unaffordable, overpriced and predatory loans. And we are engaged on the national level of mortgage reform initiatives, as well as on the State level as a steering committee member of New Yorker's for Responsible Lending, NYRL, a Statewide coalition of over 130 organizations working on economic justice issues. Since I moved back to New York from Pennsylvania over four years ago, I have come to believe that the real property tax burden in New York is as much, if not more so, of a hindrance on low-income homeownership as access to fair credit. However, the subprime lending and foreclose crisis is so severe and immediate and has the potential of harming our State's economy unlike anything since the Great Depression, that our testimony today will focus on components of the proposed budget regarding economic development. Investments made in other economic development sectors in the next year will come to naught if with we do not simultaneously and vigorously attack the foreclOsure crisis at hand. A preliminary analysis by Empire Justice of recently released numbers by the Federal Reserve Bank of New York shows that as of October, 2007 more than 28,000 mortgages that were originated in a single year, the year 2006, were more than 30 days past due in New York. 215 A215 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 Almost 14,000 mortgages were already in foreclosure. Worse though, the crisis is yet to peak in New York. Between April 1, 2008 and a year and a half, September 30, 2009 another almost 32,000 mortgage loans will reset into higher interest rates that could yield 20 percent more monthly payments. These are the very loans that are causing the national foreclosure crisis. The impact of forecloses on individual families is no doubt great; however, the subprime meltdown is a critical issue for our State economy and affects all of us, including those of us not in jeopardy of losing our homes. A report issued by the United States Conference of Mayors in November, 2007 predicts the New York City metropolitan area will lose almost $10.4 billion in gross metropolitan product in 2008 as a direct result of the foreclosure crisis. The predicted GNP loss for ten Upstate metropolitan areas is an additional $2.4 billion, totalling a nearly $13 billion loss for New York State in 2008 as a result of the foreclosure crisis. The bad news, however, does not end there. Additional State and local government fiscal losses will result from the subprime lending crisis if the State does not act quickly and decisively. First, local property tax growth typically generated from rising real estate values will decrease by $686 million in New York in the year 2008 without immediate and drastic intervention. Second, the impact on consumer spending as a result of the foreclosure crisis will reduce New York sales tax revenue by $97 million. Finally, New York stands to lose $47 million in 2008 in transfer tax revenue as 216 A216 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 • housing prices and housing sales go down. The impact of the current economic crisis on job growth in New York has not yet been calculated, though the U.S. Conference of Mayors reports that nationally, employers are becoming more cautious about hiring resulting in a deceleration of employment growth. Another cost tobe anticipated is the financial impact on community resources as New Yorkers move from houses to rental units. Our State is in dire need of more affordable housing properties, as realized by the Governor through his dedication of over $400 million in funding for the development of affordable housing throughout the State. The foreclosure crisis will only further strain this valuable resource and it is yet to be seen how New York will deal with the increased demand for rental housing. The Federal Reserve Barikof New York's numbers indicate that this is as much ofan Upstate as a Downstate problem when one compares the foreclosure numbers. Indeed, Long Island is in particular trouble where almost 8,500 mortgages were already 30 or more days past due as of October, 2007. However, almost 12,000 mortgages were delinquent in Upstate as of October, compared to about 16,000 in New York City and Long Island combined. As mentioned above, New York is not at the apex of the problem. Almost 32,000 mortgages with adjustable rates Statewide are set to reset into higher interest rates between April 1st and September 30, 2009. The impact of these numbers on New York City neighborhoods will be huge. The impact on Upstate cities could 217 A217 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 be devastating. In many communities across Upstate New York with stagnant populations and economies, there is already a widespread vacancy problem. An epidemic of foreclosures will ultimately perpetuate the cycle of disinvestment we have already observed and will further undermine State and local efforts to revive our struggling towns and downtowns and get properties back on the tax roles. Even in light of this grim Outlook, New York is actually in a better position than many states to curb the devastation if immediate investment is provided. New York, first of all, has the benefit of learning from what is already happening in states such as California, Colorado, Oklahoma and Ohio. The more recent waive of adjustable rate mortgages, known as ARM's, with exploding interest rates has not yet adjusted in New York. New, York also has a relatively lower number ofARM's than other states. This is not to say, by any means, unfortunately, that New York is not facing a crisis. Rather, we believe that in New York, at least, the crisis can be contained with a relatively limited amount of upfront investment, but it must come now. The Federal Reserve Bank of New York data, limited in that it only studies Than originated in the single year of 2006 that are now delinquent, is very instrumental in that it show's us real trends in New York. For example, attached to my testimony is a map of Long Island which illustrates the most intense pockets of subprime loans and predicts the areas that will be hit the worst. Empire Justice is developing Statewide maps that similarly show hot spots of bad 218 A218 JOINT BUDGET HEARING -ECO.DEV./TAXES FEBRUARY 11,2008 • loans. If we target these areas with intense relief, foreclosures can become a manageable crisis and we can prevent some of the economic predictions expressed in the U.S. Conference of Mayor report. If we fail to deal with these hot spots now, however, New York will inevitably experience extreme and perhaps irreversible problems in these communities. • Our recommendations are three. First, create a Statewide home retention loan rescue product. Attempts to engage investors, lenders and servicers to provide voluntary modifications and assistance to borrowers have largely failed. They are dragging their feet and timing is too critical to wait for the private sector to act voluntarily. Thousands of New York homeowners would be able to afford their homes if they can be refinanced into loans with prime rates. The only way that New York can limit the expected almost $14 billion loss from foreclosures in the next year is to create a fund to enable homeowners to get out of the onerous loan terms trapping them. Empire Justice supports the Assembly's proposal to create a $150 million fund. While we do not yet know the details, we urge the Governor, along with the Legislature, to create a program that would either purchase mortgages wholesale and then modify the terms and/or a fund that would allow homeowners to refinance out of their existing mortgages. This measure, with increased funding, would directly and immediately allow thousands of New Yorkers to remain in their homes. Such investment would revitalize our State economy 219 A219 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 in other ways by reducing monthly mortgage payments and giving New Yorkers more disposable income, thus providing an economic stimulus for our State by generating spending on our local economies. A significant number of homeowners would also benefit from a State-funded program that would provide small grants or loans to allow them to negotiate better loan terms and/or repayment plans with their lenders. Here in the Capital Region, as part of our home save initiative, a small grant fund of this sort has proven to .be very effective in preventing foreclosures. Our second recommendation is to increase State funding for foreclosure prevention and default counseling and legal services. Successful models across the State have proven that with appropriate one-on-one assistance from counselors, attorneys and • other advocates, borrowers are more than likely to retain their homes and avoid foreclosure. We support the Assembly's proposal to provide $30 million in funding for housing counseling and legal services. The Governor has already provided $2 million in matching funds for housing counseling through the Banking Department. The funding proposed by the Assembly would build upon the Governor's initial investment as well as create legal services resources for homeowners. Not only is money needed for agencies to hire staff, but funding must be allocated for training, as well as for ongoing support to enable counselors and, lawyers to adequately help homeowners. Empire Justice urges the State to increase resources and, one, create a dedicated State funding source to provide 220 A220 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11, 2008 • sustainable funding for high-quality pre-purchased counseling services across New York. Seèondly, to expand foreclosure prevention services to aid troubled borrowers and, third, provide funding for non-profit, civil legal services, including dedicated funds for civil legal services for training and support, as well as for direct services, Our final recommendation is to invest money to research and implement programs that are most effective in reaching homeowners: The few mortgage lenders and servicers which are making sincere efforts to reach borrowers in trouble report poor success. Our experience similarly shows that homeowners in loans that they cannot afford or in loans that are about to reset are distrustful of their lenders and reluctant for whatever reasons to reach out to them for assistance. We recOmmend that the State research, whether through focus groups, surveys or other means, ways in which to best reach homeowners in trouble and then implement those programs immediately. I should note that New Yorkers for Responsible Lending supports budget proposals such as these and will submit written testimony. Much more is needed, including stronger regulation of the financial services industry, so that less money is sucked out of oar economy by lenders. However, the immediate allocation of resources to help individuals and families that are struggling to stay in their homes is thecritical first step that must be taken. We urge you to work with the Governor to take that step now. Empire Justice and the. over 130 members of NYRL stand ready to do 221 A221 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 whatever we can to help you make it happen. Thank you. CHAIRMAN JOHNSON: Thank you. It's very S interesting and we had a program like that going on on Long Island right now, but that was for people in the normal economy who get behind in their mortgage. But, with the situation which is evolving now in the economy, I think it takes a lot more than counseling, you know. It takes jobs for those people and the banks to back off a little. The banks have enough trouble of their own. They are not going to back off too much on these mortgages. So, ve have got a real problem. But thank you for coming up with some thought anyhow. Thank you very much. MS. KEEFE: Thank you. CHAIRMAN JOHNSON: David Hochman, Business Incubator Association of New York State. We have to get back to our three or four minutes if you don't mind, Mr. Hochman. Thank you very much. We are getting real behind here. MR. DAVID HOCHMAN•: Good afternoon, Mr. Chairman, members of the Committee. Thank you for allowing me to testili. My name is David Hochman. I am the founding Executive Director of the Business Incubator Association. We were formed just a couple of years ago and now represent 30 organizations operating or planning 38 different business incUbator programs across the State, fromBuffalo to Long Island, from the North Country to Brooklyn and 31 Assembly Districts, 23 Senate Districts and nearly every 222 A222 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 . Congressional District. Our member organizations are very diverse; half areaffihiated with universities, SUNY, CUNY, the independent colleges. Many are operated by independent non-profit economic development entities, some are affiliated with a county government, others with a private sector chamber. One actually union affiliated; two government affiliated and three for-profit. I am here to applaud the use of incubator-related vocabulary in the Executive Budget and, specifically, in the agency narratives of Empire State and NYSTAR. But I am also asking the Legislature to define incubator-specific programmatic funding in the budget so these agencies have the resources and mandate to work with us to improve the quality, sustainability and accountability of services Statewide. I am going to skip a section of my written testimony for you. New York State has a significant number of business incubators and many are quite excellent, but State support has been sporadic, generally for facilities construction rather than programmatic improvements, and often dependent on the goodwill of'individual members of the Legislature rather than guided by programs managed by our economic development agencies. Without programmatic support, quality would be less than its flll potential from the perspective of our tenants. Running an incubator that delivers valuable business advice and support to its tenants is difficult and almost impossible without some kind of subsidy. In the non-profit and educational 223 A223 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 worlds, incubators work best when embedded in rich sources of business support, such as business school entrepreneurial centers or well-staffed small business development centers. But what if you are not able to borrow expertise in this way? Where do you turn for the truly modest support that will allow your tenants to achieve their full potential and remain satisfied corporate citizens? To help you assess those questions, I want to highlight for you what is known to be true about business incubators. I am drawing from A Guide to Business Incubation for New York State Elected Officials, prepared for us by Professor David Lewis of UAlbany, an academic expert on incubation. He accepted no money from us and had complete editorial independence. We are actually lookIng for corporate sponsors so we can put a copy of this into the hands of every member of the Legislature. Here are some of his findings in highlight: In six academic studies, he reviewed business survival rates and incubators range from 68 to 87 percent. Those of you who know small business know that's an amazing statistic. So, business incubators seem to be effective in improving survival rates. In the same six studies, between 76 and 85 percent of graduates, incubator graduates, remained in the same region after graduation. So, business incubators also seem effective at making their graduates to stick to the regions where they got started. A slightly broader set of studies showed public sector cost per job ranging from $3,000 to $1 1,300. So, publically-assisted incubators seem to be very cost effective on a per-job basis, compared 224 A224 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 • with recruitment-only strategies. I am not the only witness to have made that point. There are still questions we don't know about, but overall the data are very good. So, what do we want from the budget? Now, we would never say that the State's entire economic development strategy should rest on incubation alone. Our members house several hundred companies employing 1,000 or 2,000 New Yorkers at most at any one time. But among these companies are several young public companies, venture-capital backed startups and many other good businesses that are all welcome contributors to their regional economies. As they graduate, hopefully they stick and the effects add up. Incubation needs to be one acknowledged component of the State's economic development strategy and to be credible, it must be guided and held accountable by programs that are actually funded. We have worked well with both NYSTAR and Empire State across the transmission in administrations, but neither one has explicit budgets to develop and strengthen the State's incubation system. We believe it's essential for either or both agency to have the budget resources to work with us to improve the system and to surround it with the resources that improve the chances of our tenants for successful graduation into their communities. For examplç, there is demand, but not budget among our members, to put on more pre-seed workshops to identily 9 promising ideas by local entrepreneurs, scientists and engineers. Or 225 A225 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 with funds available, our association could help by serving as an intermediary with our national level professional society to bring in tiger teams that can audit our incubators for best practices and to bring in some of the really fine national workshops to New York State to establish our deserved reputation for innovation in this sphere. With budget available, we could work with the agencies on making awards that acknowledge incubator company of the year, and other ways to celebrate these successes. We would also like to collect good data that the State can use to diagnosis problems and progress. We want to help guide the Stat&s evolving mechanism for seed-stage equity financing to give special priorities to companies based in incubators where chances of success are higher and we would like to produce materials that can market our incubators globally for inward investment by small and mid-size companies based overseas. All of this will take mandate and budget. That's what we 'ask you to consider. Thank you, Mr. Chairman, I would be happy to answer any questions. CHAIRMAN JOHNSON: Thank you very much. No questions. Reverend Victor Cptlier, New York State Thruway Alliance. What do preachers know about roads? Let's hear from them. Is he here? ' SENATOR STACHOWSKI: No. CHAIRMAN JOHNSON: GuessTnot. 226 A226 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 . SENATOR STACHOWSKI: Next. CHAIRMAN JOHNSON: Next. Scott Brandi, Ski Areas of New York. MR. SCOTT BRANDF Good afternoon, members of the Committee. My name is Scott Brandi. I'm the President of; Ski Areas of New York, Inc. We are the trade organization that represents the ski industry in New York State. Like Dan Murphy who spoke before, I'm also a member of the Tourism Industry Coalition. I appreciate the opportunity to present some of the challenges of the ski industry, in New York State. First, I would like to give you some facts. We are a part of, as Dan Murphy said, a. $43 billion New York State tourism industry. Of this, about $4 billion generates from recreation. The ski industry itself generates approximately $1 billion of recreation tourism sales in Upstate New York on an annual basis. This revenue is generated mostly during the winter months. In many regions, the ski industry is the only game in town when it comes to tourism. Many communities throughout the State depend upon the tourism dollars that we generate from December to March. 1 wonder how many people know the answer to the question: What state in this nation has the most ski areas? The answer is New York. With the opening of the North Creek Snow Bowl this winter, we have 44 ski areas in our great State. And it's interesting to note that they are spread out pretty evenly throughout the regions from the Hudson Valley to the Adirondacks, to central 227 A227 JOINT BUDGET HEARING - ECO.DEV.ITAXES FEBRUARY 11, 2008 New York, the Allegany region, Buffalo; there are ski areas everywhere surrounding every community. Some facts about our industry. We employ over 10,000 New York State residents. Our annua' payroll is over $50 million; most of it when we need it the most in the winter in Upstate New York. We generate over 4 million skier visits per year and the economic impact of these skiers on Upstate New York is over $1 billion spent. Every skier that goes to an Upstate community spends, on average, per day, $100 outside of the money they spend directly to ski. Sales taxes paid are over $4.8 million, property taxes over $4 miliion. It's a fact that New York has the second highest percentage of residents who ski, but yet we are fifth in the nation in skier visits. We are behind California, Colorado, Vermont and Utah. We export skiers and their cash to New England every day in the winter. And this speaks to what Dan Murphy was talking about, about our support of the "I Love New York" budget presented by the Governor. I just came from a three-day event in New York City. We had, in Union Square Park in Manhattan, over 8,000 people coming to one of our "1 Love New York" events. And in Central Park where we tried to make snow but it was too warm, we had over 20,000 people at an "1 Love New York" event. . So, we are getting a fair amount of support. We would like to keep that going. We want to overtake Vermont in skier visits. But I am also here to report that we are an industry with a lot of 228 A228 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 • challenges and trouble. We are faced with many unique problems. Senator Betty Little and Assemblymember RoAnn Destito have introduced Bill Nos. 2342 and 5392. These bills seek to exempt • energy-efficient snow-making eqUipment, ski lift equipment and snow grooming equipment and energy use to make snow at ski areas from sales and compensating use tax in our State. Other states with significant ski resort operations have passed similar legislation: Wisconsin, Minnesota, Utah and Colorado. This bill has a modest impact of about $1 million in the State budget. We believe the upgrades to the physical plants, the purchase and use of more energy-efficient equipment will allow us to better deal with the challenges confronting us and help us to remain a viable part of the • New York State economy. The return on investment to the State, I think, will be multiples based on the improvements, based on the additional taxes and revenues through tourism. Some of the challenges we are facing that are significant, the most important one right now is New York State is unique in that we have threé publicly operated ski resorts that are in direct competition with the private-sector. These ski areas do not incur costs such as insurance, some taxes, administrative costs and some labor. These costs are estimated to be between $2- and $3 million per year, incurred by a like-size private resort. The private resort would have to sell over $40,000 full-price lift tickets to overcome, this inequity. The sales and compensating use taxes outlined in the bills I mentioned before are not paid by the public ski 229 - - A229 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 areas. We are looking to try to level the playing field for the ski areas - a little bit. New York State ski areas, many of them opened in the early '60s, we have aging infrastructure, old lit components, old pumping systems and compressor systems. They need to be upgraded. The elimination of the sales tax to purchase new energy-efficient equipment will help our ski areas to remain competitive and viable. We really need that. The rising cost of power and fuel, again, that points towards the energy efficiency of the new equipment. It's environmentally friendly. It will help us operate and keep our profitability. The last comment I want to make about the ski industry is we contribute greatly to the quality of life in our cities and small towns throughout our State. Our learn to ski programs get our children out of the house, away from the video games. We provide, through my association, a Statewide learn to ski program called "Four for Free" where all fourth graders in the State ski for free; it includes lessons and lift tickets. Something we provide for free and it is paid for by the ski areas. So, I am here asking for your support of our bills, to provide some tax relief to the ski industries like other states have done, recognize the importance we play in the role in Upstate New, York to generating tourism revenue and the quality of Life. And also, I just want to put in, again, my support of the Governor's budget for "1 Love New York." Thank you very much. 0 230 .A230 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 • CHAIRMAN JOHNSON. Thank you very much. CHAIRMAN FARRELL: Thank you. Susan Wieler, Citizens' Committee for Children. MS. SUSAN WIELER: Good afternoon. CHAIRMAN FARRELL: Good afternoon. MS. WIELER:, My name is Susan Wieler and I am the Senior Policy Associate for asset building and community development at the Citizens' Committee for Children of New York. I would like to thank Chairman Johnson and the members of the Committees for the opportunity to testify on the budget for this fiscal year. . 'Citizens' Committee for Children is a 64-year-old child advocacy organization dedicated to ensuring New York's children are healthy, housed, educated and safe. CCC has convened and formed and mobilized New Yorkers for over six 'decades to make New York a better place for children. Our approach to child advocacy is fact-based and balanced, offering common-sense solutions to the complex problems affecting children. We applaud the Governor for developing a budget that seeks to maintain and improve upàn many. essential services for children and families. Given the deficit, the effort to' avoid reducing supports for families and children is laudable. However, CCC is concerned that there are numerous proposals related to preschool special ed, public assistance, youth detention, municipal aid and education aid that will either shift costs, reduce State aid or eliminate 231 A231 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 State aid completely, and in so doing, negatively impact localities, especially New York City and the children who live there. As all localities, including the City of New York, are experiencing the effects of an economic slowdown, we are extremely concerned that cost shifts of this magnitude proposed will force localities to cut essential services. With that said, I will turn my attention to the budget proposals pertaining to economic deyelopment and taxes. We applaud the Executive Budget proposal to create a housing opportunity fund; however, we are concerned that much of the revenue for the fund is contingent on the sale of property at the Javits site, a one-time source of revenue. The affordable housing crisis across the State requires nothing less than a housing trust fund with a permanent and dependable source of funds. A true trust fund financing structure would assure that housing investments by government are not threatened by budget constraints or fiscal crisis in the years to come. In addition to capital programs like the Housing Opportunity Fund, tax relief can also be us used to increase housing security for families. Unfortunately, the families that struggle most to maintain stable housing benefit lease from tax relief programs. In New York State, 47 percent of all households are renters.' In New York City, 67 percent Ôfãll households are renters and nearly half of all New York State renters spend more than 30 percent of their income on rent. While these households don't pay property taxes, their rents are directly impacted as landlords pass along the cost of 232 A232 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 rising property taxes in the form of rent increases. As changes to the STAR program are contemplated in this year's budget negotiation process, tax equity for renters should be considered. Thank you for the opportunity to testify to the Executive Budget for fiscal year 2008-2009. I would be happy to answer any questions. CHAIRMAN FARRELL: Thank you veiy much. Any questions? Thank you. Anne Ackerson, Executive Director, Museum Association of New York. MS. ANNE ACKERSON: Good afternoon. CHAiRMAN FARRELL: Good afternoon. MS. ACKERSON: You are receiving my testimony and statistical fact sheet that helps to put the museum community, I think, in context regarding the kinds of contributions that it makes, both educationally and economically to the State of New York. My name is Anne Ackerson and I am the Director of the Museum Association of New York, a member-based service and advocacy organization serving the State's diverse museums and heritage organizations. New York's 1,900 museums and historic sites are economic and educational resources that pump more than $1 billion into the State's economy every year, primarily in the form of wages, 233 ( A233 JOINT BUDGET HEARING - ECO.DEV.ITAXES FEBRUARY 11,2008 taxes and the purchases of goods and services. While New York State's museums and heritage organizations are critical to the State's tourism economy and, indeed, the Museum Association of New York is also a participant in the Tourism Industry Coalition, my remarks will specifically address the New York State Arts and Cultural Capital Grants Program. We at the Museum Association applaud the Empire State Development Corporation and the Governor for recognizing cultural institutions of all types and museums and heritage organizations, in particular, as pivotal resources on which to build economic revitalization efforts everywhere across the State. We were heartened to hear ESDC testify at the Division of the Budget hearing last October on capital funding, that they saw capital funding of arts and cultural organizations as part of the whole solution to reviving Upstate New York. And they specifically pointed to the fact that historic sites are anchors in many neighborhoods in communities across the State and that cultural amenities could serve as magnets to revitalize downtowns. Museums across the State were further encouraged by Governor Spitzer last month in his Upstate revitalization speech about his plan to connect cultural facilities, such as museums and historic sites, to affordable housing projects, job creation, retail development and educational and recreational opportunities. The Governor transformed this verbal acknowledgement of the centrality of museums and cultural institutions to the economic vitality of the State 234 A234 JOINTBUDGET HEARING - ECO.DEVITAXES FEBRUARY 11,2008 • into a concrete' fiscal commitment by proposing $40 million in new capital funding in the ESDC budget called the New York State Arts and Cultural Capital Grants Program. This is a precedent-setting initiative. Of the total amount, $12 million is reserved for Upstate communities. You should know that museums and heritage organizations undertake their economic development missions with very little funding from the State and without any 'funding from the State Education Department, their primary incorporator and regulator. Unlike schools and libraries and public broadcasting, which together will receive in excess of$1 billion in funding next year from the State Education Department, chartered museums and heritage organizations are incorporated and regulated by the Department, but receive no aid • from it. The $40 million incapital funds from ESDC is the first time in my memory that the Executive Budget included a lump sum appropriation focused specifically on cultural institutions. For this reason, it is very important to us that the Legislature work with the Executive Branch and the New York State Counsel on the Arts andthe Museum Association of New York to develop criteria and to open a transparent process for distributing,the $40 million lump sum. Thank you very much. CHAIRMAN FARRELL: Thank you. • David Culbertson, member and President of National Pipe and Plastic Inc. Unshackle Upstate. • Did the ankle break before the shackle or after? 235 I A235 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2608 MR. DAVID CULBERTSON: I want to tell people that was the 150-meter ski jump, but nobody believes me yet. CHAIRMAN FARRELL: Can't resist, excuse me. MR. CULBERTSON: Chairman Farrell, our own Assemblyman Clifford Crouch, members of the Joint Fiscal Committees, thank you for the opportunity to speak today. My name is Dave Culbertson, President of National Pipe and Plastics, a manufacturer of PVC pipe for residential, agricultural, commercial, municipal and export markets since 1970. We are the largest PVC pipe producer in the Northeast quadrant of the United States and one of the largest in North America. We have two manufacturing facilities, one in Greensboro, North Carolina and the other in one of our own Southern Tier communities, Vestal, New York; 175 employees in New York. I appear today as a member of Unshackle Upstate, a bi-partisan coalition of over 65 business and trade organizations - representing upwards of 32,000 companies and employing more than one mU lion people with a goal of achieving reforms in Albany that make Upstate a stronger place to do business. I am also here as a resident of Upstate New York, with children and grandchildren living here, and a business owner faced with the challenges and opportunities that go along with any business. I am currently spending $3 million on three new product lines that would expand our business in New York and bring new jobs into Upstate. As we analyze the cost and benefits of 236 . A236 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 • expansion, we have to compare our two locations. Among the factors we have to consider are an enegy cost that is two-and-a-half times higher in New York than North Carolina, a Workers' Compensation cost here that is still more than double the cost in North Carolina, even after the improvements made in New York last year, and a higher tax burden in New York. Where we ultimately decide to grow these new markets will depend on whether New York makes the necessary changes to create a more competitive business climate in Upstate. Overall, Unshackle Upstate has mixed feelings on the Executive Budget. There are some great initiatives that we enthusiastically applaud, a few negative aspects that we firmly oppose and certain key elements that are noticeably missing, but which we believe are essential to revitalize the Upstate economy. Let me begin with the positive aspects of the Executive Budget. Unshackle Upstate supports the Governor's proposed Upstate revitalization fund, particularly the $350 million Upstate Regional Blueprint Fund. An economic infusion of this magnitude will go a long way toward jump-starting the Upstate economy and creating mch needed jobs all across Upstate. Additionally, we fully support the creation of the New York State Commission on Property Tax Relief to examine the root causes of high property taxes, identify ways to make the State's property tax system fairer and develop a fair and effective school property tax cap to hold the line on property tax growth. Unshackle Upstate is also pleased with the new 237 - A237 1 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 brownfields legislation that was introduced as part of the Executive Budget. Developing more shovel-ready sites and an improved brownfield clean up program is a key component of Unshackle Upstate's economic development agenda. Over the past few months,. we have had positive discussions with Chairman Gunderson and Commissioner Grannis on brownfields reform and we are pleased that many of our suggestions were included in the new legislation. However, to be successful we still believe further amendments are needed. Finally, we support efforts in the Executive Budget to reduce energy costs for Upstate businesses, including enactment of a new Article X siting law and offering eligible companies receiving low-cost power the opportunity to receive contracts up to seven years in length so that businesses will be able to count on lower electricity costs for years to come. Now I need to address what Unshackle believes are the missing pieces in the Executive Budget: Tax relief and business cost reduction. Unshackle believes that significant tax relief and business cost reduction are essential components of the Upstate revitalization effort. In order to generate sustained economic growth and job creation across Upstate as a region, the State must provide real structural reforms to the Upstate.economy in addition to capital investment. While we welcome capital investment for Upstate through the new revitalization fund, we must point out that there is little, if any, tax relief for Upstate businesses in the budget proposal. 238 . A238 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 o In our view, a better balance needs to be struck between capital investment and long-term structural tax relief for Upstate. Taken together, the Upstate Revitalization Fund and structural tax relief would provide a solid foundation for a long-term economic growth and job creation across the region. As part of our 2008 agenda, Unshackle has proposed the elimination of corporate franchise tax 9-A for Upstate businesses over a five-year period. Eliminating the corporate franchise tax would be extremely helpflul to Upstate in two ways: First, it would provide substantial and desperately needed tax relief to existing Upstate businesses and second, it would help make Upstate a far more attractive site for new businesses looking to relocate. Indeed, if the State eliminated the corporate franchise tax for Upstate, then the region would become one of only places in America with zero State corporate tax on businesses. We can think of no better way to put Upstate on the map again then to eliminate all State corporate taxes in Upstate. We recognize and applaud the efforts of the Senate's Upstate Now plan in the area of structural reforms such as eliminating business taxes on manufacturing in New York State, providing STAR property tax rebates to small businesses that employ fewer than 20 employees. We also recognize that the Assembly has, likewise, proposed eliminating business taxes on manufacturing and extending STAR to small businesses in separate bills spOnsored by Assemblymembers Schimminger and Koon. Unshackle Upstate's 239 A239 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 2008 agenda proposed similar initiatives and we hope that inthe next six weeks we can have an open discussion and dialogue on instituting a compromise on much needed structural Upstate tax reform. In terms of lowering the cost of doing business, last year's Workers' Compensation reform appears to certainly be a first step in cost reduction for Upstate businesses. However, the Executive Budget does not contain any similar cost reduction initiatives for the coming year, aside from the energy relief measures noted above.. In order to create sustained, long-term growth Upstate, the State must continue to deliver significant cost reduction reforms for Upstate businesses each year, such as Scaffold Law reform in 2008. We would be remiss if we did not identi1y some of the negative components in this year's Executive Budget that • Unshackle Upstate firmly opposes. The more than 5 percent increase in total spending in the budget proposal up to $124.3 billion is extremely alarming. The various member organizations that form Unshackle Upstate are very concerned that New York's current rate of spending is destined to cause serious financial problems for the State in the near and long-term future. There is also a serious concern about the various tax loophole closers, increased health èare taxes and fee and penalty increases in the Executive Budget. We continue to examine these revenue actions to determine their impact on Upstate businesses and consumers, but we do object to the fact that unlike last year, none of the savings from the loophole closers are being utilized for 240 A240 JOINT BUDGET HEARING - ECO.DEV.ITAXES FEBRUARY 11,2008 • across-the-board tax relief for businesses. Unshackle Upstate maintains its strong opposition to the Wicks Law reform legislation contained in the Executive Budget because it would, one, disproportionately benefit Downstate communities when Upstate is the region most in need of relief and two, unfairly mandate the use of project labor agreements, PLAs, in certain cases and require contractors, on work over $3 million, to have apprenticeship programs for three years. In closing, Unshackle Upstate fully recognizes the extreme difficultly in crafting this year's enacted State budget; however, any further delay in efforts to remediate the Upstate economy will have dire consequences, further jeopardizing its,return to the economic prominence the area once held decades ago. It is essential for the generations that follow us that we act now to correct the region's fragile financial status. I appreciate the opportunity to share Unshackle Upstate's priorities with you this afternoon and would be happy to respond to any questions you may have. Thank you. CHAIRMAN FARRELL: Thank you very much. Questions? Yes, Assemblyman Crouch. ASSEMBLYMAN CROUCH:' Dave, thanks for coming today. I appreciate your comments. I have to agree with you 100 percent, as we've talked a number of different times. You are here offering good, solid suggestions, not having a hand out for 241 A241 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 money. You know, I think that's very positive. So, I can't disagree with you. You have got some good suggestions and we'll see what we can do. MR. CULBERTSON: Thank you, Assemblyman Crouch, I appreciate it. Thank you all. ASSEMBLYMAN CROUCH: Sorry about your leg. CHAIRMAN FARRELL: Thank you, and watch those shackles James Colvin, President, New York Association of Convenience Stores. If can you stay within the five minutes it would be appreciated. MR. JAMES COLVIN: Chairman Johnson, Chairman Farrell, Committee members and staff, thanks for the opportunity to speak with you today. Our association represents more than 7,000 neighborhood mini-marts and convenience stores from Hamburg to Hempstead that employ 60,000 New Yorkers and serve 6 million customers a day. Many of our stores are reguiated by the Department of Taxation, the Department of Environmental • Conservation, the Liquor Authority and the Lottery Division. We are so relieved that there aren't any tax increases for small businesses in this budget that Governor Spitzer has proposed. Of course, there are a few surcharges, fee increases, penalty increases, tax reclassificationsaid reforms, and combined, they would add up to at least $189 million a year in additional costs for retail stores and their customers. But thank heaven, no new taxes. 242 A242 JO1NTBUDGET HEARiNG - ECO.DEV./TAXES FEBRUARY 11,2008 • Some examples of these proposed not-a-taxes: $15 million from reclassifying Smirnoff Ice and other flavored malt beverages, which we sell to adult customers, as it would be classified as liquor instead of beer for taxation purposes, and the result would be a jump of 2,2 10 percent in the tax rate on those products. $3.6 million from reclassifying little cigars, like Swisher Sweets and Winchester, which we sell to adult customers, as cigarettes instead of cigars and that would increase the tax from 37 percent of the wholesale value to $1.50 excise tax for packof 20. In both cases, New York City could impose its own higher surcharge on top of that. $25 million rising to $100 million when fully effective from expanding the Bottle Bill to non-carbonated beverages. This would force additional mounds of empty containers down the throats of small food markets that have no place to store them and no way to prevent them from compromising sanitation. Over $1 million from tripling or quadrupling the maximum fines for violating Agriculture and Markets Law or regulations, including food service inspections. Taken together, Governor Spitzer is saying let's flood mini-marts with unrinsed beverage containers that will pile up in their back room, attracting bugs and bacteria, and then let's send in Agriculture and Markets inspectors to write them up for poor sanitation and fine them three or four times as much as we would have last year for the same violation. And lastly, consolidate and, quote, "reform" all State and local taxes on petroleum products to create a 243 A243 JOINT BUDGET HEARING - ECO.DEV/TAXES FEBRUARY 11,2008 new, unified State and local excise tax on motor fuel. Consolidation, which would eliminate costly and duplicative paperwork for us and the Tax Department, is long overdue and we commend the Administration for advancing the idea. Yet somehow, they found a way to do it that would extract $13 million more in tax revenue from the motoring public next year and $56 million the year thereafter. In our opinion, the Legislature should reject all these revenue enhancements. None is warranted, none is desirable. No matter what the Governor calls them, all would have the same effect of tax increases. Now, when you start the budget negotiations, the Second Floor is going to tell you all of these highly-creative revenue items are essential to the survival of the State of New York in the next budget cycle; that no part of this $189.million may be removed without pushing our State toward bankruptcy. And yet, last November, Mr. Spitzer's budget office revealed that the Administration had decided to forgo $200 million in anticipated new revenue that they had placed in the current budget. That was supposed to come from the lawful collection of taxes on the vast quantities of gas and cigarettes that Native American retailers sell to non-Native American New Yorkers. - So, $189 million in new taxes and fees and fines and reforms and surcharges that will do nothing but suck the life out of an industry already crippled by the State's tax policy the Spitzer Administration considers absolutely imperative. But $200 million in new revenue from enforcing existing Tax Law that they have blatantly 244 A244 JOINT BUDGET HEARING - ECO.DEV.ITAXES FEBRUARY 11,2008 • refused to implement, they consider that optional, expendable, no big deal. No big deal? It's an all-out, full-scale cigarette and motor fuel tax evasion epidemic and it costs licensed tax collecting retailers $1 billion or more in gross sales every year and costs our State at least $500 million a year in lost tax revenue. It costs the average New York household $100 a year in taxes to spbsidize other New Yorkers' tax-free purchases of cigarettes from Native American outlets. Compelling people to quit smoking by making it too expensive through taxation is a wonderful idea, but it can never work as long as it's easy for smokers to routinely buy cigarettes without paying the tax. No big deal? The fundamental rule of law is at stake. Since when does any Governor get to pick and chose which duly enacted laws he will or won't enforce? Now, with all due respect to • the new Tax Commissioner, his prepared remarks on this issue earlier this afternoon were disingenuous. He stated that the Department is enjoined from enforcing the Tax Collection Law. in reality, the Department has chosen to enjoin itself. It is no more enjoined from • enforcing this law than you are enjoined from walking out of this room whenever you wish. Last January in Buffalo, a State Supreme Court Judge issued a preliminary injunction barring the State of New York from enforcing the Cigarette Tax Collection Law until the Department, as required by statute, issues tax exemption coupons to the tribes to protect their exemption on sales to other members of the tribe. The remedy was simple and obvious. The Department, at its will, could go 245 A245 I' JOINT BUDGET HEARING - ECO.DEV/TAXES FEBRUARY 11,2008 ahead an implement the law by issuing the tax exemption coupons to the tribes. Indeed, Governor Spitzer said as much the day after the ruling. It is sort of like the character Otis on the old "Andy Griffith" show; he is in the jail in the local sheriffs department, but any time he wants to he can reach through the bars and grab the key and let himself out. In the case of the Tax Department, they have the key but they elect not to use it. The shackles are imaginary and they are a convenient illusion. But for C-store operators and their suppliers, the shackles are painfully real. For 20 years, they have had to do business with one hand tied behind their back by the State of New York, trying to keep up with steadily increasing costs arid more regulations from the State, while selling less and less because more and more of their customers desert them for tax-free outlets. One casualty of the cumulative economic harm lies in Hamburg, New York, in Senator Stachowski's district. On January 11th, last month, the 48 employees of E.P. Kirst & Sons, a century-old, fourth-generation family business, were told the firm was closing permanently. Kirst was a wholesale distributor and 70 percent of his trade had been supplying licensed, tax-collecting convenience stores in Western New York with tobacco. Because Governor Pataki and now Governor Spitzer refuse to enforce the law to restore a level playing field between Indian and non-Indian retailers and suppliers, thousands of smokers abandoned those convenience stores to buy cheaper, tax-free products at nearby Indian outlets. Kirst's sales 246 A246 a JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 volume plummeted, and finally, last month it reached the point of no return. Licensed mom-and-pop retailers and wholesalers who dutifully collect taxes for the State of New York have a right to expect our State to ensure a level playing field. Taxpayers have a right to expect that taxation will be administered equitably. Citizens have a right to expect that constitutiona] duties will be carried out faithfully. Because the Governor and the Tax Department have turned their back on these principals, small stores and their suppliers are being forced to close or sell and this State, already $4 billion in the hole, continues to forfeit billions more in legitimate, desperately needed tax revenue. Here we are, more than a year after "Day One," when Governor Spitzer said everything would change, nothing has changed except we have a new Tax Commissioner who offers the same old excuses. E.P. Kirst and Sons has drowned and who knows how many more tax-collecting, family-run businesses are, right now, on the verge of collapse; betrayed by those who preachUpstate economic revitalization while serving as handmaidens to Upstate economic annihilation. Thank you very much. I would be glad to answer any questions. CHAIRMAN FARRELL: Questions? ASSEMBLYMAN HAYES: Mr. Calvin, just one quick question. The $200 million that was the amount that was put in 247 . - A247 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 the budget last'year by Governor Spitzer that was uncollected, is there, in your research on the budget, is there an amount that you have been able to identify that is in the budget this year? MR. CALViN: We can't find it. ASSEMBLYMAN HAYES: And what do you make of that? MR. CALVIN: We are told, secondhand, that he put the same $200 million in there. We can't find it. It is probably in there, but we just can can't find yet. I would add, Assemblyman, that we are undertaking a new economic analysis to determine exactly how much tax revenue the State of New York could collect in the next budget cycle and beyond if the Administration were to enforce this law. ASSEMBLYMAN HAYES: I would be very interested to see that study. Thank you. MR. COLVIN: It should be ready by the end of the month. Thank you. CHAIRMAN FARRELL: Amy Kramer, Vice President of Government Affairs, Credit Union League. MS. AMY KRAMER: Thank you. Distinguished members of the Senate and Assembly, Chairman Johnson, Chairman Farrell, Assemblyman Hayes, Senator Stachowski, thank you so much for letting me testify on behalf the New York State Credit Union League. Again, I'm Amy.Kramer. I represent the Credit Union League. It is a State trade association for credit unions representing 248 A248 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 • nearly 500 State and federally charted credit unions and their 4.2 million member owners in New York. As you know, not-for-profit credit unions are an important asset for New York's consumers. They employ over 11,000 and, again,, they serve 4.2 million consumers. At a time when many banks and other financial institutions are leaving areas oTthe State that aren't quite profitable enough, and they are also playing a role in the mortgage crisis and are consistently hiking consumer fees, credit unions continue to place serving their members as their highest priority. We request your action on two issues important to credit unions and their members: Mortgage parity for State-chartered credit unions .and also funding for the newly created New York State Community Development Financial Institutions Fund, which I know was referenced earlier. Regarding the mortgage parity issue, as you know, New York's 500 credit unions are not-for-profit financial institutions owned by the members who use their services. Credit unions may be chartered by the State of New York and supervised by the State Banking Department, or they can be chartered by federal law and supervised by the National Credit Union Administration in Washington. But all credit unions in New York are federally insured. • Today, we have 22 State-chartered credit unions and .478 federally-chartered credit unions doing business in the State, and under the current law, State-chartered credit unions are required to pay the special additional mortgage recording tax, while • 249 A249 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 federally-chartered credit unions do not. As not-for-profits, this tax to record mortgages is unfair, burdensome and puts the New York State Credit Union Charter at a disadvantage. State-chartered credit unions pay this tax whenever they record a mortgage and they can't pass it on to their members. This situation continues to present a significant financial disincentive for any credit union to select a State charter. Current federal credit unions, which might otherwise consider conversions to the State charter, are deterred by the additional cost of this tax. In June of 2007, the New York State Tax Department estimated that elimination of this tax, special additional mortgage recording tax, for State-chrtered credit unions resulted in lost revenue to the State of about $500,000 annually. Not too much, but it is a very, very important amount for State-chartered credit unions and the survival of the State Charter. Depending on which county records the mortgage, the tax is distributed to the State, SONYMA, the Metropolitan Commuter Transport District and the Niagara Frontier Transportation Authority, or just into the county's general fund. This Legislature has taken great steps to make legislative proposals to address the subprime mortgage crisis. Credit unions, both our State and federal charters, did not play a role in creating the mortgage crisis, but they are making significant contributions to support families who are in trouble with affordable financial services. Credit unions, as not-for-profits, grant responsible mortgages always with their members' ability to repay and long-term 250 A250 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 • financial health as a priority. Why, then, would we want to make it more costly for State-chartered credit unions to grant mortgages? The savings from this tax, these credit unions will grant more great mortgages, create jobs and expand financial services and investment in their communities. And we do have several bills out there sponsored by Assemblywoman Greene and Senator Farley to address the situation. The second issue I would like to comment on today is funding for the newly created New York State Community Development 'Financial Institutions Fund, or CDFI Fund. CDFIs are financial institutions, some of which are credit unions, with a special mission of serving underserved communities and people of modest means. They provide a range of affordable financial services and loans to consumers, homeowners, small and micro businesses and to community organizations financing affordable housing and community facilities. CDFIs specialize in making the type of loans that banks cannot or will not make, either because they don't have a presence in these low-income communities or because borrowers do not conform to conventional underwriting criteria or the loans are too small or considered risky. So, CDFI is an umbrella term to include community development credit unions - CDCUs -. community loan funds, venture capital funds, housing groups, community banks and others. CDFIs help low-income people build assets, manage debt, obtain financing to become productive stakeholders in the economy; 251 ' A251 , - 1 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 and these are the people most often neglected by mainstream financial institutions. 70 percent of CDFI clients are low-income; 76 percent are minorities and 58 percent are women. In 2007, Governor Spitzer signed legislation to create the framework for the first ever full-fledged CDFI fund-- I know Ron Deutsch was telling you about this as well. This fund, at the State - level, is to be administered by the Empire State Development Corp. Enactment of this legislation empowers the ESDC, which. already runs a small CDFI program for women and minority business lending, to begin developing a larger-scale program to attract substantial growth, capital to CDFIs across the State. But again, funding is needed. We urge your support for an initial appropriation of $5 million to the New York State CDFI fund, along with a separate combined appropriation of II .5 million for ESDCs women- and minority-owned business program. We know there is always budgetary constraints, but if direct funding is not available, we urge you to take a look at other New York State economic development programs that might be undersubscribed and ask that you reallocate the full $5 million requested for the New York State CDFI fund. Members of the Senate and Assembly, New York's credit unions applaud your leadership in holding these budget hearings - and staying here all day to let me speak - serving your communities and we appreciate your steadfast support of the credit union movement. Thank you. CHAIRMAN FARRELL: Thank you very much and 252 A252 JOINT BUDGET HEARING - ECO.DEVJTAXES FEBRUARY 11,2008 • thank you for adhering to the time limit. I appreciate it. John Henderson, President and CEO of High Falls Brewery. MR, MARK SORINI: Goodafternoon, Chairman Johnson, Chairman Farrell. This is actuaily Mark Sorini representing the Flavored Malt Beverage Coalition. I am here with Mr. Henderson from High Falls and because I need to catch a plane very soon, I took the bold step of stepping in and speaking first. Let me first say thank you for your long day here and for your patience in listening to a little bit about a very technical subject of beer this afternoon, but it is one of vital importance to the coalition members and, particularly, to several businesses here in New York, including High Falls Brewing Company. The coalition, which represents about three-quarters of the volume of flavored beer sold in the United States today; is puzzled why any State would propose punishing its consumers, its retailers, its wholesalers and several manufacturing businesses within the State with what amounts to an almost 2,300 percent tax increase on flavored beers. So, I would like you to understand two things about this category of product. First, what is a flavored beer? And:then - second of all, try to dispel a couple of myths that seem to be floating out there about the category. So, what is a flavored beer? You'll here the term flavored malt beverage coalition, flavored malt beverage. The nomenclature comes from federal law. A malt beverage, anything 253 A253. - JOINT BUDGET HEARING - ECO.DEVJTAXES FEBRUARY 11,2008 from Budweiser to Sam Adams to aSmirnoff Ice or a Seagrams Cooler, these are all malt beverages under Federal law. In New York, there is no such term. The term is beer. So; if you will forgive me, I will try to stick to the term appropriate for New York, flavored beer. A flavored beer is simply that, a beer, with added flavors. It has the same alcohol content as a standard beer. It has the packaging in 12-ounce bottles,just like a standard beer; sometimes 11 .2-ounce bottles. It's packaged in six-packs. It's made at breweries It is distributed by beer wholesalers and beer retailers and it really aims to serve the same drinking occasion for the adult consumer. It's something that you wouldn't take a shot of, it is something that you would drink at a backyard barbecue and those sorts of events. So, a flavored beer is simply that it; it's a beer. The • major difference, of course, is that it has a different taste profile and I don't think the State really wants.to be in the business of imposing a taste tax on those consumers who happen to prefer, say, a lemonllime flavored beer beverage as opposed to something that has a hop profile or a malt profile. The second thing I would like you to understand about' this is some of the things that have been said that, well, in fact, these have liquor in them. Well, they don't have liquor in them. Nobody can take, in fact, under federal law, if I were to take a distilled alcoholic beverage, a vodka,,a gin, a whisky and pour it into a beer, that product would be a distilled spirit. There is no question about it. The same applies in New York 'law and, in fact, federal law doesn't 254 A254 JOINT BUDGET HEARING - ECO.DEVJTAXES FEBRUARY 11,2008 • even allow the bringing of a distilled alcoholicbeverage onto the premises of a brewery. What these products do have is a majority of their alcohol from the fermentation of grain just like any beer. They are, however, flavored. And as most of you know, if you've ever looked at the vanilla extract, the cherry flavor, any other flavor soft drink concentrates if you are familiar with those, they almost always contain some amount of alcohol; why? For a variety of technical reasons. It is why the flavor industry routinely uses alcohol. It is why New York law recognizes that flavors aren't alcoholic beverages. Because these products derive a tiny amount of alcohol from the flavoring system does not make them liquor. Indeed, if you total up, for example, a product that John makes, the Seagram Cooler, the amount of alcohol, the maximum amount of alcohol that can be contributed to that product from the flavoring system amounts to 18/100 of an ounce. To try to claim then that that converts to product into a liquor, to me, that is the loophole that is trying to be used here to enact a 2,300 percent tax increase on this category of products. One other myth that we have seen, at least in the press, is that somehow this is a tax on rnit liquors like Colt 45. That's absolutely not true. In fact, when it comes to some of those higher alcohol beers that do not have flavors, they would be treated exactly the same, whereas a 3.2 percent alcohol product, like John's Seagram Cooler, would suddenly be taxed as if it was the same thing as an 255 A?55 JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11,2008 80-proof vodka or an 80-proof whisky. We think that is unfair. We think that's w.rong and we think it's illogical. I would be happy to take any questions. MR. JOHN HENDERSON: Thank yOu, Mark. Good afternoon. 1 have written a testimony here and! am going to ad-jib it so I am going to try to get through quickly -- CHAIRMAN FARRELL: Thank you. MR. HENDERSON: -- recognizing that I am the last one here to keep you from adjourning here. My name is John Henderson. I am one of the founders of the High Falls Brewing Company, which was formed in 2000 to purchase the assets of the Genesee Brewing Company. I'm a Rochester native and like many other Rochester natives, we were very concerned about the economic health of the community and Upstate New York, and frankly, we did not want to see the Genesee Brewing Company close, which was a very real possibility back in the late 1990's and 2000. So, we were very concerned about keeping the jobs in place. I presently serve as Executive VP and CFO of the company and my main purpose for being here today is to let you know what the devastated impact of this 23 fold increase in the New. York State excise tax on flavored malt beverages would have on our financial viability and the security of the jobs of the 400 people we employ in Rochester, New York at the brewery. Just to give you a little background. We are in 256 A256 •H JOINT BUDGET HEARING - ECO.DEV./TAXES FEBRUARY 11, 2008 • multiple businesses. You probably know us primarily as the Genesee Brewing Company. We produce Genesee Beer, Genny Light, Cream - Ale, Honey Brown, but those products have been declining since the early 1980's. And as a way of diversifying and expanding our business, we have gotten into different lines of business. We produce, first off, products for other people on a contract basis; beer, as well as flavored malt beverages. Secondly, we sell and distribute third-party products, and the third way was to enter into a license and direction agreement with Pernod Ricard to sell, market and distribute and produce the Seagram Cooler brand, which we entered into in 2007. This is a majQr trans formati on al event for the brewery. We are very excited about it. It represents a 50 percent increase in our sales. Ten percent of this product that we now have responsibility for will be produced in Rochester. We expect to add 90 new jobs over the next three to four years. We are making a $5 million investment in the brewery, in order to make this product capable of being produced in Rochester. It is a high margin product and it has a significant impact on our cash flow and profitability, so much so that the economic folks and development people at New York State, through the Empire State Development Corporation, approved 'a $1.5 million 1 grant to the High Falls Brewing Company in 2007 to help 'with the integration of the Seagram Cooler business. It's helping with the $5 million expansion that we have in the facility. It is helping us to retain the jobs and it's a very important part of our future, as is the JDA 257 A257 - JOINT BUDGET HEARING.- ECO.DEV./TAXES FEBRUARY 11,2008 mortgage that was provided to us back in 2002 to help us acquire the business from the Genesee Brewing Corporation back in 2000. - So, the economic impact of this business is quite significant to us. And I want to now give you some sense for what this really is going to mean to us because it is rather significant. The current tax now on flavored malt beverages and beers is $0.11 a gallon. It is proposed to go to $2.54 a gallon and if you converted that into a six-pack price at retail, which is now about $5;99 for a six-pack of Seagram Coolers, the price will go up about $2.40 to $8.40 a six-pack. These products compete in the beer category. Beer is very price sensitive and in our opinion, that sort of an increase will essentially kill this category of product within New York State. The consumers will not pay that increase. They will find alternative products, be it beers or wines or spirits or other non-alcoholic products; CHAIRMAN FARRELL: I'm sorry, what size is the bottle? MR. HENDERSON: Seagram Cooler is a 12-ounce bottle. So, in our opinion, the intent of raising $15 million of additional excise tax really is a hollow one in regards to the fact that the sales of the product are essentially going evaporate due to that higher tax. Now, what does that mean for us? Flavored malt beverages are a significant piece of our business We have been able to expand our production because of these products. 40 percent of our 258 .- A258 JOINT BUDGET HEARiNG - ECO.DEV./TAXES FEBRUARY 11,2008 • sales are the result of flavored malt beverages that we sell or produce. 35 percent of what we do produce is flavored malt beverages. So, if the category is essentially killed within New York State, and if our neighboring states take a lead from what happens in New York State, it can have a devastating impact on High Falls Brewing Company in theform of significant loss of sales, production, direct loss of jobs that are related to flavored malt beverages directly, but also for the brewery in total. Taking that sort of a volume and putting it in jeopardy puts our whole facility, which has been in Rochester since 1878, at jeopardy and we are very concerned about that. But it is not only us, it's our suppliers as well. We will have $65 million of materials, just materials, that go into our product that we will consume in 2008. 40 percent of that comes from two suppliers in New York State: Ball Metal Packaging in Saratoga that we get our aluminium cans from and the Anchor Elmira glass plant that we get our glass from. So, that's $25 million worth of product that is coming from two suppliers in New York. We obviously buy other materials that go into the product from New York suppliers. We have a whole series of services: Marketing, printing, consumables that are provided by people in New York State as well. So, we have a very large concern, as you might imagine, about the impact of this. We don't feel that there is going to be any additional tax revenue for New York State. We, unfortunately, personally feel that it's counterproductive to the other incentives that 259 A259 . - JOINT BUDGET HEARING ECO.DEV.ITAXES FEBRUARY 11,2008 New York State has provided to us, which, by the way, we are extremely appreciative of, and we think it will have a very big negative impact on us, our suppliers, our employees and our , customers. CHAIRMAN FARRELL: Questions? Thank you very much. MR. HENDERSON: Thank you for the time. CHAIRMAN FARRELL: Are you getting exemptions from the -- are you in any of the programs we were talking about earlier today? MR. HENDERSON: We are an Empire Zorfe, so that is another way that New York State is helping us. CHAIRMAN FARRELL: Very good. So, on one hand they are giving and the other hand they are snatching back. MR. HENDERSON: That is the way it looks like to us, yes. CHAIRMAN FARRELL: Thank you. MR. HENDERSON: Thank you. CHAIRMAN FARRELL: Have a good day. MR. HENDERSON: Thank you.. CHAIRMAN FARRELL: Thank you. Time? It's 5:00. We are exactly 45 minutes late, not bad. We will adjourn until tomorrow at 9: 15 a.m. Thank you very much. (Whereupon, the Budget Hearing was concluded.) -0 . 260 - A260
