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How the City of Sonoma Used Tax-Increment Financing to Build Economic Prosperity

June 14, 2013
Note: With job creation and affordable housing on the minds of public officials throughout California, the power of state-local partnerships in creating good paying construction and other private sector jobs merits attention. This is part of a series of special papers on some successful partnerships.
Signs of economic stability and growth in Sonoma, a small city of about 11,000 in the heart of California wine country, could be found in recent years in dozens of storefronts and business facades all over town. This thriving local economy was the result of smart policies and partnerships between the city of Sonoma, county government, the Sonoma Valley Chamber of Commerce, local businesses and the state. Sonoma’s economic development efforts are showcased in the city’s Strong Cities | Strong State profile.
Like many successful economic strategies developed by the state's most resilient and vibrant cities, Sonoma’s approach depended on those partnerships.
Streams of tourists regularly passed through Sonoma's historic plaza, which in Mexican colonial times lay on the Camino Real, or "Royal Road," that connected one Spanish mission to the next. Today the plaza still serves as the community’s focal point.
After 9/11 and the subsequent economic downturn, however, tourism tapered off. Concerned city officials and business leaders united around a strategy that would prove vital to the region's economic interests and help Sonoma endure the Great Recession that began in 2008.
Because of this effort, says City Manager Carol Giovanatto, "We were not hit quite as severely in the economic downturn." The strategy developed by the city and its partners, she says," very definitely helped insulate us against the downturn."
That strategy provided assistance to the Sonoma Valley Visitors Bureau to help tourism and made forgivable loans for improvements to a museum, community center and county hospital, as well as loans to four hotels. Just one of those loans funded through tax-increment financing "bumped up our transiency occupancy tax by one-third" to a total of $400,000 annually, says Giovanatto.
The strategy also addressed storefronts and business facades. Starting in FY 2005–06 businesses could apply for loans through a Facade Improvement Matching Grants program. The city contributed on average about $2,500 to each business although loans could go as high as $5,000 for facade work, or up to $10,000 if additional rehabilitation work, such as disabled access improvements, were included. As Giovanatto explains, if the business remained "vital" for a period of two years and did not close its doors, the city agreed to write off the loan.
For a period of nearly six years, shops surrounding the historic plaza, many in older buildings, began an intense period of repairs and updates. New doorways, windows, awnings, signage and lighting appeared as storefront after storefront, from tasting rooms to clothing shops to restaurants, underwent facelifts.
Big Picture Changes Dramatically
Then in 2011 the Legislature, in an effort to balance the budget, ended the state’s decades-old effective tax-increment financing program, which essentially was a partnership between the state and local governments. Sonoma, along with other communities, lost this critical economic development tool. On an annual basis, tax-increment financing supported more than 300,000 full- and part-time private sector jobs annually statewide, including approximately 170,000 construction jobs.
The door slammed closed on the facade program. And it also closed on most of the partnership’s efforts around meeting urgent infrastructure needs, retaining and expanding business and jobs, and creating affordable housing.
Economic Development Project Manager Laurie Decker doesn’t hesitate to describe the advantages of the former facade program, which was supported through tax-increment financing. Sonoma had aging building stock surrounding its downtown plaza, and rehabilitating the buildings also helped maintain the city’s historical character, says Decker.
The renewal of the "ambience of the plaza" has been a hit with visitors as well as with appreciative local businesses, says Giovanatto. For a community dependent on tourism this was a big deal.
The plaza, a National Historic Landmark, functions as the city's centerpiece. It is the largest example of its type, eight acres in size. But long before the city was incorporated on Sept. 3, 1883, it served as the capital of the short-lived California Republic, having played a key role in the Bear Flag Revolt against Mexican rule. Since then it has been known as the birthplace of "American California."
State Stalls Sonoma’s Economic Vision
Since 1995, when it adopted a Local Economy Element in its General Plan, Sonoma has sought to build a "healthy, growing economy" that also recognized the future of the city could not be separated from that of the county. By 1998 a task force of city and county residents created the city's Community Development Agency Economic Development Program, which set about making matching grants, start-up loans, seismic safety grant, and improvement and retention loans to small businesses.
The city inked an agreement in 2003 with the Sonoma Valley Chamber of Commerce to jointly fund the newly formed Sonoma Economic Development Partnership. The partnership's slogan remains the same today: “Grapes aren’t all that’s growing here.”
At its height, assisted by an economic support office financed by the state, the partnership was spending about $300,000 annually to leverage continuing regional economic growth in the private sector, says Giovanatto. Over the life of the program she estimates the tax increment financing leveraged $1 million in private investments.
After the state dissolved its growth-spurring tax-increment financing program, the Sonoma partnership's spending to enhance economic growth and business retention dropped precipitously to $85,000 annually. All of it now comes from the city, though the chamber makes an in-kind contribution in the form of office space for Decker.
The city is attempting to retrench. It’s identifying its priorities as a first step toward figuring out what new economic tools it needs to develop, says Giovannato.
Without a loan program or money to work with, Decker continues to offer advice and what city help she can to businesses. "I wish we were still able to do what we did in the past," she adds.

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