longevity, durability, remaining in this city. that allows us to laser in on what we think is a win-win solution to help them with their growth, so that when they grow, we grow with our revenue stream because of the job force that will also grow with their success. it is also a revenue stream that comes back to the city and county of san francisco because we are not affecting the payroll tax. so with that said, chair chu, i would be more than happy to pass this onto president david chiu. supervisor chu: i know that there are a number of amendments coming. the one that you laid out, the six-year period.

if you could describe the amendment, then we will take public comment. >> absolutely. i wanted to thank supervisor mirkarimi as well for his legislation and provide some context from my experience. before i joined the board, i ran a small tech company. like many of us, we have viewed the payroll tax as an impediment to economic growth. ever since i came into office, a number of us have been advocating for a more comprehensive business tax reform. i am very glad that this topic is finally getting the appropriate attention, given the conversations recently involving twitter, zynga, and other companies. at this point, there is a widespread belief in the business community at san francisco's unique payroll tax need to be replaced with something else. likely, gross receipts business

tax. i think it is worth remembering that we are still an incredibly innovative city. in fact, "the chronicle" reported on a study from price waterhouse coopers that found san francisco to be the third most rich opportunity city in the world. i think we know there are growing companies with real incentives to lead our great city. there are also mature companies that leave our city or are looking elsewhere. it is important for us to do better. i think this piece of legislation helps to do that. a number of weeks ago, i asked the office of the comptroller, tax collector, office of economic work force and development, to study different options to these challenges that would reduce the incentive for growing technology companies to leave san francisco while minimizing the impact on our budget. it just so happened on that same

day i introduced a formal request, supervisors mirkarimi and mark farrell introduced their versions. it is very appropriate be consider all of these items together. i want to thank ted egan and the comptroller's office for their report, which responds to our legislation, which charts a good path forward to deal with the potential fight -- spike in peril tax liability for private companies that could go public with significant valuation. i would like to take a moment to talk about the other amendments on supervisor mercury's -- mirkarimi's amendments, and then i am sure mr. egan will go into them in more detail. there are a set of amendments to change the proposal that had initially focused a two-year tax exclusion to only tech

companies who had been founded after 2001, that were larger than 100 employees. i would suggest that we not omit this legislation to just as companies, that we need to have the exclusion open to any private company that undertakes either an initial public offering on a public stock exchange, or experiences a change of control prior to any such public offering, as in through an acquisition, during the period that the agreement is in fact. supervisor mirkarimi has proposed that we change that time from two years to six years. in the mn and that you have, i also suggest we amend the definition of the stock option compensation to be more precise. the definition that i think we adopt is a language from supervisor farrell's legislation to ensure compensation that the stock based includes incentive and non statutory stock options,

including all underlying stock related to such options restricted to stop, stop units, or stock acquired as a result of employee purchase plans. i also think for us to understand the impact of this legislation, we need annual reporting as well as at the end of the six-year period, a study similar to the study that was done for our biotech payroll tax is exclusion. finally, in supervisor mirkarimi's initial legislation, a $1,500 per individual employee item. it had been proposed that we exclude stock options above $750,000. this is a change based on the research that has been done on companies that have gone public in our city.

that being said, i hope the committee will support these amendments and i look forward to discussing this legislation, as well as supervisor farrell's legislation. supervisor chu: thank you. we will now go on to the presentation from ted egan. >> good morning, supervisors. ted egan, comptroller's office of economic analysis. we provided a report to supervisor mirkarimi's legislation also responded to david chiu's work. i would lead to summarize the findings of our report. the first thing to be clear about estimating comedy there the economic or fiscal impact of excluding stock options is, the city does not have clear information how much in taxation

these companies are actually paying. what i tried to do is initially develop a model of what a typical highly valued tech company would pay for stock options. i also did some research with the assistance of the treasurer's office that allows us to make a rough estimate of what we think companies may have paid in the years immediately they went public. at the crux of the issue, if we could go to the overhead screen, -- because the city taxes stock options and most cities will only experience a peril tax liability from that after they go public or another change in public control, in that year you could see a highly valued company see a highly exonerated increase in the apparel tax liability. -- the payroll tax liability.

a typical company, based on any company's tax record, but what we have learned is that it is not uncommon for a tech company to have 20% of its total shares committed to satisfy stock- option spirit about 80% of those options would be the sort that would fall under the city's payroll tax. so in this particular company, valued at $5 billion, which is quite a high amount when going public, you can see the amount in year five, their peril tax payment shoots way up. it continues to go up after that. the bulk of that payment is not simply because they are hiring more people, but because they are starting to pay taxes on stock options. in this hypothetical company, after those options are exercised, the company's payroll tax actually starts going down because it begins to pay more of its payroll tax from employee

wages and salaries, which is what a to between non-publicly traded company in the city would do. in terms of the pinch point for these companies, is in this state where they see highly accelerated, in this case, over $10 million of payroll tax payment a year. it seems reasonable that would increase the likelihood of moving outside of san francisco. by the time those pre-ipo options are exercised, here in for a successful company, you would expect to see a majority of their payroll not coming from stock options but employee wages and salaries. so with that in mind, we worked with the treasurer's office to understand the actual experience of companies that have gone public has been, any bonds that they have may have had to pay at the time that there went public. we looked at some tech companies that have left san francisco,

whether there was any connection in what they owed in payroll tax to their timing of leaving. with respect to the first question, the spirits of companies that have gone public in san francisco and stayed, the treasure provided us with peril and employment for 14 such companies. we were able to provide a rough estimate of what these companies may have paid in stock options in a given year. that ranges, depending on the value of the company at the time it went public, anywhere from $40,000 a year, up to $685,000 a year. the average annual payment we associated with stock options is about $140,000 a year. if you assume over a three-year period those stock options will be exercised, that works out to about $400,000 a company. if we have a few i feel less -- ipo 's a year, the city would lose

all of that money. of course, after companies go public, they continue to hire employees, grant new options, and there are over 200 publicly traded companies in san francisco, so the post-ipo question is a much bigger question that i am not going to try to answer here. that is the substance of supervisor farrell's legislation. from our best estimate, the type of exclusion that supervisor mirkarimi's is calling for would cost the city less than $1 million a year on average. however, it would have the effect of taking the extremely high jump of going public, and making it simply a darker line, which is a gradual increase to the payroll tax. and for a highly valued the company, like twitter, it would greatly reduce, in my opinion,

their incentive to leave san francisco. the last point i would make is about the companies that had left. we did have 43 companies that are now publicly traded, or are part of a publicly traded company that were at one time in san francisco. on average, there is no pattern that the large companies leave and the small companies state. that is an important thing to keep in mind. what we're looking for is likely that, the exclusion is a backstop for a few number of companies that would be strategically significant to keep in this city because of their size and importance, but they are not very numerous. that also drives our recommendations as well. it is fine to broaden the exclusion to incorporate non-

technology companies of any size, and to broaden the definition of any stock compensation. from the point of view from the efficiency of the exclusion, it is important to restrict it to stock options are granted before the ipo, and also to protect the city, to cap, rather than exclude, the taxation associated with stock options. based on our experience, we have seen companies that have been able to stay in san francisco despite paying a moderate amount in taxes on stock options. when we have not seen is a company staying in san francisco that has paid multimillion- dollar is a year in tax associated with stock options. so converting the pure exclusion to a cap that says you need to pay us up to $750,000 a year end stock options, and not above that, would cover the companies

that we have looked at in the past 13 years, but would still protect a company looking at a multimillion-dollar payment from having to make that payment. that is my brief summary. happy to take any questions that you have. supervisor chu: thank you. supervisor mirkarimi? supervisor mirkarimi: thank you. i feel your report very much _ the direction we are going in. -- underscores the direction we are going in. for anyone who hears in your report that this will cost $750 million not coming into this city because of this exclusion, how would you address that? the trade-offs of that risk of that money not coming into the general fund and the benefits that offset that? >> the source of that cost to

the general fund, which would be mitigated entirely by the amendments that you and david chiu have made today -- so i want to emphasize, as amended, according to my projections, -- well, the exclusion would not apply to any company that i have studied in the past 13 years. so the city would not be losing money on an annual basis and would really be out monied by a company that is so large they would be likely to leave anyway. i think your question goes to the benefits of maintaining these large companies in san francisco, after the spring show in which they become a public traded company. after the company, like zynga, goes public and remains in san francisco, they will continue to

issue stock options and will continue to pay payroll tax on that stock compensation that is granted after the ipo, provided they stay in san francisco. to the extent this has prevented large companies from leaving san francisco, immediately after their ipo year, we will be getting payroll tax revenue from all of their employees staying in san francisco and all of the stock compensation they issued in the post-ipo year. i know that is a complicated answer and there is no simple way to describe it, but there are fiscal advantages that are immediate and go on for a long time to keep technology companies in san francisco that this legislation will help to foster. supervisor mirkarimi: we have seen the pattern where there are the private companies that aspire to go public, the significant growth from these companies when they make the conversion, correct?

yet, in the last 13 years, a number of companies that were evolving in that direction, from the private to the public, as an ipo, when they did blum, going public, that they had also left, too. >> correct. we have seen companies leave either directly before their ipo period, or after, when they were looking at a higher rapayroll t. supervisor mirkarimi: is the converse may be an incentive for companies? those companies already going through their economic transition. what about companies that we

want to bring into san francisco? promote that we are now undertaking this. down the road, potentially reforming the payroll tax. >> i think it would be valuable. there are certainly many technology start-ups in san francisco, in the region outside of san francisco. i would venture to guess the city's payroll tax option is a disincentive for many. to the extent that this mitigates the problem for those companies, it would make it more attractive for them to be in san francisco, and would be an important signal to the industry that we are committed to maintaining a healthy sector. supervisor mirkarimi: i know presidents chiu and i had submitted some amendments.

i thought the feedback was a program for us to adjust the period back to six years. i know when twitter was occurring, i felt eight years was a bit too much, but six years gives us an effective gauge. how do you feel about that? >> i think that is about right. would you do not want is an exclusion period that is so short, companies considering going public, they will say, i do not want to incurred by employees to try to quickly exercise their options so they are covered by the exclusion. that is not an effective incentive. on the other hand, you do want to have a period of study, certainly, and in other tax policies, we have study after five years, and not make it a

permanent exclusion, until we have the chance to get some permanent members in terms of what we're talking about. supervisor mirkarimi: this is why i feel, maybe for this time now in san francisco, an interim step like this is most appropriate because we can size up those impacts, more empirically, for what is a limited population. for those mature companies, we would not be ready to size up those impacts. is that correct? >> i think, with the more mature companies, we would basically be in the position that we are at with these companies, the numbers i just reported to you, rough estimates. we would be able to do a rough estimate of what mature companies are paying in the way of tax on stock options, but that is not a sound way to make permanent policy decisions.

supervisor mirkarimi: thank you. supervisor chu: thank you, supervisor mirkarimi. supervisor chiu, you are on the roster. >> i know there was confusion about whether we would be providing $750,000 to companies as a tax break. it is the opposite. if companies were to go through an ipo, they would have to pay $750,000. from my perspective, that would assume payroll tax on $50 million worth of payroll. could you expand on what you suggested that? >> most ipo's companies based in san francisco have not resulted in delhi which in so high -- valuations so high that i pointed out in the chart. if you are not that valuable

when you are an ipo, it is not a big share of your peril tax, it is not clear why that would lead you to leave san francisco. this policy, with the $750,000 ceiling on what you would pay, based on the recent experience, would require just about every company that has gone public in the city to pay what they paid. really, it is only the extremely valuable companies that would be looking at payments in excess of $750,000, who would only have to pay up to $750,000. >> i know in the initial version of the legislation, it was focused on the tech industry, companies formed after 2001, with over 100 individuals. i am not sure it makes sense to have those distinctions. in my amendment, we took those out. >> we have seen a number of

ipo's from companies and not in the technology sector. some of them were found dead after 2001, some before, some have more than 100 employees. i feel the best way to make this petition is to focus on the stock compensation granted pre- ipo. that immediately takes the question of what to do with the mature companies and makes it a different conversation. of course, you have to remember that most start-ups will grant stock option that will never be worth anything because those companies will not be acquired or go public. so by its nature, the way to limit the legislation is to restrict it to the pre-ipo stock compensation and not worry about the other definition. supervisor chu: thank you.

thank you for your presentation. why don't we go to the budget analyst report. >> i believe mr. egan have provided you a comprehensive report. from the budget analyst standpoint, obviously, the approval of this legislation is a matter for the board. i would be happy to respond to any question that you might have. supervisor chu: if we do not have any questions at this moment, let's go to public comment. anyone in the public that would like to speak to the items 6 or 7? >> good morning, my name is douglas yepp. when i was looking at the schedule on monday, i did note for items 6 and 7, it noted that the 30-day rule was waived. i do not think it has happened very often in the past few

years. i was wondering if we could get an explanation for that. i think most people listening in or looking at the procedures probably would not understand that. i am not familiar with that at all, so i thought i would bring it up. i did think of this even before the president came here today. supervisor chu: thank you. is there any other member of the public that would like to speak on these items? >> good morning, supervisors. bright line defense project. i wish to introduce an idea that strengthens the goals of this legislation and hiring of local residents. we are circulating proposed language right now that injures a company hires disadvantaged

residents for entry-level positions if it takes the exemption. you notice the language on the work force fidel the system, which in 2007 was overhauled successfully. we have some thoughts about how to promote local job creation and non-construction industries, particularly for local residents, economically disadvantaged communities. we were also just told that zynga will be sitting down with us to see how they can make this work. we would be happy to meet with you this week, in pursing, or in writing. -- in person, or in writing. supervisor chu: thank you. >> i just also wanted to highlight the work that is being done to strengthen this legislation. it is obviously going to a good place. i wanted to circulate another thought. we have been dealing with some

of the local hiring challenges out of some of the folks from sacramento. we would have loved to get this to the committee earlier, but spending some time with our partners in labor, we came up with an interesting addition to this legislation for consideration, pursuant to whatever process needs to happen. we have already vetted this with our partners in labor. we could call it an area of standard wage amendment that seeks to leverage the need to get our unemployed tradesmen and tradesmen back working. particularly union members. there has been a lot of discussion as to how to do that. added to the list of requirements at page 3 of 23, perhaps language that would say that during a period of exemption a contractor business seeking to take advantage of the exclusion would utilize

contractors that pay area standard wages and provide benefits and journeymen upgrading training tools for facilities upgrade maintenance including tenant improvements for the city and county of san francisco. the agreement would be included in leases, sub-leases, and other occupancy contracts during the period of payroll expense hiring discussions is that tenant improvement is a strong vehicle for creating opportunities and jobs for local union members. here is some language that i will pass to supervisor can -- supervisor camp. -- kim. [tone] supervisor chu: thank you very much. >> good morning, supervisors. by name is gary marshall, the

good government policy director. our interest is navigating for coordinated strategies around business investment locations, which this addresses had done. what we would like to do is just encourage thoughtful consideration of both of these proposals that have identified specific issues. the core of our business in payroll taxes. we need to be mindful of our opportunity for balancing opportunities to generate revenues. like to acknowledge the proposal around the cap or payroll tax payments for stock options. it is an opportunity. both of these proposals make apparent for us the need for comprehensive analysis and further discussion. we cannot continue to govern by exception and we would like to