presentations, we should hear from the controller who will clearly give an objective analysis of the impact on the figures for the city budget, et cetera. mr. egan? >> which one do you want? >> ted egan, chief economist in the controller's office of economic analysis. i'm here to share with you this evening a review of a report we issued last week on supervisor mirkarimi's legislation. i understand that you're considering both pieces of legislation side by side. we're still in the process of working on the analysis for supervisor farrell's legislation so don't have any findings to share with you on that piece of legislation now so i do have the results of supervisor mirkarimi's legislation. i should also tell you too the report that we issued last week, we issued prior to supervisor mirkarimi making amendments to

his legislation, and he has outlined those amendments. they're closely aligned with what we recommended in our report, and i will try and clarify the points in my report here where the legislation has been superseded by the amendments that supervisor mirkarimi has made. zwroust go to the presentation as both supervisors told you the city included the stock values of exercise stock options and its payroll expense. although it is recently highlighted in the wake of the central market policy discussion, this has always been the city's practice. so this is not a new tax practice of the city. according to the treasurer's office, businesses have always been liable for this part of the tax and paid it. one of the things we did learn during the debate regarding twitter is that the stock options piece of the payroll tax for person types of companies, companies namely that are as

valuable as twitter in the multiple bills of dollars at this this point could be looking at an extremely -- extreme payroll tax payment when they go public, specifically from tax options. twhe go public, twitter would be owing considerably more payroll tax from stock options than its wages and salaries on employees. i will talk about that on the slide. what is it about the i.p.o. event that could create such a tax lie abt for a very valuable company? in the wake of that discussion and and our report on that issue, wreelly determined it was twitter's tax liability related to stock options that was the bulk of the difference in the cost twitter would pay between a location in san francisco and a location in san mateo county when you consider rent and transportation and the rest of the payroll tax and everything else, it was really the tax on stock options that made the difference. in our report, we recommended

that the city take a look at a more general modification of the payroll tax out of awareness of the fact the central market tax exclusion solved a problem for twitter, but there were other companies out there that faced a similar issue and there likely will be in the future. and that recommendation was the genesis for this legislation. what i've done here is i should say from the outset is for supervisor mirkarimi's legislation that we have reported on and for supervisor farrell's legislation that we will report on, we do not have detailed information on what companies have paid in the way of payroll tax on stock options. the city does not require businesses to say here's your compensation, tell us your compensation for wages and salaries and then tell us your compensation for stock options. it's all one lump of compensation and it's all taxed at the same 1 1/2%. so consequently, we do not have records of what businesses have paid for in the way of tax on

stock options. so what i have done here on this chart is basically, this is the simulation model of a business that's worth $5 billion when it goes public might pay. this is an i.t. company when it went public and the blue lines are what it's paying on the payroll tax salary, including the head count grows dramatically and accelerates when it grows public and slowly afterwards. the red bars are what is paying on stock option. the paying on charge is to show in the event of going public is when the total size of the payroll tax really accelerates dramatically and the bulk of the growth it's associated with stock options and the reason it's so high in that period, and actually tapers off going forward is because that year of the i.p.o. or event of the i.p.o. is when all of the stock options have been granted ever since the country has been founded, when the company had a very low valuation, can suddenly

be exercised and potentially the shares sold. if the company is very successful at a very, very high level of profit. so what happens in a situation where a very successful technology goes public is everyone who's gotten stock options suddenly makes a lot of money exercising those stock options. what happens is the company they're paying 1 1/2% on their employees' profit. and everybody else who has gotten those stock options profit. that could be, we estimate for twitter and the central market report, tens of millions of dollars. that tens of millions are still 1 1/2% of what all of the stock option recipients are making but from the company's point of view, in particularly a company looking at san francisco location where we taxed that, versus a brings bane or south san francisco location where they don't tax at all, it can be a very big difference. but specifically during that period. going forward if you go back to the chart in what i'm calling stage three, immature stage, the

company is still enoccurring payroll tax expenses associated with stock options but it's smaller because once the i.p.o. has happened, the company is granting stock options at the value of the publicly traded stock. and so in this case, the stock is still going up and so people are still making profit exercising those stock options but it's not nearly as much. you can think of stage two as going from, you know, your option is a dollar a share and company is trading at $60 a share and you're making $59 a share. the second stage maybe the stock has gone up from $60 to $70 and maybe you're making $10 a share. i think that's a typical experience of a successful technology company. i should also say at the outset that the number of companies that even before supervisor mirkarimi amended his legislation that would be affected by this is very small. there are a lot of technology start-ups in san francisco and they generally all grant stock options. but it's really only the ones

that experience an i.p.o. or get acquired by a public company ever have those options worth anything. you know, i work for a technology company in the late '90's and stock was never worth anything. and most of them were that type of a company. it's an incentive but the incentive doesn't always pay o this is an exclusion that will only kick in and effect a prei.p.o. technology company that is successful enough to get to that i.p.o. stage and it only excludes the stock options that they granted before the i.p.o. because that's where the bulk of the payroll tax differential will come from. so that's my best description of what the legislation does. in terms of the cost and the benefit, as i say, because we don't have great data or any data really on what companies actually paid, it's hard to estimate but the treasure's office did provide me with the tax paying history of 14 companies that went public so i was able to look what they did before they went public, the

year they went public and the year after. based on, that i was able to estimate the amount of additional tax they paid that you could attribute to stock options as opposed to just the growth of head count averaged about $140,000 a year for these 14 companies and the most that any company paid in one year was about $685,000 a year. so if this was $140,000 is an average i.p.o. in san francisco and that's the case for the past 13 years, if we have two to three i.p.o.'s a year, which has also been an average rate, it could cost the city about $750,000 a year on average. now supervisor mirkarimi, he told you introduced this idea of effect irving criming to the policy, which is no company can take advantage of the exclusion unless they're paying up to $750,000 already. the most we have ever seen any company pay is $685,000. so none of these companies in the past 13 years would even qualify under supervisor

mirkarimi's amended legislation and that's why i told the budget and finance committee for all intents and purposes, the cost of the amended legislation over the past 13 years would be zero. because no company i could find would have qualified. none would have paid the maximum $750,000 above which it gets excluded. if you're talking about a company like zinga, which is also valued now in the upwards of $5 billion range, then if they had an i.p.o. in the next year or two could very well be in that category where they would be owing more than $750,000 and, therefore, they would be taking advantage of the exclusion. but i think that's why we said it was a very efficiently design policy. it is focused on very few number of companies who have a very, very big tax differential between san francisco and nearby locations. it is not trying to -- this particular legislation is not trying to reduce the tax payment of every company that goes public.

particularly as it's been amended. >> in terms of the benefit, there have been a number of companies that were based in san francisco, publicly traded technology company that's have left. that does happen. we found 43 of them and in almost every case they left within a few years of their i.p.o. we don't know how many left because of the payroll tax and it certainly is there is true that those who left didn't necessarily owe more than those that stayed. i was looking for that. i wanted to say the ones that stayed paid little in stock options and the one that left would have paid a lot? it doesn't work that way. but i think it is fair to say the bigger your risk of paying -- the bigger your payroll tax payment associated with stock options, the bigger risk you are. i think it's reasonable to take a look at twitter, for example, and say if it's a $1 million difference between san francisco and san mateo county, maybe we don't need to take any action. if it's 25 million, maybe it's a

very clear indication that it's better for them to move and, therefore, it's a different rational for making a policy change. i believe supervisor mirkarimi ran through his amendments which closely reflect the recommendations in our report, making it a six-year exclusion. our office in conjunction with the treasurer's office will be doing a review of the legislation after five years and presenting that to the board of supervisors as they decide if they wish to continue it after the six-year period and our report would basically look at the reflection of it. it includes all i.p.o. stock options. the main two thing that's limit the legislation and make it very efficient are, first, it's only the pre-i.p.o. stock options. again, it only applies to start-up companies that do eventually go public and even so, they will pay up to $750,000

in tax related to stock options before the exclusion kicks in. just to sum vies, the legislation has the benefit of protecting the city against the risk of very successful technology companies leaving to avoid having an i.p.o. event in san francisco, while, at the same time restricting the policy to a very, very few number of companies and, therefore, minimizing the loss to the general fund. happy to take any questions. president o'brien: thank you very much mr. egan. i think at this point we should go first to public comment -- or to commission remarks -- >> commissioner questions first. president o'brien: anybody have any questions at this point? >> for mr. farrell. i just wanted to ask, do you

have a feeling of how many companies here in san francisco that are public have left because of their continuing to pay stock options? >> right. i think mr. egan as you mentioned before, i think it's impossible to tell how many of those have left over the past number of years to track them down. what i would tell you in anecdotal evidence in terms of research so what we've all been doing right now is public companies are actively placing head count elsewhere outside of san francisco. is it specifically related to stock options? i think it's more of a cumulative issue about their perception of the overall economic environment in san francisco. but they will actively tell you they're buying office space outside of san francisco and trying to add head count outside of the city when possible. >> thank you. >> just a followup on that then. if you're going to, for future public offerings and you're not

going to have a tax on those, do you anticipate that you're going to drive out more of the larger in 2010/2011 payroll taxes that they're currently seeing if their neighbors pay zero? >> no, i think that's a great point. quite frankly, originally i was a little more aggressive in my intentions of basically eliminating it all together and a lot of dialogue and officiating here in city hall and budgets in our sing narrow right now we don't want to create a budget deficit, for instance, based on what we collected last year. i have spoken and reached out to any number of them and their c.f.o.'s and c.e.o.'s and their representative bodies to say at a minimum, would you support getting on board from paying to what you paid to this date, but at least having the security going forward and the understanding city hall is looking out for you as well, that this policy is going to talk about all companies here in

san francisco. they were on board with that. actually, they need to be commended for that because regardless right now we're going to be talking about a two-tier type of structure here in san francisco. whether it be any of the popular companies now that can go public in the next year or two under either of our scenarios, we're going to have one company that is paying far less than the other company. and i do have an interpret problem with that. that being said at a minimum we want to create security for all companies now about what they're going to be pay going forward. so that was my approach. president o'brien: any other questions, commissioners? >> you mentioned that you want to exclude even public companies from paying the payroll tax for stock options? >> we're going -- my legislation is designed that the higher of

2010 or 2011, whichever year they paid more payroll tax attributable to stock-based compensation, that would be their maximum going forward. to existing public companies would continue to pay very much and continue to pay into the future. >> how many of these public companies you say will fall under the small business category? >> i would think very minimal. but what i do think is these larger public companies employ a ton of people here in san francisco that allow small businesses to be created in our city. all of the ancillary small businesses support jobs and all of the ancillary things that come out of employing people in larger companies here in the city, which is why i think it's important, from my perspective, to create a city wide perspective. president o'brien: commissioner o'connor? commissioner o'connor: how are you? i supported the twitter tax break for the reasons which you just stated, which is i wasn't so concerned with twitter,

although i think it's great to see the furniture mark building filled with workers who are going to support all of the small businesses and revitalize that area, which has been struggling for a long time. we all know that. however, having said that, the idea that this city could enter into a quasi partnership in supporting and keeping developing companies staying here with the caveat that we would as a city share a potential gain when that company did go public, that's very attractive in lieu of these payroll stock options that are going to be taxed, correct? but what -- you are against this? >> i'm sorry, maybe you can clarify a little bit. commissioner o'connor: i

apologize, i got here a little late. i was on public transportation and didn't get to hear mirkarimi's presentation. >> it was great by the way. commissioner o'connor: the issue at hand is there's a potential for the city to gain revenue when a company does go public by taxing the income that individuals are making at that public offering, correct? >> absolutely. what we're talking about, what we're all focused on right here is the specific portion of our payroll tax, which i believe mr. egan talked about and we all know, we do not call out the difference between payroll tax or just head count salary versus stock-based comp. so we're only talking about is a sliver according to stock-based compensation. the additional part about being able to tax companies with salary head count or head count salary, absolutely, that exists still. >> i'm going to digest a little

bit more. >> commissioner? commissioner kasselman sclon i'm going to throw out the idea it's great you're helping large businesses who are already here go public and have the tax break but it would be nice for small businesses who are maybe hearing about this to say now is a great time to go to san francisco but i'm in the incubater phase. i'm not ready to go public but i might be in ten years to grandfather them under the clause of, whatever, the legislation that would say not ready today but i'm going to make the investment in the city to stay there and see this through and keep them here too. >> i completely agree with you. i think our goal and our focus here in city hall should be creating that environment where people want to come, want to locate here because of the other companies that are here, because of the employee base that exist because of our national city in what we have to offer. my legislation, this is a permanent going forward so that does -- and i think that's a principle difference we can talk about.

president o'brien: collisioner clyde? >> thank you, supervisor farrell. the intent, it's very clear, i do, however, want to know how do you replace your lost income? because if this exemption applies to all companies public and private going forward, for instance, i believe we have for our frotional attorneys and doctors, really high earners, $300,000, $300,000, $500,000 earners, i believe there's a cap or some kind of exclusion to help those very highly paid professionals deal with our 1.5% payroll tax. now, i may be wrong, but i just feel uncomfortable with a complete exclusion, and that -- >> sure. let me just say two things. first, i absolutely believe and

i believe has been brought out in the last few months we need comprehensive reform of our tax system. lock, stock and barrel, that has to happen. when you talk about an exclusion, again, public companies today, we are going to continue to get the same amount tomorrow as we did yesterday. it's we're not going to get more. from my perspective again, it's recognition on the city's behalf once we realize because of this twitter debate, we're the only major city that does this, we said oh, gosh, we have to stop, we want to protect our baseline but we don't want to continue to gain more revenue off of that going forward in the years forward because we understand we're the only city that does that. if we continue to do that and continue to articulate we should be doing that, companies, i believe, and their investors are rightfully going to look at san francisco and say this is not an environment i want to be part of. that's my fear and that's what my legislation was designed to protect against. commissioner clyde: i will be

looking forward to the report so we can continue the discussion. president o'brien: commissioner o'connor? >> commissioner o'connor: i would be interested in asking supervisor mirkarimi a couple questions about this. president o'brien: go ahead. >> why don't we do a handoff? >> i appreciate the discussion. a couple things i would like to point out -- president o'brien: i think he has a question. >> i would like to hear the rebuttal, there's competing legislation. president o'brien: the question? >> what is your response to the topics of discussion we have just been having? >> kind of anticipating where the conversation was simmering. i don't know if you're competing but we are at different periods of time where i think were more right for us putting our legislation forward for two specific reasons that makes supervisor farrell's legislation

much different than me. one is his is a perpetuity, eternity. that is impossible for us i think to provide the kind of analysis that our controller said is just not prepared to do so compared to ours, which is a six-year time window, and ours are, as i said earlier is defined by a very discreet population. now since the twitter tax deliberation had -- had implicated both payroll tax and stock option, what we sliced off was just on the stock option set because it is that genre of companies on the prei.p.o. that we have the greatest amount of information on, even though it might be a small number, not sexy in the sense of sweeping citywide reform but enough evidence to at least give us a complete yard stick as to what we can anticipate through the

loss of those companies and the gain of keeping them here and tradeoff of them getting -- two very specific differences. i just want to say i'm very open minded to the legislation i hear being advanced by supervisor farrell. but in this day in age, when i hear somebody like peter darby, the c.e.o. of pg&e, who is exiting with a $35 million stock option bonus and is not taxed, that doesn't agree with me. i'm not going to support something that would give somebody like peter darby that kind of free ride from pg&e with a $35 million stock bonus that he gets as an exit. should that be applicable to somebody or somebody like him. so those i think matters would need to be reconciled for something that would be a sweeping legislation that would be addressed on the eternity level and perpetuity, which is why i like the stepped process. and that is where legislation is different because it is on a

very stepped process. president o'brien: council member kasselman? >> i just want to ask you the question i asked supervisor farrell to grandfather small businesses that came into san francisco in the next year or two who might come because it's attractive that this is a great opportunity for them not to pay tax on their offering but they're still seven years out from going public because in the start incubater phase. is there a way to look at the small businesses to say, you come in, and sign a release coming in 2013, you're ok. will you make an exception? >> that's the hook. the hook is the six years doesn't mean it can't be renewed and extended beyond that and successive government and board of supervisors and mayor can do

that. so the six-year period but the gage is the fact it was a five-year average we look at as to why we fix that six years. chances are this is something we may do in perpetuity such as what supervisor farrell i think is intimate what he suggested. but if it's just on the pre-i.p.o. in that genre, that's easy to be extended. president o'brien: ok, commissioners, anybody else from the commission have any questions? no. ok, i think we should open it up for public comment. >> thank you, appreciate it. president o'brien: that's ok. do we have any public comment on this issue, please? come forward. >> good evening, ladies and gentlemen. my name is paul courier, and i'm a candidate for mayor in 2011, and this issue of payroll tax

and income tax on payroll base and stock option is very familiar with me. i had a company called the communication bridge global, our wireless antenna towers are the hotel, we lit up, packed out the park before at&t now, before they knew what wireless season it was. i'm familiar with being an early mover. my business mentor has grinned and taken over 500 companies through the i.p.o. process with hambert and quinn. i'm familiar with this. richard rizotti was my law firm, and they're the premier law firm 234 in palo alto through the i.p.o. process. if you have not been through the i.p.o. process, it's a wild ride. many businesses have done it in the bay area and california, netscape for one, sun microsystems, cisco, on and on and on. san francisco is blocking itself

from participating in this gain, end of story. it's that simple. and i'm not for or against any of the specific legislation that is now being groomed and will go through the process of acceptance. i'm speaking to the principle of we need to eliminate payroll tax and we need to start looking at gross receipts tax for revenues in san francisco. and that's one of the reasons i'm running for mayor. we need to go ahead and set up a county-owned bank, model it after the bank of north dakota that's publicly owned. that would generate $300 million to $400 million revenue immediately in financial services for san francisco. we need to have a public owned benefits company that provides the angel funding for the twitters and future companies that are coming through san francisco to get their finance capital right here from the city and county of san francisco and lets us participate. right now the angel community

where i grew up now takes the bulk of the funds. why don't we get $5 billion when the next twitter goes public? why don't we do that? are we brain dead? seriously. and the last issue is this issue of pensions that's percolating all the way along. thank you very much for your time. president o'brien: thank you. do we have any further public comment? ok. i would like to just make a couple -- sorry, commissioner clyde? commissioner clyde: after you. president o'brien: ok. so clearly there's an agreement that taking away tax ordinance is a good thing, and that's obviously something that's agreed to