COVER STORY: Eric Garcetti needs to convince skeptical politicians to fight against rich tax incentives from outside California
Los Angeles’ new mayor has vowed to help stanch the flow of film and TV production jobs out of Hollywood, starting with the appointment of a film czar at City Hall. But to make a real difference, Eric Garcetti needs to convince skeptical state pols to combat the lure of rich tax incentives from outside California.
Only a smattering of reporters and photographers showed up, perhaps because the gathering was to address “runaway production,” a buzzword that means little for those outside the industry and, for insiders, is a timeworn term for a chronic, unresolved problem alongside piracy and studio accounting.
But Garcetti, a series of location managers and other crew workers who spoke in late February tried convey a message of urgency: Hollywood’s homegrown industry is being ceded to other states and countries whose favorable tax credits are increasingly luring away movie and television production at an alarming rate. As competition both in the U.S. and abroad continues to grow, the state’s market share and longtime stronghold on production jobs and spending are fast evaporating.
“I am starting to see people who have never made a feature film in Los Angeles,” Chris Baugh, location manager for Oscar winner “Argo,” which actually shot in L.A., told the small group outside a soundstage. “In fact, they are afraid to. They are concerned that it is too expensive and too difficult.”
These days studio chiefs insist that filmmakers they work with take advantage of out-of-state incentives to lower production costs, which on a single major motion picture can amount to savings of tens of millions. Those savings are crucial in a franchise-obsessed era when big-budget movies commonly cost north of $200 million to produce, while on the revenue side the DVD market has largely collapsed and cinema attendance has been generally flat over the past decade. In the current climate, most independent projects would not even be produced without incentives.
With the rise in the past decade of state tax breaks for movie and TV filmmaking, California, with its own modest incentive program, can’t compete when the bottom line is the sole factor in deciding whether to shoot in the Golden State.
It is no longer a given that Hollywood is the place where movies and TV shows are produced.
The California Film Commission recently released a sobering report concluding that the state “continues to experience a pronounced erosion of this signature industry.” Although the state’s incentive program has recaptured lower-budgeted features, TV movies and basic cable dramas, California is losing out big on network TV dramas and feature films. Many local businesses that support production have closed or been forced to lay off workers, and the trade unions report high levels of unemployment among their California members, according to the study.
After decisively winning L.A.’s top elective office, Garcetti put the flight of production atop his agenda. But the challenge is not only to convince those outside the biz that the city and region, to use his word, has an “emergency” on its hands, but that the state must do more about tax breaks that are still perceived by many as a giveaway to the glitterati.
Other mayors have talked about the issue; none have cited it as a priority in their inaugural address, as Garcetti did on June 30. Suggesting that it was important to act when “my political capital is strongest,” he vowed that he would create the position of film czar, who would be responsible for making the production process as smooth as possible through the thicket of City Hall red tape, and perhaps more importantly, would be the face for an industry that has historically kept a distance from downtown. Garcetti hopes to have the czar in place by the fall.
The two would presumably work closely together, much like New York City Mayor Michael Bloomberg and film chief Katherine Oliver have successfully done, to help boost L.A.’s production activity and rebrand the City of Angels as the entertainment capital of the world once again.
Earlier this year the City Council passed a set of initiatives to waive fees for TV drama pilots, which next to feature filmmaking may be the most important production category to flee the area.
Yet even if the city is ready to smooth over the bureaucratic bumps for any kind of production, it won’t change the fact that the determining factor in whether a project shoots here or in Louisiana lies in the hands of lawmakers in Sacramento, where the sense of urgency over this issues competes with many other voices and industries with differing agendas, all calling for something to be done. Now.
Capitalizing on Clout (Photograph by Art Streiber)
Garcetti has pledged to leverage his new position to be an ardent lobbyist for rescuing Hollywood production despite all the hurdles. He and his constituents must now convince Sacramento that the threat is real.
“Tomorrow we are not going to wake up with an unlimited cap on credits,” Garcetti says. “But we have to show forward progress, and I am going to be like a dog with a bone on this and stay with this. I can’t single-handedly move Sacramento, but I think we will do what works to educate our lawmakers…that this is a huge shot in the arm for our economy to land a lot of this back.”
Skeptical lawmakers can say that the state already has done what it can: its $100 million-per-year incentive program may not match those of other states (New York’s is about $420 million) but is certainly better than nothing. California elected officials renewed the program, in the midst of ever-tight state budgets, twice. The most recent renewal, a two-year extension to 2017, was passed overwhelmingly even after a state legislative analyst report concluded that the economic benefits of providing incentives would be a wash, or even a slight net loss, to the state’s coffers.
When it comes to expanding the program, Garcetti already has talked to Sacramento leaders and, he says, there is one key figure who “still needs to be convinced”: Gov. Jerry Brown.
“We had a great conversation. He doesn’t suffer fools lightly, and you better bring your data, but I did,” Garcetti says. “I showed him the impact, the multiplier effect, the benefit to the state treasury. Some studies have shown, at worst, some small debit to the state treasury, which is then multiplied many times over in economic activity. And I underscored the importance that this is a signature industry.”
Garcetti says the most unfavorable study he’s seen shows the state losing 7¢ on every incentive dollar. “But maybe that dollar is multiplied five times (by the economic activity spurred by production). If you told me I could spend 7¢ and get $5 of economic activity, or to put this in real numbers, that I could spent $70 million and get $5 billion, that is a pretty good deal.”
A spokesman for Brown said the governor was unavailable for comment. But Kish Rajan, director of Brown’s office of business and economic development, said they “will be working with industry leadership to enhance the business climate in California so this critical economic sector continues to thrive.”
This fall, the coalition that has traditionally pressed for incentives, which includes the MPAA, the Directors Guild of America, the Teamsters and IATSE, will be setting the stage for a push to expand the program in next year’s budget. A priority, says one studio executive, will be to win over powerful groups that have been opposed, such as the California Teachers Assn. The teachers’ chief argument is that budget cuts have already pinched their members, so how can the state possibly think about giving out tax breaks?
Bonnie Reiss, who advised former Gov. Arnold Schwarzenegger on establishing the production tax incentive program, says that while remedying runaway production is important, “it still has to compete with other budget priorities, and until there’s more revenue, it’s going to be a very difficult challenge to get that done in the state legislature.”
Indeed, the state’s tax credit was conceived in the cauldron of fiscal uncertainty.
For more than a decade, lawmakers, largely from the L.A. area, pressed for production tax incentives in California, but the legislation stalled. Schwarzenegger filled the California Film Commission with high profile personalities, like Clint Eastwood and Danny DeVito, in the hopes of making a stronger case. But not until his penultimate year in office did he see the incentives come to fruition —as part of an overall package to resolve the state’s budget crisis.
“Ugly Betty” had just left L.A. for New York — a psychological and financial blow representing a reversal of the historical migration of production from East Coast to West Coast. Schwarzenegger, in an interview just before leaving office, said that it came to a point where his opponents needed something, “and I just leveraged it.”
Crying Wolf (Photograph by Art Streiber)
Hollywood’s production exodus is hardly a new issue.
At a Hollywood Palladium event to press the case for action on runaway production, California’s governor, a recently elected U.S. senator and a major filmmaker showed up at a rally entitled “Is Hollywood through as the film capital of the world?”
That labor-organized event was held 43 years ago, with Gov. Ronald Reagan, Sen.-elect John Tunney and producer Robert Wise headlining the bill.
Back then, the industry was coming off a decade of retrenchment following the breakdown of the studio system and revolution in the production process, as corporations sold off backlots, and the realism of the new Hollywood demanded more location shooting not necessarily tied to the Los Angeles region.
But California didn’t lose its dominance. By the late 1990s, however, Canada’s incentives coupled with its favorable exchange rate lured not only feature film shoots but also TV movies and primetime series. The past decade saw a race among states to compete for production dollars and, despite budgets that have often left incentives to the whims of lawmakers, the givebacks have become a regular part of studios’ budget calculations.
“The assumption is, if you are going to shoot a feature, you are going to shoot out of town,” says Oscar-winning producer Mark Johnson, now also a successful TV producer with such series as “Breaking Bad” (shot in New Mexico) and “Rectify” (shot in Georgia).
Name a major movie of this summer, and chances are it wasn’t shot in L.A.: “Iron Man 3” (North Carolina), “The Lone Ranger” (New Mexico, Utah) and “The Great Gatsby” (Australia). The future looks equally as bleak when considering that Warner Bros./Legendary’s just-wrapped “Godzilla” was lensed in Vancouver, and Disney’s reboot of the “Star Wars” franchise with three new installments has already staked its home in England, which has been expanding its incentive program.
CFC’s report shows that the loss of big-budget features, which employ thousands of workers, utilize dozens of support businesses and represent several billions in direct spending, “has had the most damaging effect on California’s infrastructure.” The incentive program is not available to projects costing above $75 million.
Given a limited incentive program, even Garcetti suggests that the flight of major features has reached a point where targeting them has to be weighed against the payoff from pursuing other types of production.
With the larger degree of unpredictability of Hollywood, he says, it is important to look at things “in a larger statistical manner.”
He adds, “I want to look at how many jobs did we bring back here, how many jobs did we have and get ahead of the curve. We lost feature films. That’s sad. They may come back to some degree, but probably by and large they won’t.” But, Garcetti adds, a one-hour drama provides steadier employment than a feature film.
“We have to be smart about what we chase,” he says. “Maybe it is not the $200 million movie. Maybe it is the premium cable and the commercials. Maybe it is the videogaming as well as the smaller commercials.”
Losing Market Share (Photograph by Art Streiber)
Los Angeles is not Detroit. Studios are still making money, and some, like Paramount, NBCUniversal and Disney, have ambitious expansion plans to build out their lots.
Still, movie and TV production jobs in L.A. County fell from 117,086 in 2011 to almost 115,953 in 2012, according to the state Dept. of Finance. Those figures have bounced up and down over the past two decades, from a high of 136,680 in 1997, during a booming economy, to a low of 94,288 four years later, during a recession.
To Garcetti and others, a major source of alarm is the drop of market share, resulting in lost work and less opportunity for below the liners and support businesses that include equipment suppliers, catering companies and other outfits that depend on a steady stream of production to stay afloat. Payroll service Entertainment Partners says that from 2004 to 2011, the state’s share of total production wages in the U.S. fell nearly 10% from 68% to 59%. In 2005, the state commanded 89% of network hourlong dramas, which aren’t eligible for incentives; that figure plummeted to 37% in 2012.
The danger, Garcetti and others say, is that L.A. will lose even the steadier jobs or the infrastructure that has helped maintain what hold it has on TV production in particular. The more projects gained by another state, the more likely it is to establish an enduring talent pool. New York, for instance, provides production incentives but also established a credit for visual effects.
California is at a disadvantage in the competition for incentives not just because of the state budget but due to scale.
More than 40 U.S. states offer financial incentives as do offshore sites including the U.K., Canada and Australia. Many of those other states are starting from zero, and some don’t have caps on how much in tax rebates they give out. If California, which already has a huge production infrastructure, did that, every studio project, network TV series and TV movie would apply, claiming eligibility. So the state’s incentive program was crafted with limits, from a $1 million minimum to $75 million maximum on features, with further restrictions on drama series and an exclusion of commercials.
Even then, the demand is so great that the solution was to set up a lottery system: Winners of each year’s credit are selected in a random drawing every July 1. Producers complain that the lottery makes it difficult to plan out budgets, along with a host of other roadblocks to shooting, like the payment of so-called post-60s residuals to members of IATSE and Teamsters in California and in 13 other Western states — which can add millions to a project.
There’s also a twist: It’s not entirely clear that it is in the interest of the major studios to lobby for expanded tax credits given that, particularly on major projects, they already enjoy competition from elsewhere vying for business. Perhaps that’s why studio chiefs are skittish to talk on the record about the issue, though privately they complain bitterly to journalists about why the state doesn’t do more. The MPAA advocates for credits in California as well as other states.
“It is not in some people’s interest to see California win,” Garcetti says. “They may benefit from this competition being in as many places as possible, because it has been a race to the bottom. And I certainly won’t lead a race to the bottom.” The mayor says he will press for a fair credit, but not the highest credit.
Keeping production in L.A. and California will also take an appeal to local pride, or “knowing that you are helping out your city and your state’s economy,” says Garcetti. Councilman Tom LaBonge, who also represents portions of Hollywood, talks of appealing to the desire of cast and crew “to sleep in their own beds at night.” He hands out Made in Hollywood awards to productions shot in the area, which itself reflects that production in the film capital of the world now demands special recognition.
Walking the Walk
For Garcetti, the entertainment industry was largely a backdrop as he grew up in Los Angeles. He didn’t come from Hollywood royalty as much as it was around him.
As he followed his father, Gil, former Los Angeles County district attorney, into public life, he won his first City Council job in 2001. The seat encompassed a big chunk of Hollywood proper, and he has subsequently been around production and all of its intricacies, informing his prioritizing of production in the area.
He made several cameo appearances on TNT’s drama “The Closer,” playing the mayor of Los Angeles, in 2010 and 2011, when it seemed apparent that he was going to seek that office. His father was a consulting producer on the series, which wrapped its seven-year run last August. But Garcetti also has gotten down in the trenches on behalf of Hollywood.
Glenn Gainor, an executive producer at Screen Gems, recalls that when shooting the movie “Burlesque” in 2009, a scene in which Cher and Christina Aguilera walk across Vine Street was being blocked due to construction of a parking lot. “He got us on the phone with the contractors,” Gainor says. They worked out a construction delay, with Sony paying the cost.
Showbizzers played a key roles in Garcetti’s mayoral campaign, which started a few years ago as he began lining up donors, with a heavy emphasis on winning support from Hollywood. Jimmy Kimmel hosted several events. Will Ferrell appeared in a campaign Web video. Garcetti’s finance chairman was Sony exec Eric Paquette.
In the end, the campaign’s greatest share of support came from arts and entertainment sources, with some $1.4 million in direct contributions and to an independent committee that supported his campaign, according to a Los Angeles Times analysis.
Shortly after his inauguration, Garcetti gathered together a group of entertainment executives for what amounted to a brainstorming session. Among those present were Showtime’s David Nevins, Sony’s Paquette, Tennis Channel CEO Ken Solomon and location managers Baugh and Marilyn Bitner. “My first impression was that this was totally real,” recalls Solomon. “There is no window dressing here.”
Garcetti believes his prioritizing of the issue sent the right signal: “It struck a chord with people, because inside the industry, they have never felt they have had very strong cheerleaders,” Garcetti says. “It is easier to get a dinner with the governor of New Mexico than it is to get a call returned with the mayor of L.A.”
A Fine Line
There has been criticism of the way that the industry has lobbied for incentives in the past, particularly since the one advantage that showbiz has — its visibility — can also be a liability. Set painter Another has been that the effort has been somewhat disjointed. “You can certainly get someone’s attention with a big star or producer, but then that just kind of fulfills that cliche that this is just kind of somehow subsidizing their lives,” Garcetti says. “It is different when you bring back a truck driver who has been unemployed for eight months of the year, or a florist whose business has plummeted or has gone belly up, in to meet with someone.”
Garcetti would like to see a no-cap credit and to have it expanded to premium cable, commercials and visual effects. But even though lawmakers voted for an extension of the credit last year, a bill to provide $15 million in incentives for commercials stalled out this year. He’s also open to other ways of attacking the problem, like establishing tax breaks at the county level, although he warns to “not kid ourselves” by thinking state level incentives don’t pack the biggest punch. It will be essential to “humanize” the issue and make it relevant to “an assembly member from Eureka and a state senator from San Diego,” he says.
“We are going to fight a lot of fights,” says the mayor. “I know we are not going to win every single one of them. But if we don’t put a lot of strength toward winning a couple of battles in this war, we are just going to continue to be left behind on the battlefield.”