An Assembly committee is recommending major changes to the California enterprise zone program, hoping to refocus the program to serve the state's neediest regions and residents.

The 22-year-old program was designed to spark economic growth in the state's poorest regions by giving companies tax breaks for hiring disadvantaged workers and investing in depressed regions. Companies in 42 zones, including five in the central San Joaquin Valley, are eligible.

Economic development officials say the program is one of the few remaining state-supported tools they have to lure companies to communities.

But critics have long complained that the tax breaks amount to corporate welfare. They cite cases in which they say companies took advantage of program gray areas to get credits for hiring well-to-do residents.

Fresno's enterprise zone runs through the city's core. But companies can claim credits for employees living in parts of the city's wealthier north side.

An Assembly committee led by Juan Arambula, D-Fresno, recently held hearings on the program and concluded that it should continue but only with significant changes.

Though the state handed out more than $260 million in tax credits in one recent year, "it's unclear what the state is getting back in return," said Arambula, chairman of the Assembly Committee on Jobs, Economic Development and the Economy.

The committee made 46 recommendations, including several that would allow companies to only claim tax credits for hiring a neighborhood's neediest residents.

Other suggestions are more business-friendly. One would make it easier for small companies to use the program; another would waive environmental review of new zones under certain circumstances.

Arambula hopes to get some of the recommendations inserted into already-introduced legislation that deals with the zones.

"I feel that a major overhaul is necessary," Arambula said. "I had no idea that the state was losing so much money without knowing what it was getting in return. The program was allowed to grow almost uncontrolled."

The review comes as the Department of Housing and Community Development prepares to issue new regulations governing how the program is run.

The department took the program over in January 2004 from the now-defunct Technology, Trade and Commerce Agency. Most agree that the housing department is doing a better job overseeing the program, which critics say lacked oversight as the commerce agency suffered budget cuts.

Making major legislative or regulatory changes to the program could prove difficult because of the number of stakeholders involved.

Zones are located in portions of at least 47 Assembly districts and more than 30 Senate districts, opening up the tax benefits to hundreds of businesses big and small. In 2003, companies claimed credits for 71,150 jobs, according to state records.

In addition to Fresno, Valley zones are in Madera, Porterville, Lindsay and Merced/Atwater. Tulare County has a similar zone that operates under slightly different rules that open the tax benefits up only to businesses in a handful of targeted industries, including manufacturing, food processing and warehousing/distribution.

The zones in Fresno, Porterville and Merced/Atwater are among 18 set to expire at the end of the year. Officials can apply for renewal but must compete with other applicants across the state to get one of the 42 reserved slots. Arambula's committee recommends extending the expiring zones until Dec. 1, 2008, to allow time for reforms.

Program critic Lenny Goldberg said the program has become a bit of a sacred cow.

"What legislator doesn't want to say to their local business community, 'Hey, I'm going to bring some tax breaks to you.' "

Goldberg is executive director of the California Tax Reform Association, a nonprofit group that advocates for low-income residents.

Businesses operating in the zones can claim several benefits, including tax credits for equipment purchases.

Perhaps the most controversial benefit allows companies to claim up to a $34,000 tax credit for each disadvantaged employee hired. Critics say the qualification criteria are too broad. Credits can be claimed for workers who fit some 14 categories -- from Native Americans and Vietnam War veterans to "ex-offenders," which has been interpreted to include anyone ever convicted of a misdemeanor.

One category allows companies to claim credits if they hire recently laid-off workers. But there is no salary threshold, meaning someone who makes six figures could theoretically qualify.

Also qualifying are employees who live in so-called "targeted employment areas." The problem is that the areas haven't been updated in years, said Goldberg, who testified before the jobs committee. Once impoverished, some of the areas are now gentrified, wealthy neighborhoods, he said.

Fresno's enterprise zone covers a large part of the city's core, mostly running from Belmont Avenue south to North Avenue. But companies operating in the zone can claim tax credits for employees living on far-away streets such as North Fort Washington Road, in the Woodward Park neighborhood, or on Friant View Lane, in the shadows of the Copper River Country Club.

Tulare County's zone, known as a "targeted tax area," covers large chunks of the county. Under its rules, credits can only be claimed for employees living in the targeted tax area.

The jobs committee recommends that credits only be available to companies hiring employees from "low-income households" within the targeted employment areas. The committee also suggests tightening other qualifications, such as specifying that the "ex-offender" qualification include ex-felons only.

Goldberg questions the effectiveness of any tax credit. Companies don't come to an area because they get tax credits, he said. Instead, he said, they base decisions on other underlying economic factors.

Chris Micheli, lobbyist for the Association of California Enterprise Zone Employers, says critics like Goldberg lose sight of the fact that the credits serve as a retention tool, keeping companies from fleeing to other states and cities.

"We think it's an effective economic development program," he said. "Moreover, it's really the only one left in the state."

According to a recent audit, Fresno's zone, run by the city's economic development department, has been mostly effective.

In a review completed in February by the Department of Housing and Community Development, the zone was found to have "fulfilled at least some or all of 12 of 14 goals, or 86%."

But one of the questions surrounding the enterprise zone program is how effective such performance reviews are.

The Assembly jobs committee report says that "conceptually, this process should be effective; however, due to a lack of measurable goals and objectives, this process has not been adequate."

Since August, the housing department has begun or completed 21 performance reviews and every zone got a "superior" or "pass" score, according to the Assembly committee.

But the performance calculation is "very rudimentary," the committee notes. For instance, each goal is given equal weight, even if some are more far-reaching and specific than others.

According to the audit, one of the goals achieved by the Fresno zone was to "create an average of 200-250 new core industry jobs per year by the year 2004; increasing 10-20% per year thereafter."

Compare that with one of the goals in the Tulare County zone: to create 14,500 jobs from 1998 to 2002, or about 2,900 jobs per year.

The zone, which hasn't been officially audited, fell short according to zone officials, creating 8,900 jobs, or 1,780 per year -- an amount that still exceeds the Fresno jobs goal.

In short, Tulare County could be penalized just because it set a more ambitious goal.

Paul Salda?a, chief executive of the Tulare County Economic Development Corp., cautioned against using job numbers in goals. That's because economic cycles, out of the control of economic developers, can curb growth, he said.

Jobless rates, poverty rates and income levels more accurately depict success, said Salda?a, who testified before the committee.

Tulare County's jobless rate was 16.7% when the zone was applied for, Salda?a said. Last year, it was 9.4%.

Fresno and Tulare officials defend the effectiveness of the zone program by citing anecdotal evidence.

Tulare County's zone, Salda?a said, was a key factor in helping the county recently lure the West Coast distribution center for VF Corp., the world's largest clothing company. The county competed with Nevada for the center, which is expected to employ 350 people.

Dave Spaur, president of the Economic Development Corp. serving Fresno County, cites the case of LiDestri Foods. Formerly operating in Selma, the food processing company was considering leaving the region. Officials persuaded them to move to the Fresno enterprise zone, Spaur said.

Without the zone, "that deal would've blown up and gone to Stockton [or] out of state, for sure," he said.

If anything, the zone program should be less restrictive, said Spaur, who testified before the Assembly committee.

"If you want to induce more jobs, you want to open it up and get rid of all the labels you put on people," he said.

The reporter can be reached at eschultz@fresnobee.com or (916) 326-5541.