Chapter 8

CHAPTER VIII

RETAIL CORPORATE WELFARE

More and more the news out of Washington, D.C. are statements that America's corporations are often permitted tax incentives, subsidies, financial and other types of encouragement that are generally not available to small businesses. This has been termed as "corporate welfare." Generally speaking, "corporate welfare" programs are products of local, state and federal initiatives and are supposed to be directed to community redevelopment.

The question that must be resolved is, "Jobs at what price?" The author of this study has surveyed this dilemma from east coast to west coast -- with particular interest in local, state and federal benefits offered to mega-retail discount chains, and only occasionally provided small business or specifically, small retailers.

What is responsible versus irresponsible economic development? The Clinton Administration is attempting to persuade pension plans to invest their vast resources in projects that offer benefits to low income communities. On June 23, 1994, the U.S. Department of Labor released Interpretive Bulletin 94-1 to encourage pension plan investments in ETI's, or "Economically Targeted Investment." An ETI is purported to be an investment that seeks to furnish a benefit to a pension plan's community, at the same time it seeks to provide the pension plan with a competitive risk-adjusted rate of return.1 Recently, they have been tabled.

While the objectives of the ETI program may be fair and worthwhile, the federal government should first see what is happening with similar financing projects, using public funds that appear to be directed to firms which receive favorable treatment far beyond the benefits received by the communities in terms of job creation and economic vitality. Secretary of Labor Reich recently, through administrative decree, has suggested 5% of the Taft-Hartley Pension Fund assets could be invested in ETI's.

It is true and sad indeed that, in the new world of trade and declining jobs, local and state governments are finding themselves trapped in bidding wars for private investment. They've been offering a "candy store" of tax abatements, credits and loan subsidies in the hope of keeping existing jobs or getting new jobs. More often than not, they're left holding the bag.

Examples of incentives offered large corporations are presented for each of the states studied with particular detail on California examples. One can see that although the particular details for each city are slightly different, the overriding long-term effect on the community is similar.

California's Experience with Respect to Incentives Provided Developers and Mega-Retail Discount Chains ("Big Boxes" and Redevelopment)

California, a state which characteristically is one of first to start new initiatives has had considerable experience in offering a "candy store" of incentives for the mega-retail discount chains. Redevelopment agencies in California gained substantial strength and influence during the 1980's. Their power was created because Proposition 13 (Jarvis Amendment) in California froze property values, thereby, making it exceedingly difficult for municipalities to generate revenues. Due to this short-fall, redevelopment agencies became the new economic engine. The original intent was simply the revitalization of areas blighted by economic and social decay. Cities and local townships were literally coming apart at the seams; redevelopment was the thread used for resurgence, needed repair and necessary economic stimulus.

Historically, the last couple of decades have witnessed a myriad of cities and townships designating large sections of real estate into redevelopment zones. Some of these locations had little chance of recovery without the proper financial incentives needed to "push-start" their dying economies. The redevelopment agencies were established to ameliorate this problem; however, either through clever design or total disregard for original intent, large portions of redevelopment zones are now simply raw land.

This contamination of original intent, having positive value on the one hand, exacerbated the problem relating to urban blight and economic decay. As interest increased, the criteria for Redevelopment Agencies' (RDA's) zones gave little concern to proximity or economic merit within the parameters of any given municipality. Simply stated, RDA zones were spread throughout entire communities and, in many cities created several redevelopment sites. This resulted in an interesting paradox, competition now existed not only between cities but within the same cities.

The most salient aspect of the paradox was the competition created within separate RDA's in a given city. The developers, seeing an absolute "win-win" formula, took on Darwinian characteristics in their demands and "natural selection" became rule of thumb. The least attractive zones (economically and downtown areas) were now in direct competition with raw land with all its inherent advantages. Original intent was now a document for historians and considered innocuous by modern municipal standards. Underdeveloped land being more attractive due to economic realties and propinquity to freeways, throughways, interstates, et. al, were now the major objective. Social decay and blighted downtown sections constituted an anathema to new construction. The very structure of RDA'S was going through a complete metamorphosis; what would finally spin out would be complete absolute change and direction.

Downtowns were left to cascade into an economic "black hole" paradigm; like most major cities throughout America, economically blighted sections were a secondary consideration while raw land attained primacy. Small downtown emporiums were becoming an endangered species! All would agree this was never a redevelopment objective.

Revitalization

In the past few decades, the destruction of our downtown urban areas across America have unquestionably become one of the major concerns of modern society. It has bred social disorganization, crime, violence, poverty, and rates of illegitimacy to unbelievable proportions. By not addressing these problems in earnest, one can expect that in the next several years, America will become a cauldron of racial fervor, discontent, anger and hatred. Many pundits believe the process has already started. Our 16th President, Abraham Lincoln, stated, "We cannot live for long in a house divided."

Whatever the reason may be, the problem of the institutionalization of urban decay is simply pushed aside by politicians, distantly involved. Moreover, to think that inner city blight is a manifestation of the welfare state is pure sophistry.

It is through the recognition of urban blight that certain enlightened individuals on both sides of the political spectrum have embraced concepts like economically targeted areas (ETI's - Economic Targeted Investments), described earlier. By creating certain tax and economic incentives it was thought industry would find it feasible, more importantly, profitable to construct new facilities within ETI parameters. Additionally, the revitalization paradigm conceivably could parent quality jobs, opportunities and needed hope, thereby starting a process which would diminish residential flight from urban communities. The economic dynamics could be far reaching by giving cities once again a tax base where today only a vestige of traditional business appears and poverty permanently resides.

In the beginning, RDA's did their job rather effectively, but as a myriad of loopholes became available and no enforcement agency was created to monitor or correct abuses, city developers and corporations manipulated the process with impunity. Who could blame them? City attorneys simply felt they would never be challenged because the RDA had no state enforcement arm. Moreover, RDA's were so esoteric and complicated that 98% of the population knew nothing about their existence or the methods they incorporated to consummate a deal. Responsibility was so fragmented in a RDA's decision making process that there were possible abuses of power.

For example: Hemet, California, basically a farming or agriculture community approximately 70 miles northeast of Los Angeles, attempted to make 11,000 acres of raw land, a redevelopment zone. (That's over 1/3 the size of San Francisco).

"The lament over uncontrolled growth is virtually California's state anthem. The signature method of planning -- or failing to plan -- development has always been simple sprawl."2

This illustration shows that the new dynamics of redevelopment zones have had little or nothing to do with urban blight or revitalization. It simply became a tool in which cities participated while others negotiated hundreds of millions of dollars in construction costs, infrastructure improvements, incremental financing and future tax revenues. In light of all this, the interesting question is who ultimately pays the bill? The answer is -- the taxpayer.

Concern over chaotic planning and deal-making by municipal authorities using redevelopment governmental authority and financing led to the establishment of the Bergeson Committee, chaired by Senator Marian Bergeson, Chairman of the California Senate Committee on Local Government. The 1989 Bergeson Report spread a great deal of light on the mission of "Redeveloping California; Funding the Legislative Agenda for the 1990's"3

A blatant case history of abuse stimulated California Republican State Senator Bergeson to cry foul. In the early 80's, car franchisors were building multi-faceted car dealerships (i.e. Mercury, Ford, Lincoln, Cadillac, Chevrolet, Honda and Toyota) on a single block within redevelopment zones and getting enormous financial consideration as the "carrot" to finalize the deal. Ostensibly this was okay in the beginning; however, once the dealership's incentives ran out, or came close to expiration, dealers began renegotiating with the municipalities to extend the deal (RDA can "roll over" any deal for approximately 60 years without interference). Furthermore, while negotiating with one city to extend the contract, some dealerships actually negotiated with other cities for the same economic package, thereby, putting enormous economic leverage on both cities to capitulate to demands. To State Senator Bergeson's credit, she saw this for what it was - a blatant tax shelter structured for perpetuity benefiting no one except the avarice of a few. The economic dynamism relating to this type of behavior is interesting. The question is: how does a municipality regain the economic and moral authority within its own RDA agency - if the pre-existing tenant can renegotiate a new contract once the economic incentives expire? This could become a Pandora's Box with societal implications which are profound and which require detailed examination.

Tax Incentives

A major component of RDA projects are their abilities to orchestrate the distribution of taxes. This is a very effective tool and in many instances can be used to ameliorate economic and social dislocation. An important application that tax incentives have within agencies is their ability to use tax dollars to lure new business into communities.

The original objective was a mutually ideal investment in which both parties (city and corporate partners) create prosperity for community and business. Tax incentives grant cities a considerable ability to negotiate or structure very attractive deals in order to entice future partners. Incorporated into redevelopment agencies are a series of powerful inducements which coalesce into a catalyst to promote business. Their power is unprecedented with taxes and condemnation topping the list. It is apparent that because of this power, many restrictions have been established ostensibly to monitor and maintain control over the agencies. However, the attempts at constraint through legal measures have been weak and reluctant. According to testimony at the Bergeson Hearings, most agencies proceed with impunity and quite a few knowledgeable critics allege that these RDA's frankly, disregarded the rules with little concern since they are rarely challenged.

The mega-retail discount chains, such as Kmart and Wal-Mart and others, have also been the recipients of generous treatments, both with respect to tax incentives and other financial benefits or tax abatements in California, as well as in other states studied by the author; such as Illinois and New York (see respondent comments in Chapter IV).

Schools and Tax Distribution and Redistribution

Within Redevelopment Agencies there is a little known fact that had a "Leviathan impact" on how schools received needed tax dollars. The RDA has had almost complete power to circumvent the normal distributions of taxes. It could actually stop the tax dollars generated by sales revenues within a city from ever going back to the schools. The school's only recourse is "pass-through" agreements or lawsuits. If the school fails to challenge the RDA within 60 days of approval it has theoretically lost revenues forever.

By way of "pass-through" agreements, school districts can negotiate with redevelopment agencies for the right to obtain revenues for any new commercial enterprise. In California, a school district may be mandated a certain percentage of income through commercial development based on the square footage or the calculated profit. Via this relationship, needed monies are available to schools for new teachers, books, school repairs, athletics and new construction. Despite this, a redevelopment agency has a legal avenue to thwart this entire process, and since the early 80's, as has been documented in the Bergeson RDA studies 4; at least 80-90% of all schools have failed to receive proper "pass-through" agreements in relation to redevelopment agencies and their projects.

Effects on School Finance

The allocation of sales tax and property tax revenues from the counties to the Redevelopment Agencies, and their further use of these funds to support the financing of developments which include the mega "Big Boxes" or Supercenters, created strong concerns in the report of the Bergeson Committee. Little has been rectified or corrected since the Bergeson public hearings.

According to Dave Rabousky 5 who testified at the Bergeson Hearings:

"The state is a silent partner' in redevelopment finance through its financial support for K-14 schools. The diversion from the State General Fund is probably $400 million, but that is not the net cost."

Rabousky then explained to the senators that there are four factors that temper the Legislative Analyst's estimate: (1) there is already some underlying growth in assessed value in project areas; (2) some projects capture growth that would have occurred anyway; (3) redevelopment affects the location but not the level of retail activity; and (4) some redevelopment spending is not always directed against blight.

Rabousky continued by explaining how redevelopment finance interacts with State General Fund's obligations to schools under Proposition 98 which the voters approved in November 1988. Questioned by Senator Bergeson, Rabousky told the senator that when the state operates under "Test 1" redevelopment does not cause a net increase in state school apportionments to specific school districts.

If Rabousky's estimates on the shortfall in revenues to schools were $400 million 6 in 1989, it could probably have accumulated to between $800 million and $1.2 billion by 1995. RDA apparently has not only forestalled taxes being normally distributed via state or local governments to the schools, but additionally these vast funds have all gone into a myriad of redevelopment agencies throughout California.

It is apparent that "counties must be concerned by the cumulative fiscal efforts of redevelopment, incorporation, annexation and unfunded state mandates;" according to Dan Wall, who also testified at the Bergeson Hearings. "But everything is not right with the world (inasmuch) as the counties' fiscal stake in redevelopment is growing and growing rapidly."7

A number of specific agreements between developers and mega-retail discount chains will follow shortly. However, it does appear to informed observers that RDA's have legally been open to direct monies to developers, who in turn are then legally able to redistribute such funds to reimburse these national firms for capital outlay and construction. Such firms as Super Kmarts, Target, Costco, Sam's Clubs, Price Clubs, and Wal-Mart have been the recipients of RDA funds.

Short-falls in school revenues take place where a mega-retail discount chain receives an RDA agreement which permits it to retain sales taxes to pay for construction and debt service. If as a result of the new mega-retail chain activities in the area, the "Main Street" stores have their business volume decline, or they go out of business altogether, then their former collection of sales taxes is reduced substantially as is revenues to the schools.

One example is an RDA deal between the City Council of Chula Vista, California and Wal-Mart, reported on August 26, 1994.8 The Wal-Mart was proposed to open in late 1995.

"Wal-Mart Offered $1.9 Million Deal - Chula Vista"

"Wal-Mart would get $1.9 million over 15 years from the city as an inducement to build a store in a proposed shopping center at the northwest intersection of Fifth Avenue and C Street under a plan approved by the City Council, this week. The money would come from sales taxes the city collects from Wal-Mart and other stores in the 21-acre shopping center, planned by Chula Vista Center Associates, said Community Development Director Salomone. As part of the deal, the developer would build a $1.2 million bridge over the Sweetwater River to connect the shopping center to Broadway. The developer would also install traffic signals at Fifth Avenue and C Street and on Fourth Avenue and Dixieline Lumber Co. The store is projected to open in late 1995."9

Subsequently, the award of $1.9 million was disallowed by the appeal of several citizens to the Superior Court of the County of San Diego. (See discussion later in this chapter.)

Typical RDA Deals Which are Pending or Have Been Finally Consummated with Developers and Mega-Retail Discount Chains in Recent Years in California

The following RDA "packages" are entirely legal but are typical of advantages that are provided in California to large retail firms and developers and which are generally not available to small businesses. The information has been voluntarily provided by a prominent California law firm.10

Summary of California Taxpayer Aid to Box Store Development

(The author does not take responsibility for the complete details of the narrated "packages," but believes that essentially they do describe a picture of what has been made available by the RDA's to developers and chains in recent years.)

Anaheim Plaza, California
Redevelopment Agency to borrow about $6.3 million from owner to use for improving roads and other infrastructure for the project at 7% interest. In addition, Agency to pay 50% of costs of relocating existing residents. Being done to assist in procuring a mega-discount retail chain.

Cathedral City, California
Redevelopment Agency reimbursing owner for 90% of owner's acquisition costs by giving owner 75% of City's sales tax receipts. Estimated acquisition costs of $1-2 million.

Chino Hills, California (tentative agreement only)
It involves a complicated land swap, plus developer receiving refund of $1 million from sales taxes supposedly generated by project.

City of Industry, California
Redevelopment Agency was to give, in effect, a $2.5 million subsidy by purchasing land for $7.6 million and then reselling it to a mega-chain for $5.1 million. If the deal completed, the chain has a saving of $2.5 million against the true value of the property.

Covina, California
Redevelopment Agency to buy land and resell to a discount chain for $5 million. Agency to make various public infrastructure improvements. Developer to advance funds for acquisition, capped at $9.8 million. Agency must fund any short fall, with agency to repay at 2% above, prime rate, with a maximum of 12%.

La Habra, California
Redevelopment Agency purchased land for $8.2 million and sold it for $5.3 million. Agency to borrow $4 million from developer to make improvements.

Oxnard, California
A mega-retail discount chain received a deferral of $1.4 million in city's infrastructure impact fees, plus $1 million in "reimbursements" from city.

Paramount, California
Redevelopment Agency purchases land for $10.7 million and sells it to developer for $6.4 million.

Paso Robles, California
Redevelopment Agency pays cost of $537,000 in box culvert of creek, with a mega-discount retail chain to repay only 83% of costs. Agency also pays $1.6 million for offsite improvements, primarily roads. City supports creation of a "community facilities district" in area to make road improvements which is to be funded by property tax increment. Agency to receive a portion of any "net" proceeds from sale or refinancing of land.

Porterville, California
In 1991, Wal-Mart built a Warehouse Center initially to employ 300 workers in a building of 1.2 million square feet. By locating in Porterville's Enterprise Zone the company was able to slice $19,000 per worker off in tax payments over 5 years. The tax waivers were estimated to amount to between $5 and $9 million over the period.11

Chula Vista, California
Redevelopment Agency buys land for $8.50 per square foot (cap $4.98 million) and to sell to a major chain for $6.50 per square foot (cap $3.8 million). Agency to assist the chain in getting a community facilities district formed which would use the taxes received for $9 million worth of infrastructure improvements in the area.

Impact on Small Businesses by These Pending Real Estate Packages Arranged by RDA's in California

A number of the nation's largest corporations, both retail and non-retail with annual gross revenues of almost $100 billion and upward are in effect being subsidized by municipalities, school districts and taxpayers with the employment of millions in redevelopment funds to build their stores in California and in other states with similar programs. What chance does the small retailer have for survival? Has he or she been given the opportunity to improve their downtown facilities with a similar use of funds? This is certainly "corporate welfare" at the retail level.

Return to the Bergeson Committee Report of 1989

At the Bergeson Hearing on Redevelopment, Mr. Chris Norby of Fullington, California, Co-Chairman of the Municipal Agenda for Redevelopment Reform in his comments which follow, made clear his disillusionment with the abuses in redevelopment powers. He also made certain constructive recommendations which should be enacted.

Statement of Chris Norby12

I. "Purpose of Redevelopment is to alleviate serious urban blight and originally a good one. In doing so, however, the Legislature granted to cities extraordinary powers that have now become subject to such widespread abuse that they must be curtailed."

II. Redevelopment Powers Abused:

A. "Eminent Domain: Property rights are abused when cities condemn the property of one private interest for the benefit of another."

B. "Tax Increment Financing: In theory the tax increment is created by redevelopment efforts themselves. In reality, most of it is due to inflation and development that would have occurred even without redevelopment. All of this tax increment is funneled back into redevelopment projects and is denied to the counties, school and special districts. The State General Fund is left holding the bag."

C. "Flawed Decision-Making: Redevelopment gives cities vast powers to subsidize and acquire property on behalf of private development. City Councils and staff must make economic and development decisions for which they are not capable. Redevelopment puts cities in the development business which is the responsibility of the private sector, not a proper role for government."

D. "Anti-Competitive: Redevelopment decisions require cities to grant special favors (subsidies, land grants, etc.) to certain select businesses at the expense of others enjoying no such benefits!"

E. "Distortion of Free Market: Using redevelopment, cities often raid each other's tax basis by luring businesses to relocate through offers of redevelopment goodies.' Redevelopment-subsidized auto malls are a prime example of this. Some cities do benefit, but at the expanse of others who have used redevelopment less aggressively. Business owners make location decisions based not on traditional free enterprise considerations, but on which city offers them the highest financial incentives."

F. "Zero-Sum Game: Since redevelopment does not facilitate industrial growth but only a redistribution of sales tax revenue, there is no overall benefit to the state. Redevelopment cannot increase statewide economic activity, but only shifts it around. The state General Fund is spending huge sums under the guise of economic development that is, in fact, only an elaborate shell game."

Mr. Norby made the following strong recommendation, which if followed should end "corporate welfare" in California.13

III. "Recommended Actions: The State Legislature created Redevelopment, and only the State can reform it. Individual cities cannot be expected to control their own abuses. The Legislature must restore a level playing field for all cities so the rules for redevelopment -- if it must remain -- are clearly defined."

"Possible courses of action:"

A. "Forced Phase-out of all Redevelopment Projects: The state should intervene to be sure that redevelopment districts are speedily phased out and no new ones be created."

B. "Limits on Land Acquisitions: The Legislature should prohibit cities from becoming land acquisition agents for private developers. The power to condemn property for private development should be ended, as well as land write-downs' at public expense."

C. "Sales Tax Apportionment: Sales tax to city government should be apportioned on a per-capita basis, rather than on how much is actually raised in specific cities. This would end ruinous inner-city competition for sales tax dollars."

It is obvious from Norby's remarks at the Bergeson public hearings that the unchecked powers in development have become subject to widespread abuse and that favoring certain projects has created an anti-competitive environment "granting favors to select businesses at the expense of others enjoying no such benefits." Further, that "redevelopment does not increase statewide economic activity, but only shifts it around. It becomes, as Norby states "a shell game."

It is also clear from the foregoing discussion that when Redevelopment Agencies divert property (and other tax revenues) from school districts and community college districts, the state must ultimately replace the diverted revenue.

The Bergeson Report made a strong statement on Competition for Business.14

"We have found situations in which cities are using their redevelopment agency's funds (and other revenues such as sales tax) for subsidies to influence the location of businesses that serve a regional market but generate significant local revenues. Auto dealers and warehouse type retailers such as Price Club are typical beneficiaries of these subsidies because of the large amounts of local sales tax revenues that they generate. We doubt that these subsidies provide any net economic benefit to the state because they merely change the location of businesses within a region, sometimes to the detriment of neighboring communities."

Statement at the Bergeson Hearings by Los Angeles County (Testimony of Amanda Susskind and Diane Shamhart)15

While the County has supported numerous redevelopment projects over the years, speakers from Los Angeles evidenced frustration that present redevelopment attitudes had ignored the original purpose of the statutes, namely to redevelop "blighted areas," so that the blighted area would have a healthier economic base. Instead, "blight" and the dying "Main Street" have been ignored and developers are creating a new kind of sprawl outside the traditional business areas.

Disturbing Trends

The Los Angeles delegation at the December 7, 1989 hearing saw certain "disturbing trends."16

"Whenever a redevelopment project approaches the end of the project, near its bonded debt limit, annual tax increments limit, or it's maximum tax increment limit, the agency amends the plan to take advantage of additional tax increment."

"Agencies set bonded debt limits and tax increments far beyond what the project is estimated to generate. Limits are established not by what the project intends to do, but by what agencies estimate the project will generate in tax increment."

"Redevelopment law was never intended to permanently divert funds from various taxing entities, such as the County of Los Angeles. It was to provide a mechanism for eliminating blight so that communities could become economically viable and productive. At the end of any given redevelopment project, the revitalized area would provide numerous benefits to taxing entities serving the community."

"The growing number of redevelopment projects and the extension of the terms of these projects (ranging from 25 to 50 years), raise serious doubts as to the realization by taxing entities of the benefits of redevelopment. In addition, redevelopment law was established at a time when limitations on taxing entities were not as stringent as they are today. It was adopted in a time when the decay of cities was at its worst and revenues sources were more abundant."

California Law AB 1290 (Health and Safety Code 33426.5) Provides That an Agency May Not Give Away Tax Dollars to Retail Projects of More Than 5 Acres on Land Not Previously Developed for Urban Uses (Citizens of Chula Vista California v. Redevelopment Agency, et al., March 31,1995)

Previously mentioned in this chapter was a $1.9 million grant to finance a Wal-Mart in Chula Vista. On March 31,1995, the law firm of Davis, Cowell and Bowe of San Francisco, California filed a suit on behalf of Bozek and Gonzales, Petitioners against Respondents-Defendants; the Redevelopment Agency of the City of Chula Vista; City Council of Chula Vista; Wal-Mart Stores; Town Center Associates; the Gatlin Development Co. Inc.; and KRB Enterprises.17

The plaintiffs wanted to enjoin the real estate project because they claimed that AB 1290 passed by the California Legislature in 1993 was enacted to restrict financial support for certain redevelopment projects by redevelopment agencies. Specifically targeted were developments on a parcel of land, 5 acres or more, which had not been previously developed for urban use (with certain exceptions noted in the case).

The suit is reproduced here because the arguments used by the plaintiffs pin-point the concerns expressed by witnesses in the Bergeson Hearings of 1989, when the purpose of RDA activities was fully explored. Also fully presented is the final judgment which gives a fairly full account of the results.

The petitioners not only wanted an injunction against Wal-Mart's building a new store on the particular site in question; but also wanted the $1.9 million subsidy to Wal-Mart reviewed as being possibly in conflict with the California AB 1290 statute, codified as Health and Safety Code 33426.5.

Details of the suit and final judgment follow:

Andrew J. Kahn #129776
Marjorie M. Alvord #135868
DAVIS, COWELL & BOWE
100 Van Ness Avenue, 20th Floor
San Francisco, California 94102
(415) 626-1880

Fern Steiner
GEORGIOU, TOSDAL, LEVINE & SMITH
600 B Street #2300
San Diego, California 92101
(619) 239-7200

Attorneys for Petitioners-Plaintiffs

SUPERIOR COURT OF CALIFORNIA

COUNTY OF SAN DIEGO

WALLY BOZEK; HENRY GONZALES;CASE NO. 684525
FIRST AMENDED PETITION FOR
Petitioners-Plaintiffs,WRIT OF MANDATE; COMPLAINT
FOR INJUNCTIVE AND
v. DECLARATORY RELIEF
REDEVELOPMENT AGENCY OF CITY OF[Cal. Code Civ. Pro.
CHULA VISTA; CITY COUNCIL OF526a, 1085; Cal. Health &
THE CITY OF CHULA VISTA and theSafety Code 33426.5]
members thereof, in their
official capacity;
Respondents-Defendants.
WAL-MART STORES, INC; CHULA
VISTA TOWN CENTER ASSOCIATES,
L.P., a California Limited
Partnership; GATLIN DEVELOPMENT
COMPANY, INC.; KRB ENTERPRISES,
INC.,
Real Parties in Interest

Petitioners-Plaintiffs (hereinafter "Petitioners") allege:

1. Petitioners are residents and taxpayers of the City of Chula Vista. On November 15, 1994, the Redevelopment Agency of the City of Chula Vista approved a government subsidy of $1.9 million to Wal-Mart Stores, Inc. for putting up a new store. This subsidy will violate the Legislature's recent enactment designed to prevent redevelopment agencies from giving away tax dollars to new retail developments, AB 1290, now codified at Health & Safety Code 33426.5. This provides that an agency may not give away tax dollars to retail projects of more than 5 acres on land not previously developed for urban uses (with exceptions not applicable here). Respondents' financial assistance to the Wal-Mart project violates AB 1290. Accordingly, the court must prevent the loss to taxpayers and the community.

JURISDICTION

2. This court has jurisdiction under California Code of Civil Procedure sections 526a (taxpayers' suits), and/or 1085 (writ of mandate).

GENERAL ALLEGATIONS

3. Respondent-Defendant Redevelopment Agency for the City of Chula Vista (hereafter "the Agency") is a redevelopment agency governed by the California Redevelopment Law, contained in Cal. Health and Safety Code 33000 et seq. The agency's members are the members of Respondent-Defendant City Council of the City of Chula Vista, who are sued in their official capacity (hereafter collectively "respondents").

4. Petitioners are residents and taxpayers of the City of Chula Vista.

5. Petitioners will be affected by the tax subsidy and by the construction and operation of a Wal-Mart store in their city, including effects on traffic, air quality and environmental values.

6. On or about August 23, 1994, Respondents voted to authorize their staff to enter into a Disposition and Development Agreement ("DDA") with Wal-Mart Stores, Inc. And Chula Vista Town Center Associates, L.P., concerning construction of a Wal-Mart store in Chula Vista. (A "true and correct" copy of the DDA was attached to the filing as Exhibit A.)

7. Section 2 of the DDA provided that the DDA was not effective until the City Council and Agency later decided to approve the construction project via plan amendments and conditional use permit. This entailed complying with the California Environmental Quality Act, which gave Respondents discretion to disapprove the project.

8. Prior to Respondents' vote on August 23, Petitioners' representatives urged Respondents not to offer this project a subsidy, relying on AB 1290.

9. On September 2, 1994, Petitioners' counsel telecopied a letter to Respondents' counsel enclosing a copy of public testimony against the subsidy, urging a prompt reply and requesting "an expeditious answer because I will not expose my clients to the risk of being told they are suing too late." A "true and correct" copy of this letter and enclosure was apparently attached hereto as Exhibit B.

10. On September 7, 1994, Respondents' counsel wrote back directing the attention of Petitioners' counsel to section 2.1 through 2.3 of the DDA, stating:

"These provisions clearly provide that the DDA will not be legally effective and the Agency will have no obligation to provide any assistance, unless and until all necessary CEQA review has been completed, a Final EIR has been certified by the City and all other required entitlements have been approved. Section 2.3 expressly retains for the City its full and independent discretion to disapprove, if it so chooses, the Final EIR or any other of the proposed entitlements for the proposed Wal-Mart Project. * * *

We encourage you, Mr. McMahon, and any other interested party to continue to present any and all legal and practical concerns that you may have with respect to the proposed project. It is my understanding that most of the required land use permits for the Wal-Mart project, including certification of the final EIR, are likely to be presented to the city/Agency for consideration within the next few months. Notice of these proceedings will also be published and forwarded to Mr. McMahon (and you if you so desire) in order that all interested persons are given full opportunity to express any objections or"

(A "true and correct" copy of this letter was attached as Exhibit C.)

11. Petitioners' counsel relied on Respondents' letter in believing that the statute of limitations on any challenge to the subsidy would not begin to run until Respondents had decided after public hearings whether the project to be subsidized would go forward at all.

12. Petitioners' counsel acted reasonably in so relying on Respondents' letter.

13. Respondents' letter equitably estops Respondents from asserting a statute of limitations defense.

14. Petitioners' counsel timely pursued an administrative remedy against the subsidy by urging Respondents not to approve the project due to its unmitigated effects on the environment, which were admitted to be significant. (A true and correct copy of the letter sent by Petitioners' counsel as Exhibit D.)

15. Respondents did not certify the environmental impact report or approve the necessary plan amendments until November 15, 1994.

16. Prior to November 15, 1994, Respondents had not committed themselves to extending a subsidy to retail development at this site.

17. The statute of limitations on Petitioners bringing this action was tolled until November 15, 1994.

18. Real Parties in Interest Chula Vista Town Center Associates, Gatlin Development Co., Inc. And KRB Enterprises, Inc. Are the owners of an unimproved parcel of approximately 12.94 acres of property at the northwest quadrant of Fifth and C Streets in their City of Chula Vista, County of San Diego, State of California which was formerly owned by Metropolitan Shopping Square Ltd. And others ("Metropolitan property").

19. The Wal-Mart development requires use of the Metropolitan property.

20. Prior to the filing of this action, there were never any improvements on the Metropolitan property.

21. Immediately adjacent to the Metropolitan property is an unimproved parcel of approximately 17.22 acres owned in the past by Dixieline Lumber Company ("Dixieline property"), but now owned by the Real Parties-In-Interest other than Wal-Mart.

22. The Wal-Mart development requires use of the Dixieline property.

23. Prior to the filing of this action, there were never any improvements on the Dixieline property.

FIRST CAUSE OF ACTION:
VIOLATION OF CAL. HEALTH & SAFETY CODE 33426.5

24. Petitioners reallege as though fully set forth paragraphs 1 through 23 of the foregoing.

25. In 1993, the California Legislature enacted A.B. 1290, legislation intended to restrict financial support for certain redevelopment projects by redevelopment agencies. That statute became effective January 1, 1994, and was codified at California Health and Safety Code 33426.5. This provides, in relevant part:

"Notwithstanding the provisions of sections 33391, 33430, 33433, and 33445, or any other provision of this party, an agency shall not provide any form of direct assistance to:

* * *

(b) (1) A development that will be or is on a parcel of land of five acres or more which has not been previously developed for urban use and that will, when developed, generate sales or use tax pursuant to Part 1.5 (commencing with Section 7200) of Division 2 of the Revenue and Taxation Code, unless the principal permitted use of the development is office, hotel, manufacturing or industrial or unless, prior to the effective date of the act that adds this section, the agency either owns the land or has entered into an enforceable agreement, for the purchase of the land or of an interest in the land, including, but not limited to, a lease or an agreement containing covenants affecting real property, that requires the land to be developed."

26. Section 3.3 of the DDA provides for direct assistance from the Agency within the meaning of Health & Safety Code 33426.5.

27. The DDA provides for Wal-Mart to receive approximately $1.9 million in subsidies from the Agency.

28. The project will include at least one parcel of land of five acres or more which has not previously been developed for urban use.

29. The direct assistance to Wal-Mart found in the DDA violates Health & Safety Code 33426.5.

30. Respondents are under a mandatory duty to comply with Health and Safety Code 33426.5.

31. Respondents are violating that duty.

32. No award of damages could make Petitioners whole for the intangible injuries caused by the loss of public revenues. Petitioners' pecuniary losses are difficult or impossible to calculate.

33. The balance of hardships and the public interest favor the issuance of injunctive relief here.

34. In seeking to enforce the laws at issue here, Petitioners are conferring a significant benefit upon the public at large, in that they seek both to enforce a law of public benefit and to protect fiscal values. The costs of pursuing this action are considerable. This combination of public benefit and the considerable burden of private enforcement makes recovery of attorneys fees by Petitioners appropriate.

35. There is currently a live dispute between Petitioners and Respondents, in that Petitioners claim that the Agency's subsidy of the Wal-Mart project violates the Health and Safety Code, while Respondents and real parties in interest contend the subsidy is lawful.

WHEREFORE, Petitioners pray:

1. For a temporary restraining order and/or preliminary injunction during the pendency of this action barring Respondents-Defendants from providing any direct assistance towards a development on the subject properties of a store selling taxable items, absent the recipient(s) providing sufficient security to reimburse such assistance if it is subsequently found unlawful.

3. For a judicial declaration that Respondents' financial assistance to a development at this site of a store selling taxable items is void, invalid and unenforceable as violative of Health & Safety Code 33426.5.

4. For a writ of mandate and/or permanent injunction compelling Respondents not to provide any financial assistance to any development of this land of a store selling taxable item.

5. For Petitioners' reasonable attorneys' fees, pursuant to Cal. Code Civ. Pro. 1021.5.

6. For costs of suit herein;
/ / /
/ / /
/ / /
7. For such other and further relief as the Court deems just and proper.

Dated: March 27, 1995

DAVIS, COWELL & BOWE
By: Andrew J. Kahn #129776
Marjorie M. Alvord #135868
Attorneys for Petitioners-Plaintiffs






SUPERIOR COURT OF CALIFORNIA

COUNTY OF SAN DIEGO

WALLY BOZEK; HENRY GONZALES;CASE NO. 684525
FINAL JUDGMENT FOR
PETITIONERS and
Petitioners-Plaintiffs,ORDER GRANTING
PETITIONERS' MOTION
v.FOR PEREMPTORY
WRIT OF MANDATE
REDEVELOPMENT AGENCY OF CITY OF[CCP 526a, 863 1085
CHULA VISTA; CITY COUNCIL OFH & S 33426.5
THE CITY OF CHULA VISTA and the
members thereof, in their
official capacity;
Respondents-Defendants.
WAL-MART STORES, INC; CHULA
VISTA TOWN CENTER ASSOCIATES,
L.P., a California Limited
Partnership; GATLIN DEVELOPMENT
COMPANY, INC.; KRB ENTERPRISES,
INC.,
Real Parties in Interest

Petitioners having moved for issuance of a writ of mandate, this cause came on regularly for hearing on the papers on October 20, 1995, in the Courtroom of the Honorable Richard J. Haden, Department 37 of the above entitled court. The Court considered the arguments and evidence from all parties, and issued a telephonic ruling in Petitioners' favor directing that a peremptory writ of mandate should issue. Oral argument was requested by Respondents. Oral argument was heard by the Court on November 3, 1995, at which time additional briefing was permitted by the Court. The Court considered an amicus brief from the Chula Vista Firefighters' Association. The Court considered the arguments and evidence from all parties and issued a ruling dated December 8, 1995 confirming its ruling on October 20, 1995 that:

1. A peremptory writ of mandate shall issue to prevent Respondents from financially assisting Real Party in Interest Wal-Mart. Such assistance is prohibited by California Health and Safety Code section 333426.5(b)(1). This statute is applicable and no exemption applies.

2. Petitioners are taxpayers with standing to bring this action.

3. Petitioners did not personally need to exhaust any available administrative remedies because there were no administrative procedures in place to address claims of illegal subsidy under H & S 333426.5. There is nothing requiring findings on any subject in the statutes concerning Disposition and Development Agreements (H & S 334433), let alone findings on whether the Disposition and Development Agreement is extending direct assistance to a retail development on land not previously developed for urban use. Since there was no administrative procedure to address claims of illegal subsidy under H & S 33426.5, there was no exhaustion requirement.

4. Even if there were administrative procedures in place to address claims of illegal subsidy under H & S 33426.5, Petitioners could rely on the efforts of William McMahon (McMahon) before the Agency since a public interest claim was involved. Friends of Mammoth v. Board Supervisors County of Mono (1972) 8 Cal.3d 247.

5. The sixty (60) day statute of limitations in California Cod of Civil Procedure section 860 et seq was also equitably tolled as McMahon, a member of the public, pursued a remedy in front of the City Council by arguing the whole project should be denied for failure to comply with CEQA concerns.

6. Even if no equitable tolling exists based on the efforts before the City Council, Respondents are estopped from arguing the statute of limitations in light of the letter from the Chula Vista City Attorney to Petitioners' counsel dated September 7, 1994. Estoppel requires knowledge of the facts by the party to be estopped, intent his conduct be acted upon, or so act that the party asserting the estoppel has a right to believe it was so intended. The other party must be ignorant of the true facts, and must rely on the conduct to his detriment. Strong v. City of Santa Cruz (1975) 15 Cal.3d 720, 725. The letter reasonably implies Petitioners would not be precluded by CCP 863 while the City Council considered the CEQA issues prior to authorizing the whole project.

7. The Semi-Exclusive Negotiating and Covenants Agreement (SENA) between Respondents and Real Party in Interest did not "grandfather" this project for purposes of H & S 33426.5 (b)(1). The SENA did not grant the City an interest in these parcels and it did not require their development. The financial assistance would improperly go to a parcel over five (5) acres not previously developed for urban use.

IT IS ORDERED, ADJUDGED AND DECREED

1. That a peremptory writ of mandate issue preventing Respondent from providing financial assistance to Wal-Mart as described in Disposition and Development Agreement by and between Redevelopment Agency of the City of Chula Vista, Wal-Mart Stores, Inc. and Chula Vista Town Center Associates, L.P. dated August, 1994. (Exhibit A to Judgment)

2. That Petitioners shall recover their costs herein.

Dated: _________________

_______________________
Hon. Richard J. Haden
Superior Court Judge

Submitted By:

DAVIS, COWELL & BOWE

By ____________________
Andrew Kahn, Attorney for
Petitioners

APPROVED AS TO FORM AND CONFORMITY WITH COURT'S RULING:

Dated:
BRUCE M. BOOGAARD


_______________________
Attorney for Redevelopment Agency
of the City of Chula Vista and
City Council of the City of Chula
Vista

Dated:
GRESHAM, VARNER, SAVAGE, NOLAN &
TILDEN


By: _____________________
John C. Nolan, Attorneys for Wal-Mart Stores, Inc.; Chula Vista
Town Center Associates, L.P.

A. Corporate Welfare State in the Making?

The term "welfare state" is a familiar one when the taxpaying public hears of public assistance; aid to dependent mothers, food stamps, Medicaid and public housing subsidies; but what is involved in this type of aid is a fight against poverty, and a recognition of personal need. Of course, there are excesses in the administration of these "Great Society" programs and they need to be analyzed and corrections executed to save vast funds wasted in many instances.

Now, however, the term "corporate welfare" has come to the fore with giant corporations who are financially powerful and eminently successful, being treated to subsidies through redevelopment agencies -- not available in most instances to help small businesses.

The great debate in the current Congress is therefore about the "welfare state." However, most of the debate relates to the individual and not to the corporation or small business. Many Republicans and Democrats are convinced the "welfare state" is bankrupt, morally vanquished, and in need of a complete overhaul. Social disorganization, inner city decay and the institutionalization of welfare should no longer be tolerated in the minds of many members of Congress because such aid is alleged to destroy the very lives it was intrusted to protect. The institutionalization of welfare makes it nearly impossible to wean its recipients when one generation after another joins the welfare rolls. The creation of a sub-culture is born with little or no hope of success.

These arguments are not only powerful, but painful in their applications for renewal or revision. Well! If welfare is bad for the individual, what happens, as discussed earlier, when major corporations become corporate welfare recipients?

Interestingly enough, major corporations are among the largest recipients of welfare or taxpayer money in America. They do it without compunction and fail to see themselves "feeding at the public trough" since their joint applications with developers are entirely legal. Together, the mega-retail discount chains which may be interested in "corporate welfare" may include Wal-Mart, Kmart, Target, Sam's Clubs, Price/Costco, among many others, and collectively have annual operating revenues between $100 and $200 billion. Yet they continue to apply for Disposition Development Agreement (DDA) funds in California and similar funding in other states, despite the negative impact of their grants on the health of school districts and state finance.

As was mentioned previously, Porterville, California built a distribution center for Wal-Mart in which the government was committed to give away $19,500 in tax reductions per job or possibly up to $7 to $9 million for jobs estimated to be paying between $8,000-$12,500 a year.

Lake Elsinore, California, in supporting a major chain's development was to give away approximately $7 million in infrastructure improvements and sales tax rebates for jobs that pay between $6,000-$8,000 a year. These average earnings appear to be below the poverty line. The City of Lake Elsinore may not see any substantial revenue generated for the City for 10-20 years. Why did they do it? The simple answer, apparently, is fear. Officials were afraid the neighboring cities would negotiate a better deal and kill their opportunity for future revenues. Moreover, elected officials often are untrained in corporate and public finance and simply believe they may be doing the right thing with respect to creating jobs.

It becomes obvious that during the past several years Wal-Mart, Kmart and other major chains, through their business plans, have been committed to expanding market shares within California and particularly, Southern California. These decisions have been arrived at through careful planning and analysis. Through their analysis, real estate and construction costs have been a major consideration, as well as the demographic planning.

In a sense, professionals on the staffs of these mega-retail discount chains have been doing their jobs well; while City Council personnel, RDA officials and other public sector personnel have not been able to cope with the ever increasing sophisticated challenges of public and private finance. As a result: the expected job creation often fails to materialize; sales taxes are lost to schools; traffic congestion, pollution and other environmental problems occur; and projects get renewed with final termination many years later than visualized in the original projects. The Bergeson Hearings of 1989 have not been followed up with conscientiousness by public officials and RDA personnel.

What About Meeting the Needs of Already Established Stores?

In February 1995, incentives offered by Chula Vista, California to Wal-Mart were challenged by an important competitor -- Target. The San Diego Union story stated: " Target Stores say this City (Chula Vista) is offering big incentives to lure its competitor, Wal-Mart, to town while overlooking the needs here of Target's two established stores. Some of the incentives could hurt Target's store on Fourth Avenue which stands to lose business by having Wal-Mart open next door,' Mark Johnson, a Target administrator stated to City officials."18

Community Development Director, Chris Salomone responded by saying:

"Target has a point. If the roles were reversed and Target were coming to town, we would help them. Chula Vista is eager to attract Wal-Mart as a source of sales and property taxes while Target, as an established business, already pays such taxes and, therefore, gets less attention from the City. It is not fair, and there's no pretense that it's fair," Salomone said. "We're all in the competitive mode to generate business."19

However, as pointed out previously, new business is not "generated," a shift in retail dollars merely occurs from the small "Main Street" retailers in many communities to a single "Big Box" mega-store in one "lucky" community. In fact, Mark Johnson, of Target, also stated that 25-30% of Target's business would be lost.20

According to the articles, the development package was to have included an almost $2.0 million dollar give away in sales tax rebates that could last for fifteen years, to simply build a bridge connecting Wal-Mart with Broadway.21

Previously discussed in this chapter was the fact that Chula Vista was being sued because the public believed their city has acted in violation of AB1290 - a new law passed in 1994.

What Do the Mega-Retail Discount Chains Bring to the Community?

Is it jobs? In a Lake Placid, New York study by a group of local citizens, "Residents for Responsible Growth," it was reported that for every part time job established in a new mega-discount chain facility, such as Wal-Mart, that one and one-half jobs will be lost by a decline in sales or bankruptcies and closing of the traditional "Main Street" stores.22 This startling comparison is even mild as against the reality described in July 1993 Inc. magazine article (quoted in the Lake Placid study) that:

a. Don Shinkle of Wal-Mart contends that the company's work force is at least 60% full-time.

b. That Wal-Mart defines full time as only 28 hours or more than the traditional 40 hours in retailing.23

In discussions with retailers in California, city planners, San Diego Council persons and San Diego city financial officials, it appeared to this writer that Wal-Mart's objective might be to build over 200 stores in California alone. This is not confirmed, but based upon the RDA subsidy record for mega-retail discount chain construction to date, cities with their numerous programs through RDA projects might contribute over $100 million in tax dollars, highway improvements, sales tax rebates to these ventures to help corporate giants such as Wal-Mart, Kmart and others establish a market in California, while pre-existing small businesses have to compete with these mega-chains with no offered incentives.

Even though Wal-Mart's experiences in California have been the scenario for this exercise, Wal-Mart itself is not the issue. What it obtains from RDA grants are legal, indeed. The problem is corporate America, which through this new type of subsidy program is also feeding, as are the poorest welfare recipients, from the public trough at the expense of the taxpayers. Further, the original purpose of the RDA objectives was to rehabilitate and upgrade the downtown areas of aging urban areas and not to provide dollars for large corporations.

"Corporate Welfare" Is Beginning to Have National Implications: When Will It Stop?

What is happening in retail is also noted in other mega-corporate endeavors. In a December 1994 article in the St. Louis Post-Dispatch24 it was reported that the Commonwealth of Virginia had authorized a subsidy package for the then pending Disney development worth $163 million to create the equivalent of 2,700 full time jobs. However, residents soon found out that 73% of these jobs were "part-time or seasonal." Further wage data from Walt Disney World and Disneyland suggested that most of the Virginia jobs would have paid only $3,700 to $6,200 a year, with no health care provisions.25 In other words, at the $6,200 level, based on the subsidy package, Disney would not have paid a single dime in salary to its employees for 10 years; at the $3,700 level, Disney would have been freed of labor cost for approximately 16 years.

The article continued, "Virginia taxpayers were actually looking at a much bigger subsidy package for Disney. There would have been massive hidden costs' of a poverty level work force, including Medicaid, unemployment compensation, food stamps and earned income tax credit."26

In the Disney example, in retrospect, if the employment created were truly full-time and paid $30,000 per year with benefits, a salient economic argument could have been made for strong subsidies. The economic dynamism for Disney, community and employees would have existed and been beneficial in a myriad of applications. However, subsidies for low paying, high turnover employees are a losing proposition and the taxpayers realized it. The billions of dollars given away to financially sound, healthy corporations in terms of subsidies, both nationally and state by state are staggering. The comments by respondents in Chapter IV from businesses in Illinois and New York support the California view.

Small business respondents resist the use of state and federal funds to remove traffic from the traditional downtown area and to subsidize the "Big Boxes" on the interstate highways. Relatively few taxpayers know they are subsidizing some of the wealthiest corporations in America, but the competitive small retailer is very well informed about these inequities.

The Role of Redevelopment Law in "Box Store" Expansion

Commercial development has received millions of dollars in taxpayer subsidies from redevelopment agencies in California and in such states as Illinois, New York and in some instances in Pennsylvania. Typically these redevelopment agencies are set up by an individual city and influenced by members of its City Council. While intended to cure urban "blight," these agencies have often been set up in growing areas - hence the subsidies offered may not have been necessary to attract business to locate there. Moreover, these agencies often have simply attracted businesses which by their nature strip clients and customers from other businesses nearby, such as retail stores and hotels.

These subsidies are generally obtained by means of "tax-increment" financing -- meaning that the agency is allowed to step in and siphon off the taxes from an area which heretofore would have been paid to the City, County, School District and State. This gives the agency the funds to buy land and then sell or rent it at a discount to developers and end-users. To illustrate the concerns about "corporate welfare," the following case discussion is set forth.

Regus v. City of Baldwin Park, California (1977)27

A major legal precedent for instructing Redevelopment Agencies that they should stay away from "commercialism" and concentrate on eliminating "urban blight" was the case of Regus v. City of Baldwin Park, California in 1977. Kmart was involved in this case.

The precepts and principles set forth in this case have largely been ignored by RDA's and city and state officials as was borne out by a review of the 1989 Bergeson Hearings, described earlier in the chapter. More and more community and societal interest must be induced to save "Main Street" traditions and retail stores and to conserve the scarce assets of schools districts, cities, states and taxpayers.

The agencies' abuse of their powers is summarized well by a California appellate court in Regus v. City of Baldwin Park, California.

"Under the law, blight must be found before redevelopment can be authorized, because, first, without evidence of blight there is no solid justification for compelling taxpayers in one section of the community, for example to those in the county, the school district, and in Baldwin Park outside the Project area, to subsidize the cost of development of another section of the community by carrying a disproportionate share of the cost of local government."

"Second, unrestricted use of redevelopment powers fosters speculative competition between municipalities in their attempts to attract private enterprise, speculation which they can finance in part with other people's money."

"When the extraordinary powers of urban areas are used as a fiscal device to promote industrial, commercial, and business development in a project area that is merely underdeveloped rather than blighted, competitive speculation may be turned loose. By misemploying the extraordinary powers of urban renewal, a redevelopment agency captures pending tax revenues which it can then use as a grubstake to subsidize commercial development within the project area in the hope of striking it rich. Such schemes contemplate borrowing money by issuing bonds on the strength of assured future tax revenues, money which is then used to acquire, improve, and resell property within the project area at a loss as an inducement to business enterprises such as Kmart to locate within the project area rather than in neighboring communities. In essence, tax revenues are used as subsidies to attract new business. The immediate gainers are the subsidized businesses. The immediate losers are the taxpayers and government entities outside the project area, who are required to pay the normal running expenses of government operation without the assistance of new tax revenues from the project area."

"The promoters of such projects promise that in time everyone will benefit, taxpayers, government entities, other property owners, bondholders; all will profit from increased development of property and increased future assessments on the tax rolls, for with the baking of a bigger pie, bigger shares will come to all. But the landscape is littered with speculative real estate developments whose profits turned into pie in the sky; particularly where a number of communities have competed with one another to attract the same regional businesses. Undoubtedly, it was for these reasons that the Legislature restricted urban renewal to blighted areas, and when faced with abuses in 1976, further tightened its restrictions."

"At best, City's projected redevelopment plan possesses a particularly speculative cast in that the businesses it hopes to attract through redevelopment are primarily those of consumption rather than production, businesses such as hotels and shopping centers whose acquisition does not increase the total wealth of a region as a whole but merely redistributes the existing supply by capturing business from rival communities. The success of such strategy assumes the absence of effective counter-measurers by rival communities targeted for displacement."28

In summary, the author concludes that there is little in the redevelopment law to stop agencies from currently abusing their powers. First, as a practical matter, there appears to be no one to enforce these California laws. The tax burden these agencies (RDA's) redistribute to other taxpayers does not hit any one taxpayer hard enough to justify him or her spending tens of thousands on litigation to challenge the subsidy. Apparently, state administrative agencies fail to monitor what the local redevelopment agencies are doing. City attorneys are not aggressive in telling the city council which employs them that they may be acting either unlawfully or immorally in grabbing added revenues.

Second, the agencies succeeded in convincing the California Legislature to impose a short statute of limitations (60 days) on many redevelopment law claims by citizens -- meaning that by the time most citizens learned about what the agency was up to and hired counsel competent to deal with the matter, it was too late.

Third, the standards governing these agencies have historically been loose. Courts generally have applied their usual rules of complete deference to "legislative" decisions and extreme deference to "administrative" decisions.

Comments from Illinois, New York and Pennsylvania

Previous chapters indicated both quantitative and narrative comments from Illinois, New York State and Pennsylvania as well as California. California has been treated in great detail and the subsidy program there with its apparent abuse became quite clear. A word about other states in the survey follows:

Illinois

Chapter IV described many critical comments from small retailers about Illinois' subsidy program for the major chains. Apparently this resentment has reached the governor's office and the following statement by Jim Edgar, Governor of Illinois in 1993, admits damage to resident retailers by favoring the incoming "giants." In a State Government News article entitled, "Are Economic Development Incentives Smart?"29 he summarizes his concern about oversupport of the "giants" and undersupport of the small businesses in Illinois:

"State leaders have no greater charge than to promote and preserve the economic security of those they serve and the generations that will follow; yet, I am convinced that we can meet that responsibility more responsibly and more effectively by calling a truce to the bidding wars that became the centerpiece of economic development efforts in the 1980's."

"The battles have been intense and well-publicized. State after state has tried to outdo its competitors in wooing new commerce by fashioning glittery giveaways that feature tax breaks and other allurements. All of us can point to success stories -- to creation of new jobs, both direct and spinoff."

"But at what cost? Businesses that have bolstered a state's economy and have helped support vital government services for decades have been neglected -- and worse yet, imperiled -- as competitors receive handsome subsidies to locate a few miles away. Moreover, policies and projects that promise to enhance a state's economic viability in the long term are detoured and perhaps even ditched in favor of the instant gratification, not to mention political credit, that can accrue from a short-term gain."

"In Illinois, we are not disengaging unilaterally. To do so would be just as unrealistic as it would be for the United States to have withdrawn unilaterally from the nuclear arms race. However, we have retooled our economic development efforts."

"We are shifting the emphasis away from luring new businesses with company-specific incentives and toward providing the basics that will help businesses in our state survive and thrive in a global economy that is becoming increasingly competitive."

New York Developments

The respondent comments in Chapter IV were quite critical of the unfairness of the New York state subsidy program with respect to resident small retailers. It was the California and Illinois resentment, disclosed once again.

Edward Regan, former Comptroller of New York State, was a crusader for subsidy accountability and wanted to disclose "hidden costs." In his 1988 booklet, Government, Inc., he argued that politicians were remiss in their duty to watch the public till because they would rather cut ribbons than scrutinize the total impact of their giveaways. (Government Inc. was published by the 14,000-member Government Finance Officers Association.)

Regan's points follow:30

"State economists generally agree that it is in the hidden tax expenditures' of abatements and credits that corporations often get the largest subsidies. Because they are not paid in the form of outright government checks, and because they fade from public attention over many years' duration, they attract little attention. However, the cost to taxpayers is the same as if the government wrote a check."

"But governors and mayors do know about these hidden values, and they are often quite touchy about the subject. Indeed, one governor summarily fired a state economist because he had dared to make a conference talk that questioned whether the state would ever break even on a lavish auto-plant deal."

Regan pointed out a pending New York State Senate Bill (text follows) which simply required that each program resulting in forgone tax revenue be reported on annually, as any other government expenditure would be, at the state, city, town, village, and county levels. Beside actual dollar costs, the bill would require an evaluation of the expenditure's effectiveness, and whether or not the program has caused jobs to shift from one part of the state to another, resulting in dislocation.

The Senate Bill in New York which began to list requirements for the behavior of subsidy recipients follows:

New York Senate Assembly Bill A. 6068-A, 1993-1994 Session 31

"163-B Recoupment of Financial Incentives to Certain Businesses."

"1. . . . Each contract, agreement or understanding by which a person, firm, partnership, company, association or corporation within the State receives an award, grant, loan, tax abatement or other business incentive from the state, any of its political subdivisions, or any department, bureau, board, commission, authority, or other agency or instrumentality of the State or its political subdivisions . . . shall contain the following provisions:"

"(a) A stated period of time within which the terms of the contract, agreement or understanding are to be fully executed and completed."

"(b) A stated purpose and the amount of the award, grant, loan, tax abatement or other business incentive."

"(c) Where applicable, the number of persons to be trained pursuant to the terms of the contract, agreement or understanding."

"(d) Where applicable, the number of jobs to be created or retained pursuant to the terms of the contract, agreement or understanding."

"(e) Where applicable, the extent of the operations or facilities to be developed pursuant to the terms of the contract, agreement or understanding."

"(f) Notice to the recipient that the full amount of the award, grant, loan, tax abatement or other business incentive awarded shall be payable with interest, upon a finding that the recipient has not executed or completed the stated purpose of the project within the stated time period."

The New York Economic Development Zone Law passed in 1990 further provides restrictions on the behavior of recipients.

"Section 959; Responsibilities of the Commissioner."32

"The Commissioner shall:"

"(1)(a) . . . promulgate regulations governing (I) criteria of eligibility for economic development zone designation . . . (iv) . . . so as to revoke the certification of business enterprises for benefits . . . upon a finding that . . . (2) the business enterprise has failed to construct, expand, rehabilitate or operate its facility substantially in accordance with the representations contained in its application for certification; (3) the business enterprise has failed to create new employment or prevent a loss of employment in the economic development zone provided; however, that such failure was not due to economic circumstances or conditions which such business could not anticipate or which were beyond its control; . . . (A) the date determined to be the earliest event constituting grounds for revoking certification shall be the effective date of decertification; ... the commissioner shall notify the commissioner of taxation and finance that such decertification has occurred . . ."

Also a New York Senate Assembly Bill 33 sought to add strict "clawback" language to contracts let by every single State development program. The contracts would specify how many people were to be trained or how many jobs were to be created or retained or which physical developments were to occur. They would also specify the timetable for achieving the numbers, and if a company failed to deliver, the value of the subsidy would be payable with interest back to the relevant State agency.

Pennsylvania Tax Abatements

In the Pennsylvania study reported in earlier chapters, there was resentment discerned in tax abatements provided by local governments to large discounters. For example, Carrefour, a French discount retailer, was to pay no property taxes to the City of Philadelphia for five years. After receiving all the tax abatement advantages, Carrefour left the city after 4 years.

The following bill was introduced in 1993 to correct this abuse:

Pennsylvania House Bill 199334

"Section 1. Standards for financial aid."

"Persons, firms and corporations seeking to construct or expand commercial or industrial facilities within this Commonwealth and who are applying for financial assistance from the Commonwealth or any of its development agencies or authorities are subject to the following standards:"

"(1) Applicants are required to prove a need for financial aid."

"(2) Applicants will be held to promises made relating to the type and nature of facilities; the type and nature of the products produced; the type, nature, number and wages of any jobs promised to be created; and whether or not such jobs are truly new jobs or merely transfers of jobs from other in-State locations. Any such promise shall be legally enforceable as provisions of contracts are enforceable."

"(3) If an applicant has had operations within this Commonwealth within the past ten years, it shall be required to prepare a preferential hiring list and offer new jobs to former employees wishing to relocate and to assist financially in their relocation within a radius of 500 miles."

"(5)(ii) There shall be no discrimination in hiring based on previous union membership."

"(6) Wage rates and minimum job levels shall be negotiated in advance and shall be enforced."

As described earlier there are varying types of corporate welfare found in the sates under study. One unique example took place in Philadelphia where mega-retail discount chains such as Home Depot, Sam's Clubs and Wal-Mart wanted to open their "Big Box" stores on land abutting the Delaware River, to create a "Power Center." An influential interstate government authority, the Delaware River Port Authority (DRPA), with jurisdiction over bridges, piers, marine and related facilities was involved. This authority in 1993 was requested by real estate developers to consider financing the purchase of water front land for the mega-retail discount chains to build upon. The land was to be purchased by the DRPA rezoned and sold for development. The land in question is now occupied by Home Depot and Wal-Mart. The unique characteristics of this form of corporate welfare is that the package was created by a port authority and not a local municipality.

A New Civil War is Brewing

According to Greg LeRoy, author of No More Candy Store:35 "Whether or not the federal government ought to practice industrial policy is a much-debated issue. Industrial policy critics often characterize the debate as whether or not government can or should pick winners and losers'."

LeRoy states further:

"The fact is, however, the federal government's laissez-faire attitude towards the ruinous civil war over jobs is actively contributing to the problem of capital mobility and thereby producing lots of losers'."

"The biggest job subsidy programs such as Industrial Revenue Bonds (enabled under the federal tax code) and Community Development Block Grants (Department of Housing and Urban Development) and other Department of Commerce titles, have no anti-relocation rules at all."

"Only two current federal job subsidy programs have anti-relocation regulations: the Job Training Partnership Act (JTPA), (Department of Labor) and the Public Works title of the Economic Development."

"In any case, states routinely evade the JTPA and EDA anti-relocation rules by simply substituting state funds for the training and infrastructure purposes served by the federal funds."

"But it's all a shell' game, because state budgets rely heavily upon federal grants. The money is fungible' or interchangeable, and many of the non-regulated state programs could not really exist but for big annual federal grants."

"By allowing companies to play states against each other with federal money, the U.S. government is aiding and abetting the jobs civil war. Little regulation plus the shell game means that federal subsidies in effect subsidize runaway shops all the time. Therefore, only strict, broad federal rules plus aggressive state punishments can stop runaway subsidies."

This competition among communities and states is rightfully described by LeRoy as a "ruinous civil war." A similar accusation is made in a recent Time article describing various deals made by cities and states to lure industry. The article mentions a theory by Barry Rubin, a professor of public and environmental affairs at Indiana University, that the tax breaks that everyone competes on are not the real deal makers:

"The dirty little secret in the incentives game is that the real criteria for site selection are skill and cost of labor, proximity to customers and price of real estate. Tax breaks are rarely the deal maker. ... a firm's variable costs - charges that come on top of fixed expenses like lease payments - state and local taxes make up at most 3%. Giveaways are likely to have little impact unless other factors are virtually equal."36

However, cities and states are still afraid to not offer these incentives. Examples can be found daily in the news of deals and counter deals among states competing for industry.

As was mentioned earlier, some governments are establishing controls to keep these fights from getting completely out of hand.

"Connecticut, for example, has created clawback' agreements that require corporations that fail to meet job targets to repay tax subsidies. Minnesota scaled back $620 million in aid to Northwest Airlines after it delivered fewer than 1,000 of 1,500 promised jobs. Washington has also grown concerned. Senator Jeff Bingaman, a New Mexico Democrat, wants the Commerce Department to decide whether companies that receive tax benefits should be required to file cost-benefit analyses and stand behind their job pledges."37

Small Businesses Join the Rally

At the 1995 White House Conference on Small Business, delegates identified the 60 most important recommendations which They felt would further the economy, protect their position in the economy and society and promote growth in the social and economic welfare of the United States. Two of these recommendations highlighted the concern of these small business owners and advocates on this "civil war" and the victims (the displaced small business) of the bloody battle.

"44. State-to-State Competition for Jobs and Business: Efforts of an individual state or municipality to benefit its local economy should not be made at the expense of other states or municipalities and at the peril of the strength of the entire economy. It should be the interest of the Congress to benefit the economic security of all the citizens of the United States by working to provide the resources to expand the economy nationwide. Therefore, Congress should ban the direct or indirect utilization of federal funds of any kind, including subsidies, grants bonds or tax exempt financing that funds, in whole or in part, any special tax, infrastructure improvement and/or financing incentive by any state or municipality to lure existing jobs and businesses from one location to another."38

"139. Small Business Relief Fund: Congress should legislate the creation of a Small Business Relief Fund to economically assist small businesses that are displaced by the establishment of a big business in their localities where the big business will contribute an annual fee for the fund."39

Interestingly neither of these recommendations were in the leading recommendations of the two previous White House Conferences on Small Business in 1980 and 1986. This speaks to the growing concern of small businesses about the impact of mega-retail discount chains and the corporate welfare' they receive. Unfortunately, no action has been taken by the Administration or Congress on either recommendation at this time.

Recommendations to Congress for Federal Legislation to Combat and Restrict "Big Box" Abuses

The following recommendations, hopefully would restrict "Big Box" abuses by mega-retail discount chains, developers and Redevelopment Authorities operating under existing state redevelopment laws, by taking away state and local tax giveaways; and provide a vehicle for Congressional Hearings.

The idea is to attach strings to federal monies given states and localities: for example, such strings are often attached to highway monies. This would make sense here because these "Big Box" stores create additional burdens on federal highways, as they are often built in areas accessible only by federal highways.

The legislation would say that highway money would be reduced to any state which allowed these stores to go up in any of the following circumstances:

(1) if the development received state or local tax incentives;

(2) if it was within x miles of a federal highway;

(3) if the developer/retailer did not pay the government for the full social costs of building such a store (not just for repairing highways more often, but also cleanup of air pollution) (a study to determine those costs should be required); or

(4) if a required "small business impact report" showed existing small businesses would be injured significantly.

Ideas for titles could be: Small Business Survival Act; Retail Overdevelopment Act; Tax Financing Restraint Act (or any combination of these).

Further, since the Internal Revenue Code is filled with provisions which aid, help or restrict the activities of certain industries; it is a natural place to consider to curtail the redevelopment agency, developers and "Big Box" abuses.

The idea might be to impose an excise or penalty tax on any state or local tax giveaways these "Big Boxes" wangle out of state and local governments. The legislation could possibly apply only to retailers with an income over x billion dollars or upon those with facilities over a certain size. Our logic is this: the federal agencies and Congress are the only people who can stop the states and cities from cannibalizing each other as each gives away more and more in the form of tax breaks to win these mega-retail discount stores; only to rob their neighboring town or state of tax revenues (and jobs) from the existing retailers. Again, in total, sales revenues are not increased, they are merely shifted.

Only states or the federal government can step in to stop the current warfare; warfare which makes local governments more dependent on Washington, D.C. No new net jobs are created, and because the mega-retail chains pay their employees less and eliminate jobs at others retailers, they cause the federal government to receive less in income taxes. This should certainly interest Congress and the U.S. Treasury Department.

It is obvious that there are also incidental costs to the federal government for "Big Box" store development. They tend to expand near interstate highways adding additional traffic which certainly this costs the federal government more.

The mega-retail discount chains generally don't provide health insurance to employees, adding these people to the governments' burden. These chains are quite profitable, so an excise tax would not put them out of business.

Further, the environmentalists and preservationists should see the need to reduce the tax incentives for "Big Box" development. Finally, those in favor of reducing the federal deficit should be eager to embrace new sources of revenue.

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