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.
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).
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.
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:
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.
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.
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.
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.
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.
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
Mr. Norby made the following strong recommendation, which if followed should end "corporate welfare" in California.13
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
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.
The Los Angeles delegation at the December 7, 1989 hearing saw certain "disturbing trends."16
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
GEORGIOU, TOSDAL, LEVINE & SMITH
600 B Street #2300
San Diego, California 92101
Attorneys for Petitioners-Plaintiffs
|WALLY BOZEK; HENRY GONZALES;||CASE NO. 684525|
|FIRST AMENDED PETITION FOR|
|Petitioners-Plaintiffs,||WRIT OF MANDATE; COMPLAINT|
|FOR INJUNCTIVE AND|
|REDEVELOPMENT AGENCY OF CITY OF||[Cal. Code Civ. Pro.|
|CHULA VISTA; CITY COUNCIL OF||526a, 1085; Cal. Health &|
|THE CITY OF CHULA VISTA and the||Safety Code 33426.5]|
|members thereof, in their|
|WAL-MART STORES, INC; CHULA
VISTA TOWN CENTER ASSOCIATES,
L.P., a California Limited
Partnership; GATLIN DEVELOPMENT
COMPANY, INC.; KRB ENTERPRISES,
|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.
2. This court has jurisdiction under California Code of Civil Procedure sections 526a (taxpayers' suits), and/or 1085 (writ of mandate).
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:
(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.
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:
* * *
(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."
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.
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
|WALLY BOZEK; HENRY GONZALES;||CASE NO. 684525|
|FINAL JUDGMENT FOR|
|WRIT OF MANDATE|
|REDEVELOPMENT AGENCY OF CITY OF||[CCP 526a, 863 1085|
|CHULA VISTA; CITY COUNCIL OF||H & S 33426.5|
|THE CITY OF CHULA VISTA and the|
|members thereof, in their|
|WAL-MART STORES, INC; CHULA
VISTA TOWN CENTER ASSOCIATES,
L.P., a California Limited
Partnership; GATLIN DEVELOPMENT
COMPANY, INC.; KRB ENTERPRISES,
|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.
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.
Hon. Richard J. Haden
Superior Court Judge
DAVIS, COWELL & BOWE
Andrew Kahn, Attorney for
APPROVED AS TO FORM AND CONFORMITY WITH COURT'S RULING:
BRUCE M. BOOGAARD
Attorney for Redevelopment Agency
of the City of Chula Vista and
City Council of the City of Chula
GRESHAM, VARNER, SAVAGE, NOLAN &
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:
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:
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.
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:
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:
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
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:
The New York Economic Development Zone Law passed in 1990 further provides restrictions on the behavior of recipients.
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:
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:
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:
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.
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.
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:
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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