Local Businesses Call Subsidy Unfair : Economy: Lancaster officials lure a pet supplies chain to town with an offer of public money. Established companies protest.

Three months ago, staring at a big vacancy in the city’s major shopping center and with a national pet supplies chain talking about coming to town, Lancaster officials decided to offer a public-money subsidy to close the deal--and it worked.

After the city offered the Phoenix-based PetsMart chain a redevelopment subsidy of up to $187,500 spread over 7 1/2 years, the company picked Lancaster for its new outlet.

So the city gets a new business, new jobs and a big new sales tax generator. Everyone has reason to be happy, right?

Not quite. In a dispute that exemplifies the problems and perils of government subsidies to attract new businesses, the PetsMart deal and another one like it have caused controversy--some established local businesses contend that the city has only given them the shaft.

While city officials contend that the new businesses they entice will more than pay for themselves and bring in new revenue, local owners fear the subsidized newcomers will only steal away their customers.

“I don’t think the city has any business going into partnerships with retail businesses,” said Tim Harris, owner of the city’s Pet Oasis store. “The only way the city can increase dog food sales is to bring more dogs into town.”

Throughout the state, with California’s economy still mired in recession and local governments often fiercely competing with each other to snare big new businesses, the issue of whether such subsidies are good policy and fair to existing businesses often has been debated.

Nationally, one of the biggest deals ever was announced earlier this month when Mercedes-Benz chose Alabama to build a new auto assembly plant expected to employ about 1,500 people, but only after the state beat out several rivals by offering a $250-million incentive package.

In California, much smaller subsidies often have been directed at auto malls, shopping centers and even high-volume discount chains such as Wal-Mart and Price Club. The reason is that such businesses generate large amounts of sales tax dollars, an increasingly important revenue source for many cities.

Yet, according to William Carlson, executive director of the California Redevelopment Assn., there has been little solid research to answer a fundamental question. As he put it, “Is there net growth or are we just shuffling the deck?”

When Lancaster joined neighboring Palmdale in March to announce a new business incentives program, the news was only good. Although many cities have offered individual subsidies, this was billed as the first time in California that cities had made such a blanket subsidy offer.

The deal was this: Any business bringing 25 or more new manufacturing or office jobs to either city, along with an investment in land or facilities exceeding $1 million, would receive a one-time subsidy of $2,000 per job in reduced development fees or other costs.

But in the half a dozen subsidy deals that Lancaster has negotiated or approved since then, the city has taken a more liberal approach. In some instances, the businesses have not met the program’s investment guideline, or the city has approved larger or year-after-year subsidy deals.

Citing a lack of businesses willing to meet the original guidelines, Palmdale officials have yet to approve a subsidy under the program. But Lancaster Redevelopment Director Steve Dukett said his city has taken a broader approach, saying the guidelines were only meant to be general.

Dukett stressed that the city does not consider the PetsMart subsidy to be part of the two cities’ $2,000-per-job Business Attraction Incentive Program. But it nonetheless touched off community concerns about the subsidy program.

City Council members said they continue to back the program, although the dispute over the PetsMart deal and similar opposition to one approved Monday night for a petroleum wholesaler have made some council members more cautious. It has caused them to begin talking of helping existing businesses.

Councilman Frank Roberts, part of the original unanimous vote for the PetsMart deal, now says the city ought to do something to “level the playing field” for other pet supply businesses in town. And he said the council ought to consider the impact of such deals more carefully.

“I’m a person who learns by trial and error. And I’ve learned,” Roberts said of the dispute over PetsMart. Opponents gathered several thousand petition signatures from residents against the deal. And even the Lancaster Chamber of Commerce opposed it.

City officials said they have been giving business subsidies for years in various forms and drew no community complaints. But that was during the 1980s when the area was growing rapidly and there were enough customers for everyone. Now, businesses are closing and money is tight.

Ideally, the subsidy program was meant to avoid the most direct area of competitive conflict by focusing on office and manufacturing jobs instead of retail. But the same unfair advantage issue could apply equally to a new real estate brokerage, accounting firm or metal shop.

Mayor Arnie Rodio said he does not regret the PetsMart deal, saying he has to consider the city’s financial well-being over negative impact on other businesses. “We’re not here to put local people out of business. But we also have a commitment to make things grow in our city,” he said.

Yet Rodio said he too is now willing to explore expanding the subsidy offers to existing businesses. The original program did offer the subsidies to existing businesses willing to undertake large expansions. But the 25 new jobs criterion put the offer out of reach for many smaller businesses.

Under the PetsMart deal approved by the council in July, the city agreed to use up to $25,000 a year in redevelopment funds over 7 1/2 years to subsidize the company’s lease of the former Drug Emporium store in the city’s Valley Central shopping center.

City officials said the store has the potential to more than offset that subsidy by generating up to $450,000 in sales tax revenue to the city over the same period. And had they not acted, city officials said, PetsMart might simply have located in Palmdale, and still competed for local business.

But there is no guarantee that the store’s sales and accompanying sales tax revenue will be new instead of business taken from other pet stores in the region. And local pet store owners say they expect the new store to embark on a deliberate campaign to put them out of business.

In the deal approved Monday, the city agreed to provide $350,000 or more of redevelopment funds--about $50,000 a year over seven years--to Cardlock Fuels System. The petroleum products supplier will establish its office in Lancaster and have 25 employees within two years.

Because the city then will get credit for all the company’s sales throughout the state, city officials expect that the business will generate at least $100,000 a year in sales tax revenue for Lancaster, more than offsetting the amount of the subsidy.

However, the subsidy far exceeds the original $2,000-per-job formula that would have yielded a one-time grant of about $50,000. And neither is Cardlock required under the deal to make any major capital investment in the city.

At Monday’s council meeting, four longtime petroleum wholesalers in the city turned out to complain that Lancaster first ought to help existing businesses.

“I think it should be tit for tat,” said Newell Little, the founder-owner of Little Oil Co., which employs 86 people.

Little, saying he and the others have been approached about leaving Lancaster for Kern County, said they also could use city loans to expand their businesses. “I’ve been here for umpteen years, and if they’re giving money away, I’d like to have some of it too,” Little said.