The High Price of L.A.’s Addiction to Business Fees

The Los Angeles City Council seems constitutionally incapable of learning the key lesson of modern urban governance: Only cities that are capable of appealing to and retaining wealth-creating businesses can hope to provide adequate services to their residents.

Faced with a money shortfall because it fears that Mayor Richard Riordan’s budget, which relies on LAX and port revenue transfers, is built on legal sand, the City Council returned to the old wells of raising fees and hiking some taxes to balance the books. It is not a decision likely to accelerate L.A.’s economic recovery.

In its attempt to reverse the city’s decline, the Riordan administration has been most effective in cutting individual deals--the Van Nuys GM plant, for example--that shepherd companies or projects around the city’s fee and regulatory regime. But Riordan’s attempts to implement desperately needed reforms have been stymied by the administration’s sometimes high-handed relations with council members.

Already, amid a strong regional recovery, the city is lagging behind its neighbors in everything from industrial investment and job creation to retail sales and property values. “We’re in danger of becoming the hole in the doughnut,” warns Dan Garcia, an advisor to Progress L.A., a group seeking to streamline the city’s bureaucracy.

Filling the leadership vacuum created by Riordan’s political ineptness, the council seems bent on perfecting what could be called “supply side” economics in reverse--taxing and regulating enterprises to feed its sprawling bureaucracy. In apparent deference to public employee unions, for example, it refuses to consider contracting out such work as parking enforcement. It maintains its own staff of elevator inspectors and an electrical testing lab, jobs contracted out to private companies or performed by the state of California in virtually every other California city. Generous labor contracts, involving both union and non-union personnel, translates to higher fire and workers’ compensation insurance than most surrounding cities. The list could go on.

To pay the bills, Los Angeles has become more addicted to levying fees on businesses than any large city in the region. Indeed, 61% of the city’s revenue is fee-related. The problem is that such a heavy reliance on fees forecloses other revenue options, like sales taxes, because it frightens, or chases away, businesses.

“The reason business-license fees and building fees are so high [in Los Angeles] is that you’re supporting a big family,” says consultant Larry Kosmont, a former director of community development in Burbank and city manager of Bell Gardens. “That leads a lot of companies to reject moving into L.A. because the fees will kill them.”

The cost differential between setting up a business in Los Angeles and in surrounding cities is substantial enough to scare off many a small company, increasingly the engine of L.A.’s economy. In Ontario, a 60,000-square-foot office project costs a maximum of $54,000 in local fees; in Los Angeles, that same project would cost $1 million in fees. For a 50,000-square-foot manufacturing facility, Ontario charges a maximum of $18,000 in fees, compared with more than $200,000 in Los Angeles.

Similar differentials exist for companies that simply want to occupy built space, something Los Angeles possesses in huge quantities. The average costs of a business license, utility and other fees for, say, an electrical-equipment manufacturer using 50,000 square feet ranges from zero in unincorporated parts of Riverside County to $1,550 in Ontario, less than one-third the fees charged in Phoenix. In Los Angeles, the same company would pay $23,860. Even Orange County, hardly a cheap business location, charges fees, for both developers and new tenants, in industrial cities that are a fraction of those in Los Angeles.

By providing relatively high levels of public safety--one reward of a thriving city economy--and pro-business administrations, such cities as Burbank, Glendale, West Hollywood and Culver City are well on their way to capturing the bulk of the expansion of entertainment, multimedia and other information-age companies.

Essentially, these cities offer the location advantages of being in the midst of Los Angeles’ talent pool and infrastructure without being subjected to the city’s burdensome cost structure. Although closer to downtown Los Angeles than many parts of the city proper, Burbank, for example, charges developers of office space a maximum of $6.38 a square foot, about half that charged by Los Angeles. For the average business-service provider using 30,000 square feet of space, fees in Burbank average about $12,000, compared with $116,000 in Los Angeles; the electrical-equipment manufacturer in Burbank pays roughly $8,980 a year in fees, while its L.A. counterpart spends $23,860.

Coincident with the Los Angeles’ higher fee costs is a regulatory nightmare. Although permitting procedures have been somewhat streamlined during the Riordan administration, various bottlenecks, such as the city’s electrical testing lab, have held up new businesses and company expansions throughout the city. For example, construction of of the Magic Johnson Theatres in the Crenshaw district was delayed for months at a time because of regulatory demands.

“We’re building theaters all over the country, and we’ve had problems in Los Angeles that we have not seen anywhere else,” says Ken Lombard, president of Magic Johnson Theatres. “The criteria the [city} use to regulate businesses are essentially antiquated.”

Unfortunately, not all entrepreneurs are as determined to stay in Los Angeles as Magic Johnson. Many growing businesses, particularly in the fast-paced entertainment and multimedia fields, have little time or inclination to cut through L.A.’s bureaucratic thicket when there are options nearby. “I have windows of opportunity that open and shut in a matter of weeks,” explains one entertainment executive who decided to move his 150-person company from Los Angeles to Burbank. “I don’t have time for L.A. City Hall to make the deal.”

City Hall’s political economy is increasingly an albatross not only because it indulges its bureaucracy. The problem, says L.A. planner and developer David Abel, is that the council doesn’t hear any other voice besides that of public-employee unions. In contrast to smaller cities, Los Angeles’ organized business community, according to the mayor’s office, has been MIA during the budget battle.

“The problem is the stakeholders, the multiple publics, are out of the process,” contends Abel. “Now it’s down to the people who have to be there every day. The public employees have risen in importance as everyone else--business, the Valley, the neighborhoods--has fallen away, and that gives them [the unions] the power.”

Ultimately, the issue is the fundamental interests of local governments. Successful cities like West Hollywood, Pasadena and Culver City are hardly conservative bastions. Rather, they are communities with a demonstrated interest in providing quality public services. The big difference is that both government workers and elected officials get the connection that nurturing business provides the most efficacious means to subsidize not only better police and fire services, but also good schools, libraries, parks and other public infrastructure.

Indeed, the biggest losers of the council’s economic policies are not the business elites, who can always move their operations elsewhere, but the poor, heavily minority and working-class parts of the city. Successful high-end businesses in affluent areas--notably in Century City, the Westside and parts of the Valley--are far more capable of bearing the higher costs of an L.A. location. They can hire their own security services, send their children to private or parochial schools and organize business-improvement districts.

By contrast, the businesses most likely to flee and head for surrounding cities is the smaller manufacturing or service company located in the less affluent areas of Los Angeles. For such companies, the city’s regulatory and tax regime constitutes a significant disadvantage. Industrial investment per worker in Los Angeles, for example, dropped significantly between 1991 and 1994, while rising dramatically in Burbank, Santa Fe Springs and Vernon.

Recent examples of this disturbing trend include the expansion plans of two long-standing companies in South-Central. Casa Herrera, a prominent tortilla-equipment maker, is moving its new operations to Chino; contact-lens maker Younger Manufacturing is expanding into Torrance. Between them, they will take hundreds of jobs from the inner city.

“It’s the machine shop in South-Central that’s likely to move to Southgate or some place else outside the city. So you lose the jobs most where you need them,” says RLA President Linda Griego.

Beyond the current budget disputes, Riordan, along with a reinvigorated business community, must begin to educate and lead the City Council to take up the most important fiscal issue facing the city: How to wean the city off its dependency on business fees and revenue-generating regulations in order to build a stable and growing tax base. Until the city does so, it hastens the day when it may become the hole in the regional economic doughnut.*