Experts Warn Against City Competing for Valley HMOs

The competition for four HMOs here and a fifth downtown, which prompted Mayor Richard Riordan last week to endorse a $15-million tax break, is a potentially corrosive process that many cities have begun abandoning in favor of regional cooperation, experts say.

Known in planning lingo as “poaching,” the practice of one town trying to steal another’s tax base can lead to corporate blackmail, drain public coffers, and sour relationships between business and government, according to several leading experts on economic development.

Yet Riordan, who is up for reelection this spring, may have felt he had no choice but to offer the health-care companies a generous incentive to remain in Los Angeles, especially because four are in the voter-rich San Fernando Valley, political consultants said.

“Poaching is a war against all,” said Max Neiman, a political science professor at the University of California, Riverside, who has made an extensive study of poaching and other forms of competition among Southern California cities. “It’s very, very bad for the state of California.”

Indeed, citing such possible pitfalls, a majority of City Council members voted last week to study the issue rather than immediately grant the tax break being sought by five health-maintenance organizations. But when the HMOs claimed later that day that several suburbs were already competing for their business, the mayor came out strongly in favor of instituting the breaks right away.

That would be a mistake, said Trish Kelly, associate director of the California Assn. for Local Economic Development.

“It has to be very carefully considered,” Kelly said. “You don’t just take their demand at face value. We have told communities sometimes, ‘Hey, maybe you’re really better off without them.’ ”

The city of Sacramento, for example, is looking very carefully at the demands of the Sacramento Kings basketball team before deciding how to respond to its threats to leave, Kelly said. A few years ago, when Sacramento was trying to keep Campbell Soup Co. from relocating a major facility, city officials carefully studied the company’s income and expenses before finally granting some requests but not others.

When a business makes demands on a city and the city responds, both are participating in a cycle that urban planners say pits municipalities against each other and costs taxpayers big bucks--not only for the incentives offered but in consulting fees and in-house labor costs. Many cities’ economic development departments were set up specifically to lure new business and prevent its loss.

In California, where municipalities depend on sales tax receipts for income, the competitive focus in recent years has been on shopping centers and so-called big-box stores, like Wal-Mart. The rivalry can also flare up over the business taxes generated by companies that, like the HMOs, are expected to rent large amounts of office space and provide jobs.

“I see it as dysfunctional and predatory,” said UCLA professor Allen Scott, director of the Lewis Center for Regional Studies.

But caught up as he is in a reelection campaign, Riordan would have had a difficult time saying “no” to the HMOs’ demand to cut their gross receipts business tax, or the fee they pay the city based on their income, said political consultant Larry Levine. Four of the HMOs--CareAmerica, Health Net, Prudential and WellPoint--occupy about 30% of the office space at Warner Center in Woodland Hills. The fifth company, Maxicare, is on South Broadway in downtown Los Angeles. Together they provide 6,500 jobs and generate about $23 million in tax revenue.

“It’s the perfect time to hold a gun to his head,” Levine said. “Politically, they’ve got him exactly where they want him.”

Gary Mendoza, the mayor’s aide for economic development, said the mayor’s decision was a careful, reasoned one, based on 10 months of study.

“You don’t need to look at their books,” Mendoza said. “You just need to look at the tax structure of competing jurisdictions.”

Burbank, for example, where officials admit they are aggressively pursuing the HMOs, has no gross receipts sales tax. And Calabasas, where private developers are courting the companies, has a very low one.

As Los Angeles and its neighbors prepare to do battle, other parts of the country are learning to cooperate with each other, some even signing contractual agreements to support one another.

In Detroit, Mayor Dennis Archer has reached out to local suburbs with enormous success, even persuading General Motors to remain in the city. Portland and Seattle on the West Coast, and Charlotte, N.C., in the East have crafted peace treaties with their neighbors and are seen as models of the new trend.

The Greenville-Spartanburg region of South Carolina has cooperated so well that it is now a center for manufacturing with investments from around the world, according to Donald Borut, executive director of the National League of cities.

Southern California has come late to the table of cooperation, mostly because the economy until recently was so strong here that it didn’t matter if businesses hopped from one community to another. The economic slump of the 1990s, however, combined with a hunger for more revenues on the part of growing suburbs, changed everything.

It got so bad in the Inland Empire that the cities of Moreno Valley and Riverside, bruised by a battle over a shopping mall, entered into a non-competition contract.

“The blatant shopping of an industry for a ‘better deal’ in a neighboring community is not in anyone’s best interest and could result in a needless expenditure of public resources,” wrote Moreno Valley economic director Linda Guillis in a report to the City Council in 1994, when the measure was adopted.

The cities voted not only to quit competing, but to eschew the whole idea of offering financial incentives to companies wishing to locate in the area.

Indeed, said Neiman of UC Riverside, the only way to stop the cycle is for cities to stop providing incentives for companies to relocate. That way, he said, there’s no reason to move other than legitimate needs for space or infrastructure.

“It’s not a criticism of business,” Neiman said. “It’s the perverse behavior that results from perverse incentives.”