ZONES OF CONTROVERSY

With Los Angeles on pace to supplant New York City as the nation’s capital of private efforts to rejuvenate aging business districts, some Southland business owners are feeling steamrollered by the fast-growing economic development movement.

Known as business improvement districts, or BIDs, these business-funded efforts are revitalizing older commercial areas from San Diego to Saskatoon by financing sanitation, security and other services that City Hall is too strapped to provide.

Results nationwide have been impressive. BIDs are credited with polishing the Big Apple’s Times Square and for putting the strut back into Philadelphia’s once-stumbling Center City district. Los Angeles has become a hotbed of BID activity, with 17 active zones formed just since 1995 and 27 more on the drawing board.

“BIDs are a very hot tool . . . and a very effective way for groups to target specific problems,” said Sam Staley, who has studied BIDs for the Reason Public Policy Institute. “They’re popping up all over the place, from big cities to small towns.”

But even fans of these special districts are concerned that too many Southland communities may be jumping on the BID bandwagon too quickly.

Some merchants grumble that cities are promoting the districts in an attempt to palm off maintenance of public spaces on the business community. Others point to fat overhead in some zones as proof that BIDs aren’t the shining models of private-sector efficiency they’re made out to be. Still others decry what they view as an undemocratic approval process that allows some BIDs to be established without the consent of a majority of merchants in the area.

Managed correctly, BIDs have proved to be a valuable tool for economic development. But a movement meant to unify business owners already has spawned a lawsuit in San Diego, a BID renewal battle in L.A.’s Fashion District, a move to oust a BID executive in Westwood and a mini tax revolt in Los Feliz.

“It has pitted neighbor against neighbor,” said Los Feliz merchant Reiko Mathieu, owner of SquaresVille vintage clothing. “Instead of unifying this business community, it has divided it.”

Fund-Raising Mechanism

Spawned in Canada in the 1960s and copied in the United States a decade later, BIDs provide a legal means for business owners to harness the taxing arm of local government to fund projects within their own business districts.

Essentially, merchants or property owners agree to tax themselves to fund extra sanitation services, safety patrols, marketing programs, even physical improvements. The city uses its taxing authority to collect the levies, which are mandatory for all zone residents once the BID is approved. The city then returns the money to the business district, which decides how the funds will be spent. Assessments range from less than $100 a year for small fry in modest-sized BIDs to tens of thousands annually for large property owners in more ambitious zones.

While the city retains some oversight authority, the private sector essentially controls the purse strings--a key selling point, according to Carol Schatz, president and chief executive of the Downtown Center BID, a 65-block area of downtown Los Angeles that includes the Los Angeles Times.

“These aren’t like taxes that get lost in the general fund,” Schatz said. “The money stays inside [the business district] . . . where businesses can see the results.”

The concept has exploded across North America as urban business owners have banded together in the face of declining property values, shrinking city services and relentless competition from suburban competitors. More than 1,200 BIDs now are operating in North America, many of them established within the last 10 years, according to New Jersey-based BID expert Lawrence Houstoun.

In California, which boasts 150 to 200 of the special zones, BIDs helped turn areas such as Santa Monica’s Third Street Promenade and Old Pasadena into bustling examples of merchant collaboration.

“The old order was that the business guys went to the club for lunch and [complained] about the local government,” said Houstoun, principal of Atlantic Group. “The new order is that they go to the BID meetings, and they make decisions that change things.”

Los Angeles is a relative latecomer, with no BIDs formed in the city until the mid-1990s, when Mayor Richard Riordan made them a part of his economic development strategy. Los Angeles’ first attempt was short-lived. The 1995 Miracle on Broadway was dismantled after just one year by downtown merchants who resented paying extra for services such as sidewalk sweeping and bicycle cops they thought city government should be providing.

Since then, the city has gotten proactive in marketing the districts, providing start-up funds, consultants and other assistance to interested business groups. The approach has worked. Los Angeles is on pace to become the nation’s next BID capital, replacing New York City, which has nearly 40 of the zones. Los Angeles’ 17 BIDs range in size from a two-block stretch of Larchmont Village, which uses its $40,000 annual budget just to trim trees and tidy sidewalks, to the $3.5-million Downtown Center BID whose services include business retention and marketing.

“This is a big city,” said Assistant Deputy Mayor Debbie LaFranchi. “We haven’t reached many of the communities [where BIDs] could be the best fit.”

But even BID proponents worry that the zones may not be right for every area. Denver-based BID expert Bradley Segal, who has served as a consultant to several California BIDs, says the zones have become something of a status symbol for Los Angeles City Council members eager to have them in their districts. Though BIDs are funded by the business owners, council members help select the board members who control how the funds are spent.

“There is sort of a feeding frenzy at the council level to start these BIDs,” Segal said. “I contend that not all these districts are ready for them.”

Taxation Without Representation?

Begun last year, the Los Feliz Village BID has yet to implement its sanitation and marketing strategy in the funky shopping district northwest of downtown. Part of the trouble is that more than a fourth of the merchants haven’t paid their assessments--a sizable chunk considering the BID is one of the smallest in Los Angeles, with a budget of only $65,000. Some disgruntled merchants say it’s a tax revolt over a BID they didn’t want and never got to vote for.

The root of the dispute lies in the complex mechanics of BIDs. In California there are two types. So-called property-based BIDs have life spans of up to five years. They are funded by property holders and can be approved or renewed only if landlords representing 51% of the projected assessment vote “yes” on the deal. Votes are weighted so that a landlord with a $100 assessment has twice as much say as one paying $50.

“Merchant-based” BIDs such as the one in Los Feliz Village are funded by business owners. As in property-based BIDs, the votes are weighted, but 51% of merchants never actually have to approve the measure. Instead, the onus is put on opponents to round up a majority to dismantle it, which they can attempt at least once a year.

Critics say the process is unfair and confusing. They point to the high delinquency rate on assessment payments as proof that Los Feliz merchants now are voting with their pocketbooks.

“It’s not the money, it’s the principle,” said vintage-furniture merchant Virginia Jacks, who faces fines for failing to pay. “I want my day in court.”

BID President George Abrahamian says organizers held a number of meetings to explain the process, and he contends the delinquencies reflect little more than merchant confusion over when and how to pay the new fee. He acknowledges that “a very small, vocal minority” resent the fact that BID membership is compulsory. But he says voluntary business associations can’t begin to address the problems plaguing urban areas.

“BIDs are fair because everyone benefits and everyone pays,” said Abrahamian, owner of La Belle Epoque cafe.

Still, the remonstrance procedure that allows merchant-based BIDs to be established without majority consent has stirred a backlash in other California cities as well.

Four San Diego merchants, along with the Howard Jarvis Taxpayers Assn., have sued that city over a BID established in the coastal community of Pacific Beach. The 1997 lawsuit alleges that the merchant-based BID violates Proposition 218, the ballot measure that requires local tax measures to be approved by a two-thirds vote.

The protesters lost the first round after city attorneys argued successfully that the BID fees aren’t really “taxes” as defined under Proposition 218. The case is pending on appeal.

In the tiny village of Loomis, about 30 miles east of Sacramento, merchants were so vexed at having a BID imposed upon them without a majority vote that half of them withheld their assessments. That BID finally crumbled in 1997--one of only a handful in the nation ever to be dismantled.

Urban development consultant Houstoun says there’s a simple reason for that: BIDs work.

“To me, the ultimate test is that 1,200 of these things make a conscious decision to keep going,” Houstoun said. “These are the guys paying the bills.”

But Jon Coupal, president of the Howard Jarvis Taxpayers Assn., has a different interpretation.

“It’s like any government entity or tax,” he said. “Once it’s in place, it’s almost impossible to get rid of it.”

Downtown Dissenters

BID proponents dislike the word “taxes” to describe the payments made by their members. Instead, they compare the special assessments to management fees paid by merchants in suburban malls, where no one expects government to scrub the floors and polish the handrails just because they pay city taxes.

Started in 1996 with an annual revenue now approaching $3 million, Los Angeles’ downtown Fashion District BID is hailed as a prime example of this self-help philosophy. Its gold-shirted crews have removed tons of trash and thousands of graffiti tags from the area, helping drive property values up and crime rates down.

“It has transformed our district,” said Marianne Giblin, former BID executive director. “When customers get off the freeway, they now have a good impression of the area.”

But that’s no consolation to two major property owners, who see the zones as a way for the city to shift maintenance responsibilities to the private sector. So when BID supporters launched a drive last year to renew and expand the district, the City Market wholesale produce mart and Los Angeles Flower Market made it clear they wanted no part of it.

“The city loves these things because they don’t have to do their job anymore,” said Johnny Mellano, general manager of Los Angeles Flower Market. “This is just another tax.”

The markets hired political consultants to persuade the City Council to extricate them from the BID and even launched a petition drive to dismantle it, but to no avail. A majority of property owners voted to reauthorize the zone through 2003.

Giblin said the BID tried to make peace with the markets by assessing their properties at the district’s lowest rate. But resentment lingers. Giblin recently left the Fashion District BID to pursue other opportunities.

Her departure came after an internal audit of the BID’s finances and heightened scrutiny of its expenses by property owners.

“They’re getting into all of these other things that we don’t want to pay for,” said Peter Fleming, president and chief executive of City Market of Los Angeles. “The whole organization is top-heavy.”

Questionable Returns

Similar complaints are coming from the Westside, where some business owners grouse they have gotten scant return for the $2 million they’ve pumped into the Westwood Village BID since 1996.

Once a lively retail and entertainment strip, the commercial corridor near the UCLA campus has stagnated, its decline linked to everything from a 1988 gang shooting to parking woes.

Merchants acknowledge the BID alone can’t resurrect Westwood. But they say funds have been squandered on expensive amenities such as a $69,000-a-year security office and ineffective promotions that have failed to raise foot traffic on the street.

“The whole idea is to bring people back to the Village, but I just don’t see them,” said Joel Rothblatt, president of California Tea House & Juice Bar. “I can’t say we’ve gotten our money’s worth.”

Another controversial expense is the pay package of the BID’s executive director, Bob Walsh. At $130,000 a year, his salary and benefits approach those of Los Angeles BID executives whose budgets are four times the size. Total administrative costs account for at least 35% of Westwood’s $757,000 budget; the national average is 12% to 15%.

“If we had hired a private-sector firm that performed at this level, it would be unacceptable,” said Ed Cacciotti, who recently moved his family’s optometry business out of the business district. “If I had flushed the money down the toilet, at least I’d know where it went.”

Other merchants say they’re thrilled with BID-funded jazz concerts, a film festival and splashy holiday decorations that have raised the area’s profile. Walsh cites increased property values and occupancy rates as proof that the efforts are yielding fruit. He acknowledged some complaints but says the BID is heading into 1999 with several new board members and a fresh spirit of cooperation.

“Our mission is to keep this area alive and thriving while continuing to be responsive to everyone in the district,” he said.

But the changes aren’t coming soon enough for merchants such as Mike Haas, owner of the restaurant Great Chicago Dog. He is circulating a petition to oust Walsh as executive director and vows to gather enough signatures to scuttle the BID if management changes don’t come quickly.

“We’re either going to get new leadership or dissolve this thing,” Haas said. “Enough is enough.”

Experts say such wrangling underscores the inherent strength of the BID process, which allows members to hold their leaders’ feet to the fire instead of complaining to some nameless bureaucrat at City Hall.

But some BID watchers say more government involvement may be needed as the zones continue to multiply across Los Angeles. Mayor Riordan’s business team has proposed the creation of a “BID czar” who would provide oversight as well as upfront education about what BIDs can and cannot do for a business district.

Los Feliz merchant Jacks said it’s too little too late.

“We’re individualists over here,” said Jacks, owner of Virginia’s furniture shop. “Now we’re stuck in a club that we don’t want to be in.”