Can L.A. lure on looks?

Amazon says pub­lic sub­si­dies will in­flu­ence its head­quar­ters de­ci­sion. But the city has tended to rely on its other as­sets.

Los Angeles Times - - BUSINESS - By An­drew Khouri

When Amazon rolled out its pub­lic search for a sec­ond head­quar­ters last week, the tech gi­ant de­tailed at­tributes it deems key in se­lect­ing a win­ner: a large met­ro­pol­i­tan area, an in­ter­na­tional air­port, recre­ational op­por­tu­ni­ties and a top-notch univer­sity sys­tem.

In­cluded in its re­quest for pro­pos­als was some­thing else Amazon said would be a “sig­nif­i­cant” fac­tor in its de­ci­sion: pub­lic sub­si­dies.

“They are ask­ing th­ese com­mu­ni­ties to dress up and go to the dance,” said Larry Kos­mont, a Los An­ge­les-area ur­ban de­vel­op­ment con­sul­tant. “What would you do for us, and what would you do for the area to make it bet­ter?”

The re­al­ity show-like an­nounce­ment, eco­nomic de­vel­op­ment ex­perts said, is likely to spark a race among Amer­i­can gover­nors and may­ors to of­fer pub­lic sub­si­dies to land the com­pany and its prom­ise of as many as 50,000 new jobs.

Cal­i­for­nia and Los An­ge­les are sure to play along — but if his­tory is a guide, they will be less gen­er­ous than other states and mu­nic­i­pal­i­ties, eco­nomic de­vel­op­ment ex­perts said.

Cal­i­for­nia has re­lied more on its in­her­ent at­trac­tive­ness, rather than large pub­lic sub­si­dies such as those be­ing de­bated in Wis­con­sin to give Tai­wanese elec­tron­ics com­pany Fox­conn a $3bil­lion pack­age to open a flat-screen fac­tory with 13,000 work­ers.

“Cal­i­for­nia can af­ford to be stingy be­cause it has all th­ese mag­nif­i­cent as­sets help­ing it grow,” said Greg LeRoy, ex­ec­u­tive di­rec­tor of Good Jobs First, a Wash­ing­ton think tank that’s crit­i­cal of tax cred­its and other pub­lic sub­si­dies.

Those as­sets include top­notch re­search uni­ver­si­ties such as UCLA and UC Berke­ley and ma­jor tech com­pa­nies such as Google and Face­book. There’s the beach, Hol­ly­wood and the largest port com­plex in the na­tion in San Pe­dro Bay.

South­ern Cal­i­for­nia and the San Fran­cisco Bay Area also boast a deep pool of highly skilled work­ers. That is both an at­trac­tion to in­com­ing em­ploy­ers and a rea­son the state has less in­cen­tive to pull out the stops on tax breaks and other incentives to at­tract or keep em­ploy­ers.

Since 2012, the state’s econ­omy has tended to grow faster than that of the rest of the na­tion, with the num­ber of non­farm jobs ris­ing 15% in Cal­i­for­nia since Jan­uary 2012, com­pared with 10% na­tion­wide. And given the state’s size, any one re­lo­ca­tion, ei­ther to or from Cal­i­for­nia, is a drop in the bucket.

For ex­am­ple, the 50,000 jobs Amazon said it hopes to cre­ate is huge for a cor­po­rate move, but it still rep­re­sents only 0.3% of Cal­i­for­nia’s to­tal 16.8 mil­lion non­farm jobs. If Amazon chose Den­ver, on the other hand, that would rep­re­sent 1.9% of Colorado’s 2.6 mil­lion non­farm jobs.

Cal­i­for­nia of­fi­cials have largely held their purse strings com­pared with other states, de­spite los­ing out on some high-pro­file com­pe­ti­tions in re­cent years, in­clud­ing when Toy­ota an­nounced in 2014 that it was mov­ing its North Amer­i­can head­quar­ters to Texas and Tesla chose Ne­vada to build its so­called gi­gafac­tory, also in 2014.

Af­ter los­ing Tesla’s lithium-ion bat­tery fac­tory to Ne­vada and its nearly $1.3bil­lion pack­age, Gov. Jerry Brown said Cal­i­for­nia “fought hard for Tesla.”

“But Tesla wanted a mas­sive cash up­front pay­ment that I don’t think would be fair to the tax­pay­ers,” Brown said.

That doesn’t mean South­ern Cal­i­for­nia cities can’t pre­vail in the bid­ding for Amazon’s sec­ond head­quar­ters site, known as HQ2. Los An­ge­les and Irvine have said they will sub­mit pro­pos­als, and any lack of mega-sub­si­dies may not be a deal breaker.

Eco­nomic de­vel­op­ment ex­perts said the main rea­son com­pa­nies move or grow in an area is not a sub­sidy, but rather prox­im­ity to a skilled work­force, dis­tri­bu­tion routes, a strong cus­tomer base and an area where ex­ec­u­tives want to live.

Christo­pher Thorn­berg, found­ing part­ner of Beacon Eco­nom­ics, said Amazon’s de­ci­sion prob­a­bly will be based on such fac­tors. He said the pub­lic search serves as an op­por­tu­nity for the com­pany to lever­age a lu­cra­tive of­fer from a city where it has no in­ten­tion of mov­ing to get a bet­ter deal from the city it ul­ti­mately wants to call its sec­ond home.

“From a busi­ness per­spec­tive, it makes to­tal sense,” said Thorn­berg, who thinks the Wash­ing­ton, D.C., area is a likely can­di­date be­cause Amazon al­ready has a West Coast base in Seattle. “If some­one is will­ing to give you money, you are a fool not to take it.”

Peter Fisher, an ex­pert on tax in­cen­tive pro­grams, said only com­pany ex­ec­u­tives know whether a sub­sidy made a dif­fer­ence. But re­search in­di­cates the pro­grams are an ex­pen­sive deal for tax­pay­ers and rarely needed. “It prob­a­bly means in 90% of incentives, the com­pany would have made that de­ci­sion any­way,” said Fisher, a pro­fes­sor emer­i­tus of ur­ban and re­gional plan­ning at the Univer­sity of Iowa.

Ti­mothy Bar­tik, a se­nior econ­o­mist at the W.E. Upjohn In­sti­tute for Em­ploy­ment Re­search, agreed, but said incentives can tilt the scale when a com­pany de­cides two cities would work equally well.

“Incentives do make some dif­fer­ence,” he said.

Even if Cal­i­for­nia hasn’t shown an ea­ger­ness to of­fer pack­ages on the scale of Ne­vada and Wis­con­sin, it does have some tools at its dis­posal.

The Cal­i­for­nia Com­petes pro­gram has given out $555 mil­lion in state in­come tax cred­its for more than 750 com­pa­nies since its launch in 2014, said Sid Voorakkara with the Gov­er­nor’s Of­fice of Busi­ness and Eco­nomic De­vel­op­ment.

Amazon was among the re­cip­i­ents in the in­au­gu­ral year of the pro­gram when it got a nearly $1.6-mil­lion tax credit to build and ex­pand ware­houses in the In­land Em­pire and San Fran­cisco Bay Area, projects it said would cre­ate 1,550 new full­time jobs. The pro­gram — un­like those in some other states — func­tions as a credit, rather than an up­front pay­ment. Com­pa­nies have to hit spe­cific job-cre­ation mile­stones to get the break.

There also are one-off deals that can be crafted by the state Leg­is­la­ture or city coun­cils such as Los An­ge­les. The city, in an ef­fort to spur the re­vi­tal­iza­tion of its down­town, has given sub­si­dies to build new ho­tels in the city center.

For ex­am­ple, last year, the Los An­ge­les City Coun­cil ap­proved a $198.5-mil­lion fi­nan­cial aid pack­age for Re­lated Cos. to build a ho­tel and res­i­den­tial project across from Walt Dis­ney Con­cert Hall.

The deal al­lows Re­lated to keep nearly half the $396.9 mil­lion in tax rev­enue that would be gen­er­ated for the city by the project over 25 years. That money nor­mally would flow into the gen­eral fund, which pays for po­lice, fire­fight­ers and other city ser­vices.

In a state­ment af­ter Amazon’s an­nounce­ment, Los An­ge­les Mayor Eric Garcetti did not men­tion any pub­lic sub­sidy but said: “L.A. is the per­fect place for a com­pany like Amazon to find tal­ented work­ers, and an en­vi­ron­ment that nur­tures growth and in­no­va­tion.”

Garcetti spokesman Alex Comisar de­clined to say whether the mayor would sup­port sub­si­dies. “We are de­vel­op­ing our bid, and look for­ward to par­tic­i­pat­ing as the process moves on,” he said in an email.

Amazon de­clined to com­ment be­sides say­ing it hasn’t yet set­tled on any lo­ca­tion.

Voorakkara of the gov­er­nor’s eco­nomic de­vel­op­ment of­fice de­clined to say whether Brown was will­ing to sup­port an aid pack­age for Amazon, cit­ing a pol­icy of not com­ment­ing on spe­cific projects.

Car­rie Rogers, se­nior vice pres­i­dent of busi­ness as­sis­tance and de­vel­op­ment with Los An­ge­les County Eco­nomic De­vel­op­ment Corp., said the or­ga­ni­za­tion is meet­ing with cities this week to put forth a re­gional pro­posal for L.A. County.

She said pos­si­ble incentives could include the Cal­i­for­nia Com­petes tax credit, which she said has suc­cess­fully per­suaded busi­nesses to in­vest when they oth­er­wise wouldn’t. Other pos­si­bil­i­ties include part­ner­ing with Los An­ge­les In­ter­na­tional Air­port and the ports of Los An­ge­les and Long Beach to make the move­ment of goods eas­ier.

One of the last times Cal­i­for­nia en­gaged in a cam­paign sim­i­lar to Amazon’s re­quest for pro­pos­als was when it tried to woo Tesla in 2014.

At that time, the state of­fered a num­ber of tax breaks worth as much as $500 mil­lion. Leg­is­la­tion also was drafted that would have waived large por­tions of the land­mark Cal­i­for­nia En­vi­ron­men­tal Qual­ity Act to speed con­struc­tion of the bat­tery fac­tory.

How­ever, the CEQA breaks stalled, and Ne­vada of­fered more than dou­ble the amount of incentives, in­clud­ing large breaks on lo­cal prop­erty taxes. Crit­ics said the deal would starve lo­cal schools and agen­cies that would be pro­vid­ing ser­vices for the new work­ers.

Amazon could turn out dif­fer­ent.

Cal­i­for­nia’s bid for Tesla’s sprawl­ing man­u­fac­tur­ing plant was likely hurt by high land, la­bor and hous­ing costs, ex­perts said.

Be­sides sub­si­dies, the things Amazon says it is seek­ing play more to Cal­i­for­nia’s strengths and are much harder to repli­cate than empty land and man­ual la­bor: a top-notch univer­sity sys­tem, highly skilled la­bor and rich cul­tural ameni­ties.

“Cal­i­for­nia is go­ing to win on looks, not its wal­let,” said Kos­mont, the de­vel­op­ment con­sul­tant.

Tesla

TESLA chose Ne­vada and the state’s nearly $1.3-bil­lion pack­age over Cal­i­for­nia to build its gi­ant lithium-ion bat­tery fac­tory.

Re­lated Cos.

LAST YEAR, the L.A. City Coun­cil ap­proved a $198.5-mil­lion fi­nan­cial aid pack­age for Re­lated Cos. to build a $1-bil­lion ho­tel and res­i­den­tial project across from Walt Dis­ney Con­cert Hall. Above, ren­der­ings of the project.

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