For City Subsidies, it Takes Money to Get Money
San Diego leaders say subsidies aren’t blank checks for business. And a new survey shows San Diego tracks the cash it does dole out more closely than some other cities.
San Diego leaders have a message for businesses seeking subsidies: You’ve gotta give us something before you get something.
The city’s three most recent business incentive deals, doled out to a biotech company and two breweries, require each company to deliver new tax money before those businesses can collect tens of thousands of dollars in tax or permit rebates.
In a handful of cases, companies that have signed deals with the city in the past haven’t reaped all the money they were promised because they didn’t live up to what they pledged.
“When it comes to tax incentives and tax rebates and reimbursement, it’s always performance-based and we’re looking to make sure they’ve done everything they’re supposed to do before we pay out that money,” said Russ Gibbon, the city’s business development manager.
That’s not necessarily how it works in other places.
Nevada’s offering of upfront cash was reportedly among the reasons Tesla opted to build a car battery factory there. Texas is also known for writing checks to lure businesses before they’ve had a chance to prove they’ll actually bring new jobs or tax money.
Many cities and states also don’t track whether such subsidies pay off in the long run. A recent survey of about 1,200 cities and municipalities nationwide found at least a quarter of them don’t measure the effectiveness of business incentives they offer or even perform cost-benefit analyses before handing out help.
The report released by the Washington D.C.-based International City/County Management Association also found almost 45 percent of respondents never or only sometimes inked performance agreements with the businesses that benefited from local incentives.
San Diego’s not offering money up front, and it tracks the cash it does dole out more closely than some other cities that took part in the survey. (The city says it participated.)
In San Diego, the metrics officials use to measure success often come down to a few simple questions: Did the company maintain or create new jobs? Did it stay in San Diego? Did the company pay more taxes?
City officials say they’ve tried to structure subsidy deals so the city doesn’t reach into its coffers unless those metrics are met.
The formula to determine whether those companies actually get a check varies by the deal.
Biotech manufacturer Illumina is set to receive a tax rebate of up to $1.5 million plus interest if it keeps about 300 manufacturing jobs in the city and tax revenue in excess of what it’s already paying, which would presumably be associated with increased business here.
The company’s 10-year contract with the city approved this summer requires annual reports on manufacturing jobs associated with the subsidy. Illumina’s rebate would drop $15,000 per job if it can’t maintain them.
Deputy Chief Operating Officer David Graham, who oversees San Diego’s economic development department, said the city would judge the subsidy a success if Illumina delivers what it promised in the deal.
Increased business equals more tax money for the city, he said.
“At the conclusion of the incentive, that company is still here and the expansion is still here and we continue to get 100 percent of the revenue,” Graham said.
Graham had a similar take on deals approved with brewers Ballast Point and AleSmith, which offset their spending on city permits and other fees associated with renovations and expansions in Miramar. Each will receive reimbursements of more than $150,000.
Per their agreements with the city, the brewers won’t get those rebates until they produce new tax revenue associated with their new locations.
At Ballast Point, city staffers have projected a $50,000 net increase in cash for the city.
Companies that don’t meet the requirements of their city incentive deals don’t get subsidies.
Gibbon said semiconductor supplier SGS-Thomson didn’t receive promised incentives in the late 1990s after it failed to supply all the jobs detailed in its city agreement. Electronics company LG Infocomm also lost out during the same period when it moved its manufacturing facilities elsewhere.
And biotech firm Biogen Idec lost out on roughly $350,000 of a larger incentive deal in the mid-2000s with the city because it didn’t participate in separate reclaimed water and tax reporting programs. Idec later shuttered its University Towne Center complex, which now houses Illumina.
The city didn’t lose out on any money in those deals because they were structured to protect taxpayers if the companies didn’t follow through, Gibbon said.
Similar incentive deals are likely in the future. Mayor Kevin Faulconer has said he’s eager to offer assistance to businesses to help them add new jobs.
Not all companies will get them, though.
Businesses that offer well-paying jobs, significant tax hauls and prestige have a leg up. Companies with more political connections and more influence on the city’s tax base are also more likely to seek and get government help.
But city officials have made it pretty clear: If you’re going to get city money, you must first offer something concrete.
This is part of our quest digging into the difficulties – real or perceived – of doing business in San Diego. Check out the previous story in our series, How San Diego Swapped One Government Moneymaker for Another, and the next, The Most Frustrating Labor Rules for California Businesses.