At the beginning of every war, generals always try to fight the last one. Experienced professionals are often the last to realize the times and terrain have changed.
Since the passage of Proposition 13 — the 1978 'taxpayer revolt' against California property taxes — most California cities have focused on generating sales tax. Property tax, which had been the traditional backbone of local revenue, was slashed by 60%, sparking an intense Darwinian struggle between cities for sales tax market share. During the nineties, the cities along the 101 Corridor in Ventura County competed intensely in the “mall wars” over which cities would get auto dealers and major retailers. The City of Ventura won some and lost some, but during the last consumer boom we were still number two in the County in sales tax per capita, after Thousand Oaks.
This intercity competition spawned redevelopment megadeals, tax sharing agreements and fawning over chain stores and “big boxes.” “Public-private partnerships” was the name given to deals cut with favored developers and retailers. Some cities won the lottery (Camarillo declared its strawberry fields next to the freeway “blighted” in order to grab redevelopment funding to build its successful outlet center), and some lost (Oxnard’s planned 600,000 square foot “Riverpark Collection” sits vacant and forlorn, and the city's downtown theater and restaurant development scrapes along with continuing city subsidies).
With the steep drop in sales tax revenue across California, cities are tempted to try that much harder to grab a bigger slice of a shrinking pie. That’s why a major retailer that pays low wages to mainly part-time employees stills gets more attention and help from cities than a similar size manufacturer or company headquarters paying top salaries. That’s why cities review detailed reports on their top 100 retailers every quarter and don’t even keep lists of their top 100 employers.
But that is fighting the last war. In the debt-fueled boom that crashed in 2007, 70% of every dollar was going to consumer spending, as consumers tapped their credit cards and home equity loans. To cash in on that spending spree, developers could continue to build new shopping centers and auto malls.
Now all that has changed. Consumers not only have less income and credit, they are saddled with more debt. Even a recovery in consumer buying power might not translate into needing more stores, as the Internet changes the way people live, shop and entertain themselves. Retail square footage will be slashed as inventory is digitized (think e-books) or as consumers take advantage of an electronic market that offers infinitely more variety than any store (think Zappos Shoes and More.)
Today's sharp drop in sales tax is an economic Pearl Harbor. The next war has already begun. Cities will need to fight, not for more stores, but for high wage private sector jobs that can directly compete in the brutal global economy. There are two basic ways to do that: provide value through local advantage, or provide world-class quality.
Local advantage is not easy. Local retailers and service businesses still compete with corporate giants by adapting to serve a local clientele. Our downtown is primarily made up of these niche companies, serving local customers and clients. But economies of scale continue to favor bigger players.
World-class quality is even harder. “Buy American” is a nice slogan, but most Americans pay no attention to labels on their underwear or their autos. To sustain high wage jobs, companies located here must overcome the cost disadvantage of operating in coastal California by providing products or services that are worth the premium.
Patagonia, the outdoor specialty clothing powerhouse, is a high profile success story for competing in the world economy. Although they do nearly $400 million in annual sales, most of the company’s actual work (manufacturing, shipping, back office functions and retailing) takes place elsewhere. But its highest-value headquarters function remains in Ventura, providing 200 high quality, high wage jobs. Their unique passion for a green supply chain landed them on the cover of Fortune as “The Coolest Company on the Planet.”
Can cities be as effective at growing these kinds of companies as they have been at luring Walmarts and Lexus dealers?
Ventura is a test case. Our Ventura Ventures Technology Center and quest for Google Fiber are innovative experiments. We are “incubating” thirteen tiny start-ups – and fostering what Lottay CEO Harry Lin, an experienced high tech entrepreneur, calls a “technology ecosystem” of connected players in the new company game.
If we succeed in our efforts to promote new and expanded “world class quality” companies and the high wage, high value jobs they produce, will that help pay the bills for city services? Isn’t a new Walmart still a better bet?
The answer is not clear-cut. A new Walmart will provide some tangible real revenue, particularly if it diverts Ventura residents from driving to Oxnard to shop at their Walmart. But if Walmart primarily takes customers away from our two Targets and our other retail outlets, there's little actual gain in revenue. And the point is, in a shrinking retail market (lower incomes, lower spending, more diversion to the Internet), there isn’t much opportunity to keep adding new stores, especially in a competitive market where Oxnard is trying to fill up the brand new center they have sitting vacant. To refill our recent sales tax declines, we'd need the net sales tax of about ten new Walmarts, or their equivalent. For obvious reasons, that can't happen and won't. It still makes sense to "buy local" where a penny on every dollar stays home to fund city services. But we can't build enough stores to restore a prosperous economy or the community services we've had to slash.
So while Ventura's entrepreneurial emphasis on high wage jobs may be experimental, at least we are fighting the right war. It will be a while before we know whether we are winning. But fighting the last war is a sure loser. Even if the economy “recovers,” it will be years before the region's retail space is filled -- if ever. The best thing we can do to create a healthy retail environment is to generate new wealth in our region through robust business and job growth.
In the early years following Proposition 13, some cities led the way toward retail development in the war for sales tax dollars. Today, Ventura is adopting new tactics and weapons in the war for jobs. That may seem like a new and untested strategy. It is. Yet in a changing world, there is great opportunity to rebuild local prosperity on a new and stronger foundation.
This article is part one of a two-part series by Rick Cole on the new war for jobs.
Flckr photo of Ventura by ah zut
Rick Cole is city manager of Ventura, California, and 2009 recipient of the Municipal Management Association of Southern California's Excellence in Government Award. He can be reached at RCole@ci.ventura.ca.us