Did L.A. Overbid at Job Auction?
The gavel came down last year on the greatest job auction of all time: The State of Kentucky agreed to give Willamette Industries up to $8.8 million in tax credits for each new job the company would provide in the City of Hawesville. As it turned out Willamette created 105 jobs instead of the required 15, so the subsidy was only $1.26 million per job.
In that light, the $35 million subsidy approved last month by the Los Angeles City Council to the developer of the Playa Vista development seems like small change. This deal promises to pay a between $81,000 and $172,110, in present-day dollars, for each job created at Playa Vista.
Still, at that rate, the Playa Vista deal may be a candidate for the annual "Terrible Ten Corporate Candy Store Deals" compiled by Greg LeRoy, director of Good Jobs First, a project of the Institute on Taxation and Economic Policy in Washington, D.C., LeRoy's eye-opening compendium of the Terrible Ten for 1998 was published in the May issue of The Progressive magazine.
Five of the 10 deals in this year's list offered subsidies of $100,000 or more per job. In Alabama, for example, LeRoy estimates that corporations will be entitled to $6.4 billion in tax credits during the next 20 years, or $280,000 per job for the 22,668 jobs created last year by corporations that took advantage of the state's incentives. At Playa Vista, the actual tax credits range from $2,700 to $5,737 annually for 30 years, depending on the salary level and the type of job.
Playa Vista is a 1,087-acre entertainment and technology-oriented development on the Los Angeles oceanfront. The development partnership, known as Playa Group, proposes 5 million square feet of industrial buildings and more than 4,000 housing units on the degraded wetlands and old industrial sites formerly owned by Howard Hughes.
The most notable tenant of Playa Vista, of course, is DreamworksSKG, the new film studio created by Steven Spielberg, David Geffen and Jeffrey Katzenberg, which will use the tax credits for its expected staff of 1,000 people. Not surprisingly, Dreamworks is viewed as a sort of "anchor tenant" that can attract many other technology- and entertainment-related companies to Playa Vista.
The Dreamworks lease is a big deal to the city, psychologically as well as fiscally. The agreement is one of the peak achievements of Mayor Richard Riordan's business retention efforts. Previously, the mayor's office had been active in retaining at least two other media companies, Capitol Records and Chiat Day. While any city would be pleased to hang onto major employers, Los Angeles is particularly sensitive about business retention, because the city has watched numerous corporate headquarters leave town.
Predictably, there are the pointy-head types who object to big public subsidies to the likes of Dreamworks and Morgan Stanley, a partner in Playa Vista. (God knows why.) But even a cold-eyed, business-minded look at this package questions whether it is worth its salt in economic-development terms.
Arguably, subsidies for a steel mill in Alabama or a paper mill in Louisiana are more defensible than the Playa Vista incentives. In depressed urban areas and in underdeveloped rural areas alike, the presence of major employers can create new "clusters," to borrow a term from the economic development experts. Not only will the big plant employ hundreds of people, but the big plant will function as an economic "anchor" for many ancillary businesses that support it, directly or indirectly — parts suppliers, messenger services, real estate brokerages, fast food restaurants, and so on.
The problem with the Playa Vista deal, on the other hand, is that the economic cluster already exists. Here, we assume that Dreamworks will be the anchor tenant that will attract many smaller businesses of similar ilk. Obviously, the film business has already spawned an immense human and physical infrastructure in Los Angeles. True, Dreamworks and other new tenants can reasonably be expected to add new wealth to this infrastructure. But "the synergistic effect may be muted, because the cluster already exists," says Jeff Finkle, president of the Council on Urban Economic Development in Washington, D.C.
But what about job creation, the rationale for subsidies? Playa Vista promises to become a major business center. Still, the economic benefits for the City of Los Angeles remain somewhat intangible. True, Playa Vista, a condition of receiving the tax credits, will provide an impressive 6,300 jobs exclusively for Los Angeles residents. On a regional basis, however, that seems less impressive because those jobs were going to be in the Los Angeles area anyway. Unlike Mercedes, Dreamworks cannot locate in Alabama. A major film studio can only go to Los Angeles or New York. And not just anywhere in Los Angeles: Keep in mind that film studios are major land users, sometimes covering hundreds of acres. Dreamworks will cover at least 47 acres.
The most important question remains: Did Los Angeles overpay for the jobs? It depends on how you look at it. By corporate standards, the rate appears to be in the high-but-defensible range. By the standards of genuine job creation and net economic development, however, probably. Dreamworks and other entertainment-related tenants need to be in greater Los Angeles, if not in Los Angeles proper. The most attractive part of the deal is that a third of the jobs are earmarked for city residents. On the other hand, many of those jobs would have gone to Los Angeles residents anyway, because Los Angeles is where the great majority of people in the entertainment industry live. (Here we are talking about the lower- and mid-level studio, post-production and technology-related employees, not just moguls and stars.)
So what is the Los Angeles City Council really paying for? In a word, marketing. Landing Dreamworks and its hangers-on means that the city can be perceived as a viable location for major entertainment companies. A major new corporate headquarters is a marketing coup for an insecure city. But let's not mistake marketing for economic development. At this point, Los Angeles residents might be forgiven for having a sinking feeling that they have waived $35 million in tax revenue merely for the privilege of saying that Los Angeles is the home of Dreamworks. Even in Tinseltown, that's a lot to pay for symbolism. But in this uncontested auction, that's exactly what Los Angeles has bought.