As cities offer massive incentives to win business, economists at UC Riverside offer up a cautionary tale—and examples of how to negotiate benefits for workers and the community.
When home-shopping retailer QVC announced it would be opening its first West Coast distribution center in 2015, California cities scrambled to compete to host it. At the time, Ontario, California, like many other cities in the U.S., was still recovering from the recession, and it needed the influx of jobs and cash. So the city bet big—and won.
Ontario billed itself as the place with everything QVC was looking for. “There were a number of criteria: freeway adjacency, adjacency to an international airport—but also incentives,” said John Adams, economic development director for the city.
The city had appealing offerings on those points, including a major airport, warehouse availability, other distribution giants like UPS and FedEx, and proximity to Los Angeles. QVC promised to stay in the city for at least 41 years and to create nearly 1,000 jobs, both full- and part-time. It also named Ontario its “point of sale,” meaning the city would collect sales tax revenue from QVC customers around the world. In exchange, the city council and economic development office drafted a plan to return 55 percent of the total sales tax revenue collected from the company up to $500 million, 60 percent of sales tax thereafter, and 60 percent of sales tax back on the goods and equipment that QVC bought.
In the six months since another big retailer—Amazon—announced its search for a place to host its second headquarters, economic development practices like this have come under increased scrutiny. More news breaks each week about the incentives being offered up to Amazon by cities and states: They’re turning over their high schoolers’ SAT scores, offering employees relocation bonuses, and giving away free land. Concerned parties have come out against this incentive baiting, warning that the process will bleed communities dry. While no one knows exactly how HQ2 will affect the metro area that barters millions of dollars to win it, a group of researchers at nearby UC Riverside says the Ontario-QVC story offers up an important example of how these deals play out, at least in the short term.
Of course, there’s one big difference between the two cases: QVC’s project was a distribution center, not a corporate headquarters full of six-figure tech gigs. But the incentive/benefit tradeoffs are comparable, said Ellen Reese, a professor of sociology and labor studies at the University of California, Riverside. Working with professors Juliann Allison and Nathaniel Cline, Reese published a briefing in February on the economic relationship between Ontario and QVC. They say the city failed to negotiate enforceable terms, instead taking a “low road” approach to economic development. Instead of sustainably profiting off QVC’s investment, the researchers say, Ontario entered into an agreement that only deepens “the city’s high level of poverty, keeps the city’s tax base low, and fails to capitalize on civic engagement” that could have improved workers’ and residents’ quality of life.
“Giving away not just half but slightly more than half? It just seems like that’s a lot to give back,” said Reese. “[A] better deal could have been negotiated with the company.”
Viewed through a short-term lens, “better” deals are rarely negotiated. When Boeing went to Seattle in 2014, the city projected an estimated $8.7 billion in tax breaks by 2040. When Foxconn, an Apple manufacturer, opened a plant in Wisconsin, the state promised close to $4 billion. And some jurisdictions in the running for Amazon HQ2 (like Maryland and Newark) have offered to not only match, but exceed Amazon’s $5 billion investment.
And in the long term, advocates (or grin-and-bear-it accepters) of economic incentives say it’s worth it for cities to give something up in order to capture even a fraction of the investment that developers purport to bring in. While Ontario is giving back 55 percent of QVC’s sales tax generation, it still gets 45 percent of a pie that, before 2015, didn’t exist.
“We focused on bringing them here and having them locate here first,” said Adams. “What benefits not only the locality but also the region were the revenues that were to be the result of the location.”
But UC Riverside’s briefing lays out how Ontario specifically could have struck that better deal, and how other cities could turn a “race to the bottom” into a “race to the top.” The answer, they say, would have been a tougher negotiation process, guided by community benefit agreements (CBAs) or project labor agreements (PLAs)—contracts drafted pre-development, designed with input from the community, and backed by strong enforcement mechanisms.
Project labor agreements are sort of like collective bargaining agreements, which lay out terms for the labor force (like anti-discrimination policies or requirements to hire union workers). Community benefit agreements are more about minimizing the harm of the development projects themselves, and tying their completion to new community funds, environmental projects, or affordable housing units—depending on the needs of the city.
California has already piloted local versions of each.
In 2016, Los Angeles passed ballot Measure JJJ, or the Transit-Oriented Communities Affordable Housing Incentive Program, that targets things the city needs most: affordable housing and local employment. Measure JJJ requires residential building developers to pair projects with a certain number of affordable housing, and hire local workers for at least 30 percent of its workforce. Championed by the Alliance for Community Transit and Build Better L.A., the measure also closes loopholes for developers who don’t want to build affordable units on-site.
The Staples Center CBA, championed by L.A.’s Figueroa Coalition for Economic Justice, is a less expansive policy: It targeted only the 2001 development of the Staples Center sports and concert arena by the L.A. Arena Land Company and Flower Holdings, LLC. In addition to affordable housing construction, a job training program, and a commitment to pay living wages, the company agreed to provide $1 million for parks and recreational facilities, build a publicly accessible plaza, and to allocate resources to address traffic and parking issues. More than a decade later, these stipulations still hold, and developers meet with the advisory committee four times a year.
Meanwhile, Oakland implemented another CBA tied to specific development projects: the Maritime and Aviation Project Labor Agreement of the Port of Oakland (MAPLA). In 2000, local unions and community organizations that made up the Bay Area Construction Sector Intervention Collaborative (BASIC) joined with the Port of Oakland commissioners to draft an agreement ensuring that projects in the area will use union labor and pay fair wages for construction jobs. MAPLA has continued to evolve. The 2016 version also requires the development of an apprenticeship program; an emphasis on hiring local and “disadvantaged” workers; and donating money to a “social justice trust fund.”
Of course, what works in California can’t necessarily be replicated in the rest of the country. Amy Liu, a senior fellow at the Brookings Institution, has pointed to a few other CBA-style policies that Amazon HQ2 cities could model: Transit and Mobility Fund in Columbus, Ohio; and a Business Development and Workforce Training Fund in Portland’s E-Zone.
Reese envisions scaling up policies like Measure JJJ state-wide, federally, or creating a regional policy for inland California. But really, “what we were trying to raise up is the idea that [any] community can come together to make demands in terms of what they need and want from developers coming into their city,” she said. “[That] if developers want to come in and develop things or big projects, they need to give back to the community—and do so in ways that are legally enforceable.”
L.A.’s own bid for Amazon HQ2 hasn’t been released to the public, but the head of the city’s economic development council has said it includes “substantial” incentives, The Los Angeles Times reports. Mayor Eric Garcetti has also said no city tax brakes are included in the package. The Bay Area’s HQ2 bid did include CBA provisions, but the region didn’t make Amazon’s list of 20 finalists.
In Ontario’s case, the economic development team prioritized producing the most competitive bid above all, and thought aggressive demands would alienate QVC, Adams said.
And, he added, after two years in the city, the investment has already been worth it. “We’re finding that [QVC’s] establishment at the location that they ultimately chose has been a catalyst for other development in that area,” he said. New businesses in the logistics, distribution and supply chain relations industries have opened up in the QVC corridor. “And while they haven’t hit the employment numbers yet, we’re already seeing their growth,” he said.
Adams said he never expected QVC to fill the 1 million square foot warehouse with over 1,000 jobs immediately, or even soon—the company has created between 200 and 300 so far. But in an ideal agreement, Reese said, companies would be held legally responsible for following through on their claims. And while city legislators didn’t expect swift progress, many community members did.
In July, members of a new community group, Ontario for Us, spoke in front of the mayor and council at a public hearing. Paul Mim Mack, a longtime Ontario resident and Ontario for Us advocate, held a blown-up image of a barren concrete plain in his hands. “Today, a photo was taken of the QVC parking lot,” he said. “As you can see, it’s basically empty.”
What’s more, simply stipulating job creation without specifying what kind of jobs—how much they pay, and how stable they are—opens the door for more exploitation, Reese said. When asked about QVC’s hiring in Ontario, Krueger wrote: “[H]iring is scaled to coincide with operational capacity. As a general practice, we do not typically provide hiring updates externally.”
Ontario’s population of approximately 130,000 people is 70 percent Latino. Its residents earn a median income of $54,114 (compared to the state-wide median of $61,818). The population living below the poverty line is almost 2 percentage points higher than California’s; unemployment rates widened dramatically after the housing crisis in 2008 and are only slowly shrinking.
And 22 percent of the existing jobs in Ontario are warehousing or material moving jobs that, according to the Bureau of Labor Statistics, pay a median wage of $14.88 per hour. A large subset of those jobs are manual mover jobs that pay $12.38 per hour. QVC did not provide data on the pay in its labor force in Ontario.
“Per the agreement, the city determined that the new QVC warehouse and distribution center will generate substantial revenue for the city, and new jobs,” Mim Mack said, confronting the council. “We hope that is true, given that Ontario residents are the ones who have to deal with the traffic, extra trucks on the road, pollution, and everything else that comes with large warehouse developments.”
Judging by its proposed scale, Amazon HQ2’s benefits and costs will dwarf that of an operation like QVC’s. But drilling down those benefits—and mitigating those costs—before the 8 million-square-foot operation touches down isn’t as hard as it seems.