Sunday, March 20, 2011

Incentives--Are They Successful?

At a recent City Council meeting, staff stated that the five downtown restaurants awarded incentives, would generate 4.2 million dollars in revenue over the life of the agreements. Council members touted this as evidence of the success of the incentives program.
Mayor Tom Tomzak pointed to this number as an example of efforts to, "maintaining an income stream from non-property tax sources."
http://fredericksburg.patch.com/articles/mayor-says-taxes-must-rise-to-pay-for-services
However, before declaring the incentives program a success, let's take a closer look at the revenue projections; look at factors impacting these numbers; and put them in context with the city's overall revenue picture as well as in context with the long-term economic development goals. Upon closer study, we will see a different story.

First it should be understood that the revenue projections upon which this new revenue is based come from the restaurants involved. But for the sake of our discussion let's accept them as given. The income to be generated from these sales projections will come from three sources--sales tax, meals tax, and Business and Professional Occupational Licenses Tax (BPOL). In the case of Capital Ale, Kybecca, and Bavarian Chef the incentive agreements are for a period of ten-years. For Longstreet's and Castiglia's the agreement s are for five years. Based on projections provided by the City's Economic Development Dept. the yearly average revenue stream for these restaurants will be $465,620.00. Here is the breakdown:

Capital Ale.........$187,600.00
Kybecca.............$ 64,320.00
Bavarian Chef....$125,300.00
Longstreets.........$ 77,600.00
Castiglia's...........$ 10,800.00
TOTAL...............$465,620.00

As noted, each incentive agreement is subject to different lengths and terms but all include a maximum payout. Dividing these pay-outs by the length of each agreement the cost to the city per year are:

Capital Ale...........$ 5,500.00
Kybecca...............$ 8,000.00
Bavarian Chef......$ 9,000.00
Longstreets...........$ 9,250.00
Castiglia's............$ 5,300.00
TOTAL...............$37,050.00

So we are looking at a projected revenue stream to the city of $428,570.00 per year. The inference being made is that this is a net revenue increase to the city. Based on the proposed 2012 budget , staff projects the increases in revenue for meal, sales and BPOL taxes at $830,000.00. This would mean that these five restaurants will account for almost 52% of the proposed increase. However, this is not the case. Let's take at look beyond just the numbers at some of the factors not being considered.

While downtown has gained five new or improved restaurants these new establishments are replacing a number of restaurants that have closed. Therefore, the incentivized restaurants need to cover the lost revenue from its predecessors before the city actually sees new revenue. A related issue is the competition with the already established downtown restaurants.

Downtown is not on what would be considered a major thoroughfare, and does not have the infrastructure, i.e., roads and parking, to support a significant influx of new visitors which the restaurants applying for the incentives factored into the revenue projections provided to the city. We have a lot of available retail/office space downtown that remains vacant because of a lack of adequate parking. Plans to build a courthouse downtown with no parking provided will exacerbate this problem as caseloads continue to grow. More restaurants, and restricted access, means some restaurants may do better but at the expense of others. And will these restaurants by themselves attract new customers downtown? That is one of the primary goal of the incentives program.

A case can be made for providing incentives to Capital Ale, Bavarian Chef and Kybecca for attracting people downtown. Capital Ale had an established record of attracting clientele from outside the area based on their Richmond operations. They also invest in events that would attract visitors downtown. Bavarian Chef also had a record of attracting clientele from well beyond its Madison County location and also provides a new dining experience. Kybecca's wine bar is a unique addition not only in the city but in the region as well. The same cannot be said of the most recent restaurants who received incentives.

The incentive for Castiglia's was centered on a brick oven for pizza. There are already two other brick oven pizzeria's in the area including one in the city. There are five other pizzerias in the area and a number of other restaurants that serve similar fare. Those include another Castiglia's in Spotsylvania and Longstreet's, located on the same street, which also received an incentives package. Longstreet's has no track record nor does it provide a unique experience or menu. Hard Times Cafe, which has locations in the city and Spotsylvania County, has a bar and also pool tables. However, there are a number of other "sports bars" with TVs and similar themes in the area.

What is also a bit perplexing in the case of incentives for Castiglia's and Longstreet's is that both were moving ahead with their projects before applying for incentives. Under these circumstances the city basically gave back revenue that was already coming.

Another factor to consider is the city doesn't seem to be having a problem attracting restaurants. Looking at the Rt. 1 corridor we now have Umi, Miso, Pueblo's, and all the new restaurants at Eagle Village. A number of new restaurants have also opened in Central Park the most talked about being Quaker Steak & Lube. None of these restaurants received incentives. And all, with adequate parking and on major thoroughfares, I would guess they will ultimately have a greater impact on the city's bottom line than the five incentivized restaurants downtown. So one has to ask--What is the point? and what has been the financial impact on the city of all these restaurants?

To gauge the success of the incentives program we need to see an increase in revenues from, "non-property tax sources." That being said, let's take a look at the sales, meals and BPOL tax revenues over the past few years to put the impact of these five restaurants into perspective.

The high point in sales tax revenue was in 2006 when the city collected $12,856,952.00. The projected revenue from these sources in the current draft 2012 budget is $9,750,000.00. Down $3,106,952.00 from the high in 2006. The BPOL high was also in 2006 with total revenue collected at $5,893,564.00. BPOL revenues also dipped and in the 2012 draft budget they are projected at $5,395,000. A loss of $498,364.00 from the 2006 high. Because we have increased the meals tax rate, and modified the discounts paid for on-time filing of meals taxes, exact revenue numbers cannot be provided. But if one backs the recent increase to 2006 , meals tax revenues have been static at best, even with the number of new restaurants opening in the city.

The 2011 budget projected significant decreased revenues in all three areas. As I understand it revenues did turn out better than expected but we have yet to reach 2006 levels. As noted, the projected increase in all three areas in the 2012 budget draft is only $830,000.00 above the projected 2011 budget figures. The projected increase in meals tax is only $180,000.00. The city is still digging itself out of a big hole. So how did we get here and what do we do to turn the economic picture around?

The best explanation on our current state of affairs is provided by City Manager Bev Cameron in his cover letter to the 2010 City Financial Report in which he states, "The dramatic national economic downturn of 2008, coupled with regional competition in the form of increased retail shopping and dining opportunities in neighboring counties, continued to adversely impact most local tax sources during fiscal year 2010. With mortgage foreclosures and unemployment rates at levels not seen in decades, and with real estate and stock market values still sharply down, a prolonged economic recovery seems likely."

Even prior to the economic downturn the city knew that it had become overly reliant on retail development and needed to diversify its tax base. The city had already begun reducing revenue projections prior to 2007, recognizing the negative revenue impact of competition from Stafford and Spotsylvania. It was this recognition that played a role in developing the incentives program in the first place.

The goals discussed for the incentives program were 1) To diversify the tax base focusing on higher end employment opportunities which would also help support retail; 2) Reduce the city's reliance on property tax; 3) Actively recruit business opportunities that not only achieved goals (1) and (2) but also fit or enhanced Fredericksburg's unique historic character.; and 4) That we look for unique opportunities especially those that brought visitors to the city. The measure of success would be a more stable and sustainable tax base as well as increased revenues while minimizing the tax impact on residents.

To ensure its future Fredericksburg needs to keep the focus on the original goals discussed in setting up the incentives program. To fully understanding the current economic dynamics, and being pro-active in its economic development efforts. Unfortunately, the city seems prepared to offer incentives to those who ask, without considering other factors like competition or unique qualities, and ignore the importance of economic diversity. The city seems content to point to a handful of downtown restaurants as evidence of the success of the incentives program. However, the question arises, is that claim of success justified?

As noted, the current revenue picture does not bear out the claim. Additionally, the staff's revenue projections for the coming year do not bear out the claim. What about the statements made that these incentives are examples of, "maintaining an income stream from non-property tax sources." As shown in the chart below the percentage of revenue from property taxes has increased. Revenue from non-property taxes has dropped or remained stagnant. The jump in meals tax percentage is due to the rise in the tax from 5% to 6%.

Revenue Breakdown by Percentage
.............................2009.......2010....2011.....2012
Real Estate.............30%........33%.......33%........34%
Sales Tax................14%........13%.......13%.........13%
Meals Tax................9%.........11%.......11%..........11%
BOL Tax..................7%..........7%.........7%...........7%
Lodging Tax............1%...........1%.........1%.........1%
Admissions Tax.......--.............--.............--..........--

It is clear that the claims of success are a bit premature.

I would acknowledge that the jury is still out on the incentives awarded to date. As noted I have my doubts as to whether, in the case of the downtown restaurants, the revenue impact will be as significant as presented. It should be pointed out that both Capital Ale and Kybecca are meeting their revenue goals. However, the impact on other restaurants cannot be determined beyond looking at the overall revenue figures. A bigger concern is that the City seems content with the direction the incentives program is going and is declaring success. Some have voiced concerns about the approval process but not the projects themselves.

There are significant issues that need to be addressed. The city should hold off on further incentives to re-evaluate the incentives program from top to bottom. The city should not only deal with the process issues but ensure that its focus is on the original goals discussed. It is also important to make clear to the public what the city is trying to achieve with the incentive program and set out benchmarks to measure and ascertain success. The question is, based on council members' comments to date, whether they see any need for such discussions?

What should the role of incentives in the city's future ?

Adendum--Owners of The Bavarian Chef have advised me that they are also meeting incemtive benchmarks as per their agreement with the city.

3 comments:

Anonymous said...

It is planning and diversity that the city is lacking. Here we go again with the courthouse packed into a downtown location with little regard for future growth. Great restaurants can be a draw for downtown locations, but we are still short of having great restaurants. Incentives are tricky and should be periodically evaluated. What if no incentives had been given? Business people are going to take what they can get. The current mentality is to take from the people and then dole it back out in some kind of redistribution program. Give the entrepreneur some room. Lower the burden and quit fiddling. We seem to think that our ever increasing public sector budgets are mandate. Wouldn't it be better to lower that burden and allow business to operate and provide reasonable revenue. It baffles any logical person that we are considering this court construction. Incentives and subsidies rarely accomplish their best intentions. Good government is less government.

Anonymous said...

Offering incentives to attract new businesses downtown is good for the business of downtown. But the city needs to be very careful as to which business receives the incentive and at what time in their renovation process is the application considered. These incentives are not grants that are awarded to non-profits. The application should be in place and the decision made prior to the start of the renovation. The perception of need would then meet reality.

Parking downtown has always been a source of frustration. For decades. Finally the parking deck was built. But more parking needs to be created. The city build the new police station on Cowan Blvd. Why can't we build a new court campus with all of the courts out of downtown? There may be land adjacent to the Police Station. Consider putting the fire station there too. Take that daily parking pressure off of downtown.

Finally, the city needs to address the continued parking problem. Put a deck on the Sophia Street lot. That would double the spaces immediately. The incentive packages will not increase business downtown. Customers and volume will increase business. How many times will you circle the block looking for parking before you will leave downtown and eat or shop elsewhere?

Manny said...

Agree that incentive awards should be: A. applied judiciously, and, B. Closely scrutinized and evaluated for ROI.

Criteria should be the leverage to attract highly unique business that "fit in" downtown with the highest probability for success that might not otherwise locate in the city.
Clearly, Castiglias redeux does not meet those criteria (and I am a big fan and frequent patron.)

A parallel set of issues is the current view that the City is not a favorable environment for small business.

Conversation with current, potential and former Fredericksburg small business owners reveals a landscape of frustration, confusion and exasperation, crystallized by the chilling statement of one new establishment that, "Had I known what I know now I never would've located my business here."

Contradictory directives; lack of standardized policies; uninformed staff; agencies not communicating with each other; City not enforcing code on landlords and lack of responsiveness are far to common an experience.
(And to head off the easy assumption that this view is nothing more that "sour grapes or whining" by a couple of malcontents, I assure you it is not. This is the experience of experience of a slew of sophisticated small businessmen and women who have interacted with City government.)

Cities have reputations in the small business community. Leesburg, Sheperdstown W Va, Old Towne Alexandria all have very to highly postive reps for small businesses. Fredericksburg needs to understand that the City's current reputation is tilting to the negative and they must work to improve it