How STAR bonds can kill Northern Nevada businesses
‘'It’s a little late to get on that horse. …The horse is out.”
Marty Piccinini has a point. He’s one of the local victims of the Sparks city government’s successful effort to lure the Scheels sporting goods chain of North Dakota to the Rail City, where it built a store mostly at taxpayer expense.
Piccinini’s Mark Fore & Strike sporting goods, which opened in Reno in 1963, is feeling the pinch from Scheels.
Businesspeople like Piccinini know they are always at risk from chain stores. He believes Mark Fore & Strike is the last non-chain sporting goods store in the city.
But that’s a different thing from local officials intentionally luring chains to Nevada and giving them tax dollars to help drive local merchants out of business. What’s worse is that all the supposed circuit breakers that were supposed to be built into the system to protect local merchants and the public failed to trip when they were needed.
State legislators who created the tool that local officials are using to lure chain competitors—Sales Tax Anticipated Revenue (STAR) bonds—didn’t closely examine how it would work and failed to ask important questions. Local government officials were panting so hard after the payrolls chain stores would bring that they supported outside businesses against local merchants. Journalists barely covered the issue at all.
“I objected, and nobody wanted to listen,” Piccinini said.
The allure of those payrolls was so great that even other entities that would be damaged by the program went along. Piccinini has little sympathy with those officials who belatedly learned that what appeared to be progress was only change, because they were too willing to buy into STAR bonds in the first place.
“The school district—and now, those are educated people—they signed off on the program: ‘Oh, yeah, this is great. We love it; we love it.’ Now, two weeks ago, they had a deal in the newspaper—‘Oh, we’ve been screwed.’ Well, it’s too late.”Falling STARs
The bill that enabled STAR bonds, Senate Bill 306, was introduced in 1995 by Washoe County Sen. Maurice Washington, and provided for companies to keep three-fourths of the sales taxes they collected to pay off construction bonds—if they could convince state tourism officials that half of their customers would be tourists. In other words, taxpayers would pay for most of those companies’ building costs without gaining a piece of the action. And there was no way for the corporations to be penalized for not attracting enough tourists or bringing in enough sales tax money because the law imposed no performance goals and provided for no penalties.
Legislators didn’t foresee the snakeskin problem—the way businesses could use STAR bonds to shed old stores where they paid full sales taxes in order to build new stores at taxpayer expense and pay only a fourth of the sales tax.
The legislators didn’t anticipate how easily chains would be certified as tourist magnets.
They didn’t realize how badly entities like schools that depend on sales taxes would be hurt by STAR bonds if a recession combined with businesses that failed to attract promised customer traffic.
If legislators had engaged in the kind of rigorous, even adversarial questions they should, some of these failings of STAR bonds might have been foreseen—and might have triggered alarms among representatives of other businesses, business groups, journalists and local governments.
The lawmakers designed a mechanism that can only be used by certain corporations. Local merchants like Piccinini can’t take advantage of it. They don’t have the capital for giant complexes, even if they wanted to run those kinds of stores, and they aren’t tourist magnets. They serve the community, something that is not valued by officialdom. There are no STAR bonds for them.
STAR bonds are only the latest wrinkle in a web of business incentives that permeate every level of government in every community and state. Many have been around for years, while others (like STAR bonds) are new and relatively untried. They serve to reinforce each other.
By playing states off against each other, corporations can get mind-boggling giveaways. When Mercedes-Benz parlayed rivalry among southeastern states into a $300 million Alabama package in 1993 at a time when the state was under court order to improve its schools, it became a major scandal and campaign issue. But that usually happens in only the most blatant cases.
Even some who believe business incentives have a place say that incentives for retail are foolish because incoming businesses simply displace those already there while damaging the locally-based business infrastructure. (The shutdown of locally owned Gilly Fishing Store in Sparks is credited to STAR stores.)
“Retail is an important part of the economic system, but it doesn’t create wealth,” wrote columnist Rick Casey in the Houston Chronicle. “It collects it, for a cut, from the consumer for the manufacturer. If the fisherman doesn’t buy a rod and reel at Cabela’s [another STAR bonds-subsidized store], he’ll buy it somewhere else. And even if Cabela’s makes him want to fish, it just means he’ll spend money on fishing equipment that he would otherwise have spent elsewhere. So if Cabela’s is wildly successful in Buda [an Austin, Texas, suburb where Cabela’s was given corporate welfare but performed far below promised levels], it means some retail jobs in nearby towns and cities will disappear.”
When something does go awry, as in the Alabama case, so many people are involved that they reinforce and protect each other. In a recent speech, Sparks Mayor Geno Martini pointed out that he had a lot of company in promoting STAR bonds: “We worked tirelessly with Washoe County, the School District, and other agencies, and all agreed to move forward on financing STAR Bonds to see this project come to fruition.”
Not surprisingly, STAR bonds tend to attract chain stores.[page] Chaining up commerce
It’s not as though local officials haven’t seen the consequences of chains. When Barnes & Noble opened in Reno, two local bookstores went out of business (“Chain reaction,” RN&R, Aug. 28, 1996). Local office supply stores like Siri struggled and then died after Office Depot and Office Max came to town, though a survey by RN&R in 1996 showed the selection in the local stores was greater.
When Tower Records on South Virginia Street opened, the CD Store on Keystone closed. Tower later went out of business, so the area lost both the local and the chain merchants. But the danger from chains is not just that they can put local merchants out of business.
Chain stores also drain communities of capital. That’s why some critics say that local officials have an affirmative obligation not to encourage chains—and to closely regulate and control them when they do arrive—because they are so damaging to local economies. In his book The Chain Gang, about the Gannett newspaper corporation (publishers of the Reno Gazette-Journal), Richard McCord describes the way chains drain localities of capital:
“Perhaps no single action better illustrated Gannett’s imperial attitude than a 1979 directive that came straight down from the top. From now on, the order stated, all bank deposits except daily operational funds would be transferred by local papers to national headquarters every night. The drain on local economies around the country was considerable—about $1.5 billion a year when the order was issued, and more as the chain kept growing. The day Gannett [received the moneys], all this homegrown wealth ceased to nourish its own communities.” (Emphasis in original.)
Excesses in business incentives have helped drive a movement called “re-localization,” turning communities away from national chains to stances of protection for local businesses and businesspeople. So have new findings about the contribution local merchants make. An analysis by Civic Economics in 2002 indicated that every $100 spent at a chain store makes a local impact of only $13. The same figure for independent merchants is $45.
Civic Economics names factors that drive “the enhanced economic impact of locally-owned firms”:
1. Labor costs, which directly inject money into the local economy through payments of wages and benefits to local residents;
2. Profits, which remain in the community in proportion to local ownership;
3. Procurement of local goods and services for resale and operations; and
4. Charitable giving, when local firms contribute a greater share of revenue to local causes.
In a speech to the American Planning Association in 2000, Stacy Mitchell of the Institute for Local Self-Reliance said, “Chain store proliferation has weakened local economies, eroded community character, and impoverished civic and cultural life.”
In addition, the dominant market position of many chains allows them to charge inflated prices free from major competition. (Gannett advertising is less expensive where it faces competitive dailies.)
To cool local resentments, chain corporations—like foreign mining corporations operating in Nevada—make contributions to local charities and schools. Sometimes they don’t even necessarily use their own money. Next Sunday, Scheels in Sparks—built with STAR bonds—will hold a 5k run, charge participants $30, and give the money to Big Brothers Big Sisters.
Local organizations who come to depend on chain support often regret it. Chain stores going out of business or withdrawing from the market is an old story in the Truckee Meadows—Fantastic Fair, Gemco, Circuit City, Wherehouse Records, Weinstocks, Shopko, Liberty House, etc.Community self defense
Where local officials will not defend the public from chains—and, indeed, encourage them with devices like STAR bonds—there are ways for members of the public to protect themselves. When the Washoe County Commission was unresponsive to citizens who wanted to protect the balance between water and development, they used a county initiative petition to impose such a policy. When state legislators let the interests of gambling lobbyists prevail over citizens who asked for anti-smoking health policies, a statewide initiative petition imposed the policy over the heads of the lawmakers.
In Belfast, Maine, voters voted 2-to-1 to limit new retail stores to no more than 75,000 square feet. “The law will keep Wal-Mart, Home Depot, and other ‘big box’ retailers out of the community,” Mitchell observed. Such a move goes around the incentives that officialdom inevitably offers. More than a hundred communities around the nation have approved such ballot measures to curb or reject chains. Nothing can be done about existing chain stores and the drain they cause on the local economy. But additional chain activity can be restricted as long as it is applied fairly.
Some local merchants have found ways to compete with the chains. Sundance Bookstore was hard-pressed when Barnes & Noble first opened in Reno but was able to hang on until it sank in to the store’s longtime customers what the differences in selection were—after which it won back almost all of its lost customers. While Barnes & Noble’s stock is huge in square footage, it is limited in areas of interest. Sundance customers had come to expect the kind of esoteric titles they found there, while Barnes & Noble principally sells mainstream titles with broad appeal. “We did feel some effect for the first year,” said Dan Earl at Sundance in 1996. “Now that they’ve been here close to two years, we’ve recovered 80 to 90 percent of that loss.”
Piccinini had a similar experience when Sportsman’s Warehouse opened just up Kietzke from Mark, Fore & Strike. He felt the impact of the opening but hung in there. “It took the Warehouse about nine months to level out,” Piccinini said. In that case, like Sundance, he wasn’t fighting both a competitor and his municipal government.
Independent bookstores in 10 states formed the Midwest Booksellers Association to take group action to protect themselves from the chains.
Coronado, Calif., limits the number of chain restaurants to 10.
Last month, 80 percent of Plaistow, N.H., residents voted against a zoning change that would have allowed a Wal-Mart “supercenter.”
Thirty miles west of Reno and Sparks there’s a great example of re-localization to follow. Residents of Truckee formed the Sierra Business Council to lobby for federal and state policies that recognize the worth of local economies and demand public policies to protect them. It also conducts a “Think Local First” campaign, encourages community discussions of what’s at stake for residents, helps locals get their names off national catalog and advertising mailing lists, and holds conferences with other community groups in the state doing the same thing so they can swap ideas.
It helps that Truckee residents have had the support of some of their municipal officials. Former mayor and town council member Beth Ingalls recently wrote about the chains that have gradually arrived in Truckee:
“Many will argue that if we choose not to support local chain stores, we will also be contributing to the loss of local jobs and tax revenue, and that’s a fair assertion. But these giant corporations have a much better chance of surviving without us. Safeway is the third largest grocery store chain in North America with more than 1,740 stores, over 200,000 employees and $42 billion in annual revenue. Savemart, a considerably smaller corporation ranked in the top 75 of supermarket chains, still managed to rack up $5 billion in revenue in 2007. The independent retailers that have set up shop in our communities will never make the Fortune 500, but they are [an] integral part of our community character and vitality. … As an added benefit, local merchants have a track record of being more involved in the community decision-making process, more committed to quality of life issues and more supportive of local charities and youth organizations.”
When the STAR bond legislation was being processed by the Nevada Legislature in 1995, Marty Piccinini and his wife tried to stop it, but found no one in officialdom willing to listen, and members of the media were disdainful. Mark Fore & Strike had served the valley for more than four decades, but now officials were more loyal to North Dakota and Nebraska than to locals.
A few weeks ago, referring to a Cabela’s plea for corporate welfare, the governor of South Carolina spoke the words not one public official was willing to speak for the Piccinini family in Nevada in 2005: “[G]overnment shouldn’t be picking the winners and losers in the business marketplace and, therefore, government should treat businesses the same. Too often government will hand incentives to the new business in town, but offer no help to the business producing the exact same product while that business has been paying taxes for years here in the state. Too often if you’re a big business you get the red carpet rolled out in incentives, but if you’re a little business you get nothing.”
At the Nevada Legislature, state lawmakers rattled by complaints about STAR bonds are trying to decide what to do about the law. While some want them to repeal it outright, Assemblymember Debbie Smith says there is no appetite for that much change, so the law will probably only be amended.
When Cabela’s opened in Verdi, Mark Fore & Strike barely felt it, to Piccinini’s surprise. But Scheels in Sparks was another matter. It hurt.
“To be truthful, I didn’t even know Cabela’s opened,” Piccinini said. “I was really worried about it, and when they opened, our business—it increased. But yes, I felt the [Sportsman’s] Warehouse. … And I did feel Scheels.”