The one per cent solution

“This leakage of sales tax from Alameda residents to surrounding communities is a major cause of the City’s financial crisis.”

So saith City Manager John Russo in a “letter to the editor” distributed to the local papers and blogs (alas, once again, the Merry-Go-Round didn’t make the list).  The issue he identifies is that Alameda’s sales tax revenues are lower they might be if Alamedans did more of their retail spending on the island instead of going elsewhere to shop.

Reading Mr. Russo’s letter, one gets the impression that the City Manager thinks that the leakage problem results from a character defect afflicting Alamedans.  Alameda is a “laggard,” he says, in “sales tax performance,” because our residents spend less per capita locally than those of other East Bay cities do.  A pox on us!  But it’s unlikely that Alamedans can be shamed into changing their spending habits.  Nor, of course, can they be compelled to do so.  These days, the federal government may have the power to require citizens to buy health insurance or pay a penalty. But the City of Alameda does not enjoy similarly far-reaching control over where Alamedans spend their retail dollars.

No, as Mr. Russo surely knows, the leakage problem can’t be solved by exhortation or edict.  So what can the City do about it?  Let’s take a closer look.

For any given community, one can estimate the total household demand for consumer goods in various retail categories.  One can then get data on the total dollar amount of sales actually made in the community in those categories.  If the former is greater than the latter, the assumption is that residents are going outside the community to buy consumer goods.  This difference represents the retail sales “leakage.”  And since sales tax revenues depend on retail sales, you can use the “leakage” number to estimate how much sales tax revenue the community is losing because its residents are shopping elsewhere.

As it happens, the economic consultants hired by Catellus in connection with the Alameda Landing project performed just this kind of analysis for Alameda.  Here are their overall conclusions:

  • Total household demand by Alamedans for consumer goods:  $961 milllion.
  • Total sales in Alameda: $540 million.
  • Retail sales “leakage”:  $421 million.

The consultants then broke down the “leakage” figure into nine retail categories.  Measured in dollars, the greatest “leakage,” they found, came in “general merchandise” (which includes department stores, warehouse clubs, discount stores, and dollar stores) and motor vehicle and parts dealers.  Following in order were:  home improvement and garden; gas stations; restaurants and bars; apparel;  furniture, home furnishings and appliances, and specialty stores.  In only one category – food and beverage stores – did local sales exceed demand.

Suppose we found a way to “recapture” this “leakage” – i.e., to bring all of the sales made to Alamedans elsewhere back onto the island.  The current sales tax rate is 9 per cent, of which 1 per cent goes to the City – i.e., for every $100 in sales, the City gets a buck.  If we brought all of the off-island sales home, we’d get another $4.21 million in sales tax revenue.  Not enough, maybe, to cover the forecast increased spending on pensions and other retirement benefits for public safety union members, but still a nice chunk of change.  You can see why Mr. Russo sees “leakage” as such an enticing target.

But is it doable?  Let’s go back to Catellus’ economic consultants.  In addition to calculating “leakage” in dollars, they also estimated how many square feet of new retail space would be needed to satisfy the unmet demand.  It ain’t a small number.  For purposes of their analysis, the consultants threw out the motor vehicle and parts and gas station categories.  Of the remaining six retail categories in which leakage existed, they found that it would take 973,290 square of new retail space in Alameda to give residents what they demanded.  Here’s the breakdown:

  • “General merchandise”:  457,333 square feet.
  • Home improvement and garden:  313,182 square feet.
  • Restaurants and bars:  67,442 square feet.
  • Apparel:  56,000 square feet.
  • Furniture, home furnishings, and appliances:  60,000 square feet.
  • “Specialty retail”:  19,333 square feet.

The retail stores planned for the Alameda Landing development are expected to fill a portion of this void.  According to Catellus’s consultants, the project will “satisfy a significant portion” of the unmet demand by Alamedans in the general merchandise, specialty stores, home improvement and garden, apparel, and restaurant and bars categories by “recapturing” 285,000 square feet of retail sales “leakage. ”  City staff recently estimated that when the project is fully built out, it will produce $78,655,881 in taxable sales, which translates into an additional $786,559 in sales tax revenue.  Nice, but nowhere near enough.

In his letters to the editor, Mr. Russo didn’t go into any detail about how he proposes to solve the rest of the “leakage” problem.  But in an email to the Merry-Go-Round from which he gave us permission to quote, he outlined his thinking this way:

As for the future of sales tax growth in Alameda:  we will be looking for growth in areas that already have a retail infrastructure.  Places like South Shore, Park Street, and Webster Street.

Second, we will be looking for retail opportunities as a piece of the puzzle at Alameda NAS.

Finally, we are most interested in recruiting to Alameda businesses that generate sales tax through business to business sales.  Those types of businesses would be most appropriate at Marina Village, Harbor Bay Business Park, and Alameda NAS.

Except for the emphasis on “business-to-business” sales, this strategy is virtually the same as the ones City leaders put forth in the Alameda Citywide Retail Policy in 2004 and the Economic Development Strategic Plan Update in 2008.  Unfortunately, as the chart below taken from State Board of Equalization data shows, taxable sales in Alameda have remained essentially flat for the period encompassing these plans:

Sales tax data jpeg

This doesn’t mean the either of the prior plans was a bad one.  Execution rather than conception may have been the flaw.  (And, of course, Alameda Point remains just a “piece of the puzzle” even now).

But it does give one pause.  Increasing retail sales and thereby sales tax revenue by “revitalizing” existing shopping areas has been a constant theme for the last decade.  No wonder:  it’s a politically palatable nostrum to promote, since it doesn’t require sacrifice from anyone.  And the opportunity for retail sales growth in these areas is certainly there. Public information about retail vacancy rates is hard to find, but the 2012 Economic Outlook prepared by the East Bay Economic Development Association put Alameda’s retail vacancy rate at 6.6% at the end of 2010.  And a March 2013 article in the Alameda Patch quoted City staff estimates that, as of December 2012, the retail vacancy rate was 12 per cent at both Harbor Bay Landing and South Shore and 6 per cent at Marina Village.  There are also empty storefronts on Park Street and Webster Street.

As Mr. Russo recognizes, going this route won’t bring us all the way to the destination.  Inevitably, the call will go out to the developers to build new stores at new locations to satisfy Alamedans’ unmet demand for consumer goods.  But this is a costly road to hoe.  As Mr. Russo points out, South Shore, Park Street, and Webster Street “already have a retail infrastructure.”  But Alameda Landing did not, and Alameda Point does not.  We’re used to talking about infrastructure in terms of housing development, but it’s equally necessary for retail development.  Basic infrastructure at Alameda Landing cost around $100 million.  The most recent estimate of infrastructure costs at the Point, to be updated this fall, pegs the tab at $774 million.  That’s a lot of dough to spend in exchange for increased retail sales.

Bear in mind, also, that any new retail stores will attract not just Alamedans but also customers from off the island.  Indeed, one can be sure that Target wouldn’t put a store at Alameda Landing just to help Alameda solve its “leakage” problem.  It wants to see people coming through the tube and over the bridges to shop there, too.  Any retail developer interested in Alameda Point undoubtedly will think the same way.  And so we’ll run smack into the predicament that plagues any proposed development in Alameda:  traffic.  Just this week, we heard Bayport residents bemoan the traffic congestion that they fear from putting an In-and-Out Burger at Willie Stargell and Webster.  Imagine the outcry about possible gridlock if a major retailer announced plans to build a new store at the Point.  This isn’t a concern a few more bike lanes will make go away.

So is Mr. Russo just kidding himself –- and us – when he declares that the “the City’s financial future” depends upon solving the “leakage” problem?  Is he really setting us up for a proposal to increase the sales tax rate?  One can discount the former statement as typical Russonian hyperbole.  And one would hope that the City Manager learned a lesson from the failure of Measure C, the sales tax initiative that was designed to offer a little bit of something for everybody (and a lot of everything for the fire department).  Only time will tell.

But, even as we wish Mr. Russo success, let’s not lose our perspective:  the fault, dear Brutus, lies not in our revenues but in our costs.  In FY 2012-13, sales tax revenue is estimated to be $5,266,000, which represents 7.25% of total general fund revenue.  If sales tax revenue increased by 10% in FY 2013-14, the increase wouldn’t even cover the budgeted $645,000 deficit.  By contrast, fire and police department spending in FY 2012-13 is estimated to be $47,796,000, which represents 74.55% of general fund operating expenses and 67.16% of total general fund expenses and transfers.  If police and fire spending were cut by 10%, not only would the decrease cover the entire deficit but it would produce a surplus of more than $4 million.  We can only hope that, some day, the politicians take off the blinders conveniently supplied by the public safety unions and start focusing their attention on actions that truly will make a difference.

Sources:

Alameda Landing Retail Tenant Strategy: 2013-04-16 Joint_4-A (Alameda Landing retail tenant strategy)

Staff report on Alameda Landing retail tenant strategy 2013-04-16 staff report re Alameda Landing tenant strategy

Alameda Citywide Retail Policy: Alameda Citywide Retail Policy

Economic Development Strategic Plan: Economic Development Strategic Plan — January 2008 update

About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
This entry was posted in Budget, City Council and tagged , , , , . Bookmark the permalink.

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