Santa Ana City Council members have approved spending $1 million from the city’s emergency reserves to build a new freeway digital billboard for car dealerships at the Santa Ana auto mall, including luxury brands Audi, BMW, Volvo, and Lincoln.

The council agenda and city staff called it a “sales tax loan,” but outside government finance experts said the way it’s set up, it also appears to be a subsidy, a type of grant to businesses or industries used by governments to help them keep prices competitive.  The dealerships aren’t required to pay the city back, except if sales taxes paid by buyers don’t replenish the reserves in 10 years, which city staff said was unlikely.

Under the arrangement, which was proposed by the car dealerships in August and approved Nov. 7 by the City Council on a 5-1 vote, the city will pay the full $1 million cost of the new sign – which replaces a more than 20-year-old billboard. The city said  it was an investment in the economic growth of the dealerships.

The council also increased the maximum allowed size for the billboard to 1,200 square feet, or about twice as large as a typical freeway billboard.

City staff predict the new sign will significantly increase car sales, with buyers boosting the city’s  sales tax revenues.

Michael Manville, a UCLA professor who specializes in local public finance, said it “very much is a subsidy.”

“The dealers don’t technically pay this back,” Manville said. “Their consumers pay it back if [the dealerships] sell more cars. So it very much is a subsidy in the sense that the city buys a big sign for the dealers, and then presumably the dealers sell more cars, and then the money from those taxes – which comes from the car buyers, not the car dealers – goes to pay back the sign.”

Manville questioned whether $1 million in increased sales tax revenues can actually be attributed to the sign. Cities receive sales tax revenue equivalent to 1 percent of the sale price, so the new sign alone would have to increase car sales by roughly $100 million to pencil out.

“How do you know that the sign is responsible for the increased car sales?” Manville said. “People might just buy more cars in the next [few] years, and if they do then the city’s gonna get more sales taxes, and are we really so confident that one big glowing sign is really going to” generate those additional sales?

“If the sign’s so important, why can’t the dealers build it? And if the city decided not to build it, what would the consequence really be?”

Representatives of the car dealerships didn’t return phone calls on the issue.

But city staff said it’s a loan, not a subsidy.

“Everything is structured as a loan,” said Deputy City Manager Robert Cortez, who is also the city’s interim spokesman. “Maybe the way it’s described in the staff report maybe isn’t clear enough,” but when looking at the terms “it really is a loan.”

The agreement does say that if the $1 million cost isn’t paid off after 10 years, the dealers have to cover any remaining part.

“At the end of the day, they are liable” if the sales tax growth doesn’t cover the cost of the sign, Cortez said.

But that scenario is unlikely to happen, according to city staff’s projections, which estimate the sign’s costs will be paid off by sales tax growth within six to eight years, well before the 10 year deadline.

While city revenues have been increasing with overall growth in the economy, the city has been spending more than it earns. Santa Ana had a budget deficit last year of $390,000 and city staff now project a deficit this year of $600,000, according to an update for Tuesday’s City Council meeting.

Santa Ana’s operating reserves, which the city is drawing from to pay for the $1 million billboard, are intended to be used for fiscal emergencies due to economic downturns or unforeseen rising costs, according to the city’s policy.

The $1 million sign agreement is with six car dealers at the auto mall: Audi South Coast, Lincoln South Coast, Crevier BMW, Crevier Mini, Volvo of Orange County, Subaru South Coast, Volkswagen South Coast, and Freeway Honda. The contract is between the city and an organization the dealers formed called the Santa Ana Auto Mall Dealers Association, LLC.

Michael Coleman, chief fiscal policy advisor to the California Society of Municipal Finance Officers and the League of California Cities, said the arrangement “seems to be a subsidy,” given there’s “a private benefit that’s being funded by a public cost.”

He noted subsidies often are justified as a way of growing jobs and developing the local economy.

“Essentially by approving [the agreement], the City Council is saying as a matter of policy that they believe that this will have a net public benefit,” said Coleman.

At the same time, he said, there are often questions about whether the private development “would have happened anyway,” even without the public spending.

“From the city’s standpoint, if they’re making this decision, then implicitly they’re saying there’s some public benefit from using public resources for this,” Coleman added. It could be the city is anticipating potential job growth or revenues that exceed the upfront city expenses, in other words a “return on investment” to the city general fund that would more than cover the costs.

The City Council’s public agenda documents called it a “loan” financed through “sales tax increment,” which national association of government finance officials said is a form of subsidy.

The $1 million cost of the 75-foot sign will come from the city’s taxpayer-financed reserve fund. Half of any increase in city sales tax income from the car dealers, beyond 2016 levels, will be redirected from the city’s general fund and go instead to re-filling the city’s reserves.

There is no increase in the dealers’ sales tax rate.

The basic structure – the public pays upfront to improve a private business, and is reimbursed in future years through growth in tax revenues, while the business’s tax rate stays the same as before – is similar to Anaheim’s much larger resort bonds subsidy for the Disneyland Resort.

In public comments before the council’s vote last week, a representative of the auto dealerships pointed to significant investments they’ve made to their businesses, including $66 million in facility upgrades in recent years.

Al Parajeckas, speaking for the Crevier BMW and Crevier Mini dealerships at the auto mall, said his dealerships’ sales have been “number one in the nation for three years solid running.”

Council members also emphasized the auto mall is one of the largest revenue sources for the city, and that investing in the sign will bring additional sales tax dollars to the city.

“I think this is one of those opportunities…where we can promote and support economic development,” said Councilman Vicente Sarmiento. “It really does benefit the private sector, but it also benefits the public sector as well.”

Councilwoman Michele Martinez said she supports the new sign, but she has a problem using the city’s reserve funds for it, when the reserves are only supposed to be used for fiscal emergencies. She was the only vote against the subsidy deal.

In a follow-up interview, Martinez said she doesn’t blame the car dealerships for seeking the subsidy, but that “it’s wrong” for the city to agree to it.

“Our residents are fighting tooth and nail for so many resources, and this is who we’re subsidizing,” Martinez said, adding the dealers are “well-off” financially. “I don’t think the city’s in any position to say that we’re solvent… we’ve got less revenues coming in and more expenses. That’s a structural deficit.”

“It’s very clear where the [city’s] priorities are. It’s not in the people. It’s in big business.”

The billboard issue was approved on a 5-1 vote, with Martinez opposing and Mayor Miguel Pulido recusing himself. 

Pulido said he abstained because he’s worked in the past with ICC Collision Centers, an auto body repair company that has worked with the Crevier dealers.

“It’s not an economic interest, I have no conflict. But I feel better recusing myself,” Pulido said at the council meeting.

Nick Gerda covers county government and Santa Ana for Voice of OC. You can contact him at ngerda@voiceofoc.org.

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