Just doing my homework here. I am sure there is some logical explanation for some of misinformation presented in an earlier thread, but I thought readers should have the facts.
The original offer of an EDA to Wal-mart was approved unanimously by the Council in December of 2004 (http://www.cityoflafayette.com/News.asp?NewsID=173). Something apparently changed between then and October 4, 2005 when the final vote occurred.
Here is an accurate description about how the EDA works (taken from the City Website):
Wal-Mart will incur the total expense up front for the above items. The City will contribute the $2,335,832 towards the land cost over time from the increase in sales tax revenues generated by the new store. Only the sales tax revenues above what the existing store already generates (projected to be $1,150,000 for 2004) will be rebated to Wal-Mart to pay for the incentives. At conservative estimates, the new Lafayette Wal-Mart is expected to produce $1,800,000 in sales tax revenues each year, meaning that there will be a 3.6 year payback period, after which these additional revenues will be available to the General Fund. It is important to note that the portion of the sales tax that is dedicated for the purchase and maintenance of Open Space are exempt from these rebates, so those funds will see an immediate benefit from the new store’s revenues.
The final numbers in October were: The base was set at $1,110,689 and the rebate amount was set at $2,238,332.
To explain this in simple terms -- if Wal-Mart submits $1,000,000 in revenue to the city, the city keeps it all. If Wal-Mart submits $2,110,689, the city keeps $1,110,689 and Wal-Mart is reimbursed $1,000,000. And so on. The City will not rebate a cent to Wal-Mart until it has collected the base amount. When the rebate amount is reached, all additional revenue goes to the General Fund of the City. At the time the EDA was passed, it was expected to take 42 months to complete the rebate.
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16 comments:
Not bad for a 'Newbie'! ;-)
When this went down even the press did not get it right in their reporting, good job on explaining it. With the Super Target EDA their is a similar arrangement, we still get some tax revenue every year even while the the EDA is being paid off. The difference is there was no sales tax revenue before since the land was undeveloped, so any tax revenue is a plus.
The standing order with any of these agreements is "protect the base". An interesting fact that has not been published enough to counter those that say we are simply taking revenue away from another store is that even though we have opened up two new groceries stores (King Soopers and Vitamin Cottage) the net sales tax revenue from grocery stores has continued to go up! This means we are not Cannibalizing our base, but getting new customers. It will be interesting to see if this trend continues when the Super Walmart and Target open their grocery stores. We are bound to attract some of the folks from Anthem & Vista Ridge, and the old Target down the road in Broomfield will be closing.
Councilor Cameron is quite correct as far as she went. But that is not the entire story. So now for the rest of the story.
The council approved moving forward to NEGOTIATE an EDA with Wal-Mart in December, 2003. But the structure of the EDA was not on the table at that time. In fact, we only became informed of the results of that negotiation when our packets arrived on a Thursday night to be voted on the following Tuesday. There was never an executive session on it like we did with Target (lessoned learned?). I looked for a yearly cap on the sales tax rebate like the King Soopers deal but there was none.
After we agreed to NEGOTIATE, the council was bombarded with congressional reports, position papers, etc. You name it. We got it. Out of all of that there were two consistent messages.
1. A super Walmart will cannibalize up to 30% of existing grocery store and other retail business it competes with within 5 miles. That 30% is incremental to WM but it comes from existing retail business.
2. A super Walmart usually causes a decrease in prices in its target area as competitors respond to pricing pressure. (That lowers sales tax on the existing base).
I buy our groceries at King Soopers today. If I decide to buy them at WM when it opens, that is incremental business for WM. They will keep that sales tax from my purchase. The city loses it because I didn't buy them at Kings Sooper. There is no cap on the amount WM will keep each year. It is not spread out evenly over three or four years. So if there is the so called "cannibalization" effect, which all the Congressional reports and blogs says happens big time, a portion of the incremental business for WM is a loss of sales tax to the city (open space tax remains the same). The only question is how large the amount will be.
In the Target deal, the city gets a lot of money first, then Target, then a split after that. The structure of that deal was no accident. It protects the city from a cannibalization effect. Lesson learned from the WM EDA?
Fortunately construction of WM was delayed a year. So now we will see. I hope all the Congressional reports and blogs are wrong and very little cannibalization takes effect. If there isn't much, why does everyone accuse WM of it?
Very cogent analysis, Kerry. Thanks. These are points that the City would be wise to consider in future economic development discussions.
Remind me of another detail of the SuperWalMart EDA: Even though there was no annual cap, wasn't there a total cap? In other words, doesn't the incentive terminate once some total rebate number is reached?
To answer Alex's question, yes, there is a total cap.
I believe Mr. Bensman's argument was that it would be better to stretch out the rebate period over 42 months than to pay it off more quickly and have the money return to the general fund earlier.
I see his point -- if, for some reason Wal-mart did produce $3,349,021 in sales tax revenue the first month they were open (ridiculous, I know, but just for ease of explanation), in Mr. Bensman's scenario, the city pays WM $79,739 per month for the next 42 months while the money sits in our accounts (nice to gather the interest, I will concede). In the scenario that passed council, WM takes their $2,238,332 and we get every cent of tax revenue from that point on.
Now, as far as approving negotiations, this deal was different than Target, where actual numbers were being negotiated back and forth. With Walmart, what council approved in October differed from what was approved in December only in numbers that were based on data that had yet to be finalized, like 2004 revenue base.
(http://www.cityoflafayette.com/news.asp?newsid=125 click on "economic development proposal")
The only thing different in the final proposal, than the one Council approved on December 30, 2004 (in a special meeting, no less) was that the tax base was $39,311 lower than anticipated and the costs to be rebated were $97,500 less than anticipated. Hardly a shocking revelation to council or the general public (I was at that meeting).
Sorry, Kerry, but the structure of the EDA was on the table when you voted on it, or at least that is what the record shows.
Kerry "Both Ways Bensman" should have learned from Bob Beauprez that you can't spin minutia into justification for flip flop votes and expect people to buy it.
Oops, make that 1/42 rebate $53,293/month, not $79,739 (accidentally calculated on the total revenue, not the increment).
Once again, Councilor Cameron errors in her understanding of the EDA. If you read the link she provides, what it outlines is the amount of the WN tax rebate that was on the table and an expected payback period. But the actual contract DIFFERS. The terms of a deal are critical to determine what the financial impacts are.
Her portray of the Target negotiations is also in error. But I won't go there for now.
The WM deal runs 42 months. But WM gets every cent of the retail sales tax it generates (minus open space) or up to the $2.33M, whichever comes FIRST. The rebate is not spread over 42 months. The city will rebate the amount every 12 months starting with the day of opening (not a calendar/fiscal year boundary). The monthly collections will be kept in reserve by the city to be rebated.
It is also easy to be in denial of the "cannibalism" effect. WM is locating between three grocery stores, two in Lafayette. There are at least six within its target area. It ranks #1 in grocery sales in Colorado. Their basis of competition is to take business away from the King Soopers, Albertsons, and Safeways in the state. They also have a auto repair facility, garden store, drug store (with their new $4 per generic drug offering), and optometry facility. Now they are targeting organic foods as well.
Now WM is smart and known to be ruthless. The EDA allows it to get its money back as fast as possible and gives them 42 months to do it. The city hopes that is spread over 42 months. To make that happen, the contract would be structured differently, caping the rebate on a monthly basis for 42 months totally $2.33M.
In addition, city staff avoided the issue of how much of that $2.33M would be generated by lost business from current businesses. And it did not provide a financial impact statement. The finance director did not comment on the proposed EDA. (In fact, it took the previous council two years to get the city admin to provide any financial impact statement on any proposal being made.)
So the EDA is done. The terms are now fixed. The only unknown is what the cannibalism impact will be and negative hit on city revenue in the first 12 to 18 months.
By the way, the secondary effect is what existing businesses will go out of business. Currently Albertsons probably tops the list.
Sorry, readers, that's the way it is. The devil is in the details, always.
Perhaps a reminder of the 'details' is in order. Walmart does not get the entire sales amount rebated until the incentive is paid off. The following is directly from the signed agreement. Walmart receives back the additional sales tax above $1,110,689 collected. Further they assume the risk of the possibility (slim though it might be) that the sales tax collected will not be above that. The cannibalism effect remains to be seen. Our experience so far with every additional grocery store (King Soopers, Vitamin Cottage) is that TOTAL grocery sales tax receipts has RISEN. The cannibalism arguement would show the receipts as static with the revenue being redistributed among existing stores. If we lived in an isolated community this would be more likely. Time will tell.
Excerpts from the Walmart EDA below
d. The sales Tax Incentive Payments shall be paid solely from the sales tax incremental revenues generated from the Store in excess of the sales tax revenues base (the "Sales Tax Increment") as of December 31, 2004 which base amount is $1,110,689.
h. The City's payment obligation under this section shall be limited solely to the amount of Sales Tax Increment actually received by the City from the Store. Nothing herein shall be construed to require the City to make any payments to Wal-Mart in excess of such amount. Accordingly, Wal-Mart agrees to assume the entire risk that the Sales Tax Increment generated by Wal-Mart will be insufficient to enable the City to pay the Incentive to Wal-Mart as provided in this agreement.
Am I reading this right?
In December of 2004 Lafayette agreed to reimburse $2,336,000 total sales tax after keeping a base of $1,150,000. No open space taxes would be rebated.
In October of 2005 the final agreement was for a reimbursement of $2,238,332 after keeping a base amount of $1,110,689 each year. Again no open spae taxes on the table.
The differences between the intial and final agreement being the total reimbursement was $97,668 lower than initially agreed, a little over 4% decrease, and the base was $39,311 higher meaning Lafayette keeps more money before any rebating takes place?
Dreamer, actually the base ended up being $39,311 lower than anticipated (about 3.4% less). Correct on the lower rebate amount.
As you note, the $1,110,689 is an ANNUAL amount, not a one time amount. It isn't that the City takes the first $1.1 million (to round it off) and then WM gets the next $2.2 million. WM has to bring at least $1.1 million in sales tax revenue (plus OS taxes, which aren't rebated) before they get anything at all.
Walmart ONLY gets the increment.
Tough crowd. A key point in the WM EDA was to protect the city's revenue stream it received from the existing WM store. So a base level was agreed upon that the city would receive. That "protected" amount was derived from the current store's performance with a little upside to it. Everyone agreed that it was logical that a Superstore would retain at least the same sales volume that the existing store did. After all, why build a Superstore on 287 if it can't outperform the existing outmoded store on So. Boulder Road? Statistics available from WM show they were closing the old stores as fast as they could and replacing them with Superstores.
Now WM wanted $2.4M in rebates from the city. After all was said and done with the property owners, the number came in a little lower. By agreeing to the EDA, it is clear WM felt certain it could generate sufficiently enough incremental sales yearly with the new store on 287 and the city would receive incremental sales tax generated by them that it could rebate to WM. Why ask for $2.3M+ in rebates unless the money would actually be there to be rebated?
But what you will not find in the EDA is any language about where those incremental sales will come from. That's the key to any impact analysis on city overall revenue. WM could care less. And they made sure they were well protected and will get their money.
The city did not protect itself as well as WM did.
I am curious how Councilor Bensman thinks the city could protect itself on where incremental sales come from. Require anyone shopping at the new Walmart to sign a statement that they have never shopped in any other lafayette grocery store? Yes there is a certainty that existing shoppers will spread the money around. But again, the EXPERIENCE with new grocery stores opening is that total Grocery sales increased, not remained static. I would prefer to take the glass is half full viewpoint. I guess we will all just have to wait and see.
In response to Councilor Phillips, the city cannot protect itself from cannibalization if it participates in deals like this. Of course someone like WM has a ton of statistics and models on how it works but if asked, I doubt WM would share the info. (One tidbit lost in the discussion is that WM looked at Hwy 7 and Erie and discarded the idea. Are they wiser than Lowe's?)
Also when one talks about King Soopers and Albertsons supposedly reaching equilibrium, that $1.2M in the Old Albertsons building should be worked into the equation.
But what the city can do is dampen that effect and spread it over a number of years, in this case over 42 months. Especially since there can always be unforeseen events that have negative financial consequences. The city could have done what the council briefing memo suggested, cap the rebate at around $600,000+ per year or pushed for a Target-like deal, get some of the incremental sales tax up front. It didn't.
So now the city has this challenging scenario in 2007 and 2008: the WM effect, new police buiding opening up, new ambulance service, use and building permit revenue down, and roads to fix. There are no big boxes on the horizon for at least two or three years to compensate for all that. And no money to help subsidize the re-development of the WM/OA site (the developers bidding conference was a dud.)
And there is another "financial time bomb" on the horizon right now. More later on that. We'll see.
Huh?
How do you reconcile this: "there are no big boxes on the horizon for two or three years to compensate for all that" with "no on A." Will they compensate or not, Kerry? Are you saying that it is better to never build up our tax base than to wait the 2-3 years that it takes to get through the process?
I am tired of arguing over the color of the sky. I think it is blue, Kerry thinks it is falling. Frank has it right, time will tell.
What is the "financial time bomb" and why would you not work for a yes vote on the Wankea annexation if you are aware of financial hardship the city will face in the future?
Some feel the council has the ability to wave a magic wand and that is how it is. (Can't find mine, then again I never received one) Let us not forgot we were turned down twice before by Walmart when the city approached them. To some extent you have to accept that the city staff who are professionals at this know their job and craft the best deal possible. Failing that, councilors can make motions to change the deal to something else and work with the rest of council on a compromise. Councilor Bensman never made such a motion, simply said 'No', and now complains about it incessantly.
Legislate or vacate!
I am now done with this subject too!
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