San Francisco’s Legacy of Cronyism

Cronyism is alive and well in San Francisco  Fourteen months have passed since San Francisco voters passed Prop J, the establishment of a Legacy Business Historic Preservation Fund.  This is a government-sponsored grant program devised by then-Supervisor David Campos to help traditional San Francisco businesses keep their doors amidst rising costs.  We recently checked the San Francisco Office of Small Business website, which lists all the companies that have been approved for “Legacy” status, and already 64 businesses qualify for the grant program.  Everything from music and book stores to dance studios are listed in legacy business registry.  Since as many as 300 businesses can be added to the giveaway program each year, this proliferation is likely to continue.

It’s actually rather easy for established companies to qualify for the registry and grant.  The business must have operated in The City for 30 years or more and either was formed or is currently headquartered here.  It has to show that it has “contributed to the neighborhood’s history or identity,” and it must be committed to maintaining the physical features or traditions that define the business.  Here’s where the cronyism kicks in:  it must first be nominated by a member of the Board of Supervisors or the Mayor and then approved by the Small Business Commission.  If the application is submitted and is not rejected within 30 days, then it automatically joins the registry.  So, by default, established businesses automatically qualify for the handout, unless there is outright fraud.  The other part of the giveaway is for landlords of legacy businesses:  if they lease to a legacy business for 10 years or more, they also qualify for an annual grant of up to $4.50/square foot of leased space.

These subsidies are not small change: for the legacy business, it’s $500 per year for each full-time equivalent employee, up to a total of $50,000 per business per year, and for the property owners, it’s up to a limit of $22,500 per business per year.  Due to the number of businesses involved in this scheme, it won’t take long for this program to cost the taxpayers millions.  The City Controller estimated an annual cost of between $51 million and $94 million eventually.  And once a business is granted legacy status, it will get the subsidy each year.  And as we all know by now, once you start these government programs, they are nearly impossible to shut down.  Can you imagine the commotion at City Hall if the Board of Supervisors were to cut funding to this program once thousands of San Francisco businesses (the Controller estimated a total of 7,500 businesses could qualify) have been on the dole for years?  While the City is in boom mode right now and the program is just beginning, it should have been obvious that there would be an inevitable downturn in the future.  What could the voters have been thinking when they approved this bit of high-cost madness?

Of course, the program was touted as a first-in-the-nation way to help small businesses, but actually there’s nothing in the ordinance limiting the size of those receiving the grants, so even big corporations like Levi’s Strauss and Ghirardelli Chocolates could apply.  Furthermore, if our political leaders were really interested in helping small businesses, why don’t they lower taxes and fees and cut regulations and mandates, rather than doing just the opposite?  As for the astronomical rents, indeed they are out of control. While some contributing factors like the Fed’s loose monetary policy and urban growth boundaries around the Bay Area are beyond the control of our local politicians, the constant barrage of local laws making it more and more expensive to operate in The City fuels the fire even more.  Indeed, with the unpredictability of fees, taxes, regulatory costs and compliance, it’s small wonder that commercial landlords currently prefer short-term leases.  In addition, most local politicians support the idea of a split roll for Prop 13, which would greatly increase the property tax of all commercial properties, thereby increasing the rents of many small businesses.  So “help” from the politicians is totally hypocritical.

Missing from the politician’s calls to help small businesses survive in this business-hostile city is any mention of all the small businesses just starting out that are not eligible for subsidies.  They will not get the unfair advantage that the “legacy” businesses get.  They will have to earn all their revenue from their customers—and they better serve them well or they’ll be gone.  A legacy business will not have to work as hard to please its customers because it will be partially subsidized by the taxpayers.  Whether you as a taxpayer like or even utilize the services of a legacy business—you are forced to support them.  Businesses come and go all the time—just like people choose to change jobs or move elsewhere.  Since when is it the responsibility of the government (the taxpayers) to help some businesses “survive” while driving out the competition?  We find a certain irony in this whole legacy scheme that one of the companies now listed on the registry is Luxor Cab Company.  If that isn’t crony capitalism, then we don’t know what is.