Unveiling hidden districts: assessing the adoption patterns of Business Improvement Districts in California.

INTRODUCTION

Anecdotal evidence (Chapman, 1998; Fay, 1989; Porter, 1989) suggests that tax and expenditure limits adopted by states in the 1970s have led to a proliferation of special assessment districts. Generally, a special assessment district is a sub-municipal entity that levies taxes on a geographically small district and uses the revenues to fund local improvements in that district. By levying taxes only on districts constructed to directly benefit from those levies, special assessment districts avoid tax revolt strictures. Despite the growing importance of these districts, basic patterns of adoption are unknown. Indeed, because these districts are not surveyed by the Census of Governments, their adoption patterns are a mystery to researchers (see Briffault (1999) for the state of knowledge on special assessment districts). (1) More broadly, special assessment districts are part of a long research interest in the determinants and consequences of provision of local public goods (Tiebout, 1956; Epple and Romano, 1996; Helsley and Strange, 1999; Cheung, 2006). (2)

This paper begins to fill the gap in knowledge about sub-municipal public goods provision by presenting the results of a survey of California cities describing the adoption patterns of one particular form of special assessment district: the Business Improvement District (BID). In California, a BID is formed when a group of merchants or property owners vote in favor of a package of taxation and local public services. Once a majority of assessment-weighted votes are cast in favor, state law makes the contributions of all neighborhood members mandatory. BIDs provide local public goods such as cleaning, marketing and safety, and are of interest because quantitative analysis shows they have been able to reduce crime in Los Angeles and Philadelphia (Brooks, 2006b; Calanog, 2004; Hoyt, 2005a) and increase property values in New York City (Ellen, Schwartz and Voicu, 2006). In addition, anecdotal evidence credits them with a myriad of neighborhood improvements (Houston, Jr., 2003).

Previous work has surveyed existing BIDs (Mitchell, 2001) to determine services and goals, relying on the list of BIDs compiled by the International Downtown Association. While this list likely includes most of the largest BIDs, it is unreliable as a comprehensive survey of BID adoption. To completely capture BID adoption patterns, this paper offers the first comprehensive survey of adoption patterns by city, the jurisdiction that authorizes BIDs in California. I find that roughly half of California cities with a population of at least 25,000 in 1980 have BIDs. Among the sample of all cities in the four largest Southern California counties, almost one-fifth have at least one BID.

What motivates BID adoption at the city level? I propose and test supply- and demand-side hypotheses. On the demand side, recent work has suggested that more heterogeneous cities should be more likely to either supplement or opt out of government provision (Alesina, Baquir and Easterly, 1999; Chaudhary, 2005; Poterba, 1997; Temple, 1996). The intuition behind this prediction is that heterogeneous residents may have difficulty agreeing upon a public good of mutual interest.

In contrast, the supply-side hypothesis is motivated by the work of Olson (1971), who argues that even groups with common goals face a collective action problem in the provision of public goods. In commercial clusters, local public goods of mutual interest include security, cleanliness and parking. One way to overcome collective action problems in providing these local public goods is an institution that coerces membership. In newer commercial development, such as malls, coercive force is applied by the developer who prices externalities into rental contracts (Gould and Pashigian, 1998). In contrast, urban planners have long noted that older commercial areas have no counterpart for the mall developer. Thus, the theory of collective action argues that the BID institution should solve the problem of an inadequate level of public goods only in non-mall commercial areas, which are predominantly in older commercial neighborhoods and cities.

By combining the data from the survey of BIDs with demographic, government and economic data, I test whether these two hypotheses--and the two in conjunction--can explain BID adoption. I find that the only persistently significant explanation for BID adoption lies on the supply side: a 30-year decrease in city age lowers the likelihood of adopting a BID by 15 percent. More limited evidence suggests that the interaction of heterogeneity and community age also explains BID adoption, and is consistent with both the supply- and demand-sides of the theory.

THEORETICAL FRAMEWORK

Consider that BID adoption is a function of both a demand for BID-like services--heterogeneity--and a supply of BID-resolvable difficulties--those problems created by older neighborhoods. On the demand side, I modify the Alesina et al. (1999) model to explain why the heterogeneity of residents should also apply to firms--which BIDs are--and not just residents. The Alesina et al. model posits a jurisdiction without mobility, where individuals have preferences over the amount and type of a public good. The jurisdiction chooses its level of public goods first by voting on the size of the public good and then by voting on the type. In equilibrium, as tastes for the public good become more heterogeneous, the jurisdiction provides less of the public goods.

To modify the model, I associate citizens In Alesina's world not just with a city, but also with a neighborhood. In addition, I add two not terribly restrictive assumptions. First, assume that the firms of interest are retail businesses. This conforms very closely with the actual composition of BIDs. Second, assume that firms serve local residents and local public goods such as crime prevention and cleanliness are an important part of the retail shopping experience. Specifically, assume that firms' profits are decreasing in the difference between the municipally provided level of the public good and the locally desired level of the public good. (3)

Retailers' profit increases as the difference between the municipally chosen level of public good and each neighborhood resident's desired level of public good shrinks; more public goods than desired is not harmful. From the Alesina et al. (1999) model, we know that the amount of the public good provided by the city declines in consumer heterogeneity. (4) Because firms' profits are increasing in the public good, firms are more desirous of supplementing the municipally provided level of public goods when the residential population of a city is heterogeneous. In sum, the Alesina et al. (1999) model suggests that more heterogeneous cities are more likely to have supplemental provision of local public goods. Note that in the present case, residents' heterogeneity impacts firm decisions because residents determine the level of public goods to which firms respond.

This conclusion is the commercial correlate to that tested in the literature investigating school district consolidation; most, but not all, research finds that if the consolidated school district will be more heterogeneous than its initial parts, a merger is less likely (Gordon and Knight, 2006; Brasington, 1999; Kenny and Schmidt, 1994). BIDs differ from school districts, however, in that BIDs supplement municipal services, while school districts are sole providers.

On the supply side, suppose that BIDs resolve a collective action problem in the provision of local public goods in a neighborhood of firms. For example, each firm in a neighborhood would prefer that the street were cleaner, but no firm finds it profitable to clean the entire street alone. Because a clean street is a local public good for firms, each firm is reluctant to make a commitment to cleaning without a binding commitment from all other firms. Without a binding commitment, a suboptimally clean street--perhaps even a very dirty one--is provided.

Note that this collective action problem arises only when the number of firms is large and when an actor to internalize externalities is lacking. In the urban context, these two elements are closely correlated with the era of development. In older commercial neighborhoods, firms lease from individual property owners. In addition, older neighborhoods have a large number of stores in a small geographic area. In effect, this means that older commercial neighborhoods experience larger positive externalities from and greater economies of scale in local public goods provision than newer commercial neighborhoods.

In newer commercial neighborhoods, firms are typically agglomerated into shopping malls, strip malls or big box centers. In these newer developments, a single developer writes a contract with his many tenants to provide the public goods at issue, in effect internalizing the externalities. Gould and Pashigian (1998) show that developers write lease contracts for malls to efficiently allocate space and internalize externalities, such as those generated by anchor stores. In big box developments, where each store provides a wide variety of goods, the number of firms is smaller than In older commercial neighborhoods, and firms may be dispersed over a wide geographic area. Therefore, the BID institution is of use only in older commercial areas; if newer commercial developments are providing sub-optimal levels of public goods, it is not because they have failed to overcome the collective action problem. (5)