L.A.'s free enterprise system takes hit.

In an historic move, the Los Angeles City Council appears to have removed the word "Free" from the "Free Enterprise System." By a vote of 10-3 (Council Members Parks, Smith and Zine opposing) the Council approved a measure extending the City's "Living Wage" ordinance to hotels in proximity to LAX claiming that the hotels are beneficiaries of the airport, a city-owned asset.

The "Living Wage" has been used to allow the City to mandate that a "Living Wage" be paid by contractors providing services to the City of Los Angeles. By extending the mandate to business owners that have not contracted with the city, the Council appears to have overstepped their bounds and denied a freedom (inherent in the "Free Enterprise System") to local business owners.

The extension of the ordinance to the hotels not only applies to the hotel owners and operators, it also applies to the retail stores and concessions operating in the hotels, thus placing these businesses at a competitive disadvantage to those operating outside of the hotels.

One must ask: "What was the Council thinking when they approved extending the ordinance?" One Council Member, Bill Rosendahl, displayed his thinking in a quote published by the Los Angeles Daily News on November 23, 2006, saying: "This is good for the workers. It is good for business. It will be good for the hotels. I tell the hotel owners that they should look at this as being to their advantage because it will result in a happy workforce that will bring business back to your hotels."

It is not surprising that the hotel owners do not share Mr. Rosendahl's theories. Allegations are emerging that the Council's action was a payback to the unions for supporting the campaigns of a number of them and for supporting the recently passed Proposition R which increased term limits from two to three terms for Council members. Suggestions are also being made that the action was purposely done after the date of the election which approved Proposition R to avoid negative influence on the election. Whether or not the allegations and/or suggestions are supported by truth, there are people who perceive that there has been inappropriate behavior. These perceptions are strengthened by the fact that hotels with union contracts will not be subject to the "Living Wage" ordinance.

More to come?

The ordinance extension is of great concern to many business owners because it is seen as a precursor for additional regulations to come. Perhaps the Council will determine that businesses located near other City owned assets (of which there are many) should be subject to the ordinance. Additionally, labor activists are already looking at the increase in wages as only a first step in seeking many additional benefits for workers.

Los Angeles has long been considered a non-business-friendly city due to the high costs and difficulties of doing business here. The myriad of taxes, fees and regulations have driven numerous businesses out of Los Angeles to neighboring cities that do not create these severe obstacles for doing business. What will happen to Councilmember Rosendahl's theory of "Happy Workers" when the hotel workers lose their jobs because hotel operators choose to operate with fewer employees or to outsource many functions entirely?

Companies providing outsourced cleaning, maintenance, restaurant service staff etc. can easily be established in (and gather their work pool from) cities such as San Fernando, Glendale, Burbank, etc. where businesses have much lower overhead due to lack of city imposed fees, taxes and regulations and can pass the savings on to the hotels. Not only will the employees lose their jobs, the City will lose revenues because outsourced workers are more likely to spend their earnings in the cities where they live. Therefore, rather than creating a "Win, Win" situation, as Rosendahl would have us believe, this is a definite "Lose, Lose" situation.

Alternatives

I believe that all workers deserve the opportunity to receive a living wage. I do not believe however that government mandates on business owners is the appropriate way to accomplish this. In the hotel workers circumstance perhaps a better solution would have been for City representatives to broker an agreement between hotels, hotel workers and the City that would have provided a reasonable wage increase in exchange for a partial offset by a reduction in City Business taxes. The workers would get an increased wage providing them with more money to spend in the City. The reduction in City revenues created by the incentives granted to the hotels would be offset to some degree by increased business tax revenues received from the businesses benefiting from the increased purchasing by the hotel workers. And, finally, the hotels would not be forced to reduce their workforce and/or outsource services to stay competitive with hotels in adjacent areas.

Hotel owners have expressed plans to seek a voter referendum to suspend the extension of the ordinance and take the decision to the voters by initiative on the March 2007 city ballot. I believe it would be more productive to have the California Legislature deal with this issue than to take the decision directly to the voters since city elections traditionally have a low voter turnout and many of the voters may not be as well informed on the issue as the Legislature will hopefully be.

There may be existing law that has been violated by the City Council by their recent action but, if not, there should be legislation developed at the state level to prevent cities from being able to deprive business owners of their rights and to inappropriately interfere with the "Free Enterprise System.

Gregory N. Lippe, CPA, is managing Partner of the Woodland Hills-based CPA firm of Lippe, Hellie, Hoffer & Allison, LLP and a director and vice-chair of the Valley Industry and Commerce Assoc. (VICA).