Brightening the Beacon:
Removing Barriers to Entrepreneurship in San Diego
By Clint Bolick [Economic Liberty]
"If something disturbs people in this country, it's illegal."
-Sergey Autandilov, recounting what a realtor told him upon immigrating to this country from Russia.1
Mexican immigrants pushing carts selling "paletas" (fruit-juice bars) on hot summer days are a common sight in Logan Heights and along Imperial Avenue in San Diego. But despite selling a popular product and earning a living for themselves and their families, the pushcart vendors are outlaws, subject to frequent harassment by police. Any effort to operate the pushcarts as lawful enterprises is futile: street vending is prohibited in most areas of the city.
The spectacle of hauling people away for no greater crime than selling frozen juice bars is a blight to the city's reputation, for in many ways San Diego is a model of free enterprise. The city provides encouragement and assistance to myriad small and fledgling business enterprises and promotes a vigorous pro-business philosophy. But the city's regulatory reality does not always measure up to its noble aspirations. While the City and County provide various forms of assistance to start-up enterprises, it still remains difficult for people with little experience or capital to navigate the regulatory thicket. Regulations restricting entry into such businesses as taxicabs and street vending are oppressive and anticompetitive. State laws regulating small-business lending and occupational licensing also impede entry-level entrepreneurship. This report examines both San Diego's successes in fostering entrepreneurship as well as the obstacles that remain.
This report is prepared by the Institute for Justice, a nonprofit public interest law firm in Washington, D.C. that litigates to expand individual autonomy and restrict the scope of the regulatory welfare state. One of the Institute's core objectives is restoring economic liberty-the freedom to earn an honest living in a chosen business or occupation-as a fundamental civil right. In recent years, that precious liberty has eroded, with devastating ramifications for people outside the economic mainstream. Especially in light of national reforms emphasizing the transition from welfare to work, it is essential to identify and remove unnecessary regulatory impediments to entrepreneurship.2
The Institute recently has completed reports on regulatory barriers to entrepreneurship in six cities: New York, Baltimore, Boston, Charlotte, Detroit, and San Antonio. We focused on entry-level enterprises-businesses and occupations that require relatively little skill and capital. So that we could compare the relative regulatory burdens, in each city we examined regulations covering the same entry-level businesses and occupations-such as taxi-cabs, cosmetology, daycare, street vending, and home-based businesses-as well as additional regulatory barriers that came to our attention. As expected in a survey of cities that differ widely in geography and demographics, the regulatory climates facing would-be entrepreneurs also vary widely. In each city, however, regulatory obstacles block entry into many businesses and occupations.
In San Diego, we began by researching general regulations governing business start-ups, and proceeded to investigate regulations governing the specific entry-level businesses and occupations we studied in the other cities. In each case, we interviewed both government officials and entrepreneurs. We have reported our findings whether or not we found regulatory barriers in each of those areas. We also interviewed local experts on the subject of business formation, and obtained leads about other regulatory problems. Although we always attempted to obtain justifications for regulations from appropriate government officials, in most instances no explanations were provided.
On the whole, we find that San Diego is far more hospitable to enterprise than many other large cities, and its leaders seem genuinely committed to fostering new and small businesses. Still, too many barriers to entrepreneurship remain. San Diego's overriding challenge is to harmonize its policies and practices with its pro-entrepreneurial philosophy. This report is aimed at helping San Diego identify and remove unnecessary regulatory barriers so that the city can make a reality of its promise of opportunity.
State of Entrepreneurship in San Diego
San Diego is blessed with a beautiful location, a nearly perfect climate, and a diverse and enterprising population. Its population of 1.15 million people makes it the sixth largest city in the United States.3 Its steady population increase makes San Diego the 16th fastest-growing large city. San Diego's population is 9.4 percent black, 11.8 percent Asian, and 20.7 percent Hispanic. Nearly 21 percent of its inhabitants are immigrants, giving San Diego the nation's 13th largest immigrant population.
As social analyst Joel Kotkin observed, San Diego "has benefited from what it fortunately does not have: no vast municipal welfare state, no entrenched urban underclass, no powerful municipal employee unions to skew spending priorities, and no industrial union tradition to make its labor force rigid."4 Though Kotkin's assessment may be overly upbeat, the local economy is strong. Substantial pockets of poverty exist, however. Among the city's population, 13.4 percent live below the poverty level. Nearly one-quarter of the city's households are headed by a single parent, and nearly nine percent of San Diego residents derive income from public assistance.
According to the Office of Small Business, 50,000 businesses are registered in the City of San Diego. The city understands that enterprise offers a major part of the solution to problems of poverty, and it has aggressively promoted and supported business. Elected in 1992 in the midst of a serious recession, Mayor Susan Golding reduced the size of government and cut fees and regulations for businesses moving to or starting in San Diego. As a result, San Diego's combined business taxes and fees are the lowest of all major cities.5
Perhaps the strongest signal of the city's commitment to new and small enterprises was its creation in 1992 of the Office of Small Business.6 Likewise, the Small Business Advisory Board was established in 1982 to develop a supportive atmosphere for small business, to act as an ombudsman, to review existing laws and regulations, and to explore opportunities for privatization. These entities have compiled an impressive track record. Among other accomplishments, they have twice fomented reduction in business permit fees for small businesses, and have aided particular businesses to make the regulations that govern them clearer and less onerous.7
The Office of Small Business administers numerous programs to assist small businesses, including 14 business improvement districts in different areas of the city, an urban main street pilot program, a storefront improvement program, a seed capital grant program, and a business resource center.
In particular, the City's business "incubator," the Business Innovation Center, helps launch new businesses. Offices and business services are provided to small businesses at below-market rates. Clients are also taught the City's contract bidding process, and the center posts bid information for government contracts. The center has helped foster numerous successful businesses, including such enterprises as Ric T's Tea Cakes and a carpet cleaning business.8
But the City's pro-entrepreneurial philosophy does not always trickle down the bureaucratic ranks. Entrepreneurs complain that the City's zoning, health, and business regulations-and the bureaucrats who enforce them-too often stymie the very entrepreneurs the city does so much to foster. "You go to the regulators, and they feel their job is to say no, rather than to let their creative juices flow," says Ken M. Clark, Small Business Programs Coordinator at South-western University. "They talk about self-sufficiency, then tie your hands, make you walk the plank, and say `we hope you're self-sufficient'."9
"Artificial barriers eat people up psycho-logically," Clark observes. "People have a nonaccomodating mindset when they're in public service. Why do they look for a way to say no to an entrepreneur, rather than a way to say yes?"
Navigating the Regulatory Maze
A number of regulatory requirements are common to starting all new businesses in San Diego. Some are particularly onerous and are discussed in greater detail below. But the overall process that confronts all new entrepreneurs seeking to operate any lawful business deserves separate initial treatment.
The process entails both good and bad news for entrepreneurs. The good news is that San Diego has taken several steps to help guide prospective businesses through the regulatory process. The County of San Diego Office of Trade and Business Development has prepared a comprehensive guide titled Getting Down to Business, which lists federal, state, county, and city requirements as well as the names and addresses of agencies and resources. The City's Office of Small Business has created a similar brochure for businesses within the city. The San Diego Regional Permit Assistance Center was established downtown to assist prospective businesses with obtaining requisite city, county, state, and federal permits. As Ken Clark correctly observes, "The people there try to be facilitators rather than regulators."
The bad news is that the regulatory requirements are voluminous and complex. Moreover, governmental jurisdictions are overlapping and confusing. The state, county, and city governments all tax and regulate businesses.10 San Diego County includes 18 cities as well as unincorporated areas. Technically, a business needs a permit in every jurisdiction in which it does business. Some county requirements apply to all businesses; others apply only to businesses in unincorporated areas. Each city has different processes and regulations. Several observers mentioned that the City of Chula Vista has an especially progressive and business-friendly regulatory system; other cities earn lower marks. Navigating this regulatory maze is treacherous, particularly for people with little experience and few resources.
Starting a business. The county business guide lists the following as some of the requirements for starting a business11 :
Check Zoning. Business owners may have to obtain zoning permission for "discretionary uses," "conditional uses," new or remodeled buildings, new businesses in existing buildings, or temporary uses. If the business is not compatible with existing zoning, the business must of course obtain special permission. The depiction of that process is chillingly stark:
Depending on the type and complexity of the application, the planning process for review and approval or denial can take anywhere from a few weeks to several months or more. The process may involve environmental review in order to comply with the California Environmental Quality Act (CEQA).
Public hearings may be required.12
Obtain Commercial Building Permits. Building permits are required whenever a business makes physical or cosmetic changes to the exterior or interior of a building or constructs a new building; and for any electrical, plumbing, or mechanical work.
Obtain Sign Permit. Businesses must obtain approval and pay a fee for all exterior signs or promotional banners.
Check Fire District Requirements and Obtain Safety Inspection.
File a Fictitious Business Name Statement. All businesses operating under anything other than the owner's full legal name must file a statement and publish a newspaper notice.
Obtain a Business Certificate. All businesses and people engaged in professions and trades must obtain a business certificate and pay a business certificate tax. The certificate does not evidence authority to operate or compliance with regulations, but merely that the tax has been paid. In the City of San Diego, the business tax is $34 per year for most businesses with fewer than 12 employees, plus a zoning use clearance fee of $12.
Certain businesses require special licenses and/or permits from local authorities. San Diego County issues special licenses or permits for 30 types of businesses, such as teenage dances, swap meets, fortune telling, and taxicabs. The city maintains similar requirements.
File Articles of Incorporation/Register a Trademark/Pay Franchise Tax. The state charges an annual minimum franchise tax of $800 for all corporations authorized to issue stock (along with a $100 incorporation fee). No exemption exists for small businesses. The Small Business Advisory Board staff reports that many new and small businesses do not incorporate in order to avoid the annual franchise tax.13
Obtain a Seller's Permit, If Needed. In addition to local regulations, the California Board of Equalization requires seller's permits for certain activities.
Obtain Agricultural Permits or Registrations, If Necessary.
Register Weights and Measures Devices Used in Business.
Apply for Alcoholic Beverage License, If Needed.
Determine if Business is "Police-Regulated". Certain businesses and professions, such as adult entertainment, carnivals, explosives, fortune telling, and taxicabs, require investigations by the county sheriff.
Obtain State Licenses for Specific Businesses and Professions. At least 35 regulatory boards exist to provide licenses for professions ranging from accountants and landscapers to barbers and shorthand reporters.
Obtain Environmental Health Permits for Certain Businesses.
Obtain Air Pollution Control Permits for Certain Businesses.
Obtain Wastewater Discharge Permit. All new buildings and new occupants in existing buildings must obtain this permit.
Determine State Requirements Related to Employees. Applicable state regulations include workers' compensation, fair employment, occupational safety, wage-hour, and child labor requirements.
Pay Business Personal Property Tax. All businesses must pay an annual state tax on property held for business purposes, appraised at market value.
Pay State Income or Corporate Income Tax. Every business must pay an annual state income or corporate income tax.
Obtain State Employer Tax Identification Number.
Once a business has successfully completed this regulatory process and paid the requisite fees and taxes, then-and only then-can it operate lawfully. Many of the requirements are justifiable, but the sum total is overwhelming. Little wonder that many new and small businesses fail or operate outside the mainstream economy.
Complaints about the zoning process are among the most frequent cited by business owners and people starting businesses in San Diego. As described above, the zoning process-even for so simple a matter as obtaining permission for outdoor seating at a restaurant-can be cumbersome, time-consuming, complex, and expensive. The City's zoning process, to put it mildly, conflicts with the City's policy of fostering small businesses.
A prime example is the recent practice of imposing "sunset" limits on conditional use permits. Such permits are necessary for uses of property that are inconsistent with local zoning requirements. For the past few years, the City has begun a policy of approving conditional use permits that will expire upon a date certain-therefore imperiling the business that depends on the permit. The City has no standards to guide its discretion on such matters.
One frustrated businessman, Philip Linssen of Iskate Inc., remarks, "It's scary, the Planning Commission is not committed to seeing small business succeed."14 He should know: his company has invested over $250,000 in a business, the San Diego Ice Arena, which transformed a deteriorating property into a family-oriented recreation facility. But a sunset provision on the company's conditional use permit threatens its future.
The Small Business Advisory Board has made a priority of reforming the City's zoning practices. A recent letter to Mayor Golding from board chairman George P. Chandler, Jr., set forth the board's views on the Iskate controversy and the sunset practices generally:
Such a sunset provision clouds the economic viability of the business by prohibiting long term planning and financing of its facilities. Furthermore, it restricts the firm's future salability as an ongoing commercial concern. It is the Board's opinion that this virtually constitutes what amounts to a de facto condemnation. Consequently, we recommend that this CUP be issued without the sunset provision. Additionally, we believe the Council should review Planning Commission policies and procedures to assure that they are "business friendly."15
1. The Office of Small Business and Small Business Advisory Board-in concert with entrepreneurs, the San Diego Business Partners, and community leaders-should conduct an audit of all business regulations to determine in each case whether the regulation is narrowly tailored to fulfill a legitimate governmental objective without unduly hampering enterprise. They should recommend repeal or reform of all ordinances and regulations that do not meet this standard. All new regulations should be measured against this standard.
2. The City should conduct a summit with the heads of all City agencies to make sure they understand and support the City's policy of encouraging enterprise.
3. San Diego-area governments should coordinate and harmonize their business regulatory requirements to reduce confusion among jurisdictions. That effort also could commence with a summit among all local governments with a goal of reducing and streamlining regulations.
4. Local governments should expand the one-stop permit centers to encompass more of the requisite approvals, to make the paperwork simple and efficient and to take as little time as possible. Counselors should be available to walk entrepreneurs through the entire process, including as many federal and state requirements as possible. Entrepreneurs should be able to leave the center with all they need from the government to commence a lawful business. One possibility is to provide a "provisional business permit," evidencing that the applicant has fulfilled the essential basic requirements applicable to most start-up enterprises. City agencies that have additional requirements could then contact the businesses rather than placing the initial burden on the entrepreneurs to scour the regulatory universe and determine which regulations apply.
5. The City and County should implement its zoning and planning department functions in a manner that does not interfere with economic development, so that the local government's business-friendly philosophy is not inadvertently subverted by the zoning bureaucracy. Zoning and planning approvals, particularly for new and small businesses, should be streamlined, with strict time limits for consideration of applications, adverse decisions made with specificity in writing, and prompt appeals. Processes should be simple and inexpensive so that small and fledgling businesses can understand and afford them.
6. The City should repeal "sunsets" on conditional use permits and abandon the practice.
7. In accord with oft-repeated recommendations from small business advocates including the Small Business Advisory Board, the State should abolish the minimum franchise tax for new and small businesses.
Barriers to Entry
In addition to the regulatory thicket that all new businesses face, some businesses are subjected to special regulations that create additional barriers to entry. We have surveyed below regulations on businesses that ordinarily require relatively little skill or capital, and that in a rational regulatory environment should provide plentiful opportunities for entry-level entrepreneurs.
Scratch the surface of many of America's greatest business success stories and you'll find their roots in street enterprise. But that won't happen anytime soon in San Diego.
Nowhere is the dichotomy between San Diego's dominant free enterprise philosophy and the regulatory reality more stark than in the local government's strict restrictions of street vendors.16 Of the seven cities surveyed by the Institute for Justice, San Diego maintains the most restrictive regulations on street vendors. The city's proximity to the Mexican border and its flourishing tourist trade lend themselves to a bustling street vendor industry-a promising avenue for bootstraps enterprise thwarted by the City's strict regulations. The juxtaposition between the large number of street vendors actually operating in San Diego and the severe limits of the law suggests that the vast majority of street vendors are operating illegally.
Sylvia Martinez of the Metro Area Advisory Committee on Anti-Poverty in San Diego County (MAAC) puts the matter succinctly: "There's a lot of people who would like to retail, near their homes and on their own streets, but they can't."17 Not only pushcarts selling paletas, but "tamale ladies" selling home-prepared Mexican foods and purveyors of all manner of food and merchandise are precluded from street-based enterprise by the City's regulations.
Anyone doing business on public property must obtain approval from the Development Services Center.* However, stationary vending and pushcarts on public property are prohibited altogether except in the downtown and Old Town areas. Pushcarts may offer only food or flowers; merchandise may be sold only at stationary locations. Pushcart operations also require permission from the adjacent owners of private businesses. The pushcarts must maintain an eight-foot area away from buildings or other obstructions. They must also be located within 25 feet of toilet facilities, with written permission from the owners allowing patrons to use them. All vendors located on public property must secure $1,000,000 of liability insurance.
The Development Services Center issues "discretionary permits" to authorized vendors for a one-time fee of $475. If the cart is sold, a new permit must be obtained by the purchaser. Although technically no limit exists to the number of vending permits, the overall effect of the restrictions is severe: City officials report that only two new permits were issued over the past year, both of them to replace previous vendors at the same locations.
Vendors selling flowers, fruit, or vegetables grown by someone else must obtain a Cash Buyer's License each year from the California Department of Food and Agriculture. The fee ranges from $100-$600 based on the amount of purchases.
The county Health Department also issues permits and inspects pushcarts. The permits cost $50 per year for prepackaged nonperishable foods and $225 for perishable foods or foods prepared on-site. No food prepared off-site may be sold unless it was prepared in a licensed commercial kitchen. Pushcart vendors selling food must take a three-hour food handler's course and examination, renewable every three years by taking the examination again.
Public parks in San Diego also have restrictive vendor policies. The City does not allow any vending in community or neighborhood parks except during special events, such as softball tournaments. Permits must serve a "park need" and are limited to specific dates, times, and locations. Pushcarts must possess all other requisite government permits, and may sell food only. With all these requirements, the Parks Department only issues approximately six permits per year. Ice cream reportedly is sold illegally in some community and neighborhood parks.
Regional parks maintain their own regulations regarding vendors. At Balboa Park, the Parks Department leases out one concession stand and issues permits for five or six pushcarts. The rules specify that no commercial gain may be made on park land, and the City enforces that rule by taking 22 cents of every dollar grossed by pushcarts. Still, pushcarts can gross between $1,000 to $2,000 per day in Balboa Park.
At Mission Bay Park, the government allows major lessees (such as Water World, Princess Cruises, and the Hilton) to permit vendors and concessions that comply with applicable regulations. As part of their lease agreements, the lessees must provide between three and seven percent of their profits from food and merchandise to the City. The City forbids other vendors to operate within one-half mile of the lessee pushcarts. In the remainder of its land, the park uses a request-for-proposals process to award pushcart permits. Presently, a single company has a contract to operate all pushcarts within the park. However, because of its desire to support small businesses, the park plans to divide up vendor sites and award multiple permits in future RFPs.
1. Local government should substantially relax restrictions on street and park vendors, recognizing them as an important and legitimate means of enterprise.
2. The government should lift the prohibition against street vending outside the downtown and Old Town areas.
3. Legitimate public health and safety considerations can be met by maintaining the current rule requiring minimal clearance between street vendors and buildings or other forms of obstruction; and through health inspections of food vending operations. The government reasonably may limit the number of permits in certain areas to avoid congestion, but the burden should be on the government to demonstrate the necessity of any limits.
4. The requirements of approval from adjacent businesses and access to toilet facilities should be repealed.
Of all the possible types of businesses, it is perhaps most essential to avoid over-regulation of child care. Certainly the State has a strong interest in ensuring the health and safety of children entrusted to the care of others. But not only are small and informal child-care businesses an ideal means of entrepreneurship for people outside the economic mainstream, convenient and affordable child care is a prerequisite for still other people to be able to work. State and local governments should take all possible steps to encourage child-care businesses and to tailor regulations to ensure they are not unduly expensive or obstructive.
Regulation of child care takes place primarily at the state level. Fortunately, the regulations generally seem reasonable. Reports vary on whether a child-care shortage exists in San Diego. The YMCA says that 7,000 families and 10,000 children are currently wait-listed for child care in San Diego.18
Home child care
Two types of family (at-home) day-care licenses are available: small family day care, which allows up to six children below age ten; and large family day care, which allows up to 12 children under age ten and requires a helper.19 Both licenses require a $25 application fee, as well as a license fee of $25 for small family day care and $50 for large family day care. All persons living in the home must be tested for tuberculosis, and providers must submit to fingerprinting and a background check. The state requires triennial inspection of small homes, and requires a "fire clearance" inspection for large homes. Providers may have up to 12 children without zoning approval from the city; more than that number requires a conditional use permit.20
Family day-care providers must be at least 18 years old and fulfill minimal training requirements: a total of 15 hours of CPR, First Aid, and preventative health practices. Helpers must be at least 14 years old and have training in CPR and First Aid. The state does not provide training but approves vendors, many of whom provide training in languages other than English. Day-care providers need not speak English, making the business accessible to immigrants.
Day-care centers also must obtain a state license. The cost of application and license fees is the same, and is based on the center's size, starting at $100 for a day-care center with up to 30 children. The center must maintain at least 35 square feet of indoor space per child and 75 square feet of outdoor space. Generally the maximum teacher-to-children ratio is 1:6 for toddlers and 1:12 for older children.
Day-care center directors must meet one of the following qualifications: (1) a high school diploma or GED, 15 semester units in early childhood education, and four years teaching experience in a licensed day-care center or group child-care program; (2) an associate degree with a major in early childhood education and at least two years teaching experience; (3) a bachelor's degree with a major in early childhood education; or (4) a Children's Center Supervisory Permit issued by the California Commission for Teacher Preparation and Licensing. Teachers must obtain at least six units of early childhood education before employment, and must obtain at least two additional units per semester for a total of 12 units following employment. Additional formal training is required for infant care center directors and teachers.
1. The City should assign a priority to encouraging and providing zoning approval for day-care centers, including programs operated as part of existing businesses.
2. To remove obstacles to day-care centers in the inner cities, the State should ease indoor space requirements for children in day-care centers, and allow centers that do not have their own outdoor space but are accessible to parks or playgrounds.
3. The State should allow day-care center teachers to obtain training through apprenticeships and/or community programs rather than requiring formal college-level education.
Among the odder sights a person can see in San Diego are white Volkswagen Beetles transporting passengers around town. The reconditioned cars are owned by Bug Express, a company launched in 1994 by entrepreneurs Rick Reed and Chris Brady, who invested everything they owned in the enterprise. They offer prearranged transportation for a fixed price less than the cost of a taxicab. But they cannot pick up street hails or use a meter. The reason: as a "charter" service, the company is regulated by the California Public Utilities Commission, which imposes few restrictions on such services. Taxicabs, by contrast, are tightly regulated by the Metropolitan Transit Development Board (MTDB), and new entrants are discouraged.
Entrenched taxicab companies want to keep it that way. "What most of the taxi owners are saying is, we want a level playing field with our competition," remarks Anthony Leone of Yellow Cabs, which owns more than one-third of the scarce taxicab permits. Or maybe not so level: many local taxicab owners, Leone says, favor rewriting state rules to forbid competition from charters and squash companies like Bug Express21.
Absent regulatory obstacles, alternative transportation services can provide an excellent opportunity for entry-level entrepreneurship. Taxicabs, jitneys (usually vans that operate along fixed routes and charge a flat fee), and limousines are ideal small enterprises. Such services typically require only the cost of the vehicle and insurance plus driving skill and knowledge of geography. Moreover, private transportation services benefit consumers by providing alternatives to highly subsidized public transit.
Unfortunately, in many cities this entrepreneurial avenue is thwarted by regulations that exceed legitimate public health and safety objectives. Instead, they protect public transit and established taxicab companies from competition22. In San Diego, restraints on entry are not as harsh as in some other cities, but they remain unduly restrictive and thereby stifle entrepreneurship and valuable transportation options.
All "paratransit" vehicles-taxicabs, jitney vans, and limousines-in San Diego are regulated by the MTDB. All vehicles require an MTDB23 permit, a driver's identification card that costs $65, insurance, and an annual inspection that costs $245. Drivers must take an MTDB course that teaches personal safety and courtesy.
Approximately 900 taxicab permits exist in San Diego, which is the de facto limit because the board has issued few if any new permits in recent years. About 150 taxicab businesses consist of a single cab, while the remaining permits are spread among 70 owners. Because of the limit on new permits, existing permits are sold on the market for prices ranging from $20,000 to $50,000, depending on whether the permit is accompanied by a car, an airport permit, and "bell" (dispatch) service. A permit transfer also requires a $2,000 fee plus $200 for each additional vehicle. These numbers illustrate the state of the taxicab market in San Diego: they provide an opportunity for small enterprises, but are out of reach to entrepreneurs with little capital.
An additional permit from the Unified Port District is required for airport pickups. The airport issues only 200 permits.
By artificially limiting entry into the taxicab industry and making the limited permits economically precious, the City may unwittingly contribute to an atmosphere of fear. One official of a company that wants to expand from charter car services into the taxicab business canceled an appointment with me out of fear of unspecified "retaliation" from existing taxicab companies, and others who hope for a permit also refused to meet with me. When I recounted this experience to an informed observer, he remarked of the would-be taxicab entrepreneurs, "they'll wind up in a car trunk" if they complain publicly. The City should not abet a system that serves to protect entrenched economic interests against competition.
Jitneys operated within San Diego until approximately 15 years ago,
serving primarily military personnel and airport passengers. As military bases closed and hotels started offering their own airport shuttles, jitneys within the city declined as a viable transit option.
But as the public transportation costs and traffic congestion grow, jitneys can provide a solution, along with a means of entry-level enterprise. "Particularly in low-income communities, people have serious transportation issues," says MAAC'S Sylvia Martinez. But MTDB must approve all routes, and opposes allowing jitneys to compete on public transit routes.
One entrepreneur, Sergey Autandilov, calls jitneys an "excellent family business" because of the low capital required. But he found the best routes within the city blocked by government regulation. "In an open competitive market, it is not government's business to control the market," he declares. "People should be able to choose the best service for themselves.''
In contrast with the dearth of jitneys operating within the city, most jitney businesses in the area today cross municipal lines and therefore are subject to lessonerous regulation by the California Public Utilities Cornmission.24 The PUC issues "passenger stage corporation" permits for door-to-door transportation services, including airport service. Permanent permits cost $500, with additional costs for expanded service or permit transfers. The PUC requires at least $750,000 of insurance coverage depending on vehicle capacity, as well as alcohol and drug certification for drivers. The commission does not limit the number of permits, and estimates it has issued more than 1.000 statewide.
The PUC also issues "charter party" permits for all prearranged
transportation businesses that charge a group rate. The fee is $500 for a permit that is renewable every three years. The commission requires insurance ranging from $750,000 to $5,000.000, depending on vehicle capacity. No limit exists on the number of permits, and the PUC estimates approximately 2,000 charter party permits exist state-wide, with about 200 in the San Diego area. The proliferation of intensely competitive charter services demonstrates what can happen when regulations are reasonable rather than protectionistic.
1. The Office of Small Business and Small Business Advisory Board should canvass opportunities for privatization out of City services, and should ensure that contracting out procedures are accessible to small businesses and community economic development organizations.
2. San Diego should eliminate the de facto ceiling on the number of taxicab permits, allowing the market to determine the number of services rather than insulating existing companies from competition.
3. The MTDB should reduce the cost of taxicab permit transfer fees.
4. The MTDB should regulate taxicabs only to the extent necessary to protect public health and safety; e.g. insurance, safety inspections, and driver background check.
5. The San Diego District Attorney should investigate the taxicab industry to determine whether corruption or illegal intimidation exists.
6. The City should study whether it could turn over or contract out city bus routes to private jitney enterprises, including possibly nonprofit communityoperated services. Such services might also be used as feeders for public transportation or to provide transportation for workers to jobs outside the city.
Cottage industry at one tune was a mainstay of American enterprise. Those days are returning for advances in technology, the proliferation of single-parent f d e s and stay-at-home parents, and other social forces have fomented an explosion of home-based businesses. "Now not only are there mom and pop operations, but you've got professionals who use all the resources their home can offer." observes Katrina Newby, executive director of the Home Business Network. "It's an entire industry."25
In many areas, regulations have not kept pace with reality and unduly restrict home-based businesses. Obviously, home-based businesses lend themselves to concealment, so any excessive regulatory obstacles will drive such businesses underground. In such instances, "people feel they have to do something behind the government's back," reports Newby.
Fortunately. San Diego has a comparatively progressive attitude toward such enterprises, though not progressive enough. People doing business in their homes must comply with all regulations applicable to businesses generally, and must obtain from the Development Services Department a home occupation permit, which costs $150, and a zoning use certificate.26 he businesses must not serve customers at the home or disrupt the residential neighborhood. Home-based businesses may request a variance to have more than one employee, to allow customers by appointment, or to have more than one vehicle. Variances are granted after a hearing and requires the approval of neighbors.
State regulations prohibit commercial food preparation in the home altogether27, although local zoning rules apparently do not forbid home-based food preparation. Not only does that restriction preclude home catering businesses, it adds another layer of regulatory prohibition against food vendors such as the "tamale ladies" in San Diego's impoverished immigrant neighborhoods.
1. San Diego should ease rules on home-based businesses, increasing the number of employees, customers by appointment, and vehicles that homebased businesses can have without obtaining a variance.
2. The State should rescind its prohibition of commercial food preparation in the home, allowing local governments to apply ordinary health requirements to ensure public health and safety in such enterprises.
OCCUPATIONAL LICENSING LAWS
Occupational licensing laws, usually enforced at the state level, artificially restrict entry into dozens of professions. Indeed, an entire chapter of the Californiastatutes regulate businesses and professions. Rules for entry into a profession typically are set by licensing boards comprised of members of the regulated profession with the coercive power of government at their disposal. Often the rules far exceed legitimate public health and safety objectives, and instead protect current practitioners against competition from newcomers.
Few people would object to licensing of occupations that require high skill levels or present serious threats to public health or safety. But California's licensing laws extend to many occupations that certainly could be privately regulated, such as land surveyors28, locksmiths29, landscape architects30, interior designers31, and court reporters32. To the extent that regulations on entry exceed legitimate public health or safety objectives, they unnecessarily limit competition, particularly among those who have few economic resources to combat the legalized cartels.
A prime example is hairbraiding, a centuries-old art brought to this country by Africans. Today, thousands of hairbraiders operate across the country, usually in their own homes. Nearly all operate outside the law.
California's rules are particularly oppressive. Anyone who arranges hair must obtain a cosmetology or barber license from the California Board of Cosmetology and barbering. A cosmetology license requires 1,600 hours of prescribed formal training, virtually none of it directly related to bairbraiding, followed by a practical examination that does not test hairbraiding. No specialized license is available. Applications are available only in English, and it is difficult if not impossible for people who do not speak English to complete the courses and pass the examination.
The effect of the licensing rules is that well-trained hairbraiders either must spend vast time and resources to learn and demonstrate proficiency in practices unrelated to bairbraiding, or operate illegally without a license. The law works particular hardship on African immigrants, who could teach the cosmetology board how to braid hair but can't pass its test. "Why can't they take the exam in Swahili?" asks MAAC's Alexei Ochola.34 The licensing process is "totally irrelevant to what they want to do," adds Sylvia Martinez.
It also deprives the industry of legitimate status. JoArme Comwell, who chairs the Africana Studies Department at San Diego State University, braids hair in her home.35 She is so proficient that she has created a unique braiding style called "sisterlocks," which was featured in the fall 1996 issue of Black Hair Styles. "I should be teaching other people, but there's no way I can do it," Comwell laments. 'To think that every time I train somebody I'm breaking the law, that's absurd."
Like most home-based braiders, the state ignores JoAnne Comwell. But when she tries to open a salon in the near future, she knows the regulators will swoop down on her, and she will have trouble obtaining capital. "There's no way in for me. There's no way to make this legitimate, without a change in the law," Comwelldeclares. She favors private certification rather than a specialized license. "There's nothing the Board of Cosmetology could add to that," Comwell argues.
In driving the industry underground, the regulations also have the perverse effect of diminishing tax revenues and removing businesses from the scrutiny of health inspectors. By vastly overregulating the business, the State's cosmetology rules serve the interests of neither producers nor consumers only the narrow interest of economic protectionism.
In January 1997, the Institute for Justice filed a lawsuit challenging the constitutionality of the cosmetology regulations on behalf of JoAnne Comwell and the American Hairbraiders and Natural Haircare Association. Federal District Judge Rudi Brewster denied the government's motion to dismiss the lawsuit on May 2, 1997.36 The case is a significant step toward ensuring economic liberty for entrepreneurs.
For the time being, at least, the Board of Cosmetology and Barbering has ceased to exist, a deserving victim of California's regulatory agency "sunset" law. But the laws remain on the books, passing to other regulatory hands to administer. The agency's nebulous status only adds to the uncertainty of hairbraiders who are trying to earn an honest living.
I. The State of California should review all occupational licensing laws to (1) determine whether they are necessary at all, or whether private certification instead adequately could protect the public: and (2) ensure that requirements are narrowly tailored to ensure proficiency and to protect public health and safety.
2. The State should deregulate the hairbraiding profession, allowing local officials to apply ordinary health and safety standards.
Access to Capital
The largest real-world impediment to most new enterprises is access to capital. Banks rarely make small business loans, particularly to companies that have no collateral or credit history. San Diego is not a banking center and lost three of its largest financial institutions in the early 1990s 37, with the result that it has little indigenous capital for lending.
The regulatory barriers to business formation discussed in the preceding sections compound this challenge. For in order to have any chance at securing the capital necessary for survival and growth, a company must be legal. Regulations and excessive taxes that drive businesses into the underground economy also forever sentence those businesses to economic marginality. Furthermore, state regulations governing loans for small and startup businesses-and the nonprofit entities that make such loans-are burdensome, further limiting access to capital for entry-level entrepreneurs.
A number of efforts are underway in San Diego to make capital more readily available to promising new enterprises. The City itself has a seed capital program, which in the last fiscal year made grants totaling $131,000 to groups providing assistance to underserved populations of small business owners.38
Private organizations are directly providing "micro-loans" to new small businesses that cannot obtain capital through traditional sources. Through the 1 efforts of 20 local banks, the Bankers Small Business Community Development Corporation (Bankers CDC) makes loans from $2,500 to $35,000 available to businesses that do not meet criteria for conventional bank loans or Small Business Administration loans.39 At an even more basic level, a nonprofit group called ACCION makes loans from $300 to $25,000 to small enterprises.*O According to Villa Mills, who heads ACCION San Diego, the group's purpose is "to build a good credit history" so the businesses can secure capital through ordinary channels thereafter. Last year, the microlender made 175 loans, with a high repayment rate.
ACCION emphasizes a quick and simple application process, basing its lending decisions on personal credit history and on the community and human capital resources available to the new business. ACCION is housed in the San Diego World Trade Center, where the city provides free rent in exchange for services. The group is "not a social service agency, but we would be remiss not to evaluate the ability of the person and the family to sustain a business," Mills explains. ACCION tries to transition companies to the regular banking community after one year and for loans above $7,500.
Not surprisingly, lending regulations hamper this effort. ACCION operates in five states, but California poses by far the most onerous regulatory obstacles.41 "This is not banking, it's economic development," Mills stresses; but unfortunately the regulations do not comprehend the distinction. Even after companies establish a successful credit history with ACCION, she reports, banks sometimes still are reluctant to make loans because "regulators are beating down on them." Moreover, despite its nonprofit status, ACCION is forced to comply with myriad California regulations covering ordinary lenders like Bank of America, because no special rules or exemptions exist for non-profit lenders or economic development. Among other things, the group is required to post a $50,000 bond, maintain $25,000 on hand ("If you're a nonprofit, that's a large amount of money to have sitting in the bank," Mills observes), comply with extensive disclosure requirements for directors, submit to unannounced government audits for which the group must pay $75 per hour, obtain pre-approval for advertising, and endure a complex annual licensing process with hefty fees. ACCION has had to devise creative strategies to help loan applicants deal with collateral requirements. "We have to play all these stupid games," Mills complains. An official at the California Department of Corporations could not explain why nonprofits such as ACCION were forced to abide by the same regulations as large commercial lenders, or why regulations in California are more onerous than in other states.42
Beyond securing loans, a challenge for new enterprises is developing the basic management skills necessary to operate a successful business and acquire capital. "We have found that government agencies have not been any good at technical assistance for start-ups," recounts Art Goodman of Bankers CDC. That means nonprofit lenders like ACCION must take on training functions to ensure the longterm success of new enterprises-functions that the regulations do not contemplate.
A recent economic summit of San Diego entrepreneurs sponsored by the Jacobs Family Foundation underscores these twin challenges: nearly every participating entrepreneur responded that greater access to capital and technical assistance are needed in San Diego43. Though government regulations seriously impede microlending, it is the private sector that ultimately can best overcome those challenges.
1. Policymakers should understand that excess business regulation and taxation have the effect of driving businesses underground, which deprives the society of legitimate enterprises and tax revenues, and deprives the businesses of access to capital. This reality has special resonance for companies started by people with little skill, capital, or proficiency in English.
2. The State should release economic development lenders from regulations that unnecessarily stifle microloans to new small enterprises.
3. The San Diego business and philanthropic communities should lend their acumen and resources to assist prospective entrepreneurs in developing basic business management skills.
Undergirding other challenges is perhaps the most systemic barrier to opportunity: the abysmal public education system. "Education is the backbone of entrepreneurship," remarks Art Goodman of the Bankers CDC. 'They have to have the foundation." But that foundation is sorely lacking for many in San Diego. The San Diego Entrepreneurs Economic Summit identified a lack of education, training and skilled labor among the critical causes of gaps in services in San Diego. There is "absolutely no awareness about what entrepreneurship is all about in the schools," says ACCION's Villa Mills. She notes that in impoverished areas, kids are much more likely to learn about economics from drug transactions rather than in school. "Redirecting that into process and curriculum" would help greatly, she suggests.
Although San Diego schools are roughly on par with the state as a whole, that is not saying much: the National Assessment of Education Progress reports that last year, California tied Louisiana for the nation's lowest reading and mathematics test scores.44 In the 1993-94 school year, SDUSD reported a 16 percent dropout rate. The school district is heavily ininority, with 26 percent Hispanic and 17.8 percent black students.45 Test scores of minority students in San Diego lag behind nonminorities.46
Business and philanthropic groups have poured resources into the public schools. The Girard Foundation, for instance, has strived to increase parental involvement in the public schools through support for the Parent Institute for Quality Education, which serves first-generation immigrants, and the Center for Parent Involvement in ducati ion.^^ Some of the schools have instituted entrepreneurship programs with community support.
One of the most promising education reforms in California is charter schools-innovative public schools that control their own educational programs and are exempted from some state regulations. Sail Diego has six operational charter schools. Two others were shut down last year by the San Diego school district.
Despite their promise, charter schools are heavily restricted under state law. The charter school legislation limits the number to 100, and places substantial limits on the schools' autonomy.48 The Little Hoover Commission in March 1996 found that current charter school regulations artificially restrict innovative educational options, and it urged such reforms as lifting the 100-school cap, funding charter schools directly from the state rather than through local school districts, creating alternative sponsors and petition mechanisms, and recognizing charter schools as separate legal entities.49
Charter schools in San Diego have received strong support from the business community, particularly the San Diego Business Education Roundtable.50 But because charter schools operate only with the blessing of local school districts, support from those entities is crucial not only for the charter schools' existence but for their success. Among charter school experts, the San Diego school district has a reputation for hostility toward charter schools. Pamela Riley of Pacific Research Institute in San Francisco says that "charter schools in San Diego are a round peg in the district's square hole."51
The bitter conflict between the school district and the Johnson Elementary/Urban League Charter School bears out that claim. The San Diego Board of Education granted a five-year charter in February 1995 as a collaboration between Johnson Elementary School and the San Diego Urban League. The charter school was established to address poor academic performance among the school's predominantly black students. The school encompassed three components: a pre-school Head Start program; an ethnocentric K-6 program focusing on educational basics; and a Family Service Center providing health education, parent skills training, and crisis intervention. The school trimmed $140,000 in operational costs, which it planned to reinvest in the classroom, and created a partnership with Hewlett-Packard that provided new computer technology. The efforts paid off: after one year, most Johnson students improved their test scores in reading, language, and mathematics.52
But the school experienced constant conflict with the San Diego school district over issues of autonomy-the very feature that distinguishes charter schools from ordinary public schools. District officials accused the school of asserting independence from the district by hiring its own legal counsel, and the Board of Education voted on November 26, 1996 to rescind the charter after only one year. Shutting down a school not for performance but for independence negates the very idea of charter schools.
Still, six charter schools continue to operate in San Diego; and the School Futures Research Foundation, backed by businessman John Walton, opened a new charter school in San Diego called the Nubia Leadership Academy. Approved last July by the San Diego Board of Education, the Nubia Leadership Academy emphasizes academics, business principles, the arts, character development and leadership. This September, the school welcomed 180 predominantly low-income, minority children from kindergarten through fourth grade with the student body expanding in the coming years through eighth grade. Meanwhile, efforts to provide educational competition and private sector alternatives are being proposed by reform advocates, including Governor Pete Wilson. Private scholarships and publicly funded voucher systems are expanding educational opportunities for lowincome youngsters in cities around the nation. They could do the same for children in San Diego and throughout California.
Education is the foundation upon which business can flourish. The willingness of San Diego education officials to dow innovation, autonomy, and competition may go far in determining the educational opportunities available to youngsters who desperately need them.
1. The business and philanthropic communities should encourage and help develop an entrepreneurial curriculum and business internship opportunities in the public school system.
2. The California legislature should adopt the Little Hoover Commission's recommendations to increase the number, flexibility, and autonomy of charter schools.
3. The business and philanthropic communities should support scholarships to allow children from low-income families to attend private schools; and should support the creation of new private schools in low income neighborhoods.
4. The California legislature should adopt remedial school choice legislation, such as that proposed by Governor Pete Wilson, to allow children in the worst public schools to opt out into private schools.
Walk down the pleasant streets of San Diego's Gaslamp Quarter and you will see the fruits of free enterprise. Vibrant new restaurants abound, featuring every type of cuisine. Skilled artisans roll cigars at the Havana CigarFactory. New barbers learn their trade in a storefront barbering college. The spirit of enterprise is ubiquitous.
One of the new businesses is a restaurant called the Kabob House. It was established by Russian immigrants, who started out selling kabobs from a vending stand at a swap meet. When the exorbitant rents started devouring their profits, the family decided to try its hand at running a restaurant. They faced a plethora of regulatory obstacles, such as obtaining a liquor license and permission for outdoor seating. But now the restaurant is flourishing, introducing native San Diegans to Russian cuisine and Russian patrons to California wines. "It's kind of like the American Dream." a waiter remarked to me.
It is the American Dream-a dream sometimes dimmed when regulations grow too onerous. This report presents concrete actions that can be taken-by local government officials, state officials, and business leaders-to open opportunities and strengthen substantially the region's economic base. The dominant regulatory philosophy should be that businesses are good for the community, and that whatever regulations are necessary should impede entrepreneurship as little as possible. Instead, regulations too often are protectionistic, revenue-generating, and otherwise unjustifiable. The result of over-regulating is all too predictable: the stifling of entry-level enterprises, the backbone of America's economy-and the foundation for America's future.
San Diego's beacon bums brightly for entrepreneurs. With renewed resolve and implementation of the reforms outlined in this report, that beacon can bum brighter still in the 21st century.
1. Interview with Sergey Autandilov, Business Counselor, Metro Area Advisory Committee on Anti-Poverty in San Diego County (MAAC).
2. See, e.g., William H. Mellor, "No Jobs, No Work," New York Times (August 31, 1996).
3. Source for statistics: U.S. Department of Commerce. Bureau of the Census, County and City Data Book (1994).
4. Joel Kotkin, "San Diego: A City for the New Millenium," City Journal (Winter 1997). p. 74.
5. Kotkin, p. 77.
6. Interview with Santo Fragale, Community Development Specialist, Office of Small Business. The author expresses special appreciation to Mr. Fragale for his generous contribution of time and expertise and for making available the office's records.
7. The business tax is now $34, with $20 dedicated to the Small Business Enhancement Program. Minutes, Small Business Advisory Board, July 26, 1995.
8. Minutes, Small Business Advisory Board, March 27, 1996.
9. Interview with Ken M. Clark, Small Business Programs Coordinator, Southwestern College Small Business Development & International Trade Center.
10. Interview with Santo Fragale, Office of Small Business.
11. County of San Diego, Office of Trade & Business Development, Getting Down to Business in San Diego County. The city maintains similar requirements. See City of San Diego, Office of Small Business, Quick Reference Directory for Starting a Business in Sun Diego.
12. Getting Down to Business, p. 10.
13. Minutes, Small Business Advisory Board, May 1, 1996.
14. Minutes, Small Business Advisory Board, June 26, 1996.
15. Letter to Mayor Susan Golding from George P. Chandler, Jr., chairman, Small Business Advisory Board, June 5, 1996.
16. Information about applicable regulations is based on primary source materials and on interviews with Kathy Henderson, County of San Diego Development Services Center; Alice Boyd, City Treasury; Robert Romaine, Department of Environmental Health; Mary Ann Oberle, Community Parks and Recreation Department; Penny Scott, Balboa Park; and Michael Beehan. Mission Bay Park.
17. Interview with Sylvia Martinez, MAAC.
18. Interview with Nan Mitchell, Day Care Supervisor, YMCA Child Care Resource Center.
19. Interviews with Donna Brown and Stephanie Daniels, California Department of Social Services, Community Care Licensing Board.
20. Interview with Kathy Henderson, Development Services Center.
21. Jim Okerblom, "Pair's Bug Express May Be Beachy Idea," San Diego Union-Tribune (September 3, 1994).
22. See, e.g., William H. Mellor, Institute for Justice, Is New York City Killing Entrepreneurship? (1996).
23. Interview with Barbara Lupro, Taxi Administrator, Metropolitan Transit Development Board.
24. Interviews with Rosalind White, Passenger Stage Permits, and Santos Flores, Charter Party Permits, California Public Utilities Commission.
25. Interview with Kairina Newby, executive director, Home Business Network.
26. Interview with Kathy Henderson, Development Services Center.
27. Interview with Robert Romaine, Department of Environmental Health.
28. Cal. Bus. & Prof. Code 5 8740, et. seq.
29. Cal. Bus. & Prof. Code 5 6980.17, et. seq.
30. Cal. Bus. & Prof. Code 5 5650, et. seq,
31. Cal. Bus. & Prof. Code 5 5800, et. sea.
32. Cal. Bus. & Prof. Code 5 8020, et. seq.
33. Interviews with Liz Scherer and Gary Winkelman, California Board of Cosmetology and Barbering.
34. Interview with Alexei OchoIa. Community Development Specialist, MAAC.
35. Interview with Joanne Cornwell.
36. Cornwell u. California Board of Barbering and Cosmetology, 962 F.Supp. 126 (S.D. CaL, 1997).
37. See Kotkin, pp. 76-77.
38. See Office of Small Business, "Small Business Enhancement Program FY 1996 Accomplishments."
39. Interview with Art Goodman, Bankers Small Business Community Development Corporation.
40. Interview with Villa Mills, ACCION San Diego
41. Interview with David Chong, ACCION International. Information about. ACCION San Diego and the California requirements were obtained in interviews with Chong and Villa Mills. Regulations are set forth in various provisions of the California Financial Code, 5 22001, et seq., and the California Code of Regulations, 5 1401. et sen.
42. Interview with Wayne Morris, Licensing Specialist, California Department of Corporations.
43. Materials from Jacobs Family Foundation, San Diego Entrepreneurs Economic Summit (March 2-3, 1995).
44. Virginia Butterfield, "Our Schools in Crisis,'' San Diego Magazine (November 1996), p. 82.
45. San Diego Schools News Release (May 9, 1995).
46. Susan Gembrowski, "Minority Students Still Lag on Tests." San Diego Tribune (October 29. 1996). p. B-1.
47. Interview with Laura Fleming. Girard Foundation. See Chester E. Finn Jr. and Bruno V. Manno, "Better Schools: A Promising Reform Challenges Education's Status Quo," San Diego Union-Tribune (September 22, 1996).
p. G-1. The charter school legislation is codified at Cal. Educ. Code 5 47602, et seq.
49. Little Hoover Commission, The Charter Movement: Education Reform School by School (March 1996).
50. Interview with Kay Davis, Business Education Roundtable of San Diego.
5 1. Interview with Pamela Riley.
52. "A Noble Experiment," San Diego Union-Tribune (November 26, 1996).