Pre-Summit Workshop Smart Incentives & Technology

Kent Gardner, Ph.D. Chief Economist

Center for Governmental Research

Ellen Harpel Founder

Smart Incentives

About CGR •  Independent, objective nonprofit (501(c)(3)) dedicated to

the public interest

•  Consultant to government, business and nonprofit leaders, providing decision support, policy analysis, implementation guidance

•  Active throughout NYS with additional engagements in Ohio, Massachusetts, Ohio & New Jersey

•  Key areas of focus: local government, education, human services

•  Creator of

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About Smart Incentives • Business Development Advisors is an economic

development consulting firm •  Works with leaders at the local, state and national levels to

increase business investment and job growth in their communities •  Founded 1999

• Smart Incentives helps communities make sound decisions throughout the economic development incentives process •  Due diligence and business case analysis for incentive projects •  Processes for monitoring compliance and evaluating effectiveness •  Launched 2013

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Smart Incentives 4x4 Framework

Recipient  Deal  

Compliance  Effec1veness  

Data  and  analysis  to  

enable  be7er  decision-­‐making  

Greater  transparency  and  accountability  

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Analytics for Smart Incentives •  Incentives are part of a community’s financing toolkit

•  Evaluating deals •  Monitoring the return on investment

• Quality data and analysis help you: •  Reduce risk •  Understand if an incentive deal can generate net benefits for your

community •  Refine incentive strategies •  Explain and build support for decisions •  Achieve better outcomes

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Incentives Basics A working definition of incentives: •  Tools to influence business decisions in order to spur

the growth of companies and jobs in specific locations

•  Taxpayer-financed programs that support individual businesses

Development finance: •  Fostering job creation and economic growth through

the use of tax-exempt and other public-private partnership finance programs

Blurred lines between the two categories

Incentives Basics (2) • Categories

•  Direct business financing •  Indirect business financing •  Community-oriented •  Tax-related

•  Types •  Bonds •  Grants •  Investments •  Loans •  Tax abatements, credits, deductions, exemptions

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Incentives Basics (3) • Business Need

•  Capital access •  Facility/site location •  Infrastructure •  Marketing •  Product/process improvement •  Regulatory climate •  Workforce

• Discretionary and non-discretionary •  Targeted (or not) by industry or geography

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Pursuing diverse community goals •  Economic growth

•  Jobs •  Investment

•  Downtown revitalization •  To support remaining business •  To provide jobs for center city residents

•  Brownfield redevelopment •  Improved quality of life

•  To support business retention •  To support business attraction

•  Strengthen local fisc •  Taxable income •  Property value •  Taxable retail sales

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Economic goals also diverse •  Jobs for whom?

•  Skilled v unskilled •  Under & unemployed v. new workers •  Is population growth a community good or a community evil?

• Business development •  Existing v. new •  Traded sector v. support infrastructure

• What are the “investment” goals? •  To support construction •  To add taxable property

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Analy1cal  tools  (project  orienta1on)  Analy1cal  tools  (project  orienta1on)  

Measurement is just as difficult • Core metric: Jobs • Payroll/Payroll per job adds quality dimension • Skills needs will help discern if project is going to

support existing workforce or in-migrants • Cleveland Foundation’s laundry: More cleaning being

done? • What are your incentives buying?

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Can this deal generate net benefits for your community?

• Project Attributes •  Fiscal Impact • Economic Impact

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Project attributes (1) • Project characteristics

•  Number of jobs •  Type of jobs and wages •  Investment •  Location – where is the project and where will the benefits occur?

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Project attributes (2) •  Fit with economic development strategy

•  Target industries •  Business types •  Coordination with state and regional allies •  Meets established program criteria

• Would this project harm existing businesses?

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Project attributes (3) •  Timeframe

•  When will the project begin? •  When will investment and hiring occur? •  What is the expected lifespan?

•  Likelihood of success •  Does it make sense? •  Other backers (banks, investors) •  What is the level of risk?

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Why devote effort to impact assessment? • Heightened sensitivity in use of public dollars •  “Good Jobs for All” and similar efforts propose

restrictions in business tax and incentive structure • Efforts to improve public/private partnerships •  Increasing skepticism about economic impact claims • What can’t we measure?

Questions and discussion

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Case Study: Measuring economic & fiscal impact

• Ohio Star Forge announces expansion in Warren (N of Youngstown)

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OSF: Key Facts • Subsidiary of Daido Steel, multinational

steel firm headquartered in Japan • 40,000 SF addition to support automotive

sector • Current employment: 100 • Anticipated expansion: 26 jobs • Cost of expansion: $20 million

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Why do we care? First, OSF will spend more

• OSF will expand purchases of supplies • steel • energy • food services • office supplies • janitorial services • lots of other stuff

Suppliers Will Spend More

Buy  more    local  tomatoes  

Replace    delivery  truck  

Hire  new    employees  

Adds new PERMANENT jobs in Warren

Paul,  Engineer  Katherine,  Clinical  

Psychologist  

And they’ll spend Paul’s paycheck

And they’ll spend Paul’s paycheck

OSF plus Paul & Katherine will pay taxes • Warren

•  Income Tax •  Property Tax

•  Mahoning County Property Tax •  Ohio

•  Corporate Income Tax •  Personal Income Tax •  Sales Tax

Let’s review •  Direct impact: cash direct from Ohio Star Forge

•  Payments to Pizza Joe’s for pizza bought by the company •  Salary to Paul •  Benefits purchased on Paul’s behalf •  Taxes to Warren, Mahoning County, State of Ohio

•  Spillover •  Indirect: cash from OSF suppliers –  Payments to Joe’s suppliers –  Salaries to Joe’s employees

•  Induced: cash from OSF employees –  Co-pay for Katherine’s OB/GYN services –  Baby food for Katherine Jr. –  Pizza from Joe

Economic Impact of Ohio Star Forge • Permanent Jobs – Approximately 50

•  Direct: 26 “New” •  Spillover: 22 –  Indirect: 9 –  Induced: 13

•  Temporary Construction Jobs: Approximately 40 •  Income

•  Approximately $4.5M

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Total  Employment  =  87  Direct  =  26  Indirect  =  9  Induced  =  13  Temporary  ConstrucCon  =  38    State  Labor  Income  =  $4.5  Million  Average  Salary  =  $51,800    

Costs  to  State  and  Region  =  $221,000    Benefits  to  State  =  $2,000,000  Benefits  to  Region  =  $1,000,000    Benefits/Costs  =  13.6  

Takeaways • Devote some resources to your analysis

•  CDFA can help make the case •  The analysis has to be customized for your location • Band together with others in your community and

region •  Pool your resources •  Look to other governmental departments

• You’ll never be “right” – need order of magnitude estimate

• Strike a balance between detail and reasonableness • Be prepared to communicate your decision and

rationale

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Takeaways (2) • Beware of oversimplification/overly precise outputs –

judgment still needed • Share your assumptions/the model’s assumptions • Doesn’t have to be set in stone; tweak it over time

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Reporting to stakeholders • Who are your stakeholders?

•  Board •  Developer •  Municipal officials •  Public

• Who needs to know what? • How do you communicate?

•  How honest should you be? •  How do you deal with the media?

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Compliance and Effectiveness • Monitor compliance – project performance • Evaluate effectiveness – policy objectives • Reporting and policy feedback

• Transparency • Accountability

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DID  this  incen+ve  deal  generate  net  benefits  for  your  community?  

Compliance – performance agreements •  Are performance requirements clearly defined? •  Are expectations laid out in a signed agreement?

•  Only 56% of local governments report that a performance agreement is required when providing business incentives

•  Is the agreement timeframe tied to the ROI break-even point?

•  Is the company required to report on its progress in meeting those requirements? •  Is there a way to verify reported information?

•  Are policies in place to protect the community in the case of non-performance?

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Compliance – monitoring ROI • Whose job is it? • Are there resources available? • Can information be verified?

•  Require reporting as part of agreement •  Data sharing among agencies to verify key reporting variables

• How is data tracked? •  Timeframe • Site visits and closeout interview at end of term

COLLECT THE DATA to figure out what is working and what is not

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Compliance - challenges •  Internal/process

•  Access to information •  Coordinating among agencies/departments •  Definitions – e.g., what is a “new job” •  Ability to track long-term

• Outcomes •  What do you do when the project is not in compliance? •  What happens if the project changes? –  Economic environment –  Changes at the company

•  Who enforces the agreement?

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Other challenges? Questions?

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Evaluating incentive programs for effectiveness • Did the incentive affect the choices businesses

made? • Were existing businesses harmed by the incentive? • Did the benefits outweigh the costs? •  Is the program meeting the community’s goals? • How could it be improved? • Are the community’s incentives working together

efficiently?

Source: Pew Charitable Trusts

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Business Incentives Initiative

•  Identify effective ways to manage and assess incentive policies and practices

•  Improve data collection and analysis •  Develop national standards and best practices that states can use to

report on economic development incentives •  Participating states: IN, MD, MI, OK, TN, VA

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Evaluations should draw clear conclusions based on measurable goals • Metrics should:

•  Reflect the goals of the incentive •  Consider available data •  Use clear and consistent definitions

• Metrics should emphasize strengthening the overall economy •  Yes, fiscal impacts but not to the exclusion of economic measures •  Focus on outcomes that affect the well-being of state residents •  Consider whether incentives are reaching their target areas

Source: Pew Charitable Trusts

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Evaluating incentive programs to inform policy choices •  Review your portfolio of incentive offerings •  Consider building reviews into the budget process (RI) or

legislative calendar (IN, MS) •  Define the goal of each incentive program clearly •  Use real data – not imputed or modeled figures •  Create a team with agency experience, analytical skills

and subject-matter expertise •  Collaborate with other agencies to collect data and share

analytics expertise. •  Leadership is critical. Provide a supportive environment,

training, resources and encouragement.

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Questions?

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Contact Information Ellen Harpel President Smart Incentives 571/212.3397 eharpel@businessdevelopmentadvisors.com www.businessdevelopmentadvisors.com ellen@smartincentives.org http://www.smartincentives.org/ Twitter: @SmartIncentives

Kent Gardner, Ph.D. Chief Economist CGR 585/466.4273 kgardner@cgr.org www.cgr.org

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