Reports Examine Two States' Experience with Economic Incentives

Incentive packages to attract companies are nothing new in economic development. In recent years, though, incentives have been used to recruit technology companies, and these incentive packages are growing in scope and complexity, with some in the hundreds of millions of dollars. Two recent reports that take a close look at experiences in North Carolina and Iowa may be of interest to communities and states using incentive packages to recruit companies to their area.

 

North Carolina

In 2004, Dell accepted an incentive package to build a computer assembly plant in North Carolina. With the state’s contribution over a 15-year period valued at $242 million, plus an additional $40 million provided by its counties, the North Carolina Department of Commerce argued the package was reasonable because the investments would stimulate 8,086 jobs. Researchers at the North Carolina Budget and Tax Center and the Corporation for Enterprise Development analyzed the incentive package, however, noting differences between North Carolina’s offer and Virginia’s $37 million offer for the same project. Virginia believed its project would yield 4,113 jobs while North Carolina’s investment would nearly double this number, they found.



In their report, Getting Our Money’s Worth? An Evaluation of the Economic Model Used for Awarding State Business Subsidies, the researchers conclude that North Carolina's offer to Dell was overly generous, with fiscal impacts three times higher than those of other projections. The researchers attribute the high fiscal impacts to weaknesses in the model North Carolina used to make its projections and a reliance upon excessive sales estimates provided by Dell. Following corrections to the model, the report estimates North Carolina will lose $72 million in revenue from the deal rather than gain $707 million, as the state predicted. The researchers suggest similar generous offers may be widespread, noting preliminary findings of 31 other projects in the state’s Job Development Investment Grants program.

 

While the researchers caution that no projections are 100 percent correct, including their own, they provide recommendations to improve future practices, including:

• To enhance openness, 30 days after the deal is closed, post the model and spreadsheets of financial estimates online;
• Use sources other than those provided by the company to estimate sales projections;
• Take into account that annual sales from a single plant may be distributed to stockholders around the world, so not all of the money will stay within the state;
• Include more clawback provisions in future agreements; and,
• Create a unified development budget (UDB) report for programs, which totals all spending, both on- and off-budget.

Getting Our Money’s Worth? is available at:

http://www.cfed.org/imageManager/_documents/getting_our_moneys_worth.pdf

 

Iowa

Another examination of employment projections recently was performed in Iowa. The state auditor of Iowa claimed that, of the 30,732 jobs the Iowa Department of Economic Development reported to have been pledged between July 2003 and June 2006, only 14,285 jobs were included in contracts signed between the department and the businesses receiving funds. Additionally, the auditor evaluated the effectiveness of the Grow Iowa Values Fund, stating that while contracts were signed to create 343 jobs and retain 52 existing jobs, as of June 2006 only 80 jobs were created and 28 existing jobs were retained. The difference may illustrate either unrealized employment or just a time lag between jobs pledged and jobs created.

 

In response to the audit, the Iowa Department of Economic Development said that no wrongdoing had occurred, but that improvements can be made in the methodology the state uses to track and report employment figures which are subsidized by various funding mechanisms. The department proposed several corrective actions, including:

• Identify the funding sources for each of the incentives received by companies in the department’s annual report;
• Differentiate between the number of jobs pledged and the number of jobs that are outlined in a signed contract;
• Collect into one administrative unit all of the employees who monitor job-creation and investments for separate programs; and,
• Report annually how programs such as the Grow Iowa Values Fund are performing.

The Iowa State Auditor’s report on the Grow Iowa Values Fund can be found at:

http://auditor.iowa.gov/specials/ValueFund.pdf



Links to both reports and more than 4,500 additional TBED-related research reports, strategic plans and other papers also can be found at the Tech-based Economic Development (TBED) Resource Center, jointly developed by the Technology Administration and SSTI, at http://www.tbedresourcecenter.org/.