Compliance Evaluation and Sound Decisions for Smart Incentives

COMPLIANCE, EVALUATION & SOUND DECISIONS FOR SMART INCENTIVES CDFA//BNY Mellon Development Finance Webcast Series March 18, 2014 Ellen Harpel, Founder Smart Incentives

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© 2014 SMART INCENTIVES

Introduction • 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 Framework

Recipient Deal

Compliance Effectiveness

Data and analytical tools to

enable better decision-making

Prepare for a future of greater

transparency and accountability

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I. Incentive Basics Working Definition: Incentives are a) tools to influence business decisions in order to spur the growth of companies and jobs in specific locations; b) taxpayer-financed programs that support individual businesses.

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Incentive 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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Incentive 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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II. Trends in Incentive Use •  Incentives for everyone • Growing use of incentives that benefit third parties (such

as investors) other than the company in the community • More programs serving entrepreneurs and small

businesses • Specialized services to businesses are rising in popularity

as a complement to financial incentives • Programs designed to help distressed areas seem to be

losing favor

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Trends (2) •  Incentive programs are under greater scrutiny with

demand for more transparency • States and some local governments are disclosing more

data on incentive use • Elected officials are demanding better data on compliance

and outcomes associated with incentive agreements • More places are employing caps, clawbacks, performance

agreements and sunset clauses to limit risk – but finding them harder to implement than expected

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III. Sound Decisions • Project Benefits • Fiscal Impact • Economic Impact

Can this incentive deal generate net benefits for your community?

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Project Benefits (1) • Project characteristics

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

•  Fit with economic development strategy •  Target industries •  Business types •  Coordination with state and regional allies •  Meets established program criteria

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Project Benefits (2) •  Timeframe

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

•  Likelihood of success •  Make sense test? •  Other backers (banks, investors) •  What is the level of risk?

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Fiscal Impact • Definition: Tax and budgetary implications of incentive

decisions for state and local government • Reasons: Are taxes generated likely to exceed the cost of

the incentive and additional costs of service • Elements:

•  Cost of incentive •  New state and local taxes generated by project •  Cost of additional services

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Fiscal Impact (2) • Data Needs

•  What will generate revenue? •  Local tax structure •  Company assets and operations •  Individuals

•  What additional expenditures will be required? •  Services to new residents

•  Assumptions on household characteristics •  Services to the company

•  New infrastructure

•  Value of incentives

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Fiscal Impact (3) •  Issues to keep in mind

•  Jurisdictions to consider •  Fiscal impact of indirect and induced jobs •  New jobs and new residents •  Timing – annual or over time

• Ease of use/simple interface • Sophistication of back end analytics

•  Correlations between land use factors and revenue streams •  Average costs versus marginal costs •  Rules of thumb •  GIS integration

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Economic Impact (1) • Definition: Traces the flow of money throughout the

economy after the initial investment • Reasons: To estimate the contribution of economic

activities to a regional or state economy • Economic impact depends on industrial structure and size

of your region • Components:

•  Direct •  Indirect •  Induced

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Economic Impact (2) • Data Needs

•  Employment •  Payroll •  Annual spending •  Construction spending •  Industry classification (NAICS code)

•  Issues to keep in mind •  Industry choice matters •  By geography •  Cost •  Technical skills •  Interpretation – does it make sense?

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Economic impact models • Methods and tools

•  REMI •  IMPLAN •  EMSI •  TBL •  Location-specific

• My point of view: •  REMI •  Impact DataSource •  InformAnalytics

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Communication • Can your organization:

•  Describe the project benefits? •  Quantify the fiscal impact? •  Explain the economic impact?

• Have you prepared brief summaries that can be shared with different stakeholders?

• Have you avoided jargon? •  Is the analysis transparent?

•  Assumptions and inputs clearly stated

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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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IV. Compliance and Evaluation

• Monitor compliance - performance • Assess effectiveness - evaluation • Reporting and policy feedback

Did this incentive deal generate net benefits for your community?

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Compliance – performance agreements • Are performance requirements clearly defined? • Are expectations laid out in a signed agreement? •  Is the company required to report on its progress in

meeting those requirements? • Are policies in place to protect the community in the case

of non-performance?

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Compliance – monitoring and follow-up • Whose job is it? • Are there resources available? • Can information be verified? • How is data tracked? •  Timeframe?

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”

• 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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Evaluating incentive programs • 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 Center on the States

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Evaluating incentive programs (2) • Review your portfolio of incentive offerings • 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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Lessons learned from evaluations • We’re not there yet • Business surveys may not be reliable • Validate the data • Be clear what is measured and what is modeled • Changes in program guidelines make evaluation difficult • Devote resources to the effort • Not just the EDO’s job

•  Requires political leadership •  Requires cooperation among agencies (workforce, revenue)

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Reporting and Communication Elected officials and community groups are demanding better data from economic development organizations on compliance and outcomes associated with incentive use. • Many organizations still struggle to report basic

information about incentive use • Good reports explain the incentives and put their use in

context – not just a list of project and programs • Regular conversations between legislative and executive

branches can improve incentive policymaking and use • Reports should offer clear, concise analysis and

synthesized findings that can drive program change.

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Concluding Thoughts •  Incentives should be used to accomplish community goals

– not just win a deal. •  The problem is that we haven’t known which incentives

actually help our communities. • Communities need better data and analytics throughout

the process to identify what works and enable sound decisions when awarding incentives.

•  The next few years will see tremendous improvements in the way we talk about and evaluate incentives.

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Contact Information •  Ellen Harpel

President •  571/212.3397

•  [email protected] •  www.businessdevelopmentadvisors.com

•  [email protected] •  http://www.smartincentives.org/

•  @SmartIncentives

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Additional Resources • Smart Incentives – www.smartincentives.org/blogs/blog • C2ER State Incentives Database –

www.stateincentives.org • Pew Charitable Trusts, Economic Development Incentives

Project – www.pewstates.org • Cost – Benefit Analysis

•  informAnalytics •  Impact DataSource •  REMI

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