ED411 | 2017 | Track 1: The Site Selection Short List

#ED411

SITE SELECTION SHORT LIST –

HOW TO GET ON AND STAY ON

THE LIST

December 1, 2017

#ED411

Adam Bering, Principal, Ernst & Young LLP

Paul Naumoff, Principal, Ernst & Young LLP

The better the question. The better the answer.

The better the world works.

December 1, 2017

ED 411

Page 4

Tax reform

► Tax reform contains several major changes that will impact federal corporate tax liabilities including:

► Reducing the 35% corporate tax rate to 20% (House version begins in 2018; Senate version begins in 2019);

► Repealing the corporate alternative minimum tax (AMT) (House and Senate versions both begin in 2018);

► Eliminating various deductions and credits, such as the work opportunity tax credit and the new markets tax credit; and

► Repatriation

NOTE: As of November 17, 2017

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Potential impact of federal tax reform on state budgets

► The overall goal of tax reform is to lower the rate while broadening the base so that the result ends up being revenue neutral.

► If states adopt the new structure, which is not guaranteed as each state may be impacted differently based on the make-up of the companies in their state, they would have a broader base upon which to apply their tax rate.

► It is likely that states do not cut the state tax rate proportionally to the cut at the federal level. If that tactic is employed by states they may see increased revenue which can be utilized to close deficits and/or provide additional economic development programs to improve the states competitive position within the U.S.

► A concern remains that in getting the federal budget to a revenue neutral positions, programs which send funds to the state will be cut and/or Federal programs maybe cut which will require increased state expenditures to maintain the same level of service.

► As such once Federal Tax Reform is settled there may likely be a number of years where we see a ripple effect at the state level as each state will have to deal with the budgetary results along with decide whether or not to implement tax reform of their own.

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Repatriation: impacts on capital expenditures?

► The goal of repatriation is to encourage multinational companies headquartered in the U.S. to bring

foreign-earned income back into the U.S. by assessing a lower tax rate on the income when it is brought

back.

► Last repatriation in 2004 saw over $300 billion in income brought to the U.S. from foreign subsidiaries.

Companies indicated they would put such funds toward financing capital spending, paying down debt,

R&D, venture capital, and acquisitions.

► Repatriation of foreign-held earnings typically comes with requirements to invest in U.S. domestic

operations to encourage job creation and economic growth.

► Combined with potential for imposing new tariffs on imports, this creates enhanced reasons for future

investment domestically.

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What you can do to be ready

► First, estimate the static impact of changes in tax base and tax liability, by industry. This may include the following:

► Estimate share of sales from export sales;

► Estimate share of cost of goods sold from imports;

► Estimate annual capital investment and interest deduction;

► Estimate total change in tax base; and

► Estimate total change in federal tax liability.

► Next, test the relevance of the national, industry-level results to companies in your local jurisdiction (or target companies in other jurisdictions). This may include the following:

► Analyzing publicly available financial statements from the company and other available data to show:

► Geographic location of sales and assets;

► Capital intensity; and

► Leverage.

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Key considerations for a successful investment

Strategy: Align the business strategy with the federal, state, and local economic development and job creation

strategies

Public relations: Preserve confidentiality, manage the press and reputational risk. Communicate positively

about your proposed plans and their positive community impact

Human Capital: Assess the attractiveness of the local labor market in terms of labor availability, skills, wages,

union relations, and other factors

Project costs: Understanding and quantifying the total project cost and potential cost offsets through the

application of an integrated incentives process

Political environment: Analyze strategic priorities for economic development and the enthusiasm of States to

attract new capital investment and job creation

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The location advisory process

Location Evaluation

Index ranking

Financial and tax

modeling and

incentive identification

Location visits

and incentive

negotiation Selection of

final location

01 02 03 04

• Develop operating and

financial profiles for the

proposed facilities

• Project cost levels at each

finalist location

• Estimate tax liabilities by

year

• Compute present value of

operating costs

• Prepare credits and

incentives assessment

• Coordinate community

visits with relevant

stakeholders

• Draft economic impact

report for distribution to

state and local

governments

• Prepare required

applications

• Negotiate and review

incentive proposals

offered; discuss project

terms

• Identify location

evaluation factors that

reflect business

objectives

• Rank locations using a

customized, weighted

score

• Identify finalist locations

for financial and tax

modeling

• Filter and reduce number

of locations based on

critical location criteria

• Review and finalize any

incentives agreements

• Develop compliance work

plan to track and maintain

incentives agreements

• Preform final stage cost

modeling inclusive of

incentive benefits

$

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Locations are typically defined as the relevant metropolitan statistical area (MSA) or county. Factors to consider vary from company to company. Below are

example factors that companies consider:

Labor

► Population

► Population growth

► Workforce

► Workforce growth

► Occupational employment

► Occupational wages

► Industry employment

► Industry wages

► Labor productivity

► Wage trends

► Demographics

► Commuter patterns/local draw

► Effective labor force

► Unemployment rates

► Unemployment demographics

► Degree attainment, rate & type

► Percentage unionized

► Days lost to union strikes

► Number of colleges & universities

► Number of STEM graduates

Infrastructure/Logistics

► Utility costs

► Accessibility (freight/port)

► Proximity to airport

► Supplier proximity

► Future local production

► Logistics for semi-finished parts

► Location of customers

► Climate and natural disasters

► Time zone

► Construction costs

Tax landscape

► State and local tax rates

► Federal taxes (if including Mexico)

► Tax credits and incentives (tax and non-tax

incentives)

► Major discretionary and statutory credit and

incentive programs:

► Usable value

► Retroactive

► Transferable

► Refundable

► Labor incentives

► Expedited permitting

► Workforce training support

► Foreign Trade Zone

Quality of life

► Quality of life

► Crime rates,

► Teachers / pupil,

► Public school spending

► Cost of living levels

► Cost of living growth rate

► Availability and quality of health care

services

► Current housing stock

► Average home prices

Potential location evaluation factors

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Ohio example when analyzing for a manufacturing company

Ohio currently has a Republican Governor, Senate and House. Ohio voted for President Trump and Vice President Pence in the 2016 presidential election in 2016.

Pros

► Seventh most populous US state (11.6m residents)

► Second largest manufacturing workforce in the US (689,000 workers)

► Third largest state for job creation in 2015 (25,800 jobs created)

► Sixth most capital investment in 2015 ($5.1b)

► Seventh largest University for Bachelor’s degrees in Engineering (The Ohio State University)

Cons

► Low unemployment rate (5.0%)

► Not a right-to-work state

► Median hourly wage in industry: $16.34 (+5% above US average)

Business environment Tax attributes

Pros

► No personal property tax

► No income or franchise tax

► No inventory tax

Cons

► The Commercial Activities Tax is a gross receipts tax that does

not allow for the same deductions and credits as an income tax

► High real property tax

► Municipal-level income taxes

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Manufacturing project case study

• Location analysis (cost-benefits-risks) including determination of location criteria, weighting scenarios and conducing a high-level location

assessment to identify and rank potential target US states and sites

• Due diligence and cost analysis on sites that meet client’s requirements and business needs in order to prioritize sites

• Conduct RFP process with targeted states to understand baseline incentives packages and develop economic impact study for negotiation

purposes

• Performed a comprehensive study from a supply chain and logistics perspective at specified locations in targeted states

• Conduct community evaluations (in-person site visits)

• Incentives negotiation process at the federal, state and local levels

• Negotiating final commitments from state and local municipalities

• Perform financial modeling to support final location decision along with review of incentives agreements

• Company located to the Midwest

• The negotiations resulted in multiple incentives offers

Outcome

Approach

Large-scale US inbound contract manufacturer

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A balanced economic development agenda

Balanced Economic

Development Agenda

Objectives and Strategy

Analysis

Economic Development

Funding

Return on Investment

ExecutionDeployment

Accountability and

PredictabilityBenchmarking

Page 15


► What is the mission of the economic

development group or department?

► Is the mission to attract new companies?

► Is the mission to retain existing companies?

► Is the mission to grow the existing industrial

base?

► Are you trying to pivot to attract a new

industrial base?

► What are the tools in the toolbox?

► How are those tools deployed?

Balanced Economic

Development Agenda


Analysis

Economic Development Funding


ExecutionDeployment

Accountability and

Predictability Benchmarking

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Benchmarking

► How is your county, district, city, etc. faring against the

competition?

► Are you seeing a return on your investment?

► How are you measuring that return, i.e. new jobs,

higher wages, new company commitments, etc.

► What are your peer municipalities doing to attract and

retain companies?

► Are they offering different incentives? Are they

being more or less aggressive than you are?

► What are your strengths and weaknesses? Have you

done a SWOT analysis?

Balanced Economic

Development Agenda


Analysis



ExecutionDeployment

Accountability and


Page 17

Analysis

► Have you analyzed assets/liabilities (availability of land, labor, logistics, workforce training, etc.)?

► Have you conducted an analysis to identify key growth sectors?

► Economic impacts for consideration:

► Budget changes

► Tax law changes

► Business changes

► Labor changes

► Incentives analysis:

► Which economic development programs are used and

to what effect?

► Which economic development programs should be

used?

Balanced Economic

Development Agenda


Analysis



ExecutionDeployment

Accountability and


Page 18


► Are your programs performance based, i.e. tax

credits, or grants?

► Leading practices:

► Federal programs

► State programs

► Local programs

► Utilities

► Universities

Balanced Economic

Development Agenda


Analysis



ExecutionDeployment

Accountability and


Page 19

Execution Deployment

► How are you communicating your competencies, resources, tools, partnerships and collaborations to the private sector?

► Leading practices:

► Policies and procedures

► Marketing

► Lead generation

► Organizational structure

Balanced Economic

Development Agenda


Analysis



ExecutionDeployment

Accountability and


Page 20

Accountability and Predictability

► How is your jurisdiction handling GASB 77

reporting?

► Is your jurisdiction getting a return on their

investments?

► Are the jobs that were committed actually

occurring?

► Do the incentives that were offered meet the

requirements of the company?

► Is the company abiding by the terms of the

agreement?

Balanced Economic

Development Agenda


Analysis



ExecutionDeployment

Accountability and


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► Is your jurisdiction seeing a return on their

investments?

► If so, what can you do to replicate and continue

that success, if not, what changes need to be

made?

Balanced Economic

Development Agenda


Analysis



ExecutionDeployment

Accountability and


Page 22

Questions?

#ED411

THANK YOU

ED411 | 2017 | Track 1: The Site Selection Short List

Economy & Finance