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Compliance Evaluation and Sound Decisions for Smart Incentives

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Compliance, Evaluation & Sound Decisions for Smart Incentives. CDFA//BNY Mellon Development Finance Webcast Series, March 2014. Ellen Harpel, Founder, Smart Incentives.

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Compliance Evaluation and Sound Decisions for Smart Incentives

  1. 1. COMPLIANCE, EVALUATION & SOUND DECISIONS FOR SMART INCENTIVES CDFA//BNY Mellon Development Finance Webcast Series March 18, 2014 Ellen Harpel, Founder Smart Incentives 1
  2. 2. © 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 2
  3. 3. © 2014 SMART INCENTIVES 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 3
  4. 4. © 2014 SMART INCENTIVES 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. 4
  5. 5. © 2014 SMART INCENTIVES Incentive Basics (2) •  Categories •  Direct business financing •  Indirect business financing •  Community-oriented •  Tax-related •  Types •  Bonds •  Grants •  Investments •  Loans •  Tax abatements, credits, deductions, exemptions 5
  6. 6. © 2014 SMART INCENTIVES 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 6
  7. 7. © 2014 SMART INCENTIVES 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 7
  8. 8. © 2014 SMART INCENTIVES 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 8
  9. 9. © 2014 SMART INCENTIVES III. Sound Decisions • Project Benefits • Fiscal Impact • Economic Impact Can this incentive deal generate net benefits for your community? 9
  10. 10. © 2014 SMART INCENTIVES 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 10
  11. 11. © 2014 SMART INCENTIVES 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? 11
  12. 12. © 2014 SMART INCENTIVES 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 12
  13. 13. © 2014 SMART INCENTIVES 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 13
  14. 14. © 2014 SMART INCENTIVES 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 14
  15. 15. © 2014 SMART INCENTIVES 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 15
  16. 16. © 2014 SMART INCENTIVES 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? 16
  17. 17. © 2014 SMART INCENTIVES Economic impact models •  Methods and tools •  REMI •  IMPLAN •  EMSI •  TBL •  Location-specific •  My point of view: •  REMI •  Impact DataSource •  InformAnalytics 17
  18. 18. © 2014 SMART INCENTIVES 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 18
  19. 19. © 2014 SMART INCENTIVES 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 19
  20. 20. © 2014 SMART INCENTIVES 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 20
  21. 21. © 2014 SMART INCENTIVES IV. Compliance and Evaluation • Monitor compliance - performance • Assess effectiveness - evaluation • Reporting and policy feedback Did this incentive deal generate net benefits for your community? 21
  22. 22. © 2014 SMART INCENTIVES 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? 22
  23. 23. © 2014 SMART INCENTIVES 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 23
  24. 24. © 2014 SMART INCENTIVES 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? 24
  25. 25. © 2014 SMART INCENTIVES 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 25
  26. 26. © 2014 SMART INCENTIVES 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. 26
  27. 27. © 2014 SMART INCENTIVES 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) 27
  28. 28. © 2014 SMART INCENTIVES 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. 28
  29. 29. © 2014 SMART INCENTIVES 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. 29
  30. 30. © 2014 SMART INCENTIVES Contact Information •  Ellen Harpel President •  571/212.3397 •  eharpel@businessdevelopmentadvisors.com •  www.businessdevelopmentadvisors.com •  ellen@smartincentives.org •  http://www.smartincentives.org/ •  @SmartIncentives 30
  31. 31. © 2014 SMART INCENTIVES 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 31

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