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

1. 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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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
• eharpel@businessdevelopmentadvisors.com
• www.businessdevelopmentadvisors.com
• ellen@smartincentives.org
• 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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