Guidelines for effective & responsible business incentives

Guidelines for Effective & Responsible Business Incentives"SMART INCENTIVES

APRIL 2015

About us"  Business Development Advisorsis an economic developmentconsulting firm"

 Smart Incentives helps communitiesmake sound decisions throughout the incentives process""

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Why do we use incentives?"  To achieve our community’s economic development goals "◦  Jobs"◦  Business Development"◦  Investment"◦  Downtown revitalization"◦  Brownfield redevelopment"◦ Quality of life and quality of place"◦  Strengthen tax base"

 Incentives are not just about winning a deal. Smart incentive use is always connected to a larger economic development strategy."


Today’s environment requires better analytics"  Reduce risk"  Quantify net benefits"  Refine incentive strategies"  Explain and build support for decisions"  Achieve better outcomes"


Smart Incentives 4x4 Framework"

and to communicate and improve incentive outcomes

Transparency Accountability

at all 4 stages of the incen@ves process

Recipient Deal Compliance Effectiveness

Rigorous analytics to reduce risk

Data Analysis


Reducing Risk - Making Sound Decisions"Data and analysis prior to awarding incentives"


Due diligence"  Recipient"◦ Background research on the applicant"

 Deal"◦ Business case analysis of the project"◦ What could go wrong?""


Can this deal generate net benefits for your community?"

 Project Attributes"  Fiscal Impact"  Economic Impact"


Project attributes"  Project characteristics"  Fit with economic development strategy"  Effect on existing businesses"  Timeframe"  Likelihood of success""


Fiscal impact"  Tax and budgetary implications of incentive decisions for state and local government"

 Cost of the incentive"  Tax revenue the project may generate"

 Additional expenditures that might be required"

 Challenges:"◦  Jurisdictions affected"◦  Fiscal impact of indirect and induced jobs "◦  New jobs and new residents"◦  Timing "


Economic Impact"  Traces the flow of money after an initial investment to estimate the contribution to the regional or state economy"

 Economic impact depends on industrial structure and size of your region "

 Components: "◦  Direct"◦  Indirect"◦  Induced"

 Data needs"  Judgment and interpretation"


Takeaways ""  Devote resources to the analysis"◦  Organizations like IEDC, CDFA, C2ER can help make the case"◦  Band together with others in your community and region"

 Strike a balance between detail and reasonableness"◦  You’ll never be “right” – need order of magnitude estimate"◦  Judgment still needed"

 Be prepared to communicate your process, decision and rationale"


Compliance and Effectiveness"Evaluating incentives outcomes"


Did this deal generate net benefits for your community?"

 Project performance "  Achieving economic development goals"

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Compliance – performance agreements"  Define performance requirements"  Prepare an agreement"◦  Only 56% of local governments report that a performance agreement

is required when providing business incentives"

 Tie the project timeframe to the fiscal break-even point"  Require progress reports "  Are policies in place to protect the community in the case of non-performance?"


Compliance monitoring"  Whose job is it?"  Can information be verified?"◦  Require reporting as part of agreement"◦  Data sharing among agencies to verify key reporting variables"

 How is data tracked?"  Timeframe?"  Site visits and closeout interview""

Collect the data to see what is working and what is not""


Evaluation"  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?"


States regularly evaluating incentives"


Business Incentives Initiative"

 Identify effective ways to manage and assess incentive policies and practices"

 Improve data collection and analysis"  Develop national standards and best practices that states can use to report on economic development incentives"

 Participating states: IN, MD, MI, OK, TN, VA"

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© 2015 SMART INCENTIVES

Evaluating to inform policy choices "  Review your portfolio of incentive offerings"  Define the goal of each incentive program clearly"  Consider building reviews into the budget process (RI) or legislative calendar (IN, MS)"  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"


Improving communication"Preparing for greater transparency and accountability"


Reporting & communication"Elected officials and community groups are demanding better data from EDOs on incentive use.""Reporting should"◦  reflect different types of information"◦  recognize the needs of different audiences "

 Creative presentation can help audiences absorb complex information"


Transparency"  Lawmakers/the media/the public generally want to know:"◦  How much are we spending?"◦ Who is receiving incentives?"

 Reporting considerations"◦  Individual recipient versus aggregate reporting"◦  Just the facts or analysis?"◦  Need to provide context"

 Usable/user-friendly information"


Accountability"What are we getting out of our incentives spending?"Reporting the results of the evaluations"Collaborative approach to evaluation – and reporting "Using reporting to improve not punish/get punished"


GASB: State & Local Tax Abatement Disclosure"  Disclose agreements between individual taxpayers and the government that might diminish the tax base"

 Would include:"◦  General descriptive information (tax being abated, authority, eligibility,

mechanism by which taxes are abated, provisions for recapture)"◦  Commitments made by the recipient"◦  Other commitments made by a government (such as infrastructure)"◦  Number of tax abatement agreements entered into and in effect during

the reporting period"◦  Dollar amount of taxes abated during the reporting period"


Some guidelines"  Transparency"◦ Share process and rationale for decisions"◦ Release basic deal information"

 Accountability"◦ Annual report – what we did and what we hope to achieve"◦ Evaluations every 3-5 years – what worked, how can we

improve"

 Context"


Concluding thoughts"  Incentives should be used to accomplish community goals – not just win a deal"  The problem is we haven’t known which incentives actually help our communities"  Economic developers need better data and analytics 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 us"  Ellen Harpel President"  571/212.3397"

[email protected] "www.businessdevelopmentadvisors.com"[email protected]"http://www.smartincentives.org/" @SmartIncentives"

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Economy & Finance

Guidelines for effective & responsible business incentives