compliance evaluation and sound decisions for smart incentives
DESCRIPTION
Compliance, Evaluation & Sound Decisions for Smart Incentives. CDFA//BNY Mellon Development Finance Webcast Series, March 2014. Ellen Harpel, Founder, Smart Incentives.TRANSCRIPT
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
• [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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