A new war between the states

Incentives are ammunition in battles for jobs and investment

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Print this page by Robert Burke

There were lots of smiles in Isle of Wight County in October 2011 when Vermont-based Green Mountain Coffee Roasters announced plans to invest $180 million in a new production facility near Windsor, creating up to 800 jobs in its first five years. That’s exactly the kind of deal that the county and the surrounding area needed, after losing 1,100 jobs with the closing of the International Paper mill near Franklin in 2010.

The Green Mountain project was won in part by a 10-year incentive package from Isle of Wight County, valued at $7.9 million along with $6.2 million in state incentives that include a $4 million grant from the Governor’s Opportunity Fund (GOF). “It was the toughest deal I’ve done by far,” says Lisa Perry, director of the department of economic development in Isle of Wight, which was competing against a site in Pennsylvania. “At the end of the day, Green Mountain ended up with, I think, the best site they could have had.”

The deal was a Virginia victory in a new war between the states, a constant battle for new business investment and jobs in which the ammunition is incentives in the form of grants, tax breaks and infrastructure improvements.

Intense competition is raising the ante for state and local governments. The skirmishing has sparked what one top Virginia official calls “a worthy dialogue” about the effectiveness of incentives in a number of recent studies and a series of stories in The New York Times. 

The Green Mountain deal ranked as the third biggest in the commonwealth in 2011 in terms of both investment and number of jobs. Gov. Bob McDonnell called the announcement “transformational” for Isle of Wight where the giant paper mill had been a bulwark for the regional economy for decades.

In its return on investment (ROI) analysis of the deal, the Virginia Economic Development Partnership estimates new state taxes generated by Green Mountain will allow the commonwealth to recoup its $6.24 million incentive package by the third year of the plant’s operation.

NewsIn a report issued in July as the county updated its strategic economic development plan, VEDP Senior Economist Brian Kroll said Isle of Wight should regain most of the jobs lost in recent layoffs and plant closings, including the paper mill. Besides the new Green Mountain facility, the county also got an economic boost from International Paper, which reopened part of its Isle of Wight facility to produce fluff fiber, employing about 220 people. 

Kroll predicts the two plants will create 1,038 direct jobs at full employment in 2017. The ripple effect of the new jobs would create another 825 non-company jobs in the county. Kroll says cumulative local tax revenue from the Green Mountain plant and the fluff mill will exceed the value of local incentives by 2015.

Nonetheless, two economic development hits don’t necessarily equal a home run in making up for the tax revenue lost in the paper mill’s closing. Green Mountain and the fluff mill are expected to generate $4.5 million in annual taxes for Isle of Wight in 2017. The combined effect of $7.6 million lost in the paper mill closing and $3.6 million lost in other recent business shutdowns and staff reductions still leaves the county $6.7 million behind in annual revenue.

“The gains created by Green Mountain and International Paper do not close the tax revenue gap created by the paper mill closing and other job losses, but they are an important step in the right direction,” Kroll’s report says. In fact, the county scored another win just five days after the report was issued. Using another part of the International Paper mill, Tak Investments Inc. will invest $60 million to recycle waste paper into tissue for napkins and towels. The project, expected to create 85 jobs, was secured with the help of a $200,000 GOF grant.

Many factors play a role
So, do incentives work? According to a 140-page study released in November by the state’s Joint Legislative Audit and Review Commission, the answer is “yes” but modestly so. In the past 10 years, according to JLARC, Virginia’s 18 economic development incentive programs have approved nearly 3,400 grants, with a total value of $718 million. Those grants created more than 70,000 jobs during that period.

Companies look at many factors in deciding on a new location or an expansion, and factors affecting long-term profit count the most. The checklist can include the condition of the local transportation system and the quality of the available labor pool, for example. Incentive grants “appear to have a positive but small impact on their decisions,” a draft copy of the study says, largely because they usually represented a fairly small percentage of project costs.

About 70 percent of the grants awarded in 2002-11 were for less than $100,000, JLARC notes. But those dollars had a bigger impact toward the end of the site selection process, especially if competition was down to just a few sites.

Martin Briley, president and CEO of the VEDP, points to its data on the state’s results between 2001 and 2011. Using a smaller number of programs than the JLARC study, VEDP reports that 266 projects received grants totaling $321.7 million producing gross revenues of $2.7 billion for a net of $2.4 billion for the state. During the next 10 years, VEDP expects to provide incentives worth $436 million to companies that already have made commitments to the state, creating another 61,000 jobs and $3.79 billion in revenue for the commonwealth’s general fund. These are grants and tax breaks that these companies will continue to get as long as their agreements with the state exist.

“This is economic development at its finest,” says Briley, who took over the VEDP in 2011 after 14 years as executive director of economic development in Prince William County. “This is how you make the economy turn.”

Briley says the state doesn’t offer incentives for every potential project. They are used “very sparingly” on only about 15 percent of the deals that VEDP works on. “You use it when you have to,” he says. “We’re following the ROI model. There’s absolutely a line you do not cross, and we’ve walked away from deals.

“We’re very sensitive to the discussion on incentives,” Briley says. “We understand that when people look at the capital outlay going to a company, when they feel that the money could be better spent in other places, we understand the argument.” But, he argues, the money diverted in the short term pays long-term dividends.

Not a big spender
One thing Virginia hasn’t done over the years is throw huge amounts of money at a company to win a big project. Virginia can give substantial sums to major projects — $25.7 million in incentives and grants to Orbital Sciences for its projects in Accomack County, for example. But the case that stands as almost legendary in economic development circles is the roughly $300 million in tax breaks and incentives that Alabama offered in 1993 to win a new Mercedes-Benz plant and its 1,500 jobs. The deal worked out to about $200,000 per job. “It floored everybody in economic development on the planet,” Briley says. Another more recent example is the $132 million deal that Tennessee and Memphis made in 2010 to get Electrolux to build a $190 million manufacturing plant there, bringing 1,200 jobs.

Kenneth Thomas, a professor at the University of Missouri-St. Louis who has written two books on the use of economic development incentives, says states and localities that become excited about snagging a business prospect are missing the bigger picture. In many areas, he says, formulas used for calculating the value of incentives leave out important details. “Even when you create a new facility, you wind up having a negative impact on existing facilities” such as competition for workers and disgruntlement over not receiving the same tax breaks, he says. “And states don’t take this into account, which is why they get into these bidding wars.”

Thomas favors a federal approach that he believes would level the playing field. Refereed by the federal government, wealthier states could offer few or no incentives, while poor states could offer more, within limits. “So Connecticut couldn’t give anything, and Alabama would have to give less,” he says. Of course, the current political climate makes such a scheme highly unlikely. So absent that, Thomas says, the next best thing is making sure that states do a good job of measuring their return on investment.

In that category, Virginia gets fairly good marks. A Pew Center on the States report released in April rated states on how well they track the effectiveness of incentives. Virginia had mixed results in meeting Pew’s criteria but still performed better than half the states. “This analysis shows that although some states are doing a better job than others, no state has a complete picture of what its state incentives are achieving,” the study’s authors wrote.

The JLARC study reached similar conclusions. In Virginia, “no comprehensive evaluation and reporting encompassing all programs is currently available to policymakers,” the study’s authors wrote. Their recommendations include a suggestion that the General Assembly require the eight state agencies handling Virginia’s 18 grant programs to evaluate their effectiveness and make annual reports to the General Assembly money committees.

Getting the money back
Besides making sure tax dollars are well spent, there is the matter of making sure money is recovered when companies don’t meet commitments in areas such as number of jobs created, wages paid or capital investment. Between 2002 and early December of last year, the state recovered $16.6 million in incentives given to 58 projects that didn’t meet their goals. “We think we do a very, very, good job of tracking performance” and getting the money back when companies don’t hold up their end, Briley says.

He adds there is “a worthy dialogue” under way about the value of economic incentives. The JLARC study, the Pew study and a recent The New York Times series of articles taking a hard look at government subsidies are parts of that conversation. The Times’ series provided a particularly notable spotlight, saying “the giveaways are adding up to a gigantic bill for taxpayers” and citing examples of multimillion-dollar incentive packages that didn’t pay off.

Still, one theme in the Times series and in the JLARC study, too, is how difficult it is to know exactly how effective incentives are. The Times says it analyzed 150,000 awards and still admits that “a full accounting … is not possible” because the governments handing them out either don’t track results or can’t say for certain what would have happened if they didn’t offer incentives.

Briley, though, says the VEDP does track results and contends the Times report gives an inaccurate picture. “They [are] alleging Virginia spends $1.29 billion” on incentive programs per year, he says. “We wish” that were so, he says. “The vast majority of that money comes from the sales tax breaks for manufacturing equipment.” What the Times calls an incentive, Briley says, “we call that a competitive business environment.”

And competition is getting fierce. New York in November announced a $50 million ad campaign for economic development, and Alabama voters in that month approved a constitutional amendment letting the state borrow up to $750 million. Alabama Gov. Robert Bentley says the money “will allow the state to provide financial incentives that will attract new companies while also helping existing companies expand and hire more Alabamians.”

Briley calls it “very, very aggressive in the marketplace. There are a lot of good products. Our sister states are all very aggressive, and all are proponents of deal closure. We are, too, and we believe our product is better.”

Tools in the kit
The state has a number of ways to sweeten the deal for companies looking to relocate or expand. The Governor’s Opportunity Fund (GOF) is probably the main tool; it can provide an upfront cash grant intended to help “close the deal,” especially when Virginia is fighting out-of-state competition. A grant usually is limited to $1.5 million but can be more if the governor wants to raise the ante. Eligibility guidelines require that a company generally make a $5 million capital investment, create at least 50 jobs and pay the prevailing average wage. Those levels are lower for companies locating to regions with high unemployment or high poverty levels. The General Assembly appropriated $11.8 million each year for the GOF in fiscal years 2013 and 2014.

Darryl Gosnell, CEO of the Hampton Roads Economic Development Alliance, says the GOF “is probably the most versatile tool that we have” when it comes to beating the competition. “Two things that are key are having access to funds and flexibility on how to use it so you can close deals,” he says. If anything, Gosnell wishes the fund was bigger. “Most states have some version of our Governor’s Opportunity Fund, but the level at which they fund it dwarfs our fund,” he says.

A key part of Virginia’s strategy is helping companies already here expand their presence. Robin Sullenberger, CEO of the Shenandoah Valley Partnership, says the valley has made big gains in recent years through expansions supported by the Virginia Jobs Investment Program (VJIP). Handled by the state’s Department of Business Assistance, VJIP helps with training, recruiting and retraining employees. Last August the program was used to help Tennessee-based McKee Foods spend $19 million in expanding its Stuarts Draft facility, adding 78 jobs. The company also got $200,000 from the GOF and was eligible for tax credits as well. Sullenberger says the VJIP “really is a deal-closer and a huge asset for us.”

Another source of cash to some parts of the state — Southwest and Southern Virginia — is the Virginia Tobacco Indemnification and Community Revitalization Commission. It handles much of the money the state receives under a 1998 agreement between 46 states and the four largest tobacco companies. The commission has given out 1,407 grants totaling $793 million.

Helen Cauthen, president of the Thomas Jefferson Partnership for Economic Development, knows firsthand the difference tobacco money can make. Her current job doesn’t involve any counties covered by the Tobacco Commission, but she used to be vice president of the Greensboro Economic Development Alliance in North Carolina. “When I was in North Carolina, I feel pretty confident that we lost two projects to Virginia in regions that had tobacco money,” she says, declining to identify the projects. “From my standpoint, Greensboro would have won” in a straight competition, but “there was just so much money on the table.”

Details of the deal
Tobacco money didn’t play a role in the Green Mountain deal, but local and state incentives did. In addition to the $4 million GOF grant, the $6.2 million incentive package offered by the commonwealth includes state benefits from the Virginia Enterprise Zone Program and funding and services to support employee recruitment and training through the Virginia Jobs Investment Program.

The terms of the local incentives are complex. Under the negotiated agreement, wages have to average $18.95 an hour, equal to $39,300 a year. The 800 jobs must be in place by the end of 2016. Green Mountain will get an annual cash grant equal to 70 percent of its real estate taxes and 45 percent of its machinery and tools taxes paid over a 10-year period. “They weren’t afraid to ask for everything,” Perry says.

Although the local incentives come from Isle of Wight, the deal is expected to affect employment throughout Southeast Virginia. Kroll’s report estimates 311 of the 1,038 jobs created by Green Mountain and the fluff mill by 2017 will be filled by Isle of Wight residents. The remaining 727 jobs are expected to be filled not only by Franklin, Suffolk and Southampton County residents (a big part of paper mill’s former labor pool) but also workers from Portsmouth, Chesapeake, Surry County, Sussex County and Newport News. 

Should local incentives be the responsibility of one locality if a project affects employment in a wide area? A small but growing number of Virginia localities are collaborating on revenue-sharing economic development projects. Perry says that wasn’t an option in this case.

“It is really difficult to get elected officials from multiple jurisdictions to come together for any one thing,” she says.

There’s wide agreement that offering good incentives helps a state or locality get into the game, but there’s no guarantee of winning. And the reality is, in a lot of deals, there is no choice but to ante up, says Cauthen. “When other states are aggressively offering incentives, if you don’t offer them, you’re just at a huge disadvantage,” she says.

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