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One of the most important tasks for the finance officer in economic development is to help create economic development policies. Much like the other types of financial policies a finance officer helps craft, economic development policies allow for a shared understanding of the parameters for decision making. For instance, policies help define the government's economic development goals and objectives, and the criteria for projects it will consider favorably These specifications then make it easier to evaluate actual proposals from land developers, corporations, or other private firms (which this article will collectively refer to as developers). Being able to discern which proposals most closely align with a government's interests becomes increasingly vital as more and more developers seek financial commitments from government, and fewer public funds are available to devote to such commitments.
A sound economic development policy addresses the following major elements:
* Goals and objectives for economic development
* Conditions under which public subsidization will be provided for private activities
* The financial incentives the government may use
* Performance standards for economic development projects
* How development proposals will be evaluated
* Systems for monitoring compliance with performance standards
This article describes each of these policy elements as well as considerations for putting the policies into practice.
GOALS AND OBJECTIVES
An economic development policy helps create a common understanding of the goals a government wants to achieve through economic development. Setting goals gives governments a yardstick that enables them to pursue the most appropriate economic development strategies and to decline less appropriate opportunities. For example, job creation is often a primary goal of local economic development programs. Timothy Bartik, senior economist for the W.E. Upjohn Institute for Employment Research, contends that job creation is most effective when economic development focuses on businesses that "export" outside of the local economy--their activities bring new money into the jurisdiction. Hence, a consensus to focus on job creation as an economic development goal might lead a city to develop policy instruments that encourage new and expanded export activities.
Survey research has shown that for cities with populations of more than 100,000, the two highest-priority objectives are to increase employment (48 percent rated this factor as the highest priority) and to improve the local tax base (18 percent). (1) An economic development policy can better define these kinds of broad priorities, making them a more meaningful basis for guiding decisions. To illustrate, given an objective of job creation, a policy should address the types of jobs the jurisdiction wants to create. This provides a basis for evaluating development proposals and determining which projects may be most deserving of public involvement. Some job-creation issues that a policy could address are:
* The level of education/qualifications required by the job. Higher levels of education will usually mean better levels of pay; however, local residents might not be able to fill jobs that require very high levels of education or qualifications. These types of jobs would lead to in-migration into the jurisdiction to fill the available positions. This situation might be acceptable if the jurisdiction is looking to increase population and the skill level of its workforce, but less so if its intent is to increase employment opportunities for current residents.
* The industry in which the jobs are created. If the region has a specialty in a particular industry or is following an economic development strategy oriented toward attracting a specific industry (i.e., a "cluster" strategy (2)), those types of jobs may be given a policy preference. Conversely, jobs in industries that are declining may be discouraged.
* The pay level of jobs. Higher-paying jobs are clearly more desirable to residents. Higher-paying jobs also have the added benefit of generating increased tax revenue. As an example, a policy might direct that 75 percent of new JODS associated with a proposal should pay a salary equal to or above the average wage level for the locality as a whole in order for the proposal to qualify for a certain incentive.
* The benefit level of jobs. Because health-care and retirement benefits are becoming less common features of employment arrangements, a government policy might address the creation of jobs with these benefits as a policy goal. Adding jobs that provide health-care and retirement benefits could be seen as reducing the burden of the employed on public health systems and a signal that business is committed to the long-term financial security of its workers.
The goals and objectives of an economic development program should be reflected in the government's policies on how economic development opportunities will be evaluated. For example, the City of Denton, Texas, maintains a tax abatement policy that describes the conditions under which a developer may be granted abatements. These conditions reflect the city's specific goals for economic development. Examples of conditions that qualify a project for tax abatements include:
* At least 25 percent of the new jobs created by the project will be filled by Denton residents.
* The project will provide knowledge-based jobs (at least 25 percent of jobs require a bachelor's degree at entry level).
* The project will create improvements to the Denton Central Business District.
CONDITIONS FOR SUBSIDIZATION
Many economic development incentives are characterized by public subsidization of private activities. Subsidies can be politically controversial because they raise questions about government's role in a free-market economy. They can also be ineffective, if they are used for development that would have occurred even in the absence of subsidies. A policy can define the conditions under which a subsidy will be offered. Bartik identifies certain situations under which a subsidization program may be appropriate: (3)
* The program affects an entire local industry in a way that enhances competition, and local consumers will likely share in some of the resulting benefits.
* Businesses that are deemed socially beneficial are affected. For instance, businesses located in economically disadvantaged areas might be designated as socially beneficial.
* The program increases general wage levels in the area by improving work productivity (e.g., a general skills training program).
* The program affects businesses that "export" outside the local economy, and the amount by which the program improves productivity is greater than the amount it costs.
FINANCIAL INCENTIVE TOOLS
Financial incentive tools carry inherent risk in their use. Innovations on these tools are regularly developed; innovations will often have the effect of making the tools more complex, thereby increasing risk. Therefore, a policy should define the tools the government is willing to consider and the extent to which it will use them. By establishing upfront the tools it will consider, government can direct economic development proposals and projects toward those tools in which it has developed a particular expertise and for which it best understands available risk-mitigation strategies.
By establishing the extent to which it will use incentive tools, government places a limit on the risk to which it will expose itself. For example, Denton's tax abatement policy establishes the type of tool the city will consider and the extent to which it will be used. The policy describes which types of projects are eligible for tax abatement, the maximum portion of taxes the city will consider abating, and the maximum time period for which the city will consider abatement (which is based on the value of the structures and personal property included in the project).
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PERFORMANCE CRITERIA
Given that local governments are becoming increasingly financially invested in economic development projects, many are seeking to safeguard their investment by requiring developments to meet certain standards of performance in order for private sector participants to receive and/or retain the public incentive. These standards may be expressed in terms of new jobs created, types of jobs created, new tax revenue generated, or other objectives the government wished to pursue when it entered into the agreement. Incentives may also be tied to such targets. For example, a private firm may receive a tax abatement only if it generates the requisite level of new tax revenue (e.g., sales, income, or lodging tax).
Often, economic development incentives must be offered up-front to be effective in influencing location decisions. (4) In these cases, a clawback provision could be used to make the recipient of an incentive return some portion of the incentive if certain performance targets are not met. The economic development policy should include a description of the government's commitment to performance standards and the clawback mechanisms it will use to help ensure results from local economic development projects and/or to limit losses if a project does not unfold as originally envisioned.
PROPOSAL EVALUATION
An economic development policy should set forth the procedure that will be used to evaluate proposals, both in terms of the impact of each individual project in isolation and the cumulative impact of the project on the community. Clear procedures and standards for evaluation will provide for consistency and transparency, which are crucial given the potential political volatility of economic development incentive programs. Elements of proposal evaluation policy/procedure nay include:
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