Is All Fair in Economic Development?

September 10, 2018

 

Some truisms to ponder:

 

A)  It is so easy to judge the actions of others, more so than ourselves.

 

B)  We live in a world of gradations of gray. However, we can make black and white determinations. (That’s a duck. That’s an elephant. That’s a  Ford F-150 pickup truck.)

 

C)  Things can get complicated, which means that even the best minds can disagree. (An example would be the Supreme Court.)

 

Most of us would probably agree that companies, like people, can move wherever they like within the constraints of the law. People cannot build homes in national parks. Companies cannot build manufacturing plants in residential neighborhoods. (There are these little things called zoning laws.)

 

Freedom of Choice and Incentives

 

But generally, businesses have the freedom to choose where they will set stakes. Toyota is currently building a new assembly plant in Huntsville, Ala.  Last year, the company opened its new North American corporate headquarters in Plano, Texas, having shifted it from Torrance, California.

 

Certainly, local and state officials in California were none too pleased by Toyota’s decision, whereas their counterparts in Texas were very pleased. Huntsville and Alabama were also elated at winning the assembly plant project, which began as a publicly-announced, multi-state search.

 

Mind you, the projects were very different. Huntsville was another new satellite operation, which happens with some frequency with larger companies, whereas Plano represented a wholesale move of a corporate headquarters, which is relatively rare.

 

In both cases, government incentives played a role. Alabama and Huntsville committed an $800 million incentive package to Toyota/Mazda for the future assembly plant. (North Carolina had offered twice that amount.) Texas and Plano committed a $50 million in incentives for the corporate headquarters move.

 

Gradations of Gray

 

Not surprisingly, a government largesse of this magnitude directed at private companies will create controversy. Opponents, both on the right and the left, believe that government has no place in subsidizing such a move. In their minds, incentives are tantamount to corporate welfare. This is a very black and white issue for them.

 

I see gradations of gray. There are times when I believe incentives are wholly appropriate. Conversely, there are times when I believe incentives should not be offered, or at the very least, scaled to a minimum. In short, I look at incentives on a case-by-case basis with true economic impact and return on investment as my guide sticks.

 

Most economic developers probably take this position. For the uninitiated, economic developers are those poor souls who are unreasonably tasked with growing their local economies in terms of jobs and investment, which usually translates into aiding and abetting the private sector. In some places, this is an impossible job. In all places, it is not easy.

 

Practice with Responsibility

 

About a year ago, I wrote a blog called, “You Gotta Have Somethin': In Defense of Incentives,” in which I said that companies should never let incentives become the driver of a deal, but that solid business reasons should prevail whenever making a move.

 

I also wrote that “greasing the skids”—attempting to defray some upfront costs – is a legitimate practice but comes with great responsibility. Here’s what I said in the Oct. 19, 2017 blog:

 

“Economic developers and local officials must know what the impact or return on investment will be to the local economy in terms of jobs created, (both direct and indirect) annual payroll, taxes paid, and the general economic ripple effects. Only then, when armed with the numbers, should they be offering public dollars as an inducement.

 

“By the same token, companies seeking incentives should know the numbers (and be willing to divulge them publicly) and only accept incentives if they are certain that they can do what they say they will do in terms of capital investment and job creation.”

 

Recently, two business news stories in Dallas, where I live, got me thinking, which admittedly can be a dangerous thing. Again, I caution you that it is easy to judge (wrongly) and things can get complicated.

 

The Nokia, Irving and Dallas Story

 

The headline from the July 11 story in The Dallas Morning News pretty much tells the story: Dallas offers Nokia $4.8 million to move headquarters 3 miles from Las Colinas, jobs from Plano

 

Las Colinas is an upscale, developed area of Irving, which like Plano, is a suburb city that shares borders with Dallas.

 

As you read in the story, clearly this is a consolidation move for Nokia, and it probably makes a great deal of sense. Nokia’s move into the sprawling Cypress Waters development is one of the largest office leases in North Texas so far this year, according to the newspaper.

 

Nokia will be largest employer in the 1,000-acre, mixed-use complex, but here’s the deal – we're talking about the same jobs, the same people who were employed in Irving and Plano.

 

My question is simple. How is moving jobs from one location to another within a confined metro area creating new economic activity? If the Nokia deal with the nearly $5 million in incentives from Dallas does that, I will shut my trap and stand corrected. Mea culpa.

 

But if this really comes down to being a real estate transaction, with little or no new true job creation, which was the opinion of a fellow Dallas-based site consultant when we discussed it, then you have to wonder. Hell, I wonder.

 

The 3 Nations, Farmers Branch and Carrollton Story

 

The second story, also published in the Dallas Morning News this past week, is one that I knew something about before it came out. 3 Nations Brewing, a craft brewer less than a mile from my home and where I have been known to knock back a few on occasion, will eventually be moving from Farmers Branch to Carrollton.

 

Both towns border each other and are suburb communities to Dallas. The principal owner told me that he was looking for something bigger and better, which is totally understandable. Well before he told me that, he was having conversations with Farmers Branch, where the brewery has been operating for the past three years, and with neighboring Carrollton.

 

Both cities responded. Farmers Branch offered to move 3 Nations into a planned future mixed-use development, whereas Carrollton offered $1 million in mostly property improvement grants to move into a 60-year-old grain silo just off city’s historic downtown square and two miles away from its current location. (The Farmers Branch package was valued at about $300,000.)

 

Keep in mind that 3 Nations is a small operation with five full-time jobs and five part-time jobs. That compares to 2,300 jobs at Nokia.

 

My friend, John Land, the deputy city manager in Farmers Branch and ever the statesman, took the high road when contacted both by the 3 Nations owner and by the newspaper. He said there were no hard feelings, that he wished 3 Nations all the best with their move and future.

 

He did tell the newspaper, however, that Farmers Branch typically will not offer economic incentives to companies relocating from within the region. I found that interesting.

 

Applying Some Animal Tests

 

Economic developers will note that I have not, until now, used the “P” word. P stands for poaching, which may evoke a strong reaction but curiously is seldom discussed among economic developers. Apparently, one community’s poaching is another’s win. I guess it is a matter of whose ox is being gored.

 

Keeping with our animal theme, the duck test – if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck – is useful in identifying poaching. There’s also the elephant test. Like an elephant, poaching is a bit hard to describe, but instantly recognizable when spotted.

 

Animals aside, one has to consider the intent and purpose of economic development. What is it supposed to accomplish? Where is the economic development value of providing incentives to a company that is literally moving down the street a few miles?

 

Should All Be Fair in Economic Development?

 

My intention is not to cast stones, but merely to get people to think. Certainly, I find no fault in Nokia or 3 Nations for wanting better and more suitable buildings from which to operate, wherever that might be. Nor do I have a problem with them accepting offered incentives from a neighboring jurisdiction.

 

What I have difficulty reconciling is why these incentives were offered in the first place. I have these nagging thoughts of return on investment and the proper use of financial inducements, especially so when it comes to existing companies within the same metro area. This is, after all, taxpayer money.

 

Some people might consider this altogether proper and good economic development, that all is fair in love and war. But I have to wonder. I hope others will wonder, too.

 

I’ll see you down the road.

 

 

 

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