Deals are really just transactions between two or more willing parties each trying to achieve their own economic ends. For the public sector those economic ends usually are focused on job creation, increased property values (in terms of adding tax revenue) and the resulting incomes for residents generated from the new or retained jobs. States, cities and villages have employed a variety of tools or resources with money in some form usually being at the center of what is brought to the table. A recent example which received statewide notoriety was a state agency offering future state income tax credits to a private company in exchange for retaining and creating new jobs. Aside from what some people feel was an offer made or negotiated outside the public’s purview, it appears to have been a measured plan to make an offer of future state revenues in exchange for new private jobs now. There would be no current assets offered so there’s nothing out of pocket on the front end. Usually, it’s the other way around; private companies receive benefits now in exchange for jobs and taxable developments to be delivered at some point in the future.
Cities employing loans and grants from federal and state agencies and local tax incremental financing assistance are the usual resources tendered to the private sector. In that environment money is granted or loaned to a private business entity but how much is enough money to make a deal happen without leaving too much money on the table?
Good question but no single answer. One problem often befalling many cities is their tendency to compete against one another making an offer richer to entice a new development. Some companies play one community against another or in the worst case threaten to leave a community which is a dastardly form of hostage-taking. (Ask oneself is that the kind of partner you want your community to do business with?) There usually are few exact formulas for how much money to offer. One federal agency may regulate that no more than $10,000 per job is acceptable and another may expand the offer to $20,000 per job or more in extraordinary circumstances. Due diligence is key to making offers of public funds. How well do you know your private partner? What kinds of jobs are being created? Are the proposed new jobs at the entry-level of the workforce or positions requiring formal education and high-end technical skills and in what sector will those jobs be created? What wages will be paid? Usually the higher the wage the greater the multiplier effect of money swirling throughout the local economy.
Two basic gauges of public deals are 1) the ratio of public dollars to private dollars committed and 2) the payback period. Obviously, one public dollar for every 15 dollars of private investment is a far better ratio than a 1:5 ratio. But there’s no exact acceptable ratio because it depends in part on where communities are on the development spectrum. Cities which are desirable places to live and have a complex economy negotiate from a different position than communities which are just beginning a development program and are struggling to spark economic activity. In the case of the latter, an acceptable ratio may be one public dollar for three private dollars. Obviously, the more public funds needed to invest in a deal will have an effect on how long it takes for those public dollars to be recovered. If a community offers $1M toward a manufacturing project and private investment is planned to create a facility with a property tax liability of $50,000 per year then the payback period is 20 years (not considering index adjustments or the value of any new jobs created). It’s also important to judge the end-use of the public and private funds. Is the investment for an industrial building or is it for equipment? Equipment alone doesn’t contribute to local tax revenues. Going just a bit deeper then, is a public contribution of $1M solely for equipment a good investment? It may be but the question then becomes what is the public benefit? With no new private property tax revenues and no new jobs, what is the purpose of the public contribution?
One customary measure might be knowing more about the entire proposal. How much cash is the private company spending and how much is being borrowed? Commercial lenders are invaluable as partners in evaluating deals. The question becomes will a bank make the loan? Another seriously important question: does the business need the assistance? Just because a company requests financial help doesn’t mean they need it. Have the private financials been shared? Don’t be afraid to ask to see numbers on the private side. If private companies worry about sharing their financial information with a public entity for fear of public disclosure then arrange for that data to be forwarded to an agreed-upon legal and accounting expert to review the information and make a judgment as to previous company performance and current financial capacity.
There are numerous considerations to be taken into account when public corporations make contributions to private entities. Making a good public economic development investment requires one set of factors under which projects and deals are initially evaluated but the real test comes at the end of the deal when obligations have been met and required goals and outcomes are achieved…or not!
