Koelemay's Kosmos

Doug Koelemay

ROI

Business incentives have an excellent return on investment in job creation and tax revenues. So why would Virginia reduce its investments at a time there are bargains to be had?

If states are experiencing budget crises across the United States and having to make tough spending decisions, how is Idaho expanding broadband connectivity for 150,000 people, and how is South Carolina ponying up $17 million in incentives to lure a 14-employee biotech firm away from North Carolina? Despite short-term budget problems, leaders in these states and others are able to keep their eye on the primary reason to make any investment – ROI, the return on investment.

For the record, Idaho's legislature in 2001 passed a three percent tax credit for companies investing in broadband. A dozen independent telecommunications companies formed a consortium to tackle the project. The U.S. Department of Agriculture chipped in from its loan and loan-guaranty programs for rural broadband development. And voila, a $36 million network of interconnected fiber-optic cable rings totaling over 1,400 miles will provide better and faster Internet connections for 80 percent of the population in southern Idaho by the end of 2002. No small potatoes.

For South Carolina, the chance to nab Pilot Therapeutics and its potentially lucrative over-the-counter asthma medication was a no-brainer. In return for free land, a $4 million equity investment, $3 million in grants and $10 million in performance-based job tax and development credits, South Carolina could get 180 new biotech jobs, a commercial success and a magnet for other biotech companies in Charleston. Despite offering an $8 million package, North Carolina couldn't tap the new $540 million Economic Stimulus and Job Creation Act grants its legislature gave it earlier this year. The legislature designated those funds for new businesses only, an Achilles tarheel for existing enterprises ready to expand.

Like businesses, states invest in economic development activities for a variety of reasons. States want jobs, corporate headquarters, highly paid corporate executives, big name companies and cutting edge companies. States want business partners for their research universities. States are in competition with other states. Governor Mark R. Warner has cited each of these reasons at one time or another in announcing more than 22,000 new jobs and $2.32 billion in new investment in Virginia thus far in 2002, including 1,388 jobs in six different announcements in Southwest and Southside Virginia in one whirlwind 24-hour period last week.

Only occasionally, however, do states measure whether their economic development activities actually pay off in the medium- or longer-term. Are jobs still there? Are companies still growing? Was the commercial potential of a new product realized? Have those corporate executives made a difference in their communities? Have the research universities built new partnerships? A review by the Joint Legislative Audit and Review Commission (JLARC) of the Virginia General Assembly released November 12 suggests there is an ROI.

JLARC does not, of course, tell the General Assembly what to do. Its estimates earlier this year that the Commonweath underfunds K-12 public education by about a billion dollars a year has not sparked any remedial action. But JLARC did recommend in its latest report that legislators consider the likely benefits of incentive grant programs, not just their cost, in budget deliberations. "In particular," the study suggests, "because the benefits appear to outweigh the costs in two to three years, the General Assembly may wish to continue funding the Governor's Opportunity Fund and the Virginia Department of Business Assistance's Workforce Services program."

The recommendation flowed from a JLARC study of 89 companies that received state business incentive grants in 1997 and 1998, primarily from the Governor's Opportunity Fund and Workforce Services. Those two years cover the last year of the Allen administration and the first year of the Gilmore administration. The results, as venture capitalists and stock market investors have found out, were mixed, but on the whole, positive.

Of the 89 projects announced in those two years, 17 fell through, 44 did not meet short-term job targets and 28 met or exceeded the number of jobs anticipated. Several produced two, three or four times the expected number of jobs. In the long term, about a quarter of the projects met job creation objectives, about half increased the number of jobs expected and about a quarter did not meet objectives.

The study did not attempt to quantify all economic benefits from these projects, such as sales tax revenues, corporate income tax revenues or local construction, materials and equipment sales from facility investments. It focused, instead, on readily measurable income tax revenues for the Commonwealth. Returns from income tax revenues alone, JLARC concluded, means the state recovered about $31 million in costs in a short amount of time and will continue to benefit from these projects for years to come.

A second recommendation from JLARC -- to screen applicants "for undesirable impacts they may have on Virginians before awarding them incentives to locate in Virginia" -- seems a little more arcane. Businesses do bring risks, as the study points out, whether from telemarketers being sued or manufacturers polluting.

The bottom line from the General Assembly's own study group, again, is that returns on investments are real and that failing to make investments even in a particularly difficult budget year, will have huge costs. What would be the consequences of zeroing out the Governor's Opportunity Fund and Workforce Services?  

• "Fewer new jobs would likely be created or transferred to Virginia.

• "In two or three years, State's resulting loss in individual income tax revenues would likely be more than amount saved by cutting these programs.

• "There would likely be less sales tax and corporate income tax revenue, and less indirectly economic activity."

Add to those programs the abandonment of other economic development investments, such as Virginia's Center for Innovative Technology, focused on increasing federal R&D and helping technology companies grow, or deep reductions in K-12 education, and one can see why there is real fear that the Commonwealth could be sacrificing a decade of economic potential with one year of frenzied budget-cutting.

Returns follow investments. The real question before Virginia's leaders, who are charged with the stewardship of the Commonwealth, is not whether to invest, but how. JLARC has the numbers. So do Idaho, South Carolina and every other state.

-- November 18, 2002

Bring Home the Bacon