7/18/2011

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Pushing Incentives Boundaries:

A Framework for Analysis

NCGFOA Conference

July 2011

Tyler Mulligan

Purpose

• Incentives authority has limits

• Businesses demanding more while promising less

• Training exists for economic developers and local government attorneys

• Finance officers at the table for incentives, too

2

Businesses seek incentives for

no jobs, few jobs, retail jobs?

Some Legal History:

Authority for Cash Incentives

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2

Rewind to early 1990s In 1995, could NC local governments pay

incentives to attract this facility?

Yes

No

Not s

ure

0% 0%0%

3

1. Yes

2. No

3. Not sure

Local Development ActG.S. 158-7.1

“Each county and city … is authorized to make appropriations for the purposes of

aiding and encouraging the location of manufacturing enterprises … and locating

industrial and commercial plants … or other purposes which, in the discretion of the

governing body … will increase the population, taxable property, agricultural

industries and business prospects of any city or county.”

Public Purpose – NC Constitution

• N.C. Constitution, Article V, Section 2.

– (1) Power of taxation. The power of taxation shall be exercised … for public purposes only….

– (7) Contracts. The … State, any county, city or town, and any other public corporation may contract with and appropriate money to any person, association, or corporation for the accomplishment of public purposes only.”

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3

NC Supreme Court Gets Last Word

on Public Purpose

• 3 incentive cases

– Maready v. City of Winston-Salem (1996)

– Blinson v. State (2007) [Dell]

– Haugh v. County of Durham (2010) [Nitronex]

• 3 caveats

Caveat #1: Incentives Must

Achieve Net Public Benefit

• Incentives serve public purpose when they

ensure a “net public benefit” through:

1. “continuing employment opportunities”

2. “better paying and more highly skilled jobs”

3. “enlarging the tax base”

4. “diversifying the economy”

• Maready dissent: “jobs and tax base” (9x)

Caveat #1 (cont)

General Assembly Piles On:

Statute Requires Jobs and Tax Base

• 2007 Amendment adds G.S. 158-7.1(h)

• Clawback (taking incentive back) required if:

–Fewer jobs

–Lower capital investment

–Failure to maintain operations

Caveat #2: Must Follow

Strict Procedural Requirements

• G.S. 158-7.1 contains “strict procedural

requirements” to prevent abuse.

• Notice and hearing requirements.

• Must create “substantial number of jobs” when:

– Convey real property for less than fair market value

– Pay cash to reimburse company for real property

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Caveat #3Interstate Competition Required?

• “… we are competing with inducements … in other jurisdictions….” Maready.

• “… economic development … might otherwise be lost to other states….” Maready.

• “…the Supreme Court held in Maready that economic incentives to recruit business to North Carolinainvolve a proper public purpose.” Blinson.

• “…the case sub judice is not solely one of intrastate competition between Wake County and Durham.” Haugh. [subtext: but what if it had been?]

Summary: Five Factors

1. Jobs for displaced workers

2. Better paying jobs

3. Enlarging the tax base

4. Diversifying the economy

5. Interstate competition

The unknown is how factors are weighted

– Job creation is present in every court case

Manufacturing FacilityIncentive negotiation: Trouble with any

of the following?

Jobs

for d

ispla

ced w

orkers

Bett

er pay

ing

jobs

Enla

rgin

g ta

x base

Contin

uous opera

tions

Inte

rsta

te C

ompetit

ion

None

of the

above

0 0 0000

3

1. Jobs for displaced workers

2. Better paying jobs

3. Enlarging tax base

4. Continuous operations

5. Interstate Competition

6. None of the above

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Factor Checklist:

Manufacturing

Jobs for displaced workers

Better paying jobs

Enlarging the tax base

Diversifying the economy

Interstate Competition

√√√√

√√√√

√√√√

√√√√

√√√√

And the case law ends there….

• All court cases evaluating incentives have involved:

– Job creation

– Increased tax base*

– Interstate competition

• It is hard to say how a court would handle a different set of facts.

Small Business Incentive

• Chamber of Commerce proposes:

– Cash incentive to everysmall business owner who increases taxable assessed value of commercial property.

– Incentive based on some percentage of the additional tax revenue generated by real property improvements.

Chamber’s incentive policy: Trouble with

any of the following?

Jobs

for d

ispla

ced w

orkers

Bett

er pay

ing

jobs

Enla

rgin

g ta

x base

Contin

uous opera

tions

Inte

rsta

te C

ompetit

ion

None

of the

above

0 0 0000

3

1. Jobs for displaced workers

2. Better paying jobs

3. Enlarging tax base

4. Continuous operations

5. Interstate Competition

6. None of the above

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Factor Checklist:

Small Business

Jobs for displaced workers

Better paying jobs

Enlarging the tax base

Diversifying the economy

Interstate Competition

?

?

?

√√√√

Speculative Office Building

• Developer building commercial space (making capital investment)

• No tenants lined up; speculative

• Requests cash incentive from local government

Incentive negotiation: Trouble with any

of the following?

Jobs

for d

ispla

ced w

orkers

Bett

er pay

ing

jobs

Enla

rgin

g ta

x base

Contin

uous opera

tions

Inte

rsta

te C

ompetit

ion

None

of the

above

0 0 0000

3

1. Jobs for displaced workers

2. Better paying jobs

3. Enlarging tax base

4. Continuous operations

5. Interstate Competition

6. None of the above

Factor Checklist:

Spec Building

Jobs for displaced workers

Better paying jobs

Enlarging the tax base

Diversifying the economy

Interstate Competition

√√√√

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Which jobs can residential

developer promise?

Jobs

for d

ispla

ced w

orkers

Bet

ter p

ayin

g jo

bs

Both

of t

he above

No jo

bs

0 000

1. Jobs for displaced

workers

2. Better paying jobs

3. Both of the above

4. No jobs

Other Common

Incentive Questions

Acquire property by eminent

domain?

30

Yes N

o

0%0%

1. Yes

2. No

5

Require company to hire local

residents: permissible?

31

Yes

No

0%0%

1. Yes

2. No

5

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Incentives to prevent company

from leaving: permissible?

32

Yes

No

0%0%

1. Yes

2. No

5

Existing company wants same

incentives as new company:

permissible?

33

Yes

No

0%0%

1. Yes

2. No

5

When can grants be offered to

private companies without

requiring jobs?

Community Development and

Redevelopment

CED Blog: http://sogweb.sog.unc.edu/blogs/ced/?p=588

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7/18/2011

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Development Finance Tools:

Numerous, Overlapping, Complex• Tax Credit financing

– New Markets

– Historic (state and federal)

– Mill Credit

• TIF and Synthetic TIF

• Business Improvement Districts

• Special Assessment Districts

• Redevelopment Areas

• Community Development Programs

• Economic Development Incentives

• RLFs

• Loan Loss Reserve Programs

PPP increasingly complex—

School of Govt response:• Courses

– Development Finance Toolbox (Sep. 20-21)

• Real estate pro forma analysis—better understand private developer’s perspective

• Overview of federal, state, and local finance tools

• Elected officials, managers, economic developers, finance officers

– Finance and CED Curricula (see SOG website)

• Advisory capacity

– Development Finance Initiative

Questions and Comments

Tyler Mulligan

UNC School of Government

CB#3330, Knapp-Sanders Bldg.

Chapel Hill, NC 27599-3330

919-962-0987

mulligan@sog.unc.edu

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