Everybody’s doing it

Despite the risks and reservations, we have to do it, insist local officials: Use taxpayers’ dollars to lure new companies to town and hold onto those we have.

It’s the gamble of economic incentives, in which governing bodies offer businesses up-front cash grants, low-interest loans, infrastructure improvements and/or tax abatements — in the name of encouraging economic growth.

“Personally, giving away public money is not my first, second or third choice,” declares Asheville Mayor Leni Sitnick. She’d rather see public funds spent on meeting current infrastructure needs, improving affordable-housing opportunities and addressing other quality-of-life issues — such as building new ballfields.

But the city needs money. The property-tax rate hasn’t been raised in nearly 10 years and isn’t likely to be any time soon, either — despite growing infrastructure needs and funding cutbacks from the state and federal governments.

“If offering an incentive is an investment that increases … our … property-tax base, brings good, head-of-household jobs and draws other businesses [to town], then it’s probably a good thing,” Sitnick adds, after a thoughtful pause.

That’s a cautious endorsement.

The new mayor inherited an updated economic-incentives policy adopted by City Council last September (see sidebar). In theory, it’s a game plan for increasing tax revenues and bringing new jobs to town. But critics argue that it’s gambling with taxpayers’ money — however slight the risk.

Participating companies, they note, might go out of business, leave town or simply renege on promised jobs. What’s more, the city, state and county incentives all tend to target larger businesses, leaving smaller ones out of the running. Even with incentives, economic growth isn’t a sure bet — and if it does occur, growth brings its own problems: increased traffic, ever-rising infrastructure costs and environmental concerns.

Supporters counter that incentives do work. And without growth, one supporter remarked, cities and counties “wither and die.” Besides, in a day and time when companies seem to routinely consider downsizing or moving to Mexico, incentives are a competitive tool to keep them here.

But former Asheville Vice Mayor Chris Peterson called the incentives game “voodoo economics.” He was particularly concerned when City Council approved a $2.25 million loan for the development of Broadlands Technical Park in south Asheville last October.

Mayor Russ Martin and other then-Council members insisted that the deal was close to a sure bet: It’s backed by the Cecil family — whose members own Biltmore Farms, Inc., (the Broadlands developer) and Biltmore Estate.

But that assurance only raised another concern. “I’m all for public/private partnerships,” remarked Kenilworth resident Susan Andrews, “but I don’t want to use public funds to help a wealthy developer.” She urged Council to “leave the public money to the public.”

Do Asheville’s and Buncombe County’s new policies address these risks and concerns?

Investing in a little magic

“I believe in magic,” confides Asheville Council member Barbara Field, who voted for the Broadlands incentive last October and remembers Peterson’s remarks.

Despite personal reservations about using public money for economic development, Field argues that there’s that a good chance the city’s “investment” in incentives will pay off.

Besides, the city hedges its bets, she points out.

For starters, the Broadlands deal requires that Biltmore Farms agree to voluntary annexation into Asheville, adding as-yet-untallied thousands of dollars per year to the city’s tax revenues. Biltmore Farms also has to pay the city back, should development of the high-tech park fail to materialize.

Just a few months after the city backed the park’s development, Volvo Construction became the first tenant at Broadlands, which could help attract other companies.

“Incentives do work,” concludes Mac Williams, vice president of economic development at the Asheville Area Chamber of Commerce.

Not a sure thing

“Work? That depends on how you define ‘work,'” UNC-Charlotte transportation sciences Professor David Hartgen responds. From an economist’s big-picture perspective, attracting a company like Volvo to a new business park isn’t a gain, it’s a transfer, he emphasizes.

Volvo will simply relocate its offices from downtown Asheville’s BB&T building to Broadlands. That’s a local transfer — though it does, at least, keep Volvo in town, supporters of incentives stress.

Consider, too, Vertique’s relocation to Asheville last year from Kentucky. The warehouse-systems company built a new 27,000-square-foot facility in Avery’s Creek last year — with $38,200 worth of cash assistance from the Buncombe County commissioners. Vertique had been based in West Palm Beach, Fla., for nearly 20 years before relocating to Kentucky. But after four years there, company owners decided to head south to Buncombe last year, according to Treasurer Janet Stingel.

The county picked up 50 new jobs — with 25 more on the way — as well as close to $8,000 per year in new tax revenues, County Manager Wanda Greene estimates.

But Kentucky and Florida lost out.

“When you attract a business from far away, you gain locally, but … it’s a loss for the other area,” Hartgen observes.

Local benefits are one side of the coin, but there’s also an inherent risk to incentives, according to UNC-Charlotte Professor Al Stuart. It’s not uncommon for a company to renege on promised jobs, expansions or relocations — or simply go out of business before the municipality reaps any benefits, he points out.

In Buncombe County, for example, the commissioners granted more than $18,000 to Gerber in 1996. Asheville Council members awarded a similar amount. … One year later, the baby-food plant announced that it was closing its Asheville facilities. And, near Raleigh, food giant Nabisco got a hefty tax incentive from state legislators — but never built the promised new plant.

“I wish there were federal regulations to put an end to incentive programs, because they’re a form of corporate welfare. They may create jobs and build tax bases, but new and expanding businesses also add to infrastructure needs: schools, traffic, water and sewer,” Stuart argues.

That’s the point then-Asheville Council member Jim Skalski tried to make when he voted against the Broadlands package last October. “The [municipalities] that are going to get the better jobs are going to need two things: Infrastructure and a well-educated work force,” he argues, adding, “If you have those two things, you’ll attract jobs.”

Hartgen agrees. Municipalities, he insists, are better off improving schools to provide a more educated work force, meeting existing infrastructure needs, planning for future ones, and taking care of the environment. “Do that, and companies will be breaking your doors down to do business in your town,” Hartgen declares.

“It’s hard to disagree with that,” says former Asheville Council member Charles Worley now chairman of the Regional Water Authority of Asheville, Buncombe and Henderson. While serving on Council last fall, he voted to approve the Broadlands deal. “Why can’t we … offer incentives and improve infrastructure and meet educational needs?” Worley muses.

The winning ingredients

Worley may be on the right track. Both supporters and critics of incentives programs suggest that it seems to take the right combination of ingredients to grow a local economy.

Calling incentives “a necessary evil,” Williams recounts, “I can tell you from personal experience [recruiting new industries that] everybody asks you, up front: ‘Are there incentives?'” Companies looking to relocate or expand need “something that makes an impact,” something that helps defray the costs, Williams insists.

And incentives, he argues, are that something extra.

“All the things I’m saying don’t negate … quality-of-life issues. You’ve still got to have good roads, sewer and water systems, a clean community, low crime rates and good schools,” Williams adds. “I look at incentives as a competitive tool.”

But was the cash grant from the Buncombe County commissioners the primary factor in bringing Vertique to Avery’s Creek? Would Vertique have come without that incentive? Company Treasurer Stingel replies, “Probably, but it sure did help [in] building our new facility.”

Other factors were more critical in the company’s relocation, she explains: finding and keeping skilled workers, as well as saving money. Says Stingel, “Property taxes [in West Palm Beach] had become exorbitant. We needed more space, [but] we couldn’t afford to stay.” In their search for lower property taxes, company owners first tried Kentucky, but found a better deal in Buncombe.

With Vertique planning to expand, the County’s bet appears to have paid off — with a small company.

Ironically, however, Vertique’s initial $1.07 million investment wouldn’t meet the $1.5 million threshold now required to qualify under the County’s newly amended incentives policy.

“I’d like to see such thresholds removed. We have a lot of super-fine little companies in western North Carolina who just will never trigger existing incentive thresholds,” argues Ray Denny, who manages the state Department of Commerce’s Western Division. Denny points out that 95 percent of the manufacturing companies in North Carolina have fewer than 100 employees.

Driven to compete

Whatever the thresholds, incentives supporters insist that we have to offer grants, tax abatements and the like — because everybody else does.

“Just about every county in the state is doing it, or at least considering it,” argues Asheville City Attorney Bob Oast. He worked with the city’s development director, John Scaralia, to draft Asheville’s new incentives policy.

Oast reports that the most recent legal basis for incentives came in 1996, when the judge in the Maready vs. Forsyth County case concluded that governments can use tax monies for aiding and encouraging economic development.

Also that year, the state of Alabama offered German auto-maker Mercedes-Benz a $253 million incentives package. That was more than double the $109 million bid of North Carolina, another top contender. More importantly, Alabama’s high-stakes move reverberated all the way down to the local level, according to Greene.

“There wasn’t the need to compete before Mercedes … and BMW … came along,” she says. But those companies brought billions of dollars’ worth of economic impact to Alabama and South Carolina, respectively; Mercedes alone brought 1,500 jobs to Vance, Ala., a small town southwest of Birmingham. The lure of such large apparent economic gains — new property-tax revenues, new jobs, plus other indirect economic benefits — made local and state governments rethink incentives, Greene believes.

Sitnick offers a different take on the reasoning behind incentives: “We give [them] because we’re in fear of the competition.”

Before the Maready case made it legal and Alabama made it a high-stakes game, the Buncombe County commissioners spent less than $250,000 per year on incentives. In 1997, they spent twice that much.

Asheville City Council members have also increased their use of incentives in recent years, committing nearly $70,000 in 1996 and $128,250 in 1997. The city is still holding those monies, Scaralia stresses, pending completion of the participating companies’ expansions and job creation. The $2.25 million loan incentive to Broadlands committed by Council last October was part of a $27 million bond package that included funding for major repairs and renovation of several city-owned buildings.

But as states and cities scramble to outdo each other — or at least keep up — some politicians are crying uncle.

Ohio legislators tried to pass a bill calling for a moratorium on incentives; it failed. In North Carolina, Forsyth County commissioners passed a resolution urging other governing bodies to end incentives by 1999 — but didn’t kill their own program. In nearby Guilford County, however, commissioners actually cut incentives from their budget.

Theirs was a rare move.

“I don’t think anyone would mind if everyone else quit doing [incentives] — but they haven’t,” observes Deputy Secretary Rick Carlisle of the North Carolina Department of Commerce.

At the state level, that assessment spurred North Carolina leaders to expand existing incentives programs, Carlisle reports.

Trying to stay in the game, both Buncombe and Asheville leaders opted to expand their economic-incentives policies last fall — but structured them to make sure participating companies deliver the goods.

Cutting future risks

N.C. State economics Professor Mike Walden has this advice for municipal leaders who feel they must offer incentives, “Be cautious in using [them], and make sure businesses … follow through with what they promise. … Make a contract.”

Local governments should also consider the impact of newly recruited or expanded businesses on infrastructure costs, such as water and sewer lines, traffic and schools, Walden advises.

Professor Stuart adds that municipalities must also address other issues that companies have to contend with: labor markets, airport access, the availability of support businesses, and quality-of-life issues. “Asheville has one of the highest costs of living in the Southeast — higher than Charlotte. Tell [local officials] to do something about that,” he says.

And Denny urges, “Keep [businesses’] recurring costs as low as possible — such as water, sewer, electricity, gas, taxes and transportation — and provide a productive work force.”

Both the city’s and the county’s new plans address some of these issues, placing strict conditions on incentives packages: Participating companies will receive no public money until they have invested their own, paid their new taxes and created the promised jobs. Incentives packages must also go through the public-hearing process, giving taxpayers a chance to comment on how their money’s being spent, Scaralia emphasizes.

But whatever the city and county try to do to encourage economic development, they remain at the mercy of global forces and trends, Sitnick observes. “We could offer all the incentives in the world, but if a company wants to pare down or send its people elsewhere in order to save money, there’s nothing we can do.”