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Local governments get involved in big-stakes game to woo business

[caption id="attachment_11308" align="alignright" width="300" caption="Government leaders join officials from Johnson Controls at ground breaking for new Middletown facility."][/caption]

When Johnson Controls broke ground in Middletown Friday on a $75 million, 400,000 square foot facility to build and distribute lead-acid batteries, officials from the state and the town shared credit for the economic coup. The state offered more than $2 million in grants from its $61 million Strategic Fund to entice the company to expand its existing operations in the town, and Middletown chipped in a 10-year property tax break worth an estimated $600 thousand to $1.2 million, depending on how the new facility is assessed for tax purposes.

Middletown mayor Kenneth Branner says his town's commitment made sense, since it wouldn't receive the tax revenue if it lost the bid to host the new Johnson Controls facility.

"If they went somewhere else, we wouldn't get [the revenue] anyway," said Branner.  "So, by giving a 10 year tax abatement, we didn't give up anything.  In turn, we created new jobs.  We created the opportunity for economic development in the town."

For its investment, Middletown gets 67 new full-time jobs.

"These are manufacturing jobs.  It's not service jobs. It's core, first-class, middle-class jobs," said Branner.

It’s the state, however, that reaps the revenue windfall from personal and corporate taxes.

Local governments receive little direct financial benefit when new businesses locate in their jurisdiction. (The exception is Wilmington, which has a wage tax). Increased employment may strengthen the overall economy, improve community morale, and provide many spinoff benefits, but it’s not a guaranteed pot of gold for cash-starved localities.

Government Cooperation in Economic Development

Local government officials on landing new Johnson Controls facility.

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What’s in it for local governments?

County and city officials sampled throughout the state acknowledged that, beyond providing more jobs in their jurisdictions, it is difficult to assess the benefits of local economic incentive programs.

“If DEDO [the Delaware Economic Development Office, which administers the Strategic Fund] comes to us with a business that’s bringing 200 new employees, we’ll do what we can to help out,” says David Baker, Sussex County administrator. “But the reality is, that doesn’t have a major impact on revenue for county government.”

Nevertheless, some localities are looking to ramp up spending on economic development. New Castle County, struggling with a $10 million deficit, is considering the creation of its own economic development fund this year. (See related story.) Kent County has a little used half-million-dollar economic development fund, and Sussex County is considering a proposal to create its own program. A number of cities have, or are looking at, incentives to promote business growth.

Advocates of local economic development programs acknowledge the limited potential of their initiatives, saying that the state is better equipped to offer meaningful relocation deals to businesses. “Realistically, the state gets the most inquiries because they have the most to give,” says Dan Wolfensberger, CEO of the Kent Economic Partnership.

“I’ve got one guy working on economic development. The state has a whole team,” adds New Castle County Executive Paul Clark, whose 2012 budget address included a mention of his desire to create a new county development fund.

State-local coordination a mixed bag

Some observers suggest that local incentives could be more effective if used in tandem with DEDO’s popular Strategic Fund. Yet according to DEDO, of 76 loans and grants disbursed from the Strategic Fund since 2008, only three included added incentives from local governments.

One is the Johnson Controls expansion in Middletown. The other two involve Strategic Fund awards that brought Fisker Automotive to Delaware. Those deals included New Castle County property tax abatements to offset utility costs and facility improvements at the former General Motors Boxwood Road plant.

[caption id="attachment_11171" align="alignright" width="150" caption="A county-by-county breakdown of the 76 Strategic Fund awards granted since 2008. Click the image to enlarge."][/caption]

Advocates of local development spending note that when the state competes for new business with communities in states nearby and far away, it is important to have some sort of development incentives in place, because businesses expect it. County tax breaks “probably aren’t a deal breaker, but they’re part of the deal that’s put on the table because it’s in the offer everywhere else,” Clark said.

Local incentives don’t have to be cash-laden, added Melody Booker, DEDO business development leader in Sussex County. “It’s a complement, in addition to being able to expedite permitting, to create a positive atmosphere,” she said.

Cities or counties within the state rarely compete with one another for big out-of-town corporate relocation deals. As companies do their research to determine, for example, whether they need to be near a rail line or a port, or near a work force of lawyers or scientists or mechanics, the site-selection options tend to narrow.

“These things sort themselves out,” said Joe DiPinto, Wilmington’s economic development director.

Counties’ development efforts vary

Several jurisdictions have strategic funds that resemble the one DEDO manages.

Kent County has had its own Strategic Development Fund since 1999, but its use had lagged until Levy Court last year replenished it with a $500,000 appropriation, said Wolfensberger. The Kent Economic Partnership, the not-for-profit organization that oversees the fund, has a board of directors that includes representatives from the county, Dover, other municipal governments and the private sector.

The economy has been so slow that few businesses have come forward seeking incentives to locate in the county, but that may be changing as the recession eases, Wolfensberger said.

“The last two or three years were very difficult. In the last six months, we’ve had more activity than the two previous years combined,” he said.

One company has made Kent County one of three semifinalists in its upcoming site selection, he said. Also, interest in Garrison Farm, east of Route 1 in Dover, could trigger use of the county Strategic Development Fund to attract environmentally friendly manufacturing businesses, said Bill Neaton, Dover’s economic development director.

In recent years, Wolfensberger said, the largest grants from the Kent County fund have been $500 per new job created for three years.

In Sussex County, Georgetown and Seaford have incentive programs to attract businesses. The county administration recently developed a proposal, modeled in part on the Georgetown and Seaford programs, to present to the Sussex County Council. Its new-business incentives include a five-year phase-in of any increased property taxes, reduced fees for building permits, and expedited reviews of plans by county government, said Julie Wheatley, the county’s economic development director.

County Administrator Baker said the proposal drew a cool reception from County Council. County property taxes already are so low—among the lowest in the nation—and make up a small part of overall property tax bills that council members didn’t think the abatement incentive would be substantial enough to convince a business to relocate, he said.

In recent years, the county’s preferred means of encouraging businesses to locate there has been to issue industrial revenue bonds, a program used by state and local governments nationwide because of the federal tax benefits it provides. The county issues the bonds but the business is responsible for all the payments, Baker explained. Since the county’s name is on the bond, it qualifies for the lower tax-exempt interest rate, making payback easier for the business and bond sales more attractive to individuals looking for tax-free income.

New Castle County will have its own economic development fund this year if County Executive Clark has his way. In his budget address in March, Clark proposed using a portion of the county’s real estate transfer tax revenue to create the fund. He has not released any details of his proposal yet.

Clark acknowledges that with Delaware’s tax structure, it is difficult to gauge the value of economic development incentives for local governments because the most obvious return on government investment—revenue from increased personal income and business taxes—flows to the state.

New Castle County Council President Tom Kovach offers a modest solution to that problem: If a county offers incentives that reduce its income from taxes and fees in order to help state officials persuade a business to move to Delaware, then the state should funnel some of its increased revenues back to the county to replenish the county economic development fund.

“If the county takes a hit to its bottom line for an economic development deal, you have to show that the bottom line overall is a benefit for our state, our county and the municipalities,” he said.

Wilmington fund focuses on jobs

Wilmington has its own strategic fund, and like the DEDO program, it is keyed toward job creation and job growth, DiPinto said. The city uses the fund to provide loans or grants to incoming or expanding businesses, with the amounts based on the company’s hiring and payroll projections for five years, he said. The city usually breaks the award into two parts; the first disbursement is made within 90 days after the business signs a new lease, and the second two years later.

“The awards are a consideration for relocation costs or fit-out costs—any costs that the business needs to absorb when it makes a decision to come into the city,” DiPinto said.

Loans typically convert to grants if the business meets its employment targets. The city’s objective, DiPinto said, is to recover its outlay over two and a half to three years through increased wage tax revenue generated by the company’s new employees.

If the business is falling short of its employment projections, he said, “we don’t send a nasty note, we just reduce the amount of the second payment.”

The city uses a separate economic development initiative, a $15.5 million bond anticipation note called the “Upstairs Fund,” to finance an array of improvements intended to make Market Street more appealing and draw more permanent residents to the downtown area. The Queen Theater restoration project received a $3 million loan through the fund, DiPinto said. The remainder is available primarily to two developers, the Buccini/Pollin Group and Preservation Initiatives, which have purchased many downtown storefronts and are rehabilitating their second and third floors to return them to residential use.

“They’re rehabbing properties that haven’t been touched for 40, 50, 60 years,” DiPinto said. “It costs a lot more to redevelop them and bring them up to code.”

Dover plans new incentives

In both Wilmington and Dover, businesses can receive loans and grants to upgrade their storefronts through façade improvement programs, DiPinto and Neaton said.

Although Dover does not have a strategic fund, businesses moving into the city can apply for assistance through the Kent County fund, Neaton said.

The Dover city administration plans to offer what Neaton called a “big box ordinance” to City Council for consideration this month. The proposal calls for tax abatements to developers who take over large buildings that have been vacant for two years or more, he said. Ten percent of the regular property tax would be paid in the first year, 20 percent in the second year, and so forth, until the 10th year, when the full tax levy would be paid, he said.

The city also has the option of abating various permit and impact fees, like those usually charged when a business must install sinks or toilets, Neaton said.

Officials cite improved state-local cooperation

No matter what incentives they offer, city and county officials agree that they now have productive working relationships with DEDO, with business leads passing freely in both directions.

A roundtable group of county and city economic development directors, along with Chamber of Commerce officials, has recently begun quarterly meetings with DEDO leaders, DiPinto said.

“We’re on the same page, we’re swinging with the same bat,” DEDO’s Booker said, “so we will make a difference.”