7/18/2011
1
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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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
35
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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
47
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