Economic development a big challenge now for cities, states

McClatchy NewspapersFebruary 17, 2011 

Workers lay pipe at a job site in Hagerstown, Maryland, a construction project made possible through bonds under the federal economic stimulus program.

KEVIN G. HALL / MCT

HAGERSTOWN, Md. — On a cold winter's afternoon, construction workers laid pipe for what'll be an eye clinic in this crossroads city nestled in a narrow stretch between West Virginia and Pennsylvania. For local economic development officials here, it was a rare win; for them, these are the toughest of tough times.

The project was possible thanks to special bonds issued as part of the broad federal effort to stimulate the moribund U.S. economy.

Across the nation, counties and cities are fighting to attract a small number of potential employers while U.S. corporations sit on more than $2 trillion in cash, awaiting clearer signs of economic normalcy before spending it to expand and hire.

"It is a challenge," acknowledged Timothy Troxell, the executive director of the Hagerstown-Washington County Economic Development Commission. "I don't have as many programs, but most of my competitors don't ... either."

States are slashing budgets, pulling back money from the very development agencies charged with enticing employers to locate or expand in their territory, thus creating jobs and generating tax revenue.

The rural commission in western Maryland tapped a federal program that allowed it to help private companies issue almost $20 million in bonds to expand or build. The bonds, administered by the state and given to counties, allowed for the construction of the eye center, a women's care center and the expansion of an airport facility for a growing defense contractor.

The companies' ability to tap the federal Recovery Zone Facility Bonds, said Troxell, "reduced their cost of borrowing by more than 1.5 percentage points. It allowed them to move forward on a project in a tough economic climate that they may not have been able to do if they did not get the rate."

Recovery zone bonds, whose return to investors who buy them is exempt from taxes, were part of the American Recovery and Reinvestment Act, shorthanded as the government's stimulus program, launched in 2009. About $15 billion in bond authority was divvied up among the states with an eye toward helping small communities hit hard by the economic downturn.

"I think that's one of the more underappreciated elements of the Recovery Act. It's taken states and companies a lot of time to figure out how to use it," said John Irons, the research and policy director at the Economic Policy Institute, a liberal research center in the nation's capital. "The advantage of it is it is relatively low cost for the federal government to issue these."

The initial response was lukewarm, Irons said, because companies weren't seeing any customers. Over the past year, the economy has improved, he said, and the "use of these bond financing vehicles will have more traction now."

The Obama administration's new budget includes a new effort to spur economic development in hard-hit areas. President Barack Obama proposes a new national competition to be designated a "Growth Zone," similar to the "Race to the Top" contest for federal education money.

Communities or regions would submit rigorous plans to compete for "Growth Zone" status. Twenty "Growth Zones" would be created, 14 urban and six rural. Winners would, over five years, divide $2.5 billion in tax credits for employers who hire and invest in these areas.

"There's no question that in a tough budgetary environment, this type of economic development work is more challenging. But I think you see in tough economic times, the demand for it goes up a lot," said Jason Furman, the deputy director of the president's National Economic Council.

The "Growth Zones" would replace congressionally designed Empowerment Zones, launched in 1994, which benefited communities as diverse as Miami, Fresno, Calif., and Columbia, S.C. These zones grew partly out of efforts by the late Jack Kemp, a former GOP congressman and secretary of the Department of Housing and Urban Development from 1989 to 1993.

While bond programs have proved helpful for Hagerstown and other communities, they're not a panacea for economic development. The issue for those in the trenches of development remains jobs, jobs, jobs. In many cases, lenders want to lend but few companies are borrowing.

"The biggest thing banks tell us is that businesses are hurting from demand. They're trying to make sales, and sales aren't prevalent. ... Businesses are still on the sidelines," said Mike Downing, the deputy director of the Missouri Department of Economic Development in Jefferson City.

For more than five decades, Missouri had been an important home to automobile manufacturing. But in the last decade, it lost Chrysler and Ford plants, and that meant not only a loss of direct employment but also related jobs at suppliers to those car-manufacturing facilities.

"That was a big loss for us, and we're trying to replace that. Our strategic focus is on life sciences; plant and animal health as a subsector of that," said Downing, who's been in economic development for 28 years. "We're trying to be more innovative than before."

Missouri has tapped a number of federal stimulus efforts, including the recovery zone bonds and Community Development Block Grants, to cope with the severe economic shock.

"I can't see how anybody would think that they're not helping us," Downing said of the federal programs.

Some analysts worry that the urgency to create jobs generates the risk of poor decisions. A recent research paper by John Silvia, the chief economist for Wells Fargo Securities in Charlotte, N.C., warned that there should be more attention to measurement of the costs and benefits of economic development. He pointed to $260 million in incentives that North Carolina offered in 2005 to land a Dell manufacturing plant in Winston-Salem; the plant closed four years later.

"Oftentimes we make estimates on what we think the impact is. Is there any postmortem on what actually did happen?" asked Silvia, adding that "most people would be very surprised that a lot of these projects are never accounted for after the fact. We never ask, 'Why isn't it making money? What happened to the original estimates?' "

Silvia recommends claw-back language in contracts with development consultants, holding them accountable if they miss the mark for jobs promised.

"If you don't generate the 2,000 jobs, do we get your consulting fee back?" Silvia asked. "There is a tremendous interest in just not looking at what is going on. We really need to go back and look at how we are spending the money."

The financial crisis taught economic-development officials hard lessons. Missouri is re-evaluating the incentives it offers companies, with an eye toward being more user-friendly. It's considering upfront funding for projects rather than stretching out money over a period of years.

"Small business would be better off," Downing said, noting that seed money and co-investment may prove more useful.

In Hagerstown, it's back to the drawing board after an effort to provide a $1,500-per-hire cash offer for companies to expand or locate locally generated little interest.

"It just wasn't utilized. It's been a learning experience," said Sarah Lankford, the commission's marketing specialist.

ON THE WEB

Obama's Growth Zones information sheet

Wells Fargo's State of Economic Development Incentives

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