Local Governments Need Policies on How They Use Economic Development Incentives

The Government Finance Officers Association (GFOA) recommends local governments using or considering the use of economic development incentives create a policy on the appropriate parameters for use of such incentives and that the finance officer play an active role in the creation of the policy.

And I agree with GFOA’s recommendation. In fact, back in the 1990s I worked with GFOA and other groups to move in this direction. The municipalities, county government, the ports, and other public entities in Ashtabula County should develop and follow policies guiding how they invest the public’s money in economic development projects. We should be using incentives in a way that supports our economic development plans and goals. This is an ongoing issue we will be discussing here on the Development Forum.

According to GFOA, at a minimum, an economic development incentive policy should contain the following elements:

Goals and Objectives. Goals and measurable objectives create a context and accountability for the use of economic development incentives. Common goals used in economic development include: target economic sectors, business retention and/or recruitment, geographic focus, job creation, blight mitigation, improving economically distressed neighborhoods, and environmental improvements.

Financial Incentive Tools and Limitations. An economic development policy should define the types of incentives and the extent to which the jurisdiction will use them. For example, governments may choose to grant an entitlement to any firm that meets minimum qualifications, or may choose to provide incentives based on an assessment of individual firms. Governments may also establish maximum funding for a particular program.

Evaluation Process. A clearly defined evaluation process should be outlined in an economic development policy for the purposes of consistency and transparency. Evaluation activities and factors typically include:

  1. How a proposal measures up to established economic development criteria
  2. A cost/benefit analysis
  3. An evaluation of tax base impact, both in terms of increases in taxable value and, where a TIF is proposed, the impact on all overlapping taxing jurisdictions.
  4. Analysis of the impact of a project on existing businesses
  5. A determination of whether the project would have proceeded if the incentive is not provided.
  6. A jurisdiction may also wish to include in its policy a list of required documentation for the economic development application and the officials who are a part of the review team.

Performance Standards. An economic development policy should require that specific performance standards be established for each project receiving incentives. Not only will these performance standards help a jurisdiction gauge the effectiveness of its overall economic development program, but may also be used to recover promised financial benefits, through clawbacks or linkage agreements, of recipients failing to fulfill their commitments.

Monitoring and Compliance. A process should be established for regular monitoring of the economic development incentives granted and the performance of each project receiving incentives. The policy should also provide for organizational placement and staffing of this activity. The monitoring process should examine performance standards relative to each economic development agreement and determine whether the goals for each project are achieved within the defined timeframe. Ongoing monitoring of these projects should become part of an overall economic development program.

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