COVER STORY: Communities differ in use of economic development incentives to attract companies

When Ashtabula, OH-based Molded Fiber Glass Companies was searching for a location for a wind turbine blade manufacturing plant, Aberdeen, SD, officials offered to build a new factory and lease it back to the company.

The proactive approach by the Aberdeen Development Corporation and the state helped Aberdeen beat out communities in Minnesota, Iowa and Kansas for the plant that began production last year. The facility currently employs about 300 with as many as 100 additional employees expected to be added in the next year.

“The biggest thing for us is the jobs,” says Jim Barringer, executive vice president of the Aberdeen Development Corporation. “Our return on investment is the jobs. This will have a major economic impact on the community.”

Molded Fiber Glass spokesperson Carl LaFrance says the incentive package was not the deciding factor, but played a role in the decision along with Aberdeen’s ideal location, strong labor force and available infrastructure.

Nationwide the use of incentives is intensifying, sweetening the pot for companies looking for prospective sites to house operations ranging from manufacturing to customer service and back office support. Many communities and states have upped the ante to win the economic development sweepstakes at all costs. While most cities in the region have been fairly conservative, some mostly smaller communities have been more aggressive in attempts to lure factories, jobs and increased tax revenue.

Some communities have benefitted from offering companies financial incentives. But the slippery slope of economic development subsidies has backfired on a number of communities, leaving them holding the bag when call centers and similar customer service-related businesses leave town after the tax breaks and inducements expire.

“It’s a game that is being played all across the nation,” says Ben Snow, the new president of the Rapid City Economic Development Partnership, who previously held a similar position in a Denver suburb. “Some companies are on an incentives shopping trip. They are looking for the best offer. The community just needs to be careful that the incentive being offered is used in a wise manner for a company that will become a long-term member of the business community. You have to get a comfort level that the company isn’t just going to bail out when the incentives go away.”

Economic development incentives ranging from property tax exemptions or reductions, tax increment financing and loan pool programs have become standard economic development tools in the competitive game of attracting new primary-sector employers.

“Incentives will always play some role in the site selection process,” says Brian Walters, president of the Greater Fargo Moorhead Economic Development Corporation. “Almost every city in the country provides some type of tax incentives to companies. Tax incentives are preferred because they do not require a cash outlay and carry little or no risk. Overall, incentive decisions should be justified with tools such as cost benefit analysis to protect the public’s interest.”

HOW GRAFTON, ND, ATTRACTED MARVIN WINDOWS PLANT

Grafton, ND, with assistance from Walsh County and neighboring Park River, ND, offered Warroad, MN-based Marvin Windows and Doors a package that included the use of a city-owned building until construction of the company’s new window manufacturing facility was completed in addition to infrastructure help like taking care of the permitting process and locating water, sewer and utilities within the company’s property line. The offer also included phased tax incentives on the land, interest buy downs on a state-sponsored PACE loan from the Bank of North Dakota, a per-job annual payout to the company and employee training assistance through Job Service North Dakota.

Mylo Einarson, Grafton’s economic development director and city administrator, estimated the value of the incentives the company has received since the Marvin Windows and Doors plant opened in 1998 at between $3 million and $4 million. The incentives were scheduled to be phased out within 20 years.

Einarson admits the incentives were only one factor in the company’s decision along with the ability to get up and running quickly, location and labor force, among other things. “The incentive package was just something that tipped the boat and made it easier for them to locate here,” Einarson says.

The company initially built an $8 million facility and recently completed an expansion estimated at upwards of $10 million that has doubled the plant’s size to 456,000 square feet. The plant now employs about 500 and Einarson says there is hope in Grafton that staffing may increase further when the construction industry recovers and orders rebound. Marvin has also set up a fund to offer monetary incentives to residents who build new houses in Grafton.

“The plant has had a big impact on the community,” Einarson says. “It has stabilized the local economy and added more jobs to the community. The workers and the company spend money here in town.”

In addition to letting the company pay for the costs of building its own factory, the community also protected itself by tying annual bonuses doled out to the company to the plant’s year-end employment.

“The building, equipment, parking lot and infrastructure were all paid for by Marvin Windows,” Einarson says. “The company is not going to come here and spend $8 million building a factory and then leave the next year. The way we structured the incentives requires them to be here employing people to get them.”

SUCCESS STORIES

The National City, CA-based Knight & Carver Wind Group opened a wind turbine blade manufacturing facility in Howard, SD, in 2007 after receiving property tax incentives, revolving loan fund help, access to micro loans and short-term electric bill discounts. The Rural Learning Center, formerly known as Miner County Community Revitalization, also built the plant and signed Knight & Carver to a five-year lease.

Knight & Carver’s employment has grown to 60 workers in Howard and the company is considering an expansion that could more than double the size of its 26,000-square-foot facility by next spring.

“Small rural communities have quite a bit of land,” says Randy Parry, president of the Howard-based nonprofit Rural Learning Center, which helps rural communities with economic development, housing, leadership and collaboration. “We have a lot of land and we are fortunate to have an industrial park that is already set up. It takes a lot of collaborative partners like the Governor’s Office of Economic Development, partners who can help with financing and getting the building built to take the risk away and get companies to come.”

Global financial services company ING received financial incentives to open a 250-person service center in Minot, ND, in 1999. A decade later, ING’s largest U.S. servicing center employs more than 900 in Minot.

“Economic development incentives make good business sense,” says Jerry Chavez, president and CEO of the Minot Area Development Corporation. “Incentives are an expectation of businesses looking to expand. Communities should recognize there is a cost of doing business. There is a high start-up cost when a business moves to a new location. Incentives are looked at as a way to ease those costs.”

U.S. Healthcare, which has since merged with Aetna, opened a facility in Bismarck in the late 1980s. The company started out with 125 employees in a 25,000-square-foot building. Today, Aetna employs 625 in a 75,000-square-foot building that the Bismarck-Mandan Development Association helped the company expand. Bismarck Industries, which builds and leases buildings back to tenants like Aetna, helped the company expand its facility and also helped IT company Unisys, which employs 325 workers in Bismarck, add a 53,000-square-foot building in the 1990s.

“Carefully-used incentives are a vital part of bringing companies here,” says Russell Staiger, president and CEO of the Bismarck-Mandan Development Association. “We do it because they are offered everywhere in North America. If you want to bring in companies and add to the resources that will get their attention, you need to do something to help them get here. It might be tax incentives, but it needs to be used judiciously. You can’t just open up the bag and say, ‘Take whatever you want.’ We have never had a company that came here and received incentives say, ‘Now give us more incentives or we’ll leave.’ Ninety-nine percent of the companies are still here and many have doubled, tripled or quadrupled their business. We have gotten back our original investment many times over.”

Not all economic development incentives are handed out to large corporations. Arlen Kangas, president of the Detroit Lakes, MN-based Midwest Minnesota Community Development Corporation, which provides capital to businesses throughout the state, says helping aspiring local entrepreneurs develops the next generation of business and while not as immediate, provides more substantial long-term benefits to communities.

Two decades ago the Bemidji, MN-based Joint Economic Development Commission started working with entrepreneur Andy Wells III and helped him secure a $5,000 grant to patent his Airsnip pneumatic scissor system. Wells was named the 2009 Minnesota Small Business Person of the Year by the U.S. Small Business Administration and his Bemidji-based Wells Technology precision machining company had sales of $54 million last year.

“When we are working with a company we don’t just offer the standard pitch, we ask them what they need,” says Larry Young, executive director of the Joint Economic Development Commission. “One company needed a building, so we actually pooled resources with others in the community, built a 10,000-square-foot building and leased it back to them.”

CAUTIONARY TALES

Much fanfare surrounded technology companies Alien Technology and Imation Corporation and their anticipated future growth in North Dakota. But Imation closed its Wahpeton, ND, facility last winter as part of a companywide restructuring, moving some of the jobs to Mexico. Six months later, Alien shuttered its Fargo plant after a drop in orders for its radio frequency identification tags attributed to the recession. Both companies received millions in state and local incentives, including low-interest loans.

Imation employed more than 700 in Wahpeton as recently as 2001 and had nearly 400 employees in 2007 when the plant’s pending closure was announced. The hundreds of jobs Alien Technology was anticipated to bring to Fargo never materialized. The plant had only about 30 employees when the company announced earlier this year that it would close the 50,000-square-foot facility in North Dakota State University’s Research and Technology Park.

Tony Grindberg, executive director of the NDSU Research and Technology Park, says the state of North Dakota, the City of Fargo, Greater Fargo Moorhead Economic Development Corporation and the research park took all possible precautions. “With the Alien project we minimized risk in every way we could,” Grindberg says. He added that even though Alien Technology ended up leaving, the company’s presence helped attract other technology businesses to Fargo and the tech park.

The loss of Imation left Wahpeton without one of its top employers, but ComDel Innovation, which started up as a contract manufacturer shortly after Imation’s eventual departure was announced in late 2007, occupies part of Imation’s former campus and employs more than 100 workers, many of them former Imation employees.

The American Express Business Travel call center, which employed 46 in tiny Linton, ND, closed earlier this year. Governor John Hoeven announced shortly afterwards that the state would provide $250,000 in loans to help Mohall, ND-based Midwest Teleservices International Inc. open a 50-person call center in Linton, replacing the one that closed.

At one time Sykes Enterprises operated two customer support centers in Bismarck and another in Minot. The company received financial incentives from both communities. But as a result of changing market conditions, Sykes closed one of its two Bismarck facilities and earlier this year closed its Minot operation more than two years after it opened, blaming its departure on a shortage of workers.

“People said they’re going to take your money and run,” says Staiger of the Bismarck-Mandan Development Association. “When they came in the first time we took a serious look at incentives. It cost about $2.5 million for the first project and we did a second project that was about $3 million. After about eight or nine years they closed one of the centers. We still have one of the centers that employs about 400 here. In their time here I would say Sykes has probably spent about $160 million in payroll. They also trained all the people they hired in hardware and software applications. Some of those people moved into banking and other industries and took with them skills they would not have had without Sykes.”

Coventry Health Care moved into the former Sykes building in Bismarck and now employs about 400 at the facility.

MORE CONSERVATIVE APPROACH

While incentives are becoming more of a factor in the escalating national economic development arms race, a number of communities in the region have been able to attract top-notch employers with only modest incentives.

Danish wind turbine blade manufacturer LM Glasfiber and Duluth, MN-based Cirrus Design Corporation have added manufacturing plants in Grand Forks, ND, without receiving lavish incentive packages. Both facilities received declining five-year property tax abatements from the city and help from North Dakota’s PACE loan program.

Klaus Thiessen, president and CEO of the Grand Forks Region Economic Development Corporation, says offering Cirrus the use of a turnkey city-owned building in its industrial park and offering LM Glasfiber a skilled workforce were the community’s main selling points.

“We really don’t offer grants,” Thiessen says of the local economic development group’s approach. “A location has to stand on its own merit without incentives. If a company comes into my office and the first thing they ask is what incentives are available, a red flag goes up.”

Snow of the Rapid City Economic Development Partnership says modest incentives should only be used to close a deal or to add to an already strong pitch. He says sometimes the best economic development deals are the ones that aren’t made, recalling an experience with a company when he was working with an economic development group in Denver’s south metro.

“There was a lot of pressure to offer them incentives to occupy a building, incentives we didn’t have frankly,” Snow says. “They ended up going to Texas. A couple months later another company that was more sold on Denver as a long-term location came in and it ended up working out better for the community.”

While city and state incentives ranging from property tax abatements to revolving loan funds are available for companies interested in locating facilities in Fargo and Sioux Falls, the cities’ economic development groups have focused their attention on improving infrastructure like air service and addressing the needs of targeted industry clusters instead of offering individual financial help to companies seeking to relocate.

“We’re not offering anything extreme,” says Slater Barr, president of the Sioux Falls Development Foundation, who previously worked for an economic development group near Atlanta. “It’s a total package of high-quality, productive workers, a good working environment and industrial sites that are ready to go. Companies are looking for sites and buildings. We try to focus on sites, being ready to go and having the infrastructure in place for them so they can get in and be operational much faster. We concentrate on that more than financial assistance.

“In the big scheme of things, incentives are kind of a deal-closer strategy. Many other issues take precedence. Typically incentives come into play when there are two or three sites that would work and companies look at which offer would make it easier for them with start-up costs.”

LIMITING RISK

Economic development officials stress the importance of performing thorough due diligence on interested companies and not offering too much assistance without receiving binding assurances of how long the company will stay and how many workers it will employ. It is also important to ensure a company and deal make sense for the community.

“You have to take into consideration the capital expenditure, the jobs and types of jobs and the total cost to the community, which is more than just the infrastructure,” Barr says. “If you attract a company that will employ 600 people and 400 workers will need to move into your community, but the workers won’t be paid enough to purchase good housing, they won’t generate enough in tax revenue to cover the services they will receive. If you are attracting a bunch of low-end jobs, it is easy to win the project, but lose the economic game.”

Good Jobs First, a Washington, D.C.-based national policy resource center that promotes accountability in economic development, recommends communities link financial assistance to employment growth or wages and benefits, encourages the use of clawbacks or agreements with companies requiring them to pay back some or all of the assistance if they do not meet agreed-upon obligations and suggests communities involve the public in the process, disclosing how taxpayer dollars are being used in economic development efforts.

But economic developers say that like it or not, risk is part of the job.

“There’s always going to be risk,” says Staiger of the Bismarck-Mandan Development Association. “There’s no way you can limit it 100 percent. Even legitimate companies are facing difficult circumstances. It is imperative that you don’t get so caught up in the rush to add new businesses that you are willing to take something that isn’t in the best interest of the community.”