State, provincial and local jurisdictions utilize economic development incentives to pursue goals and objectives set forth in an economic development policy. Economic incentives allow jurisdictions to promote, grow (and maintain) the local economy through job creation, wage and compensation growth, and/or tax base expansion. Incentives can be provided in a variety of forms, including cash, debt financing, credit enhancement, tax and fee waivers, credits and rebates.
To ensure the objectives established in an economic development policy are accomplished, agreements need to include performance requirements the recipient must fulfill as a condition of the incentive extended by the jurisdiction. For this reason, it is the responsibility of the jurisdiction to evaluate the performance requirements of individual incentives as well as the cumulative impact of those incentives and agreements to ensure that the jurisdiction’s economic development objectives are realized.
This best practice will give the finance officer guidance on how to monitor economic development performance.
The Government Finance Officers Association (GFOA) recommends that state, provincial and local jurisdictions monitor economic development projects and program performance to ensure objectives established in an economic development policy are accomplished. The finance officer plays a central, functional role in monitoring economic development projects and program performance, and GFOA recommends the following to guide such efforts.
1. Monitoring Project Performance. For the purposes of consistency, transparency, and accountability, a clearly defined monitoring process should be a part of every economic development policy. The monitoring process should include periodic evaluations of individual project performance by incentive and an evaluation of the cumulative costs, benefits, and degree of goal attainment of the jurisdiction’s overall program.
Each project receiving an incentive should undergo periodic evaluations. The intent of the project evaluation is to examine conditions attached to the incentives in the economic development agreement to ensure that compliance standards for physical development and fiscal performance are met. Project performance can include both the timing of benchmarks and actual results compared to targets provided in the economic development agreement. This process should consider specific risks throughout the project life cycle.
Where possible and practical, GFOA recommends a collaborative evaluation of project performance from a broad base of departments and/or a third parties. This can help produce a higher degree of objectivity during the data review process.
Examples of project specific measures might include:
- Comparison of actual to estimated investment,
- Comparison of actual to estimated land use,
- Numbers, type of jobs created, and residency requirements,
- Average wage,
- Dollar amount of private investment,
- Net increase in property tax base,
- Living wage requirements,
- Low-to-moderate income employee qualifications,
- Actual market value and/or tax revenue performance,
- Occupancy requirements,
- Disclosure of any tax delinquencies,
- Actual to estimated debt service cash flow,
- Debt coverage ratio, and
- Any conditions which might change the tax status of any related public bond offering.
Project evaluations that reveal unfavorable variances should trigger further review and possible implementation of remedies as outlined in the agreement.
2. Monitoring Jurisdictional Impacts. A jurisdiction should measure the performance of its economic development program against the overall goals and objectives set forth in its economic development policy. Financial projections and impacts of economic development projects should be evaluated for the collective impact and incorporated into the jurisdiction’s annual financial forecast and budget process. Regular reviews of this revenue stream in conjunction with debt service requirements and other obligations should be performed.
Examples of jurisdictional impact related to the use of incentives might include:
- Tax base changes,
- Economic activity changes (e.g., employment, property valuations, average wages and income levels),
- Redeveloped activities in blighted areas, and
- Housing opportunities.
In addition, other elements to consider include:
- Cumulative use of incentives on ability to fund operations and other programs,
- Risk, and if necessary quantification, of accessing general revenues or other jurisdictional credit support in the event of project underperformance, and
- Credit rating impacts.
3. Communicate and Report Results of Project Performance and Fiscal Impacts. The governmental jurisdiciton should be responsible for reporting the project performance and fiscal impact on the jurisdiction of each incentive used and the cumulative impact of all incentives on the overall financial condition. For the purposes of transparency, the report should be made public to appropriate jurisdiction officials, stakeholders and citizens.
The finance officer plays an integral role in ensuring a strong, transparent process and in serving as a steward of the short and long-term public interest in economic development. This includes consistent periodic monitoring and due diligence, analysis of performance and communication to the jurisdiction’s elected and appointed officials and the community. The finance officer should assist in determining whether agreed-upon performance criteria are satisfied, and if not, the appropriate steps that should be taken to remedy or invoke reversion process and/or penalty provisions as outlined in the agreement.
- GFOA Best Practice, “The Role of Finance Officer in Economic Development”, 2011
- GFOA Best Practice, “Developing an Economic Development Incentive Policy”, 2008
- GFOA Best Practice, “Performance Criteria as a Part of Development Agreements”, 2013
- GFOA Best Practice, “Establishing Public-Private Partnership Agreements for Economic Development/Redevelopment,” 2014