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HomeMy WebLinkAbout2019-04-11 Study Session - Economic Development Incentives -- , _ , � � CITY OF PnLfll DESERT ii . ., 6 ,_ ,r,'...'. �, _ 73-510 FRED WARING DRIVE r, 1 I ill t /oy' PALM DESERT, CALIFORNIA 92260-2578 b4 44l4, a'!,PH . TEL: 76 0 3 4 6—0 611 4Q - . '. yfG,;.• FAX: 760 341-6372 °=9-73 . info@palm-desert.org Wol NOTICE OF STUDY SESSION OF THE PALM DESERT CITY COUNCIL NOTICE IS HEREBY GIVEN that the Palm Desert City Council will convene for a Study Session Thursday, April 11 , 2019, at 2:00 p.m. in the Administrative Conference Room of the Palm Desert Civic Center, 73510 Fred Waring Drive, Palm Desert, California 92260. Said Study Session will be for the purpose of discussing Economic Development Incentives. RA ELLE D. KLASSE , ITY CLERK CITY OF PALM DESERT, CALIFORNI April 4, 2019 NO ACTION WILL BE TAKEN AT THE STUDY SESSION. PURPOSE OF THE STUDY SESSION IS INFORMATION ONLY. C,PRINTED ON RECYCLED PAPER t 0 " Invest Palm Desert" 2 � 0 Incentive Programs 'l(_ 0 7 Palm Desert City Council 0 Study Session April 11 , 2019 Today's Agenda 1 . Background 2. Why use incentives? 3. Successful tools 4. Best practices 5. New tools 6. Linking the General Plan and EDSP 7. Next Steps/Discussion Goals Gather and identify current incentives Explore new incentives to meet goals of EDSP Tie incentives program to EDSP and General Plan Create and offer comprehensive, marketable program Timeline FY2019/20 General Plan (2017) San Pablo Improvements Plan Incentive Program/ (2018) BRE Program • One Eleven Economic Development Development Code Marketing Plan (2017) EDSP (2018) TBD Citywide Goal Setting (2019) sik�"rrr � r r � DD yfa rrh.r:uy City 2019 Goals "5. Develop and adopt economic development incentive programs for targeted businesses and properties." ' 1111114%111%41i111%, „ What'sIncentive?an 14 461 Local government mechanism that allows • the public sector to induce changes in ° underperforming markets. ‘wi.. 411440 ote Why Incentives? zlry. %, 74t. Leads to • Underperforming properties • Vacancies • Declining aesthetics Markets aren't contributing • Lack of motivation to sell to desired changes • Tax breaks/Tax rebates • Supporting public works infrastructure • Workforce development What tools • Business attraction • Business expansion and retention are available? • Job and housing creation • Convertible loans • Forgivable loans Unlimited ! • Working Capital Loans • Grants • Training grants • Tech support grants • Industrial revenue bonds... • Loan participation programs • Interest competitive programs ....The list is endless Residents Neighbor- hoods Workforce Jobs Education Business 1111 Retail Hospitality Sales Tax :1111Tourists A Diverse Economy Supports Quality of Life 9 i WIC Incentives: Success in Palm Desert 431 Palm Desert already offers a good mix of incentives: (5 • Business-friendly culture • Efficient project review process • Façade Enhancement Program • Public infrastructure support .. 4 • Events, programs & sponsorship pi 1110 fig , • Progressive zoning in General Plan _. • Hotel Paseo TOT rebate .w ' • Tech STEM industry support � ' '"� `� �� � " 10 Successful example of City-directed fundsp • Palm Desert iHub • Tech-based industry support • Partnership with CSUSB - Palm Desert • Access to High Speed Broadband • Ongoing partnership with CVEP • Support the growth of emerging tech companies • 1:5 job leverage Best practices tells us to ©�`1 a• ` i;;. ► u. �Q support... ,t.,,$.).4, .:: 0 Alt OA 0 Ile' AO • Tech and STEMS ps. (6 ,#) • Medium sized businesses (& ;•r sv 4 � manufacturing when possible) • Grow local and small businesses ...And evidence suggests (economic gardening) Support catalytic, city-changing g g • Workforce development - CSUSB- PDC & COD projects to create transformative change • Tax base (e.g. San Pablo Corridor Improvements) 1. Economic Development Strategic Plan,City of Palm Desert, Feb 2018 2.2018 Bartik, Improving Economic Development Incentives,W.E. Upjohn Institute& Pew Research Center, Pew Charitable Trusts 12 The New Opp Connect current and new tools into comprehensive, marketable incentive program OPPORTUNITY • Create time limited use DOESN'T KNOCK, • Develop new incentive tools buikda-- • Identify areas of the City DOOR • Target specific sectors • Use Measurable outcomes New Programs and Tools Limited-time incentives, within targeted areas: • Fee adjustment/elimination • Expedited project review (plan check/permitting) • Formalized TOT program • New development project assistance (case by case) • Modified land use designations (i.e., potential future Downtown Core Overlay expansion) €50 • Improved capital improvements fund (FEP repackaged) • Partner organization programs (e.g. BRE/SBDC training) 14 ‘4K,‘ Linking the General Plan . . . . . .to an Incentive Program f PAIMt "Transform" Target: transformative, „ m - ' ter``•''` city-changRIVERSIDE ing projects & job multipliers ,,..;�4 �� "Enhance" �, j } fNgAN WELLS J f �,. CITYQF Target: medium sized businesses'' '.;::"r ' / /I/ ,' ,r-'-- L ;IP 7/// ''.7.;*,* .--''' :''''K 1,'.-ii:*'' - ,;-,-,:,- - "Preserve" A, J / / g Legend / 74 Target: ongoing commercial activities Preserve Enhance Trsnsrorm N 4. 15 " Invest Pa l m Desert" "Transform" • Fee adjustments/elimination** at1Ve,G1tY • Expedited project review — (eg. plan review, permitting)** �zaris�,o"Ccc Y�o•ects � • Formalized TOT program** G.harg11 plies$ SST • New development project assistance** l\li� • Infrastructure investments (e.g. parking, drainage, streets) • PD - iHub "Enhance" dim, sized` • Improved capital improvements fund** 1•&eB�siness • Partner organization programs (e.g. SBDC workforce development) • Business advocacy & BRE program "Preserve" mezcial • Technical assistance from staff 4ngnctivlties • Partner linkages (e.g. SCE, County, State) 0 --..» is ONE ELEVEN DEVELOPMENT CODE , I 1 Y DOY.WT0YN0STRCTto( i b1 S' i' i ? 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NI At gym. a e WV ` t w it • - i ,4 ' s y ' T_4tj / :1T 0 Next Steps 0 • Legal review and policy development 0 • Prevailing wage impact review • Fiscal impact of programs • Develop a citywide incentives application 0 • Formal Council approval of Incentive Programs package early FY 19/20 • Ongoing Council approval of individual ordinance as required 0 • Create BRE program 0 18 „x Next Steps 0 Develop the Economic Development Comprehensive Marketing Plan (EDMP), including: • Craft a distinctive business brand message • "Invest Palm Desert" • Create/enhance owned media channels (website, newsletter, social media) • Produce collateral to support outreach efforts (brochures, 02) pamphlets, flyers) • Develop a PR campaign to capture earned media €51 19 �`/ " Invest Palm Desert" � Incentive Programs � Discussion 1�j W.F. UPJOH\ I\STITUTE FOR EMPLOYMENT RESEARCH Upjohn Institute Policy Briefs Upjohn Research home page 2018 Improving Economic Development Incentives Timothy J.Bartik W.E. Upjohn Institute,bartik@upjohn.org Citation Bartik,Timothy J.2018."Improving Economic Development Incentives."Policy Brief.Kalamazoo,MI:W.E.Upjohn Institute for Employment Research.https://doi.org/10.17848/pb2018-1 • This title is brought to you by the Upjohn Institute.For more information,please contact repository(dtupjohn.org. WE.UPJOH\ PRMISE MARCH 2018 I\STITUTE INVESTING IN COMMUNITY a project of the W.E Upjohn last:lute LI CY wrc Im proving Economic Development Incentives Timothy!.Bartik,W.E.Upjohn Institute BRIEF HIGHLIGHTS State and local governments increasingly rely on business incentives,such as job creation tax credits and property tax abatements,to attract jobs.Costs of incentives have ■ Business tax incentives are often tripled since 1990,reaching$45 billion per year,or about what state governments take costly:only a minority of targeted jobs in from corporate income taxes.Recent incentives to Foxconn and Amazon suggest this are created due to the incentives,and competition may escalate. fiscal benefits offset only a modest Incentives can have large local benefits.If incentives tip a business's location decision, portion of direct costs. this directly creates local jobs.This job creation has"multiplier effects":other local jobs are created in supplier industries or retailers.Job growth helps local workers and boosts • How incentives are paid for is key tax revenue. to their net benefits.Education cuts But costs of incentives can be high.If incentives paid for themselves through increased reduce future wages. tax revenue,as economic development agencies often assert,their costs would be no issue.However,research shows that average-sized incentives tip less than 20 percent of • Incentives are more cost-effective if business location decisions,meaning that over 80 percent of targeted jobs would still targeted at industries that create more have been created without the incentives.State and local governments thus give away jobs in other local businesses. more than$30 billion a year in incentives that create zero jobs.In addition,local job growth attracts in-migrants,which increases public spending needs.As a result,the fiscal ■ Customized services to small and benefits from incentives are far less than their direct costs.Budget costs of incentives medium-sized businesses are a cost- must be paid for by higher tax rates or public spending cuts.These budget changes can effective way to create local jobs. harm local economies,such as by hurting public school quality and thus the skills of local • Reforming incentives is politically workers. difficult because there are many large Incentive reforms should rein in costs while promoting job growth.I make three beneficiaries in the short-run,while recommendations: the costs due to lower wages occur 1. Put budget caps on tax incentives.These caps help avoid financing incentives over the long-run. through cuts in important services such as public education.When public school spending is cut,future wages tend to fall. 2. Restrict tax incentives by targeting only high-multiplier industries.Tax incentives can make sense if,for every job created directly by the incentives,five other local jobs are created—that is,the"job multiplier"is 6.Some industries, particularly in advanced manufacturing,have higher multipliers and provide more benefits per dollar of incentives. For more details and recommendations,see 3. Expand customized services to locally owned,small and medium-sized the full report's Executive Summary,Economic businesses.Customized business services such as specialized job training and Development Incentives:Who Benefits?Who manufacturing extension can be 10 times as effective as tax incentives in creating Pays the Costs?How Can They Be Improved? local jobs.These services are most useful to small and medium-sized businesses, which often lack the funds and information of larger businesses.Locally owned For additional details,see the full report, businesses spend more on nearby suppliers and retailers,further boosting local Who Benefits from Economic Development job creation. Incentives? These can be found at www.upjohn.org. - r POLICY BRIEF I MARCH 2018 W.E.UPJOHN INSTITUTE Improving Economic Development Incentives The Effects of Different Economic Development Incentive Policies Incentives financed by To compare different incentive reforms,I conduct several"thought experiments" cuts in public schools that illustrate how a specific reform affects a key outcome: the average incomes of a reduce per-capita income state's residents.For an apples-to-apples comparison,I assume each policy involves the government offering incentives equal to 1 percent of the state's personal income each of state residents by over 4 year.This magnitude is in line with the offerings of high-incentive states and localities. percent. I create a baseline incentive policy against which to compare reforms.This baseline policy makes two assumptions that reflect characteristics of typical incentive policies: • The baseline incentive policy is paid for by an even split of increased taxes and public spending cuts.This choice is arbitrary but neutral.Based on average state and local budget patterns, 11 percent of financing comes from cuts in K-12 education spending alone. • For every job created directly by the incentives, 1.5 other local jobs are created in supplier industries and local retailers.This means the job multiplier is 2.5,which is common for average manufacturing industries. Figure 1 shows how residents'per-capita incomes change for four different incentive policies:the baseline policy and three alternative"thought experiment"policies. The baseline incentive policy has slight net benefits.Per-capita income rises by 0.2 percent.The incentive policy creates jobs for residents,increases property values,and generates tax revenue.But it also has a high cost per job created.The additional revenue does not fully cover the policy's sticker price,and the share of incentives financed by cuts in public school spending reduces future wages. Now consider the same tax incentives,with one change:the incentive package is ` ' �; •*' • solely financed by cuts in public school spending.This policy reduces average per- capita income of residents by over 4 percent.The short-term benefits of more jobs are : •:,', • outweighed by the long-term losses in wages due to public school spending cuts. -z- Suppose we return to the baseline incentive financing,but assume that tax incentives , . "' are targeted at industries with a job multiplier of 6.0 rather than 2.5.Some high-tech , 1, Figure 1 How Four Different Incentive Policies Affect State Residents:Percentage Effects on Per-Capita Income 5.8 e.0 - * ' , � 4.0 - 3.0 2.0 f A ' a� „ Education cut ' , "' �, 0.2 financing :s < iv 0.0 .A1P' Baseline tax High multiplier Customized incentive policy services -2.0 - -4.0 - F -4.4 -6.0 - G,. NOTE:These four incentive policies all have the same cost:1 percent of total personal income of state residents. SOURCE:Executive Summary to Bartik(2018). 2 POLICY BRIEF I MARCH 2018 W.E.UPJOHN INSTITUTE manufacturing may have multipliers as great as 6.0.Such high multipliers are in part Average tax incentives due to what are called"agglomeration economies"or"cluster effects":a local cluster of high-tech firms can benefit from transferring ideas and workers among each other,and tip less than one-fifth from local specialized services.With the higher multiplier,this incentive policy increases of business location per-capita income by 3 percent,more than 10 times the baseline incentive policy. Finally,instead of a tax incentive,suppose we provide customized services to locally decisions. owned small and medium-sized businesses.These services may include specialized job training and manufacturing extension services.Studies have found these customized services,when done well,can have job-creation effects 10 times those of tax incentives. Because of the target of local businesses,any expansion of sales at assisted businesses may come at the expense of reduced sales at other competing local businesses.However,this is counterbalanced by locally owned businesses and their owners spending more at local suppliers and retailers.This policy increases residents'per-capita incomes by almost 6 percent—over 25 times the baseline tax incentive package. The Advantage of Data-Driven Simulation over Development Agency Assumptions These estimates come from a simulation model built on credible studies of how incentives and job creation affect local economies.Essentially,the model uses the findings of these studies to determine how incentive design affects local job creation, per-capita income,and other local economic outcomes.These outcomes are linked in a causal chain.For example,an incentive policy has some probability of tipping a business location decision,and when scaled by the number of jobs targeted,yields the expected number of local jobs created.Each of these created local jobs in turn can create additional jobs through the job multiplier effect,through either suppliers to the targeted firm or local retailers who sell to the firm's workers.Some of these new jobs go to local . w= residents and increase earnings,while other jobs go to people who move into the area and thus affect population growth.Research has shown that for every increase of 10 local jobs,local population will eventually rise sufficiently that 8 extra jobs go to in-migrant workers. The new jobs increase state and local tax revenue,but the added population requires additional spending on public services to maintain quality.The extra tax revenue less the required spending represents a fiscal benefit to the government.This fiscal benefit offsets the incentive's"sticker price"—the dollars either paid to incented firms or forgone from not collecting taxes from them.If the fiscal benefit is less than the sticker price,there is a net budget cost for the incentive,which must be paid for;for example,by cutting some other public service(such as education).The model's power comes from flexibility ll' in considering alternatives such as how net budget costs are paid for,the size of the job multiplier,and the cost-effectiveness of economic development programs in creating jobs in targeted firms. In contrast,economic development agencies often make simpler assumptions that are not research based.For instance,economic developers often assume that every new job created in assisted firms is due to the incentives;that is,it would not have been created ft ` •' "but for the incentives.Credible studies,however,find that average-sized tax incentives tip less than one-fifth of business location decisions,implying that most targeted jobs 4 would have been created even without the incentives. Moreover,economic developers often take credit for increases in tax revenue but ignore the effects of extra population on public spending.Studies show,however,that growth-induced spending needs can absorb upwards of 90 percent of the additional tax revenue,and the simulation model takes this into account.Similarly,while economic developers often use the sticker price of incentives as their cost,this can understate the true costs by failing to account for the economic costs of paying for incentives,such as cuts in public spending.As noted above,the simulation factors in these costs.For example,empirical estimates show that a 10 percent cut in K-12 education spending will decrease future wages by 8 percent. 3 POLICY BRIEF I MARCH 2018 Improving Economic Development Incentives Additionally,economic development policymakers often focus on the short term, Customized business but the costs from cutting education or other spending can take a generation to be fully realized.The simulation accounts for incentive effects over 80 years.Finally,although services can create jobs at more than 90 percent of incentives are tax incentives,specialized business services one-tenth the cost of tax (such as customized job training or manufacturing extension)can also help create jobs, especially for local small and medium-sized businesses.What's more,these customized incentives. services can create jobs at one-tenth the cost of tax incentives,and the simulation analyzes both policies. One potential drawback to the simulation approach is that the results may be sensitive to different,but still plausible,assumptions.The full report shows that alternative assumptions can change the magnitude of results,but that the general implications hold up.For instance,consider the effects on state residents'incomes of fully financing tax incentives through public school spending cuts.This mechanism reduces incomes even if the effects of spending cuts on future wages are only one-seventh of what is assumed in the simulation.As another example,customized business services to locally owned businesses still have positive effects on incomes even if such services have a job-creation effectiveness only one-sixth as great as in the simulation. Political Challenges of Reforming Incentive Policy These recommended incentive reforms face political challenges.Demand for tax incentives is unlimited:any business would like the government to provide it with as much cash as possible.In contrast,customized business services are demanded only by the relatively few businesses that find such services useful,usually small and medium- "' sized businesses at some critical development stage. Therefore,the political pressure is to expand tax incentives because they have more and larger beneficiaries.But from the perspective of promoting better public policy, customized business services offer an advantage:businesses will clamor for them only if they are perceived to be productive.This provides pressure for development agencies to • keep the quality up. Another political challenge is that tax incentives often have short-run benefits but 1°4' long-run run costs.Governors and mayors are tempted togive awaytheir successors'tax base " g- Y P to obtain short-term political benefits from immediate job growth.The full cost,in lower future wages from lower education spending,will be realized only many years later.This political bias toward the short-term can be countered if news media and interest groups encourage a greater focus on what best promotes economic development over the long too t04.1 term. Timothy I.Bartik is a senior economist at the Upjohn Institute. i Z Support for this project was provided by The Pew Charitable Trusts. The views expressed herein are those of the author,and do not necessarily reflect official views of The Pew Charitable Trusts or the w a Upjohn Institute. W.E.Upjohn Institute for tor Employment Research @UpjohnInstitute WEBSITE upjohn.org 4 . . EXAMINING THE LOCAL VALUE OF ECONOMIC DEVELOPMENT INCENTIVES Evidence from four U.S. cities JOSEPH PARILLA SIFAN LIU March 2018 BMetropolitan Policy Program at BROOKINGS Summary Every year local and state governments in the corporate relocations has drawn on academic United States expend tens of billions of dollars evidence that remains skeptical about the on economic development incentives. Under effectiveness of incentives, arguing that intense pressure to deliver economic opportunity, incentives do not influence business decisions policymakers utilize incentives to encourage to nearly the extent policymakers claim nor private sector firms to create jobs, invest in are they properly targeted to businesses communities, and strengthen local industries. and industries that can offer the greatest Drawing on a detailed literature review and economic and social benefit. a unique analysis of economic development transactions in four U.S. cities (Cincinnati, 3. Cities should target incentives based Indianapolis, Salt Lake County, and San Diego), on core principles of inclusive economic this report advances a framework for inclusive development. A review of local and state economic development to help leaders analyze economic development incentives provided to and evolve their incentive policies.Its key findings firms in four U.S.cities finds that transactions include: align with several principles of inclusive economic development but fall short on 1. Economic development incentives remain others.Cities,regions,and states must master a core aspect of local and state economic the global scale and technological complexity development policy. This report defines of the advanced economy and address the economic development incentives as direct entrenched and exclusionary biases that financial benefits that incentivize a firm's prevent all workers and communities from opening, expansion, or retention. What meeting their productive potential. We distill distinguishes incentives from broader this dynamic into four principles toward which economic development efforts is that cities and states can align incentives. Drawing governments selectively provide these on unique transaction-level information with incentives to individual businesses, arguing businesses in Cincinnati, Indianapolis, Salt that their investment or expansion would not Lake,and San Diego, we conducted a "census occur but for the incentive.Estimates suggest of incentives"to determine whether local and that these policies contribute to significant state incentive policies are aligned with these public expenditures, ranging between $45 four principles: and $90 billion per year depending on the definition and estimation method. • Grow from within by prioritizing firms in advanced industries that 2. Incentives have come under renewed drive local comparative advantage, scrutiny from both academic researchers innovation, productivity, and wage and the public. The competition between gains. Across all four cities, local and cities to land Amazon's second corporate state economic development incentives headquarters—along with the controversial disproportionately go to firms in billion-dollar incentives packages being advanced industries. On average, offered—has thrust local and state economic advanced industries account for about 20 development approaches into the public percent of economic output but receive spotlight. Pressure to limit incentives for big about one-third of all incentives. • • Boost trade by facilitating export it is less apparent in Indianapolis and growth and trade with other markets San Diego. The average poverty rate in the United States and abroad in of a neighborhood in which a business ways that deepen regional industry or redevelopment receives incentives specializations and bring in new income is nearly 30 percent in Cincinnati and and investment. Across all four cities, 18 percent in Salt Lake, compared to local and state economic development jurisdiction-wide poverty rates of 18 incentives disproportionately go to percent and 12 percent, respectively. firms in exporting industries. The export intensity of industries that receive 4. Economic development leaders should economic development incentives—that ensure incentives policies align with is, the share of local output accounted broader economic objectives, embrace for by goods and services exports—across public transparency and rigorous the four cities is more than twice as high evaluation, and only target firms that (25 percent) as the economy as a whole advance broad-based opportunity. While (11 percent). not a full analysis of economic impact, our findings offer some implications for • Invest in people and skills by economic development incentives policy and incorporating workers' skill development practice. First, policymakers should ensure as a priority for economic development incentives reflect local and regional economic and employers so that improving objectives. This census of incentives provides human capacities results in meaningful one guide for how cities can situate their work and wages. Partly because of incentives practices within four principles their tradability and technological of inclusive economic development. Second, sophistication, incentivized industries in localities must commit to making incentives these four cities pay 25 percent higher information publicly transparent, and then wages than the overall economy. Yet, rigorously evaluate their impact on firm we identified concerns related to racial outcomes to determine what works. Finally, inclusion. Black and Hispanic workers clearer criteria and more effective targeting remain underrepresented in industries should reserve incentives only for those firms that receive economic development that will advance broad-based opportunity, incentives, and a low share of incentives either by incentivizing opportunity-rich firms go to firms for job training purposes. and industries, incentivizing firms to provide workers more opportunity, or by addressing • Connect place by catalyzing economic place-based disparities in opportunity. place-making, and work at multiple geographic levels to connect local Fortunately, we observe progress toward a more communities to regional jobs, housing, responsible and rigorous incentives approach and opportunity. Within this principle, in many U.S. cities, signaling a nascent but many cities focus incentives on addressing necessary progression in the practice of economic blight and distress in communities of development. We hope this report can help concentrated poverty. Cincinnati and provide insights and tools to local leaders as they Salt Lake clearly display this focus, but undertake that important and needed evolution.