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HomeMy WebLinkAbout(6) EDC SURVEYINTEROFFICE MEMORANDUM TO: FROM: SUBJECT: DATE: STEVE HTZGIBBONS, CITY MANAGER PAUL BROWN, PLANNING DEPARTMENT SURVEY OF EDC INCENTIVES IN COMPARABLE SIZE TEXAS CITIES 01 A survey of 15 Economic Development Corporations in Texas cities (see attached chart) indicates that seven of the responding cities (including Port Arthur) have made incentive loans while six favor grants, with most of those loans and grants being for modest amounts of $100,000 or less. Although several EDC officials did say they have put together multi-million dollar deals when the situation warranted, they stressed that the recipient companies were required to rigorously document their financial solvency and to provide a significant portion of the business costs for the venture. Seven of the cities (including Port Arthur) have funded start-up enterprises, most of which resulted in lackluster performance at best or out and out failure at the worst, although Euless, Tyler, San Angelo and McKinney reported some notable successful startups. Most EDC officials said they shied away from companies wanting all or most of the incentive money up front, especially for start up businesses. Almost all of them said they would consider releasing a portion of the loan or grant early iftbe company had met some ofthe performance requirements set forth in their incentive contracts. Most favored a phased-in payment of incentives over several years and only al%r the company had made good on their promlaes for job creation and investment in the community's tax base and economy. Of the 32 Texgas cities with populations between 40,000 and 95,000, voters in 20 of those cities have approved using up to a half-percent sales tax for economic or community development efforts. Sixteen, or half, oftbe 32 cities have elected to use up to a half- percent sales tax to reduce property tax rates, while seven of the 32 have opted for no additional sales tax amounts for either economic development or property tax rate reduction~ Three of the cities have both 4A and 4B development corporations, while 10 have 4B organizations and seven have opted for 4A economic development corporations. Of the 32 cities, only Port Arthur and Odessa have 4A EDCs and do not use any sales tax money for property tax reduction~ Briefly, state law places more restrictions on the use of 4A sales tax funds, while the law allows the use of 4B revenue for almost any type of project including water, sewer, street, drainage and recreation enhancements. In general, funds for 4A organizations must be used to create jobs and bona fide training programs, to increase the tax base and to benefit the city's overall economy. Six of the Economic Development Corporations in surveyed cities do not make incentive loans to businesses. Instead, they prefer incentive grants paid out over a period of time as the recipient companies meet certain performance requirements spelled out in the incentive contract. Representatives from these six cities and several from cities that have made loans, said the grant system was less cumbersome to administer and generally more beneficial as an economic development incentive to the qualified recipients. All of the cities that have made loans reported at least one loan default, if not several, which necessitated legal action and expense. Several EDC directors said that most reputable companies seeking incentives would much rather receive grants of $50,000 to $100,000 than loans of $500,000 or more. In that sense, most EDC directors stressed the value of smaller grants and loans to serve as gap financing to bridge the void between a company's private investment and borrowed funds. Six of the EDCs have made some incentive loans, but only after the recipient companies have provided ample financial documentation, including but not limited to previous audits, past income tax records and trade references. About half of those EDCs that make loans prefer to structure incentive deals that would eventually forgive the debt as long as the recipient businesses comply with strict performance requirements as detailed in their incentive contracts. The Port Arthur EDC agreement with Service Zone represents an example ora forgivable loan deal calling for the city to retain ownership of the new Service Zone building if the company fails to meet the performance criteria in the contract. Tom Mullins, who heads up economic development efforts for a privately-funded orga~i?~tion in Tyler, said he prefers loans rather than grants because they replenish his war chest, which does not receive any of the city's annual 4B sales tax revenue of more than $8 million. Mullins stressed that his organization refuses to be the primary fuming source for any business deal. To that end, he said he follows the Small Business Administration 504 guidelines that call for loan recipients to provide at least 10 percent of the needed start-up or expansion capital, with no more than 50 percent coming fxom commercial lenders and no more than 40 percent from the economic development organization~ Seven cities, including Port Arthur, have funded start-up business ventures. However, none of the other six have provided as much oftbe necessary operating capital as the Port Arthur EDC has in some cases. The EDC directors all stressed that public funds or sales tax proceeds should not be used as a source of venture capital for tmproven companies. Instead, they maintained that public money should be used to sweeten an economic development project just enough to close the deal 2 Harlingen EDC Director Randy Seitz said his board will not consider any requests for start-up emerprises. Moreover, he said he would only consider up-front funding for a deal with a major national or international company such as Panasonic, Nokia or Bell Helicopter, for example, All of Harlingen's incentive contracts contain strong default language that requires companies not achieving their promised goals to repay the grant funds. Seitz said he and his board require funding applicants to provide tax return documents for at least the previous three years, certified financial audits for the same period and at least three favorable trade references. As a matter of due diligence, he and his board then produce a separate economic impact analysis of the proposed deal that includes a calculation of the rate of economic return to the community. If the analysis indicates a minimal benefit to the community, "we stay away from it," Seitz said. Of the cities with 4A corporations, Texas City is the only one that limits expenditures to only infrastructure improvements for economic development purposes. However, many of the 4B cities restrict use of the sales tax money to specific, non-economic development projects. For instance, North Richland Hills dedicates its 4B money for park and recreation improvements and crime reduction~ League City only builds and maintains amateur recreational facilities. Euless has funded only two ED projects, although one of those is actually more of a Main Street enhancement program, with the remaining money going to parks and the library. Bedford only funds street maintenance and repair projects, while voters in Round Rock dedicated the sales tax for transportation improvements, primarily streets and roads and not for transit. 3 Economic Developmem Incemives in Various Texas Cities city Pop. EDC & tax Prop. tax Total city Econ Dev Start Ups Up-Front Funding amt. reduction sales taxi Loans Port Arthur 57,755 4A Va¢ None 1Va¢ Yes Yes Yes Odessa 90,943 4A 1/4¢ None 11/4¢ Forgivable loans NO Only w/s~'ong only fioanOals Texas City 41,521 4A 1/2¢ 1/2¢ 2¢ No No No Pharr 46,660 4A 1/2¢ 1/2¢ 2¢ * * * Edinburg 48,465 4A 1/2¢ 1/2¢ 2¢ No No No Harlingcn 57,564 4A 1/~¢ 1/2¢ 2¢ Very few No way, No how No, except for big financially fit natq or internatq bt~lnesses Lungvicw 73,344 4A t/4¢ 1/4¢ 11/2¢ Forgivable ~oans very few w/strong ParUa~ for flnancials infi'es~ndcture w/ ~ financials Sugar Land 63,328 4A 1/4¢ 1/2¢ 2¢ * * * 481/4¢ Allen 43,554 4A 1/2¢ None 2¢ No No no 481/2¢ McKinncy 54,369 4A 1/2¢ None 2¢ Forgivable w/ a fe~ w/strong a few w/s~ong 4B 1/2¢ st~ct i~.~rformance financlals financials & North Richland 55,635 4B 1/2¢ none 11/2¢ No No NO Hills Not for Econ. Dev. Victoria 60,603 4B 1/2¢ None 11/2¢ * * * Tyler 83,650 4B 1/2¢ None 11/2¢ Yes, by private Yes Rarely Used only for £O o~, Only if co. me,ts Usually i~ase in community dev. SI~ 504 req. payments San Angelo 88,439 4B 1/2¢ NoI~ 11/2¢ a few w/ ooly w/sb'o~ No -- ~ase in i~formance financials & major incen~ves ova' restric'dons communit7 benefit serial ~ Midland 94,996 48 1/4¢ None 11/4¢ O~ly loans Yes w/strong Yes w/strong finances and finances and investment investment League City 45,444 4B 1/2¢ 1/4¢ 1¥4¢ No No No Euless 46,005 4B V2¢ 1/4¢ 1~/4¢ No Only 1 :L w/~'formance criteria Bedford ,47,152 48 1/2¢ '1/2¢ 2¢ n/a n/a n/a Galveston 57,247 4B 1/2¢ 1/2¢ 2¢ * * * Round Rock 61,136 48 1/2¢ V2¢ 2¢ n/a n/a n/a transoortaUon projects only Temple 54,514 None 1/~¢ 11/2¢ n/a n/a n/a B~Tan 65,660 None 1/2¢ 11/2¢ n/a n/a n/a College Station 67,890 None 1/2¢ 11/2¢ , n/a n/a n/a Denton 80,537 None 1/2¢ 11/2¢ n/a n/a n/a Killeen 86,911 None 1/2¢ 11/~¢ n/a n/a n/a Grapevine 42,059 None None 1¢ n/a n/a n/a Rowlett 44,503 None None 1¢ n/a n/a n/a Flower Mound 50,702 None None 1¢ n/a n/a n/a Missouri Ci~ 52,913 None None 1¢ n/a n/a n/a Ba;ytown 66,430 None None 1¢ n/a n/a n/a Lcwisville ,77,737 None None 1¢ n/a n/a n/a Richardson 91,802 None None 1¢ n/a n/a n/a Source: Texas Comptroller and thc individual cities) * Cities not responding to survey ~ Cities with 2¢ sales tax axe in counties that do not collect thc optional Y:¢ county sales mx. State law limits city plus county sales tax amount to 2¢ total unless the metropolitan area has adopted a ~¢ metro transit authority sales tax for which Port Arthur is not e~igible.