Call to Order and Roll Call
The 2nd meeting of the Interim Joint Committee on Economic Development and Tourism was held on Thursday, July 19, 2012, at 1:00 PM, in Room 154 of the Capitol Annex. Representative Leslie Combs, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Representative Leslie Combs, Co-Chair; Senators Denise Harper Angel, Ernie Harris, and Jack Westwood; Representatives Julie Raque Adams, Royce W. Adams, Linda Belcher, John "Bam" Carney, Larry Clark, Will Coursey, Mike Denham, Bob M. DeWeese, Ted Edmonds, Jim Gooch Jr., Keith Hall, Mike Harmon, Melvin B. Henley, Dennis Horlander, Wade Hurt, Kim King, Martha Jane King, Adam Koenig, Tom McKee, Terry Mills, David Osborne, Ruth Ann Palumbo, John Short, Fitz Steele, Wilson Stone, Tommy Thompson, and Addia Wuchner.
Guests: Caroline Sallee, Senior Consultant and Director, and Jason Horwitz, Senior Analyst, Public Policy and Economic Analysis, Anderson Economic Group, LLC.
LRC Staff: John Buckner, Louis DiBiase, Karen Armstrong-Cummings, and Dawn Johnson.
Approval of Minutes
A motion and second by Representatives Carney and Horlander to approve the minutes of the June 21 meeting passed by voice vote.
Review of Kentucky’s Economic Development Initiatives (2011 HJR 5)
2011 HJR 5 mandated a study of Kentucky’s economic development incentive programs. Anderson Economic Group, LLC, a research and consulting firm specializing in economics, public policy, industry and market analysis and business evaluation, was commissioned by the Legislative Research Commission to conduct the study. The completed study is titled Review of Kentucky’s Economic Development Incentives and is available on the LRC webpage. Caroline Sallee, Senior Consultant and Director of Public Policy and Economic Analysis, and Jason Horwitz, Senior Analyst, Anderson Economics, presented the study to the committee. Ms. Sallee said that the report gives an overview of the state’s major incentive programs and is designed to answer specific questions and provide detailed information for future policy-making. It compares Kentucky’s business environment and incentives to 13 peer states, evaluates the use of incentives to attract high-tech and knowledge-based jobs, reports the number of firms receiving incentives and estimates the number of jobs at these firms, estimates the “gross cost” of the incentives to the Commonwealth, evaluates reporting on incentive programs, and discusses the process of selecting the secretary of the Cabinet for Economic Development (CED).
The research process included meeting with Legislative Research Commission staff to identify elements of the study including the major incentive programs, peer states, data collection from the CED, Tourism, Arts and Heritage Cabinet, and the Department of Revenue. Ms. Sallee identified the incentive programs studied and their purpose, including revitalization of distressed local economies, cost disadvantages, encouragement of beneficial behavior, and targeted industrial policy.
Mr. Horwitz reviewed the jobs data of firms receiving economic incentives. Kentucky offers seven incentive programs that contain a jobs requirement. The CED collects detailed data on the firms that receive incentives to ensure compliance. He noted that the study does not and cannot make the claim that jobs reported were a direct result of incentives. During the period studied, 2001-2010, there were 577 companies receiving incentives. On average approximately 5,500 jobs were created and 33,000 jobs maintained on average per year, totaling 55,000 jobs created over 10 years and 330,000 jobs maintained. Mr. Horwitz said no systematic over reporting to the CED was noted. He explained that, on average, firms that received incentives reflected higher overall wages. One explanation may be that companies paying lower wages do not have access to incentive programs. The wages of participating companies are not higher than comparable firms within the same industry.
Mr. Horwitz said the cost of Kentucky’s incentive programs for the period reviewed has been approximately $1.3 billion, with most being revenue foregone by the provision of tax credits. This equals $130 million per year, or $23,000 per job created, and $3,300 per job per year.
Ms. Sallee explained the “effectiveness threshold analysis” in the report, which looked at the effectiveness of incentive programs versus alternative policies such as broad-based tax cuts. The analysis was based on five of the incentive programs that contained enough data for comparison. She explained that while the Kentucky Industrial Development Act (KIDA), Kentucky Rural Economic Development Act (KREDA), Kentucky Jobs Development Act (KJDA), and Bluegrass State Skills Corporation (BSSC) credits were in the middle to high range of the effectiveness threshold, the Office of Commercialization and Innovation (OCI) High-Tech Pools were failing to be more effective than a broad-based tax change for all companies. However, continuance of the OCI program may be beneficial due to its target audience.
Mr. Horwitz discussed the use of knowledge-based incentives that target advanced manufacturing, life sciences, and information and communication technology industries. Kentucky has a lower employment level in knowledge-based sectors but has experienced faster growth than other states, specifically in biological industries and research-relevant, advanced manufacturing industries. Kentucky is above national and peer averages in employment and payroll share in advanced manufacturing industries and performs better than its peers in research spending and degrees awarded per capita. Among the population itself, education attainment is lower than many peer states and graduate retention is problematic. Referring to Kentucky’s use of incentives to target high-tech and knowledge-based firms, Mr. Horwitz said 14 of Kentucky’s incentive programs are available to this sector along with industry specific incentives. Areas where Kentucky lags compared to peer states include incentives for infrastructure, start-up companies, and technology development.
In comparing Kentucky’s business environment with peer states, Ms. Sallee noted that Kentucky has a competitive business tax environment, average infrastructure, lower education attainment, and a labor force with lower than average career readiness as well as lower median average hourly pay rate. She explained that Kentucky’s economic incentives are comparable to peer states and noted that Kentucky is above average in incentives with jobs requirements. When comparing use of incentives to address business factors, Kentucky performs well in the areas of corporate and individual tax rates, property tax rates, and construction and labor costs, but lags in the areas of quality highway and infrastructure access and with the availability of skilled labor.
Because most of Kentucky’s incentive programs are performance-based, there is no need for claw-back clauses; however, the OCI high-tech pool does have a claw-back provision. So far, less than six percent of all funds dispersed have been returned.
Referring to the analysis of reporting, Ms. Sallee said only a few peer states comprehensively report on a regular basis. She noted that Kentucky has an extensive public website with monitoring data that is not required by legislation.
In looking at the CED secretary selection process, Ms. Sallee said Kentucky’s approach of using a national search firm differs from peer states. The secretary’s salary is $250,000, compared to an average $100,000 in peer states; however, there could be other compensation components, and job requirements may vary.
Mr. Horwitz concluded saying recommendations of the report include improvement in reporting and promoting growth in knowledge-based sectors.
Representative Henley commented that until the federal government prohibits economic development incentives, Kentucky has no choice but to participate in this practice.
Representative Henley said the recent Kentucky Supreme Court decision removing the tax exempt status of community development corporations is because board members could possibly benefit from board decisions, and this decision will make it difficult to maintain local economic development corporations. Speaking to the committee, he said the state should redefine its tax exemption laws or the organizations themselves. When questioned, Ms. Sallee said the report did not look at local level issues such as this.
Responding to Representative Denham’s concerns about rural population decline and recommendations for rural communities, Mr. Horwitz said that nationwide there is a general trend of rural migration towards urban/suburban areas. Kentucky does have some accommodations that make it a little easier for businesses to qualify for incentives if they locate in a “distressed county.” Several states have somewhat more aggressive programs that specifically target rural communities in areas such as highway access and broadband development. Ms. Sallee said that site selection consultants agreed that Kentucky’s BSSC credit, which trains workers, was very useful. High-tech and type-specific manufacturing companies said they need employees with specialized training. She said the report did not look specifically at rural area needs. When considering an area, companies look at business climate and highway access among other things. Mr. Horwitz said the report recommended research and development because of Kentucky’s relatively strong base in research funding and research oriented universities. A strong research and development base attracts advanced manufacturing which in turn attracts more engineers, and information technology and communication specialists.
Responding to Representative Thompson’s comments, Ms. Sallee said the report uses a more stable approach and is based on jobs created, maintained, and the gross cost so as not to make assumptions about new jobs. She said Representative Thompson referred to net cost or the multiplier effect which makes an assumption of the effectiveness of the incentive in terms of new outside employment in the state. Based on other studies, the multiplier effect is between two to five depending on the type of job created. Referring to critics of incentive programs, Representative Thompson said incentives create jobs and revenue that the state would not otherwise have.
Responding to Representative Thompson, Mr. Horwitz said the results of the analysis suggest the incentive programs are likely to perform as well or better than the alternative of broad-based tax reduction. Ms. Sallee added that even conservatively there was enough economic activity that made it worthwhile.
In response to Representative Julie Adams’ question, Ms. Sallee said the cabinet’s use of incentives for capital investment at the universities has seen a lot of progress. There are more start-up companies and technology transfers when local development agencies work with local universities because they have a better sense of area needs. Mr. Horwitz added that North Carolina is a good example of a successful program. North Carolina works with universities and community colleges to provide training for businesses needing certain skill sets. Mr. Horwitz said North Carolina’s “First Flight Venture Center” is a public/private partnership based near the research triangle that taps into research at state public universities along with independent entrepreneurs. It is a state-sponsored venture capital fund and a physical center with high-tech laboratories. Some incentives may be greater if the company is involved with a public university. He noted that the University of Michigan has developed a curriculum around the auto industry.
Responding to Representative Stone’s question, Ms. Sallee said the net effect of Kentucky’s financial incentives programs was not considered in the report. She noted that Anderson Economic Group was not given company-specific data to conclude what share was abated, what additional taxes were paid, or what the company claimed it was eligible for. The report could not be done on an aggregate level.
As sponsor of HJR 5, Representative Clark said the purpose of the legislation was to ensure transparency and accountability. Some of the recommendations will be seen in future proposed legislation. The OIC program needs more funding but financial constraints and its high risk nature have limited this. He suggested the Bucks For Brains program receive more attention from the executive and legislative branches. He noted the mayors of Louisville and Lexington have set up a task force to study advanced manufacturing.
Responding to Representative McKee’s question regarding special incentives for rural areas, Mr. Horwitz said there is a national trend for population loss in rural areas. Kentucky’s efforts to foster more rural economic development are minor compared to other states, however, he did not know if there was much evidence on the effectiveness of what other states have done. An example is defining depressed areas and providing higher incentives to locate in those areas. Missouri and Virginia have unique programs that offer specific incentives for infrastructure. A more effective effort would be training. Mr. Horwitz noted that Kentucky identifies distressed counties that may qualify a company for an incentive even with a lower wage rate than a non-distressed county.
Chair Combs informed members that state parks liquor sales data was included in committee meeting folders.
There being no further business, the meeting adjourned at 2:33 PM.