The recent report on the state’s business incentive programs by the state comptroller had a positive effect; that’s exactly what comptroller reports are supposed to do. Gov. Murphy reacted with strong concerns, a vigorous public debate ensued, and a legislative hearing highlighted the need to study these programs. What are the implications of all this?
Businesses have a responsibility to owners and/or shareholders to take advantage of any programs that will offer a net benefit for the company. A company’s business model may warrant consideration of financial incentives that are available through a third party (like a state). It may be in their interest if it will save them money and not dilute or compromise their ability to provide returns on their investment to their owners.
In today’s highly competitive economic environment, incentives have become routine. This is because other states offer them, and businesses are more mobile than ever before. Although we have historically attracted industries specializing in logistics, pharmaceuticals, technology and other industries, location-based competition may be fierce when businesses decide to grow or expand. We need to be in the game. And it is a game, a high-stakes one at that, wherein businesses have been known to play states against each other to get the best deal from them (e.g., Amazon’s HQ2 effort).
Many of our programs have paid off, not only in Camden (with extra incentives built into our programs) but across New Jersey. But one challenging policy issue associated with incentives is that we do not know if we would have had similar results if our incentives were half, or some other portion of their current value. We need to gain clarity on this almost existential point.
The cost of oversight
The comptroller’s report highlighted a core challenge in managing these incentives — that agencies do not always invest sufficient funds to oversee their contracts. This lack of investment often applies to incentive programs, along with contracts for services such as those for home healthcare, group home administration, health insurance management, etc. It also applies to other levels of government.
Why is this a problem? Oversight costs money, a scarce resource these days. Leaders don’t always perceive funds spent on oversight as a productive use of scarce financial resources. As a result, agencies often trust, but do not verify, that the contractor/recipient is performing according to standards. Nor do they necessarily follow up on metrics meant to measure performance and compliance. That’s what happened with the Economic Development Authority; the agency failed to adopt necessary control practices to ensure or test compliance.
Agencies need to anticipate that there will be contractors who mean well but inadvertently slip up, just as there may be the occasional bad actor. Controls for both cases need to be baked into program plans from the start. While it’s easy to give money out, the comptroller’s observations of the EDA’s oversight and project management is an example of what happens when you do not create a robust control environment.
The phenomenon known as “asymmetry of information” is another challenge. This is the circumstance when advocates or applicants know more than the agency when it comes to developing policy and reviewing applications or proposals. The balance of information between the parties is often unequal. That, more often than not, puts the public at a disadvantage.
Agencies must work hard to overcome this challenge. Smart public administrators with training and expertise in the subject area must scrutinize applications and examine assertions. This applies to evaluating applications for incentives and responses to Requests for Proposals as well as the development of new policies and programs.
Policymakers need to avoid being ‘captured’
We need to be wary when those who will benefit from a program have a practical and political advocacy role in its development. While it is often necessary and useful for people involved in an industry to engage in policy development, policymakers need to avoid being “captured” by those advocates. When this happens, the resulting policies may be overly generous to one side, and the public is left less protected. It could be argued that this happened when our current programs were developed.
The Legislature’s access to sound research has limits. While the Office of Legislative Services expertly manages the legislative process and has subject-matter expertise to contribute, it may get pushed aside by more knowledgeable advocates. Further, the impact of staff turnover in recent years has reduced the capacity of the OLS to thoroughly develop policy options in their fields of expertise, especially when driven by unreasonable time constraints.
Beyond the issue of the “Goldilocks” challenge, i.e., finding the “just right” level of corporate tax incentives, the option of allowing businesses to sell their earned tax credits needs more study before being enacted. Having recognized that, State Treasurer Maher Muoio has made some smart recommendations on the point. This issue is complicated and needs to be carefully studied to ensure that informed policy decisions are the result.
Thus far, the public discussion has not considered how incentives may be strategically multiplied using local government incentives in addition to state incentives. This practice involves redeploying what would have been property taxes (or payment in lieu of taxes in a redevelopment area) from a project and using that money for public improvements that enhance the private project. It can also mean issuing incentive-backed debt to finance the improvements.
This raises questions about how well local officials understand an applicant’s financial support needs. Do municipal officials regularly consult experts who understand pro forma financial statements? Are all incentives considered at one time or are they considered in several forums making them difficult to track? Does the business-development-focused EDA have the expertise to make judgments on the fiscal capacity of our local governments as part of its analysis? All these issues deserve sound review.
The deadline approaches
When we developed our current incentive programs there was a debate over where incentives should be offered; only in those municipalities that were fiscally challenged; only in areas in need of redevelopment; or anywhere in the state. Anywhere in the state won. Was that appropriate? In today’s economy, is that still necessary?
At this moment, we are nearing a deadline to address the pending expiration of these programs. The requirement to review and reauthorize these projects reflects a smart decision made when the laws were passed. We need to do more of that with other programs.
Gov. Murphy’s team has engaged a consulting firm whose report will hopefully highlight how other states address these issues and analyze the pros and cons of different policies. Having a third party look at our competitive environment and make well-considered and balanced recommendations will help move us forward.
We need to be competitive; our economy needs to grow. A robust business community that provides jobs with good salaries to workers who can then spend money in the state, buying homes, large appliances, and cars will increase government revenues. However, our policymakers need to be deliberative in their planning and they must make decisions through informed analysis, focusing on the economy and understanding the competitive risks. In addition, sound oversight and controls to guarantee the integrity of future projects must be baked into the process and remain consistent from administration to administration.
We need to keep in mind that leveraging public resources for private profit is a serious business. If the state and local governments are going to be effective partners with our businesses, we need to make sound decisions that reflect a true partnership.