Memorandum

City of Lawrence

City Manager’s Office

TO:              David L. Corliss, City Manager

Diane Stoddard, Assistant City Manager

CC:              

FROM:          Roger Zalneraitis, Economic Development Coordinator/Planner

DATE:           October 31^st, 2008

RE:               Economic Development Policy, Tax Abatements, ED Committees

In response to the January study session on economic development and incentives in Lawrence, staff has worked to create, review, and update economic incentive policies for the City.  In April drafts for Transportation Development Districts and Tax Increment Finance Districts were submitted, and these were approved in August.  Staff has since taken the initiative both to review the existing tax abatement policy, and develop an overarching policy to guide processes and procedures for other economic development incentives.

This memo provides a draft of the work done on the overarching economic development policy in order to help guide discussion on the subject.  It also outlines the current tax abatement policy and the roles of Douglas County Economic Development Board and the Public Incentive Review Committee (PIRC).  The memo concludes with several issues for discussion in order to revise and refine the work done so far.

Background

In November of 2007, Commissioner Chestnut provided an outline of important questions that needed to be addressed related to City processes and procedures for evaluating economic incentive requests (available here).  This was followed by a study session in January of 2008, where background information on tax abatements and other economic incentives was presented.  From that study session, several new initiatives emerged, including a review of existing policies and committees, revision to the benefit-cost model, and development of new Tax Increment Financing (TIF) and Transportation Development Districts (TDD) policies (available here). 

Since then, TIF and TDD policies have been drafted implemented (TIF Policy here, TDD Policy Here).   Staff has worked extensively on creating an in-house benefit-cost model and is nearing completion on this.  In addition, Staff has been reviewing the existing abatement policy and is developing an “overarching” economic incentive policy that will govern the use of cash-like incentives that may be used by the City, in particular those incentives that do not have clear guidelines from the State.  Finally, Staff has reviewed the history of the two economic development committees in the City, the Douglas County Economic Development Board and the Public Incentives Review Committee (PIRC).  A discussion of key features and outstanding issues related to these policies and organizations is presented below.

Overarching Economic Development Policy

Several economic programs- TIF, TDD, Industrial Revenue Bonds (IRBs) and Tax Abatements- have procedural and analytical guidelines established by State policy.  Many other programs, however, do not.  Because it is important to have clear and consistent guidelines for all incentives, Staff has been working to develop an overarching economic policy for these additional incentives.  This policy will guarantee all incentives considered by the City have clear processes and procedures for applicants, and ample opportunity for public feedback.

A draft copy of this policy is available here. The policy enhances existing application procedures and performance provisions, while fitting squarely within planning and partnership goals and objectives.  The policy contains the following key elements:

1) Objectives: Assures that the Policy is in accord with current practices and objectives.  The Policy outlines the general economic development objectives of the City as set forth in Horizons 2020, as well as the roles the City has in economic development and where the policy fits within this role.  This section is drawn from the current Tax Abatement policy as well as Horizons 2020.

2) Incentives: This new section provides a list of all the incentives that the overarching policy may govern.  Although the process may be different for some incentives where State procedures are already available, such as TIFs, this sets a minimum standard for all incentives considered by the City.  The City may choose to implement, utilize or exclude any incentive as it sees fit.

3) Application Procedures: This new section lists the application requirements, the review process for City Staff, and the review procedure for City Commission.  The public review process includes two meetings.  The first public meeting is used to present project and incentive information to the City Commission and the public.  In this draft, we suggest that at the first meeting no vote should be taken, but a vote may be taken at the second meeting.  We think that by creating a standard policy for incentive requests with two meetings, it could be helpful both for the public and the applicant.  For the public, it will provide an opportunity for them to become familiar with the proposal, while the applicant will also have a more clarified process at the City Commission level.

4) Benefit-Cost Model: The Benefit-Cost model is currently being developed in-house, and is discussed more at length in attached memos.  Within the overarching policy, the benefit-cost section establishes the guidelines for analysis for incentives where this model needs to be used.  Some incentives, such as IRBs, may not need a cost-benefit analysis.  A list of the benefits and costs that must be calculated is provided, as well as additional non-calculable factors that the City may wish to consider when evaluating an incentive request.  This section is drawn largely from the Tax Abatement policy, but adjusted to reflect the new internal benefit-cost model.

5) Performance Provisions and Accountability: Based on concerns that “substantial compliance” had not been adequately defined or enforced in the past, we suggest a more numerical and objective way to address performance.  This new section sets forth annual targets that firms would need to meet, as well as reductions in incentives should these provisions not be met.  Compliance will be measured though an annual report to City and Staff.

Tax Abatement Model

Lawrence established its first tax abatement policy in 1991.  The policy was updated in 2001 to include:

• a benefit-cost ratio of 1.25 to 1 for all projects to be approved;
• criteria that would allow for a tax abatement higher than 50%, including the size of capital invested and the length of time a firm had been in the local market;
• permission for the governing body to vary the abatement rate per year;
• an increase in the application and renewal fees;
• a reconstituted review committee (the Public Incentive Review Committee, or PIRC); and
• a performance agreement requirement for abatements.

In 2003, the policy was further refined (available here - internet access required).  The chief additional components in 2003 were:

• the inclusion of wage and health benefit requirements for all firms receiving an abatement and enforcement of those requirements;
• the exclusion of the City Commission to waive procedural requirements as well as to waive the benefit-cost threshold of 1.25 to 1; and
• new requirements that other public subsidies would be covered by the abatement policy, except for Industrial Revenue Bonds or subsidies that were less than $100,000 a year.

Some sections of the tax abatement policy may be redundant with the overarching policy.  For example, the 2003 tax abatement policy was expanded to include other incentives.  Since the overarching policy will now govern those, this section may be removed from the tax abatement.

Another consideration is the tax abatement policy language regarding taxes on machinery and equipment.  There is no longer any property tax on machinery and equipment, thus this language is no longer valid.  It can be re-inserted if the machinery and equipment exemption is removed.

Additional elements of the two policies should be reviewed to ensure a minimum of redundancy.  This could include such items as: performance provisions, accountability, and the benefit-cost model requirements.  To the extent that these are redundant, it may make sense to remove these elements from the tax abatement policy.  Sections that are unique to tax abatements or are in addition to general subsidy requirements should remain.

Economic Development Board and PIRC

There are two advisory committees dedicated to overseeing economic development in the City and County.  These are the Douglas County Economic Development Board, and the Public Incentives Review Committee, or PIRC.

The Douglas County Economic Development Board was created in 1994.  It consists of 12-15 individuals who serve on a permanent basis because they are representatives of key stakeholder institutions, including the City, County, Chamber of Commerce, the University of Kansas, Haskell University, and the School District.

The Board is charged with overseeing the annual economic development budget, ensuring compliance with Horizons 2020, convening public meetings on economic development, and keeping the City and County Commissions apprised of economic initiatives.  In practice, the Economic Development Board has not met in at least a year.  It does not appear they currently play an active function in economic development activity in the City or County.

PIRC was initially founded as the “Administrative Review Committee” under the 1991 tax abatement policy.  The Administrative Review Committee became PIRC under the 2001 tax abatement policy, and it’s membership was expanded.  PIRC is comprised of seven members, two of whom- the financial analyst and public representative- serve on three year terms. 

The primary purpose of PIRC is to review applications for tax abatements, make recommendations on whether to grant a tax abatement to the applicant, and review the annual tax abatement compliance report.  Due to a lack of abatement applications in recent years, the PIRC has only been meeting about once a year to review the annual abatement report.

Outstanding issues

The overarching policy, the tax abatement policy and the economic committees are all inter-related, and Staff seeks feedback on several critical issues in order to complete work on these items:

• With regard to the overarching policy, what “additional factors” should be considered in addition to the benefit-cost analysis?  For example, should environmental considerations be included as an additional factor?  Is there anything currently on the list that Commission would like to see removed?

• The overarching policy also has a framework for compliance with performance agreements as well as penalties if compliance is not substantially met.  Should there be any specific performance provisions that must be included in each application?  Should some incentives be excluded from these general compliance provisions (for example, IRBs), and if so, which ones?

• What additional considerations should be given to tax abatement applications over and above what is included in the general policy?  For example, should wage and health requirements only be included for tax abatements?  Should they be included in their current form?

• What is the future role for the Lawrence County Economic Development Board and PIRC?  Should these two agencies be reconstituted or merged to incorporate a different role?

• In relation to the PIRC, should the annual abatement report be expanded to include any other economic incentives?  Should the report be adjusted to include such items as compliance with performance agreements?

In addition to these specific concerns, Staff welcomes any other comments or considerations from the City Commission.