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1 Presentation Janesville City Council Economic Development Study Session February 18, 2010 Economic Development Study Session Agenda Economic Development Overview Goals, Processes, Results – Economic Development Financing – Janesville’s TIF Policies Tax Incremental Financing, Janesville’s Policies – Risk Considerations – Recommendations – Discussion – Economic Development Overview “A Business Model” Goal:To stimulate private sector investment in a • community to create jobs and increase the tax base. Our Objective is to provide public sector support in : • Economic Diversification – Job Growth and Preservation – Building the Local Tax Base – Why? Primary Source of City Revenues for Growth Economic Development is the process of stimulating the • flow (multiplier effect) of dollars into, around and through a local economy. Private sector investment creates income which creates • wealth and jobs = Community Cash flow Community Cash Flow creates tax base and fees • Taxes & Fees = Programs & Services • Bottom Line: A strong commitment to economic • development is fundamental to a community’s survival and growth in terms of providing new and continuing services to its residents and creating/maintaining an environment to attract new ones. “Reality Check” Facts, Challenges and Questions Elimination Process, Invest in Community X instead of Community Y • Economic Development: a long term investment, not an expense. • Competition is real and aggressive. • Profitability Supersedes Quality of Life. • Thinking from Your Customer’s Perspective. • Perception is Reality. • Janesville is impacted by global economics and industry shifts • Public Sector Policy Questions that need to be asked: • What do Janesville companies need from the City? – How can we effectively compete? – What will our residents support? (risk factors) – What does Economic Development Encompass? Planning and Land Use • Tax Policy, State and Local • Workforce • Infrastructure • Marketing, Sales and Public Relations • Negotiations, Negotiations, Mediation • Research • Finance • Incentives • Why Do Companies Locate? “The same things that attract new companies also retain existing ones” Labor skills/availability • Tax and regulatory climate (value vs. cost) • Proximity to markets/suppliers • Cost of doing business • Strong and stable political leadership • Adequate infrastructure • 60 minutes from an airport • Quality of life issues • Incentives • Economic Development Marketing : Competitive Opportunity: Communicate Janesville’s attributes on the following: The Right Product, People & Place – Value added vs. Cost – Differentiation/Unique Selling Position – Intangibles vs. tangibles – Brand = Perception plus Experience/Observation – Business Retention/Attraction – Targeted marketing – Data Intensive – Economic Development Strategies Business Retention & Expansion • Business Attraction • Entrepreneurship • Workforce Development • Regionalism • Role of Incentives “No one wants to pay sticker price” Incentives are tie breakers –incentives do not make a bad • deal good. Target future revenues • Available to existing, growth companies as well as new ones. • Unfortunately are reality • Should be a win/win, an evaluation of risk/return • Two Types of Incentives • Direct Financial = TIF, SBA, Tax Credits etc. – Indirect Financial = regulatory/permit timelines, workforce – services and “certified sites”. Economic Development Financing “The Public Sector Role” Objectives • Reduce the risk of private sector investment – Increase cash flow for growing companies – Reduce the potential failure due to financing – issues. Create and/or retain jobs – Provide access to capital – Public Sector Financing Role “Continued” Goal: Invest in projects or business ventures where • the economic and social benefits outweigh the financing risk. Benefits to consider include jobs, tax revenues, – neighborhood redevelopment etc. Should not take the place of private sector financing. – Seek to reduce the credit risk by allowing the company to – keep more cash on hand in order to grow and pay other debts. Reduce the perceived risk of the private sector so that they – are more comfortable in making a loan. Financing Challenges For Companies Growth requires cash, both access and affordability • To much debt, not enough equity • Commercial banks: short term lenders • Growth needs • Goal: Seek to match the term of the loan to the life • of the asset. Janesville’s TIF Policies Source:Council Policy Statement #61, Revised 11/14/2006 Creation of New Industrial TIFs on Green Field Sites. Objective: Business Attraction ? Eligible businesses –manufacturing firms and supporting businesses. ? Must have business commitments for at least $1.0 million in construction ? and the creation/retention of at least 50 jobs. The City should be able to recover its costs within eight years. ? The City may use up to two years of projected property taxes from each ? green field TIF project to capitalize a Development Fund that would provide assistance in “soft costs” ex. training costs, feasibility studies to support a business seeking to retain/create jobs that does not create new taxable property. Janesville TIF Polices Continued Council Policy Statement #61 Creating of New TIFs on Greenfield Sites Objective: Business Retention/Expansion ? Minimum size project, $500,000 increase in property value ? and the creation of a minimum of 10 jobs. City costs to be repaid within 10 years ? Can use two years of projected property taxes for a ? Development Fund as noted on previous slide Janesville TIF Policies Continued #3 Council Policy Statement #61 TIF and Downtown Redevelopment Policies When ever possible, the City will use non-TIF funding sources ? to purchase blighted buildings prior to the creation of a TIF District. This would allow a new TIF to utilize 100% of the new property values created . The City may use up to 15 years of property taxes for ? development incentives. The City may use up to 5 years of property taxes to capitalize a ? downtown redevelopment fund. Current/Active TIF Policies February 2010 Offer a forgivable working capital loan of up to 10 • years of increment on new construction which can be used for land write downs. Forgiveness based on the tax value of the increment and employment levels. Offer a forgivable working capital loan based on • leasing industrial space of $1,000/square foot leased. This loan cannot exceed $10,000 per job created. Forgiveness based on employee levels for ten years Additional TIF Information Trends and Examples Janesville TIF decisions are within legal boundaries under state law. • Communities like Madison, WI only use TIF for downtown redevelopment, (ex. • developers condo projects) and rely entirely on the demonstration of need financial via the “but for” clause. Thus it depends solely on the financial analysis. Future industrial property in Wisconsin is expected to be reassessed to lower • values due to the large vacancy rates and the over valuing of the real estate. This down sizing reality to industrial assessed values will be similar to what has happened in the residential real estate market. Since Janesville has a significant amount of industrial vacancy space, it is expected • that a large number of future TIF requests will fall under the second policy, (on previous slide) distinguished by the lack of a self generating funding increment by the project itself. It is important to recognize the increased financial risks with . these types of deals since the source of funding is other district projects Wisconsin TIF Survey Summary July 2009 Survey surveyed the use of TIF incentives in 13 Wisconsin cities including Janesville. Major results are summarized as follows: TIF loans vs. grants: 6 of 13 cities preferred loans, Janesville and Wausau use grant/loans, • Green Bay uses grants, rest is on a case by case basis. Loan interest rates: most handle on a case by case basis. Janesville and Green Bay charge • their cost of money, Eau Claire and Madison only charge interest if the TIF agreement is broken. TIF incentives for job creation: 9 of 13 cities do not consider this. Janesville and Eau Claire tie • jobs to forgivable loans. Priorities in considering projects: Almost all indicated they look at job creation, blight • removal, industrial development, redevelopment and tax base increase. Developer focused TIFs vs. city/end user focused TIFs: most of the communities use TIFs as • incentives for developer related projects. Janesville is somewhat unique in that its primary use of TIF is for industrial development. (city owned land) This is probably due the lack TIFs to develop retail as well as minimal downtown redevelopment. Current Janesville TIF Concerns TIF is used as an economic development incentive tool with a major focus on job • retention/creation as the major decision criterion. Current polices do not evaluate financial need. Currently in Janesville there is an expectation that the City will provide TIF dollars • to a project even if it does not need it. (“but for” clause) It is also perceived as an unlimited source of funding by Janesville businesses and others to attract new development/tenants. In a number of communities, TIF is used only for projects that provide significant • value in terms of job creation and/or tax base to the City. When there is a significant tax increment created, TIF is much easier to justify from a risk perspective. Where TIF is used solely to incentivize job creation ( a company just leases space or occupies existing space) the financial risk is higher for Janesville. Economic Development Financing Suggestions Creation of a Redevelopment Authority and Housing • Authority. Use of TIF and Community Reinvestment dollars from banks • to create small business revolving loan fund. Rock County Business Incentive Fund • Consider the level of financial need as well as job creation • when making TIF incentive decisions. Public /Private partnerships with banks for downtown • redevelopment TIF Policy Issues and Recommendations 1.The role of TIF in Janesville’s economic development program? TIF has been and will continue to be a significant incentive tool however it should not be the only tool used. Staff is seeking direction for the following: Direct staff to evaluate other economic development ? financing mechanisms including redevelopment authorities etc. Development of a Rock County Business incentive fund ? program involving both Rock county and the City of Beloit. TIF Policy Discussion Continued #2 2. Two major decision parameters of a project are job creation and financial risk. Is job creation/retention paramount or should the project’s financial risk also be considered and at what level? This is especially important where: The incentive being considered is greater than the estimated new tax ? increment. The project only involves leased space and job creation, there is no new ? tax increment being generated. It is important to recognize that the level of risk is much higher for these types of projects because they are not self-tax increment supporting. This will continue due the expected reduction in assessed values. Job creation is still a very important factor, however the evaluation should also consider the financial risk to the City ( the financial strength of the TIF) and the project's potential to increase the City’s tax base either though increased levels of taxable property or residential growth. TIF Policy Discussion #3 Staff Recommendations Staff Recommendations: 3. In light of our current economic challenges, should a higher level of risk be acceptable to create more jobs? Recognizing the economic issues facing Janesville, financial risk should be recognized but job creation be made a higher priority. That being said, all prudent security efforts should be made on every TIF loan. (ex. liens, personal guarantees etc.) 4. How should Janesville respond to TIF requests, particularly in the downtown area that do not expand the tax base or have significant job creation but positively impact this area? (ex. façade improvement loans) Continue to pursue public private relationships with local banks to share the risk and reduce the ITF expenditure. Also tighten up loan requirements (interest, term) to match those offered by the bank. TIF Discussions #3 Staff Recommendations Continued #4. Issue and Recommendation continued Downtown TIF loans should be made under different conditions than industrial projects , particularly where there is no significant primary job creation. These loans should be made on a financial gap basis utilizing the “but for “clause”. (Madison model) and be considered for “game . changing” projects 5. Recognize the scarcity of TIF funds particularly in the downtown area, should Janesville continue to use them to support such organizations as the Janesville Design Center or restrict the use to projects that include job creation or tax base growth? Due to the restricted availability of funds, TIF should be used for job creation and/or for tax base growth. Non-profit organizations seeking funding should be encouraged to seek other public/grant funds and /or demonstrate public/private sector funding relationships.