State's most prosperous areas see incentive grants flow
Posted October 15, 2014 6:00 a.m. EDT
Updated October 15, 2014 6:27 p.m. EDT
Littleton, N.C. — The cavernous, 50-year-old building on Highway 158 in Littleton, just across from the Piggly Wiggly, seems like an odd place to build small airplanes.
Every time Allegro LSA's dozen employees finish one of their sedan-sized two-seaters, they dismantle its aluminum wings and truck the pieces for a flight test at the nearest airport about 20 miles away.
The process adds time to each plane's one- to two-month-long production.
But to the crew here, this half-empty, county-owned building is a good place to grow. It was part of a deal offered by Halifax County, which like many across the state is struggling to combat stubbornly high unemployment rates.
Kyle Lawler, the former vice president of operations, said offers from state and local governments were the deciding factor in the company's move to the county 70 miles northeast of Raleigh, where more than one in 10 residents is out of work.
"Those incentives are the only reason we’re here," Lawler said in an August interview.
Lawmakers and municipalities are eager to create jobs, and state policy even favors companies that do so in economically disadvantaged counties. But a WRAL News analysis shows that of the hundreds of state incentives awarded to do just that, most are concentrated in the state's most prosperous 20 counties, where economists say the grants barely make a dent in already below-average unemployment rates.
Companies in the most impoverished counties, where jobs can make the biggest impact on the local economy, receive incentives the least often.
The findings lend ammunition to incentive critics, who argue the millions North Carolina puts toward incentives can be better spent elsewhere. But even advocates of the programs contend the state needs a better strategy for ensuring rural counties don't get left behind.
"It’s up to the legislature to articulate what they’re trying to accomplish, then judge whether success in economic development is getting us there, rather than saying, 'Well any job is better than no job," said Brent Lane, director of the Center for Competitive Economies at the University of North Carolina-Chapel Hill. "Big announcements, big ribbon cuttings, that tends to satisfy the political imperative, but it has not succeeded in building a strong economy in North Carolina."
More money flows to well-off counties
The N.C. Department of Commerce annually examines the economic health of the state's 100 counties, dividing them into three tiers. After factoring in poverty rates and unemployment figures, the 40 counties in the worst shape are classified as tier one, the next 40 in tier two.
Tier three counties like Wake and Mecklenburg – often urban regions with much higher household incomes and larger populations – make up the 20 most prosperous.
WRAL's analysis focused on the county-by-county breakdown of the state's two largest incentive programs, the Job Development Investment Grants and the One North Carolina Fund, both performance-based grants that offer companies no money upfront.
Even though tier three is half the size of the other two categories, companies in those counties were granted about 40 percent of the state's job-creation incentives over the past five years. Tier one and two counties each claim about 30 percent of the grants.
Data from the state Department of Commerce shows far more taxpayer money flows to the counties doing the best economically than those that are more needy. Since 2009, the state announced more than $514 million in grants for projects in these tier three counties – 80 percent of the total value of grants announced. Tier one counties claim only 10 percent of that value.
Commerce officials point out that for JDIG projects, a portion of any grant awarded to wealthy counties is earmarked for a fund for rural infrastructure. Since 2009, that portion is projected to top $170 million.
Yet even taken together, the money pouring into this fund and the grants approved for the poorest 80 counties combined only accounts for about half of what state leaders direct to the richest areas of the state.
A similar distribution holds true for the awards announced during the administration of Gov. Bev Perdue – a Democrat – as well as the year-and-a-half of announcements from Gov. Pat McCrory – a Republican.
''Big announcements, big ribbon cuttings, that tends to satisfy the political imperative, but it has not succeeded in building a strong economy in North Carolina.''
Brent Lane, UNC-CH Center for Competitive Economies
Commerce department spokesperson Graham Wilson notes there are other incentive programs specifically targeting rural areas. Since McCrory took office in 2013, Wilson said, a newly retooled Division of Rural Economic Development has awarded more than $37.9 million through these programs for the creation of 3,300 jobs.
Handling of some of those grants changed hands last year, months after The News & Observer in Raleigh revealed that taxpayer money directed to the N.C. Rural Economic Development Center had for years been used to help build fast-food restaurants and discount retailers, at times claiming jobs that didn't exist.
In an interview, Commerce Secretary Sharon Decker said although she believes the restructuring of rural initiatives has helped, there are gaps she hopes to address as she works with lawmakers to renew JDIG and expand other programs in the coming legislative session.
"We have to do more. That's the reason I'm especially proud when I see the opportunities we've been able to leverage just in the last little while," Decker said. "We are trying to be much more targeted in our use of Job Development Investment Grants and One North Carolina funds in the rural communities."
Problems persist, despite 5-year-old recommendations
To be truly effective, economic incentives should go largely to companies that create jobs where they're needed most.
That was a major finding of an almost 300-page legislative report, authored by Lane and his research group at UNC in 2009, detailing the successes and failures of the state's incentive programs.
Among the group's many recommendations for state lawmakers: increase spending on incentives like JDIG and One North Carolina while honing their focus on impoverished counties.
"When we reluctantly got into the incentives game in North Carolina, they were only available in distressed areas. That’s the way they started," Lane said. "We were essentially saying we needed to get back to that."
The evidence is rooted in the economic reality of trying to make any kind of tangible impact on the country's ninth largest state economy. With a statewide workforce of more than 4.6 million, moving the needle on unemployment just isn't possible with a few million dollars' worth of subsidies.
''A hundred jobs added to Raleigh is 100 jobs, but as a percentage of the Raleigh economy, it's trivial. But 100 jobs added in Pasquotank County – transformative. It matters where these things happen.''
Brent Lane, UNC-CH Center for Competitive Economies
"If you want to increase employment a single percent, you need 50,000 jobs," Lane said. "There hasn’t been a year in North Carolina’s economic history where our Department of Commerce claimed to create 50,000 jobs."
By comparison, Lane said strategic grants in disadvantaged areas can have a significant regional effect.
"A hundred jobs added to Raleigh is 100 jobs, but as a percentage of the Raleigh economy, it's trivial. But 100 jobs added in Pasquotank County – transformative," Lane said. "It matters where these things happen."
To Halifax County Manager Tony Brown, that's exactly why incentives are so important to rural areas like his.
At its worst in January 2010, the county's jobless rate rose to more than 15 percent. And although Brown said county leaders worked hard to invest in infrastructure despite the recession, the area still needs all the help it can get.
"It’s amazing: if you’re in the Triangle area, people get upset when the unemployment rate gets up to 10 percent," Brown said. "We’re ecstatic when it gets down to 10 percent."
Lane noted grants to more prosperous areas aren't always a bad idea. In certain cases, regardless of the location, he said incentives that lure big projects with far-reaching impacts – an auto plant for example – can ignite a cluster of industries that extends across the state.
Jim Fain, the commerce secretary who oversaw the rollout of JDIG in 2002, said that's why it's important to remember that the number of jobs is often less important than the type.
"The macro economy can wipe out, on a net basis, all the impact of that," Fain said. "But the question to ask is if these are the kinds of quality jobs in the sectors that we think will stick to your ribs."
Role of incentives in expansion a matter of debate
Either option – landing an auto plant, as the state is reportedly trying hard to do, or focusing on rural areas – isn't always easy. Especially considering big job announcements in well-off areas can also mean big wins for politicians.
In recent months, McCrory has highlighted significant incentive deals at high-tech firms like Cisco and HCL Technologies in Research Triangle Park and AvidXchange in Charlotte. Perdue did the same for Triangle corporations like Red Hat and LexisNexis.
''There’s a line people use that politicians just like to go cut ribbons. Well you’re damn right they do. Because if they didn’t, they wouldn’t get elected again. That’s for a very noble reason: Because if we lose deals that could be building our economy and providing jobs, particularly in hard times, how responsible is that?''
Jim Fain, former N.C. commerce secretary
Although it's easy to be cynical, Fain said claiming credit for these wins is part of the job.
"There’s a line people use that politicians just like to go cut ribbons. Well you’re damn right they do. Because if they didn’t, they wouldn’t get elected again," Fain said. "That’s for a very noble reason: Because if we lose deals that could be building our economy and providing jobs, particularly in hard times, how responsible is that?"
But when announcements come to prosperous areas, economists say incentives play a much smaller role in the decision.
"When most of the money simply tracks where most of the economic activity is, all you’re really doing is sticking a bumper sticker on the back of the race car and claiming you built the car," Lane said.
Just how big of a role incentives play can be hard to determine – despite claims that they're necessary to compete.
North Carolina's subsidies require companies to sign a so-called "but for" clause, which attests the firm wouldn't be relocating or expanding here without the incentive.
But research by Tim Bartik, senior economist for the Michigan-based W.E. Upjohn Institute for Employment Research, has found that 90 percent of the time, companies would have made the move without an incentive.
The real question, Bartik said, is how valuable the remainder of undecided companies could be for the state.
"The 10 percent of cases you tip may essentially pay for the other cases you don’t," he said.
There's another problem with offering incentives in areas already packed with similar jobs – it can drive up cost for the competition.
At the Cary-based tech firm SAS, company executives used no state incentives to expand the company's headquarters even amid the recovery from the recession. Jim Goodnight, the company's billionaire co-founder, told the audience of a September panel discussion that incentives for other businesses increase competition for talent and drive up salaries.
"I want the government to get out of the recruiting business," Goodnight said.
Incentives 'can't make a bad deal good'
Economists and incentive experts say the challenge to creating jobs in rural counties is that they don't always offer the range of things companies need.
"You can’t make a company fit where it can’t fit," Cathy Scott, executive director of the Halifax County Economic Development Commission, said. "No amount of incentives can make a company locate where it can’t be successful."
To improve those factors, counties need time for infrastructure improvements and worker training to take effect.
''If the state is paying out corporate welfare, somebody is losing''
Sarah Curry, John Locke Foundation
"What economists are learning is that long-term investments are really paying off," said Jonathan Morgan, a professor who studies economic development at the UNC-Chapel Hill School of Government. "If you start pounding away right now, you get five or 10 years out, wake up and realize you have a better workforce."
That's where critics like Sarah Curry, with the conservative John Locke Foundation, say incentives can do real harm. Instead of directing that money to rural improvements, Curry said state leaders are "picking winners and losers" among private companies.
"In my hometown, if I had to choose between improving schools and roads and paying to put a big manufacturing plant in, I'd say schools are first," Curry said. "If the state is paying out corporate welfare, somebody is losing."
On a personal level, Brown counts himself among those skeptics.
"I’m speaking to you as Tony, private citizen of Roanoke Rapids: I think incentives suck. I think we should never provide an incentive and each [company should succeed] on its own merit," Brown said. "That’s in my 'Alice in Wonderland' World."
As county manager, however, he says he knows his region needs jobs now.
"In the real world, with the competition that’s out there between states, between countries, between continents – so many other folks are willing to [use incentives]," Brown said. "And if you’re not willing to do that, then you’re probably not going to be as competitive, and you’re not going to land those large factories."
Living wage, modest skill
Five years after his team's report hit lawmakers' desks, Lane says he still hasn't seen enough improvement in the state's economic development strategy.
That's why he wasn't surprised to find incentives clustered in the state's richest counties. Jobs in these areas, whether high tech or high finance, may be great jobs, but he said they're not what state workers really need.
"That success is a future that left most of North Carolina out," Lane said. "What we need in most of North Carolina are not high-skill, high-tech jobs. We need living-wage, modest-skill jobs. That’s our citizenry."
It's exactly the kind of worker Allegro LSA is looking for. By the spring, the company plans to move out of its space in the Littleton Industrial Building to a smaller facility by the Halifax Regional Airport, hiring 34 workers by the end of 2015.
"They’ve really been working hard to work with us and help us," Lawler said of local and state economic developers. "In return, we’re trying to do the same for the county in providing jobs and employing people."
By being more proactive about the right companies, Lane said the state can use incentives as a tool "for self-determination about our economic future."
"You can think of it as an empowering device if you used it that way," Lane said. "Either that, or you're a victim in an auction not of your own creation."
To Brown and the residents of his county, which has seen its population slowly leech away as its unemployment rate lingers in the double digits, it's crucial that state leaders remember that the economic recovery has not come equally to everyone.
"It’s important that we as rural counties don’t get lost in the outflow from rural to urban areas, because we’re still a viable part of the state," Brown said. "I think it’s going to be necessary, for the entire state to succeed, that rural counties still have options – still have people gainfully employed."