Introduction

A cost benefit analysis is the computation of the total income from a business (increased payroll taxes, property taxes, sales taxes) less any incentives granted (property tax abatements, sales tax rebates, cash, loans, workforce development grants). Only if the benefits exceed the anticipated costs is the performance agreement likely to create wealth for local citizens. Thus, a cost-benefit analysis is imperative for local officials to optimize the use of scarce, public dollars.

“Old School” Economic Development?

In the past, communities resorted to a number of practices to lure companies to their communities. The promise of cash incentives was one of those practices but the question of how much to offer was the logical next question. A consulting firm in economic development listed the practices commonly used. (My favorite is “guessing.”) Their conclusion is that having a cost benefit analysis or financial impact analysis is the better way to evaluate financial incentives.

Old School Econ. Dev.
Source: Impact DataSource.

Minimal Rate of Return

In a presentation, two economists discouraged using incentives unless the project’s minimal return on investment was 10% or more. Cost benefit analyses are widely available and at least two Kentucky communities use them. Northern Kentucky Tri-ED (Boone, Campbell and Kenton Counties) and the City of Paducah use ImpactDataSource out of Austin, Texas, to calculate a potential rate of return.

Min. Rate of Return
Source: Impact DataSource.

ICMA

The International City/County Management Association (“ICMA”) is an organization of professional city, county, and town managers responsible for the workings of local government. In their 2014 survey, seventy-three percent (73%) of members reported that a cost benefit analysis was performed prior to offering financial incentives to businesses.

Min. Rate of Return
Source: International City/County Management Assoc.

Resources

Sample Financial Impact Analysis by Impact DataSource

ICMA Economic Development Survey 2014

Questions

Is Kyndle / City of Henderson / Henderson County obtaining cost benefit analysis prior to asking for financial incentives from local government?

Are companies being asked to sign performance agreements?

Are there “clawbacks” in place to reclaim local dollars in the event companies fail to honor their agreement?

Is there any understanding on the part of local officials as to what an acceptable rate of return is for the use of taxpayer dollars?

Would you support candidates in 2018 that advocated for greater transparency and accountability in local economic development?

Summary

The City of Henderson and Henderson County should obtain cost benefit analysis / fiscal impact evaluation prior to extending local dollars in economic development. Additionally, local officials should set the minimum rate of return the community is willing to accept on economic development investments. If Henderson wants to regain its swagger, these are common sense ideas for the responsible use of taxpayer resources.