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Sunday, 05 July 2015 22:00

Officials defend SmartZones’ ROI as state moves to expand program

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WEST MICHIGAN — Legislation awaiting Gov. Rick Snyder’s approval could triple the number of communities that use a special type of tax-increment financing to attract high-tech development and innovation.

In mid-June, a bipartisan majority in the Legislature approved expanding the concept of SmartZones, which partner communities with local institutes of higher education to attract and retain entrepreneurs through incubators and access to equipment and expertise. Ideally, the programs help businesses commercialize products developed at the state’s universities.

However, by expanding the program, some have raised concerns about the potential long-term effect on the state’s school districts, the lack of compiled statewide data on how well the zones are doing, and whether taxpayers are getting a good return on investment from the program.

The main push for the expansion came from West Michigan’s economic development community, which wants to build off the successes of the program started under Grand Rapids’ West Michigan Science and Technology Initiative — a program now managed by GR Current — by expanding into Holland.

The bill, sponsored by Republican state Rep. Daniela Garcia of Holland, would allow the 15 existing primary SmartZones to partner with other communities to start “satellite” operations and share resources. It would increase from three to nine the number of satellite SmartZones that could operate after state approval.

“It’s almost like a mentoring relationship between the lakeshore and the city of Grand Rapids to allow a program [Grand Rapids] has had in place for nearly 10 years to extend to our region,” said Jennifer Owens, president of the Zeeland-based economic development agency Lakeshore Advantage.

When applying to the state for designation, the Michigan Economic Development Corp. last year required a minimum $1 million upfront investment over five years to ensure the program is properly funded.

Owens said the Holland SmartZone already has funding commitments from Michigan State University, the Community Foundation of the Holland/Zeeland Area and Lakeshore Advantage, plus legal support from Varnum LLP. The MSU Bioeconomy Institute in Holland is poised to be a major partner in the program as well.

A spokesperson for Snyder’s office said the Governor and his staff would give the bill a “thorough review,” but most watchers expect he will ultimately sign the legislation into law.

CAN THERE BE TOO MANY?

Since 2002, Michigan has developed 15 primary SmartZones and, prior to this legislative session, allowed for up to three satellite zones. The expansion bill increasing the limit of satellites to nine easily cleared the Legislature with bipartisan support, passing in the House 79-30 and in the Senate 33-4.

For some opponents of the legislation, it was a philosophical stand against tax incentives or special treatment for certain industries. But for at least one Democratic representative, the expansion raised questions about the ever-growing list of communities with tax-capturing entities.

“Some of the SmartZones have been very successful. Others have been less than successful and have not produced the type of job, property value and economic development gains that at least I would think would be necessary to justify their existence and expansion,” said Rep. Jeff Irwin of Ann Arbor, one of seven House Democrats who voted against the bill. Twenty-three House Republicans also opposed the bill.

“The levels of success are varied and the opportunity to have success is somewhat dependent on what’s happening in those communities,” Irwin added, crediting the “compelling story” that takes place in areas like Lansing, Ann Arbor and Grand Rapids. “But I do think there is a limit to how far this tool can go in the battle for economic development. It seems to me there continues to be more and more communities that come to the table and want this tool.

“I’m just skeptical that all communities are in a position to use the tool in a way that was intended.”

Irwin expressed particular concern about the effect these special tax-capturing zones could have on education funding statewide. While the policy allows for the local school district to be made whole if they miss out on additional tax revenue, Irwin said it affects districts statewide because of the way the Legislature budgets money for schools annually.

Essentially, if one district is being made whole by drawing down funding allotted for schools statewide, then other districts may lose out on state money.

“At a macro level, every time we do these types of SmartZones, it is taking money out of the whole available pool of state school aid,” Irwin said, adding that he has been unable to get state officials to indicate otherwise.

While local schools are at least made whole, the same is not true for other taxing units, such as counties, community colleges and libraries. However, advocates point out that program approval must come from local officials anyway.

“Local units have a choice whether or not to participate,” Owens said. “All of our local units of government have approved participation because they feel the investment in the future far outweighs the resources they would forgo.”

DRIVING ACCOUNTABILITY

Irwin and one state employee who could not be identified because the person is not authorized to talk to the press also alluded to a general lack of transparency at the state level with data related to the program.

Irwin said he has made repeated requests for the state to show how the tax-capturing aspect of the program is not negatively impacting schools statewide.

The state employee said that while information on tax revenue and job-growth data related to the programs are reported at the local level, it is not relayed to the state with any regularity.

Therefore, it is difficult to show at the state level with any certainty how much public money is being invested and what the true return on investment is. Additionally, while the state requires some reporting for TIFAs, there is no penalty for not reporting, the source added, creating a problem of limited data being available to the state.

The last time the MEDC reported on the program was in 2011, the source said, showing that 1,128 businesses located or expanded in the 15 zones, resulting in more than 18,500 jobs and $1 billion in private investment. The Center for Michigan said at the time that the cost to taxpayers for those gains was $90 million.

However, as with many forms of economic development data, these figures suffer from the so-called “but-for” problem.

A University of Michigan study from 2014 pointed to a general lack of transparency among TIF zones in Michigan and encouraged lawmakers to devise more stringent reporting requirements.

“The opportunity costs of such modifications to TIF practice are not easily quantifiable for public policy makers or local economic development specialists because statewide data that could help analysts evaluate the extent and effectiveness of these tax capture tools does not exist,” the report concludes.

Owens countered that state and local reporting requirements ensure that the SmartZones provide a good return on investment for public funding. She said administrators will have to report quarterly to the MEDC as well as local units of government on things like job creation, investment and the number of companies supported.

“There’s quite a bit of oversight in terms of reporting,” she said.

Kara Wood, executive director of the Grand Rapids Economic Development Corp., also said that the MEDC “does a regular review of the outcomes we’re producing.”

GENERATING RETURNS

Those interviewed for this story generally agreed that some SmartZones in Michigan work better than others.

Wood noted that since its inception, the Grand Rapids SmartZone has generated 2,350 new jobs and last year alone brought in more than $120 million in private investment.

“We’ve had some pretty remarkable deliverables,” she said. “We feel we’ve done a good job in being good stewards of public money that we can point to directly.”

State Rep. Andy Schor, a Lansing Democrat and former Ingham County commissioner who served on the Local Finance Development Authority board, said local officials there continue to show the number of businesses moving through the incubator as a measure of success.

“In this area, the SmartZone was extremely effective in assisting people to be entrepreneurs and create small businesses,” said Schor, who supported the expansion legislation. “It’s baffling to me that people are philosophically against economic development, or the government supporting economic development. That bill was truly a good example of a bipartisan group working together. I feel good about helping Grand Rapids and creating new satellite [SmartZones].”

In addition to employment and investment figures, another measure of how well SmartZones perform is in the amount of new, or incremental, tax revenue that is generated within the zone that can be used for a variety of purposes, like infrastructure, equipment, buying properties or marketing and promotion.

Wood said Grand Rapids’ increased tax revenue figures from the SmartZone were not readily available.

According to a draft of its SmartZone plan, Holland estimates it will generate more than $4.6 million in incremental taxes over the 15-year life of the program.

Owens and others agree that the success of the programs depends largely on steady streams of income, particularly in the early stages.

“By requiring the upfront capital, then we have a sense of what we need to get up and running,” she said.

Wood added that if SmartZones aren’t delivering on the promises laid out at their inception, “they shouldn’t be allowed to capture taxes and shouldn’t be allowed to function.”

“Again, I think the monitoring and oversight is really important,” Wood said, “and I think that structure exists.”

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Editor’s Note: This story has been changed from its original version to note that the Grand Rapids SmartZone is currently managed by GR Current. 

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