Will a beefed-up Commerce RI pay off in meaningful job growth?

Joe Rando, CEO and president of a small tech company, doesn’t hesitate to describe the importance of public incentives in encouraging his company to move less than 20 miles, over the Massachusetts line, to Providence.

Without the $521,000 in Rhode Island job-creation tax credits, Trade Area Systems would have remained in Massachusetts, he said.

“It was everything. I would not have done it if it was not for this help,” Rando said. “What you basically did in Rhode Island is you stacked the deck in your favor.”

The 20 jobs initially being moved include software developers and other tech positions. Over the next five years, Trade Area Systems, which creates software programs that allow retailers to analyze sites, expects to hire eight more.

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It’s one example of the $62.7 million in public incentives awarded over the past six months by the R.I. Commerce Corp., the economic-development arm of state government. This doesn’t include a $5.6 million package expected to be awarded to GE Digital for its recent decision to locate at least 100 jobs in Providence.

Over the past 12 months, through two successive state budgets, Commerce RI has been returned financially to where it was pre-recession, according to its leaders. It is operating under a beefier organization that is intended to improve its vetting of business applications for development incentives, including new programs that target the redevelopment of existing buildings and creation of jobs.

Although it invites criticism – and was discouraged by former Gov. Lincoln D. Chafee – the deployment of state incentives to attract companies and encourage existing businesses to expand operations or facilities is seen by many economists and economic-development specialists as a necessary expense.

PAYING OFF?

But is the state getting its money’s worth from the beefed-up agency and its expanded use of incentives?

Proponents of public incentives say the approach reflects reality. The state is operating in a competitive environment to land new employers, and even its existing businesses can relocate, if not whole companies, then at least divisions. By becoming competitive with surrounding states, Rhode Island can begin to establish a new economy.

Looking at what has been awarded up to this point, critics take issue with what they say is an emphasis on real estate-related tax credits, as opposed to job creation. Rep. Patricia Morgan, R-Coventry, a prominent House minority leader, said she’s dubious that the incentives will help the state’s economy.

The state would be better served by concentrating on the underlying business climate, through reduction of taxes and regulations that sap strength from all businesses, she said.

She took particular issue with the Wavemaker Fellowship, a new incentive that aims to help recent graduates in high-demand fields repay their student loans if they remain in Rhode Island.

“If they have good jobs, they’ll stay here,” Morgan said. “You don’t have to pay them to stay here. Why are graduates leaving? There aren’t good jobs for them here.”

Gov. Gina M. Raimondo says the use of economic incentives needs to be weighed against the return. The GE Digital jobs, for example, are expected to pay nearly twice the state’s median salary.

“The question isn’t how much you’re investing,” Raimondo said. “It’s, what are you getting for it? If you put $1 million of tax incentives on the table, but you get $10 million of state income tax, I think that’s a good thing for Rhode Island.”

Excluding GE Digital, which has not yet had incentives approved, the actions approved by the Commerce RI board have resulted in the promised creation of 240 jobs through the Qualified Jobs Incentive program. 

This tax-credit program, created in the 2015 General Assembly session, allows the state to provide financing for companies that expand their workforce in Rhode Island, in the form of a payment per job, per year, based on the wages actually paid. Companies can get up to $7,500 per job, per year under the program.

This is the program that Trade Area Systems will tap into. The job-creation tax credits, paid over a five-year span, are expected to amount to $106,613 annually, or $521,507. For this investment, the state expects to collect back $135,000 in income taxes from the new positions over six years and $11 million in gross domestic production.

The bulk of the designated awards through Commerce have been distributed among five programs, led by $33.3 million in tax credits approved through the Rebuild Rhode Island program. This incentive, created in 2015 and stocked initially with $1 million in state funds, is intended to help developers renovate existing structures. The General Assembly authorized another $25 million for the program this year.

Credits are payable on building occupancy. The redeemable tax credits can be used for up to 30 percent of a project’s costs, including if the development is near a mass-transit hub or if it involves the renovation of a historic structure.

To date, 11 applications have been approved for the credits. The successful applicants, for projects ranging from a mixed-use development over a parking lot across from the Providence Journal building, to the redevelopment of the sprawling, historic Pontiac Mills in Warwick, have pledged nearly $300 million in construction activity.

That construction will lead to some 1,000 temporary construction jobs, according to Commerce RI, employing laborers in an industry hard-hit by unemployment post-recession.

Michael D’Ambra, president of D’Ambra Construction, recently received a package of incentives for development of a new, 120-room hotel in Warwick aimed at business travelers. The facility will be part of a larger mixed-use development planned near T.F. Green Airport, and had been on hold for years.

Assistance will come in the form of $3.5 million in tax-increment financing, as well as $1 million in Rebuild Rhode Island credits and $350,000 in sales tax exemption for building materials. Without that package, “We would not have been able to do the project,” D’Ambra said in a recent interview.

The creation of a new Executive Office of Commerce placed a cabinet-level executive, Secretary Stefan Pryor, over business-development functions for the first time in 2015. That same year, the General Assembly approved a total of $76.4 million in funding for Commerce functions, including $48.3 million in economic-development and relocation tools. This year, legislators approved $53 million more.

The new funds include a collective $26 million for Rebuild RI tax credits, a fund to encourage businesses to locate in the Interstate 195 redevelopment district that remains unused from last year. Tax credits awarded through the program this year have already exceeded that amount and will carry into future fiscal years.

Also, there is a collective $12 million available as part of the First Wave Closing Fund, which allows the agency to make cash payments to projects considered critical or catalytic in nature. The latter fund received $5 million in state funds last fiscal year and another $7 million this fiscal year.

Armed with these “tools,” as they are sometimes called, the Commerce board and executive team spent five to six months, from July 2015 to early 2016, creating regulations and policies that will guide their disbursement.

They did this as a reorganization divided Commerce activities into three lines.

Along with a client-services group, which works directly with existing businesses, a strengthened business-development function was created, responsible for selling Rhode Island to in-state and out-of-state prospects. A five-person investment team, including finance, equity and real estate professionals, is responsible for evaluating investments, requests for loans and bonds, with a goal of promoting business growth, according to an overview.

Marcel Valois, the former head of the Economic Development Corp., as Commerce RI was previously called, remains with the agency, and now serves as senior economic-development adviser. Valois earns slightly more than $144,000.

Commerce RI, a subset of the Executive Office of Commerce, which also oversees development of public housing and other efforts, received a total of $7.4 million in base funding in the current budget, down slightly from the $8.2 million authorized in fiscal 2016, according to information provided by the agency.

In fiscal 2010, its predecessor received $5.4 million from the state and employed 54. Staffing then steadily declined to 37 in fiscal 2015.

The economic-development agency now has 56 employees, 32 of whom have been hired since 2015.

The economic incentives it approves have grown too, from $11.5 million budgeted in fiscal 2015, to $46.6 million budgeted for fiscal 2017.

Pryor characterized the reorganization, completed in early 2016, as necessary to operate the 11 new incentive programs. “We wanted to ensure we had the professional staff capable of carrying out the work,” he said.

The new structure did not leave the organization with more layers, he insisted, adding “it’s a reasonably efficient organization.”

One of the most recent hires represents an area that Pryor said needed more emphasis. Hilary Fagan, recently named as executive vice president for business development, will take on a new function at Commerce, overseeing efforts to source new business-prospect leads. She will earn $130,000, according to the agency.

“We did find it hard to believe that the function did not exist,” Pryor said.

TOO BROAD?

But to some economic-development specialists, the Commerce RI development strategy appears to be broad, to the point of scattershot.

Liam Malloy, an assistant professor of economics at the University of Rhode Island, said he expected the governor and her economic-development team to be aggressive. “It seems like it’s a bit of a shotgun approach, which is not unreasonable especially for these kinds of things where you’re not exactly sure what is going to work, what is going to pan out,” he said.

In his view, the real estate incentives carry more weight for the state, because in addition to providing temporary construction employment, they permanently alter the Rhode Island infrastructure.

“Even though it’s private, it’s infrastructure investment that’s going to benefit the state in the long run,” he said.

Malloy is more skeptical of the relative value of the Qualified Jobs Incentive credits, which are paid out by each job created. The question, he said, is whether those jobs would have been created anyway.

“Especially because some of them are based on future expectations of hiring,” Malloy said. “If a company is experiencing strong demand for its products, it’s going to hire people anyway. If they’re not experiencing strong demand for their products, then they’re not going to hire people anyway.”

For that reason, the Rebuild credits offer something tangible, he said. “At least with the Rebuild Rhode Island one, if they rebuild this building with factory space, commercial space, townhouses, whatever, it’s still there. If the company goes out of business, its’s still there. It’s an asset we have.”

Rhode Island still has fewer jobs than it did at the end of 2007, before the Great Recession emerged. The state lost jobs along with other states but regained fewer jobs post-recession than surrounding New England states, and the country as a whole, Malloy said.

“It’s not clear from a macroeconomic point of view, how much effect these [incentives] are going to have,” he added.

Saul Kaplan, Business Innovation Factory founder and a former director of Commerce RI’s predecessor, takes an alternate view.

For him, the incentives that lead to net job creation should take priority. Overall, the state has succeeded in building a “very nice tool box of incentives” that can be deployed, he said, but the danger is that the state comes to rely on them.

In that arena, Rhode Island will have difficulty competing with other states, he said. Instead, it needs to foster its entrepreneurial and innovative industries. “I hope the incentives aren’t the central selling point,” he said. “I hope we’re selling value and strategic reasons for companies to locate here, and the incentives are kind of the icing on the cake.”

The budget request from the Democratic Raimondo administration for a second year of investment in Commerce programs was approved as part of the fiscal 2017 budget. But many Republican legislators protested the concentration on incentives as misguided. At one point, lawmakers, led by Morgan, tried to pull money from the Rebuild Rhode Island program to eliminate the so-called “car tax.” The amendment died for lack of broad support.

Gary S. Sasse, founding director of the Hassenfeld Institute for Public Leadership at Bryant University and a former director of the state’s Department of Administration, has not analyzed whether the state is getting as much out of the Commerce RI reorganization as it is investing, including the investment in new staff.

But he has serious concerns from a policy perspective on the use of incentives, and real estate tax incentives, in particular. The use of incentives should be judicious, and closely aligned with segments that the state needs to foster for sustainable growth. They should not be a long-term strategy, he said.

Commerce RI needs to be more transparent in its award of incentives, including explaining what metrics are being used to evaluate the effectiveness of the programs.

“The concern is a really basic concern … of transparency and accountability,” he said. “They have been given so much money, so quickly.”

THE CLOSER

When Raimondo arrived in Connecticut for an initial meeting with General Electric executives in July 2015, she had a tangible view of some of the competition for its headquarters.

Her car pulled in as Terry McAuliffe, the governor of Virginia, was leaving. Chicago Mayor Rahm Emanuel came in after her, Raimondo said.

In the end, GE would decide to move its headquarters to Boston. But the trip accomplished something else. She connected with the executives and kept in touch.

Raimondo offered the anecdote as an example of the environment facing states or cities that try to attract new industry. It takes more than incentives, more than a warm business climate. She has taken an active role in economic development, she said, a hands-on approach to attracting new companies to Rhode Island.

For all the millions newly invested over the past two years in a reorganized Commerce Corp., Raimondo is still the closer on critical deals. “I want companies to know, if you’re going to do business in Rhode Island, the government is going to be your partner and we’re going to work with you,” she said. “I think it’s important for companies to hear that straight from the governor.”

She feels the effort is starting to pay off for the state.

“I told people I was going to focus on getting more jobs here,” she said. “I am taking it seriously, and I’m working as hard as I can to do that.”

Following Commerce RI’s rocky launch earlier this year of the state’s tourism and marketing campaign, which attracted national attention, the GE Digital decision was a welcome rebound for the governor.

The company, which said it will hire for 100 jobs, has chosen a temporary location in downtown Providence. The jobs will pay more than $100,000 a year, the company said. This is nearly double Rhode Island’s median salary of $54,891.

Raimondo says the salary of the jobs to be created, not necessarily the size of the company, is the priority when incentives are awarded.

“My focus is high-skill, high-wage jobs, and if that comes from a small company, fine. If it comes from a large company, fine,” Raimondo said.

Kaplan called the investment by the company “hugely symbolic.” 

“When you have GE making a decision like that, believe me, it becomes a lot easier to set up the next conversation with the next executive suite,” he said.

Since taking office, Raimondo has taken nine trips for economic-development purposes, according to her spokeswoman, including four to New York, two to Connecticut, one to Massachusetts and two to California. The administration did not indicate which companies she met with.

Kaplan wishes Raimondo could have done even more traveling on behalf of the state. He views her decision in January to stay home because of an impending storm, instead of traveling to Davos, Switzerland, for the 2016 World Economic Forum, as a lost opportunity.

“The lesson of the GE story is we need to encourage and support a governor who is aggressively playing that game,” he said. •

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1 COMMENT

  1. Our Center has repeatedly criticized this economic development policy, which is furthered by the Brookings Institution report, that has as its core a series of hand-outs to a handful of special-interest insiders.

    How do such tax incentives, that further tax RI families and businesses, improve our state’s 50th ranked business climate? At $25,000 – $50,000 per job, this approach is not sustainable. We cannot afford to bribe enough companies or enough people to come here to make a significant difference. This is government-centric crony-corporatism approach.

    Instead, we need broad-based tax and regulatory reform – only this approach that can improve RI’s business climate – and that can lead to broad-based, organic business and job creation. This called free-market capitalism.

    Taxes cannot be lowered on the many if the political class needs that revenue to keep handing out to the few.