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�2 opment fee statutes have equity provisions gives to the city a downstream share of a option to use tax-exempt private activity between business and residential develop- project income flow and recovers the city's bonds as a tool for economic develop- ment which indirectly limit fee waivers in investment in the site. Others are those in ment, it will be because of abuses, typi- either area unless fully funded from a which the city or redevelopment agency tally involving assistance to develop- third source, such as an industrial devel- recovers in new revenues the cost of the ments that would have happened without opment authority, a redevelopment incentive plus a significant net gain for the the incentive. Not only the federal gov- agency, or the state. community in jobs and revenues. ernment but many state legislatures as Locally adopted investment policies or There is nothing wrong with a city well are reacting negatively and in some state statutes adopted since the Orange making a good investment. The challenge cases punitively in response to the per- County bankruptcy may further limit the often is to have the courage to ask for ception that many incentive transactions use of public funds for incentives. Finance something in return for an incentive. Most are a waste of tax resources and do not directors and city attorneys need to be entrepreneurs do not react unkindly to an achieve a public purpose. The role of involved in incentive negotiations to entrepreneurial approach by the city. finance officials is to make sure every assure their legality. incentive can be defended. What Is an Undesirable Incentive? What Is a Desirable Incentive? First, undesirable incentives are those Conclusion In the broadest possible terms, a desir- that look bad to the public. They can create The pressures associated with eco- able incentive is one that is financially the appearance of unequal treatment of nomic development are substantial. profitable to the city and its redevelop- similar businesses under similar circum- Frequently the elected official is invited ment or industrial development agency stances. Secondly, they also can be activities to the negotiating table before the finance and produces jobs. Profit can be defined in that cause or offer the potential for litiga- director is. Jobs sometimes can take this case as net revenues from the project tion, such as a developer fee rebate or sales priority over balancing the city budget. exceeding the cost of incentives plus tax exemption. Thirdly, an incentive is The challenge to the finance director is to recurring costs of providing municipal unwarranted when the recipient would pre-educate the city council, then ensure services. Another criterion for a desirable have come to the community regardless of that he/she is at the table. This calls for incentive is that it does not immediately the incentive. Lastly, an incentive is not a horse sense and close consultation with create a charge of unequal treatment of positive one if it is likely to cause a future the city attorney. The approach to incAft businesses in similar circumstances. Lastly, budget or cash-flow problem for the city. tives should be entrepreneurial: the ci a desirable incentive should be one that No finance director should be bashful seeking to make money. While portraying causes an investment or relocation that when it comes to preparing a confidential a pro-business attitude, dollars on the would not have otherwise happened. report for the city manager or legislative table for the city is by far the most In determining whether an incentive is a body 1) indemnifying specific cases or important approach to successful incen- positive one or not, a finance director prospective cases where there could be the tive negotiations. ❑ should be prepared to produce a dis- charge that unequal treatment was pro- counted proforma indicating the public vided, 2) analyzing the financial ramifica- KURT H.AHN,nne»nber of GFOA's Committee on investments and tax or utility revenues tions if similar incentives were provided Retirement and Benefits Administration,has been the financial and economic services director of the City of generated to determine the payback period generally, and 3) pointing out potentials for Healdsburg,California,since 1977,serving as finance and compare current values of each. The litigation based on gifts of public funds. If, director and redevelopment director.A past president public investments should include not only in the view of the finance officer, a business of the California Society of Municipal Finance incentives but recurring costs to provide will come to the city absent incentives or if Officers and six-year nnennber of the board of directors of the California Association for Local services including, if applicable, utility future budgets will be adversely affected, Econo»nic Development,be chairs the Economic services. the finance officer should so advise the city Development Policy Subcommittee of the League of Sound incentives can be secured loans manager loudly and clearly. California Cities and was the principal author of The to developers in which the city is assured Undesirable incentives take many forms, Economic Development Handbook published by the of full repayment with interest equal to or but the most typical is one in which virtu- California League of Cities. above the rate of the city's investment ally all new revenues generated by a project pool. Many cities will finance utility- are returned to the developer, which has related infrastructure or developer/capac- been the case in a variety of "big box" ity fees and add loan payments to utility transactions. Another case is the use of bills. Another example is a grant/loan that incentives in bidding wars to relocate an positions the city as an equity partner in existing business, in some cases from a the development and provides for loan nearby municipality. Still other examples repayment with interest and/or participa- are a grant or loan to business which tion in the income flow of the develop- would have come to the town without an ment. Typically used in many UDAG incentive, a retroactive incentive, or a tax projects, this approach is increasingly rebate incentive to every business in town employed when local incentives are sought just to create the image of a business- by the developer. Similarly, a positive friendly locality. • incentive can be a land sale or lease that If cities should eventually be denied the 32 JUNE 1996•GOVERNMENT FINANCE REVIEW