ECONOMIC DEVELOPMENT
Building a steel mill in Brandenburg, 45 miles southwest of Louisville, with a price tag of $1.35 billion and a start-up workforce of 400? How about a plant expansion at Dippin’ Dots in Paducah that will increase payroll by 28 people, or a $34 million bourbon barrel manufacturing facility in the Edmonton-Metcalfe County Industrial Park?
The thread that binds these three disparate projects together is found only in Frankfort, where the Kentucky Cabinet for Economic Development can thumb through a catalog of incentives designed to attract new companies, nurture existing businesses and, in both cases, create new jobs throughout the commonwealth.
The administration of outgoing Gov. Matt Bevin claims his four years in office have been spectacularly successful in attracting $23.5 billion of business investment that has or will create an estimated 60,000 jobs throughout Kentucky. While Bevin has been Kentucky’s CEO, some 1,200 individual projects involving state incentives got a green light.
Many other projects involving thousands more jobs went forward without benefit of incentives, which do have performance strings attached.
For those involving public benefits, Cabinet for Economic Development statistics show each job created from 2010 to 2017 (the last year for which comprehensive data is available) cost the state $2,408 in incentives.
That price tag would be substantially higher – easily twice as much – if companies actually claimed all the credits they were entitled for beefing up payrolls in Kentucky.
For example, only 46 percent of the $39.3 million in credits “earned” by companies in 2015 were claimed, state figures show. State incentives are often spread over 10 or 15 years and must be claimed annually.
The range of incentives at the state level, coupled with those that might be available through federal, county or city sources, can make business decisions quite complex when companies evaluate all the options on the table in the commonwealth and perhaps in neighboring states competing for that same project.
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“By far, the most-often used incentive program is the Kentucky Business Investment (KBI) program,” said Jack Mazurak, a spokesman for the Cabinet for Economic Development. To determine the size of an incentive offer, KBI uses a formula that includes the amount of a company’s investment, the number of full-time jobs being created and the average hourly wages paid, Mazurak said.
“Those three targets are how the company’s performance is monitored over the 10- or 15-year course of the incentive agreement,” he explained.
$270 million in credits this decade
From 2010 until October 2019, the cabinet approved up to $270.3 million in corporate tax credits for KBI projects. Approved companies achieved their three targets often enough to “earn” $234.1 million in credits.
One reason they hit those targets frequently is that applicants are thoroughly screened. Cabinet staff does plenty of preliminary research before a project is presented to the Kentucky Economic Development Finance Authority (KEDFA) board, which makes the final decision on incentives, according to Erran Persley, commissioner of business development for the cabinet.
The KEDFA board is comprised of six business people from throughout the state and Secretary William Landrum, who heads the Finance and Administration Cabinet.
“All our incentives are performance based,” Persley stressed, and contingent on the company annually hitting the targets Mazurak identified.
“We roll up all of our dollars and incentives into one spreadsheet that goes before KEDFA. There are different pockets of funding and we work with different agencies to get funding, but the KEDFA board has final approval of the package that moves forward,” Persley said.
More often than not, companies are enamored of the KBI corporate tax credit that allows them to reduce their future income taxes or their payments to the state for payroll and occupational taxes.
For example, Kentuckiana Curb, a Louisville company that handles heating and air conditioning and roof system products, received preliminary approval from KEDFA on October 31 for a $6.5 million tax credit over 10 years if it fulfills plans to spend $50 million on a new plant and create 400 jobs that pay at least $29 an hour over the life of the agreement.
KEDFA approved providing Kentuckiana Curb with up to $500,000 in incentives through the Kentucky Enterprise Initiative Act (KEIA), which allows the company to recoup Kentucky sales and use tax for construction costs, building fixtures, equipment used in research and development and electronic processing.
The KEIA program is the second most popular, especially for companies new to the state that may be investing millions of dollars in a new building and new equipment, Mazurak said.
Workforce, the ultimate incentive
The finance authority also said the company is eligible for assistance from the Kentucky Skills Network, which can help a company recruit and train employees. This incentive, which comes in many forms, is probably the third most popular, Mazurak said.
As might be expected, all of this assistance comes with some strings attached. The cabinet doesn’t just grab its overcoat and head for the interstate after photos have been taken at the ribbon-cutting ceremony.
Once the project is up and running, companies are monitored to ensure that they deliver on the promises they made to secure the incentives.
The state’s Revenue Cabinet oversees compliance for state incentives and those made available from other government sources such as Louisville Metro, according to Mazurak and Rebecca Fleischaker, director of the Economic Development Department for Louisville Forward. The Cabinet for Economic Development also scrutinizes the numbers, providing a second level of review for the state.
Fleischaker pointed out that Louisville Forward oversees the city’s economic development efforts, real estate development, land use, permitting and planning and design operations. Because of its comprehensive makeup, she said, her department can “bring all of the regulatory agencies around the table at the same time to discuss site development plans. We also work with the state to identify tax incentives that companies may qualify for.”
“We participate in the state incentive program, withholding (and foregoing) up to 1% of our occupational wage tax,” Fleischaker said, adding that the city’s “incentive threshold is at least $18 per hour.”
Both Mazurak and Gina Greathouse, executive vice president for economic development for Commerce Lexington, pointed out that cities are required to contribute to incentive deals the state cabinet has put together.
Other economic development organizations throughout the state don’t provide loans, grants or tax breaks to companies but do provide truckloads of information to businesses, make introductions to key people, open the doors to other incentive sources and do their best to establish a good relationship and make prospects feel welcome.
One such organization is Commerce Lexington, the Chamber of Commerce for the region that radiates out from Lexington.
“We’re the convener,” Greathouse said. “We don’t provide any direct incentives. We help coordinate the process so that when we have a (prospective) economic development client, my team and I manage those projects from the beginning to the end. Always at the table with us is Kevin Atkins from the (Lexington) Mayor’s Office of Economic Development,” she said, referring to the city’s chief development officer.
Good relationships are gold
“We organize the visit, set up the meetings, the roundtables, one-on-ones and organize property searches. Sometimes they might say they need 7,000 s.f. of eclectic office space because they want their engineers to be in a cool environment,” Greathouse said. “You want to get to know them better…build a relationship, because a lot of time that’s what it takes (to close a deal).
“You definitely don’t want to give away things you don’t have to,” said Greathouse, who worked for the state cabinet earlier in her career. “Some companies don’t even want incentives, but most of them do.”
In Louisville, Deana Karem plays a similar role for Greater Louisville Inc. as that chamber’s senior vice president for regional economic growth. GLI’s economic development region includes 10 counties in Kentucky and five in Indiana.
“The most common way that we get the opportunity to sell our community to companies,” Karem said, “is through site selectors.”
These consultants advise companies on the best options for locating operations based on factors that include property size, cost, infrastructure, ease of access to raw materials and their end customers, skilled workforce availability, and how cooperative local and state officials are.
When companies want to find the right site, “99% of them may be looking for something (important to them) but they’re not looking at county lines,” Karem said. “They want to meet with us and find out the options. When they start narrowing it down to a site, that’s when they start looking at incentives.”
Mazurak said one company that “really ‘gets it’ in terms of working with the state” is Mubea, a German company that makes automotive components in Florence and Elsmere in Northern Kentucky.
Going back to 1999, the company has received state incentives worth about $21 million for six expansion projects and has obtained hundreds of thousands of dollars from the state for training thousands of employees for Bluegrass State Skills Corp. programs. Mubea has gotten training incentives 45 times, according to state reports.
Workforce, good sites outrank incentives
There is no one standard path most companies take to arrive at their first meeting at the offices of Northern Kentucky Tri-County Economic Development Corp. (Tri-ED) in Fort Mitchell, said Lee Crume, president and CEO of Tri-ED. All economic development professionals interviewed for this story concurred.
When they meet with companies looking for a growth location, Tri-ED representatives regularly deal with businesses already inside its home base of Boone, Campbell and Kenton counties as well as with those from outside Northern Kentucky, Crume said.
The state of Kentucky sends leads to Tri-ED, Crume said, as does REDI Cincinnati, which works on economic development projects on both sides of the Ohio River and a corner of southeast Indiana.
However, in terms of raw numbers, he said, site selection consultants have proven to be the best single source of business prospects.
Prospects typically first ask about available sites and “want to know what the workforce looks like in Northern Kentucky,” Crume said.
“Sometimes you have to be creative in finding these workforce solutions,” said Kimberly Rossetti, Tri-ED vice president of economic development. To find people who could work with their hands for one prospect whose jobs required manual dexterity, Rossetti said, she phoned around to nail salons and dentist’s offices to talk with dental assistants. She found potential workers, but the company wound up locating elsewhere in the state.
A talented workforce and good sites were mentioned over and over again as top priorities for new and expanding companies.
Persley and Mazurak made it clear where the cabinet stands on this issue.
“The No. 1 question across the country is workforce – do you have the workforce to support our company? Can we get a good talented workforce if we come to Kentucky? Site and workforce go together, but at the end of the day let’s be honest: A lot of the sites are going to be similar,” Persley said. “Labor force is really No. 1 in a lot of peoples’ minds. And Jack made a great point: No amount of incentives is going to fix the fact that you don’t have the workforce.”
Meanwhile, low wages stand out as the reason why some companies are not offered incentives.
“The typical reason Louisville does not participate in (offering a prospect) incentives is low wages,” said Louisville Forward’s Fleischaker.
“We always tell people,” Greathouse said, “if they want to come in here and try to pay $8 an hour, A, they won’t incent you to do that, and B, you’re not going to find anyone for $8 an hour. So Lexington might not be the best fit for you. If you can’t hire people to do the job for you, why come here?”
Rosetti, who took her Tri-ED post earlier this year after more than a decade at Commerce Lexington, agrees.
“If the company across the street is offering $2 more an hour, you’re not going to be successful,” she said, explaining why some companies’ incentive proposals get rejected.
“Our job is not just to get more projects to the state, but the quality of the projects matters,” Persley said. “If a project is not paying a good wage and we know it can’t be successful…we will tell them this is not the best place for them to establish their project. With a low (current) unemployment rate, you have to be competitive with the market. If a company fails at the end of the day, that doesn’t help anybody – it doesn’t help the company; it doesn’t help the state.”
Large companies still want incentives
Few people are openly critical of state economic development incentive packages, even when these government deal sweeteners sometimes go to companies that don’t seem to need assistance.
Amazon, rated by Forbes as the world’s 28th largest publicly held company with estimated 2019 revenue of $275 billion, broke ground in May in Northern Kentucky for its Prime Air hub. It is expected to have a final price tag of about $1.5 billion and create at least 2,000 new jobs. When the project was announced in 2017, the state said if the online shopping giant hits agreed-upon levels of investment and job creation, it would be eligible for up to $40 million in tax credits and assistance from the Kentucky Skills Network for employee recruitment and training.
The Cabinet for Economic Development noted then that Amazon “has had a significant presence in Kentucky since 1999. It currently has 11 fulfillment centers in Kentucky that employ more than 10,000 people full-time.”
For 2018, Amazon reported net income of $10.1 billion on revenues of some $233 billion. Kentucky state government’s annual budget is around $35 billion.
Logistics giant UPS reported 2018 revenue of $71.8 billion and has its huge Worldport global distribution hub in Louisville. It received a potential tax credit in October of $40 million over 15 years if it fulfills plans to invest up to $750 million to expand its UPS Airlines home base and related Worldport package sorting operations and creates 1,000 jobs paying $70 an hour over the life of the agreement.
Up to $4 million of the UPS tax incentives – similar to those made available to Nucor for the $1 billion-plus steel mill in Brandenburg – will waive sales taxes to lower the initial costs of construction, building fixtures, research and development equipment, and electronic processing. The shipper also received approval for workforce assistance from the Kentucky Skills Network.
Although its signature Worldport would already seem to have UPS anchored in Louisville, Persley said the company “had other options” if it wanted to expand elsewhere and that the presence of Worldport didn’t guarantee that projects such as maintenance support for its growing fleet of aircraft would be built at the Louisville Muhammad Ali International Airport.
“Having a good (incentives) offer for this expansion made us better positioned for any future expansion. When we’re thinking about projects, we have to think about what can happen today and we’re looking down the road and want to incentivize that long-term vision,” he said. “There are certain companies in certain sectors we want to attract to our state that we believe will create other clusters of companies that will come because (UPS) is here … and then (we can) go after the (related) supply-chain or cluster companies as well. We want to look at the company in the five-year, 10-year, 20-year vision of what that company can bring to our state.”
One of the companies mentioned earlier, Dippin’ Dots, which is a cryogenically-frozen ice cream producer, received corporate tax credits up to $600,000 through the Kentucky Business Investment program and further assistance through the Kentucky Skills Network.
Nucor Corp. received far more of the same kind of corporate tax credits – up to $30 million worth – in one of the biggest economic development announcements of the year and up to $10 million in sales and use tax incentives to cover construction costs and equipment.
Like Dippin’ Dots and Nucor, whisky barrel-maker Pennington Stave and Cooperage was approved for tax incentives up to $2 million and assistance from the Kentucky Skills Network.
Outgunned Kentucky usually “boxing up”
Although many of the incentive offers from the state may seem to be incredibly alluring, Persley said other states often come up with even more lucrative packages.
“I’ll be quite honest with you – and I said this publicly in a hearing just yesterday before the rural issues committee at the capital – we are usually ‘boxing up’ (fighting heavier, stronger competition). We are usually outgunned when it comes to incentives,” Persley said. “I’ve seen a project where we have the best site, workforces were similar, (but) one of three states in the running was able to offer a great deal of cash and we couldn’t match that. They (some other states) do have more money to throw at a project.”
Persley’s comments about Kentucky being “outgunned” by some other states are supported by a recent report in Area Development, a respected national magazine that looks at economic growth and prepares an annual ranking of the best states for business development.
Kentucky did well overall, tying Florida for 12th place when Area Development analyzed data in a dozen categories from all 50 states. But three neighboring states that might be in direct competition for projects scored better: Tennessee ranked second, Ohio was ninth and Indiana was tenth.
Despite being financially outmatched in most cases, Kentucky has had an incredible (past) four years, Persley said.
“Some of the things that we offer as a state you just can’t buy: navigable waterways, the great logistics – UPS, DHL and in the future Amazon – and our location, where within a day you can hit two-thirds of the (U.S.) population,” he explained. “And we use those facts to compete. We are out-hustling a lot of people. We’re going to walk with you from the beginning to the end. Once they cut the ribbons, that’s not where it ends.”
Kentucky’s Economic Development Incentives
The Kentucky Cabinet for Economic Development provides a huge variety of incentive programs for new and expanding industries. Some of the more popular are:
Kentucky Business Investment Program: The state’s most popular incentive provides tax credits up to 100% of corporate income tax or limited liability entity tax as well as a “wage assessment” of up to 4% of the taxable wages paid employees. The employee receives credits against their state income tax and local occupational tax so there is no direct impact on the worker.
Kentucky Enterprise Initiative Act: Refunds Kentucky sales and use tax for building and construction materials and for eligible equipment used for research and development, data processing equipment or flight simulation equipment. KEIA is the second most popular incentive.
Direct Loan Program: Provides business loans to supplement other financing at below-market interest rates for fixed asset financing for agribusiness, tourism, industrial ventures or the service industry. Retail projects are not eligible.
Industrial Revenue Bonds: IRBs issued by state and local governments in Kentucky can be used to finance manufacturing projects and their warehousing areas, major transportation and communication facilities, most health care facilities, and mineral extraction and processing projects.
Community Development Block Grant Loans: Federally funded low-interest loans made available through the Department for Local Government.
Bluegrass State Skills Corp.: BSSC provides a maximum $500 Skills Training Investment Credit per trainee to companies creating at least 12 new full-time jobs for Kentuckians paying at least $12.51 per hour, including benefits. A second program, Grant-In-Aid, requires three trainees and covers 50% of the cost with a maximum of $2,000 per employee.
SBIR-STTR Matching Funds: Kentucky aggressively matches up to 100% of federal Small Business Innovation Research/Small Business Technology Transfer grants to companies with promising research and development efforts to commercialize their findings. The company must locate in Kentucky. Other states’ matches top out at 50%.
Greg Paeth is a correspondent for The Lane Report. He can be reached at [email protected].
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