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Ky Incentives Make ROI Numbers Work

By Mark Green

Gov. Steve Beshear announced two projects in Owensboro on July 1. State economic development incentives helped persuade U.S. Bank to invest $14 million to expand its Home Mortgage’s Servicing Center, bringing 500 jobs in the next few years, and Pinkerton Tobacco to invest $3.7 million to upgrade its facility and retain nearly 300 employees.

Kentucky officials have reason to feel pretty good about the business-incentives reform package enacted in June 2009 during one of most difficult and competitive economic periods in state history.

In the year since, the Kentucky Economic Development Finance Authority approved incentives deals as of late July for nearly 250 companies that could create 6,900 jobs under Kentucky Business Investment Program and perhaps more importantly preserve another 3,600 existing jobs via the expanded Kentucky Reinvestment Act.

Incentives crafted with input from local commonwealth economic development officials, corporate site-selection consultants and research into what other states were offering also include tax credits for existing small businesses that create new jobs, refunds of sales taxes on building materials, on research and development equipment, and computer and telecommunications equipment.

With the U.S. economy shedding millions of jobs in the worst times since the Great Depression, a key goal was to incent Kentucky companies and companies with Kentucky locations to upgrade their competitive position at a time when there was lots of excess capacity in most industries around the nation – and the world for that matter.

“I think they’ve helped immensely, especially the Kentucky Reinvestment Act,” said Mike Mangeot, president of the Kentucky Association for Economic Development, an alliance of local economic development directors in the commonwealth. “It provided incentives for companies already located in Kentucky.”

The incentives Kentucky enacted in 1992, while cutting edge at the time, Mangeot said, were designed, like most states’, to lure new operations and investment from outsiders. By 2009, however, the pressing need was to support in-state companies whose operations now needed to become more efficient to survive. They faced difficult choices regarding if and how they could afford to upgrade.

“If they crossed the state line, they were considered a new business” and could get help financing improvements in their competitive position, he said.
Kentucky needed to overhaul its economic incentives and did so via a package of Incentives for a New Kentucky (House Bill 3), also known as INK, which state Rep. Tommy Thompson of Owensboro introduced.

‘Much more competitive’
“The timing was great,” Mangeot said. “It has positioned Kentucky to be much more competitive in going out and talking to businesses and consultants. When we knock on the door, there’s a reason for them to talk to us.”

Under the new incentives, the aim is to help companies “make the numbers work” when they assess options for Kentucky operations and projects, said Kentucky Secretary for Economic Development Larry Hayes. With INK now on the books for one year, he said, “There is a lot of excitement. … In a down economy it is a ray of sunshine.”

When state and local economic development officials meet with members of the business community, Hayes said, “We can say we have tools to help, not just commiserate with them.”

There were little to no options previously to help most existing commonwealth businesses.

“Companies have to get a return on investment,” said Erik Dunnagin, deputy commissioner for business development for the state Cabinet for Economic Development. “Companies have to weigh those decisions. Do we reinvest or do we go elsewhere?”

INK puts a thumb on Kentucky’s side of the scales.

“The more jobs you create, the more jobs you retain, the more flexibility we have to work with you,” Dunnagin said.

Companies must hold up their end of individually negotiated deals with the state, over time, to obtain all of the incentive benefits KEDFA approves.
Kentucky does have some money for grants and low-interest, zero-interest or potentially forgivable loans, but in general companies must spend their own dollars in the state to gain access to economic benefits.

Financial incentives are not the first option, Hayes said. He and other economic development officials also find success pitching Kentucky’s business environment, low costs, residents’ strong work ethic, transportation infrastructure and location within the U.S. market. But many projects in the present environment do involve incentives.

“It’s like an arms race,” Mangeot said. “We all wish the incentives would go away, but they’re not.”

Projects negotiated individually
In each case, the conditions and numbers are different, Hayes said. And when incentives are on the table, negotiations begin at minimal levels, not with an assumption that the top credits will be granted.

“We are not cash rich by any means,” Dunnigan said. The dollars in incentive packages mostly are derived from expected future taxes a project will create rather than existing money in the state treasury.

“In essence what we do,” Dunnigan said, “is get companies to make investments up front into land, buildings and equipment … look at projected tax revenues and reduce their operational costs to help them make investments.”
The Cabinet for Economic Development views its role as “not using General Assembly funds but creating General Assembly funds,” he said.

All told, KEDFA approved potential total incentives of $411 million in 248 benefits packages from July 1, 2009, through July 29, 2010, according to the searchable database on the Cabinet for Economic Development Web site, thinkkentucky.com. If fulfilled, the approved projects will create or preserve 23,914 Kentucky jobs and involve $3.14 billion in project costs by the companies.

The largest projects involved $25 million in incentives for a $413 million project by Toyota in Scott County, where it had 6,253 workers in January; $37 million in incentives for a $370 million project by C2O Technologies in Ohio County, creating 60 jobs paying more than $77,000 each; $15 million in incentives for a $150 million project by ecoPower Generation in Perry County, creating 40 jobs; $15 million for a $166 million project by River View Coal in Union County, affecting 626 jobs; and $15 million for a $50 million project by Alcan Primary Products in Henderson County, involving 415 jobs.

The INK package was “not a magic bullet,” Mangeot said. “It is still a very, very competitive industry in recruiting and keep businesses here.”

He said he does give the administration of Gov. Steve Beshear “a lot of credit” for how it crafted INK. “They took to heart what we told them,” he said. “They listened to what the industry needed.”

INK: Investment for a New Kentucky

Provisions of key Kentucky business and economic development incentive programs after enactment in June 2009 of the Incentives for a New Kentucky package, House Bill 3, sponsored by Rep. Tommy Thompson.

Bluegrass State Skills Corporation Skills Training Investment Credit:?Credit against Kentucky income tax to existing businesses that sponsor occupational or skills upgrade training programs for their employees.

Incentives for Energy Independence Act: May reimburse up to 50 percent of investments of $25 million for an alternative-fuel facility using biomass feedstock (or $100 million using coal), or $1 million for a renewable power facility.

Kentucky Business Investment Program: Income tax credits and wage assessments to new and existing agribusinesses, headquarters, manufacturing companies and non-retail service or tech-related companies that locate or expand in Kentucky.

Kentucky Reinvestment Act: Tax credits to existing Kentucky manufacturers (and related functions) who invest $2.5 million in eligible equipment and related costs.

Kentucky Environmental Stewardship Act: For manufacturers whose products positively impact human health and the environment. Projects with $5 million in eligible costs can recover up to 25 percent of fixed-asset costs and 100 percent of employee skills training over a 10-year period.

Kentucky Investment Fund Act: Income tax or corporate license tax credits of 40 percent for investment in approved venture capital funds.

Bluegrass State Skills Corporation Grant Reimbursement Program:? Matching grant funds for customized business and industry-specific training programs.
Direct Loan Program:? Below-market-interest loans for fixed-asset financing for agribusiness, tourism, industrial ventures or the service industry. Retail projects are not eligible.

High-Tech Investment/Construction Pools:? Forgivable loans to help further commercialization of a product, process or innovation. Typical amounts are $150,000 to $400,000.

Small Business Loan Program:? Manufacturing, agribusiness or service and technology small businesses may get loans of $15,000 to $100,000 for three to 10 years to acquire land and buildings, purchase and install equipment, or for working capital and must create one new full-time job within one year.

Kentucky Enterprise Initiative Act: New or expanding manufacturing, service, technology, or tourism projects may gain a refund of state sales and use tax paid for building materials for permanent improvements, or sales and use tax refunds for research and development and data processing equipment.

Kentucky Industrial Revitalization Act: Tax credits for investments in manufacturing or coal companies that have closed temporarily or are in danger of closing permanently. Entities must save or create 25 jobs, intend to employ at least 500 persons and have production of 3 million tons from the revitalized facility.

There is a complete database of all approved Kentucky business financial incentives at thinkkentucky.com/fireports/FISearch.aspx. It is searchable by specific program, dates, counties and whether approved, final or inactive.