The Norman Transcript

February 16, 2014

City officials not making the right economic moves

The Norman Transcript

NORMAN — Editor, The Transcript:

The following is in response to Edd Painter’s recent letter, “NEDC making right incentive moves.”

Mr. Painter has it wrong. Neither the Norman Economic Development Coalition (NEDC) nor the city did its homework on the IMMY deal.  As Councilmember Jungman pointed out in an earlier letter, the NEDC attempt at fiscal impact analysis was rife with both calculation and conceptual errors.  Mr. Painter not only fails to rebut these points; his letter suffers from similar mistakes.

The main conceptual error in Mr. Painter’s analysis was his thinking that the property would stay fallow if the IMMY deal wasn’t done. The NEDC has already spent a good deal of money making this site attractive to firms. It is a prime location with great infrastructure. IMMY is a well run firm, so it wouldn’t move to a marginal location for a mere $770,000. These facts point to the conclusion that IMMY was likely to purchase the property even without the discount (they can’t admit this, of course, without also admitting that they ‘put one over’ on Norman).  

It is vital to see that even if IMMY had passed on the property, some other firm would have made the purchase.  On the assumption that the NEDC did its job in preparing the site, the marginal cost of losing IMMY itself would be minimal.  To put it more bluntly, if IMMY in particular was really the linchpin for the whole development then the NEDC put the city in a terrible position and we need to get a new outreach organization.

Even if the foregoing is wrong, it wouldn’t be clear that the IMMY deal was worth making.  It is entirely possible that we would have been better off leaving that part of the TIF empty rather than paying someone to occupy it.  We don’t have any decent evidence to establish that attracting IMMY to the site with a discount was superior to leaving the site undeveloped.  

Mr. Painter basically concedes that, due to sloppiness in using the Quick Impact model, the NEDC’s original fiscal impact report “is not reliable.”  He tries to supplement it with some of his own calculations but he ends up making the same sorts of mistakes.

When, for example, Mr. Painter tries to figure out the sales tax implications of IMMY’s planned building, he neglects the modelling parameter in the original NEDC report that only 50 percent of the materials used in construction would be subject to sales tax (p. 14).  As a result, he exaggerates the sales tax impact by 100 percent.  In a similar (albeit more complicated) way, Mr. Painter also exaggerates the property tax benefits.  (Briefly, he double-counts the first year $500,000 equipment purchase and ‘rounds up’ the annual property tax number by $18,560.)  Simply correcting for these errors lowers his “profit” (really tax-benefit-minus-subsidy) number from $392,400 to $200,200 and his “return on the taxpayers’ money over that 10-year period” from 51 percent to 26 percent.  

It is important to remember, of course, that Mr. Painter has only been trying to calculate the advantages of the deal; he hasn’t touched any of the non-subsidy costs. We know for a fact that there will be such costs to count — we’ve already spent a good deal on the property’s infrastructure.  If the benefit-minus-subsidy number is only $200,200 (or even $392,400) then it won’t take much in the way of further costs to expose the deal as a bad one even on the dubious assumption that it was the only way to attract a firm.  

Note that I am not claiming that any of the foregoing numbers are ‘rock solid’.  In fact, I rather doubt that they are: that is the point!  No one has done a good job of showing that the IMMY deal was a fiscal winner, Mr. Painter included.

The key lessons to learn from the IMMY episode are that (1) the city can’t rely on NEDC to do competent fiscal impact analysis and (2) city policymakers aren’t savvy enough (at least not yet) to fully think through the economics of the deals they are making.  As citizens, we should insist that the city cease making economic incentive offers until it acquires the necessary conceptual and modelling tools to make good decisions.



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