New Era of Economic Development

0611econdevelop

State, local government are called on to pony up incentives to compete with other states

Story by Sean Fitzgerald, publisher New North B2B

Even a thorough search of the Internet doesn’t bring up the full page advertisement Oshkosh business leader John Buckstaff took out in the Wall Street Journal in 1986 urging executives elsewhere not to even consider Wisconsin as a place to expand or relocate their own businesses. But the episode is still ripe in the memories of local business leaders who were working in northeast Wisconsin at the time.

Fed up with state government administration that was perceived as anti-business and placed a litany of onerous tax and regulatory burdens on growing enterprise in Wisconsin, Buckstaff’s group known as Businessmen of Wisconsin-Words of Wisdom – or BOW-WOW, for short – took out the spread to splash the message “Escape FROM Wisconsin” in an oversized, bold font. Playing off the state’s tourism slogan at the time, the copy was accompanied by a warning to businesses nationwide not to expand in Wisconsin and at the same time, excusing those homegrown businesses that picked up operations and moved elsewhere outside the state.

The ad made a statement – it created quite a stir nationally, as well as among other business leaders in Wisconsin who characterized it as counterproductive. At the very least, it kept the state’s business climate front and center of the impending gubernatorial campaign against then-sitting Gov. Tony Earl and eventual election winner Tommy Thompson.

In today’s economic development environment, large employers burdened by tax and regulatory hurdles considered more daunting than in other states don’t take out full page ads in the Wall Street Journal. Particularly in recent years, they’ve had to consider options to move operations outside of the state.

In certain cases, such as Mercury Marine in Fond du Lac, the state stepped forward with a financial incentive package in late 2009 that – when coupled together with grants and loans from the City of Fond du Lac and Fond du Lac County as well as concessions from the company’s organized labor workforce – encouraged the marine engine manufacturer to remain in the community and add jobs there by consolidating other out-of-state operations.

In other cases, such as the ill-fated Thomas Industries relocation from Sheboygan in 2009, a state, local government and technical college incentive package totaling roughly $2.5 million came a little too late. By the time local economic development officials knew what hit them, the parent company of the manufacturer of vacuum pumps and air compressors, Gardner Denver Inc., had already decided to consolidate it’s Sheboygan operations into an expanded facility in Louisiana, effectively eliminating 366 jobs and a more than 70-year legacy in the community.

Whether it’s been Harley-Davidson exploring options to move its motorcycle manufacturing operations out of state or Oshkosh Corp. having to keep up with its competitors in the defense business, the modern climate of economic development and job retention in Wisconsin has meant communities need to invest even more resources – financial and otherwise – to keep economy-inducing jobs at home or risk high rates of unemployment and mounting business closures.

With the advent of the Gov. Scott Walker administration in 2011 and the transformation of the forerunning state Department of Commerce into the new and retooled quasi-public Wisconsin Economic Development Corporation, the state aims to work with troubled manufacturers before they even begin to pack up the moving trucks.

“We want to get out ahead of those situations a bit further than we have in the past,” said Commerce Department Sec. Paul Jadin, who Gov. Walker tapped to serve as the first president of the new statewide EDC. As the former mayor of Green Bay and president of the Green Bay Area Chamber of Commerce, Jadin is intimately familiar with the close contact city and county economic development officials have with businesses in their communities. He expects those professional resources to serve as the eyes and ears for troubled employers who think the grass might be greener on the other side of the state line. That could simply mean just enhancing communication of the work economic development professionals are already doing.

In the New North, for example, the Northeast Wisconsin Regional Economic Partnership has been conducting its Executive Pulse business retention and expansion surveys for the past three years. The comprehensive data gathering includes site visits with executive leadership of nearly an hour or longer, and results are then stored into a database available to colleagues throughout the region.

Endeavors such as the Executive Pulse exist throughout the state, but there isn’t any central database for state officials to learn what specific challenges are facing manufacturers in Colfax or in Colby. In a recent interview with New North B2B magazine, Jadin said he plans for the new corporation to assemble a consistent platform for such site visits to be cataloged for state officials and economic development professionals statewide to have access.

Jadin is also planning for a Wisconsin EDC that boasts a budget of nearly $95 million annually, nearly $85 million of which would be designated for economic development assistance. Combine with the proposed Jobs Now and Badger Jobs early-stage funds introduced in the state legislature in early May, and Wisconsin could potentially sport one of the most robust economic development tool chests in its history.

Local government digging in

Municipal and county government have long been a critical piece of the economic development puzzle, but not typically to the extent that it awarded grants and loans to specific business.

Throughout the latter half of the 20th century, the economic development role of local government in northeast Wisconsin had typically been to develop and maintain infrastructure helpful to a business operation, or accommodate any needed flexibility on local ordinances. In some cases, local governments have helped to establish pools of funding for grants and loans to the business community – not for any one particular company – but truly in the “community chest” fashion in which any local firm can apply for and be awarded funding if they meet qualifications.

That’s not the economic development picture across the nation, though. Growing communities in many southern and western states have well-rooted reputations for doling out grant dollars to employers who create and maintain well-paying jobs in their communities.

So it became a bit of uncharted territory for Fond du Lac leaders when marine engine manufacturer Mercury Marine stepped forward in early 2009 to share the realities of its operating troubles and the dilemma it faced. With boat sales shrinking by more than 50 percent of prior-year levels heading into the recession in 2008, inventory of finished goods was near an all-time high, production in Mercury’s facilities was down substantially, and its plants were far short of capacity. Mercury was considering its options to consolidate manufacturing operations between its Fond du Lac and Oklahoma facilities. Only one of the two production facilities would survive – there was no middle ground and no ability to compromise by keeping both locations partially in production.

“(Mercury officials) made it very clear they were going to make a decision about whether they would move their entire operations to Stillwater, Oklahoma or move them to Fond du Lac,” said Fond du Lac County Executive Allen Buechel, who became involved early in the process after the Fond du Lac County Economic Development Corp. brought together community leaders in an unprecedented effort to retain its largest employer.

“This was a business decision for them, and we clearly understood that.”

Early in the process, FCEDC officials learned economic development officials in Oklahoma had put together an incentive package valued near $100 million to keep its facility running and to encourage Mercury to relocate its Fond du Lac operations and more than 2,000 jobs down south.

The state Department of Commerce would eventually offer an incentive package totaling $70 million through a combination of tax credits, grants and forgivable loans. But prior to that commitment, local officials stepped forward with proposals of their own that provided an additional $53 million to Mercury.

For the county’s part, it offered Mercury a $50 million loan repayable over 10 years beginning in 2012. To offset the costs of financing the loan, the county implemented a half-cent county sales tax – it was one of just a handful in the state which didn’t already have such a charge – with a goal of generating an additional $6 to $7 million in sales tax revenue each year. Buechel said the alternative – losing Mercury Marine altogether – would cost the local economy an estimated $350 million a year.

“From Fond du Lac County’s perspective, this was an investment in our economy and an investment in our future,” Buechel said.

In addition, the City of Fond du Lac provided $3 million in assistance to purchase land owned by Mercury Marine and a portion in the form of a forgivable loan.

After eventually seeking concessions from its workforce in September 2009, Mercury made the decision to remain in Fond du Lac, as well as to transfer its operations from Oklahoma to Wisconsin, bringing an estimated 300 additional jobs.

Though the efforts to retain Mercury perhaps broke the mold as far as how far local communities in northeast Wisconsin are willing to go in order to hold on to a critical employer, history will undoubtedly view it as a decisive victory for Fond du Lac, New North and Wisconsin. For its efforts, the Fond du Lac County Economic Development Corp. – the agency that served as the architect for much of the ongoing negotiations and eventual incentive package that was presented to Mercury officials – was recognized by the International Economic Development Council in 2010 with its Excellence in Economic Development Award.

Strengthening existing partnerships

Oshkosh Corp. has undoubtedly been the nitrogen supercharging the economy of the Oshkosh area during the past 18 months. The company recorded nearly $7 billion in military orders during 2010, adding hundreds of well-paying jobs to its local production facilities and driving increased revenues and top-line growth for dozens of its vendors across northeast Wisconsin.

But in order to win the military contracts, the heavy-duty specialty vehicle manufacturer delivered a competitive bid that was based upon assistance it would eventually receive from the state and from the City of Oshkosh to construct an electrostatic paint facility and train employees.

Just as the dust was beginning to settle in Fond du Lac in November 2009, Oshkosh Corp. initiated discussions with community leaders about the benefits winning the impending federal contract would provide the local economy. If it won the contract, though, it would need to grow its production capabilities in Oshkosh – and it would need local government assistance to do so.

The rationale seemed to make sense. Oshkosh Corp.’s competitors received state and local government assistance to grow in their own communities. Why shouldn’t it receive similar support from its home town? Surely other communities across the country would be thrilled to put forward a lucrative incentive package with the hopes of luring an employer like Oshkosh Corp.

Providing the assistance wasn’t an obvious decision for city officials – they’d been approached before from a hotel developer and from the Experimental Aircraft Association about providing assistance for expansion projects. In both situations, the businesses requesting assistance were turned down.

It was critical for city officials to take each request as a separate episode and review only the circumstances surrounding each business development, said current Oshkosh Mayor Burk Tower, a retired former dean of the College of Business at the University of Wisconsin-Oshkosh and a member of the common council at the time.

“This was a lot of money for the city,” Tower said, reflecting on the eventual $5 million in tax incremental financing the city awarded its largest employer. “It’s money we didn’t necessarily have. We were more inclined to help them get loans, but they needed cash up front.”

From Tower’s perspective, it was a combination of factors that lead to the city’s early 2010 approval of a pay-as-you-go TIF: a spike in patriotism supporting war efforts in the Middle East and the role of Oshkosh Corp.’s products in protecting American soldiers; a pledge from the state department of Commerce for an additional $35 million in assistance; the perception of a relatively low economic risk; and the fact that Oshkosh Corp. was a longstanding employer in the community with a nearly 95-year heritage.

Most any other request from an existing employer might not have met similar success.

“This isn’t going to be the general policy of the city going forward,” Tower said. “Each of these situations will be evaluated episode by episode.”

For their part, local units of government providing financial incentives to business need to establish a consistent up-front financial analysis of the impact such assistance will provide the local economy, Tower said. After providing the incentive, he said it’s just as critically important to implement clear accountability measures for the manner in which companies use those incentives.

These aren’t always easy choices for local elected officials who often take on these civic duties for little compensation.

“If you make a mistake the wrong way (relative to not financing a critical employer who eventually moves away), it’s going to be a big mistake for a long time to come,” Tower said.

Perceived improvements

National and home perceptions of Wisconsin state government’s attitude toward business development and growth have been on a bit of a roller coaster ride since John Buckstaff’s full-page ad ran in the Wall Street Journal in 1986.

It’s safe to say such impressions are becoming more favorable in 2011. Chief Executive Magazine’s annual survey of the perceived business climate among the 50 states thrust Wisconsin up from No. 41 in 2010 to No. 24 in 2011, the highest one-year gain among any state and one of the greatest increases in the history of the reputable CEO canvassing. In his recent interview with B2B, Jadin said the CEO survey results signal a change in attitude toward investment in Wisconsin businesses.

“There’s a great deal of optimism around the state,” Jadin said. “Businesses are more positive about taking risks to create jobs here (compared to recent years).”

In addition to greater financial resources for marketing the state and providing incentive packages for employers to grow their operations in Wisconsin, Jadin said the statewide EDC will place a renewed emphasis on growing entrepreneurs, starting out by enhancing the collaboration of many of the entrepreneurial development resources already assisting new start-ups in Wisconsin.

Lastly, the Wisconsin Economic Development Corp. will work to readjust the service borders between regional economic development organizations (such as New North) and workforce development boards to match up with the service area boundaries of existing regional planning commissions, Jadin told those attending a statewide manufacturing conference in Milwaukee in May.

Regardless of whether or not Wisconsin achieves Gov. Walker’s goal of creating an additional 250,000 jobs by 2015, the state is clearly not standing still in a global environment where cities, states and even countries compete for employers who can infuse billions of dollars into a local economy. Wisconsin has become re-energized in the economic development arena, and is out to prove it’s truly open for business.