Economic Development Basics

More than 400 cities in Texas have an economic development organization (EDO) working to facilitate business and job growth. Many are funded by a ½ cent sales tax and all are supported by numerous other tools that have been developed within the state to facilitate economic growth. However, a lot of the citizens have little understanding of what those organizations do and how those tools work. Over the coming months I hope to write a series of articles that detail some of the workings of an economic development organization and the tools that are used, at least in Big Spring.

The science/art of economic development is multifaceted and often complex, but the core goals are simple. Ultimately the efforts of an economic development organization should result in improving the lives of the people it serves by growing total household income and by making governmental bodies more prosperous so they can potentially lower taxes, as well as provide additional and improved amenities to their citizens.

By helping existing businesses grow and attracting new companies to the area the goal is to raise total compensation for workers. The term compensation is important because it covers more than simply wages. A “primary” job should also provide benefits such as health insurance, vacation, sick pay and so on. In some cases, low paying jobs without benefits can actually cost cities, counties and school systems more than they generate in tax revenue, ultimately causing other taxpayers to subsidize those jobs. It should be noted that some of these jobs are essential to the economy as a whole, but they are created via the income generated by the primary jobs that produce the base income that is circulated in the economy.

Therefore, new primary jobs created, retained or recruited via the efforts of the economic development program need to be tied to producing products and/or services that bring outside money into the City. To increase everyone’s share of the economic pie requires expanding the size of the pie. Studies indicate that a new dollar in a local economy will circulate at least four times before it moves out of the system, producing a multiplier effect that benefits many more than the primary wage earner.

Another thing to recognize about economic development, is that the projects resulting from “deals” are business ventures that should have a positive return on investment (ROI) to the cities, counties and other taxing entities that participate in them. Assistance offered to facilitate the creation of new employment and investment should always result in positive revenue gains over time. The quality of the projects will determine how long an entity will be willing to invest before a positive return is realized. Most in the profession will very seldom advance a project with a breakeven period exceeding 10 years. And projects worthy of that kind of timeline are few and far between.

The business of economic development involves four components:

First, as with any business, a product is required to sell to customers and determines what business an entity can compete for. The products in this case are workforce, infrastructure, available sites and the overall location of a City in relation to markets.

In the case of Big Spring, most of the revenue raised from the ½ cent economic development sales tax today is being invested in infrastructure that improves the sites the City has to offer. Fortunately, many of these projects are nearing completion, though paying for them will take additional time, hopefully just in time for a nationwide economic resurgence as the country gets control of the pandemic.

Second, the product needs to be marketed to the customer. Big Spring, for instance, is well positioned for warehouse and distribution centers, but outside of the Permian Basin few are aware of the City, much less its advantageous location. So, part of the job of the economic development organization is to use various channels to develop that awareness and then recruit opportunities to sell the products Big Spring has to offer.

The third component is the “deal.” This is the part of the process that often gets the most publicity because it often involves incentives. These may include a variety of local, regional and state investments or other considerations to benefit the company being recruited. Incentives are basically tiebreakers when a company has narrowed the choices down to two or three equally attractive sites, which is why most projects require confidentiality. This is where accurate calculations of return on investment (ROI) and cost benefit analysis are critical. As with any other business deals there can be winners and losers. However, for economic development projects to be ultimately successful a well-balanced agreement that produces a win/win scenario is mandatory.

Finally, measurement and follow up is critical to determine the effectiveness of the individual project and cumulatively the entire program. This allows an economic development organization to leverage the success, learn from experience and ensure that the company partner has met obligations.