Business Oregon, the state’s primary economic development agency, can strengthen its evaluation of incentives and loans given to private businesses, focusing on performance outcomes such as jobs created and retained, wages, and return on investment.
Business Oregon can also help improve the transparency of individual business awards by better reporting information about them to the public and policy makers. And it can improve its selection and modification of the Governor’s Strategic Reserve Fund awards to private businesses.
These improvements would help the agency, policy makers, and the public ensure that business incentives and loans are as strategic, cost effective and productive as possible, important given high statewide competition for Lottery and General Fund dollars.
Business Oregon can Better Evaluate the Results of its Business Incentive and Loan Programs
Awards to businesses that Business Oregon has some role in are estimated to total $680 million in the 2015-17 biennium. This includes $145 million of state loans, loan guarantees, grants and tax incentives, and $535 million in locally controlled property tax exemptions initially authorized by the state.
Business Oregon conducts some evaluation of these incentives and loans. But it does not regularly evaluate and publicly report some key program-level outcomes, such as jobs created and retained, wages and return on investment.
We analyzed Oregon Employment Department data that Business Oregon already obtains to illustrate the potential benefits of more in-depth evaluation, and the value of reporting evaluation results to the public and policy makers.
We focused on the agency’s top discretionary programs for private business: the Strategic Reserve Fund (SRF) and Business Expansion Program (BEP), and Business Finance loans and loan guarantees. Unlike Business Finance loans, SRF and BEP loans are forgiven if a business meets job goals. The Governor approves SRF loans.
We analyzed 21 projects that received funding through the SRF or BEP, and an
additional 210 Business Finance projects from 2011-12. These are the most recent years with at least three years of job and wage data after Business Oregon issued the award.
The analysis indicated both positive results and issues that need more examination and public discussion. The programs helped add new jobs for Oregonians, the analysis suggested, and workers filling those jobs generated positive returns to the state through their income tax payments.
However, the majority of 2011-12 awards went to businesses with average wages below that of the county they operated in, an important result given Business Oregon’s mission to encourage living-wage jobs. Agency officials say they focused on saving all types of jobs in the down years of 2011-12.
Additional analysis of incentives and loans awarded from 2006-2015 indicated that most of them went to urban areas, which already have faster employment growth than rural areas.
Business Oregon’s strategic plan and key performance measures do not have targets for rural investment and living wages, making it difficult to evaluate these results. Setting targets could facilitate deeper agency evaluation of award cost-effectiveness, the agency’s investment in rural communities, and its ability to encourage projects that pay livable wages.
The audit also focused on enterprise zone property tax exemptions, Oregon’s broadest program of local incentives. Evaluation of enterprise zone performance is sporadic, and several issues need more attention.
Our analysis of 2015 enterprise zone data showed a high amount of zone job growth in the Portland metro area, which is relatively strong economically, and in non-distressed areas. Urban areas have economic development needs too, but the concentration of benefits in relatively well-off urban and non-distressed areas is at odds with the enterprise zone programs’ original focus on lagging areas that have more economic need.
The analysis also found high tax exemptions per job in the long-term rural enterprise zone program — $54,500 in 2015 versus $4,200 in standard zones. And it found high exemptions per job for data centers built by Apple, Facebook, Google, Amazon and others. These projects could be costing counties more than typical projects, though fees and other taxes paid by the businesses involved may help offset the property taxes foregone.
In general, state income tax incentives receive more scrutiny, including “sunset” reviews when tax credits are scheduled to expire. But they also need more frequent objective evaluation.
Oregon Can Improve the Transparency of Individual Economic Development Incentives and Loans
In recent years, Oregon has substantially improved its reporting of economic development awards to individual businesses, putting it near the top in various state rankings and improving public accountability.
But policy makers and the public still do not have enough information on many economic development incentive and loan programs to assess their value, determine which businesses are receiving awards, and review the jobs and wages generated by subsidized businesses.
The transparency reporting generally meets state statutes and guidelines. But ten of the 15 programs we reviewed did not disclose outcome information, such as jobs and wages, for individual businesses receiving incentives and loans. For 11 of the programs, determining whether a particular business met program requirements given the information publicly reported was difficult or impossible.
Business Oregon does not identify which businesses receive SRF, BEP, and Business Finance loans, or how many jobs those businesses retain and create.
Agencies did not report the amount of the tax incentives given to individual businesses for four of the eight economic development tax credits and subtractions we evaluated, in part because of tax return confidentiality. And county tax assessor reports for enterprise zone tax exemptions often contain incomplete information on jobs and wages.
Business Oregon Can Further Improve its Selection Process for Strategic Reserve Fund Awards
Business Oregon has developed a new, more thorough selection process for SRF awards, typically forgivable loans. We reviewed a sample of business projects that received SRF awards, and found several areas for further improvement.
The agency should make sure it completes risk reviews before businesses begin their projects. It should also more directly incorporate risk reviews into decision-making, and evaluate the state’s full investment in projects before sending proposed awards to the Governor for approval.
We reviewed seven large projects that included SRF awards from 2008 to 2015. Business Oregon calculated projected returns for those projects based solely on the SRF forgivable loan, and did not include other state investments in the return calculation.
For five of the seven projects, adding estimated state tax credits alone to the return analysis would have significantly reduced the estimated return. For the five projects, estimated worker income taxes were projected to pay back the SRF award amount in three years on average. Adding state tax credits would have increased the estimated payback period to 24 years on average, a substantially increased risk.
Our complete recommendations are included on pages 26 to 27 of the full report. We recommend that Business Oregon develop additional metrics and targets for incentive and loan performance, using them to evaluate the awards and report performance to policymakers and the public.
We also recommend transparency improvements. They include reporting individual SRF, BEP and Business Finance loans, and working with the Legislature, other state agencies and counties to improve the quality of information reported.
And we recommend that the agency improve its selection and modification of the Governor’s Strategic Reserve Fund awards to private businesses.
The agency generally agrees with our findings and recommendations. The full agency response can be found at the end of the report.