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Business Observer Friday, Jan. 23, 2015 3 years ago

Other peoples' money

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Sarasota County is five years and a little more than $5 million into a project to use county funds to recruit and retain businesses. Has it worked?
by: Mark Gordon Managing Editor

Executive Summary
Industry. Economic development Trend. Counties across Florida have different approaches to economic development incentives. Key. Sarasota County revamped its incentives program in 2012.

The decision Atlanta investment banker Jim Westman made in 2010 is right out of the risk-it-all entrepreneurial American Dream playbook.

Westman gave up a successful and lucrative career to return with his wife and family to Sarasota, where he bought a manufacturing business. In the heart of the recession he bought Octex Corp., which specializes in making customized plastic components using a precision injection process. Clients range from consumer products to aerospace firms.

Octex had about $8 million a year in annual sales and 48 employees when Westman bought it. The firm has since grown to 85 employees and more than $20 million in annual sales. “Things are going really well,” says Westman. “We are putting the pieces together. We are at the beginning of our next great leap forward.”

Octex is also a small piece of a complicated and controversial economic development strategy on the Gulf Coast: incentives and subsidies used to woo companies to town and get others to stay.
Proponents of incentives say their benefits are twofold. One, they help the county attract investment, which boosts its tax base and provides a return to taxpayers. Two, they help diversify the economy, making it more stable during fluctuations in its primary driver: the housing market.

“The free market won't diversify our economy by itself,” says Economic Development Corp. of Sarasota County President and CEO Mark Huey. “So by definition we are inserted into the free market.”

Yet that assertion has multiple critics. In 2012, prominent urban studies economist Richard Florida wrote a book, titled “The Uselessness of Economic Development Incentives.” Florida probed into national and state data originally published by the New York Times in a series of articles on incentives.

“There is virtually no association between economic development incentives and any measure of economic performance,” writes Florida. “We found no statistically significant association between economic development incentives per capita and average wages or incomes ... and none between incentives and the state unemployment rate.”

More locally, Rich Swier Sr., an entrepreneur, former chairman of the Sarasota Better Business Council and conservative freelance columnist, calls the theory that incentives create jobs a false narrative.

“The problem when government at any level pulls tax revenue to support one business over another,” Swier told the Business Observer, “is it automatically picks winners and losers.”

Despite the critics, economic development incentives are used in one form or another in many communities nationwide. The state, through Enterprise Florida, has its own fund.

On the Gulf Coast, from Pasco County through Lee County, incentives are a multimillion-dollar high wire act of trying to spend the money on the right companies.

READ MORE ABOUT INCENTIVES IN OTHER GULF COAST COUNTIES - "Incentives: Dissected"

That's true in Sarasota County, where Octex is one of 28 companies since February 2010 to receive subsidies from the county's Economic Development Fund. The ordinance that created the fund dates back to 2009 — a time when the county had double-digit unemployment.

“In a perfect world, we wouldn't need incentives,” says Sarasota County Commissioner Christine Robinson, who helped overhaul the county's incentives approach in 2012. “But now we have a seat at the table so that if a Hertz or some other big company wants to come here, we are ready.”

Octex doesn't have the clout like Hertz, the car rental giant that's building an $85 million headquarters in Estero. But Octex is on track to become a Sarasota County incentive success story.

The firm received $200,000 in summer 2011 from the fund, which is overseen by county commissioners. Octex, in return, is contractually obligated to hire 80 people by June 28, 2016, at an average annual salary of $37,300. Through October, records show the firm had hired 25 people, at an average annual wage of $41,989. Westman says the company is growing so fast it will easily hire 55 more people by the deadline.

Octex, mostly through financing, has invested $10 million on technology and equipment over the last four years, especially in automation. The $200,000 from Sarasota, Westman says, while small, was a key boost that went directly toward the overall equipment purchases.

“We are a capital intensive business,” Westman says. “The way our industry works, you have to build the infrastructure then go get the customers.”

Westman says Octex would have expanded regardless, even if there weren't any incentives. But the support, both in dollars and in expanding relationships with county economic development officials, is helpful.

Sarasota County's incentive fund started with $2 million. County commissioners have since added more than $14 million over three intervals, for a total of $16.68 million. About $6 million comes from the county's general fund, and the rest is proceeds from escheated lot sales in North Port.

The county, records show, has paid companies $5,045,314 for a total of 2,183 created jobs in the history of the program. That's about $2,300 per job. Those jobs pay an average annual salary of $38,857, a drop less than the county average of $39,041. The total jobs created figure is 85% of the projected total, according to county records, and comes in more than $5,000 under the projected annual average wage.

Money back
Some companies, like drinkware manufacturer Tervis and impact-resistant window manufacturer PGT, both based in Venice, have been spectacular successes on new jobs. Tervis was awarded $450,000 in 2010 for a projected 214 jobs, and it blew past that for 361 hires. PGT received $600,000 in 2010 for 400 projected jobs and it had more than 700 in three years. With annual revenues at each well into the hundreds of millions, those firms are a pair of Sarasota County corporate stars.

Executives at both firms say the funds weren't a necessity to support growth, but are part of the bigger process that plays out when any expansion decision is contemplated. “There are states and counties that throw ridiculous things at you,” PGT Chairman and CEO Rod Hershberger says. “So you have to listen.”

Hershberger says Marion County in north-central Florida, for example, has an aggressive incentives approach to woo companies, especially manufacturers. “Did I have to take the dollars? Honestly, no,” says Hershberger. “But when I'm sitting in front of the board of directors and they are asking me about all these incentives out there, I have to tell them something.”

Tervis CEO Pat Redmond says he's grateful for the funds, but “it's quite literally a drop in the bucket.” The company recently spent at least $200,000 to recruit a senior business development executive.
And the firm has spent millions on equipment and infrastructure in the last five years. “It's not so much about the money,” says Redmond, “as it is the community supporting our growth.”

Redmond, like Hershberger, says any business of any size has to consider all the options when incentives are in play. “We'd be silly not to,” Redmond says. “If anyone wants to offer us incentives to grow the business, we will certainly take it.”

Others companies, such as Sanborn Studios, a movie production studio that received the largest payout ever in the program — $650,000 in September 2010 — have been spectacular failures, at least from a jobs perspective. Sanborn Studios and Sarasota County are currently in litigation over the funds.

READ MORE ABOUT SANBORN STUDIOS - "What Could Go Wrong?"

At least two other companies in Sarasota County have had minimal success in job creation.

One is Evolucia, an LED lighting firm that was named Sunovia Energy Technologies in March 2010 when Sarasota County gave it $50,000. The incentives came with great fanfare for what county officials said would be 68 jobs. The company was required to create those jobs by March 2013.

But Evolucia has had numerous issues. The firm has lost $25 million over the last four years, and has gone through multiple CEOs. It never hired a single person, county records show.

Evolucia hasn't repaid the county for not creating the jobs. But county officials intend to press the firm for a refund. “We have had contact with the officials and will continue to do so,” says Sarasota County Economic Development Coordinator Lisa Damschroder.

Another firm, Resource One, an environmentally friendly cleaning products manufacturer, received $50,000 in December 2010 for a projected 35 jobs. That firm, according to the contract it signed with the county, planned to move to Sarasota from Pinellas County. It was going to bring 15 jobs and hire 35 people by Dec. 7, 2015.

But county records indicated the firm had not hired anyone through mid-October. Resource One owner Duncan Yull tells the Business Observer the firm recently hired four people, and he needs to update the county on that. The firm did move 15 jobs from Pinellas to Sarasota, he says, and business has been good in 2014. “Regardless, we know we will have to pay some of the money back,” says Yull.

“We've been talking to them about that.”

Jobs before money
The county's incentive program has been revamped over the past two years, mostly to do away with up-front payouts. The overhaul came from Huey at the EDC and Robinson, the county commissioner, who is also on the EDC's Business Climate Committee. Changes also stem from a 2012 audit of the incentive process conducted by Sarasota County Clerk of the Circuit Court Karen Rushing.

The report found a few issues, including that contracts lacked provisions to: measure performance, require companies to submit documents and submit financial data to document if the business was viable.

The elimination of incentives before jobs, says Robinson, was a key change. Other important steps, she says, is the county no longer uses incentive funds for nonprofits or onetime events. The changes were made in conjunction with the county's Office of Business and Economic Development, run by Jeff Maultsby.

“The idea behind the incentive fund is for it to be a continuing improvement process,” Maultsby says. “It has become a better program, but if something comes along that would make it better, we would be open to that.”

Everyone does it
Huey, named head of the Sarasota EDC in June 2011, also acknowledges the changes were necessary. But so too, he says, are incentives. He says incentives, flaws and all, will remain an imperative element of economic development in Sarasota and beyond. That's partially because everyone else does it.

Huey also emphasizes that incentives, even with the publicity and controversy, aren't a magic potion. “Incentives are a tipping point,” Huey says. “It's not the tool. It's a tool. They end up being icing on the cake” for a company considering all its options.

Huey, in an interview with the Business Observer, says incentives are part of a broader risk-reward continuum. The more money in the overall pot, the greater the chances that a company that comes to town will spawn off into other businesses and provide a multiplier effect boost to the region's economy. Says Huey: “It's about how much risk a community is willing to take on.”

Robinson adds that changes to the program have helped her become more comfortable with what she calls the “good, bad and ugly” of economic development. “There will always be a risk in this,” says Robinson. “This isn't fool-proof.”

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