Report questions incentive benefits

State officials overestimate the benefits gained from companies that get rich incentives to expand in North Carolina, a report says.

Instead of pumping millions of dollars into state coffers, some economic development deals might actually be costing revenue and hurting taxpayers, according to the study released this morning by the N.C. Budget & Tax Center, a non-profit group that advocates for the poor.

An official with the N.C. Commerce Department, which manages state incentive programs, rejected that claim.

At issue is a computer spreadsheet that the department uses to assess economic development deals. Officials plug in variables — from the number of jobs expected to the amount of sales an operation will generate — to determine whether future benefits will outweigh the costs.

The report says that the model is flawed and that officials too often use inflated assumptions that make projects look better than they are. It challenges a central defense that the governor and other state officials have used to justify the tax breaks, grants and other perks promised to companies.

Those officials often tout the figures from the spreadsheet as proof that the state makes wise incentives decisions.

“Aggressive use of a reasonable, but imperfect, model appears to be leading the state to regularly make overly generous incentive offers,” the report says.

The authors recommend that the model be tweaked to improve its accuracy, that more cautious assumptions be used and that incentives policies get a thorough review.

They also say the state should allow more public scrutiny. The model and spreadsheets generated during economic development projects, for example, should be put online so that the public can easily change the variables and assess the findings, the report said.

The model was created by Mike Walden, an economist at N.C. State University to help the Commerce Department staff evaluate deals that come before them and assess whether — and how much — incentives should be offered.

Don Hobart, the department’s general counsel, said in an interview today that the report’s authors appeared to misuse the model in their analysis.

“The model that Dr. Walden designed is a soundly built model and the Department of Commerce uses it responsibly,” he said. “I can’t put very much stock in the work that’s been done in this report.”

In their analysis, the authors honed in on Dell, which in 2005 opened a computer factory in Winston-Salem. The company was promised as much as $242 million in state incentives and about $38 million more in local incentives.

Those enticements were premised on the model, which projected 8,086 jobs would be created by Dell and by companies that came or grew because of it.

A similar model run in Virginia, which competed for the facility, estimated 4,113 jobs. Virginia offered about $37 million in incentives.

When assumptions closer to those used in Virginia were plugged into the Commerce Department spreadsheet, the 20-year effect on Gross State Product dropped from $24 billion to between $5 billion and $8 billion, the report said. Instead of a $707 million net gain in state revenue, the less optimistic assumptions showed a $63 million to $72 million decline.

A review of 31 other projects that used the model “confirms that the weaknesses of the Dell projections may be widespread,” the report said.

While no model is perfect, the report says, the state appears too often to rely on optimistic projections about the effect of business expansions. It also says the state often uses data provided by companies, which have an interest in making a project look good. At the same time, Commerce officials also have an interest in using the biggest assumptions, because they are judged by the number of jobs and benefits they bring to the state, the report says.

“The self-interest of the involved parties on both sides encourages a tendency to view the project through ‘rose-colored glasses,’” the authors say.

Hobart said he and his staff are not trying to create a “rosy picture” when using the model. They run multiple scenarios with various assumptions when evaluating a project. In the Dell case, he said each check of the model showed that it was a good project for the state.

What’s more, Commerce Department officials include benchmarks to hold companies accountable for their promises. If a company fails to meet the goals they agreed to, they risk losing some or all of the grants and other perks.