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Government Money Gets 120-125 ROI, Ya Think?

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But before discussing the budget, the commissioners were scheduled to approve a $301,047 economic development incentive in the form of a cash grant to AvL Technologies, Inc. AvL Technologies is a manufacturer of portable satellites and satellite positioning systems. Its clients have included major television networks, the military, and the White House. The money was to help the company decide to stay in Buncombe County while it undergoes $11.5 million in capital improvements and creates 90 new jobs paying an average salary of $40,000. That much was printed in the commissioners’ published staff reports.

The next thing was for Assistant County Manager Jon Creighton to work his magic with the red, blue, green, and purple bar graph and pie chart. This time, they showed the $301,047 donation from the county’s general fund would allow AvL to create $3.6 million worth of jobs for the local economy, which would come with an indirect hiring of another $2.17 million. Creighton illustrated this suggesting they might have to hire another janitor or support shipments of copy paper supplies. Then, because employees had more money, they would induce another $1.3 million in jobs in the local economy, perhaps in the form of additional wait staff that could be hired once AvL employees have discretionary income they can spend eating out. All the while, an additional $783,000 in taxes would be generated.

Creighton observed the total $8 million thus added to the local economy per year represented a 125:1 ROI for the county. The returns were so huge, the bar graph couldn’t even be drawn to scale. The county would get $8 million each year, whereas the payout would be spaced over 5-10 years. Founder Jim Oliver, said he was excited, and the commissioners approved the incentives unanimously.

Shortly thereafter, the floor was opened for public comment on the budget. Well-dressed executives took the stand to ask the commissioners to continue the county’s contribution of $25,000 to the Asheville 5×5 Campaign and then add another $20,000. The campaign represented a five-year goal of the Asheville-Area Chamber of Commerce to generate 5000 jobs and $500 million in corporate investment in the community.

Well, the fifth year ended in 2015, and the program is credited with far exceeding its goals, with 6202 jobs created and almost $1 billion newly invested in the local economy. The 5×5 Campaign, according to the investor report, had a 120.32 ROI. According to Fox Business, a 15:1 ROI is good.

Government is able to achieve astounding rates of return because of a trick not unfamiliar to government accounting. It is used in calculating employment rates, and it was also used by the state with dropout rates. The technique involves using the same equations as the private sector, but redefining groups. The unemployment rate was adjusted lower by eliminating people who stopped looking for work. The K-12 dropout rate was lowered by dividing the number of kids dropping out in a four-year cohort by the total number enrolled in grades K-12.

In the private sector, as shareholder will divide his dividends by the amount spent purchasing stock to get an ROI. In government calculations, the amount of the incentive grant is properly placed in the denominator. But whereas the private sector would put in the numerator the amount of revenues coming directly back to the county – government puts in the numerator the entirety of a corporation’s profits and then adds to that any profits any other business in the community will achieve by doing business with that company, and what business other corporations might enjoy interacting with people employed by the grant recipient. After all that, government properly adds in the portion comparable to the private sector’s numerator, what revenues will come back to government.

Some ways to expose the lie would be to consider how much economic activity results from corporate welfare. For example, glassdoor.com estimates AvL Technologies brings in $50-100 million a year in revenue. Let’s suppose it’s a bad year, and it only brings in $50 million. If the company is able to return investments 125-fold, would it be fair to say some of this other money coming in might multiply also? Or does the company somehow fudge its money so profits just sort of sit there while government grants multiply like rabbits.

It would be interesting for somebody with the time and money to start collecting information from local businesses willing to participate in an exercise. Economic development agencies use the software IMPLAN to calculate returns on government investment. Much has been written elsewhere about faulty assumptions used in an otherwise useful projection tool. The objective would be to enter data from private-sector companies in Asheville, using the same assumptions government uses, and see how many companies it takes to account for all economic activity in the city, or possibly the state.

Another approach would be to enter honest projections for private-sector companies. If they can’t perform near the level of companies requesting government assistance, then there should be a reason, which nobody ever seems to mention.

AvL Technologies is no stranger to economic development incentives. In 2010, it was awarded $4.9 million from the federal porkulus fund. Moneys were spent to relocate the company from the River Arts District to its current location in Woodfin. At the time, it employed 130, and the funds were going to be used in part to hire 75 more. According to Oliver, the company currently payrolls 163 with hopes to hire 150 more.

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