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Archive for Thursday, September 4, 2008

Effect of economic spending in doubt

Report questions whether $1.3 billion spent on development has helped economy

September 4, 2008

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— A new state report says it is difficult to tell whether $1.3 billion in taxpayer funds spent on economic development has actually helped the Kansas economy.

The audit prepared by the Legislative Division of Post Audit was released with little fanfare last week, but it is causing a ruckus in state government.

Agencies that dole out funds for economic development defended their missions, saying their efforts do indeed help the economy.

"The commitment and mechanisms for private and public funding would not exist if there was no perceived value in economic development by the business community and elected officials in the local communities," said Kansas Department of Commerce Secretary David Kerr.

But the audit says the effectiveness of economic development expenditures was mixed.

On one hand, auditors said their analysis "showed economic spending had a measurable relationship with job and business growth." The audit said that $1 in economic development spending equaled a $2.46 increase in commercial property values.

But on the other hand, the audit said it was difficult to accurately determine the effects of eco-devo spending. "Data often are unavailable, unreliable or potentially biased. Further, absent a specific pilot project or 'controlled' experiment, no one can really know what would have happened without government assistance," the report said.

Tax breaks and expenses

The estimated cost of economic development from fiscal year 2003 through 2007 was $1.3 billion, which included $860 million in tax breaks and $453 million in actual expenses. The first portion of the two-part audit - simply determining how much was spent - was released in February. The second part, which focused on the effectiveness of the expenditures, was recently completed.

Not included in the $1.3 billion cost was an additional $404 million in lost revenue to local governments in future years because of the repeal of the business and machinery property tax that was approved by the Legislature and Gov. Kathleen Sebelius. The repeal was touted by its supporters as an economic development tool.

The reliability of data became a concern for auditors.

For example, state economic development agencies reported significant achievements through the expense of eco-devo funds, including the creation of 80,000 jobs over the five-year period. But the audit noted the Department of Labor showed that the number of new jobs in Kansas increased by 47,000 during that period.

Hurt or help?

The audit also said that it was possible for economic development projects to help some communities in Kansas at the expense of others.

For example, the audit said Nebraska Furniture Mart in Wyandotte County has generally been cited as a successful economic development project. It opened in 2003, as part of the Kansas Speedway complex, through the use of tax-supported STAR bonds.

Since its opening, however, the number of furniture stores in Kansas has decreased 24 percent, and neighboring Johnson County has seen a significant decline in furniture sales.

Still, the audit said Nebraska Furniture Mart has been an overall plus for the state economy, as furniture sales in Kansas increased 88 percent, sales taxes from furniture sales increased 68 percent, and the number of furniture store employees increased 27 percent.

Results unclear

Senate Majority Leader Derek Schmidt, R-Independence, said Wednesday the audit's findings were interesting, but didn't provide much guidance for lawmakers.

"They suggest we're better off than we would've been without having done everything that we did on economic development, but they really don't tell us what to do next," Schmidt said.

"The audit attempted to quantify things that are almost impossible to quantify. It is impossible to measure how much of that growth would have happened without the state incentives," he said.

Tracy Taylor, president and chief executive officer of the Kansas Technology Enterprise Corp., said the conclusions of the report "lend to an overall pessimistic tone." He said that states are fiercely competing for technology-based development and that Kansas has reaped rewards in investing in new companies and business incubation.

"Technology-based economic development works nationally, and is working in Kansas," Taylor said.

The economic development report can be accessed by going to www.kslegislature.org/postaudit/.

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