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ED411 | 2017 | Track 1: The Site Selection Short List

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ED411 | 2017 | Track 1: The Site Selection Short List - How to Get On and Stay On the List

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ED411 | 2017 | Track 1: The Site Selection Short List

  1. 1. #ED411 SITE SELECTION SHORT LIST – HOW TO GET ON AND STAY ON THE LIST December 1, 2017
  2. 2. #ED411 Adam Bering, Principal, Ernst & Young LLP Paul Naumoff, Principal, Ernst & Young LLP
  3. 3. The better the question. The better the answer. The better the world works. December 1, 2017 ED 411
  4. 4. Page 4 Tax reform ► Tax reform contains several major changes that will impact federal corporate tax liabilities including: ► Reducing the 35% corporate tax rate to 20% (House version begins in 2018; Senate version begins in 2019); ► Repealing the corporate alternative minimum tax (AMT) (House and Senate versions both begin in 2018); ► Eliminating various deductions and credits, such as the work opportunity tax credit and the new markets tax credit; and ► Repatriation NOTE: As of November 17, 2017
  5. 5. Page 5 Potential impact of federal tax reform on state budgets ► The overall goal of tax reform is to lower the rate while broadening the base so that the result ends up being revenue neutral. ► If states adopt the new structure, which is not guaranteed as each state may be impacted differently based on the make-up of the companies in their state, they would have a broader base upon which to apply their tax rate. ► It is likely that states do not cut the state tax rate proportionally to the cut at the federal level. If that tactic is employed by states they may see increased revenue which can be utilized to close deficits and/or provide additional economic development programs to improve the states competitive position within the U.S. ► A concern remains that in getting the federal budget to a revenue neutral positions, programs which send funds to the state will be cut and/or Federal programs maybe cut which will require increased state expenditures to maintain the same level of service. ► As such once Federal Tax Reform is settled there may likely be a number of years where we see a ripple effect at the state level as each state will have to deal with the budgetary results along with decide whether or not to implement tax reform of their own.
  6. 6. Page 6 Repatriation: impacts on capital expenditures? ► The goal of repatriation is to encourage multinational companies headquartered in the U.S. to bring foreign-earned income back into the U.S. by assessing a lower tax rate on the income when it is brought back. ► Last repatriation in 2004 saw over $300 billion in income brought to the U.S. from foreign subsidiaries. Companies indicated they would put such funds toward financing capital spending, paying down debt, R&D, venture capital, and acquisitions. ► Repatriation of foreign-held earnings typically comes with requirements to invest in U.S. domestic operations to encourage job creation and economic growth. ► Combined with potential for imposing new tariffs on imports, this creates enhanced reasons for future investment domestically.
  7. 7. Page 7 What you can do to be ready ► First, estimate the static impact of changes in tax base and tax liability, by industry. This may include the following: ► Estimate share of sales from export sales; ► Estimate share of cost of goods sold from imports; ► Estimate annual capital investment and interest deduction; ► Estimate total change in tax base; and ► Estimate total change in federal tax liability. ► Next, test the relevance of the national, industry-level results to companies in your local jurisdiction (or target companies in other jurisdictions). This may include the following: ► Analyzing publicly available financial statements from the company and other available data to show: ► Geographic location of sales and assets; ► Capital intensity; and ► Leverage.
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  9. 9. Page 9 Key considerations for a successful investment Strategy: Align the business strategy with the federal, state, and local economic development and job creation strategies Public relations: Preserve confidentiality, manage the press and reputational risk. Communicate positively about your proposed plans and their positive community impact Human Capital: Assess the attractiveness of the local labor market in terms of labor availability, skills, wages, union relations, and other factors Project costs: Understanding and quantifying the total project cost and potential cost offsets through the application of an integrated incentives process Political environment: Analyze strategic priorities for economic development and the enthusiasm of States to attract new capital investment and job creation
  10. 10. Page 10 The location advisory process Location Evaluation Index ranking Financial and tax modeling and incentive identification Location visits and incentive negotiation Selection of final location 01 02 03 04 • Develop operating and financial profiles for the proposed facilities • Project cost levels at each finalist location • Estimate tax liabilities by year • Compute present value of operating costs • Prepare credits and incentives assessment • Coordinate community visits with relevant stakeholders • Draft economic impact report for distribution to state and local governments • Prepare required applications • Negotiate and review incentive proposals offered; discuss project terms • Identify location evaluation factors that reflect business objectives • Rank locations using a customized, weighted score • Identify finalist locations for financial and tax modeling • Filter and reduce number of locations based on critical location criteria • Review and finalize any incentives agreements • Develop compliance work plan to track and maintain incentives agreements • Preform final stage cost modeling inclusive of incentive benefits $
  11. 11. Page 11 Locations are typically defined as the relevant metropolitan statistical area (MSA) or county. Factors to consider vary from company to company. Below are example factors that companies consider: Labor ► Population ► Population growth ► Workforce ► Workforce growth ► Occupational employment ► Occupational wages ► Industry employment ► Industry wages ► Labor productivity ► Wage trends ► Demographics ► Commuter patterns/local draw ► Effective labor force ► Unemployment rates ► Unemployment demographics ► Degree attainment, rate & type ► Percentage unionized ► Days lost to union strikes ► Number of colleges & universities ► Number of STEM graduates Infrastructure/Logistics ► Utility costs ► Accessibility (freight/port) ► Proximity to airport ► Supplier proximity ► Future local production ► Logistics for semi-finished parts ► Location of customers ► Climate and natural disasters ► Time zone ► Construction costs Tax landscape ► State and local tax rates ► Federal taxes (if including Mexico) ► Tax credits and incentives (tax and non-tax incentives) ► Major discretionary and statutory credit and incentive programs: ► Usable value ► Retroactive ► Transferable ► Refundable ► Labor incentives ► Expedited permitting ► Workforce training support ► Foreign Trade Zone Quality of life ► Quality of life ► Crime rates, ► Teachers / pupil, ► Public school spending ► Cost of living levels ► Cost of living growth rate ► Availability and quality of health care services ► Current housing stock ► Average home prices Potential location evaluation factors
  12. 12. Page 12 Ohio example when analyzing for a manufacturing company Ohio currently has a Republican Governor, Senate and House. Ohio voted for President Trump and Vice President Pence in the 2016 presidential election in 2016. Pros ► Seventh most populous US state (11.6m residents) ► Second largest manufacturing workforce in the US (689,000 workers) ► Third largest state for job creation in 2015 (25,800 jobs created) ► Sixth most capital investment in 2015 ($5.1b) ► Seventh largest University for Bachelor’s degrees in Engineering (The Ohio State University) Cons ► Low unemployment rate (5.0%) ► Not a right-to-work state ► Median hourly wage in industry: $16.34 (+5% above US average) Business environment Tax attributes Pros ► No personal property tax ► No income or franchise tax ► No inventory tax Cons ► The Commercial Activities Tax is a gross receipts tax that does not allow for the same deductions and credits as an income ta ► High real property tax ► Municipal-level income taxes
  13. 13. Page 13 Manufacturing project case study • Location analysis (cost-benefits-risks) including determination of location criteria, weighting scenarios and conducing a high-level location assessment to identify and rank potential target US states and sites • Due diligence and cost analysis on sites that meet client’s requirements and business needs in order to prioritize sites • Conduct RFP process with targeted states to understand baseline incentives packages and develop economic impact study for negotiation purposes • Performed a comprehensive study from a supply chain and logistics perspective at specified locations in targeted states • Conduct community evaluations (in-person site visits) • Incentives negotiation process at the federal, state and local levels • Negotiating final commitments from state and local municipalities • Perform financial modeling to support final location decision along with review of incentives agreements • Company located to the Midwest • The negotiations resulted in multiple incentives offers Outcome Approach Large-scale US inbound contract manufacturer
  14. 14. Page 14 A balanced economic development agenda Balanced Economic Development Agenda Objectives and Strategy Analysis Economic Development Funding Return on Investment Execution Deployment Accountability and Predictability Benchmarking
  15. 15. Page 15 Objectives and Strategy ► What is the mission of the economic development group or department? ► Is the mission to attract new companies? ► Is the mission to retain existing companies? ► Is the mission to grow the existing industrial base? ► Are you trying to pivot to attract a new industrial base? ► What are the tools in the toolbox? ► How are those tools deployed? Balanced Economic Development Agenda Objectives and Strategy Analysis Economic Development Funding Return on Investment Execution Deployment Accountability and Predictability Benchmarking
  16. 16. Page 16 Benchmarking ► How is your county, district, city, etc. faring against the competition? ► Are you seeing a return on your investment? ► How are you measuring that return, i.e. new jobs, higher wages, new company commitments, etc. ► What are your peer municipalities doing to attract and retain companies? ► Are they offering different incentives? Are they being more or less aggressive than you are? ► What are your strengths and weaknesses? Have you done a SWOT analysis? Balanced Economic Development Agenda Objectives and Strategy Analysis Economic Development Funding Return on Investment Execution Deployment Accountability and Predictability Benchmarking
  17. 17. Page 17 Analysis ► Have you analyzed assets/liabilities (availability of land, labor, logistics, workforce training, etc.)? ► Have you conducted an analysis to identify key growth sectors? ► Economic impacts for consideration: ► Budget changes ► Tax law changes ► Business changes ► Labor changes ► Incentives analysis: ► Which economic development programs are used and to what effect? ► Which economic development programs should be used? Balanced Economic Development Agenda Objectives and Strategy Analysis Economic Development Funding Return on Investment Execution Deployment Accountability and Predictability Benchmarking
  18. 18. Page 18 Economic Development Funding ► Are your programs performance based, i.e. tax credits, or grants? ► Leading practices: ► Federal programs ► State programs ► Local programs ► Utilities ► Universities Balanced Economic Development Agenda Objectives and Strategy Analysis Economic Development Funding Return on Investment Execution Deployment Accountability and Predictability Benchmarking
  19. 19. Page 19 Execution Deployment ► How are you communicating your competencies, resources, tools, partnerships and collaborations to the private sector? ► Leading practices: ► Policies and procedures ► Marketing ► Lead generation ► Organizational structure Balanced Economic Development Agenda Objectives and Strategy Analysis Economic Development Funding Return on Investment Execution Deployment Accountability and Predictability Benchmarking
  20. 20. Page 20 Accountability and Predictability ► How is your jurisdiction handling GASB 77 reporting? ► Is your jurisdiction getting a return on their investments? ► Are the jobs that were committed actually occurring? ► Do the incentives that were offered meet the requirements of the company? ► Is the company abiding by the terms of the agreement? Balanced Economic Development Agenda Objectives and Strategy Analysis Economic Development Funding Return on Investment Execution Deployment Accountability and Predictability Benchmarking
  21. 21. Page 21 Return on Investment ► Is your jurisdiction seeing a return on their investments? ► If so, what can you do to replicate and continue that success, if not, what changes need to be made? Balanced Economic Development Agenda Objectives and Strategy Analysis Economic Development Funding Return on Investment Execution Deployment Accountability and Predictability Benchmarking
  22. 22. Page 22 Questions?
  23. 23. #ED411 THANK YOU

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