Economic Development Activities in Illinois Municipalities

By NORMAN WALZER and JULIE M. KARABIN"

The 1981-82 recession created fiscal problems in many Illinois municipalities as local industries faced significant employment reductions and, in many instances, closed their doors permanently. These employment losses, in turn, caused hardships for retail establishments and service industries within the cities.

Responses to these employment declines brought forth industrial recruiting campaigns to lure branch plants of national corporations and local programs to assist industries in expanding. Increased attention is paid to fostering a climate that will promote the development of new industries or businesses in a community. These programs include providing technical assistance to entrepreneurs starting businesses and financing programs aimed at business endeavors which traditional lending institutions might find too risky.

Economic development programs in municipalities are not new. For many years cities have administered programs providing infrastructure to accommodate business expansions or relocations. Industrial revenue bonds. Urban Development Action Grants, and other block grants have assisted municipalities in working with industries to expand and/or retain employment.

Under the tax reform and budget-balancing legislation, many municipal assistance programs are threatened or slated for elimination. There is little doubt but that a loss of these programs will hurt the effectiveness of local governments to cause or assist economic development and recovery from the recession.

This article examines the uses of industrial revenue bonds (IRBs) and other incentives in Illinois municipalities with populations larger than 10,000. City officials were asked about the projects financed with IRBs, what types of financing instruments would be used if IRBs were eliminated, and the types of incentives currently offered to prospective industries. The information is based on a survey conducted in October, 1985. Of the 269 municipalities surveyed, 113 provided useful information, a response rate of 42 percent.

Economic Development Planning

Economic development takes many forms in Illinois communities with major differences arising based on size of city. For instance, 23 of the respondents indicated that they did not have a formal economic development plan for the city (Table 1). This, of course, does not mean that the activities are uncoordinated but it suggests that the council may not have taken the time to plan an overall strategy for types of industries to be contacted and local policies needed to foster economic development. When asked about types of outside assistance, if any, only 36 reported that an external consultant was employed in the economic development process. These findings are not unexpected but demonstrate that much room is left for expansion or upgrading of the economic development process.

TABLE 1
FINANCIAL INDUCEMENTS OR INCENTIVES
		Used
		Infre	Not
Incentive	Often	quently	At All
Industrial Revenue Bonds	53*	32*	26*
Property Tax Abatement	7	23	73
Tax Increment Financing	12	14	74
Fee or Low Cost City Services	10	19	71
Subsidized Interest on Loans	14	17	71
Loan Guarantees	9	13	78
Business Training/Subsidized
Wages	15	19	67
Land Write-downs	9	17	73
Subsidized Rent	4	8	88
Business Incubator	4	12	81

Local officials were queried about the use of fiscal inducements and incentives. By far, the most common fiscal incentive reported by cities is industrial revenue bonds. A total of 53 cities (46.9 percent) reported that industrial revenue bonds were used often and an additional 32 municipalities reported that they were used infrequently.

The second most frequently reported incentive is subsidized wages and business training programs. A total of 15 municipalities reported using this incentive often and nineteen reported infrequent usage. Federal

*The authors are professor and research assistant in the Department of Economics at Western Illinois University , Gratitude is expressed to the Municipal League for mailing the questionnaires. The authors also thank Penny Sympson for assistance in data tabulation. The authors accept sole responsibility for the findings.

May 1986 / Illinois Municipal Review / Page 11

and state support for retraining and wage subsidies have been available through the Comprehensive Employment Training Act and the more recent Job Training Partnership Act. Since the survey, requested information on the two most recent years (1983-85), the JTPA funds are the most applicable.

The third most frequently cited financial incentive program is interest subsidies on business loans. These may overlap with IRBs, but some cities reported direct loan subsidies through a development group or another source involving city funds. Only 10 municipalities reported using free or low-cost city services as inducements. Also, only 9 cities reported using land writedowns often and 17 reported using this incentive infrequently. Also interesting is that subsidized rent and business incubators are reported as not used at all by 88 and 81 cities respectively.

Industrial Revenue Bonds

Because industrial revenue bonds are the most commonly reported industrial inducement, they bear closer examination. When asked about the purposes for which the bonds had been issued, the most common response was industrial purposes, and cities were about equally divided between new business attraction and expansion of existing businesses (Table 2). Approximately one-half as many cities reported issuing revenue bonds for commercial activities. Relatively few municipalities reported using industrial revenue issues for white-collar and service activities.

TABLE 2
IRBs BETWEEN 1981 and 1985
	Number Reporting
			Not
	Used	Used	Used
Purpose	Most	Often	At All
Business Expansion
Commercial	18	22	26
Industrial	34	20	19
White Collar/Service	4	13	32
New Business Attraction
Commercial	17	36	19
Industrial	32	16	18
White Collar/Service	8	12	28
Storefront Improvements	2	3	43
Industrial Parks	10	6	36
Spec. Buildings	3	5	41

Source: Survey of Illinois Municipalities, October 1985.

Some overlap between reporting categories is expected. Municipal officials were asked to indicate use of IRBs for storefront improvements, industrial parks, and spec buildings. Very little activity is reported for these purposes with industrial parks being the most commonly reported in the three categories.

Size of Issues

Federal legislation governs the size of issues and amount issued statewide. Municipal officials were asked to indicate size and purpose of IRBs. One might expect that size of issue relates to size of city and type of development project. In Table 3, the number of IRBs reported by size group and number of cities reporting commercial, industrial, and white collar/service industries are shown. The largest number of cities reported

		TABLE 3
SIZE OF ECONOMIC DEVELOPMENT IRBs
		Type of Project
					White Collar/ Service
Size of issue	Commercial		Industrial
	No.	No.	No.	No.	No.	No.
	Mun	Issues	Mun	Issues	Mun	Issues
Less than $1
Million	28	(1.9)	28	(2.5)	17	(3.1)
$1 Million to
$5 Million	43	(2.4)	53	(3.4)	18	(1.9)
$5 Million to
$10 Million	13	(1.4)	11	(1.5)	5	(1.4)
$10 Million	4	(1.0)	5	(1.2)	2	(1.0)

Source: Survey of Illinois Municipalities, October 1985.

$1 million to $5 million issues for commercial and industrial projects. The average city had 3.4 IRBs for industrial in the $1 to $5 million category and 2.5 issues in the smallest size group.

The least frequently reported project was white collar/service industry with 17 municipalities reporting an average of 3.1 issues in the smallest category and 18 municipalities reporting an average of 1.9 issues in the $1 to $5 million group between 1981 and 1985. While IRBs have been criticized for use on low-cost commercial projects, the results of this survey do not support the view that these projects received extraordinary attention. A total of 28 cities reported an average of 1.9 issues smaller than $1 million tor commercial projects. The

Page 12 / Illinois Municipal Review / May 1986

same number of cities reported an average of 2.5 issues for industrial projects in this size range. The largest number of issues in the smallest offering size category was an average of 3.1 for white collar/service projects.

What if IRBs are Eliminated?

Since the future of IRBs is under debate, municipal officials were queried about incentives that could replace IRBs in economic development efforts. The list of incentives in Table 4 is not exhaustive but reflects many common incentives used by cities. Respondents were asked to indicate which incentives would be used most frequently, frequently, or not used at all.

TABLE 4
ALTERNATIVE INCENTIVES TO REPLACE IRBs
	Use
	Most	Use	Not
	Fre-	Fre-	Used
Incentives	quently	quently	At All
Property Tax Abatements	24	25	34
Tax Increment Financing	24	36	17
Free or Low Cost City Services	11	31	33
Subsidized Interest on Loans	15	28	32
Loan Guarantees	9	25	39
Bus. Training/Subsidized Wages	25	18	34
Land Write-downs	12	24	37
Spec. Buildings	5	21	44
Subsidized Rent	5	14	52
Business Incubator	9	24	38

Source: Survey of Illinois Municipalities, October 1985.

Business training programs and subsidized wages would be used in the absence of IRBs. Twenty-five municipal officials said they would use this incentive most frequently and 18 would use them frequently, but 34 said that this type of incentive would not be used at all. Since these programs are financed through the Jobs Training Partnership Act and related sources, the costs to a city may be relatively low. If, in upcoming budget-balancing efforts, these funds are reduced markedly, cities must adopt alternative incentives.

Property tax abatements and tax-increment financing followed business training in popularity as possible replacements for IRBs. Given the relatively large attention paid to these incentives in recent months, the responses are not surprising. The evidence is not clear with respect to the drawing power of property tax abatements, especially since municipal property taxes are a relatively small part of the property tax bill. Recent analyses indicate that other incentive programs may offer a greater pay-off to an incoming industry while costing a community less.

Municipal officials were asked whether property tax abatement is a standard component in their community economic development program. Somewhat unexpectedly, only 22 responded affirmatively. Of those responding that property tax abatement is used, the most common occurrence was for light industrial projects rather than commercial, heavy industry, or white collar/service activities.

Land write-downs were reported by 12 communities as possible alternatives to replace industrial revenue bonds. Often a city purchases property in an industrial park so that existing industries wishing to expand or new businesses locating in the city can be provided land at reduced costs.

Subsidized loans would also be used frequently if IRBs were not available. Providing low-cost loans may involve guarantees or outright interest subsidies including loans serving as matches with private lending institutions.

Incentives and Job Creation

Measuring the effectiveness of industrial incentives is difficult at best. Long time delays between establishment of incentives and job creation are common. These delays obscure the relationship between the incentive and the jobs created. The longer the time, the larger the number of jobs that may be created. Municipal officials were asked to report the types of industries receiving incentives, the number of jobs created, and the average private investment in the five most important development projects during the previous three years. Summary statistics were compiled to gain insight into the relationship between private investment and use of tax incentives.

The average city reported 189 jobs in commercial activities with an average private investment of $8.65

May 1986 / Illinois Municipal Review / Page 13

		TABLE 5
	DEVELOPMENT INCENTIVES AND EFFECTIVENESS
	Average,
Type of	number	Average $	Average
Business	of jobs	(millions)	$ per job	IRB	%	TaxAb	%	TIF	%
Commercial	189	8.649	38,579	71	89.9	2	0.03	6	0.1
White collar	365	2.382	4,734	11	91.7	1	8.33	0	0.
Manufacturing	177	6.434	31,959	90	90.0	9	9.09	0	0.
Average	244	5.822	25,091
Totals				172	905	12	6.3	6	.1

Source: Survey of Illinois Municipalities

million (Table 5). When private investment was compared with employment generated, an average of $38,579 in private investment per job created was reported. The vast majority (71) of incentives provided to commercial activities were IRBs. However, two instances of property tax abatement and 6 instances of Tax Increment Financing were also reported.

The largest number of jobs created in the cities responding to the survey were white-collar. The private investment behind each white-collar job was. $4,734 which is much lower than for commercial. Also, the number of incentives provided to create these jobs was less. Eleven IRBs and one property tax abatement were reported by these cities.

It is interesting, but not necessarily surprising, that manufacturing represented the smallest number of jobs created during this period. The cities averaged 177 jobs for a total investment of $6.434 million with an average of $31,959 of private investment for each job created. The cities also reported 90 IRBs used to generate manufacturing jobs and 9 instances of property tax abatements. Thus, IRBs are particularly important in generating manufacturing jobs in these cities.

Summary

Economic development programs are becoming essential for most communities. The 1981-82 recession caused significant declines in employment and local officials have faced great pressure from residents to stimulate the local economy. State governments have become active in assisting communities in working with potential industries because of the obvious benefits statewide. New programs such as enterprise zones, tax increment financing, and others have reshaped the ways in which local governments can respond to industry requests. Industries, cognizant of benefits available nationwide, make effective use of these programs and bargain with local leaders to obtain the best deal.

This article briefly describes the types of incentives currently offered by Illinois cities larger than 10,000. There is wide diversity and one might expect this variety to increase even more in the future. The economic picture in many communities is not bright. Municipal officials are challenged to work with business groups in an effort to rebuild the local economy. Fortunately, local governments have a wide selection of development tools with which to work. •

Page 14 / Illinois Municipal Review / May 1986