Lessons learned from Moberly
As local governments and citizens continue to recover from the economic downturn, the recent Mamtek fiasco in Moberly, Mo., reminded municipalities across the state to be especially careful with tax dollars as government officials promote job creation.
When searching for a location to build its new artificial sweetener factory in 2009, the China-based firm Mamtek promised to create more than 600 jobs in the surrounding community. Moberly won the bid after promising $39 million in bond financing along with $17.6 million in state tax credits. The company, however, never completed the project and missed a bond payment in September 2011. The city then had to default on the bonds and saw its credit-rating drop.
Local companies and government officials responded with lawsuits and legislation aimed at preventing this sort of problem in the future.
Columbia-based Shelter Insurance had purchased about $5.6 million of those bonds and has filed a $390 million lawsuit against Morgan Keegan, an investment-banking firm out of Memphis, for not exercising enough due diligence when it underwrote the original bond package.
“The city of Columbia is ahead of the curve on this issue,” state Rep. Chris Kelly says. “[Moberly’s city government and businesses have] a tremendously difficult economic situation, and I don’t blame them. I just view this as a learning opportunity for other municipalities.”
Kelly has proposed a bill that would require taxpayer approval before a municipality issues a bond. He said this type of bill is hard to pass because the economic development community would no longer be able to issue bonds without the consent of the people.
“If the city wants to take a risk, fine, but voters need to understand what is at stake,” Kelly says.
TIF advantages
With the exception of the recent deal to create an IBM service center, Columbia officials avoid investment risks by instead using Tax Incremental Financing so that the city never actually loses money if a company were to go under.
“The kind of incentive we offer with a TIF is based on performance,” Mayor Bob McDavid says. “We’ve given them incentives for success and if they aren’t successful, we’re not hurt.”
The Regency hotel and Tiger Hotel in downtown Columbia both receive TIF’s and would not exist if it were not for the abatement, McDavid says.
The IBM exception was based on the company’s strong financial backing and the promise of job creation. The city made an investment in that company by purchasing the building at 2810 LeMone Industrial Blvd. The Columbia Missourian reported the city then leased the building to IBM at a rate of $1 million per year over the course of 10 years. During that time, IBM has also agreed to spend approximately $10 million on improvements to the building and contribute more than $507,000 in annual sales tax.
IBM was expected to create 800 tech-based jobs in the Columbia area. The company has not yet made its current Columbia employment figures public. In early May, IBM had more than 50 Columbia-based job postings on its website.
“We knew who IBM was and we knew they were going to make improvements,” said McDavid, highlighting the main difference from the Mamtek startup operation.
The city, however, does not completely avoid startup operations. Economic development officials cite Carfax, Veterans United Home Loans and Shelter Insurance, for example, as startups that were drawn to Columbia’s healthy business environment, and Shelter Insurance is now one of the top employers in the area.
“Because we are a university community and there is technology being developed at the university, these startup opportunities come along fairly often,” says Mike Brooks, president at Regional Economic Development, Inc., or REDI.
REDI is a nonprofit partnership that works to provide increased economic opportunities for the Columbia area. It investigates potential new companies’ financial positions, communicates those findings to city government and attracts companies to develop in the area.
Before the city offers a company any sort of incentive, REDI first collects documentation of the company’s financial standing. Each situation is treated differently, Brooks said, but startups usually involve a greater level of due diligence. A Dun and Bradstreet check provides financial information and helps determine the company’s long-term capabilities.
After the city has determined a company’s finances are stable, REDI then attracts the company by highlighting Columbia’s workforce, job training, property and utilities that accommodate what the company wants to do. Startups will often utilize the Small Business Development Center, a joint venture with the University of Missouri that provides job training and market resources. Other resources, such as Boone Electric’s high voltage power lines, attract larger tech firms like IBM.