Sunday, July 20, 2003

Convergys II: Incentives

Next time

The derailing of Cincinnati's $63.4 million bid to keep Convergys' headquarters downtown might not have occurred had the city been further along reforming development functions and tax break policies.

The deal veered off-track in council chiefly over earnings tax credits granted if Convergys keeps 1,450 local jobs here. Cost to the city: about $33 million over 15 years. Loss to the city if Convergys leaves: a $125 million initial investment and hundred of millions of dollars in city, county and state taxes over the next 15 years.

First, council needs to set clear guidelines in advance on what tax breaks it will or won't support. The week of a council vote is no time to decide. This deal was months in the works. Job retention tax credits were used in the Delta Air Lines deal last year. Councilman David Pepper and others this week balked at using them for Convergys and argued it's a "horrible" precedent. That may be right, long-term, but to keep Convergys downtown now, they failed to identify alternative city dollars anywhere near what Convergys says it needs.

Second, council's "last-minute" balk on the deal adds urgency to quickly form the new Cincinnati Center City Development Corporation. But council still will need to sign off on 3CDC deals. Incentive policies need to be in place ahead of time.

Third, it would help reduce "sticker shock," if council at least agreed on some rough range of incentive costs it considers acceptable for a particular project. Is it $20,000 per job, $100,000? An independent analysis of costs versus benefits could also help guide negotiations, even allowing that such estimates can be manipulated.

Fourth, incentive packages should reward performance, as was the case with Convergys. Tax breaks should kick in as the company delivers promised jobs. For upfront money, the city should insist on enforceable "clawbacks" if the company fails to deliver. The city should measure afterwards for return on investment.

Fifth, city officials need to network in the region to minimize companies pitting one local bid against another. The goal should be to get to the point where "market performer" firms want to be here regardless of subsidies. Cincinnati can help its case by improving schools, adding infrastructure and removing disincentives that raise the cost of doing business.

Council has much work to do before it's ready for the next company asking for a deal.

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Cities face hard work trying to keep firms
Expert: Reform incentive policies
How city can cope
Convergys I: Make the deal
Convergys II: Incentives
Greg Harris: Regionalism must be our new focus
James Orr: Convergys deal is a defining moment

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