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DANIELS' DEAL CLOSERS: IEDC generating jobs, but economy shares part of credit

June 5, 2006

It would have been big.

Just last month, a team of officials from the Indiana Economic Development Corp. and The Indy Partnership, its local equivalent, were furiously negotiating with South Carolinabased fire-engine maker American LaFrance.

Intrigued by a mix of economic incentives and Indiana's central location, American LaFrance considered moving its operations to Marion County. In formal negotiations, the company dangled promises of 653 jobs and a capital investment of $18.5 million.

State records don't reveal what incentives Indiana offered before the deal fell apart May 18, but ultimately American LaFrance decided not to move.

"That would have been a nice one to have, trust me," said Jeb Conrad, executive director of Indy Partnership's Indianapolis division. "We would have loved to have that one."

Still, after 15 months in business, IEDC boasts far more wins than losses. Since replacing the Indiana Department of Commerce in February 2005, the state agency has closed 210 competitive deals across the state, securing promises for 23,178 new jobs and pledges of nearly $4.7 billion in private investment-offering $287.6 million in incentives in return.

Although large projects earned IEDC headlines, the majority of its activity involved business expansions resulting in 100 jobs or fewer.

On average, state incentives amounted to $12,400 per promised job. That's almost half as much as the $24,400-per-job offered in the DOC's final two years.

Only about 10 percent of IEDC's negotia- tions have been fruitless, roughly the failure rate agency leaders expect.

"If we weren't losing some, that would tell us we weren't doing our jobs," said IEDC General Counsel Nathan Feltman. "Our job is to give as little away as possible and yet win the opportunity."

But for all its apparent progress, IEDC still has plenty of work ahead. Despite leaders' desire to transform the state's manufacturing-heavy economy, the industrial sector accounted for most of the early success stories. Geographic diversity also remains a challenge: More projects are planned for central and northeast Indiana than the rest of the state combined.

And observers are quick to point out the agency has the advantage of operating in a growing U.S. economy-quite a contrast to the national recession its predecessor had to navigate.

"It's that old saw, 'Who gets the credit for the economy?'" said Ball State University economist Patrick Barkey. "I guess we know who gets the blame."

A team approach

In February, Indiana managed to score a victory over South Carolina that soothes some of the sting of the scuttled American LaFrance deal.

Indianapolis-based Hoosier Gasket Corp., which for nearly 50 years has been fabricating die-cut gaskets for the automotive market, was bursting at the seams. Co-owner Ben Jackson said his company is so cramped in its 55,000-square-foot Massachusetts Avenue facility that closets have been turned into offices.

South Carolina had been trying for years to convince Hoosier Gasket to uproot its operations. When it offered a new building, training and relocation money, a 10-year tax abatement, and special financing for new equipment, Jackson took notice.

"They gave us an incentive package that was just incredible," he said. "I looked at the thing and said, 'My gosh, I know we want to stay in Indiana, but as businessmen, we have to look at what South Carolina is offering.'"

It wasn't long before North Carolina and Virginia joined the chase. IEDC and the Indy Partnership hustled to match the best offer. Thanks to their efforts-and a mixture of state and local incentives-Hoosier Gasket plans to double its 100-person staff and move into a larger facility in the Keystone Enterprise Park.

"We wanted to stay in Indiana. We wanted to grow in Indiana. 'Hoosier Gasket' doesn't sound right in South Carolina," Jackson said. "'Gamecock Gasket' doesn't have the same ring."

The possibility of losing home-grown companies like Hoosier Gasket is the worstcase scenario IEDC was designed to prevent.

For years, House Republicans called for creating a state economic development agency modeled on private business, something that would take bureaucracy and politics out of the equation and focus on efficiency and results.

One of Republican Gov. Mitch Daniels' first official acts was to launch the IEDC, tapping proven business leaders Patricia Miller-co-founder of Fort Wayne-based Vera Bradley Designs-and Michael S. "Mickey" Maurer to lead the charge.

Maurer's business holdings include stakes in The National Bank of Indianapolis and IBJ Corp., publisher of Indianapolis Business Journal.

IEDC aims to help Indiana firms grow while trying to attract out-of-state companies. Its staff of 100 works with local economic development agencies to sweeten the pot for promising prospects, offering state tax breaks, training grants and expertise.

The governor is personally involved, serving as the agency's chairman and presiding over all its six board meetings so far.

Maurer, who became secretary of commerce-and IEDC's chief executive-following Miller's resignation last year, said Daniels also makes thank-you calls to some of the executives negotiating with the state.

And Daniels has asked the rest of his cabinet, whatever department they lead, to make IEDC's requests their top priority. Whether a company needs information on skilled labor from the Department of Workforce Development or roads improved by the Department of Transportation, the governor wants the request fast-tracked.

But Maurer said Daniels is no micromanager, leaving most details to IEDC.

"We're proud he has the confidence to do that," Maurer said.

Complicated comparisons

Since the switch, state statistics show a clear uptick in Indiana's economic development results. IEDC generated 4,926 more jobs in 2005 than its predecessor had the year before, and it's on track to do the same this year.

Even so, some observers say direct comparisons between the two entities aren't fair, since the IEDC is operating in a more promising economic environment than the Commerce Department did in its final years under Democratic governors Frank O'Bannon and Joe Kernan.

It's much easier to generate jobs with the wind at your back, said Barkey, director of Ball State's Bureau of Business Research.

"You're talking about a year-and-a-half period here when the industrial economy is doing very well," he said. "It's almost the mirror image of what was happening at the end of the Kernan administration."

Others say it's equally difficult to weigh IEDC's accomplishments on a larger scale.

"I don't think anybody has good national numbers," said Jeff Finkle, CEO of the Washington, D.C.-based International Economic Development Council. "The problem with the whole business is there are so many one-off deals. It's hard to take data from one state and compare it to another state."

Finkle even questioned the validity of per-job averages based on total incentives and employment promises. For one thing, some of the jobs often fail to materialize, skewing the numbers. And not all jobs are created equal.

Economic development officials must consider a multitude of factors when putting an offer on the table, including the project's likely return to taxpayers and the quality of jobs being created.

A manufacturing facility might be worth more to a community-given the large capital investment and above-average wages-than a call center, for example. And areas grappling with high unemployment might be willing to spend more to create jobs.

Alabama stunned many in economic development circles in 2003, when state leaders offered a whopping $153 million in See next page incentives to land a $300 million Mercedes-Benz plant. The per-job cost was estimated to be $150,000 to $200,000.

How did they justify it?

"Up until that point, the words 'Alabama' and 'quality' were not used in the same sentence," Finkle said. "Now they are."

Another wrinkle: State incentives are just part of the equation. Cities and counties also offer tax abatements and infrastructure improvements, so per-job totals are higher.

Without querying economic development leaders in all 92 counties, it's impossible to say whether IEDC's lower cost-per-job average is the result of bigger offers from municipalities or more frugal ones from the state.

Democrats bristle at the implication they were asleep at the switch until Daniels took over from Kernan.

"We were nimble. We were quick and we were responsive," said Tom McKenna, former executive director of the Indiana Department of Commerce. "... [Kernan's mandates] were, 'You'd better be proactive and aggressive, and you'd better be tactical and practical.'Every day we tried to do that."

Prior administrations laid the groundwork for decades, he said, and deserve some of the credit along with the strengthening economy.

"Joe Kernan always said that for our success, we stood on the shoulders of Bob Orr, Evan Bayh and Frank O'Bannon," McKenna said. "You've got to be in this for the long term."

Feltman conceded that the national economy is on an upswing, but insisted the business cycle isn't responsible for IEDC's improved results.

"I think it's a different focus and a different attitude that really started at the top with our governor," Feltman said.

"As a result of the creation of IEDC, we are focused purely on economic development. Department of Commerce had lots of other areas they were focused on. It's a different business approach today, and that really has been a big, big part of our success."

Regional differences

IEDC has made some changes, to be sure. Among the most visible: consolidating the DOC's 11 regional offices into six. State officials in each of the regional offices coordinate economic development activity with their local counterparts.

The idea was to provide a more unified, streamlined approach.

Critics say it created less-balanced results. Of Indiana's 92 counties, 59 saw at least one IEDC project-the other 33 had no competitive activity.

"I don't see how cutting back on regional offices makes you more flexible or more responsive. That's counterintuitive and just not true," McKenna said. "... If we didn't make an aggressive attempt to help all segments of the state move forward, we weren't doing our job."

Feltman said the variation in regional results stems from the level of business activity already established there. IEDC can only respond to the market, he said. It can't conjure new investments from thin air.

"It's not as a result of anything the IEDC does," Feltman said. "The IEDC does not have the ability, nor do we have the desire, to direct investment to any part of our state."

The largest IEDC region, by far, is the 30 counties in central Indiana-which are set to get 41 percent of the state's new jobs. The 16-county southwest region, on the other hand, was promised about one job for every seven in central Indiana.

Even within the six regions, some counties enjoyed a much larger share of IEDC's deals than others. Allen County, for example, had the second-most competitive projects in the state and grew 1,501 new jobs, more than every county except Marion and Hamilton.

Despite the apparent disparity, the IEDC has advocates throughout the state.

"The creation of the IEDC was absolutely the right thing to do. The old Department of Commerce didn't have the focus the IEDC has," said Phil Laux, CEO of the Greater Fort Wayne Chamber of Commerce. "They're extremely responsive. In the economic development game, that's a critical component, because companies have a lot of choices around the country."

Another IEDC supporter is Greg Fitzloff, president of the Southern Indiana Chamber of Commerce, which serves Clark and Floyd counties. Clark's 1,233 new jobs make it the county with the fourth-largest gain, but Floyd saw no competitive deals.

Even so, Fitzloff gave IEDC high marks.

"I would put the efforts that the state currently has under way as being the strongest I've seen in the 18 years I've been here," he said. "I make no bones about it. I'm a big fan of their approach and their ability to get things done."

Industrial activity

On the campaign trail, Daniels made a case for replacing manufacturing jobs with more promising careers in sectors like life sciences or information technology. IEDC has attempted to spur such change through grants from the 21st Century Research & Technology Fund, which it administers.

But most of its deals remain firmly planted in the Old Economy. Just over half of IEDC's competitive projects have been in the manufacturing sector.

In the long term, Daniels still hopes to diversify Indiana's economy. In the meantime, manufacturing is clearly the lowhanging fruit. It's also particularly juicy, resulting in some of IEDC's biggest wins-and most promising prospects.

Consider the 1,500 jobs that could materialize if Japanese automaker Honda chooses southeast Indiana as the site of a $400 million plant-or the 1,000 positions promised when Toyota Camrys start rolling off the assembly line in Lafayette.

"A thousand jobs and a $250 million investment is significant anywhere," said Cinda Kelly, executive director of the Lafayette-West Lafayette Economic Development Corp. "You don't do that very often."

Because of their supply-chain impact, manufacturing deals often are attractive, Feltman said. And there's also a manufacturing component in other industry sectors, from food production to life sciences.

"You cherish a manufacturing facility, because you know what it can mean in terms of a multiplier," he said. "Bottom line, the United States is always going to be a manufacturer. What our companies make is going to continue to change and go up the value chain. We want to make things. That's what historically we've been good at, from a work-force perspective."

New York-based Pfizer Inc.'s decision to make inhalable insulin in Terre Haute mixed life sciences and manufacturing. The project is slated to bring 450 jobs and a $174 million Pfizer investment in exchange for state incentives worth $8.95 million.

Pfizer spokesman Rick Chambers praised IEDC as a business partner, helping the company narrow a field of 70 potential expansion sites. His comments were typical of the many business executives who successfully brokered deals with IEDC.

"The IEDC was very responsive and very interested in working with us to expand our presence in Indiana," Chambers said. "We were very pleased with how the process worked."

Another IEDC focus has been to expand Indiana's ethanol industry, fast-tracking 10 ethanol production facilities already.

Although the plants typically bring only a few dozen permanent jobs, it's easy to see why IEDC has prioritized them: Capital investments often exceed $100 million. And their effect on the farm industry could be even more profound.

Mitch Miller, general manager of Marionbased Central Indiana Ethanol LLC, said his plant alone will need 18 million bushels of corn annually, which should increase local corn prices. He estimates the plant will have an annual economic impact of $100 million, once its effect on the trucking industry, utilities and other businesses is considered.

"With no help from the IEDC, it would have been likely that the project would never have gotten off the ground, because we wouldn't have been able to attract investors," Miller said. "We would have had to take our business model to another state with incentives. That's how significant it was."
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