Roiled over ROI: Measuring return on public incentives

In early May 2014, after months of secretive and at times tense negotiations, Florida Gov. Rick Scott and aerospace and defense contractor Northrop Grumman unveiled plans for an enormous expansion at Melbourne International Airport in Brevard County.

The company, which had claimed during negotiations to be considering sites in California, Texas and Alabama, pledged to add as many as 1,800 jobs and invest as much as $500 million as part of work developing the next generation B-2 stealth bomber for the U.S. military. In return, Florida promised tens of millions of dollars in public incentives, including job-training grants, impact-fee exemptions, below-market leases — and $20.8 million from the state’s “Quick Action Closing Fund,” the discretionary pot of money that the gov-ernor can tap when trying to seal competitive deals.

Dubbed internally as “Project Magellan,” it was one of the largest economic development deals of Scott’s tenure. It also failed to meet a key metric in spending decisions related to the closing fund.

According to a forecast prepared by Enterprise Florida and the Florida Department of Economic Opportunity, the state is expected — under the best-case scenario — to earn a 2.73-to-1 return over the next 10 years on the money it is investing in the deal. That’s just over half of the 5-to-1 minimum that such projects are supposed to produce under current law.

The Northrop Grumman deal is hardly unique. Since July 1, 2013, state lawmakers have required Florida’s economic development agencies to use a more rigorous formula for calculating the return on investment ratios. And over that period, records provided by DEO show that 10 of the 38 projects approved for grants through the Quick Action Closing Fund have failed to meet the minimum threshold. (The governor’s office has sole authority to approve grants of up to $2 million; anything more also requires approval of select legislators.)

The four largest Quick Action Closing Fund awards approved during that period went to projects expected to deliver returns of less than 5-to-1. In addition to Northrop Grumman, those recipients include Navy Federal Credit Union ($20 million from the Quick Action Closing Fund for a project with an expected ROI of 2.87); Carrier Corp. ($4.9 million, 2.34); and Johnson & Johnson ($4.9 million, 4.02).

Altogether, 65% of the $91.3 million approved from the Quick Action Closing Fund since July 1, 2013, is ticketed for projects that don’t meet the minimum returnon- investment requirement.

Florida law allows the governor to waive the return-on-investment criteria — for projects that would mitigate the impact from the end of the space shuttle program, for example, or those that would significantly benefit the local economy in rural parts of the state. And the governor can also issue waivers based on undefined “extraordinary circumstances.”

Scott’s administration has used the broad “extraordinary circumstances” waiver on seven of 10 projects that have received waivers since mid-2013. Three of the 10 projects that have received ROI waivers remain confidential because they were recently signed. Among those deemed to be an extraordinary circumstance: $750,000 for IT research and advisory firm Gartner to add 400 jobs in Fort Myers, with a projected return on investment of 3.36.

Of course, community leaders often are willing to accept a lesser return on investment for projects that benefit their areas. “Thus far, Magellan has been an excellent investment for Florida,” says House Speaker Steve Crisafulli (R-Merritt Island), who represents a Brevard County district just north of Northrop Grumman’s expansion project. “We will continue to monitor this project and will only pay when performance measures are met.”

Economic development boosters say the size and stakes involved in some deals make them smart investments for taxpayers even if they don’t meet the 5-to-1 metric. Scott also defends the returns that taxpayers have been getting on these deals. “We’ve done really well,” he says. “I’ll continue to make sure we get the highest investment return as we can get.”

The Florida Legislature first imposed the 5-to-1 minimum in 2006, the final year of Jeb Bush’s tenure as governor. Lawmakers were frustrated by what they saw as a lack of results from the massive deal Bush negotiated in 2003 with the Scripps Research Institute, says Mike Fasano, the former state senator who sponsored the legislation.

“We were all just furious. I was absolutely beside myself at how dollars were being spent yet no one could show us a building; no one could show us anything,” Fasano says. “I think Scripps, in my opinion, was pretty much the last straw that broke the camel’s back.”

Within a few years, lawmakers went further. Complaining of what they called overly rosy projections being used by economic development officials, they ordered economists at the state’s Office of Economic and Demographic Research to review the model that Enterprise Florida was using to project ROI. EDR found a host of flaws, ranging from inflated predictions about how much of a construction budget would be spent on building materials to forecasted corporate-income tax payments by entities exempt from the tax.

Lawmakers instructed EDR to develop the more rigorous returnon- investment model that Enterprise Florida and the Department of Economic Opportunity have been using since mid-2013. The change has been dramatic: The economic development agencies say projected returns have been “significantly reduced” in 80% of the projects they review.

The projected ROI for Gartner, for instance, would have been 5.66- to-1 under the old model, compared to just 3.36 under the current one, according to project documents.

Even with the waivers, some economic developers don’t like the return-on-investment requirement because they say it essentially freezes Florida out of legacy-making deals. The ROI minimum “makes it difficult to compete,” former Enterprise Florida CEO Gray Swoope said in an interview with Florida Trend before he left the agency last year.

Swoope specifically cited mammoth incentive packages used to lure Mercedes-Benz to Tuscaloosa, Ala., in the 1990s and Boeing to Charleston, S.C., in the 2000s. “The Mercedes deal, if you looked at the return on it — and the same thing with Boeing — they wouldn’t meet our metrics,” Swoope said. “Those, using our models, would be very difficult to fit what’s required.”

Scott, too, would like to ease the requirement. One of the economic development changes the governor has proposed to the Legislature this session would reduce the minimum return-on-investment requirement for any project seeking money from the Quick Action Closing Fund — which Scott would rename the Florida Enterprise Fund — to just 2-to-1.

The governor and his team have repeatedly framed the plan as one that would eliminate waivers — without explaining why waivers would no longer be needed. During one recent stop in Orlando, the governor refused to answer when asked why he wanted to lower the requirement.

It’s still uncertain whether projects will live up to even a reduced goal.

Last year, the Office of Economic and Demographic Research reviewed the performance of several state economic development programs. The analysis focused on three years of actual payouts to companies and included 28 Quick Action Closing Fund projects. Seven of those projects received only Quick Action Closing Fund payments during that period and delivered an ROI of 6.1. The other 21 — which received money from multiple incentive pots, including the Quick Action Closing Fund — delivered an ROI of just 1.1.

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