Weighing the Pros and Cons of Attracting New Business Communities use economic development software developed at Georgia Tech to analyze costs and benefits. By Lincoln Bates

Competition is keen among communities for attracting business to town. And why not? New firms mean more jobs, additional household income and a better tax base.

Screen capture from the LOCI fiscal and economic analysis software program.

Well aware of this "seller's market," most companies seek incentives to locate — waste treatment, tax abatements, infrastructure enhancements — and government officials must weigh the costs against the benefits of granting them. That's not always easy. So economists at the Georgia Institute of Technology's Center for Economic Development Services (CEDS) developed software to analyze the fiscal and economic details that form this crucial evaluation.

LOCI (for Local Impact Model), formulated by CEDS economists Bill Riall and Robert Lann, fills a gap left by traditional input-output models. These models are both unreliable for small economies and exclude the all-important cost side of the equation. For example, landing a new firm will stimulate the local economy, but with that growth comes more demand for services.

LOCI supports the need for objective, cost-effective economic development, Lann says. It (1) provides the information to know how far a community can go in granting incentive demands, (2) supports the community's side in negotiations by supplying data about how government costs may change, and (3) helps officials understand and communicate how a local economy works.

"We think LOCI levels the playing field by giving communities a tool to estimate the fiscal and economic impacts from a new business location for themselves. They no longer have to rely only on the claims of the prospect," Lann says.

LOCI has become an important instrument in the state's economic development toolbox. Georgia communities must now conduct a LOCI analysis to apply for a Regional Economic Business Assistance (REBA) grant from the state Department of Community Affairs (DCA).

"It is imperative for local governments and development authorities to demonstrate that public benefit from an undertaking will exceed public costs," says Brian Williamson, director of DCA's Office of Economic Development. "While handling diverse projects of all sizes and complexity, the LOCI model has proven itself very useful in assisting local governments to know 'how much is enough' when granting local incentives."

Several communities have used LOCI to successfully pursue development projects. Among them are:

• Catoosa County — A LOCI analysis aided the local development authority with its decision to assist American Recycling Technology's location to Ringgold, Ga., a venture that will mean a $1.5 million to $2 million capital investment and up to 400 new jobs.

• Griffin-Spalding County — Results of a LOCI analysis helped persuade voters to approve a special option local sales tax that, among other things, funded an industrial park and later helped local officials decide what level of incentives to offer Caterpillar Inc. The venture could equate to a $50 million capital investment and 300 new jobs.

• Savannah — A LOCI analysis paved the way for a state-supplied REBA grant that funded a road into the Crossroads Business Park where Lummus Corporation is locating. The Swiss-owned manufacturer of cotton-cleaning equipment will employ 250 workers.

"It was really nice to have LOCI confirm that the company would help the economic growth of the community, and of course we couldn't have obtained the grant without it," says Lee Grimes, the Savannah Economic Development Authority's director of Research and Established Business Initiatives. "Also, it opened my eyes to additional pieces of information. It was a good exercise."

Screen capture from the LOCI fiscal and economic analysis software program. Click on image to view larger versions (84k).

As of November 1998, there were 81 completed LOCI projects in Georgia. The estimated net impact of planned investment from successful LOCI projects totals $4.7 billion and more than 11,000 jobs. LOCI analyses for REBA grant applications number 22.

Complaints from local economic developers about incentives and lack of a good tool to deal with them spurred Riall and Lann to formulate LOCI in 1991. The project, Riall says, had to overcome several complexities, ranging from data gathering to practitioner mindset. Their initial DOS version came out in 1995. Feedback from Georgia Tech's regional office staff and local developers resulted in software enhancements, including a jump to Microsoft Windows.

LOCI is primarily a fiscal impact model that estimates how government costs and revenues will change from adding a new investment to a local economy, such as a new manufacturing plant, a distribution center, a tourist attraction or a new office headquarters.

LOCI also estimates other impacts, such as increases in new employment, income, households, commercial and industrial establishments, and retail purchases, Riall says. LOCI's calculations are based on two primary sets of data. One is a community profile containing data on tax collections, tax rates, annual government revenues and fees, annual government costs, utility usage and rates, demographics and retail activity. The second involves a profile of the new investment, such as a manufacturing firm. This requires information about construction and operating costs, utility usage, investment in real and personal property, inventories, employment and payroll.

The analysis can be conducted from one to 20 years, but most analyses cover a 10-year horizon. Annual revenues and costs are calculated over the selected period, then a net present value is figured from annual net revenues. Once the data profiles are completed and incentive options are determined, the local community can use LOCI to examine various potential impacts.

The latest version of LOCI will improve how government costs are allocated to residential, commercial and industrial sectors based on the demand each sector exerts on government services, Riall explains. Researchers also will explore ways to use statistical methods to estimate government costs and revenues based on a community's population, number of businesses and other characteristics.

The model's impact transcends dollar signs. This year, CEDS will join the American Economic Development Council in offering courses on local impact and LOCI across the country, Lann says. In addition, CEDS researchers are working on an offshoot of LOCI, a state-level impact model using similar methodology.

For more information, contact Robert Lann, Center for Economic Development Services, Economic Development Institute, Georgia Institute of Technology, Atlanta, GA 30332-0640. (Telephone: 404/894-3475) (E-mail: robert.lann@edi.gatech.edu)

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Last updated: May 28, 1999