understanding the stimulus final 12 29 09 sg€¦ · an illustrative guide to the american recovery...

Understanding the Stimulus: An Illustrative Guide to the American Recovery & Reinvestment Act

International Economic Development Council

734 15th Street, NW Suite 900 Washington, DC 20005

202.223.7800 www.iedconline.org

January, 2010

IEDC EDRP Understanding the Stimulus of 21

Principle Authors

Anne Berlin Fran Doherty

Matthew Texler

About EDRP The Economic Development Research Partners Program (EDRP) is an IEDC membership level which supports practice‐oriented research. The resources developed under EDRP’s guidance and sponsorship are designed to increase the knowledge base of the economic development profession and help practitioners navigate through today’s rapidly changing economy. Through the EDRP program, IEDC is taking its mission to a new level: to assist practitioners in successfully competing in the global economy, increasing prosperity for communities at an accelerated pace and empowering economic development professionals to better define their vision and value.

Acknowledgements We wish to recognize all EDRP members who helped conceive of and shape this document as a resource for the economic development profession. Special thanks to the following individuals who contributed their time and insight through extensive interviews: Steve Budd, President, City Wide Development Corp, Dayton, Ohio Hunter Morrison, Director, Center for Urban and Regional Studies, Youngstown State University Sharon Woodbury, Director of Economic Development, The City of Youngstown, OH Bruce A. Wright, Associate Vice President, Economic Development, University of Arizona Dr. Shari Garmise served as editor and adviser.


Economic Development Research Partners Darrell Auterson, CEcD President & CEO York County Economic Development Corporation Ian Bromley, FM MA MBA Ronnie Bryant, CEcD President & CEO Charlotte Regional Partnership Steve Budd, FM HLM President Citywide Development Corp Dennis Burnside President and CEO Burnside Analytics John Chafee President & CEO North Carolina’s Eastern Region Kurt Chilcott, CEcD FM President & CEO CDC Small Business Finance Corporation Denny Coleman, CEcD FM President & CEO Saint Louis County Economic Council JoAnn Crary, CEcD President Saginaw Future Inc. Buzz David, CEcD President & CEO Amarillo Economic Development Corp

Gene DePrez Chief Innovation Officer Creative Sheffield Don Jakeway President & CEO Brooks Development Authority Paul Krutko Chief Development Officer City of San Jose Tom Kucharski, CEcD President & CEO Buffalo Niagara Enterprise Paul Lucy Director, Division of Economic Development North Dakota Department of Commerce Barry Matherly, CEcD Executive Director Lincoln Economic Development Association Alan Levin, Director State of Delaware Economic Development Office Sandy Pratt, CEcD Deputy Director Business Services Oklahoma Department of Commerce Robin Roberts Krieger, FM Executive Vice President Greater Oklahoma Chamber of Commerce

Roel Spee Global Leader IBM Global Business Services PLI‐Global Location Strategies Bill Sproull President & CEO Richardson Economic Development Partnership Russ Staiger, AICP President and CEO Bismarck‐Mandan Development Association Longview Economic Development Corporation Allison Thompson, CEcD Executive Director Cedar Hill Economic Development Corp Marty Vanags, CEO Economic Development Council of the Bloomington‐ Normal Area Rick Weddle, FM HLM President & CEO Research Triangle Foundation of North Carolina Joy S. Wilkins, CEcD Manager, Community Innovation Services Georgia Tech Enterprise Innovation Institute Greg Wingfield, CEO Greater Richmond Partnership


Understanding the Stimulus The American Recovery & Reinvestment Act (ARRA) is a large federal spending package subject to understandably intense public scrutiny. Touted as the key to lessening our recessionary woes while investing in the economic engines of the future, the bill is accompanied by high expectations for both immediate and transformative impacts. This pressure to deliver results is set against a backdrop of rising unemployment, depressed consumer spending, an acute housing slump, a precarious commercial real estate market & projected state and local budget deficits through fiscal year 2011. Economic developers are at the epicenter of generating and measuring sustainable impacts through ARRA programs, and need to be well versed on its nuances. The purpose of this document is thus three fold:

• Assist economic developers in understanding and communicating what the stimulus package can and cannot do based on its design.

• Contribute to a more nuanced approach to assessing the use of stimulus funds, given the backdrop of acute economic malaise, to prepare economic developers for effective public relations when reporting on impacts.

• Produce a range of case narratives against which communities and organizations can evaluate their own progress, potentially providing the spark for improvements. The cases will also serve to help economic developers define success given the current climate.

Contents Section I: A Guide to the Stimulus for Economic Developers A concise overview of the bill’s design and a breakdown of what has been disbursed to date, with an emphasis on programs with relevance to the economic development community. Section II: Examples of the Stimulus in Action The bill’s potential for economic development impacts is explored through 6 case studies. The cases demonstrate how the recession is playing out at the local level and how communities can use ARRA funds to promote community development and stimulate business investment. Section III: Lessons Learned Based on the analysis and examples presented here, the document concludes with an examination of the stimulus’ initial successes as well as persisting challenges due to the legislation itself as well as to political & ideological differences, public misconceptions, and the waves of worsening economic news which followed the bill’s signing in February 2009.


Section I: A Guide to the Stimulus for Economic Developers1 In February 2009, Congress passed the American Recovery & Reinvestment Act (ARRA) in response to the recession triggered by the tandem collapse of the financial sector and real estate market. The legislation authorized $787 billion to buffer the effects of the downturn and stimulate the economy via a combination of tax cuts, formula‐based fund transfers and direct grants and loans. The bill was designed to have impacts on both a short and long‐term time horizon: in the near‐term the spending package aims to preserve and create jobs and keep more money in the hands of low and moderate‐income individuals and small companies to prevent consumption from further bottoming out. Another immediate goal of the ARRA allocations is to stabilize state and local government budgets, in order to minimize and avoid reductions in essential services and counterproductive state and local tax increases. In the longer term, the outlays are intended to spur advances in science, energy and health to fuel the industries of the future; and to invest in transportation, environmental protection, and other infrastructure that will provide sustained economic benefits. The quickest‐acting portion of the stimulus, totaling approximately 1/3 of the ARRA appropriation, was a host of immediate tax cuts and incentives to businesses and individuals. By foregoing revenues in this manner, the federal government strove to boost consumption, support business expansion and buoy household income. Within this portion of ARRA spending, ‘Cash for Clunkers’ and the first time home buyers tax credit have captured the most headlines. Other programs include expanded New Market Tax Credits, lower payroll withholding (‘Making Work Pay’), and energy efficiency & renewable use incentives. Also included here are the fee reductions and increase in loan guarantee amount for SBA loans. The next pot of funds, also approximately 1/3 of ARRA’s value, involves direct transfers to provide for continuity of services in the face of staggering state budget deficits and to support those most radically affected by the recession. In most cases, these funds were automatically allocated to states based on a set of formulas such as population and deficit level, while a handful of the elements—such as supplemental payments to foodstamp recipients or grants to support health centers serving disadvantaged populations—were delivered to local entities or individuals. The two largest components of this portion were the State Fiscal Stabilization Funds (SFSF)—which applies predominantly towards protecting teacher positions and allows states to free up education money for other general ledger expenses—and the temporary increase in Federal Matching Percentage (FMAP) of states’ Medicaid expenses. Other notable aspects include an increase in the amount and duration of unemployment benefits, subsidies to cover COBRA healthcare insurance for laid off workers and funds to support law enforcement such as the Community Oriented Policing Services Program. As this overview of the tax‐based and direct‐transfer ARRA allocations illustrates, the bulk of stimulus spending was dedicated to muting the severity of the crisis for individuals, businesses and communities. The intentions of this spending are to stabilize existing industry, expand the

1 In the following section, and throughout the document, multiple specific ARRA programs are mentioned by name. Appended to this document is a Glossary for readers to reference definitions of unfamiliar programs.


social safety net as a proxy to stabilizing labor markets, and plug near term holes in the fiscal budgets of states. It is the final 1/3 of the package—cash outlays distributed across all government agencies via a mix of formula grants, loans and competitive awards—which constitutes the ‘reinvestment’ portion of ARRA and has the greatest potential for sustainable job creation. The most fast‐acting federal spending rolled out this past summer was for transportation and infrastructure spending, predominantly for shovel‐ready projects such a bridge repair, repaving and federal government facilities improvement. Money for energy efficiency audits and Weatherization Assistance, particularly of affordable housing stocks, also hit communities relatively quickly. It is important to note, however, that the cash outlays which made headlines this summer were not intended to be exhausted in 2009. Instead, the disbursement of these investments was explicitly designed to stagger out over the coming two years to support projects of longer duration, buoy economic activity over a prolonged period, and to allow for interim project oversight and performance monitoring. Specifically to this last point, many of the spending programs are not one‐time disbursements, but rather entail a small portion of upfront funding with strong guarantees for further funding based on meeting project goals. In concrete terms, this means that communities are receiving only a small chunk of program funds to begin with, which they must use to demonstrate definitive implementation plans and/or begin initial phases of implementation. In addition, during this trial investment phase, recipient communities must meet all reporting deadlines for project oversight and job creation and preservation figures. Those communities not meeting these expectations could have the remaining value of their awards revoked, to be redistributed in future grants to other communities. For the purposes of this analysis, the important take‐away here is that, to promote transparency and accountability, and provide time for long‐term investment projects to be well planned and executed, this third portion of ARRA was designed more as a trickling faucet than a fire hose. Furthermore, for the most innovative initiatives, such as Race to the Top, Smart Grid, Health IT and High Speed Rail, spending was not intended to even commence until 2010 to allow sufficient time for project identification and prioritization. Hence, many of the reinvestment programs with the most potential to generate growth and jobs in emerging industries remain undisbursed, as the responsible agencies and relevant congressional bodies collaborate to finalize investment criteria, solicit proposals and select recipients. Given that, among those reinvestment allocations which have been awarded, very few have expended significant amounts of their funds, and that the recipients of higher‐value programs have yet to be selected, any verdict on the overall economic development and job creation success of ARRA at this stage is premature. As referenced briefly above, the element of ARRA receiving the most prolonged media fanfare and public scrutiny is its intensified reporting requirements. As communicated by the administration, the purpose of more frequent and more detailed reporting on spending is two‐fold: to achieve accountability and transparency with regards to the massive deficit‐based public outlays, and to measure incremental impacts in terms of job creation and retention. These provisions have garnered concern from recipient state and local governments who must deliver timely reports covering a vast array of agencies & funding types.What is more, given the persisting severity of economic conditions on the ground, rote job creation and preservation


figures may not be the most sufficient short‐term metric for gauging the effective use of stimulus funds to promote long‐term economic recovery and reinvention. The following is a reference list of some of the economic development‐related stimulus‐funded activities which are currently underway:

Transportation infrastructure improvements: highways, bridges and resurfacing projects Transit system acquisitions of buses, trains and parts Airport improvement Brownfield and Superfund site cleanup jobs Upgrades and energy retrofits to government agency, military and veterans’ facilities Renovations to public housing and weatherization for low‐income households Waste and water systems improvement, port projects and coastal restoration

Other highlights of particular relevance to economic developers, which are currently in some stage of disbursement, obligation or expenditure include:

Department of Energy: Energy Efficiency and Conservation Block Grants Department of Labor: Workforce Investment Act programs HUD: CDBG and Neighborhood Stabilization Program Funds EDA: Supplemental Funds for Infrastructure Projects SBA Loan Guarantees and fee reductions Department of Treasury: New Market Tax Credits, Recovery Zone Economic

Development Bonds, Build America Bonds Descriptions of the programs mentioned here can be found in the attached Glossary.


Section II: Examples of the Stimulus in Action Given the bill’s emphasis on transparency and measurement, understanding outcomes and successes within the context of the macroeconomic climate is essential. In the following cases, we identify how communities are making headway at using available stimulus funds to address the range of severe economic challenges playing out across the country. Each of the profiles below introduces a major impact of the recession and provides an example of a successful response. Due to the nuances and complexity of the ARRA legislation’s design, implementation and impact time‐frames, these illustrative examples of the stimulus in action are a practical way to understand both the bill’s purpose and potential. This section begins by painting a picture of how the economic downturn is playing out at the local level. This discussion is intended to allow the initial iterations of ARRA spending profiled here to be evaluated in context. The cities chosen as case studies represent a range of locations, demographics, economic conditions and actors, and profile the use of stimulus programs with particular relevance to the economic development community. While it may be years before the full economic potential of ARRA is realized, case snapshots at each stage of the game are a valuable way to keep tabs on how the stimulus is unfolding. A Snapshot of the Economy Suffering from successive waves of recessionary impacts, US communities are witnessing an unprecedented erosion of prosperity. Few regions of the country have escaped the declines in wealth brought on by the bursting residential real estate bubble and credit market dislocations. The resulting abandonment and neglect of property has left cities pock‐marked with blighted buildings and signs of business failure. Pervasive joblessness, whether as a result of major declines in the manufacturing and construction sectors or as a response to a depletion of aggregate demand, is straining state and local coffers. In addition, illiquidity and a lack of confidence in the financial markets are preventing the renewed flows of private investment which typically fuel economic growth and recovery. Individual communities thus have been charged with the responsibility of leveraging federal stimulus funds to stabilize and reinvigorate injured local economies. In the following cases, stimulus funds are being channeled toward specific projects hoping to reverse the downward spiral and cement a base for future economic growth. The communities were selected for their innovative approaches to addressing six key issues:

1) Rising home foreclosures. The foreclosure crisis continues to unfold across the country, having torn through subprime borrowers at a rapid pace; now many non‐sub‐prime borrowers are also facing mortgage difficulties as a fall out of joblessness and stagnant earnings. For many communities, particularly in the hardest hit states and regions, this


results in a depleted property tax base, blighted neighborhoods strewn with empty housing stock, and—most significantly for the broader economy—the loss of the major assets that many Americans have used as a source of credit to fund consumption.

2) Industrial decline and population flight in the rust belt. The shift away from the industries of the 20th century and the emergence of entirely new growth industries is starkly apparent in the rust belt, where decades of successful heavy manufacturing have given way to retracted investment, high unemployment and population decline. This trifecta of loss translated into dramatic state and local revenue shortfalls, even before the rest of the country began feeling the brunt of the recession. However, the rust belt, with its skilled workforce and vacant manufacturing facilities, is fertile ground for the energy and technology‐based advanced manufacturing which sits atop the value chain of the industries of the future. The reinvestment portion of ARRA is the rescue remedy of public investment needed to jumpstart this arduous transformation.

3) A stalled commercial development market. While the residential real estate collapse

directly precipitated the financial crisis, impending difficulties in the commercial real estate market are a lagging repercussion of the resulting job and income loss. The same banks which incurred massive write‐downs in the wake of the bursting housing bubble also hold the bulk of commercial mortgages. With rising commercial vacancy rates as businesses close or struggle to make lease payments, commercial property defaults are likely. With banks’ capital tied up in these illiquid assets and operating under increased regulatory scrutiny, the commercial construction lending industry has come to a standstill.

4) High unemployment, particularly among young adults. Nation wide, the recession has

had particularly detrimental effects on employment rates among 20‐24 year old males, hampering long‐term labor market participation for older at‐risk youth. Young men in this demographic have been the most adversely affected by the dual contraction of the construction industry and entry‐level consumption‐driven sectors such as food service, retail and accommodations. With unemployment topping 10%, and a slow, jobless recovery projected, a generation of young adults is at risk of long‐term disenfranchisement, adding to the burden on the social safety net and decreasing the availability of skilled and job‐ready workers.

5) Business restructuring and closures. Diminished demand for goods and services, tightened credit markets and the declining global competitiveness of traditional industries are contributing to spell tough times for US businesses, which are responding by contracting their workforces, restructuring operations or closing their doors for good. In some instances, however, businesses operating in sectors poised for growth or with sufficient capital reserves on hand to take advantage of rock bottom prices for competitors, capital and facilities.

6) Absence of sufficient resources to grow the industries of the future. This recession has come at a time when the US is straddling the divide between the old economy and the new economy—characterized by dynamic entrepreneurs, rapid innovation and a spectrum of ‘green’ industries which rely on different types of human, structural and


financial capital inputs. While enduring the pangs of recession as outlined above, most communities are struggling to stay afloat, let alone provide the services and investment necessary to create, attract and expand these industries of the future.

Community Case Studies Mitigating foreclosure in the suburbs: Chicago, Illinois The southern Chicago suburbs have been disproportionately affected by home foreclosures; however, with an average population of 19,000 residents, few of the individual municipalities are well positioned to compete for, or effectively invest, state and federal dollars on their own. To leverage limited resources and achieve a measurable impact, the affected towns needed to work together to pool funds across multiple jurisdictions. Spearheaded by the city of Chicago’s Metropolitan Planning Council, a coalition of nonprofit business and civic groups, real estate developers and the metro mayors’ caucus are partnering to align multiple formula stimulus transfers and grants to mitigate the impacts of foreclosures on a suburban area encompassing 17 towns.2 The aim is to stimulate community development through homeowner protection along with energy efficiency and infrastructure upgrades across a large swath of suburban Chicago. The coalition has committed to the strategic combination of several ARRA allocations within a set geographic area, based on the assumption that preserving homeowners’ wealth, stabilizing property values, avoiding further erosion of local spending capacity, and upgrading housing stock for energy efficiency will jumpstart other economic recovery efforts. Specifically, the group will collaborate to solicit funds received via formula transfers from the state for State Energy Programs (SEP) and Weatherization Assistance, and apply for competitive Neighborhood Stabilization Program (NSP2) and Energy Efficiency & Conservation Block Grants (EECBG), all under the guise of a regional community recovery strategy. Even before the disbursal of Weatherization and SEP funds from the state, and with the award of NSP2 and EECBG dollars still pending, the coalition has secured philanthropic funding to hire staff to continue advanced planning and pave the way for quick, cross‐jurisdictional implementation. This will help ensure that the coalition’s grand plans are not abandoned, even if some of the grant applications fall through. Combating the effects of population flight in the rust belt: Flint, Michigan Flint, Michigan is emblematic of the unique set of hardships facing rust belt communities as a result of the prolonged deterioration of the region’s primary industries. Waves of disinvestment and the fallout from the drastic decline of the manufacturing sector have led to a 50% drop in population, a glut of abandoned structures and unemployment levels topping the national average. Prior to the stimulus, Flint devised a “shrinking” plan which involves consolidating residents and businesses into more concentrated, easier to service sectors and demolishing abandoned areas 2 For an in‐depth case study, see Brookings’ Implementing ARRA Design Snapshot, Coordinating Inter‐Suburban Recovery: ARRA Initiatives across Chicago’s Southern Suburbs, July 2009.


so they can return to forest or green space. The plan’s implementation, however, had been stalled by local and state‐level budget hardships. The influx of stimulus allocations has allowed city and county entities to expedite neighborhood consolidation efforts as well as make improvements to the remaining housing stock. By consolidating its building stock and retrofitting homes, Flint aims to improve the efficient delivery of government services, increase property values and improve its community image. Because energy expenses disproportionately affect low‐income households, weatherization retrofits will greatly impact this group by lowering the costs of living and increasing housing values. Specifically, Flint and Genesee County are utilizing HUD CDBG stimulus transfers to fund the first stages of demolition and DOE formula grants for Weatherization Assistance, Energy Efficiency Conservation Block Grants & HUD Public Housing Improvement dollars to fund the retrofits. In this instance, stimulus funds are being used to jumpstart community revitalization and position Flint to capitalize on future opportunities. One such opportunity, the retrofitting of 4 Flint production facilities to manufacture engines for the Chevy Volt, is scheduled for late 2010 and has been touted by GM and government representatives alike as a “turning point for the city, bringing back jobs and the sheen of an automotive industry striving to reinvent itself.”3 While the city is hopeful that these strategies will spur additional investment and economic growth, there is tremendous community pushback against right‐sizing Flint. Some vocal residents equate the push for demolition and relocation to eminent domain. The ongoing debate is stalling plan implementation even though the ARRA dollars are in place. With significant chunks of money flowing into communities across the US, accelerating plans for community redevelopment and economic revitalization, it is important to note that public backlash to more rapid and visible change can slow spending. As reinvestment funds hit the ground, marshalling support and building community consensus for transformative investments will emerge as a critical role for economic developers. Circumventing the commercial development freeze: Dayton, Ohio With bank finance remaining tight and additional commercial mortgage defaults projected for the coming quarters, the market for new development is likely to remain depressed in the near future. At the same time, there is still demand for flexible centers that can accommodate research, office, retail and entertainment activities, attracting talent and supporting industrial competitiveness. Amid this climate, stimulus funds provided the necessary leverage for Dayton to secure financing for a new mixed‐use development with big economic development potential. Specifically, Dayton is applying stimulus CDBG funds for building construction and Waste Water Infrastructure funds which it secured from the state towards moving forward a multi‐use district dubbed TechTown. Tech Town is a 30‐acre technology‐oriented live/work/play district in downtown Dayton, initially envisioned 13 years ago as an adaptive reuse of GM’s former manufacturing site. The district is currently anchored by a successful business accelerator, though, until earlier this year, the construction of other planned buildings had been stalled due to the lack of sufficient public funding to lure additional private sector investment. Boosted by stimulus funding, Tech Town is finally moving forward; in fact its completion is actually

3 GreenBeat/VentureBeat, October 13, 2009: Chevy Volt poised to resuscitate dying automotive town Flint, Mich.


accelerating despite the commercial real estate development freeze elsewhere in the state. The completion and occupancy of Tech Town will provide Dayton with a place for innovative research and technology commercialization through collaboration among business, academia and government. This case is particularly notable as ARRA funds are being applied to putting in place the infrastructure necessary for economic diversification and future tech‐based growth at a time when the economic climate would otherwise not support such development. Dayton’s experience provides an example of how communities can use stimulus funds to guard against economic stagnation caused by receding private investment. What’s more, this example illustrates that the successful use of stimulus funds for long term economic gain is not solely a factor of innovation or landing new competitive grants, but about astutely guiding public intervention mechanisms towards strategic projects where they can promote healthy, sustainable private sector activity. Preventing long‐term workforce disconnection in young adults: Richmond, California Richmond, California is particularly vulnerable to the explosion in young adult unemployment as it has one of the largest immigrant youth populations in the country, suffers from a 50‐60% high school drop‐out rate and the highest level of violent crime in the state. In spite of its challenges, Richmond operates a successful youth training program based on public‐private partnerships and community sponsorship. The youth programs operated in Richmond are some of the most successful in the country, with steadily growing enrollment and permanent job‐placement rates exceeding 90%. However, severe state budget shortfalls placed this successful and meaningful program in danger of losing funding, which in turn jeopardized the private‐sector relationships for on‐the‐job training which had been cultivated over the duration of the program. The influx of stimulus funds, while intended chiefly to ensure continued operation this summer, led to an expansion of public and private employment opportunities, leveraged additional corporate sponsorship and ushered in the highest participation levels in program history. Specifically, Richmond tapped into a DOL Workforce Investment Act Youth Activities (WIA Youth) allocation which many communities used this summer to provide temporary employment for at‐risk populations. To respond to the recession’s disproportionate effects on young adults, the ARRA legislation extended eligibility within WIA Youth Activities to include 18‐24 year olds. This extension allowed Richmond to open up its successful program to older youth, who were trained to provide home energy audits and carry‐out low cost energy conservation measures. Even before the stimulus, Richmond’s Youth Employment program was a best practice model for engaging disconnected youth in productive and rewarding activities, drawing heavily on public‐private partnerships for job placement and sponsorship with public funds partially subsidizing participant earnings. The astute leveraging of stimulus funds to protect this program in the midst of California’s dramatic public cuts speaks to the importance of finding creative ways to deliver the essential functions of community and workforce development even in the most trying times. Direct support for private sector growth and job creation: Youngstown, Ohio


Youngstown, Ohio provides a good example of how to creatively use local government stimulus dollars to leverage investment by firms bucking the trend towards recession‐induced contractions. Even as the ink on the ARRA bill dried, the city was primed to quickly mobilize a supplemental CDBG grant and a chunk of Ohio Department of Transportation allocations. After a local business relocated due to downsizing measures, Youngstown courted VXI Global Solutions Inc., a Los Angeles‐based business in the same industry, to expand operations into the vacated space by using $600,000 in CDBG stimulus funds to support a $4 million renovation of the facility. VXI opened shop in the new space on October 1st immediately hiring 150 people, with a total of 500 positions anticipated by next year. In a second example of companies poised for growth despite the recession, V&M Star Steel, an existing enterprise in Youngstown, will also benefit from stimulus spending. The subsidiary of French Vallourec S.A. will nearly double its operations, permanently creating 400 skilled‐labor positions. The expansion was made possible as local economic developers successfully lobbied the state of Ohio DOT to spend a portion of its formula allocations for transportation infrastructure to enlarge V&M’s existing land parcel by relocating a national rail line that currently divides the property. Building infrastructure to fuel growth in emerging industries: University of Arizona, Tucson In late August 2009, the Economic Development Administration (EDA) announced a $4.7 million grant—the single largest EDA stimulus award—to the Arizona Board of Regents and the University of Arizona in Tucson to support phase‐one development of the Arizona Bioscience Park. The Bioscience Park will join the University of Arizona’s award‐winning Science and Technology Park and its business incubator, the Arizona Center for Innovation, as the newest element in Tucson’s high‐tech infrastructure. The University’s new bioscience park will provide a separate facility designed specifically for companies working in biosciences, biotechnology, life sciences and pharmaceuticals. The bioscience facilities will be integrated into a multi‐use development, including a hotel and conference center, retail and residential development. Construction is slated to begin in December 2009; as of September 2009 no new jobs had been created from the award, as the time since the grant was floated has been filled with efforts by existing staff to get the park’s design plans approved and to conduct an open bidding process for contractors. It is important to note the role of prolonged relationship‐building on behalf of the University of Arizona to secure this grant when additional EDA funds for infrastructure investments became available through the stimulus bill. The grant was the result of a 2 year process of seeking EDA funding for the development of the Bio Park. This history, along with the fact that the project is located in the city’s depressed central city, explains why the project received such a large EDA stimulus grant. In fact, the EDA contacted the University of Arizona’s Office of University Research Parks (OURP) directly to approach the idea of applying stimulus funds to the Bio Park, as the agency was pressed to disburse funds quickly. Notably, with regards to stimulus funds disbursed through preexisting federal grant channels, while this money is coming through the traditional EDA structures, it is accompanied by the more stringent reporting requirements introduced by ARRA.


By providing the high‐tech infrastructure and connectivity to university researchers to promote innovation in the biosciences, this grant shows the value of stimulus funds in continuing to support growth in emerging industries in an economic climate which would otherwise not support such investment. Section III: Lessons Learned Successes Our analysis of ARRA and the examples we have presented have highlighted the initial successes of the stimulus program, as well as challenges and limitations that still remain before the long‐term effectiveness can be fully realized. While the public perception of the effectiveness of the stimulus has been lukewarm, objective analysis of the results on the ground reflects a more positive story. Jobs have been created, program cuts have been delayed, and long‐term infrastructure investment has occurred. While public perception of the effects of ARRA represents a continued challenge for leaders, when awards have been given, ARRA has had a positive effect. Public sector approval, and more significantly private sector praise, has been garnered for some of the more effective new programs, such as the Recovery Zone Bonds program. 1) Long‐term strategic projects that were stalling due to paralysis in private credit markets, and strained public budgets have been resuscitated by ARRA funds. For example, in Dayton, OH Community Development Block Grant (CDBG) funds augmented Waste Water infrastructure funds to provide gap funding for a delayed multi‐use development district entitled Tech Town. This project has both short‐term and long‐term benefits, from the creation of construction jobs, to establishing a permanent technology corridor that will assist Dayton’s transformation from a manufacturing hub to a leader in advanced technology. Another example is the positive effect ARRA funds have had on increasing the flexibility of SBA provisions, allowing for improved liquidity in capital markets for small businesses. 2) Successful public programs that had faced cutbacks or closure are continuing to operate as a result of ARRA dollars. Richmond, California has been able to maintain and even expand a successful job training program that targets at‐risk young adults operated by the Workforce Investment Act (WIA). Budget cuts had threatened to put the program on hold. Without the injection of ARRA funds, this program, which is an example of successful long‐term investment, would have been sacrificed due to short‐term fiscal constraints. The addition of ARRA funds created greater flexibility to the existing program by expanding it to include 18‐24 year olds involved in youth activities. 3) Efforts to use ARRA funds are supporting the creation of networks and cooperation among different parties. This relates especially to strategic planning efforts, and involves closer coordination between state and local representatives. An example of these planning efforts is the integration of the needs of businesses into infrastructure investments. Infrastructure spending alone can create short‐term construction benefits, but if it is coordinated with business development plans, long‐term economic growth can occur. Economic development professionals in Youngstown, OH understood the importance of this when they lobbied the state to allocate a portion of its ARRA transportation funds to relocate a national rail line


dividing the property of V&M Star Steel. The relocation allowed the company to expand its manufacturing plant capacity at the current site, and create 400 permanent jobs. Moreover, this model can also be applied to the regional level in order to solve issues facing a larger geography. The Chicago Metropolitan Planning Council led efforts to create a regional alliance of non‐profit business and civic groups, real estate developers and the local mayor’s caucus in the southern Chicago region to align existing resources and also to pool ARRA funds. This approach has been replicated in the San Francisco Bay Area by local political and transportation leaders bidding on high speed rail investment funds that ARRA has made available. 4) Recipient entities are leveraging ARRA resources to increase the size and scope of planned investments. The California Emerging Technology Fund for example is leaning on its ARRA awards to attract private sector investment for its efforts funds from ARRA to increase its own planned investment. This is an example of strategic investment of stimulus funds. 5) ARRA funds are enabling an increased pace of long‐term economic transformation and diversification. The deep recession has brought to the forefront long‐term structural deficiencies in the U.S. economy, including an over‐reliance on an inefficient automotive industry. An example of the transformative applications of ARRA funds is the Economic Development Administration’s allocation of stimulus funds towards the start‐up costs of the Bio‐Science Park at the University of Arizona. This R&D park is located in a distressed urban neighborhood, and is being used to both revitalize the area as well as jumpstart the commercialization of bio‐science innovation from the university. This is another example of investment in our innovation infrastructure that are necessary for the United States to maintain its competitive advantage. 6) Access to capital for small businesses has been expanded. The fee cuts enacted for SBA 7(a) and 504 loan programs combined with increased guarantee on 7 (a) loans to 90% has had a measurably positive impact on lending. According to SBA data, not only is loan volume up by 79% since prior to the passage of the stimulus act, but over 1200 lenders have rejoined the 7(a)program, and the secondary market has improved. There is also anecdotal evidence that microloan lending has also increased. Challenges Drawing on the analysis and examples presented here, we have compiled a list of eleven challenges and limitations to the stimulus—due to the language of the legislation itself as well as to political & ideological differences, public misconceptions, and the waves of worsening economic news which followed the bill’s signing in February 2009. Armed with the knowledge of how ARRA was designed, and of the bill’s inherent challenges, economic developers will be in a better position to inform their constituents and stakeholders about the stimulus. 1) Some of the major spending initiatives have taken longer than expected to hit local coffers. Some states have not drawn down all available assistance, either due to severe budget shortfalls which preclude them from putting up the required matching funds (such as the $5


billion emergency fund for needy families, which calls for a 20% match for income transfers to boost consumption among low‐income individuals) or political differences between state leaders and the administration (such as on unemployment benefits or the State Fiscal Stabilization Funds). Due to internal politics, some states were late in formally accepting the automatic stimulus allocations, which has delayed their impact. 2) Some formula grants have been disbursed but remain unspent. This is due in part to daunting compliance regulations, and the need to design and plan for spending the money effectively before commencing projects. In addition, with public budget deficits projected into 2011, some states and localities are pushing back the spending of some portion of their formula ARRA receipts to fill anticipated budget gaps into the next 2 years. It is hoped that this gradual expenditure, rather than a huge boost now followed by more severe cuts, will allow states to better adapt to unforeseen economic circumstances.4 3) Many of the most transformative grants may inevitably support non‐US economic activity as the domestic industries have not yet reached sufficient scale. When it comes to the more advanced industries supported by the stimulus, such as renewable energy production, the gains from investments in domestic infrastructure are buffeted by some of that money going abroad because of a historic failure to incentivize and invest in capacity for manufacturing in these high‐growth fields. One case in point is the current debate surrounding the cash grants in lieu of tax credits for renewable energy production. Through the Renewable Energy Grants in Lieu of Tax Credits Program, in 2009, two rounds of announcements awarded a total of $1 billion in grants to companies investing in domestic renewable energy production. In these two rounds of funding, the Spanish company Iberdrola has been the largest recipient of renewable energy production cash transfers, which have predominantly gone to wind power generation; the company’s U.S. wind farms have snared $545 million in grants.5 Further, Germany’s E.On received the largest single award for an individual wind farm, “scoring a $121 million grant for the Pyron Wind Farm in Texas, underscoring the role that European wind developers have in the U.S. wind‐power market.”6 Though these investments accrue to the US subsidiaries of foreign‐owned parent companies, some of the most expensive components of the wind‐turbines are manufactured abroad, supporting green jobs outside the US: while up to “86% by weight of all wind‐turbine components can be domestically‐sourced (including the towers and the blades)”, the expertise and capacity for producing the highest value components lies abroad.7 As this case illustrates, in order to reach the goal of added renewable production capacity that will in the long run support the growth of domestic industry, some of the initial benefits of these new investments will accrue to non‐US companies and workers.

4 Drawn from Center for Budget & Policy Priorities, Federal Fiscal Relief is Working as Intended, 6/29/09. 5 Department of Energy Pres Release, September 22, 2009, Treasury, Energy Surpass $1 Billion Milestone in Recovery Act Awards for Clean Energy Projects 6 Johson, Keith, WSJ Environmental Capital Blog, September 22, 2009, Clean‐Energy Grants: Iberdrola Wins Big, Again 7 Galbraith, Kate, New York Times, November 17, 2009, After Outcry, 2 Companies Shift Their Turbine Plans


4) Communities must keep project plans afloat while awaiting formula grants to be disbursed from the state and notice of competitive grant awards. The challenge here is that plans and newly formed coalitions may be shelved if expected grants are not awarded, and the momentum for transformative change may be lost. 5) Funding recipients face overburdened or insufficient staff. Many communities are struggling to retain essential employees, such as teachers and police officers, let alone retaining or hiring topic‐specific experts to design, apply for and implement sustainability‐oriented economic development initiatives. Further to this point, those states that were worst off budget‐wise before ARRA were also the least prepared to put together a strategic approach to applying for and spending stimulus dollars. 6) There are pervasive public misperceptions. Misconceptions of the stimulus and its design, timing and potential abound. For instance, it may not be common knowledge that most funds are not flowing to the local level and that much of ARRA’s most impactful money has not yet been spent. The dilemma for economic developers is to convey an accurate understanding of this complex economic intervention. 7) Short term job creation figures may be inaccurate or unstable. Several uncertainties surround the issue of measuring job creation from ARRA funds. For one, there is no guarantee that jobs created through spending to‐date are permanent positions which will persist over the long haul. Additionally, if the immediate job boost is provided by construction projects, it is unclear whether the employment boost provided by the stimulus will hold strong as winter sets in. There may be significant imbalances in the pace of progress between states in the north and more temperate states which have an extended construction season. In addition, some firms are seeing a dramatic boost in business due to the stimulus, but their rapid expansion may not result in stable, permanent jobs once ARRA sunsets. Besides construction, small businesses in the engineering, planning, and data monitoring/management & IT sectors are benefiting from stimulus‐funded projects and monitoring requirements. The challenge is that this quick burst of government spending may complicate the organic expansion of these businesses, leading them to grow too quickly and potentially create unsustainable business models or positions. Furthermore, to meet this temporary boost in demand for their services, small businesses in these sectors may rely heavily on temporary workers and freelancers, who will continue to lack reliable income and healthcare coverage. Finally, the focus on job creation numbers as the best measure of impact combined with headlines about worse than expected unemployment presents a PR challenge for stimulus advocates and recipients of ARRA funds alike. 8) The focus on direct job creation figures belies the importance of other potential stimulus outcomes which merit just as much attention. While jobs directly created and preserved by stimulus spending remain the administration’s chief indicator of success, not all jobs are captured in recipient reports. For instance, money in the hands of the unemployed or low to moderate income individuals boosts expenditures on goods and services, lifting aggregate demand in the economy. Jobs generated and saved in this manner are not counted for ARRA reports, however, and can only be estimated through statistical multipliers, which thus far have proven unreliable. This points to the idea that over the long‐term, direct job counts may not be a sufficient tool for designating the efficient and successful use of ARRA funds. As expressed by


the ICMA in its recent White Paper on gauging the relative merits of stimulus outcomes: “an imbalance of attention on spending speed, jobs created or retained, and avoidance of embarrassing gaffes may serve the program’s interest in the earliest stages of public scrutiny, but it will leave the Recovery Act participants and proponents ill‐equipped for the eventual shift to a focus on lasting benefits beyond jobs.”8 It remains unclear how interim success should best be measured at the local level. 9) Using disbursement speed as a metric of success is anathema to protections against waste and fraud, and seems to prioritize deadlines over outcomes. Economic developers know it is important to strike a balance between immediately visible impacts and efficient, justified public spending. However, the focus within distributing agencies on the expediency of fund announcement and distribution has necessary trade‐offs for transparency and utility. In tandem with tight deadlines to distribute stimulus funds, federal grant programs are in some cases also dealing with significantly larger chunks of money than they previously administered. For instance, the DOE’s Weatherization Assistance Program received $5 billion from ARRA, though it was previously allocated $500 million per year. This means agencies are stressed to make more awards within a compressed time frame, stretching capacity for oversight. 10) Reporting requirements are moving targets. Given the compressed time frame between the bill’s passage and the first rounds of grant approvals & disbursements, the issuance of guidance on reporting standards and impact measurements has been an iterative process. 11) Award criteria developed based on economic conditions prevailing at the bill’s passage may not lead to an equitable distribution of funds given the economy’s continued deterioration since then. The ARRA bill is the result of a relatively hurried political bargaining process and was issued in the midst of a still developing economic crisis. The volume cap allocations for Recovery Zone Economic Development Bonds (RZED) are just one example of how distribution criteria for formula grants and tax benefits to states and localities which were set in February 2009 could disadvantage communities which felt the measurable brunt of the recession after ARRA was finalized. As set by the stimulus legislation, the volume of subsidized RZED lending authority available to each state was allocated based on the rate of change in unemployment between year end (YE)2007 and YE2008. This allocation methodology has in some cases precluded the equitable distribution of ARRA funds. For instance, in states like West Virginia, Wyoming, Oregon, Wisconsin, New Hampshire and Oklahoma, the most drastic increases in unemployment were seen through the first half of 2009, though these states saw relative stability in their joblessness rates in the period used to determine bonding authority allocations. Based on the allocation criteria of the bill, these states will receive a disproportionately lower amount of Recovery Zone Economic Development bonding authority than other states with comparable 2008‐09 unemployment levels. Conclusions The analysis and examples provided here are meant to assist economic developers in grasping the context in which ARRA spending is starting to roll out. In particular, the cases aim to provide

8 ICMA, Measuring the Results of Economic Stimulus Investments: Local Government Leading the Way, October 2009, p. 3.


narratives against which communities can benchmark their own initial efforts. Specifically, the community cases selected illustrate examples of what we have identified to date as innovative and/or successful uses of stimulus funds. Drawing on the insight developed through our case studies and interviews with stimulus award recipients, we suggest that the following factors denote an effective use of ARRA funds:

• Building regional coalitions to develop a broad recovery strategy • Jumpstarting community development to support a rebound in aggregate demand and

boost individual quality of life • Making quick yet effective use of ARRA awards, such as by seeking commitments of

local philanthropic or private sector funds to jumpstart efforts as federal monies arrive • Putting development plans back in action which were shelved due to recessionary

impacts • Protecting successful programs jeopardized due to budget cut backs • Investing in longer‐term assets for the economy of the future

Taken together, these factors serve as a guide for benchmarking preliminary successes in both a qualitative and quantitative way. Ultimately, we hope this document can serve as a resource for economic developers who may need to explain or defend the pace and strategy behind their initial stimulus spending decisions.


Stimulus Glossary Build America Bonds

These taxable municipal bonds enable state and local governments to receive a federal subsidy from the Treasury Department for interest costs on bonds issued for capital projects. The program, which lowers the borrowing costs for states and municipalities, is intended to finance capital projects that will stimulate local economies and create jobs. The federal subsidy covers 35% of the interest paid to investors and is open to new capital expenditure bonds issued before January 1, 2011.

Cash for Clunkers Officially dubbed the Car Allowance Rebate Program, this $3B federal rebate program provided cash incentives up to $4,500 to individual U.S. consumers to trade in older, polluting vehicles for newer, more fuel efficient models. The dual goals of the program were to provide a boost to the economy through auto sales and support environmental quality by encouraging Americans to operate cleaner vehicles. The program began on July 1st and ran until the appropriated resources were exhausted on August 24th.

Community Oriented Policing Services (COPS)

$1 billion in competitive grants directly to law enforcement agencies for the hiring and rehiring of additional career law enforcement officers. This program stands out in that it requires all jobs retained and created to become permanent after federal funding is exhausted. According to the legislation: “The retained position(s) should be added to the grantees law enforcement budget with state and/or local funds, over and above the number of locally‐funded positions that would have existed in the absence of the grant.”

EECBG

The Energy Efficiency Block Grants Program, administered by the Office of Energy Efficiency and Renewable Energy (EERE) and Department of Energy (DOE), awarded more than $2.7B in formula grants to U.S. states, territories, local governments, and Indian tribes in their first round of ARRA funding and are now accepting proposals through December of this year for competitive grants. The funds can be used by communities to develop and implement energy efficiency improvement projects that aim to reduce energy use and fossil fuel emission.

First Time Homebuyer Tax Credits

Administered directly by the federal government through ARRA, qualified first time homebuyers were given an $8,000 federal tax rebate to apply toward the purchase of a principle residence. The program was meant to stabilize the housing market by reducing inventory and induce activity in the residential construction industry. Initially the rebate was slated to expire after November 30, 2009, but due to its popularity with potential home‐buyers and in the building industry, Congress extended the cut‐off deadline to purchases closed by June 30, 2010 with the Worker, Homeownership, and Business Assistance Act of 2009. The Housing and Economic Recovery Act of 2008 contained a similar provision that offered $7,500 refundable tax credits for first time home buyers who purchased a home between April 9, 2008 and January 1, 2009. This credit required repayment over a fifteen year period.

Making Work Pay

This initiative gives employed individuals a tax credit of 6.2% of earned income up to $400 annually for single workers and $800 for married couples. Wage earners receive the money via a larger paycheck as less federal income tax is withheld each pay period. Unlike a one time rebate check, which provides an isolated spending surge or is saved by the recipients, the


administration hopes incremental rebates distributed over an extended period will increase on‐going consumer spending. The rebate is set to expire at the end of 2010.

Medicaid Federal Medical Assistance Percentage (FMAP)

This medical assistance program determines the amount of funding allocated annually by the federal government to specific medical and social service programs administered throughout each state. Medicaid is a joint federal‐state partnerships with requirements that states match the federal funding provided at a predetermined percentage. ARRA expanded the funding available for the existing FMAP program and distributed the grants via formula allocations to the states. These allocations enabled states to continue providing essential medical and social services in the face of budget shortfalls.

Neighborhood Stabilization Program (NSP)

The first NSP program was authorized and funded by the Housing and Economic Recovery Act of 2008 and provided $3.92 billion in funding for emergency assistance to states and local governments working to stabilize and redevelop communities that have suffered from home foreclosures and abandonment. The Recovery Act provides an additional $2 billion in NSP funding (NSP2) but makes several fundamental alterations to the program. First, the Recovery Act establishes NSP2 as a competitive program as opposed to the formula distribution. Second, NSP2 funding is available to non‐profit organizations, as well as states and local governments. Third, NSP2 rewards collaborative applications. The deadline to apply for NSP2 funding was July 17, 2009.

Race to the Top This $4.35B competitive grant program, administered by the Department of Education, is seeking proposals from states for transformative educational programs that will improve the quality of American public education. In order to receive federal funding, proposals must commit to creating conditions for educational innovation and reform, particularly in closing student achievement gaps and preparing students for higher education and successful careers. Phase 1 selection will begin on January 19, 2010 with awards announced in April 2010. Phase 2 selection will begin on June 1, 2010 with awards announced in September 2010.

Recovery Zone Economic Development Bonds Department of Treasury Recovery Zone Economic Development Bonds (RZED) represent a new lending authority for state and local governments introduced by the ARRA legislation. These bonds allow state and local entities to raise capital for public infrastructure, job training and education projects in particularly distressed communities, such as those experiencing particularly high poverty rates, foreclosures or those previously designated as Empowerment Zones. The debt payments for this new capital for economic development spending are reduced, as 45% of the interest payments to bond holders are covered by direct federal subsidy. A total of $10 billion was allocated for this program.

Weatherization Assistance Program

ARRA appropriated funding for the DOE to expand issuance of formula based grants to assist communities with weatherization activities. The purpose of the Weatherization Assistance Program is to enable low‐income families to retrofit their homes to be more energy efficient, thereby permanently reducing their energy bills. The DOE received $5B in stimulus money which it allocated to approximately 60 eligible counties and cities nationwide. The awards will be used to fund projects over the next three years.

understanding the stimulus final 12 29 09 sg€¦ · an illustrative guide to the american recovery...

Documents