Monday, May 11, 2009

Does the Department of Economic Development Actually Create Jobs?

The recent loss of Hilton Hotel’s headquarters to Fairfax and the resignation of Department of Economic Development (DED) Director Pradeep Ganguly have created significant debate about DED’s performance and mission. Four County Council Members wrote County Executive Ike Leggett urging him to select a new DED Director rapidly and Leggett picked former County Council Member Steve Silverman. But debates about DED’s leadership do not answer more basic questions, such as whether DED actually creates jobs and deserves taxpayer support.

A mammoth report from the Office of Legislative Oversight lays out DED’s functions. DED encourages private sector job creation by overseeing qualifying capital projects (valued at $5.7 million in FY09), offering tax credits (valued at $3.4 million in FY09), running the county’s business incubator program, doing marketing and outreach activities and providing career services to adults, dislocated workers and youth (mostly through contractors). The two largest DED programs are the incubators (based in Shady Grove, Silver Spring, Wheaton, Rockville and Germantown, with a sixth one coming in Fairland/White Oak) and the Economic Development Fund, which makes loans to businesses. The report describes the work of DED in exhaustive detail, but it offers no opinion as to whether DED actually creates jobs. Instead, it says:

The research literature contains few examples of rigorous outcome evaluations of state and local government economic development programs. Measuring an economic development program’s effectiveness requires establishing a cause and effect relationship between the program and outcomes. Few groups undertake this type of evaluation because it is both analytically difficult to design and because the evaluation cost is often perceived as outweighing its benefits. Further, in some situations, political interests further discourage a review that might reveal negative results.
Below are financial data on the program from Montgomery County’s operating budgets. Note that “Grant Fund MCG expenditures” refer to federal Workforce Investment Act money. Also note that FY08 was the first budget during the Leggett administration.

Total funding for DED’s operating budget grew by 3.4% and 3.7% in Doug Duncan’s last two years and then changed by 7.8%, -1.8% and 10.9% during the first three years of the Leggett administration. But that is deceptive because it includes federal grants. In terms of county funding alone, DED’s operating budget grew by 25.0% and 11.3% in Duncan’s last two years and then changed by 10.8%, -3.4% and -2.4% under Leggett. Total workyears initially rose under Leggett but have fallen by double digits in the last two years. Economic Development Fund expenditures have fallen from $3.7 million in Duncan’s last year to a recommended level of $852,440 this year. On a strictly monetary basis, Leggett has reduced the county’s commitment to DED.

What does this funding buy? Under the Leggett administration’s Countystat program, DED has attempted to quantify the impact of its work in its latest recommended operating budget:

DED claims job creation by new and existing businesses through “DED involvement” ranges from 1,200-1,800 per year. Capital investment through “DED involvement” totals $35-110 million per year and leased space ranges from 414,200 square feet to 896,318 square feet.

In comparison to the size of the county’s economy, DED’s impacts are strikingly small. The Bureau of Labor Statistics estimated Montgomery County’s private sector employment at 380,492 in 2007, meaning DED’s job creation accounts for just 0.3-0.5% of the county’s private workforce. The county has 42.1 million square feet of office space, so businesses with which DED is “involved” only occupy 1-2% of the office market. And business capital investments in the tens of millions of dollars are minuscule compared to the county’s $59 billion in personal income as estimated by the Bureau of Economic Analysis in 2006.

Another question arising from the data is the meaning of “DED involvement.” Does that constitute making a phone call, holding a seminar and mailing a brochure or does it only include more substantive activities like grants of tax credits and loans? Are DED’s performance claims really based on services that were vital to creating private sector jobs or would those jobs have been created anyway? Current Countystat data does not say.

The new DED Director and the County Council must start asking these kinds of questions to get at the central issue: does DED actually create jobs? If it does, its budget should be dramatically increased because few things are more important during a recession than creating jobs. But if it does not, then DED should be eliminated. Its funds could be better used by other agencies or returned to the taxpayers.