Below is the HillCo client report from the April 24 House Economic & Small Business Development Committee hearing.
 
The committee met to take up the following interim charges:
 
Examine and evaluate economic development incentives to determine if the incentives are achieving the desired outcomes for which the incentives were initially established.  Review which economic development goals and incentives are most important and report on methods to further improve those goals and incentives while reducing ones not meeting their desired objectives.
 
Review the Governor's Office of Economic Development and Tourism and determine its effectiveness on economic development in Texas.  Determine how the office could be more efficiently coordinated with local and regional economic development entities and other state agencies to help further the economic development goals of the state.
 
Monitor manufacturing and manufacturing workforce development initiatives passed by the 83rd Legislature.
 
Economic Development Incentives
 
Jonathan Taylor, Executive Director, Economic Development & Tourism Office, Office of the Governor

  • There are 23 incentive funds and investment opportunities within the Office of the Governor
  • One of the most transparent offices
  • Enterprise fund balance started at $115 million this fiscal year
  • Have invested $400 million so far over the life of the fund
  • The pace of the fund has doubled in the last year
  • 32 loan commitments around $75 million dollars this fiscal year
  • There have been more requests for incentive fund investments now than there ever have been
  • There are 20 other states that have direct investing deal closing funds just like the enterprise fund and most of them are bigger and faster than ours
  • Rep. Eddie Rodriguez asked if the enterprise fund along with local dollars could be used for a Tesla plant
    • Yes
  • Rodriguez asked if that is the way it works the best
    • That is the only way it works; locals must come in with money
  • Rodriguez asked if there is a minimum for local money
    • No but the ones with more local incentive involved are more competitive
  • Rodriguez asked if there is a community that wants to attract a company, can they begin talks with the company before the state
    • Yes; we want that to happen as much as possible
  • By the end of next legislative session all incentive funds in the state will be dry
  • Texas’ competition now is North Carolina, South Carolina, Georgia, Louisiana
  • Rep. Jim Murphy noted it would be nice if a report could be generated that compares Texas to the competition
  • Companies say that Texas, in general, stays out of their business and they like that
  • Being able to make decisions fast is the best way to improve the incentive funds of the state; having flexibility is the second most important
  • Site selectors for companies want to be able to have a 14 day or less turnaround
    • Texas, by law, takes 90 days to get an investment out
  • Rep. Paul Workman asked what site selectors say about water
    • Chemical companies ask about it often but are willing to invest and don’t expect it to be given to them
  • Emerging Tech Fund got $50 million but Enterprise Fund got $0 appropriated last session but they have had clawbacks
  • This is a deal closing fund, not deal opening
  • They have rules on what it takes to be competitive for fund dollars but not legislatively mandated
  • Chairman John Davis asked if this fund was not in the Governor’s office where would it go
    • Department of Commerce not favorable option – some felt it was favorable being in the Governor’s office since they get access to decision makers

Terry Chase Hazell, Director of Texas Emerging Technology Fund

  • Provided update on the fund and a bit on her background
  • ETF started in 2006 and transitioned funding over time with large amount going to university investment with smaller amounts going to companies
  • Rep. Yvonne Davis asked why the transition
    • It was a conscious decision to invest in the universities
  • Rep. Jason Villalba asked how many companies have gone on to receive professional venture capital
    • Almost half
  • Prior to 2006 Texas Tech had no research commercialization office, they formed one and have brought down around $70 million in projects; now they are spinning off companies with 8 innovations on the market
  • Villalba asked if in Texas we are able to grow innovation without the ETF
    • In emerging universities the ETF is crucial in building capacity at universities and developing innovation; Texas requires milestones that build capacity without ETF
  • Villalba asked why these companies cannot attract private capital on their own
    • Some do; Texas is not always the first buyer either
  • Villalba asked what the total tax dollars spent on ETF is
    • $200 million; much of the money in the fund is from returns and interest though
  • Villalba noted Texas spend around $70,000 per job created
    • That’s one way to look at it if you don’t include jobs created from spinoffs and such
  • Many companies end up paying more in tax in the state than they received from investment
  • Villalba noted most venture funds return on investment is around 25%; it seems that our overall record should be at least that
  • Until 2011 the ETF didn’t focus on protecting investments for ROI; now have been traunching very heavily
  • Chairman Davis asked what the number one index is of all those tracked by the state
    • Product to market; actually developing something that is being used
  • Y. Davis noted many people argue that government shouldn’t be in the business of picking winners and losers
    • It is not an either/or situation; it is a question for legislators whether or not the state should invest in innovation and university engines to create economic development
  • Villalba made the point that the Governor, Lt. Governor and Speaker are not venture capitalists so it is important to have informed staff
  • Chairman Davis asked if the new Governor doesn’t want the ETF in their office, where should it go
    • It has advantages being in the Office of the Governor; able to meet with leading venture capitalists; having relationships with a high ranking state official is important to companies

 
Heather Paige, Director, Texas Film Commission

  • Texas moving image industry is growing; related vendor business are moving to Texas; tourism is increasing; business sites are expanding
  • There is an increased demand in workforce which can be seen through college and university programs
  • Texas is currently building traction against other states; in the 2014 TV pilot season Texas had 4 lined up to shoot which is double the amount of Texas’ greatest competition
  • Not only is this because of the incentive program and the record appropriation by the 83rd legislature, the business climate in Texas is at least half of the reason for the growth
  • This industry brings high paying jobs for both moving pictures and video games
  • Texas is number 2 in the country for video game production
  • Production companies have spent over $1 billion over the last six and a half years; the state has spent around $125 million in the same time period through the program
  • Murphy asked how the program works
    • Applicants apply and must meet a few qualifications: 70% of cast and crew must be Texans, the fund only incentivizes wages of Texans, cannot spend less than $250 thousand for TV or film and $100 thousand for a commercial or video game
  • Workman asked about the content clause for the program
    • Do not allow inappropriate content or content that depicts Texas or Texans in a bad light
  • Major competitors are at 25-35% of qualified spending and it speaks to the business climate in Texas that we continue to grow despite a lower incentive

 
Casey Monaghan, Director, Texas Music Office

  • The only incentive the music industry gets is the manufacturers sales tax exemption
  • There are other states who provide music related incentives

 
Robert Wood, Director of Economic Development and Analysis, Office of the Comptroller

  • HB 437 or the JET program bill modified the program to only be available for equipment grants to colleges and schools to purchase instructional equipment for high demand jobs; also made an appropriation
  • SB 1678 made changes to the METF and ETF; said that an event must be at least $1 million in incremental taxes; also added three new events but did not make amendments to site selection organization provision so those three events are not eligible for funding right now; must compare actual attendance to estimated attendance, agency has ability to lower the funding amount to account for lower attendance; authorizes up to 5% payments for privately hosted events; study requirement was tightened up from 18 months to 10 months
  • Rep. Jason Isaac asked if only out of state dollars are calculated
    • Correct; the only in-state residents who are calculated are if teams from in-state are competing in the event
  • Changes to Events Trust Fund: narrowed down so that communities can only submit ten events of $200,000  or less in incremental taxes and no more than three can be sporting events; same attendance comparison as for METF; allows 5% for private infrastructure; prohibition on construction of arenas and maintenance
  • The office mist do a study that measure economic impact of events who receive funding from ETF and METF and determine whether or not those events would have come to the state without funding from the ETF or METF
  • Isaac asked if the METF has just one fund or if a fund is created of each event; curious about how an audit would work
    • Yes; a sub-account is created for each event
  • Changes from SB 1678 have all been incorporated or a rule making is in progress currently
  • For FY 12 there were 107 total events, this year to date has seen 31 events so it is slowing down quite a bit
  • Isaac asked if there is a decline in events coming due to changes from the bill
    • Have not heard that there has been a decline because of changes in the fund
  • HB 2482 required the office to study reasons major manufacturers have chosen other states after being offered incentives from Texas; sent out a survey to around 6,000 people; have about 98 responses; have identified 6-8 projects that meet the requirements; it is very likely that Texas is missing opportunities before they get to the offer stage
  • Murphy asked if the office has attempted to put together a report that groups all economic development programs
    • The 2010 report was an attempt to do that but most of them report in different ways so it would be difficult to synch them all up

 
Aaron Demerson, Director of­­­ Employer Initiatives, Texas Workforce Commission

  • Skills Development Fund was implemented in 1996 as a job skills training program; provides customized training using community colleges, TSTC and Texas A&M Engineering Extension Service
  • Have expanded the program to service targeted populations and simplified the application process
  • Davis asked how much was appropriated last session
    • Around $48 million

 
John Kennedy, Texas Taxpayers and Research Association

  • Chapter 313 programs can be summed up by saying it is the most important economic development tool for attracting major capital investment in the state
  • The program has been very effective in accomplishing that goal
  • The Comptroller has done a very good job in administering what is a very intricate and convoluted program
  • The property tax in Texas is high compared to other states so the program is very important especially high when it comes to industrial property taxes; Texas is 1 of 11 states that tax all business property including inventory
  • Reporting process remains complex – much simpler in other states
  • Detailed reporting requirements are making some nervous about the possibility of revealing proprietary information
  • Wage threshold requirements are also a concern – suggest a possible revisit of the issue
  • Need to coordinate – state incentive but using local property tax
  • Workman proffered we could get rid of property tax altogether – reality is it is self-rendered, appraiser may not know actual value and his point is it is an unequal tax  – what would happen if we eliminated it
    • It would not be an inexpensive proposition
    • Ballpark – about $1.2 billion/year for all commercial property and $1.5billion for all industrial and if could carve inventories out it would be a smaller number
    • Not easy thing to do once the “gorilla is in the bathtub”
  • School district does not get a bang for their buck for doing this
  • Concluded prepared remarks by noting it is a complex and convoluted program but Comptroller has done a good job administering program
  • Rep. Cecil Bell said he thinks there are some local benefits from the program but would be interesting to capture this detail
    • Program reporting does not do a very good job capturing the ripple effect that investments make such as purchasing and peripheral investment made in the community

 
Joe Myerson, Assistant Director of Tax Policy Division, Office of the Comptroller

  • HB 800 was passed by the 83rd legislature; provides sales tax exemptions and franchise tax credits for research dollars spent on qualified activities
  • Sales tax exemptions can be made on purchases made on or after Jan. 1, 2014
  • Murphy asked about a letter to the office from a business asking for administrative relief; it is a burdensome system to apply for
    • The application is lengthy in an effort to reduce fraud
  • Isaac asked about the IRS giving employees bonuses who were delinquent in taxes, does the Comptroller look into that type of thing before administering grants
    • They must be in good standing or current on their taxes

 
Dale Fowler, President, Victoria Economic Development Corporation

  • Discussed the VEDC and what they do in conjunction with the Victoria Sales Tax District
  • Murphy asked if voters are informed of the purpose of the tax before the election
    • They knew it would be used for infrastructure and economic development
  • Discussed a project in which the corporation developed some land for Caterpillar to come into Victoria
  • Caterpillar brought many jobs to town and now spinoff jobs are coming to Victoria as well as housing, restaurants, hotels and other businesses
  • Expect $1.4 billion in salaries over the first ten years that Caterpillar will have been in town
  • The $5 million investment the corporation put in will be paid back in 14 years with a 22% return

 
Tim Johnson, Entertainment Software Association

  • Texas is home to the second largest concentration of industry employees  in the United States
  • For video games, $252 million has been spent on production in the state since the incentive program began
  • For every dollar spent by the incentive program,, $12 is spent in Texas economy
  • Texas has over 180 video game companies in the state employing over 5,000 people who earn an average of $90,000
  • Isaac asked about brain drain; how many students are seeking degrees in video game design that are here on student visas
    • Not sure; Texas does not generally have a problem with in-country brain drain; Americans who go to college in Texas stay in Texas to work

 
Shawn Garrison, Economic Development Firm Owner

  • Health care jobs are growing at about 40% per year; the population grows at around 25% per year
  • The aging of baby boomers is growing the health care industry
  • Have been working on a program in Mississippi to bring more health care manufacturing and innovation to the state
  • Mississippi now has created a separate health care group that is focused on targeting health care companies to bring to the state

 
Monitoring Manufacturing
 
Tony Bennett, President, Texas Association of Manufacturers

  • Dallas Federal Reserve Bank does a monthly manufacturing outlook survey
  • Manufacturing activity is at an 11 month high and has been on an 11 month growth trend
  • Oil and gas activity in the state is driving this growth
  • In 2014 the forecast is that Texas will produce 3 million barrels of oil per day; in 2015 that is expected to increase to 4 million barrels per day
  • If that happens Texas will exceed Kuwait and the UAE in production
  • A lot was done last session to help especially with Rep. Murphy’s R&D bill; it is still early to determine where the activity will come from
  • Texas is not getting the aerospace business it should be getting; would like to see Texas do more in this area; must meet the competition

 
Mike Maroney, Jobs for Texas Coalition

  • Coalition is made up of 23 trade associations
  • Continue to be very interested in workforce development and education reform
  • Discussed HB 5 and how it will help to create more interested students and more prepared students

 
Public Testimony
 
Greg Sims, President, Greenville Economic Corporation

  • Have a very large industrial sector
  • Passed the 4a sales tax in 2002 as an 1/8 cent sales tax
  • Since then, have collected around $6 million and put back around $135 million in new investment
  • Collect about $500,000 per year
  • With the money the group has been developing land, developing roads, etc.
  • Would like the legislature to maintain the current 4a and 4b laws

 
Scott Connell, President, Sherman Economic Development Corporation

  • Established 17 years ago as a 4a corporation
  • Assisted 27 local companies in reinvesting in Sherman

 
Ben White, Vice President of Economic Development, Round Rock Chamber of Commerce

  • Would like to be able to land companies without any incentives but that is not a realistic option
  • In support of all Texas incentives that help bring new jobs to the state
  • Currently working on a project in cybersecurity that could bring thousands of jobs to Round Rock
  • The speed at which other states and areas can provide incentives is killing the competitiveness of Texas
  • Anything that can be done to streamline the system, will help

 
Dave Porter, Senior Vice President of Economic Development, Greater Austin Chamber of Commerce

  • The wage requirement for the enterprise fund is a killer for manufacturing companies in the 5 county metro

 
Brandon Aghamalian, Representing the City of Tyler

  • Water districts and water district law is becoming a hindrance to economic development