Luring Employers: Are Incentives Worth It? : Economy: As S.D. prepares packages, critics say costs to taxpayers could outweigh economic benefits.

When word surfaced that Hughes Aircraft Co. would acquire General Dynamics’ San Diego-based missiles operations, civic leaders began to assemble an incentives package designed to persuade Hughes not to move thousands of jobs out of town.

The city also is preparing an incentives package to help San Diego compete against 200 other municipalities that are bidding for a federal Defense Finance and Accounting Services regional office that could create as many as 7,000 jobs.

To be sure, incentives are now a part of doing business for cities and states seeking to attract or retain jobs. According to results of a recent survey of corporations conducted by Atlanta-based Site Selection magazine, nearly 100% of respondents to the poll reported receiving a higher level of incentives the past year.

When properly structured, relocation incentives can help to bolster a city’s economy, said Dan Pegg, president of the San Diego Economic Development Corp. “You have to tie the incentives directly to the number of employees brought to town, meaning, for every additional job created the company gets a certain incentive,” Pegg said.

Yet, even as the city readies its limited arsenal of incentives, Pegg and others are questioning whether the economic benefits generated by incentives are likely to match the long-term costs to taxpayers.

Given the city’s worsening cash crunch, San Diegans might be better served if the city instead used its limited capital to “make the city a better place for people to live and do business,” said Ross M. Starr, chairman of UC San Diego’s economics department. “That, after all, is essentially the city’s job.”

“History will point out that money spent on the infrastructure--roads, airports, schools--will enhance everyone’s opportunity to be successful,” Pegg said. “Those things make a city a better place for everyone to do business.”

San Diego’s bid for the Defense Department operation includes free use of a city-owned tract near Brown Field. The county of San Diego has submitted a separate bid that includes use of county land in Santee.

It’s still uncertain what incentives the city can muster in its bid to keep missiles division jobs in San Diego. In contrast, Arizona legislators are readying a multi-pronged incentive package to enhance the attractiveness of a huge but underutilized Hughes missiles plant in Tucson.

The bidding war that is heating up between San Diego and Tucson is reminiscent of the incentive wars that states long have waged for automobile plants.

“Incentives are a virtual disease in the auto industry,” said UC San Diego Prof. Harley S. Shaiken. “But what ultimately ends up happening is that states and communities wind up paying exorbitant tax breaks and other subsidies to gain a few available jobs. Those kinds of bidding wars can be quite destructive to a community.”

“When (governments) start business wars . . . it often means (the victor) ends up with the fewest protections for the workers and the communities involved,” Shaiken said. “It’s a game of musical chairs, and when the music stops, more jobs are lost.”

Economists who study incentives packages said that civic leaders in several Midwestern states are now beginning to study past relocation deals in an attempt to determine if tax-abatement packages have generated economic advantages.

Increasing concerns about the long-term impact of incentives packages has forced cities to recognize that it’s no longer enough simply to win a bidding war.

Officials in Austin, Tex., now doubt that their city’s successful bid for a high-tech industry research consortium during the late 1980s will ever generate the economic benefits that were expected, Pegg said.

Similarly, Honda executives and officials near the company’s Marysville, Ohio, plant have doubts about the incentive package that initially drew the auto maker to town, Pegg said. “I think you’re going to find that both sides--the company and the (government)--have a tough time living up to their promises,” Pegg said.

Those kinds of concerns were apparent last year when city, county and state officials in Indiana used a $300-million incentives package to win a $1-billion United Air Lines aircraft-maintenance facility that will create up to 7,000 new jobs in Indianapolis. Indiana officials negotiated what is believed to be a first in the incentives game: United agreed to refund those incentives on a prorated basis should the promised number of high-paying jobs not materialize.

The clause was created by “a feeling that the incentive bidding wars have gotten out of hand,” said Jack Lyne, an editor with Atlanta-based Site Selection magazine.

According to Lyne, Illinois Gov. Jim Edgar recently told a National Governors Assn. meeting that incentives are out of control. Edgar told the meeting that, “We all favor disarmament . . . but nobody wants to do it unilaterally.”

Although the allure of jobs is strong, municipalities that enter bidding wars should realize that “it doesn’t make an awful lot of sense for a city to spend more to retain jobs than the jobs are going to generate in income or benefits locally,” Starr said. “The problem is, that when you get into a bidding war with other states, you might reduce the net benefits to the victor to nearly zero,” Starr said.

As important, Site Selection’s annual surveys consistently show that, although incentives can be important, “an overwhelming majority” of relocation decisions are based almost totally upon business considerations, and incentives play only a small role.

Eighty percent of corporate relocation experts responding to the magazine’s survey said that incentives are used only as tiebreakers, when several sites are judged to be equal from a business standpoint.

Economists increasingly worry that incentives “make it a zero-sum game when areas start bidding against each other,” said Robyn Phillips, an economics professor at Santa Clara University. “From a national perspective, you’re just shifting jobs from one state to another. . . . And, you have to ask if we’re increasing national productivity or simply having areas quarrel with each other.”

Other observers question the wisdom of cities bidding against each other for what, most agree, will be an increasingly small military-industrial complex.

Joel Yudken, a Rutgers University professor and co-author of a book that chronicles changes in the defense contracting industry, questioned the wisdom of using a city’s limited cache of incentives to lure defense industry jobs.

“That seems to me that’s a pretty risky business” given the continuing and dramatic cuts in defense spending, Yudken said. A municipality’s long-term economic health would probably be better served by attracting companies in growing sectors, Yudken said.

“I would advise them to invest in areas that are probably going to have greater chance of survival in the new economic environment,” Yudken said.

H. Cushman Dow, a former General Dynamics executive, has suggested that it is simply too late for San Diego to make a bid for General Dynamics’ missiles business.

“Where were they five years ago,” Dow said. “It’s no secret that businesses are leaving California. . . . This (incentives attempt) appears to be a cheap political ploy . . . with the politicians coming to voters thumping their chests and saying, ‘Here I am representing your interests.’ ”

“But this is too little, too late,” Dow said. “They should have been protecting interests throughout the years, and maybe then the situation wouldn’t have developed.”

“I have known for some time that, if General Dynamics were to get a huge new program, there’s no way they would put it in San Diego,” said Dow, who retired as General Dynamics’ local general counsel in 1989.