Economic development organisations (EDOs) in North America, as well as investment promotion agencies elsewhere, often have to strike a delicate balance between ambitions and the reality of their budgets. A few EDOs have managed to loosen their dependence on volatile public budgets, tying their fortunes to a wide array of alternative revenue sources, from liquor concessions to tribal gambling and real estate leases. 

“The most important thing for EDOs is to have a dedicated funding stream,” Mike Kerlin, partner at consultancy McKinsey, tells fDi. “In some ways, it doesn’t matter where it comes from, as long as it’s dedicated and protected. Funding for economic development risks getting cut when state budgets go through a funding crisis or tightening. It is important to have a dedicated source of funding coming from outside the state budget, or a source of funding that the EDO is able to generate itself via things like interest income or lease income.”

JobsOhio, the private EDO of the state of Ohio, stands out for its unique funding model that secured a stable revenue stream outside the public budget. The brainchild of then-governor John Kasich, JobsOhio launched in 2011 with the main task of taking over the responsibility of creating and retaining state jobs from the state development department.

The EDO hired Mark Kvamme, then a partner at venture capital firm Sequoia Capital, and financier John Minor to set it up. Mr Kasich, Mr Kvamme and Mr Minor engineered JobsOhio’s unique funding model. It paid $1.4bn for an exclusive 25-year franchise from the state for the sale of spirituous liquor in Ohio in early 2013. It financed the operation by issuing a revenue bond. According to the agreement, the net profits generated by the franchise, which was named the JobsOhio Beverage System — or JOBS — would be available for JobsOhio to fund economic development programmes. 

This mechanism has secured a steady and growing source of external funding for JobsOhio. Its flow of annual contributions to the EDO started at $100m in 2014, peaked at $350m in 2019, and stood at $265m in 2021, according to figures from JobsOhio. Overall, the franchise originated $1.6bn of available funds, enough to make it self-sustainable and independent from other sources of budget.

The EDO’s economic development commitments ballooned accordingly. In 2014, its first full year of operation, it committed $3.8m to economic development programmes; seven years later, commitments to economic development programmes exceeded $210m. 

On the cards

If JobsOhio’s fortunes hinge on liquor sales, those of the Michigan Economic Development Corporation (MEDC) — the state EDO in neighbouring Michigan — are pegged, at least partially, to gambling. Michigan is home to 12 federally-recognised American Indian tribes that enjoy a special status under federal law and treaties. Class III gaming activities (typically card games, casino games and slot machines) are regulated under so-called ‘tribal state compacts’, where the tribe and the state come to an agreement should overlapping jurisdictional responsibilities arise.

In some cases, these agreements feature revenue-sharing provisions. In Michigan, all tribal casinos are required to pay 2% of their wins to the local units of the state government; on top of that, some tribal casinos are also required to transfer different percentages of their wins varying from 4% to 12% to the MEDC. Since the compact was agreed in 1993, this mechanism originated a total of over $957m for the MEDC to fund its operation and economic development programmes, according to official figures. The transfers to MEDC fell from $54.7m in 2019 to $28.9m in 2020 because of the pandemic, before bouncing back to $54.3m in 2021. Unlike JobsOhio, though, tribal casino money is not enough to cover the MEDC budget. In 2021, another $62.1m was transferred to the EDO from the stage budget, MEDC figures show. 

If the funding model of JobsOhio or the MEDC have been successful in generating a reliable source of resources for both EDOs, their success hinges on factors that tend to be outside their own control – liquor sales and gambling revenues. An alternative, more direct way for EDOs to fund their budgets is by directly investing and developing public and private assets, so that they can both generate resources, but also drive economic development through the likes of redevelopment programmes or start-up support initiatives.

The New Jersey Economic Development Authority, a public EDO in the state of New Jersey, is a case in point. According to its mission statement, it “independently, or in cooperation with a private or governmental entity, acquires, invests in and/or develops vacant industrial sites, existing facilities, unimproved land, equipment and other real estate for private or governmental use.

“Sites developed, and equipment purchased for private use, are marketed or leased to businesses that will create new job opportunities and tax ratables for the municipalities. Sites are developed for governmental use for a fee and also may be leased to the state or state entities. For the majority of these leases, future minimum lease rental payments are equal to the debt service payments related to the bonds or notes issued for the applicable property.” 

New lease of life

Another case in point is Philadelphia’s public–private economic development corporation, the PIDC, which has been redeveloping the city’s old naval shipyard since 2000. It offers leases and land development opportunities at the site to generate resources and drive economic development. 

“Navy Yard is an expanding community of 15,000 employees and 150 employers who occupy eight million square feet of facilities across a mix of property types, including office, retail, industrial, research and development, and institutional,” the PIDC explains on its website. 

Other EDOs take a more direct and selected, sector-based mission. This is the case with the Ben Franklin Technology Partners, which was set up by the Pennsylvania Department of Community and Economic Development in 1982 as a venture capital fund investing in early stage and established local innovative companies. According to its figures, Ben Franklin Technology Partners has invested in more than 4500 technology-based companies and boosted the state economy by more than $25bn since its inception, helping to generate 148,000 jobs through investments in client firms and spin-off companies in Pennsylvania. 

Although EDOs across the country have benefited from a wave of fresh resources unlocked by 2021’s American Rescue Plan Spending, EDO budgets remain inevitably exposed to the cycles of state budgets and finances. Securing concessions, or the control of physical assets, can give development organisations ways to break loose from these cycles. However, Mr Kerlin believes EDOs have to find ways for the public to buy into their missions.

“It would be more effective and appealing to the public if EDOs made sure they are pursuing sustainable and inclusive growth,” he says. 

From this perspective, chasing multi-billion dollar trophy investments by handing out generous incentives to already successful companies risks backfiring, leaving EDOs even further from public buy-in and financial independence. 

This article first appeared in the August/September 2022 print edition of fDi Intelligence.