Administering Economic Development Agreements

Type: 
Best Practice
Background: 

Economic development projects often involve negotiations that culminate in an economic development agreement or contract. An economic development agreement binds the parties to performance expectations and financial and other obligations.  Once an economic development agreement is in place, government officials must ensure proper administration of the agreement.  This includes processes to monitor performance milestones and compliance requirements; communicate progress to the governing body and other interested stakeholders; and establish safeguards to trigger early detection of any problems that may require renegotiation or termination of the contract.

Recommendation: 

GFOA recommends governments take steps to ensure effective administration of economic development agreements through an on-going assessment of government benefits, monitoring of commitments and requirements, and communicating progress to the governing body.

Effective administration of economic development agreements should include, at minimum:

  1. Identifying staff capacities that will be needed to properly monitor the various components of an agreement. For particularly complex or innovative arrangements, staff may need to be complemented by outside consultants. Also, components of an economic development agreement may be financial or nonfinancial in nature, necessitating participation from various divisions to ensure proper oversight. Finance staff should take an active role in quantifying projected benefits versus the financial commitment or incentives that are provided in connection with a project. Finance staff should also take an active role in monitoring financial metrics (e.g. comparing actual to projected cash flows, comparing actual to projected increases in property tax base, measuring sales tax performance, calculating financial ratios, etc.) If the economic development agreement contains payment arrangements by either party, finance staff should administer such payments to ensure they are processed in accordance with applicable terms of the agreement.
  2. Developing processes to monitor both compliance with the terms of the agreement and achievement of the project’s identified goals. This entails the following: 
    1. Monitoring compliance requirements. Economic development agreements often commit the developer or private party to take certain actions which, presumably, will cause the project goal to be achieved (e.g. completion of a new building within a specified timeframe means it will start generating tax revenues sooner). Governments should develop processes as well as agree upon access to supporting documents to ensure compliance requirements are met. Additionally, governments may also be responsible for taking certain actions to help achieve a project’s goals, so any monitoring process should also ensure that the government is living up to its obligations as well.
    2. Monitoring achievement of the goal.  Job creation, affordable housing, increases in tax revenues, etc. are often important goals of economic development projects.  On-going measurement and monitoring whether such goals are achieved is critical to substantiate the financial commitment or incentives that have been provided.
  3. Monitoring deviations from the agreement. Deviations from performance expectations are sometimes unavoidable. Deviations may result from the failure to comply with requirements in the agreement. Governments should have a process in place to detect such deviations or noncompliance in a timely manner in order to limit losses, and further, be positioned to change strategy for the project. Such measures may include renegotiating or winding down an agreement, or exercising various audit or claw-back provisions.
  4. Providing periodic reports or updates to the governing body. This informs elected officials about the extent to which the project goals have been achieved.  Often, an economic development project’s goals may change over time, or take multiple years to achieve.  Proper communication of both: a) progress on the activities expected to help reach the goal; and b) the extent to which the goal is being achieved can assist officials in better understanding the benefits that are to be received from an investment of community resources. Proactive and timely communication is also critical in helping the governing body make sound decisions on the efficacy of future economic development projects.
  5. Concluding the agreement. Upon completion of a project or termination of an agreement, governments should ensure that there is final resolution on all outstanding items with the developer or private party, in order to avoid future disputes. Sometimes completing or terminating an economic development agreement may include negotiations of wind-down provisions or settlements that necessitate an amendment to the agreement, or even a separate wind-down or settlement agreement. Attorneys are often involved in such negotiations, as well as the drafting of such amendments or additional agreements.
Approved by GFOA's Executive Board: 
September 2018