Legislators are considering options to shake up a tier-based economic development incentive system that doesn’t seem effective at bringing jobs to communities that need them the most.
Lawmakers reviewing the system are questioning not only its effectiveness but also its basic assumptions about how the state should categorize counties.
They are calling for a hard look at the 30-year-old program that they worry was “designed for another time.”
The tier system
As long as the state has had programs to distribute funds to spur economic growth, how to distribute that money and ensure it goes where it’s most needed has been a major question.
The current system, developed in the late 1980s, gives advantages to counties that the law defines as economically distressed. To do that, the state divides its 100 counties into three tiers, with the 40 “most distressed” in Tier 1, another 40 in Tier 2 and the 20 remaining counties, which the system categorizes as the most economically well off, in Tier 3.
The tier system skews incentives and rewards development projects in Tier 1 counties, assisting those counties by increasing the state’s share of matching funds for infrastructure and utility improvements.
Through the years, the programs that in one way or another use the state’s tier system have grown in number and complexity. Currently, 15 state programs use the tier rankings to distribute funding and resources.
Despite the array of programs and incentives, the end result has been frustratingly consistent: Steering more economic development interest outside the rapidly growing urban belt that extends from Charlotte to the Triad to the Triangle has seen little success.
As complex as the issue is, the problem has always been clear.
“Let’s not lose sight of what’s going on,” Sen. Tommy Tucker, R-Union, said to his colleagues at the most recent legislative hearing on possible changes to the system.
Eighty percent of the money for programs designed to help the state’s poorest counties, goes to the wealthiest counties, Tucker said. “Something’s wrong.”
Changing that dynamic would mean fighting a major economic trend.
North Carolina State University economist Michael Walden, who has been working on growth predictions along the Interstate-85 corridor, said already-growing metro areas are going to continue to attract the bulk of investment.
“Companies are going to the big metros because that’s where the talent is, particularly college-educated, and that’s where the growth is,” Walden said.
“I am optimistic that as the labor market tightens in the big metros, we will see some increase in announcements in some of the smaller metros, as we did for Rocky Mount at the end of 2017. But all the big forces in the economy are favoring big metros now.”
New ideas
Members of the Joint Legislative Economic Development and Global Engagement Oversight Committee, known as the EDGE Committee, started a new round of reviews in January with the intent of developing legislation in the upcoming short session. In recent years, the EDGE committee has focused on issues with the tier system.
The joint House and Senate group reviews the state’s economic development and global trade strategies. This time, armed with another set of studies, the committee appears ready to take a new shot at passing major revisions.
Last year, the Senate voted overwhelmingly for Senate Bill 660, a multi-section set of changes to the current system. Although there was broad agreement on the House side for much of the bill, differences between the two chambers were never resolved.
At this month’s meeting, EDGE Committee chair Sen. Harry Brown, R-Onslow, the Senate Majority Leader and the chamber’s main budget writer, said he wants to see a compromise worked out to move S660.
While it works on a deal between the two chambers on the bill, the committee is also studying possible changes to the tier-system itself, a controversial move that could reshuffle the county rankings and with it the potential winners and losers in a new ranking system.
Brown told committee members that changes to the rankings are always controversial, but said the system, now 30 years old, was designed for another time.
“You can see how things across the state have changed a lot since 1987,” Brown said at the meeting.
“This is something we surely need to take a look at, but it’s a complicated issue. When you start moving counties from one tier to another people get real excited.”
Rep. Susan Martin, R-Wilson, the House co-chair of the committee, agreed that the tier system is not doing the job it was intended to do. “It’s woven into so many programs,” she said. “It needs a harder look.”
Defining distress
One new approach to the tier system that’s under study would be to change the way the state defines economic distress. An analysis for the EDGE Committee by the General Assembly’s Fiscal Research Division highlighted several areas where the definitions used to determine a county’s economic distress can be misleading.
Emma Turner, a fiscal-research economist and one of the main researchers for the study, told legislators at a recent EDGE meeting that the state could change several of the factors used to set the tier rankings to better reflect the facts on the ground.
“When we say Tier 1 counties we mean economically distressed counties, but are all the Tier 1 counties really economically distressed counties?” Turner said. “Would they really meet a definition that makes sense to most people? It’s hard to say.”
One thing to keep in mind, Turner said, is whether the focus is on the economic well-being of a local government or residents in its jurisdiction.
“Are we looking at the economic distress of the residents within the community or are we more interested in the economic distress of the government and the government’s ability to pay for its own economic development incentives,” she said.
“If you’re looking at residents, you look at economic mobility, household economic well-being, employment opportunity and job quality. But if you looking at the economic distress of government you look at something like tax capacity, their ability to raise revenue.”
That plays out, Turner said, in using the measure of property value per capital, one of four key measurements for the tier system.
High property values don’t always equate to higher living standards for residents. Many coastal counties, she said, have high property values, but lower wage-service sector jobs. Pamlico County for instance has the lowest average wage in the state, but one of the highest property values per capita.
The same holds true in western counties like Alleghany and Clay counties. Clay County, for instance, ranks among the bottom 10 counties for average wages, while it is second highest in the state for property values per capita.
“The working population in these areas may be more distressed than the governments in these areas,” Turner said.
The research report concluded that other criteria used in the tier rankings, such as the unemployment rate and population growth can be better defined to more accurately capture a county’s economic conditions.
But one of the main factors identified as skewing the rankings may be the most difficult to fix.
To protect the state’s smallest counties, the legislature built in a provision that automatically classifies every county with less than 12,000 residents as Tier 1. The rules also limits the list of Tier 2 counties to only those with populations under 50,000.
That changes the shaped of the rankings in several ways, Turner said. It means eight counties — Alleghany, Camden, Clay, Gates, Graham, Hyde, Jones and Tyrrell — are in Tier 1 regardless of the condition of their local economies.
“Automatically designating low population counties Tier 1 displaces other counties that are otherwise ranked as more distressed,” Turner said. While most of the smaller counties could qualify for other reasons, one of them, Camden County, has the lowest poverty rate in the state and a high median income.
“It’s hard to say that Camden County is a distressed county but Camden County will always be Tier 1 due to its population,” Turner said.
The population rules have an impact throughout the rankings because they move counties that would have otherwise been classified as Tier 1 to Tier 2 and in turn bump Tier 2 counties to Tier 3.
In the last decade, Watauga County, which has the highest poverty rate in the state, moved from Tier 2 to Tier 3 after its population exceeded 50,000.
What’s next?
The EDGE Committee meets again next week to continue its review of potential changes to S660 as well as additional ideas on altering the tier system.
If successful, legislation worked on through the interim would be introduced during this year’s regular session of the General Assembly, which starts in early May.
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