In his first meeting as the director of the Governor’s Office of Economic Development, Michael Brown made a vow — the state would finally update, improve and publish a new version of Nevada’s old statewide economic development plan.
“The business plan for 2012 cannot be the strategic plan for 2020,” he said in December. “It must be updated before we can advance forward.”
Brown’s vision for the agency matched public comments made by Democratic Gov. Steve Sisolak, a skeptic of the incentive-heavy approach to economic development pioneered by his predecessor, Republican former Gov. Brian Sandoval, and who has promised major changes in the state’s approach to diversifying its economy.
But a key detail went unmentioned during that December 2019 meeting.
In spite of the promises for a “new” path for an action plan, GOED leaders under Sandoval had in late 2018 already taken steps and commissioned two major studies (with a combined price greater than $200,000) to compare and assess its current structure and lay the groundwork for a new, statewide economic development plan.
But for more than a year, GOED did not publish or publicly announce the findings of those reports. Multiple individuals interviewed for the report, including a GOED board member, say they were never told about what happened with the report, or if it was ever released. One of the reports was only published on the agency’s website on Jan. 31 after The Nevada Independent inquired about the report and acquired it through a public records request.
Sandoval, who heaped praise on the initial 2012 statewide economic development plan, made diversifying Nevada’s then-moribund economy a core priority during his two terms as governor, as part of a strategy to avoid the kind of record-setting job losses and unemployment that afflicted the tourism- and construction-dependent state through the 2008 economic recession.
But GOED officials acknowledge even now that the 2012 report is outdated, partially because of new thinking on how states should use tax incentives and abatements to attract businesses and partially because the state’s economy has improved significantly over the last eight years.
Although billed as a general assessment, the reports do contain several pointed recommendations and suggested changes for continued growth. These included major changes to the existing group of tax abatements (deemed no longer strong enough to attract new businesses), revamping the higher education system and even changing property tax formulas. But the results were never shared with the 2019 Legislature or even widely throughout state government, with one GOED board member saying he had “no idea” why it was never published or shared.
Although the report was intended to give the state’s new governor a menu of options and possible changes heading into the 2019 legislative session, it remains unclear why the agency sat on the report for nearly a year. The long delay is likely to cost the state extra dollars — GOED officials say they’ll need to contract with SRI International and Brookings Mountain West again this month to update the now out-of-date report (but noted it won’t require a full re-do of SRI International’s 2018 report).
Brown, who was appointed director in late October after a lengthy and at-times contentious search process that included a months-long pause of tax incentive applications, said in an interview that the 2018 report by SRI International would be updated and included in a new effort to develop an updated statewide economic development plan.
But Brown and GOED Deputy Director Bob Potts declined to provide an exact rationale as to why work products from the six-figure contracts had never been published or publicly used by the agency, chalking the delay up to difficulties in transitioning between governors with very different outlooks on how states should approach economic development.
“The 2012 plan was all about getting people back to work,” Potts said. “Now it’s about quality. And that plan was supposed to be updated, and that didn’t happen. Everybody was so busy doing their job, they just didn’t get it done.”
Commissioning the reports
Prior to Sisolak’s victory in the 2018 election, GOED entered into a $106,000 contract with prominent think tank SRI International to conduct a comprehensive analysis of the state’s recovery from the 2008 recession. The same organization had been tapped by the state in 2011 to do an initial analysis prior to publication of a statewide economic development plan.
The final 233-page report was finished in December 2018 and included interviews with more than 140 top government, education and business officials. It constituted a thorough assessment of the state’s economic strengths and weaknesses along with dozens of “strategic possibilities” of what future state leaders could prioritize.
Approval for the report came during an August 2018 meeting of the state’s Board of Examiners — composed of the governor, attorney general and secretary of state and charged with approving major state contracts — and gives a preview of what GOED officials hoped to accomplish heading into future years.
In documents submitted to the board, GOED officials wrote that they hoped the study would be used as the baseline for a new five-year state plan for economic development that would ideally be in place prior to the start of the 2019 legislative session.
The agency opted not to put the contract out to bid and instead retain SRI International, stating that it was more “fiscally responsible” to remain with the organization because it had completed similar work for the state as part of the initial process to create the 2012 economic development statewide plan.
“Contracting with the same vendor will help with the long-term view and will be more efficient as the new study becomes a 2.0 version of the original plan vs. starting from scratch,” GOED officials wrote. “The agency anticipates receiving another quality study that will be used to move Nevada forward in diversifying and strengthening the state’s economy.”
The contract was approved without comment by the board.
Additionally, GOED commissioned a separate, internal report with the national analytics firm of Newmark Knight Frank to compare the state’s slew of incentive programs to states such as Texas and California. That contract — which cost a hair under $100,000 and was paid for through grants to regional economic development agencies — found Nevada to be treading water in the incentive battle with neighboring states, and made another set of recommendations to make the state more attractive to relocating businesses.
Brown and GOED Deputy Director Bob Potts said in an interview that the 2018 SRI plan was the first phase of an update to the state’s overall economic development strategy, calling it a “foundational” assessment of the state’s economy and recovery since Sandoval took office in 2010.
“(The) past administration was dealing with a crisis and they had to move forward,” Brown said. “This administration is in a time of transformation and we have the opportunity to be very deliberative about this and study it closely, and that’s what I’m going to do.”
The SRI Report
SRI International’s report gave the state relatively high marks on its economic recovery between 2010 and 2017.
It states that Nevada’s Gross Domestic Product growth was 20th among all states and Washington, D.C. over that seven-year span, and marked the seventh best recovery since the 2008 recession. Part of that was because of economic development changes undertaken by Sandoval, it said.
“The economic development initiatives that Nevada has undertaken since the recession have helped accelerate a complete recovery from what was a critical moment in the state’s history, as evidenced by its increasing economic diversification,” the report stated.
But SRI’s report also stated that Nevada “still has room for growth” on economic development metrics, citing the state’s relatively high unemployment rate among neighboring states and a declining labor participation rate — possibly because of a growing older population but also possibly because of a “pool of discouraged workers, even after seven years of recovery.”
The report takes deep and detailed looks into nearly every aspect of the state’s economy — factors affecting urban and rural portions of the state, a detailed look at which industries in the state have grown or shrunk, a detailed “asset” list assessing the state’s economic strengths and weaknesses, plus proposed “strategic directions” that policy makers should adopt.
Chief among those “strategic directions” is the recommendation to significantly overhaul the Nevada System of Higher Education. It states that while the system has made “measurable” improvements over the past decade, “by almost any measure the system as a whole falls far short of the level of performance required to ensure that the state of Nevada continues its transformation to an innovation-based economy.”
“Nevada’s workforce and the performance of its educational institutions is the single greatest challenge to the future of the state,” the report states.
Potential reforms listed include changing the higher education system’s governing structure from its current, independently elected board to one under the direction of the governor and Legislature, and delegating the government of all NSHE colleges and universities to a board of trustees. Another proposed reform is altering the current community college funding formula and finding new leadership “committed to radical innovation in higher education.”
“State leaders should begin the public debate on the need for change immediately, and they should begin recruitment of change agents for the system immediately,” it states.
Though the report was never publicly distributed, the proposed change to NSHE’s governance is already in the works — a measure on the 2020 ballot will give voters the chance to remove the Board of Regents from the state Constitution and place them under the direction of the state Legislature.
Changing tax incentives
The report also briefly touches on issues with the state’s tax incentive and abatement programs, stating that many of the stakeholders interviewed by the think tank believed that the programs “no longer serve the needs of many of the state’s development goals.”
While crediting state government leaders availability and access (notably the massive 2014 Tesla tax incentive deal approved during a special session of the Legislature), the report found that the current abatement programs “are not strong enough to attract firms to Nevada,” and instead are typically awarded to businesses that have already decided to move to the state and “simply ‘sweeten the deal.’”
Additional criticisms were levied at export requirements on many of the abatement programs, saying that they are “detrimental” to service or tech related firms that do not export a physical product. Similar requirements hurt startups and entrepreneurs from taking advantage of abatement packages.
The report also credits the state’s tax structure as being favorable to business development, but suggests adding sales tax abatements for manufacturing equipment purchases — something more than 40 other states have done.
It also, notably, called for changing the state’s property tax structure, echoing the complaints of many municipalities and school districts in the state that say the tax cap system substantially limits a key revenue source for municipal and education services.
“This arrangement, while it helps to maintain affordability in the state’s housing market, also prevents municipalities from being able to adequately increase funding for services such as education,” it stated. “Several stakeholders emphasized that they would be willing to pay more in real property taxes if the funding was allocated to better public education in the state.”
Between 2010 and 2018, GOED reported offering tax abatements or incentives to at least 270 companies (out of a total of 624 total companies assisted), and has provisions allowing it to claw back or reclaim abated taxes if businesses do not meet wage or growth requirements.
But GOED’s use of metrics such as median wages to determine who gets abatements has been questioned by Sisolak and others. A 2019 Nevada Independent analysis found the state gave abatements worth millions of dollars to businesses with a significant amount of their workforce on Medicaid, for example.
Keeping up with California
That wasn’t the only report to delve into how Nevada’s system of tax incentives and abatements works. Prominent national firm Newmark Knight Frank was commissioned by GOED to produce a report in December 2018 called “Project Sagebrush” so the agency could compare how it stacked up against agency tax incentives in four neighboring states — Texas, California, Arizona and Utah.
The 69-page report essentially created two sample companies — one an “office/shared services” and another advanced manufacturing entity — to conduct a competitive benchmark between the economic landscape offered by Nevada and competing states, including real estate, labor costs, utilities, taxes, and incentive and abatement programs.
The assessment largely found Nevada’s package of incentive and abatement programs to be “competing reasonably well” with other metropolitan areas, and the economic abatements and sweeteners currently offered by Nevada were not enough to rise out of the middle of the pack.
The report stated that the mere fact of lower business costs or generous incentives was not enough to break ratings ties with other metropolitan areas competing for the same types of relocating businesses, and that the functional tiebreaker would likely go “to jurisdictions that may be qualitatively evaluated as larger or better business locations with labor markets and business conditions more favorable to growing companies.”
“Newmark’s recommendation is for Nevada to vie for project investment on the strength of its low business costs plus even more competitive incentive offerings, while simultaneously investing in a steadily improving set of qualitative business conditions,” the report stated.
Notably, the report found that Nevada’s lack of a state-level corporate income tax did not “make a significant change in the end result of this competitiveness study.” It also criticized the state’s “Catalyst Fund,” a discretionary grant program offering transferable tax credits to new or expanding businesses as “cumbersome.”
Lawmakers during the 2019 legislative session made no major changes to the program, which has not received state dollars since the 2016 fiscal year. GOED officials told lawmakers that they expect the roughly $3.5 million in tax credits left in the program to last until the 2021-23 budget cycle.
Unlike the SRI International report, Potts said, the agency funded the report as an “internal study for our own internal consumption.”
While the Newmark Knight Frank study was for the agency’s internal use, it’s unclear why the SRI report never saw the light of day after it was finished in December 2018.
Hints at the report’s progress exist. It was mentioned during a presentation to GOED officials during a meeting of the state’s Economic Forum in October 2018, and brought up in former GOED Director Paul Anderson’s monthly report in September 2018. It was also mentioned briefly by Anderson during a February 2019 legislative committee.
But Anderson — a former Republican Assembly caucus leader who was appointed to lead GOED in January 2018 — resigned from Sisolak’s administration in March 2019, with the governor appointing GOED official Kristopher Sanchez as interim director several weeks later.
The search for a permanent director took longer than anticipated. Tensions rose between a search committee and gubernatorial staff, who clashed over whether or not to engage in a full nationwide search for a new director, and a general philosophical question over where the agency was headed.
Ultimately, the search committee turned to Brown — a former mining executive turned director of the state’s Department of Business and Industry — as its recommendation to lead the agency over Sanchez, who also applied to be the full-time director. Sisolak formally appointed Brown to lead the agency on Oct. 31, nearly 10 months after taking office.
“It was provided in the transition and it was eventually going to find its way to the new GOED director, which turned out to be me,” Brown said of the report. “But that turned out to be in November. I don’t know why, I don’t know what the thinking was in the last administration on that.”
In the 12 months since the report was finished, several of those interviewed for the project said they never were given any follow-up or rationale as to why the report was never released.
Republican Assemblywoman Jill Tolles, who was interviewed for the report in October 2018, said she never received any follow-up information and was unaware the report had been published until contacted by a Nevada Independent reporter.
GOED board member Dan Klaich, a former Nevada System of Higher Education chancellor, said he was interviewed by SRI researchers but said he was never given a rationale as to why the report was never publicly released.
“I had no idea why seemingly nothing has come of it,” he said, adding that he only received a copy of the report after asking for it during GOED’s elongated director search.
Mike Kazmierski, president and CEO of the Economic Development Authority of Western Nevada, declined to comment on the delay in the report being produced beyond saying it was likely the “normal friction that occurs with an administration change.”
What happens next
Brown, who compared the experience of becoming GOED director to “getting a PhD in six months,” said he was adamant that the agency would use the existing SRI report as a baseline to conduct work on a new statewide plan.
“I did not want to start from ground zero, you know, and one of the board members had said to me ‘We don’t want to throw the baby out with the bath water on this,’” he said. “I wanted the people who were the smart people who were involved back in 2012 to also be involved in essentially the second phase of this.”
The agency plans to bring forward a contract before the February Board of Examiners meeting for development of a new statewide plan in cooperation with Brookings Mountain West, which would subcontract with SRI International. Brookings Mountain West helped develop the initial 2012 statewide economic development plan, and Potts said the cost would be in the same ballpark as the 2018 contract with SRI International.
If approved, Brown said he would plan to have a draft before GOED’s board sometime in June, and said there would likely be some form of public participation in putting the report together.
He said he had spent the initial months of his term as GOED director meeting with various think tanks and economic development experts across the country, and quoted from a Cleveland Federal Reserve Bank study on the intersection of workforce development and economic development as the kind of policy he hoped for the agency to adopt moving forward.
“We need to do a better job of matching our workforce with the jobs and seeing what we can do within state government to help train the train up the workforce that we need for the available jobs that are there,” he said. “And so there’s a lot of original thinking going on right now in this policy sphere.”