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COMMUNITY AND ECONOMIC DEVELOPMENT BULLETIN Analyzing the Benefits and Costs of Economic Development Projects Jonathan Q. Morgan Introduction l As communities compete for private investment and jobs in an uncertain global economy, they will need greater access to better information on the expected benefits and costs of economic development projects to make sound decisions about them. An increasing number of companies ask for cash and other inducements as a requirement for locating or expanding their operations in a particular location. The use of such business incentives to promote economic development poses considerable financial risk for local governments unless proper safeguards are in place. How can local governments avoid paying too much for too little in return? Local governments can mitigate the financial risk of incentives by making an accurate assessment of whether a development project will generate economic and fiscal benefits that will outweigh its costs. Such an assessment increases the likelihood that incentives will be an investment of public dollars for the greater good rather than merely being a subsidy of private business activities. This bulletin discusses some of the analytical approaches and tools available to assess the benefits and costs of development projects. It highlights the advantages and limitations of vari- ous approaches and notes certain pitfalls. This bulletin is not intended to be a technical guide for how to conduct an economic or fiscal impact analysis. Instead, it introduces the basic con- cepts and describes the fundamental knowledge required for public officials to better under- stand the importance of having access to such analysis to get the information needed to assess a project. This bulletin should be especially useful to local elected officials who must decide how to vote on a growing number of incentive requests from both prospective and existing busi- nesses. Itwill help staff who must advise elected officials on how a project will benefit the com- munity and what amount of incentives, if any, is reasonable to offer. Finally, it may also assist public officials who must demonstrate the economic benefits of local projects when applying for federal stimulus funds and seeking other grant opportunities. Jonathan Q. Morgan is a faculty member at the School of Government specializing in economic development. The author is grateful for the helpful insights and suggestions for improvement from peers and colleagues who reviewed,draft versions of this bulletin. The reviewers were George Erickcek, senior regional analyst at the W.E. Upjohn Institute for Employment Research; Lucy Gallo, associate principal with AECOM; and Bill Rivenbark, a faculty member at the School of Government. 1 ©2010 School of Government. The University of North Carolina at Chapel Hill N0.7 ~ APRIL 2010