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NM State Incentives: Political Slush Fund Or Real Economic Development?

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Courtesy: MVEDA
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In economically depressed New Mexico, job creation is a top priority for voters and politicians alike. To address the issue, the Martinez administration has increasingly used incentive programs. But studies from Ohio State University, Washington University and other institutions show incentives have little to no effect on long term job creation and are routinely given to companies that would have expanded in the area anyway.

http://www.youtube.com/watch?v=zPIKjTQtMEQ&feature=youtu.be

And that has some asking if incentives are less about economic development and more about politicians getting re-elected.
 
New Mexico has been one of the states slowest to recover from the recession-  job cuts in the wake of federal sequestration and declining oil revenues haven’t made it any easier.

So when a company announces it’s expanding operations in New Mexico it’s a grand political affair: Catered ribbon cuttings, politicians coming in from all over the state and TV crews to broadcast the good news. New Mexico Governor Susana Martinez made a speech at the opening of drone company ARCA at the Las Cruces airport in New Mexico.

“Today I am proud to announce that we will be manufacturing unmanned aerial systems right here in Las Cruces. This project will create over 100 new jobs  with an average salary of $52,000” Martinez said.

How does a private company’s decision to hire staff turn into a political ceremony? By handing out state incentives. Like the Local Economic Development Act or LEDA.

“It is indispensible in recruiting new businesses.” Martinez said.
 

LEDA is a ‘closing fund’, taxpayer money that can be used to get an edge against other states competing for a company’s expansion or relocation.  And the New Mexico economic development department has specific “Eligibility Requirements” to ensure that is how it is used.

According to those “Eligibility requirements” there “Must be demonstrated competition for the project from out of state”.  

We asked ARCA CEO Dumitru Popescu if any other states were competing for ARCA’s relocation.

“The answer would be no” Popescu said.

New Mexico Senator John Arthur Smith of Deming chairs the legislative finance committee

“Obviously it is a red flag.” Smith said.

In this year’s session the legislative finance committee questioned how responsibly LEDA funds were being spent.

“LEDA is walking a fine line and we are totally and completely reliant on how responsible each administration is with that.” Smith said.

While $500,000  in state incentive money was promised to ARCA by New Mexico and additional $60,000 given by the city of Las Cruces, ARCA CEO Popescu said his company didn’t even consider other states.

“The factor that brought us here is the availability of airspace.. This is one of the best places on the planet to develop aerospace technologies.” Popescu said.

In an August interview with KRWG New Mexico Economic Development Department Secretary Jon Barela said the LEDA funds include claw backs to get incentive money back if companies don’t follow through on obligations.

“We certainly have auditing procedures that we use in all of our programs whether it be the jobs training incentive program or the local economic development act” Barela said.

Governor Susana Martinez’s office did not respond to requests for an interview.  But Martinez did take the podium at ARCA’s opening.

“We are proud to have companies like ARCA as partners in our efforts to diversify our economy. They are one of the most well known companies in private space flight.” Martinez said

But ARCA has never flown a private space flight, in fact, ARCA wasn’t even a company in Romania not before it came to New Mexico. 

It was a nonprofit that worked on European space projects: ARCA has never produced a drone, let alone a profit. What’s more ARCA’s top executives don’t have degrees in aerospace engineering, including Chief Operating Officer Chris Lang and CEO Dumitru Popescu. Popescu says it’s not an issue.

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Credit Courtesy: ARCA
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Before relocating to New Mexico ARCA was a Romanian non-profit that worked on European space projects.

“Look at the cases of Steve jobs or Bill Gates or other entrepreneurs … Ok, no comparison between me and these guys- but you got the idea.” Popescu said.

But it is not on the company to prove its potential for job creation. It is on the New Mexico and Las Cruces Economic Development departments. New Mexico State University Economist Chris Erickson says there is a reason politicians have been eager to give out taxpayer money to companies like ARCA. 

“The reason why these programs are popular with politicians is because they are political theatre; they allow politicians to get out in the public and say I did this to get this company in here.”

Erickson said while the incentive announcements might make for good political theatre they usually don’t generate sustained economic growth.

I like to call them the cocaine of economic development where you use a government incentive to get a quick fix and attract a couple of jobs to the community instead of doing the hard work”

Erickson said the hard work takes a lot longer and it might not make for a good press conference.

“Better schools, better parks, better roads, retaining people in the community having a well trained, well qualified work force.”  Erickson

ARCA’s first drone test flights are set for November. Manufacturing is expected to begin in May 2016. Whether ARCA flies or dies, Erickson said the real cost of many taxpayer funded incentives is the loss of money that could be better spent on programs that do create sustained economic growth and new jobs.

Davin Lopez, the President and CEO of the Mesilla Valley Economic Development Alliance, told KRWG the LEDA funds from the state were committed to ARCA prior to the state eligibility requirement that companies receiving LEDA funds have demonstrated competition for their business from another state.   In addition, Lopez noted that in-state companies can receive LEDA funds without that requirement.

In regards to ARCA, Lopez also said there was verification that the company had a "sustainable level of private investment."  In addition, Lopez said the LEDA funds would be provided to ARCA in "three to four" different portions, and each award would be based on job performance.

KRWG News plans to follow-up with Lopez for more detail on this information.

Editor's Note:  An earlier version of this story did not include the August comments from New Mexico Economic Development Secretary Jon Barela.  KRWG apologizes for the omission.  In addition, we have asked the Department to provide any additional information deemed important to add to this post and our continuing coverage.