1. Audit of Economic Development: Recruitment & Expansion ABSTRACT
The City's economic development marketing &
recruitment program lacks clear focus, which
limits the effectiveness of businesses retention
= and expansion efforts. This audit recommends the
development of an analytics-based marketing,
t r recruitment, and incentive strategy. Also,
refinement of policies and procedures and
development of several reporting and monitoring
solutions are recommended.
City Auditor's Office
AUDIT OF ECONOMIC
DEVELOPMENT
Recruitment & Expansion
crry
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DENTON
The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
Table of Contents
ExecutiveSummary............................................................................................................................3
Introduction ......................................................................................................................................5
ManagementResponsibility.....................................................................................................................5
Audit Objectives, Scope, and Methodology..............................................................................................5
Background Information &Best Practices...........................................................................................6
Why is Economic Development Necessary?.............................................................................................6
What is the City doing about it? ...............................................................................................................7
Components of Economic Development..................................................................................................8
Cluster Analyses Methodology:A Best Practice in Economic Development..........................................10
Other External Factors that May Impact the City's Efforts.....................................................................13
WhatWorks Well?...........................................................................................................................14
Incentive Agreements are Adequately Administered.............................................................................14
Opportunitiesfor Improvement.......................................................................................................16
Unfocused ED Incentive Policy May Obscure Recruitment Targets.......................................................16
Revisions to Economic Development Incentive Policy May Improve Accountability.............................19
Improved Reporting& Monitoring Could Benefit Business Recruitment Efforts...................................21
Adherence to Best Practices Could Streamline the Incentive Process...................................................24
Robust Business Retention and Expansion Efforts Need Comprehensive Reporting.............................25
Appendix A: Management Response Summary.................................................................................28
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The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
Executive Summary
Honorable Mayor and members of the City Council,
We have completed an audit of the City's Economic Development efforts as they relate to business
recruitment and expansion. Economic development helps the City attract and retain companies with high
paying jobs for residents, and spurs economic growth leading to more revenue available for City services
and infrastructure.The effectiveness of economic development efforts in the City depends upon having an
impactful strategy, a strong program, and an appropriate policy for the purpose.
According to the National League of Cities (NLC), "economic development is the engine that helps cities
grow successfully." Some benefits of a successful economic development program are:
➢ Increased Employment ➢ Enhanced Standard of Living
➢ Increased Tax Base ➢ Self-sufficiency& Less Dependence on other Governments
➢ Economic Diversification ➢ Enhanced Quality of Life for Citizens
Salient Findings
• The City has identified seven target industry sectors for the purposes of Economic Development. We
did not find any documentation explaining reasons for the selection of these target industry sectors.
Also,the definitions of certain, selected target industry sectors are not clear. In addition to the seven
target industry sectors,the policy identifies ten additional priority considerations.
There are two issues with this situation:
1) Naming such broad industry targets and priority considerations may hamper the clear
measurement of objectives and obscure the City's economic development recruitment and
expansion focus. This potentially hinders the City's marketing and recruitment efforts as the
ultimate goal of the current policy is not clear. This is because the current policy encourages
recruitment of businesses in many industries that may fall within either a target industry sector or
an industry sector that is given priority.This circumstance creates confusion as to which marketing
events and activities most directly align with the City's ultimate recruitment goals.
2) The City's current target industry sectors do not completely align with potential available growth
opportunities identified during audit analysis using best practices. The above observations
demonstrate that the City may be missing out on potential marketing opportunities where growth
is possible.Additional factors that may need consideration including:
➢ Inputs like workforce availability&development and housing opportunities; and
➢ Outputs like quality of life for citizens and community wealth building.
Therefore, the City will benefit from hiring a professional economic development consulting firm to
conduct a comprehensive analysis of the full regional economy to provide strategic guidance on target
industry sectors and other economic development efforts most beneficial for the City.
• There are no clear performance measures laid out in the Tax Abatement and Incentives policy.Without
clear measures, it is difficult to determine if the City's economic development incentives are meeting
the objectives determined in the policy. m
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The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
• The Chamber of Commerce's Office of Economic Development Activity Reports do not clearly
communicate their progress on all of the metrics laid out in the Program Agreement. Likewise, there
does not appear to be a clear marketing and recruitment focus on the City's targeted industry sectors,
even when it is explicitly required by the Program Agreement. In addition, we did not find any
documentation of communications explaining why the Chamber was not able to recruit businesses
from the target industry sectors leads.
• Currently, the Business Retention & Expansion (BRE) Program only reports the date of a visit to a
business,without giving any information about discussions that would identify the business' needs and
required assistance from the City. While business visitation is a driving force in a successful business
retention and expansion program, measuring only the number of visits does not provide adequate
detail on the outcomes of BRE activities. More comprehensive reporting would allow the City to analyze
the effectiveness and efficiency of these activities and should include details about what was discussed,
and follow-up actions taken.
Management has concurred with 8 recommendations and partially concurred with 2 recommendations
made in this report. Also, the audit made one recommendation to the City Council. Management's
response is attached to this report in Appendix A. We appreciate staff's cooperation during the audit.
Please contact the City Auditor if you have any questions or need more information.
Sincerely,
Umesh Dalal, City Auditor
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The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
Introduction
The City Internal Auditor is responsible for providing: (a) an independent' appraisal of City
operations to ensure policies and procedures are in place and complied with, inclusive of
purchasing and contracting; (b) information that is accurate and reliable; (c) assurance that assets
are properly recorded and safeguarded; (d) assurance that risks are identified and minimized; and
(e) assurance that resources are used economically and efficiently and that the City's objectives
are being achieved.
The City Auditor's Office has completed a performance audit of the City's economic development
activities.Z We conducted this performance audit in accordance with generally accepted
government auditing standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit objectives.
Management Responsibility
City management is responsible for ensuring that resources are managed properly and used in
compliance with laws and regulations; programs are achieving their objectives; and services are
being provided efficiently, effectively, and economically.
Audit Objectives, Scope, and Methodology
This report is intended to provide assurance that the City has an adequate framework to perform
economic development business recruitment and expansion activities. Audit fieldwork was
conducted during July and August of 2019.The scope of review varied depending on the procedure
being performed. The following list summarizes major procedures performed during this time:
• Reviewed documentation to develop criteria including industry standards, best practices,
law, regulations, policies, and procedures;
• Developed a process narrative to identify current control activities, which was certified by
the Director of Economic Development;
• Interviewed key decision makers in the City's economic development activities including:
members of the Economic Development Partnership Board,staff members of the Chamber
of Commerce's Office of Economic Development, and the City's Economic Development
Department;
• Analyzed regional industry clusters and compared the results to the City's current business
recruitment efforts;
• Examined economic development activity reports prepared by the Chamber of L-r)
Commerce's Office of Economic Development and the City's Economic Development v
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Department; and ru
'The City of Denton Internal Auditor's Office is considered structurally independent as defined by generally accepted government auditing
standard 3.56.
z Activities reviewed include non-downtown business retention and expansion programs,marketing and recruitment efforts,and incentive
administration and approval.
The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
• Verified the accuracy of all economic development incentive agreement payments made
in the last five calendar years (2014-2018).
Background Information & Best Practices
The City of Denton encompasses 98.8 square miles and is situated north of the DFW metroplex
where Interstates 35E and 35W intersect. It was incorporated in 1866 and is the seat of Denton
County. North Texas Normal College, a predecessor to University of North Texas was founded in
1890 followed by Texas Woman's University in 1903. The economic boom in Denton began in the
1960s with the completion of the Interstate 35 links between Denton and Dallas and Fort Worth.
The initial economic development victories began with the arrival of Victor Equipment and Peterbilt
Motors companies in the 1970s.
The City is presently inhabited by about 140,000 residents3 and has experienced rapid population
growth over the past two decades, adding about 58,000 residents. In 2018, the City had a median
household income of $52,000 and a majority (89.1%) of its population had graduated from high
school or a higher institution.
Denton is a full-service city and owns its own electric, water, wastewater, and sanitation utilities.
The City offers an extensive 4,000-acre park and open space system, which includes more than 75
athletic fields, 30 parks, 27 miles of trails, 10 facilities, 2 pools, a water park, a dog park, and
numerous activities.
Why is Economic Development Necessary?
Often local governments experience difficulties in meeting the expectations of their residents,who
may desire a better quality of life, a vibrant economy that leads to job growth, or enhanced public
services and facilities to enjoy. Economic downturns and competing demand for resources
adversely impact discretionary
funding. One of the ways to achieve
community prosperity and meet Business
Attraction
citizen expectations is through and
economic development activities, Retention
which aim to increase wealth in the Better offighInfrastruccommunity. An effective economic ture
development program could
improve the resources available to r�u a Iii tly ,
the government; which can be of Life
invested in community
development, infrastructure
enhancements and maintenance, Better oconsumer
Govt.and the delivery of timely and services
effective services that residents Ad r
(Economy
esources
expect. in
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3 Population estimate based on the US Census Bureau's July 2018 estimate.
The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
Economic Development is about positioning the economy on a higher growth trajectory' and
economic growth is essential to improve prosperity, which leads to the availability of high paying
jobs and reinvestment in the community as demonstrated by the diagram on the previous page.
According to the National League of Cities (NLC), "economic development is the engine that helps
cities grow successfully." A NLC survey found that economic development is the most covered
major policy issue and has generated increasing interest from mayors over the past six years. An
economic development program is adopted in city governments for the benefit of their populations
and typically has broad goals such as:
➢ Creating and Retaining Jobs ➢ Stimulating Investment in Neighborhoods& Businesses
➢ Ensuring a Sound Quality of Life ➢ Generating Revenues to Fund Vital Municipal Services
Some benefits of a successful economic development program are:
➢ Increased Employment ➢ Enhanced Standard of Living
➢ Increased Tax Base ➢ Self-sufficiency& Less Dependence on other Governments
➢ Economic Diversification ➢ Enhanced Quality of Life for Citizens
What is the City doing about it?
The City of Denton has an Economic Development Department that offers support and services to
businesses in all sectors and of all sizes.These efforts include helping businesses navigate the City
government, providing assistance with common business issues such as real estate location and
workforce development, and improving capacity and opportunities for businesses. The City
maintains relationships with several outside organizations such as the North Texas District Export
Council and the US Export Assistance Center. The City has also created two Tax increment
Reinvestment Zones(TIRZ) under the Tax Increment Financing Act of Chapter 311 of the Tax Codes
which are part of a City-wide effort to improve infrastructure such as roads, sidewalks, signs, etc.
In addition, the City oversees several "place-making" efforts such as tourism marketing &
assistance and cultural programing.The City is also investing money in City parks to improve quality
of life. These efforts should build capacity to attract businesses to Denton and their effectiveness
will be examined in separate audits.
This audit focuses on the City's business recruitment and expansion efforts through incentives.
According to the Economic Development Department, since 1999 the City has invested $16.5
million in tax-related incentives, and in return, has benefited from a net increase in property and
sales tax revenues in the amount of$62.4 million. The total rate of return for incentives awarded
is 327%, and there have been a total of 7,536 jobs created or retained by incentivized projects.'
We have not audited this information.
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'University of North Carolina material published on EDA website.
5 Tax increment financing(TIF)is a tool that incentivizes economic development by allowing cities,alone or in partnership with other taxing
units,to use tax increment financing to pay for improvements to an area so it will attract new development.
6 City of Denton—Informal Staff Report"Net Revenue Report on Economic Development Incentives"(Dec.2018)
The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
These economic development incentives are granted by the City mainly under Chapter 312 of the
Tax Code' and Chapter 380 of the Texas Local Government Code.$ Economic development
incentives are in the form of reimbursements to the applicant companies based on the terms and
conditions of the incentive agreements. City incentives have been granted not only to companies
relocating from other areas, but also to businesses wishing to expand their presence in the City.
Based on information received from the City's Economic Development Department, our office
estimated the following employment in the City's top ten major industry clusters; these ten
industry clusters make up about 67%of Denton's employment:
Table 1: City of Denton Major Industry Cluster Employment (2019)
Industry Cluster Est. Employment
Local Health Services 8,131
Local Hospitality Establishments 7,217
Local Real Estate,Construction,& Development 4,080
Local Education&Training 4,011
Automotive 3,515
Education& Knowledge Creation 2,838
Local Commercial Services 2,750
Distribution& E-Commerce 2,245
Local Motor Vehicle Products&Services 2,235
Local Retailing of Clothing&General Merchandise 2,018
Components of Economic Development
Generally, key components of a region that a successful economic development program must
periodically analyze in order to effectively attract and retain businesses.These include educational
resources and housing stock, explored below, as well as competitive advantages, which are
discussed more thoroughly throughout the report.
Housing Stock: To attract high paying jobs, the City must have available housing opportunities to
accommodate the needs of the employees occupying these jobs. We analyzed the mix of housing
stock within City limits using Denton Central Appraisal District data. According to the US Census
Bureau,about 48%of housing units were owner-occupied between 2013 and 2017. In addition,we
found that the City of Denton has a relatively lower housing vacancy rate compared to other
economic regions.
Figure 1 below divides all single-family homes(about 30,000 housing units) by market value range.
In addition, we identifed about 1,200 multi-family properties, which roughly translates to about
25,000 housing units; according to Development Services,the City had about 53,125 housing units
as of July 2019.
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'Chapter 312 is an economic development tool available to cities to attract new industries and commercial enterprises and to encourage the
retention and development of existing businesses through property tax abatement.
8 Under Chapter 380 of the Texas Local Government Code,Texas cities may administer an economic development program and may provide
grants(including tax rebate),loans,city personnel,and city services for promotion and encouragement of economic development.
The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
Figure 1: Single-Family Housing Stock Market Value Analysis
Between
$400,000& Percentage Avg. Mkt
Range of Housing Value
Between $500,000
$300,000& Between Less than $100,000 5.68% $76,696
$400,0 $500,000& Btw$100,000&$200,000 30.55% $158,403
Between 30 000& $1,000,000 Btw$200,000&$300,000 43.26% $243,474
$ , _Greater Btw$300,000&$400,000 14.30% $340,112
$300,000 than Btw$400,000&$500,000 3.96% $439,533
Between $1,000,000 Btw$500,000&$1,000,000 2.11% $611,645
$100,000& I Greater than$1,000,000 0.15% $2,422,737
$200,0 L Less than All: 100% 240 662
$100,000 $
Educational Resources: A successful economic development effort depends in part upon the
available workforce in the area, whose skillsets for employment in certain target industries stem
from education. Two four-year public universities are primarily located within City limits and one
2-year public college has a campus presence. These educational institutes are summarized in the
Table V
Table 2: Summary of Educational Institutes in Denton
Institution University of North Texas Texas Woman's University North Central Texas College
Undergraduates I 31,500 9,500 I 10,000
Graduation Rate 53% 37% 13%
Most Popular 1. Business, 1. Health Professions 1. Liberal Arts and Sciences,
Programs by Management, & (30%) General Studies,and
Degrees& Marketing(20%) 2. Liberal Arts and Humanities(50%)
Certificates 2. Multi/Interdisciplinary Sciences,General 2. Health Professions(23%)
Awarded Studies(11%) Studies,and Humanities 3. Computer and
(Percentage of 3. Liberal Arts and (12%) Information Sciences
Degrees Sciences,General 3. Multi/Interdisciplinary (7%)
Awarded per Studies,and Studies(11%) 4. Homeland Security, Law
Discipline) Humanities(9%) 4. Business, Management, Enforcement,and
4. Visual& Performing & Marketing(10%) Firefighting(5%)
Arts(7%) 5. Family and Consumer 5. Personal and Culinary
5. Communication and Sciences/Human Services(4%)
Journalism (7%) Sciences(6%)
0)
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9 Information was taken from College Scorecards,a US Department of Education website designed to see how well different colleges are
serving their students.
The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
Cluster Analyses Methodology: A Best Practice in Economic Development
We used the following methodology, analyses and facts for drawing conclusions to our findings
described subsequently in this report:
According to the U.S. Secretary of Commerce, "The U.S. Cluster Mapping Project is used by
governments, economic developers, and businesses to understand and shape the competitive
landscape for a wide range of industries. These data are being put in the hands of local officials,
who are using the information to make strategic investments, recruit new companies, and lay the
groundwork for new industries. Across the country, our cluster mapping tool gives us the ability to
reinvent and modernize economic development strategies—all driven by open data."
According to the Cluster Mapping project website, "The U.S. Cluster Mapping Project is a national
economic initiative that provides over 50 million open data records on industry clusters and
regional business environments in the United States to promote economic growth and national
competitiveness. The project is led by Harvard Business School's Institute for Strategy and
Competitiveness in partnership with the U.S. Department of Commerce and U.S. Economic
Development Administration."
According to the International City Managers' Association (ICMA), "Clusters are geographic
concentrations of competing and collaborating firms that tend to produce innovation and higher
than average wages. Cluster-based economic development strategies are interventions designed
to improve a cluster's performance by addressing the common needs of businesses within the
cluster. ...The cluster-based approach has influenced local, regional, state, and national economic
development policy worldwide. It has also added significant value as a method of understanding
regional economies, as a tool for engaging industries in collective problem solving,and as a tool for
organizing service delivery across public sector departments, services, and functions. Looking at a
local economy in terms of clusters has the added benefit of providing a framework for addressing
the needs of existing businesses in a way that can also make the community more attractive to new
businesses in similar or complementary industries."
As part of our evaluation, our Office conducted three cluster analyses based on the methodology
and data provided by the U.S. Cluster Mapping Project of the major economic regions in which the
City of Denton is located. This analysis attempts to identify the City's strategic advantage in
recruiting new businesses.
The US Cluster Mapping Project defines a strong cluster as having high employment specialization
in a region.The location quotient10(a quantification of concentration) and employment growth of
these strong clusters can be used to classify clusters as mature, growth, or emerging based on the
criteria in Table 3.
O
10 The location quotient is a comparison of a cluster's employment in one region to another region.In this way,a 1.00 LQ would indicate that
the percentage of employment of one cluster in Denton is equal to the percentage of employment of the same cluster in the US.While a
location quotient of 2.00 would mean the percentage of Denton employment in one cluster is twice as much as the same cluster in the US.
The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
Table 3: Criteria for Cluster Classification
Mature Growth Emerging
Concentration11 High High Low
Employment Growth Low/Negative High Positive
Based on data provided by the City's economic data service, Emsi,we identified the City of Denton's
strong traded clusters as follows:1z
Table 4: Strong Clusters in the City of Denton (2019)
Cluster Name 2019 Location Growth Cluster Type
Employment Quotient (2010-2019)
Automotive 3,515 6.24 117% Growth
Education & Knowledge Creation 2,838 1.32 7% Mature
Distribution & E-Commerce 2,445 1.75 129% Growth
Transportation & Logistics 1,092 1.45 105% Growth
Paper& Packaging 464 3.97 5% Growth
Jewelry& Precious Metals 307 2.21 -8% Mature
Bubble charts are often used for identifying priority clusters as they allow visual comparisons of
economic measures13. Figure 2 illustrates relationships for the clusters in the City of Denton.
Figure 2: Clusters in the City of Denton,TX
8.00
7.00 Automotive
v 6.00 Paper and
0 5.00 Packaging 0
4.00 Jewelry and
C Transportation
o 3.00 Precious Metals and Logistics Distribution and
}
Education and
u E Commerce
2 Knowledge
1.00 Creation
0.00
-50% 0% 50% 100% 150% 200%
Employment Growth (2010-2019)
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11 Many economic development studies use a 1.25 location quotient as criteria for demonstrating a high concentration of employment as this
means the concentration of an industry is at least 25%higher than in the average area.
12 Clusters with employment greater than 300 and location quotients greater than 1.00 were considered strong;these criteria were based on
the US Cluster Mapping Project's criteria.
13 The size of bublle indicates concentration of employment in the area.
The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
While focusing on the mature and important growth clusters in the City of
Denton may be the most rewarding to the City's economic development efforts,
it does not necessarily present a full picture of the economic region as there
35F
may be opportunities to leverage strengths in the regional economy that would
yield benefits for local economic development efforts. Based on the City of Rwo
wi•5
Denton's location as the seat of Denton County and at the top of the 1-35
corridor, our Office has also conducted cluster analyses of Denton County and
Dallas-Fort Worth metropolitan statistical area (MSA).
The US Cluster Mapping Project also identified five strong traded clusters in Denton County as
follows:
➢ Financial Services ➢ Distribution & E-Commerce
➢ Transportation & Logistics ➢ Communications
➢ Jewelry
The bubbles on the right side of the chart are growth clusters and those on the left side are mature
clusters (Figure 3).
Figure 3: Clusters in Denton County,TX14
14.00
Jewelry
12.00
0
10.00 Distribution &E-
c
°1 8.00 Commerce
0
0
Cl 6.00 Financial Services
Transportation&
o Communications 4.00 Logistics
u � 2.00
.0 0.00 -
-80% -60% -40% -20%2.00 0% 20% 40% 60% 80% 100%
-4.00
Employment Growth(2007-2016)
Figure 4 illustrates similar results for the Dallas-Fort Worth MSA:
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14 The following variables are plotted:10-year employment growth(2007-2016)on the x-axis(horizontal);The cluster's location quotient
(2016)on the y-axis(vertical);and employment size of the cluster(2016)indicated by the size of the bubble.
The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
Figure 4: Clusters in DFW MSA (2016)
4.00
3.50 Aerospace&
Defense
v3.00 Financial Services
0 2.50
Cf Oil&Gas 2.00 Transportation
c
1.50
3 Communications IT 1*0 Distribution&E-
g 0.50 Commerce
Marketin Insurance
0.00
-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50%
Employment Growth(2007-2016)
The above charts indicate that Transportation & Logistics and Distribution & E-Commerce are
overlapping growth clusters with the City of Denton. This also identifies Insurance as an emerging
cluster and Aerospace & Defense and Oil & Gas as growth and mature clusters in the DFW MSA
respectively.
Other External Factors that May Impact the City's Efforts
Finally, though we did not perform a cluster analysis for the Auto Manufacturing in the Texas-Mexico Corridor
state of Texas, we did find that the state has recognized the
Automotive manufacturing industry cluster, and the
Aerospace, Aviation, and Defense industry cluster as Dena --'Gadand
priorities. Texas is home to 1,752 automaker facilities and ANnAl�� Of`
El Paso
ranked number seven in the US for automotive manu-
facturing employment. The state houses General Motors, SO*
' . .Wiuslan
Toyota, Toshiba, Caterpillar and Peterbilt Motors — a
Denton company. This situation may allow Denton to
•CoFns Chisli
leverage the resources for enhancing the automotive mon*a.
cluster in the City.
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Similarly, the Texas
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aerospace and aviation
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industry employs about .Ma—fac—ng Plants •T—p.
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130,000 workers with Tie�t°E^fs°oo'irl= San Us Patosi
F average wages of $95,000. The City has a small (less than 300
,vao R;I
W,n employees) Aerospace & Defense cluster, which is made up of
the aircraft manufacturing industry. However, the University of
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�.nA-1. North Texas offers a Bachelor of Science in Aviation Logistics
A°s,;n l.,evFegl that may provide workforce in this area.This Aircraft sub-cluster
Arc.o,E-: ..,.
`° °n"°d°" "�""Tz°`°- is also particularly strong in the DFW MSA.
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The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
What Works Well?
According to the International Economic Development Council (IEDC), there are many different
strands of economic development, which is the process that influences growth and restructuring
of an economy to enhance the economic wellbeing of a community. In the broadest sense,
economic development encompasses three major areas:
1) Policies that governments undertake to meet broad economic objectives including
inflation control, high employment, and sustainable growth;
2) Policies and programs to provide services including buildings, highways, managing
parks, and providing medical access to the disadvantaged; and
3) Policies and programs explicitly directed at improving the business climate through
specific efforts, business finance, marketing, neighborhood development, business
retention and expansion, technology transfer, real estate development, and others.
Though the City has put forth policies and programs in all three major areas of economic
development, many of the Economic Development Department's efforts fall under areas listed in
area number three above. This report specifically evaluates the City's framework to perform
economic development business recruitment and expansion activities, including:
➢ The recruitment of individual business through marketing and economic development
incentives; and
➢ The retention and expansion of individual business through economic development
incentives and a business visitation program.
Historically these activities have been divided between the Chamber of Commerce's marketing and
recruitment efforts, and the City's Economic Development Department's business retention and
expansion program and incentives administration.
Incentive Agreements are Adequately Administered
Economic development incentive agreements should be administered and approved according to
the provisions of the agreement,the City's incentive policy, and the applicable laws and regulations
(i.e. Chapter 312 and Chapter 380 of Tax Code and the Texas Local Government Code). Based on
our review of all applicable laws, executed incentive agreements (see Table 5), policies,
applications, calculation documents, certificates, and other relevant documents, the auditors
found the following:
• A1115 incentive agreements entered into in the last five calendar years were accurately
calculated; reimbursement amounts were paid according to the terms of the incentive
agreements after compliance of required conditions of the agreements.
• All of the agreements that we reviewed were properly approved by the City Council and were
appropriately executed with the proper authority and ordinance of the City Council in
compliance with provisions of the City's incentive policy, Chapter 312, and Chapter 380.
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15 Incentives have not yet been initiated for three of the eight ongoing projects.
The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
• TIRZ No. One and TIRZ No. Two agreements were appropriately executed in compliance with
Chapter 311 provisions and TIRZ grants were appropriately calculated according to the
corresponding Chapter 380 agreements.
Table 5: Status of Agreements Executed between CY14 &CY18
Type Agreements Initiated16
Agreements
New/Ongoing 312 2 0
New/Ongoing 380 6 5
Amendment 2 N/A
Terminated 4 N/A
All: 14 5
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16 Though an agreement may be executed,a project must first meet the required conditions of the agreement—such as receipt of a certificate
of occupancy,property valuation level,etc.—before it is initiated(i.e.before the business is reimbursed by the City).
The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
Opportunities for Improvement
In Denton, business recruitment efforts are generally17 divided into two parts:
1) Marketing efforts led by the Chamber of Commerce; and
2) Administration of incentive agreements by the City's Economic Development Department.
Both of these incentivized recruitment efforts are predominantly guided by the Tax Abatement and
Incentive Policy(Resolution 18-148).The Tax Abatement and Incentives Policy of the City of Denton
was last updated and approved by the City Council on March 20, 2018 and is reviewed every two
years by the Economic Development Partnership (EDP) Board18 and the City Council.
Unfocused ED Incentive Policy May Obscure Recruitment Targets
According to the Government Finance Officers Association (GFOA), the development of targeted
economic sectors is a common goal in public economic development programs. These targeted
industries should be identified based on an understanding of the business needs in the area and
defined so as to create context and accountability for the use of economic development incentives.
The Tax Abatement and Incentive Policy identifies the following target industry sectors:
➢ Aviation/Aerospace ➢ Advanced Manufacturing
➢ Renewable Energy ➢ Research & Development
➢ Information Technology ➢ Supply Chain for Existing Employers
➢ Significant Consumers of Municipal Utilities
What We Found
• We did not find any documentation explaining reasons for the selection of these target industry
sectors. Similarly, there are no specific definitions of"Advanced Manufacturing," "Research &
Development," "Supply Chain for Existing Primary Employers," and "Information Technology'
available to the City and Chamber staff, making it difficult to identify which businesses are
actually targeted.
• In addition to the seven target industry sectors, the policy identifies ten additional priority
considerations. Similar to the target industry sectors, these considerations are generally
broadly defined, such as:
➢ Promoting business&community investment ➢ Expanding&diversifying the tax base
➢ Promoting public-private partnerships in investment ➢ Generating new customers for municipal utilities
There are two issues with this situation:
o Naming such broad industry targets and priority considerations may hamper the clear
measurement of objectives and obscure the City's economic development recruitment lD
and expansion focus. This potentially hinders the City's marketing and recruitment
efforts as the ultimate goal of the current policy is not clear.This is because the current
17 While marketing and recruitment efforts are driven by the Chamber's Office of Economic Development,the City's Economic Development
Department also responds to direct leads and requests for proposals.
18 The EDP Board provides economic development policy guidance and makes recommendations to the City Council and the Chamber of
Commerce.
The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
policy encourages recruitment of businesses in many industries that may fall within
either a target industry sector or an industry sector that is given priority. This
circumstance creates confusion as to which marketing events and activities most
directly align with the City's ultimate recruitment goals.
o The City's current target industry sectors do not completely align with potential
available growth opportunities described previously during best practices discussion.
This point is depicted in Table 6:
Table 6: Industry Sector Comparison
DFW State of Texas City's
Industry Denton City Denton County MSA PriorityTargeted
Clusters
Automotive Growth ✓
Education&Knowledge
Mature
Creation
Distribution&E- Growth Growth Growth
Commerce
Transportation& Growth Growth Growth
Logistics
Paper&Packaging Growth
Jewelry&Precious
Mature Mature
Metals
Financial Services Growth Growth
Communications Mature Mature
Aerospace&Defense Growth ✓ ✓
Insurance Growth
Marketing Mature
Oil&Gas Mature
Information Technology Mature ✓
Supply Chain for ✓
Existing Businesses
Significant Customer of ✓
Municipal Utilities
Advanced ✓
Manufacturing
Renewable Energy ✓
Research& ✓
Development
0 - Opportunity Exists
a
The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
Why It Matters
The above observations demonstrate that the City may be missing out on potential marketing
opportunities where growth is possible. This being said, the above analysis is not meant to make
conclusions about the regional economy and its impact on Denton. Additional factors that may
need consideration include:
➢ Inputs like workforce availability&development and housing opportunities; and
➢ Outputs like quality of life for citizens and community wealth building.
Therefore, the City will benefit from hiring a professional economic development consulting firm
to conduct a comprehensive analysis of the full regional economy to provide strategic guidance on
target industry sectors and other economic development efforts most beneficial for the City.
Recommendations:
1. Develop an economic development strategic plan based on historical patterns, current
circumstances, and emerging trends. This strategic plan should identify the core industry
clusters that drive regional economic growth based on analytical research and clear
expectations for program effectiveness. For this purpose, the City will benefit from hiring a
qualified consulting firm practicing in this discipline. As of November 2019, the City has hired
a consultant to perform this service.
Economic Development Comments: Economic Development staff requested and received
approval for a new comprehensive economic development strategic plan during the FY 19-20
budget process, which was given approval to be funded in FY18-19. A contract with TIP
Strategies has been executed and the final report is anticipated by Summer2020. Management
appreciates the auditor's shared understanding of the value of having such a plan.
2. Identify high value-added subsectors of target industry sectors to help focus economic
development recruitment and incentive activities. These defined target industries should be
based on the analysis conducted by the economic development consulting firm hired by the
City.
Economic Development Comments: Management agrees that more clear guidance regarding
the pursuit of targeted sectors for specific incentive programs could be developed, but requests
that the development of those targeted sectors be based on a comprehensive analysis of the
regional economic ecosystem, the City Council's strategic goals, potential future development
possibilities, and an evaluation of tax-base diversification, supply chain needs, workforce
development possibilities, and additional factors. The audit relied solely on the use of cluster
analysis and location quotients to establish this recommendation.And while this type of analysis
can be informative, a cluster analysis and location quotient technique only produces a rough
descriptive indicator of relative concentrations of industries as compared to a larger area. It
forces the user to make assumptions that a given smaller region is significantly similar to a
larger geographic region on the whole, and, if the assumptions are not correct or the economic
system is not well understood, produces a value that inaccurately portrays the ecosystem in
which the industry clusters exist. There are also significant challenges in understanding how
industries and labor are classified under different systems, which can further destabilize 00
assumptions and lead to faulty conclusions. Management also understands the value of
flexibility and the consideration of innovative and unique factors of projects, and that being
a
The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
overly prescriptive can reduce recruitment potential and lead to ineffective, limiting strategies
that reduce the City's ability to find creative ways to attract and retain businesses.
Revisions to Economic Development Incentive Policy May Improve Accountability
According to the GFOA's best practices, economic development performance should be measured
against the overall goals and objectives in the government's economic development policy. The
Tax Abatement and Incentive Policy identifies the following objectives:
➢ Expand and diversify the tax base ➢ Create quality jobs
➢ Enhance the quality of life for residents ➢ Protect human health and the environment
➢ Secure new customers for municipal utilities
What We Found
• The City's Tax Abatement & Incentives policy does not outline any performance measures for
determining if the policy's recruitment objectives are being achieved.
o For example, there are several criteria for identifying "quality jobs" within the policy
as shown below.
■ Jobs with wages above the Denton County median wage;
■ Increasing the number of jobs paying more than $75,000; and
■ Encouraging knowledge-based jobs or those that require specialized or
theoretical knowledge.
Creating quality jobs is an appropriate objective for economic development as there is
generally an expectation that these employees will live in the City and spend their funds to
acquire housing and other goods and services—circulating these wages in the local economy.
However, having several interpretations of "quality jobs" related to different incentives may
confuse the performance measurement and monitoring process of the program as a whole,
though specific project performance can still be measured. Honing the policy to include only
one definition of "quality job" would facilitate the City Council's ability to monitor the
performance of the incentive program as a whole. In addition, having a single definition may
aid City staff in determining which projects are the best fit for the City, as this information can
often times be conflicting at the project level. The following example (Table 7) is taken from
projects approved by the City Council for receiving incentives in 2018:19
Table 7: Incentivized New Full Time Jobs (CY18)
Industry Sector Jobs Avg.Wages %>$75,000
Sig. Utility User 1 67 $17.34 4.5%
Existing Business 67 $24.48 22.4%
Sig. Utility User 2 100 $24.82 13.0%
All: 234 $22.58 13.2% Ql
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19 There is no documentation indicating which jobs are"knowledge-based"in the incentive application prepared by each business,so this
criterion was excluded from our analysis.
The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
As the above table depicts, the majority of employees incentivized earn less than $75,000. In
the future, it may be beneficial to determine if the wage level for new jobs proposed by an
incentive-seeking project will contribute adequately to the City's economy.
• The incentive policy does not identify specific metrics to be monitored and reported in all
project incentive agreements — allowing City staff flexibility when composing an incentive
agreement. While this flexibility allows the City to more easily negotiate with incentive
applicants, it may hinder reporting on the City's incentive program objectives.
o For example,the creation of"quality jobs" is often considered by staff,the EDP Board,
and City Council when determining what incentive package an applicant may receive.
However, we found that the creation of these quality jobs is generally not written into
the incentive agreement as a requirement. Without requiring staff to monitor the
number of jobs created and their compensation, the City Council has little assurance
that the incentive program's objective of"create quality jobs" is being met.
• The Economic Development Department has tried to measure recruitment and incentive
performance through the annual Economic Development Incentivized Projects Net Revenue
Report.This report summarizes the Tax Abatement(Chapter 312)and Chapter 380 agreements
that have been executed since the beginning of the incentives program (1999) and quantifies
their impact on the City,the County,and Denton Independent School District.While this report
does quantify the City's return on investment and states the number of jobs created, it does
not break out these jobs into "quality jobs" and does not specifically measure the program's
effects on quality of life for residents, human health &the environment, or new customers for
municipal utilities. The absence of this reporting may be in part due to a lack of definition or
criteria for how incentive projects may meet these objectives.
Why It Matters
Performance measures should be a means of evaluating the entity's performance in achieving
objectives, according to the Government Accountability Office's Standards for Internal Control.
Effective policies and procedures are essential management tools as they offer individuals
information and guidance to perform their job properly. However,there are no clear performance
measures laid out in the Tax Abatement and Incentives policy.Without clear measures, it is difficult
to determine if the City's economic development incentives are meeting the objectives determined
in the policy.
Recommendations:
3. The City Council needs to revise the Tax Abatement and Incentives policy to outline clear
performance expectations based on the City's incentive objectives.
No Management Response Needed
4. Verify critical metrics used to determine the incentive package offered to businesses as part of
incentive monitoring and reporting to ensure program objectives are met.
Economic Development Comments: Management fully agrees that regular and robust O
monitoring of incentive agreements and associated metrics is a high priority, and as noted in N
the audit, quality management of the monitoring and compliance process was demonstrated
with the finding that incentive agreements were administered appropriately. Also, as noted in
The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
the audit, the Economic Development department negotiates agreements and associated
performance measures and compliance reporting on a case-by-case basis, based on numerous
factors for evaluation. Due to the individualized nature of agreements, the negotiation process,
and the variety of metrics that are used to evaluate an incentive request, defining what critical
metrics are needed should be based on the individual incentive package being negotiated and
then incorporated into the monitoring process based on the outcome. To the extent feasible,
staff include basic critical metrics that are relevant and important to the incentive being offered
and take great care to ensure that agreements remain in compliance with negotiated terms.
Improved Reporting & Monitoring Could Benefit Business Recruitment Efforts
The Chamber of Commerce's economic development marketing and recruitment duties are
defined by an agreement between the Chamber and the City. The FY19 Economic Development
Program Agreement requires the Chamber to market Denton with a focus on the City's targeted
industry sectors. These activities are reported monthly to the City's Economic Development
Department and include social media and website metrics, brief descriptions of marketing
activities, and new lead information.
What We Found
• The FY19 Program Agreement requires the Chamber to establish an average of three new
contacts per marketing event. Based on our Office's review of the Chamber's Activity Reports,
we could not easily determine the number of new contacts established per marketing event.
In addition, detailed information about established contacts was unavailable. This being said,
we identified 30 reported marketing opportunities during calendar year 2018,20 which are
broken out by type in Table 8:
Table 8: Marketing Opportunity Types (CY18)
Mkt.Opp.Type %Opportunities
Individual Meeting 37%
ED-Related Event 13%
Booth/Floor Presence 17%
Conference 33%
o While there is no corresponding requirement in the Program Agreement, we also
evaluated the identified marketing opportunities based on industry sectors as
presented in Table 9:
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20 FY19 Program Agreement requirements were compared to calendar year 2018 performance throughout the report because FY19 was not
complete during the audit fieldwork period.
The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
Table 9: Marketing Opportunity Industries (CY18)
Contact %Opportunities
Site Selector/Broker 53%
Manufacturing 20%
Transportation & Distribution 13%
Aerospace/Aviation 7%
Metal Working 3%
Geotechnical & Environmental 3%
• The FY19 Program Agreement requires the Chamber to respond to 42 leads and to oversee site
visits from seven different companies from Denton's target industry sectors. Leads are
reported in a tabular format under a project name,which lists the company's industry,general
lead source, site needs, capital investment, jobs created, and whether or not a proposal was
submitted.
o In the Chamber's Activity Reports, we found that 64 leads were responded out of 69
leads received during CY18.21
o In addition, the Chamber hosted 10 site visits during CY18.
• Finally, three incentive agreement packages were brought before the EDP Board for
deliberation during 2018. All three agreements were for distribution projects — a non-target
industry sector; however, two of these three projects were considered to be significant users
of municipal utilities, which is a targeted industry sector. The third project met other priority
considerations for expansion incentives.These performance metrics are broken out by industry
sector in Table 10:
Table 10: Marketing & Recruitment Performance by Industry Sector (CY18)
Industry Sector22 %Responses %Site Visits %Recruited
Aviation/Aerospace 6% 0% 0%
Manufacturing* 48% 20% 0%
v Renewable Energy 0% 0% 0%
Q Research &Development 2% 10% 0%
Information Technology 3% 0% 0%
Supply Chain N/A N/A 0%
Sig. Utility User N/A N/A 66%
vSpeculative Industrial
0 Space, Distribution 41% 70% 33%
Projects and other Misc.
64 10 3 N
Total: Responses Site Visits Recruited (V
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*Could not isolate advanced manufacturing leads based on reported information
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21 The City's Economic Development Department received 29 leads during this period and responded to about 28%of leads.The Department
receives proposal requests from the Dallas Regional Chamber and the Texas Governor's Office of Economic Development,Tourism and direct
business contacts.
22 Supply chain for existing employers and significant consumers of municipal utilities were excluded from our analysis of leads and site visits as
it is unlikely that City or Chamber staff would be able to determine if a business were included in these sectors at these stages in the
recruitment process.
The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
Why It Matters
The Chamber's Activity Reports do not clearly communicate their progress on all of the metrics laid
out in the Program Agreement. Likewise, there does not appear to be a clear marketing and
recruitment focus on the City's targeted industry sectors, even when it is explicitly required by the
Program Agreement. In addition,we did not find any documentation of communications explaining
why the Chamber was not able to recruit businesses from the target industry sectors leads.
Some of this lack of focus may be due to unclear expectations in the Program Agreement and the
Tax Abatement and Incentives Policy as previously described. However, establishing a more
structured, thorough reporting system would increase the City's assurance that their recruitment
and marketing objectives are being met.
Recommendations:
5. Require Economic Development Department and Chamber staff to report the outcomes of their
marketing efforts to achieve program objectives as established by the City Council.
Economic Development Comments:Both the City's Economic Development Department and the
Chamber economic development staff will be engaged in the strategic planning process, which
will include the development of new metrics and performance measures. Management concurs
that both City and Chamber staff should report and focus on efforts to meet the goals and
outcomes established in that process. In addition, as the Chamber provides a service to the City
under a contract, the Chamber should also comply with metrics and performance measures
established in that agreement.
6. Develop a system to quantify marketing activities in order to better evaluate marketing event
effectiveness.
Economic Development Comments:As part of economic development strategic plan, staff will
work with the consultant to evaluate this recommendation and consider options for evaluating
the effectiveness of marketing activities.
7. Implement a lead tracking system to promote improved communication, reporting, and
monitoring.
Economic Development Comments: While the City currently has a detailed process for tracking
and managing its leads and RFIs, Management agrees that these efforts can be better
documented and, prior to the audit, had initiated research to find a solution that meets the
needs of the City, the department, the Chamber, and businesses. Management is working to
implement a more comprehensive reporting program during FY2019-20 that will provide more
meaningful metrics.
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The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
Adherence to Best Practices Could Streamline the Incentive Process
GFOA best practices recommend convening key stakeholders prior to negotiation in order to
establish goals and a framework for the project. Receiving direction is especially critical when
economic development incentive guidelines are very broad.
What We Found
• Figure 5 presents the current incentive approval process:
Figure 5: ED Incentive Approval Process
1. Chamber's Office of Economic Development
•Markets Denton to Businesses
2. Business
•Applies for Incentive
3. City's Economic Development Department
•Responds to direct business contacts
•Analyzes Application based on Incentive Policy
•Negotiates Incentive Amounts
•Recommends Incentive Package
4. Economic Development Partnership Board
•Reviews Application and Questions Business
•Recommends Incentive Package
5. City Council
•Provides Direction Regarding Incentive Package
•Approves Incentive Package
• Ultimately, the City Council is responsible for approving economic development project
incentive agreements. Receiving the City Council's direction is especially critical because the
City's Tax Abatement and Incentives policy is very broad as described previously. This being
said, the City Council has approved all incentives recommended by staff and the EDP Board —
in some form—since 2016.
Why It Matters
The above process results in the business being required to undergo scrutiny twice, once by the
EDP Board and another by the City Council. During this process the business does not have
assurance that they will receive a benefit which may discourage them from relocating to Denton.
We found at least one incident where a business decided not to relocate to Denton after
undergoing the above process. If possible, streamlining this process may benefit successful
business recruitment.
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The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
Recommendation:
8. Consider developing a process to discuss potential economic development projects with the City
Council before negotiations begin to facilitate the approval process. Executive session may be
utilized to provide confidentiality to high-profile development projects.
Economic Development Comments: Management partially concurs only insofar as the City
Council approves the incentive application and approval procedures as part of the incentive
policy. Currently the policy-approved process does not direct staff to bring projects to City
Council first, but instead to the Economic Development Partnership Board for review and
recommendation. If City Council wishes to make a change to the process, staff willfully comply
with adopted procedures.
Robust Business Retention and Expansion Efforts Need Comprehensive Reporting
At the City of Denton, business retention and expansion (BRE) efforts are concentrated in the City's
Economic Development Department. According to the International Economic Development
Council, a strong BRE program consist of keeping track of existing businesses and their needs and
developing a process for helping them with expansion and retention. For these purposes, the City
must decide what types of businesses will be targeted for extending local development process
assistance.This help may include assisting with regulations and permits related to planning,zoning,
and building. A successful BRE program has four main components: visitation, surveys,
clearinghouse or information center, and networking.
The City has established several annual networking events and offers all businesses tools to identify
the zoning and permitting in their area through the Denton OpenCounter website. In addition,
Denton's Economic Development Partnership has set up a website that includes information about:
➢ Available incentives and business assistance information including a downloadable
incentive application;
➢ Available properties;
➢ Small business programs;
➢ Services for existing businesses; and
➢ Workforce training programs.
What We Found
• Based on interviews with Economic Development staff, the City's main business retention and
expansion efforts are driven by in-person visits, which are said to target major Denton
employers. These visits allow City staff to build connections and relationships with local
business leaders to facilitate business assistance programs including incentivized expansion.
These interviews are currently tracked in a spreadsheet with a date entered to denote that a
business was visited. This spreadsheet lists very few details about the discussions had during
these visits or subsequent follow up activities.
o Based on this database,we categorized the completed and planned business retention N
and expansion visits by large (more than 100 employees) and small (less than 100
employees) businesses as shown in Table 11. CL
The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
Table 11: Non-Downtown23 Business Retention Visits Summary
FY18 Actual FY19 Est. FY20 Planned
Large Businesses 22 20 25
Small Businesses 13 15 3
Total: 35 35 28
• As part of these business retention and expansion visits, Economic Development Department
staff promote Workforce Solutions, a State funded organization that offers grants to fund job
training programs through local community colleges. Workforce Solutions offers two grant
programs:
1) Skills Development Fund Grants, which assist business and trade unions by financing
the design and implementation of customized job-training projects. Grants may be
awarded for up to$500,000 to develop curriculum, procure training materials,and pay
instructors and tuition.
2) Skills for Small Business Grants, which emphasizes training for new workers (up to
$1,800) and for existing employees (up to$900).
Economic Development Department staff facilitate discussions between businesses and
Workforce Solutions; however, the City does not play an active role in administering these
grants. This being said, Economic Development Department staff promoted Workforce
Solutions grants to a total of 33 businesses during FY18, 12 of which were large businesses
(more than 100 employees); this promotion led to the application and approval of two Skills
Development Fund Grants and three Skills for Small Business Grants.
Why It Matters
According to the Government Accountability Office's Standards for Internal Controls, performance
measures should be the means of evaluating the entity's performance in achieving its objectives.
Currently, the BRE Program reports only the date of a visit to a business, without giving any
information about discussions that would identify the business'needs and required assistance from
the City.While business visitation is a driving force in a successful business retention and expansion
program, measuring only the number of visits does not provide adequate detail on the outcomes
of BRE activities. More comprehensive reporting would allow the City to analyze the effectiveness
and efficiency of these activities and should include details about what was discussed, and follow-
up actions taken.
Recommendations:
9. Clearly define business retention and expansion targets and objectives to facilitate the
evaluation of the BRE program's performance. These definitions could be included in an
internal policy and procedures manual.
Economic Development Comments: Prior to the audit, Management reviewed the City's BRE �p
program and has made defining an associated work plan a priority. To accomplish this, staff N
tin
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23 The City performs similar visits in the Downtown district,which are not shown in this Table.
The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
requested the development of an actionable work plan and metrics for economic development
activities, including BRE, in the scope of work for the strategic plan.
10. Enhance documentation of business retention and expansion visits to facilitate reporting of
program results.
Economic Development Comments:Management agrees that business retention and expansion
efforts can be better documented and, prior to the audit, had initiated research to find a
solution that meets the needs of the City, the department, and businesses. Management is
working to implement a more comprehensive reporting program during FY2019-20.
11. Consider developing a survey to distribute to small businesses and those outside of targeted
business retention and expansion areas.
Economic Development Comments:As part of the economic development strategic plan, staff
will work with the consultant to evaluate this recommendation and determine if a small
business survey should be incorporated into the actionable work plan.
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The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
Appendix A: Management Response Summary
The following summarizes the recommendations issued throughout this report. The auditors found that
staff and the Department were receptive and willing to make improvements to controls where needed.
Management has provided their response to each recommendation.
Develop an economic development strategic plan based on Expected
1 historical patterns, current circumstances, and emerging Concur Completion:
trends. FY 19-20
Comments: Economic Development staff requested and received approval for a new Responsibility:
comprehensive economic development strategic plan during the FY 19-20 budget process, Economic
which was given approval to be funded in FY 18-19.A contract with TIP Strategies has been Development
executed and the final report is anticipated by Summer 2020. Management appreciates
the auditor's shared understanding of the value of having such a plan.
Identify high value-added subsectors of target industry sectors Expected
2 to help focus economic development recruitment and incentive Partially Concur Completion:
activities. FY 19-20
Comments: Management agrees that more clear guidance regarding the pursuit of Responsibility:
targeted sectors for specific incentive programs could be developed, but requests that Economic
the development of those targeted sectors be based on a comprehensive analysis of the Development
regional economic ecosystem, the City Council's strategic goals, potential future
development possibilities, and an evaluation of tax-base diversification, supply chain
needs, workforce development possibilities, and additional factors.The audit relied
solely on the use of cluster analysis and location quotients to establish this
recommendation. And while this type of analysis can be informative, a cluster analysis
and location quotient technique only produces a rough descriptive indicator of relative
concentrations of industries as compared to a larger area. It forces the users to make
assumptions that a given smaller region is significantly similar to a larger geographic
region on the whole, and, if the assumptions are not correct or the economic system is
not well understood, produces a value that inaccurately portrays the ecosystem in which
the industry clusters exist.There are also significant challenges in understanding the how
industries and labor are classified under different systems, which can further destabilize
assumptions and lead to faulty conclusions. Management also understands the value of
flexibility and the consideration of innovative and unique factors of projects, and that
being overly prescriptive can reduce recruitment potential and lead to ineffective,
limiting strategies that reduce the City's ability to find creative ways to attract and retain
businesses.
The City Council needs to revise the Tax Abatement and Expected
3 Incentives policy to outline clear performance expectations TBD Completion:
from staff based on the City's incentive objectives.
No Management Response Needed Responsibility:
Expected
Verify critical metrics used to determine the incentive package Completion:
4 offered to businesses as part of incentive monitoring and Concur FY 19-20,
reporting to ensure program objectives are met. pending 00
further a,
a
The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
direction from
City Council
Comments: Management fully agrees that regular and robust monitoring of incentive Responsibility:
agreements and associated metrics is a high priority, and as noted in the audit, quality Economic
management of the monitoring and compliance process was demonstrated with the Development
finding that incentive agreements were administered appropriately.Also, as noted in the
audit,the Economic Development department negotiates agreements and associated
performance measures and compliance reporting on a case-by-case basis, based on
numerous factors for evaluation. Due to the individualized nature of agreements,the
negotiation process, and the variety of metrics that are used to evaluate an incentive
request, defining what critical metrics are needed should be based on the individual
incentive package being negotiated and then incorporated into the monitoring process
based on the outcome.To the extent feasible, staff include basic critical metrics that are
relevant and important to the incentive being offered and take great care to ensure that
agreements remain in compliance with negotiated terms.
Require Economic Development Department and Chamber Expected
5 staff to report the outcomes of their marketing efforts to Concur Completion:
achieve program objectives as established by the City Council. FY 19-20
Comments: Both the City's Economic Development Department and the Chamber Responsibility:
economic development staff will be engaged in the strategic planning process, which will Economic
include the development of new metrics and performance measures. Management Development
concurs that both City and Chamber staff should report and focus on efforts to meet the
goals and outcomes established in that process. In addition, as the Chamber provides a
service to the City under a contract, the Chamber should also comply with metrics and
performance measures established in that agreement.
Develop a system to quantify marketing activities in order to Expected
6 better evaluate marketing event effectiveness. Concur Completion:
FY 19-20
Comments: As part of economic development strategic plan, staff will work with the Responsibility:
consultant to evaluate this recommendation and consider options for evaluating the Economic
effectiveness of marketing activities. Development
Implement a lead tracking system to promote improved Expected
7 Concur Completion:
communication, reporting, and monitoring.
FY 19-20
Comments: While the City currently has a detailed process for tracking and managing its Responsibility:
leads and RFls, Management agrees that these efforts can be better documented and, Economic
prior to the audit, had initiated research to find a solution that meets the needs of the Development
City, the department, the Chamber, and businesses. Management is working to
implement a more comprehensive reporting program during FY 2019-20 that will
provide more meaningful metrics.
Expected
Consider developing a process to discuss potential economic Completion:
8 development projects with the City Council before negotiations Partially Concur TBD, pending
begin to facilitate the approval process. further
direction from
City Council N
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The City of Denton Internal Audit Report January 2019
Audit of Economic Development—Recruitment& Expansion
Comments: Management partially concurs only insofar as the City Council approves the Responsibility:
incentive application and approval procedures as part of the incentive policy. Currently, Economic
the policy-approved process does not direct staff to bring projects to City Council first, Development
but instead to the Economic Development Partnership Board for review and
recommendation. If City Council wishes to make a change to the process, staff will fully
comply with adopted procedures.
Clearly define business retention and expansion targets and Expected
9 objectives to facilitate the evaluation of the program's Concur Completion:
performance. FY 19-20
Comments: Prior to the audit, Management reviewed the City's BRE program and has Responsibility:
made defining an associated work plan a priority.To accomplish this, staff requested the Economic
development of an actionable work plan and metrics for economic development Development
activities, including BRE, in the scope of work of the strategic plan.
Enhance documentation of business retention and expansion Expected
10 Concur Completion:
visits to facilitate reporting of program results.
FY 19-20
Comments: Management agrees that business retention and expansion efforts can be Responsibility:
better documented and, prior to the audit, had initiated research to find a solution that Economic
meets the needs of the City, the department, and businesses. Management is working to Development
implement a more comprehensive reporting program during FY 2019-20.
Consider developing a survey to distribute to small businesses Expected
11 and those outside of targeted business retention and Concur Completion:
expansion areas. FY 19-20
Comments: As part of the economic development strategic plan, staff will work with the Responsibility:
consultant to evaluate this recommendation and determine if a small business survey Economic
should be incorporated into the actionable work plan. Development
0
m