Steps to Creating an Economic
Development Corporation
Andy Lewis
Center for Community Economic Development
University of Wisconsin Extension
9-5-2003
Why should a community or region try to change its local economy? Can't the local economy take care of itself?
Most communities are not completely satisfied with their local economy. Some want more job opportunities or income growth for all their citizens or for specific groups such as displaced farmers, women, minorities, or youth. Many people are concerned about rising unemployment rates, lower then average incomes, an over reliance on a particular sector, or the emergence of an industry cluster or other opportunity. Many public officials are concerned about increasing the tax base to share the local tax burden.
Few communities choose to remain completely passive. For example, most have chambers of commerce, economic development commissions, zoning laws, or community-owned industrial parks. They may use promotional efforts, government grants, and various financing tools to influence economic change.
What is an economic development corporation?
An economic development corporation is simply a legal entity/organization directed by a board of directors and/or members, for the purpose of creating new jobs and income growth. This is one of many tools, which have been used by numerous communities, counties and regions. Traditionally, these corporations have focused on marketing an area to attract new manufacturers. Many however, have gone beyond manufacturing recruitment (please see the discussion in the section below titled, "preamble/purpose").
For a list of Economic Development Corporations with a County-wide focus or larger (along with web links), see: http://www.uwex.edu/ces/cced/edcorplist.htm
An economic development organization may form as a public entity (county or municipal committee), a not-for-profit corporation, or for-profit corporation. For a variety of reasons, the majority of recent development organizations have been formed as nonprofit corporations. Those that have formed nonprofit organizations often state that they pursued that option to allow them to garner both public support and to provide more flexibility in the way that they conduct their business. While these corporations often need to conduct confidential business, if the organization receives most of its funding from public sources, it may be covered under the open meetings law and public records law. The public records law (sections 19.32-19.39, Wisconsin Statutes), includes a "governmental or quasi-governmental corporation." This phrase is not expressly defined in the open meetings law. Up until 2006 there were no reported Wisconsin court decisions which have interpreted the phrase. For a discussion on this issue, See the League of Municipalities Web page at: http://www.lwm-info.org/legal/faq/faq10.html (Scroll down the FAQ page to, " 1.3.2. Governmental or Quasi-Governmental Corporations "). When the Grant County Economic Development Corporation was being formed, our attorney Tom Geyer requested an informal opinion on this issue from the Attorney General and that opinion is discussed on the League of Municipalities web site (along with other conflicting opinions!). A copy of that opinion letter can be found on the Department of Justice Web site at: http://www.doj.state.wi.us/AWP/OpenMeetings/1987_02_26_geyer.pdf A.G. Donald Hanaway's informal opinion was that this nonstock, nonprofit corporation created by private individuals, was not a "quasi-governmental corporation" subject to the open meetings law even though the corporation served a public purpose and received more than 50% of its funding from public sources. In a more recent request for an informal opinion (10-25-05), Attorney General Peg Lautenschlager was of the opinon that the Wisconsin Land and Water Conservation Association is a quasi-governmental corporation subject to Wisconsin's open meetings law. For a copy of that informal opinion, see: http://www.doj.state.wi.us/ag/opinions/2005_10_25Kaminski.pdf
On July 19, 2006, state Attorney General Peg Lautenschlager filed suit against the Beaver Dam Area Development Corporation, saying it is a governmental body or quasi-governmental corporation within the meaning of the open meetings law. In a press release, Lautenschlager noted that a government agency “cannot ‘spin off’ a private entity . . . then consider itself above the state laws that ensure the public has open access to the public’s business.” That suit was filed after receiving a complaint from a Citizens group in Beaver Dam opposed to a Walmart project supported by the Beaver Dam Area Development Corporation. Marquette County Circuit Judge Richard O. Wright ruled against the attorney general, concluding that the development group was not created by city ordinance, does not make decisions on the city's behalf, and operates independently. Judge Wright was assigned to the case after Dodge County judges recused themselves from hearing the matter. The Attorney General has since filed an appeal as an attempt to get guidance from the Appellate Courts on how to apply a test to such situations. There is not time frame set for the court to reach a decision (August 2, 2006).
If a County Board were to create a public "industrial development agency" under sec. 59.97 of the Wisconsin Statutes, this governmental corporation would absolutely be covered by the Open Meetings law and the Public Records Law. If a public body (i.e. the County) wanted to stipulate that their contribution to a nonprofit economic development corporation was a "contract for service" as opposed to a "contribution", that too would likely open the door for public access to records as the public records law has language that coveres contract work.
Furthermore, it is important that you understand what it means to incorporate as a nonprofit organization. The Center for Community Economic Development ( University of Wisconsin Extension ) maintains a long list of annotated web resources on the topic of "Starting a Nonprofit Organization" at: http://www.uwex.edu/li/learner/sites_start.htm . While incorporating as a "not-for-profit" corporation will almost certainly exempt you from paying federal income tax, it is important to recognize that the IRS has over 30 classifications for "nonprofits". Some County Economic Development Corporations in Wisconsin are organized as 501(c)(4) (A "Social Welfare Organization) or 501(c)(6) ("Business League") corporation. There are however, some that have been granted 501(c)(3) status (i.e. Jackson County , Door County , Oconto, Oneida , Racine , Waukesha , Waushara) that would allow the organization to accept tax-deductible contributions. For a list of nonprofit types, see: http://www.muridae.com/nporegulation/documents/exempt_orgs.html . If you have a specific interest in creating a 501(c)(c) charitable organization that could accept tax-deductable contribution, please see the following IRS publication with a discusion on this topic: ECONOMIC DEVELOPMENT CORPORATIONS: Charity Through the Back Door by Robert Louthian and Marvin Friedlander
I think it would be more relevant to think about whether economic development activities could be best handled by a committee of a larger board, or whether those activities need to be the focus of a new organization with a narrow focus. One advantage to a nonprofit organization is that the bylaws can be written in a way that does not constrain leadership to be restricted to elected officials. Nonprofits and for-profit corporations have the flexibility to recruit and appoint board members with skills that are a good match with the mission of the organization.
Start with a set of sample by-laws and review the standard elements within those by-laws. This will help the organization begin to make decisions about what the organizations will look like:
• Preamble/purpose: What will be the purpose of the organization? While this may seem obvious to some, its clear that not everyone thinks of economic development in the same way. Some E.D. organizations take a broad view of the economy and take on responsibilities relating to activities such as tourism. Other E.D. groups focus their efforts entirely on manufacturing, commercial or residential development. It might be helpful to take a quick look at some of the broad economic development strategies to help determine what the organization wants to focus on (perhaps all of these strategies):
• Attract new basic employers (manufacturing, non-manufacturing, and non-local government offices). Efforts in this area tend to include the creation of promotional literature, attending trade shows. Participating in State promotional efforts and building infrastructure for new employers.
• Improving the efficiency of existing firms (the retention and expansion of existing firms). Strategies might include: Assisting with the procurement of job training funds, sponsoring business seminars, encouraging collaborations and industry clusters.
• Improving the ability to capture dollars. Strategies in this area would focus on retaining retirement income in the community, increasing the amount of purchases made locally, providing more services locally, etc.
• Encouraging the formation of new businesses (Encouraging and assisting entrepreneurs to form businesses, which respond to the changing needs of the community. The formation of investment capital, revolving loan funds, creation of incubators, building shell spec buildings, and providing management assistance might assist these efforts)
• Increasing aids received from broader government (A significant portion of a community's income is composed of payments from things like the University, vocational schools, state & federal government, social security, veterans benefits, agricultural land conservation assistance, military contracts and installations, and aids for such things like schools, parks, streets, etc.). Grant writing and sponsoring federal procurement seminars might be approaches in this area.
How will the proposed corporation interact with other economic development efforts within the region? In most instances, regional, or County development corporations have been formed to serve as a link between the numerous local economic development efforts and to provide some focus to those efforts. A regional or County economic development corporation is only as organized as its members. If the various communities expect to be equal partners in the organization, a lot of local community and economic development work will be required. There is of course an option of consolidating existing organizations into one E.D. entity.
• Membership. Membership could consist of representatives from for-profit corporations (i.e. other local economic development related organizations), civic groups, organizations, and local governments. Membership will likely be determined by who funds the activities of the organization and is typically a mix of community, county, and corporate funding. Many of the County corporations are funded with a mix of about 50% of funding from the counties with the larger communities picking up the other 50%. This approach typically relies on municipalities agreeing to fund their 50% membership fee (typically based on a per-capita basis) and then approaching the County for the remaining 50%.
• Board of Directors. Again, the board of directors is typically made up of representatives appointed by the organizations which provide funding for the organization. Consideration might be given to weighted representation based on the percentage of funding support. Consideration should also be given to advisory members (persons who would assist the organization but not have a vote on governance issues. These might include persons working for public agencies with a role in Economic development activities or local elected officials). Directors need to be committed to providing fiduciary and personnel oversight as well as a commitment to providing the financial resources needed by the organization. Effective development corporations typically have monthly meetings in addition to the meetings of the committee. These meetings can be used to report on the activities of the corporation as well as providing a forum for educational programs on a variety of economic development topics. Often, there is a perception that paid staff replaces the need for volunteer staff. The opposite, I think is true. Professional staff however, brings a set of skills and a commitment level that often is absent in an all volunteer organization.
• Committees. You need to give some consideration to whether or not you will allow non-directors to serve on committees (i.e. citizen members). Committees are typically appointed by the President with approval of the Board of Directors. Formal committees often include: Executive, finance, membership, nominating, personnel and special committees appointed as needed.
• Office. Consideration will need to be given to space related to any employees that you intend to hire. Location of both the employees and the office can often be a point of contention for regional organizations (i.e. perceived bias). If you are successful in finding an entity to donate office space or provide space at a reduced rate this could reduce budget implications and make the location decision a bit easier.
Other considerations relating to the formation of a county/regional economic development corporation:
- Potential employers often look at a County or region before they look at specific communities.
- Benefits from the location of a new employer extend beyond the resident community (Up to 70% of the employees in a plant will often live outside of the community of their employment).
- The formation of a corporation does not guarantee results. In Wisconsin , some have done very well and some have performed rather poorly. For others, performance has been tied to the director or changes in the board of directors.
- A regional corporation can promote cooperation between communities, competition, or a combination of both.
- The same conditions which create the need for economic development are the same conditions which make it difficult to fund new economic development activities. The creation of an economic development corporation requires the dedication and passion of a number of community leaders committed to the merits of the organization. Without the commitment and willingness to advocate for the creation of a new organization, it not likely that local elected officials would consider providing financial support during difficult economic times. Time needs to be spent on developing an effective case and strategy for presenting the concept of an economic development corporation.
- Industry and government (Department of commerce, Forward Wisconsin, utilities, etc.) have a difficult time dealing with numerous economic development organizations. One initial contact for a region, might stream-line the process and lead to more business contacts and better matches between business needs and business opportunities.
- The only way to reduce taxes is to cut local services; reduce the costs of providing services; or create new development to share the tax burden. Many forms of development however, create more service demands then they generate from additional tax base.
- An economic development corporation is only as organized as its members. If the various communities expect to be equal partners (and equal benefactors) in the organization, a lot of local community development work will be required.
- The success of many development corporations is often difficult to document. This is because the success of a project hinges on the cooperation between communities and other public agencies which play different roles in economic development (Department of commerce, Regional Planning commissions, Private Industry Council, Universities and Colleges, U.W. Extension, Forward Wisconsin, Utilities, other development corporations, etc.).
- Few communities have the financial resources to hire paid staff to promote economic development opportunities.
In December 2000, the Waukesha County Economic Development Corporation contracted for a study that examined the operation of other economic development corporations in the state. This study was based on interviews with 12 economic development professionals in the State of Wisconsin and offers very useful insights into how these corporations function. Click here for a copy of this study completed by Sturiale & Company and shared by Bill Mitchell of the Waukesha County EDC. See also a summary of a survey of Wisconsin County Economic Development Corporations conducted by Jim Goldsmith in 2001 (Microsoft Excel Worksheet). Most recently (12-2-2003), Al Anderson (UWEX) and Roger Nacker (WEDI), completed a Survey of Local Economic Development Organizations in Wisconsin. For a copy of that report, please click here. If you are considering a corporation which would have a regional focus beyond
For start-up corporations, it might be useful to try to construct both an operating budget (salaries, office space, telephone, supplies, postage, equipment, travel, etc.) and an activities budget that reflects the kind of activities that the organization intends to pursue (i.e. feasibility and market studies, advertising, promotional programs, trade shows, seminars, construction costs, etc.). It would be wise for a steering committee to construct a start-up budget before presenting any proposals to local units of government. A specific work plan that would then inform the actual budget would likely be constructed jointly by paid and volunteer staff. Or, you may already have a work plan that could help provide more detail for the proposed budget.
