Tags: Erie | Pennsylvania | Pa. | Koehler Brewery | wrong way | economic growth | developers

Erie, Pa., Shows Wrong Way to Shop for Economic Growth

By    |   Tuesday, 26 May 2015 05:43 PM

After sitting empty for decades, by 2001, Erie, Pennsylvania's historic Koehler Brewery was ready for a major facelift.

The vacant brewery complex sprawled over the better part of a city block, its smokestack still pointing skyward, aspirationally, years after many decorative elements had lost their luster or been looted.

That year, would-be developers pitched a $51 million redevelopment project that would restore the historic building and provide retail, commercial, and residential space. There might even be a theater and a hotel.

Local and state leaders became believers, and the Koehler Brewery Square project gathered millions in pledged money from city, county, state, and federal governments.

But the project was a dismal failure. After several years of going nowhere, in 2006 the once-bullish developers demolished the historic brewery.

It's now a parking lot for a car dealership.

But it wasn't just a building with history that was bulldozed when the project failed. Taxpayers took a hit, too.

The failed Koehler Brewery Square project shows what happens when government officials loaded with taxpayer money go shopping for solutions to the problem of economic growth.

Research indicates the benefits of government economic-development programs are murky at best — and that's when the projects don't utterly fail. Yet cities like Erie, suffering through decades of post-industrial decline, continue to throw cash at promises of growth, new jobs, and future investment.

The Brewery Square Project was to be funded in part by $5 million in low-interest loans from the state. Things went south before $4.5 million of that was actually handed out, Lyndsay Kensinger, director of communications for Pennsylvania's Department of Community & Economic Development (DCED), told Watchdog.org.

DCED is waiting on repayment of a half-million-dollar loan that must be repaid "in full, with interest, to DCED on or before March 14, 2020," Kensinger said.

All told, about $1.2 million in local, state, and federal money was wasted, according to the Erie Times-News. The developers also defaulted on a separate $825,000 bank loan.

The bank recouped $99,000 from the sale of the leveled property to the car dealership.

Nathan Benefield, vice president of policy analysis at the Commonwealth Foundation, told Watchdog.org most studies show that such economic-development spending "doesn't create net economic benefit — just shifts where [the development] is."

A 2014 report by the Commonwealth Foundation says Pennsylvania topped the list of such spending over a seven-year period, yet state job growth over a 10-year period wasn't compelling.

In fact, the 10 states that spent the least actually had a higher average job growth rate, at 4.12 percent, than the 10 biggest spenders, at 3.87.

Such results call into question the effectiveness of handing out piles of taxpayer money in the hunt for economic growth — especially when such policies implicitly mean the government is picking winners and losers. Or at least trying to.

State vs. State

It's not just publicly funded pipe dreams. Taxpayers can also lose out when companies feel there's money to be made by playing one state off another — and when they smell desperation. Take the case of Lord Corporation.

Lord Corporation was born in Erie 90 years ago, when a local patent lawyer couldn't find anyone to manufacture his inventions. So he did it himself. You've probably never heard of it because Lord is a privately owned company that makes such obscure-sounding things as sensing systems and elastomeric components for aerospace, automotive, and other industries.

Lord now spans the globe, with manufacturing facilities on multiple continents. But one is still in Erie. And it employs over 1,000 people.

RELATED: Private Investment Helps Small Businesses in Erie Take Off

In 2011, a Lord representative summoned the region's biggest economic-development leaders to deliver good and bad news: Lord needed to expand, he said. It wanted to stay, but it was willing to go — and two other states were offering quite a bit.

Katrina Smith, president and CEO of DevelopErie, told Watchdog.org each of those packages was worth about $9 million.

Lord even commissioned a study to show exactly how much its departure would cost the region's economy: 5 percent of the area's economy was linked to Lord, it said. (Lord declined to provide the study to Watchdog.org.)

Folks in Erie scrambled. They put together a massive "multilayered retention plan," as local journalist Kevin Flowers described it in a detailed 2012 article.

The package, using a variety of grants, loans and tax credit programs, would help Lord offload its two properties and move into a large facility in Summit Township, farther from downtown but still in Erie County.

Summit Township: A History

The Summit Township facility itself is a warning about the downside of government economic-development programs.

That story begins in 1995, when Gov. Tom Ridge approved a $2 million industrial development loan to Bush Industries to expand its furniture factory in Summit Township. In return, Bush committed to creating 300 jobs in three years.

A DCED spokesperson tells Watchdog.org Bush delivered. But within a decade, Bush moved those jobs abroad, using just a bit of the facility for shipping and logistics. Most of it sat unused.

When Lord made its demands on Erie, it's possible government officials saw an opportunity for a win-win: State and local taxpayers would kick in $4 million in tax credits, loans and grants.

DevelopErie, a local economic development agency, would clean up Lord's old manufacturing site. And Lord would stay where its highly trained workforce already lives.

And there's this, of course: Lord would move into the old Bush facility — turning one of the state's high-profile economic-development failures into something that might look like a win.

In December 2011, Lord accepted the deal, even though Pennsylvania's stated package of incentives fell $5 million short of what two other states were reportedly offering. Smith believes Lord stayed despite the math because the deal was able to "creatively leverage resources."

That creativity — the government-funded cleanup, the cost savings to Lord in not having to move away from its workforce — also closed that $5 million gap quite a bit. Taxpayers are picking up the tab for at least a hefty chunk of it.

The 2011 deal let Lord walk away from its manufacturing site. DevelopErie bought the property for $1 — and took on a cleanup job estimated at $5 million. DevelopErie has already secured $1.1 million in state grants and a $1.8 million state loan.

"Philosophically, I'm not a big fan of handouts," Smith said. "But you can't be in the game if you you're not willing to take a swing at it."

Benefield is skeptical of this sort of economic development. "It's kind of like negotiating with hostage-takers: The reason that we don't do it is because it encourages others to do it," he said. "You're incentivizing bad behavior."

Part 2 of 2 in the series Entrepreneurship and Erie's Evolution
Rachel Martin is an investigative reporter for Watchdog.org based in Pittsburgh. Contact her at rmartin@watchdog.org and follow her on Twitter @RMartinWatchdog.

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After sitting empty for decades, by 2001, Erie, Pennsylvania's historic Koehler Brewery was ready for a major facelift. That year, developers pitched a $51 million redevelopment project that would restore the building and provide retail, commercial, and residential space.
Erie, Pennsylvania, Pa., Koehler Brewery, wrong way, economic growth, developers
Tuesday, 26 May 2015 05:43 PM
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