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Paying for Potential Pays Off in Wichita Falls

Nov. 5, 2011
A creative approach to incentive financing is helping the city rebuild its manufacturing base.

The recession was particularly unkind to Wichita Falls, Texas. Beginning in December 2008, when building-materials manufacturer Saint-Gobain Corp. shuttered its local factory and eliminated 750 jobs, a slew of plant closures and layoffs hit the city so hard that its unemployment rate shot up 60%.

So when local economic development officials found out that Carrier Corp. wanted to sell off a local air-conditioner manufacturer that it had acquired a decade earlier -- Magic Aire -- they feared the worst.

"When our future is left at the hands of folks who don't live here and they're making decisions, sometimes those decisions are advantageous to us, but many times they're not," says Tim Chase, president and CEO of the Wichita Falls Chamber of Commerce and Industry, which handles economic development efforts for the city.

Chase: "We looked at every one of the incentives that we offered and we pushed them to the front of the timing chart."
"We know from history -- both past and recent -- that when corporate decisions are made outside of our community, we face the possibility of being in jeopardy."

The story of Magic Aire has a happy ending, though, thanks to a creative financing approach that the chamber devised during the dark days of the recession.

After Carrier announced its plans to divest Magic Aire in late 2009, the Magic Aire management team-backed by local investors-proposed a buyout. However, the group was about $1 million short.

Enter the Wichita Falls Chamber of Commerce and Industry, which bridged the financing gap by providing a 20-year, no-interest loan of $1 million to the group.

"And in each of those 20 years when it comes time to pay the loan back, if Magic Aire is still up and operating and they have the requisite number of jobs still in place, the community will waive that repayment," Chase explains.

With sufficient funding in place, the management team made a bid on Magic Aire, and Carrier ultimately accepted it. The sale was finalized in July 2010 -- keeping Magic Aire and its 100 employees in Wichita Falls, where the company was founded in 1932.

The chamber "was critical in supporting us and encouraging us and closing the gap that we had," says Magic Aire President and CEO Ron Duncan, who was part of the buyout group. "Otherwise, it would not have been possible for us to even tender an offer."

Upfront Financing

In the late 1990s, the people of Wichita Falls voted for a sales-tax increase -- what's known in Texas as a 4A sales tax -- to fund job-creation efforts. Up until the last few years, the chamber had been using the funds to reward companies for creating jobs or making capital investments in Wichita Falls, and had been disbursing the funds on a pay-for-performance basis -- typically six to 12 months after the companies delivered on what they promised.

When the recession hit, though, community leaders took a hard look at the best way to use the funds, which had grown to $26 million, Chase estimates. They came to the realization that companies place a higher value on incentives that produce results upfront-or within the first three years.

"So we looked at every one of the incentives that we offered and we pushed them to the front of the timing chart," Chase says.

The city decided to offer interest-free loans to tantalize companies to make capital investments or create jobs in Wichita Falls. As long as the companies deliver on what they promise, annual repayments on the loans -- which range from seven- to 20-year terms -- are discounted or waived altogether.

Over the past two years, the shift to a pay-for-potential incentive model has helped Wichita Falls secure economic development projects that promise to create or retain 2,300 jobs, Chase says.

That includes 125 jobs that are expected to be created by Excalibur Paint & Coatings, an environmentally friendly coating manufacturer that secured $1.5 million in funding from the city to grow its business.

Sweet Spot for Process Manufacturers

Chase believes the new financing tool, coupled with a redoubling of the chamber's marketing efforts, will help Wichita Falls build on its core strengths: cheap electricity, plentiful natural gas, an abundant water supply and "a workforce that understands a three-shift-a-day work environment."

Those assets should make Wichita Falls a sweet spot for large process manufacturers, particularly in the food and beverage sector, Chase says.

"We think that as more prepared foods are in our future as consumers, we're going to need new plants to manufacture those foods," Chase says. "Because we're sort of equidistant from the Dallas-Fort Worth area and the Oklahoma City area, we're close to the mouths of a lot of people."

Wichita Falls also hopes to build on its aerospace cluster -- Alcoa Howmet, with more than 1,000 workers, is the city's largest employer -- and capitalize on its proximity to the epicenter of the oil and gas industry as well as the Eagle Ford Shale.

The city's greatest asset, though, is its workforce, Magic Aire's Duncan asserts.

"We have very low turnover, very low absenteeism and very strong labor relations," Duncan says.

When the air-conditioning manufacturer needed to ramp up production during this past summer's record heat wave in Texas, Magic Aire was able to add "good people very quickly," Duncan notes.

"Part of it is the agrarian culture," Duncan says. "But I think the city has done a pretty good job over the years of bringing manufacturing jobs here, so it's not hard to find someone with at least a little bit of manufacturing experience."

Even though the city is chipping away at the losses of the recession, local officials aren't "taking any victory laps."

"We're just barely beginning to see a turnaround in terms of the employment," Chase says. "But it's very fragile, and we're certainly approaching this as we still need to be as aggressive as we can to provide good-paying jobs for our citizens."

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