Goodbye, Sampson, Inc.? 
Jeffrey A. Raffel and Kevin C. McGonegal 

Editor's introduction 
Economic development and financial administration are intrinsically related. The pace and kind of economic development affects local government revenues and, in turn, imposes demands for additional government expenditures to pay for new and expanded local services. The relationship is even more serious, however, in communities where the local economy is declining or stagnating. Such communities frequently find it necessary to offer financial incentives-tax breaks or financial support-to attract or, as in this case, retain business firms. 
This case examines the linkage between economic development and local government finance, demonstrating the kinds of policy and management decisions that must be made as a result of this linkage. Such decisions cover a broad range of concerns-setting policy precedents, managing intergovernmental and public-private relations, and synthesizing opposing points of view within the management staff itself. 
The case also portrays the critical linkage between economic development policies and local neighborhoods. In this case, the proposed development would help revitalize the city's central business district, but at the same time it would have an impact on adjacent residential neighborhoods with their aging housing stock and diverse racial and socioeconomic makeup. Along with economic development, then, are classic problems of city social and land use planning. 
Redevelopment, whether of downtown business districts or of aging residential neighborhoods, has been a vital issue for local governments for more than a half century. The threatened departure of Sampson, Inc., in this case threatens a severe loss of jobs; its retention could be the foundation for downtown redevelopment. But at what cost should the city intervene? Should the costs to affected neighborhoods and displaced residents be considered along with costs to the city treasury? 
Economic development rarely proceeds without complex intergovernmental interaction, and this case is no exception. It demonstrates not only the role of different governments, but also the different objectives being pursued by each. Distinct, but also related, is the necessary effort to involve the private business sector in the total development effort. 
Most important, however, the case poses the central policy issue of economic development: What is the role of government, and what, if any, incentives should the public sector provide to the private sector in order to promote the overall welfare of the community? 

Goodbye, Sampson, Inc.? 213 
Case 18 
Goodbye, Sampson, Inc.? 
Background 
The city of Metropolis faced a major economic development crisis. Its second largest employer, Sampson, Inc., was considering a move to the suburbs, and city officials had to decide what actions they could and should take to persuade Sampson to stay. 
Metropolis, a city of approximately 80,000 people, is the state's largest city and is Tower County's urban core. Metropolis' 15.77 square miles of land is bounded on the east by a river and on the remaining boundaries by suburban areas. The city's location on the Eastern Seaboard makes it an important link in the Boston-to-Washington megalopolis; approximately 30 percent of the U.S. population is within a 350-mile radius of the city. 
Metropolis is particularly significant to the state's economy, as it is an important center for banking, health and social services, communication, cultural and historical facilities, and education. The city has a thirteen-member elected city council and a mayor elected at large every four years at the same time as the national presidential election. 
At the time this case unfolds, Metropolis had been experiencing problems similar to those of other cities in the Northeast in the 1960s and 1970s-a declining population and tax base, a loss of business and industry, obsolescence of its manufacturing facilities, housing stock, and public facilities, and a concentration of elderly, poor, and disadvantaged populations within the city. The number of manufacturing jobs was declining, while managerial, professional, and clerical jobs held by suburban commuters increased as a proportion of total city jobs. No new nonmanufacturing firms had been established since 1950, and the twelve major nonmanufacturing firms in the city had shown negligible growth in that period. Unemployment in Metropolis was significantly higher than in the surrounding county and in the rest of the state. 
Metropolis' central business district (CBD), in particular, was aging and economically threatened. The CBD was located between two rivers, the picturesque Lamar River on the north and the Lomax River on the south. Residential neighborhoods bordered the district on its east and west sides. The district sorely needed to retain the level of business activity in the city, not only to retain and increase its own employment levels but also to provide jobs for the residents of surrounding neighborhoods and to encourage redevelopment efforts in the area. 
Sampson, Inc., which began life as a divested part of the well-known and huge Clemson Chemical Company, had spent its entire existence in the shadow of the larger company. A successful Fortune 500 firm in its own right, Sampson was a diversified chemical company that developed and manufactured plastics, synthetic fibers, textiles, agricultural chemicals, detergents, and protective coatings. Originally named the Sampson Firepowder Company, it had expanded greatly from its beginnings as a manufacturer of explosives, but it still maintained a significant presence in that field with products for mining, quarrying, and even ballistic missiles. 
When Harold Hammer, an experienced and dynamic executive, took the reins at Sampson as president and chief executive officer, he was determined to establish a stronger, separate corporate identity for the company. Sampson, which was leasing 360,000 square feet of office space in Metropolis. needed 600,000 square feet for a new corporate headquarters. Its 1.350 employees at the downtown location made it the second-largest employer in the city. 
214 Cases in Decision Making 

after Clemson. It was considering various relocation options, including a suburban location that was already home to its research center and its country club. 
Hammer was particularly upset with the state's personal income tax structure, which taxed top income levels at 20 percent. His feeling, and that of other business leaders, was that this high rate of taxation kept other corporations out of the state, thus hurting the state's image as a business center. He went so far as to threaten to move the corporate headquarters out of state, and in fact was talking to a city in California about relocating there. Excerpts from a newspaper article written the day after President Hammer's speech to the Metropolis Rotary Club describe Hammer's position (see Exhibit 1). 
Whether or not he would have followed through on his threats, Hammer certainly got the attention of the governor and the general assembly. Work was begun on a state income tax cut, which subsequently passed, dropping the top rate from 20 percent to 14 percent. The governor also realized that the economic 

Exhibit 1 Excerpts from newspaper article Sampson, Inc., an important element in the state's economy since its founding in 1913, could well sever the historic relationship to find a better business climate elsewhere, its chief executive made clear in a carefully worded speech yesterday. 
Though avoiding any explicit threat, President and Chief Executive Harold H. Hammer left no doubt that the financially struggling chemical company was giving real thought to uprooting its highly paid 1,350 employees currently headquartered in downtown Metropolis. 
The state's business leaders have for some time been grumbling that the state's policies, especially the personal income tax, hurt economic development, but this week could go down as the time they went public. 
In a speech to the Rotary Club, Hammer centered his attack on the top rate of 20 percent in the state's personal income tax structure. 
Sprinkling the talk with general references to business moves, Hammer rammed home his point by saying Sampson would be watching the state legislature's tax action and noting that the headquarters occupies leased space. 
"There is a greater tendency on the part of business today to maintain flexibility. 

Many companies rent or lease office space instead of building on their own. This, of course, gives greater flexibility. Sampson, for example, leases its space in the Sampson Tower. ... " 
The lease expires a year from December for the offices occupied by 1 ,350 employees in the Sampson Tower building. "No new lease has been signed," a spokesman said, adding, "It's not even time to sign one." 
After the speech, a reporter asked Hammer whether he was threatening to leave. "We have no plan to pullout of the state at this time," he replied. "I will not voice threats. We will do what business prudence tells us to do." 
Describing the state as a perfect geographic location that was being shunned by business, Hammer said state government was making little effort to solve basic revenue problems. 
Apparently agreeing were the more 
than two hundred corporate executives, lawyers, surgeons, insurance representatives, and others who jammed the Rotary meeting. Hearty applause continued for twenty-five seconds at the end, and several came to their feet clapping. 
Sampson will study the revenue committee's recommendations for tax legislation, Hammer said. 

Goodbye, Sampson, Inc.? 215 

health of the state's major city was crucial to the overall economic health of the state. Metropolis was the "core of the apple," and it was in the state's best interest for Metropolis to retain its second-largest employer and stay as self sufficient as possible. 
Following the tax cut, Hammer announced that Sampson intended to remain in the state. But this decision by no means meant that Sampson would remain in the city. 
Another article in the Metropolis News reported Hammer's decision to move the company from the Sampson Tower building into a new leased complex, but Hammer said no decision had been made as to whether it would be in Metropolis. 
"I think one of the reasons we're not talking about building ourselves a building, but rather about leasing, is because we're a little skeptical about the long range," said Hammer. In the same press conference he went on to point out that the corporate office of Sampson, Inc., represented an annual contribution to Metropolis of about $100 million. He also dropped broad hints that Sampson was being courted by industrial development officials from other states but denied that he was seriously considering an out-of-state move. 
The press report went on to say that city and state officials, in an effort to retain Sampson, had hired two consultants to help them make proposals for a Sampson headquarters. They talked to Sampson about several "concepts" in the $70 million price range with government-subsidized financing. Photographs of the proposed building at three different sites had one thing in common: a forty-two-story cyclinder that towered over the Clemson Chemical Company's complex. 
The case 
In its search for a new headquarters site, Sampson soon limited its options to two. One was the suburban land already owned by the corporation. The other was a city site made up of two parcels on the northern edge of the downtown area along the Lamar River; one parcel was a vacant lot owned by the Clemson Chemical Company, and the other was occupied by an old vocational/technical school building. The company offered to remain in Metropolis if the costs of the city site were made comparable to those of the suburban location. 
Immediately adjacent to the city site, and to the west, was a residential neighborhood called Midtown Lamar, which had been undergoing a transition with fairly extensive housing renovations and rehabilitation. It was now populated with young black and white professionals and lower-income black renters and homeowners (Table 1). Only 3.9 percent of the families in this neighborhood were below poverty level, and the median income equaled the mean for the entire city. A strong neighborhood organization attempted to maintain the racial and economic mix. 
To the east of the site was Eastside, a predominantly black, lower-income neighborhood composed of a large number of long-term homeowners and some elderly renters. According to the U.S. census, the median income of Eastside families was one-third less than that of the whole city, and about 30 percent of the families had an income below the poverty level. The area had experienced a 41 percent decline in population in the decade between the last two Census counts; urban renewal was the cause of about half of this figure. 
The residents of these two areas expressed a number of concerns to city officials regarding the possibility of a major office structure in their midst. Construction problems for the neighborhoods, such as dirt and construction debris. were shortterm issues; of more significance were the longer-term issues such as traffic congestion, design considerations, and displacement. Related concerns included the high unemployment rate among Eastside residents and the deterioration of certain parts of the neighborhoods. 

216 Cases in Decision Making 

Table 1 Demographic data. 

Population (total) White 
Black 
Percent black 
% 16-21 years, not high school graduates, not enrolled in school Persons 25 years & over 
Median school yrs completed % high school graduates Male, 16 years & over 
In labor force 
Female, 16 years & over In labor force 
Income below poverty level 
Families (% of all families) Persons (% of all persons) Households (% of all households) 
Source: us Census of Population and Housing 

City 
80,386 44,901 35,072 
43.6 
20.7 46,204 109 39.7 25,317 18,462 32,123 14,549 
3,084 (16.0) 16,991 (214) 5,245 (210) 

Census tract 			
Eastside 	Mid-Town Lamar 	
2,945 	787 		
94 	266 		
3,844 	511 		
96.6 	64.9 		
21.0 	118 		
1,816 	444 		
8.8 	11.2 		
20.9 	43.2 		
1,046 	265 		
626 	224 		
1,176 	296 		
688 	187 		
201 (29.7) 	6 	(3.9) 	
1,111 (379) 	59 	(81) 	
270 (36.5) 	43 (15.0) 	

The cost differential between the urban and suburban sites was substantial. 
First, the cost of the city parcel owned by Clemson was $3.9 million. Since Sampson owned the land outside the city, there would be no out-of-pocket expense for purchasing land for a suburban headquarters. Of course, choosing the suburban site would mean a lost opportunity for other development on that site. Second, since the downtown location would be a high-rise structure rather than a low-rise office park structure, the construction costs would be $9.7 million more in the city. Third, a parking garage would be needed in the city, adding $12.7 million to the project cost. Fourth, costs that were proportional to the total project costs, such as contingencies, architects' and engineers' fees, transfer taxes, and financing expenses, all increased roughly in proportion to the overall budget. All in all, the cost of the city location was higher by $32.3 million, or 42 percent, than the cost of the suburban location (Table 2). 

Table 2 	Proposed 					
Sampson headquarters 	Cost component 	Urban 	Suburban 	Differential 	
building: Cost differential 	Building 	$ 45,967,000 	$36,256,000 	$ 9,711,000 	
between urban and 					
suburban sites. 	Fixed equipment 	1,552,000 	1,552,000 		
	Site development 	1,694,000 	2,971,000 	-1,277,000 	
		Parking landscaping 	1,200,000 		1,200,000 	
		Parking garage 	12,700,000 		12,700,000 	
		Arch & eng fees 	3,443,000 	2,447,000 	996,000 	
		Construction! contractor 	3,000,000 	3,000,000 		
		Owners' admin. expenses 	976,000 	930,000 	46,000 	
		Land 	3,878,000 		3,878,000 	
		Furnishing 	10,750,000 	10,750,000 		
		Interior designer fee 	850,000 	850,000 		
		Contingency 	6,352,000 	4,700,000 	1,652,000 	
		Legal fees 	72,500 	65,800 	6,700 	
		Closing costs 	10,000 	10,000 		
		Title insurance 	63,000 	47,500 	15,500 	
		Transfer tax 	2,100,000 	1,054,000 	1,046,000 	
		Construction financing 	14,201,000 	12,045,000 	2,156,000 	
		Application fee 	160,000 		160,000 	
		Total 	$108,968,500 	$76,678,300 	$32,290,200 	

Goodbye, Sampson, Inc.? 217 

Metropolis had several models to draw on. A few economic development projects had been undertaken in the city, though not really as part of an overall development plan. Most notable among these were a pedestrian shopping mall on Main Street and a hotel constructed over a downtown parking garage, a project that had been financed in part by a federal grant. This grant was part of a federal program to encourage urban development projects by making low interest loans available to businesses locating in economically depressed areas. The process was competitive among cities, and the cities receiving the grants could, in turn, loan the funds to the project businesses. The businesses would repay the loans to the city over a period of time. Other federal grants had been used by the city to aid development in recent years, including grants for community development1 public works, urban parks, and job-training programs. 
City administrators estimated that approximately $10 to $20 million could be available through various federal programs to help close the gap between the costs of a city site and the costs of a suburban site for Sampson. A primary goal of the federal government was to create long-term economic growth opportunities for distressed cities like Metropolis; therefore, the government would evaluate any proposal on the extent to which it involved a partnership with the private sector that would increase investment in the city and lead to new long term employment opportunities, especially for the city's unemployed minorities. To secure the investment from Sampson, and to reduce the city-suburban gap, the city realized that it would need to provide incentives or concessions. These might be in the form of a property tax abatement (a new Sampson headquarters was expected to increase Sampson's property taxes by $360,000 per year), a waiver of the property transfer tax, or other actions that might lower the cost of the city site. 
Modest state funds, perhaps as much as $5 million, also could be available for this project. The state's interest, however, had been limited ever since Hammer announced that Sampson was staying in the state. 
Thus, outside funds could be available to the city, but city officials would have to determine what they would be willing to "pay" for them and under what conditions. Furthermore, officials would have to decide how to make the development package as attractive as possible to these funding sources. 
The loss of the Sampson corporation would be a severe blow to Metropolis first, because the company was the second-largest employer in the city. The company's 1,350 employees represented over $92,000 in "head-tax" payments (levied on employers according to number of employees over a minimum of five) and $300,000 in wage tax payments (levied on all employees living or working in the city at 1 percent of annual wages). The city depended a great deal on this wage or "municipal user tax," receiving about 30 percent of its $30 million budget from it. Second, a ripple effect on the city economy would be felt by the numerous services employed by the company, such as copying firms, travel agencies, and janitorial services. Third, Sampson employees had a significant impact on retail sales in the central business district. The city planning department estimated that each Sampson employee spent an average of $830 per year downtown, totaling about $1.1 million annually. 

The decision problem 

David Dunworthy, chief administrative officer of Metropolis and the top aide to Mayor William Williams, was charged with recommending a strategy to meet the Sampson threat. The members of the mayor's administrative cabinet who were involved in this decision had different views and concerns regarding the situation. 
The budget director was concerned with the price that the city might have to pay to keep Sampson in town. Trying to reduce the cost of the city site might 

218 Cases in Decision Making 
set a precedent for which the city would pay dearly in later years when other corporations tried to gain similar advantages. He did not feel that the city was in a financial position to make tax concessions to Sampson to make up for the added cost to Sampson of remaining in the city. Yet, the budget director reasoned, the city must also be concerned about the loss of taxes and revenue that the flight of Sampson would inflict on the city tax base. He thought that Hammer might well be bluffing, and at times he advocated calling his bluff. 
The commerce director believed that it was imperative to keep Sampson in the city. If Metropolis' number two employer left town, who knew what firm might be next? And word would get around that Metropolis couldn't hold its own corporations. He therefore advocated doing whatever was necessary to keep Sampson in the city. 
The planning director viewed the situation as an opportunity to develop the downtown area more rationally. However, he was concerned about the objections of the neighborhoods adjacent to the site; he did not want an antidevelopment mood to dominate the city's political life for the next five years. He estimated that ten families and businesses would need to be relocated if the headquarters were built on the vocational school site. 
The mayor was adamantly against "losing Sampson," but he was also concerned about losing the goodwill of the adjacent neighborhoods. 
The city of Metropolis, therefore, had a classic dilemma: it could not afford to lose Sampson, and it could not afford to keep Sampson. 
City officials determined that if Sampson left for the suburbs, the city would incur the following costs: 
Loss of city wage taxes estimated at $300,000 and head taxes of $92,000 Loss of retail sales in the CBD totaling about $1.1 million annually 
Loss, not easily measured, of the secondary economic benefits of services employed by the company and the associated wage and head taxes 
Loss of economic development "goodwill" and reputation. 
Given a total city budget of $30 million and a declining tax and economic base, the loss of more than $400,000 in taxes loomed large. 
Yet the city of Metropolis could not afford, by itself, to reduce the city’s urban gap of $32 million to induce Sampson, Inc., to stay. Even if the city's revenue losses were estimated at $1 million per year, the current value of this loss would represent only about $9.1 million at a 10 percent discount rate over twenty-five years. The city could not justify spending much more to keep Sampson. Nor was it clear that Metropolis could raise the money to do this, in any case. 
In formulating his recommendation, Dunworthy had several decisions to make. 
First, should the city take direct action to further influence Sampson to stay in Metropolis? 
Second, if the city took direct action, what strategy should be used, and what conditions should be negotiated? 
Third, what actions could the city take to close the cost differential between the city site and the suburban site? What amount would be enough to convince Sampson to stay? And what cost elements (listed in Table 2) were the most appropriate to alter? 
Fourth, what effect would the new Sampson building have on the surrounding neighborhood, and what steps could be taken to mitigate any negative impacts? 

James M. Banovetz, ed. Managing Local Government: Cases in Decision Making (Washington, DC: ICMA 1990)