Playskool closing may change the way cities woo firms

The toy factory doesn't need Samuel Sosa anymore. Last week, Playskool Inc. laid off Mr. Sosa, a painter and 12-year employee. ''This was my first job,'' says Santia Oliveras, standing outside the two-story brick factory on Chicago's West Side. She still has her job for the moment. But the factory is due to shut down permanently in February.

Ordinarily, the closing of this Chicago factory would be a sad, local story with a familiar ring. The toy operation is moving to Massachusetts. Some 700 jobs, mostly to women and minority workers, are being lost. But the Playskool move has become more than that.

In what may be a precedent-setting case, the city of Chicago has gone to court, charging that Playskool broke a promise to create new jobs.

''We've had our share of plant closings,'' says Robert Mier, commissioner of the Chicago's economic development department. ''But this one struck a community chord.''

The case, which has its share of twists, including an anonymous letter to the mayor that started the controversy, revolves around an industrial revenue bond. These bonds, known as IRBs, are popular lures used by state and local governments to keep existing businesses in the area and bring in new ones.

In the case of Playskool, the measure eventually failed. In 1980, the company received a $1 million IRB through the city. It used the money to buy new equipment. In return, Playskool said it would add 446 new jobs at the Chicago plant.

The bank-financed bond helped Playskool. It had a low interest rate. And because it passed through the city's hands, the money came tax-free. Unfortunately, the new jobs never materialized. In fact, the number of workers dwindled from 1,150 to 700.

Then, last January, the mayor's office received an anonymous letter, apparently from an employee, who said the plant would close. This was denied by Playskool's then president, who reportedly said the plant was profitable. But in September, Hasbro Industries Inc. bought Playskool's parent company, Milton Bradley Company. Twelve days later, the company announced the Chicago factory would close.

Talks between city and company officials were not fruitful. Company representatives said one thing and did another, Mr. Mier charges: ''There was that . . . feeling of a trust or understanding between the public and private sector, and that the trust had been breached.''

Reluctantly, the city sued, charging that Playskool just wanted the IRB money and had never intended to create new jobs. The suit got support, even from the neighborhood's nonprofit economic development group, which includes many business people.

''The plant was being phased down almost to the day the bond was let,'' charges James Lemonides, executive director of the group, called the Greater North Pulaski Development Corporation.

Company officials refute the accusation.

''If there never is an intention to build the business . . . I think that constitutes fraud,'' says Stephen Hassenfeld, chairman and chief executive of Hasbro Bradley Inc. But Milton Bradley did try to keep the plant afloat, he adds , putting in at least four different management teams and investing some $43 million in the plant since 1972.

''This is not a situation where this company is big and impersonal and doesn't care,'' Mr. Hassenfeld says. ''I was not then, nor am I now, comfortable with the people issues (involved).''

But the consolidation with an underused Massachusetts facility was needed, he adds. Charges that the company was saying one thing and doing another were caused by what Hassenfeld calls misunderstanding on the part of city officials.

The legal case, now in the Cook County circuit court, is a test of whether a company's job-growth predictions included in an industrial revenue bond are legally binding. More broadly, economic development experts say, the Playskool case is a lesson in limits.

Across the country, states and cities have been preoccupied with economic development. Success has hinged on a variety of long-term factors, many of which can't be controlled by short-term government programs, economists say.

The high-tech success story of North Carolina's Research Triangle, for example, ''sort of happened,'' says Nina Klarich, chief regional economist at the First National Bank of Chicago. ''There's little that the state could have done initially.''

''The first thing a state has to recognize is that it can't do everything,'' adds Phillip Phillips, assistant vice-president of the Fantus Company, a site-location consulting firm. While most of its clients actively pursue revenue bonds or other inducements to locate in a certain area, they don't base their decisions on them. ''The incentives are a little something extra.''

Nor are they always used properly, says Charles Bartsch, a legislative analyst with the National Council for Urban Economic Development.

Examples of IRBs used to build fast-food franchises and discount stores - which employ relatively few people and at low wages - have moved Congress to cut down the scope of IRBs. Many of these measures, such as limits to how much each state can allocate in IRBs, take full effect in January, he says.

Not all companies receiving IRBs have lived up to their job-creation promises , Mr. Bartsch adds. But most cities have been unable to include strict job-growth requirements into their IRBs. ''There are so few cities . . . that can afford these types of restrictions, because companies go somewhere else.''

The problem is the job forecasting itself, economic development experts say. Companies tend to be overly optimistic about new plants, and they can't accurately predict the economic conditions under which they will be operating. Bartsch says incentives such as IRBs should be tied not to the promise of new jobs, but to ''first source'' agreements like the ones used by Portland, Ore. These agreements give local job agencies the first opportunity to refer people for job openings.

The Playskool issue, however it is resolved, has caused a fair amount of soul-searching.

''We find ourselves wrestling with the whole question of what a company's responsibility to the society is,'' says Mr. Lemonides of the North Pulaski group. The group's businessmen ''are becoming more open about the problems they're having,'' he adds. ''Little by little, you're going to see more concern for the community.''