• Strategy
  • CFO Magazine

States Show Their Claws

Companies face pressure to return economic-development incentives, but there is always room to negotiate.

In 2009, CFO Mark Poncin found himself in a situation many CFOs now face. Three years earlier, his company, boat-builder Chris-Craft Corp., struck a deal with North Carolina. If Chris-Craft created a certain number of jobs over the course of the year, the state would grant it more than $50,000. If the company reached its job target for each of 4 years, it would receive escalating annual payments for the length of a 10-year contract (which required that it stay in the state for that period).

But then the economy plummeted, and so did Chris-Craft’s sales. “We had to make a decision,” Poncin says. “Sales fell almost 80% overnight. We had to close that operation to survive.” In North Carolina, that meant Chris-Craft owed the government a check — a “clawback” of the money the state had given it.

Over the past decade, states have included and strengthened clawback provisions in their economic-development incentive contracts, and the recession has intensified their efforts to recoup funds from companies that have failed to meet various requirements. Some states have also shifted to longer-term, performance-based contracts (with clawback provisions) in lieu of upfront cash grants.

Yet, at the same time, many states are adding incentive programs to their budgets in an effort to revitalize local economies. “Generally, there is a pullback on incentives because of budgets,” says Kathy Mussio, managing partner at Atlas Insight, which helps companies with site selection and also works with them to obtain incentives. “But there are also states that recognize that they can’t do that, because they won’t be able to retain certain businesses or attract new ones.” As a result, companies need to study their options more carefully than ever.

Mapping the New Landscape

With 44 states projecting budget shortfalls this year, incentives are becoming stricter and more difficult to secure. States across the country are slashing discretionary deals and statutory incentives from their budgets. In Michigan, the governor has proposed removing most discretionary incentives and replacing them with a flat business tax rate. In California, the governor has defunded the state’s largest statutory tax-incentive program in his 2012 budget proposal. State legislatures may vote to restore some of these programs, but the trend is enough to make a CFO nervous.

“The amount of money available for these kinds of programs is going to be severely constricted,” says Andrew Wheat, research director at Texans for Public Justice, a policy-analysis group that believes state incentives should be curbed. “There is going to be less money around, and to the extent that more money is going to be made available in the future, there are going to be more checks and balances.”

After losing businesses they have subsidized, some states are looking to strengthen already-existing clawback provisions. For instance, the Massachusetts governor and state legislature are pushing for stricter, more consistent clawback rules as they watch Evergreen Solar and a major division of Fidelity Investments depart the state despite having received hefty incentives.

Discuss

Your email address will not be published. Required fields are marked *