Working It Out
What should CFOs do if they invest capital and hire new workers but then have to make cuts or close factories to survive? Tracey Hyatt Bosman, director of strategic consulting at commercial real-estate firm Grubb & Ellis, says clawback provisions are here to stay, but states will often renegotiate the terms of individual contracts if companies are struggling. “They’re not interested in hastening your demise,” Bosman says. “If you’re not going to meet your hiring or investment requirements, most economic-development organizations are willing to extend the deadlines and work with you to mitigate those effects.”
Bosman adds that “even when a company is presented with a seemingly inflexible contract, it may have room to negotiate.” During contract negotiations, companies agree to follow program guidelines, which set the percentage of a job target they must meet to get or keep incentive payments. States usually don’t lower the minimum targets, because they are set by legislation, but they might flex by incorporating sliding scales, so companies will receive more money if they hit 100% of their targets than if they hit the minimum percentage.
Or they might extend deadlines. North Carolina will give a company two extra years to meet its goals, for example. During that period the state will not claw back payments already made, but it will stop making new payments until the company is back on target. If the company terminates the agreement but remains in the state for the length of the contract, it will not owe a clawback. Mark Poncin says state officials promised not to pursue a clawback when Chris-Craft could not meet its job targets, unless the company left North Carolina. Once Poncin closed the factory, the state was still willing to work with him, agreeing to a zero-interest repayment plan over several years.
Still a Good Deal?
Some say the shift toward performance-based contracts and clawbacks is beneficial for both states and companies. Deputy Secretary of Commerce Dale Carroll says that North Carolina, which has signed 524 incentive contracts since 2001, has clawed back only 13. All but 2 of these clawbacks occurred after the recession began in 2008. “A performance-based incentive is an investment in job creation,” Carroll says. “When the business has to meet its milestones in terms of creating jobs and investing in equipment and machinery, it’s win-win because it’s investing in itself as a corporation.”
While the tide may be turning against upfront cash grants, Bosman says that grants will live on because states know that such programs are a particularly effective way to attract business, since the payments help companies offset initial costs.
Atlas Insight’s Mussio says companies should also keep in mind that, in the face of budget cuts, projects do not have to be ambitious to get a state’s attention — and funding. “For a CEO who is on the fence about a decision, help from the state may mean enough to swing the decision one way or another,” she says. Therefore, it’s worth exploring whether a state would be interested enough to “help offset some of your costs.”
Mussio and Bosman say finance chiefs should think both strategically and conservatively before they sign incentive contracts, particularly those that include clawbacks. Bosman says companies should “know what a reasonable target is in terms of investment and jobs, especially when there’s a clawback involved. This is not the time to be grandstanding or making your project appear to be better than it is.”
Ultimately, when it comes to clawbacks, “a company committed to realistic goals should have only moderate concern,” says Bosman. She adds that, for the most part, the benefits of incentive programs — even those with clawback provisions — continue to outweigh the risks.
Marielle Segarra is a staff writer at CFO.