Economic Developers Working “Smarter” With Incentives
With slower economic growth and budget constraints still facing many states, economic development agencies are being more selective when awarding competitive incentives to expanding and relocating companies. As economic developers seek to preserve capital and protect their investments, companies should be aware of performance requirements and repayment provisions accompanying incentives.
Beth Mattson-Teig (Q1 / Winter 2013)
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A financing package from the state of Kentucky enabled Ford to retool its Louisville Assembly Plant, which reopened in 2012 and is currently producing the 2013 Ford Escape.
Ford Delivers ROI
Certainly, cities and states are facing stiff competition to attract and retain businesses today in a climate where there are so many choices both in the United States and internationally. Financial incentives can be a critical component that gives states and communities an edge in landing new business. At the same time, agencies are keenly focused on mitigating risks and protecting their investments.
One notable example of how states are leveraging incentives to generate a sizable return on investment is a package that Kentucky created for Ford to retain and grow jobs at the automakers two Louisville facilities. When the economic crisis hit in 2007, Ford was faced with deciding where to focus production and where to close plants.
Ford operates two manufacturing facilities in Louisville. Its Louisville Assembly Plant, in particular, was at risk; it was an aging facility that was producing the Ford Explorer, which was seeing declining demand. The state of Kentucky put together a financing package that enabled Ford to completely retool the plant. The new global platform assembly line can be adjusted to accommodate different car models. The plant, which reopened in 2012, is currently producing the 2013 Ford Escape.
“In essence, we took a plant that was at risk of being closed and we turned it into one of their most modern facilities that can now produce product for a global market and really secured that investment and Ford’s presence in Louisville for years to come,” says Erik Dunnigan, commissioner of the Department for Business Development at the Kentucky Cabinet for Economic Development. At the same time, Kentucky did not have to spend any money up front. The incentive package is structured so that Ford will recoup some of its investment by getting a share of future tax revenues as the company puts its people back to work in the new facility and continues to hire more individuals.
As part of that economic development effort, Ford plans to invest upward of $1.2 billion between its two facilities in Louisville and employ nearly 8,000 people. Ultimately, Ford will reclaim up to $240 million over a 10-year period. “A lot of times when people see those numbers, they think we are writing a check. That is not the case,” says Dunnigan. The reality is that the state does not start paying out until the employer has made the investment and ramped up and created jobs, he adds.
Penalties and Clawbacks
At the end of the day, incentives are offered for jobs. “States are looking for jobs any way that they can get them, and the incentive environment is more competitive than ever,” says Migdal. That being said, states and municipalities are under more pressure to be more transparent and show that these programs are helping to drive economic growth.
Most incentive agreements have very strong reporting requirements. There is usually an annual report and a closeout report that is filed related to every incentive agreement. The state of Illinois’ Economic Development for a Growing Economy (EDGE) program, for example, requires online reporting that makes companies receiving incentives accountable for the results. “Any company that receives an incentive has to file a report online. So, there is complete transparency on what is offered from the state,” says Migdal.
Agencies also are strengthening the penalties and payback provisions for those firms that don’t deliver on their promises. Essentially, if a company does not perform, they are going to have to pay back the incentive. Over the last five to six years, there has been an added focus on making sure that the repayment provisions are watertight, notes Lenio.
Slower economic growth, as well as business failures that have left communities holding the bag, has brought that issue of mitigating risk to the forefront. Every state and community is highly focused on creating long-term partnerships. Yet states and cities want a guarantee or safety net to know that they can go back and get their money just in case a company does not fulfill its promises.
“If a company does not hit its jobs or capital investment target, then — in every agreement that we work on — there is always going to be repayment scenarios,” says Lenio. “So very rarely is there a case where a company can cut the cord and be done, and not owe anything.”