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Compliance: Where Incentives Are Won or Lost

Proper incentives compliance reporting will help a company to ensure that it receives the full value of the incentives it was offered in the application and negotiations process.

Q3 2015
Rivalries between state governments to attract new jobs and capital investment continue at a steady pace, and discretionary incentives remain a primary tool used by state and local governments to attract business investment. However, many states are under increased scrutiny regarding their handling of the discretionary incentives process; as a result, there have been increasing calls for greater government transparency and consistency in the handling of incentives programs.

This assessment extends through the application, approval, and agreement phases, as well as through reviews of compliance reporting, internal upward reporting to senior government officials, and the clawback of incentives that are in default. This scrutiny is leading to a trend of more stringent procedures of state and local incentives programs, requiring incentive recipients to put forth a greater effort to monitor their progress to meet incentives commitments and to satisfy compliance requirements.
According to Oklahoma Watch, the Oklahoma City Air Logistics Complex is the largest recipient
of Quality Jobs Program payouts at $37 million. Shown here is the F-108 engine maintenance for
KC-135 Stratotankers
According to Oklahoma Watch, the Oklahoma City Air Logistics Complex is the largest recipient of Quality Jobs Program payouts at $37 million. Shown here is the F-108 engine maintenance for KC-135 Stratotankers
An Example
As reported in The Oklahoman, Oklahoma Governor Mary Fallin signed legislation in April 2015 that requires government evaluation of incentives effectiveness at least once every four years, and it requires future business tax incentives projects to have measurable goals. Oklahoma believes that these measures will evaluate the performance of incentives more accurately and will increase the likelihood of success for Oklahoma’s investment in incentives.

According to a report by Oklahoma Watch,2 only 25 percent of companies approved for the Oklahoma Quality Jobs Program (QJP) completed their incentive compliance. The QJP is a payment of up to 5 percent of payroll for up to 10 years. An applicant must meet either the county or state average wage, whichever is lower, and offer basic healthcare to employees. The applicant must also meet a $2.5 million threshold of new payroll within three years. The compliance reporting requires quarterly reports of qualifying employees and the amount of payroll paid. The majority of approved companies that did not receive the QJP either had their contracts terminated or voluntarily withdrew from the program.

Many factors may contribute to a company’s decision to discontinue their participation in an incentive program. Non-performance during the compliance period is certainly one of the reasons why so many companies fail to receive the benefit. Companies pursuing and accepting incentives program benefits must thoroughly understand the incentives commitments and diligently manage their responsibilities and potential liabilities under incentive programs to ensure they receive the full benefit.

Clearly Define the Project
Plato once said, “The beginning is the most important part of the work.” While many factors play into decisions that impact incentive commitments, a clearly defined project profile at the onset of a project lays the foundation for not only developing the negotiation strategy, but also augmenting the potential to strategically maximize the incentive value over the incentives term with a plan and process for reaching an achievable and successful end result.

Many factors may contribute to a company’s decision to discontinue their participation in an incentive program. Non-performance during the compliance period is certainly one of the reasons why so many companies fail to receive the benefit. Incentives compliance validates incentives commitments agreed upon during the negotiation process. Ideally, a detailed project profile that accurately defines the specific project characteristics — such as the locations under consideration, capital investment breakdown of asset investments and costs, number of existing full-time employees associated with the project, projections of new full-time jobs to be created as a result of the project, wages of employees, and any other unique project-related facts — will lead to project results that align with earlier profile details.

Incentives compliance periods may total 10 to 15 years. For instance, New Jersey’s Grow New Jersey program is a maximum 10-year incentive with a 15-year compliance period. As a result, several different report preparers may participate in annual compliance reporting over the full compliance period, so the project profile becomes a resource for each preparer to understand the company’s project details and expectations at the time the incentives were secured.

Know the Requirements
With the project fully defined, yet prior to applying for incentives and entering into incentives agreements with state or local government agencies that bind a company to incentives commitments, companies would benefit by conducting a detailed review of the requirements surrounding the incentives programs. This includes eligibility requirements, program limitations, and reporting requirements to ensure their project profile aligns with incentives qualifications and commitments. The term of the incentives commitment is another important consideration. Will the company’s use of the facility and incentives commitments outlast the compliance period?

In addition, it is important to develop a project file that includes all project-related documents, including:
  • Capital investment budgets;
  • Employee detail;
  • Training budgets;
  • Incentives research including statutory provisions;
  • Incentives program guidelines, incentives offer letters, and submitted applications;
  • Application support detail, approval letter(s) and incentives agreements/contracts; and
  • Real estate lease or sale contract.
All of these documents become reference material during future compliance reporting.

Create a Timeline for Reporting
A significant component of a compliance plan is a calendar of incentives reporting due dates. The calendar will hold the due dates for each incentives report submission and allow the administrator to create a timeline for data collection and review, identify and rectify any discrepancies, complete the report, and allow time for senior officers to review and certify the findings. Any timing misunderstandings in the process of data collection and dissemination may jeopardize meeting the compliance reporting deadlines.

With a timeline in place, the focus should turn to the collection of project-related data that satisfies the requirements for the compliance report. Information requests should be in the same format as governing agency formats to minimize data manipulation and potential for errors. Identify in advance the company person managing the data, and build into the calendar the time needed to collect the requested data.

Unforeseen Circumstances
What happens when the data does not meet the commitment? Assessing risks tied to an incentives commitment is an important consideration for any company. Unforeseen circumstances may arise over time that impact the ability to satisfy an incentives commitment, including:
  • Merger or acquisition;
  • Sale of a division or subsidiary;
  • Change in C-class leadership;
  • Operational change;
  • Re-organization;
  • Economic conditions;
  • Natural or man-made disaster; and
  • Inaccurate project data at application
These situations impact job counts or capital investment projections and lead to non-compliance of incentives commitments. Companies may control their incentives destiny better by visiting project-related data tied to incentives commitments periodically throughout each year to ensure the company is on-track with its incentives commitments, and especially when any of the events above are planned.

Government agencies administering incentives programs have greater flexibility in handling some compliance matters versus others. An open, communicative approach with government officials is the best practice when project data indicates a shortfall in satisfying a commitment. Solutions for non-compliance may include a pause in the incentives payments until compliance is restored, a re-grading of the incentives to a lower amount, or a partial repayment of the incentives received.

Understand the Use of Personal Data and Privacy Laws
Compliance reporting typically includes the submission of personal identifiable information (PII) such as employee social security numbers, partial or full employee home addresses, and employee salary information. Incentives recipients should ensure privacy laws and company confidentiality policies and safeguards to protect confidential company information throughout every step of the compliance process. In addition, companies should consider the authority of each incentives compliance team member to view sensitive PII prior to beginning the compliance report.

All parties involved in compliance reporting should agree to procedures for use of PII in reporting, including whether the retention of the data is planned, and by whom, or if the return or destruction of PII is necessary. These procedures should apply not only to the internal compliance team, but also to the government agency administering the incentives program.

Companies must realize that the heavy workload of incentives is often not during the front-end negotiation and application approval process. Likewise, an incentives offer from a state or local government, or even an incentives approval from a government body, does not secure the realization of the full incentives value. Proper incentives compliance reporting is as important, and usually is more important, to securing incentives. Sound planning and process implementation may be the difference between realizing the full value of an incentives program and potentially falling out of compliance and not receiving the benefit.
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