Training Incentives - The Good, the Bad, and the Ugly

Investment in economic development has become increasingly more strategic as many states attempt to attract specific industries such as life sciences, advanced manufacturing, and information technology that create high-skill jobs commanding high wages. Talent is the key issue in attracting these types of jobs, making training incentives a requirement for states to stay competitive. States financially support the training of highly skilled employees in hopes that they will stay and make the state a better place in which to live, thereby also attracting other companies. For companies, training assistance mitigates some of the risk of work force turnover before recovering the training investment.

Since training increases the competitiveness of a work force, why, then, did only 56.6 percent of the respondents to Area Development's 2007 Corporate Survey rank training programs as "important" or "very important"? Respondents may have been more concerned with project incentives that impact the direct cost of the company's proposed project, like property tax abatement, infrastructure assistance, or corporate income tax credits. Also, respondents may have had an unpleasant introduction to working with state authorities and/or difficulties with government training or incentive programs.

The Good
Many states are beginning to recognize that training programs must address the needs of the employer as well as employees.

States use various ways to encourage training. Traditionally, there has been discretionary, statutory, and federal funding for training incentives, typically in the form of training grants. Training grants generally provide cash reimbursement to help cover the cost of external and internal training expenses. Some states are experimenting with new ways to finance training assistance through payroll levies and tax credits. A payroll-based levy allows companies to choose to either spend a specific percentage of their payroll on training or contribute that percentage to a state-initiated training fund. A training tax credit typically equals a percentage of an employer's approved training cost and can be used to offset the taxpayer's income tax liability. Programs are becoming more flexible and effective in mitigating the costs of training employees.

While it is good news that high skills/wage job classifications are getting training dollars from states, it is great news that progressive states are exploring ways to train low skills/ wage employees. It is well known that a high school diploma does not necessarily guarantee a high level of practical literacy. Non-native speakers of English may also require more training of a basic nature. States are better-positioned to offer direct training services with fewer requirements than the federal government. States can create work force development programs and provide companies with technology and training assistance through partnerships with community colleges and tech schools. These training providers can concentrate on specific industries, help companies develop job ladders, and support the training requirements of particular vocations. This also adds to the base of building a firm foundation of intellectual capital within the state.

Take, for example, the real case of a 500-employee financial services corporation based in the Southeast. After a competitive process, the company decided to locate a satellite operation in a different southeastern state in a relatively rural region. The company chose to purchase and renovate an older building. The community recognized that the company was restoring a dilapidated building and that residents in a declining area would have new job possibilities. The town council approved substantial tax abatement and provided a generous grant to the company for building improvements that did not have to be repaid if employment goals were achieved. The company invested about $5.5 million total for the building and equipment purchase.

The project had a tight timeline. Initially, training and work force requirements took a backseat to more important building, equipment, and associated abatements. However, the company planned to hire 150 workers during the first year of operation and over 100 more in the second year. As the company began gearing up for operations, the serious lack of a trained work force in the region became a major issue, especially since the company only had a few months to get its first employees hired and trained.

Discussions were held with the state project manager and the training program administrator. There was one two-page application listing out general information about the company and proposed project. Additional attachments were available for each program for which the company would make application. The company filed the application with tax credit and training program attachments, listing various high- and low-skilled job requirements.

The state, in turn, informed its educational partners about the project and was able to leverage established university relationships. In partnership with the local university, the state tested and screened potential employees, made employment recommendations, and formulated job-specific training programs. The result was that the company was able to hire the employees after they were completely trained for their jobs at no cost to the company. Such efforts have resulted in lower turnover and greater efficiency at the company, and afforded many employees the opportunity to excel in positions that would not have been attainable otherwise.

The Bad
Many states have overly complicated applications and processes for incentives that keep companies from gaining reimbursement for their training efforts.

Here's another scenario - company letters and calls to government officials and project managers have, for the most part, gone unheeded. The message is clear: the training programs and associated processes are too complicated to be cost-effective.

Regrettably, when the time comes to claim the incentives that were negotiated, companies often find the process more difficult than they had anticipated. A state may have three or more different training programs through unrelated governmental agencies, each requiring a different application. Applications are redundant, confusing, and request information not relevant to the project. Many applications are not available online or electronically - or if they are available, they are not formatted properly. Applications are often arranged for the benefit of the project managers and may use jargon that the company does not understand. To further complicate the issue, some states change applications often enough that project managers may have different versions of the same document.

The unfortunate truth is that state project managers are not going to complete applications or write training budgets for companies. They are busy people with many projects. However, this also means that state project managers have never had to complete an application for the very programs that they are "selling" to potential "clients," creating a serious disconnect. It takes a lot of time to complete one application, not to mention three or more. In addition, the programs themselves cover different training and have different requirements. Staff turnover and inconsistent policies aggravate the situation. Poor communication and slow approval processes drive many companies to simply give up.

Since life sciences projects are so sought after, it is a mystery as to why there was any trouble at all with a world-renowned medical device manufacturer's training reimbursement. The Midwest company was making a multimillion-dollar capital investment and adding more than 500 new jobs to a large existing work force. After negotiations with several possible states, the company decided to stay and grow at its headquarters location. It received incentives in excess of $20 million, with training incentives accounting for $1.4 million. However, the advantage was that the training incentives could be drawn as cash reimbursement within two years. The training assistance was divided among three discretionary programs.

These discretionary training program awards were granted on the basis of a competitive process. State officials reviewed the project details and needs, taking into account the legislative and regulatory requirements and criteria established for each program. The company was not aware that each program had a separate application and program manager. Each grant expired in two years and each grant had a different focus, rules, and reimbursement requirements. The company had naively thought that the training money would simply be deposited into a company account to be drawn when needed. The reality is that most programs are connected directly to capital investment and job-creation goals - not to mention the fact that, typically, grants are a 50 percent reimbursement. In order for the company to realize the $1.4 million reimbursement, it needed to spend and substantiate $2.8 million of approved training expenses.

After nearly two years of trying unsuccessfully to access funds from the three programs, the company decided to hire a consultant. It became clear that the applications were not completed with the correct information, and one program required board-approved amendments to fix the issues. It was also apparent the state was just as frustrated as the company, as state officials had been out to the company's facility to explain the programs at least seven times, yielding no results. The consultant secured extensions on the programs and accessed the entire sum of money within two months. The consultant was able to generate quick results due to familiarity with state programs and previous experience with the project managers. It became the consultant's task to make sure that the training was reimbursed; previously, the company did not have any dedicated personnel responsible for the grants.

Of note, the company did not reach predicted five-year employment goals. It was unable to collect all of the tax credits committed to the project, which made training money even more valuable. Companies often overlook nontraditional methods to reduce costs, but training incentives can make a real impact on company financials.

The Ugly
Companies that are "promised" incentives and aren't able to use them because of "failure to meet or comply" with program requirements feel misled.

Training incentives can be counterproductive when companies think they are going to receive training money, plan their training budget, spend the money, and then realize that they are not going to be reimbursed because of a failure to comply with program requirements.

For instance, a large car manufacturer in the West was promised a $150,000 grant to train employees on a new manufacturing certification. The company submitted an initial draft of an application for training. The state requested a few changes to the budget list since the approval board would probably not allow that particular training. If the company were to remove the training, then their budget expenditures with the grant would be cut by two thirds. After three months of discussion with the particular approval board, it became apparent that the training would not be approved on the grounds it was deemed unnecessary. None of the board members were specialists in car manufacturing.

An inflexible and slow process cost the company time and $150,000. This is a terrible result, especially after assurances of a quick process and the excitement of finalizing the project and distributing related press releases. This situation created a rocky partnership between the state and company at best. Considering that the other incentives were equally difficult to claim, the company has already expressed that it will not expand at its current location, but instead look to move to another state.

In Sum
In a perfect world, training enhances work force, thereby leading to an improved standard of living. There must be a positive link between training and profitability. Training incentives are an opportunity for the state and company to partner for mutually shared benefits. It is the company's responsibility to commit to realistic growth and wage numbers and reach those goals within a specifically stated amount of time. It is the state's responsibility to create well-designed programs with straightforward and flexible processes.

Companies are the best judges of the types of training required to make their businesses competitive; therefore, state training programs should be flexible enough to allow for changes in technology. Companies should have dedicated staff or consultants responsible for training incentive reimbursement. Training money that is set aside by state authorities that is not being used by companies does nothing to develop a state's intellectual capital.