Incentives….. Is it Worth Debating?
In the community, I live in of 90,000 people; we have elected a 35 year old, state representative who has introduced a bill in the New Mexico legislature to require clawbacks. The situation came to light after a major solar tube and panel manufacturer was granted $12,000,000 by the former Governor. Without getting into all the details, there has been a lot of finger pointing, yet no one was at the table when the Governor was attempting to out position Oregon and Texas on the project. Nevertheless, the legislation will probably get passed. On the other hand, more states are beginning to require clawbacks and site selectors like me are beginning to tell our clients, they may be necessary to negotiate the type of incentive structure you need to absorb the losses that are anticipated with starting up a new plant or call center.
My site selection practice and those of the firms that I affiliate with have mostly focused on optimizing workforce. Several years ago when I was with Paragon Decision Resources, we had a substantial Fortune 500 client. The client used our firm to handle their employee relocation outsourcing. As part of a future long term group move, the client asked us to analyze the best location for their new divisional headquarters for a medical products manufacturing and technology support facility. We were asked to concentrate mostly on the skills of the workforce in the two communities in which they had existing plants, and one was going to be the home of their new divisional headquarters.
The process included spending about 3 full days of on the ground interviews with employers and schools in both areas, as well as the workforce system administrators. One community was in the South, and the other was in the Northeast (but it could include several towns). The community in the South and had a community college and a school system that were in lock step with one another and an outstanding high school graduation rate. The schools, the college and the workforce system (Job Service in those days) were all using Work Keys at an early age. The only drawback was that the nearest four year engineering school was 30-40 minutes away. The wages and benefits in the Southern community were less than the Northeastern community and the commutes to work were easier.
The Northeastern communities were spread out. There were several school districts, several community colleges and many large employers that dominated the market. A fear that we had was that they would have to keep up the wage high enough to be able to attract good workers with a variety of skills. In terms of attracting top talent from the universities, they would have to raise their salary levels.
We were also asked to analyze the incentives but not calculate them. Both packages of incentives were good but the Northeastern area pushed their incentives harder than the Southern community. The Northeastern state offered an enterprise zone program that had substantial tax credits and could assist somewhat with startup cash flow.
Our team had been hired by the Senior Vice President of Human Resources so we had no direct interaction with the other members of the executive team. On the day, we were to present our findings, I can remember the New Jersey heat in June at the Fortune 500 headquarters. We didn’t have much of a wait and enter a mini board room and most of their executive team was waiting for us. Their projector was already set up so we went right in to our presentation. We recommended the Southern community based on their workforce preparedness and that this location would be of the most benefit to the company in the long run.
This is when I got a lesson in on the pressure placed on publically company traded executives. The most out-spoken of the five executives in the room was the Chief Financial Officer, followed by the Vice President of Engineering and Technology. They very much understood our analysis and appreciated it and knew we were hired mostly to analyze workforce. However, they needed a further analysis on the incentives and how soon they could get some cash into the project without absorbing anymore debt. Their focus was very much on the stockholders and how this could be perceived by the general public. They very much liked the enterprise zone approach and that this may have a positive public relations impact in a Northeastern area.
Our argument about the long term workforce development in the Southern community wasn’t holding up. When we started to discuss the salaries needed to attract the talent needed, the VP of Engineering was adamant that the company needed to be able to compete for the “best and the brightest”, and that they could with the number of four year engineering universities in the area.
It was no problem to go back to Chicago, where our office was and calculate the incentives, which they would negotiate themselves. We calculated a $5-$7 million dollar savings in cash after completion of a 125,000 square foot combination office and technology center in the Northeast enterprise zone. They needed to find their own site inside one of the zones. Ironically, $7 million was not a great deal of money for the company, but the perception of getting front end cash and credits was important to them.
Within a year, they closed their Southern facility and opened a new facility inside an enterprise where they bought an existing building and expanded it to fit their technology needs.
For years, I have heard thought leaders and other consultants in economic development complain about site selectors and their methodology. Very often, these thought leaders and others have never been in those offices in New Jersey or wherever, hearing from the CFO behind closed doors what is important to the company and the stockholders.
The incentive debate can continue but I don’t know if it is worth the time. Recently, I visited a Texas community which has a substantial population and has made great strides over the last twenty years. After a few incidents that have hurt the city, they are enacting some responsible clawbacks. Communities need to have some safeguards in place to demonstrate to taxpayers that they are doing their best to protect the city. In their case, they are using their sales tax funds (specific to Texas) to either grant or loan funds to a company. In the case of the grant, they are asking in the provision for the company to repay the community a portion of the grant back or take some collateral at the signing of the incentive package that is not encumbered.
At the same time, legislators and others should try to understand what goes into a project and how difficult it is to get the company to the table. Every elected official needs a set of classes in economic development in order to be able to effectively debate incentives or grants.
In the meantime, the New Mexico rookie legislator should understand that the site selector who negotiated the solar company project was simply doing his job and getting his client the most optimum deal.
Submitted By Jack Allston, JBA Associates