A Clawback Enforcement Trend?

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North Carolina officials, outraged at Dell over its closure of a heavily subsidized assembly plant, are doing everything they can to recoup subsidies given to the company. Governor Purdue, a fierce proponent of incentives to attract jobs, stated “that every red cent of incentives money had to come back to the people of North Carolina.” State and local officials have enforced clawback provisions from various grant programs recapturing $28 million, but Dell says it’s not obligated to pay back up to $6 million in tax credits given between 2005 and 2007. The state openly disagrees with Dell’s interpretation.

Secretary of Revenue Kenneth Lay stated in an interview that Dell no longer meets agreement benchmarks and is therefore ineligible for past and future tax credit subsidies. Dell’s position is that by creating the number of jobs required by past benchmarks, it is entitled to keep past tax credits awarded, even if by closing the factory it becomes ineligible for that same subsidy going forward. The law, hastily written and passed in 2004 under pressure from Dell, is unclear about who is correct.

Ambiguous legislative and contractual clawback language is also an issue in Missouri. Two years ago, Pfizer broke ground on a heavily subsidized St. Louis facility. Now, Pfizer has announced it is closing the lab, and officials appear unwilling to let Pfizer walk away from the deal with taxpayer subsidies in hand. Pfizer was offered a $7 million, 10-year tax abatement as well as sales tax exemptions on construction materials and training cash grants for creating 1,000 jobs. State and local officials are reviewing the economic development contract signed with Pfizer, Inc. to determine if a clawback of subsidies is possible.

Although no national statistics are available, clawback enforcement appears to be an increasing trend. Between 2004 and 2009, the Texas Enterprise Fund has clawed back at least $1.3 million from 12 projects. In 2008, the State of Illinois found 11 projects to be in violation of agreement terms and began recapture efforts on all of them.

Even site location consultants are recognizing that clawbacks are here to stay. Most now advise clients to seek easily obtainable benchmarks in negotiations instead of refusing clawbacks outright. “Even when a company is presented with seemingly inflexible documents, it may have some room to negotiate related points,” said site location consultant Tracey Hyatt Bosman. Many deals now contain clawbacks but lack strong standards. Clawback agreements are much less useful if they lack clear, robust benchmarks.

As clawbacks become the norm in development agreements, officials should take care to ensure that incentive standards are not watered-down or negotiated out altogether.

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