Archive for the ‘Clawbacks’ Category

Amazon Prevails in South Carolina

June 6, 2011

Amazon will be allowed to help its customers in South Carolina dodge sales taxes, after all. In a dramatic reversal, Palmetto State legislators approved a bill that gives the online retailer a five-year exemption from collecting sale tax from the state’s residents. The move revives Amazon’s plans for a $125 million distribution center in the state that is projected to create 2,000 jobs. Unfortunately, the bill does not include strong clawback provisions.

The legislation is a defeat for Amazon’s brick-and-mortar competitors, both small businesses and big-box retailers such as Wal-Mart that lobbied hard against the exemption sought by Amazon.

As we previously reported, the original promise to exempt Amazon from its obligation to collect sale taxes was made last year by then-Gov. Mark Sanford and was a part of a subsidy package that included $5 million in free land; $3,250 in tax credits for each job created; and property tax breaks on equipment.

Initially, the House rejected the deal but gave into political pressure stoked by Amazon’s decision to increase its job-creation projection by 750 jobs. Gov. Nikki Haley has opposed the deal, though she now says she will let the bill take effect without her signature.

Limited attention is being paid to the terms of the company’s job promises. The final version of the bill requires Amazon to create 2,000 jobs by the end of 2013 and retain 1,500 jobs between the end of 2013 and January 1, 2016. If the company decides to lay off up to 500 workers after 2013, it will face no consequences. After January 1, 2016 (when the exemption expires), Amazon is not required to retain any specific number of jobs.

If the company does not meet job creation or investment ($125 million) obligations, the only penalty Amazon would face is cancelation of the exemption. There are also no wage requirements for the jobs, though Amazon is required to provide a comprehensive health plan for the workers.

It is disappointing that after the long battle, the legislature did not put measures in place that would truly protect workers and hold Amazon accountable.

Stung by Shutdowns, Massachusetts Debates Reforms

April 12, 2011

Recent job loss events in Massachusetts, though unfortunate for the state and its workers, may prompt passage of strong economic development accountability and clawback legislation that would apply to all economic development subsidies statewide.   Announcements by Evergreen Solar and Fidelity Investments – both major recipients of economic development subsidies – that the companies would be moving large numbers of jobs out of state have frustrated development officials, lawmakers and residents alike.

Evergreen Solar announced in January that it would shutter its Devens manufacturing facility and send over 800 jobs to China, despite the $58 million in job creation and development subsidies it received from the state.  Fidelity’s March announcement that it would be relocating approximately 1,100 jobs to two neighboring states from its Marlborough facility also came as an insult to the state; in the 1990s – at Fidelity’s urging and great cost to the state – Massachusetts altered its state tax code to apply single sales factor (SSF) corporate income tax calculation to mutual fund firms.  Weak accountability standards and a lack of safeguards in the state’s subsidy programs mean that Massachusetts will be able to recoup very little from Evergreen and nothing from Fidelity of the subsidies they received to create and maintain jobs in the state.

Executives from both companies were questioned by lawmakers last week about their acceptance of job subsidies and subsequent decisions to move jobs out of Massachusetts.  Evergreen Solar CEO, Michael El-Hillow, stated during the hearing that the company would not be repaying the $21 million it received as direct cash grants and tax credits from the state.  Fidelity’s major economic development subsidy, provided in the form of reduced corporate income tax responsibility through the SSF calculation, is impossible to recapture.  However, even some lawmakers who voted for the passage of SSF are now questioning its value to the state’s economic development efforts.  During the hearing Senator Mark Montigny, chairman of the Senate Post Audit and Oversight Committee, stated that he expected SSF “not to continue in perpetuity with no oversight” or accountability.

Prompted by these revelations,  the Massachusetts State Auditor issued a preliminary review of business tax expenditures this week.  She found that of 91 business tax expenditures, only 8 include a sunset clause, just 10 contain clawback provisions, and only 19 have public disclosure or accountability reporting requirements.  (Program sunsets, clawback provisions, and public disclosure are among the most basic and most critical aspects of key subsidy reforms supported by Good Jobs First.)   Massachusetts passed its first public disclosure law last year, which covers only the recipients of refundable or transferable tax credits.

This law, though a good first step towards strong public disclosure, is narrow and incomplete compared to other states’ disclosure practices.  It would be leapfrogged by S153/H2565: An Act to Promote Efficiency and Transparency in Economic Development, legislation currently being examined by the Joint Committee on Revenue.  Over 50 legislators, including primary sponsor Sen. Jamie Eldridge, are co-sponsoring the omnibus economic development reform bill.  Among its many provisions are the following major subsidy reforms:

  • Transparency, including spending transparency via a Unified Development Budget
  • Enhanced online disclosure of job creation and performance monitoring
  • Mandatory clawback provisions; and
  • Job quality standards

If enacted, the bill would protect Massachusetts’ future investments in economic development and ensure that companies can no longer take taxpayers’ money and run.

Evergreen Solar Turns Out the Lights

January 24, 2011

Massachusetts Governor Deval Patrick and Evergreen Solar's CEO, Richard M. Feldt (Boston Globe 2008)

Evergreen Solar announced this month that it would shutter its solar wafer and cell production plant in Devens, Massachusetts despite the generous $58 million it received in subsidies from the state.  Eight hundred workers will lose their jobs by the end of March this year.  The company is moving its manufacturing operations to China, where it will enjoy higher levels of government subsidies in the form of low-interest loans and factory wages averaging less than $300 a month.

When you compare a $300 monthly salary with an average Massachusetts factory worker salary of $5,400 a month, it’s little wonder that the subsidy awarded by Massachusetts makes little difference in the company’s long term business strategy – especially given the fact that Evergreen will be able to take most of the money and run.  Of the $58 million award, $13 million was provided through an infrastructure subsidy, $21 million in the form of direct grants, and the remainder was provided in tax credits.  Massachusetts officials stated that the state stands to recoup only $3 million of its $21 million grant, even though Evergreen constructed its factory just two years ago.

In its rush to bag a green trophy business, Massachusetts neglected to attach job creation requirements to the majority of the subsidy.  Only $20 million of the total award contractually required that jobs be created at all.  (For more on green job quality and job creation, including the Evergreen Solar deal, see Good Jobs First’s 2009 publication “High Road or Low Road:  Job Quality in the New Green Economy.”)

It’s never fun to say “I told you so” when the subject is economic development subsidies because it is so often the case that workers will be losing their jobs, so we’ll focus instead on the takeaways:

  1. Job creation subsidies provided to companies that have a history of outsourcing manufacturing jobs are a dangerous bet.
  2. When a company can retain nearly 90 percent of its development subsidy after operating for just two years, it’s time for stricter clawback requirements.
  3. Attempts to combat global market forces and federal trade policy with state tax subsidies are ineffective and wasteful.

After Massachusetts’s experiences with Raytheon and General Electric, one might think they would have learned these lessons by now.

Pfizer Pays Up

December 8, 2010

Yesterday, Bloomberg News reported pharmaceutical giant Pfizer paid New York City $24.7 million for subsidies it used along with a penalty, for failing to live up to promises made in a $46 million corporate retention package awarded by the Industrial Development Agency in 2003.

While this is indeed welcomed news, it’s diminished by the fact that the subsidy package should never have happened in the first place.

As GJNY testified at a hearing before the subsidy was awarded, Pfizer is a mainstay of Manhattan’s East Side and didn’t need taxpayer’s money to expand its offices. Others, angry at Pfizer’s drug policies concerning distribution of drugs to poor people and those with HIV and AIDS, were offended that public money would go to the pharma giant’s real estate pursuits. To top it off, in June of 2003, an executive was quoted in Crain’s New York saying the firm never planned to leave the city.

While details are sketchy, we assume the company fell out of favor with the city after closing its Brooklyn plant in 2007 where it’s been since the mid 1800’s and when word got out about reductions in its workforce and Manhattan office space. The Pfizer deal, while egregious, shows that the Bloomberg Administration allows for strong recapture (compared to his predecessor Rudy Giuliani) especially in the very early years of a deal; the city can demand 100% repayment and penalties for job losses before June 2011. Though the city’s handling of the MetLife deal shows recapture provisions aren’t always equally enforced.

The city, as of yet, hasn’t put out a press release detailing where the Pfizer deal went array, but it shouldn’t be shy about holding companies accountable.

Led by Community Groups, Newly Elected Officials Put Accountable Development in NYC on Front Burner

February 22, 2010

The rotten political culture in New York has forced ordinary New Yorkers to become increasingly savvy at making their voices heard, particularly when it comes to big development projects. And it’s making a difference. Advocates in the Northwest Bronx, for example, led by the Kingsbridge Armory Redevelopment Alliance (KARA), spent years organizing for a plan for the Armory that would bring good, permanent jobs to neighborhood residents. In a dramatic climax at the end of 2009 to their dogged efforts, they managed to defeat a proposal that fell short of these basic standards.

Blocking the city’s determination to take the low road represents remarkable progress, but what New York desperately needs is development policies that guarantee concrete benefits for local residents. Could a brand new crop of elected officials who are talking tough on accountable development provide a critical moment for advocates to finally accomplish just that?

Early signs are promising. Take the city’s new Comptroller John Liu, who spiced up February’s board meeting of the New York City Industrial Development Agency by voting ‘no’ on tax breaks for several projects, including a Western Beef grocery store proposed for the Bronx that, according to its application for benefits, would pay employees an average wage of about $19,000 a year with no benefits. Stating his concern that the current system lacks “clear processes and standards for project development and approval,” Liu pledged to “examine how scarce public resources are used to advance our City’s economic development.”

The proposed Western Beef would fulfill an urgent need for grocery retailers in this part of New York City, but Liu’s call to examine IDA’s way of doing things more closely could lead to more analysis of the consequences of subsidizing companies that pay poverty wages in order to address other legitimate problems such as food deserts.

Just over a week after his debut at the board meeting, Liu was at it again, suggesting in a bold op-ed in the Daily News that New York is behind other cities like Los Angeles and Milwaukee in embracing equitable economic development policies, a point neighborhood advocates have also fought hard to convey. He called for city developers to stop “stifling” neighborhood voices, and for remarkably high standards of transparency, accountability, and inclusiveness in Community Benefits Agreements, a promising tool that has thus far proven little more than a sham in New York City.

Other public officials appear to be hopping on the accountable development train, too. In another recent Daily News op-ed, the city’s newly-elected Public Advocate Bill de Blasio toughly proposed a citywide code of conduct for businesses that receive public subsidies, and called for requiring firms to pay a prevailing wage, and to stay neutral when workers try to form a union. These are all positive signs that some of the city’s newly elected officials may have gotten the message that voters have long been pushing. Now is a critical time for advocates to stay on alert and keep these officials on the right track.

Not to deny the handful of veteran public officials who have been pressing for policy reform, like Manhattan Borough President Scott Stringer, who has been advocating for stronger accountability at the New York City Industrial Development Agency for some time now. Stringer’s appointee to the IDA board, Kevin Doyle, stands out as one of the few board members willing to ask challenging questions about IDA’s decision-making processes.

In addition to ensuring that large development projects are a boon to local residents, creating more equitable development policies will also help exorcise the larger culture of corruption that bedevils the city and state. This was most recently played out in the indictment of Bronx City Councilman Larry B. Seabrook on charges that he stole cash from the city through a series of money laundering schemes, including one connected with the new Yankee Stadium. It’s all too easy to view such scandals as the bad behavior of stray individuals, and stop there. But by condoning a process that excludes community input and encourages wheeling and dealing behind closed doors over transparent, democratic means, our current approach to development reinforces the very culture that incubates such tainted public officials.

Ordinary New Yorkers are clearly prepared to keep fighting for a different way. Hopefully Liu and de Blasio will do them justice by continuing to show real leadership on these issues, creating momentum for other elected officials to fall in line.



A Clawback Enforcement Trend?

December 15, 2009

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.

Struggling Chicago finds $25 million for United Airlines

September 3, 2009

Last month, the City of Chicago offered a substantial tax increment finance (TIF) subsidy of $25 million to an ailing United Airlines (UAL) if it promised to relocate its operations center to the Willis Tower (formerly the Sears Tower). Use of TIF as a relocation incentive is problematic given net new jobs are not being created and TIF is intended to help revitalize downtrodden areas, not encourage occupancy in skyscrapers.

The TIF subsidy encourages UAL to leave its current operations center next door to Chicago’s O’Hare Airport, shifting commutation patterns for 2,800 employees –employees who probably use airport facilities.  The operations center used to house UAL’s headquarters between 1961 and 2006 until the city gave tax breaks and incentives to UAL for a new office in the Loop. Why would an airline relocate its operations center 19 miles away from the world’s 4th busiest airport?

Historically, Chicago and outlying suburbs use incentives in controversial ways. In 1989, Sears, Roebuck & Co. announced that it was seeking to relocate from the Sears Tower to cut costs (see page 36 of our 2003 report, A Better Deal for Illinois). The State of Illinois feared losing $411 million in income taxes (from 5,400 jobs) and 2,200 ripple-effect jobs if they left Illinois. An affluent suburb 29 miles northwest of the Loop put together what was the largest subsidy package ever in Illinois history at $178 million. The state not only chipped in but expanded the definition of ‘blight’ in Illinois’ TIF law so that the wealthy suburb could buy 786 acres of land with TIF bonds to be repaid out of Sears’ property taxes.

Although Sears promised to make up shortfalls in the property tax revenues (and did in 1998 and 2001), missing was a clawback relating to the 5,400 jobs which the state based its incentive rationale on from the get-go. Sears never approached the original employment number, which begs the question: did it move out of necessity or to avoid paying for mass layoffs and the negative media attention?

The City of Chicago is in a pinch. Two recent winters have threatened the city’s budget to the brink of collapse and forced the mayor to lease the city’s parking meters to a private entity for 75 years. Despite city coffers in ruin, TIF funds overflow. A new report by the Chicago Coalition for the Homeless shows TIF-funded units are disproportionately sold or rented to high-income households. Recent investigations indicate that TIF dollars are awarded on dubious basis in lieu of need in a city full of questionable zoning practices. Moreover, a recent $10.4 million TIF deal fell through, leaving the city without the jobs it paid for. Despite this, the city resists passing TIF sunshine laws.

Chicago’s 158 TIF districts covering 30 percent of the city are diverting revenues that would otherwise keep schools solvent, plow streets, maintain public transit, and fix potholes. TIF has strayed from revitalizing distressed communities and is instead being used to shuffle tax base across the region. Moving jobs does not create new jobs. TIF reform is long overdue in Illinois.

New York Advocates to “Drill Down” on Where Federal Stimulus Money Goes

February 26, 2009

cropped_workinggroup_presser_02_09-26A diverse coalition of two dozen advocates named the “NYS Stimulus Oversight Working Group” and led by Common Cause/New York have signed on to a set of common principles that would make the allocation of funds under the American Recovery and Reinvestment Act fully transparent.

At a press conference this morning on the steps of City Hall in New York City, members of the Working Group and local Council Members agreed that it would take citizens, advocates and elected officials to create a truly transparent process.

Among the recommendations the working group is proposing in the principles is creating a website that has bi-monthly reports, copies of written agreements with contractors, impact on energy efficiency and the environment and details on job creation and wages.

Addressing the desire to learn more about projects in New York State that received stimulus funds, Susan Lerner the Executive Director of Common Cause/New York, said, “New York City must collect all of the information related to the stimulus spending including drilling down” to the subcontractor level.” Advocates on the national level have also expressed this concern.

Several Working Group members also attended: Citizens Union, Environmental Advocates of New York, Good Jobs New York, NYPIRG and the Urban Justice Center.

Also in attendance at today’s press conference were several Council Members: Eric Gioia Chair of the Oversight and Investigations Committee, who recently proposed a form of “Google government” for all city tax exemptions; Gale Brewer, Chair of the Technology in Government Committee; Daniel Garodnick, Chair of the Planning, Dispositions & Concessions Committee and Robert Jackson Chair of the Education Committee.

The transparency issue seems to be taking hold locally as Council Member Bill deBlasio and Council Member Brewer move forward to create a website called SunlightNYC.gov.

Money for Nothing

February 24, 2009

Money for NothingThe West Virginia Center on Budget & Policy has just released a new report examining how state agencies can improve their bang for the buck on job-creation investments. The report, entitled “Money for Nothing: Do Business Subsides Create Jobs or Leave Workers in Dire Straits?,” focuses on the three of the most common subsidies with job-creation requirements: the Economic Opportunity Tax Credit, the Manufacturing Investment Tax Credit, and the West Virginia Economic Development Authority’s (WVEDA) low-interest direct loans.

Despite spending millions of dollars annually to encourage private businesses to create good-paying jobs, the report concludes West Virginia is getting little in return. The authors recommend better public disclosure on the details of each program, timely and company-specific information on the number and quality of jobs created, clear consequences for non-compliant subsidy recipients, and an annual unified development budget to keep state agencies better informed.

Will North Carolina have Nothing to Show for Its Dell Subsidies?

September 9, 2008

Public officials in North Carolina and several other states are reeling from the revelation that Dell is considering the shutdown or sale of its assembly plants. The news that the computer maker is considering an exit from the manufacturing side of the business came in a front page story in the Wall Street Journal. Dell has not denied the report, which said the company might sell some of the plants to contract manufacturers and shutter the rest, but it has not provided specific details on its intentions.

Anxiety about Dell’s plans is especially intense in North Carolina, which went to great lengths in 2004 to put together a state and local subsidy package worth more than $250 million for an assembly plant in Winston-Salem. The deal was negotiated by the Department of Commerce and pushed through the state legislature in a special session with scant debate or analysis. The incentives package included a computer manufacturing tax credit, job investment grants, tobacco settlement fund grants, training incentives, transportation infrastructure grants, workforce development grants, sales tax refunds, waiver of property tax for 15 years and 200 acres of free land. In 2004, Governor Mike Easley estimated that the Dell plant would employ 8,000 people; so far, however, it has hired only about 1,150.

Along with the Winston-Salem plant, Dell owns 11 other manufacturing and distribution centers in Austin, Miami, Nashville, Brazil, Ireland, China and Poland.

Last March, however, Dell closed its facility in Round Rock, TX eliminating 900 jobs.

According to the Journal, Dell is in talks with manufacturers in Asia, who could either operate the plants on a contract basis or buy them outright. It is unclear whether those contractors would be willing or able to operate plants such as the one in Winston-Salem. A key complication would be the subsidies. There is no apparent precedent in North Carolina for transferring incentives to a new owner, which might not want to take on the job-creation provisions of the deal.

Dell spokesman David Frink has declined to comment on the report, instead stating, “we will continue to evaluate and optimize our global manufacturing and distribution network.” Bob Leak, president of Winston-Salem Business Inc., the local economic development agency, said he was not aware of any changes to Dell’s future in Winston-Salem.

In their negotiations of the Dell deal, North Carolina, Forsyth County and Winston-Salem bent over backwards for the company. They assumed that throwing subsidies, tax breaks and other incentives at a successful corporation was a smart economic development tool. Now they may regret putting so many of their eggs in one corporate basket.