Due to the economic cliff most businesses fell off of in March, some will not meet the performance milestones set out in incentive agreements negotiated years before. Are communities being flexible on incentive compliance, and if so, how? We asked Azad Khan with Parker Poe Consulting this burning question and others related to incentive compliance. We collaborate with Azad on the economic impact of site location projects he is working. He is a leading-edge thinker in economic development. So, we picked his sharp brain on this hot topic.
Question: What changes are companies requesting in incentive compliance?
Answer: Companies that do not think they will get back up to normal operating levels soon are asking state and local officials to renegotiate the terms of their incentives. In these cases, companies are asking for the job requirements to be lowered. Additionally, companies that are approaching performance deadlines under their incentives are asking for extensions.
Question: What flexibility are you seeing in incentive compliance right now?
Answer: In an effort to minimize incentive non-compliance, at least one state is taking a more liberal approach to their interpretation of the legal requirements surrounding one of their incentive programs. For example, the way a “new” job is defined normally does not include remote workers or furloughed workers. Because of COVID-19, many employers are requiring folks to work from home. Some employers have furloughed workers. This particular state is temporarily changing their interpretation of “new” job to include remote and furloughed workers in the definition of a “new” job.
Additionally, at least one state is considering other concessions, such as not penalizing companies that are renegotiating incentive terms. For example, this state always reduces the duration of the incentive benefit when a company asks to renegotiate the terms of their incentive. This state is considering not reducing the duration of incentives for companies that want to renegotiate terms due to COVID-19.
Finally, along the lines of duration, some states are considering a “stay” on the term. For example, incentives that have fixed 10-year terms (where jobs are measured and must be maintained quarterly), the state is considering allowing companies to have a pass if they are in noncompliance during a calendar year quarter due to COVID-19 . Normally, the company would lose incentive benefits for any quarter of noncompliance.
Question: What are other compliance adjustments you recommend states and localities consider?
Answer: Most companies believe the fallout caused by COVID-19 will be temporary. When things “go back to normal,” most companies expect to return to pre-pandemic operations, at least in terms of production, employment and investment. However, the time needed to recover from the pandemic will vary greatly among companies, industries and even individuals. In my opinion, the best thing states and localities can do to minimize incentive non-compliance is to allow for greater flexibility within incentive programs, especially with regard to timing.
Question: What steps should a local economic developer take to 1) determine the failure to comply is COVID related and 2) determine the best adjustment for the company and community (win/win)?
Answer: It’s not unreasonable for local economic developers to ask their incentivized existing industries for documentation of performance criteria related to their incentives. Local economic developers could request copies of current and pre-COVID 19 employment rosters, fixed asset listings and a written statement from the impacted company detailing how their operations have been derailed by COVID-19. Comparing the company’s job creation/maintenance and investment levels against the timing of COVID-19 related disruptions and taking into account the company’s written statement is probably the only way to determine if their non-compliance is COVID-19 related. Coming up with a win-win will be a little more challenging, as state and local governments may be limited in their flexibility with incentives due to statutorily established guidelines. To the extent possible, I would recommend that state and local governments do what they can to provide companies with more time to achieve their commitments. In my opinion, if the company still meets their overall commitments and receives agreed upon incentive benefits, then it’s a win-win even if commitments were not achieved within originally designated time-periods.
Question: Do you foresee changes to state and local incentive programs due to the economic crisis caused by the pandemic?
Answer: I do not foresee changes to state and local incentive programs unless the pandemic lasts longer than expected. As it stands today, the pandemic is expected to have a relatively short-term impact on most businesses and our overall economy. However, if it takes many years for a vaccine to be produced, or if there are other significant delays with the economic recovery, then I would expect incentive program changes so that communities are able to incentnew capital investment and job creation in the “new normal,” whatever that is.
On a separate but related topic, we are noticing slight changes in state and local government’s recruiting efforts as a result of the pandemic. Economic development agencies are now more aggressively targeting PPE producers and other manufacturers of critical materials or medical supplies. If the pandemic becomes a long-term problem, then we could see state and local governments create new incentives (or direct existing incentives) to better align with their new strategy to more effectively recruit PPE and other critical material manufacturers.
Azad Khan worked in state and regional economic development in South Carolina before joining Parker Poe Consulting. He advises clients on all facets of site selection and economic development. He has a particular emphasis on location-specific business costs, taxes, incentives, compliance, workforce analysis and quality of life analysis. Connect with Azad Khan, Consultant, Parker Poe Consulting at 803-253-6864, [email protected], or on LinkedIn https://www.linkedin.com/in/azadkhanjr/.