Honing N.C.'s business recruitment tools

November 13, 2011 

— As August turned to September this past summer, rumors of a new economic development project began to circulate around North Carolina. Code-named Project Soccer, this recruitment effort sought to attract a corporate giant, Continental Tire, to the state with the promise of creating over a thousand new and relatively high-paying jobs.

In the endgame negotiations between state officials and company executives, Continental dismissed North Carolina's existing incentive programs and instead demanded a lump sum payment of $45 million with no strings attached. If the cash was not forthcoming, the executives threatened, the new facility would go to South Carolina instead.

Ultimately, of course, the legislature decided against offering the incentive and, despite Gov. Beverly Perdue's strenuous appeals Continental Tire made good on its promise, deciding to build in Sumter County, S.C.

Put simply, this situation embodies many of the worst problems with the way our state pursues the economic development "game" - different factions of state government negotiating secretly with company executives over large public subsidies with few strings attached and thousands of desperately needed jobs on the line.

In many ways, this situation can often resemble a hostage-taking scenario; one in which companies can demand large-value tax rebates, cash incentives and other publicly funded "goodies" from state and local governments in exchange for promising to locate their facilities (and jobs) in those communities, and not elsewhere.

The ever-present threat of "losing" those jobs often leads economic development officials to meet even the most excessive company demands, and particularly at the local level, to do so with little accountability for ensuring that firms meet their basic promises of job creation in exchange for public funds.

As the state now considers reforming how it plays the economic development and incentives game in the aftermath of Project Soccer, elected officials should consider making several policy changes that will reduce the ability of companies to hold the state hostage and improve the overall effectiveness of industrial recruitment and retention strategies.

At the top of the list: the state needs to strengthen accountability and transparency requirements for all incentive deals. In other words, we must hold companies accountable for their promises and open up the process by which the state monitors their compliance. In doing so, we can reduce the ability of companies to "take the money and run" in search of another incentive elsewhere.

Fortunately, we already have a good template in current law that can be easily extended to all of North Carolina's incentive efforts. In their current form, the state's statutory incentive programs - notably the Job Development Investment Grants (JDIG) and OneNC programs - require fairly strict performance standards for firms granted incentives.

These programs stagger the incentive over a number of years, and obligate public funds only if recipient companies actually create the number of jobs they've promised. Firms that fail to meet any of their performance criteria are subject to "clawbacks" and forced to give back the money they have received.

Unfortunately, there are three giant loopholes that often swallow these standards up:

1) when the General Assembly passes special incentive grants above and beyond those contained in the statutory programs (as was proposed for Continental Tire),

2) when local governments offer incentives for projects not matched by state incentives (this is the most common type of incentive offered in North Carolina), and

3) when the legislature feels like exempting companies from meeting the job creation performance targets required under law.

Just last June, for instance, the General Assembly agreed to give an incentive worth several hundred thousand dollars to a distribution company that had actually laid off more workers than it had hired. In other words, the legislature "incentivized" a firm to cut jobs, instead of creating them!

Although incentives can and do play an important role in economic development, these loopholes allow this tool to be abused in unsustainable ways.

In order to ensure better accountability, therefore, the state needs to extend existing requirements to these three categories of projects. Except in very rare cases, the state must avoid "special" incentives for projects beyond those included in existing state law. More important, the legislature should never provide incentives to companies that renege on their job creation promises - certainly no firm that cuts jobs should ever receive public subsidy.

Likewise, the General Assembly should oppose "blank check" cash grants without performance criteria attached.

Finally, it's imperative that local governments be required to use the same performance and accountability criteria as the state.

If expanding these performance requirements will help ensure greater enforcement, opening up the reporting process to the public and the legislature will help hold all parties accountable for how incentive dollars are spent. Now is clearly the time for North Carolina policymakers to recommit the state on both fronts.

Allan Freyer is a public policy analyst a the N.C. Budget & Tax Center

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