Upfront money to draw businesses includes risk
TAMPA - As the recession raged in 2009, communities lined up to offer Robert Easter big money to land his small manufacturing firm. The biggest offers came from Texas. At least 14 cities in the Lone Star state made offers to attract his business, Easter said, but he moved his plant from California to the sandy shores of Panama City Beach, instead. The lure of the Sunshine State included a $500,000 state check, delivered upfront. Today, Easter's Coast Water Efficient Technology employs only about 30 people. He fell far short of the 160 jobs Florida had required by last December, hampered by the BP oil spill and the recessionCoast Water shows the risks state governments take in handing out incentive money before requiring companies to fulfill their job promises. But even as states see their revenues decline, they keep gambling – pushing one another to spend more and more in a cutthroat competition for jobs. And Coast Water shows why. "If I'd have waited until Texas," Easter said, "they would've paid twice what Florida did. If you don't do something up front, you're going to lose." States, cities and counties for years have offered companies money to lure them from out of state or to encourage expansion. Companies often angle for public subsidies by threatening to leave unless they receive them. Today, the way governments pay is changing. Traditionally, companies could count on tax credits and refunds after they created jobs and built factories. Awarding the money after the fact ensured companies actually fulfilled their promises. But in recent years, state after state is adding upfront cash grants to the mix, often distributing them through new "deal-closing funds." Florida created such a fund, the Quick Action Closing Fund, in 1999 and has been ramping up its use in recent years. Between 2000 and 2006, the state awarded a combined $28 million in cash grants to corporations through this fund. That rocketed to about $199 million from 2007 to 2011, according to the state's chief economic development agency, Enterprise Florida. The state requires companies to hit a few initial milestones before collecting their cash, such as signing a lease or making a significant financial investment in Florida. But most companies receive their cash years before they finish a new factory or create all the jobs they've promised. As one state creates an upfront fund, neighboring states feel pressure to follow suit or risk losing jobs to their neighbors. Texas created its deal-closing fund, the Texas Enterprise Fund, in 2003. Gov. Rick Perry's website says it is now the largest cash-grant program of its kind in the country with $465 million in awards. So Oklahoma got spooked and created its own deal-closing program last year. "There has been talk of doing that for about 10 years, mainly because Texas has one," said Robin Roberts-Krieger, an executive vice president of the Greater Oklahoma City Chamber. Today, as many as 20 states – including South Carolina, North Carolina and Virginia – may have some form of deal-closing fund, two corporate relocation consultants told the Tribune. Companies prefer upfront money because they often spend millions on real estate, equipment and new employees when opening an office somewhere, said Dan Levine, a corporate real estate consultant with MetroCompare in New Jersey. "The climate has gotten such that companies now have leverage to demand that states get sites ready, and that means money," Levine said. Critics say this puts taxpayer dollars at risk because some companies are bound to miss their job-creation and capital investment goals. The Tribune reviewed 82 projects that signed contracts and received money from the Florida Quick Action Closing Fund through June 30, 2011, the most recent information available. At least 36 companies failed to create as many jobs or invest as much capital as they promised or missed their deadlines for doing so. Their contracts require the companies to refund some or all of the money for missing deadlines, but evidence shows Florida officials often amended the companies' contracts to give them more time. Karen Woodall, executive director of the Florida Center for Fiscal and Economic Policy, a liberal advocacy group in Tallahassee, said Florida doesn't have a solid mechanism for recapturing money when companies don't perform. The idea that "we've got to give more tax breaks, we think is problematic," Woodall said. In Orlando, for example, Florida awarded AirTran $3 million to help it build a new complex at Orlando International Airport. The discount airline was required to create 121 new headquarters jobs by December 2011, according to its agreement with the state, as well as retaining 290 existing jobs and investing $6.9 million in its new building. AirTran did retain its existing headquarters jobs, but hasn't added the 121 new positions. Instead, it persuaded Florida to amend its contract to give it a few more years to comply. Even that contract now looks in jeopardy: Southwest Airlines purchased AirTran and plans to consolidate all its headquarters jobs in Dallas, a Southwest spokeswoman said. Government watchdog groups, meantime, complain that states are too secretive about their awards of taxpayer money to corporations. South Carolina may deposit into its deal-closing fund as much as $32 million the state received from a legal settlement with loan servicing companies, which were implicated in fraudulent mortgage practices. A public policy group, the South Carolina Policy Council, can't get an accounting of how economic development leaders use the fund, said Andrea Sepenzis, a policy analyst. The Pew Center on the States gave South Carolina poor grades this year for monitoring and evaluating corporate subsidies when it reviewed all states' incentive policies. "When it comes to trying to figure out where that money goes, we have no idea," Sepenzis said. "Job creation is the watchword in the state right now. And no one is going to question anything going to that purpose." South Carolina's neighbor to the north may do things better, some watchdog groups suggest. The Pew Center and another group that monitors corporate incentives, Good Jobs First, both rank North Carolina high for the accountability and transparency of its incentives. Like Florida, North Carolina has a deal-closing fund that it uses to lure companies to the state. But North Carolina awards most of its money in increments instead of upfront. For example, companies get 25 percent of the money when they create 25 percent of the jobs, said Tim Crowley, a spokesman for that state's Department of Commerce. Even if cash grants put taxpayers at risk, Enterprise Florida considers them "critical to the state's ability to attract projects where Florida is at a significant competitive disadvantage," its 2011 Annual Incentives Report says. Easter, the Panama City Beach manufacturer, pointed back to Texas as a model for Florida. People there have a different attitude toward public investments in companies, reflected in how many Texas cities courted his company. He may have only 30 employees now, but within a few years he may still grow to 300, Easter says. "In Texas, if you lose a few and invest in a few companies, isn't that just capitalism?" he said. "Right now, this whole Northwest Florida is taking a backseat."
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