States Now Want A Money Back Guarantee

New York City is putting the heat on Stroehmann Bakeries Inc. This summer, Stroehmann closed a plant in Flushing and laid off 360 employees. Back in 1985, when Stroehmann acquired the plant, New York issued $5.2 million in tax-free, reduced-interest bonds and $780,000 in tax breaks to help upgrade it. Now, the city wants the money repaid--all $6 million.

As Stroehmann is discovering, taking dough from the government is no longer a cakewalk. Even in hotly contested deals, states are showing more savvy (table). Many now require that subsidies be returned if promises are broken--a provision felicitously called a "clawback." Florida, Nebraska, and Vermont all demand clawbacks in their deals. "It clearly is better than it was 10 years ago, when many states were giving away the store," says Jeffrey L. Esser, executive director of the Government Finance Officers Assn.

CANDID CAMERA. Make no mistake, inducements are still around. In recent months, Indiana lured a United Airlines maintenance facility with a $1 billion package, South Carolina gave BMW $130 million for an assembly plant, and Minnesota provided $835 million to snare maintenance shops for Northwest Airlines. Some states are so desperate for job growth that they don't bother to assess a project's viability before dispersing the manna.

But government officials are becoming more businesslike in their beneficence--thanks to their instinct for political self-preservation. In the late 1980s, the governor of Indiana, the mayor of Flat Rock, Mich., and a Kentucky gubernatorial candidate were defeated by challengers who charged that too much was spent luring Subaru-Isuzu, Mazda, and Toyota plants, respectively.

Most governments now concentrate incentives in such areas as worker training or infrastructure--which remain in place even if the company decamps. Some compare notes to avoid overpaying. When Mazda Motor Manufacturing (USA) Corp. asked Flat Rock for more tax abatements to cover new plant equipment, the mayor checked abatements at other Michigan auto plants and found Mazda already had the most abatements. The request was turned down.

Last November, Detroit's city council demanded that a Pepsi bottler explain why it hadn't hired all the workers promised when a tax abatement was granted. Pepsi-Cola Metropolitan Bottling Co. denied making any concrete employment promises. So the city ran a video of a company representative talking about employment levels when requesting the aid. The council wants to rescind Pepsi's abatement.

CLAWBACK IMPACT. Kentucky has just implemented a pay-as-you-go approach that ties the size of the incentive for certain qualifying companies to wages paid for new workers to be employed. The Bluegrass State will credit companies for state income tax withheld from employees' paychecks. This reduces the direct drain on Kentucky's coffers and cuts out the sticky matter of broken promises.

But nothing has the in-your-face political impact of a clawback. The township of Ypsilanti, Mich., is suing General Motors Corp., saying the carmaker's plans to close its Willow Run assembly plant violate promises of employment made when the township granted tax abatements in 1984 and 1988. Ypsilanti seeks an injunction barring the plant closing. GM says any statements made were a "mere expression of hope." Retorts W. Douglas Winters, the township's lawyer: "I'd like to use that argument the next time I miss a car payment."

So it's in vogue now for states to demand collateral. In its deal with Northwest, Minnesota intends to issue bonds to build and then lease two maintenance facilities to the carrier at rates below what it could have obtained itself. The debt is partly collateralized by Northwest's transatlantic routes from Boston.

It may have been the kind of collateral held by the voters that Indiana Governor Evan Bayh kept in mind while negotiating United's maintenance facility. Having criticized his predecessor for giving too much for the Subaru-Isuzu Automotive Inc. plant in Lafayette, he wrote strong clawbacks into the United deal.

Bayh set up the deal so that the state would get its money back in payroll taxes and other ripple effects within 15 years--less than half the time it will take Indiana to recoup its $86 million investment in the car plant. The airline guaranteed that it will spend $800 million on the maintenance facility by the year 2002 and employ 6,300 people there by the year 2005.

Sometimes including clawbacks simply isn't possible. "Rarely do our clients accept these penalty clauses," says James A. Schriner, vice-president of site consultants PHH Fantus. "They get negotiated out, or they go elsewhere." South Carolina's contract with BMW, for instance, has no clawback clause.

Of course, it's one thing to write a clawback proviso and quite another to enforce it. Steven R. Kelley, an official with the Ohio Development Dept., believes that as clawbacks become more common, their language will be less binding. Says Kelley: "The political reality of enforcing it can be distasteful." Especially since new jobs are hard to beat in lean times.

      ZAPPING WELSHERS Some states require that companies with plants benefiting from 
      tax breaks and other goodies refund the largess if the facility closes
      SETTING SPECIFIC GOALS States are pursuing defined objectives, such as luring 
      high-tech firms or bringing jobs to high-unemployment areas
      LINKING PAY TO PERFORMANCE Rather than handing out the breaks up front, more 
      states are setting benchmarks, such as jobs created or amounts invested--and 
      releasing the money only when companies attain them
      CREATIVE FINANCING Why bleed state coffers? Kentucky lets some businesses get 
      credit for funds withheld from payrolls, to avoid up-front state payments
      COST-BENEFIT ANALYSIS States are just starting to measure whether the new jobs 
      justify the expense. So far, only two states use econometric-based analysis
      DATA: BW
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