Ex-Commerce chief: Lift the veil on state incentive deals

June 25, 2010

A former executive director of the Indiana Department of Commerce—the predecessor agency to the Indiana Economic Development Corp.—believes state economic development officials should lift the veil over details of incentive deals they cut with companies once the ink is dry.

Tom McKenna has observed the recent public records tussle between Indiana Secretary of Commerce Mitch Roob and House Speaker Pat Bauer with surprise.

McKenna, now a Democratic candidate for Secretary of State, served as Indiana’s lead economic developer from 1998 to 2003 under Gov. Frank O’Bannon. Back then, McKenna said, public transparency was a top priority.

“You go to school, you take a test, you get a grade, the grade gets published,” McKenna said. “You make a deal, you get incentives, and at the end of the day, you should be able to indicate how that deal evolved and what kind of value you got for the investment that you made.”

“Everybody wants to go to the ribbon cutting,” McKenna added. “Nobody wants to deal with the follow-up.”

On June 8, Bauer, D-South Bend, sent Roob a letter formally requesting IEDC share details of the awards packages it has offered companies for their expansion or relocation projects; documentation whether firms actually created jobs as promised; and particulars about IEDC’s incentive clawback efforts when deals soured. Bauer said then he suspected IEDC’s job-creation figures were inflated.

Roob replied June 22 with a written response and a spreadsheet summarizing the status of clawbacks—attempts to reclaim incentives for unmet promisesIEDC has sought from 42 companies.

The amounts range from $616.33, which IEDC pursued from Carmel-based Theron Inc.—an amount the agency has since written off—to $3,040,157 from Elkhart’s Monaco Coach Corp. The spreadsheet lists $300,000 of Monaco Coach’s incentives as written off while IEDC continues to pursue the remaining $2,740,157.

IEDC’s spreadsheet shows the agency has gone after a total of $10.6 million in clawbacks. Of that, $2.2 million has been collected, $1.6 million was written off and $5.1 million is pending. IEDC also has agreed to “performance workouts” worth $1.5 million with four firms, extending the time the companies have to meet the terms of their incentive deals.

IEDC’s clawback efforts apply not only to deals it struck since its formation under Republican Gov. Mitch Daniels in 2005, but also to incentive packages the state awarded companies all the way back to 1994. According to IEDC, its spreadsheet does not include any clawback efforts against companies who inked deals in 2009 or 2010, since their filings to collect tax credits are not yet complete.

In a telephone interview, Roob said IEDC only awards economic incentives—primarily tax credits—in situations where other states or countries are directly competing for jobs “in play,” because companies are considering adding or moving them to locations outside Indiana state lines.

IEDC doesn’t announce every deal, Roob added. In somewhere between one-fifth and one-third of all cases, he said, companies consolidating operations here from other states don’t want any publicity, and specifically request no ribbon cutting or press release. In those situations, Roob said, IEDC includes their job and incentive tallies in its annual report.

Subsequent verification of job creation is mainly a function of the tax payment process, Roob said, and IEDC relies on the Indiana Department of Revenue to determine whether firms have met their expansion goals. Using a benchmark of job counts at the time deals are struck, companies receive tax credits for the net new jobs they ultimately claim on their returns. Those returns include a number of details as proof, such as employee Social Security numbers, annual income and tax withholdings.

If the tax returns don’t confirm jobs were added, the tax credits can’t be claimed. Roob said other incentives such as training grants or infrastructure investments are also performance-based, even though they’re a relatively small portion of most deals. And IEDC expects some real-world variance from the growth projections companies provide.

“Obviously not every job that’s announced is created. Sometimes more jobs, like at [locally based] AIT [Laboratories] are created than announced,” Roob said. “Other times, there are fewer jobs because of economic conditions. But no tax dollars go out the door until jobs are created.”

Whenever possible, IEDC attempts to recognize that factors outside a company’s control, such as the recession, can force a change in plans and actually cut headcounts after expansions. In those situations, IEDC uses its discretion to arrange extensions.

“We recognize that pursuing a large sum … that’s just going to further impact their business and their ability to keep employees employed,” said IEDC spokeswoman Blair West. “Our hope is they weather the storm they’re in, and once they find light at the end of the tunnel, we can renew the conversation. The goal is never to pursue somebody out of business.”

A good example, West said, is Benton Harbor, Mich.-based Whirlpool Corp. In 2007, IEDC’s annual report for that year shows the company promised to add 158 jobs and invest $9.3 million in its Evansville operation. Under its 10-year deal, the company has actually collected incentives worth $902,502, West said.

But when Whirlpool decided to move its Evansville refrigerator plant to Mexico, the company violated its incentives deal and simultaneously orphaned a nearby 300-employee research and development facility. West said Whirlpool asked IEDC for a new awards package in exchange for keeping the facility there. Instead, IEDC agreed to a $902,502 performance workout of the original deal. Evansville officials, starting with the mayor, encouraged that plan to keep the R&D jobs.

“We said there’s nothing new on the table. But if you keep these positions for a duration of time, with certain level of headcount, then after 10 years you can be relieved of that obligation, the $902,502,” West said. “That was the deal we structured with them, with strong encouragement of the locals.”

Pursuing clawbacks is a situation-by-situation judgment call, Roob said, that often boils down to practical questions, such as whether a company even remains a going concern.

“We look at it from the circumstances, then we try to work out with that company what they will pay us back and what they won’t pay us back. In some cases, we collect all the money back. If they go bankrupt and there are no assets left, there’s no place to go,” Roob said. “And sometimes we use clawbacks, or threats of clawbacks, to get the company to do certain things for Indiana employees.”

That’s how it worked under the Department of Commerce as well. The difference, McKenna said, is how much deference public officials gave to companies, often under the blanket excuse of “proprietary information.” Then, as now, government economic developers were bound not to disclose details from the negotiations leading up to an incentives deal.

But once the deal has closed, McKenna said, it’s the duty of public officials to share the final terms with the public, then regularly report whether companies are measuring up to their agreements.

“If they’re going to share proprietary information, you’re going to sign a non-disclose agreement and you’re bound by that,” McKenna said. “But it’s public dollars. Given your fiduciary responsibility, you’ve got to be transparent and have information that’s accessible. An entity, whether strictly governmental, quasi-governmental or quote privatized unquote needs to be sensitive to that, because it looks like you’re hiding something.”

“The natural tendency is to move from deal to deal to deal, get the buzz, feel great, but not follow up and analyze the deal,” he added. “But you need to find out what works and what doesn’t.”

There is a clear need to keep economic development information confidential while the state is negotiating with firms, agreed Stephen Key, general counsel for the Hoosier State Press Association. But the cumbersome process afterward of checking and verifying compliance is “the price for playing the game,” he said. Otherwise, contracts between the state and companies would have no teeth.

“If a company can’t quietly negotiate with Indiana about moving its plant from Kentucky ... there’s a good chance the Kentucky employees will look for other employment and that would cost the company efficiencies and money,” Key said. “There are good reasons why there’s confidentiality in the negotiating process. Conversely, when the deal is struck, the public has the right to know what the terms were, and whether or not the terms were met as time goes by.”

Part of the problem, McKenna said, is the media hasn’t held the Daniels administration to the same reporting standard it applied to predecessors. McKenna said he remembers when jobs announcement stories were routinely laced with current unemployment figures and calculations underscoring whether Indiana had seen a net gain or loss for the year. These days, he said, many reports only include the plus side of the column.

“What occurs now, IEDC gets to talk only about jobs created, and nobody ever does the balancing act or the complete accounting,” McKenna said. “If it was appropriate reporting then, I don’t know why it isn’t now.”


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