Companies that take cash from the Governor’s Quick Action Closing Fund and then fail to deliver on the promises of jobs should expect to repay some of the incentive money.
Since the beginning of this year, Allied Wireless of Little Rock, Nice-Pak of Jonesboro and Pinnacle Foods in Fayetteville have repaid the fund a total of $215,000 for missing promised employment goals after receiving a total of $8 million from the economic incentive account.
Soon Nordex USA and Hewlett-Packard will be added to that list.
Both companies received millions from the fund and pledged they would bring hundreds of jobs to the state. But in June, Nordex, which received $2.5 million from the fund, announced it was stopping production at its Jonesboro wind turbine plant. In July, Hewlett-Packard of Palo Alto, Calif., said it was slashing 500 jobs at its Conway office. HP had been awarded $10 million from the closing fund.
Since its creation in 2007, the Quick Action Closing Fund has announced awards of $87.8 million for 51 projects. Not all of the projects meant the immediate addition of jobs in Arkansas but instead were expected to hire workers over a number of years.
“We’re just now getting into that period where we’re starting to see some clawbacks,” said Arkansas Economic Development Commission spokesman Joe Holmes. “It’s just now starting, and I’m sure there will be some more.”
The AEDC is in negotiations with HP and Nordex for a refund of some of the money they received from the fund.
Exactly how much the companies are on the hook for, though, isn’t publicly available. The staffing and salary numbers and other information used to calculate the clawback are considered proprietary information and not subject to release under the Freedom of Information Act, Holmes said. In addition, there are a number of factors that are taken into consideration when the AEDC asks for money back, Holmes said.
“I think there’s a misconception that this can all happen in two or three days,” he said. “That’s not the case.”
In the past decade, the clawback provisions have become common as a way to protect taxpayers when government money is used as an incentive to create jobs in a particular place, said Kathy Mussio, a managing partner at Atlas Insight LLC in New Jersey, a site selection and incentives consulting firm.
“I rarely, if ever, see an incentive agreement without a clawback, and most clawbacks cannot be negotiated out of an agreement,” she said.
If a company doesn’t meet or exceed the minimum number of jobs it promised, then the government agency could claw back some or all — or even all with interest — of the incentive money, Mussio said.
States, however, tend to work with companies to help them though the rough patches.
“We always reserve the right to maybe renegotiate an agreement” to help keep a company in business, Holmes said.
Shortly after the Quick Action Closing Fund was created in 2007, the AEDC began to insert clawback provisions in its contracts with companies that accept the money.
“It’s a mechanism for us to recoup some of the Quick Action monies that are used when things don’t go right,” Holmes said.
Holmes said the clawbacks are mostly used in agreements involving the Quick Action fund because other incentives, such as tax breaks, are performance-based and only realized when a company actually creates jobs.
High Hopes for HP
In June 2008, Hewlett-Packard announced it would open a customer service and technical support center in Conway that would employ 1,200 workers.
These are “the kind of jobs that represent increased earning capacity and wages for the needs and demands of families in today’s society,” Gov. Mike Beebe said during the announcement, held in front of a packed house at the University of Central Arkansas’ Donald W. Reynolds Performance Hall.
The state of Arkansas offered a number of incentives to lure HP to Conway including $10 million from the Quick Action Closing Fund.
It also was a big deal for Arkansas when, just a few months after HP’s announcement, Nordex said it would invest about $100 million and employ 700 people with an average wage of $17 an hour.
“Today we celebrate another important step for our state into the renewable-energy industry with Nordex’s decision to make a significant investment in Arkansas,” Beebe said in a news release at the time. “While we have seen a lot of high-quality jobs coming to Jonesboro in the past few years, Nordex opens up all kinds of future opportunities for northeast Arkansas.”
Nordex’s incentives included up to $8 million from the Quick Action Closing Fund, of which $6 million was to go for training, the training facility and site preparation. As of last week, only $2.5 million of that amount had been used.
The city of Jonesboro was approved for $2 million to do rail and road work in connection with the site, but only $1.4 million had been paid out of the fund.
But neither company delivered the jobs it promised, at least not long term. When Nordex made its announcement about stopping production, it had only 50 workers.
It is unclear exactly how many employees HP had at its Conway plant. HP’s spokeswoman said the company doesn’t release employment figures at a specific location.
A spokesman for Nordex didn’t respond to emailed questions.
A Matter of Formulas
The AEDC said that a number of factors are considered during clawback negotiations. The commission looks at how long the employees were employed and what their salary was.
“There’s a different formula for each year,” Holmes said.
The amount due the fund could be prorated. If the money was used to improve the site, such as adding a rail line that could be used for another company, “we do not claw back that portion of the money,” Holmes said.
Nice-Pak was awarded $2.5 million in October 2008. As with other awards from the Quick Action Fund, a check wasn’t written as a lump sum, but paid over time as work was completed, Holmes said.
Nice-Pak was supposed to create 300 full-time jobs but didn’t, which resulted in a clawback payment of $95,736 in January, Holmes said.
Holmes said he couldn’t release more details about the transaction because it is considered proprietary information.
Pinnacle Foods was awarded $500,000 in April 2010. It was supposed to retain and maintain 594 full-time employees, “and they fell below that for a period of years,” Holmes said.
The clawback payment of $59,550 was received this month.
Allied Wireless was awarded $5 million in December 2010 and was supposed to create 200 jobs.
“They fell below that number, but I can’t tell the exact staffing numbers,” Holmes said.
Allied repaid the fund $60,000 in March.
Protect the Investment
When economic developers insert the clawback provisions, they aren’t trying to create an adversarial position, said Tracey Hyatt Bosman, managing director for BLS & Co. of Chicago, which handles incentives and location selection strategies for companies.
During the Great Recession, she said, a number of companies across the country triggered clawback provisions, but most economic developers were willing to work with the companies to renegotiate the terms.
The developers might give the companies more time to hit the job creation numbers, Bosman said.
“It isn’t the state’s intent to be the final nail in the coffin if the company is struggling,” she said.
Good Jobs First of Washington, D.C., a nonprofit organization that works for economic development accountability, said clawback provisions are effective.
“The whole point in giving public money to private parties is to get results in the way of job creation and so forth,” said Philip Mattera, the research director at Good Jobs First. “If companies feel like those obligations are optional, we’re going to get a lot less job creation.”
He said that these days he is seeing more economic developers willing to apply the clawbacks provisions. Before the Great Recession, economic developers feared enforcing clawback provisions because such action might scare off future businesses and site location consultants who would think that the area has a “bad business climate,” Mattera said.
“Everyone expects government to be more accountable,” he said. “This is public money that’s involved. There’s an increasing feeling that the public money can’t be wasted.”