Re-evaluating the Numbers: Incentive Compliance Management in the Covid-19 Era

2020 has affected our economy in a way that most of us have never experienced. With the landscape changing daily, remaining in compliance with incentives is likely not at the forefront of issues for company leaders.  However, with much at stake in the form of potential repayment of incentives, company leaders need to make sure they are prepared and well-informed.

Let’s Assess; Where Are We?

Has your company experienced layoffs or furloughs during these last months?  Because many state and local incentives are performance-based – dollars are awarded in proportion to job goals being met – a good starting point is thinking ahead to how your year-end 2020 employment numbers will look.  For example, if you are fortunate to have been awarded a payroll tax credit like Economic Development for a Growing Economy (EDGE) tax credits in states like Indiana and Illinois, job reductions can impact current and future compliance because credits are tied directly to an employee’s state withholding.  If an employee has been laid off or furloughed for part of 2020, income and payroll withholding amounts will be reduced, thus reducing the tax credit benefit available proportionally.  Losing this financial benefit would be painful enough when a company may have accrued for the benefit during budget planning, but worse are the long-term consequences in the form of clawbacks or repayment of incentives, when job commitments are not met.

About That Fine Print…

Let’s face it, unless you have a professional site selection advisor and/or in house expert with familiarity in understanding incentive agreements, you likely haven’t read the entire, usually quite lengthy, contract.  Now is the time to familiarize yourself with the sections dealing with capital investment, job and wage/salary commitments and any corresponding clawback provisions.  Some incentive agreements, such as the Texas Enterprise Fund, have a section that deals with force majeure or acts of God, which is defined as “including but not limited to strikes, lockouts or labor shortages, embargo, riot, war, revolution, terrorism, rebellion, insurrection, flood, natural disaster, or interruption of utilities from external causes.“; in other words, events beyond a company’s control.  These events may be able to include mandated shutdown of private and/or public services, rules against gathering in groups, and/or other restrictions such as those recently imposed in many states that practically cease commerce.

Let’s Talk It Out…

Behind every incentive agreement is the state or local economic development agency who initially drafted and approved the agreement.  If you, as the grantee, have negotiated incentives on your own, you have likely already met a representative of the agency.  However, if you have a site selection consultant working on your behalf, this is where that consultant’s relationship with the agency representative – if it is a strong one – can be of great benefit.  Until 2020 year-end numbers begin coming in early next year, we won’t really know how flexible these economic development agencies will be, but our expectation is that an honest conversation between the agency and the company and its’ site selection advisor, and the chance to explain the impact of the pandemic on the company’s business, may net extended terms or timing for incentive compliance.  Some states, such as; North Carolina, have already proactively extended incentive agreements by one year in recognition of the economic impact of COVID-19 on companies’ plans.

Amendments, Anyone?

So you’ve had “the talk” with your economic development agency partner, and they have agreed to extend the time period for you to fulfill your commitments.  The next step will likely be an amendment to the original agreement, which can be fairly simple or more complex, depending on the agency and structure of the agreement.  If the agency is a public entity or an economic development organization, the amendment can simply be an administrative task; the agency generates the document, sends to you for signature, and you send it back to the agency.

Unlike performance-based incentives, property tax abatement is automatically applied as a reduction to tax bills based on the company’s investment in real estate and/or personal property.  It is when yearly abatement reporting forms are filed that the local governing body would take notice that a company has fallen short of job projections.  If an amendment to a tax abatement resolution is requested, approval may require a public hearing where the company must explain the reason for the shortfall.  We can’t say it enough:  those good relationships with your economic development officials are crucial!

What Will the Future Look Like?

The effects of this unprecedented pandemic on business will be felt for years to come.  Where a company may have planned growth and expansion, they may have instead experienced layoffs and revenue loss.  While a new round of incentives tied to that growth may not be possible, it will be even more important for companies to maintain the valuable incentive commitments already in place.  Not only will they provide much-needed cash flow and/or offset to taxes, but maintaining compliance and staying in communication with state and local agencies could keep companies from having to repay those valuable dollars, while at the same time keeping in place the potential for future incentives once business is back to a new normal.

Reducing Risk and Increasing Resilience

In moments of unexpected change, it’s an important reminder of the value of having an experienced site selection consultant by your side.  Not only have seasoned consultants navigated tough times in the past, they have established strong relationships with economic development agencies to collaborate on a clearer path forward for everyone.

The Ginovus team has been managing economic development incentive agreements and protecting its clients for over 18 years. If you need guidance on how to consider different strategies for moving your business forward, we would appreciate a chance to work with you.