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When Business Gets Bad -- and Governments Claw Back

June 28, 2011
Clawback provisions should take into account economic downturns and other 'unforeseen circumstances.'

In September 2007, Evergreen Solar Inc. broke ground on a $165 million photovoltaic-module factory at the site of a former military base in Devens, Mass. Four and a half years -- and $58 million in state incentives -- later, the company closed the facility.

When Evergreen Solar made the announcement this past January, the company blamed falling prices for solar products, and its inability to compete with low-cost manufacturing in China, for the decision to shutter the Devens plant and displace its 800 workers.

But the company's explanation didn't matter much to outraged taxpayers, who -- understandably -- wanted to see the government reimbursed for the millions of dollars it doled out to Evergreen Solar.

Thanks to a clawback provision in the incentive agreement, the company reportedly will have to pay back at least $3 million in state grants. In May, state economic development officials cut off Evergreen Solar's property-tax breaks and voided another $7.5 million in state tax credits that were contingent upon the company creating a certain number of jobs, according to the online version of the Boston Globe.

"If a company does not meet its commitments, then there are consequences," Massachusetts Secretary of Housing and Economic Development Greg Bialecki told in May.

Meanwhile, some lawmakers have called for legislation mandating stricter corporate accountability rules and more aggressive clawback provisions when companies receive incentives to expand or relocate in the state.

It's a scenario that became increasingly frequent during the recession, says Anthony Figliola, vice president of New York City-based lobbying firm Empire Government Strategies.

As the economy sputtered and companies had a difficult time meeting job-creation targets and other requirements of their incentive packages, state and local governments increased their use of clawback provisions in their incentive contracts, Figliola explains.

"Because all of a sudden these companies weren't reaching their goals," Figliola says. "They may have had lofty goals, but it wasn't necessarily their fault -- it was the recession." (Figliola, by the way, did not speak to the Evergreen Solar example specifically.)

Figliola, who has worked in the public sector as the former deputy supervisor for the Town of Brookhaven, N.Y., understands why some critics argue that economic development incentives are tantamount to "corporate welfare."

But while he agrees that there are some "bad apples," Figliola argues that government agencies need to realize that when companies don't meet the goals of their incentive packages, there sometimes are extenuating circumstances.

Figliola: Clawback provisions need to strike a balance between holding companies accountable and taking into consideration circumstances such as the economic conditions."When politicians run for office and they talk about these lofty goals, if you really did the math, they probably didn't meet half of what they said they were going to do because of unforeseen circumstances," Figliola says. "And the same holds true in business. So you can't hold a company to say, 'Absolutely, unequivocally, you're going to hit this mark.'"

Use Clawbacks 'Responsibly'

Figliola asserts that clawback provisions should include language that takes into account the possibility that companies might fail to meet their incentive goals because of the "economic climate" or other circumstances.

"And I think that's what a lot of municipalities and government agencies are doing," Figliola says. "If you're going to put in clawback provisions, you need to do it responsibly and add that language."

The onus is both parties -- the company and the government agency -- to ensure that such language is included in a clawback provision, Figliola adds.

In his home state of New York and elsewhere, Figliola also is seeing economic development agencies offer performance-based incentives.

In other words, companies must prove that they have created a certain number of jobs -- or that they have met other stipulations of the agreement -- before receiving the incentives -- as opposed to receiving the money upfront on the promise that they will create jobs in the future.

"That actually works a lot better," Figliola says. "Then you don't have to deal with the clawback issue. Because if you performed and you met your goal, you get your money. If you didn't reach your goal, you won't get as much as you originally thought you were going to get. And that's been working."

The Dark Side of Clawbacks

The problem with aggressive clawback provisions, Figliola argues, is that they can be counterproductive for government agencies.

"Companies don't want to fire people -- that's not what they're in business to do. They're in business to grow," Figliola says. "If you go and try to take that money away from them, now they may have to lay off even more people. They're trying to weather the storm."

And while he agrees that bad apples need to be held accountable for recklessly squandering taxpayer dollars, he asserts that critics of economic development incentives are missing the bigger picture that "there are a lot of companies out that are doing great work in hiring people."

"And nobody can tell me that if you hired five people that that wasn't a good thing," Figliola says. "That means five less people are unemployed today because a company hired them and gave them a full-time job with benefits, which means they can feed their family. That's a good thing."

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