Incentives: Do they really work?

It's a common news item: The county is negotiating with a business that is considering an expansion into the local area. Managers say they intend to invest a fairly specific amount of money and hire a certain number of workers. The county agrees to offer various "incentives," such as land, buildings, utilities, improvements to a road or money to encourage the company to select our fair city for its new location.

Businesses large enough to hire more than a few workers today expect states and municipalities to compete to attract them by offering the most generous incentives package. It's a common practice, and it's authorized in North Carolina by state law.

But does it work? Do the incentives offered come in at or under the estimated budget? And do the promised jobs materialize?

These questions have a more urgent tone these days, when much-trumpeted incentive deals have collapsed both locally and throughout the state. One of the jewels of McDowell's economic development campaign was Cobia Boats; it went under in 2008, leaving in its wake an empty building and at least 68 workers out of a job. 

North Carolina and Winston-Salem invested hundreds of millions of dollars to entice Dell Inc. to expand there. The company walked away from that deal in 2009.

The state approved an incentives package of up to $267 million in 2004, according to the Winston-Salem Journal. Forsyth County kicked in another $37.2 million. In exchange, Dell promised to hire "at least" 1,200, perhaps as many as 2,000 employees. The Dell deal called for the company to hire 1,700 employees and invest $100 million within five years. Having failed to do so, Dell must pay back more than $15 million to the city.

There've been quite a few industries that have made the decision to come to McDowell in the past few years, and many have had the pot sweetened through deals brokered by the McDowell Economic Development Authority (MEDA) and approved by the McDowell County Commissioners. MEDA is directed by Chuck Abernathy, who, as county manager, wears two hats. He's been directing MEDA for about seven years.

"MEDA is a nonprofit entity that handles the recruiting of manufacturers," he summarized. Its job is to seek out employers and convince them that McDowell is the right place for them. That can mean offering them sweeter incentives packages than anyone else. 

MEDA presents its recommendations to the County Commission for approval. Public hearings are held, with opportunity for public comment, and then the commissioners vote whether to approve or reject the contract. 

Incentives packages -- or "selective corporate subsidies" to their detractors -- can mean anything from land, buildings, roads, utilities and tax exemptions to outright cash payments. 
Although MEDA was created by the county, not all the incentives it negotiates come from McDowell's pockets. Part of Abernathy's job is to tap into state money, negotiate discounts on utilities from Duke Power or handle the planning and logistics with getting the city to extend water and sewer service.

Abernathy said the ultimate goal for his office is not only bringing manufacturers to McDowell, but to recruit from a diverse sector. 

When most of the county is employed in just one sector of manufacturing, that leaves it vulnerable to that industry downsizing or collapsing, he said. A well-planned industrial base is as broad as possible so as to be less vulnerable. 

That's why, he added, recruiting Cobia Boats was such an achievement, and its loss such a bitter disappointment.

Boats were an untapped sector of the economy, and Cobia was energetically courted by three different states, and five counties in North Carolina, he said. And Cobia was more than just the 250 jobs it promised; a network of support businesses had begun the process to grow up around it. 

"It was a devastating loss," he said. "The economy took it out."
After about two years of production, Cobia announced it would "temporarily" furlough its 68 McDowell workers "until the economy improves."

Abernathy recalled the terms of the agreement that brought the boat works to McDowell. The company was to make a $4 million investment. MEDA arranged a $1.25 million incentives package. 

When the company announced its closing, MEDA had handed over $890,000 of that $1.25 million. Neither the property at the McDowell Industrial Park nor any of the money can be recovered, he added. 

"They met the terms of the contract," Abernathy said, "and they made an enormous investment of their own."

Today, that building is occupied by Morganton Pressure Vessels, a business MEDA recruited from Burke County, offering incentives totaling $200,000 in exchange for 67 jobs and a company investment of $500,000. 

"They have 53 hired and working," he stated, "and we have made our first payment. They lease that building from Cobia and if it weren't for the building they would never have made the move here. It's not what we were hoping for when we recruited Cobia, obviously," but at least "the site was put back into use and we are continuing to get something for that investment." 

Part of the art of writing good incentives and recruiting contracts is providing that the county can reclaim its investment if the deal falls through. MEDA negotiated a 2007 deal with DGR Networks, an IT communications company based in Burke. That deal promised to bring 12 jobs and a $1 million investment. MEDA arranged for the county to grant the company a 5-acre site at the industrial park. 

Since then, the company has asked for an extension on the terms of the contract and that extension was granted. But as it stands now, said Abernathy, the property comes back to the county if the company fails to meet its obligations.

There have been dozens of MEDA-negotiated projects approved by the county since Abernathy took reigns. In 2004, MEDA recruited a kidney dialysis center to operate at the Senior Center. MEDA arranged for the county to grant Foothills Industries a site at the Industrial Park for its 40,000-plus-foot facility. 

Also that year, the county purchased approximately 7 acres on Barnes Road for $2,000 per acre and sold it to ALL Mechanical and Construction for $4,000 per acre -- well below the market value of the land, Abernathy said -- with the stipulation that ALL build on the property and develop it for industry. MEDA negotiated for the county to grant an extension on those terms, due to health problems ALL's owner experienced. He said that paid off.

"The building was built and there are two businesses in there today," he stated.
Carriage House Doors negotiated with MEDA, promising to invest $750,000 and create 80 jobs in 2005 with a $75,000 incentive from the county. Today the company employs about 40 workers and the county has so far paid $25,000 – one-third of the pledged incentive.

In 2007, Funtime Factory promised to invest $200,000 and hire 24 employees in the defunct Marion Manufacturing facility. The county pledged $45,000 incentives. The company failed and the county lost its $15,000. 

Just one year ago, Toolcraft offered to invest $1 million and create 25 new jobs, and MEDA secured the county's agreement for $50,000 in incentives. So far, Abernathy said, the company has honored its pledge and the county has anted up $16,666.66.

Many projects don't pan out or are delayed for months or even years. North Cove Water Bottling pledged a $1.1 million investment and stated its intention to hire 103 employees, and MEDA secured a $310,000 incentive from the county. The project is on hold, and the contract has not been finalized, so the county has not forked over any cash yet.

Several other MEDA-negotiated projects are "on hold," their status considered "active" but with "no contract" -- deals finalized and agreed but not activated as businesses wait and see what the future holds.

Whatever their track record, the practice of using incentives to attract business is widespread and well-entrenched.

But do people like incentives? It's a challenge to find anyone in government who will speak glowingly of the practice in unqualified terms; businesses that benefit from them are perhaps too tactful to comment. But incentives have many detractors.
John Hood of the John Locke Foundation has said that incentives are not about creating jobs, but are about giving politicians the opportunity to take credit for creating jobs at lavish press conferences. 

"Giving subsidies to some politically favored companies inevitably means increasing costs to other companies," he wrote, "typically smaller ones less capable of presenting a credible threat to leave if they aren't subsidized.

"Incentives shift the tax burden for local services," he said.

Hood called attention to a report in the Winston-Salem Journal, which found that of 70 local incentives packages awarded since 1990, 40 percent of the pledged jobs either never materialized or were soon eliminated.

The Dell deal was challenged in court. Former N.C. Supreme Court Justice Bob Orr brought suit, challenging that the incentives offered to Dell were not consistent with a state Constitutional requirement which stipulates that the spending of public money is to be only for public purpose. He said the taxpayers of the state were being "deprived of revenue by virtue of these (Dell) incentives." 

His suit was thrown out by Wake County Superior Court. Orr appealed and, according to the News & Record of Greensboro, the state Court of Appeals ruled that incentives "promote the general economic welfare of the communities involved" and that Orr and anyone else who disagree should seek relief in the Legislature, not in court. 

The McDowell News asked Abernathy his take on incentives. Do they work? And do employers' projections about the numbers of jobs tend to be right?

"Some of the companies haven't performed," he said. "Did they over-promise? I think generally, this is a recession that has changed every employer's goal."

He said that if any one player, McDowell County for example, took the initiative to unilaterally stop offering incentives, the community would quickly find itself out of the running for business recruitment -- completely. You don't win games if you refuse to play.

He spoke of North Carolina's failure to win in fierce competition for automobile industry facilities. BMW went to South Carolina, Saturn to Tennessee, Mercedes-Benz to Alabama. Those states were more willing to pay what basically amounted to a higher bounty to land their operations 

Did those state's lower personal income tax burdens for upper-end executives make a difference? 

"Possibly," Abernathy answered. "I hadn't thought of that, but higher income taxes (in North Carolina) could have made a difference."