Despite big job promises, incentives often fail to deliver
Posted October 14, 2014
Raleigh, N.C. — At groundbreaking ceremonies, ribbon cuttings and company-wide announcements, governors in North Carolina have for decades appeared alongside corporate executives to herald the coming of new jobs.
They're aided by millions in taxpayer dollars that North Carolina, much like other states, uses to lure and retain businesses.
As the state dug out from the depths of the recession, the projects were seen as bright spots in the slowly recovering economy.
But years after these jobs were announced by executives and state leaders, most failed to fully materialize, a WRAL News analysis found. More than 100 companies named in job announcements since 2009 have since reported no new jobs. Some have laid off workers or closed up shop altogether.
North Carolina's grants are performance-based, so companies can only claim payments if they deliver on their promises. That means the state often pays out a fraction of the money it originally commits.
Proponents of economic incentives say this is a sign the state's incentives work as intended, encouraging risk while responsibly employing taxpayer money to recruit industry.
To critics, the lackluster hiring casts doubt on the conventional wisdom that incentives are necessary to lure job creators – even if the state is risking little in offering the benefits.
"The politicians get to do the ribbon cuttings and get to take the credit for the incentives," said Sarah Curry, director of fiscal policy studies at the conservative John Locke Foundation, which opposes incentives. "But they're not actually creating as many jobs as they say they are."
Grants promised often don't mean new jobs
Since 2007, the N.C. Department of Commerce has tracked the performance of its incentives on a variety of metrics in an annual report to the General Assembly.
Among the state's grant programs, the largest are Job Development Investment Grants and the One North Carolina Fund. Depending on the project, grants take two to eight years to fully pay out as companies ramp up production, build new facilities or relocate.
WRAL News analyzed the JDIG and One North Carolina projects announced by Gov. Bev Perdue from 2009 to 2012 to get a complete picture of how the administration's incentives measure up. Although not all projects are required to report as of the 2014 commerce report, 267 projects at varying stages of their grants have.
For those projects, Perdue announced the creation of 39,562 jobs during her tenure.
Data show that only 38 percent of those jobs have been created, despite the projects being a cumulative 75 percent of the way through their grant cycles.
Even among the 146 projects closed out or past their ramp-up period, companies created 8,774 of the 19,537 announced jobs – less than 45 percent.
Since 2009, commerce data shows 127 projects have reported zero new jobs out of a promised 17,592. About half of the companies reporting zero jobs created still have time to catch up, although only 18 are less than halfway through their grant cycles.
There have been some notable wins – 38 projects have filled all of the jobs promised or more. Manufacturing companies in Davidson, Rockingham and Pitt counties even hired more than twice the number of workers they said they would.
And although the projects often fall short, so do the costs. Only 12 percent of the projected cost of the grants has so far paid out – a price tag of $38.6 million for about 15,000 jobs.
That reduces the projected cost per job from about $8,000 to an actual cost of $2,500 per job.
''The politicians get to do the ribbon cuttings and get to take the credit for the incentives. But they're not actually creating as many jobs as they say they are.''
Sarah Curry, director of fiscal policy studies, John Locke Foundation
Through a spokesperson, WRAL News shared the data on job creation with Perdue, who would not agree to sit down for an interview. But in a written statement, she said her administration was "aggressive in the pursuit of these jobs" and that without incentives, many companies would not have expanded or relocated at all.
"I’m glad these companies chose North Carolina and that they are working to live up to their commitments," Perdue wrote. "I look forward to seeing their progress and success in the years to come."
After announcements, hiring lags
Cathy Pierce doesn't remember if the governor showed up personally at the Gates Corporation in Jefferson for a job announcement in February 2011. But she does remember hearing about the new production line coming to the auto parts factory where she worked as a supervisor.
According to Perdue's press release, the expansion would mean 58 new jobs spurred in part by a $100,000 grant from the One North Carolina fund and additional contributions from the county and city. It was great news and promised a 22 percent jump in payroll for a company that had for decades been a staple in the Ashe County community.
"Back when I started in 1980 – golly – it was prestigious to tell people you worked at Gates," Pierce said. "It's been a great place to work."
About three weeks ago, the company shuttered the plant and consolidated operations out of state, leaving 247 people out of a job.
That included Pierce, who like many was surprised and upset when the company broke the news in July 2013.
"Most of the average people there were in their 50s," Pierce said. "Our lives were dedicated to the Gates Corporation."
Because it didn't meet its job targets, Gates received no grant money from the state. But it wasn't the first time the company sought incentives.
In late 1997, Gates received a $400,000 low-cost loan after considering a similar shutdown.
"We were actually saved by those tax dollars that the state and county gave them," Pierce said.
Gates Executive Vice President Tom Reeve declined to comment on the closure, saying only that it was a difficult decision.
"We’re just trying to move it forward," Reeve said.
Across the state, other companies with high hopes for expansion also closed their doors or failed to start production altogether.
Three years after Perdue announced that UK-based ACW Technology would hire 155 people for its new electronics manufacturing plant in Durham, that plant is no longer operational. It never received the $50,000 One North Carolina payout for the purchase of equipment.
''There were companies, plenty of them, that made announcements pre-recession that ended up being more optimistic than what they were actually able to do when we entered the recession.''
Adrienne Cole, Wake County Economic Development executive director
In February 2013, much of that gear – brand new in 2010 – was offered up at auction.
In Littleton, a Halifax County town with a population of 659, a building materials manufacturer called FASTA was set to hire 105 and settle in a county-owned industrial facility. In addition to a rent deal, the firm would have received $300,000 from the One NC fund.
The company never moved in.
Townsends, a chicken processor with plants in Siler City and Mocksville, filed for bankruptcy in 2012 after laying off hundreds of workers at both locations. It received none of the $250,000 One NC grant Perdue announced in September 2009 for the creation of 103 new jobs.
For some corporations, job announcements came with intermittent downsizing.
Layoff notices filed with the state show Noranda Aluminum laid off 59 workers at its Salisbury facility in December 2013. Yet the most recent commerce data show the company created 21 out of the 25 jobs Perdue announced in August 2010, collecting $81,000 in the process.
In March 2009, GMAC financial services announced it would add 200 high-paying jobs in Charlotte with the help of a $4.5 million JDIG award. A year later, the company announced in two separate notices that it would lay off 160. Commerce reports show the company created 231 new jobs – better than expected – pulling in $1.9 million of the grant.
In a statement, Noranda Vice President of Communication John Parker said the layoffs were the result of temporary downsizing that lasted only 60 days. Only one employee, he said, hasn't been hired back.
"We believe we have fulfilled the capital investment obligations and are fulfilling the employment obligations for the grant payments we received," Parker said.
An email to GMAC media relations requesting comment went unanswered. But Commerce spokesperson Graham Wilson said tax records the department uses to verify employment show the company has met or exceeded job targets every year.
"It's possible those layoffs were in divisions that did not receive a JDIG," Wilson said.
Although these projects were planned and announced in the wake of the recession, Wake County Economic Development Executive Director Adrienne Cole said it's important to remember that the slower-than-expected recovery had a big impact on companies looking to grow.
"There were companies, plenty of them, that made announcements pre-recession that ended up being more optimistic than what they were actually able to do when we entered the recession," Cole said.
Some companies report big hiring
Among the commerce data are dozens of companies that have met or exceeded their promises or are on track to hire during their expansions and relocations.
United Furniture Industries in Davidson County, SANS Technical Fibers in Rockingham County and the Roberts Company in Pitt County reported hiring twice the number of workers they expected.
Pharmaceutical giants Novo Nordisk and Novartis created more than 100 jobs each at their Triangle-area plants, topping their 2010 projections by a handful.
Technology firm Red Hat, which considered moving its headquarters from Raleigh, has reported hiring about half of its 540 announced jobs about halfway through its grant cycle. The company has so far received about a half-million dollars out of its potential $15 million package.
Keeping the firm was a huge win for Perdue, who called the competition to keep the company and its CEO Jim Whitehurst in the Tar Heel State "aggressive."
"It's one that I got personally involved in," Perdue said at a January 2011 news conference, where she donned the company's iconic red fedora. "I did everything but cook him a home-cooked meal."
Red Hat wouldn't agree to an interview about the incentives it received. Nor would other large recipients such as EMC Corp. and Caterpillar. Many other companies did not return phone calls or emails.
But at a news conference in January 2011, Whitehurst told reporters why Raleigh won out over Atlanta, Austin and Boston.
"Without the incentives, we would not have been able to stay here. We work for a public company and I have to look my board of directors and my shareholders in the eye and say I got the best economic deal," he said. "Obviously North Carolina came in with the total best package."
A pattern of 'phantom jobs'
The numbers aren't particularly surprising to economists like Tim Bartik, who studies incentives nationally at the Michigan-based nonprofit W.E. Upjohn Institute for Employment Research. He notes there's often a tendency for both companies and politicians to talk up the best-case scenario.
"That's a universal criticism of these programs," Bartik said. "You should always discount somewhat these incentives announcements. It's very common for them to fall short."
''Even if these programs are underperforming, what does that say about whether the incentive was a good deal? Maybe we're not getting as many jobs as we thought, but we're still getting something.''
Jonathan Morgan, UNC-Chapel Hill School of Government
North Carolina is certainly not alone.
A 2013 investigation by The Atlanta Journal Constitution found that about half the companies didn't deliver the numbers touted by Georgia leaders and that government statistics were skewed by a handful of projects that produced more jobs than expected.
North Carolina itself has a history of overselling job creation numbers – even without incentives. In 1985, two separate studies by North Carolina State University and the University of North Carolina-Chapel Hill examining different periods found that in the 1970s and early 80s, the commerce department inflated new job numbers by nearly twofold.
"We do believe that the deception of economic growth in terms of jobs available is significant to the citizens of North Carolina," UNC researchers wrote in the study.
Recapping the research, a 1985 N.C. Center for Public Policy Research journal article dubbed it a case of "phantom jobs."
Undershooting employment goals reduces the cost per job, which state officials compare to the expected benefits of a newly expanded company. That benefit is called the multiplier effect, and it helps commerce planners determine whether each deal will ultimately be worthwhile for taxpayers.
Among the biggest factors in that decision are the salary levels, the number of jobs created and how many of those workers are hired from the state's unemployed workforce, says Mike Walden, the N.C. State University economist who authored the model the state uses to forecast JDIG benefits.
"Most of the additional revenue would be coming from the spending the workers engage in," Walden said.
With fewer workers than expected, Bartik says the cost-benefit analysis can change quite a bit – even if it appears the state is paying much less per job.
"That's good in a sense," Bartik said. "But on the other hand, it does mean that if the cost of these incentives is less than originally feared, maybe the benefits are less too."
Other incentives experts aren't so sure.
''I really don’t like penalizing people when the deal doesn’t turn out the way it’s supposed to, but one of the results is we saved money – it cost us less. That’s a win, even if the job number doesn’t reach what [we said].''
Brent Lane, director, UNC-CH Center for Competitive Economies
"Even if these programs are underperforming, what does that say about whether the incentive was a good deal?" said Jonathan Morgan, who studies economic development at the UNC-Chapel Hill School of Government. "Maybe we're not getting as many jobs as we thought, but we're still getting something."
That's the attitude of Jim Fain, the state commerce secretary who in 2002 oversaw the implementation of JDIG and major boosts to the One North Carolina fund.
"It says that the grants are structured right and you're better off than not having played the game," Fain said.
Part of the game, says Brent Lane, is responsibly encouraging and rewarding companies who take risks. The director of the UNC-CH Center for Competitive Economies, Lane led the research team behind a massive report evaluating incentives for the state legislature in 2009. The study recommended ending the state's now defunct tax incentives and increasing spending on more strategic subsidies like JDIG and One NC.
Lane said with good performance measures in place, missing job targets isn't failure.
"I really don’t like penalizing people when the deal doesn’t turn out the way it’s supposed to, but one of the results is we saved money – it cost us less," Lane said. "That’s a win, even if the job number doesn’t reach what [we said]."
Why incentives show 'skin in the game'
Talk to enough consultants, site locators, economists and business executives about incentives, and you'll hear the word "risk" come up quite a bit. It's a factor that weighs heavily, they say, on any state that lets its guard down in the incentive negotiation.
"The landscape is littered with deals where states didn't do their due diligence and didn't do a good job of protecting the taxpayer," said Chris Lloyd, senior vice president and director of infrastructure and economic development at McGuireWoods Consulting.
''The amount of paperwork you have to fill out to get an incentive in North Carolina is incredible. But it's a process that North Carolina does a very good job of vetting to make sure the company is credible and the taxpayer is protected.''
Chris Lloyd, senior vice president, McGuireWoods Consulting
Lloyd has worked on several deals for companies considering relocating in North Carolina and other states in the southeast.
That North Carolina has only paid a fraction of the money officials have offered doesn't surprise him – especially considering the state's efforts to hold companies accountable for performance.
"The amount of paperwork you have to fill out to get an incentive in North Carolina is incredible," Lloyd said. "But it's a process that North Carolina does a very good job of vetting to make sure the company is credible and the taxpayer is protected."
That means a lot of rules, even for companies reporting big hiring.
North American Aerodynamics, a Roxboro company that manufactures parachutes, announced the creation of 375 jobs at its Person County facility in 2009. According to President John Higgins, the firm's payroll peaked at 500 people.
Yet the company never received its $300,000 One North Carolina award because not all of those new employees had health insurance – a requirement of the state's grant.
"They had nothing to do with creating jobs for us. It could have helped us a lot in absorbing some of the costs, but getting up to 500 people was an investment that we made," Higgins said, adding that the cost of health insurance wouldn't have been worth it. "Nothing came from the state."
After a number of the company's military contracts dried up, they're now down to about 90 employees.
In Elizabeth City, a riverside town in northeastern North Carolina home to one of the country's largest U.S. Coast Guard bases, the state terminated a $1.2 million JDIG award with defense contractor DRS Technologies. The firm overhauls the Coast Guard aircraft that take off and land less than a half-mile from the main DRS hangar.
After losing contracts, DRS went from a peak of 248 people to about 100.
It received nothing from the state. But Don Davis, vice president for operations, said the company's initial hiring earned it about $4.2 million from other community-based grants. It's now on track to pay off grant penalties by January 2015.
A retired Marine and former Boeing executive, Davis didn't join DRS until after the award negotiation. But he said the grants showed the state and community believed in the company's vision and "had some skin in the game."
"If I had to go back and do it all over again, I would take the grant," Davis said, pointing out it helped build infrastructure for the company's current hiring. "It became a catalyst for the 206 people working here today."
Despite already being highly regarded nationally for its programs, commerce officials say the state will continue to improve its accountability measures.
After a July 2013 state audit of JDIG found the department relied too heavily on hiring data companies self-reported, commerce officials retooled the reporting process to verify employment data with the Division of Employment Security. That step also ensures companies can't lay off workers in one location in the state to boost hiring in another.
"We've got good solid programs that now have a number of years of experience with them so we can confirm and then reaffirm," Decker said. "I have a great deal of confidence in the data and it is something we continually monitor and continually watch."
Back in Jefferson, Ashe County Manager Sam Yearick says things aren't so dire after the closing of the Gates plant.
GE Aviation announced last July that it would add 105 jobs at its West Jefferson plant with the help of a $3.6 million JDIG award. It has not yet been required to report new jobs to the commerce department.
In the shuttered Gates plant, ambulance manufacturer American Emergency Vehicles is moving in from an existing facility across town. The company received no incentives from the state, but Yearick said he wouldn't be surprised to see some sort of incentives agreement for the company from the local government before January.
As for Gates, Yearick said he has no regrets about the grants state and local government officials offered the firm. For a rural county with an unemployment rate of 7.7 percent – more than one point higher than the state and the nation – jobs like those matter.
Even if they don't last forever.
"They paid a lot of mortgages and sent a lot of kids to school," Yearick said. "I was thankful for every day they were here."