@NCCapitol

@NCCapitol

Under two governors, incentive programs miss the mark on hiring

Posted December 19, 2019 4:00 p.m. EST
Updated December 19, 2019 8:23 p.m. EST

— More than a third of the incentive projects announced under North Carolina's largest economic development programs in the last decade failed to generate a single new hire.

That's according to a new analysis from WRAL News, which examined job creation under the state's Job Development Investment Grant program and the One North Carolina Fund. Both programs, administered by the Governor's Office, are designed to lure companies seeking to expand or relocate with the promise of cash grants.

Overall, companies awarded the grants from 2009 to 2016 have so far reported hiring just over half the jobs announced under the two programs. But the state has also paid out far less to the companies than it expected – just under 20 percent of the almost $1 billion committed.

To officials at the state Department of Commerce, which administers incentives, the cost savings is a sign the programs are working as designed. Companies get paid only when they hire. Without the incentives, the agency says, firms would take their investments – and the expanded tax base that comes with them – elsewhere.

"While one could argue for or against incentives, it's a reality globally, not just here in the United States," Commerce Secretary Tony Copeland said. "I think it's the responsible thing to do to look at these companies."

But given that nearly four out of every 10 of these recruitment projects didn't hire, saw their incentive deal canceled or simply walked away from the grant altogether, critics say the state is taking the wrong approach toward job creation.

"If there was any other program in state government that 40 percent of the time was failing in what it was trying to do, that program would be eliminated," said Allan Freyer, director of workers’ rights at the liberal-leaning N.C. Justice Center.

Two governors, similar profiles

Since 2014, WRAL News has examined the performance of grants under JDIG and One North Carolina using annual data from the Commerce Department. Because the projects take several years to ramp up, the most recent analysis focused on projects announced during the administrations of Democratic Gov. Bev Perdue and – for the first time – Republican Gov. Pat McCrory.

It shows the performance of the grant programs under the two governors is fairly similar. That's despite vastly different political ideologies and economic conditions.

Of the roughly 42,500 jobs Perdue announced through the grants from 2009 to 2012, companies have hired about 60 percent of what was promised in high-profile announcements and press releases.

At about 44 percent of the projected hiring, McCrory's numbers are lower. But a larger share of those projects – and the roughly 39,300 jobs his administration announced under the two programs – still have time under provisions of the grants to make their hires.

Perdue and McCrory announced about 81,800 jobs under JDIG and One North Carolina during their administrations. But companies under those grants have delivered on just over 50 percent of that total – reporting about 42,600 jobs so far.

Of the nearly $900 million of incentive grants announced under these programs from 2009 to 2016, companies have collected only about $200 million. That's about 20 percent of what the state expected to pay the firms.

The payouts are low by design, Commerce officials say, since companies must hit hiring, retention and investment benchmarks before receiving portions of the funding.

"They don't get paid if they don't create the job," Copeland said.

Copeland said hiring that did happen, meanwhile, boosted tax revenues on the local and state level, and it means more people employed in good-paying jobs.

The actual economic picture may be more complicated, said Josh Goodman, of the Pew Charitable Trusts. The nonprofit research foundation has worked since 2012 with states across the country to analyze and improve their incentive programs.

"If not every company's getting their incentives because they didn't create the jobs, that could be a sign the state is doing a good job enforcing these agreements," said Goodman, a senior officer for economic development and state fiscal health for the organization. “But it could also mean the state isn't targeting the right kinds of businesses, or that the incentives aren't really well designed to offer a benefit that are useful to companies."

Thirty states now have processes for regularly evaluating their incentive programs, Goodman said.

North Carolina isn't one of them.

“That really means lawmakers don't have consistent, reliable information on how well incentive programs are working and how they can be improved,” Goodman said.

Given the differences in incentive programs across the state, it's hard to know how North Carolina's efforts measure up, says Nate Jensen, a professor of government at the University of Texas at Austin who studies incentives nationwide.

But he said WRAL's finding that about 37 percent of North Carolina's grant projects failed to create a single new job seems particularly large.

For the companies involved, he said there's little downside to over-claiming and under-delivering. The job announcements and press releases, after all, won't be followed up with corrections.

"If you're a company and you think you're going to create jobs, and if you create those jobs and receive all these incentives, why not say it?" Jensen said. "It can be this perfect storm where you see these photo ops and job announcements and these companies never really deliver – but there's no penalty for not delivering."

It's no surprise to Joe Coletti, a senior fellow at the conservative John Locke Foundation, that the failure rate is similar for both Republican and Democratic administrations.

"There's no secret sauce that one side has that the other side doesn't," Coletti said. "No side is better at predicting the future than anybody else."

Copeland said his department does a thorough examination of each company before moving forward with an incentive offer. They examine the potential economic impact, whether the company is growing and whether its in a sector that will benefit both the local area and the state.

But business conditions, he said, are always subject to change for companies – even those with big plans for hiring.

"Some fail," Copeland said. "But our incentives, I think, stand up against any in the world so far as being responsible."

How to count jobs

Commerce officials also argue that an important component of the incentives are the agreements themselves. The deals require companies to attest that, without the incentives, they wouldn't have selected North Carolina for their relocations or expansions.

Because the cash grants are essentially recouped from a portion of what the companies or their new employees pay in state and local taxes, Copeland said the firms are paid with money that wouldn't have existed otherwise.

Jensen said that's a common argument in many states.

"It is just the absolute wrong way to think about economic development to say it generated more tax dollars than we gave in incentives," he said.

Jensen compared the process to Nike spending $10 million on marketing, getting $100 million in sales and claiming a great return on the investment.

"People would have bought some Nike shoes anyway," Jensen said. "It's how much did that campaign increase sales?"

Economists point out – and Commerce officials fully acknowledge – that incentives are far from the primary driver for companies making decisions about their growth. That's why state recruiters regularly tout factors like the quality of North Carolina's workforce, its tax climate and quality of life in their efforts to woo businesses.

"All economic decisions are made on the margins," Jon Sanders, director of regulatory studies at the John Locke Foundation, said. "Only in a few cases are incentives going to be a marginal benefit that changes a 'no' to a 'yes.'"

But figuring out how many companies would have hired in the state regardless of the incentives is a hard thing to measure.

Tim Bartik, an economist at the W.E. Upjohn Institute for Employment Research, studied that question specifically for incentive programs across the country. His 2018 paper showed the vast majority of the jobs attributed to incentives in a given state – somewhere between 75 to 98 percent – would have been created there without the subsidies.

"Government – really, state or local – doesn't really know what's happening in those businesses about whether they expand or move," said Kasia Tarczynska, a research analyst with Good Jobs First, a watchdog group that tracks incentives nationwide. "We just have to believe what they say."

Such an inherent information imbalance puts states at a disadvantage in incentive negotiations, she said.

But even if incentives make an impact on only a fraction of new job growth, the Justice Center's Freyer said there are areas of the state where even slim returns are worth the money.

"I just think we need to get that number higher," he said.

In North Carolina, it's unlikely incentives are going anywhere anytime soon.

The state legislature in recent years has re-upped its commitment to incentives and expanded the size of grants for so-called "transformative projects" – major expansions and relocations aimed at corporations the size of Apple and Amazon.

Records have shown that even for the programs the state hasn't landed – Amazon's second headquarters or a joint automotive plant run by Toyota and Mazda – North Carolina Commerce officials have put millions on the line to attract the investments.

"That money is money that could also go to general government tax cuts or spending in other areas. That's why it's really important for lawmakers to think through how well their incentives are working, how they can be improved and to do that on the basis of good information," Goodman, of the Pew Charitable Trusts, said. "Otherwise, it's a lot of money involved – and it needs to be accountable."

Our commenting policy has changed. If you would like to comment, please share on social media using the icons below and comment there.