The Compliance Reckoning Is Here

Incentives are awarded as a result of company commitments – including, but not limited, to job creation, job retention, wages and capital investment. However, in these recent times of uncertainty, forecasting has become more difficult and companies are increasingly falling short of their project commitments within their intended timeframe. The reasons vary, but a large portion of what we are seeing in the marketplace can be attributed to high turnover and employee attrition, optimistic job creation estimates, talent availability, the rise of automation, supply chain disruptions and the impact of federal funding. With the public putting economic development organizations and government officials across the globe under increased pressure to hold corporations accountable, it is critical to understand the recent themes associated with project shortfalls to inform corporate strategy.

High Turnover & Employee Attrition

Companies with higher turnover and attrition rates are often disproportionately impacted by incentive programs that require new positions to be maintained for a specific duration before any benefits can be realized. Turnover and employee attrition tends to be higher in certain industries like manufacturing, warehouse and distribution. Companies should take time to understand the program and benefit realization requirements and processes to best position their projects for success. By prioritizing compliance requirements on the front end and working backwards, companies can appropriately align their project commitments and funding expectations with the current environment.

Overly Optimistic Job Estimates

Sometimes the best laid plans for business growth are subject to extraordinary events that cause inflation and rising interest rates, such as COVID-19. However, job shortfalls have also been a result of overly optimistic expectations of business growth that have either been delayed or have not been met, leading to a significant number of incentives awarded that have never been collected. With each municipal entity having different recapture or project cancellation rules, serious consideration should be given about the end result when entering into agreements. We find that looking in advance to the back end regarding the compliance requirements and projecting their implications forward helps further evaluate the viability of advancing in the process.

Talent Availability

Talent availability remains tight, with employers across the nation reporting challenges finding and retaining a qualified workforce. Companies often inquire about talent availability during the site selection process, which is generally (and in part) illustrated by way of existing occupational data in a given location. However, this data alone does not provide adequate market visibility. Corporations should gather supplemental information to better understand competing projects and operations, ability to hire, quality of talent pool, etc. to inform their project commitments and mitigate risk. In the event a company is experiencing unforeseen obstacles in fulfilling its hiring commitments, discussions with state and local partners should begin as early as feasible.

Rise of Automation

The significant rise of AI and technological innovation has greatly accelerated automation across industries. Companies are deploying automation to fill jobs that are otherwise difficult to hire and maintain, while also using technology to increase productivity and enable employees to engage in more strategic work. Although automation may lend itself to fewer new jobs, particularly if implemented as a reaction to hiring challenges, corporations may find themselves paying higher wages due to the increase in skills needed to run the automated machinery and equipment and/or exceeding their capital investment commitments. In either instance, companies should evaluate their ability to achieve and/or exceed the agreed upon project return on investment (ROI) through a combination of increased wages and/or capital investment despite the potential decrease in physical headcount.

Supply Chain Disruptions

Supply chain disruptions are increasingly prevalent due to increasing global demand, fluctuations in international trade policies and natural disasters. Emerging industry suppliers are especially susceptible to these disruptions as their ability to scale and achieve project commitments is dependent on other activities within the value chain taking place, which can trigger a domino effect and impact short-term growth plans. Companies should consider how external factors such as customer contracts, regulatory environments, sourcing and geopolitical risks might impact their ability to meet project commitments. It is crucial to address these considerations proactively in their agreements to mitigate potential risks.

Pursuing Federal Funding

The pursuit of federal funding has disrupted the typical site selection and incentives negotiation process due to the need to engage with state and local communities much earlier in the decision-making process – in most cases prior to securing adequate funding that makes the project feasible. Federal funding rejections are often more common than approvals. In the event a project is not selected for funding, companies should have a viable back-up plan to close the potential financing gap and realistic timeline for when they expect to secure. It is important to note that many states and local communities now have restrictions and/or strong preferences on a project’s investor location of origin. Foreign investors may be required to complete a review with the Committee on Foreign Investment in the United States (CFIUS), and investors from non-preferred foreign countries may ultimately preclude a company from qualifying for certain state and local incentive programs and/or have triggered community backlash. These considerations should be made proactively and communicated frequently to the state and local community partners.

While each year we see new trends across the incentives landscape, there are many common denominators amongst the related implications and potential solutions year over year. As a result, some states localities have already begun making proactive changes to ensure their programs aren’t lending themselves to non-compliance and triggering shortfalls by design, such as consideration of remote workers; lowering required compliance thresholds from 100 percent (unrealistic) to 75-90 percent; and leveraging weighted performance formulas that blend job creation and/or retention, wages and capital investment to determine compliance among others.

Incentives continue to act as a location differentiator and are worth pursuing. However, with corporate accountability taking center stage, the public sentiment in certain areas (and for certain projects) isn’t as supportive as it once was. Regardless of the reason for project shortfalls, the best solutions are generated when corporations are upfront with their challenges and involve their incentive consultants or legal teams early in the process. The timing in which shortfalls are communicated gives states and local communities time to be part of the solution and hopefully avoids triggering formal default procedures and potentially sensitive public funding discourse.