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Episode 31 – Incentives in the Age of COVID-19

Site Selectors Guild
Episode 31 - Incentives in the Age of COVID-19
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Rick Weddle: Welcome to Site Selection Matters, where we take a close look at the art and science of site selection decision-making. I’m your host, Rick Weddle, president of Site Selectors Guild. In each episode we introduce you to leaders in the world of corporate site selection and economic development. We speak with members of the Site Selectors Guild and our economic development partners and corporate decision-makers to provide you with deep insight into the best and next practices in our profession.

In this episode we again have as our guest Andy Shapiro. Andy is a principal in the location advisory firm Biggins Lacy Shapiro & Company and the immediate past chair of the Site Selectors Guild. He’s here to talk with us about economic development in cities in the United States, more specifically, how such incentives are being or likely to be impacted by the COVID-19 health emergency. Join me as we welcome back Andy Shapiro to Site Selection Matters.

Andy, we’ve been hearing that the climate around state and local incentives has really been evolving both before and even after now the pandemic that’s underway. Tell us about that a bit and help us understand what’s happened since COVID-19 has emerged.

Andy Shapiro: Thanks, Rick. You know, in many ways the practice of economic development incentives has or soon will be unrecognizable by pre-COVID standards. But you’re correct. There’s been a change underway for quite some time now. And in particular, before COVID, we were receiving a pullback in many of those states that had typically deployed incentives strategically as part of their economic development efforts. I’ll just give you a couple of examples from the recent experiences we’ve had at BLS & Company.

For example, New Jersey, you know, under Governor Murphy, you know, they basically allowed most of those Christie-era programs such as the Grow New Jersey incentive to sunset and have done so without any clear guidance on what would be the successor incentives. This has had a significant impact on the state, not the least of which has been the cratering of the office market, particularly along the New Jersey-Hudson River waterfront, which has historically thrived on the steady diet of New York City’s, you know, out-migrating companies. So there’s a lot of uncertainty there on the New Jersey side and without a successor program in place, a lot of deals have gone basically on lockdown. This is all, again, before COVID.

Another pre-COVID example of how the incentives climate has changed to a nearby state in the Northeast in Connecticut. There, another new governor, Governor Lamont, ordered a top to bottom reevaluation of all state incentive programs with recommendations that ultimately the state curtail some of the more discretionary inducements in favor of some of the more what we would call “pay-to-play” programs such as payroll withholding-based incentives instead.

And then finally in Florida it’s been a very contentious climate for several years around incentives in Florida. A lot of that really came about during the Scott administration with a tug of war with the legislature. That has eased somewhat under Governor DeSantis. The governor and legislature seem to be more on the same page now. They’ve agreed, at least for the time being, to allow some of the state’s major incentive programs such as the QTI program and the closing fund, the governor’s closing fund, they allowed them to sunset. So, you know, again, these are three states that have actively used incentives strategically in a competitive process to lure or retain businesses over the last decade or so that have gone through some significant changes.

We can ascribe some of this to what we call “the Amazon effect” or maybe FOX con, that attention given to both projects treated somewhat unkindly in the press has created challenges for state and local officials within the incentives environment right now in terms of, again, pre-COVID awarding projects incentives. Some of this has also been attributed just in the overall strength of the U.S. economy. Again, before the health crisis the unemployment rate’s at record lows and almost, what, 19 months of consecutive growth. There was just a perception by some lawmakers that incentives were really no longer a material factor in job creation and investment, it just is not that important.

Rick: You know, Andy, you mentioned unemployment, you think about it, we were for many of the last few years we were at not just historically low unemployment rates but when I went through school what was considered to be full employment. And then now we’re looking at an environment where the unemployment, we have no idea what it’ll actually be but we’re hearing numbers that are certainly not anything we’ve seen in our lifetime. So certainly there’s a lot of change underway.

How do you see this COVID-19 pandemic further altering the incentives landscape in the U.S.? You’ve mentioned, you know, New Jersey, New York, Florida, some of the big states. How’s it changing the rest of the landscape?

Andy: It’s really unprecedented right now and I think you put it correctly. It’s so hard to really perceive where this is all going to be going. There have been some of my colleagues who have drawn parallels with 9-11 and sort of the fallout from that tragedy. Nine-eleven was an obvious shock to our system but when you think about it, the most serious economic damage is really confined to a relatively small area, New York City. In fact even there it was confined to Lower Manhattan. What we’re seeing now are really almost universal impacts and nobody really has any real clear line of sight to the future.

You know, just a bunch of questions that we’re asking ourselves and others are asking us and our clients and we are discussing, you know, things like, you know, when will the economy justify resumed hirings, right? Or let’s downplay that explanation. When will we at least see a subsidence of risks and furloughs and hiring freezes? You know, in the manufacturing workplace, you know, when will technology perhaps be implemented going forward and to what extent will that cost us more jobs?

Again, technology is in reaction to, you know, a virus that has taken such a toll on human capital, can we expect technology to come in at an even faster pace now and replace jobs? What about supply chains? We’ve heard a lot about damaged supply chains. You know, how extensive is this effect? Can we expect these supply chains to be rebuilt onshore now in the workplace? What about flexible hours, transferring rotations and work at home and remote worksites and acceleration? You know, all this is the result of economics. It’s the result of psychological and social considerations as well.

What will be the fallout here on occupancy and office occupancy in particular? Are we going to be needing more space or less space or different kinds of space? All of these factors, investments in space and so on and so forth, occupancy, head counts, all factor into incentives and the value that incentives can bring to a project and the value a project can bring to a jurisdiction.

And, you know, let’s talk about the public side for a moment. You know, again, we’re really just now trying to get a grasp on what the fiscal impact of all this is going to be. We’re seeing projections that this year alone we might see state budget shortfalls somewhere in the line of around 10%, some really dire projections. You might see up to 25% reductions in state revenues by 2021. I mean, the damage is already coming in. I mean, Maryland is already projecting a $2.8 billion shortfall this year alone. Arkansas is projecting somewhere in the order of about $350 million. And then we’re hearing the real risk and real vulnerability in some of the oil patch states, in particular Texas and Oklahoma that are so heavily reliant on energy and energy pricing.

You know, what does all this mean for incentives? Again, this environment which we really don’t fully grasp what the magnitude is, what does this all mean for incentives? Well, you know, we’re getting questions from our clients. These questions focus really on two key areas I guess you might say. The first is, you know, will they be able to obtain or continue receiving the incentive benefits for which they’ve already been rewarded? A lot of our clients have entered into agreements with states and municipalities, you know, over the last few years for incentives in return for major investments and growth in head counts in different places. If these states and governments are suffering this deeper revenue shortfall as we expect them to be, you know, how will they be able to fulfill any of their existing obligations? Grants in particular, which are funded through tax revenues.

The other thing is will states and localities want to renegotiate these agreements? If so, what does that look like? You know, we’re watching all this pretty closely. There may be some trading. The states cannot afford to cover their obligations right now and if companies cannot commit to actually creating the jobs and investment they said they would, then perhaps there’s an opportunity for some tradeoffs and perhaps we’ll see things such as agreements for cash grants which are subject to appropriations, they might be extended over a longer period of time. But, you know, other incentive types and other agreements generally require…have less flexibility. I mean, agreements for tax credits for instance, they typically require legislative approval. They’re not subject to appropriations and therefore not part of the budgetary process. So in those cases governors and legislators might have less flexibility to adapt existing incentive agreements in the current economic realities.

So, you know, we’re watching this all very closely. There’s also the issue of just, you know, given the current situation, for a company that has a project in motion right now, and our firm has several going on right now, should they think about engaging at all with state and local governments on incentives for their new project? In which case the question you have to ask is do you really want to be the company that is seen as seeking a handout, and that’s sort of an awkward term, but seeking a handout at a time when everyone else is focused on health and safety and family finances and small business recovery?

Rick: You know, Andy, when I’m listening to you kind of walk through the range of questions in this current environment I’m reminded of the run-up to the Gulf War with Donald Rumsfeld talking about the list of known unknowns. And, boy, does my list of known unknowns go up as we look at all this because there’s so much that we just don’t know right now. But one thing that seems clear is there’s a lot of change underway. Tell me, how do you believe the role of optics, how this looks, perceived, perceptions, the optics around incentives will be a factor or a consideration in these corporate location decisions going forward? What role will optics play?

Andy: I mean, we are, for all those reasons you just described, those optics are such a key consideration right now and our firm is really, really focused on optics. Optics and appropriate communications. You know, it’s going to be a major theme in our mind at least in the near term and let’s just say over the next six to eight months, next year, no, perhaps much longer. We just don’t know. But how the ask for incentives is perceived in the public, how you handle message management and communications around this even when there can be a compelling case made for, and obviously the only reason you’d apply for incentives is that you can make a compelling case for incentives, despite that, there’s still going to be the perception that incentives awarded to a business, even if they are creating jobs and investment could be viewed as diverting needed resources from health issues, from states needing resources to satisfy the needs of small businesses, families in need and so on and so forth.

So how do you manage that? We are very much concerned and very much focused on the optics issues and also on communications. There’s a lesson to be learned in all this. There’s a lesson on the way the public dialog is managed or some might say mismanaged during Amazon, for example. And you could even look right now for an up to date example just look at the fallout that’s hitting some of the major institutions like Harvard or the L.A. Lakers and other big names and big institutions that have accepted, you know, federal PPE loans. You know, this is kind of amplifying the theme that a lot of these government programs right now can be seen as happening at the expense of small businesses, public health, families and so on. So optics are key.

Optics are key in almost any case. The downside and therefore the need to really focus on optics and communications is magnified even more if a company is seen as seeking incentives to move a project, jobs and investment from one state to another. But even if it’s all about just net new jobs and investment, even if it’s just a new project that is not relocating but rather coming onshore for instance, companies will still need to consider the timing of any incentive requests that they make. And they’ll need to make sure that they’ve really thought out well the talking points and emphasize, you know, the win nature of the inducement that they’re requesting.

Rick: Really good discussion. But as we look at all this uncertainty and all the change underway, I don’t want to nail you down on anything specific as there’s more unknown than known, but what types of incentives would you, from your perspective, your experience, think might find support going forward in this current climate? With everything that we’ve said so far in this conversation, what types of incentives might work now?

Andy: It is a good question, Rick. I think you can generalize. It’s all we can do right now is generalize. But incentives that have a lessened fiscal impact and incentives that can be clearly seen and portrayed as a win-win all for the company seeking them and for the public entities awarding them, you know, could well find more support in this environment than other forms of incentives.

So, you know, just to take a couple of examples, you know, requests for tax increment financing or payments in lieu of tax abatements might be supportable more so than other forms of incentives because, number one, they do have less of an immediate fiscal impact and, number two, they can often be spread over a longer period of time. And these programs also might be viewed as essential, especially if a project could help drive small business and local economic recovery. And if that project requires incentives to pencil out, if it makes it viable, then one could comfortably communicate that if one feels comfortable and good making that ask and partnering with local officials to sort of accomplishing that kind of program and that kind of grant.

The other incentives that might be more tenable at this time are, you know, inducements that go towards infrastructure improvements. And a lot of projects that we deal with require trenches of sewer lines or, you know, road buildings or perhaps new rail, things of that nature. These kinds of incentives, those that go towards local infrastructure can also be seen as having kind of both a public and a private benefit, not the least of which is to facilitate additional job generation. So, you know, again, that could be portrayed as a win-win as well.

So looking back on it all you think about what kind of incentives does a company need to make a project viable financially and operationally? How well do those incentive asks fit in with local public needs? And where there’s alignment between what a project needs and what a public entity and a jurisdiction can benefit from, you’ve really got clearly a winning situation there and a more supportable incentive process.

Rick: Andy, what a great conversation. Alignment of the private project with public benefit and public interest, a really good way to kind of look at the whole concept of incentives. You’ve really given us a lot to think about but that’s all the time we have today so let me say to our listeners, thanks to Andy Shapiro for being with us today and talking with us about incentives in the time period following COVID-19 on this episode of Site Selection Matters. Thank you, Andy.

Andy: Thanks, Rick.

Rick: Thanks for listening to this episode of Site Selection Matters and a special thanks to Andy Shapiro for helping us get inside and better understand the impact of COVID-19 on business and site location incentives. What an informative discussion and one that leaves us with a lot to think about. Again, I am Rick Weddle, president of Site Selectors Guild. This podcast episode represents my views and the views of my guest and they do not necessarily represent the views or opinions of the Site Selectors Guild or its membership. We hope you’ll subscribe to Site Selection Matters podcasts on Apple Podcasts, on Stitcher, on Spotify, or wherever you get your podcasts. We look forward to bringing you some great discussions in the year ahead. Until next time, good day.