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Episode 37 – Incentive Compliance Management during COVID-19

Site Selectors Guild
Episode 37 - Incentive Compliance Management during 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 the Site Selectors Guild. In each episode, we introduce you to leaders in the world of corporate site-selection and economic development who speak with members of the Site Selectors Guild, our economic development partners and corporate decision makers to provide you with deep insight into the best [inaudible 00:00:26] practices in our profession.

In this episode, we have as our guest Larry Gigerich, Executive Managing Director of Ginovus, one of the nation’s leading consulting firms, providing site-selection, location modeling, and city procurement and incentive compliance management. Today, Larry will talk with us specifically about incentive compliance management issues in the COVID-19 impacted economic environment. Join me as we welcome Larry Gigerich to “Site Selection Matters.”

Larry, before we get into the deeper topic of incentive compliance management. Why don’t you take a minute or two and set the stage and explain for our listeners just how economic development incentives do or are designed to work generally?

Larry Gigerich: Yeah. I think it’s important, Rick, to really understand that economic development incentives only are of importance when you get to the final stage of the site-selection process. If you think about the process that a professional site-selection consultant goes through in working with a client, we are going to start with a list of communities. It could range from 5 to 15 different places. But really, when we get down to the final…let’s call it two or three locations, those locations will look very similar on paper. And we’re gonna be comfortable that our client can be successful in any of those locations.

And incentives, at that point, can really tip the scale in the location’s direction. So, I think in particular, you think about two things. One would be how incentives can impact project costs? And then, secondly, how they can impact ongoing operating costs? And most of the time, the incentives are designed in a manner to take a portion of the new tax revenue that’s being generated by a company’s project and reinvesting it in that project in some way.

So that’s why we always like to call it a public-private partnership because we really view it that way. Our client is investing capital and hiring people, creating economic activity. And if the local or state governmental entity agrees to provide some of those new tax dollars that are being generated back into the project as an investment, it really works like a co-investment. So, that’s typically how they’re designed and how they work. And finally, most of those incentives are paid post performance. So, a company has to invest money, hire people, pay people, whatever it may be before they see those dollars come into the project.

Rick: So, when you get down to that final two or three, then incentives become more important? Maybe the most important, on the last day, because, if you’ve done your work well, both of those locations are probably pretty close to rough parity.

Larry: Absolutely. I mean, again, when we look at it, we get it down to those final couple locations, they are gonna look very similar to one another, you know, whether that’s talent, cost, and quality, whether it’s real-estate cost, infrastructure, whatever it may be. So, we’re gonna be confident our client can be successful in either one of those locations, if you’re down to two. And again, that’s where the incentives can really make a difference or tip the scale at the very end.

And again, we say this all the time as guild members, no amount of incentives can make a poor location a good one and no company should make a decision based on incentives solely. Everything else has to work. And then again, at the end, the incentives become important.

Rick: So, the old saying that incentives can’t make a bad location good, but they can make a good location a winner is probably relevant?

Larry: Oh, absolutely. There’s no question about that, Rick.

Rick: Interesting, very interesting. So, given the overall understanding of economic development in cities, how has COVID-19 and the recession, or depression, or whatever it is we’re currently experiencing, impacted companies, location strategy, and specific projects?

Larry: Yeah, there’s no doubt, Rick, that the COVID-19 pandemic has impacted companies in so many different ways. And really, all of us, our lives, what we do day to day, you know, businesses have had to look at their ongoing day-to-day operations, think about health and safety protocols in new ways, and also look at their customer and vendor relationships and make adjustments and change in the current circumstances we find ourselves in. And then, you layer, on top of that, that, you know, we’re officially in a recession now. And perhaps COVID expedited when that started but nonetheless, we are in a recession that, candidly, we were long overdue for because of all the years of economic growth here we’ve experienced.

And as a result of all these circumstances, but in particular COVID, many companies have seen their hiring and capital-investment plans change. And recognizing that those two things, along with payroll, often dictate how the incentives are earned and invested into projects and ongoing operations, we’re seeing that is impacting a lot of companies in terms of the incentive agreements that they struck with local or state governmental entities.

And the other part of that is really looking at how you evaluate then the issue of what do you do going forward. You know, we see a number of our clients right now that are saying, “We want to understand if we can convert some of our employees to full-time remote workers and what does that look like.” I think we’ve all become more comfortable with technology and being able to use technology to function well in our, you know, personal lives and professional lives as well.

So there’s that piece of it. And then, I think the other part of it is really looking at businesses and who have concentration of operations in urban areas that are maybe very densely developed. So, places like a New York or places like a San Francisco are evaluating long term how many of their assets do they deploy in those areas because of COVID-19 but really, frankly, understanding there’ll be future pandemics and what needs to be done to be able to react to the situation. So, maybe suburban areas or more rural areas and small cities become more attractive as a result of that.

Rick: Larry, if companies are I guess, in essence, missing their numbers or failing to hit their job creation and other targets, what does that mean for the very complicated incentive agreements that they’ve signed with a state or with a community?

Larry: Yeah. I think there’s a number of factors or things to consider. I mean, you know, as we just touched on, many companies have scaled back their investment employment plans due to the economic impact of COVID. And as a result, they’re also anticipating, or rather we are anticipating, that a number of companies aren’t gonna be able to meet their calendar-year-2020 project commitments. So, if you think about these incentive agreements that companies and governmental entities enter into with one another, they typically have annual commitment numbers, and then, commitment numbers for the entire project period, whether that’s 2, 3, 5, 10 years. Whatever it may be.

So, in that, there definitely will be an impact short-term but that could be long-term, depending on how things, you know, will play out. Because as we look at it, Rick, we believe that it will take companies a few years to really kind of rebuild, so to speak. Especially the ones that have experienced layoffs, maybe deferred capital investment for a year or two, to be in a position to hit some of those project goals. So, really what it comes down to is understanding that the compliance targets, again, those commitments for a project, may not be hit, you know, based on the incentive agreements they are entered into when the project began. And while balancing the need to be accountable and governmental entities to be good stewards of taxpayer dollars, also recognizing…you know, exercising some flexibility and understanding, while a company is going through a period like this, I think will be really important. Because companies, at the end of the day, they view these partnerships with governmental agencies as being very important in a two-way street. And the places that are able to exercise flexibility under these circumstances will benefit from that over the long term, as these companies look to make more investments and hire more people down the road outside of whatever the original project was.

Rick: Larry, listening to you talk about agreement, the word, just I think about the agreement, is when you come to looking at a company and a community or a state talking together, is there a presumption of precision in these numbers that really is just not there because it’s really a projection or an estimate? It’s aspirational what the company wants to do but they can’t really just absolutely guarantee that they can achieve those goals.

Larry: No, that’s a great comment, Rick, and you’re exactly right. And that’s one of the things that we always try to do as a firm. And I know my fellow guild members think this way too is to tell our clients, you know, “Be pretty conservative in these projections.” Because you’re right, especially when you’re looking at 3-5-10 years out, and no one has a perfect crystal ball and can be that precise. So, one of the things that’s important…you know, and it’s a positive comment about governmental agencies and professional economic development organizations, they also recognize that. So, the ability to be able to help them in how you structure these agreements and really build in almost like a formulaic approach…so, you know, if a company says, “Hey, we’re gonna hire 100 people over 4 years,” and let’s say they hire 60 people, it’s not an all-or-nothing proposition. Right? Because most of these incentives are performance-based, so you just then ratchet that down on a proportional basis. And a company that completes 60% of what their commitments are could be eligible to receive up to that 60% amount. So, again, it’s not an all-or-nothing exercise.

I think that is very important, along with, again, being conservative. Nobody has a perfect crystal ball and that is really important to recognize that everybody’s entering into this agreement, on both sides, in good faith, as you said, Rick, aspirational, but recognizing things change. Whether it’s the economy, the business, or unusual things that can happen, natural disaster. We’ve seen that with clients of ours, they’ve experienced a natural disaster in their area and that’s impacted operations. Again, it’s about open communication, a strong relationship, and understanding that there’s accountability on both sides and people need to work together in those unusual circumstances like we’re experiencing today.

Rick: Who was the heavyweight boxer that said, “Everybody’s got a good plan until they get hit in the nose when they start a fight or the fog of war starts out.”? So we had a great set of estimates and recommendations and ideas but a funny thing happened on the way to the future. Pandemic occurred, everything came off the rails in a kind of strange way. Could you go a little deeper now though and help us understand the complex…because this has gotta be a very complex set of issues that come to really making sure that the companies manage their relationships with these states and communities. Unpack that a little bit, if you can.

Larry: Sure. No, absolutely, Rick. And I think, you know, as you think about these incentive agreements, you know, from the governmental side, they are looking at the things, whether it’s local or state government, that directly generate new tax revenue for their governmental entities and help them pay for all the important things that we all count on, you know, public safety, schools, healthcare. All those things are important, the governmental entities play a role in some way. So that’s why, in these incentive agreements, you’re typically going to see commitments or projections tied to job creation, job retention, capital investment, and wage or salary levels. Those are the things that are gonna drive things like personal-income tax, property taxes, sales taxes. All those things, again, that fund government to do the things that are important.

So, when you look at those pieces…and then, what I touched on earlier also that often you’re gonna look at annual projections, and then, projections for the entire project. And then, you have an understanding, based on that set of assumptions, what new tax revenue is going to be generated. So, as you kind of work through that and understand that, that inherently creates some complexity to the process certainly.

So, then you have to look at situations where, obviously, if a company hits their projections or overdelivers, so to speak, they exceed their projections, that’s a good thing. Because the governmental entities benefit more from that, and then, in many cases, you know, the company will benefit from that as well. But in situations, you know, some of the things we’re talking about today in the COVID world we’re living in, if a company fails to hit their projections, you know, then, typically, these agreements have built-in mechanisms to address the shortfalls. You know, in the cases, again, with most incentives being post-performance, often it just adjusts, Rick, on a proportional basis, like we talked about earlier. So, you know, again, if you created 60% of the jobs you said you were gonna create and you invest in 60% of the capital, then those things adjust automatically.

Now, you will see, in some situations, where there are dollars provided up front, that may be in a situation where there’s some kind of upfront grant that comes from a deal-closing fund. Or it could be a tax increment financing transactions where dollars are provided up front, you know, then that gets a little bit more difficult in how you structure and manage shortfalls and it may be…and again, we’re seeing a little bit of this right now, Rick, where a state like North Carolina has automatically said, “Hey, we’re gonna add 1 more year to all of our economic development agreements that have incentives associated with them,” you know, “because we recognize these are very unusual times.” So, in those situations where money is being provided up front, coming up with an approach…and really, it’s very very important on both sides, the company side and the governmental agency side, to think about all the things that could come up.

Now, granted, a pandemic like this was something that wouldn’t be on many people’s radars when they were doing these agreements, needless to say. But thinking about things that could come up and how you approach the situations, again, recognizing that, if dollars have been provided up front by governmental agencies, they have an absolute responsibility to be good stewards of taxpayer dollars and making sure that they have a process in place to address those situations. But also, at the same time, recognizing that you don’t wanna punch a company in the stomach, so to speak, in difficult economic times that could be more harmful to them and result in them, you know, laying off more people, you know, or not investing as much as they might be able to do because of the situation that they’re in. So, I think that that adds more complexity.

And then, I think that, you know, the final piece of it is, there will be situations, Rick, where a company’s gonna look at this and say, you know, “It’s gonna take us 3 years to dig out of this hole.” And it may be the right decision for a company to approach the governmental agencies and just say, “Let’s terminate our agreement early to move forward because we’re not gonna hit these goals,” and, you know, “we’ve done everything we can but,” you know, “this COVID-19 pandemic has hit us so hard that we recognize we’re not gonna be able [inaudible 00:16:34] goals of the project. So, either we need to terminate the agreement or we tear the agreement up, we negotiate a new deal that’s more realistic, based on where the future goes.” So it’s a long way of saying that there’s a lot of complexity here, you know, it is something where people have to exercise flexibility and be nimble, and again, work together. It is a partnership. I mean we tell all of our clients, from the very beginning of this, you know, “We’re gonna do our work, we’re gonna help you find the right place, but wherever you pick,” you know, “you’re going to have to have a relationship that needs to be good with governmental agencies and economic development groups for 10, 20, 30, hopefully longer, number of years. And in order for that to work, there needs to be open and honest feedback, in both good times and bad times.”

Rick: Larry, you’ve been talking about, what I would call, the micro-level, you know, company-specific issues with regard to a unit of government. But you mentioned earlier, sometimes companies hit their targets, sometimes they miss their targets. When you look at incentives generally, in my experience, under normal times, and admittedly we’re not normal time, sometimes some companies miss and come in underperforming and some companies actually overperform. And so, when we evaluate or assess or criticize incentive programs, oftentimes we find ourselves only criticizing the underperformers and overlooking the overperformers. In your experience overall, don’t you find that there’s an upside to these agreements also where a lot of companies do overperform?

Larry: Oh, absolutely. And I think that you hit on a really important point, Rick, that there’s really very little, if any, attention given to situations where companies overperform. I mean it’s kind of like, you know, unfortunately, often what we see in the news where people wanna focus on the negative but not look for the good or the positive things. And that is definitely the case. And really too I mean sometimes, if a company overperforms, they do benefit from that in these incentive agreements. But in other cases, you’ll see where their upside is capped. In those cases, those local units of government and entities that receive tax dollars, you know, benefit mightily from that.

So, there’s absolutely, case after case, we’ve seen it with a number of our clients, all the way from kind of small fast-growing privately-held businesses all the way up to Fortune 100 clients of ours where they have overperformed. And in part to get to their credit, they’ve been very conservative on the front end with their projections for what they want to do with their project or what they think they can do. Because they are big believers and, hey, we wanna keep our promises. I mean especially those companies that are public-facing, whether it’s, you know, B2B business or B2C business, they want to be able to say, “Hey, this is what we said and, at the minimum, we at least delivered on our promises if we didn’t do better than what we promised.” Because they see the importance of having, not only goodwill built up in that relationship with governmental entities, but they also understand the governmental entities have to be responsive and accountable for their constituents. And everybody wins in that scenario. So yes, we’ve definitely seen those circumstances. And it’s unfortunate that more attention isn’t paid to those companies that do overperform, in terms of the commitments they make for a project.

Rick: Larry, let’s switch gears now and talk a little bit about economic development more generally. What do you see in the year ahead in terms of economic-development-project activity or state and community efforts to attract new jobs and new investment?

Larry: Yeah, I think it’s a really important question, you know, where we sit Rick. And I think, you know, we went through this phase and they still remain very important. We’re first responders, healthcare workers, public-safety officials in dealing with the COVID-19 pandemic. But, you know, we’re also in a situation now where the importance of rebuilding our economy is critically important. I mean, not just, you know, in North America, but as you look around the world. And, you know, economic development professionals and governmental leaders are on the front lines of helping rebuild the economy, and important partners in that process.

So, really kind of thinking about where we are and where things go. I mean we are anticipating that project activity will return to kind of pre-COVID-19 levels sometime during the first half of 2021. So, as a result of that, public-policy decisions and strategy that’s put in place now will really start to pay dividends when we see that activity resume, we hope, to normal or pre-COVID levels again. So, as a result of that, you know, thinking about all the variables that are out there, not just with COVID-19 but other things tied to the economy, the current recession we’re in, you know, what happens after the presidential elections in the United States and what public policy comes out of that, what’s proposed, what’s actually implemented into law. All that creates a lot of uncertainty for cities, regions, and states.

So, you know, as I like to think about it, Rick, kind of those basic blocking and tackling things that economic-development professionals can do is really what they should lean on in times like this. So, you know, as a result, kind of thinking about, you know, how are they best positioned to be flexible and nimble to react to different conditions that often they have no control over.

Secondly, really really great importance for cities, states, and regions to not try to be all things to all people and really meaning, “Focus on your strengths and your assets, know what your challenges are and have a strategy for dealing with or addressing those challenges, and then, really pursue the opportunities that are a strategic fit for their areas.” I mean you’ll often see, either really good economic times or really bad economic times, you know, people act out of desperation, so to speak. And maybe they try to be all things to all people. So, you know, everybody wants to chase certain industry sectors. You know, right now, obviously, IT and life sciences remain areas of great attention for everyone. But not every place is well-positioned to attract aspects of those industries because they don’t have the assets that they need to be successful. So, you know, an area might be in great position, on the life sciences side, to attract manufacturing and distribution logistics operations for that industry but maybe not well-positioned for the research and development and engineering side of it. And understanding that and how you position yourself.

So, I guess what I would say in summary is, you know, there’s a lot of things that are happening, not just COVID-19 but others, that none of us can control. Control what you can control. Understand, you know, what your strengths are, what your weaknesses are. And again, try not to be all things to all people. Really go after what you know you’re well-positioned for, you know, and understand that you have a really important role in helping, you know, rebuild the economy for your area and also really try to attract and retain those things that help you achieve the goals you have for your community, region, or state. Because really that’s what economic development comes down to is how can you get things accomplished in your communities to grow the economy, to benefit the people that live and work there.

That’s really what economic development is all about and one of the reasons why I’ve always loved working in it in different roles, whether on the professional economic development side and now, for the past 18 and a half years, doing site-selection work.

Rick: Larry, thanks for really pulling the curtain back and giving us a peek maybe inside your crystal ball to see what’s ahead. What a great conversation, you’ve given us a lot to think about. But that’s really all the time we have today. So let me say thanks to Larry Gigerich with Ginovus for talking with us today on this episode of “Site Selection Matters.”

Larry: Thanks Rick. As always, I enjoyed our conversation. And be well.

Rick: Thanks for listening to this episode of “Site Selection Matters” and a special thanks to Larry Gigerich for helping us get inside and unpack all the issues associated with economic development incentive compliance management. What an informative discussion. Again, I’m Rick Weddle, President of the Site Selectors Guild. This podcast represents my views and the views of my guests and they do not necessarily represent the views or opinions of the Site Selectors Guild or its membership. We hope you will subscribe to “Site Selection Matters” podcasts on Apple Podcast, on Stitcher, on Spotify, or wherever you listen to your podcasts. We look forward to bringing you some great discussions in the year ahead. Until next time, good day.