One can understand why North Carolinians hold a grudge against Dell Computers. In 2009, the company shuttered its Winston-Salem plant, laid off 900 people, and made off with $6 million in state subsidies and incentives.
Most states and cities will do almost anything to induce companies to set up shop within their borders—or to keep them there. It seems no tax incentive is too plush, no subsidy too bountiful. Businesses, in turn, will make grand claims about the jobs and other benefits they bring to a community.
But what happens if they renege on the deal and pack up or simply don't live up to their promises? Too often, the answer has been "nothing." States and municipalities are left scrambling to explain why they spent the taxpayers’ money and got nothing in return.
Fortunately, this is starting to change. Good-governance groups are putting forth a simple message for businesses that do not deliver on their promises: We want our money back. Nonplussed by lax subsidy standards, advocates—from public-interest watchdogs to labor unions to elected officials—are introducing stronger "clawback" language into subsidy agreements and are using public pressure and the courts to compel delinquent companies to return taxpayer subsidies that they have received. "Clawback" provisions in contracts require that companies repay cities and states if they fail to deliver the economic gains they've promised.
According to a December report from Good Jobs First—the watchdog group at the forefront of efforts to monitor public subsidies—taxpayers dole out $70 billion per year in incentives for companies. In many cases, states require "little if any job creation" in exchange for support, and their agreements "lack wage and benefit standards covering workers at subsidized companies."
"If subsidies do not result in real public benefits, they are no better than corporate giveaways," said Philip Mattera, a research director at Good Jobs First, upon the release of the report. "States should be using these programs to reduce unemployment and raise living standards, not simply to increase corporate profits.”
But getting strong public-benefit requirements into subsidy agreements is only the first step. For them to mean anything, they have to be enforced. "Many states fail to even verify that companies receiving subsidies are meeting their job-creation goals and other commitments, and many more have weak penalty policies for addressing non-compliance," said another report from Good Jobs First. To be effective, states must monitor compliance with clawback provisions and use the courts to enforce them. Good-governance advocates, in turn, must rally public pressure to hold companies accountable for the promises they make.
The Genesis of Clawback
Clawback agreements have a history in this country stretching back several decades. "The genesis in America was plant closings," says Good Jobs First Director Greg LeRoy, author of several books about public subsidies for business. LeRoy became aware of the depth of the problem as early as the 1980s, when a national network called the Federation for Industrial Retention and Renewal (FIRR) found, over and over again, that plants that were scheduled to close had received subsidies. LeRoy worked with FIRR groups to formulate a response. "We would read the fine print, and invariably the fine print had loopholes in it which basically made it legal to take the money and run. That was true 90 percent of the time," he says. "But a few times, there were hooks."
In the case of the Diamond Tool plant in Duluth, Minnesota, the company had received public-bond support on the condition that its assets would stay put. In 1988, when Diamond Tool's parent company threatened to relocate the plant, the city went to court and successfully blocked the move. This example convinced many politicians—especially those in states and localities where subsidized companies had fled without penalty—that they needed to add stronger clawback language in public-support agreements.
In the decades since, more local and state governments, often supported by labor and community groups, have won partial victories against companies that have fallen short on their job-creation promises. In 2002, Albuquerque, New Mexico, won back $13 million in property-tax abatements when Philips Semiconductor suddenly pulled up stakes and left—after receiving tens of millions of dollars in incentives in previous years. In 2009, when Wal-Mart closed an optical lab near Columbus, Ohio—an act which resulted in the loss of 646 jobs—the state was able to recoup $1.7 million it had given in tax credits for the plant.
A $70 Billion Impact
For states and municipalities facing budget shortfalls and cutting back on public services, reclaiming money that has been spent under false pretenses could have a significant impact. Research by Kenneth Thomas, a political scientist at the University of Missouri-St. Louis, has shown that the $70 billion in annual subsidies shelled out by state and local governments could, if redirected, easily allow for the rehiring of all the public employees who have been laid off in recent years—a total of about 467,000 people (Thomas).
But recouping these losses requires vigilance and public pressure. In Chicago, dogged reporting by the Chicago Reader and reports by the Illinois Public Interest Research Group (PIRG) helped to expose a massive pool of public funding known as tax increment financing (TIF). These funds were ostensibly set aside to support economic development in struggling neighborhoods but in fact served as a slush fund for political patronage.
“Every year, $500 million worth of property tax revenue collected from Chicago taxpayers flows into a funding pool that, up until very recently, has been completely off the books,” PIRG field director Celeste Meiffren wrote, “allowing for an out-of-control spending spree to well-connected developers and other special interests."
Shining the spotlight on these misused subsidy funds made TIF a hot political issue. In January, just as PIRG was prepared to release another report, Mayor Rahm Emanuel announced that he would implement some of his promised reforms. The Chicago Tribune reported January 31 that “the city is creating a website to make public more information on TIF districts where tens of millions of dollars are spent each year, Emanuel said. Part of the data will reveal whether companies getting TIF funds are meeting their goals, which also will be evaluated by outside auditors, the mayor added.”
Moreover, three companies—Bank of America, the CNA Group (an insurance company), and the CME Group (a financial exchanges company)—preemptively declared that they would return a total of $34 million in subsidies to the city. Bank of America and the CNA Group had each failed to live up to promises to create 2,700 jobs in exchange for public support. Instead of getting the TIF cash, the CME group has said it will rely on a new set of state tax breaks. Illinois PIRG is calling for a local clawback law so that taxpayers will not need to rely on voluntary reimbursements from companies fearful of public shaming in order to be protected.
"It’s the tip of the iceberg," says Meiffren. "If we know that there are two companies that have taken tax money and haven’t created jobs, there must be so many more out there."
A Coalition Approach to Clawback
While researchers at good-governance nonprofits have taken the lead in exposing companies who cut and run and enforcing clawback provisions, the issue has the potential to attract a wide range of allies who are concerned with safeguarding taxpayer dollars, maintaining state and local services, and ensuring that public subsidies are used to support quality jobs. For unions that are expanding their research capacities and taking a greater role in developing public policy, clawback campaigns hold particular promise.
One labor group that has pursued a version of the strategy is UNITE HERE Local 217 in Providence, Rhode Island, representing hotel, restaurant, and casino workers. Along with allies such as the carpenters’ union, the painters’ union, and the community group Direct Action for Rights and Equality (DARE), UNITE HERE helped establish an official commission in Providence to evaluate the city's long-standing "first source" ordinance—a measure requiring that businesses receiving tax breaks or other assistance from the city must give preference in hiring to local residents. In September 2011, the commission released its recommendations. Among other findings, it cited a City Law Department memo that reads, “Based on the language, the First Source Ordinance is actually very powerful, but has simply been unenforced since its inception ... 25 years ago.”
Following up on the commission's report, a City Council Ordinance Committee has been tasked with creating a revised ordinance with stronger clawback provisions. Community members have monitored the process with keen interest. After a February hearing of the committee, local resident Earl Danielson stated, “I think the City should take back every dime that it has given to companies that did not hire Providence residents and use that money for job training and social services.”
Jenna Karlin, staff director for UNITE HERE Local 217 and vice chairwoman of the “first source” commission, highlights the role of coalition organizing in spurring the commission's creation. She explains, "It was really DARE and Jobs With Justice [a labor-community group of which Karlin's union is a part] mobilizing our members and connecting them with the mayor’s office and members of the City Council to emphasize what unemployment is like in the neighborhood. To emphasize how much regular folks are really suffering."
The coalition's message, Karlin says, was that the city needed to review subsidies as a part of addressing its fiscal problems—making sure that public investments were really resulting in good jobs for residents and were not merely tax giveaways.
Should residents of other localities follow the example of advocates in Chicago and Providence, "clawback" may become a rallying cry throughout many states that, in times of tight budgets and persistent unemployment, can hardly afford to see tax dollars go to waste.