We Want Our Money Back

Amy Dean
The American Prospect
March 7, 2012

http://prospect.org/article/we-want-our-money-back

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.

[Amy Dean is a fellow of The Century Foundation and principal
of ABD Ventures, LLC, an organizational development
consulting firm that works to develop new and innovative
organizing strategies for social change organizations. Dean
is co-author, with David Reynolds, of A New New Deal: How
Regional Activism Will Reshape the American Labor Movement.]

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