Clawbacks In Connecticut: What Idaho Could Learn From How One State Handles Breaks For Business

Transform Solar

Transform Solar received $1.68 million in state training grants shortly before announcing it's closing and laying off about 250 people.

Every state, including Idaho, offers tax breaks, grants or subsidies to businesses in hopes of spurring economic development.

But the states vary widely in terms of what they do when a company doesn’t create as many jobs as it agreed to, or otherwise follow through with its end of the incentive bargain.

According to the National Conference of State Legislatures, nearly half of all states attach some kind of provision requiring businesses to pay the state back in such circumstances.  This tool is often referred to as a “clawback.”

Idaho is one of the states that does not use clawbacks. So if a company in Idaho shuts down soon after receiving taxpayer dollars, the state has no recourse for getting a portion of its money back.

That’s what’s happened with the state’s workforce development training grants. As StateImpact reported this week, at least 11 companies that received these grants from Idaho since 1996 either left the state or closed part of their business within a couple of years of getting the taxpayer funded grant.

The state Department of Labor, which manages the program, doesn’t see this as a problem. Even if a company leaves the state or closes part of its operation, says program manager Jenny Hemly, those employees still received valuable training that will continue to benefit them.

“Those people now have new skills they can take with them to a new job,” Hemly says.  “It’s a win-win, whether the company survives or not.”

But in Connecticut, a state known in economic development circles for attaching tough clawback provisions to its incentive deals, things work very differently.

Connecticut puts stiff penalties on companies that receive tax dollars for development but don’t follow through.  Michael Lettieri, of the Connecticut Department of Economic and Community Development, says part of the contract the state signs with businesses includes requirements for job creation and retention, as well as an agreement to stay in the state for at least ten years.

All of those requirements, Lettieri says, have certain clawbacks tied to them.  If a business falls into financial trouble, the state will work with the company to come up with an agreement that fits both parties.  “Obviously, our goal is not to put the company out of business,” Lettieri says, “but also realize we’re using taxpayer financing to fund a lot of these projects.”

Connecticut doesn’t just put these kinds of restrictions on loans and grants but also on tax credits. According to Lettieri, this is historically just how business is done in that state.  Lettieri says it hasn’t been a hindrance in attracting new companies to Connecticut because the terms attached to these incentives are outlined early in the process.

“When you’re utilizing taxpayer dollars to finance many of these projects, I think there’s an expectation that there needs to be performance – on both sides,” Lettieri says. “One by the company, in terms of investment or job creation and retention. But also the state agency that’s administering those funds, to make sure those investments are being protected and the state is getting a rate of return.”

Idaho’s approach to incentives became an issue last month when Transform Solar announced that it was closing and laying off about 250 people at its facility in Nampa. The manufacturer of high-tech solar cells received $1.68 million in workforce training grants from the state of Idaho, and had been in business since 2009.

StateImpact found ten other examples of companies that had closed Idaho operations not long after receiving workforce training grants. One of them is XL Four Star Beef, a Nebraska-based company that closed its Nampa plant in 2011, after receiving $564,231 from 2006 to 2009. None of those companies are required to pay back their training money.

Economic development transparency and clawback policy is a key focus for Good Jobs First, a Washington, D.C.-based research organization.  Executive Director Greg LeRoy is an advocate for economic development transparency and favors the use of clawbacks when governments use taxpayer dollars to help private business.

But in this case, LeRoy is less concerned.  “In a case like that, even if a company runs away five years from now, the taxpayer investment in that skilled worker is probably going to stay in the community.”

“Although it’s unfortunate, and you’d hope the company would pay something back for not retaining the job for a certain period of time,” LeRoy says, “training grants compared to other types of economic development incentives are often quite cheap.”

Other states with built-in clawback provisions include Arizona, Colorado, Georgia, Illinois, Nebraska, Nevada, North Dakota, Oklahoma, and Virginia.