Pay to Play?
Cambro Manufacturing is the most recent company to enter into an incentive agreement with Alamance County and Mebane.
But it’s hardly the first.
The use of incentives to lure companies to the region isn’t new, the practice actually dates back decades. And when government is involved, it often creates a divide for those who don’t believe public funds should be used to spur economic growth. Cambro was no exception. Several people spoke out against Alamance County providing incentives to the company during a public hearing on April 7.
The questions are more than philosophical. While many agreements work out, some do not. For example, companies that enter into agreements with their governmental partners don’t always meet their benchmarks and incentive payouts are either delayed or don’t go paid at all.
Graham, for example, has an incentive agreement with Indulor America, LP approved in August 2009. In the agreement, the city agreed to pay the company a $20,000 incentive if it created 20 jobs before Dec. 31, 2013. Graham Finance Officer Sandra King said the city didn’t provide the $20,000 incentive since Indulor didn’t meet the job creation deadline.
King said Indulor America is still working to make real estate improvements and installing equipment at its East Elm Street facility. The company still plans to invest $5 million in the project, King said.
Another company that didn’t live up to its incentive agreement expectations was Burlington Technologies. In January 2012, the Alamance County Board of Commissioners and Burlington City Council entered into an incentive agreement with the company.
Burlington Technologies’ total local and state incentives deal was for $230,000, including $120,000 from the One North Carolina Fund. The company had planned to produce and distribute uniform pants for the U.S. Army, but the contract was never awarded.
Burlington City Manager Harold Owen said the city’s incentive agreement with Burlington Technologies is void since the company wasn’t awarded the contract. According to Alamance County Assistant Finance Manager Susan Roberts, Burlington Technologies has withdrawn its expansion plans which were part of the pact.
BUT WHILE there have been a few misses, incentives have played a role in attracting new business to the region especially over the past two years. Alamance County Area Chamber of Commerce President Mac Williams said companies routinely inquire about the availability of incentives when they first consider a potential site.
Many other factors are considered by companies during the selection process including infrastructure and site readiness. Williams said incentives can help differentiate one community from another. Incentives usually re-enter the conversation when companies narrow their potential sites to just a few locations, according to Williams.
Williams said there are cash grant incentives, incentives for infrastructure and job training incentives made available to companies by local and state government. Williams said he believed the use of incentives to attract companies to the region will continue to be part of the recruitment process.
“It will remain in place as a factor,” Williams said. “I don’t see an end to it.”
Since 2009, the Alamance County Board of Commissioners has approved incentive agreements for nine companies: Cambro, Walmart, Kayser-Roth, Sheetz Distribution Services LLC, Burlington Technologies, Ferraro Foods, Laboratory Corporation of America, Tri-Vantage, and Indulor America LP.
The county’s incentives combined for these companies equals $3 million. Of that total, the county has paid out $180,450.
When the county approves an agreement, it doesn’t automatically distribute the money. Incentives are distributed when a company meets the required job creation and investment benchmarks established.
The Burlington City Council has approved incentive agreements since 2009 for three companies: LabCorp, Burlington Technologies and Sheetz Distribution Services LLC. Owen said the city’s incentive agreements are based on providing between 1 percent and 4 percent of the company’s total taxable investment.
Burlington Director of Finance Peggy Reece said the company has to pay its property taxes for the first year. Then, once they make a request, a portion of the taxes paid is returned to the company and the incentive is paid to the company over a three- to five-year period.
“The city of Burlington maintains a positive cash flow throughout the years the incentive is paid,” Reece said. “Once the incentive is completely paid, the City of Burlington gains the property tax revenue that the company pays each year going forward.”
Owen said based on state law, incentive agreements between companies and the city cannot extend beyond 10 years.
The depreciation schedule of capital and equipment is part of the incentive equation as well. Owen said that while older equipment depreciates reducing taxable value, companies often buy new equipment to replenish their inventory.
Owen said most of the city’s incentive agreements with companies are for three to five years. Offering incentives to attract business to Burlington is part of the competitive process, Owen said.
“It’s part of the playing field now,” Owen said.
OWEN SAID he believes that some existing business owners in the city feel like they have been left out of the incentives process. Owen said the city’s incentive policy provides incentives to local business owners if they decide to expand by investing at least $1.5 million.
Owen said another factor the city uses to gauge whether to provide incentives is the quality of the jobs being offered. Owen said the city prefers that any jobs created be at least the average annual wage of the county. The Alamance County average wage is $35,789.
Owen said while the 140 jobs proposed by Burlington Technologies to produce military pants didn’t have a high wage, the city supported the project because it would have provided textile jobs.
Alamance County Manager Craig Honeycutt said while the use of incentives is a common practice by most governmental agencies there are those in the public that view the practice as “corporate welfare.”
NOT EVERY company looking to expand or locate to Alamance County over the past few years has sought incentives.
Glen Raven Inc. located in Burlington began renovation work last year to a 100,000-square-foot facility and began running test products in August for the company’s Sunbrella product line. Glen Raven’s total investment in the building’s renovation and equipment was $12 million and was done without receiving incentives from local governments.
But Glen Raven is not the norm. Honeycutt said companies today more than ever expect governments to include incentives as part of an economic development agreement.
“It used to be the exception to the rule,” Honeycutt said.
For many projects including Sheetz, Walmart and Cambro, companies request incentive agreements from more than one government body.
Since 2007, the Mebane City Council has approved incentive agreements for eight companies: Cambro, Walmart, Morinanga, Ferraro Foods, AKG, Tri Vantage, Sandvik and Nypro. The incentive total for these agreements was $4 million. Of this total, Mebane has paid $2.7 million.
The Graham City Council has approved incentive agreements since 2009 for three companies: Indulor America, LP, Walmart and Fitzpak. Fitzpak was the latest company approved by the city for incentives in January.
Graham’s agreement includes reimbursement for Fitzpak’s relocation, facility construction, and machinery and equipment installation in the amount of $12,500. No payment has been issued by Graham. Fitzpak plans to expand its manufacturing facility in Graham and relocate machinery and equipment with an estimated value of $1.5 million.
OFTEN, STATE incentives are provided through the N.C. Department of Commerce to companies for expansion or relocation projects. Stewart Dickinson, N.C. Department of Commerce Director of Finance, said that state incentives are based on the number of jobs created and not capital investment.
Dickinson said companies considering potential sites in North Carolina often consider neighboring states Virginia, South Carolina and Tennessee as well. Several of these states are able to provide larger packages than North Carolina is able to.
The state uses its One North Carolina Fund to recruit companies. Dickinson said this fund requires a local match. The fund provides money for companies to install or purchase equipment, renovate existing buildings used for expansion or to make infrastructure improvements including water and sewer.
Not everyone including Jon Sanders of the John Locke Foundation believes governments’ use of business incentives to attract companies is the best use of public funds. Sanders serves as the Director of Regulatory Studies for the conservative think tank.
“It’s government getting in bed with industry,” Sanders said
Sanders said governments often tout the financial benefits of incentive agreements and what the company is projected to bring to a region in terms of job creation and total investment. Sanders said governments sometimes fail to account for what the public funds used for incentives could have been used for instead.
Sanders also said he believes that local and state government officials sometimes spend all their energy in landing a company and don’t place enough emphasis on analyzing what the company’s long term impact might have on a region or even if the company is a good economic fit.
Sanders said he believes government officials also tend to inflate a project’s economic impact figures to justify providing incentives to a company. To spur economic growth, Sanders said lower taxes should be the key to attract companies instead of providing incentives.