LITTLE ROCK — A company’s announcement that it plans to open a factory or office in the state is often met with great fanfare.
What happens next usually isn’t.
Like many other states, Arkansas works to attract large companies to the state by offering incentive packages with perks such as income tax credits, sales-tax refunds for certain expenditures and payroll-tax rebates.
To get these incentives, businesses have to make certain promises, such as investing certain amounts in the state or meeting payroll thresholds, for example.
From 2005 to 2010, the state offered incentives for 521 projects planned by companies that make pet food, car parts, jets, battery-powered shopping carts, faucets, and all manner of other goods and services.
In total, the companies said they planned to invest more than $8 billion in the state and create 32,635 jobs, according to the Arkansas Economic Development Commission.
But have they?
Economic-development officials say there’s no simple way to find out.
Multiple state agencies have the task of keeping an eye on things. Every year,the commission reports to the Legislature on the number of incentive agreements signed, the number of jobs the companies plan to create, and the investments they plan to make in the state.
The state’s Legislative Audit Division is required to prepare a cost-benefit analysis on each of the economic incentive programs every five years.
The resulting reports are among the reasons that the Pew Center for the States recently included Arkansas among 13 states that are “leading the way” in terms of analyzing the economic impact of the incentives offered and using that analysis to make informed policy decisions.
Most of the incentives Arkansas offers are “performance-based,” meaning that a company benefits only if it meets the targets set out in state laws.
That reduces the amount of money the state pays to companies that should not get it, but some of the incentives can start flowing before payroll or investment thresholds have been met.
The Department of Finance and Administration audits companies to make sure they meet the criteria for obtaining benefits, but the results of those audits are confidential and treated as private taxpayer information.
CLAWBACKS
The state has more than a dozen programs in its arsenal to attract specific industries or types of business activity.
In 2003, the Consolidated Incentive Act grouped several previously existing programs into one incentive package and gave the commission the ability to offer special incentives to “targeted businesses,” which include high-tech manufacturing, agriculture, biotechnology, information technology, transportation logistics and bio-based products such as ethanol.
Some of the programs are statutory, available to any qualifying business applying for funds. They include Tax Back, a sales and use tax refund for building materials and equipment purchases; InvestArk, a sales and use tax credit for existing businesses that make new investments; and Advantage Arkansas, income tax credits for job creation.
Others are discretionary and are negotiated only inhighly competitive situations. Included in this group is the Create Rebate - which provides annual cash payments for new, full-time, permanent employees.
According to the Department of Finance and Administration, the state paid $338 million for all its incentive programs combined from 2006-10.
Through its audits, the Department of Finance and Administration is responsible for figuring out when a company has received benefits it should not have and for recovering the money. Recovery efforts have been called clawbacks. But the department does not generally keep a running total of the amounts billed for repayment and ultimately collected.
In response to a request from the Arkansas Democrat-Gazette, the Department of Finance and Administration reviewed its audits for three programs and found that the state has billed companies to repay $1.9 million of the $287 million it paid out.
Nearly all of those billbacks came from companies that received tax credits under the InvestArk program, which is intended to encourage capital investments and create jobs.
A qualifying company can get a 6.5 percent sales and use tax credit if it meets investment and payroll thresholds within four years. Those thresholds vary by county: In “tier-one” counties, which are the most prosperous, a company has to invest at least $5 million in a project.
A company has four years to work up to those levels, but it can start getting the tax credits right away. If, in the end, it doesn’t meet the threshold, state law requires the Department of Finance and Administration to bill the company for any benefits it should not have received, plus 10 percent interest.
The state has recovered smaller amounts from companies in two other programs - $80,550 from Tax Back, which provides a refund of sales and use taxes for building materials and taxable machinery and equipment associated with a project; and $1,083 from Advantage Arkansas, which offers a state income tax credit for job creation. The state has issued $19.6 million in total Tax Back refunds, and $17.3million in total Advantage Arkansas tax credits.
Typically, companies that have had to pay money back for those programs did not meet the law’s minimum payroll requirements within the allowed time period or pay their workers the required hourly wages, said John Theis, state assistant revenuecommissioner for policy and legal.
Though the audits for these programs are done when companies make refund claims or submit payroll certifications, a company can receive benefits before the thresholds have been met, said Tom Rugger, manager of the Tax Credits and Special Refunds section of the Department of Finance and Administration. If a company fails to meet the payroll threshold within 24 months (or longer if an extension is granted), it is liable to pay back the incentives it received.
Theis said the state has recovered all but $26,500 of the $1.98 million it billed back. The $26,500 was owed by a business that closed and went bankrupt.
In addition to the performance-based programs, the Economic Development Commission administers a handful of cash incentives that have clawback provisions - the Governor’s Quick Action Closing Fund, Economic Infrastructure Funds and Community Development Block Grants.
A spokesman for the commission, Joe Holmes, said $1.107 million in block grant funding has been billed back from three projects since 2008.
The clawback provisions of the Quick Action agreements have never been used, though that could change.
In Texas, the governor’s office produces a report of how much was paid to each recipient from its Texas Enterprise Fund and how much has been billed back.
That fund is similar to Arkansas’ Quick Action Closing Fund, which was set up in 2007 and has been used to lure or keep 31 companies in Arkansas, with promised payouts to the companies ranging from hundreds of thousands of dollars to $10 million.
Those companies have promised to create 7,652 jobs. The number of jobs retained by companies that were persuaded to expand or remain in Arkansas is 3,418, according to the commission.
Holmes said the state will probably make informationsimilar to what Texas does available if clawback provisions in Quick Action agreements are invoked.
FOLLOWING UP
But for the performancebased incentives, the results are harder to gauge. Even counting how many jobs have been created is difficult, in part because the figure is constantly changing and in part because a company might have hired people that are not counted toward the incentive payroll thresholds because they are not paid enough or have not worked there long enough.
Holmes said it can be years from when the commission offers an incentive until an agreement is signed and the company is actually ready toclaim it. Once the agreement is signed, the commission doesn’t always find out what happens with the incentives from that point on.
“It may beanother year or even two years before the information is submitted to DFA for audit to verify what they’ve done, what their payroll is or how many people they’re actually employing at what levels. Then DFA conducts that audit, and that determines what that incentive is going to be, and most of that information we don’t know here,” he said.
Before offering incentives, the commission uses a computer model to determine what the return on a project will be, comparing the cost the state is expected to pay versus the benefits it will bring in terms of taxes and employment.
The commission predicted that the 82 incentive agreements it worked out in 2010 will have a cost/benefit ratio of 3.3, meaning that over 10 years, the state will get back $3.33 for every dollar spent in incentives.
Checking whether that model’s projections are accurate is difficult, though.
“That’s the problem that we’ve had on two aspects: one is determining the actual performance of the company, and then going in and actually looking at the sales and corporate income tax contributions the company makes,” said Kurt Naumann, assistant director of strategic planning for the commission.
Naumann said it would bepossible to search the Department of Finance and Administration’s payroll verification audits for each year, project and program, and determine the number of jobs created, but the process would be tedious and would raise questions about which jobs qualify for inclusion in the count. It’s not something that’s been done thus far.
Rugger said the verification audits could not be released under state tax-procedure law, but the name of a taxpayer receiving economic incentives and the amount of the tax credit or rebate received can be disclosed.
Naumann and Morris Jenkins, director of strategic planning and legislative liaison for the commission, said the state needs to offer incentives to compete with other states. Naumann said he has seen the results from a 2009 law requiring companies to pay higher-than-average wages to receive job-creation tax credits.
“I think it shows on the average hourly wages of the prospects,” he said.
But both said they would like to have more access to information about companies after the agreements have been signed.
“We want to know, how accurate is our front-end estimate?” Jenkins said.
Naumann said he would someday like to work on creating a “longitudinal database” that could compile all the information about a project, including initial estimates, actual incentive awards, time extensions to meet thresholds and legislative audits.
“It’s not impossible to do that. I think it would be pretty laborious on the front-end,” he said.
Jenkins said the commission was encouraged by a 2005 law that requires the Legislative Audit Division to review incentive programs annually on a rotating basis so each program is evaluated at least once every five years.
The analysis may include the dollar mount of incentives actually provided, the direct and indirect benefits associated with each program, and other information.
The first audit, released in 2009, concluded that “the cost savings to businesses that are realized from the tax credits and rebates have a positive impact on employment, labor force, personal income, and gross state product.”
The most recent audit prepared by the division focused on textile, petroleum andmachinery industries, which together account for 28.4 percent of funding through the Consolidated Incentive Act, and concluded that the programs were successful.
Doug Spencer, a state auditor, said the Legislative Audit Division reviews the Department of Finance and Administration’s work to make sure that the department is accurately and thoroughly verifying the information provided by the companies.
“What we did, we went behind DFA’s work to see if they’re doing their job. And we didn’t find any exceptions there,” Spencer said.
Though records of the jobs created by each company do exist, Spencer said, much of it is considered proprietary.
“The companies don’t always like to let their competitors know what they’re paying their employees or give out too many details. That’s just an understanding the state has with them to protect that information.”
Jenkins said he hopes to change that law in 2013 so that the division reviews every incentive award project, not just the overall programs.
“The cost benefits that are run are run on projects, not on programs,” he said. “We’re definitely moving in that direction. We wish that had been done ever since 2005.”
Act 1282 of 2001 requires the director of the Arkansas Department of Economic Development to report annually to the Legislative Council and the House and Senate Committees on Revenue and Taxation. The law says the report is to include “the number of jobs created by each project and the average hourly wages or salaries for each project.”
The most recent report created for this purpose covers the 2010 calendar year. It does not include actual jobs created, only the announced jobs. It does not include actual salary amounts, only announced salary ranges for each project. It also doesn’t name the specific companies.
Jenkins said he believes that the department is following the law as it was intended by the late Sen. Bill Gwatney, D-Jacksonville, who sponsored Act 1282.
That means there is no public report that says whether the companies have lived up to the terms of the agreements.
“The best we could do is ‘they say they’re going to create X number of jobs’ and that’s what’s in the agreement,” Jenkins said.
Front Section, Pages 1 on 06/24/2012