State and local governments offer firms all kinds of incentives in hopes of spurring local economic development. New research finds that a specific group of companies is more likely to want to keep those incentives secret.
It has become almost standard for companies considering a relocation, expansion, or new investment to seek some sort of “incentive” from US state or local governments. For example, Amazon’s search for a second headquarters led to 238 locations in North America attempting to woo the tech giant by offering incentive packages including grants, tax abatements, free land, and other benefits. Stonecrest, Georgia even offered to de-annex part of the city so it could be renamed “Amazon.” Amazon’s HQ2 search—which ended up with Arlington, Virginia and Seattle, Washington, where Amazon was already headquartered, as victors—was exceptional in that it was a public “beauty contest” and some of the bids were made publicly available. Most economic development deals are private negotiations between government entities and firms, or their firm’s site location consultants.
Estimates on the total costs of these incentives vary dramatically, with the highest estimate at $90 billion per year. The lack of transparency in how these deals are negotiated makes it difficult to tally their total cost to taxpayers, and even more difficult to estimate the costs to a single community.
The lack of transparency of these agreements is often due to pushback from organized interests. For example, in 2015, the Government Accounting Standards Board (GASB), the body that sets standards for US state and local finances, issued a new rule called GASB 77 that required government agencies to disclose the total amount of dollars in lost revenue due to incentives. Dozens of business organizations, consultants, and many local governments submitted comments opposing this rule. In other cases, economic developers used the courts to challenge public records requests on incentives. This has resulted in comical examples in Texas, such as the city of McAllen refusing to release the details of its payments to pop singer Enrique Iglesias for a 2015 holiday concert due to economic development competitiveness reasons.
This fight over transparency of economic development policy was the starting point for our own research. What is it about economic development incentives that leads particular companies to push back against transparency?
In our newly published paper “Who’s Afraid of Sunlight,” we examine this question by examining the largest economic development “deal closing fund” in the country: the Texas Enterprise Fund. This fund provides cash grants from the state, on top of the other state and local incentives, to swing particularly big investments to the state of Texas. Companies like Apple received $25 million to locate a facility in the Austin area, and $40 million for Toyota’s relocation of their North American Headquarters to Plano. You can see the list for yourselves.
The Texas Enterprise Fund has been controversial. In the early years, under then Texas Governor Rick Perry, companies would receive incentives without a formal application or without any job creation requirements. Years of reforms have led to changes in the program and today companies submit a formal incentive application and if accepted, the state and company negotiate a contract that stipulates details including capital investment, jobs created, and average wages. The Texas Enterprise Fund can then cancel or “claw back” the grant payments if companies do not fulfill their obligations.
In our research project, we submitted a public records request through the state of Texas to obtain these applications and contracts. What happened after we submitted our request?
Companies in Texas have the right to legally challenge public records requests, attempting to block the disclosure of information that is specific to the company’s operations. Whether or not the challenges are successful, they always delay the records request process, potentially discouraging journalists. Of the 164 companies whose records we requested, 45 (27 percent) challenged our request.
In our research paper, we used these challenges as data, examining what leads some firms, and not others, to challenge our request.
Our findings were striking, and to some extent unexpected. Numerous companies have failed to meet their job creation promises, which led to a non-disbursement of their incentives (SpaceX) or on other cases repayment of their incentives plus interest. To our initial surprise, these companies were less likely to challenge our public records request.
Our conjecture is that for the companies who have failed to meet their job creation promises, the jig is up. These companies have been subject to formal clawbacks and their names already appear online in a database as having failed to meet their Texas Enterprise Fund commitments. There may be some embarrassing or confidential information in their applications or agreement, but their failure to fulfill their promises is already public.
There was another set of firms that was much more likely to challenge these public records requests.
Although some companies were successful in their challenges, leading to redactions in some applications, we received the data we needed for our study. This data led us to observe a troubling pattern: Numerous companies had amendments to their initial agreements. We found a total of 56 amendments for the 164 incentive deals.
We compared these amendments to the original agreements and found that most of these amendments were lowering job numbers, pushing back job creation dates, and in some cases even redefining what type of position could be counted as a new job. We document all of these cases in our paper, including one company that counted their CEO and other executives as newly created jobs to meet the minimum required “average weekly wage,” and another company that amended their contract the day before jobs numbers were due and they were subject to clawbacks.
The main finding of our study is that the companies that were most likely to challenge our public records requests weren’t the companies that publicly admitted to not fulfilling their obligation. Companies that had non-public amendments to their agreements, lowering job numbers, changing the math on jobs or wages, or pushing out deadlines challenged our request.
Our findings not only speak to firm non-market strategies, but also to the perils of the lack of transparency of economic development policy. In many communities across the US, economic development agencies have included performance requirements and clawbacks in their incentive agreements. The logic is that the economic developers are better stewards of public dollars by setting a clear set of rules that match local economic development goals. Unfortunately, we find that not only are governments willing to bend these rules, companies are using legal means to obscure these changes from the public.