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Incentive Clawbacks Ineffective Without Transparency, Research Finds

POSTED ON Feb. 5, 2019

New research into Texas incentive agreements indicates that clawback provisions don't work as intended unless combined with transparency requirements. 

Nathan Jensen, a government professor at the University of Texas at Austin, and Calvin Thrall, a doctoral student at the university, filed public records requests to obtain information on economic incentive deals offered through the Texas Enterprise Fund.

The fund — created in 2003 — awards cash grants to companies looking to relocate or expand in Texas and is the largest fund of its kind in the United States, according to the paper. As of December 31, 2018, more than $609 million had been awarded since 2004 in exchange for the promise of 94,000 new direct jobs, according to the fund's most recent legislative report. Awards given through the fund must be approved by the governor, lieutenant governor, and the state House speaker. 

Jensen and Thrall requested information on 164 agreements, of which 45 were challenged by the companies involved, including Apple Inc., CITGO Petroleum Corp., eBay Inc. and Subsidiaries, Ernst and Young LLC, General Motors LLC, and PepsiCo Inc. In a working paper available through the Washington Center for Equitable Growth, the authors examined why the requests were challenged, focusing on "two potential explanations — firms that have been subject to formal clawback penalties . . . for noncompliance, and firms that have renegotiated their incentive contracts to avoid suffering clawbacks."

According to the working paper, the incentive agreements often contain recapture provisions to ensure that the recipients meet job creation and wage targets. If a company defaults on the agreement, the state can impose penalties, the authors said.

However, companies can renegotiate incentive agreements to reduce the number of jobs created, change the hiring schedule, or change the definition of the term "job" as specified in the agreement, the authors said. These renegotiations, which often take place right before a company would be subject to clawback provisions, are not publicly disclosed. "It's not even clear that the lieutenant governor and Speaker of the House have to sign on to the renegotiations," Jensen told Tax Notes February 2. “We only saw the governor's office signature on the renegotiated contracts.”

Indeed, a 2014 audit of the Texas Enterprise Fund found that the governor's office had allowed recipients to avoid clawbacks by amending award agreements to lower job creation targets or grant more time to meet them without informing the lieutenant governor or the House speaker. The audit also discovered that some recipients never filed a formal application and there were no job creation targets. Jensen said all the contracts he reviewed had applications and job criteria, however, indicating that there has been some action taken in response to the audit.

According to the working paper, firms whose negotiated agreements hadn't been publicly disclosed were more likely to push back on the authors' public records requests, while firms subject to publicly disclosed clawback provisions were less likely to challenge the requests.

Many of the renegotiated contracts were "targeted at avoiding a publicly disclosed clawback, even if that means accepting a smaller incentive award," indicating that the "public stigma of being identified as being noncompliant with an incentive award is a motivating factor in renegotiation as well as the motivation for challenging the transparency measures,” the paper states.

The authors concluded that clawback provisions are not effective unless coupled with transparency provisions. "Allowing companies to renegotiate contracts outside of the public eye violates the very spirit of adding performance requirements and performance provisions," they said. Companies that sought to keep their contracts under wraps "seem to be doing so for serious reasons," including noncompliance with economic development agreements, the paper states.

To increase the effectiveness of clawback provisions, Jensen said applications and contracts should be made public and public hearings should be held, even once a contract has been negotiated. For example, the New York City Council is holding a series of public hearings on the incentive package offered to Inc. for the company's planned headquarters in Queens.

Jensen also said the Texas Economic Development Act, which allows school districts in the state to grant property tax abatements in exchange for job creation, is a model of transparency for other incentive programs because the public can "see the applications, contracts, evaluations, and details on what the comptroller said about the deals.”

John Wittman, a spokesman for Gov. Greg Abbott (R), said in a February 4 statement that under the governor’s leadership “the Texas Enterprise Fund has been revamped to include additional methods of transparency.”

“These methods include further protections for taxpayers, including requiring companies to meet their job targets each year prior to receiving their annual disbursement and ensuring agreements have clawback provisions,” Wittman said.

The fund has added 39 new active projects from January 2015 through the present, he said. "These projects, which have been offered Texas Enterprise Fund awards totaling $122,227,480, have committed to more than $16.6 billion in new capital investments and more than 25,700 jobs across the state,” Wittman added.