Establishing an Effective Economic Incentive Compliance Process

As the end of the year approaches, companies are shifting their focus to economic incentive reporting. Unfortunately, the most overlooked aspect of a successful economic incentive package is the establishment of a comprehensive compliance process, which is why it has been reported that more than half of companies awarded economic incentives never fully realize the benefits. 

Noncompliance can occur for several reasons: different parties being responsible for the site selection phase of a project and economic incentive negotiations versus the actual reporting on a project after it is underway, misunderstanding key commitments, personnel turnover and not clearly delineating who is responsible for the economic incentive compliance efforts.

The following blog aims to provide considerations and guidance on how to effectively prepare and manage the economic incentive compliance process.

Considerations when establishing the economic incentive compliance process

If a company does not timely or accurately complete compliance requirements, there is risk that the benefit may be reduced or eliminated, which may create a financial gap for the project. This can be averted or mitigated by proactively taking measures before an issue arises. Site Selection Group recommends establishing an economic incentive compliance process which includes the following:

Creation of an economic incentive compliance team

Many companies are accustomed to creating a team of key stakeholders for the site selection process and will include individuals who are responsible for economic incentives, but this rarely includes individuals who will be responsible for the actual compliance efforts and realization of benefits. The individuals on such a team may differ depending on the actual economic incentives procured, but likely should include:

• Tax and finance, including members from the income, sales, property and payroll tax departments
• Human resources
• Legal
• Third-party payroll provider
• Plant manager/Office manager
• Real estate
• Governmental affairs
• Third-party consultant

All these individuals will play a critical part in providing necessary data which will be needed to comply and realize benefits. In addition to the various roles described above, it is highly suggested that companies appoint a primary contact to take ownership of the overall process. This could be an internal resource or a third-party consultant.

Review all economic development agreements or memorandums of understanding

Ideally the established compliance team will be a part of the review of economic development agreements during the negotiation phase of the incentive process to identify common pitfalls that occur later in the process. Regardless, the first key step in establishing the compliance process is to fully understand and summarize each economic incentive program and its terms, including:

• Definitions: Defined terms are perhaps the most important aspect of any economic incentive program. Definitions will be included in negotiated economic development agreements and may also be included as part of the legislative granting authority, such as statutes and administrative rules. Defined terms may include items such as project location, type and level of capital investment, qualified employee, qualified wage, qualified legal entity, eligible training types, length and duration of benefits, period to include jobs and or investment, timing and frequency of incentive requests, etc.
• Legal entities: It is important to understand which legal entities in a corporate structure are parties to the contract because it is possible various entities are involved as the operating entity, employer of record, real estate owner and personal property owner. In addition, multiple legal entities and how they are organized may affect how benefits will flow to parent entities or partners. Finally, the compliance team should understand whether benefits are transferable based on mergers, acquisitions or internal restructurings to avoid surprises later.
• Confidentiality: The compliance team should be aware of whether information submitted as part of the compliance process will be made public or subject to Freedom of Information Act requests. Obtain any necessary internal approvals to submit such information in advance to avoid late submissions.
• Deadlines: Understanding deadlines includes tracking the dates on which reports are due, but also includes the need to understand the deadlines by which project commitments must be completed (i.e., capital investment made, jobs created, operational target date, etc.). The compliance team should routinely check the status of the project commitments to ensure future compliance and to proactively address any concerns.
• Clawbacks: Clawbacks can be drafted in various ways and understanding their impact is critical throughout the course of compliance. Constant communication and positive relationships with state and local jurisdictions on the status of a project can go a long way toward lessening the negative consequences of underperformance.
• Cost: Comprehending the cost involved with receiving economic incentives is important to ensure that the costs do not outweigh the benefits. There are the more obvious upfront costs associated with application fees, consultant fees, legal fees, bond fees, etc., but there can also be fees associated with compliance. These additional costs may include the compliance team’s time, the cost of compliance software, filing fees associated with reporting, and some jurisdictions may charge a percentage of the benefit received by the company.
• Miscellaneous commitments: Increasingly, jurisdictions are requiring miscellaneous commitments in exchange for economic incentives. Some examples include requiring companies to utilize a certain percentage of minority or women-owned suppliers, a specified percentage of purchases from local vendors, use of designated community or technical colleges for training benefits, posting open positions on specific state and local workforce websites, or making joint press announcements.

Invest in an economic incentive management system

Most companies use Excel spreadsheets to track their economic incentive portfolio. Unfortunately, Excel is rather limited in its functionality for these purposes. In addition, employee turnover can wreak havoc on the compliance process if the Excel documents are only controlled by one or two individuals. Site Selection Group created a proprietary, web-based software application, IncenTrak^®, to internally manage our clients’ economic incentive compliance. We also license such software for use by third-party corporations, as well as economic development organizations. Whether a company uses IncenTrak® or not, the key characteristics of an effective economic incentive management system are:

• Critical date management with alerting capabilities
• Contact management for company locations, state and local jurisdictions, consultants
• Program management of project commitments, incentive types, incentive forecasted receivables
• Document storage
• Financial reporting across your entire portfolio or by program or location

Conclusion

By bringing the right resources to the table, communicating incentive requirements consistently and early in the process to all interested parties and establishing effective tracking and monitoring systems, a company can ensure it maximizes its economic incentive portfolio to its full potential.