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Selecting the Best State

Increasingly Fierce State Competition for Business Site Locations Offers Opportunities and Pitfalls.

CEOs can expect a potentially rewarding, yet perilous, landscape in business expansion incentives in 2010. High-stakes competitions for business expansion are nothing new. But with the current unemployment rate, the stakes have gotten much higher. As a result, negotiations for business expansion in 2010 will be more complex and financially significant, meaning CEOs will have more options to evaluate and a wider array of possibilities to consider.

For those navigating the increasingly complex site-selection maze, lessons can be learned from some recent state deals.

Battle for Boeing: Did “Right to Work” Make the Difference?

In September 2009, 267 South Carolina workers took matters into their own hands and altered the high-stakes show down over where the Boeing Corporation would build its second 787 Dream liner assembly line in 2010. The workers, based in Charleston, voted to decertify their South Carolina Boeing workplace as an International Association of Machinists union facility. The vote was 199 for decertification to 68 against.

A day later, Washington State Senator Mike Hewitt (R-Walla Walla), the minority leader and a member of Governor Chris Gregoire’s Council on Aerospace, called the decertification “a serious blow to our quest to keep the second 787 production line in Washington.” He further said, “Today’s vote puts Washington at a major competitive disadvantage.”

Hewitt would later ask the state legislature to lower unemployment insurance costs and to reject a proposed hike in workers’ compensation tax in hopes of improving Washington’s competitive position.

The location of 3,800 potential jobs and $750 million of capital investment was up for grabs. Which was the best state for Boeing?

Washington has strong advantages: a highly trained aerospace workforce and state leaders prepared to meet any incentives other states offered. What it could not do is rewind the history of a costly 52-day strike in 2008. Boeing wanted production security.

In the end, union decertification and South Carolina’s right-to-work laws made the difference. Boeing selected Charleston for its second assembly line. The largest private sector capital investment in South Carolina history became reality, thanks to the vote of 267 workers.

Lesson: Non-financial state characteristics can make the difference.

State Wars for Business and Jobs in 2010

Selecting the best state to grow your business today involves increased political considerations and more restrictive conditions. State wars for business, employing tax incentives, training grants, land acquisitions and other devices, could become common and fierce. These expansion and location decisions will be full of potential opportunities – and pitfalls – for CEOs.

According to the Center on Budget and Policy Priorities, combined state budget deficits for 2010 and 2011 could reach a staggering $260 billion. California is on the verge of bankruptcy and 10 other states, the center reports, have fiscal situations equally dire. The Department of Labor recently reported that 23 states are borrowing money from the federal government just to meet their weekly unemployment obligations. Governors and legislatures will have to get very aggressive to bring in employment and business in order to stanch fiscal bleeding.

Economist James Hughes of Rutgers University, widely regarded as an expert on business expansion incentive programs, is generally a proponent of state incentive plans and has quantified the positive returns for New Jersey. He predicts unprecedented state wars. “Every governor in every state is going to be desperate for job growth for their citizens, since we’re in such a deep employment hole,” Hughes said in an interview. “Those states that have the most effective economic development strategies, teams and programs are going to have a better chance at getting the jobs,” he added. “But the competition will be furious, like nothing we’ve never seen before.”

Lesson: States will be creative and aggressive.

New York vs. New Jersey Battle Heats Up

CEOs in the Northeast or those considering expansion there will find the incentive battles in this region noteworthy. In what the New York Observer dubbed the Battle of the Holland Tunnel, New Jersey and New York will compete furiously in 2010.

In early January, New York Governor David Paterson proposed a remake of New York State’s longstanding business incentive programs. “Unfortunately, our Empire Zone program is no longer working,” Paterson said in his State of the State speech.  “And so, as I said last year, we’re going to put it where it belongs – in the past.” Paterson wants to replace it with the Excelsior Jobs program (named after the state’s motto), which would create new incentives for jobs, research and capital investment.

But in today’s economy becoming competitive with other states might not be enough. The battles for growth and jobs in the shrinking economies of the Northeast, where states typically recruit against their neighbors, will be fierce. Companies outside the New York- New Jersey-Connecticut area view the region as very expensive, with some of the highest wages, taxes, regulation and cost of facilities in the nation.

New Jersey appears to be leading in the early rounds of the Holland Tunnel campaign. It started in November 2009, when The Depository Trust and Clearing Corporation announced that it would relocate 1,600 of its employees to New Jersey, reducing its Water Street footprint in New York City to about a third the size. Depository Trust signed a long-term lease for 415,000 square feet in the Newport Office Center on Jersey City’s Gold Coast waterfront. Employees are expected to begin work there in early 2013.

“[W]e concluded that relocating to New Jersey would allow us to manage our cost structure more readily and position DTC for continued business expansion in the years ahead.” Said William Aimetti, CEO. Garden State incentives, including the Business Employment Incentive Program and the newly authorized Economic Redevelopment and Growth grant program, offering grants toward relocation expenses and signed into law by then-Governor Jon Corzine, played an important role in the decision, company officials say.

This year there will see more high-profile battles between the two states. According to public documents, Deloitte, the $26.4 billion accounting giant, “anticipates relocating 1,400 jobs from New York City,” and has applied for $35 million in New Jersey state incentives. Jonathan Gandal, a Deloitte spokesman, said in an emailed statement that the application was “preliminary research of the tri-state area commercial real estate market in advance of our expiring leases in New York, New Jersey and Connecticut. The New Jersey grants are available to us, but no decisions have been made. Tax incentives are one of multiple factors we’re weighing.”

Significant state tax revenues are at stake. ACE Limited, the insurance company, has reportedly been approved for several million dollars of incentives to move 336 employees to New Jersey. A final decision has yet to be announced. Starwood also recently announced it would move its headquarters and 800 employees from White Plains, N.Y., to nearby Stamford, Conn.

New York City has also had some wins, but primarily with companies renewing their commitments or expanding. Major leasing announcements have come from law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP, hedge fund D.E. Shaw and law firm Stroock & Stroock in early 2010.

“Right now, New York doesn’t make the short list on where to expand or put back-office jobs” said Kathryn Wylde, president of the Partnership for New York City, a leading business group. Look for New York to respond with more programs and incentives.

Lesson: Explore neighboring states. They will be eager to compete in 2010.

Clawbacks and Drawbacks: Dell’s $26.5 Million Bill

States are also getting more sophisticated about clawback provisions (which require the company to commit to stipulations  such as a timeline on creating new jobs, the amount of capital to be invested and meeting wage standards, under penalty of  losing incentives) and other terms that make expansion decisions perilous. Business is full of risk; now states are asking businesses to pay them if their expansions do not last.

When Dell made the decision to build a new facility in Winston- Salem, N.C., in November 2004, the county, media and political establishment were excited. Dell desktop computers would be assembled in North Carolina.

In its agreements, Dell pledged to create a minimum of 1,700 jobs, with possibly as many as 2,000. It also pledged to invest a minimum of $100 million. The North Carolina General Assembly approved $242 million to $267 million in incentives. In addition, the Winston-Salem City Council and Forsyth County Board of Commissioners passed a $37.2 million package of incentives.

Unfortunately for Dell, the demand for desktop computers has been falling, while the demand for laptops and other equipment has increased. The facility’s peak employment was 1,400, but in late 2009Dell decided to close the plant in January 2010. The date has been extended until October 2010, with approximately 400 employees staying on as demand increased.

In November 2009, along with the announcement of the plant closing, Dell took a $59 million charge against its approximate $115 million investment. That loss was bad enough, but it was not the entire bill for the plant closing. In its agreements with North Carolina authorities, Dell was required to repay certain incentives if it closed the plant prior to October 2010. It also was required to repay graduated amounts based on employment metrics.

After the announcement, Winston- Salem Mayor Allen Joines sent Dell a letter outlining the upfront costs and expenses it had incurred: $26.5 million. Dell paid up.

The political leaders hailed the reimbursement as a positive in protecting the community, yet it highlighted another risk in accepting state business incentives. More and more states want companies to repay them if business changes. For example, New York Gov. Paterson also said in his State of the State address, “We are no longer going to provide tax credits for  businesses that do not provide the jobs that we’ve been promised.”

For most companies, change is to be expected. Trying to predict employment levels and demand for products over the long term is very difficult.

Lesson: Beware – or be prepared for – clawbacks in case things don’t go as planned.

Edward Kopko is CEO of Mercury Z, an innovation company. He also writes regularly on various aspects of states.

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