Incentives: The Good - The Bad

It’s one of the most fulfilling calls a broker can get. A longtime client contacts you to start a new site selection assignment. A high profile multi-state search is the quintessential red-carpet event of the industry. Job announcements, ribbon cuttings, and the boundless sense of optimism that a new project delivers to the winning community. Economic development officials from a place you didn’t even know existed will be courting your project. Inevitably, incentives will be part of the conversation and an over-the-top incentive offer can be rather enticing when your client makes its final decision.

Numbers don’t lie and the financial impact of incentives is rather simple to plug into your final analysis. Once your client signs the contract, the long-term public relations can be an entirely different matter. When local or state governments are involved with providing incentives, the pride and joy of a ribbon cutting can vanish at the first sign of trouble. Growing a new workforce is difficult enough without having to fight local media and 50% of the state residents that may oppose the governing party that provided your client the package.

We here in Wisconsin have been at the epicenter of one of the most controversial incentives awards in recent memory. The state of Wisconsin became the proverbial dog that caught the car when it prevailed in the 2017 Foxconn sweepstakes. The 8^th Wonder of the World was going to encompass 20 million square feet of high-tech manufacturing, $10 billion in private investment and 13,000 jobs. The Foxconn project was the envy of the Midwest and aggressively pursued by several states. Wisconsin went all-in with a $4 billion dollar incentive package and we won the deal.

Fast forward to 2021, while Foxconn has delivered four buildings totaling over 1.5 million square feet, they have fallen woefully short of projected hiring goals and an opaque cloud hangs over the future of the development. The Wisconsin Economic Development Corporation (WEDC) recently notified Foxconn that they are ineligible for its annual tax incentive award for missing the minimum job creation targets. Foxconn publicly disputes the WEDC ruling, and the relationship seems to be spiraling towards irreparable harm.

While I have had no personal involvement with Foxconn, I have followed the project intently since it showed up on the Wisconsin radar. “Project Flying Eagle” was initially being promoted as a one million square foot high tech manufacturing project with upwards of 1,000 jobs. Then the politicians got involved. As an SIOR, the Foxconn saga can offer several crucial lessons for providing proper guidance to your client when a large incentive package is on the table.

When politics prevails over economics – Politically speaking, economic development in many locales has entered the zero-sum world of party ideology. Within months of the incentive package being approved, the Foxconn deal became a key wedge issue in the 2018 Wisconsin Governor’s race. The state Democrat party coalesced around an anti-Foxconn campaign that amplified every company misstep before a shovel even hit the ground. The public backlash helped swing the Governor’s race to the challenger Tony Evers, and it also handed Foxconn a big black eye with half of the population of the state before they could even open their doors. The political opportunism isn’t limited to one party. The state Republican Party, led by then Governor Walker, terminated a $700 million federal award in 2010 for a high-speed rail line between Milwaukee and Madison that was funded by the American Recovery & Reinvestment Act championed by President Obama. Take note, if your client signs up for taking funds from a governmental entity, be very aware that the current state of politics can deliver unexpected PR surprises for years to come. Under-promise and over-deliver is a best practice position to take. Project Flying Eagle would have been an economic homerun for the state had the project stuck to its initial billing.

Contingent incentive awards – A well-crafted incentives agreement has served as a back stop to a potentially calamitous event for not only the state of Wisconsin, but also for Foxconn. Three billion dollars of the incentive package was negotiated as a “Pay as you Grow Award.” Annual Tax Credit allocations to Foxconn are based upon minimum job creation goals and only due when the targets are met. To date, Foxconn has not achieved the hiring requirements and WEDC is not funding the tax credits. As bad as the PR has been for Foxconn, imagine the public blowback if the state had agreed to pay the incentives without the job creation contingency.

Position for future success – A primary motivator of state and local governments participating in the incentive game is the multiplier effect. Studies leading up to the approval of the Foxconn package suggested up to 39,000 multiplier jobs that would be supported in the area by suppliers and service providers. Nearly $1 billion of the package was delivered through a Tax Incremental Financing (TIF) district through the local community of Mt. Pleasant. The TIF was utilized to assemble the needed land sites and deliver the necessary infrastructure to support the projected growth across 3,921 acres throughout the community. Although presently behind the original development schedule, the $1 billion TIF was underwritten on bonds paid back by the real estate taxes on the guaranteed increment of the 1,200 acre Phase 1. Foxconn is obligated to cover the annual property taxes assessed to cover the entire bonding payments regardless of its overall pace of development. The big win for the local community was that the TIF payback did not consider the development potential that would arise from the additional 2,723 acres now primed for development. This area has been transformed with bustling new infrastructure that would be envied by any community around the world and new commercial & residential development is following. With, or without, Foxconn.

The media and political spectacle that has embroiled the deal from Day 1 has most certainly been an unforeseen challenge that the company and the state have had to contend with.

While the results to date have not lived up to the initial hype, the reality is a mixed bag.

Foxconn has developed nearly $450 million worth of facilities and Fisker just announced a joint venture electric vehicle production opportunity that could be housed in the Wisconsin plant. Unless all 50 states vote to ban the use of incentives in economic development, incentives will continue to play an important role in the site selection decision-making process. As employers publicly espouse the values of social responsibility and stakeholder capitalism, incentives will need to be reviewed through the additional prism of long-term public perception which is being impacted by our politics.