Industry incentives can be high stakes game

Some see N.C. cities at disadvantage if ‘bidding war’ breaks out

Tom Joyce
Staff Reporter

Interstate competition for industrial prospects can be a rough business, at times employing devious tactics likened to those of back-alley poker games or shady used-car lots.

A city in North Carolina might put one offer on the table, for example, only to have its ante upped by a competitor in Virginia. Back and forth they will go, with the outcome possibly decided by some “deal breaker” whipped out at the last minute like an unexpected ace of spades.

And when localities in Northwest North Carolina are involved, some will argue that they aren’t being given sufficient chances to even compete at all due to officials in Raleigh not steering enough prospects this way.

Recently, North Carolina’s ability to compete with Virginia on industrial incentives — special enticements often used to lure companies and their precious jobs to communities needing them — came into question with the expansion of Aerial Machine and Tool, a Defense Department contractor.

Though he had expressed a preference to locate in Mount Airy, the head of that company ultimately chose Ararat, Va., instead for an operation that initially is employing 30 people to manufacture military fuselage jackets containing a fire retardant that extinguishes flames.

The reason, said Aerial President John Marcaccio, a Mount Airy resident, was that economic-development officials in Virginia were able to assemble a more attractive incentives package than their counterparts in Surry County. Marcaccio has said economic-development leaders in Surry “got outdone” by those in Virginia.

States’ PhilosophiesDiffer

Several officials on this side of the state line say it was simply a matter of the government in Virginia offering money that North Carolina couldn’t — or wouldn’t.

The main deciding factor was said to be a state grant from the Tobacco Region Opportunity Fund (TROF), the amount of which has not been announced. The TROF is roughly Virginia’s equivalent of the Golden LEAF Foundation in North Carolina, as each awards grants to aid economic development in communities that have been dependent on tobacco.

Another item that helped swing the deal, according to one official in North Carolina close to the negotiations, was a willingness by Virginia to provide for on-the-job training at the Aerial manufacturing site in Ararat. The training arrangement in North Carolina would have forced employees to use facilities of Surry Community College.

The incentives package in North Carolina was assembled by the Surry County Economic Development Partnership in conjunction with the Mount Airy and county boards of commissioners.

Based on the minutes of the April 3 meeting of the city Board of Commissioners, the incentives to be offered by the city to Aerial were discussed and agreed upon during a closed session held at the end of the meeting. Afterward, the Surry County Board of Commissioners adopted a matching package.

With the company ultimately choosing to expand in Ararat, Va., the incentives were not voted on in open session and have not been disclosed publicly.

But they are believed to have been in keeping with the city and county’s normal procedure that is based on the “self-funding” policy. Under that system, a portion of the tax proceeds to be realized from a company expansion is used to provide a grant to encourage the industry to locate here. Factors such as the manufacturer’s own investment in machinery or equipment are taken into account in determining the incentives to be offered.

In February, for example, Mount Airy and Surry County each offered tax incentives of $17,700 to about $26,800 for Bodet & Horst, a German mattress company that recently launched a manufacturing operation in Mount Airy. The plan called for the exact amount of the tax incentives provided to that entity, which initially planned to hire only 10 people, to depend on the actual investment by Bodet & Horst.

The local incentives for the mattress-maker are in the form of tax rebates calculated over a five-year period.

Surry’s economic-development agency is on record as saying that incentives exceeding the self-funded amount will be provided to a firm offering a significant addition of jobs, based on a commitment by local governments.

However, a different situation faced local officials in Aerial Machine and Tool’s case. Since the company planned to lease an existing building rather than construct a facility and to add a relatively small amount of machinery, it made the incentive figure low when the expected tax revenues to be generated were taken into account.

Surry County, in addition to offering local incentives to Aerial, sought a matching grant from the Governor’s Matching One NC Fund, a special state fund, that would have doubled the total incentive figure. But no support was received from that source, which requires certain criteria to be met, including that the industry’s wages be comparable to a county’s average hourly manufacturing wage.

Aside from the grant fund, about the only other incentives offered by the state are tax credits given to companies that create jobs. The N.C. Department of Commerce classifies its incentives as “targeted, performance-based incentive programs.” They are built around the philosophy that a company first must add to the tax base or generate jobs and pay its taxes before receiving any money.

Though local governments do have some leeway to “sweeten the pot” on their own, “We don’t have as much flexibility as we once did,” Mount Airy City Manager Don Brookshire said in reference to the tight financial situation that has hampered the municipality in recent years.

Brookshire said that Mount’s once-lofty budget surplus of $16 million — which would have offered it much flexibility — has largely been spent on readying Piedmont Triad West, a local industrial park located near Interstate 74, for new tenants.

Virginia Tactics QuestionedVirginia, meanwhile, was able to dangle the Tobacco Region Opportunity Fund grant at a strategic point in the Aerial negotiations and steered the expansion away from North Carolina, which a source close to the company said offered “too little too late.”

But Virginia’s use of the tobacco funds in such a way is considered questionable by one source in North Carolina familiar with economic-development projects in both states, who addressed the issue only on condition of anonymity.

“They throw that in as the deal-breaker,” he said. “It’s the closer for them.”It is hard for North Carolina to compete with Virginia’s ability to offer such a grant in the late stages of the process, he said. “You’ve got them hooked, you’ve got them interested and you’re neck and neck with them — then bam! Here!” he added of the tobacco money being injected into the equation.

“But I have no way of proving that,” the source said of the questionable tactic allegedly used by Virginia to usurp its neighboring state.

Another factor that seemed to play a role in Virginia’s ability to recruit Aerial Machine and Tool was a strong partnership not only between the state and local governments, but the federal branch as well. U.S. Rep. Rick Boucher, whose congressional district includes Patrick County, worked closely with local economic-development leaders to rapidly assemble the overall incentives package.

The local entities pursuing the project included the Patrick County Economic Development Authority and the Patrick County Chamber of Commerce.

Although Mount Airy Commissioner Deborah Cochran, who worked some on the Aerial project, said she contacted Surry’s congresswoman, Rep. Virginia Foxx, about the expansion, there appears to have been no federal-to-local effort similar to Virginia’s.

More OpportunitiesNeeded
No matter what kind of incentives package can be offered, prospects must be available to even consider them.

Brookshire, the Mount Airy city manager, wants officials in Raleigh to direct more companies considering new plants or expansions to this corner of the state.

“What I would like to see them do is recognize that Northwest North Carolina is in a depression and not a recession,” he said. They could address that by steering more prospects here, Brookshire added, instead of areas that are already prosperous.

While saying he is not a fan of incentives, Brookshire said that Surry and other border counties need more of them at their disposal if that’s what it takes to avoid “a competitive disadvantage with other counties right across the state line.”

“Please give us something that at least lets us compete fairly with them,” the city manager said.

Sen. Don East of Pilot Mountain, who represents Surry County in the state Legislature, personally would like to “outlaw” incentives altogether. “They’re nothing more than a bidding game of who will pay the highest price,” he said Saturday.

East added that he thinks the present “performance-based” system that determines incentives according to the tax base should be left intact. “I’m not sure that I’m ready to go on record for changing anything right now.”

The Republican senator explained that he sees problems with North Carolina getting involved in bidding wars with other states that only serve to set the incentives bar higher and higher. “You absolutely have to draw the line somewhere,” East said.