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Economic development incentives are inducements offered by a jurisdiction to persuade a business to remain, expand or move to that place. In North Carolina, state law authorizes municipal and county governments to use incentives for economic development purposes.1
Most jurisdictions in North Carolina offer incentives, even if they do not have an explicit policy governing their use. Incentives come in a variety of forms. One common type is cash grant offered by a state or local government. Other common types are offers of land, buildings or infrastructure (either already in existence or to be constructed or improved for the project), workforce training, permit assistance and tax abatements or credits.
There are two main types of incentive: statutory incentives and discretionary incentives.
- Statutory incentives are defined by law. The law spells out what a company must do to receive an incentive. Any company that meets the eligibility requirements can automatically claim the incentive. Because the conditions and terms that determine an award are the same for everybody, there is no need for participating parties to enter into an agreement.
- Discretionary incentives are offered to companies on case-by-case basis. Since the parties negotiate specific terms and conditions for each project, an incentive agreement is necessary. The agreement for each project establishes the goals, targets, timelines, award amounts, conditions for receipt, and other project-specific terms. This process provides a chance for a local government and a business to identify priorities, find common ground and start to build a relationship.
North Carolina law requires economic development agreements between a local government and a private enterprise to “clearly state” the “respective responsibilities” of each and to “contain provisions regarding remedies for a breach of those responsibilities on the part of the private enterprise.”2
Local governments can make sure that businesses uphold their responsibilities by specifying performance standards. Performance standards outline what a business must do to receive an incentive grant and are included in the incentive agreement. Performance standards are often related to job creation and capital investment, but they can also refer to remediation efforts, wages and benefits, “green” construction or any number of agreed-upon goals.
In order to prove that it has met the performance standard, a business must produce evidence of compliance, usually culled from internal records, on a regular basis (the type of proof and the timeline to produce it are generally included in the incentive agreement). If the business shows that it meets the performance standard, it receives the incentive grant. If it fails to do so, it forfeits the grant.
Performance standards are useful, but they have limits. Not all projects fit neatly into this “perform first, get incentive later” model. Some projects may need the incentive before sought-after goals can be reached. Some goals may not be realized for a number of years. A business might fulfill a promise one year but then undo it the next (for example, by laying off workers from jobs created to meet a performance standard). A business could simply skip town after receiving an award for years.
This is where clawback provisions come in. Clawback provisions enforce the terms of the agreement and give it muscle. If a business breaches the agreement, a clawback provision permits the local government to recapture funds it has already appropriated or expended. North Carolina law requires incentive agreements to contain a clawback provision if certain events, specified in the agreement, occur (or fail to occur).
Clawbacks are good practice. An unenforceable agreement leaves the city or county open to abuse. Clawbacks ensure that local governments have the ability to hold companies to their promises. If a company defaults, a clawback provision allows the local government to get its money back.
2North Carolina General Statute § 158-7.1(h).
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Case studies by Nichola Lowe, PhD, Associate Professor City and Regional Planning, UNC-Chapel Hill
Question and Answer
Q. I would like to learn more about economic incentives contracts that require living wage. NC 160A-20.1, indicates that a City may not require a private contractor to abide by any restriction that the City could not impose on all employers in the City. Am I correct that we would be prohibited from placing a wage requirement based on this statute? Do any communities have Living Wage provisions as a requirement for incentives? -- municipal economic development official
A. In the context of an economic development incentive agreement, it is perfectly permissible to require a company receiving an incentive to pay a certain wage. In fact, G.S. 158-7.1(d) requires a local government to make findings about wages to be paid to workers and G.S. 158-7.1(d2) involves minimum wage requirements. Many local governments will not offer incentives to a company unless the company promises to pay wages that exceed the county’s average wage. G.S. 160A-20.1 pertains to requirements imposed “as a condition of bidding on a contract.” It does not apply to the economic development incentive context, because in the econ dev context a company is not bidding for a contract. In some ways the opposite is true—the local government is the one bidding in competition with other local governments to attract jobs and private investment.
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W.E. Upjohn Institute
In collaboration with the Department of City and Regional Development