The Charlotte Observer

September 25, 1995

Incentives game: What's next move?
An upcoming N.C. court ruling could end the strategy of luring industry with giveaways

Taylor Batten, Staff Writer

Copyright © 1995, The Charlotte Observer

Companies around the country can almost hear the song playing in the background of their board rooms:

``Here comes Santa Claus, here comes Santa Claus, right down Santa Claus Lane. He's got a bag that's full of toys . . . .''

States hoping to attract new industry come bearing gifts as never before, but a pending ruling by the state Supreme Court could make North Carolina look like the grinch who stole Christmas among a sleighful of jolly St. Nicks.

Throughout the nation, with few exceptions, states are offering millions of dollars in lower taxes, cheap land, job training, and infrastructure improvements to land companies and new jobs. And it's not just industrial heavyweights like Motorola and Mercedes seeking the giveaways.

``Today it is fair to say that virtually every individual company that comes to the state of North Carolina asks for incentives,'' said Terry Orell, Charlotte's top recruiter.

For North Carolina, the explosion in incentives has been bad news. Unwilling to offer giveaways on the same scale as some of its neighbors, the state has lost big projects.

Now it could fall even further behind in the incentives game. Superior Court Judge Julius Rousseau Jr. ruled last month that incentives given by Forsyth County and Winston-Salem were unconstitutional. The case, brought by Winston-Salem lawyer William Maready, is expected to bypass the appellate courts and arrive in the Supreme Court in the next few months.

``The ruling in Maready is terrifically damaging for the state,'' said Ernest Pearson, who managed North Carolina's economic development under former Gov. Jim Martin. ``Now we're out of the ball game on many projects that have incentives as part of their consideration. To be reasonably competitive you have to be in the game.''

The Maready ruling directly affected only Forsyth County, but its ramifications are rattling statewide. A company known only to state officials by a fake name crossed the state off its list in the wake of the Maready ruling. AMP Inc. was considering North Carolina, but moved to South Carolina shortly before the ruling when that state beckoned with a reported $20 million offer.

A handful of counties across the state report that they have lost projects because of the ruling. Still others say their recruiting efforts are in limbo until the Supreme Court rules.

``I'm working on one now that lack of incentives will probably cause to go to another location,'' Orell said.

Site selection firms, which help companies find the best place to locate, are warning their clients about North Carolina's uncertain status.

``Some companies made the decision they're going to go elsewhere. Their time frame can't wait out the decision,'' said James Schriner, a consultant for PHH Fantus. ``Companies are saying maybe we should not necessarily deal with North Carolina until it's settled. . . . If everything's equal and North Carolina's incentive package is less generous than another area, they'll go somewhere else.''

``I'm talking to one company, and one of the first questions they had was What's the status of North Carolina on incentives right now?' `` said Buzz Canup, an executive with Fluor Daniel in Greenville, S.C. ``And from the business evaluation perspective, it's a good question. The advice we give our clients right now is that the climate is uncertain.

``Today's clients will go where they have the most cost-effective location, and if incentives make the difference, it will hurt the state of North Carolina.''

``The locational business is driven by a very short time frame,'' said Ken Bleakly, a consultant for Arthur Andersen in Atlanta. ``As a result, the decision is going to hurt North Carolina. They may just say, We don't have time to mess around with that.' ``


Making hay while sun shines

Even so, the state and some counties are not allowing the ruling to halt their economic development efforts.

Just last week, Cabarrus County landed toolmaker Stanley Works, which was also being courted by York County, S.C. Many observers expected that county to win Stanley's 625,000-square-foot distribution center with an attractive incentive package. But Cabarrus, unintimidated by the Maready ruling, assembled a package that included road improvements, water and sewer extensions, worker training, and community development block grants.

``Our read on that is we are not bound by that ruling yet. Once the Supreme Court rules on it, we'll have to deal with it then,'' said Maurice Ewing, the director of economic development in Cabarrus County. ``Until then, we're going to continue what little bit we can do.''

The state and other counties are taking a similar stance. The state's top recruiter, Gary Carlton, says the state usually gets 250 prospective projects each quarter, and that is down to about 200 over the last 90 days. But the state is still using what incentives it has: Just last week, Remington Arms Co. secured $150,000 from Gov. Jim Hunt's Industrial Recruitment Competitive Fund to relocate its headquarters from Delaware to Rockingham County.

Catawba County has not been sidetracked by the ruling, either.

``As it stands right now, as far as Hickory is concerned, if our counsel feels it's appropriate to offer incentives, they will do so,'' said J.R. Stigerwald, an economic developer with the Catawba Planning and Development Department.

Other counties are more timid. David Brody, an economic developer in Lenoir County, said the ruling has frozen that county's efforts.

``We're basically on a holding pattern until the suit is resolved,'' he said. ``It's handicapped us tremendously for a period of time until we find another way to get a leg up. In the short term, it'll have a chilling effect.''


Protecting public money

William Maready doesn't like to see North Carolina lose business. Maready, in fact, was active in Winston-Salem's recruiting efforts for two years, and has traveled internationally with two N.C. governors to drum up business. But he's not apologizing for bringing such upheaval to the state's development efforts.

After watching Winston-Salem and Forsyth County give more than $13 million to 24 companies, Maready filed suit. He said state statute 158-7.1, which allows incentives, violates the N.C. Constitution, which requires that public dollars be spent for public purposes. Judge Rousseau agreed. Experts say the public does, too.

``I'm a fairly responsible fellow, and I have a family and my roots are in North Carolina, and I certainly don't want to hurt my state and have no motive to do so,'' Maready said last week. ``But I believe what I'm doing is good for this state and good for the country.''

Maready also had practical objections. The state and counties, pitted against other states and counties, were spending millions on individual companies rather than on public improvements that could boost a community's business environment.

``Once you set up that kind of competition, it's like being on the racetrack driving a Ford with other race cars trying to get there and win the money,'' he said. ``You just keep going faster and faster and faster, and so do cities and counties and states.''

Said Mike Robinson, a law partner of Maready's who joined him in the suit: ``Corporations make up their mind as to where they want to go, then get localities in a bidding war against each other to raise the ante in economic development incentive dollars. There is a tide of opinion by thoughtful economists that the game of economic development has gotten out of hand and is skewing the market.''

Over 100 economists and policy experts from the Midwest signed a resolution last week calling for an end to targeted incentives. And Arthur Rolnick and Melvin Burstein, executives with the Federal Reserve Bank of Minneapolis, used the bank's annual report this year to call on Congress to end the practice nationwide.

Hunt's use of his industrial recruitment fund has only stiffened opposition to incentives. The state last year gave $300,000 to Seffi Industries, which filed for bankruptcy shortly afterward and left the state holding the bag. Spring Lane Co., which owns three Cheers restaurants in North Carolina, sought bankruptcy protection for its N.C. operation earlier this month, still owing the state $181,764.69. And the governor gave $230,000 to This End Up after the furniture maker promised it would create 200 jobs at a new plant in Lillington; the company then closed its Raleigh plant, where 150 people worked.


Weapons in economic war

North Carolina officials recognize the problems inherent in the incentive business. And they say they would rather spend the money on public improvements than private corporations. But the incentives ``war between the states'' is a fact of life, they say, and it would be economic suicide to be the only one to disarm.

It's an unending cycle that most states repeat: We only use incentives because everyone else does. We would be happy to stop, if everyone else would.

``It's a cost of doing business. If you want to be competitive, whether you like incentives or not, you have to use them,'' said Bob Leak Jr., president of Winston-Salem Business, the business-recruiting group Maready once worked with and now a defendant in Maready's suit.

``If all the states on the East Coast would abandon incentives, that would be fine. I'd put our developers and our state against anybody,'' recruiter Carlton said. ``But as long as they have theirs, the playing field's not level. You've got to have them to at least be competitive.''

Faced with that argument, Maready and Robinson are calling for congressional action that would ban every state's use of incentives. And they say North Carolina should not hesitate to be out front on the issue.

``Somebody has to come to his senses first. Somebody has to say this is wrong and it needs to be stopped,'' Robinson said. ``North Carolina has not been afraid to be in the minority on positions. That doesn't mean we're wrong and everyone else is right.''

In the meantime, other states love to see North Carolina wrestle with these problems. It has become a selling point: We don't have the uncertainty North Carolina does.

``They think it's great, it's terrific, North Carolina's out of the picture,'' Charlotte's Orell said. ``They're jumping up and down.''

Yet other states, which have faced legal challenges of their own, are not taking the Maready case as a signal that they could be next.

``South Carolina is ecstatic and they're playing on it. They're making hay while the sun shines,'' Carlton said. ``I haven't heard of another state having binoculars on us and saying, It could happen to us.' It's a marketing tool for them.''


What happens next?

All attention now turns to the state Supreme Court, which could make a landmark ruling that would shake the economic development business nationwide. State officials are plotting what to do if the court upholds the Maready decision.

Among the options:

* Have the General Assembly put a constitutional amendment before the people.

* Pursue other statutes besides 158-7.1 that allow economic development.

* Pass new legislation that alters 158-7.1 but allows some form of assistance to new companies.

* Have states and counties make grants to private, not-for-profit regional partnerships, who could then spend the money on attracting business.

Those options would be unnecessary if the court allows incentives. But state officials are eager for a decision in either direction. In economic development, nothing is more crippling than uncertainty.

``We get five or six calls about the Maready case daily,'' Carlton said. ``We don't know what the upper ruling will be. We just say, We're just as interested as you are.' ``


Bristol Compressor's $18 million deal

North Carolina competed against several other states for Bristol Compressor, a Virginia company that opened a plant in the northwestern N.C. town of Sparta last year. Other bidders included Alabama, Georgia, Ohio, Virginia, South Carolina and Tennessee. Here's the package of incentives the state and Alleghany County assembled to woo the company.




Water and Sewer Fund$750,000Industrial Recruitment Competitive Fund
Access road/bypass$5,200,000Transportation Department
U.S.21 improvmments
Job Training $1,000,000Comm. Coll. Industrial Training Program
Job screening$56,250Employment Security Commission
Tax credit$2,100,000Jobs Tax Credit (Dept. of Revenue)
Sewer plant update$1,000,000Community Development Block Grant
Land$300,000 Alleghany County
Site preparation$800,000Community via loans
BREMCO and Skyline Telephone
Site work $40,000Alleghany Co./Farmers Home Administration
Electric connection$500,000BREMCO
Local discretionary$20,000Committee of 100
Initial cash incentive$2,400,000RDCDC via banks via BREMCO; Skyline Telephone, Sparta, Committe of 100
Ten-year cash incentive$4,000,000County via wheel tax, budget

Source: N.C. Commerce Department

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Copyright © 1995, The Charlotte Observer.

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