Due to the COVID-19 pandemic, companies large and small have experienced radical disruptions in their ability to sustain operations and staff, fulfill orders, and perform on contracts. It has thrown businesses into unprecedented levels of chaos. Concern over these impacts is weighing on decision-making processes, and their inability to meet their obligations under existing state and local incentives agreements is further aggravating an already trying situation.
We’ve outlined the best ways to both understand and navigate the current climate, with attention to incentives negotiated pre-COVID-19, as discussed in a recent Biggins Lacy Shapiro & Co. (BLS & Co.) webinar.
The coronavirus pandemic has resulted in a near complete shift to work-from-home, hiring freezes, layoffs and furloughs, salary reductions, construction delays, closures or reduced operations at manufacturing plants, and disrupted supply chains.
Under the surface of this crisis are latent additional risks embedded in government/business contracts, with parties unable to perform – raising issues of potential defaults, liabilities, “force majeure” defenses, insurance claims and other uncertainties.
Incentive agreements almost always require companies to meet annual performance criteria to remain in compliance and to earn incentives. The most common feature is the requirement to meet specific job retention or creation levels, while others may also require minimum average wage levels and capital investment targets.
Most agreements also require companies to complete the planned “project” – both construction and hiring – by certain deadlines.
Thousands of companies have made good-faith commitments in these agreements to create and retain jobs for extended periods of time, maintain those jobs at specific “project” locations, construct and occupy new facilities by certain deadlines and/or make specified amounts of capital investments.
These obligations may become impossible to fulfill in the immediate future because of government restrictions on occupancy, employment actions, construction closures, permitting, and manufacturing delays, as well as employee preferences for work-from-home arrangements.
Beyond 2020, the uncertainties remain open-ended – including the potential need to “de-densify” workplaces, requiring capital investment and time to implement, and continuation of work-from-home preferences.
The result of failing to meet contractual obligations will vary by state, locality and program, but could include: a reduction in incentive payments, forfeiture of payments, deferment of commitments and payments, or termination and recapture of all or a portion of prior payments.
Virtually all outstanding incentives agreements could be at risk of one or more performance impacts. While most states extended deadlines for 2019 reports due in Q1 2020, the longer-term risks for 2020 and beyond remain to be seen.
All states are wrestling with these challenges. With impacts expanding, more attention will be needed to address the uncertainties and financial risks companies with existing incentives commitments are facing. Here are two differing examples:
In most states, public officials are broadly acknowledging the need for adjustments to existing agreements. Plans to address these needs in many states will be conducted on a case-by-case basis – with a potentially enormous volume of proposed amendments and approvals now piling up – while other states may follow North Carolina by implementing simple one-year extensions.
So, how can companies navigate their commitments negotiated pre-COVID? One area presents the greatest potential concern – job shortfalls due to the “work from home” format – both in the near-term and potentially for many years.
To address these concerns, states will be considering a spectrum of approaches: ranging from default (an adversarial and potentially counterproductive approach), to proportional reductions (reducing benefits to amount earned) and obligation/payment delays.
Consensus forecasts point to some material level of long-term change in market norms. The going-forward reality will be at odds with expectations in most incentive agreements – some requiring precise quantitative targets.
Further, incentives involving city and/or county funding present even more specific local sensitivities – as many employee residences may be in-state but outside local jurisdiction and tax base.
There are numerous “cross currents” in this environment. Stressed fiscal conditions may pressure states and localities to reduce or delay incentives payments. However, the political environment surrounding “incentives” may lead some states to be cautious about appearing to be too lenient in enforcing contract terms.
The first step companies should take is a detailed review of the commitments and remedies, which will vary. From there, companies should define the specific issues in their projects creating compliance concerns. Then, they will want to determine what specific action is required to provide relief (e.g., contract amendment, change in regulations, amended legislation, etc.).
Companies should then present concerns to public agencies – also illustrating what other states/localities are doing to align with market realities.
Given that this is a shared challenge, they should consider whether to present these concerns on a project-specific basis or join with business or industry groups to present concerns as part of a broader coalition. Ultimately, the relief may include revised terms, approvals and other amendments which may be project-specific or may entail a program-wide solution.
The ongoing pandemic has drastically altered the corporate landscape – and the incentives agreements that foster growth in a traditional climate.
While many companies may be at risk of falling short of objectives set forth in their agreements, they are not alone. Most states and municipalities are addressing these assessments on a case-by-case basis – with some regions taking more, or less, forthcoming approaches.
Altogether, now that we are about to enter the fourth quarter, companies should take swift action to communicate with public agencies about their agreements, their near-term projections and longer-term uncertainties in the context of the current “health” of their respective markets.