Connecticut state officials left many unfulfilled demands on the negotiating table in striking a $4.5 billion deal with United Technologies Corp. and want to get the Hartford conglomerate in further discussions to hatch an additional agreement.
“We would have loved to have other parts of the company in this deal,” said Ben Barnes, secretary of the state Office of Policy & Management. “This deal does not exhaust their entire backlog of unused tax credits, so we feel there is opportunity to secure further commitment from UTC.”
As part of the deal struck in late February, Connecticut will allow UTC to cash in $400 million in unused research & development tax credits in exchange for the company investing $500 million in new manufacturing and research facilities over the next five years, particularly at subsidiaries Pratt & Whitney, Sikorsky, UTC Aerospace, and United Technologies Research Center. UTC committed to spend another $4 billion on research and capital expenditures. The deal is still awaiting state legislative approval.
Despite achieving what Gov. Dannel P. Malloy and UTC Chairman and CEO Louis Chênevert called an historic agreement, Barnes said more stipulations were left out of the final deal.
Specifically the state wants:
• A long-term commitment for the UTC headquarters to remain in downtown Hartford;
• A long-term commitment beyond the five years already agreed to keep the Sikorsky headquarters in Connecticut;
• More investments in employment at Sikorsky;
• Investments in capital and employment at UTC’s building systems subsidiaries, including Carrier Corp. and Otis Elevator Co., both based in Farmington;
• Greater overall expansion of UTC employment in Connecticut.
“While it doesn’t go as far as we would like it to go, we are pleased with the commitment we were able to get,” Barnes said.
UTC officials declined to comment on further negotiations with the state.
“This agreement is truly a new chapter for our company,” Chênevert said when the $4.5 billion deal was announced. “The systems in Connecticut share the benefits of all this future growth in Connecticut.”
Unused Credits
Connecticut was able to negotiate the deal because of the large backlog of unclaimed research & development tax credits in the state. Companies like UTC, Fairfield’s General Electric, and big pharmaceutical manufacturers earn the credits by performing R&D and use them to offset their state corporate taxes.
However, many of the credits go unclaimed as companies can offset only 70 percent of their tax burden in a given year and businesses are more likely to claim other credits first, since the R&D incentives never expire.
As a result, 334 Connecticut businesses had $1.4 billion in unclaimed R&D tax credits as of 2011, including the $400 million UTC is set to cash in as part of its deal with Malloy, according to the state Department of Revenue Services.
“They need to make these credits available to any company that is willing to make a capital investment … The infrastructure is what anchors them here,” said Fred Carstensen, director of the Connecticut Center for Economic Analysis, who first advocated for allowing companies to cash in the R&D credits in 2010.
Malloy said he is willing to negotiate with other holders of unclaimed R&D tax credits so they can cash them in, but they must be willing to make the same level of commitments as UTC.
State officials aren’t currently negotiating with any other company about potential deals, Barnes said.
Any new deal with UTC, or another R&D company, would have to make financial sense for the state, Barnes said. Despite ceding the additional tax credits, the state expects a $6.5 million annual net increase in tax revenue generated by economic development from UTC’s expansion.
“This deal is good for our revenue, and we would like to have similar deals with other companies,” Barnes said.
Feeding Suppliers
UTC, though, stands out from every other company because of its large supply chain in Connecticut, Barnes said. The conglomerate has 2,500 suppliers in the state, and the $4.5 billion deal is expected to impact 75,000 Connecticut jobs.
“It is with all you suppliers and your employees in mind that we come to these agreements,” Malloy said when the deal was announced.
Suppliers need their customers in close proximity, as it is key to developing relationships and making sure parts are made to proper specifications, said Colin Cooper, CEO of the Whitcraft Group of Eastford, which supplies Pratt & Whitney.
“If they were like Boeing and went to South Carolina, that wouldn’t be good for the supply base,” Cooper said. “We need to bring them out on the floor and show them what we are doing.”
Keeping UTC research and development is vital, Carstensen said, because chances are its subsidiaries will develop the technology for the next generation and Connecticut could capture any spin-off companies.
Not to mention the state last year launched its $1.5 billion Next Generation Connecticut initiative, a program designed to help UConn develop a curriculum based on science, technology, engineering, and math to churn out employees for companies like Pratt, Sikorsky, and UTC.
“We are bolstering our advanced manufacturing capacity,” Barnes said. “We are poised to be long-term leaders in advanced manufacturing.”
Community Impact
Besides all the future plans, locking down UTC and its subsidiaries in Connecticut for the immediate future is important for the state now, said Barnes, who lives in Stratford, where Sikorsky is headquartered.
Stratford and surrounding communities like Shelton and even Bridgeport are scared that UTC will shut down its Connecticut operations, which impacts not only the UTC employees but the supplier companies, their employees, and the many businesses those employees support with their wages, Barnes said.
Chênevert denied UTC was looking to close down or unload its Sikorsky operations.
Still, locking down the company for the next five years was vital for the community and the state, Barnes said, and securing a longer term deal with another negotiation for Sikorsky to stay longer is just as important.
“The communities would be decimated by the loss of all the jobs and all the jobs from the suppliers,” Barnes said. “That is a real fear.”
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