🔒CT takes a step toward slimmer, less risky corporate incentives model

The state recently made headlines announcing that four New York companies were either relocating or opening new offices in Connecticut, lured in part by incentives that will save three of those businesses millions of dollars after they create a certain number of jobs.

But those deals don’t represent a newfound effort to ramp up state-backed incentives to recruit companies in a post-pandemic world, where states are urgently trying to jumpstart their economies.

In fact, the state is largely going in the opposite direction, trying to move away from direct and upfront incentives to businesses.

For example, a relatively generous and oft-criticized incentive program launched a decade ago to help small Connecticut companies recover from the Great Recession is now officially being handed off to the private sector as the state works to heal the economic wounds inflicted by the COVID-19 pandemic.

After doling out more than $333 million in financial assistance to more than 2,000 employers, Connecticut’s so-called Small Business Express program (EXP for short) will see its taxpayer-funded financial firepower folded into several other existing and envisioned lending programs that instead rely on banks and other private lenders to extend loans from their own balance sheets.

State-backed guarantees in those programs act as a backstop for private capital, deliberately spurring them to open the spigot wider in order to lend to minority- and women-owned companies that have historically struggled more to secure traditional loans.

The change, a product of the recent legislative session, delivers — at least partly — on a 2018 campaign pledge from Gov. Ned Lamont to wean the state off up-front incentives for business investments, which he has criticized as too costly to taxpayers.

Forgivable loans and matching grants, delivered up front and tied to future job-creation targets became a central element of former Gov. Dannel P. Malloy’s economic playbook after he took office in 2011.

While EXP has been a major investment of that sort, Malloy’s First Five Plus program was more visible, producing numerous incentive packages worth tens of millions of dollars in forgivable loans and up-front grants for companies that pledged to create at least 200 jobs and make other investments and commitments.

Lamont and his economic czar, Department of Economic and Community Development Commissioner David Lehman, have been urging lawmakers to extricate state government from the loan underwriting business, arguing that private lenders have more expertise and that the state shouldn’t compete with banks. They’ve also pushed an “earn-as-you-go” model for business incentives that requires recipients to create new jobs before getting any special benefits.

The recent changes to EXP, slipped into the legislature’s budget implementer bill, allow the administration to check off some of those boxes, Lehman said in a recent interview.

“It’s verbatim what I’ve wanted for the past two years,” Lehman said of the changes to EXP.

However, the administration didn’t get everything it wanted during the session.

A second attempt by Lamont this year to win approval for a separate job-creation incentive program, dubbed JobsCT, died in committee without reaching a vote in the House or Senate.

Lehman said he will continue to lobby next session for the broad-eligibility program that would provide income tax rebates to eligible employers for seven years, equivalent to 25% of the personal income taxes their net new hires pay the state, or 50% for jobs in lower-income areas known as opportunity zones or distressed municipalities.

There did not appear to be any obvious significant opposition to the proposal, but it may have gotten lost during a session where COVID-19 response and other major issues like legalizing recreational marijuana, sports betting and online casino gaming (all of which passed into law) dominated, Lehman said.

Even without JobsCT, DECD can still offer earn-as-you-go incentive deals using current statutory authority, but it’s more costly to the state than JobsCT would be, he said.

Rep. Caroline Simmons (D-Stamford), co-chair of the Commerce Committee, said she supported the EXP changes and the ultimately unsuccessful JobsCT proposal.

Simmons, whose committee oversees DECD’s incentives programs, said she prefers the earn-as-you-go model.

“I think it’s a much more sustainable and strategic way to be giving out incentives,” Simmons said. “Because for many years, our model was the First Five program, where we would give out big deals and they wouldn’t always create the jobs that were promised and they wouldn’t always stay [long term in Connecticut].”

Changing market

States that provide less lucrative incentives may lose out on a corporate relocation deal if a competing state is willing to be more generous. Critics have called it a race to the bottom, and one that mostly benefits corporations, but even politicians who concur with that sentiment are unlikely to want to tie their hands on potential relocation and expansion deals that might arise down the road.

Simmons said she has discussed that fear of losing out with colleagues in the legislature.

“There is definitely a little bit of fear around giving up that incentive tool,” she said.

However, she’s convinced Connecticut’s government already has the capacity to respond if a situation arises that merits opening up the wallet, such as Malloy’s legislature-approved deal with Pratt & Whitney that allowed the jet-engine maker to exchange $400 million in stranded tax credits if it committed to building a new headquarters in East Hartford and staying there for at least 15 more years.

“We would still be able to have that flexibility in certain situations,” Simmons said.

If companies are responding tepidly to Connecticut seeking to lower its incentives spending, it wasn’t apparent in June, when Lamont announced that three out-of-state companies were establishing operations here.

Investment fintech iCapital, manufacturer ITT, and digital real estate fintech Tomo plan to bring 357 jobs to Connecticut. In exchange, DECD has promised them “grants in arrears” worth at least several million dollars once they achieve their targets.

“No company has rejected our incentives,” Lehman said. “I think maybe the market has changed too. We are putting forth a competitive model consistent with other states.”

Besides those three newcomers, a fourth, tobacco giant Philip Morris International, announced it would move its headquarters and 200 jobs to Fairfield County. However, Philip Morris wasn’t offered incentives reportedly due to the optics of giving taxpayer dollars to a cigarette company, albeit one that’s in the midst of transitioning its business to non-smoke alternatives like vaping.

Helping minority businesses

A key goal of the Lamont administration’s business incentives strategy, according to Lehman, is to attract or create the greatest number of jobs for the least amount of taxpayer money.

Providing EXP loan guarantees to private lenders allows the state to leverage perhaps 20 times the value of its money in loans, rather than issuing general obligation bonds in order to lend out the money directly, Lehman said.

He estimates that EXP 2.0 — the program will likely be rebranded when it launches later this year — will cost the state $27 million during its first four years. That’s at least several million dollars less than the average amount the state spent every year on the original program since it launched in 2012.

Compared to the former First Five Program, JobsCT — capped at $40 million per year — would virtually eliminate state borrowing entirely, since the government would simply be rebating some of its net income tax gains to employers, rather than providing loans and up-front grants.

The cost per job would be an estimated $5,000 to $10,000, compared to an average of nearly $19,000 per job in First Five, according to Lehman.

EXP had already been winding down over the past few years, with total assistance slowing to a relative trickle of just $12 million during Lamont’s first two years in office, well below what it was over much of the last decade, including its 2013 peak of more than $60 million in loans and grants.

Also important, the legislature increased the maximum loan size allowed per borrower within EXP’s carve-out for minority-owned businesses, hiking it five-fold, from $100,000 to $500,000. The legislation also allows more minority business lenders, such as community development financial institutions, into the program by removing a previous cap of two such entities.