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Senate | February 25, 2015 | Committee Room | Finance Committee

Full MP3 Audio File

Against this heat we'll be able to finish this up approximately 2 o'clock or maybe a few minutes early depending on your questions but this is an opportunity for us to have a Finance Committee meeting. Our co-chairs Senator Rabin and Senator Tillman, any comments you'd like to make. [SPEAKER CHANGES] No mine's been [??] twice. I can't say it. [SPEAKER CHANGES] Alright, Senator Tillman refuses to speak today. Well, let's just see. I don't think we have. We do have sergeant at arms but I don't have the names in place, so thank you for being here. We appreciate it very much. Today's goal is to begin some discussion on economic development. This is going to be probably a hot topic for this session. I believe the House it working on a plan to come this way and we need to be knowledgeable of the portions of economic development that hopefully work or at least know the ones that don't work and make some decisions as we continue on with our tax reform principles and the rules. That being said, let's have Ms. Avery, would you begin and bring forth the information. [SPEAKER CHANGES] Thank you, Mr. Chairman. Yesterday Dan and I spoke to the House Finance Committee and the handouts that you have before you are the ones that we used there and in mine we covered a little bit of other things, but because we want to focus today on economic development you'll have to sort of fast forward through that handout to get to this section of the presentation. When we start looking at economic development, you realize that a lot of it is on the appropriations side but when the state first went down the road of economic development incentives it started here in the Finance Committee and the Finance Committee has always taken a very strong interest in economic development. Prior to 1996, North Carolina made very little use of incentives to lure companies to come to this state. It didn't need to. It relied heavily on its educational system, in particular the community college system, its transportation system, its low cost of doing business in this state, its trained workforce but then in pressure from other southern states in the 1990s who began to offer tax incentives to lure companies to their state, this state began to also look at what it needed to do. It was perceived that we were at a weakness that we needed to overcome. The response in 1996 was an array of statutory tax credits that were collectively known as the Bill Lee or the William S. Lee incentive program. That program had two goals, it was to create high quality jobs and to promote widely shared prosperity throughout the state. In the coming decade, the General Assembly began to enact more and more tax credits or tax incentives to lure companies, and I just listed a few. I was surprised when I looked at all those different credits how many of them were enacted after 1996. For some reason I thought they'd been there a lot longer, but it wasn't, the a lot, the Ports Tax Credit, the Historical Rehab Tax Credit, the Low Income Housing, Renewable Energy, all of these tax credits that you all are discussing today are things that came about from beginning in the mid 1990s and what you notice when we did tax reform was that many of those tax credits had sunsets on them, even the Bill Lee credit had a five year sunset because at the time the General Assembly enacted it it was seen as a type of experiment, that in five years this body was gonna look at it again and determine whether those incentives were cost-effective or that they actually affected behavior or whether they merely provided tax reductions to businesses that would've located or expanded here anyway, and as those who have been around a while know, we actually let the Bill Lee Credits expire and we replaced them with the Article 3J tax credits. Also beginning in about 2002, in addition to the statutory tax credits, we begin to make more use of discretionary programs such as JDIG, the Job Development Investment Grant Program. There came a point, I've entitled this slide Points Colliding. I won't go over

Too much of the tax modernization studies because we've talked about that at length over the past four years, the different studies. But I just listed on the right hand side the basic recommendations that all of the tax reform studies recommended. This was something that you all talked at length about in 2013 as you did your major reforms to the tax code, but what was also happening simultaneously to a, during those tax reform discussions was a discussion about your incentives. There was an increased use of incentives in 2006 and in 2007, and with that increased use of incentives, there was an increase in the conversation about whether or not those initial questions have been answered. Are these incentives effective? Are they doing what they need to do? And that was the catalyst to a committee called the joint select committee on economic development incentives. One of the main things that that committee did was it contracted with UNC Center for Competitive Economies to do a report, a study, primarily looking at your article three J tax credits, your, as well as your discretionary spending programs. And that slide has a link to that study. Some of the major findings of that study was that the statutory tax credit spending, the amount you spent on those tax credits, greatly exceeded what was being spent through the discretionary programs. It also found that those tax, statutory tax credits weren't necessarily achieving the stated economic development goals of high paying jobs, quality jobs, and of prosperity shared throughout the state. What that study found was that most of the statutory credits were going toward investment, not job creation, and that most of those credits were going to companies located in your metropolitan areas. So there was less correlation between what the stated goals were and the outcome of those statutory credits. It found that with your discretionary incentive programs, the, you had more control over whether or not they were being used to meet the goals. And lastly, it found that reducing the North Carolina corporate income tax credit would be a viable alternative to the various statutory credits. Now I said points colliding is because that as you all looked at that legislation in 2013 and you made your policy decisions, one of those decisions was to eliminate those statutory tax credits. And it, we have. We've let many expire. We've repealed several others. You can see that there's another group that is going to expire in 2015, a couple more that will expire 2016, and in lieu, in replacement of that was a reduction of a corporate tax credit. One of the other things that came out of that study was the thought that this body needed a permanent group that would look at economic development during the interims. You have the joint select committee on economic development and global engagement. One of the key things that that committee has done, Senator Brown has chaired that committee, was it asked the fiscal research division to put together an, an economic development inventory so that the group, this body would know collectively what money it is spending on economic development. And that study came up with five major expenditure categories, and the last one was done in March of 2013, and so that's where these numbers come from, but you can see that the money spent or lost by the state for economic development is heavily, was heavily in your tax expenditures, your tax credits. $1.2 billion as opposed to your grants, which were $37 million, and then your various other things. And that's just sort of my lead in now for you, we, I feel like the group has spent time evaluating. You've at least made some initial decisions about your corporate tax rate, about your tax, statutory tax credits, and what you have left now in your arsenal are your discretionary spending programs. And so what I’ve tried to do is sort of give you a little bit of the history and be the warm up band to Dan who will come in now and talk to you specifically about how your discretionary spending programs work and what the requirements are, and as you go down the road of economic development

Um, give you sort of a base of knowledge. [SPEAKER CHANGES] Thank you, Miss Avery. Members of the committee, this is designed to bring everyone up to a level of knowledge, some first time coming to the General Assembly, some first time coming to Finance, and what we will do is also at some point is get one of the authors of that study from UNC to come in, briefly describe what has been, you know, in the study and then come forward and offer some updated information as regarding incentives and their effectiveness and what should be the metrics as we look at them and decide if indeed they do deliver the intended goal. Miss Detef, if you'll present we're glad to have you here today. [SPEAKER CHANGES] Good afternoon, my name is Dan Edifaw and as Cindy and Kay, I'm gonna be reviewing some of the specific economic development incentive fund programs with you. So, also as Cindy shared, economic development efforts in North Carolina have evolved over time sort of from the left to the right of this slide, and that's because we moved towards tax simplification, the study that Cindy referenced, and so these incentive funds have played an increasingly important role in recruiting industries to our state. The primary tools in our incentive funds are JDIG, 1 in C, the utility account, site infrastructure development and JMAC. The job development investment grant program or JDIG as it's commonly called is sort of the flagship program of the state and it was created in 2002 as an incentive for jobs to create, excuse me, an incentive for businesses to create new jobs in the state. When the program was created, the objective was to incentivize high paying jobs and since high paying jobs typically result in higher withholdings, the program correlates the incentive amount paid with the withholdings of the jobs created. In fact, the amount of the incentive is equal to the withholdings of the created eligible positions multiplied by a percentage between 10-75%. JDIG agreements are not allowed or may not be entered unless certain prerequisites are met, and those are listed on the slide. I'm gonna draw your attention to three of them. First, that the business will have a net increase in in state employment, that is they will have a larger employment footprint in the state because of the JDIG agreement. That the project would not locate in the state but for the JDIG agreement and finally that the benefits of the project outweigh its costs. For purposes of making this last determination, Commerce uses a couple of models, the in-plan and the Waldon models. The in-plan model measure inputs such as investment, jobs created and salaries associated with those positions and accounts for multipliers such as the type of the industry and the ability of the industry to bring in induced and indirect benefits such as supply chain manufacturers in its wake. The in-plan model is then paired with the Waldon model to evaluate costs versus benefits with the goal of ensuring that there's a net state benefit or a positive general fund impact, at least by the end of the JDIG term. In order to be eligible to participate in the JDIG program, a business in the agreement must create at least 10 jobs that's located at tier 1 and at least 20 jobs that's located at the tier 2 and tier 3 area. Certain businesses such as retail establishments and professional sports teams are ineligible for participation in the program and there are also health insurance and OSHA compliance requirements that apply to all agreements. Programatically, the General Assembly has put certain constraints on its overall JDIG obligation. These take the form of cost caps. Historically speaking, agreement caps, and term limitations on each JDIG agreement. As originally enacted, the calendar year JDIG commitment cap was $10 million per year. Two years later in 2004 this was increased to $15 million per year, and as a matter of statutory concern, that has been the persistent cost cap for the program until this day. That being said, there have been temporal deviations from that, so for example in 2006 for that year alone the cap was raised to $30 million, in 2007 for that year alone the cap was raised to $25 million. More recently we've seen JDIG availability increases take the form of collapsing future time periods in with the future time period, so for example in 2007 the calendar year was collapsed into a physical bianuum period and that effectively took half of the money and half of the year from the following calendar year and put it into the current time period.

Allowing the department to go ahead and begin committing that portion of the funds. Turning to agreement limitations as originally enacted, the Department of Commerce could enter no more than fifteen new JDIG agreements per year. This was subsequently increased to 25 agreements per year, and then the agreement cap was eliminated altogether. Finally, a JDIG agreement with a business cannot have a term of more than twelve years. Okay, so how does the actual process work? How do we go from being interested in a business and vice versa to a consummated agreement where they are making investments in the state and creating jobs in the state? Well, personnel from the economic development partnership of North Carolina begins working with potential JDIG participants, and using a JDIG pricing model, they come up with a preliminary calculation of the incentive amount based on project location, job count, average salary, the investment the business is bringing, and the industry type. The committee, excuse me, the company submits a draft application for review by commerce staff, and they then work with the company to make a finalized, accurate application to submit to the department, along with an application fee. The application is considered by the economic investment committee, which is comprised of the secretaries of commerce and revenue, the director of OSBM, and one appointee each from the House and from the Senate. The application must contain certain pieces of information, including the name of the business and financial statements of the business, where the project will be located and the project activity type, the proposed new jobs that will be created by the project and the associated withholdings. The application should also disclose all other considered locations and the incentives associated with each considered location. The EIC then evaluates the application and chooses program participants pending the negotiation and execution of a community economic development agreement. This is going to set the requirements related to and the amount of the incentive. I'm not gonna mention all of the things that must go into the agreement. There's roughly 25 statutory requirements. I do want to draw your attention to a couple of them. First, you're gonna see mentioned the utility account, and we're gonna discuss that program in detail in a few minutes. But relevant to the JDIG program, if a project is locating in a tier two or tier three area, the amount of the incentive to the business is reduced by 15% or 25% respectively, and that percentage is automatically diverted into the utility account. So natural question might be what is a tier two or tier three area? These are rankings done by the Secretary of Commerce to determine relative economic health of all the counties in the state. The 40 most economically distressed counties in the state are classified as tier one, the 40 next economically distressed counties are tier two, and the remaining 20 counties are tier three. In determining these annual rankings, the secretary uses four statutory factors, average rate of unemployment, median household income, percentage growth and population, and adjusted assessed property value per capita. Turning back to the required agreement terms, one other thing to note is that while incentive payments may not exceed a term of twelve years, a company that enters into a JDIG agreement must agree to maintain operations for at least 150% of the grant term. So if the grant term is twelve years, they have to maintain operations for eighteen years. Oh, I probably should have done that halfway through. Sorry. So what happens when things don't work out, when they don't go according to plan? The JDIG program has three primary ways of protecting the state's investment. These are active callbacks, requirements regarding when funds are actually dispersed, an then monitoring, auditing, and reporting of requirements. So I just mentioned the JDIG participant must agree to maintain operations for at least 150% of the agreement term. If they fail to do so, the EIC is empowered to recapture some or all of the incentive payments that were paid. Regarding disbursement of funds, if a business fails to meet the terms of the agreement during the year, during one of the years of the agreement, the term of the incentive or the amount of the incentive must be reduced proportionate to the failure. If a business fails to maintain or meet its performance metrics for two consecutive years, then one of two things happens depending on whether or not you're in the base period. The base period is the ramping up period. It's the period of time that a company has to make the new hires associated for the eligible created positions that forms the basis of the calculation for the JDIG incentive amount. So

a fair way to meet performance metrics for 2 consecutive years and you're in the base period then subsequent years grant payments are withheld until the business comes back into compliance. In that situation, the EIC has the discretion to increase the base period for up to 2 additional years. If the business fails to meet performance metrics for 2 consecutive years and you're outside of the base period, then the agreement is terminated. Also dealing with scheduling of the disbursement of funds no JDIG amount is disbursed to a participating company until the Secretary of Revenue certifies to the EIC the amount of the withholdings that were received in that year from the company. Turning to 'Reporting and Monitoring Requirements'. A JDIG participant must submit annual payroll records to the EIC and the EIC may audit the business at any time. The EIC in turn, reports annually on the program to the general assembly and conducts an annual study for the purposes of determining the minimum funding level necessary to implement JDIG. To help contextualize this and bring to the fore, how these things work out, I've put together a simple illustration. [SPEAKER CHANGES] I've got a question come to mind. [SPEAKER CHANGES] You've got a question? [SPEAKER CHANGES] I do Mr. Chairman. [SPEAKER CHANGES] Alright. I hate to interrupt - he's on a roll. But now, when you're my age and you think of it, you've got to ask it. [SPEAKER CHANGES] That's what you have a pencil and paper there for Mr. ?? *laughter* [SPEAKER CHANGES] No, no. I don't write very well and I think worse than that. *general laughter* [SPEAKER CHANGES] Alright. [SPEAKER CHANGES] How much of the JDIG money is upfront money and how much is reimbursed after expenses are incurred? I know in the beginning period that there may be some funds that they've not incurred the cost on yet. I need that explained because we're at that point now where I need to know. [SPEAKER CHANGES] Right now. [SPEAKER CHANGES] Just got to know and if I don't know right now I'll forget it. *general laughter* [SPEAKER CHANGES] And ?? correct me if I'm wrong. There's no money that's paid upfront. A JDIG calculation is based on the withholdings that are generated so you'll have a year where the company is meeting its performance metrics - it's remitting its withholdings and it will it will report on that information. The Department of Revenue will certify the validity of it and then the calculated percentage in the agreement is applied to the withholdings generated and it's submitted to the company in the following year. And I'll talk about that a little bit in the [INTERRUPTED] [SPEAKER CHANGES] That helps. Is that in the base period or at any point? [SPEAKER CHANGES] You have to follow up through the Chair please. [SPEAKER CHANGES] Mr. Chariman, followup. [SPEAKER CHANGES] Okay. [SPEAKER CHANGES] That is the case in each year of the agreement including the base period so, as they're ramping up their employment, if they plant to create 400 eligible positions andthey create 100 during the base period, you would calculate the withholdings that they've actually remitted on those 100 eligible positions and then you'd apply the percentage of the JDIG percent to it. [SPEAKER CHANGES] Very good. [SPEAKER CHANGES] That's even better than Rucho could've explained it. [SPEAKER CHANGES] Thank you Dan. Please continue. [SPEAKER CHANGES] This will tie in nicely. We're going to go into an example that sort of illustrates this. So let's say that in 2015, Stark Industries enters into an agreement with the Department and they create a sufficient number of jobs with sufficient withholdings and the JDIG incentive to Stark is one million dollars for a twelve year term. So the first question presented is "What is the total potential JDIG obligation to Stark?" Well, if Stark meets all of its metrics each year of the agreement, the JDIG incentive is one million dollars times each year of the twelve years for a total JDIG obligation to Stark of twelve million dollars. In fact, generally speaking, whenever you think of JDIG availability: for every dollar of JDIG availability, in your mind you should be thinking of a potential twelve dollars of obligation over each year of the maximum twelve years for an agreement. The second question is "How much do we appropriate for Stark Industries in 2015?" and this ties into Senator Tillman's question. The natural response might be to think one million dollars but remember, there's no disbursement from JDIG until the department of revenue certifies the amount of withholdings received during the year from the company. So for 2015, there's no JDIG disbursement but if Stark spends 2015 meeting the performance metrics - remitting the required withholdings, then the department will certify that and a disbursement will happen the following year in 2016. So, if Stark meets all of its metrics for each year of the agreement for 2015 through 2026, it will receive JDIG disbursements in the amount of one million dollars for each year in years 2016 through 2027. The last question is going to show you sort of how [END]

Of these awards begin to layer on year over year, so assume in 2016 Ultron Industries enters into a JDIG agreement and the amount of the incentive to Ultron is $10 million per year for 12 years. So in 2016 again you're going to have, so in 2015 you're going to have Stark meeting it's metrics, remitting it's withholding, it's going to get $1 million in 2016. In 2016 Ultron's going to be meeting its metrics, remitting its withholding and it's will get its first disbursement in 2017. In 2017 you'll see the layered effect of $11 million in total commitment representing but JDIG obligations to the two participating businesses. That will continue until 2028 when your JDIG obligation for appropriations purposes is going to drop back by $1 million as Stark will term out after 12 years of participation in the program. The following year Ultron too would term out after 12 years so you would have no JDIG obligation in the absence of any new JDIG agreements entered during that time period. I also want to touch on the appropriations process for JDIG purposes. Each year hopefully it's a little clearer now after the example that we need to appropriate enough money to the JDIG program to meet all the state's collective obligations to all participating businesses, but that amount is necessarily going to depend on how well each of the participating businesses hit their metrics, so for planning purposes based on a study that was done by the Department of Commerce, we determine that as a place holder for the past couple years and probably for this year and maybe the next one going forward, there's a base $63 million appropriation for JDIG obligations. Now, that amount is less than what would be needed if all participating businesses hit all their performance metrics. To my knowledge that has never occurred. You can imagine that in down economic times like out of the great recession that we've just come out of, companies were underperforming. In that situation, the $63 million may fall short of what's actually needed to meet the state's collective JDIG obligation to participating businesses. That's going to result in a non-recurring surplus for that year. Similarly, during boom economic times or recovery periods, companies may typically perform all the metrics, they may fully perform and may be entitled to the full amount of the obligation. In that situation the $63 million may fall short of the state's obligation and in that year you're going to have a non-recurring deficit. You're gonna have to have an additional procreation to meet the state's JDIG obligations. It is only after we received the funding study by the EIC that we're able to true up those numbers, the $63 million place holder and the actual obligation of the state. So that covers one of the five programs we're gonna discuss, but it does have the largest fiscal footprint, so we're going to move a little more quickly through the remaining four, and I want to touch next on the 1 in C fund. This is as I called it yesterday, the old man of our discretionary funds. It was created way back in 1993 although it was not codified. [SPEAKER CHANGES] Do you want members to ask questions specifically on this JDIG before we move on? Would that be helpful? Members of the committee, you would prefer to just listen to the whole thing or specifically? Okay. Well, I've got yes and no. Alright, if it's specific to JDIG, Senator Alexander. It might be good because while it's fresh in your mind you can ask the question. [SPEAKER CHANGES] Yes, I'm some kind to Senator Tillman I do believe and proud of it. I understand we had a couple of companies, Chiquita and Dell who came to town and came to our state and things didn't work out and now we're working a claw back. Can you tell me how well that claw back is working? I'm told that they don't have to give the money back until they leave and what is the definition of them leaving? [SPEAKER CHANGES] Well, I certainly with respect to monies that have not yet been earned under JDIG, you don't have to worry about clawing that back. In terms of payments that have already been made, we have Commerce here, they might be able to speak to the process of the clawing back. In terms of the statute there's not really a mechanism in place. [SPEAKER CHANGES] Is somebody from Commerce able to answer Senator Alexander's question. Just don't all stand up and say yes, I know that answer. Okay, we've got, would you please come forward and identify yourself and see if you can share that answer to that question. [SPEAKER CHANGES] Yes, Stewart Dickinson, I'm the Director of Commerce. [SPEAKER CHANGES] Can't hear you. Turn on your mic. [SPEAKER CHANGES] Okay, Stewart Dickinson, Director of the Commerce Finance Center. The claw back in the case of the two specific companies you mentioned, Dell paid their entire amount back, it was approximately $1.1 million of the discretionary incentives to Commerce

30 days after they notify the department that they would be closing that factory down. They in fact didn't close that factory for several years. But they did pay that right away they did not have to but they did. In the case of Chiquita we have been notified by Chiquita that they are going to be exiting Charlotte and the funds that they've received which is a little bit over a million dollars in discretionary funds will be paid by the end of this calendar year by December 31. [SPEAKER CHANGES ]Senator Alexander, right why are you up? [SPEAKER CHANGES]The amount of money if I remember correctly was in the hundreds of millions between the state and the local with Dell and they were here what three years? Other than discretionary money what else did they get that they didn't have to return? [SPEAKER CHANGES] Well the part the that we wouldn't know about is any tax credits. However I doubt that there would have been any tax credits that they would have had to profit to pay tax credits on being here such a short time and having losses in the early years. The Community College investment and the workforce was not in my knowledge was not paid back to the state but that created a trained workforce in that area. [SPEAKER CHANGES] Okay I've got Senator Bill Rabon [SPEAKER CHANGES] Thank you. [SPEAKER CHANGES] I have a question. [SPEAKER CHANGES] Yes sir [SPEAKER CHANGES] One specific question I have is I read the bill from the house last night but I did not and I did not see and there may have been and I may have just overlooked the fiscal note of the House bill recommending 45 million dollars and increasing or extending the sunset on the jet fuels tax. Does fiscals have a a note on that yet? Do we know what that's going to cost the state? [SPEAKER CHANGES] Jet fuel or JDIG? [SPEAKER CHANGES] Jet fuel this was the whole package they gave. [SPEAKER CHANGES] Can we stick to the JDIG right now? [SPEAKER CHANGES] Okay we'll stick to the JDIG on that I figured that the bill itself would have a fiscal note. [SPEAKER CHANGES] Hello I'm Aubrey Enright from fiscal research I'd be happy to answer that. [SPEAKER CHANGES] Yes please. [SPEAKER CHANGES] So the full impact is forthcoming in a memo of a note rather a note now that it's public. I can speak specifically to the maximum liability associated with JDIG in that legislation. The increase to the current program is a 15 million dollar increase of the liability cap if you multiply that over 12 years that's a 180 million dollars and the extension of four years equates to a 720 million dollars you add those two together the maximum liability would be 900 million dollars. As Dan stated the actual liability is less than the maximum liability but 900 million max. [SPEAKER CHANGES]Thank you. Follow up question. [SPEAKER CHANGES] Senator Rabon. [SPEAKER CHANGES] That was the number I was looking for thank you very much on that but I have a question about JDIG now and the jobs that they create or that are supposed to be created. Is there any mechanism by which we know how many jobs these industries bring with them to North Carolina and then get paid as part of the JDIG compared to how many North Carolinians who get hired by the administration of this fund. In other words how many of their employees are home grown and how many do they bring with them? And if we don't address that I would certainly suggest that moving forward we do address it. [SPEAKER CHANGES] So there's no breakdown in JDIG in terms of required reporting of homegrown versus imported employees. JDIG is relatively agnostic as long as you're creating a position and creating with holdings there are some factors when you're trying to determine the 10 to 75 percent. What percentage to use there are some some factors in there that are to be considered in terms of whether you're hiring residents of a development zone and other economically distressed areas. Those would be home grown but I believe that it is the only provision. [SPEAKER CHANGES] Thank you. [SPEAKER CHANGES] Okay Senator Cook [SPEAKER CHANGES] Of the companies that take part of this JDIG do we have any data on how many of them actually go the full term and how many jobs in total that they end up contributing to North Carolina's economy? [SPEAKER CHANGES] I bring ??

Fiscal Research. There have been 201 JDIG grants awarded through the end of calendar year 2014. Only three have gone to full term. 73 have terminated or withdrawn. I do have a total job number on the number of jobs announced initally but that is not those that have been actually created if that would be useful. I'm looking that up right now. [SPEAKER CHANGES] I wanna dovetail on that just a little bit in terms of only three have gone full term, you have to remember a lot of these agreements are 12 year agreements so we're still trying to determine whether, a number of those are still sort of in progress so those, of course, have not gone to completion. So I don't want you to get the wrong idea with only three going to completion. [SPEAKER CHANGES] And we do have this available for the committee members? Is that possible? [SPEAKER CHANGES] Yes. [SPEAKER CHANGES] I think, would everybody appreciate seeing that information? [SPEAKER CHANGES] We need to know this stuff. [SPEAKER CHANGES] And then to the minimum number of jobs announced as provided by commerce was 64,141 jobs. [SPEAKER CHANGES] Follow up, sir? [SPEAKER CHANGES] Okay, follow up, Senator Cooke. [SPEAKER CHANGES] Sorry. I'm just trying to get a good feel for the impact, the success, [phone rings] oh Lord. [laugh] [SPEAKER CHANGES] All right, Senator Cooke, it's your turn. [SPEAKER CHANGES] Thank you. You talk about [??] What was I saying? Oh, yeah. Success of the program. Just in the numbers I heard a moment ago it doesn't sound very successful but you make a good point, we haven't had time for a lot of these companies to go full term. That's your point. Is there any way to get a better handle on the success of this program than those metrics? [SPEAKER CHANGES] Well, I think it's about $1.4 billion that's been committed so far in JDIG awards, so you're looking so far over the term of the life from 2002 to now of roughly committing $1.4 million and 64. [SPEAKER CHANGES] Million or billion? [SPEAKER CHANGES] Billion. [SPEAKER CHANGES] Thank you, billion right? [SPEAKER CHANGES] No. Million? Billion? [SPEAKER CHANGES] Aubrey Gobryer, Fiscal Research, $1.5 billion has been announced as awards to those 201 JDIG grants. [SPEAKER CHANGES] Thank you. [SPEAKER CHANGES] Yes. 1.5 billion, 64,000 roughly jobs, so that might be one of the best ways to get a general idea of a snapshot of where we are in terms of how much we've put into it and jobs, created jobs that's come out of it. [SPEAKER CHANGES] Follow up. $1.5 billion has been committed so far and 64,000 jobs have been created? [SPEAKER CHANGES] 64,000 jobs, $1.5 billion. I'm not a mathematician, but thank you. Thank you, sir. Somebody wake him up. That sounds like an awful lot of money per job to me. [SPEAKER CHANGES] That is a decision for the body. [SPEAKER CHANGES] If I can add a little nuance to that $1.5 billion, as Dan mentioned the Utility Account structure is in place. Out of that $1.5 billion, $330 million has been committed to the Utility Account which is used in tier 1 and tier 2 counties which is used for economic development infrastructure for those economically distressed counties, and in terms of the success of the program, I would also speak to an internal process that commerce goes through prior to awarding a JDIG grant. They have a model that they run in partnership with NC State's Dr. Waldon that requires any awarded JDIG to demonstrate a net positive impact on the general fund over the term of the grant. That's just more nuance to this complicated program that might be helpful. [SPEAKER CHANGES] Now, the chairman is going to allow a lot of, any questions it want because this needs to be understood and we're going to have meetings next Tuesday and Wednesday, Economic Development and Revenue and Single Sales Factor and all the others. So there's plenty of time. I want you all to have a chance to ask your questions and become knowledgeable about this. Okay, you all set? Good. Senator Rabin. [SPEAKER CHANGES] Yes, thank you. In sort of follow up, I think that we have to consider having

some measure of effectiveness installed, so that we know if we have a successful program, or a program that needs fixing, or some way to look into the future on that. I've gone about near blind in the other eye reading reports in other areas and we seem to be sort of deficient when it comes to demanding measures of effectiveness on these programs, so we can't get a handle on the cost-effectiveness of any of them. Follow up, please. [SPEAKER CHANGES] Follow up question. [SPEAKER CHANGES] It seems to me, from when you were describing base year and what goes on and ramping up and all of that, the workforce thing was brought up by the gentleman who just spoke, that there's potential for cranking into the JDIG program a workforce internal development part that could be supported by our population and our community colleges as part of the incentive for bringing them in here or as part of the package, so that we know we're not importing people to work, but we're giving jobs to people who live here, and have been paying the taxes, who are paying for the JDIG program. I think that might be something that someone has got to sort of research and look at. And the last one [SPEAKER CHANGES] Follow up? [SPEAKER CHANGES] You all set? [SPEAKER CHANGES] I'll probably come up with more, because I'm awake now. [SPEAKER CHANGES] That's wonderful. [SPEAKER CHANGES] I can wait until the end of the thing, and I've got a pen, so give me a couple more minutes. I'll put you back to sleep. [SPEAKER CHANGES] Good point, Dan. I will just to make a point. Now, the money that you said that is obligated definitely goes toward future availability. And I think what we talked about is $1.5 billion. It's out there. That goes against availability going out over the 12 years. I don't know if that point was quite made? [SPEAKER CHANGES] Yes, sir. And of course the 1.5 represents a collective of all the agreements. The ones entered in 2002. The ones entered in 2003, 2004. And so those will, that represents the amount that has been collectively obligated should all the performance metrics be met over the entire term of the first agreement. If it hasn't already rolled off, it's probably getting close to the most recently entered ?? [SPEAKER CHANGES] Right. And they keep intertwining, and by doing so we have accumulated 1.5 potentially liability that cuts into availability on every year going out. Correct? ?? [SPEAKER CHANGES] Yes, sir. I just want to speak to the total potential liability of the current footprint of the JDIG program is $1 billion if companies maximize performance. [SPEAKER CHANGES] I've got Senator McInnis. [SPEAKER CHANGES] I understand the 64,141 announced jobs. Do we have a feel for jobs created versus jobs announced? I understand jobs announced doesn't necessarily mean that any of them, for that matter, were filled. [SPEAKER CHANGES] Yes, we do have a feel for that. There's an economic development grant report that requires Commerce to share actual jobs created within job development grants. It does not encompass the full time horizon of the JDIG program, but it goes back to 2007. I don't have that number available right now, but could get that to you. [SPEAKER CHANGES] Please see that the entire committee gets that part of that report. Senator McInnis, you all set? [SPEAKER CHANGES] And just to verify, and I think I've heard it a couple times. It's $1.5 billion is the liability that is on the state of North Carolina right now? [SPEAKER CHANGES] Just to nuance that a little bit. 1.5 billion were awarded over the total program history. Currently, the existing liability for the program in its current state with its current sunset date at January 1 of 2016 is $1 billion. [SPEAKER CHANGES] I've got Senator Bryant. [SPEAKER CHANGES] I have one question. [SPEAKER CHANGES] Great. [SPEAKER CHANGES] My previous one was answered. When I hear my local economic developers and community folks telling us we maxed out of the JDIG program, and if we don't get more money they won't have JDIG available as an incentive, can you explain to me what they're meaning by that, and what kind of limitation are we currently under with JDIG? [SPEAKER CHANGES] Sure. So under JDIG currently, the statutory cap is $15 million in commitments per year. So the department can

commit no more than $15,000,000 in this calendar year and each… well not this calendar year. As a statutory matter, generally it’s $15,000,000, and each new calendar year brings a new infusion of $15,000,000. That’s subject to deviations by the General Assembly, so right now we’re dealing… instead of a calendar year cap, we’re dealing with a biennium cap of 2013 to 2015 of I believe $22,500,000. As of July 1, 2015, there’ll be a half year cap of 7.5 million, and I imagine what you’re hearing from the locals is as soon as… let’s go with a traditional calendar year cap. If you have awards being committed by the department, once they hit 15 million in committed awards, they can’t award anymore by statute. They would have to come… the department could come and let us know if we were in session, and then the General Assembly could consider either collapsing a future time period in to bring some of that money into the time period, or increasing the amount. [SPEAKER CHANGES] Follow-up. [SPEAKER CHANGES] Follow-up. [SPEAKER CHANGES] So where are we right now in terms of the current cap and the amount and what’s available for economic development projects? [SPEAKER CHANGES] So of the 22.5 million for this biennium, they’ve got roughly $25,000 left. [SPEAKER CHANGES] I’ve got Senator Tillman. [SPEAKER CHANGES] Thank you, Mr. Chairman. We’ve danced all the way upon that, sir. Oh, it’s on. You want me to look at it? [SPEAKER CHANGES] Yes sir. [SPEAKER CHANGES] Thank you, Mr. Chairman. Senator Cook, I believe you were on the right track, and you stopped short. I think you asked how much had been expended and how many jobs we’d hired since the conception of JDIG, and I heard the number of jobs and I heard the 1.5, but nobody did the division. [SPEAKER CHANGES] 23 thousand. [SPEAKER CHANGES] $23,000 per job. That comes from an expert over there. Thank you. [SPEAKER CHANGES] I’ve got Senator Clark. [SPEAKER CHANGES] My question has been answered, Mr. Chairman. [SPEAKER CHANGES] Thank you. Senator McKissick. Good to have you with us today, Senator McKissick. [SPEAKER CHANGES] Absolutely, as always. Well I was sitting back listening; most of my questions have been answered. In fact, I was trying to get the math straight on that 1.5 billion, but it that an accurate number and it works out at about 23 thousand per job if we look at the 64 thousand jobs? [SPEAKER CHANGES] Yes. [SPEAKER CHANGES] Now let me ask you this: How does that compare to averages within, say, the southeastern states with what is being offered as incentives to get employers to come within their respective states? Do we have that comparative data? I’m sure we must. [SPEAKER CHANGES] I can’t speak to the cost per job created, but I can speak to other states in the southeast having similar JDIG-like programs, and Commerce regularly competes against those states with this tool. I don’t know if Commerce would say more or if they know more about a cost per job. [SPEAKER CHANGES] It would be very helpful in a… [SPEAKER CHANGES] That’s a follow-up. [SPEAKER CHANGES] Follow-up, Mr. Chair. In a comparative context to see… The 23 thousand sounds like a lot, but when I think about what I’ve seen in terms of some federal averages, it would not appear to be disproportionate, but having said that, is there somebody here from Commerce who could answer that question? [SPEAKER CHANGES] You have an answer? [SPEAKER CHANGES] It doesn’t look like there is. If staff could get back with me, that would be… [SPEAKER CHANGES] We’ll get staff back with you on that one. [SPEAKER CHANGES] That would be fine. [SPEAKER CHANGES] Good. Senator Cook. He’s gone. I’ve got Senator Jackson – Brent Jackson. [SPEAKER CHANGES] Thank you, Mr. Chairman. Dan, I know we’re getting down into the weeds on this thing and we’re picking at it, but you mentioned the utility fund a while ago. I think it would be beneficial to this audit that we understand with this JDIG money that it’s not only helping the big cities and metropolitans where these companies move to, but it’s also helping the rural because of that utility fund. Could you…? And you might not want to do it now, but Mr. Chairman, I think that would be a good point to be explained. [SPEAKER CHANGES] The point is well-taken, but he’s going to talk about the utility fund after the JDIG, even though there is some tying together. But that’s probably a better time. Dan, is that okay with you? [SPEAKER CHANGES] That’s fine. [SPEAKER CHANGES] I’ve got Senator Alexander. [SPEAKER CHANGES] You made mention you were going to be talking about the utility fund after the JDIG? [SPEAKER CHANGES] Yes sir. [SPEAKER CHANGES] I’ll defer my question then. [SPEAKER CHANGES] Thank you, Senator. Wells? [SPEAKER CHANGES] Over here. This applies, as I understand it, to all of our incentive funds, so I started to save this for the last, but since you went into the tier system on the JDIG, I thought I’d ask now. The latest numbers I’ve seen from staff of all this big pot of incentives money committed

We're talking about 3/4 of it has gone to the 20 wealthiest tier 3 counties in the state and of that 3/4, 3/4 of that went to two counties. Had there been studies, discussions, any ideas on how we might allocate incentives money in maybe a little more equitable manner across the state of North Carolina. [SPEAKER CHANGES] Let's break the question up if we may. Can you tell them how much money from the inception and recently had the JDIG money been distributed to certain urban centers versus rural? Okay. [SPEAKER CHANGES] So, over the life of the program, approximately 67% of awards to companies have gone to Durham, Wake and Mecklenberg. In the past two years, 83% of awards have gone to, the value of the awards, not the number of awards. [SPEAKER CHANGES] And that handles your first q [SPEAKER CHANGES] That corrects my intial understanding, but it's worse than I said. Again, have there been any studies, discussions, any way we might spread this out across all 100 counties? [SPEAKER CHANGES] Well, there are ways that you can disincentivize locating in tier three areas. I think one of the tricks involved is companies aren't necessarily comparing the most economically distressed county in the state as a possible location with say Raleigh or RTP, they're comparing Raleigh versus Austin, TX. So part of this is an inability to control where it is, an industrial suitor is willing to go in the state, but there are certainly ways that the program could be modified to lower incentive amounts in more wealthy areas. Does that answer your question? [SPEAKER CHANGES] I think Senator Wilkes, I think it's this committee's discussion that will hopefully explore some of the areas that will modify the JDIG program to reach the metrics that we wanna do if we want all 100 counties to be prosperous. Okay? So we can continue that discussion. Okay, I've got Senator Rudolph. [SPEAKER CHANGES] One of the questions have already been asked, so when you spoke about the three tiers, but I also want to know about the stem of these funds. You say you started this in 2002 and the grants was that some kind of way connected some of this money with the grant program? [SPEAKER CHANGES] Was it originally like Federally funded do you mean? [SPEAKER CHANGES] Yes. [SPEAKER CHANGES] I don't believe so. [SPEAKER CHANGES] No, ma'am, not to my knowledge. [SPEAKER CHANGES] Okay, cause you got to stem this money into the study I wanted to know was it included in these JDIG programs. I just wanted to know. [SPEAKER CHANGES] It's strictly state money, okay? I've got Senator Rabin. I'm sorry, Senator Ford. I apologize. Go ahead. [SPEAKER CHANGES] Thank you, Mr. Chairman. [SPEAKER CHANGES] You have a question? [SPEAKER CHANGES] Yeah, I do. Thank you, Mr. Chairman. I think it's important to put a little bit of context and historical information on the table as we're gathering it, Mr. Chairman, as it relates to the income tax revenue that is produced from the counties that are being talked about here as it relates to where the JDIG funds are going. Can we get staff to produce that for us, sir? [SPEAKER CHANGES] Staff. [SPEAKER CHANGES] So you want to understand the total withholdings associated with counties and how much the companies are getting back based on that total withholding? [SPEAKER CHANGES] No, ma'am. I want to look at the total revenue that the state receives from income tax withholdings from the companies that are receiving the JDIG money. [SPEAKER CHANGES] Okay, your question is good. Dan, would you spend a minute explaining how that money is distributed up to 75% and the withholding based on the contract or the grant that's there? This'll go in the direction that you're wanting to talk about and then ultimately lead to a question of yes, we gave so much grant money back because that was what was the 75% of the withholding. I guess the question you want asked is how much money was left that actually went to the state coffers once the grant was paid for. [SPEAKER CHANGES] So going sorta to the way the system works, and I won't give a specific example with numbers cause I tried that one time in a committee meeting off the fly and it ended in epic failure, but the way it works is if a company says I'm gonna create x number of eligible positions then you look at the withholdings associated, that the