Return to Virginia Business - February 2004

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- Entrepreneurs and Northern Virginia will help drive Virginia’s economy in 2004

by Paula C. Squires
Virginia Business
February 2004

They’re known as “deal closing funds,” money set aside by the state to tip the scales in favor of Virginia when companies come calling. These grants can help with everything from land acquisition to work-force training. Sometimes, though, after making big announcements, companies don’t show. Others build shiny new plants and operate for a while, and then close down. In these cases, what happens to the deal-closing dollars?

In Virginia, depending on the grant, companies may not get any incentive money until five years after opening. And if they don’t perform as expected, the ones that do receive money up front from the Governor’s Opportunity Fund (GOF) have to pay it back.

Take the case of Gateway computers in Hampton. When the computer manufacturer announced a major expansion in 1999, Hampton Roads economic leaders rejoiced at the prospect of an additional $26 million investment and as many as 2,000 new jobs. To get the deal, the city offered $1.5 million in land, and that amount was matched by the GOF for a total incentive of $3 million. Gateway built two 250,000-square-foot buildings close to an existing manufacturing facility and opened them in 2000. It hired 437 new people to fill mostly assembly and technical support jobs. But by September 2003, Gateway closed up shop in Hampton as part of a restructuring to restore the computer maker’s profitability.

Since the company carried through on its investment commitment by building two new centers, Hampton credited Gateway for that part of its performance. However, the expected number of jobs never materialized so the city, state and Gateway negotiated a deal requiring the company to pay back $453,000 to the GOF in four installments over 12 months. An additional $483,000 owed to Hampton doesn’t have to be paid out of pocket, because the city resumed ownership of land it originally offered to Gateway.

When deals fall through, “it puts both parties in an awkward position,” says Raymond White, Hampton’s director of economic development. Still, he says the process works, because business incentives helped get Gateway to the city in the first place — at one time it was Hampton’s largest employer — and performance contracts required by Virginia since 1996 create a legal basis for repayment when things go bad.

Sometimes, though, companies go out of business and incentives can’t be recovered. A recent report submitted to the General Assembly by the state’s commerce and trade office shows that half of the 34 projects awarded GOF grants in fiscal 1999 have fulfilled their performance agreements to date. Six projects are still active and three either closed after operating for a short period (John Deere in James City County) or reduced their work force (Gateway, and Vaughan-Bassett in Smyth County). Two projects declared bankruptcy — eToys in Pittsylvania County and LKM Industries in Alleghany County — and another project was canceled. So of $16.9 million in GOF grants from fiscal 1999, $620,000, or about 3 percent, is unrecoverable, according to the report.

Without incentives, it’s hard to compete for economic development, says Michael J. Schewel, Virginia’s secretary of commerce and trade. Still, Virginia is on the low end when compared to other states. The ratio here of $1,942 of GOF investment per new job is less than the national range of $2,000 to $5,000 per job. Some people contend that the public money would be better used improving Virginia’s infrastructure. “Our incentives are peanuts compared to the cost of infrastructure,” responds Schewel. In the most recent biennium, the state set aside $17.5 million for the GOF. “That’s half of a short road, a few teacher salaries,” he says. In Gov. Mark R. Warner’s proposed budget, the GOF would increase to $23 million, below the $30 million mark where it stood a few years ago.

Return to Virginia Business - February 2004