Scott Goss

The News Journal

DuPont Co., JPMorgan Chase and Amazon are vastly different companies that share at least two things in common.

They are among some of the largest companies in the United States.

And each has pocketed millions of dollars in Delaware taxpayer grants for promising to stay or expand here.

“In some cases, the money is less than what these companies earn in a single day,” said former state Finance Secretary David Singleton, who also spent 15 years as JPMorgan’s managing director. “But it’s still a good chunk of money, and it’s coming out of our pockets.”​

Economists, retired corporate executives and former state leaders say those incentives are seldom the deciding factor in where companies choose to put their resources. They also question whether the investments pay dividends in the long run.

But they all agree it’s a game Delaware – and other states – must play if they want to attract corporate jobs because no state can afford to back out now.

“Look, everybody does it so we have to do it, too,” said Jim Butkiewicz, who heads the University of Delaware’s economics department. “It may not be the easiest fact of life to accept, but it’s a reality of economic development today.”

How Delaware outhustled other states to win DuPont ag unit

So why does Delaware and practically every other state in the country award money to corporations that rake in billions of dollars a year?

“It’s not because the companies need [state help],” said Timothy Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, Michigan.

“But in the highly competitive world of economic development, [corporations] are perceived as having location options and, therefore, leverage,” he said. “As a result, governors and mayors throughout the country are afraid of the political and economic consequences of not providing those incentives.”

In DuPont's case, for instance, those state payouts played a significant role in retaining a corporation that has been synonymous with Delaware for two centuries.

Losing the company would have meant more than additional job losses. DuPont has been synonymous with Delaware for more than two centuries, providing not just tens of thousands of jobs, but building roads, supporting charities and providing for its extended family. Few people in Delaware are not touched in some way by the company.

To lose it would have been a psychological blow.

"DuPont was clear to us that this was a business decision and that company leadership had a duty to do what was in the best interest of shareholders," said Bernice Whaley, director of the Delaware Economic Development Office. "So if they were to choose Delaware, they would need us to put forth a package that then allowed them to justify their decision to shareholders."

Big money for big companies

Some of the nation’s largest corporations have received some of the biggest payouts from Delaware's Strategic Fund, a pot of money set aside to provide incentives for job creation and capital development.

Six Fortune 500 companies are among the 10 biggest recipients of those funds since 2009, according to an analysis by The News Journal.

Delaware has committed about $92 million to those six businesses since Gov. Jack Markell took office – that is 37 percent of the roughly $250 million in Strategic Fund grants and loans awarded by his administration.

In November, for instance, JPMorgan Chase secured $10.5 million in state grants to support an expansion that promises to bring 1,800 new jobs to Delaware.

The deal brought the state’s total commitment to JPMorgan over the past three years to more than $22 million, making the nation’s largest bank the second-largest recipient of Strategic Fund dollars under Markell.

Those payouts helped encourage JPMorgan to grow its local workforce from about 6,600 in 2012 to roughly 8,700 today – making the bank Delaware's second-largest private employer behind Christiana Care.

"Our firm is extremely appreciative of the supportive business climate in Delaware, and that’s a big reason why we have chosen to expand and invest here," spokesman Paul Hartwick said. "We have grown significantly in Delaware over the last five years, and we believe the broader community has benefitted from our growth and investments."

Last year, JPMorgan hit record profits of $24.4 billion. Delaware’s operating budget, by comparison, is $3.9 billion.

Citing those massive profits, the Delaware Coalition for Open Government asked the bank to withdraw its most recent application for state support.

“We don’t have a problem with the Strategic Fund in general,” spokesman John Flaherty said. “Our issue is that it’s used to subsidize financial institutions that obviously don’t need these grants.”

Amazon in 2011 received nearly $3.5 million in state incentives, along with a 10-year municipal tax break, to support its 1.2-million-square-foot distribution center in Middletown. The deal was tied to the creation of 850 jobs. Amazon, which recorded $596 million in 2015 profits, does not release specific hiring numbers, but is believed to have roughly 2,500 workers at its Middletown plant today.

JPMorgan Chase adding 1,800 jobs

DuPont and the Dow Chemical Co. are now poised to collect $21 million in state and county grants over the next five years as an enticement for keeping their post-merger agriculture unit in Delaware.

DuPont earned nearly $2 billion in profits in 2015, while Dow raked in nearly $11 billion.

Whaley said closing those incentives off to major corporations would mean closing the state off to the jobs they bring.

DEDO's active portfolio – deals in which benchmarks are still being monitored – has disbursed $92.1 million, with $39.5 million left to be distributed.

To date, those payouts to 500 businesses have led to the creation and retention of nearly 32,300 jobs – about 6,500 more than were promised, the agency says. That's a working population similar in size to the entire population of Newark at an average cost to taxpayers of about $2,850 per job.

“[Markell] has discussed with other governors their mutual dislike of employment incentives,” Whaley said. “But as long as there are states that give these kinds of incentives, then Delaware must do so.”

Some might call that corporate welfare.

John Stapleford, who heads the libertarian-minded Caesar Rodney Institute, likens it more to bribes and ransom.

But even he concedes state incentives are so widespread that they now amount to the cost of doing business.

“States are caught between a rock and a hard place,” he said.

“It’s chump change to these companies, but if you don’t throw something on the table, it looks like you don’t care and that could kill a deal.”

The state of economic development

Economic development incentives are nothing new and their use extends well beyond Delaware.

“Some use more and some use less, but I can’t think of any states that don’t use them at all,” said Bartik, who has authored several research papers on the topic. “It’s not even a liberal or conservative issue at this point.”

Blue states like New York and New Jersey offer some of the biggest incentives, along with red states like Texas and Louisiana.

Even states that once avoided using incentives have been lured in by the promise of jobs.

Minnesota Gov. Mark Dayton, a Democrat, created its first grant program tied to job creation in 2013. The program, capped at $2 million per award, committed to more than $13 million in grants the first year as part of an effort to create nearly 1,400 jobs at 26 businesses, according to media reports.

Since Republican Gov. Brian Sandoval took office in 2011, Nevada has twice broken its record for incentives, packages that rely on targeted tax breaks instead of grants. More recently, Nevada approved a 20-year, $1.2 billion package in 2014 to land a Tesla battery factory, plus a $43 million deal to buy an existing road through a private industrial center.

At least 10 states have approved economic development packages of $1 billion or more, according to Good Jobs First, a labor-backed nonprofit that analyzes tax incentives.

Inside Nevada's $1.25 billion Tesla tax deal

“Most of these things got started back when the South was attempting to attract industry after World War II,” Bartik said. “It then intensified with each economic downturn through the '70s, '80s and '90s.”

Delaware’s Strategic Fund dates back to the mid-1990s under then-Gov. Tom Carper.

At the time, Playtex Products was being courted to relocate its Dover tampon manufacturing plant to Richmond, Virginia, by a promise of $6 million in incentives.

Delaware’s economic development director recommended the state counter with a $3 million cash payment to the company.

Now known as Edgewell Personal Care, the plant is still operating in Dover, where the company employs about 500 workers.

Another 250 new jobs are expected to be added at the site by 2017 thanks to its consolidation with a Montreal plant – a move facilitated by a $3 million Strategic Fund grant approved last year.

A risky game

Like most states, Delaware’s track record with high-dollar grants and loans for major corporations has been spotty, at best.

The First State’s most notorious bust came in the form of a $12.5 million loan and a $9 million grant to Fisker Automotive, marking the third-largest Strategic Fund outlay under Markell.

At the time, the California-based electric car maker was planning to build its Atlantic automobile line at General Motors’ shuttered Boxwood Road plant near Newport, a project that promised to bring more than 2,000 jobs.

Levin: Fisker could return to Delaware

Fisker never built a car in Delaware.

Months of missteps cost the company access to a federal loan, leading the car maker to file for bankruptcy protection in 2013.

Only a small amount of the state’s money was returned.

More recently, Bloom Energy has come under fire for missing hiring benchmarks the company agreed to in 2012 when it received a $16.5 million grant tied to the creation of 900 jobs at its Newark manufacturing plant.

Bloom Energy, which relies on revenue from Delmarva Power surcharges, has blamed its slow growth on regulatory hurdles.

DEDO has given Bloom until 2017 to make up any hiring shortfalls before being required to repay the state grant.

DEDO also extended the deadline for specialty chemical maker Ashland to reach employment benchmarks set in 2012 when the state committed $10 million in grants tied to the creation and retention of 800 jobs.

Since then, Ashland has sold its Delaware-based water technologies unit and paid back the roughly $334,800 received from the state.

DEDO, meanwhile, extended $1.1 million in grants last year to Solenis, the new name of the Ashland spinout.

“The truth is those examples are all pretty typical,” said Jonathan Justice, a public policy professor at UD. “Everyone has similar success or failure rates when it comes to these incentives and I don’t see anything that would suggest Delaware’s record is any worse than other states.”

A questionable practice

A mounting body of evidence indicates few, if any, of the incentives offered by states are achieving their goals.

“The latest studies suggest the probability of these packages being the decisive factor in where a company locates is about 5 to 10 percent,” Bartik said.

A state’s business climate, tax codes, regulatory structure, labor force and education systems are given considerably more weight by companies looking to move or grow their business operations, he said.

“There are much bigger reasons why a company chooses where to locate and it ain’t $10 million to $20 million in one-time money,” Singleton said. “It would be a real embarrassment if these executives had to explain to their shareholders why they stayed or moved to a state and the answer was because they bribed you.”

Singleton, who served as chief of staff to Wilmington’s mayor William T. McLaughlin from the late 1970s to the early 1980s, recently penned a column in The News Journal lamenting his role in helping to create what he says has become an incentive “monster.”

The city’s incentive program pre-dates the state's, beginning in 1977 with a loan to the developers of a Doubletree Hotel, followed years later with a deal to keep Hercules Inc. in downtown Wilmington.

“Back then, incentives were a difference-maker because they weren’t available everywhere,” he said. “Now it’s an arms race with every state and most cities offering bigger and bigger deals because no one wants to call these corporations on their bluff.”

A 2013 report by Good Jobs First found both the number of so-called “megadeals” – packages valued at more than $75 million – doubled nationwide in six years.

Carper, for instance, used a $40.7 million package of grants and tax credits, along with $70 million in road improvements to convince the newly formed AstraZeneca to establish its North American headquarters in Fairfax in 1999. In exchange, AstraZeneca pledged to increase its workforce at the site from 2,400 to 4,000 by 2004.

The pharmaceutical company's employment hit a peak of 5,000 workers in 2005, only to have patent losses and a global recession lead to a major restructuring. Today, AstraZeneca has about 2,400 workers in Delaware.

But the sheer size of those "megadeal" incentives makes it increasingly unlikely states will recoup their investments through future property and payroll tax revenue.

“The problem is states tend to overbid on these projects,” Bartik said. “It’s easier to explain why they paid so much to win a company than to explain why they didn’t after losing out to another state.”

An incentive for reform

Concerns over whether ballooning incentive payouts are justified – and actually creating the jobs they promise – have led many states, including Delaware, to re-examine their programs.

Some have started cutting back on incentives, imposing stricter accountability measures and responding to calls for increased transparency.

“Some places don’t have any guidelines for achieving a return on investment,” Bartik said. “If there aren’t any rules, how can you have any limits?”

A 2014 report by Good Jobs First ranked Delaware and three other states among the worst in terms of providing taxpayers with details about their economic development incentives.

For Delaware, $200M in corporate giveaways, little transparency

Delaware offers virtually no reports of actual job creation numbers online and no independent evaluations are conducted to determine the state’s return on investment.

Those issues helped lead the General Assembly’s Joint Sunset committee to review DEDO’s performance over objections from the Markell administration.

That 2015 review resulted in passage of a bill, later signed by the governor, that made small changes to DEDO’s reporting requirements.

The legislation required new annual reports on the incentives provided and jobs promised, but not actual jobs created. The first of those reports was released in December.

The measure also requires DEDO to develop a five-year comprehensive plan that details actual job creation and return on investment, along with the office’s strategies and objectives related to specific business sectors.

The first of those plans is due in 2019 – two years after Markell leaves office.

Delaware jobs grants get more transparency

The governor, in recent years, also has cut funding for the Strategic Fund.

Markell in 2015 set aside $10 million to cover incentives for the fiscal year that began July 1, a 48 percent cut from the previous year. And his budget proposal for the coming fiscal year would hold the funding at the same amount.

Despite questions of their true effectiveness, Whaley said Delaware’s use of incentives has been successful because it pursues the biggest bang for the buck.

“We are competing against 49 other states, many of which have more resources than we do and are willing to spend more per capita than we do,” she said. “In order to maximize our chances of success, we have to be willing to compete for jobs from big and small companies.”

No end in sight

While the use of incentives may be a factor in that job creation, it’s also possible investing those funds in other areas would pay larger dividends, Bartik said.

A portion of the incentive package offered to DuPont and Dow, for example, includes $3.6 million in grants to support the creation of 400 jobs.

“You could achieve the same magnitude by offering 200 small businesses $1,800 a year for the next five years to each add two new jobs,” he said. “The state investment would be the same but that kind of money would certainly be more impactful to those companies.”

Leaders in the state’s bioscience industry called for exactly those kind of investments last year.

“If your focus is on high-paying jobs that tend to more broadly support the locally economy, there are also other investments you could be making,” he said. “Customized job training, business incubators or simply investing in education, in the long run, would make a state more attract to employers.”

The problem, he said, is that no state wants to take the risk of giving up its economic incentive programs.

“Once you’ve started down that road, how do you turn back,” he asked. “In the [European Union], these kinds of incentives are illegal, but it would take federal legislation to put a stop to it here, and I don’t see that happening any time soon.”

States now have little choice other than to keep playing a game everyone knows is flawed, Butkiewicz said.

“If everyone stopped, it wouldn’t have any impact on the overall economy because companies would still move,” he said. “But if Delaware stopped on its own, I imagine it would lose out on every one of those deals.”

Contact business reporter Scott Goss at (302) 324-2281, sgoss@delawareonline.com or on Twitter @ScottGossDel.