Even Kentucky's film office can't justify losing millions to filmmakers

The three employees running Kentucky's film office spent the last week of January watching emails roll in.

Each ping was a new application for the state's film incentive program, which promises to reimburse companies up to 35 percent of qualifying dollars they spend in the commonwealth.

By the end of the month, the office had received 214 requests — more than the 150 applications it got in all of 2017, according to an analysis of film office data.

The rush of applications followed Gov. Matt Bevin's recommendation that state officials suspend new applications amid an unprecedented budget shortfall. They set a deadline of Feb. 1.

With the cutoff days away, companies near and far began madly submitting requests for credits ranging from $8,000 to $14 million. By mid-April, a state board approved more than $428 million in potential incentives that can be claimed through 2022 — including more than $250 million to one company alone.

Film office employees don't expect Kentucky to pay that full amount. Some projects, they say, will never get made while others won't claim as much as they estimated.

But state finance planners will still have to reserve enough tax dollars to cover the approved incentives in case every penny of that $428 million is claimed — meaning money that could have entered the general fund will be held in limbo.

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Now even the film office wants to make changes to the highly criticized program, which it asked Kentucky's lawmakers to temporarily suspend.

The lawmakers, however, have not heeded the office's request. In April, the legislature pushed the program through the state revenue bill with a new $100 million annual cap — continuing the incentive for another year.

STARRY-EYED STATES

Increasing the film industry's presence in Kentucky can be exciting for residents who hope to get a peek at big name stars.

But the purpose of the incentive program isn't to bring celebrities like Jennifer Lawrence home to film.

Instead, state officials hoped the incentive would attract companies that put down roots — thus growing the number of full-time employees who have steady work throughout the state.

"In order to build our film industry here, we have to work on volume," said Jay Hall, executive director of the Kentucky Office of Film and Tourism Development. "It's smaller, independent films and it's a lot of them. What that allows us to do is build our crew base, create jobs for people."

The Tourism, Arts and Heritage Cabinet, which oversees the film office, says the film industry created 372 full-time equivalent jobs in Kentucky by the end of 2017.

Hall said production companies have also spent more than $52 million within Kentucky since the program launched in 2009, spending money on labor, lodging, construction and other expenses.

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If all $428 million of the 2018 credits are collected, that will mean companies have spent $1.3 billion in the state, Hall said.

To date, Kentucky has reimbursed just $14.3 million in tax credits, many of which have been issued since 2015, when the state increased the credits companies could receive.

That year, lawmakers increased reimbursements from 20 percent to 35 percent while reducing the minimum amount companies had to spend in Kentucky.

For example, a film production that had to spend at least $500,000 on in-state expenses before 2015 now has to spend just $250,000 to qualify for the incentive.

The expansion created a perfect storm. As other states rolled back their incentives, Kentucky charged full steam ahead, putting the state on the radar of filmmakers nationwide.

Credits were soon earning approval at accelerating rates, growing from a total $4.3 million in 2015 to $117 million in 2017, according to a Courier Journal analysis of film office data.

The surge shocked some proponents of the incentive, including state Rep. Rick Rand, D-Bedford, who sponsored the bill expanding the program.

"We were told it would be $3 to $5 million a year, not $50 million a year," Rand told the Herald-Leader in its October investigation of the program.

Longtime critics were less surprised. Jason Bailey, executive director of the nonprofit Kentucky Center for Economic Policy, said research has resoundingly shown that film incentives are not cost effective.

Production companies tend to bring in out-of-state labor instead of hiring locally and they do not often build the permanent infrastructure that state officials are looking for, which leads states to lose money on the incentives, Bailey said.

"There's no justification that it needs to be subsidized instead of something else," he said. "I think states have become starry-eyed about being a location where these things happen. That's more what's driving it. That's just not a justification for spending all that money that we need for these really important services."

Proponents of the incentive say the $14.3 million that the state has issued so far is a drop in the bucket of the total general fund.

But Pam Thomas with the Kentucky Center for Economic Policy said that as the amount of approved incentives increases, so will the amount of reimbursements.

Even if just a quarter of the $428 million approved in 2018 is claimed, Thomas said, the credits could create a multi-million-dollar burden on the state.

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"The danger is that we could see a lot of money siphoned away from our general fund as these projects are produced and the incentives claimed," Thomas said. "... The horse is already out of the barn for the next four years."

CHANGES TO COME

Don Parkinson, the former secretary of the Kentucky Tourism, Arts and Heritage Cabinet didn't want any of this to happen.

In February, Parkinson told lawmakers that the film incentive program was losing money and that the legislature should remove it from the 2018 budget, according to Herald-Leader coverage of the meeting.

"The problem is, we're spending more than we're receiving in tax revenue. That's the bottom line to us," Parkinson told a House budget subcommittee, according to the newspaper's report. "Right now, given the situation with the pensions, we just can't justify it."

Parkinson's cabinet oversees the film office and both agencies review film incentive applications for approval by the Kentucky Tourism Development Finance Authority, a nine-member board appointed by the governor.

Hall, the film office director, said the cabinet's plan was to convince lawmakers to place a two-year moratorium on film incentives until the state was in better financial shape.

The film office would use that time to conduct a study of the program's true economic impact and planned to use its research to make the incentive more sustainable going forward.

Already, the office has suggested changing the length of time a company has to start a production as well as the time is has to file for its approved credits, Hall said.

Companies currently have a two-year window to start their productions and must turn in receipts for their expenses within four years, Hall said.

The office would like to reduce those lengths to six months and two years, respectively, so that approved productions won't create undue burden on the state.

"We have a backlog of incentivized films that will never get made," Hall said. "... Right now, I've got films on my spreadsheet that go back almost four years."

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The two-year window also allows companies to more easily file applications that they can later amend to fit coming productions, critics said. With a six-month window, the companies would have to be closer to producing their films or television shows.

One company that drew criticism for entering dozens of applications is Lexington's Post Time Audiovisual Services, which recently changed its name to Wrigley Media Group.

Since 2015, the company has received approval for more than 100 applications totaling $283 million in credits — almost half the total incentives approved since 2015, according to an analysis of film office data.

Bailey with the Kentucky Center for Economic Policy said the company has taken advantage of the incentive, getting the state to subsidize up to 35 percent of everything it produces.

CEO Jayne Hancock disputes the criticism, saying the tax credits have helped Wrigley Media Group retain long-term work for its expanding staff.

Though the company has operated for 25 years, Hancock said it has greatly expanded within the last two years thanks to private investment from majority owner Misdee Wrigley Miller. Under her leadership, Wrigley Media has moved to a larger facility, purchased new equipment and added nearly 20 people to its 10-person roster.

The private investments combined with the state incentives have enabled Wrigley Media to secure new clients, including television networks like A&E and the Travel Channel, Hancock said.

The networks have hired Wrigley Media to produce full seasons for several television shows, and each episode can receive its own tax credit — accounting for dozens of the company's 93 applications filed in January alone.

Hancock said the credits are helpful when securing work, but Wrigley Media will continue to build its infrastructure in Kentucky with or without them.

"Our commitment is to grow our business and grow business within the state," Hancock said. "We're bringing more work here, more film work, more content, more development work, shows that otherwise wouldn't have come here."

With the recently imposed $100 million cap, Wrigley Media will likely not receive all of its requested credits.

Hall said applications are currently denied only if they don't meet the requirements of state law — which happens rarely. But with the cap, the film office will have to find a way to better prioritize applications.

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Hall is now talking to employees in states with similar incentives to learn how they choose which projects to approve.

"What I want to make sure is that we are weighting the films properly so the ones we approve are actually going to get filmed," Hall said. "Maybe if you have a fully financed film you get so many points."

Hall has a few months to make those decisions. With the cap greatly surpassed for the year, his office will not begin accepting new applications until December.

By then, Hall hopes to have completed an impact study that should shed some light on which projects serve the state better than others. He expects the study to be finished by September.

"We will still move forward with that through the film office. We have to," Hall said. "It's clear there are some misconceptions about the film incentive program. The only way to clear those up is to provide clear, concise, accurate numbers for all parties involved."

Bailey Loosemore: 502-582-4646; bloosemore@courier-journal.com; Twitter: @bloosemore. Support strong local journalism by subscribing today: www.courier-journal.com/baileyl.

FAQS | KENTUCKY'S FILM INCENTIVES

What are the film incentives?

Since 2009, Kentucky has offered tax incentives for film productions including feature-length movies, television shows and Broadway productions.

Companies approved for the incentives receive reimbursements for a percentage of qualifying expenses they made within Kentucky during their film-making processes.

As of 2018, the qualifying purchases and credits include:

A 30 percent credit on approved expenses such as lodging, construction and food

A 35 percent credit on wages for Kentucky workers

A 30 percent credit on wages for non-Kentucky workers

A 35 percent credit for any approved expenses made in an "enhanced incentive county"

How do companies get the incentives?

Companies with limited liability status in Kentucky can apply for the incentives, which are reviewed by the Kentucky Film Office; the secretary of the Tourism, Arts and Heritage Cabinet; the Finance Administration Cabinet; and the Kentucky Tourism Development Finance Authority.

To be eligible, companies based in Kentucky must spend at least $125,000 on production of a film or television show, at least $20,000 on a touring production or at least $10,000 on a documentary.

Companies not based in Kentucky must spend at least $250,000 on production of a film or television show or at least $20,000 on a touring production or documentary.

What are the restrictions?

State legislators in April approved a $100 million annual cap on approved incentives. The film office will not approve any new applications until January 2019.

How much has already been approved?

Ahead of the cap, the Kentucky Tourism Development Finance Authority approved more than $428 million in credits for 2018. That's a 265-percent increase over the nearly $118 million that was approved in all of 2017. Since 2015, the authority has approved almost $600 million in credits for more than 400 projects, according to film office data.