The news broke this week that the pharmaceutical company Merck was backing out of an economic development deal with the city of Austin and the state of Texas. Merck would have received almost $7 million in exchange for creating 600 Austin jobs.
This failed deal isn’t an aberration, though such deals end for different reasons. Austin’s economic development program, called Chapter 380 agreements, provides cash incentives to companies for investing in the Austin area, requiring companies to create jobs and meet other conditions. The city’s contracts with these companies are publicly posted, and the city has the ability to verify the company is meeting its goals.
These local incentives are usually matched with even larger state incentives. The idea is that to receive state incentives, the local community must first endorse a company, assuring that it is providing real value to the area.
According to the city’s website, Austin has had 22 of these agreements since 2004, including one film production, the mixed use development of the Domain, and investments by private companies such as Visa, Facebook and Apple in exchange for jobs. But of these 22 agreements, only six are still active.
That means that 16 companies that had contracts with Austin are no longer part of this program. Why?
A few companies created the jobs they promised and received their incentives. But this is rare. In fact, only Samsung and the film “Friday Night Lights” were paid the full amount. Two out of 22 is a low graduation rate.
More common are cases like Merck, where a company promises to create jobs in exchange for incentives but struggles to comply with the agreement. In the original agreement, Merck was required to create jobs by 2017, but the company revised its contract with the city, pushing the job creation deadline to 2019. As we know, Merck eventually pulled out of its deal. So did Dropbox, which was forced to repay all of the state’s incentives with interest after it failed to create the promised jobs by 2014.
As research assistant Graham Reblitz and I discovered, most companies drop out of the Austin incentive program before the city pays out a single dollar. Nine companies exited their 380 agreements, leaving a total of $6.4 million in incentives on the table. That might sound like a good deal for Austin taxpayers, but there’s a catch.
Each company that dropped out, such as Dropbox, eBay and Facebook, had millions of dollars in state incentives they still tried to collect from the Texas Enterprise Fund.
By dropping out of the Austin agreement, they were no longer bound by its terms. And unlike the city of Austin, which was rated the No. 1 city for economic development transparency by Good Jobs First, the contracts with the state aren’t published online, and there isn’t independent verification of job creation.
Therefore, leaving the Austin agreements allows you to skirt the transparency requirements and avoid any additional conditions on the investment. In a research project, co-author Calvin Thrall and I made public records requests for details on the Texas Enterprise Fund.
Many companies challenged our requests for information. Despite delays and some redactions, we found that many of these companies actually secretly rewrote their incentive contracts with the state, lowering their job requirements. If this was done with the city of Austin, the new contracts would have to be posted online.
The good news is that Austin has a much more transparent economic development process, making it easier to find out that Merck had exited its 380 agreement in the first place, and thankfully Merck isn’t trying to collect state incentives.
The bad news is that some companies have learned that Austin’s 380 program is a step towards unlocking much larger, and less transparent, state incentives and they continue to collect after they drop out of Austin’s program.
Companies can promise the world to Austin, and then quietly exit this city agreement while still attempting to receive money from the state — a classic bait and switch.
Nathan Jensen is a professor of government at The University of Texas at Austin.
A version of this op-ed appeared in the Austin American Statesman.