A clawback, or recapture provision, is a clause of a subsidy law or contract that simply says that a company must uphold its end of the bargain or else taxpayers have some money-back protection.

How clawbacks work
When a company signs a subsidy deal, it typically promises to deliver a set of public benefits. For example, a company may state on its subsidy application that it will invest $1 million in a new plant projected to employ 100 people full time at $20 per hour. If that company fails to follow through on the investment, number of jobs, employment hours, or wage rate in a specified amount of time, and the subsidy deal has a clawback provision, the company must forfeit or repay all or part of its subsidies to the state or local government that awarded them.

Many clawback laws are written so that different penalties apply depending on how badly a company fails to meet its targets. A clawback may prorate a subsidy; for example, if the company falls 10 percent short of its goal, it has to pay back 10 percent of the subsidy. A steeper penalty may apply if the company falls far short. If a company shuts down or moves out of state, the government may require it to pay back the full amount of the subsidy, with interest.

Clawbacks are added to development subsidy programs through the legislative process at the state and/or local level. They are also included as a provision of subsidy contracts negotiated and signed by governments and developers.

Why we need clawbacks
Clawbacks provide taxpayers a way of making sure their investment in development subsidies pays off in the form of real public benefits, and allows governments to recoup their money if it does not.

The concept of a clawback may seem like common sense. However, with the way many subsidy deals are currently structured, companies often face no penalties if they fail to deliver on promised jobs or investment. A company's plan to create public benefits may be regarded by both corporate executives and public officials as more of a goal than an enforceable commitment. Governments often take a "good faith" approach, assuming the company has done and will continue to do its best, and letting it off the hook if it falls short.

The result of such lax enforcement is that taxpayers end up subsidizing companies for things they don't do. In most cases, the failure of a company to live up to the terms of the subsidy means that it creates fewer jobs, or jobs of lower quality, than promised. In some cases, subsidies have gone to companies that later eliminated jobs, closed up shop entirely, or moved to other states, literally taking the money and running.

Just as important as the money-back penalties in clawback laws are the requirements that companies and governments monitor the outcomes of subsidized projects. Neither companies nor public officials can typically boast a stellar record when it comes to tracking or reporting to the public how actual performance of subsidized projects measures up to expectations. Annual reports ensure that individual companies are complying with the terms of their agreements, and also allow states to evaluate whether subsidy programs are meeting their objectives overall. When this information is made available to the public, it is called disclosure data (see key reform #1).

Best practice
Twenty states and dozens of cities already use clawbacks with one or more of their subsidy programs. See the chart of state subsidy programs with clawbacks for a list of state clawback laws.

If you compare the laws on the chart, you'll see that the scope, triggers, and penalties vary considerably. Some, like Connecticut's law, apply very broadly to all subsidy programs. That law has a steep penalty (full recapture plus interest) and holds subsidy recipients accountable for a long time (ten years or more), but applies only to the worst case scenario of a subsidized company moving out of state. Others, such as Colorado FIRST's clawback provision, apply narrowly to only one subsidy program. This law and laws like it are typically designed to ensure ongoing compliance with several eligibility criteria (job creation, job hours, wage rate, etc.) that are the basis of the effectiveness of the development program, as well as protect against runaway companies.

Since state legislation that applies to all subsidies awarded at both the state and local level has the greatest impact, we advocate such laws as the best practice model (although local clawback laws, clawback language in a subsidy program, or inclusion of a clawback in an individual subsidy agreement is always a good start). The strongest clawback laws:

• Apply to all business subsidies at both the state and local level.
  
  
• Prorate subsidies in the event of partial non-compliance, ensuring that companies are subsidized only for what they actually deliver.
  
  
• Require complete repayment, plus interest, of a subsidy in the event that a company ceases operations or moves subsidized equipment or jobs out of state.
  
  
• Hold companies accountable for meeting wage requirements and other commitments, in addition to investment and job creation.

Minnesota's clawback law is a good example of best practice. The law requires that subsidy recipients sign formal subsidy agreements, which must include clawback language enabling the granting jurisdiction to recapture all or part of a subsidy, with interest, if a company does not fulfill the terms of the contract. The jurisdiction granting the subsidy must create minimum requirements for subsidy programs, including wage standards, and subsidy recipients must commit to wage and job goals. Companies that fail to meet their commitments are barred from receiving further subsidies in the state for five years or until they have repaid what they owe (read the full text of Minnesota's accountability law).

Caveats
Many of the early clawback laws were passed by jurisdictions that were recently hurt by a subsidy gone awry. States and cities without clawback laws shouldn't wait to be the next victim, but should proactively add clawbacks to their subsidy programs. Public officials are sometimes reluctant to enact clawbacks, citing concerns that such laws would send unfriendly signals to potential businesses and hurt the region's "business climate." But clawbacks should not be viewed as a threat to business. Rather, they are a tool that set out clear expectations for parties on both sides of the table, lessening the possibility that disagreements will escalate to lawsuits. If the rule is simple, fair,and evenly enforced, businesses will accept it.

Clawback language is a tool to protect taxpayers' investment in subsidized companies, ensuring that companies deliver on their promises. But what are they promising? In addition to clawback provisions, development deals must incorporate strong standards as to the benefits subsidized companies are expected to create. Other key reforms, including job quality standards, get into this issue in more depth. Once those requirements are in place, public officials must monitor corporate performance on a regular basis, and enforce clawbacks when needed. Public participation is often key to holding both companies and public officials accountable to following through with the terms of subsidy agreements.