To achieve this, in part, governments are employing “clawback” provisions. A clawback is any provision that ties economic incentive disbursement to specific key performance indicators, such as projected job creation and capital investment. Historically, most states have been hesitant to initiate clawback provisions due to the risk posed to goodwill established with local employers and because they do not want to overburden or impede companies’ success. However, at this time, some states are modifying of withdrawing incentives and seeking recourse against companies that do not meet their agreed-upon performance requirements.
For example, in New Jersey, routine modifications to existing incentive agreements were used to accommodate changing business conditions or needs but are now being employed as a tool to re-score Grow New Jersey Assistance Program awards, resulting in reductions in value of 50%, 75% and up to 90%.
Companies that have received economic incentive packages could face more stringent reporting requirements, as state and local governments seek ways to preserve funding post-COVID-19.
Depending on the circumstances, state governments may aggressively enforce incentive agreement clawback provisions or, in some cases, eliminate any future benefits. Our advice to companies is to be vigilant and proactive by taking these immediate steps:
- Companies should review incentive agreements even if the benefit or term of the incentive is expired as many clawback provisions extend beyond the term of the incentive.
- Take a proactive approach and address any non-compliance or potential non-compliance by contacting the incentive authorizing agency to establish open communication.
- If a company is in jeopardy of default, auditors will report it as a contingent liability – this could potentially be avoided by proactively addressing the issue with the authorizing agency.
- State and local governments will factor COVID-19 into decisions, however it will not circumvent existing clawback provisions. It is the responsibility of companies to understand incentive obligations.
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The CARES Act was created to offer critical financial support to businesses and individuals but does not address economic incentives. Click here for an introductory primer on the CARES Act