In 2009, CFO Mark Poncin found himself in a situation many CFOs now face. Three years earlier, his company, boat-builder Chris-Craft Corp., struck a deal with North Carolina. If Chris-Craft created a certain number of jobs over the course of the year, the state would grant it more than $50,000. If the company reached its job target for each of 4 years, it would receive escalating annual payments for the length of a 10-year contract (which required that it stay in the state for that period).

But then the economy plummeted, and so did Chris-Craft’s sales. “We had to make a decision,” Poncin says. “Sales fell almost 80% overnight. We had to close that operation to survive.” In North Carolina, that meant Chris-Craft owed the government a check — a “clawback” of the money the state had given it.

Over the past decade, states have included and strengthened clawback provisions in their economic-development incentive contracts, and the recession has intensified their efforts to recoup funds from companies that have failed to meet various requirements. Some states have also shifted to longer-term, performance-based contracts (with clawback provisions) in lieu of upfront cash grants.

Yet, at the same time, many states are adding incentive programs to their budgets in an effort to revitalize local economies. “Generally, there is a pullback on incentives because of budgets,” says Kathy Mussio, managing partner at Atlas Insight, which helps companies with site selection and also works with them to obtain incentives. “But there are also states that recognize that they can’t do that, because they won’t be able to retain certain businesses or attract new ones.” As a result, companies need to study their options more carefully than ever.

Mapping the New Landscape
With 44 states projecting budget shortfalls this year, incentives are becoming stricter and more difficult to secure. States across the country are slashing discretionary deals and statutory incentives from their budgets. In Michigan, the governor has proposed removing most discretionary incentives and replacing them with a flat business tax rate. In California, the governor has defunded the state’s largest statutory tax-incentive program in his 2012 budget proposal. State legislatures may vote to restore some of these programs, but the trend is enough to make a CFO nervous.

“The amount of money available for these kinds of programs is going to be severely constricted,” says Andrew Wheat, research director at Texans for Public Justice, a policy-analysis group that believes state incentives should be curbed. “There is going to be less money around, and to the extent that more money is going to be made available in the future, there are going to be more checks and balances.”

After losing businesses they have subsidized, some states are looking to strengthen already-existing clawback provisions. For instance, the Massachusetts governor and state legislature are pushing for stricter, more consistent clawback rules as they watch Evergreen Solar and a major division of Fidelity Investments depart the state despite having received hefty incentives.

Working It Out
What should CFOs do if they invest capital and hire new workers but then have to make cuts or close factories to survive? Tracey Hyatt Bosman, director of strategic consulting at commercial real-estate firm Grubb & Ellis, says clawback provisions are here to stay, but states will often renegotiate the terms of individual contracts if companies are struggling. “They’re not interested in hastening your demise,” Bosman says. “If you’re not going to meet your hiring or investment requirements, most economic-development organizations are willing to extend the deadlines and work with you to mitigate those effects.”

Bosman adds that “even when a company is presented with a seemingly inflexible contract, it may have room to negotiate.” During contract negotiations, companies agree to follow program guidelines, which set the percentage of a job target they must meet to get or keep incentive payments. States usually don’t lower the minimum targets, because they are set by legislation, but they might flex by incorporating sliding scales, so companies will receive more money if they hit 100% of their targets than if they hit the minimum percentage.

Or they might extend deadlines. North Carolina will give a company two extra years to meet its goals, for example. During that period the state will not claw back payments already made, but it will stop making new payments until the company is back on target. If the company terminates the agreement but remains in the state for the length of the contract, it will not owe a clawback. Mark Poncin says state officials promised not to pursue a clawback when Chris-Craft could not meet its job targets, unless the company left North Carolina. Once Poncin closed the factory, the state was still willing to work with him, agreeing to a zero-interest repayment plan over several years.

Still a Good Deal?
Some say the shift toward performance-based contracts and clawbacks is beneficial for both states and companies. Deputy Secretary of Commerce Dale Carroll says that North Carolina, which has signed 524 incentive contracts since 2001, has clawed back only 13. All but 2 of these clawbacks occurred after the recession began in 2008. “A performance-based incentive is an investment in job creation,” Carroll says. “When the business has to meet its milestones in terms of creating jobs and investing in equipment and machinery, it’s win-win because it’s investing in itself as a corporation.”

While the tide may be turning against upfront cash grants, Bosman says that grants will live on because states know that such programs are a particularly effective way to attract business, since the payments help companies offset initial costs.

Atlas Insight’s Mussio says companies should also keep in mind that, in the face of budget cuts, projects do not have to be ambitious to get a state’s attention — and funding. “For a CEO who is on the fence about a decision, help from the state may mean enough to swing the decision one way or another,” she says. Therefore, it’s worth exploring whether a state would be interested enough to “help offset some of your costs.”

Mussio and Bosman say finance chiefs should think both strategically and conservatively before they sign incentive contracts, particularly those that include clawbacks. Bosman says companies should “know what a reasonable target is in terms of investment and jobs, especially when there’s a clawback involved. This is not the time to be grandstanding or making your project appear to be better than it is.”

Ultimately, when it comes to clawbacks, “a company committed to realistic goals should have only moderate concern,” says Bosman. She adds that, for the most part, the benefits of incentive programs — even those with clawback provisions — continue to outweigh the risks.

Marielle Segarra is a staff writer at CFO.