Taxpayer funded corporate incentives fail to produce promised jobs

When Canadian entrepreneurs touting a healthy new snack product scouted Kingsport, Tenn. as their new headquarters in 2015, local economic development officials like Clay Walker were enthusiastic. They sampled the gluten-free, non-GMO fruit and vegetable bars and worked to seal a deal that would bring 273 jobs to the northeast Tennessee town of 54,000 in exchange for a $1.2 million state grant.

Within a year, however, Pure Foods declared bankruptcy without ever having filled the promised jobs. Walker, the CEO of NETWORKS Sullivan Partnership, the economic development group for the area, found out in an unexpected call from CEO John Frostad.

“It wasn’t a heads up,” Walker said. “He called the mayor first, then me. It was just to say we’re declaring bankruptcy. We were disappointed they didn’t come to us with the problems they were experiencing.”

The company is now on the hook for the entire $1.2 million received from Tennessee’s FastTrack program, an economic incentives program that provides grants in exchanges for pledges to create jobs for Tennessee workers.  Pure Foods is one of nine companies lured to do business in Tennessee with incentive packages — $12 million altogether — that have since been referred to the Tennessee Attorney General for possible legal action for failing to deliver on promised jobs.

An additional 17 companies overpromised and underdelivered on the number of jobs created, according to their agreements with the state. State collections efforts against those companies have resulted in the return of $41 million in taxpayer-funded dollars.

Altogether, nearly one in ten jobs promised to Tennessee workers by companies that received millions in taxpayer-funded incentives have either failed to materialize or have since been eliminated, a Tennessee Lookout analysis of FastTrack funding and performance found.

Collectively, the state issued $53.6 million to companies that failed to deliver 8,385 jobs for Tennessee workers in exchange for taxpayer-funded investments. Some companies created jobs – approximately 1,244 altogether — but went bankrupt, closed or downscaled after receiving state funding, the review found. It’s unknown how many of the 1,244 jobs remain.  The state has thus far secured the return of more than $41 million in FastTrack grants.

The failed ventures represent a significant portion of the total state dollars invested in deals between the state government and private companies relocating to Tennessee or expanding their operations in the state. The FastTrack program, in total, issued more than $250 million in economic investment dollars, getting commitments of 88,179 new jobs for Tennessee residents.

The failed promises came from both large- and mid-sized operators across the state, welcomed with open arms by local economic officials who often landed on the front pages of community newspapers wielding shovels in pictures commemorating groundbreaking ceremonies.

In Newport, a small town of about 7,000 that serves as the county seat for Cocke County in east Tennessee, RGE USA received $205,000 in FastTrack grants in 2016 to make improvements to its injection molding plant in exchange for a pledge to create 41 new jobs. None of the jobs materialized. The company ceased operations in 2018  and the company’s robots, molding machines and industrial space were sold at auction last year. Despite a notice of default letter demanding repayment sent in 2019 by the Tennessee Department of Economic and Community Development, the company has failed to return a single dollar of its grant.

MIA (Made in America) Seating received $4 million in exchange for creating 510 jobs at its ergonomic seating manufacturing plant in Clinton, Tenn. in 2013. By 2019, the company reported it had created just 55 new jobs — or 11% of the total workforce promised to state officials. The company has failed to return the $3.56 million state officials calculate is owed based on its unfulfilled job pledges, according to records. After an attorney for the company contested the state’s repayment demands last year, state officials reasserted their claims, writing in a July 2019 letter that “the State provided $4,000,000 to assist the Company for which the Company agreed to create 510 new Jobs. The Company failed to meet its performance requirement.”

Textile Corporation of American pledged in 2017 to create 1,000 new jobs at its plant in Pikeville in exchange for a $3 million FastTrack grant for building acquisition and improvements. Company owners, Karim Sadruddin and Rahim Sadruddin, pleaded guilty in 2018 to wire fraud and money laundering charges.

The FastTrack program is now under scrutiny by state lawmakers after a critical audit from the Tennessee Comptroller questioned oversight of the program by the Department of Economic and Community Development. The audit, released last week, concluded that state officials “cannot ensure that FastTrack grants were awarded and administered as intended to create jobs.”

“Management’s inability to effectively measure contract performance also increases the risk of noncompliance, fraud, waste, or abuse of state funds,” the audit found.

Tennessee’s FastTrack program was designed to recruit companies to do business or expand their operations in Tennessee — particularly in rural areas — with incentives tied to the number of jobs created that amount, on average to $4,500 per job.

In Kingsport, where the Pure Foods snack manufacturer declared bankruptcy, Walker said local officials have found a way to compensate for the loss of 273 jobs. The FastTrack funding paid for the production plant, which economic officials used as an incentive to lure another snack food company. Anita’s Snacks now employs more than 100 workers, with goals — slowed by the COVID-19 pandemic — to hire more, Walker said.

The California-based company has been a different experience, he said. Anita’s Snack Foods is a decades-old, family owned company — unlike the failed Canadian startup — that manufactures tortilla chips.

“Anita’s is exciting for opposite reasons,” Walker said.