The City of Boston took the unusual step of cutting $3 million off the tax break it provided Vertex Pharmaceuticals Inc. for moving its headquarters to the Seaport District after the big drug maker created fewer jobs than it promised.
The city is slicing Vertex’s tax break by one-fourth, to $9 million phased in over four years, because the company is 400 employees short of its target.
Vertex got about $22 million in tax breaks in 2011 from Boston and the state in exchange for building an $800 million headquarters complex on Fan Pier and moving most of its operations out of Cambridge. A key component of the deal was Vertex’s promise to increase employment by 500, to 1,741.
Soon after, though, Vertex had trouble meeting the job targets and in 2013 surrendered a portion of the money it received from the state.
It’s unusual for a local government to cut back on corporate incentives that have already been awarded, especially to a big marquee company like Vertex. But observers say the move reflects the strong hand that city officials have in the current hot real estate market, and the reality that Vertex, just two years into its high-end office buildings, isn’t going anywhere.
Indeed, the company approached city officials earlier this year to talk about its business plans, said John Barros, Boston’s economic development chief. Those plans included employing fewer workers than it projected four years ago, when the deal was crafted. With the tax break only in its first year, Barros said both sides agreed to rework the deal.
“Given their new trajectory, we needed to make an adjustment,” Barros said. “Since the tax breaks were heavily set on jobs and job growth, it became fairly easy to walk back from that.”
Since Vertex employs about 25 percent fewer people than it promised, Boston reduced its tax break by a similar amount, from $12.1 million over four years, to $9 million. The change was disclosed in a letter from Mayor Martin J. Walsh to the City Council and first reported by the blog Universal Hub on Tuesday.
The company employed 1,311 in Boston earlier this year when the tax break was renegotiated. But Vertex vice president Dawn Kalmar said the company is confident it will be increasing its workforce here, thanks in part to its successful launch of a new treatment for cystic fibrosis. It added 70 jobs as it moved from Cambridge last year, and plans 80 more over the next three years.
“We are committed to the Boston community and we’re committed to the growth of our company,” Kalmar said.
Still, this is the second time in 18 months that Vertex has had to give up incentives tied to its move to Boston. In late 2013, the company repaid $4.9 million to the Massachusetts Life Science Center after it eliminated 175 jobs amid falling sales of a hepatitis C drug.
The clawbacks illustrate the perils of projecting — and subsidizing — employment in the risky biopharma business, said life sciences consultant Kevin J. Gorman, the chief executive of Krisander LLC in Concord.
“These companies are putting their finger to the wind and trying to guess what their sales might be in five years and how big a workforce they’re going to need,” Gorman said. “They’re assuming they’ll meet all their milestones and they’re looking at history to predict the future, and that’s always risky.”
Indeed, nearly 30 percent of the incentives the Mass. Life Science Center awarded in 2009 were returned because the companies did not hit the promised job targets. The center has issued 143 incentives, worth a total of $135 million, and more than 40 of those were paid back.
“Our program was designed with strong accountability measures,” said Angus McQuilken, a spokesman for the center. “The existence of strong clawback provisions provides us with leverage to make sure taxpayers get a return on their investment in terms of jobs.”
Those sort of repayments represent progress, said Phil Mattera, research director at Good Jobs First, a Washington-based group that tracks economic development subsidies. For many years, state and local governments gave out big incentive deals with little protection in case things went awry. But after several high-profile failures, including the collapse of Evergreen Solar in Massachusetts and 38 Studios in Rhode Island, governments are attaching more conditions to their subsidies.
“Those kinds of fiascoes make public officials a little more careful,” Mattera said. “They at least want to give the impression that they’re safeguarding the public’s interest.”
In Boston, the real estate market is strong enough that city officials do not need to provide incentives to developers to build, said Sam Tyler, president of the Boston Municipal Research Bureau. The result is fewer tax breaks that span decades — Vertex’s deal expires in 2018 — and tougher clawbacks when something goes wrong.
“The city’s in a much stronger financial position than it once was,” Tyler said. “It’s trying to be smarter about what agreements it reaches to bring in development.”
But a tax break that can be revised down can also be revised up. Barros said if Vertex were to come back to City Hall before its deal runs out in 2018 with plans to hire hundreds more workers, that $3 million would be back on the table. “If they did that, we would happily readjust,” Barros said. “And we’d celebrate those jobs.”