Connecticut officials evaluate whether costly tax credits to film companies are worth it
It was a Hollywood ending, but not the good kind.
An executive decision, made in a Disney boardroom thousands of miles away, led to the shuttering of Greenwich animation company Blue Sky Studios in April, leaving more than 450 people out of work.
The move came after more than a decade of state support for Blue Sky Studios, in the form of hundreds of millions of Connecticut taxpayer dollars in incentives aimed at creating and retaining jobs and economic activity. The most recent installment — a $32 million tax credit payment — was disbursed less than two weeks before corporate parent Disney announced it was closing the shop.
That’s raised questions about whether Connecticut should keep rolling out the red carpet for an industry that is characteristically fleeting.
Beyond its home base in Hollywood, film and television production is driven by tax incentives. Steve Kaplan, a representative with The Animation Guild in Los Angeles, said animation studios in places like Atlanta, Portland and Vancouver perform a lot of contract work for Hollywood conglomerates, passing along local tax credits to the major studio — often as a condition of the contract.
But with so many tax credits available across states and around the world, Connecticut’s incentive program may not have even factored into Disney’s move to shutter Blue Sky Studios, Kaplan said.
“They’re a multinational conglomerate — they made a decision based on money. I doubt the Connecticut incentive crossed their mind.”
The dynamics of the Hollywood-centered film and TV industry aren’t entirely lost on the state’s economic development officials. In its 2019 annual report, DECD found that over the last decade, the average economic impact of the Film and Digital Media Production Tax Credit amounted to a loss of $58,510,604 in net revenue per year — well over half a billion dollars in all.
“While there are gains in jobs, the additional revenues gained by the state do not compensate for the loss in state tax revenue due to the credits,” the department concluded in the report. But DECD went on to recommend continuing the program despite those losses.
DECD said it has commissioned an outside consultancy to evaluate the state’s film tax credit programs. And in its most recent 2020 annual report, the agency said it was awaiting the results of that study — originally expected in mid-2021 — before recommending any changes. The report was delayed and is now expected to be made public later this month.
A fixture in Greenwich
After nearly 35 years in Connecticut, Blue Sky Studios had become a source of pride for the state’s film and television sector. Soon after 20th Century Fox took a majority stake in the company, in the late 1990s, the studio launched its “Ice Age” franchise, followed by its “Rio” movies. It also produced the Oscar-nominated “Ferdinand,” “The Peanuts Movie” and others.
In 2019, Disney absorbed Blue Sky Studios in a $70 billion deal to acquire Fox’s film and television assets. And over the following two years, employees at the studio grew increasingly concerned about their fate — even as production continued on the animated feature “Nimona.”
In early February of this year, Disney announced plans to shutter the studio, shelving “Nimona.” Blue Sky Studios vice president Carolyn Wilson notified the Connecticut Department of Labor of the imminent layoffs of all 469 the company’s employees.
“Due to the continuing business impacts of the COVID-19 pandemic, Blue Sky Studios, Inc. has made the very difficult decision to close its studio and begin the process of permanent layoffs at its One America Lane, Greenwich, Connecticut 06831 location,” Wilson wrote. “We hope to accomplish our reduction in force with the least possible disruption to the lives of our employees.”
That notice was dated less than two weeks after Blue Sky Studios received a $32 million tax credit from the state of Connecticut — the second such payment in as many years.
The value of those credits exceeded what auditors have since said should have been the upper limit of any credit granted to animation studios in the state: $15 million a year. In their most recent audit of the Department of Economic and Community Development, which administers film and television tax credits, state auditors concluded that Connecticut overpaid Blue Sky Studios by almost $50 million during the fiscal years 2016 through 2019.
(Blue Sky Studios has also received incentives under another state program, the Film Infrastructure Tax Credit, which covers 20% of any infrastructure costs, such as buildings and production facilities, of over $3 million. Blue Sky received a total of about $7.4 million in infrastructure credits in the years 2009, 2012 and 2014. Auditors didn’t take issue with those credits.)
The audit report, released March 31 of last year, didn’t include tax credit data for 2020 and 2021. But by the auditors’ same logic, the two $32 million payments to Blue Sky Studios in the last two years would amount to overpayment of another $34 million, they told the Mirror. That’s because, according to auditors, Blue Sky Studios applied for — and received — the wrong credit. The company should have been eligible for a program known as the Digital Animation Production Tax Credit, which is capped at $15 million a year, auditors said. Between 2009 and 2016, Blue Sky Studios received the full $15 million animation credit every year, and it remains the only company that has received incentives under that program.
Beginning in 2016, Blue Sky Studios shifted to the broader Film and Digital Media Production Tax Credit, which has no cap. Under that program, companies can receive — in the form of a tax credit — up to 30% off qualified production expenses or costs incurred in the state. “These tax credits are not tied to a specific economic development project or the amount of jobs created or retained,” auditors said.
According to DECD data, 2020 and 2021 payments to Blue Sky Studios under this program were based on in-state spending of more than $105 million each of the two years in question. By the time the second of those two tax credit payments arrived, Disney was days away from announcing Blue Sky Studios’ permanent closure.
With it, hundreds of jobs in Connecticut would be lost — including those of many artists and animators who have since accepted positions at Disney’s other animation studios in California and relocated to the West Coast, according to a former artist at the company.
Speaking on condition of anonymity, the former Blue Sky Studios artist said the company’s fate had felt tenuous ever since the Disney acquisition. Blue Sky Studios was working on one feature production, “Nimona,” and not much else, while nearly all of Disney’s other animation productions were humming along in California, the person said.
“My feeling was: There’s a studio that’s kind of struggling on the other side of the country from all their main stuff … Maybe we can get that talent to come over to our other studios instead of worrying about maintaining a studio on another coast.”
The ‘ephemeral industry’
Many studies in other states and countries have raised similar criticisms of local film tax credits. Production activity may build up somewhere for a period of years, as long as tax incentives are available, but the industry base has remained in California. Hollywood still holds the purse strings.
“When I spend a dollar on a film tax credit, I’m incentivizing economic activity today that may not be there tomorrow,” said Michael N’dolo, an economic development consultant who has studied film tax credits in several states. “It’s a somewhat ephemeral industry that is highly sensitive to incentives and will go where the incentives are. You can see that in the numbers: As states expand their tax credits, the industry responds. It’s quite elastic.”
Connecticut’s Film and Digital Media Production Tax Credit is this state’s only ongoing business incentive program — grant, loan or tax credit — that is calculated as a discount off a company’s expenses in the state, as opposed to being tied to a specific project, investment or number of jobs created or retained. And there’s no limit on the number of years a company can receive the tax credit. In this way, Connecticut’s program is very similar to those in other states competing for film production activity.
George Norfleet, commissioner of the Connecticut film office, said tying a production tax credit to a company’s expenditures makes more sense than requiring a set number of jobs. “You’re not going to need the same amount of people working on a webisode or commercial that you would have working on an ongoing television production. So I think it’s hard for us to tell a producer how many people he or she needs or that company might need to execute a particular type of production,” he said. “We’ve tied it to [capital expenditures] as opposed to job creation, but of course you’ve gotta have a crew, so you know you’re creating jobs.”
Norfleet also pointed to the other two film and television industry incentive programs his office administers: the Digital Animation Production Tax Credit, which requires recipients to employ at least 200 full-time employees and is capped at $15 million, and the Film Infrastructure Tax Credit, which covers a portion of facility construction costs of over $3 million.
Infrastructure credits have declined steeply since a high of $40 million in 2013, and the state didn't award any in 2018 or 2020. Since 2017, the state has awarded $0 in animation credits.
N’dolo said the kind of incentives that encourage the long-term development of an industry — like infrastructure credits — are more economically sound. Building up an industry “cluster” for film and television can attract multiple studios and a permanent workforce available for whatever productions might come through, he said. “If I were to do anything, that’s what I would suggest a state to do — incentivize fixed assets associated with your production capacity.”
The Film Infrastructure Tax Credit has helped companies like ESPN, NBC, Disney and World Wrestling Entertainment strengthen their physical roots in Connecticut, Norfleet said. Since 2009, WWE has received just over $10 million under the infrastructure program, NBC about $32 million, and ESPN has gained $48 million in tax credits toward buildings and facilities, according to DECD data. Each of those studios also receive several million in annual credits under the film and digital media credit program.
“Our bread and butter is definitely the brick-and-mortar television soundstage-type studio businesses, where people come to work 250 days a year to the same building — to a production,” Norfleet said.
WWE has been in Connecticut since well before the tax credit programs were established. The company says it operates within all the state's tax laws as written, just as other companies in the sector do, and it's committed to sticking around long-term. In 2019, the company signed a 16-year lease on a new headquarters space in downtown Stamford.
NBCUniversal owns and operates the Stamford Media Center, and a decade ago it consolidated its North American NBC Sports operations to another facility in Stamford, which now also supports streaming operations for Peacock. The company has spent more than $200 million on broadcast operations and facilities in the state, and those operations have grown to support, directly and indirectly, more than 3,500 jobs.
"The production credits were the catalyst responsible for these economic results," a spokesperson for NBCUniversal said in an emailed statement. "The Connecticut tax credit’s stability and competitive design plays a critical role in building and maintaining a thriving production environment across the state."
Bristol-based ESPN has undergone major expansions since founder Bill Rasmussen purchased the property in 1979. Since then, it has expanded to roughly 20 buildings across more than 100 acres in Bristol and Southington. The network is now 80% owned by Disney and 20% by Hearst. Spokesman Mike Soltys said ESPN has invested hundreds of millions of dollars in its Connecticut campus, but it also has major production facilities in Washington, D.C., North Carolina, Los Angeles and New York City.
"Any time we’re doing a new network, new show or product, we evaluate where is best place to do it," Soltys said. "And the tax climate in any of those states is an important factor when we look at the total picture."
Representatives for Disney didn't respond to emails seeking comment.
Taking a closer look
For the first 10 years of the headline Film and Digital Media Production Tax Credit, the state paid out between $22 million and $79 million in incentives each year. But from 2017 to 2020, the value of the program jumped to an average of about $130 million a year.
Blue Sky Studios’ $32 million in 2020 accounted for roughly one-quarter of the total credit payments issued under the program — even as the company was swallowed up by a Hollywood behemoth and founders and long-time employees braced themselves for closure.
Connecticut has a major advantage in its proximity to New York City’s media industry and workforce. According to the Motion Picture Association’s latest report, Connecticut’s film industry was directly responsible for more than 13,500 jobs and $1.8 billion in wages in 2019. The association compiled a list of Connecticut productions over 2019 and 2020, which included a half dozen Christmas movies and several long-running television series such as “Judge Jerry,” “Maury,” “The People’s Court,” “The Steve Wilkos Show,” and WWE’s “Smackdown” and “Monday Night Raw.”
Still, state officials continue to provide tens of millions of dollars in tax incentives every year to retain the studios that have put down roots here — with no limit on the number of years companies can apply for the credit and no guarantee a company receiving incentives will keep production going in the state year to year.
State auditors pointed out in an email to the CT Mirror that the law requires that businesses receiving financial assistance “shall not relocate out of state for 10 years after receiving such assistance or during the term of a loan or loan guarantee, whichever is longer, unless the full amount of the assistance is repaid to the state and a penalty equal to 5% of the total assistance received is paid to the state.” But recent audits have found that DECD hasn’t consistently applied those requirements, nor has the department adequately kept track of “whether companies that received financial assistance remain in the state during the relocation period,” auditors said.
In the case of Blue Sky Studios, it’s a moot point. The studio was shuttered by its corporate parent. And while many of its former employees have gone on to work at Disney’s other animation studios, the company is no longer.
For the other major studios like ESPN and NBC — among the top recipients of the state's film tax credits — an all-out relocation is unlikely. But there's always the risk that those studios could shift major portions of their operations, like a network, a show, a streaming service or a post-production team, to one of their other hubs. Tax credits may stem those losses.
After Disney's announcement of Blue Sky Studios' closure, production work stopped, and employees turned their focus to finding new jobs. The company's human resources department held information sessions for staff with animation studios from all over the world. HR representatives also assembled a spreadsheet they sent to recruiters at several other studios, including the names, professional details and demo reels of employees who were looking for work. And Disney gave Blue Sky Studios' employees access to details on every available opening at the company, encouraging them to apply.
"I definitely did not feel left hanging," said the former employee, who had been working remotely in another state since the start of the pandemic. "The animation industry is a community. It's nice to have friendly faces all over the world."
Employees stayed on until the studio's last day, and most received severance packages that continued to provide income for weeks or months beyond that. That extra time allowed many of the creative staff to make arrangements to relocate for new jobs.
Asked about Disney's decision to close Blue Sky Studios after it had received state assistance and become one of the higher-profile players in Connecticut's media cluster, the former employee said, "Business is business."