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Derrick Corp. may be first test case for Erie County IDA clawback policy

When Derrick Corp. went to the Erie County Industrial Development Agency nearly two years ago for tax breaks to help expand its Cheektowaga factory that makes equipment used by oil and natural gas drillers, the nation’s energy markets were still fairly robust.

But a lot has changed in the last two years. Oil and natural gas prices have plunged. Drillers have stopped drilling. And their suppliers, including Derrick, are dealing with a steep drop in business, too.

Since Derrick went before the IDA in June 2014, the company has cut 25 percent of its jobs, putting 119 people out of work. Those cutbacks have put Derrick on a course to become the first test case for the IDA’s recapture policy, which allows the agency to claw back tax breaks from companies that don’t meet the employment promises they made when they sought tax breaks.

IDA officials, for the moment, are treading carefully. The policy gives the IDA discretion in how aggressively to seek clawbacks, which become an option once a company falls 15 percent below its job targets. In Derrick’s case, that happened when its workforce, which stood at 477 in June 2014, fell to 359 at the end of last year.

“We are still deliberating,” said Richard Lipsitz Jr., the IDA’s vice chairman and head of the agency’s policy committee that has been discussing how to proceed. “There are good reasons for them not meeting their employment goals, and we’re mindful of that.”

IDA officials are walking a fine line, not wanting to make Derrick’s financial position worse by penalizing a company that is already struggling. At the same time, the agency’s policy, put in place to prevent companies seeking tax breaks from making promises that they can’t keep, puts Derrick squarely in the danger zone for clawbacks.

“There is a failure to get to a certain employment level,” Lipsitz said.

At stake are about $509,000 in sales tax breaks that the company received during a pair of expansion projects in 2014 and 2015 that were supposed to lead to the creation of eight additional jobs and preserve the 477 positions by building a 31,250-square-foot addition to its factory and headquarters building at 590 Duke Road. The company, which has completed the expansion work, also was granted property tax breaks that are worth about $1.5 million, but those incentives are not scheduled to start taking effect until July. However, the status of that property tax break is up in the air.

Among the options that the IDA is considering is to give Derrick more time to meet its job goals in hopes that the U.S. energy market will rebound. But with Derrick being the first company that could be subject to clawbacks, the question that IDA officials are debating is how much extra time the company should get.

Oil prices have risen steadily from their late winter lows, but natural gas prices remain deeply depressed. In Pennsylvania, which once was a hotbed for natural gas drilling, only 16 drilling rigs were operating last week, down from a high of 115 five years ago, according to oil field services firm Baker Hughes.

Derrick makes vibrating machines that are used by oil and natural gas drillers, as well as customers in the mining industry, to filter out particles as small as 10 microns.

Company executives, who couldn’t be reached to comment Wednesday, haven’t been hiding their troubles. The company contacted IDA officials last October to let them know the company was struggling and cutting its workforce. A Derrick executive met with members of the agency’s policy committee behind closed doors earlier this month.

“We’re not going to negotiate with them,” Lipsitz said. “We’re going to tell them their options.”

email: drobinson@buffnews.com