Take Three

“We are getting calls … but it’s just not the level we were hoping for.” – Catherine Parrington, Austin Studios (Photo by John Anderson)

On April 23, things were looking good for the Texas film industry. After months of negotiations, marquee names from the creative arts and the political establishment gathered at Robert Rodriguez's Troublemaker Studios in East Austin to witness Gov. Rick Perry sign House Bill 873 – the latest version of the Texas Moving Image Industry Incentive Program. Perry told the assembled crowd, "With this legislation, we are strengthening our state's investment in a vital industry that not only shows off our state to the rest of the world, but also draws investment and creates jobs for Texans."

The Texas Film Commission in early Nov­em­ber plans to approve its new rules based on the legislation. With applications for the new and improved grants already filed in expectation of receiving the money, Texas Film Commissioner Bob Hudgins finds himself in the enviable position of helming a program that may be perhaps too successful. With only $62 million in the program's budget for the next two years and a greater number of companies being attracted by more generous incentives, Hudgins said: "Unfortunately, what's going to prove up this time is that we need more money for the program. I fully expect to run out."

Previously, in Texas Film ...

The history of film incentives in Texas has been fraught with false starts. The trouble really started in 2002, when Louisiana established a film tax-credit program. New Mexico quickly followed suit, and by 2005 more than a dozen states offered similar programs – including, theoretically, Texas. With concerns about lost production dollars and talent drain as crews moved out of state for work, Dallas Sen. John Carona authored Senate Bill 1142, establishing the Texas Film Industry Incentive Program. The bill was intended to provide grants for film, TV, and commercial shoots. "Intended" is the right word: Though the legislature passed the bill, it never actually funded the program, so there was no money for grants.

In 2007, Austin state Rep. Dawnna Dukes picked up the torch and worked to pass HB 1634. The first big change was the name: Now it was the Moving Image Industry Incentive Program, adding "digital interactive media production" to the list of industries eligible for grants worth 5% of their project budgets. The legislature funded this version to the tune of $22 million. That was the good news. The bad news was that the terms were tighter than most states, with low grant caps, higher minimum qualifying budgets, and higher requirements for in-state staffing and shooting. The terms were so stiff and gave Hudgins' office so little leeway to negotiate with producers that applications fell short of the intended levels. Where it worked was in keeping existing productions, such as Prison Break, in the state. But when it came to attracting new productions, Texas Motion Picture Alliance President Don Stokes explained, "It was just not competitive enough to make people look at the other advantages the state can offer."

So in 2009, with other states already running various incentive programs and producers scarcely glancing at states without, it was back to the Texas Capitol for take three. After lengthy negotiations between studios and a financially skittish legislature, Dukes' HB 873 allowed more cash for a broader pool of applicants. More importantly, it upped the percentage available for film and TV and gave Hudgins the leeway to reform the rules if and when they are shown to be ineffective. Stokes said: "We've gone from 5 percent to 15 percent, plus extra in an underutilized area. We in effect tripled the incentive program."

The numbers are already, arguably, speaking for themselves and proving the program's worth as an economic driver. Since the Texas Film Commission started taking applications under HB 873 on April 23, it has already attracted well over half the value of production dollars that HB 1634 managed between June 2007 and April 2009. Since only $11 million out of the original $22 million had gone out in grants, there was even money left in the pool, so Hudgins' office was able to start allotting that old cash under the new rules before the end of the fiscal year. He explained, "Friday Night Lights was the one that put us over the top to seal the deal so that we didn't lose any money from the old program."

"Unfortunately, what's going to prove up this time is that we need more money for the program. I fully expect to run out." – Bob Hudgins, Texas Film Commission (Photo by Jana Birchum)

Hudgins had leftover cash from the 2008-2009 appropriations "because something wasn't working," he said. "We're not going to be having that problem this time." His office has been taking applications under the new rules and can start processing them once they're approved. If all the applications are awarded the maximum grant, then more than $17 million will be paid out. In return, the state will have attracted $138 million in production spending and added 1,180 full-time jobs.

Once Upon a Time in Austin

Hudgins' job is to get productions into the state. After that, it's up to the individual counties and municipalities to compete for those productions. The city of Austin has a vested interest in making sure that filmmakers get off the plane at Austin-Bergstrom International Airport and then stay inside the city limits. Says Vincent Kitch, the city's cultural arts program manager, "Our internal philosophy is to make it quicker and cheaper and easier to make movies in Austin."

Mostly, the city relies on the services of the Austin Film Commission, run by the Austin Convention & Visitors Bureau, to serve as a one-stop contact shop for content producers and moviemakers. What subsidies the city does provide are effectively stealthy, such as the 2008 council ordinance waiving rental fees on city property for qualifying projects or the Austin Film Commission's Now Playing card, where local vendors offer discounts to cast and crew. Gary Bond, the bureau's director of film marketing, said: "My motive in [the discount card] is mostly for the businesses who want to know, 'How do we get some of this film money?' They're actually getting it, whether it's barbershops or automobile dealers." And for local firms, he argues, it's a very focused publicity tool. He added: "You're dealing with a very narrow demographic of folks. It's not like sending coupons to a ZIP code."

The city's only real experience with a direct incentive so far is the 2007 economic development agreement City Council signed with NBC to bring the filming of Friday Night Lights to Austin (available at www.cityofaustin.org/redevelopment/downloads/FridayNightLightsCh380Eda.pdf). Much like the state reacting to the slow industry response to its grants, city staff experienced a learning curve when FNL ended up out of compliance with the agreement. The core problem was the 2007-2008 Writers Guild of America strike: The original deal with the city was for 21 episodes that year, but the strike resulted in the completion of only 15 episodes for season two. So, just as the state revisited its incentive rules, the city went back and reworked the deal. On Oct. 15, council dropped the episode requirement down to 12 and added a force majeure clause in the event of a talent strike. Rodney Gonzales, acting director for the city's Economic Growth and Redevelopment Ser­vices Office, explained: "That's a big benefit, because for season three they've filmed and completed 13 episodes, and for seasons four and five, our understanding is that they're going to record 13 episodes each. So council fully realizes the benefits that Friday Night Lights brings to the industry here in Austin."

But that doesn't mean all the contract glitches are fixed. There were other noncompliance issues, and while city staff expects that the new amendments will retroactively cover season one, the fact that NBC omitted the preagreed phrase, "Made in Austin, Texas, U.S.A.," from the credits means season two won't be eligible for the incentive cash. Kitch said, "They weren't willfully being noncompliant, but [the agreement] doesn't allow us to just say, 'Well, we understand.'"

The Studio System

Arguably the city's biggest indirect subsidy for media firms was the agreement to extend the Austin Studios lease to the Austin Film Society until 2042. Gonzales explained, "For a dollar a year, we get a lot of return." The general hope among the local film community was that the new incentive program would cause a flood of moviemakers to hit Austin. Unfortunately, that deluge has still to materialize. Catherine Parrington, the studios' director of operations, explained, "Thank God for Troublemaker Studios, because they're the ones keeping us busy." Rodriguez's production company completed the upcoming Machete on her soundstages, and now it's working there on his reboot of the Predator franchise, Predators. Beyond that, the books look pretty empty, making the controversial agreement to lease stage four to Soundcheck Austin, a music production and rehearsal space firm, seem even more fiscally wise (construction on Soundcheck's facilities in the Mueller development is scheduled for the end of the month, with a Jan. 1 completion date and a rehearsal booked for two weeks later). Even with a new regular tenant and the addition of the neighboring National Guard armory to the site in 2012 to boost the soundstage space, Parrington admits the lack of incentive-driven production is disappointing. She said, "We are getting calls, and they're good, but it's just not the level we were hoping for."

So what happened? Under HB 1634, Austin led the state in total production spending; the number of films, TV shows, and video games applying for grants; total grants; and total number of full- and part-time jobs created. Under HB 873, Austin has hosted four grant-eligible films that spent a total of $9 million, compared to five spending $42 million under the old program. And it's now Dallas leading the state in films, with seven projects spending $23 million. Yet Austin's total eligible spending across all categories in the six months since April is already at $74 million, compared to $106 million previously. So if the cash isn't in films, where is it?

Playing the Money Game

Gold Diggers of HB 873: In less than seven months, the new incentives offered under HB 873 have attracted more than half of the eligible in-state spending the old rules attracted in nearly two years.

It's in video games. While the program is commonly still called film incentives, the moving image grants also cover digital media, and it's a growing component of the program. Last year under HB 1634, there were 33 qualifying applicants statewide, spending $58 million and getting $2 million in grants. Under HB 873, there have already been 19 applicants, investing a total of $62 million and receiving nearly $4 million from the state. (Game developers have an advantage over other applicants as employers. Out of the 1,662 jobs created by films, only 294 – fewer than one in five – were full-time positions; 564 out of the 572 jobs gaming created were full-time.) And who is the biggest beneficiary of that gaming cash? Austin, which attracted more than $43 million of that $62 million in applicant spending.

Tony Schum is director of economic development for the Greater Austin Chamber of Commerce, and his job is to attract and promote tech firms, including gaming ones. The incentives are doing some of his job for him. When it comes to industry awareness of the program, Schum said: "They all know it. There is no faster communications network than talk among the game industry. This is a very powerful tool for us to prove to firms how committed the state of Texas is to helping develop gaming companies." Lawmakers cagey about the incentives could be won over by this industry sector, where full-time, long-term developer jobs can easily pay between $60,000 and $90,000 a year. He noted, "These are extremely good payroll numbers for the state of Texas, [and] the multiplier effect of having one of these jobs is extremely effective."

However, he added, "It's not so much a recruitment tool as a way to help firms grow within the state of Texas." Surprisingly, that could be helped by recent shake-ups in the local gaming community, like last year's closure of veteran development studio Mid­way Austin. With talented and experienced developers looking to establish start-ups and large creative and tech communities already present, Schum said, "All the right mixture of elements are here for us to promote gaming, and these incentives are really an accelerator."

Blood Simple

For now, the latest iteration of the incentives is paying off in raw economic terms. On the national scene, Stokes explained, "I'm not going to tell you that we are the most competitive program, but I think that we're a realistic program." And there's a structural difference between Texas and states like Louisiana: "They were spending these incentives to create an industry that already exists in Texas. We're just trying to maintain that industry and stop people from leaving the state to find work."

The balancing act is to make sure that the grants aren't so big that they lose money, and some states are already scaling back. Michigan led the field with a 40% refundable tax credit on production expenses, but the Michigan Senate Fiscal Agency estimated that because of the overly generous terms, the state will end up subsidizing the program by $150 million in 2010. Over in Wisconsin this year, Democratic Gov. Jim Doyle advocated for completely ending the subsidies, but, after losing that fight with his Legislature, he instead settled for slicing the program through the state budget. Stokes said, "Our belief is that those programs are not sustainable because they're not a positive cash influx for the state." While he could never see the fiscal conservatives under the pink dome letting the Texas program have a negative fiscal impact, the reality is that it will still undergo oversight. So while filmmakers may want more, he said, "We're still going to have to prove to legislators that we're netting money and making jobs."

That's going to be vital in the next legislative session. The consensus is that, without federal stimulus dollars to backfill the budget, the state will be running a full-blown deficit in the next biennium. Dukes argued that budgetmakers will be looking for three things from state programs: "Performance, performance, performance. Any recommended legislative initiative that can prove itself will be of the greatest assistance in furthering that program, so I'm very pleased that the program is doing very, very well."

So Hudgins' first big job starts next summer, when the state starts collating data for budgetary recommendations. The fact that $17 million in grants has already won $138 million in production spending before the first check is signed is, he said, "a great thing, because we can go to the comptroller and say, 'Look what it provided.'"

However, if the current rate of grant applications keeps up, there is no way the $62 million budget will last until the next legislative session, and the state will be back where it was in 2005: with an unfunded incentive program. Hudgins said: "As soon as the faucet gets turned off, I expect our phones to go quiet, and that's the damning part of this. I keep warning people that's gonna happen." After that will come what he called "the unfortunate part: calculating how much production we lost because we didn't have enough money for the program."