Connecticut officials evaluating tax credits for film companies

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 performa 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 programmay 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 Hollywoodcentered 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.

After nearly 35 years in Connecticut, Blue Sky Studios had becomea 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.”