Start-UP NY: Early warning signs

May 19, 2015 by

Start_UP NY blog

The Start-UP NY economic development program does one thing well: it gets people talking. The one-year-old program started generating headlines from the moment it was announced, in part due to its ambitious – some would say excessive – use of subsidies. The program creates tax-free zones to connect start-up companies in targeted industries with university research and development resources.  Companies that locate in the zones are exempt from paying any taxes — including sales taxes, business or corporate state and local income taxes, and property taxes — and employees of companies enrolled in the program pay no personal income tax for the first five years, and a reduced income tax rate for the second five years.

Last month, the state’s Empire State Development agency produced a report on the program’s outcomes revealing that in its first year it created only 76 jobs yet spent $53 million advertising the program nationwide. Though officials maintain that the program’s slow start and high cost are to be expected from a program in its first year, Start-UP NY already has many critics.

Groups from both the left and the right — including the state’s Conservative Party, Working Families Party, National Federation of Independent Businesses, Reinvent Albany, Citizen Action, and the Fiscal Policy Institute —  have come together to call for an end to the program. State Assemblyman Kieran Lalor (R-East Fishkill) has introduced legislation to repeal the program, calling Start-UP NY “an expensive gimmick.”

Watchdog groups have good reason for concern. Some perceive similarities with the Empire Zone program which was ultimately dismantled in 2010, and widely criticized for poor results and corruption. Indeed, there are already early signs of problems with Start-UP NY. According to a review by The New York Times of the program’s participants (based on the ESD report), only about half of the businesses enrolled in the program in 2014 were actually new companies, the others are businesses relocating from within New York State, or from out of state. One company moved just one mile to qualify for enrollment

There’s also controversy about the cost of advertising the program. An audit by Comptroller Thomas DiNapoli found that the state performed no evaluation of the Start-UP NY promotional campaign and actually does not have a metric for doing so.

Based on Start-UP NY’s initial results, the criticism it has received in its first year is clearly justified, raising questions about the future of the program.

Supported By a Megadeal, Volvo Choses South Carolina

May 18, 2015 by

Swedish automaker Volvo has chosen South Carolina over Georgia and North Carolina for its first car-making facility in the Volvo_logo-LUnited States. A hefty subsidy package of more than $200 million helped the state close the deal.

Volvo, owned by a Chinese investment company but still managed from Sweden, will locate in Berkeley County, about 30 miles north of Charleston. The company is planning to invest $500 million and to hire 4,000 workers by 2030 (the first hiring benchmark will be 2,000 workers in about a decade).

The $208 million package will include $120 million that the state will borrow to pay for infrastructure and road improvements around the plant. The economic development bonds still need to be approved by the legislature. The South Carolina Commerce Department will provide about $30 million in grants, most likely via Job Development Credits. State-owned energy company, Santee Cooper, will spend $29 million to buy the land for the plant and will provide an additional $24 million in loans and grants to the company. Berkeley County will chip in $5 million toward the purchase of the land as well. The reported value of the subsidy package is about 41 percent of Volvo’s investment.

The final cost of the subsidy package, however, might be much larger than what has been reported. The package amount includes neither funds for workforce training nor the value of local property tax breaks.

By locating in South Carolina, Volvo has chosen a state that not only has a “right-to-work” law but also a governor who is openly anti-union. It remains to be seen whether Volvo, which has strong ties to unions in Sweden, will join the long line of European and Japanese companies that gladly operate non-union in the U.S. or will follow the exception to the rule, Volkswagen, in being receptive to some sort of worker representation.

Based on what has been announced, the Volvo subsidy package would rank as the third largest megadeal ever awarded in South Carolina (behind the $900 million to Boeing in 2009 and the $250 million to Continental Tire in 2011), according to data compiled by Good Jobs First for our Subsidy Tracker. Another automaker, BMW, has been located in South Carolina since 1992; it received $150 million in 1992 and another $103 million in 2002.

Learning the full value of the Volvo package will be difficult, given the state’s poor disclosure practices. Now would be a good time for South Carolina to improve its transparency.

Balancing the Scales in New Jersey

May 14, 2015 by

Risky Business, a new report by New Jersey Policy Perspective, urges the state to improve subsidy accountability and protect taxpayers from bad economic development deals. Such reforms are needed now more than ever as spending on subsidies has sky-rocketed under the Christie administration: $5.1 billion has been awarded since 2010, four times the amount awarded in the previous ten years.

One of NJPP’s key recommendations is to change the “net benefits test,” which is intended to ensure that the new tax revenue generated by a subsidized project exceeds the cost of the subsidy. The current formula is lopsided: benefits are counted over 35 years and subsidy costs over 15 years, the latter being the length of time the company must meet its performance obligations to receive the maximum award. NJPP’s analysis of a $260 million tax break to Holtec International shows how this works. If Holtec keeps performing for 35 years, the state gets a net benefit of $156,000. Yet if it were to leave the state or significantly downsize after 15 years, the New Jersey would experience a loss of up to $105.7 million.

Image Source:  NJPP

Image Source: New Jersey Policy Perspective

Changing the nets benefits test to equally weigh costs and benefits might rein in some of New Jersey’s more extreme subsidy awards. But it still avoids the most important question: do the benefits of awarding a subsidy outweigh the benefit of investing the money in other proven economic development assets like education and infrastructure? Research has shown the answer to this question is almost always no.

Wisconsin’s Privatized Jobs Agency Criticized Again

May 13, 2015 by

Audit_Bureau_Logo

The evidence continues to mount against the notion that privatized economic development agencies are a responsible means to promote state  economic development  A new audit of the Wisconsin Economic Development Corporation (WEDC) echoes previous findings in outlining missteps at the agency. For example, the non-partisan Legislative Audit Bureau finds that:

  • “WEDC did not report clear, accurate, and complete information on the numbers of jobs created and retained as a result of its programs.”
  • Subsidy recipients were not required to submit critical informational about job creation outcomes.
  • Subsidies were awarded to a company for jobs that had been created prior to the awarding of a tax break agreement.
  • The agency has lax implementation on wage standards.
  • A provision to steer state economic development dollars toward small businesses and rural areas was quietly eliminated in July 2014.

The audit was so embarrassing that Gov. Scott Walker dropped a plan to expand the WEDC’s authority by merging the state’s housing finance agency into it.

Despite the poor track record of agencies such as WEDC, other states including Wisconsin’s neighbor Illinois, continue to consider privatizing their state commerce agencies. They should instead heed  the lessons of Wisconsin (and Indiana, Florida, and Ohio to name a few) and acknowledge that privatization is no policy panacea.

New Markets for Whom?

May 11, 2015 by

A recent series of articles from the Portland Press Herald (see Payday at the Mill and Shrewd Financiers Exploit Unsophisticated Maine Legislators) is bringing new attention to the complex system of state level New Markets Tax Credits (NMTC). Whit Richardson’s reporting exposes how a NMTC deal that was intended to upgrade the Great Northern Paper mill in East Millinocket, Maine was exploited by out-of-state investment firms using complex financial tools. In the end, $8 million was expended on debt payments and fees with no investment made in the mill itself. A one-day loan for $32 million artificially inflated the investment to a total of $40 million, allowing the investors to cash in on a $16 million tax credit (at 39% of the total investment) payable by the state of Maine over the next 7 years.

Image Source: Portland Press Herald

The Federal NMTC program states the intent of the program as “the creation of jobs and material improvement in the lives of residents of low-income communities.” Many states, like Maine, have in recent years created state level NMTC programs, driven largely by the lobbying efforts of a handful of investment firms that benefit from these deals. And as the Maine case strongly shows, it seems it is these very firms that are benefitting from the state NMTCs, not low-income communities or the businesses that serve them.

In the weeks since Richardson’s piece legislators and others have been pushing to attach greater accountability measures to the NMTC program.

Good Jobs First: Open for Business!

April 1, 2015 by

cash-flowIn our quest for revenue diversification, Good Jobs First is pleased to announce that we are Open for Business! Advertisers: don’t be misled by our wonky, ethical façade: we’re ready to go head-to-head with associations and public media bulking up on pay to play!

Naming Rights: Subsidy Tracker 3.0, the hottest spot on our website, is available for the right price! Reach tens of thousands of unique visitors a year: non-profit, for-profit, public sector, tons of journalists. A super nameplate for a technology company in the government IT space. Our Smart Growth for Working Families page is just waiting for the right transit-vehicle or construction/engineering sponsor—even a law firm. And our email list, with its incredible open rates: great visibility—no monkeying around!

YourLogo

Individual States/Megadeals: Is your company one of those pulling down nine or ten figures and hobbling a state’s budget for decades?  Show your pride and sponsor that state’s page at Accountable USA! We’re thinking of a certain aerospace company in a rainy place… A microchip company next door… A metals company near a famous hydro-power source… A medical lab close to orange groves… A failing retailer that left a very tall building… C’mon folks, you know who you are! We’ll also accept clever historical references (Con Agra: Nebraska is still available! Fidelity Investments: we have Massachusetts for you! Sorry, Rhode Island: 38 Studios struck out.) Who’s in your wallet?

State and Local Agencies: Your economic development agency can sponsor an Accountable USA page—featuring your “report card” accountability grades. Or perhaps you’d prefer to sponsor a pop-up that covers up that grade—let’s talk! We can’t promise anything of course, but who knows what our next report will find? Hey, maybe we’ll divide the country up so there can be six winners! Just think about it.

War Among States Special: Planning to relocate closer to the boss’s exurban home or his favorite golf course? Realize you can get paid for creating “new” jobs by just jumping a state line and merely changing people’s commuting patterns? Why not sponsor the losing state’s page in a show of tough love, to show you really do care about its future without you—even link to a prospectus about your abandoned facility to help the state market it! Show me America’s bread basket!

Association Specials: The American Legislative Exchange Council (ALEC) issued a paper on “The Unseen Costs of Tax Cronyism” even though some of its corporate leaders are with big subsidy recipients. Of course, we have no favorites in this association space: we’d love to hear from the governors (hey, it’s only been 22 years since they last debated the economic war among the states), state legislatures, counties, cities, development officials, development financeers, and their sponsors! Ah, the power of ideas!

Invisible Sponsorships: For site location consultants wishing to remain in the shadows, we’re offering fingerprint-free sponsorships of [recruitment records exempt from FOIA]. You can’t bash whatcha can’t see.

Happy April Fools’ Day!

DC Subsidy Transparency Leads to Campaign Finance Reform

March 27, 2015 by

On the heels of a terrific NPR-station exposé, the District of Columbia has become the first large U.S. jurisdiction to enact campaign finance reform thanks to job subsidies becoming transparent.

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In 2011, the D.C Fiscal Policy Institute convinced the DC Council to require an annual Unified Economic Development Budget (UEDB, a key Good Jobs First reform). Better than most UEDB’s that report only program costs, DC’s UEDB was how DC began online recipient disclosure for all subsidy transactions worth more than $75,000 in any fiscal year. It was a landmark moment in economic development transparency: District subsidies are now posted online in a single place for all to see.

When the data came online in 2012, WAMU reporters Julie Patel and Patrick Madden began investigating rumors that big campaign contributors were also getting big subsidies. Their 2013 series, “Deals for Developers, Cash for Campaigns,” mashed up campaign finance reports with subsidy deals. The results shocked many: over a decade, 10 big developers had given more than $2.5 million in campaign contributions to political candidates and then received nearly a third of the District’s $1.7 billion in subsidies examined. Despite strict campaign finance laws capping such donations, developers skirted the law by forming multiple LLCs and donating to candidates from each of them—the “LLC loophole.” Madden and Patel built a timeline that found such campaign donations were also timed noticeably close to subsidy award, suggesting an influence connection.

Timing of Campaign Contributions & Awarding of Subsidies (credit: WAMU)

 

So thanks to economic development transparency, the District learned it had a massive campaign finance loophole. Council members were outraged and eventually passed a bill in 2013 to close the LLC loophole. The new law went into effect in January 2015 and LLC bundling is no longer legal. Before the loophole took effect, numerous developers rushed to make significant contributions. Unfortunately, political consultants are already suggesting the law be defeated by trusted campaign staffers to run Political Action Committees (or PACs) which can take unlimited campaign contributions after the Citizens United decision.

While subsidy transparency can reveal influence and loopholes and spur officials to act, ethics in government need more than local campaign finance reforms. Mashing up subsidy disclosure data and campaign finance records can change the public discourse and allow citizens to demand greater ethics from their elected representatives.

Chicago Mayor’s Proposed Tax-Free Zones No Policy Panacea

March 26, 2015 by

As early voting begins in the Chicago mayoral runoff election, incumbent Rahm Emanuel has proposed tax-free zones allowing businesses exemptions on property, income, and sales taxes in impoverished neighborhoods. The idea is neither new nor promising. In fact, Illinois already has six Enterprise Zones in Chicago and they have very mixed track records.

For example, Pepsi Cola General Bottlers, Inc. received Enterprise Zone subsidies, but automated its business processes and shed 14 positions after applying for the subsidies. The Sherwin Williams Company’s Chicago facility had 12 fewer jobs than when it applied for Enterprise Zone subsidies. And although the Solo Cup Operating Corporation has gained 24 jobs since applying, according to public documents, the company did not make use of Enterprise Zone State Utility Tax Exemptions for which it was eligible. In other words, they hired without needing subsidies.

Research on the effectiveness of enterprise zones makes it clear these anecdotes are not atypical. As the Minnesota State Legislature found in a review, “the economic effects of enterprise zones remain unclear. Most studies find no significant increase in employment, while a few do.” Moreover, it concluded that enterprise zones are most likely to be successful in already thriving areas, not blighted ones. Most importantly, the review suggested that subsidies should never let the quality of public services drop as it would easily wipe any positive effects of the policy. However, many of Chicago’s poorest neighborhoods have been made less desirable by Emanuel’s closure of 50 public schools. Emanuel has proposed shifting dollars from other subsidies, including the heavily criticized TIF program, to pay for his rendition of enterprise zones.

For the average company, state and local taxes amount to less than two percent of their overall cost structure. The business basics—the 98 percent of corporate cost structures that are not state and local taxes—almost always dictate why companies expand or relocate where they do, factors such as access to a qualified workforce, proximity to suppliers and customers, energy costs, availability of high-quality infrastructure and logistics.

Tax Breaks Don't Move the Needle

Tax Breaks Don’t Move the Needle

But while tax breaks can do little to move the needle on corporate location decisions, the opportunity costs can be enormous. Indeed, as we documented last year, subsidies in Chicago appear to have significantly harmed public budgets. Since 1985, some $5.5 billion in property tax revenues have been diverted into TIF accounts and one out of every ten property tax dollars now ends up in TIF districts instead of funding schools and other public goods that benefit all of Chicago’s employers by investing in the labor force and infrastructure as well as keeping up with the city’s bills.

It’s also important to consider that enterprise zones may do little to target job creation to communities of need. Without adequate community benefits like local hiring policies included in enterprise zone policies, companies may not hire from within a neighborhood hungry for jobs enabling inclusive revitalization and a pathway to the middle class.

Uncle Sam’s Favorite Corporations

March 17, 2015 by

UncleSam_WebTeaserFederal “Corporate Welfare” Database Now Online
Study: Large Corporations Dominate Federal Subsidy Awards; Banks, Foreign-Owned Energy Firms and Federal Contractors Among the Biggest Recipients

Washington, DC, March 17, 2015 — Two-thirds of the $68 billion in business grants and special tax credits awarded by the federal government over the past 15 years have gone to large corporations. During the same period, federal agencies have given the private sector hundreds of billions of dollars in loans, loan guarantees and bailout assistance, with the largest share going to major U.S. and foreign banks.

These are key findings of Uncle Sam’s Favorite Corporations, a study with accompanying database released today by Good Jobs First, a non-profit and non-partisan research center on economic development accountability based in Washington, DC. They derive from the first comprehensive compilation of company-specific federal subsidy data. The study and database are available at www.goodjobsfirst.org.

The database, which collects more than 160,000 awards from 137 programs, expands Good Jobs First’s Subsidy Tracker, which since 2010 has posted economic development data from states and localities. The federal data was enhanced with Good Jobs First’s proprietary subsidiary-parent matching system, enabling users to see individual entries linked to more than 1,800 corporate parents, along with each parent’s total subsidies.

“For more than 20 years, so-called corporate welfare has been debated widely with little awareness of which companies were receiving most of the federal assistance,” said Good Jobs First Executive Director Greg LeRoy.

“We now see that big business dominates federal subsidy spending the way it does state and local programs,” said Philip Mattera, principal author of the study and creator of Subsidy Tracker. “Our hope is that the new Subsidy Tracker will serve as a resource in the ongoing debates over federal assistance to business,” Mattera added.

Other key findings:

  • Six parent companies have received $1 billion or more in federal grants and allocated tax credits (those awarded to specific companies) since 2000; 21 have received $500 million or more; and 98 have received $100 million or more. Just 582 large companies account for 67 percent of the $68 billion total.
  • The largest recipient of grants and allocated tax credits is the Spanish energy company Iberdrola, which acquired them by investing heavily in U.S. power generation facilities, including wind farms that have made use of a renewable energy provision of the 2009 Recovery Act. Iberdrola’s subsidy total is $2.2 billion. Other top grant/allocated tax credit recipients include NextEra Energy (parent of Florida Power & Light), NRG Energy, Southern Company, Summit Power and SCS Energy, each with more than $1 billion. The results exclude the numerous corporate tax breaks that cannot be attributed to individual companies.
  • Mainly driven by the massive programs launched by the Federal Reserve in 2008 to buy up toxic securities and provide liquidity in the wake of the financial meltdown, the total face value of loans, loan guarantees and bailout assistance run into the trillions of dollars. These include numerous short-term rollover loans, so the actual amounts outstanding at any given time, which are not reported, were lower but likely amounted to hundreds of billions of dollars. Since most of these loans were repaid, and in some cases the government made a profit on the lending, we tally the loan and bailout amounts separately from grants and allocated tax credits.
  • The biggest aggregate bailout recipient is Bank of America, whose gross borrowing (excluding repayments) is just under $3.5 trillion (including the amounts for its Merrill Lynch and Countrywide Financial acquisitions). Three other banks are in the trillion-dollar club: Citigroup ($2.6 trillion), Morgan Stanley ($2.1 trillion) and JPMorgan Chase ($1.3 trillion, including Bear Stearns and Washington Mutual). A dozen U.S. and foreign banks account for 78 percent of total face value of loans, loan guarantees and bailout assistance.
  • A small number of companies have obtained large subsidies at all levels of government. Eleven parent companies among the 50 largest recipients of federal grants and allocated tax credits are also among the top 50 recipients of state and local subsidies. Six of the 50 largest recipients of federal loans, loan guarantees and bailout assistance are also on that state/local list. Five companies appear on both federal lists and the state/local list: Boeing, Ford Motor, General Electric, General Motors and JPMorgan Chase.
  • Foreign direct investment accounts for a substantial portion of subsidies. Ten of the 50 parent companies receiving the most in federal grants and allocated tax credits are foreign-based; most of their subsidies were linked to their energy facilities in the United States.
  • The Federal Reserve aided a large number of foreign companies in its efforts to stabilize banks that had acquired toxic securities originating mainly in the United States. Thanks largely to those programs, 27 of the 50 biggest recipients of federal loans, loan guarantees and bailout assistance were foreign banks and other financial companies, including Barclays with $943 billion, Royal Bank of Scotland with $652 billion and Credit Suisse with $532 billion. In all cases these amounts involve rollover loans and exclude repayments.
  • A significant share of companies that sell goods and services to the U.S. government also get subsidized by it. Of the 100 largest for-profit federal contractors in FY2014 (excluding joint ventures), 49 have received federal grants or allocated tax credits and 30 have received loans, loan guarantees or bailout assistance. Two dozen have received both forms of assistance. The federal contractor with the most grants and allocated tax credits is General Electric, with $836 million, mostly from the Energy and Defense Departments; the one with the most loans and loan guarantees is Boeing, with $64 billion in assistance from the Export-Import Bank.
  • There is also a link to the current debate over so-called tax “inversions.” Federal subsidies have gone to several companies that have reincorporated abroad to avoid U.S. taxes. For example, power equipment producer Eaton (reincorporated in Ireland but actually based in Ohio) has received $32 million in grants and allocated tax credits as well as $7 million in loans and loan guarantees from the Export-Import Bank and other agencies. Oilfield services company Ensco (reincorporated in Britain but really based in Texas) has received $1 billion in support from the Export-Import Bank.
  • Finally, some highly subsidized banks have been involved in cases of misconduct. In the years since receiving their bailouts, several at the top of the recipient list for loans, loan guarantees and bailout assistance have paid hundreds of millions, or billions of dollars to U.S. and European regulators to settle allegations such as investor deception, interest rate manipulation, foreign exchange market manipulation, facilitation of tax evasion by clients, and sanctions violations.

Astonishing Failure Rate Found in Major North Carolina Subsidy Program

February 19, 2015 by

Every time a company is approved by the North Carolina Commerce Department for a Job Development Investment GrantPICKING LOSERS Cover (JDIG), there is 60 percent of chance that the company will fail short on its jobs, investment or wage promises. This astonishing statistic is contained in a new report by the North Carolina Justice Center that evaluates performance of this key subsidy program in the Tarheel State.  The study comes at a time when the North Carolina legislature is about to debate Gov. Pat McCrory’s request to expand the faulty program.

JDIG provides performance-based grants to companies that create certain number of jobs in the state.  If a company fails to deliver on the promised jobs within five to seven years, the subsidy is cancelled and in some situations money is recouped through clawback provisions (for example, the 2004 failed Dell deal). The Justice Center found that 62 out of 102 projects approved for JDIG grants between 2002 (the year the program was created) and 2013 did not deliver on their jobs, investment or wage obligations and thus were canceled. This 60 percent rate would give you an F in school!

The report also found that out of only nine percent of JDIG grants that went to rural counties, 77 percent were canceled (90 percent of JDIG projects went to urban counties). However, “the most troubling trend in the state’s targeting mismatch,” as Allan Freyer, the author of the study, puts it, is the fact that 60 percent of all approved grants went to three counties with the fastest job growth: Durham, Wake and Mecklenburg. Freyer adds: “the state is investing the majority of its incentives resources in the counties that need it least.”

In recent months Gov. McCrory has been arguing that money in the JDIG program has dried up and is asking the legislature to allocate more resources.  The report, however, shows that JDIG money did not suddenly run out. Rather, more than a half of the money earmarked for the program was granted to one “megadeal” for MetLife. In 2013, the insurance company was awarded $110 million over ten years, or $11 million a year. The yearly payments to MetLife constitute half of the money in the program, leaving only $11.5 million for all other projects.

Instead of expanding the JDIG program as requested by the Governor, the report urges lawmakers to strengthen performance measures and evaluation processes. It also recommends focusing on companies in growing industries and taking steps to bring about a more equal distribution of grants between urban and rural counties.


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