$42M Taxpayer Incentive Tab for ZF Group

April 26, 2011

Investigative Reports

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The NerveSpeaking last July at the company’s corporate headquarters in Friedrichshafen, Germany, then-Gov. Mark Sanford called it the “single largest infusion of jobs in the history of Laurens County.”

Sanford said the announcement by automotive supplier ZF Group to create about 900 jobs and invest approximately $350 million in a Laurens County plant represented a “telling dividend from our continued efforts to better the business climate in South Carolina.”

But what Sanford and other state and local officials never publicly disclosed was that the project likely is the largest taxpayer giveaway in recent years for an industrial project in the county. It also was among the biggest incentives deals in the state last year.

The project comes on the heels of another announced industrial project that was supposed to have been located in the same county industrial park. But it never materialized.

A Laurens County official told The Nerve last week that incentives were offered in the failed project, though he said the county didn’t lose any money because the proposed incentives were tied to job-creation and investment targets.

In comparison with other announced industrial projects in the state last year, the ZF Group project ranked fifth in job creation behind the First Quality Tissue manufacturing plant under construction in Anderson County (1,000 jobs), and third in capital investment behind the proposed AQT Solar manufacturing plant in Richland County ($460 million), according to the S.C. Department of Commerce’s year-end activity report.

The taxpayer cost of the ZF Group project in the first year alone is projected at nearly $8 million, according to a cost-benefit analysis that was included with a state incentives agreement provided by the S.C. Department of Commerce to The Nerve under the S.C. Freedom of Information Act.

Over a 10-year period, the taxpayer cost is projected at about $42.3 million, according to the analysis, prepared by the S.C. Coordinating Council for Economic Development, made up of the heads of state economic development agencies. Commerce, which is a council member, provides staff support for the group.

The taxpayer cost of the project over the 10-year period includes, according to the cost-benefit analysis:

  • $20.5 million in job tax credits, which are tied to the number of jobs created and the location of the plant;
  • $10.5 million in job development credits, which are refunds of employee state income tax withholdings;
  • A $3.5 million state grant to Laurens County for site work, wastewater infrastructure and road improvements;
  • About $2.8 million in increased state education costs;
  • Nearly $2.7 million for “special schools,” presumably for worker training through the S.C. Technical College System’s “readySC” program; and
  • $2.2 million in increased local education costs.

Other Incentives

And those costs don’t include millions of dollars ZF Group likely will save in county property taxes through a fee-in-lieu-of-taxes (FILOT) agreement. Laurens County Attorney Sandy Cruickshanks toldThe Nerve last week that under the agreement, the company’s property would be assessed at 4 percent for at least 30 years rather than at the manufacturing rate of 10.5 percent.

On top of that, the company, if it meets its target job-creation and investment goals, will be eligible for “special source revenue credits,” or rebates equaling 65 percent of its FILOT payments, for up to 10 years, Cruickshanks said.

In its first year, the company would pay an estimated $457,000 in property taxes on an 800,000-square-foot building, and machinery and equipment, according to a state grant information sheet.

As a comparison, at the 10.5 percent assessment rate and a county millage rate of 297.6 mills, ZF Group would owe nearly $11 million annually in property taxes on its minimum required investment of $347.5 million, according to an analysis by The Nerve.

Cruickshanks said he would provide The Nerve with a copy of the county incentives agreement, though it was not made available by publication of this story.

Under the county incentives agreement, ZF Group has up to 10 years to create at least 897 jobs and invest at least $347 million, according to Cruickshanks. If it doesn’t hit those thresholds, it loses its special source revenue credits, he said.

The agreement for the $3.5 million state award, which is made up of a $3.4 million “set-aside” grant and a $100,000 rural infrastructure grant, requires the job-creation and investment thresholds to be met within an eight-year period.

Should the company fall short of meeting its targets, it would have to pay back a percentage of the state grant based on how close it came to meeting the thresholds. But there are no “clawback,” or penalty, provisions that would require ZF Group to repay the other state incentives should it fail to live up to its end of the deal.

Unexplained Numbers

ZF Group will pay its 897 workers an average hourly wage of $19.11 or an average annual salary of $38,216, according to the cost-benefit analysis prepared by the S.C. Coordinating Council for Economic Development, which was included with the state incentives agreement.

The analysis projects an additional 1,418 “indirect” jobs for a total “employment impact” of 2,315, though it doesn’t specify what makes up the “indirect” jobs. It also projects an overall “net benefit” of $1 billion over a 10-year period, or a benefit-to-cost ratio of 24 to 1, though much of that figure is made up of the projected payroll of the unspecified “indirect” jobs.

The Department of Commerce blacked out the projected values of the building, machinery and equipment. Agency officials did not respond to The Nerve’s inquiry last week seeking an explanation for the redaction.

But after subtracting other listed values in the “income benefits” section of the analysis, the total capital investment would be $171.3 million – slightly less than half of the announced investment level.

The agreement also includes one mostly blank page with a handwritten note indicating that information on the page was withheld under an exemption in the S.C. Freedom of Information Act for “confidential proprietary” information, though no further explanation was given.

Repeat of History?

ZF Group plans to locate its Laurens County plant in the Owings Industrial Park off Interstate 385 near Gray Court. Laurens County Administrator Ernest Segars said it would be the park’s first tenant.

The plant will produce fuel-efficient automatic transmissions for the passenger car and light truck market, according to a Department of Commerce press release. A ZF spokesman was quoted in an Upstate newspaper at the time of the announcement as saying that the company hoped to land BMW as a customer. The same story also said a ZF subsidiary in Duncan has supplied BMW since 1994.

According to the company’s website (www.zf.com), ZF operates 117 plants in 26 countries with a workforce of about 70,000 employees.

“I’ve been doing this for a long time, and I’m reasonably confident they will do what they said they will do,” Segars told The Nerve last week, noting that the plant is expected to be in operation in about a year.

Segars said the incentives offered to ZF Group are “just part of the process.” Asked if he believes the company would have chosen Laurens County without the incentives, Segars replied, “I doubt very seriously they would have.”

Perhaps, but dangling out the incentives carrot doesn’t guarantee success – at least that’s what happened with another proposed industrial project in the county.

In October 2008, Brazilian-based Fitesa, a fabric manufacturer, announced that it would invest $120 million and create at least 80 new jobs with a new plant in the same industrial park that the ZF plant will occupy.

Sanford and other state and county officials attended the announcement at the Laurens County Courthouse. A large banner was dropped at the courthouse that read, “Laurens County Welcomes Fitesa.”

But “Project Goldbug,” as it was dubbed, never got off the ground.

“At the time they announced, the economy worldwide had trouble,” Segars told The Nerve last week.

Segars said incentives were offered in the failed project, though he couldn’t recall specifics. He said the county was “not out anything,” noting that the incentives were based on Fitesa hitting job-creation and investment targets.

Regardless, Laurens County officials apparently are about to roll out the incentives red carpet again for yet another company.

Last week, Gov. Nikki Haley along with Commerce and county officials announced that Flame Spray S.p.A, an Italian international group and maker of thermal spray coatings mainly for industrial gas turbine and aircraft components, plans to locate a $9.2 million plant in an existing building in the Woodfield Industrial Park. The project is expected to bring at least 50 new jobs over the next five years, officials said.

Cruickshanks, the county attorney, declined last week to discuss specifics of the county incentives agreement for that project, saying it would be made available publicly after a scheduled County Council meeting tonight.

“Flame Spray’s job-creating, multi-million dollar investment in Laurens County is exciting news,” Haley said in a prepared statement last week. “It demonstrates how committed we are to bringing jobs to rural areas in addition to big cities, and it’s just the beginning of what we’re going to see when we work to reduce taxes, cut red tape and preserve our right-to-work status.”

Added Commerce Secretary Bobby Hitt, the former chief spokesman for BMW’s operations in South Carolina: “Flame Spray S.p.A’s decision to locate its new North American operations in Laurens County is another sign that our state is doing the right things to compete in the global market place. We are committed to building on these efforts.”

Whether they want to be or not, taxpayers likely also will be committed.

Reach Brundrett at (803) 254-4411 or rick@thenerve.org