Part 2: The Boeing Deal: Big Bill To Taxpayers

January 11, 2010

Investigative Reports

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The NerveSouth Carolina taxpayers are in for severe sticker shock with the deal to bring a new Boeing aircraft assembly plant to North Charleston.

What S.C. lawmakers didn’t reveal in October when they rushed through an economic incentives package for Boeing was that it will cost state taxpayers tens of millions of dollars – and possibly several hundred million – more than what was said in the official record.

An investigation by The Nerve found that:

  • $170 million in economic development bonds that lawmakers unanimously authorized – the largest known part of the incentives package – will be paid back entirely by taxpayers.
  • According to an internal Treasurer’s Office analysis obtained by The Nerve, the total debt cost for the bonds, including interest, could run more than $300 million over a 14-year period. Conservatively, the average total cost, including interest, could run about $250 million, based on bond sales in recent years for two other large industrial projects, including one at the Boeing site.
  • Lawmakers didn’t have to comply with any constitutional debt ceilings when approving the bonds. And the state’s economic development bond debt payments have skyrocketed in recent years.
  • Under the Oct. 28 legislation, Boeing faces no liability for the bonds if it doesn’t create 3,800 jobs and invest $750 million over seven years. The Department of Revenue can assess unspecified taxes on other incentives should Boeing not live up to its end of the deal, but there’s no requirement to do so under the legislation.
  • Besides state incentives, Boeing likely will receive millions of dollars in county property tax breaks for up to 30 years.
  • Taxpayers will never know specific dollar amounts of much of the incentives package because certain breaks, including sales tax exemptions, are considered private tax records under state law.
  • Boeing can quickly take advantage of certain exemptions, though under the legislation, the company can wait years before notifying the state whether it has complied with the incentives agreement.

South Carolina officials have publicly described the Boeing deal as the single largest announced job creation and investment project in state history. As far as incentives are concerned, it will rank second only to what the state has provided over the years to BMW, according to state Department of Commerce documents.

“The state has put forward an extremely aggressive incentive package,” according to a Commerce document on the Boeing deal, provided to The Nerve by the Governor’s Office under the S.C. Freedom of Information Act.

The Governor’s Office declined an FOIA request by The Nerve for specifics on the incentives agreement or a cost-benefit analysis of the project that reportedly was done by the state Board of Economic Advisors.

It did provide The Nerve with a Commerce document that said Boeing has “committed to invest” more than $970 million – $220 million more than what has been revealed publicly – and create “more than 4,000 new jobs” – about 200 more than what was announced. But that document, which was background material for the Nov. 20 groundbreaking at the Boeing site, didn’t offer specifics on the additional investment.

Besides the Governor’s Office, state lawmakers and state agency officials also denied FOIA requests by The Nerve for specifics on the Boeing incentives agreement. They included Senate President Pro Tempore Glenn McConnell, Senate Finance Chairman Hugh Leatherman, House Speaker Bobby Harrell and other legislative leaders involved in the Boeing deal, as well as officials from the S.C. Department of Commerce, Treasurer’s Office, Budget and Control Board, and Charleston County.

Most of the lawmakers wouldn’t even answer general questions about the BEA analysis, which McConnell and Leatherman publicly said was provided to the General Assembly before their Oct. 28 vote.

They and state agency officials contend that under South Carolina law, they don’t have to reveal any specifics until an incentives deal has been finalized. That process can take up to a year, so taxpayers likely will be in the dark for a long time.

Despite the large, long-term costs, the Boeing incentives package is a “hell of a good deal” for taxpayers, said state Sen. Paul Campbell, R-Berkeley, who was involved in the negotiations.

Campbell told The Nerve he never saw the BEA analysis. But the former Alcoa executive said it didn’t matter to him anyway.

“I did a back-of-the-envelope calculation on the deal,” he said. “I’m looking at an approximate 15 percent return in five years. … If I get a 15-percent return, it makes great business sense.”

 

No Debt Limits

The largest known chunk of the incentives package – $170 million in state economic development bonds – was approved under a section of the S.C. Constitution that allows lawmakers to disregard debt ceilings.

“This is the most appropriate way to issue debt for a targeted purpose like specific economic development projects,” according to the internal Treasurer’s Office analysis obtained by The Nerve.

(The Treasurer’s Office denied an FOIA request for any analyses of the Boeing deal. The Nerve obtained the internal analysis independently of the request.)

The S.C. Constitution requires a two-thirds vote of each chamber to disregard debt ceilings under an amendment adopted in 1976. The Oct. 28 legislation passed unanimously in both chambers.

Under the constitution, general obligation bonds, including economic development bonds, are secured “in whole or in part by a pledge of the full faith, credit and taxing power of the state.” Practically speaking, taxpayers are responsible for paying back economic development bonds, including the bonds approved for Boeing, according to attorneys and others familiar with the process but not connected to the Boeing deal.

And taxpayers will be opening their wallets for years to come to finance the Boeing deal, codenamed “Project Gemini.” According to the internal Treasurer’s Office analysis:

  • Based on average annual increases, the deal could result in about $330 million in additional debt over 14 years, a graph with the analysis shows, though the document provides no details on how the figures were calculated.
  • That would equate to about $86,842 in bond debt for each of 3,800 promised workers.
  • For the first three years of the repayment period, taxpayers would pay an estimated $17 million in bond payments.
  • The projected $17 million would put the state over the debt limit under a section of the S.C. Constitution dealing with economic development bonds. The current annual debt limitation under the section is about $28 million, with about $21 million owed yearly on all economic development bonds.
  • The state constitution limits the amount of annual general obligation bond debt – excluding state highway and certain other types of bonds – to 5 percent of state general revenues from the previous fiscal year.

 

The Treasurer’s Office analysis said the Boeing bond sale could not be authorized under another section of the constitution that limits annual economic development bond payments to one-half of 1 percent of general fund revenues from the previous fiscal year.

That’s because debt ceilings under that section were nearly reached with bond sales for  the construction of a Vought Aircraft Industries plant – now owned by Boeing – in North Charleston, and a BMW expansion project in the Upstate, according to the analysis.

The analysis contended that although debt ceilings were disregarded in approving the Boeing bonds, it would not put the state over the general 5-percent debt limit, and that total debt payments would gradually decrease over the 14-year repayment period.

But that’s “assuming no additional bonds are issued,” the analysis noted.

The legislation passed Oct. 28 makes no mention of any liability on Boeing’s part for the bonds. But state taxpayers are on the hook for them, even if there aren’t enough general fund revenues to cover the payments.

Under the S.C. Constitution, if the General Assembly cannot make “punctual payment of the principal of and interest on” the bonds, the state comptroller general and treasurer have to levy and collect property taxes “without limit as to rate or amount upon all taxable property in the state sufficient to meet the payment of the principal and interest of such general obligation debt due then.”

The bottom line is that S.C. taxpayers, not Boeing, will owe the $170 million, plus at least tens millions of dollars in interest, for the bonds.

 

Vought and BMW: A $332 Million Tab

Although the actual bond costs for the Boeing project aren’t yet known, South Carolinians already are slowly paying off hundreds of millions of dollars owed on bonds for two other large projects, one of which is owned by Boeing.

The Vought and BMW projects cited in the Treasurer Office’s analysis will cost taxpayers a total of $332 million, with interest equaling nearly 50 percent of the bond principal, according to The Nerve’s analysis of bond sale documents for those projects.

Vought was a Boeing supplier of rear fuselage sections that opened in 2006 and was bought last summer by Boeing. Its plant is located behind Boeing’s new assembly plant under construction at Charleston International Airport.

The BMW project primarily involved building a new I-85 interchange to accommodate the existing BMW plant in Spartanburg County, a graduate automotive engineering center for Clemson University in Greenville County, and two other research/testing facilities for BMW, plus buying 55 acres for future use by BMW.

The Nerve’s analysis of bond sale documents for the two projects found that:

  • The total bond costs for the two projects are eight times more than all of the state’s economic bond debt that had been outstanding since fiscal year 2005. Before the Vought and BMW projects, the total outstanding debt for all economic development bonds from fiscal 2005 through fiscal 2029 would have been $42.4 million.
  • Taxpayers will pay more than $57 million in interest over 15 years on $128.5 million in bonds sold in 2005 for the Vought plant. About $98 million, or 75 percent of the total, was authorized for building construction.
  • Put another way, taxpayers were committed to paying back $465,000 for each of the initial 400 promised jobs with the Vought project.
  • For the BMW expansion project, taxpayers will owe more than $52 million in interest over 25 years on $94 million in bonds sold. About $58 million, or slightly more than 60 percent, of the total was authorized for building construction.
  • The total bond debt for the project works out to $365,000 in debt for each of the initial 400 promised jobs.
  • The bond sales for BMW and Vought were authorized under a 2002 law, which was amended in 2004, that raised the state’s general obligation bond debt ceiling from 5 percent to 5.5 percent of the previous year’s general fund revenues to fund large-scale economic development projects.
  • Based on the average payment schedules for the BMW and Vought projects, S.C. taxpayers would owe $83 million in interest on $170 million in bonds for construction of the newest Boeing plant, for a total projected cost of $253 million.

 

That would equate to $66,578 in bond debt for each of the initial 3,800 promised jobs.

To put it in some perspective, the total projected bond payments for Boeing could eliminate most corporate income taxes collected statewide for one year, and could more than cover all of the annual motor vehicle taxes paid in South Carolina.

The future bond payments could be higher, depending on interest rates, which are largely determined by the state’s credit rating. South Carolina currently has two triple-A ratings – considered the best – and a double-A rating from the nation’s three main credit rating agencies, according to the Treasurer’s Office.

But although those agencies maintained the state’s triple-A rating for the Vought and BMW projects, they expressed some concern then about the state’s long-term ability to meet payments on $2.4 billion in all outstanding general obligation bonds, including bonds for economic development projects

Said Moody’s Investors Services in a 2005 report: “The negative outlook reflects a trend of weakened revenues resulting from a slowing in the state’s economy. Despite year-over-year spending cuts and use of non-recurring revenue sources including reserves and federal relief funding, state finances have been strained in recent years.”

Sound familiar?

With the current recession that officially started in December 2007, S.C.lawmakers have been forced to slash well more than $1 billion from the general fund budget. Last month, the state announced a record-high unemployment rate of 12.3 percent – less than two months after lawmakers approved the Boeing incentives deal.

 

Incentive Secrecy

Taxpayers will never know the actual dollar amounts of certain claimed incentives in the Boeing deal, such as job tax and development credits and sales tax exemptions. That’s because those incentives are considered private tax records under state law.

Citing that law, the state Department of Revenue denied a request by The Nerve for an agency database of the amount of tax incentives claimed by every company over the past 10 years.

The Boeing legislation allows DOR to enter into an agreement with the company “establishing the allocation and apportionment of the taxpayer’s income for a period not to exceed ten years,” though it gives no details.

No specific numbers were provided during a 16-minute Senate Finance Committee meeting the day before the legislation was approved, though it was noted during the presentation that Boeing would be eligible for a “more manufacturer-friendly” income tax break.

Besides reduced corporate income taxes, the legislation also gives Boeing an unspecified amount of sales and use tax exemptions for:

  • All construction materials
  • Computers and related equipment
  • Fuel for test flights and transporting assembled aircraft from one manufacturing plant to another

The company also reportedly will get state assistance for job training, though no specific cost figures have been revealed.

Boeing is eligible receive a $2,500-per-hired-employee corporate income tax credit because the plant site is located at Charleston International Airport, which is designated as a multi-county industrial park. That could mean a total tax break of $9.5 million to the company if 3,800 jobs are created.

Although most of the corporate income and sales tax exemptions already exist under state law, the legislation allows Boeing to take advantage of them as soon as possible. But the legislation does not require Boeing to regularly update DOR about the number of created jobs or investment at the plant.

In fact, for the most part, nothing in the legislation prevents Boeing from waiting until the end of the seven-year period to notify DOR about whether it created 3,800 jobs and invested $750 million.

The deal is even sweeter for sales tax exemptions on computer equipment. If Boeing complies with the agreement in five years, it can claim the exemption on all computer equipment purchases in perpetuity for the site.

DOR can tax Boeing if it doesn’t live up to its end of the deal for income and sales tax breaks, which Sen. Leatherman at the Oct. 27 Senate Finance Committee hearing referred to as a “clawback provision.” But under the language of the legislation, the department isn’t required to assess any tax.

When questioned by The Nerve, Department of Revenue spokeswoman Adrienne Fairwell could not say whether any companies have been assessed taxes over the past 10 years for violating incentive agreements.

“DOR does not supply anecdotal information,” she said in a written response. “If the Department does not have figures, there are none offered.”

The Department of Revenue isn’t the only agency that is secretive about specifics on incentives. The S.C. Department of Commerce denied separate FOIA requests by The Nerve to obtain a list of incentives given to all industrial projects of at least $1 million since 1984, and a database of all incentives given to every company in the state over the past 10 years.

In its written response, Commerce contended it didn’t have to “create a record where the record does not otherwise exist,” citing a 1996 S.C. Attorney General’s opinion.

Commerce did provide recent annual reports of the state Coordinating Council for Economic Development, which is made up of the heads of 10 economic development agencies, including Commerce.

The Council approves certain discretionary incentives to companies, such as infrastructure grants and job development credits, which are refunds of a percentage of a company’s employee state income tax payments. But the reports give specific numbers only on infrastructure grants awarded through the counties where the companies are located.

Commerce spokeswoman Kara Borie in a written response to The Nerve said a company never receives a discretionary credit “until they provide sufficient payroll and property tax documentation to the Coordinating Council to verify that the minimum investment and job numbers have been met.”

Borie said after the company begins claiming the credits, the DOR audits it to “confirm that they remain in compliance.” She also said local units of government, which receive the infrastructure grants, also monitor the companies; if they are out of compliance, the Coordinating Council will “initiate a claw back if necessary.”

But Borie didn’t respond to a question by The Nerve about whether the Council has ever held a company accountable for living up to its end of an incentives agreement.

 

County Goodie Bag

State officials aren’t the only ones being tight-lipped about incentives deals for Boeing.

Charleston County Council members and officials have declined to release specific cost figures on the county incentives package. The county Attorney’s Office denied an FOIA request by The Nerve for details on the agreement.

The breaks primarily will include replacing Boeing’s property taxes with a flat negotiated fee, known as a fee-in-lieu-of-taxes (FILOT); and allowing the sale of special revenue bonds for infrastructure, which would be repaid with FILOT funds.

On Friday, Boeing disclosed that under a proposed incentives deal with the county, the North Charleston site would be assessed at the same rate as an owner-occupied home – 4 percent. Typically, industrial property is assessed at 10.5 percent.

Boeing did not reveal figures on how much it would save under the proposal.

Boeing last summer bought the Vought plant, which builds the rear fuselage section of the 787 at the site, and last month completed purchasing a Global Aeronautica assembly plant next door, which had been a partnership between Boeing and Italian aircraft maker Alenia Aeronautica.

Boeing possibly will assume substantial incentives from Charleston County for the existing Vought/Global Aeronautica complex, though county officials won’t discuss it.  County economic development director Steve Dykes did not return repeated calls by The Nerve.

According to documents provided to The Nerve by the county Attorney’s Office under the Freedom of Information Act, the Vought/Global Aeronautica deal included:

  • A FILOT agreement that fixes millage rates for the two plants at 2002 levels, and assesses the property for 30 years at 4 percent – the state’s owner-occupied home assessment rate – instead of at the standard 10.5-percent rate for industrial property. In a written summary of the project, county officials estimated the county would collect a total of about $60 million in FILOT fees over 30 years – about $2 million a year – with about $12.6 million of it going to the county.
  • A separate property tax agreement with Boeing that exempts personal property taxes for 10 years on two large cargo planes – housed in a third existing building at the site – that transport the assembled 787 fuselages for final assembly at a Boeing plant in Washington state.
  • A special source revenue credit equal to 8 percent of the 30-year FILOT revenues, further discounting local taxes by about $5.5 million for the first 10 years, with annual payments of $548,481 rebated back to the company.
  • The county designating the aircraft plant and site as a multi-county industrial park, making the companies eligible for state corporate income tax credits of $2,500 for each new job versus a $1,500-per-new-worker credit.
  • The county acting as a conduit to receive a $5 million set-aside grant from the Department of Commerce for project site work.

The Nerve also was provided county treasurer records on the FILOT agreements for the two projects, which show that:

  • Since opening in 2006, Vought on average has been billed slightly more than $1 million per year in FILOT payments for its plant.
  • Vought received a refund of nearly $150,000 in 2008 after a recalculation was done.
  • For the last three years, Global Aeronautica has been billed an average of about $560,000 for its building, receiving a $2,000 refund in 2008. It was unclear why its refund was far smaller than Vought’s.

If the 2007 and 2008 Charleston County millage rates for the property were applied to the negotiated fees, the assessed valuations would range from about $1.5 million to $4 million – far less than what the property, machinery and equipment are currently worth on the market.

For example, Global Aeronautica’s valuation in 2009 for its building, machinery, furniture and fixtures, was $108 million, according to the Department of Revenue, which certifies FILOT bills.

Based on a standard assessment rate of 10.5 percent for industrial property, Global’s site would be assessed at about $11 million for tax purposes. That would normally yield a property tax bill of at least $3 million – more than five times what Global is paying on average under its FILOT agreement.

Boeing could assume all of those tax breaks as well as the likely millions in county incentives it will receive with its new assembly plant, though county officials aren’t saying for now.

In a written summary that was part of the FILOT documents, county officials estimated, citing a multiplier formula, that the Vought project would create a total of about 1,200 new jobs and generate $49.2 million in annual payroll. The summary, however, didn’t give any specifics on the basis of the projection, or on the flip side, discuss any potential costs to area businesses for the incentives.

Michael Sponhour, spokesman for the state Budget and Control Board, told The Nerve in a written response to an FOIA request that he did not have any records showing that state researchers did a cost-benefit analysis of the Vought project.

He said the state’s economic analysis unit conducted research – at the request of Sen. Leatherman – for the new Boeing assembly plant, though he declined to release the review, noting the deal has not yet been finalized.

 

‘Back-Of-The-Envelope Calculation’

Sen. Campbell, a former Alcoa executive in Washington state where Boeing’s first 787 Dreamliner assembly plant is located, told The Nerve he never saw a state Board of Economic Advisors analysis on the latest Boeing deal, though Sens. McConnell, R-Charleston, and Leatherman, R-Florence, said in an Oct. 30 press release it was provided to the General Assembly.

The Berkeley County Republican was the only lawmaker out of eight top-ranking or key legislators in the Boeing deal to contact The Nerve after receiving an FOIA request for details on the incentives agreement.

Besides McConnell and Leatherman, the other contacted lawmakers included Senate Majority Leader Harvey Peeler, R-Cherokee; Sen. Larry Grooms, R-Berkeley; House Speaker Bobby Harrell, R-Charleston; House Majority Leader Kenny Bingham, R-Lexington; and House Ways and Means Chairman Dan Cooper, R-Anderson.

In an interview in November, Campbell told The Nerve he believes the incentives package offered to Boeing is well worth the cost.

“If the state is going to pay 100 percent (of the economic development bonds) back, it’s going to get a lot more back,” he said.

Campbell said the way he figures it, the state would earn an approximate 15-percent return in five years on a $500 million incentive package. He estimated the project likely would create an estimated 2,200 spin-off jobs in addition to the 3,800 promised plant jobs.

That would result in annual unemployment cost savings of $90 million, assuming all 6,000 workers were state residents and unemployed beforehand, he explained. In addition, the project would generate roughly another $20 million yearly in personal income tax revenue, he said.

A group of Vought workers told The Nerve recently, however, they suspect about half of the workers initially hired for the new Boeing plant will be out-of-state contractors, which they noted is roughly the current makeup of their plant.

Campbell said he is satisfied with his “back-of-the-envelope calculation,” adding he would have sought out a more detailed cost-benefit analysis if he thought the return on the incentives was less than his 15-percent projection.

“I’m a business person; I’m not a politician,” Campbell said. “I’d invest my money in this.”

Reach Brundrett at 803-779-5022, ext. 106, or rick@scpolicycouncil.com.