Top Project Carries Hefty Taxpayer Tab

April 21, 2011

Investigative Reports

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The NerveWith an announced investment of $1 billion and creation of 1,000 jobs, the proposed First Quality Tissue manufacturing plant in Anderson County has been touted as the Upstate’s biggest industrial project since BMW opened in the early 1990s.

It easily was the state’s top announced capital investment project in 2010, beating out the second-highest announced project, the proposed AQT Solar manufacturing plant in Richland County, by more than a half-billion dollars, according to a year-end report by the S.C. Department of Commerce.

In terms of announced job-creation projects, First Quality ranked fourth in the state last year just behind AQT’s proposed 1,017-job project, according to the report. Based in Great Neck, N.Y., First Quality Enterprises Inc.has more than 3,400 employees in all of its operations, including First Quality Tissue, which manufactures tissue and paper towels, according to the corporation’s website (www.firstquality.com).

But what hasn’t been fully disclosed about the Anderson County project is the cost to taxpayers. S.C. Rep. Dan Cooper, R-Anderson and the House Ways and Means Committee chairman, was quoted in other media reports at the time of the announcement last May as saying the value of the state and local incentives was around $7 million.

That’s not even close, The Nerve found in a review of state and county incentives agreements obtained under the S.C. Freedom of Information Act.

In the first year alone, the project would cost taxpayers an estimated $13 million, and over 10 years the taxpayer tab would jump to a projected $33.8 million, according to a cost-benefit analysis included with the state incentives agreement.

Taxpayers usually are left in the dark about the full costs of incentives doled out to select businesses. But one state lawmaker wants to change that.

Sen. Tom Davis, R-Beaufort, announced Wednesday that he would file a bill that would require early public disclosure of taxpayer costs of proposed incentives based on “independent economic” analyses; and, if incentives are approved, annual reports detailing how job-creation targets were being met.

Davis spoke at a State House press conference organized by the South Carolina Policy Council, the parent organization of The Nerve, and taxpayer advocates and grassroots leaders.

Davis said he would offer his bill (S. 832) in amendment form on every bill creating new sales tax exemptions or tax credits for select companies or industries, noting there are “seven or eight brewing in the House right now.”

“If you really want to hire 170 politicians to drive your economy,” Davis said, “not only should there be due diligence on the front end and transparency and debate, but guess what? On the back end, they’re going to give you a report each year on what they bought with your money.”

Policy Council President Ashley Landess said during the press conference that from 1995 to 2008, South Carolina spent about $2 billion on economic incentives.

“Open the process – no more secrecy in incentive giveaways,” Landess said.

Davis’ bill, titled the “South Carolina Economic Incentive Transparency Act of 2011,” would, among other things, require that the state Board of Economic Advisors conduct “an economic analysis of the impact of any proposed incentive to a beneficiary,” and post it on its website at the same time public notice is given for a hearing on the proposed incentive.

The bill, which has nine co-sponsors, also would require the S.C. Department of Commerce to conduct a separate review of the proposed incentive by “an independent economist not employed by any state agency,” and post it on its website.

Companies receiving incentives would have to submit annual reports to the S.C. Department of Revenue summarizing the number of jobs created or lost in full- or part-time positions, and by hourly wage. Under the bill, those reports would have to be made available on the department’s website.

First Quality Incentives

The state incentives offered to First Quality over a 10-year period would include, according to the cost-benefit analysis obtained by The Nerve:

  • $10.3 million in job development credits, which are refunds of employee state income tax withholdings;
  • $9.6 million in state grants;
  • $8.7 million in job tax credits, which are tied to the number of jobs created and the company’s location; and
  • $1.8 million in “special schools,” presumably the “readySC” worker training program offered through the S.C. Technical College System.

In addition, the analysis also factored in $3.3 million in increased state and local education costs.

The analysis was prepared by the S.C. Coordinating Council for Economic Development, which includes the heads of state economic development agencies.Commerce, a member of the council, provides staff support for the group.

The analysis doesn’t include incentives – worth millions – offered by Anderson County, The Nerve’sreview found. Those breaks include, according to the county incentives agreement:

  • Significantly reduced property taxes. Under a fee-in-lieu-of taxes (FILOT) agreement, First Quality’s annual payments would be drastically reduced to $350,000 in each of the first three years of the project and $700,000 per year annually after that. Real and personal property would be assessed at the owner-occupied homeowner rate of 4 percent for 40 years instead of at 10.5 percent for manufacturing property.
  • With “special source revenue credits” factored in, the annual payments would drop to the $350,000 and $700,000 levels. Those credits also would apply to investments above $500 million. As a comparison, First Quality would owe nearly $16 million in property taxes annually based on the county’s total 2009 millage rate if it had $500 million of taxable property assessed at 10.5 percent; at the 4 percent rate, it would owe $6 million annually.
  • Reimbursement for land costs and water/sewer lines. First Quality would be reimbursed for up to $16 million in up-front investment costs through later refunds or credits from its fee-in-lieu-of-taxes payments on investments above the base $500 million, according to attorney April Lucas of the Nexsen Pruet law firm in Columbia, which represented the county in the deal.
  • If, for example, First Quality owed $700,000 more annually on an additional $500 million in investments, the company would be free from paying anything on the additional investment for 22 years based on a $16 million up-front investment, according to The Nerve’s analysis. (After this story was published, Lucas told The Nerve that under a revised agreement, the county committed itself to reimbursing $7.5 million of the up-front costs through annual FILOT payments, and that the balance would be covered by the state and other grants. She said the county expects to pay off its $7.5 million commitment in about 12 years.)
  • $1.2 million in waived permit and “construction-related administrative” fees;
  • Free, temporary office space of undetermined value; and
  • Free relocation and “acclimation” services of undetermined value.

In contrast to the public announcement of an investment of $1 billion and the creation of 1,000 jobs, the incentives agreements set lower base investment and job-creation thresholds, The Nerve’s review found.

To receive the $9.6 million in state grants, for example, the company would have to create 600 jobs and invest $750 million in two phases by Dec. 31, 2017. The county agreement requires a base investment of $500 million and the creation of 400 jobs by Dec. 31, 2015.

Few “Clawback” Teeth

In terms of “clawback,” or penalty, provisions should First Quality not uphold its end of the deal to receive the state grants, the company would be required to repay a percentage of the grants based on how close it came to meeting the investment and job-creation targets.

But the agreement provided by Commerce to The Nerve contained no specific “clawback” provisions for other state incentives. First Quality, for example, would be under no obligation to repay any of the job development or job tax credits it had received in previous years if it failed to maintain the minimum required employment levels after receiving the credits.

The county incentives agreement contains more detailed “clawback” language, though how much First Quality would suffer financially is a matter of perspective.

If the company, for example, failed to meet its deadline for the base investment and job-creation thresholds, it would have to repay all of the amount of the “special source revenue credits” it had received up to that point, though it wouldn’t lose the base 4 percent assessment rate, according to Lucas of Nexsen Pruet.

“In our clawback and incentives, we much more attuned to the jobs,” Lucas told The Nerve, adding, “If they don’t do 200 jobs, they get nothing.”

That won’t be a problem, if you ask Burriss Nelson, the county’s economic development director. He toldThe Nerve last week that the project is “ahead of schedule,” noting that the “first product should be coming off the line” by September.

“There’s just a cloud of dust and a lot of people working,” Nelson said when asked about the activity at the plant site, located at the former BASF-Shaw Industries facility near the Anderson Regional Airport on the county’s south side.

A company project information sheet included with the state incentives agreement listed the size of the plant at 1 million square feet. Lucas said there is a room on the approximate 570-acre site for more buildings, though she didn’t know of any specific plans.

The cost-benefit analysis for the project listed an average hourly wage of $22.44 for the base 600 jobs. It projected an overall “net” benefit of nearly $1 billion, or a benefit-to-cost ratio of 29 to 1, though much of that amount includes estimated payroll for a projected 1,012 “indirect” jobs, which weren’t defined.

The analysis lists the total value of the building, machinery and equipment at $354.4 million, far short of the base $750 million investment required for the state grants and the base $500 million in the county agreement.

Lucas said state law doesn’t specifically define “investment” for incentive purposes, though she said under the county agreement, it would be determined by whatever real and personal property is included for property taxes.

In the state grant agreement, the value of the grants is included in the base project cost.

The state agreement also includes a handwritten note that five pages were withheld under a provision of the S.C. Freedom of Information Act exempting “confidential proprietary” information, though it didn’t provide any further explanation.

The Department of Commerce also blacked out certain categories of information, such as the value of the land, building and machinery that were cited in the county agreement.

Commerce officials did not respond to The Nerve’s written questions asking them to explain those differences.

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