Just west of Lake Charles, the faintest outlines of the biggest industrial expansion in Louisiana history are taking shape.
Preparations are being laid for “man camps” — villages of mobile homes, restaurants and bars that will be thrown together to accommodate the thousands of construction workers needed to handle the $82 billion in projects announced in Calcasieu and Cameron parishes. The largest is Sasol Ltd.’s potentially $22 billion fuel plant in Westlake, a city of about 4,600.
State and local officials are ecstatic about Sasol, which could end up hiring more than 1,250 employees, paying them an average of $88,000. But the plant will come at a cost to taxpayers, in the form of a $257 million incentive package that the state approved last year, including $115 million in cash.
Despite the huge influx of money that the South African company is injecting into the region’s economy, it’s still not clear whether the massive undertaking will do anything to improve Louisiana’s perennially grim financial picture. At best, the Legislature’s chief economist, Greg Albrecht, argues that the project will be a wash for the state’s finances, though he concedes that it will benefit the region, as well the people working there.
In fact, Albrecht is skeptical that Louisiana’s incentive package was really a game-changer. It’s a big commitment for the state, but still only about 1 percent of the project’s estimated cost. (A state-granted break on Sasol’s local property tax could be worth far more, perhaps $3 billion.)
“Can you legitimately say this (benefit package) caused all that?” Albrecht asked rhetorically. “I think that’s a real fair question.”
Of course, Gov. Bobby Jindal’s administration has a much rosier view of the benefits Sasol will bring. His secretary of economic development, Stephen Moret, admits it’s impossible to know what brought the chemical giant to Louisiana, but if the state aid played any role in landing such a big fish, it’s money well spent, he says.
“I’m not a pound-the-table incentives guy, but what I’ve observed through hundreds of these site-selection processes is usually that a company gets down to a small number of sites that offer relatively comparable advantages — it’s not uncommon to see Texas, Louisiana and Mississippi, for example — and in those cases, incentives can make a difference at the margin,” Moret said.
The debate over the Sasol numbers frames a series of larger questions about the ways in which Louisiana lures big business. Among the contentious issues: Is the state giving up too much? Are the millions — and sometimes billions — of dollars in corporate subsidies driving boardroom decisions, or are companies that already decided to invest here taking us for a ride? And to what extent are state officials offering such deals out of political expediency?
After all, big-ticket job announcements make for positive headlines, and tying the deal to an incentive package underscores the role state officials played in bringing it home.
Experts who study economic development say it’s rarely possible to know if or when incentives tilted the scales. With states across the country dangling free money, corporations would be foolish not to seek out any tax break available. But in general, most experts are skeptical about the importance of incentives. They note that companies don’t always go to the place offering the richest subsidies, reinforcing the notion that other factors carried the day. Those bigger factors often include business costs, access to transportation routes, customers and suppliers, and the quality of the local workforce and schools.
“There’s a good bit of evidence that, in general, you’re paying people to do things that they would have done otherwise,” said James Alm, who chairs Tulane University’s economics department and is helping to lead an analysis of Louisiana’s tax structure commissioned by the Legislature. “Then what is the impact? You’re simply losing tax revenues.”
Discretionary vs. automatic
Louisiana officials have at their disposal a bevy of programs they can use to attract businesses to the Pelican State, some of them discretionary and others for which certain firms automatically qualify. Discretionary spending requires an analysis of the state’s return on investment to determine how much to award. Participation in these programs requires an invitation from the state and approval by the Joint Legislative Committee on the Budget.
The state’s off-the-shelf subsidies are built into state law and given to any company that meets the criteria and fills out the paperwork. One program forgives local property taxes on large capital investments; another refunds up to 15 percent of a company’s payroll as well as some sales and use taxes, depending on how well the new jobs pay. Both breaks last a decade.
The Quality Jobs program, which targets new full-time jobs paying at least $14.50 an hour in a half-dozen growth industries, refunded about $100 million per year, on average, in payroll expenses and in sales and use taxes from 2008 to 2013. Most projects that receive the aid are also eligible for breaks from the Enterprise Zone program, which provides tax rebates for businesses that add new full-time jobs.
But the state’s industrial property tax exemption dwarfs all the others; more than $8.5 billion in breaks were granted in the same six-year span. Though that program doesn’t directly affect the state’s revenue stream, it does reduce how much is available to pay for public services in Louisiana — and local governments have no say in whether to grant the relief. That money tends to be overlooked because the property wasn’t on the tax roll to begin with; often, by the time the investment becomes taxable, it has already lost a good portion of its value, making for smaller tax bills.
Paying millions per job
It’s largely because of that decades-old property tax exemption — which removes all local property tax liability for qualifying companies for 10 years — that Louisiana has handed out some of the biggest corporate giveaways seen anywhere in the country. Those gifts must be approved by the state Board of Commerce and Industry, which typically approves the breaks before it without discussion.
A study last year by the nonprofit Good Jobs First, which tracks corporate subsidies across the U.S., found Louisiana to be among the nation’s leaders in awarding so-called “megadeals” worth $75 million or more. In the last three-plus decades, Louisiana handed out 11 such deals, the fourth most of any state.
Nearly all of the projects were located in the Lake Charles area or along the Mississippi River corridor between New Orleans and Baton Rouge, regions that boast enviable transportation networks, access to water and, perhaps most significantly, a welcoming attitude toward heavy industry and the petrochemical sector in particular.
Among the 240 megadeals reviewed by Good Jobs First, the fifth-most expensive in the nation went to a major liquefied natural gas export facility that Cheniere Energy is building along the Sabine River in Cameron Parish. The company is investing about $18 billion there, making it the largest industrial project in state history, except for the Sasol plant.
The state approved almost $1.6 billion in property tax relief for Cheniere, in addition to $117 million in workforce training costs and payroll rebates. About 150 new jobs paying $100,000 each are expected to result.
The whole package works out to a cost to taxpayers of nearly $7.5 million per new or retained job, making it the most expensive megadeal that Good Jobs First reviewed, on a per-job basis. And that was arguably generous, given that one-third of the 225 positions used to arrive at that number were existing positions that Cheniere simply pledged to “retain.” Each new job cost nearly $11.4 million.
Even before the new exemptions were approved, Cameron Parish was already giving away more money in industrial tax exemptions — by roughly $6 million a year — to import facilities owned by Cheniere and Sempra Energy’s Cameron LNG than the parish now collects in property taxes, according to Assessor Mona Kelley. When the new export terminals that both firms are building come on line, Kelley said, their exemptions will dwarf the parish’s collections by nearly a 10-1 ratio.
Kelley noted ruefully that locals, herself included, generally don’t hear about the large breaks until they’re approved by the state.
And while they’re glad for industry investment, some officials, including the parish administrator, Ryan Bourriaque, believe the 10-year blanket tax exemption stretches local resources thin, especially since his parish does not collect sales tax.
“We’re being impacted today; we’re already having to hire new deputies, pave new roads, build general infrastructure, add to our emergency response,” Bourriaque said. “They strain us.”
On the other hand, an economic impact study by retired LSU economist Loren Scott and commissioned by Cheniere found that the company’s project would have other positive effects. For instance, Scott estimated that almost $5 billion of its construction cost will be spent in the state over a nine-year span, and by the time the facility is up and running in 2019, Cheniere will be spending $137 million annually in Louisiana.
Megafund tapped out
When Louisiana’s Economic Development officials have especially coveted a particular project in recent years, they’ve sometimes offered incentives above and beyond the state’s standard programs.
To do that, they’ve tapped the Louisiana Mega-Project Development Fund, or megafund, a pot once holding about $500 million aimed at giving state leaders a leg up in closing big deals. It has been mostly depleted by Jindal’s economic development team, led by Moret, who said he believes it should be replenished.
Even with the megafund exhausted, the state hasn’t stopped making deals. The state’s agreement with Sasol, for instance, calls for Louisiana taxpayers to hand the company $115 million in cash plus $142 million in other subsidies, as long as its ethane cracker is running by 2018 and a proposed gas-to-liquids plant is up by 2021. The company is also eligible to receive billions more in local property tax relief.
Sasol is required to hire and retain at least 1,272 workers by 2021, and spend at least $14.5 billion in capital investment by 2023.
If Sasol does not meet its capital spending requirements in a given year, it’s required to reimburse the state 1.6 percent of the shortfall.
When the state’s $115 million payment is due by 2019, the deal doesn’t specify where the extra money will come from; that will be up to legislators and a future governor to sort out.
How much is too much?
The state’s ways of spending its limited discretionary money haven’t always won it a lot of admiration.
Seven years ago, for instance, Moret’s predecessors in Gov. Kathleen Blanco’s administration offered a $1.6 billion incentive package to ThyssenKrupp in hopes of luring the German steel giant to St. James Parish. Most of the money was allotted to pay for infrastructure upgrades, including work at the port, nearby roads and the electrical system. There was also the usual array of payroll rebates and property tax breaks.
All told, the deal was worth almost half of ThyssenKrupp’s $3.7 billion investment to build the steel mill. Though the jobs the company planned to create were high-paying ones compared with the parish’s average, Louisiana was giving up nearly $600,000 for each new direct job — much less than in the Cheniere project, but still a high number.
Even so, Louisiana lost the project to its only real competitor, Alabama, which crafted a package worth about 40 percent less. Key factors in the company’s decision included proximity to suppliers and cheap electricity available in the heart of Dixie, underscoring the point that costly incentive arrangements are not always the make-or-break factor in whether a deal gets closed. Though Louisiana won the incentives arms race for the steel plant by a country mile, it ultimately lost the war.
The ThyssenKrupp episode also serves as something of a cautionary tale. The steel mill Alabama was thrilled to win was a flop, largely due to low global steel demand. In 2013, ThyssenKrupp sold the plant for $1.6 billion, less than a third of its roughly $5 billion cost to build. Had the project moved forward in St. James, it’s unclear what would have happened to Louisiana taxpayers’ investment.
Richard House, who was executive counsel for LED under Blanco, says Louisianians “would have been protected.”
But some fiscal watchdogs are doubtful. Robert Travis Scott, president of the Public Affairs Research Council, called the state’s subsidy package “the most egregious example of excess that I’ve ever seen.”
It made sense, Scott contends, for the state to cover some infrastructure upgrades. But he says the deal went way too far.
“Some infrastructure, certainly, is fine, but when does it become too much?” Scott asked rhetorically. “When are you spending so much on infrastructure that it’s no longer worth the investment?”
Failing to meet expectations
If Louisiana was lucky to lose ThyssenKrupp, there are other cases in which the state was arguably unlucky to win, as once-heralded deals failed to live up to lofty expectations.
Take the Federal City project in Algiers, an ambitious, 156-acre redevelopment of a former U.S. Navy base that was marked for closure in 2005. By far, Federal City has been the biggest beneficiary of the megafund — the state poured $125 million into the project in 2009, almost one-third of the fund’s balance, in addition to $25 million in bond proceeds — but nearly everyone involved is disappointed by the results.
Initial plans called for a mixed-use development with nearly a half-million square feet of retail and office space and 1,400 housing units. Nearly all of the investment so far in what was billed as a public-private partnership has been provided by taxpayers. Work on the Marine Corps Reserve headquarters is finished, as is a 400-seat auditorium, a YMCA fitness center, and facilities for the New Orleans Police Department’s 4th District and the New Orleans Military and Maritime Academy, a charter school.
But the project’s ambitious broader vision has been slowed by a drawn-out legal dispute between the nonprofit formed to oversee the site and its original master developer over myriad factors, including who’s responsible for paying utility costs, observers say.
The stalemate was finally resolved this year, and a new developer was selected for the nonmilitary portion of the site. But the optimism that greeted the announcement of the project six years ago is in short supply now, particularly after the prospect of adding 300 jobs fizzled last year when a key Marine Corps function decided to remain in Kansas City.
State Rep. Jeff Arnold, who chairs the Algiers Development District, a political subdivision that owns the complex, wishes the site boasted “more visible success,” like a big grocery store, but disputes the notion that the expensive undertaking hasn’t been worthwhile.
“I wouldn’t say that we’re disappointed that we don’t have more out there,” said Arnold, a Democrat from Algiers. “The fact of the matter is that we’ve got 2,500 people on that campus everyday.”
To Moret, Federal City has been a bit of a disappointment. But ultimately, he says, the state has little recourse to recoup its investment because it’s a joint venture with the federal government.
Even if the project has failed so far to live up to its billing, Moret said the state has gotten the one must-have item from Federal City: a new headquarters for the Marine Corps Reserve, which the department credits with preserving thousands of jobs in the area.
“Everything else was lagniappe,” he said, adding: “We’re certainly supportive of their aspirations, but there are a lot of challenges that are in play.”
Lacking recourse to recoup
In its 2013 review of megadeals, Good Jobs First noted that large-scale incentive packages have grown in size and scope at a much faster pace than inflation. Such deals have a growing political dimension, as well, with governors and local legislators eager to bask in economic development “wins,” even if they come at a cost or at the expense of another community.
Experts say the deals can sometimes deliver a one-two blow: not only giving away more than necessary, but also failing to deliver what was advertised in the gauzy announcement. And when things go south, there’s never a follow-up news release.
That’s especially true in the case of Blade Dynamics, a U.K.-based tenant in New Orleans East’s Michoud Assembly Facility that assembles parts for wind turbines. In 2010, the state trumpeted its role in luring the firm, which it said would create 600 new jobs paying $48,000 a year on average. In exchange, Louisiana offered nearly $12 million in performance-based grants, as well as help with recruiting and training employees.
“This is a huge win for New Orleans and our whole state,” Jindal said then. “By recruiting Blade Dynamics and its revolutionary wind power technologies to Louisiana, we are creating hundreds of high-paying new jobs in New Orleans while diversifying the economy of this region.”
But the heady promises haven’t materialized. The company today has only about 25 employees, Scott, the retired LSU economist, noted in his annual economic outlook report for the region.
Moret concedes that Blade Dynamics didn’t play out the way officials hoped. But, he says, the state has gotten good at protecting itself, drawing up incentive packages that guard the state’s investment while ensuring that the deals remain attractive.
Under its deal with the state, Blade Dynamics was required to have $14.2 million in payroll in 2013. Instead, that figure has been only about $1.5 million, leading the state to suspend further payments. So far, the state is on the hook for about $1.3 million from the deal.
Subsidizing low-wage jobs
While in some cases Louisiana has gotten criticism for paying too much for good jobs, in other cases state officials have reached into the piggy bank to prop up lousy ones.
Take the case of Foster Farms, a California poultry company that took over a shuttered chicken-processing plant in northeast Louisiana with help from the megafund.
The plant’s previous owner, Pilgrim’s Pride Corp., declared bankruptcy and abruptly closed the Farmerville plant in 2009. The facility employed more than 1,000 workers, and it supported hundreds of poultry farmers. Ultimately, the state paid for half of the $72.2 million it cost for Foster Farms to buy the plant. That made Foster Farms the biggest private beneficiary of the megafund, even though the jobs being preserved paid an average of just $22,500 — 40 percent less than the median household income for the area.
Moret says the deal, though certainly not glamorous, was desperately needed in rural, impoverished Union Parish.
“The thing that we have to remember, sitting here in Baton Rouge or New Orleans, is that we’re a very rural state, and there’s a tremendous amount of diversity across the state in terms of the economy,” he added. “I think a lot of folks in South Louisiana or Baton Rouge looked at that with a very critical eye, and I can understand where they were coming from. But you also look at an impoverished region where it would’ve represented the loss not just of 1,000 jobs, but several thousand additional jobs.”
Moret says it’s unlikely he could have lured an automaker or an aircraft manufacturer to Farmerville, let alone IBM, even with an array of incentive programs at his disposal.
“Did I take office as secretary of economic development aspiring to invest millions of dollars in chicken-processing plants? No,” Moret said. “Some people might not have liked it, but I’m definitely at peace about it.”