Retention PILOTs Are Not economic Development

why shelby county taxpayers should care

By Joe Kent

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The Economic Development Growth Engine’s (EDGE) retention payment-in-lieu of taxes (PILOT) program is not economic development while significantly costing Memphis/Shelby County taxpayers and overall business community. The following points are addressed in this article based on an analysis of EDGE data as of 12/31/17 found at http://database.growth-engine.org/:

  • Bogus EDGE accounting platform that counts existing tax revenue as “Total New Tax Revenue Generated” to justify EDGE retention PILOTs resulting in very few local winners in medium-large size corporations and real estate investors as Memphis/Shelby County small business vitality suffers and below peer average total wage growth occurs
  • Overstated EDGE “Total New Tax Revenue Generated” estimated at $893M. Adjusted down from EDGE reported “Total New Tax Revenue Generated” of $1.14B to $250M
  • Retention PILOTs cost Memphis/Shelby County taxpayers an estimated $281M; not an approximate $600M gain as reported by EDGE
  • Retention PILOTs and largely locally focused economic development efforts result in below peer average total wage growth costing Memphis and Shelby County taxpayers an estimated $60M per year within what appears to be a decline by design economic development framework

The purpose of this article is to provide a quantitative context to the local PILOT discussion with respect to EDGE retention PILOTs only. Retention PILOTs are tax abatements against existing tax revenue generated from filled jobs at the time of PILOT approval to retain company operations and jobs in Shelby County. This article does not address or question the use of more responsible new job expansion PILOTs used to recruit company operations and jobs to Shelby County

Overview

Since the recession ended along with the rest of the country, Memphis has grown economically but it is falling behind its peers accompanied by primarily locally focused economic development efforts and costly tax incentives. Tax incentives that could have otherwise gone to improve public safety, education and transportation while serving to support small business and attract external economic development to Memphis and Shelby County.
Instead, these tax incentives have created a market condition for large existing employers to expect tax abatements (retention PILOTs) as Memphis small business vitality plummets and needed community investments to fuel workforce and economic development are forgone. This approach to economic development does not serve the overall business community and is potentially a prescription for growing income inequality while achieving below peer average total wage growth rates.

For these reasons, locally focused retention PILOTs appear not to be about economic development and “good jobs”. The reason for this assertion is that the primary beneficiaries for retention PILOTs are few in medium to large size corporations and real estate investors that enjoy an indirect subsidy for the risk premium of holding commercial real estate by locking in long term lease tenants.

This activity begs the questions: 1) Would not all parties have been better off if economic development efforts would have been more externally than locally focused? and 2) Would not all stakeholders to include small business, big business and real estate investors been better off if forgone investments would have been made in the community that would have potentially attracted average peer employment growth rates that resulted in 20,000 more filled jobs?

EDGE – A Brief History

In 2011, after the successful external recruitment of new jobs to Memphis in Electrolux, EDGE was introduced to govern the abatement of taxes for economic development purposes. Across the country, tax abatements or PILOTs are commonly needed to support new economic development such as what occurred with Electrolux. And for what it’s worth, manufacturing jobs such as those at Electrolux have been shown to decrease income inequality which is locally desirable. So, the Electrolux project was a good model from which to launch sound practices in local economic development.

Unfortunately, following the Electrolux recruitment, operating with the trust of City Council and County Commission, EDGE then adopted economic modeling that would then be used to support beyond new job recruitment, retaining existing jobs. EDGE then went on a binge of granting retention PILOTs over the course of seven years while using incomplete accounting to justify abating existing tax revenue while reporting already existing revenue as “Total New Tax Revenue Generated” on their website at http://database.growth-engine.org/.

This practice raises concerns because it deviated from the successful external new job recruitment practice of Electrolux from which EDGE emerged while instead internally focusing economic development targeting existing local employers and abating existing tax revenue. Approximately $800M of the $1.1B in reported EDGE “Total New Tax Revenue Generated” includes retention PILOTs and significant amounts of tax revenue that existed at the time of PILOT approval.

This bogus platform of $1.1B in “Total New Tax Revenue Generated”, further widely reported by the non-investigative local press, provides economic developers with an enabling tool to “smoke their own dope” while touting the success of locally directed economic development efforts. This practice persists in arguably a locally closed business culture that has resulted in below peer average total wage growth rates and local tax revenue shortfalls on the back of a community in need.

Analysis – Technicolor and Retention PILOT Accounting / A Loser for Taxpayers

It was recently reported that the Technicolor PILOT would close generating $63.6M in local tax revenue with a taxpayer funded incentive of $35M. This is a renewal of an existing PILOT which will give Technicolor a 30-year PILOT which stands to undermine the recently announced Pre-K funding formula.

Close examination of the EDGE Project Summary methodology reveals that these retention analyses beyond Technicolor when abating against existing taxes do not account for 1) some probability that a company will stay in Memphis/Shelby County and avoid the hefty cost of relocation with the extended benefit of a PILOT for new jobs only, 2) economic impact value of the remaining workforce upon company departure or 3) economic impact of forgone investments in the community due to abated taxes.

To that extent, some measure of proper accounting needs to be employed to fully account for the Technicolor retention PILOT. To keep it simple, the following analysis generously assumes for EDGE that there is a 100% probability that Technicolor will leave without a retention PILOT. Next, since most of the workers will remain part of the tax base in Memphis upon a Technicolor departure, 50% of the tax base is retained in the below Technicolor analysis:

  • $63.6M – $31.8M (economic impact of remaining workforce) – $35M (tax abatement) = $3.2M taxpayer loss

When more responsible complete accounting is applied, this $3.2M taxpayer loss differs greatly from the overstated EDGE and press reported figures of $63.6M revenue generated resulting in projected net tax proceeds of $28.6M for the Technicolor PILOT. In short, there does not appear to be a pathway for the taxpayer to benefit from the Technicolor retention PILOT in this generous analysis.

Further, for the sake of simplicity using the Technicolor EDGE Project Summary , the above Technicolor analysis does not account for 1) any probability that a company will stay in Memphis/Shelby County without a retention PILOT or 2) any lost multiplier economic impact effect (as used in EDGE economic modeling) of using tax proceeds to invest in the community as opposed to giving tax abatements against existing tax revenue.

Since the risk of and cost of relocation, in most cases, significantly exceeds the benefit of a PILOT offer in an alternative location, companies in pursuit of risk avoidance and increased profits are more than likely averse to relocation. Given this likely aversion, when deriving projected tax revenue to be generated from abating against existing tax revenue, some probability of corporate retention must be accounted for to derive projected “Total New Tax Revenue Generated” from a retention PILOT. This reasoning is further buffeted by information out of Texas which reveals that approximately 90% of the companies that received tax incentives already knew where they wanted to locate operations regardless of any tax incentive.

To evaluate the retention PILOT program in total, the above variables discussed need to be accounted for using the EDGE PILOT data found at http://database.growth-engine.org/search-results/pilots/ as of 12/31/17.

The following calculated evaluation generously assumes that some companies would leave without a retention PILOT and a 60% (not 90%) overall retention rate without offering tax abatements against existing revenue is assumed. Next 50% of the taxes generated from the remaining workforce of departed companies are assumed. And finally, a multiplier economic impact of forgone investments resulting from retention PILOTs is assumed. Given these assumptions, the EDGE retention PILOT program is evaluated to arrive at an estimated impact on Memphis/Shelby County taxpayers as shown below using EDGE data as of 12/31/17:

  • $811M (retained reported revenue for retention PILOTs only) – $487M (60% retention without retention PILOT) -$134 (Impact of the remaining workforce)-$274M Economic impact of investing in the community) -$197M (abated taxes) = $281M net tax revenue loss or $22M per year
  • Overall the analysis adjusts reported EDGE “Total New Tax Revenue Generated” down from $1.14B to $250M resulting in an overstated estimated EDGE
    “Total New Tax Revenue Generated” of $893M

Another methodology for evaluating the retention PILOT program can be found at http://mcclmeasured.net/erp/. The Memphis Corporate Community Leadership (MCCL) Measured site provides grades for the entire retention PILOT program, categories of PILOT capital investment with individual company retention PILOT profiles. This methodology throughout applies greater levels of retention probability based on decreased levels of disruption to the business. For example, investing in an existing facility like Valero would have a greater probability of retention when compared to ServiceMaster that would have a lower probability of retention given the disruption and risk of relocation associated with the need for and construction of an entire new headquarters facility. In this analysis at http://mcclmeasured.net/erp/, the total estimated loss to Memphis/Shelby County taxpayers for retention PILOTS comes out to an estimated $267M or $18.8M per year.

And finally, with respect to the North Mississippi threat and retention PILOTs, Memphis/Shelby County would not lose anywhere close to the entire tax base associated with a business relocation to North Mississippi which EDGE retention PILOT modeling assumes. In such a relocation, many of the workers and business that serve the business would continue to reside in Memphis and Shelby County while paying property and sales taxes.

Analysis – Lagging Peer Average Total Wage Growth

In this analysis of shortfalls in Memphis/Shelby County tax revenue that result from below peer average total wage growth, The Bureau of Labor and Statistics Quarterly Census of Employment Wages (QCEW) program is used. QCEW is used as a data source for 2 reasons: 1) it measures total employment wages paid by businesses within a county geography and 2) the promise of employment in “good jobs” and overall total wage growth is what justify retention PILOTs.

In this analysis, Shelby County’s 15 county peers are compiled as identified by the University of Memphis and The Memphis Economy. The average growth rate for total wages paid from 2010-2016 for all counties to include Shelby County in the peer group was 23.3%. Shelby County’s growth rate was 17.6% which is 5.7% below average. Given this data set, the following analysis occurs:

  • In 2010, total wages paid by employers in Shelby County were $22,258,167,000 x 1.233 (peer average wage growth for 6yrs) = $27,444,319,911 which would have been total wages had the Shelby County percentage wage growth rate been the average of its peers. $27,444,319,911 – $26,166,453,000 (Shelby County 2016 Total
    Wages) = $1,277,866,911 in deficient wage production versus the peer average percentage growth rate.
  • Next to derive the resulting deficiency in Memphis and Shelby County tax revenues, an approximate 3% rate used by EDGE in their economic impact studies is applied
    to produce the following calculation. $1,277,866,911 x 3% = $38,336,007 in Memphis and Shelby County tax revenue shortfalls due to below average percentage total wage growth from 2010-2016.

The takeaway is that internally locally focused and expensive taxpayer-funded retentions PILOTs are contributing to below average total wage growth totaling $38 million in Memphis/Shelby County tax revenue shortfalls. The former occurs as Memphis small business vitality plummets. When this $38 million is added to the $22 million per year in estimated loss to taxpayers due to retention PILOTS from the previous section, it results in a $60 million annual recurring tax revenue shortfall in Memphis/Shelby County tax revenues.

The shortfall occurs on the back of expensive internally focused economic development efforts that use retention PILOT tax abatements that forgo needed investments for a community in need. Needed investments that would benefit all businesses and the entire community while attracting economic development.

Conclusion and Solutions

Expensive locally focused retention PILOTS that have occurred within an arguably closed business culture are not economic development and undermine true economic development efforts to support safer streets, education/workforce development programming, transportation and small business development. Retention PILOTs do not serve the community and are not economic development. To support the entire business community to include small business, the following solutions are recommended:

1. Adopt Dr. John Gnuschke’s Amazon Road Map for economic development
2. Resolve to be the National Leader in Career Education for talent retention / and development purposes and get on offense
3. End retention PILOTs and get off defense
4, Support inner city and small business development
5. Focus economic development efforts more external to Memphis with the aid of responsible tax incentives
6. An investigative press
7. Train EDGE Board Members and policymakers on economic modeling and associated assumptions used in PILOT modeling
8. Recast the EDGE Board with an equal balance of voting members from small business, local legislative government and corporations
9. Since companies typically know where they want operations located over and above tax incentive considerations, avoid putting excessive importance on PILOTs in economic development efforts while prioritizing other economic development activities
10. Cap tax abatements with a 10-year term and a minimum 2.0 benefit to cost ratio

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