Grant Process Tightens at VEDP

Not His Best Day

Tomorrow Governor Ralph Northam travels to the coalfields for what is billed as a major economic development announcement, and steps have been taken so that four years from now he won’t cringe when shown the old photos.

For the past year the Virginia Economic Development Partnership (VEDP) has been doing additional due diligence on companies receiving discretionary incentives, and if there is a high enough level of perceived risk the incentives are paid only after performance.

The tighter policy was described by President and CEO Stephen Moret in a response to my earlier post about detailed performance measures on Virginia’s various incentive programs.  “With this new approach in place, Virginia may not win some projects that we previously would have won, but neither will we place taxpayer dollars at undue risk,” Moret wrote.

The agency and its practices were the subject of a scathing review by the Joint Legislative Audit and Review Commission after the embarrassing failure to launch of a major Chinese-owned project near Appomattox, announced with great fanfare by Governor Terrence McAuliffe.  The firm in that case had received $1.4 million from the state in advance, and two years later a newspaper reporter found obvious signs that should have warned the state it was possible fraud.   Apparently the same pitch was rejected by North Carolina.

Then Moret came in from Louisiana and the General Assembly weighed in with 2017 legislation.  Now Moret reports all applications are vetted by a Project Review and Credit Committee (PRACC).  Prior to the revelations there was no VEDP person assigned full time to administering incentive programs and now there are four – with the potential for more and the inclusion of somebody with commercial credit experience.  Somebody is held to account for each project’s compliance.  

 

“During my first year at VEDP (2017), I asked PRACC to begin producing both company risk ratings and incentive risk ratings for every project, as well as to shift substantially all incentive payments associated with moderate- or high-risk companies to occur after the Commonwealth has received at least as much new state tax revenue as the amount of a given incentive,” he wrote in providing details.  He stressed he is fully on board with the new system.

The early tax money from these projects often comes to the locality, which imposes property taxes on any new building, equipment or business personal property as soon as they enter service.

The state tax revenue tracked is basically two sources slower to kick in, the same two sources that Secretary Aubrey Layne recently complained are too dominant in the state budget – personal income taxes and sales tax.  So for the state to have received an amount equal to the grant, the company has to be well underway in meeting its hiring goals.  The state does add in a multiplier on the assumption that the new employees are spending money generating indirect taxes.  And the state does recognize the substantial sales and use taxes paid on construction materials and other assets.

“Sometimes this means an incentive will be provided only after a project is fully completed; other times it means that incentives are provided in tranches as milestones are achieved. Notably, for low-risk companies (e.g., a large, well-capitalized Fortune 500 firm), we typically propose to provide incentive funds early in the development of a project, as otherwise the impact of the proposed incentive on the company’s decision process would be substantially diluted by the company’s net present value discount rate that often is in the range of 8-10%.”

Other states are not as strict, but Moret said – so far – he does not believe the new reviews and approach have scared off any prospects. “Indeed, one of the most common reasons (but not the most common reason, which is the lack of prepared sites) that Virginia’s loses economic development projects is that competing states often offer substantially more robust incentive packages.

Moret got my attention when early on in his Virginia tenure he noted that high local property taxes, especially on manufacturers and other capital intensive businesses, were a recruitment impediment in the state.  He provided a slide showing where Virginia ranks well, and where it doesn’t, on various 2017 site selection criteria.

“While the details can vary greatly by project, most economic development projects break even by the end of year three (i.e., by the end of year three, they have generated more direct and indirect state tax revenues than the state has provided in incentives). For companies rated moderate or high-risk, break even usually now occurs from day one since incentives for those companies nearly always are provided on a post-performance basis. This has been standard practice since mid-2017,” Moret wrote.

If the announcement tomorrow involves a solid company with a known track record, perhaps significant funds will be provided through the Opportunity Fund or some other up-front grant program. But going forward it will be happening less often apparently.

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10 responses to “Grant Process Tightens at VEDP

  1. If you’ve got to have incentives (which I generally oppose), at least be careful about doling them out. The new rules look like a definite improvement.

    • A step in the right direction. The next good step would be full transparency as well as a complete annual retrospective of the results, grant by grant.

      • See http://www.yesvirginia.org/incentivereports. I think this is in the ballpark of what you are looking for. We will be exploring ways to make the information more easily accessible. These reports will be updated periodically. Note that we expect the performance of COF grants to improve with the new risk rating approach, since projects entailing substantial risk typically will not receive up-front incentives.

        • Thank you for the link. I will go through it. I’m not sure why any company should receive up front payments. If a company is so poorly capitalized that it needs the COF to commence operations in Virginia I have to wonder if it’s a good target. The ease of declaring corporate bankruptcy seems to argue for making COF payments in arrears rather than prospectively.

          • COF grants are not focused on helping companies have the capital necessary to complete their projects. Rather, they are intended to help tip the scales in favor of Virginia when a traded-sector company such as a manufacturer is considering relatively comparable locations in multiple states (e.g., VA vs. NC and TN). COF grants always are offered before a company has selected the state in which it will locate a particular project. Because many companies make investment decisions based on an NPV (net present value) analysis with an 8-10% annual discount rate, an up-front (or nearly up-front) incentive will tend to have a considerably larger impact on the company’s location decision than an incentive paid several years later. That’s why incentives typically will be paid roughly a year into a project for low-risk companies. In every case, there are clawback provisions that kick in for any underperformance.

  2. Love the picture of Terry McAuliffe. I went to the original article and saw that the extra super large pseudo check (why do people do that?) was signed by Terry Kilgore. Oh boy! So, I thought I’d take a quick peak at Terry Kilgore’s campaign donation expenditures. He seems to be keeping the Glenrochie Country Club in business! He desperately needs to hold a $7,000 fund raiser there every year (election year or not) to maintain his razor thin margins in Delegate elections … and guess who the top donor is to this politician that hasn’t been in a competitive race since Christ was in high school? Dominion! What a shock.

    2009 – 98.92% of the votes (unopposed, only write ins in opposition)
    2011 – 98.6% of the votes (unopposed, only write ins in opposition)
    2013 – 100% of the votes
    2015 – 100% of the votes
    2017 – 76.03% of the votes (hey! the Dems actually ran a candidate)

    Yeah, with that kind of white knuckled competition you can see why ole Terry has to fund a soiree every year at a local country club or three …

    https://www.vpap.org/candidates/270/service/22/?page=1&start_year=all&end_year=all

    Dominion pays Terry to throw parties for his friends. As far as I can tell, in Maryland most of those expenditures would not be allowed.

    Yeah, that’s a guy I want handing out supersized multi-million dollars grants paid for with my taxes.

    Ugh!

  3. http://www.yesvirginia.org/Content/pdf/Library/FY2017%20HB1191%20Report.pdf

    DJ – this is a report from the state you might not have seen. It is what sparked my conversation with Moret. It is far more detailed than anything prior. Comes pretty close to what you were asking for. You can read about many, many more uses of the Tobacco Fund dollars…..which actually are only your tax dollars if you smoke.

    • I will take up smoking if that pushes more intelligent spending of the tobacco funds. We are effectively dropping dollar bills from an airplane flying at 30,000 feet over rural Virginia. Sprinkling money hither, tither and yon buys votes not progress.

  4. re: ” The state tax revenue tracked is basically two sources slower to kick in, the same two sources that Secretary Aubrey Layne recently complained are too dominant in the state budget – personal income taxes and sales tax.”

    as opposed to what else? As far as I know, Virginia does not assess property taxes…. so what other options are available at the State level?

    Also – ” which actually are only your tax dollars if you smoke.”

    well if that were true then the “fund” should only be spent on smokers, eh?

    The theory behind the fund – I think – was that people and localities that would be hurt as smoking reduced – would be “helped” to transition into other economic practices…

    I believe in some states – that money goes to people harmed by smoking…. instead of using MedicAid or other taxpayer-funded healthcare money – so yes.. taxpayers are also involved.

  5. When the master settlement agreement was reached growing out of the federal lawsuits over the deadly health impact of tobacco, Virginia had choices to make. One of the decisions – and it was pushed hard by those of us in the Attorney General’s Office at the time – was this pot of money for economic development in the tobacco region. For obvious reasons the General Assembly loved the idea. I cannot remember who came up with the idea, but I do think it was one of the people working with then-AG Earley, perhaps the chief deputy.

    Of course the real purpose of the master settlement agreement was to protect the tobacco industry and to allow it to continue causing premature death for high profits – as long as it was willing to share those high profits with the government. The nicotine addicts feed the government-spending addicts. We are their partners now in a very real way. I do think some of the money continues to flow into the health programs.

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