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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