Micron Incentives Were Behind Layne Warnings

One mystery solved:  Secretary of Finance Aubrey Layne was probably talking about Micron Technology in Manassas on August 17 when he warned the General Assembly about some very expensive economic development incentive package not yet announced or accounted for in the Commonwealth’s budget.

Layne repeated that warning during a discussion of tax policy yesterday with Jim Bacon and me, noting that whatever it was, the state’s incentive cost would be early in the process and the payback in state tax revenue would be years down the line.  Traditionally the state’s (very conservative) approach has been to require performance first before the incentives were paid.

Governor Ralph Northam’s announcement today about the $3 billion expansion plans, which include a new company global research facility and should produce 1,100 new jobs, is tied to a $70 million commitment from the state for “site preparation and facility costs.”  Additional local taxpayer incentives coming are not yet detailed, and the presence of Dominion Energy in the announcement indicates Micron will be getting special electricity rates – again, details to be announced.   Existing employment is about 1,500 according to one story and 1,800 another.

The potential Micron expansion was the subject of a June Wall Street Journal story that then prompted a Bacon’s Rebellion post.  Micron publicly flirting with New York and splashing the news in the Journal (does it have a Page Six, too?) to make Virginia jealous apparently worked.

The $70 million cash pledge by the state (it could include tax forgiveness), apparently blessed by legislative leaders through the Major Employment and Investment Commission, would exceed the grants tied to the Rolls Royce location in Prince George County (which has not lived up to promises) and the submarine facilities expansion underway at Newport News Shipbuilding.  A previous incentive program benefitted Micron and other semiconductor manufacturers, and the industry is further subsidized by favorable sales tax treatment.

Layne’s point on August 17 and again on August 28 was that the Commonwealth has growing financial commitments at a time of slow revenue growth, although there is hope the national economic renaissance will change that.  You will not see him leading any charge to return the extra state revenue being generated by conformity with the new tax laws, especially since Congress put sunsets on many provisions.

The full details of the Micron deal will be revealed in the fullness of time and face the usual gauntlet at the 2019 General Assembly.  The company is not a particularly large donor to political causes and is represented at the Capitol by Hunton Andrews Kurth (formerly Hunton & Williams).  Is Amazon HQ2 still out there with an even larger ask from Virginia?  Only time will tell.

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10 responses to “Micron Incentives Were Behind Layne Warnings

  1. I think to Layne’s credit -he knows the current increased revenues as a result of the Federal tax cuts is ephemeral and that Virginia still has some issues with recurring expenses.

    You never know with some of the folks like Lane whether he actually has substantial skills and knowledge or if he happened to be in the right place at the right time.

    But he’s the man that truly reformed VDOT and brought in Smart Scale, a data-driven, metrics-based way to prioritize transportation spending – and truly hated by developers and others who benefit from politicizing the process.

    Despite the continued efforts from our friends on the right to paint Dems as irresponsible tax and spend types.. both McAuliffe and now Northam are proving otherwise – yes they are doing MedicAid but it’s a fairly conservative and measured approach as both Lane and Northam know that Medicaid can be the 600 lb gorilla in the budget closet.

    One thing I’d be curious about is what involvement Mr. Moret has in the Micron thing. Is he working hand-in-glove with Lane and company or is he off doing a separate thing?

    And I give credit to Northam for advocating for rural Virginia… what a novel concept!

    • VEDP would have to be involved and its person is on the contact list on the press release. Neither Moret nor Layne would step out into the spotlight at a time like this – the Governor gets the bow. Both are amply blessed with what you call “substantial skills.”

      There is great risk here offering $70 million in incentives to a multinational company and at the same time trying to argue so many Virginia taxpayers should just absorb the tax hit created by the federal changes. This could get very interesting.

    • Indeed, Moret told Bacon’s Rebellion that he was very engaged with Micron. As published in a previous blog post, he wrote:

      Because Micron is one of our largest traded-sector employers, they interact regularly with VEDP staff members and other state officials.

      Including a plant tour back in February, several in-person meetings with Manassas and/or headquarters officials of Micron, and many phone calls, I’ve personally talked with Micron at least 15 times since late last year. I’ve interacted more with Micron than with nearly any other company that has operations in Virginia.

  2. To elaborate upon what Layne was saying about tax giveaways… He told Steve and me that Virginia routinely exempts incentivized companies from paying the sales tax. He said that the sales-tax exemptions are so extensive that they have cut materially into growth of sales tax revenues.

    Layne did not provide any figures to back up that analysis, and Steve and I did not dwell on the point. However, in a presentation to the Senate Finance, House Appropriations and House Finance Committees Aug. 17, Layne noted that sales tax collections advanced 3.1% in fiscal year 2018.

    According to Trading Economics, year-on-year U.S. retail sales as of June increased 6.4%. In other words, Virginia sales tax collections increased at half the rate of the national growth in retail sales. While Virginia’s economy may be lagging the national economy, it’s not lagging it by that much.

    We can only hope that Layne will produce some analysis documenting the extent to which tax incentives are responsible for the slow rate of sales tax revenue growth.

  3. “Traditionally the state’s (very conservative) approach has been to require performance first before the incentives were paid.”

    The state’s traditional approach prior to last year had been to pay economic development grants up front and require companies to perform over time. While the amounts usually were conservative (i.e., low), the grants most often were paid up front — at least relative to the state’s primary deal closing fund (the Commonwealth’s Opportunity Fund, which I think previously was called the Governor’s Opportunity Fund).

    As noted in your recent column (https://www.baconsrebellion.com/wp/grant-process-tightens-at-vedp/), VEDP last year shifted to paying substantially all incentives for moderate- or high-risk companies on a post-performance basis.

    Micron represents a special case in that the company is large, well capitalized, and highly profitable, but it is in an industry sector that involves substantial technology risk. Therefore, while the total grant amount is being paid out relatively early in the project ($50 million a year from now and $20 million two years from now, contingent upon progress as planned), the payments will not be made until the company has established a cash escrow to protect the state’s ROI. The escrow account is being established to ensure that the commonwealth would be made whole in the event that the company faces unanticipated headwinds before the commonwealth achieves breakeven on the grant investment.

    The company’s outlook is very bright. The escrow account was required simply to avoid technology risk inherent to this industry sector.

    The MOU includes clawback provisions that would apply if the company underperforms on any of its commitments relative to jobs, wages, or capital investment. The required escrow balance will decline over time as the company meets its commitments relative to jobs, wages, and capital investment.

    • Mr. Moret – thanks for chiming in with additional details. I should indeed have noted that the state often opens these deals with some cash up front from the “opportunity fund” (the name keeps changing), usually $1-2 million. But in most cases the bulk of the incentive funds were/are not paid out until the capital investment and job growth were/are underway or complete, and of course I had previously reported that you were reinforcing that policy. If as you say Micron will get $50 million in the first tranche just a year from now, with rest just a year later, that is quite unprecedented and I understand the lines I saw in Aubrey’s brow yesterday.

      I still like that cutline on that earlier post!

    • These matters are now coming into focus and beginning to make sense.

      The broad performance / incentive standards recall three analogies. Here is only one of those three analogies.

      In mountain climbing, one encounters three overriding principles to success, or failure, including catastrophic failure.
      Here I refer to control of risk versus boldness as modulated by skill. If these three factors are not properly aligned, at best inefficiencies arise. If they work one against the other, then in that case failures arise.

      If these three principles work in tandem, then advantages begin to play one upon the other, for cumulative benefit and reward. Getting there, to the top of ever higher and more difficult ascents at acceptable levels of risk and effort is a process. They better the climber learns to calibrate his boldness to his ability to control risk and effort, the lower and easier the SAME MOUNTAIN GETS OVER TIME.

      Meanwhile, new, more difficult ascents, impossible before, come into range. The result can become fantastic.

      Hence, the ever more competent climber opens up beneath his hands and feet whole new worlds. What seemed impossible before becomes quite doable and sane now to those who continually refine their skills and ability to discern and minimize risk, thus maximize opportunities as they arise.

      So its a process. At first 2=1. Then 2=2. Then 2=3. Then 2=4. And so on up the cumulative ladder of risk + skill + effort where the three working together garner ever more advantage and benefit for the climber of rock and ice, or whatever.

      The same rules apply to most all speculative games. Like real estate or other business ventures for example.

  4. Not sure that Layne can provide satisfaction any more or less than his prior counterparts.

    “Transparency” in matters of economic development is fraught with political danger – at all levels of government! I’m sure some see that as a recipe for skulduggery and maybe it is – but any person responsible for economic development knows that jobs – long term jobs – are worth their weight in gold and everything else is negotiated.

    Even then, no guarantees for the jobs – because – promises made – cannot be easily kept in the wild wild world of economics where new “ideas” can wipe out an entire industry overnight.

    I think people who hold this responsibility – (of getting jobs for Virginia) take that job very seriously – and calls for “transparency” are a potential threat.

    I remember a guy from an earlier administration named Connaughton. He was the golden-haired boy – then he wasn’t … US 460 did not help his cause.

  5. Note: I admit to suffering from PDS – Politician Derangement Syndrome.

    What are the odds that Layne and Moret both have aspirations for elected office? Layne worries that Moret is getting a lot of attention for his economic development success. So Layne shoots off a flare about how Moret’s economic development spending threatens Virginia budget. Of course Moret makes more than twice what Layne is paid so Aubrey might just have a bad case of wallet envy.

    Seriously, what percentage of Virginia’s budget goes to economic development incentives? Let me guess – nobody knows. Or, somebody knows but nobody’s talking.

    • Finally, where is Northam in all this? Don’t Layne and Moret both work for him? How is it that one guy is pushing incentives that the other guy says will threaten the budget? In a private corporation two Senior VPs working for the CEO wouldn’t take their strategic disagreements to the press. If they did the CEO would grab each by an ear and pull them into a closed door sit down – metaphorically speaking. If either of the two SVPs continued their debate in the public forum that SVP would quickly find himself or herself unemployed.

      I am getting the growing sense that Ralph Northam is turning out to be a very weak governor.

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