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VOL. 7 | NO. 7 | Saturday, February 8, 2014

PILOT Reform

Economic development leaders weigh changes to incentive program

By Amos Maki

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Nike is in the midst of a $301 million expansion of its Northridge plant in Frayser, a project that means the Beaverton, Ore.-based company will create 250 new jobs and retain 1,600 existing local jobs.

But Nike officials said the expansion could have landed in another community if not for a payment-in-lieu-of-taxes (PILOT) incentive that is expected to save the company $57.8 million over 15 years. Nike was considering multiple sites for the project at the time and the PILOT incentives offered by Memphis and Shelby County played a key role in the company’s decision to expand locally.

“It is our intent to be here in Memphis,” Willie Gregory, Nike director of Community and Business Relations, said at the time. “The support and incentives that we have received will help in that decision.”

Now, major changes could be in store for the PILOT program, the primary economic development incentive tool used by Memphis and Shelby.

The Economic Development Growth Engine of Memphis and Shelby County has launched a sweeping review of the PILOT incentive that could lead to the most significant reforms in the program’s history.

“This is the city and county’s most effective and important program,” said EDGE president Reid Dulburger. “It has served the county well over the years.”

“It has been tweaked over the years, but this is the best opportunity in years to do a thorough review from top to bottom,” he said. “From our board members’ perspective, it’s been a long time coming and the time is finally here.”

EDGE has hired Sharon Younger of Younger Associates to conduct the review, which will include getting input from commercial real estate brokers and developers, elected officials, PILOT recipients, chambers of commerce from across Shelby County and the public.

“Given the importance of this program it’s important that we get it right and take the time to talk to the right people,” said Dulburger. “Everything is on the table, from small tweaks to the program to completely rethinking the program.”

Main tool in the toolbox

The PILOT program administered by EDGE is the main business recruitment tool used by Memphis and Shelby County.

The program works by abating taxes – 85 percent on the city side this year, before dropping to 75 percent next year, and 75 percent on the county side – for real and personal property improvements. Companies pay the full amount of taxes on the pre-developed land. A scoring matrix that includes the number of jobs created, wages, capital investment and other factors determines the length of the PILOT term.

A cost-benefit analysis is performed to ensure that for every $1 in taxes abated at least $1 in new taxes is produced. To qualify for a PILOT, companies must produce at least a $1 to $1 tax ratio and the vast majority of PILOT recipients far exceed that amount.

Nike’s $57.8 million PILOT, for example, is expected to lead to a local tax benefit of $105.3 million in return, or $1.82 in revenue for every tax dollar abated.

“We have net new dollars that otherwise would not be coming in to the community,” Dulburger said. “We try to negotiate the best deal for the community that we can.”

Memphis and Shelby County have relied heavily on the PILOT program to offset the cost of property taxes to businesses to locate or expand here. A national expert on business incentives told City Council members in 2012 that nearly a third of all properties enrolled in PILOT programs across the state of Tennessee are from Shelby County.

The PILOT has been used to land everything from the corporate headquarters of International Paper and ServiceMaster to the manufacturing plants Electrolux and Mitsubishi Electric Power Products Inc. are operating. Conduit Global, which recently announced it was building an $8 million call center that will employ 1,000 people, will likely seek a PILOT.

But it has also been a lightning rod for criticism. Some residents and elected officials paint the incentive as corporate welfare, and public employee unions have blasted the tax breaks, saying city and county governments have slashed public employee salaries, reduced benefits and cut services while doling out lucrative tax breaks to often-profitable businesses.

A 2010 report from the Tennessee Advisory Commission on Intergovernmental Relations said exemptions and tax incentive programs suck “millions of dollars in uncollected taxes” from local governments and “impose unfair tax burdens on households and businesses” that don’t receive the incentives.

“We’re issuing long-term PILOTs but once the companies get established and get on their feet they should contribute to the community,” said Mike Williams, president of the Memphis Police Association. “A lot of them are making major profits but they’re not contributing back to the city other than the jobs they provide.”

Memphis Mayor A C Wharton Jr. has heard the criticisms for years but says Memphis must remain competitive in the high-stakes game of job recruitment if the city is going to make significant strides toward alleviating poverty and curing the city’s financial woes.

“The competition is fierce and there is a need for incentives,” said Wharton. “Our job is to make sure we get a return for those incentives, not only in terms of dollars but what (the companies) are doing for the community as a whole. So far the companies who have come in here have been good corporate citizens contributing more than just tax dollars.”

Gov. Bill Haslam said incentives should be viewed as an investment that produces returns for taxpayers.

“The challenge for me is to look at it like you would in business and that is return on investment,” said Haslam. “We’re literally investing the taxpayers’ money when we give incentives so we have to make sure the return is there in terms of the number of jobs, what those jobs pay and the capital investment.”

Dulburger said he understands the controversy that surrounds the use of incentives but that simply doing away with incentives like the PILOT program would be tantamount to unilateral disarmament in the ongoing battle for jobs.

“We get that there is general criticism from people who don’t like the concept of public sector incentives for private firms and that’s a common theme around the country,” Dulburger said. “They say, ‘We pay our taxes; they should pay theirs.’

“But we live in a highly competitive world and the choice we have is to compete or not compete. If we choose not to compete we will have fewer jobs and capital investment in Shelby County.”

Expanding the arsenal

Wharton also understands the criticism surrounding and even harbors his own mixed feelings for the PILOT program.

“We have to have the incentives but I wish we had a greater arsenal of incentives,” Wharton said. “I’m not a big fan of the PILOT program because you’re manipulating the tax rate, but it’s the only tool we have for the most part.”

That is beginning to change, and the PILOT review could produce recommendations that could allow the program to do more.

EDGE has already introduced several new incentive programs in the hopes of expanding the number and types of businesses it can reach.

Dr. David Ghodoussi, founder of Optimum Polymer Technologies, a Memphis-based automotive detailing solution manufacturer, was trying to expand his business and looking at locations in Memphis and Mississippi.

In 2013, Ghodoussi acquired a $271,000 loan through the EDGE Impact Fund, which provides capital to small businesses that want to expand in Shelby County but would not qualify for a PILOT.

“It was a great program that we were able to take advantage of for a building we wanted to purchase,” Ghodoussi said. “The terms were much better than what the banks were offering us and I really enjoyed working through EDGE because most small businesses like us are not able to go and find all the resources available to them.”

EDGE also provides Small Business Administration 504 loans, which can help fund land and equipment purchases and building renovations. EDGE has also launched the Inner City Economic Development Fund, a forgivable loan program to fund façade and interior improvements for neighborhood businesses in distressed parts of Memphis.

Dulburger said the ongoing review will include exploring ways to do more with the PILOT program, which currently places a heavy emphasis on job creation.

“How can we use the existing tools we have in new and innovative ways to spur additional growth in Memphis and Shelby County?” Dulburger said. “A focus on jobs means we are structurally precluded from other projects that may be of benefit to the community.”

Younger will take a close look at the PILOT program offered by the Center City Revenue Finance Corp., the financial arm of the Downtown Memphis Commission. Both PILOT programs are authorized by the same state law, but the one offered by the CCRFC places a greater emphasis on capital investment, which encourages redevelopment. EDGE, which places an emphasis on job creation, may be able to craft a similar program to encourage investment in targeted areas to spur things like inner-city redevelopment or speculative industrial development.

The ongoing review will also focus on the process for receiving incentives, which has been criticized for years by some business officials as too cumbersome.

“The general notion is, if we can compete how can we better compete?” Dulburger said. “How can we streamline the process, or make the process simpler, while at same time maintaining the transparency we have worked very hard to implement at EDGE?”

PROPERTY SALES 51 328 20,960
MORTGAGES 58 387 24,132
BUILDING PERMITS 170 842 43,435
BANKRUPTCIES 50 288 13,468