I know that everyone in the Memphis area or in the national business world has heard about the recent decision of Electrolux to relocate a new manufacturing plant to Memphis. The decision came of no surprise even in light of the reluctance and indecision on the part of Electrolux. The city of Memphis, Shelby County and the state of Tennessee have given the Electrolux company an unprecedented incentive package that if completed between 1999 and 2008 it would have ranked 14th on a list of 25 of the highest economic development subsidies given to any manufacturing plant. In this economy, any kind of job creation from the private sector is considered a victory by any local and state government, but is the cost always worth the product? There have been numerous concerns raised by the media and other watchdog groups around the economic development incentives and the location of the manufacturing site. While I agree that the location is somewhat questionable, I am going to focus on the economic development incentives given to Electrolux by local and state governments, but first I need to give some background on Electrolux as a company in order to put things in prospective.
Electrolux is a Swedish based company with 86 total manufacturing locations worldwide with a questionable track record. Electrolux recently made the decision to shut down a manufacturing plant in Vastervik, Sweden. While this may seem like a typical business move, Vasterik is the hometown of Electrolux CEO Hans Straberg. He cut 500 jobs and moved them to the cheaper manufacturing and wage market in Hungary. The new model for the Electrolux Company is to search for low the lowest cost manufacturing locations. This is either a feast or a famine for the city of Memphis. In 2010, Electrolux decided to shut down a plant in L’Assomption, Quebec and relocate in Memphis. The plant in Quebec is scheduled to shut down completely by 2014, but not without cost to Electrolux. Canada was wise enough to put a contractual agreement that required Electrolux to pay back money that was spent in 2008 if certain requirements were not met. The money will be paid back to Canada in the amount of $4.7 million. Guess what? Memphis does not have this protection.
The total cost for Electrolux to relocate to Memphis and develop a green-field site is coming up to approximately $190 million, but the cost seems to be falling largely on the taxpayers of Tennessee. The state of Tennessee is projected to put in $97 million funds to Memphis and Shelby County both putting in $20 million apiece. This money came in the form of bonds that the state, city, and county issued. The cost of the bond issuance was $347,500, and the annual debt service on the bonds will be roughly $68.8 million over 25 years. Electrolux will be making up the difference of only $60 million; does not quite seem equitable to say the least.
Electrolux is also receiving tax breaks in the form of a famous Memphis Payment-in-Lieu-of-Taxes (PILOT) program that will last for fifteen years. The PILOT program gives Electrolux tax breaks in both real and personal property taxes to the tune of a 75% percent reduction in Shelby County and 90% reduction in Memphis city taxes. This will cost the city and the county a meager $33,870,858. Electrolux will take the title to the building and the land; turn the title over to the Shelby County Industrial Development Board (SIB); the SIB will then lease the property to Electrolux for no more than $1,000 annually; and Electrolux will run and operate as if they own the property, or because of the lack of protection that Memphis so wisely left out, pack up and leave. That would leave Memphis with a new modern industrial manufacturing facility that it is currently paying for with no tenant. Like I stayed early; smart move Canada.
While these considerations alone are enough to raise eyebrows, my biggest problem is with the required Economic Impact Report that the University of Tennessee was contracted to complete. I must say that this was the poorest attempt at this kind of report that I have personally ever seen. This is something that if I was the department whose name was being put on the report; I would be very embarrassed. Electrolux has stated that they will roughly employ 1,240 people within five years of the start of production and could potentially create nearly 8,000 jobs in the construction and supplier jobs combined, but the study conducted by the University of Tennessee estimated 1,500 manufacturing jobs. I’m sure they know more about the number of jobs being created than the actual employer does anyways. They, however, generated some wonderful numbers on tax revenues to the both the state and local governments. The study stated that the state and local governments would receive $7.7 and $6.5 million in tax revenues respectively every year. The state and local governments would also receive $132.5 and $95.9 million respectively in tax revenues over the life of the plant which they estimated at thirty years. While these are some great and impressive figures that they conjured up, there is a footnote in the study that causes concern. They did not account in any of these figures for the tax revenues forfeited by both governments in the form of incentives. A fairly smart 8th grader could have generated these numbers with a good enough calculator. I do have to say that due diligence was not done here.
From my calculations at present value, the state, city, and county have given Electrolux $137 million to build the plant, given up $33.8 million in tax incentives, and a total debt service on bonds of $68.8 million. If the figures that the University of Tennessee generated are correct, the project will generate a total tax revenue to the local and state governments of $14.2 million annually. I am not a mathematical genius, but if my calculations are correct it will be almost 17 years before enough tax revenues are generated to recover what has been spent or forfeited for Electrolux to relocate to Memphis.
I realize that this has been a mostly negative outlook on the future that Electrolux will have with the city of Memphis. There could quite possibly be a large amount of good that comes from this, but, from my point of view, I feel that Memphis and the state of Tennessee are going to get the raw end of the deal sooner or later. Job creation is important in times like these, but at what cost? Electrolux had a strong reason to move to Memphis, whatever it may be. Was it necessary for tax payer money to be offered up so that Electrolux could put the money in its capital budget and treated like pocket change?
With the logistical advantage that Memphis has over a large number of cities across the country, Memphis could have dared to be a little less generous. Memphis has a strong advantage over most of the country, and I felt as if we threw it away. There needs to be more thought on behalf of the people that make these decisions. Is selling your soul or giving up millions in tax dollars worth letting someone in with no connection to the community and no contractual agreement to stay here? I guess only time will tell.
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