New info shows how Foxconn will never be worth it, and don't bet on WEDC getting our money back

This week, we got a new analysis that put real numbers behind something we've suspected all along - that the Foxconn deal in Racine County won't come close to paying back what Wisconsin taxpayers might put into it.

The figures come from Timothy Bartik of the Upjohn Institute, who published work that he did on the “Costs and Benefits of a Revised Foxconn Project.” And a main emphasis of the report seems to be identifying how to change the current deal Foxconn has with the Wisconsin Economic Development Corporation (WEDC).

This memo analyzes the costs and benefits of a revised Foxconn deal that is some scaled back version of the original Foxconn deal. In other words, the analysis here is of a possible new state contract with Foxconn, but one that follows the credit rates of the original deal. Why analyze a possible new contract? Because given that the Foxconn project has been significantly revised, a new contract seems likely. Why not analyze what a scaled-back Foxconn project might receive in incentives under the original contract? Because under the original contract, there are many goals and timetables, and many scenarios for possible clawbacks; it is difficult to project what might happen, legally and economically, under all these scenarios. What can be readily calculated are the implications of a new contract, that applies the current deal’s investment credit rates and job creation credit rates to a scaled-back Foxconn project….

New contract? That’s an interesting sidelight, especially since Bartik says he did this work was derived from “a request from the Wisconsin Department of Administration, who asked for my assessment related to the costs and benefits of the evolving Foxconn project.”

So let’s look at the three scenarios Bartik used – the current Foxconn contract, and a couple of alternative incentive schedules.

The original Foxconn plan incentive payments are directly taken from the November 2017 agreement between Wisconsin and Foxconn. As mentioned, although the incentives are technically paid as a 17 percent wage tax credit for 15 years, and a 15 percent investment tax credit, there are various limitations implied in the maximum incentive schedule. In particular, the wage payment maximums do not allow for full inflationary adjustment of the initial wages. Furthermore, the total investment tax credit is limited to $1.35 billion, which is only 13.5 percent of the planned investment of $10 billion. Furthermore, the investment tax credit is paid out over seven years.

In the reduced Foxconn scenarios, one possibility is that the wage credit will continue to be limited to not allowing for full inflation adjustments, and that the maximum investment tax credit will be limited to 13.5 percent of $2 billion and allocated evenly across seven years. These are the scenarios described as new limits or ratcheted down limits.

A second possibility is that the reduced Foxconn scenarios will keep the old annual limits and lifetime caps of the original contract, but simply allow the reduced scale project to claim 17 percent wage credits for 15 years and a 15 percent capital investment tax credit. This scenario provides significantly higher incentives than the ratcheted down limits.

Bartik goes with a relatively optimistic scenario that mirrors what Gov Tony Evers’ told CNBC in late June. In this case, Foxconn would add 1,500 to 1,800 jobs in a $2 billion Gen 6 facility, then keep those jobs for the next 15 years.

If we assume that comes true, here are what the various results and payments look like.

Bartik also notes that the money sent to Foxconn is going to come at a cost. Some of which we have already seen through the hundreds of millions of dollars in infrastructure that has been sunk into SE Wisconsin in the last 2 years. That cost also comes in the form of less state aid being available for other services like K-12 education, and because of more needs that communities will have to pay for in the future if the Foxconn project actually does work out.

As the Table shows, net fiscal benefits are slight relative to incentive costs. Incentive costs range from $341 million to $482 million, and net fiscal benefits range from $55 million to $68 million. The Foxconn job creation, and the associated multiplier job creation, does generate considerable increases in state and local tax bases and hence tax revenue. However, over 90 percent of this is offset by increased needs for public expenditure due to an expanded population.

The job creation resulting from Foxconn does increase employment rates, and this puts some upward pressure on Wisconsin wage rates. Countering that is that the cutbacks in K-12 reduced wages. As it turns out, these two effects tend to be of similar size. The costs of the education cutbacks tend to dominate if the incentive costs are larger relative to job creation. The key point here is that net incentive costs are not just a dollar cost to the state government, but also potentially an economic cost to the state economy and state residents...

To fully ascertain plausible substitute effects would require a detailed economic study of plausible alternative uses for the Foxconn site, and possible direct jobs generated. In the absence of such a detailed, site-specific study, one could rely on statistical averages. If one enters the maximum cost per job incentives into the model, the 1,500 jobs scenario with the old limits used, the model says that such incentives would be expected to have a “but for” of 73 percent. That is, on average, if one compared one state that offered such incentives to all projects, with another state that did not offer such incentives, the job creation in the state that did not offer the incentives would be 27 percent as great as the state that did offer the incentives. If we applied this statistical average to the 1,500 jobs at the Foxconn project, this implies job creation in substitute jobs of about 400 jobs without the incentives. But a site-specific study would give a better estimate.

In other words, Bartik estimated that 400 jobs would have been created at the Foxconn site IF NOTHING WAS HANDED OUT AT ALL. Instead, we're projected to spend hundreds of thousands of dollars per job, and a whole lot more in infrastructure.

When the Wisconsin Examiner asked WEDC CEO John Hogan what he thought about Bartik's analysis, he claimed that a reduced, Gen 6 project for Foxconn would eventually mean they'd have to pay back any money they got from the state.

.Hogan continued "...The plain fact is the company would not be able to retain any incentives if, by the year 2023, it had only created either the 1,500 or 1,800 jobs the study is based on."

— Wisconsin Examiner (@WIExaminer) August 5, 2019

And according to the state's handout on the Foxconn deal, he'd be correct, as Foxconn would be subject to clawback provisions in 4 years if it didn't have 5,850 jobs in the state. But there is a problem with Hogan's spin.

How are you going to get the money back? Wisconsin Public Radio had an update this week on another pre-election WEDC “new manufacturing business coming to Wisconsin” deal from 2012. And if this any indication of what might happen if WEDC tries to claw back money from Foxconn, we are likely screwed on ever recovering our funds.

Kestrel Aircraft Company and its parent company ONE Aviation Corp. filed for bankruptcy last October along with 10 other subsidiaries. At the time of filing, the New Mexico-based business listed a total debt of more than $198 million. Of that, the company owes $53 million in loans to state and local governments, including around $3.4 million to the Wisconsin Economic Development Corp.

In 2012, Kestrel pledged to create 600 jobs in Superior in what was billed as the city’s largest job creation project since World War II. The city’s redevelopment authority loaned Kestrel $2.6 million and Douglas County provided a $500,000 loan through its revolving loan fund. As of last fall, the company owed the city $1.7 million and Douglas County $479, 421, according to court documents filed in Delaware.

"We gave them money in the hopes that they would (create jobs). They used that money. They invested in some things. I’m sure they intended to build airplanes, but (it) didn’t work out," said Superior Mayor Jim Paine. "Now, we don’t take risks like that anymore…

WEDC announced it was pursuing legal action against Kestrel in October 2017 after the company failed to make loan payments. In June of last year, the agency filed a civil lawsuitwith the city and county to recover their loans. The suit was dismissed in November with the right to re-open if any bankruptcy case is dismissed or closed, according to Dane County court documents.

"As a creditor, WEDC is attempting to recover funds through the bankruptcy process," wrote WEDC spokesman David Callender in an email. "It will be up to the bankruptcy court to determine whether or how much WEDC will be repaid. WEDC’s claim in the bankruptcy is based on the $4 million in loans that Kestrel received from the state."

And Kestrel is based in America. I’d imagine it’ll be even tougher getting money from Foxconn if they pull up stakes and head back across the Pacific Ocean. In the meantime, we will already have paid hundreds of millions of dollars from the 15% kickback on construction and 17% payment of salaries if Foxconn has 520 jobs in the state by the end of this year, or 1,820 next year.

Which tells me that limiting the state's liability or cutting a check to Foxconn to have them go away are things that need to be done at this point, to keep this albatross from getting even more weighty. We didn't really need Timothy Bartik to run the numbers to tell us Foxconn is a scam, but it's nice to see the reality laid out in black and white on your computer screen.