Volkswagen incentives less than original plant but watchdog groups call government aid 'excessive'

Volkswagen incentives less than original plant but watchdog groups call government aid 'excessive'

July 25th, 2014 by Dave Flessner in Business Around the Region

POLL: Are the government incentives for VW excessive?

The Volkswagen assembly plant in Chattanooga has been chosen to build a new SUV.

Photo by Tim Barber/Times Free Press.

By the numbers

$274.2 million - Government incentives provided for VW expansion

$137,150 - Incentives provided for each new VW job

2,000 - Number of VW jobs to be added by SUV line

3,600 - Projected supplier and spin-off jobs from new SUV line

Source: Good Jobs First, Chattanooga Area Chamber of Commerce

Volkswagen isn't getting as rich of an incentive package for its next 2,000-job expansion as the German auto maker was given by local governments six years ago when it first came to Chattanooga promising an initial 2,000 jobs.

But local leaders said Thursday they hope the new VW vehicle line will bear just as much economic fruit, if not more, than the original $1 billion plant announcement.

"We're providing a sizable incentives package -- and we wouldn't have gotten this latest project without it," Chattanooga Area Chamber of Commerce President Ron Harr told the Downtown Rotary Club Thursday. "But it's smaller than what was provided six years ago."

Chattanooga Mayor Andy Berke said the city of Chattanooga and Hamilton County will provide a combined $52.5 million in upfront cash this year to VW, in addition to $177.8 million of grants and training assistance pledged by the state of Tennessee to be provided for the project in fiscal 2015. Combined with property tax breaks and TVA assistance, nearly half of the cost for VW's $600 million plant expansion will be paid for by government taxpayers and ratepayers.

Although criticized as excessive by some watchdog groups, Berke said the local governmental assistance is one third less than the $80 million VW got from the city and county in 2008 for its first plant.

"This time around, we're not going to do a lot of the open-ended commitments we made the first time," Berke said. "Some of those sound great until you try to figure out what that costs down the line to actually accomplish."

The new package also will require VW to give back 300 of the 1,200 acres of the free land it got six years ago and require VW to pay an annual $250,000 economic development fee.

"One of the things that was important to us was to get some of that land (optioned by VW) available to use for suppliers we know will want to locate here now to help the new SUV," Coppinger said.

Suppliers and spin-off jobs generated by the planned $600 million SUV line are projected to create another 3,600 jobs and boost the $100 million-a-year payroll addition at VW to a projected $260 million of additional payroll in the local economy every year.

Berke and Coppinger both said they hope for even more economic activity from the VW expansion as the company adds other vehicle lines and brings new research and tourism facilities to downtown Chattanooga. At the urging of Berke, VW has agreed to locate its $12 million welcome center in Chattanooga's downtown tourism district and may locate part of its 200-employee research and development center in a new downtown innovation district, Berke said.

"That's key to driving our innovation economy," Berke said.

Despite the job, research and tourism gains from the latest VW expansion, however, a watchdog group that monitors business incentives questions the amount of money given VW for the expansion.

Philip Mattera, research director for national policy resource center Good Jobs First, said the city, county and state may have over paid with the $274.2 million incentive package that cost $137,150 per job.

"We tend to think anything more than $25,000 to $50,000 per job is excessive," he said. "It isn't one of the most expensive deals ever, but it's on the costly side."

Mattera added, however, that auto plant projects are better than others in terms of the spin-off effects.

"There's more potential for broad economic growth," he said.

Combining the VW direct jobs with supplier and other spin-off jobs from the expansion, the per-job cost of the incentives shrinks to about $48,964.

Mattera said there's a risk that not all which was promised by VW will come to pass.

"Normally, we discourage laying out a lot of money upfront," he said. "We look more positively toward performance-based programs where money is paid out after the jobs are created."

Kasia Tarczynska, a Good Jobs First research analyst, said European nations by statute limit incentive packages, with the maximum often at 20 percent of the investments. She noted that the VW incentives are at nearly 50 percent.

The new incentives combined with the original $577 million package to woo VW to Chattanooga amounts to $851 million.

The local grants have so far won the quick endorsement of city and county leaders without much public discussion. over their cost. Chattanooga's Industrial Development Board on Thursday joined the County Commission in giving its OK to the latest financial incentive package.

Panel member Chris Ramsey did ask for regular reports on minority- and women-owned business participation and hiring for the project. In addition, there was a request for similar reports related to military veterans.

A report last year showed that minority-owned businesses in the Chattanooga area appeared to have directly benefited little from the $211 million in local and state grant money spent to plan and build VW's auto assembly plant, which opened in 2011.

City figures showed then that just $58,385, or barely more than one-tenth of 1 percent of the $38 million in city and Hamilton County funds spent to that date on the VW project, went to disadvantaged business enterprises such as black- or woman-owned firms.

If state contracts for VW-related projects were included, only 2.1 percent of the $211 million spent went to the minority companies, the report showed.

Ric Ebersole, then-chairman of the board, had termed the lack of participation by minority businesses "abysmal" and "disappointing."

State grants for VW must still be approved when the General Assembly convenes in January to set the budget for the next fiscal year.

"The Legislature is always very prudent and we will have to sell this package," state Sen. Bo Watson, R-Hixson, said after the Rotary Club presentation. "I'm confident in the end that the Legislature will look very favorably at an investment and job addition from an existing business in our state of this size."

Contact Mike Pare at mpare@timesfreepress.com or Dave Flessner at dflessner@timesfreepress.com.