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Rejecting Siemens deal serves our town’s best interest

February 29, 2016

Last spring, the town of Pepperell, Mass. approved a 15-year tax-increment-financing (TIF) agreement with 1A Auto, Inc. to construct a 100,000-square-foot, $26 million headquarters on the site of a former mill. The plan called for the creation of 150 jobs and the retention of 95 jobs, and it would allow the growing company to remain in Pepperell instead of having to construct its North American headquarters elsewhere.

Pepperell’s agreement with 1A Auto, which averaged out to about a 70 percent tax break over the time of the 15-year agreement, represents exactly what TIF agreements are supposed to be used for – attracting private investment to blighted sites that need redevelopment, luring additional businesses to come to town to diversify the tax base and help pay off the town’s cost of the TIF, and promoting job creation and job retention in an area of the state that has had difficult economic conditions in its past.

As a privately-owned small business, 1A Auto also promised to invest the estimated $1 million in tax savings in building the company, not just padding shareholders’ pockets.

In contrast, Walpole Selectmen are seeking Town Meeting approval this month for a 20-year TIF agreement with Siemens that isn’t in the spirit of what tax breaks for economic development are supposed to be about.

The proposed agreement with Siemens sticks taxpayers with a big tab, and accomplishes very little for the local community. While Pepperell’s deal with 1A Auto ensures the revitalization of an abandoned property, Walpole’s deal with Siemens is for a property that is already on the tax rolls in a vibrant part of town. While Pepperell’s agreement with 1A Auto will entice other businesses to come to their town as well, the Siemens TIF won’t do that for Walpole. While 1A Auto will re-invest the tax savings in keeping people employed, Siemens’ TIF ensures that a multi-national billion-dollar corporation has more money to give to its shareholders.

Under the proposed agreement, Siemens will invest up to $300 million to renovate and expand their facility in Walpole, creating a minimum of 400 permanent life sciences jobs, and hundreds of temporary construction jobs. The town has agreed to give the company a 90 percent tax break on just the value of the expansion for the first five years, 80 percent break the next five years, 70 percent off the next five years, and 60 percent off the final five years of the agreement, totaling about $21 million in total discount. The state will also give Siemens about $20 million in tax incentives of their own, but will recoup most of that money through payroll taxes within the first ten years of the agreement. The town will garner a net total of about $6.6 million in property taxes, about $330,000 per year.

TIF agreements originated in 1952 in California to promote urban renewal, and have been utilized as an economic development tool in Massachusetts since the early 1990s. If used correctly, TIFs temporarily redirect government revenue in order to create tax revenue that would not otherwise exist, thus providing a net benefit to the community and state. As Rose Naccarato writes in a research brief for the Tennessee state government in 2007, any improvements associated with a TIF agreement are intended to “encourage private development and thus raise property values above where they would have been without the improvements.” With the higher property values, property tax revenues rise. Then, the “property tax revenue from increased assessments over and above the level before the TIF project began (the tax increment) is used to finance the debt” that came about because of the TIF in the first place.

During the early history of their use, TIFs were primarily used in economic target zones where the economy was depressed and governments had no other easy means to attract new businesses.

Nowadays, TIFs are used frequently by cities and towns across Massachusetts and the country even in cases where the local economy isn’t depressed. Their liberal use has been aided by more flexible rules by state governments that allow TIFs to be used in locations other than blighted areas, and towns are often pressured into giving out generous tax breaks because companies will play one state or town against another in order to receive the most savings.

Of course, TIFs, by their very nature, fly in the face of basic economic principles because they theoretically give unfair advantage to one company that will be able to reduce its operating expenses while their competitors still pay the same. That’s why TIFs need to be used sparingly, and only for the right reasons – like in cases where they are necessary to help rehabilitate a depressed area.

Not only does the proposed TIF for Siemens run against basic economic principles, and against basic tax fairness, the Board of Selectmen’s approach to the TIF has been flawed from the start.

When Siemens approached the Board of Selectmen last summer to discuss negotiating a TIF for their proposed expansion, Chairman Cliff Snuffer and Town Administrator Jim Johnson unilaterally appointed a committee to negotiate the TIF without the input of an independent TIF Committee, as required by the Board’s own policies and procedures, and from the Economic Development Committee. The framework for the agreement was developed before the completion of basic due diligence, including an independent appraisal of the property, a traffic study, and, most importantly, an economic impact study.

When the final product was finally presented to the rest of the Selectmen, the Board violated the Open Meeting Law twice to discuss the deal in two illegally-held executive sessions. The Town Administrator also signed a confidentiality agreement with the town in which he promised to actively obstruct all public records requests. Details of the deal weren’t released to the public until one Selectmen forced it out. As of today, Snuffer has not apologized to the public for the secrecy or for the OML violation.

Of course, transparency has never been one of Town Hall’s strong suits. It was the same with the 2014 facilities override and the Jarvis Farm purchase – Town Hall holds information from the people as long as possible, in order to force it through Town Meeting. Were it not for the efforts of one Selectman, the Siemens deal wouldn’t have become public until much later than it did. It is easier to stifle any opposition when the opposition has less time to conduct the necessary research and prepare opposing points. Information is power at Town Hall. Town Hall’s obsessive control of information is what is destroying the Representative Town Meeting form of government in Walpole.

It turns out, too, that the initial provisions of the deal were a moving target and couldn’t be trusted. In several Selectmen and Finance Committee meetings over the course of two months, as this YouTube video helpfully shows, both Siemens executives and town officials repeatedly claimed that the company expected to create “more than” 700 jobs as part of the expansion, and the tax break would be about $12 million. But when the rubber hit the road, and it was time for Siemens executives to commit to that jobs number in the agreement, they backed off. The TIF agreement being presented to Town Meeting only calls for a commitment to 400 jobs, and gives the company a number of outs in the form of ambiguous legal language, in the event they don’t meet those projections. The total tax break, too, widened, once the Board of Assessors hired an independent appraiser to look at the property.

So when the total number of jobs to be created actually went down, from 700 to 400 in just a matter of weeks, the extent of the tax break went up – not down.

Selectmen and Siemens officials also initially claimed that the addition of 700 Siemens employees would provide tremendous benefit back to the town through increased meals tax revenue. But as details of the TIF emerged, this claim turned out to be inflated as well. Siemens actually will be expanding its own cafeteria as part of the expansion, so they won’t be sending too many employees to local restaurants. And mathematically, even if every single Siemens employee went out to eat at a local restaurant every single day, the revenue generated to the town would still be minimal – less than $7,000 per year.

So, who is paying the $21 million that Siemens won’t be paying? The rest of us. That’s because the whole purpose of taxation is that it provides revenue to the government for services provided for the benefit of all taxpayers and citizens at large. When a taxpayer doesn’t pay its fair share, other taxpayers must pick up the slack because the same government services will still be provided and must be paid for. As a 2011 Cato Institute analysis suggested, the increased tax burden on everyone else in the community affected by a TIF can actually reduce economic growth overall and make the region less attractive for business.

If the town of Walpole is saying that $21 million won’t matter, and can be waived, doesn’t that technically mean that our tax rates are $21 million too high, because we can still provide the same services with $21 million less? In theory yes, but in this case actually the impact of that $21 million reduction will be seen and keenly felt by taxpayers.

At a broad level, Siemens employees will use our roads and bridges, paid for and maintained with tax dollars. Walpole DPW employees will plow Coney Street after every storm with our tax dollars. The Siemens plant will occasionally require the response of public safety officials, even for routine fire drills or fire alarm maintenance, the cost of which will be higher than for many other parts of town because of the company’s isolation in East Walpole and distance from the fire and police stations. There are many other town employees and services that will either directly or indirectly provide benefit to Siemens, just as they do every other business and residence. This all costs money – part of the social contract that every taxpayer agrees to when they pay their tax bill in exchange for services. The $21 million break equates to about $2,200 that will be picked up by each of Walpole’s approximately 9,600 other taxpaying businesses and residences. Just a cup of coffee per day?

At a more specific level, the impact is even greater. Siemens will put a tremendous strain on the town’s Building Inspection, Engineering, and Planning Departments because the agreement caps Siemens’ permit fees at $250,000 – a discount of about $1 million from what they would otherwise pay. The purpose of permit fees is to ensure that town staff can cover the costs of the inspections and paperwork they must contend with. Even though Siemens will be capping their fees, the expense to the town of following through with the Building Inspection services does not go away. Because of the complexity of the multi-year expansion project, the town has plans to hire an outside company to help town staff, at great expense. The more than $1 million worth of services that will be provided to Siemens without compensation will inevitably be subsidized instead by other taxpayers and by other fee-payers.

An economic impact study commissioned by the town and funded by Siemens shows that the deal will provide only modest economic benefit to the town. The study indicates that more than $2 million in consumer spending will be created from the Siemens expansion, but doesn’t specify how much will be focused in Walpole. Out of the roughly 600 employees currently at the Walpole facility, only about 32 live in Walpole. The majority of employees reside out of Norfolk County. With the addition of 400 additional employees, the number of Walpole residents employed is expected to increase only slightly, by about 15. The total net revenue to the town of Walpole over 20 years actually drops as the number of additional employees increases, because of the cost of servicing additional employees and their families.

But that also doesn’t account for the impact to the Building Inspectors, nor does it account for indirect expenses such as snow plowing and road maintenance affected by the 400 additional vehicles on the road near Siemens twice a day. It’s telling that Siemens isn’t even interested in contributing anything in the agreement toward road maintenance, evidenced by their apparent disinterest in subsidizing the construction of a Coney Street on-ramp to Route 95. That cost will ultimately be borne by the state, and possibly by the town as well. Although the state will provide more than $2 million in one-time payment for Coney Street road improvements, that money does not come close to paying for the cost of a new on-ramp. That’s also $2 million that will be diverted away from other road priorities in town, such as rebuilding Hitching Post Drive.

The study also projects modest economic gains to the local economy, but mostly through increased consumer spending. If most of the employees live outside of Walpole, this increased consumer spending will be mostly regional in focus, rather than local. Siemens’ isolated location in town, near two other towns and a major highway, also means the economic benefits, if any, won’t trickle out to downtown businesses or any economic corridors outside of Route 1. And isn’t it interesting that Siemens has never even been a member of the Walpole Chamber of Commerce?

The substance of the deal also poses many significant questions and concerns. For one, a majority of the additional construction at Siemens is for a parking garage. So taxpayers will give Siemens a break on what amounts to a luxury item. If the purpose of a TIF is to help boost job creation, the presence of a parking garage does not create one additional job by itself.

Siemens will provide several goodies to the town, including $160,000 for snow removal and equipment, $100,000 for new fields, and $250,000 to partially pay for a new ladder truck. These so-called “benefits,” which are really just window dressing, are all front-loaded, within the first five years of the agreement, leaving nothing for the town for the remaining 15 years.

All it takes is one bad winter to wipe out the $160,000 in snow removal costs. The new fire truck will actually cost a total of upwards of $1,000,000, which is another hidden cost to the town that has been glossed over during Selectmen discussions of the agreement.

None of the three “freebies” have ever been approved as a town spending priority at this time by the Capital Budget Committee. Selectmen overstepped their authority in unilaterally including the items in the agreement, apparently because they were on their own Board “wish list,” without the input of other boards as to what the true priorities of the town are. By earmarking the funds for specific purposes, Selectmen have taken power away from the Capital Budget Committee, Finance Committee, and Town Meeting, which are all supposed to decide the appropriation of all revenue into the town. A fairer approach would have been for Siemens to simply provide the total amount of all three items ($510,000) in the form of a check to the town, which can then decide how to spend the money through an appropriate and transparent vetting process as provided in the Town Charter and Mass. General Laws.

Support for the deal seems to come down to several seemingly logical, but flawed arguments. Some Town Meeting Representatives have publicly said that they believe Siemens would be more likely to leave town if the TIF is not approved. But Siemens executives have said repeatedly that they are not threatening to leave if the TIF is not approved. In fact, Siemens has already invested more than $100 million in their Walpole facility under their current 10-year TIF with the town. All RTMs are being given the opportunity to tour the Siemens plant, and will have the chance to see the many hundreds of millions of dollars in equipment that Siemens currently possesses right here in our town. The reality is that Siemens won’t be leaving Walpole any time soon. Doing so would require re-training hundreds of new employees. Siemens executives have said they want to do the expansion here, because the necessary personnel and equipment are all here.

Even on the slim chance they would want to leave, the TIF itself actually does nothing to keep Siemens in Walpole in the first place. Even while well-compensated Siemens executives in Germany look to spin off the company’s healthcare division that would include the Walpole plant, there are no provisions in the agreement that require Siemens to stay in Walpole for the duration of the agreement.

Don’t think it can’t happen in Walpole. Across the country, there are many tales of companies leveraging their position to get lucrative tax breaks, then bailing even before the breaks are about to expire. Since the agreement with Siemens lacks even the most basic enforcement mechanisms, there is little protection for the town’s interests. The agreement doesn’t even require Siemens to retroactively pay back any money if it fails to meet job projections.

If Siemens decides to leave Walpole before the TIF has run its course, there is nothing that would require them to pay back the tax break they gained from the town. Siemens’ own presentation to Selectmen in January indicated that the Walpole plant has had four different owners in the span of about 30 years, making it problematic for the town to commit to a 20-year tax break with little assurance of continuity in loyalty to the town. Those who are running the Siemens plant today will most assuredly not be the same ones running the plant 10 or 20 years from now. A lot can change in Siemens’ industry in just 20 years.

A fairer, more equitable arrangement would have called for Siemens and the town to agree to a 10-year TIF, which is also more in line with the length of comparable TIFs in other parts of the state, and then Siemens could choose to revisit the negotiating table with a new Board of Selectmen and Town Meeting to get another 10-year TIF after the first one expired. If a TIF is really supposed to create economic development that would not otherwise exist, it seems that 10 years would be sufficient to accomplish that goal.

The town of Walpole government should not be so dependent in the first place on one large taxpayer. Government spending in Walpole has grown from $63.2 million in FY 2009 to more than $80 million in FY 2016 – an increase of more than 25 percent in seven years. This is a recipe for un-sustainability in itself, but the budget’s apparent dependence on Siemens’ presence in town is risky given the current economic conditions facing our town and state in general. Going forward, the town would be better served if it diversified its commercial tax base and controlled spending to ensure more flexibility in the event that Siemens ever did vacate the town.

Other TIF proponents point to the supposed “new money” that the TIF deal would generate for the town that wouldn’t exist otherwise. Even while the company makes out like a bandit with $21 million, the town will generate a net revenue stream of about $6.6 million and just has to patiently wait 20 years to get a windfall. But the cost to town taxpayers is real because the $21 million must be paid by everyone else. And while the payoff after 20 years might be big, that’s also making a mighty assumption that Siemens won’t have left Walpole by then, or won’t be looking for another TIF at that time.

Meanwhile, as Siemens gets a big break in their taxes, Walpole officials will be constantly pushing more Proposition 2.5 overrides to help pay for the services that Siemens’ $21 million in property taxes is supposed to be helping to pay for. Why would Walpole residents support any override when not everyone is paying their fair share? Again, the basic principle of taxation is that everyone pays to get services returned to them. When $21 million is removed from the revenue stream, it must come from somewhere and that means from our wallets.

If the Siemens TIF will really be as beneficial to the town budget as town officials claim, the logic must follow that there will be no reason for overrides at all during the duration of the agreement because the revenue from Siemens is the equivalent of $330,000 per year in higher tax revenue without an override. We all know that the town will be seeking overrides anyway. Conversely, if it is really “new revenue,” then it doesn’t exist in the first place so its addition to the budget is not necessary. The town spends money recklessly anyway, so why are we giving the town more money to spend? The money does not exist, so if the TIF is rejected it has no impact.

Another common argument for supporting the TIF is that it is necessary to present Walpole as business-friendly at a time when corporate culture makes it easier for companies to play towns off of one another for substantial subsidies. But what does it say about Walpole when one large company can throw its weight around and get big breaks while Walpole’s small businesses get soaked?

A local Italian restaurant is currently having difficulty getting its approval from Town Hall to open its doors, while Siemens has been promised “expedited permitting” for its own project. While Southridge Farm and Nursery on South Street is investing $3 million and spending more than $20,000 in building inspection fees to create 10-15 permanent jobs and many construction jobs, they are not getting a tax break. The inequity between a large corporation like Siemens and small businesses like Southridge Farm and Nursery is what makes Walpole “anti-business.”

A core tenet of free market capitalism is the notion that government should not intervene in the economy, either to help or hurt businesses. Subsidies, protectionist tariffs, tax breaks, and similar policies are all intended to artificially support a company, just as regulations and tax increases will all hurt businesses in one form or another. Just as a tax increase hurts a business, conversely a tax break helps them. When the government gives tax breaks to a particular company, they are basically giving that company a competitive advantage and a financial savings unavailable to other firms. This makes the playing field unequal and hurts our economy overall when one company has an artificial government-created advantage over a competitor. This is equivalent to the government imposing a tax increase on one company, while keeping taxes stable for all other companies in the same industry. In other words, competition is not on equal footing. This is the essence of crony capitalism.

A 2012 white paper by the Public Interest Institute noted that TIFs are frequently “sold to homeowners as having no impact on their property taxes, as basically ‘free money.'” But “possibly the TIF area had not been developed by the private sector in the first place because the market had decided the area was undesirable.” The effect is referred to as a “moral hazard” by economists, because private and public funds are being diverted in a “detrimental manner.” TIFs disrupt the natural flow of the free market.

The nature of TIFs, of course, when done right, is that they can help boost economic development by luring one business into town to redevelop a blighted area, and then other businesses that follow suit to be near that first business will pay their fair share to offset the cost of the original TIF. Since Siemens is in an isolated part of town, it is not likely that any other businesses will be enticed to move here to be part of the Siemens-backed local economy. The town lacks clean industrial land for businesses to move to, making it even less likely that the Siemens deal will translate into tangible economic growth. So how “business-friendly” does it really make us to give Siemens this tax break? Not very business-friendly, because we do not have much to offer other corporations since Siemens is taking up just about the only prime industrial real estate that we have – and they are not even going to pay their fair share for it.

Being “pro-business” is about more than just handing out tax breaks to multi-billion dollar corporations. A town that makes itself “pro-business” through other means is a town that will have all the leverage when a company like Siemens comes knocking, because companies want to set up shop in a “pro-business” town where zoning is simple, the tax rate is stable and low for all, the permitting process is efficient, and town officials are cooperative. Walpole will not magically become “pro-business” because it gives away $21 million to Siemens, because there is still a lot of work to do to change the economic development mindset at Town Hall.

A more effective way to make Walpole “pro-business” is to lower spending and reduce taxes for all residents and businesses, not just for one large corporation.

The extraordinary generosity of this particular deal actually makes it more difficult for other cities and towns across the country to push back against extravagant corporate tax breaks. Data from the Mass. Economic Development Coordinating Council indicates that the time length of this deal (20 years) and scope (average 75 percent break) would be an anomaly, and not in a good way, among TIFs signed in the past 18 months in Massachusetts.

If Siemens receives this TIF, the race to the bottom is on for other local businesses to demand similar tax breaks from our town government. As a 2006 article points out, some municipalities in other parts of the country have given tax breaks to retailers like Cabela’s, setting a new standard in the use of TIF agreements that will surely makes its way to Massachusetts eventually. “We may see the day when every new 7-Eleven and McDonald’s has its own TIF,” author Daniel McGraw writes. “That prospect may seem farfetched, but it wasn’t too long ago that cities wouldn’t even have considered giving up tens of millions of dollars in exchange for yet another store selling guns and fishing rods.”

The TIF itself just doesn’t serve the best interest of tax-soaked Walpole residents. As with previous override proposals, Selectmen have a tendency to develop poor concepts for the town and then use every means available to them to justify it in the eyes of the public, bringing in well-paid consultants to confirm their claims, and shutting down any dissent. Precious political capital and time is spent attempting to persuade the people that Selectmen know best, instead of spending that capital and time on getting it right for the people in the first place.

The Selectmen have shown an apparent inability to negotiate in the best interest of the town, when they gave away the store with the sale of the old Walpole Library in 2013 and the purchase of Jarvis Farm in 2014. Add that to the very one-sided town union agreements that the Selectmen have negotiated, which have created an unsustainable payroll that is higher than most other comparable communities, and the result is that the Selectmen are clearly in way over their head.

As Finance Committee member Kenneth Guyette asked at the January 5 Selectmen meeting, “If  [the deal] ended at [a] 90 percent [tax break], where did the negotiations start?” Apparently Selectmen never really negotiated.

If the Siemens TIF passes Town Meeting, it may be a cause for celebration for some, but for the majority of voters it really represents yet another reminder that our Selectmen have failed us. Our community deserves better than this, and they deserve better than a Town Meeting and Board of Selectmen that does not represent them.

One Comment leave one →
  1. Raj Ponnuraj permalink
    February 29, 2016 10:45 AM

    Hi Sam.Thanks for your article.It is very helpful. I hope the RTMs defeat this proposal. IT is not a fair deal for Walpole and its residents. THanks.

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