Secrecy and Subsidies

Secrecy and Subsidies

Behind the state's deal to bring new jobs to Hoyt Lakes.

In early June, Gov. Mark Dayton signed a supplemental budget bill passed during the acrimonious 2016 session. At the time, most Minnesotans had no idea that it contained a provision for up to $30 million in taxpayer-funded “production incentives” for an anonymous company looking to build a wood-siding plant on the Iron Range. A press release from the governor’s office about the bill made no mention of it.

Additional funds set aside for the company and its project raise the total to nearly $80 million. Of this, nearly $75 million in public money would consist of the aforementioned $30 million in production incentives from the state, $30 million slated for infrastructure from two different Iron Range Resources & Rehabilitation Board (IRRRB) funds, a proposed tax exemption on building materials and supplies that could be worth up to an estimated $9.6 million, and up to $5 million from St. Louis County for public infrastructure support.

The subsidies were intentionally kept quiet by a small circle of powerful politicians and community leaders who worked behind the scenes to pull it together: the governor, key legislators and IRRRB staffers. Many signed non-disclosure agreements promising to keep the company’s identity under wraps.

By mid-June, the beneficiary had been revealed to be Nashville-based Louisiana-Pacific (LP) Corp., which is contemplating developing the wood-siding plant in the small town of Hoyt Lakes on the eastern edge of the Iron Range. It could mean 250 jobs for a corner of the state that faces consistent economic challenges. The estimated price of building the siding plant is $400 million, but that number climbs to $440 million if you add infrastructure and other expenses.

Collectively, the total incentive package works out to roughly $318,000 for every new job created. Rep. Jason Metsa (DFL-Virginia) acknowledges the state money is “steep on the front end.” He represents the district where the plant could be built.

But he argues that in the long run the deal will pay off for both the Range and the state through income taxes and other taxes, as well as the creation of related jobs. “It’s no small investment,” he says. “It’s a very serious opportunity for us.”

Metsa adds that the positions at the plant would be good-paying jobs averaging $27 per hour, or about $56,000 per year, but LP says it has not discussed wage details with local or state officials.

Backers argue that secrecy about the company’s identity was warranted because of the size of the project, the number of jobs at stake and competition with out-of-state sites to land the deal. Besides, they say, LP asked to remain anonymous as the details were being hammered out.

But former GOP Senate Minority Leader Duane Benson does not like the precedent that the deal establishes. “I think it’s terrible public policy. The Legislature does the public’s business, and those things should be, to the greatest extent possible, public,” says Benson, who also served as the executive director of the Minnesota Business Partnership from 1994 to 2003.

Historically, Benson says, the name of the company and the details of proposed incentives would be part of the debate: “Normally they have hearings and you go before committees and it’s well vetted.”

Benson’s concerns are echoed by former Shoreview GOP legislator Phil Krinkie, a former president of the Taxpayers League of Minnesota.

“Why can’t we know the name of a business that’s going to reap tens of millions of dollars of tax benefits?” asks Krinkie, who is also a small business owner. “It’s utterly ridiculous that the Legislature should be voting on tax giveaways without knowing the name of the business. . . . It just seems extraordinarily unusual that these types of things are happening.”

Such deals are fundamentally unfair to other companies, which don’t receive tax breaks or other subsidies, says Art Rolnick, former research director for the Federal Reserve Bank of Minneapolis and former president of the Minnesota Economic Association. Rolnick has earned a national reputation over the years as a critic of business subsidy “bidding wars” between states.

“If you’re going to do this for one business, why aren’t you doing it for all?” asks Rolnick. “The best business policy is lower taxes for all businesses.”

Nothing Sewed Up Yet

Despite the state money on the table, the LP project is hardly a done deal. The company’s board of directors still needs to take two more votes—one in late July, another in February 2017—before greenlighting the plans. The company has also explored options in Michigan and Canada.

Funding Breakdown

$79.6 million total {Nearly $75 million of which is from taxpayers}

$39.6 million from state taxpayers:
• Production incentives of up to $3 million for 10 years
• $9.6 million tax exemption on building materials

$30 million from IRRRB:
• $20 million from its 21st Century Fund
• $10 million from its DJJ Fund

$5 million St. Louis County (estimate)

$5 million Allete (Minnesota Power, estimate)

The touted $400 million cost of the plant remains an estimate; Louisiana-Pacific has yet to design it.

“It’s not our number,” says Brian Luoma, executive vice president and general manager of LP’s siding business. “It’s a project of that magnitude. . . . We don’t know what that number is yet.”

Luoma says that the state incentives weren’t a requirement of the deal, but he adds that the company is typically seeking locations near timber, which usually puts it in small rural towns hungry for jobs. “For a project like this, wherever you went there would be incentives,” says Luoma. “The incentives are attractive, and that does make a difference.”

IRRRB Commissioner Mark Phillips emphasizes that the $30 million pledged by the agency is going to pay for infrastructure at the 800-acre site. “We looked at what would be our appropriate role,” says Phillips. “We aren’t going to finance the plant for them.”

The supplementary budget bill also expanded the range of industries that could receive money through the IRRRB’s 21st Century Fund, an economic development fund aimed at diversifying the Iron Range economy. The change freed up a larger subsidy for LP’s project.

Senate Majority Leader Tom Bakk (DFL-Cook), a veteran Iron Range legislator, says that the change was necessary: “I think to access any of that money, it had to be done.”

The IRRRB’s project overview also includes $10 million that is listed as the “partner investor estimate.” That includes up to $5 million in public infrastructure from St. Louis County, as well as yet-to-be-determined contributions from Duluth-based Allete Inc. (parent of Minnesota Power) and “other partnering agencies.” Allete owns the potential site, which is next to a Minnesota Power facility.

Phillips adds that the IRRRB is working out an agreement under which LP would reimburse the agency for some site analysis and prep work if it decides against building. He adds that the early estimates for incentives and tax breaks are all maximum amounts, and final numbers could be lower.

At its mid-June meeting, the IRRRB also pledged $6 million to “backfill” proposed tax exemptions that are in limbo due to Dayton’s pocket veto of the 2016 tax bill. If and when a new tax bill gets signed, the IRRRB would be off the hook for that money.

Necessary Secrecy?

Several key public officials agreed to LP-mandated secrecy provisions. “We signed nondisclosure agreements and so did a lot of other people,” says Phillips. “We respected that. It was just during this preliminary phase they didn’t want their name out there.”

Phillips says that he and other IRRRB staffers working on the project signed nondisclosure agreements. Bakk says he signed an agreement in 2014, when LP was weighing another potential expansion. Dayton spokesman Matt Swenson says that the governor did not. Metsa says he did not sign any documents.

Swenson confirms that the governor was a key player in the behind-the-scenes economic development deal. “He was following it closely for sure. It’s something that he supported and worked with Sen. Bakk and others on.”

Swenson says that Dayton kept quiet because of the jobs involved: “That was an agreement that the governor and others were willing to abide by.”

It’s not clear if disclosure would have killed the deal. “If a legislator had demanded that the name be out there, I don’t know what the company would have done,” Phillips says.


More Subsidies, More Secrecy

Bakk had already planned to travel to Nashville in December 2015 for a legislative conference. He took the chance, along with two IRRRB staffers, to meet with LP executives to make a pitch for sites in northeastern Minnesota. (Bakk had been in on earlier talks of an LP expansion, but the company ultimately chose Manitoba.) Upon his return, Bakk says that he promptly told both Dayton and Speaker of the House Kurt Daudt (R-Crown) about the prospect of a deal.

Bakk insists that proposed incentives for the company are in line with past state programs. “That production incentive really pretty much mirrors what we did for ethanol [plant] construction,” he says, adding that tax exemptions for building materials have become commonplace on “most larger projects.”

With a goal of bolstering the state’s ethanol industry in the mid-1990s, Minnesota had a program to pay ethanol producers 20 cents per gallon of ethanol produced. A report from the Office of the Legislative Auditor in 1997 found state payments to ethanol producers cost roughly $22.1 million per year from 1994 to 1996 and estimated $66.1 million from 1997 to 1999.

The state’s current tax expenditure budget outlines other tax breaks that have been granted in recent years. A provision from 2011 exempts sales tax on technology equipment and software for qualifying data center projects. From fiscal 2016 to 2019, the value of the data center exemption is estimated at $22.5 million.

Tax exemptions for construction materials and supplies for the new Vikings stadium were valued at $11 million for fiscal 2016. An exemption passed in 2010 for the Goodrich Corp. manufacturing plant in Burnsville is worth $3.2 million from 2016 to 2019. An exemption aimed at “Greater Minnesota business expansions” is estimated to have a value of $6 million over the next four years.

While critics question the value of such subsidies, politicians and economic development professionals remain true believers.

“It’s difficult to find an economist who thinks these tax incentive packages are a good thing,” says Mark Haveman, executive director of the nonpartisan St. Paul-based Minnesota Center for Fiscal Excellence. But “this is the reality of economic development and you can’t play the economic development game without them.”

The Taxpayers League of Minnesota was critical of the Hoyt Lakes deal “from the sidelines,” says Margaret Martín, research director. “It just seemed like a lot of money chasing very few jobs,” she adds. “We were definitely concerned about the lack of transparency.”

Furthermore, the decision not to disclose the name of the company was impermissible under the Minnesota Government Data Practices Act, according to an expert on the state law.

“It’s not supposed to work this way,” says Don Gemberling, spokesman for the Minnesota Coalition on Government Information, who worked for the state of Minnesota for more than three decades. Under the law, government information is presumed to be public unless there is an exception in the law. The law applies to both the governor’s office and the IRRRB, but not the Legislature, which is exempt, says Gemberling.

Capitol watchers can point to one previous case with surreptitious similarities. In 2013, Dayton and staffers with the state Department of Employment and Economic Development tried to keep a lid on the name of Baxter International Inc., an Illinois-based medical products company, as the state weighed potential subsidies for its proposed expansion in Brooklyn Park.

But Baxter’s name did surface before final votes were taken. In that case, the company had been slated for $5 million from the Minnesota Investment Fund, but it never received that money because it did not undertake the expansion originally outlined.

Chronic Economic Stress

While the Louisiana-Pacific name might not mean much in the Twin Cities, it is well known in northeastern Minnesota. Phillips recalls that during the administration of Gov. Rudy Perpich, the IRRRB sold $10 million in tax-exempt bonds to help finance a plant for the company in Two Harbors. The plant, which opened in 1985, has about 135 employees. During fiscal year 2013, the IRRRB loaned LP $2 million to help expand its operations and rebuild machinery there.

Phillips served as IRRRB’s director of economic development from 1983 to 1988. He returned to the agency when Dayton appointed him commissioner in January 2015.

Louisiana-Pacific has a long-standing presence in northern Minnesota. The building products company has operated a siding facility in Two Harbors since 1985. 0816-SecrecySubsidies_S04.jpg The proximity to timber is a key factor for the selection of locations for Louisiana-Pacific facilities. The company’s siding plant in Two Harbors has about 135 employees.

Today, LP has 21 plants in North America including a location in Hayward, Wis., and several in Canada. The company’s business depends heavily on the state of the residential housing market.

Its latest annual report opened with a candid assessment of the current business climate: “2015 was another tough year.” The company reported a net loss of $88.1 million on revenue of $1.9 billion for 2015. But for the first quarter of 2016, LP’s sales were up 7 percent to $504.6 million, and the company posted a net profit of $10.3 million, compared with a loss of $34.5 million a year ago.

The backdrop of the state’s efforts to land the plant is the longstanding economic challenges on the Iron Range, where the outlook follows the ups and downs of the mining industry. In recent years the region’s goal has been to diversify the Range’s economy beyond mining.

For May, the state’s seasonally adjusted unemployment rate was an enviable 3.8 percent, notably lower than the national rate of 4.7 percent. But there can be sharp regional differences. In St. Louis County, which includes Hoyt Lakes, the rate was 5.3 percent; statistics from the Minnesota Department of Employment and Economic Development put the unemployment rate for northeastern Minnesota at 5.6 percent. In the seven-county metro area, the unemployment rate was just 3 percent.

“During that deep recession starting in 2001 we had four plants up here that made a wood-engineered product,” recalls Bakk. “During that housing recession we lost all four and a lot of jobs.”

The town of Hoyt Lakes has a population of about 2,200 people—about half of what it was in the 1980s, says Mayor Mark Skelton. He points to the mining economy as the cause: “They shuttered our taconite plant back in 2001. We lost 1,400 jobs.”

Range residents have seen many potential projects never reach fruition. Essar Steel Minnesota is wrangling over the payback of $66 million in state loans for its stalled taconite project, which had been slated to cost nearly $2 billion. In early July, the company filed for bankruptcy.

The downturn in the mining business has hurt the region. Skelton has heard complaints about the amount of money that the state is kicking in to lure LP, but he notes that total project cost is much larger than the state’s contribution.

“Some folks will say, ‘Well, geez, that’s a lot,’ ” says Skelton of state incentives. “This company is making a huge investment. This is close to a half-a-billion-dollar project.”

But at the end of the day, LP is not yet fully committed to Hoyt Lakes.

“We’re doing a lot of work with the state to make this happen, but we need to get through the approval process at LP before it will happen,” says Luoma. “We’re in a good place, but we’re not done by any means.”

Reinvesting in the Range

The IRRRB traces its history to 1941. The economic development agency draws most of its funding from taxes on taconite mining.

In March, the Office of the Legislative Auditor released an extensive report that was critical of many IRRRB operations. It found that the IRRRB has done a spotty job of tracking the actual job growth created by companies that have landed agency loans or grants. The auditor found the agency’s “oversight and evaluation of its loans and grants are inadequate” and its loan database “inaccurate and outdated.”

Although the agency’s mission includes investing in workforce development, the report noted: “For IRRRB grants, many files we reviewed that referred to job creation contained only vague estimates of job growth and had little evidence of achieving objectives.”

Some projects that are announced with fanfare on the Range never see the light of day. Golden Valley-based Segetis Inc. pitched a $105 million biochemical plant in Hoyt Lakes. The IRRRB pledged $21.2 million in loans, plus a $7.1 million grant from the 21st Century Fund. But the project never moved forward, and Segetis was sold to an Italian company earlier this year. Segetis never received any of the funds.

The report also noted the IRRRB’s unique status among state agencies: Its board is composed of nine legislators who represent the region, including Bakk and Metsa. These legislators voted to support the company both during the Legislative session and later during the IRRRB’s board meeting.

Iron Range blogger and journalist Aaron Brown has tracked his share of big plans in northeastern Minnesota. He says that observers often overlook the meat-and-potatoes work of the IRRRB: providing loans and grants to small businesses and community agencies. But Brown says the high-profile failures make Range residents wary. A startup called Excelsior Energy never got started; the company has yet to repay about $9 million in IRRRB loans.

“Everybody is hopeful,” says Brown of the Louisiana-Pacific possibility. “They’re a real company . . . and that is an encouraging thing.”

Brown heard the LP name during the legislative session, but he says nobody would confirm it.

“We’ve heard it all before. . . . We’ll believe it when we see it,” says Brown, former editor of the Hibbing Tribune. “It’s really hard to believe these proposals and these numbers until they happen.”

Burl Gilyard is TCB’s senior writer.