Second Place Writing – Enterprise Reporting

Michael Tobin

Second Place
University of Oregon
$2,000 Scholarship

Big Corporate Handouts with Little Oversight

Enterprise zones give nearly unsupervised tax breaks to Lane County businesses

By Michael Tobin

In 2009, Seneca Sustainable Energy went looking for a handout from Lane County taxpayers.

The company promised to build a cogeneration facility near Eugene Airport that would burn sawdust, tree bark, shavings and other forest biomass materials to power 13,000 homes. Seneca also promised to create up to 11 new jobs.

Seneca companies comprise one of the biggest timber businesses in the state. But Lane County and the city of Eugene agreed to the tax break, and over a period of three years, Seneca avoided having to pay $1.67 million in property taxes, according to city of Eugene officials.

In the end, Seneca claims it created 10 jobs. That means taxpayers subsidized the company to the tune of $167,780 per job — a cost that experts in such arrangements say is enormous.

The device Seneca used to gain this windfall is an incentive called an “enterprise zone,” a subsidy program popular with Oregon cities and counties.

Eugene Weekly’s investigation found that, despite handing out millions of dollars of taxpayer money, county and local officials responsible for monitoring the enterprise zones rarely — if ever — verify the companies’ jobs claims. The same lack of oversight appears to hold true for cities where the enterprise zones are located. Lane County’s assessor would not respond to repeated requests for comment asking if the companies are meeting the wage standards as promised.

Companies relish enterprise zones, too. In the past decade, cities across Lane County have handed out nearly $15 million in these tax breaks to companies such as the Whiteaker-based brewery Ninkasi, the maker of Franz Bread in Glenwood, and the International Paper mill in Springfield.

Local officials don’t exercise strong oversight over the program to ensure that companies are hiring workers and playing by the rules. Despite repeated requests for comment, many local officials didn’t want to talk about it.

Sarah Means, Lane County economic development manager, declined to be interviewed for this story and referred follow-up questions to Lane County spokeswoman Devon Ashbridge. Lane County Assessor Michael Cowles did not respond to numerous requests for comment about wage verification and only one of Lane County’s commissioners responded to EW’s request for comment, but not by deadline.

Small local companies participate in the enterprise zones, but city and county officials have given the best deals and taken millions from taxpayers — money that would have otherwise gone to schools and the fire department.

The program is expensive. Enterprise zones in Lane County hand out subsidies at the rate of $6,380 for each job companies claim to create, according to an investigation by EW and the Catalyst Journalism Project.

Elsewhere in the state, that average is about $4,200, according to a 2016 audit conducted by the Oregon Secretary of State’s office.

Nathan Jensen, a professor in the Department of Government at University of Texas, Austin, studies economic development incentives. He cites a 2017 study by the W.E. Upjohn Institute for Employment Research that says the cost per job across a range of incentive programs should be more like $2,400.

Jensen notes the study does not include enterprise zones, but that the report “gives a rough benchmark on the cost per job of incentives.”

He was struck by how much Lane County and the city of Eugene spent to subsidize jobs at Seneca. “This is a very, very high cost per job,” Jensen writes.

Lane County officials declined to answer questions about how they select companies or why the county’s program costs far more on a per-job basis than programs elsewhere in Oregon.

In some cases, companies won approval while promising very few jobs. In 2009, for example, the city of Florence gave a $79,639 tax break to an Alaskan cable company that, in exchange, said it would create just one job.

And the deal International Paper won from the city of Springfield in July 2015 allows the company to lay off as many as 52 workers and still pocket the tax breaks.

“Local [tax-incentive] programs have worse enforcement practices because local governments have less resources to perform enforcement or even administration of the programs,” says Kasia Tarczynska, a research analyst with Good Jobs First, a Washington, D.C. group that tracks economic subsidies.

“Every locality that provides economic development incentives should monitor what companies are doing because, in the end, local agencies sign contracts with the businesses and you expect them to do what they agree to.”

An enterprise zone’s manager and the Lane County assessor are responsible for reviewing and approving each application for a business that wishes to join a city’s enterprise zone. In most cases, the county co-sponsors the program while a city hosts the company.

City and county officials have the legal right to verify the number of jobs companies say they are creating, but state law doesn’t require them to do so, and local officials just don’t bother, despite the cost to taxpayers.

Courtney Griesel, the city of Springfield’s economic development manager, says that she has not asked any company getting tax breaks in her city to backup their jobs claims. Businesses in Springfield have received $8.7 million in local tax subsidies in the past 15 years.

“There have been no instances of asking the companies to verify jobs,” Griesel says. “I have not exercised that ability to request clarification or confirmation. We have not received anything that alerted us or brought it to our attention.”

Not Only a Local Problem

Oversight doesn’t happen in many other places around Oregon, either. The 2016 state Audits Division report found that poor reporting and a lack of transparency meant it’s not clear whether cities, counties and businesses are complying with enterprise zone rules. One exception is Multnomah County, which sued one company for not meeting zone requirements.

The audit found one-fifth of enterprise zone projects had missing job and wage information.

National experts on tax-incentive programs say this lack of oversight and accountability is a big problem, and that local taxpayers deserve assurances that companies getting big property tax breaks are keeping their promises.

“Unfortunately, this program shares some of the same flaws that we have seen in other programs around the country,” Jensen writes in an email. “Monitoring shouldn’t be discretionary; it should be a program requirement.”

Local economic development officials say enterprise zones have brought economic growth to areas that might not have seen it otherwise. Amanda D’Souza, a business development analyst with the city of Eugene, says the West Eugene Enterprise Zone has made a big difference.

“Overall, I do believe that the enterprise zone does help businesses in west Eugene grow and create jobs,” D’Souza says via email. “We’re able to support many local businesses. In fact, 23 of the 24 businesses that have participated in the program since 2005 are locally based. As of June 2017, those 24 businesses have invested over $135 million and created 551 jobs.”

D’Souza later added that many of the industries in enterprise zones pay higher than average wages and that the program was established to help these types of businesses continue to grow and create higher wage jobs.

The county’s highest-profile enterprise zone tax break was created by Eugene for Hynix, formerly known as Hyundai Semiconductor, in 2003.

Over five years, Hynix received more than $10 million in property tax breaks — and then laid off all 1,100 of its employees in 2008, saying that it could “no longer remain competitive.” Under pressure from the courts, Hynix repaid $5.4 million of its tax breaks to the city of Eugene.

Officials Can Verify Information, but Choose Not To

EW’s examination of enterprise zones in Lane County excludes Hynix. We looked at the other 40 companies that have collected tax breaks over the past 15 years. Our analysis used reports on the program that county officials send to the state every year, as well as examinations of property tax bills sent to the companies that got tax breaks.

Some reports included companies that did not have job numbers, and those were not included to give the companies the benefit of the doubt that they did in fact create jobs.

Companies apply for enterprise zone tax breaks through a paper application that must be signed off by the local zone manager and county assessor. Only certain business activities are eligible — for example, manufacturing, assembly and energy generation.

Companies must pledge to make a significant investment in buildings or equipment, declare how many new jobs they intend to create and enter into a first-source hiring agreement that maximizes local hiring, and abide by additional local regulations.

In turn, counties waive all or part of the company’s property tax bill for three years; however, some firms have extended their breaks for up to five years. Companies that receive the extensions must also guarantee their workers receive at least 150 percent of the county’s wage, or just more than $61,000 in 2017.

Despite receiving such tax breaks, there’s no enforcement or legal requirement for companies to hire the number of employees they list on their application.

“Estimates are just estimates,” says Peter Reaksecker, a sales data analyst at Lane County Assessment and Taxation Office in an email. “I think the reason that question is on the application is to give the governing bodies an idea of how many jobs may be created.”

Nor is there any legal requirement for county officials to verify the job totals or whether the companies are paying wages at the levels they promised.

Local officials have the right to verify the companies’ claims — and yet they don’t do so.

Overexpansion and Lack of Oversight

Lane County isn’t the only locality that suffers from poor oversight; experts say they aren’t surprised the program gets so little scrutiny.

Good Jobs First’s Tarczynska says the idea of attracting businesses to a locality can seem more important than verifying that the companies follow through on their commitments.

“Officials want to show that they’re bringing and creating jobs, but what happens next isn’t really important,” Tarczynska says. “I think [for officials] the verification is not important as the attraction, and more time and resources are dedicated to attracting the company. Verification is a secondary activity to recruiting businesses.”

The Oregon Legislature created the state’s enterprise zone program in 1985 after the state stumbled out of a severe recession, and local officials wanted help spark new investment in jobs in their communities.

Since then, the state has established 72 enterprise zones, supposedly targeted in those areas that need the most help. The state Audits Division, however, found strong job growth in Multnomah and Washington counties — which have only seven enterprise zones between them.

Joe Cortright, who served as legislative committee staff in 1985, says the program has expanded beyond its original intention of helping 30 areas that were in economic distress.

“It was fairly circumscribed then,” Cortright says. “The point of having 30 areas was to give a special boost to worst hit places, and to expand that number means that it is not as powerful and special because its not helping the worst hit places.”

The audit also made a note of this trend, saying that the presence of economic benefits in urban areas is “at odds with the enterprise zone programs’ original focus on lagging areas that have more economic need.”

What troubles experts is a shortage of evidence that companies needed the tax breaks to create jobs in the first place.

“The whole goal of these programs is to change behavior that wouldn’t have happened without the incentive,” Jensen says. “So you are attempting to push companies into additional job creation or higher wages. But without verification, companies may not ever plan to meet these requirements.”

Brewing up Breaks

The West Eugene Enterprise Zone, which stretches from the Whiteaker neighborhood to the Eugene Airport, features businesses that range from microbreweries to software developers. It hosts 23 companies, which many local officials claim are successful.

One is Ninkasi Brewing, which says it has created 105 jobs and received a total of $889,740 in property tax breaks at two different sites in the Whiteaker neighborhood. The taxpayers’ per-job subsidy of $8,474 is well above both the county and the statewide average.

Ninkasi co-founder and CEO Nikos Ridge said that the enterprise zone tax abatement helped Ninkasi to grow its business.

“[The enterprise zone] allowed us to invest more back into the business quicker than we were otherwise able to do and grow more quickly than we were able to do without the enterprise zone,” Ridge said.

Another brewery, Hop Valley, received breaks from 2014 to 2017, and was awarded $378,695 in property tax abatements. According to county documents, Hop Valley’s unverified claim of new jobs is 40, with a cost to taxpayers of $9,467 per job.

Hop Valley didn’t respond to repeated requests for comment. MillerCoors purchased a majority stake in the brewery in 2016.

Some companies report being far more cost-efficient in creating jobs, even though their actual job counts have changed.

Symantec, a cybersecurity company, received $1.74 million in tax exemptions and hired 778 employees, costing taxpayers $2,235 per job. The business received exemptions from 2003 to 2009.

According to The Register-Guard, the business employed about 1,400 people in 2007 but shrank significantly in 2017.

When asked how many full-time employees the Springfield location has, Symantec spokesman Matt Nagel could not give a definitive answer. “By March 31, 2018, we will have space for 150 seats, but this does not necessarily equate to 150 employees,” Nagel says in a statement. “We don’t have a final number of employees to share at this time.”

Local officials have also approved tax breaks even if a company promises to create the bare minimum of jobs: one.

That was the case with Alaska Cable Systems, which in 2009 sought tax breaks for building a cable landing station facility in Florence. ACS promised to create a single job with the project. The taxpayer cost for that lone job: $79,639.

ACS representatives said that only one person is needed to run the facility. Heather Cavanaugh, a spokeswoman for ACS, writes in a statement that ACS is “pleased to have one of our fiber-optic cable landing stations in the Enterprise Zone and appreciates the opportunity to participate in the program.”

Florence’s economic development coordinator, Kelli Weese, and its city manager, Erin Reynolds, didn’t return repeated requests for comment.

Lane County spokeswoman Ashbridge says job creation is only one aspect of the enterprise zone program, and that the ACS deal allowed the company to build a new station in Florence. Ashbridge says ACS added to the local tax base and pays property taxes it didn’t before.

As a result, she says, the ACS tax break paid for itself after three years.

Big Breaks for Big Corporations

Some of the costliest tax breaks have also gone to some of the biggest companies.

Between 2007 and 2011, United States Bakery collected more than $3.3 million in property tax breaks at its Springfield plant, where it made and distributed breads under its Franz brand. According to county records, the company claimed it created 46 new jobs, at a taxpayer cost of $72,092 per job.

As of June, Franz officials say, the bakery employs 240 at its Springfield plant — an increase of 81 employees — and it plans to hire 55 after it finishes expanding its business operations.

International Paper, based in Memphis, Tennessee, won a five-year extension in 2015 for its Springfield plant, and received a $8.5 million property tax abatement.

In order to receive the extension, International Paper said it would invest $101.6 million in renovating old parts of the mill, pay workers at least 150 percent of Lane County’s average wage and maintain at least 208 of the 260 workers it had at the time of the agreement.

The company says it’s in compliance with the agreements. The deal did not require International Paper to hire new workers; in fact, the mill could lay off 64 workers and still receive the abatement.

The agreement with Springfield City Council said the company cannot employ fewer than 208 employees, essentially giving them the ability to lay off workers and still receive a tax break. International Paper’s employment sits at 272 employees, and the company’s tax break expires in 2022.

Michael Culver, International Paper’s mill controller, said in a statement that the deal is a “good example of the mill and local government working together to achieve a beneficial outcome for both parties and the community.”

Asked if the city was concerned if International Paper were to lay off Springfield workers, Amber Fossen, the city’s spokeswoman, says that she “could not comment on speculation.”

In the case of the huge Seneca tax break, the company and the county are in a legal dispute over the taxable value of the site. A court ruling or a settlement could end up lowering the amount of subsidy Seneca is due.

Ashbridge writes in an emailed statement that the oversight system the county uses is similar to that of federal agencies such as the IRS, saying that evaluations are necessary only if suspicions of wrongdoing arise.

“When we have reason to suspect that a company receiving an abatement may have violated the agreement, we do have the ability to request and receive documentation that allows us to clarify whether the agreement has been breached,” Ashbridge writes.

Maybe local officials can take an example from Multnomah County, which aggressively verifies its enterprise zone agreements. Last year, the county sued one company, SoloPower, to recoup $673,411 in tax breaks after the company failed to create a minimum number of jobs, according to The Oregonian.

Jensen writes that in order to keep a check on the businesses involved receiving economic development incentives, it is necessary for officials to conduct thorough reviews.

“I think best practices require every state to perform regular evaluations of their programs. These evaluations help provide feedback into reforming, and sometimes canceling programs,” he writes. “But it is also an opportunity to more generally learn about the business environment, and which firms are thriving and which firms are struggling.”


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