Gov. Mike Beebe presented us last week with another illustration of how hard times make beggars of us all. Good times, too, for that matter.
Beebe’s long-awaited announcement of the “largest economic development project in Arkansas history” was this: If Arkansas taxpayers will give a group of investors some $132 million from the state treasury, a few largely unidentified investors, headed by a venture capitalist named John Correnti, will build a steel mill on the Mississippi River at Osceola that will one day employ 525 people earning an average of $75,000 a year. That $132 million is money the state would otherwise spend on public schools, colleges, prisons or healthcare services like Medicaid—or streets and roads if the state chose.
The theory is that the taxpayers eventually will get their money back because all those new workers at Osceola will pay income, sales and excise taxes back into the state treasury and there also will be other jobs created by the steel mill’s activity. Not much will come from the company itself, Big River Steel LLC, because it will enjoy income and sales tax exemptions as part of the deal with the state.
Corporate welfare like this (and like bank bailouts) does not sit well with a lot of people, us among them, but the fact is that this is the game states must play now or else sit on the sidelines. Everyone is hungry for jobs and industry, and investors learned a quarter-century ago that they could get states, particularly Southern states, to compete with each other in tax giveaways and thus lower their startup or moving costs by hundreds of millions of dollars. Arkansas entered the game timidly in the 1980s, but it was nearly always outbid for the big projects by Mississippi, Texas, Tennessee or the seaboard states. (Just Thursday, Gov. Beebe agreed to lay out $1.75 million of our taxes for an Internet marketing company that wants to move its offices from New York City to Conway, where it plans to put perhaps 30 people to work this year.)
Arkansas became serious in 2004 when we amended the state Constitution to authorize the legislature to give away hundreds of millions of dollars through grants and tax-backed industrial bonds for a really, really big project. This is the state’s first really, really big project. The legislature must vote for it before the state can issue the general-obligation bonds.
Twenty-four hours after the congratulations and rejoicing at the governor’s big ceremony at the Capitol, the euphoria dissipated just a bit. We learned that Mr. Correnti has left a trail of jilted economic-development suitors in Mississippi and Ohio. The Osceola steel mill was supposed to be built at West Point, Miss., near the Alabama border, but Correnti pulled out because the local people could not negotiate low enough electric rates with the utility serving the region. The Mississippi legislature voted to give him $75 million in incentives for a silicon-purification plant that would bring high-paying jobs to Lowndes County. Correnti missed a Dec. 31 deadline to put $150,000 in escrow to show he could go forward with the plant.
Headline in the Columbus, Miss., paper on Jan. 5: “Jilted!: Collapse of Silicor project is latest of Correnti’s empty promises.”
Correnti was in a group that did start a steel company at Columbus, but the company fired him after it went into operation. He became CEO of Nucor Corp., the big steel company down the road from Osceola in Mississippi County, but Nucor fired him. He got a job with Bethlehem Steel, but Nucor bought the plant and fired him again. The president of the Lowndes County, Miss., Board of Supervisors said this week that Correnti wants to start a plant a few miles from Nucor at Osceola because he has a vendetta against Nucor. But who knows?
Nucor reportedly is gearing up to fight legislative approval of the grants and loans to Correnti’s group. You can see why Nucor might be a little miffed. The taxpayers put up very little for Nucor’s startup, but it will now compete with a company with a truly massive subsidy from the state.
We don’t yet know who Correnti’s investors are, except the Arkansas Teacher Retirement System, which is putting up $60 million for part ownership of the mill. Correnti is reputed to be a great salesman. George Hopkins, the director of the Teacher Retirement System, saw the chance to invest in Correnti’s mill as a virtual gold mine for retired teachers. The teachers will reap a huge return on the investment in just four years, he said.
Someone should tell Hopkins about deals that sound too good to be true. Existing steel mills are running well below capacity. Business economists were speculating where the mill’s business would come from. Six years ago, Arkansas and Mississippi County in particular were in the bidding for the biggest steel plant built in the United States in the past 40 years, by ThyssenKrupp AG, the German conglomerate. Mobile, Ala., won the bidding war. ThyssenKrupp is pulling the plug on the $11.8 billion investment, owing to high production and transportation costs and intense competition. The plant is for sale, reportedly for $1 billion.
The point is only this: The legislature and the state’s economic development agency should exercise extraordinary diligence in vetting this project before committing taxpayers to these mammoth subsidies. That includes an ironclad commitment from all the investors—escrowed cash—that assures the construction of the plant and a rigidly vetted business plan that shows realistic prospects for sales. Legislators must consider worst-case scenarios in these cases. That $132 million commitment from the taxpayers? It could be much more if the company goes belly up and defaults on $50 million of bonds. Your income and sales taxes would pay the bondholders.
Let’s be confident that it really is the deal of the century. John Correnti’s word is not enough.
