Insufficient due diligence, speculative returns, lack of concern for local impacts and convoluted structure set project apart in a historic year for corporate welfare megadeals.
December 27, 2022 – Georgia’s $1.5 billion subsidy of a Rivian electric vehicle assembly plant has been selected as the “Worst Economic Development Deal of the Year” for 2022 by the Center for Economic Accountability (CEA). This award recognizes a state or municipal government subsidy of a private company that best exemplifies the massive wastefulness and ineffectiveness of government economic development subsidy programs.
“In the worst year ever for giant state and local corporate welfare deals across the country, Georgia’s $1.5 billion Rivian subsidy still managed to stand out for the way that bureaucrats and elected officials completely failed in their responsibilities to the state’s residents and taxpayers,” said CEA President John C. Mozena. “They made a massive, speculative investment of taxpayer money in an early-stage company in a highly competitive and government policy-dependent industry without doing basic due diligence. They went to great lengths to get around the fact that Georgia has no law that gives them the authority to hand out property tax breaks. They didn’t do their homework on the downsides of this project for the communities where the plant would be built, they kept the people who would be impacted the most in the dark until the deal was almost done and then they went to great lengths to keep local leaders from having a say in what happens to their communities.”
The CEA identifies the Worst Economic Development Deal of the Year as part of its independent and nonpartisan mission to advance economic opportunity for all by promoting transparency, accountability and free-market-based reform of state and local economic development initiatives across America. Previous winners include North Carolina’s subsidy of an Apple Research Triangle campus in 2021, the General Motors/LG Chem joint venture battery plant in Lordstown, Ohio in 2020, the Charlotte Panthers’ team offices and practice facility move to Rock Hill, SC in 2019 and Amazon’s “HQ2” in 2018.
Failures of Due Diligence
The CEA is far from the only critic of the size, scope and structure of this subsidy deal. In September, Georgia Superior Court Judge Brenda Trammell took the virtually unprecedented step of ruling that the bond sale mechanism at the heart of the deal’s structure was not “sound, feasible and reasonable” and did not “promote the general welfare of the local community.” (The government is appealing that ruling.)
“The judge asked the economic development bureaucrats to show that they’d done their jobs and ensured that public money was going to be spent in the public interest,” explained Mozena. “That’s an appropriate question to ask of any deal involving taxpayer money, much less one with such a gigantic price tag. But the Georgia Department of Economic Development and the local Joint Development Authority ended up effectively admitting, under oath, that they hadn’t done that.”
In her ruling, Judge Trammell noted that a representative of the local multi-county Joint Development Authority had “admitted that the JDA did not employ an investment banker, economist, financial analyst or other third-party to evaluate the financial wherewithal of Rivian and its ability to commence and complete the project.” In fact, the JDA’s representatives admitted that they had not even reviewed Rivian’s public 10-K or 10-Q filings with the Securities and Exchange Commission, which laid out significant challenges the company was facing in its efforts to grow to profitability.
“One of the big things that stands out about this deal is that a judge got agency bureaucrats on the record effectively admitting that they did about the same amount of due diligence into a speculative investment with a billion and a half of taxpayer dollars as we’d expect from some diamond-hands meme stock trader on Reddit,” Mozena commented.
“With all due respect to Rivian, its people and its products, the blunt truth is that it’s an early-stage company in an incredibly competitive industry, and its future is far from certain,” said Mozena. “We know this because they say so. In Rivian’s government filings and investor materials, they’re transparent about challenges like supply chain limitations, negative cash flow, tough competitors, lack of experience, existing debt and other impediments to their future success. But you’d never know about any of that if you listened to Georgia’s politicians and bureaucrats go all-in with a billion and a half dollars of taxpayer money. To hear them talk, this is a slam-dunk investment.”
It’s not just the auto industry’s competitive landscape that puts Rivian, along with other early-stage EV automakers, in a precarious position. Consumer demand for their vehicles is impacted strongly by federal tax credits – for which Rivian’s current vehicles largely do not qualify, by dint of being too expensive – and the fate of those credits and other federal policies is the subject of trade negotiations between the United States and European Union.
In this, Georgia’s Rivian deal exemplifies one of the fundamental flaws in the traditional subsidy-driven model of state and local economic development programs: The presumption that it’s a good idea for governments to be making speculative investments with taxpayer dollars.
“If Georgia’s economic development agency staffers were truly able to identify which companies are going to emerge successfully from the volatile scrum of startup EV manufacturers, then they’d be making millions on Wall Street rather than civil service salaries in state capitals or city halls,” said Mozena.
Intentionally Convoluted Structure
Georgia’s Rivian deal also exemplifies the lengths that governments will go to reach the outcomes that they and their corporate friends want, regardless of what the law says should happen. The convoluted deal structure is designed to get around the issue that the state has no law allowing for property tax abatements and a Constitutional provision prohibiting the government from granting “any donation or gratuity, or to forgive any debt or obligation owing to the public.”
Under the terms of the agreement between Rivian, the state and the regional development authority, instead of paying to build and equip their own factory, the local Joint Development Authority would issue bonds that Rivian – and only Rivian – would purchase. The money from that purchase would go into a “Project Fund” that would pay to build and equip the factory. The rent Rivian paid the Authority for its land would then be used to repay Rivian for the principal and interest due on the bonds.
“This is a mechanism to obtain tax abatement for a private company for which there is no ability legislatively or constitutionally,” Judge Trammell wrote, noting that when a Georgia Department of Economic Development representative had been asked, “What’s the purpose of this type of bond structure?” his response was, “The purpose is to offer property tax incentives.”
The judge ruled that despite the attempts of state and local officials to create tax breaks out of thin air, Rivian would still have practical ownership of the land and therefore should be responsible for the same property taxes as any other similarly assessed business, rather than a significantly below-market-rate Payment In Lieu of Taxes payment to local governments. (That determination is being appealed by state and local government agencies.)
Ignoring Local Impact
To be fair, the deal structure wasn’t solely designed to provide tax breaks. It also works to keep local governments from exercising inconvenient oversight over the project’s impacts on their communities, because the state purchased the land from the Joint Development Authority and then immediately leased back the land to them so that it would become exempt from local zoning and other oversight as state-owned land.
One local journalist described the proposed Rivian plant as “three times larger than Disneyland, and it’s four times larger than Vatican City.” Despite the inevitable disruptions of a facility of this size being constructed in a largely rural community, neither the state nor the Joint Development Authority did any analysis to determine what impact the Rivian plant would have on county government budgets or the demands on public services such as schools or roads.
The Transparency Lesson
Georgia’s Rivian deal might not actually be the Worst Economic Development Deal of the Year – but it’s the worst we know about. That’s one of the biggest issues with the standard model of economic development in America where basic tenets of government transparency are hidden behind screens of “trade secrets” and “private taxpayer information.”
“It’s worth noting that virtually everything we know about this deal is thanks to a judge doing her job and making sure that government agencies had to answer hard questions under oath,” added Mozena. “In a year where there were four times as many multi-billion dollar subsidy deals than ever before, we have to ask just what we’d discover elsewhere around the country if we had the same kind of transparency into every deal.”
Previous “Worst Economic Development Deal of the Year Award” winners:
- 2021: North Carolina’s subsidy of an Apple campus in the Research Triangle
- 2020: General Motors/LG Chem joint venture battery plant in Lordstown, Ohio
- 2019: Charlotte Panthers’ team offices and practice field facility in Rock Hill, South Carolina
- 2018: Amazon’s “HQ2” in New York City and Arlington, Virginia
- Text of the agreement between Georgia government agencies and Rivian
- Local activists’ filing against the bond deal
- Judge Brenda Trammell’s ruling
About the Center for Economic Accountability
The Center for Economic Accountability (CEA) is a nonpartisan and independent 501(c)(3) nonprofit organization that works to advance economic opportunity for all by promoting transparency, accountability and free-market-based reform of state and local economic development initiatives across America. Headquartered in Michigan, the CEA was founded in 2018. For more information, visit https://economicaccountability.org/.
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