Sunday, December 05, 2010

Christiansburg's Microsoft miss brings pricey lessons

With spring approaching, recruiter Michael MacNeilly with the Virginia Economic Development Partnership could smell victory.

Microsoft Corp. was poised to announce plans to locate a nearly $500 million data center in Christiansburg, ending a three-year courtship to bring the high-tech, high-paying project to Montgomery County's prime industrial site.

"You could be pouring footers in less than a month," MacNeilly wrote to the company's head of data center development on Feb. 24.

A news release drafted March 23 under the headline, "GOVERNOR MCDONNELL ANNOUNCES MICROSOFT DATA CENTER IN MONTGOMERY COUNTY," called it the largest industrial investment in Southwest Virginia history.

Seven weeks later, Microsoft dropped Montgomery County from consideration.

The high-wattage electricity, premium broadband, utilities and government incentives Microsoft demanded were all there.

The deal-killer: a sinkhole about the size of a small backyard swimming pool that led to the discovery of underground voids that Microsoft feared could bring more.

The abruptness with which Microsoft changed course is characteristic of how big economic deals are made, with the company calling the shots.

"Everything has got to be absolutely perfect. They don't cut you any slack at all. Because the competition is so severe, they don't have to," said Glenn Barbour, chairman of the board of supervisors in Mecklenburg County, where Microsoft eventually decided to build the center.

The case was a nail-biter for officials who dealt with Microsoft in near-total secrecy.

It is noteworthy as a near-win of significant proportions that, aside from the geologic issues, places Montgomery County in a positive light. But it also raises the question of how much is too much when it comes to luring companies through economic incentives.

To attract Microsoft's interest, local leaders had dangled tens of millions of dollars in financial rewards through a commonly used tax-rebate mechanism.

Aric Bopp, who directs the New River Valley Economic Development Alliance, was quick to find a silver lining.

The region will not become a hub of Microsoft data operations. But neither is it on the hook for the steep price tag promised to the company.

"Maybe there will be a bigger and better use for the site in the future that employs more people and demands fewer incentives. I sure hope so," Bopp wrote to the Microsoft recruitment team.

But first, local officials have to grapple with the disclosure that Microsoft judged one of its prime sites geologically challenged, a potential obstacle for attracting the next "big one."

Incentive offers play out as a high-wire act

New River Valley economic development officials have declined repeated requests to talk about the Microsoft deal.

Yet 436 pages of e-mail correspondence and related documents -- released by the state after the Aug. 27 announcement that Mecklenburg County landed Microsoft -- tell the story of a three-year recruitment that unfolds in tense written exchanges and moments of intrigue.

Microsoft created the first personal computer software in widespread use and is a top player in the ongoing quest for the best search engine, best smart phone operating system and most trusted Web-hosting enterprise.

Hoping to expand quickly into cloud computing, or delivering computing power over the Web, Microsoft has begun work on a series of data centers around the globe.

Behind the veil of secrecy that officials fought hard to keep down during negotiations is evidence that Montgomery County and Christiansburg offered a small fortune to become a major contender for the new center.

To understand the magnitude of the story, one has to go back to January, when the business prospects were looking good for the Montgomery County site.

During confidential negotiations with local and state officials, Microsoft had gotten seriously interested in a graded lot measuring 46 acres. The facility was to house more than 100,000 computer servers to host ever-more data and computing power online.

Brian Hamilton, Montgomery County's economic development director, belonged to an inner circle of fully informed government employees who signed confidentiality agreements with Microsoft.

Scores of e-mail messages reflect his earnestness and hard work.

"We want this project," Hamilton told the Virginia Economic Development Partnership, a state-funded and controlled private, nonprofit corporation that oversaw the effort to attract the Microsoft facility to Virginia.

While the county grappled with finding money for basic services such as education, the localities offered to forgo $62 million to $117 million in taxes to attract the facility and its 50, $50,000-a-year jobs, according to e-mail correspondence. The incentive amount has not been publicly released, but a state official tasked with making dozens of redactions in the 436 pages of e-mails before their release failed to black out Montgomery County's offer completely. It could not be confirmed.

Bernard Weinstein, who was director of the Center for Economic Development and Research at the University of North Texas from 1989 to 2009, is one critic of localities offering huge economic inducements to get noticed by the likes of Microsoft and other large corporations that from time to time add major new facilities.

Typical support includes upfront cash, discounts on land and utility connections, and rebates that return a portion of tax payments shortly after they are made.

Weinstein said he's got a big problem with localities behaving like cash machines to attract jobs when corporations are more than able to pay their own way.

Microsoft, based in Redmond, Wash., earned $18.8 billion on revenue of $62.5 billion during the 12 months ended June 30.

When told of Montgomery County's offer for the Microsoft data center, he called the offer "absolutely insane."

"This competitive incentives game is worse today than it's ever been," he said. "That's partly because there's so much anxiety about job creation, and local politicians love to run on a platform of 'Thanks to me, such and such company located here, or expanded here.' "

In addition, incentives are called unfair to established businesses that do not have a deal and must pay taxes.

To make matters worse, local government agencies do not know the names of the communities in the same state or another state they are competing against, let alone how much they have already bid.

But some "will do anything to land a business and garner splashy headlines ... for businesses that may bring few jobs to an area or have little overall positive effect on the economy," John Accordino, who teaches urban and regional planning at Virginia Commonwealth University, wrote in an article in Virginia Issues & Answers, a Virginia Tech magazine.

For their part, private and government economic development officers describe incentives as the price communities must pay to attract new business investment in today's environment.

Without incentives on the table, a community will be passed over, they say.

"Our region would fare much better if economic incentives did not exist because our natural attributes and assets would far outweigh what other communities have, especially in places like North Carolina," Bopp said of the NRV alliance. But "they're a necessary evil these days."

Accordino argues that the setting and offering of incentives should at a minimum be opened to public review. In a public arena, officials would have to make the case for incentives to citizens.

"If economic development focuses on growing the economic base and generally enhancing the region's ability to compete, public officials have nothing to fear from full and frequent public disclosure," he wrote.

As it stands, deals are all but sealed in private.

Documentation, even the confidentiality agreements, are hidden from public knowledge. Even the amount of incentives offered is information local and state officials say the public should not know.

A more radical proposal would be to ban government incentives at the local level, leaving the financial enticement of businesses to the states.

Tim Sutton, an elected official in Alamance County, N.C., who supports this vision, said if a company does not wish to expand or move in without a local financial reward, let it go elsewhere.

"If you've got something to sell in your county besides cash giveaways, you ought to be able to sell that," Sutton said.

As it builds in Mecklenburg County, Microsoft Corp. is in line for the following incentives
-$2.1 million from the Virginia Governor’s Opportunity Development Fund.
-$4.8 million through the Virginia Tobacco Indemnification and Community Revitalization Commission.
-More than $20 million in savings through a state sales-tax exemption for computer purchases.
-$50,000 in state-paid employee hiring and training benefits.
-Free grant of county real estate worth $2 million.
-$3.95 million of benefits related to local water and sewer connections.
-20-year, 90 percent local personal property tax rebate worth $12 million during the first three years alone.

Source: Incentives agreements signed by Mecklenburg County, Virginia Economic Development Partnership and Microsoft Corp.

Microsoft lands valuable incentive package

Mecklenburg County is unable to estimate its tax gains, break-even point or even the total value of the local incentives package for Microsoft, because it does not know precisely what the company will spend or when, County Administrator Wayne Carter said.

At its new home in Southside, Microsoft is in line for upfront payments of $2.1 million from the state and $4.8 million through the Virginia Tobacco Indemnification and Community Revitalization Commission; state sales tax exemptions of unknown value; $50,000 in state-paid employee hiring and training benefits; a $2 million piece of county real estate free; $3.95 million of benefits related to local "water and sewer connections;" and a 20-year, 90 percent local personal property tax rebate worth $12 million during the first three years alone, according to agreements signed by the company and government officials.

For its part, Microsoft promised the state it would spend $44 million on a new building subject to the local real estate tax and $255 million on equipment including computer servers subject to the local personal property tax by the end of 2014 and, in later years, spend an additional $200 million, for a grand total of $499 million, the agreements said. The company is preparing its building site, which sits beside U.S. 58 just outside Boydton.

The company has said hiring will begin by early summer. It is looking for about 50 people who will receive an average salary of $49,700, which is 75 percent higher than Mecklenburg County's average annual salary of $28,423.

The state expects to break even by 2021, according to its agreement.

Had the same deal been made in Montgomery County, it's unknown how much tax Montgomery County and Christiansburg would have kept.

Officials have said Montgomery County's offer was comparable to Mecklenburg's but would not detail it.

The new jobs would have expanded a budding tech job market in Montgomery County.

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