By Alexandra Scaggs | Jan. 28, 2015 6:01 p.m. ET | www.wsj.com
Photo: Skip Rowland Photography for The Wall Street Journal
States and municipalities have long used financial incentives to lure new businesses. But when taxpayer-funded incentives benefit a new rival, existing local businesses can get angry.
Consider the resentment stirred up in Richmond, Va. The city on the banks of the James River, with a population of about 200,000, has a burgeoning local dining and beer-brewing scene, touted as a draw for tourists. Now Richmond itself intends to get in on the craft-beer boom, through an incentive package offered to Stone Brewing Co. of Escondido, Calif.
Stone, known for its Arrogant Bastard Ale, plans to make Richmond the home for its East Coast headquarters. In return, Richmond offered to use $31 million of public money to build it a brewery, restaurant and beer garden, as part of the city’s renovation of a riverfront area razed in the 1970s.
The problem, in the eyes of some local business owners, is that this incentive package gives the city a direct financial stake in the success of a bigger competitor. Richmond will become landlord to Stone, which plans to pay the city back by renting those properties for 25 years.
“We were flat-out flabbergasted by the deal being cut,” said Michael Byrne, director of operations for the Tobacco Company Restaurant, a decades-old, 140-employee establishment a few blocks away from the river.
Matt Fabian, head of market and credit research with Municipal Market Analytics, added, “If the brewery doesn’t work and becomes defunct, you have taxpayers on the hook.”
Cities, states and other municipalities have used other aggressive tactics to attract businesses and jobs.
In April 2013, the city of Provo, Utah, agreed to sell its fiber optic network to Google Inc. for just $1. Veracity Networks LLC, a locally owned telecommunications provider with 145 employees, had been operating the city’s fiber-optic network for about five years, leasing it out on a monthly basis. As a result of the sale, Veracity had to build a new network for nearly $7 million to continue to provide high-speed connections delivered over fiber-optic lines to local companies.
“We’ve had to make a huge investment to bring fiber optics to businesses,” said Neal Hopkin, the director of marketing at Veracity. “A lot of them relied on that speed, so we had to improvise and make a big investment.”
The iProvo fiber network cost the city nearly $39 million to build, and the deal allows Google to sell the network back to the city for $1 if it isn’t successful.
According to Provo Deputy Mayor Corey Norman, the city’s fiber optic network was becoming obsolete and needed an estimated $20 million in upgrades. After the network was shopped around with no luck, Google pitched them an offer: If the city sold it the network for $1, Google would handle the upgrades.
“The government should not pick winners and losers. It should let consumers do that,” said Steve Davis, executive vice president for public policy and government relations at the Google rival CenturyLink Inc., a Monroe, La., telecom company with about 45,000 employees.
Development efforts are “not a big component of government spending, but it’s definitely growing,” said Roger Noll, economics professor emeritus at Stanford University. “The new wrinkle is to have a subsidy be an investment of some sort,” instead of tax forgiveness or grants, he said. He worries that local governments are overstepping their bounds by taking a stake in a business’s success. “Why should a small local business be discriminated against, relative to a larger newcomer?” he asked.
Alan Schankel, managing director of municipal-bond strategy and research with Janney Montgomery Scott LLC, worries about cities using their credit ratings to bring in business, like Richmond is doing. “I generally don’t like to see communities borrow money for purposes beyond their central purpose,” he said.
In 2010, Rhode Island backed $75 million in taxable bonds to attract a videogame company founded by former Boston Red Sox pitcher Curt Schilling. When the company later filed for bankruptcy, taxpayers weren’t legally on the hook, but a state report found that failing to pay would result in “swift and severe” action from credit-ratings firms, and a big jump in borrowing costs.