In this article we will look at some of the perils that happened with public funds going for private gain. These case studies will revolve around Albuquerque with two companies operating there in the early aughties: Phillips Semiconductors and Eclipse Aviation
Phillips and IRB’s
In November 2002 Philips Semiconductor, whose parent company is Royal Philips Electronics, announced it would close its Albuquerque plant the next year in 2003, putting 600 people out of work who would lose nearly $50 million in payroll. Philips built its semiconductor fab plant in 1980, and its first chips came off the line in 1982.
The signs of the closing were coming before. The following September it already laid off 70 people. The company reported 3rd quarter losses of $324 million, as 2002 the rest of the technology industry was also suffering.
Before this Philips was granted an Industrial Revenue Bond, or IRB, of $400 million in 2001. IRB’s are used to finance business projects, and the company and not the city is responsible for them. In the bond it gave the company $19 million in tax breaks over the next 11 years. This bond was then the largest one given in Albuquerque’s history. It allowed Philips to expand and upgrade its facility while keeping its tax bills low. It had a clause that it would pay back some tax breaks if they closed within five years.
Thankfully they agreed in August 2003 to pay back $13.1 million for tax breaks they received. This was calculated as 100% of what taxes it would have paid without the IRB. The money was divided between the city of Albuquerque, which would get $2.2 million, and through Albuquerque Public Schools and other entities.
Yet this was not the first IRB Philips received. Back in 1995 the City Council voted to give the company a $200 million IRB, which included $50 million in tax breaks over 16 years. Despite this IRB the company succeeded in losing hundreds of jobs.
One would think they would be wiser in allocating public monies to shaky private firms next time. But alas…
An even bigger blunder was from what was then called Eclipse Aviation. Founded by former Microsoft employee Vern Raburn in 1998 (Bill Gates was an early stakeholder in the company), Eclipse promised to build a light jet for under $1 million. He just needed the money to build the infrastructure for it. And Albuquerque was quick to comply.
Many political figures jumped to give Eclipse funds for various things in their move of the manufacturing center to Double Eagle Airport on Albuquerque’s West Side.
One of the main projects was $5.5 million for a water and sewer line project to supply Eclipse with water for its manufacturing. The funding was split the following: $4.125 million from the Army Corps of Engineers through the Water Resource Development Act, and the remaining $1.375 was to come from the city of Albuquerque’s Aviation Department funds. Water lines to the west side were controversial, with the fear that available water on that fast growing section of the city would lead to more sprawl development. A plan for an onsite well was rejected by Eclipse because of the quality of the water. Some city councilors such as Eric Griego wanted to restrict the size of the line to limit other development. Then mayor Martin Chavez stated that the water line must be created to serve industry needs:
“Double Eagle is going to be one of the most important job centers in New Mexico. The line will be whatever size is necessary to serve a fully functioning economic center at Double Eagle II. It’s going to be determined by the professionals.”
There was other support, mostly federal. Senator Bingaman secured more than $2 million for the reconstruction of the Interstate 40 and Paseo del Volcan interchange, as well as $750,000 to widen the airport access road. There was federal grant money of nearly $2 million applied to install new telephone lines and drainage ponds. The Transportation Department provided $358,000 for a new taxiway at the airport. The Federal Aviation Administration provided nearly $2 million for a new control tower. $3.4 million was received from the Department of Housing and Urban Development for extension of electric and gas services.
Eclipse moved its manufacturing to Double Eagle in 2005. They predicted they would create 2,000 jobs.
“Eclipse Aviation Announces Job Cuts: Company Reduces Work Force By 38 Percent”
-headline from KOAT Channel 7, August 22, 2008.
Surprisingly it didn’t work out. Eclipse filed for bankruptcy in 2009, and its CEO Raburn resigned.
I would direct readers who want to know the rest of the story to the History of Eclipse Aviation page on Wikipedia. It is well cited, so you can read the primary sources. Some gems:
“… investors, suppliers, Eclipse 500 owners and order holders lost well over $1 billion. There has never been a financial failure of this scale in the entire history of general aviation. Eclipse investors have lost hundreds of millions, but individuals are also big losers. Anybody who had a deposit for an airplane lost the money. And anybody who took delivery of the 260 or so airplanes to leave the factory has lost all warranties and the promises to modify the airplane to a final and usable status …The Eclipse episode is the biggest disaster in memory for GA because it took more than a billion dollars that could have been used to create new and viable airplanes and wasted it. And the trauma will linger for years as investors, rightly terrified by the Eclipse disaster, refuse to put money into new airplane programs that can really work.”
“In addition to the economic cost, this program and related air taxi schemes have had a toxic impact on a broad range of political and governmental entities. Somehow, the FAA got co-opted. If the [Inspector General’s] report is correct, the FAA’s actions were reprehensible, a threat to the principles of good governance that keep society safe. It would be akin to the FDA deciding to approve possibly tainted milk because it came from a well-connected dairy. During recent congressional hearings, New Mexico Gov. Bill Richardson implied that jobs were more important than honesty, safety and good government. For possibly the first time, a US government entity provided equity cash for a private business.”
Of course these types of corporate incentives are not limited to New Mexico. Big corporations have long played states against each other, states eager to get new jobs and revenue, and corporations eager to cut labor costs. The Baltimore Sun did an in-depth report that year, cited in the Village Voice by James Ridgeway, where states provided more than $3 billion in incentives including grants, tax cuts, and loans, to attract corporations to their states. Most of these deals are outright scams, as the number of jobs created, when they do, often times than not do not justify the money given the corporations.
The ever-heralded public-private partnerships are seen as ways where government and industry can collaborate, where everyone benefits. Businesses prosper, jobs created, and everyone is happy. But they don’t always turn out that way. These are just ways to privatize the gains and socialize the costs. When the companies fail the public is the one that pays. New Mexico, with a weak economy and desperate for jobs, was really susceptible to these public-private con games. Well see if they are fooled again.
Uyttebrouck, Olivier. “Feds Likely to Fund Water Project.” Albuquerque Journal. July 16, 2002. Pg. 1.
Journal Staff Report. “Funds for Double Eagle Upgrades Made Official.” Albuquerque Journal. July 31, 2002. West Side Journal, pg. 1.
Vogel, Chris. “Eclipse Plant Inches Toward Double Eagle Airport.” Albuquerque Journal. September 12, 2002. West Side Journal, pg. 1.
Vorenberg, Sue. “High-Tech Tumble.” Albuquerque Tribune. August 19, 2002. Pg. 3.
Ludwick, Jim. “Philips To Repay Tax Break.” Albuquerque Journal. August 22,2003. Pg. 1.
Anderson, Shea. “Phillips Axes Plant, 600 Jobs.” Albuquerque Tribune. November 8, 2002. Pg.A1.
Journal Staff Report. “Feds Add Funds for I-40 Exit Near Double Eagle.” Albuquerque Journal. June 16, 2003. Business Outlook, pg. 9.
Ridgeway, James. “The Cost of Corporate Incentives: Billion-Dollar Blackmail.” part of “Mondo Washington.” Village Voice. June 21-27, 2000. http://www.villagevoice.com/issues/0025/ridgeway.shtm (Accessed July 11, 2000).