The University of Kansas
Policy Research Institute
Luke Middleton
Policy Research Institute
Blake Hall
1541 Lilac Ln, Room 607
Lawrence, Kansas 66044
April 20, 2004
With the draft release of the 2003 Tax Abatement Report by the city of Lawrence, it was possible to re-evaluate what results the PRI Tax Abatement Model might have predicted for selected firms had information on their actual future performance been available at the time the model was run.
There is not a single case where future reality coincided exactly with original predictions, nor would we have expected such an outcome.
The degree to which most firms came close to their investment predictions is actually somewhat surprising. Of the 13 firms receiving tax abatements in 2003, only three fell below 90 percent of their predicted dollar investment in buildings, land, and machinery and equipment. In two of these cases (Allen Press and Sauer-Danfoss), the reason appears to be that the final phases of investment have yet to be completed: in other words, while possibly behind schedule, it can not be ruled out yet that the total investment will occur. The third case, PackerWare, involves a decision by the firm to lease machinery and equipment rather than purchase it. Because leased equipment does not qualify for an abatement, the total abated investment fell far short of the predicted amount. What would be interesting to know in this case is who ultimately owns that leased equipment, because they are certainly paying property taxes on it. If that owner resides in Douglas County, the result could conceivably be considered positive since full taxes are being collected on it, rather than the 50 percent the abatement provided for.
Besides the three firms whose investments fell short, there were five whose total investment exceeded 100 percent of the predicted. The rest fell between 90 and 100 percent.
In terms of the number of new jobs the firms predicted would be created, 5 of the 13 firms fell short, although in the case of Jayhawk Bowling Supply, the deficit was by only 1 full time job, and they exceeded the number of half-time positions by 3. The others were DST (evaluated in-depth later); E and E Specialties, who actually not only failed to create the new jobs they predicted but shed some of its existing, pre-abatement labor force as well (their abatement ended in 2003); Reuter Organ (also detailed later); and Sauer-Danfoss, under projections by a considerable 41 full time positions.
The issue of wages is more difficult to evaluate in terms of the firms’ original predictions. The 2003 Tax Abatement Report lists average firm wages for each occupational category within the firm, and specifies whether the firm’s wage is above or below a calculated mean wage for that occupation in the Lawrence MSA. However, not specified is which of those occupational positions within a given firm are the result of new hiring the firm predicted on its application, and which of those represent job positions that existed prior to the abatement.
For example, Allen Press employed 314 employees before their abatement application, and predicted they would hire 13 more as a result of the new investment the abatement would make possible. In fact, they hired 23 new full time employees. But where these 13 to 23 new employees fall within the over 50 separate job categories within the company is impossible to determine from the city’s report. While the report does states that only 55 percent of the firm’s full time positions meet or exceed the mean wage for their respective occupations, we are not able to say from that information whether the firm’s wage predictions as it concerns the new hires were met or not. Those 23 new employees may, for all we know, fall in the 55 percent of occupations within that company that pay above average wages. Or, they may all fall in the 45 percent that pay below, or they may be scattered across both categories. In short, although the majority of firms appear to pay workers in quite a few of their occupations wages below the average, in most cases it is not possible to say conclusively whether that means they failed to meet their abatement-application predictions.
Following this introduction are the results of a revised run of the tax abatement model for three firms, using information from the 2003 Tax Abatement Report to supplant what they originally stated on their abatement application:
- DST: has not hired nearly the number of employees they predicted (depending on which estimate you go by, they are short 30 to 200 employees). However, they have come quite close in meeting their investment predictions.
- Reuter Organ: has exceeded their investment amount, but is short about 12 employees. Considering their total workforce is currently only 48, this can be considered a sizeable shortfall.
- Allen Press: has fallen short on Phase II of its investment predictions: they’ve achieved slightly less than 50% thus far. However, they fully met Phase I investment goals, and have hired 15 more employees than predicted on their abatement application for both phases combined.
In each of these three cases I ran the revised analysis with an exact replica of the model used to perform the original. Because the model changes consistently as input variables are updated, using a current version would not tell us how the firm might have compared if better information were known at the time of application, as the different results would also be a product of a changed model. Using a replica means that any difference in results are sole products of the difference in what the firm predicted compared to what the firm delivered.
Additionally, all that has been changed in these new analyses compared to the originals are the firm’s actual investment in real estate and personal property as of 2003, and the actual number of new workers hired. Due to the difficulty with salaries mentioned above, various ad hoc assumptions are made and described in the summaries below. No adjustments have been made for inflation: these results are simply what the outcome would have looked like at the time of application, if the future (up to 2003) could have been foreseen.
Besides these three, there are three other firms for which a re-analysis would conceivably be interesting on the face of things, but which we did not evaluate:
- Sauer-Danfoss: is, according to the city report, 41 jobs under their predictions. It appears that PRI did two analyses for this firm, one which predicted 45 jobs total, and another which is internally inconsistent but predicted at least 183. The city report says the original prediction for new jobs was 150. We only have a copy of the original model for the case where they predicted 45 total new jobs, which is clearly not the case the city is working from. Given this, it would be difficult to know what to compare a revised analysis to. Sauer-Danfoss is additionally listed as $13 million under their total predicted investment amount: however, this is largely due to the fact they have yet to apply for Phase IV of their expansion project, which accounts for $10.2 million of their original investment estimate. Ignoring Phase IV, the company has achieved 95% of their investment goals: a non-story. It might also be reasonable to expect that when this additional investment is made more employees might be hired. And although (as already described), it would not be possible from the existing information to accurately determine how well Sauer-Danfoss met their wage predictions, 86 percent of the firm’s occupational categories are paid above average wages: a fairly decent number.
- PackerWare/Berry Plastics: is listed in the city report has having achieved only 34% of their original investment estimates. However, the city report goes on to say that this is because the firm made a decision to lease and not purchase equipment, and leased property doesn’t qualify for an abatement. One may well argue, however, that this could have been a better outcome for the city, if the ultimate owners of that equipment are local: they would be paying full property taxes on the equipment, rather than an abated percentage. Additionally, the firm has completely met its employment estimates, and has also hired 18 additional part-time employees not originally predicted. And again, although it would not be possible from the existing information to accurately determine how well PackerWare met their wage predictions, they likewise paid 86 percent of their occupational categories above average wages, which isn’t too awful.
- E&E Specialties: this firm has met its investment predictions, but of all the firms with an abatement it has had the worst employment record by many degrees. The city report lists them as 201 jobs short of predictions. In fact, if the model were to attempt to re-calculate this analysis, it would need to be able to accept negative employment figures, since the number of people they employ now is substantially less than they did even before the abatement application. The model in its current state is not adequately arranged to accept negative employment. Furthermore, this abatement was granted in 1992 and we do not have any electronic versions of our model dating back to that period, making any new analysis rather difficult. But perhaps the primary reason a new analysis is largely unnecessary is because there is no uncertainty as to what it would say: clearly the model would have predicted an unacceptable benefit/cost ratio. Total net benefits would have been in the negative range.
The other seven firms listed in the city report are all doing close enough to what was originally estimated, and in several cases exceeding predictions, that a re-analysis would not challenge the original decision to grant them an abatement.
Luke Middleton
DST Abatement requested in November, 2000
Investment
The 2003 Tax Abatement Report states that improvements to personal property were expected to be $2,200,000, of which only $1,020,317 have been made so far. On the tax abatement application, however, the company’s listed improvements to property of only $2,000,000: only slightly off from the city’s report. There is no discrepancy in regards to estimated investment on machinery and equipment, which both list at $1,450,000. In 2003, DST had achieved close to this amount: $1,387,418.
Workers
The 2003 Tax Abatement Report claims 175 employees were estimated. In 2003 DST employed only 149. The tax abatement model, however, was run on the assumption of 350 new employees. In their application, DST claimed they would hire 175 employees from Sallie Mae. Furthermore, they hoped to have their total work force up to “350 in the immediate future” (application letter, Tom McDonnell, November 21, 2000). In discussion with DST at the time, it was indicated that the 350 number should be used in the analysis. This revised report is run with 149 new jobs, using the salaries listed in the 2003 Tax Abatement Report (because the firm employed no one in Lawrence prior to the abatement, we can be certain that all of the salaries listed in the city’s report are for new employees).
Results
Estimated Benefit/Cost Ratio after 15 years
Original Application (2000) Revised with 2003 Data
Lawrence 1.13 0.94
Douglas Co. 1.04 0.83
USD 497 0.85 0.54
Combined 1.05 0.83
Estimated Net Benefits after 15 years
Original Application (2000) Revised with 2003 Data
Lawrence $221,292 -$79,555
Douglas Co. $41,105 -$127,878
USD 497 -$89,337 -$233,217
Combined $173,060 -$440,650
Reuter Organ Abatement requested in December, 1999
Investment
The 2003 Tax Abatement Report states that the total abatement authorized was $3,683,480, for land, building, machinery and equipment. No breakdown is provided. The firm has actually achieved a bit more thus far: $3,716,489. According to the firm’s tax abatement application, however, the cost of the new building was estimated at $3,750,000. This did not count the purchase price of any land, as at the time the final location had yet to be finalized. The company also estimated that machinery and equipment purchases would total $200,000. Therefore, the model was originally run with a total investment of $3,950,000. Although the firm has exceeded the investment amount listed in the 2003 Tax Abatement Report, they have fallen short of what was estimated on their application.
Workers
The 2003 Tax Abatement Report claims that 14 new full time jobs were predicted. On the tax abatement application, however, the firm predicted 17 new full time jobs, and 1 part time job. As of 2003, the firm had only hired 3 additional full time employees, and 3 part time employees. Because the 2003 Tax Abatement Report doesn’t list salaries by new hires compared to those who already worked at the firm before the abatement request (see introductory letter), for this revised analysis the salaries of the full time workers was assumed to be the average of the full time categories the city’s report lists, excepting general managers. There is only one category of part time workers listed in the 2003 Tax Abatement Report, so for the part time workers those salaries are used.
Results
Estimated Benefit/Cost Ratio after 15 years
Original Application (1999) Revised with 2003 Data
Lawrence 1.33 1.42
Douglas Co. 1.65 2.23
USD 497 3.45 11.8
Combined 1.89 2.61
Estimated Net Benefits after 15 years
Original Application (1999) Revised with 2003 Data
Lawrence $58,616 $44,198
Douglas Co. $81,013 $76,669
USD 497 $207,116 $176,001
Combined $346,745 $296,869
Allen Press Abatement requested in February, 1999
Investment
The 2003 Tax Abatement Report splits the investment into two phases. On the first phase, the company has already reached the full amount of investment predicted, for both equipment and building improvements. Second phase investments are somewhat less than 50 percent of the predicted value as of 2003. When the application was originally received, it was processed by the tax abatement model as one single project: it was not split into phases. In this revised analysis, the firm’s total performance thus far (phase I and II combined) is compared to the total projections on their original application.
Workers
The 2003 Tax Abatement Report indicates the firm predicted 13 full time jobs would be created. This concurs with what was listed on the tax abatement application. In 2003, however, the firm had already created 23 new full time jobs, as well as 5 additional part time positions. Because the city’s report lists salaries for every position in the firm, and doesn’t indicate which salaries belong to just the new jobs, wages in this revised analysis were kept at the level predicted in the application. The only change made has been the number of employees hired.
Results
Estimated Benefit/Cost Ratio after 15 years
Original Application (1999) Revised with 2003 Data
Lawrence 2.31 1.80
Douglas Co. 2.50 1.84
USD 497 2.73 2.11
Combined 2.50 1.91
Estimated Net Benefits after 15 years
Original Application (1999) Revised with 2003 Data
Lawrence $208,475 $158,925
Douglas Co. $185,147 $129,332
USD 497 $228,324 $175,912
Combined $621,945 $464,168