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May 2009

APRIL REVENUE (IN MILLIONS): SALES TAX: $1,660.8 OIL PRODUCTION: $52.3 NATURAL GAS: -$5.0
MOTOR FUELS: $259.7 MOTOR VEHICLE SALES: $181.4 TOBACCO: $114.6

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Spurring Business Growth

by Gerard MacCrossan

Downturn or upturn, Texas leaders want our state to be the most attractive in the country for businesses.

The traditional pros and cons still play a role when it comes to selecting a location: Are transportation routes readily available? Is the right site or building available at a good price? Is there a sufficient labor pool, training partner and affordable cost of living for the wages a company can afford to pay?

As Texas leaders have increasingly found, financial incentives can mean the difference between companies choosing a Lone Star location or finding another state to do business. In its first five years, the Texas Enterprise Fund (TEF), an initiative of the Office of the Governor that supports the growth of Texas businesses, has funded or contracted for $377 million in investment grants to 51 companies and institutions that pledged to create more than 52,000 jobs. The estimated $14 billion capital investment needed to complete those projects is more than 37 times the taxpayers’ share, which is allocated by the governor, lieutenant governor and house speaker.

With its emphasis on long-term job creation, TEF grants have been awarded to a wide range of companies – from poultry processors to high-tech companies such as Rackspace Hosting. A leader in “cloud computing,” San Antonio-based Rackspace hosts Web sites, databases, e-mail and acts as a storage backup for clients in 50 countries. At the end of 2008, Rackspace’s work force was slightly more than 2,600 “rackers,” as its employees are known.

Incentives are Investment in Home-Grown Business

Eighty percent of our jobs are in Texas and 90 percent of the revenue comes from outside of Texas, so it’s a huge transfer of wealth into the state, which is a phenomenal thing,” says Lew Moorman, Rackspace’s chief strategy officer.

In addition to Texas' excellent access to capital, facilities, work force, cost of living and training, the Texas Enterprise Fund can be used to bring new businesses to Texas.

To date, Rackspace has received $5 million of the $22 million TEF grant awarded in August 2007 to help the company expand in the San Antonio area. Moorman says 600 employees already operate out of the first building renovated – a former Mervyn’s store – and up to 5,000 people could ultimately work at the site, breathing new life into more than 1 million square feet of shuttered retail premises at Windsor Park Mall. Most of the company’s new hires come from within Texas – just 11 percent relocated to here in 2008.

According to the Texas Governor’s office, which administers TEF funds, Rackspace’s total investment at the site is projected at $111.39 million. Julie Rabeux, business research manager in the Governor’s Economic Development and Tourism division, says Rackspace’s TEF funds are slated for four installments paid as the company adds to its work force.

The company also was aided by a $4.5 million Texas Workforce Commission Skills Development Fund (SDF) training grant and a valuable 100 percent, 14-year avoidance of city, county, school and community college district taxes.

The Texas Enterprise Fund (TEF) is the largest “deal-closing” fund of its kind in the nation and is used to attract businesses and jobs to Texas. The TEF can be used for a variety of economic development projects, including infrastructure development, community development, job training programs and business incentives. Since 2004, $377 million has been allocated, leading to commitments to create 53,389 jobs.

Rackspace officials say the SDF grant is training employees while developing Alamo College’s instructors.  

“The primary purpose of the grant is to improve the Alamo College’s ability to teach IT,” says Rackspace’s Senior Training Manager Duane LaBom. “To do this, many Rackers will receive training in different areas, technical and non-technical.”

According to Windcrest Economic Development Director Ray Watson, the property tax avoidance – and sales tax savings on equipment and materials used in renovations – were made possible when ownership of the 68-acre mall property was transferred to Windcrest Economic Development Corporation, a 4B sales tax recipient. Walzem Road served as the boundary between the cities of San Antonio and Windcrest, with the mall on San Antonio’s side until 2007, when it was transferred to the suburban community.

“Eighty percent of our jobs are in Texas and 90 percent of the revenue comes from outside of Texas, so it’s a huge transfer of wealth into the state, which is a phenomenal thing.”

– Lew Moorman,
chief strategy officer, Rackspace

Watson says the loss of Windsor Park Mall hit businesses hard on both sides of Walzem Road. San Antonio and Windcrest lost sales tax revenues when many businesses closed after the mall’s demise.

“Once the mall closed, it dominoed across the area,” he says. “We were losing about $100,000 a year in sales tax.”

Watson says initially Windcrest and San Antonio were rivals in the bid to retain Rackspace in Bexar County, but pushed by County Judge Nelson Wolff, the property tax incentive benefit of transferring the mall property to a 4B corporation gave Windcrest a card that San Antonio didn’t have to play.

“It helped keep Rackspace in the San Antonio area and it was beneficial to everyone,” Watson says.

Video on Demand

See how Rackspace used incentives to become a major player in San Antonio. Check out Lew Moorman’s T2 Summit presentation and video online at www.t2summit.org.

Lew Moorman,
chief strategy officer,
Rackspace Hosting

San Antonio and Windcrest will benefit equally by sharing municipal sales tax receipts generated by Rackspace. The northeast area of Bexar County will continue to benefit from the influx of an expected 5,000 or more employees. A new “urbanist community” is planned for the 140-acre property adjacent to the Rackspace headquarters and will offer diverse housing, entertainment and dining options for the entire area.

The second 85,000-square-foot phase of redevelopment at Rackspace’s Windcrest site is under way. Company officials say plans to convert the former mall are on schedule and that future pace will be dictated by the company’s growth.

Huge Investment Requires Local Commitment

When Motiva Enterprises started thinking about where to locate a multi-billion refinery expansion earlier this decade, its choices were limited to two states where it already has operations – Louisiana and Texas.

In the Bayou State, the incentives were already on the table: a potential 10-year, 100 percent property tax incentive for manufacturing businesses, says Danny Harris, a Shell Oil real estate advisor who worked with local and state governments to obtain incentive packages.

The Deal-closing Fund

The Texas Enterprise Fund awards grants to entice businesses that will bring new jobs to Texas communities.

Grants under contract$365,623,392
Grants awarded*$377,036,392
Capital investment$14,029,261,913
Funds disbursed$332,628,196
Jobs pledged52,051
Jobs reported23,342
No. of contracted projects51

* Hewlett-Packard and Maxim Integrated Products refunded $5 million in grants.

Source: Texas Governor’s Office

“We needed to level the tax playing field with Louisiana and Texas didn’t have a one-stop shopping place for local tax incentives like Louisiana,” he says. “We started our meetings with the Governor’s Office and, ultimately, we had to negotiate incentive packages directly with each taxing jurisdiction.”

Out of those negotiations came an agreement with Port Arthur Independent School District that ultimately let school districts tax qualified properties to a certain value. In Port Arthur ISD, the value cap is $30 million, a fraction of the $3 billion capital investment that Motiva initially projected. When the expansion was given the green light, the costs were expected to top $7 billion. In all, Harris says, Motiva negotiated contracts with six taxing districts.

Motiva Oil Refinery, Photo courtesy of Shell Oil

Motiva’s capital investment is huge, creating thousands of construction jobs, filling hotel rooms with workers and generally providing an economic boon for Port Arthur during the multi-year construction period. When the plant is at full capacity and processing 600,000 barrels of oil per day, up to 300 additional permanent workers will be employed there.

Despite its massive capital investment, Motiva is eligible for a relatively small TEF grant – $2 million compared to Rackspace’s $22 million. However, the refinery is poised to save millions on local property taxes. The expansion’s completion has been pushed back until the first quarter of 2012, says Motiva spokesman Stan Mays. Lower refinery margins and consumer demand for gasoline in 2008 prompted Motiva to affirm its commitment to the project but revise its aggressive completion schedule in a bid to keep costs in line.

The Texas Emerging Technology Fund was created by the Texas Legislature to allow Texas to expedite the development and commercialization of new technologies and recruit the best research talent in the world. More than $250 million has been allocated to date.

How Do Texans Benefit?

If companies are not paying their full tax levy on property and sales taxes, on the surface the community appears to be losing large streams of potential revenue. Not so, according to proponents of economic development.

Former Texas Secretary of State Phil Wilson says incentives are targeted to companies that can provide a ripple effect.

“So by getting a Motiva or Rackspace and the jobs associated with them, whether it’s construction or long-term permanent employment, you then have the ability to amplify that to the overall economy,” he says. “[Don’t look at it] as ‘what am I giving away,’ but ‘what am I getting?’ Then you really can have tremendous things happen for your local community, for your county and for the state.”

Harris says when Motiva was negotiating incentives, the company was asked to use local labor and contractors as much as possible.

Port Arthur Chamber of Commerce president Mary Ann Reid says Motiva worked well with local contractors helping them form alliances and partnerships to work on the expansion. A consortium was created to allow independent dump truck owner-operators from the Port Arthur area an opportunity to bid on a Motiva contract. The 100-strong group members remain independent operators, but working together, they won the contract.

On the Money:

The Federal Stimulus

Check out Laylan Copelin’s column “On the Money,” a conversation about federal stimulus money and how it’s being spent in Texas, exclusively at Texas’ American Recovery and Reinvestment Act site:
A Texas Eye on the Dollars.

“It’s had a huge impact on the economy over there,” Harris says. At the original estimated project price tag, the economic impact was estimated at $20 billion over 20 years, a number that he says definitely will increase as project costs rise.

“I’m not sure too much bad comes with a $6 billion or $7 billion expansion,” says Port Arthur City Manager Steve Fitzgibbons. In fiscal 2009, Motiva made an in-lieu-of-taxes payment of $3.3 million. For the next three fiscal years, that payment will be $4.3 million, rising to $7.3 million in fiscal 2013 in recognition of the refinery’s increased value. Port Arthur doesn’t supply city services – other than water and sewer, for which Motiva pays 50 percent more than if it were in the city limits – but yields about 10 percent of its general fund revenue from the refinery.

“Having a company commit to a $6 billion or $7 billion expansion, in addition to the economic development that one of the biggest investments in the country brings, that’s something we’re certainly very glad is happening here,” Fitzgibbons says. FN

For more information about the Motiva Refinery Project, visit www.motivaexpansionproject.com.

Learn about the Texas Enterprise Fund and other state economic incentives at www.governor.state.tx.us.

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