5 Ways a Georgia Judge Exposed the Corporate Subsidy Machine

Georgia officials built a bad deal, and a judge called them on it.

Photo credit: Chris Yarzab

This is Boondoggle, the newsletter about corporations ripping off our states, cities, and communities. If you’re not currently a subscriber, please click the green button below to sign up. Thanks!

Last week, a very rare thing happened: A judge blocked a corporate subsidy deal, on the grounds that the officials who negotiated it didn’t do anything to ensure it would work out to the benefit of the state or local communities.

Rivian, the electric truck manufacturer, earlier this year announced a deal with the state of Georgia under which it will receive about $1.5 billion in public subsidies, the linchpin of which is about $700 million in property tax breaks. Incumbent Republican Gov. Brian Kemp has made the Rivian deal a key point in his re-election campaign this year. It was also one of those secret deals, where the beneficiary wasn’t known until it was too late, and part of the wider electric vehicle race to the bottom occurring in states across the country.

Everything was just chugging along, until, on Thursday, Morgan County Superior Court Judge Brenda Trammell rejected the part of the agreement that covered Rivian’s property tax breaks, agreeing with local opponents who said the state hadn’t done its due diligence to ensure the deal provided enough benefits to justify the cost. She also ruled that Georgia officials used a loophole to provide Rivian with its property tax breaks that isn’t actually legal. The property tax portion of the deal involves local communities floating some bonds in a complicated but common maneuver which requires judicial sign-off, giving Trammell the opportunity to stop everything in its tracks.

The 34-page ruling is a brilliant rebuke not just of this particular deal with Rivian, but of the corporate subsidy machine in general, and how it cranks out money for private concerns without guaranteeing public benefits. You can read the whole thing here.

I pulled out five sections that I think particularly reflect the judge’s work pulling pack the curtain on how a subsidy scam comes into being.

1. “Mr. Silvio further testified that in the current proposed project, Rivian also committed to creating 7,500 new jobs by 2028 with an average pay of 56,000 per year. However, on cross examination, he admitted that he did not know how the salary he attested to was calculated or how much executive salary was included in the projected salary amount. Further, no explanation was given in regard to the stated commitment of Rivian in Exhibit F to the Economic Development Agreement that [full-time-employee] positions [would meet certain criteria].”

“Mr. Silvio” is the poor soul who was tasked with justifying the Rivian deal in court, on behalf of the local economic development authority, the JDA. He had a very bad day.

First, as the judge explained, he was forced to admit to a common corporate subsidy tactic: A corporation promises a certain number of jobs in a deal, along with a certain salary, but then includes executive pay or other perks in its calculation that drag the average up, while most workers still make peanuts. Rivian may or may not have done this, but local officials apparently didn’t bother to check.

In fact, a running theme of the ruling was that Georgia officials just took Rivian’s word for it on a host of metrics, with no independent verification regarding whether the corporation is even capable of keeping its promises, or what those promises would mean to the surrounding communities or future Rivian workers.

2. “During his cross-examination, Mr. Silvio admitted that the IDA did not employ an investment banker, an economist, a financial analyst, or any third party to evaluate the financial wherewithal of Rivian or in making the decision on the soundness of this Project. The 10-K 2021 annual report of Rivian to the U.S. Securities and Exchange Commission report showed that Rivian delivered only around a thousand cars during that time. Mr. Silvio could not state how much of the EV market that Rivian had nor how many cars had been delivered in 2022.”

Will Rivian even be in a financial position to follow through on its commitments to Georgia? No one knows! The corporation has been taking some hits recently, which weren’t factored into the original decision to provide it with a massive subsidy package.

Every corporate incentive deal is, in some way, a bet on whether the corporation receiving it will be successful and stay in business long enough to make the state’s investment worthwhile. As the judge noted, there are at least reasons to be very skeptical Rivian is going to need or be capable of maintaining the massive Georgia factory it envisions, which would merit more due diligence from the state that wasn’t ever done. Again, Georgia just took Rivian’s word that everything is fine.

3. “Mr. Silvio further testified that there were no studies done to determine what the cost of maintenance of county improvements would be if the Project is constructed. For instance, no study was done to determine addition EMS costs, school expenses, educational buildings and facilities or teachers, or infrastructure costs. No determination was made of additional county costs for the construction of the project.”

This is a really key point: Subsidy deals almost always necessitate new obligations on behalf of taxpayers to provide services to the corporation’s physical grounds and its future workers. But the costs of those services — be they increased water and power usage, public safety, infrastructure degradation, environmental costs, or what have you — are not treated as actual costs for the purposes of the deal. Every new worker is treated as all upside, as opposed to someone who, yes, brings some economic activity in the form of new income, but also puts additional strain on the community’s resources.

Judge Trammell pointed out that none of these future costs were even considered by the state, period. State officials just said everything would be all upside for everyone, everywhere.

4. “As he explained, there is no statutory or constitutional mechanism in Georgia to abate taxes, so if the property is transferred to an entity like a JDA that does not have an obligation for taxes, property tax incentives can be given.”

In Georgia, technically, giving corporations tax reductions on their property, such as those provided in most corporate subsidy deals, is not allowed. The oh so clever workaround is that local governments own the land and lease it to the corporation, allowing them to negotiate payments in lieu of property taxes.

The trick, though, is that prior court rulings have said such an arrangement is only legal if the corporations don’t functionally own the land in all but name; it really needs to be a rental.

Judge Trammell ruled that, while Rivian won’t own the land in question on paper, it really will, because the site will be so specifically tailored to its needs; therefore, it needs to pay property taxes. This doesn’t just blow up this particular deal, but an entire way of doing economic development in Georgia.

5. “Mr. Capezzuto also acknowledged that the State did no analysis as to the impact the Rivian plant would have on the local communities and the additional expenses of government services. Their analysis was limited to the State costs and benefits.”

“Mr. Capezzuto” represented the state economic development authority, and he reiterated that the officials negotiating the deal simply didn’t bother to take into account the costs local communities would have to bear — which lends a lot of justification to the local residents who were angry at being cut out of the deal during the planning stages.

Ultimately, Judge Trammell found that Georgia officials “failed to put forward sufficient evidence demonstrating that the Project would promote the general welfare within the territory of the Authority,” which is the baseline work necessary for a subsidy deal to receive judicial blessing. Georgia officials and Rivian say they are looking at the possibility of an appeal.

Of course, the case could swing back the other way and a higher court could ultimately move Rivian’s project forward. But even if it does, this ruling is valuable for blowing the lid off of how corporate subsidy agreements are negotiated: Without public input, without adequate examination of the promises corporations are making, with too much deference to corporate leaders, and without taking into account the downsides for local municipalities. Economic development officials admitted, under oath, that they’re not doing anything to ensure the public investment is protected, or that local workers or residents see an upside from the state’s subsidy wheeling and dealing.

It was very refreshing, for once, to get a clear look behind the curtain, and have a public official step up and say those shenanigans won’t be allowed on her watch. More like this, please.

---

Thanks for reading this edition of Boondoggle. If you liked it, please take a moment to click the little heart under the headline or below. And forward it to friends, family, or neighbors using the green buttons. Every click and share really helps.

If you don’t subscribe already and you’d like to sign up, just click below.

Thanks again!

— Pat Garofalo