Foxconn's waffling on Wisconsin jobs may pressure bonds

Backtracking by Taiwanese technology giant Foxconn about job promises for the heavily subsidized plant it's building in southeast Wisconsin has raised new questions about whether it's worth local and state subsidies that include borrowing.

Then-Gov. Scott Walker and President Trump unveiled the company’s choice of Wisconsin with great fanfare at the White House in 2017, hailing it as the state’s largest economic development project with the promise of 13,000 jobs.

Shovels stand in a patch of dirt ahead of the groundbreaking ceremony for the Foxconn Technology Group facility in Mount Pleasant, Wisconsin, U.S., on Thursday, June 28, 2018
Shovels stand in a patch of dirt ahead of the groundbreaking ceremony for the Foxconn Technology Group facility in Mount Pleasant, Wisconsin, U.S., on Thursday, June 28, 2018. After repeatedly bashing the leadership of Harley-Davidson Inc. this week, President Donald Trump is set to be 30 miles away from its corporate headquarters during the groundbreaking for the Foxconn Technology Group electronic screen manufacturing campus. Photographer: Daniel Acker/Bloomberg

The state and local governments offered billions of dollars in tax credit and other subsidies to attract the complex that was to produce advanced LCD displays for TVs and other products. Mt. Pleasant and Racine County are borrowing heavily to support land acquisition and other infrastructure improvements to support the project.

The increased debt load required to support Foxconn commitments brought Moody's Investors Service downgrades to Mt. Pleasant and Racine County.

In mid-January, Foxconn reported it had fallen short of its initial job creation target under its governmental agreements. That news was followed by a Reuters story this week quoting a Foxconn official saying it no longer plans to use the complex for manufacturing, but for research and engineering instead.

The company told the state and local officials it remains committed to the project but a Thursday story in a Japanese publication reported the firm is delaying work and cited negotiations with the new state administration and trade disputes between the U.S. and China.

The job target shortfall prompted Moody’s on Thursday to issue a report calling Foxconn’s missed job creation target a “credit negative for Mount Pleasant, Racine County and Wisconsin.”

The new administration of Gov. Tony Evers is in communications with the company. The Democrat unseated Walker in the November election.

“In the coming weeks, the Evers administration will continue to commit time, resources, and personnel to ensure that the interests of Wisconsin workers and taxpayers are protected and promoted by our approach to the Foxconn project,” Department of Administration Secretary-designee Joel Brennan said in a statement.

The local governments in a joint statement stressed that Foxconn has so far spent $200 million toward the project and completed the first major building. “We fully expect that Foxconn will meet its obligations to the state, county and village,” a statement from the village and county said.

“The troubling part is governments have done their part and issued debt and made accommodations for a project and if it’s not built or built to expectation then the taxpayer takes a big hit," said Richard Ciccarone, president of Merritt Research Services LLC. "It becomes a speculative decision and therefore can be a speculative investment.”

MOODY’S
The state government is largely insulated because its subsidies are tied to such targets as job-creation numbers but any pullback on the project could have a ripple effect on the local governments that are mostly providing subsidies upfront without any job targets, so the state could be asked to step up.

On Jan. 17 Foxconn disclosed it had missed the minimum target of 260 jobs needed to receive the first round of $9.5 million in state tax credits; it reported creating 178 jobs.

“The missed target highlights the project's risks to Racine County and the village of Mount Pleasant given their exposure to upfront expenditures and bonding that support Foxconn’s project,” Moody’s wrote. “The state, while considerably protected given the contingent nature of its support, is also exposed to project failure.”

If growth falls short, Mount Pleasant may need to draw on the state's moral obligation, which supports a portion of its borrowing. The village would be required to repay the state. About $125 million in village TIF borrowing carries the moral obligation.

“Although Wisconsin has not made any explicit promises to support other Foxconn-related debt, the state may decide to assist municipalities in the event of project failure, given the project’s high-profile nature and the associated political realities,” Moody’s said.

Moody’s rates the state Aa1 with a stable outlook. Mt. Pleasant is rated Aa3 with a negative outlook and Racine County is rated Aa2 with a negative outlook.

Moody’s downgraded the village in August. “The negative outlook reflects a significantly increased overall debt burden, which could pressure the village’s financial position in the event revenues generated by the Foxconn development fall short of expectations,” Moody’s wrote.

The village considered the long term prospects worth the investment as noted in Moody’s report that reported “Mount Pleasant is poised for significant expansion as work begins on Foxconn's $10 billion LCD manufacturing project, which is expected to boost regional employment opportunities and related economic activity.”

Moody’s cut the county in late 2017 and revised the outlook to negative from stable last May ahead of its BAN issuance.

“The negative outlook reflects our view that the county has taken on substantial short-term leverage that could pressure the GO rating should the county experience difficulty in securing take-out financing for the BANs. The rating could also be lowered if revenue generated directly or indirectly by the Foxconn development falls short of county expectations,” Moody’s wrote.

SUBSIDIES
The state package provides Foxconn $2.85 billion in cash over 15 years if it meets job targets and investment promises with additional tax subsidies on construction costs. The total package, with local governments counted, reached a potential $4 billion. The legislative fiscal bureau reported it would take 25 years to recoup the investment.

The state committed about $258 million in general obligation borrowing to support improvements to a major interstate. A state official said those improvements would eventually have been undertaken whether or not the state won Foxconn because they “are serving a bigger public purpose.”

Local borrowing by the village and county totals $360 million, some of which has been completed with more to come, and is part of $764 million in local incentives.

The Foxconn comments this week are not currently expected to alter the financing timeline, said Todd Taves, a senior municipal advisor at Ehlers Inc., which is advising the village. The county has taxable bond anticipation notes that mature Dec. 1 that are to be taken out with a long-term financing.

The village of 26,000 has a second TIF revenue bond planned for the fall with the timing dependent on when its 2018 proceeds are exhausted. A village sewer BAN will be refinanced into a long-term structure in 2020.

The borrowing includes sewer bonds, TIF, and general obligation debt and loans from state agencies and includes a mix of publicly offered debt and private placements sold through either the village, county or a village development authority.

The site is home to a TIF district established last November and an Electronics and Information Technology Manufacturing Zone is located in the TIF. The TIF’s incremental valuation must achieve $1.4 billion by 2023 and be maintained through 2047, with the company on the hook for any revenue shortfall.

For reprint and licensing requests for this article, click here.
Ratings State of Wisconsin Wisconsin
MORE FROM BOND BUYER