State Approves Reworked MEGA Credit Terms With Ford Motor Co.
June 15, 2015
A state board signed off on a reworking of Ford Motor Co.’s massive state tax credit package, marking the first company to come to new terms on a type of tax agreement that caused some state budget trouble earlier this year.
The plan came in the form of an amendment to Ford’s Michigan Economic Growth Authority (MEGA) tax credits, which was presented by Michigan Economic Development Corp. (MEDC) staff to the Michigan Strategic Fund (MSF) board Monday for approval.
The amendment calls for limiting the state’s liability in these tax credits it can pay out to Ford to $2.3 billion, while also calling on Ford to make an additional $3.1 billion in capital investment in the state to make it eligible to earn out the rest of the credits.
Officials said Monday that under the previous agreement, there really wasn’t any kind of limit on the liability to the state. Charlie PRYDE, regional director of state and local government relations for Ford, called the original deal “open-ended.”
That would bring Ford’s total investment in the state under these credits to $6.2 billion, according to a memo outlining the revised terms. The amendment also would not increase the state’s liability under this MEGA, the memo said.
The amendment incorporates some ideas publicly floated about fixing the MEGA credit problem and how to potentially avoid similar issues in the future.
Those include requiring Ford to provide periodic forecasts of its estimated tax credits earned, and setting annual limits on the tax credit value that can be claimed in a given year. The annual limit was not given in the memo, but an MEDC staffer said at the meeting it could fluctuate year-to-year depending on certain factors.
The idea behind these provisions, according to the memo, is to assist the state with budgeting and cash-flow planning, as well as provide stability and predictability with the audit and payment for the credits throughout the life of the credit.
The deal calls for combining two of Ford’s previous MEGA credits first awarded in 2009 and 2010 into one credit that will last until 2025. The combined credit would allow investment at all Ford locations in Michigan to count toward the cumulative project investment for the life of the credit.
The lucrative MEGA credits awarded to the Big Three automakers and hundreds of other companies first became a budget problem this year, as the state found more companies cashed in credits than originally expected this year.
The rush to turn in tax credits — attributed by the administration to the recovering economy, companies adding jobs and then qualifying for the credits — poked holes in this year’s budget, which resulted in mid-year cuts and reductions in next year’s budget.
Further research into the issue found the state was on the hook for $9.3 billion in MEGA credits, extending all the way out to 2029.
The deal with Ford doesn’t immediately bring down the $9.3 billion number, said MEDC CEO Steve ARWOOD. He described it as the upward limit of liability for the state.
The MEGA credits sparked debate this year over how to rein in their impact on the state budget long-term. The House recently moved to cap MEGA credits, including that amendments cannot be made to existing deals that would increase the state’s liability.
The administration initiated negotiations with companies earlier this year over the credits and Monday’s action before the MSF is the first public fruits of those negotiations.
Gov. Rick Snyder praised the deal in a statement released shortly after MSF approved it.
“Ford is to be commended for being the first company to assist us in addressing the liability issues associated with the MEGA program,” Snyder said in a statement.
It wasn’t immediately clear today where the state is at in negotiations with other companies, and if those companies include Chrysler and General Motors.
When asked about the negotiations, Arwood said the state is in talks with about half a dozen companies. He would not say if those included GM and Chrysler when asked about them specifically.
Together, the Big Three automakers carry a large portion of MEGA liability potentially borne by the state.
Despite the mention of $3.1 billion more in investment by Ford, there’s no planned announcement for investments at this time by the company, Pryde said.
Pryde said there’s no guarantee that’s what will be invested – because it’s a performance-based tax credit, it all depends on whether Ford wants to use the credits.