Pennsylvania governor wants big bond bet on site development

BY SourceMedia | MUNICIPAL | 05/06/24 08:07 AM EDT By Christina Baker

Companies don't want to move to Pennsylvania, Gov. Josh Shapiro said in his budget address.

Mainly, because it's too hard to move in.

Intel (INTC) notoriously passed over Pennsylvania for Ohio for a $20 billion factory back in 2022 ? "I'm sick and tired of losing to friggin' Ohio," Shapiro said in his speech ? and as a wave of factories have gone into construction around the country in the wake of the CHIPS Act, which offers $39 billion of incentives to spur semiconductor manufacturing inside the United States, the wave has dodged Pennsylvania.

Shapiro proposed $500 million of bonds for site development in his executive budget this year, which supporters say will create jobs and revenue for the commonwealth. But site development has its risks, and the returns may take a while to materialize.

The Intel (INTC) site, for instance? Ohio's still waiting for the company to move in.

Pennsylvania has a number of impediments to site development, according to Don Smith, president of the Regional Industrial Development Corporation, private nonprofit focused on economic development in western Pennsylvania.

The first obstacle developers encounter is usually geography.

Southeast Pennsylvania has gentle hills, but the rest of the commonwealth has several mountain ranges, Smith said. And developers working in one of the commonwealth's less populated regions may also have to build water, sewer and electricity infrastructure.

Some regions of the commonwealth, especially in the southwest corner, literally don't have enough space, according to Christopher Briem, an economist at the University of Pittsburgh.

"We were a very heavily industrialized region for a long time," Briem said. "We used up a lot of the available space not just decades ago, but a century ago. Large steel mills and related things used up the large tracts of land that were available on the rivers. "

Developing a fresh patch of land is known as greenfield development. Repurposing an old tract of land for a new factory is called brownfield development. It can be a much more expensive and time-consuming process, and Pittsburgh, Briem said, has one of the largest concentrations of brownfield land in the world.

Of course, the commonwealth is far bigger than just Pittsburgh, Briem noted. Pennsylvania's disparate regions have wildly different needs.

"There's not one cohesive Pennsylvania economy," Briem said.

That makes it difficult to create a statewide economic plan. Worse still, the commonwealth had been without an economic development plan for twenty years.

Shapiro, a Democrat, bemoaned this set of circumstances when he launched his economic development plan in January, and a week later when he released his budget. He described trying to pitch a focus group of site selectors on Pennsylvania, the country's fifth biggest state.

"They were bullish on our highly skilled workforce, our world-class universities, and the way we've reformed government to make it move quicker. They liked that we're less than a day's drive from 40 percent of the nation's population," Shapiro said. "But they told us it's nearly impossible to sell a company on this commonwealth because we don't have sites ready to go."

Shapiro's $500 million taxable bond proposal will be modeled on PA SITES, a pilot program his administration created last year. PA SITES had $10 million of grants available. But within the weeks-long application window, more than 100 companies applied for grants, requesting a total of $235 million.

"The demand is there. The business community is ready," Shapiro said.

In his budget address, Shapiro said such bonds would ultimately pay for themselves.

"We'll use the added revenues we get from the companies that move to these sites to pay back that bond," Shapiro said.

According to Shapiro's budget book, the bonds would be issued on behalf of the Department of Community and Economic Development and debt service payments would be subject to annual appropriations by the General Assembly.

The money would go to the DCED to distribute through PA SITES, with the first $300 million between 2024 and 2025.

Smith, who works with the administration through RIDC and served on the governor's economic development transition team, said DCED is already working on the proposal as it waits for the budget to pass in June.

Through RIDC, Smith knows that site development can be a "speculative" endeavor, especially on a large scale.

In 1978, for instance, Volkswagen (VLKAF) was looking to build a factory in the U.S., and Pennsylvania offered incentives worth nearly $100 million ? at that point, the richest corporate deal in the commonwealth's history. Volkswagen (VLKAF) agreed to spend $250 million building its factory in an unfinished Chrysler plant and the surrounding farmland in Westmoreland County.

The deal was supposed to create 5,700 jobs, sorely needed in a region with an economy declining alongside the coal industry. But by 1981, sales for the Rabbit ? then the plant's only car ? were lagging, and Volkswagen (VLKAF) began furloughing employees.

The plant produced its last car in 1988.

Volkswagen (VLKAF) left Pennsylvania around the time its government benefits dried up. Sony (SONY) moved into the plant in 1990, and for a time kept the local economy going producing TVs. But after a string of layoffs, Sony (SONY) left in 2008.

Today, RIDC owns the plant and leases sections of it to various smaller companies. If Pennsylvania wants to avoid repeating the past, Smith said, the commonwealth should be discerning in which companies it offers incentives to.

"A big part of it is understanding why your location is a good fit for the company. If it just comes down to cheap land or big incentives, at some point there'll be cheaper land or a bigger incentive somewhere else," Smith said. "But if you are really targeting companies that fit well with your workforce, and your educational infrastructure ? as long as there's an economic reason for them to stay, they're going to stay."

The Shapiro administration will have a lot of choices about how it spends the $500 million. The only specifics mentioned in the budget is that the funds will go toward "priority industries, such as agriculture and manufacturing."

Although developing smaller sites is faster and has a higher likelihood of a return on investment, Smith said, he would like to see the majority of the grants go to larger sites with 25 to 50 acres.

The administration will also have to decide how long they're willing to wait for sites that receive grants to develop. Smith said he would stipulate that most sites supported by the program should be shovel-ready within two years, but there are some sites with potential in Pennsylvania that could take the better part of a decade to develop.

With interest rates so high and banks feeling the investment is too risky, many big sites won't be developed without government grants. The economic stimulus from these sites begins during construction, long before a plant is operational, Smith argued.

"There are a lot of sites where this kind of investment could definitely result in pad-ready sites being available [within] 18 to 24 months," Smith said. "Once there's confidence in the company, that you will be ready on their timeframe, you'll start to see some of these investments happen? We can see new investments and new facilities and new jobs being created with these funds."

The $500 million, which Smith said was "a great start," would go a long way in Shapiro's competition with Ohio. Last year, Ohio announced $750 million in zero-interest site development loans, some of which are forgivable.

"There's really no obvious lagging of employment growth in Pennsylvania compared to Ohio. So I'm not exactly sure where that's coming from," Briem said. "Those public comments, I think, are coming on the heels of just the one announcement about Intel (INTC). Everyone saw this big Intel (INTC) plant ? which is delayed."

The Ohio Intel plant, the company announced in February, will not open in 2025 as scheduled. It may take an additional two years.

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