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State Uses Stranded Tax Credits To Help Pratt & Whitney, Sikorsky & UTC

by Christine Stuart | Feb 26, 2014 6:30pm
(24) Comments | Commenting has expired
Posted to: Business, Economics

Christine Stuart photo

UTC Chairman and CEO Louis Chenevert and Gov. Dannel P. Malloy

Gov. Dannel P. Malloy and United Technologies Chairman and CEO Louis Chenevert want state lawmakers to approve a deal that allows the company to use up to $400 million in unused tax credits to reduce their tax liability and expand their facilities.

At an hour-long event Wednesday afternoon, Malloy and Chenevert, told employees and suppliers gathered at the Pratt & Whitney Hangar Museum in East Hartford that Connecticut doesn’t want to lose its critical mass of aerospace and engineering jobs. That’s why they said this deal is so vital to the state.

“Your kids will have an opportunity to work for this company because of what we announce here today,” Chenevert said.

The deal Malloy is asking the legislature to approve would ensure Pratt & Whitney stays in Connecticut for a minimum of 15 years. It also keeps Sikorsky’s corporate headquarters in Stratford for a minimum of five years. In addition it creates a customer training center at UTC Aerospace Systems in Windsor Locks and new labs at the United Technologies Research Center.

The company is expected to invest up to $500 million in capital improvements over the next five years and the tax offsets from the state of Connecticut will be extended over 14 years. The total income tax credits for the various entities cannot exceed $400 million.

The centerpiece of the new agreement will be a 425,000-square-foot global headquarters and world-class engineering building for Pratt & Whitney in East Hartford. UTC will also build a new 12,000-square-foot global customer training center at its Aerospace Systems business in Windsor Locks, and capital improvements at Sikorsky. Construction on the projects would begin this year and continue through 2018.

It’s unknown exactly how many unused or stranded tax credits the company has because the state considers that proprietary information and officials were not able to say.

Malloy called the proposal “dynamic,” but Republican legislative leaders remained skeptical.

“I didn’t hear anything about job growth,” House Minority Leader Lawrence Cafero said. “If they don’t grow one job they get to use 90 percent of those credits.”

According to the spreadsheet provided by the company Pratt & Whitney, UTC Aerospace Systems, and United Technologies Research Center currently employ 14,100 workers and 4,900 engineers. That’s the amount they need to retain in order to use 90 percent of the tax credits. In order to qualify for the full credit, it needs to employ 5,000 engineers and 14,400 workers.

Cafero said the deal also applies specifically to Pratt & Whitney, Sikorsky, UTC Aerospace Systems, and United Technologies Research Center and doesn’t apply to UTC, which is the parent company.

Sen. Minority Leader John McKinney said he has a lot of questions he needs answered before he’s comfortable with the legislation, which at this point doesn’t exist.

The financing deal is unusual for the state. Department of Economic Development Commissioner Catherine Smith said over the first five years of the deal the company earns the right to use the $400 million in tax credits.

According to a chart, the Pratt & Whitney, UTC Aerospace Space Systems, and United Technologies Research Center is expected to use $80 million in the first year of the program, $100 million in the second and third year, $75 million in the fourth year and $20 million in the fifth year. There are another $50 million in credits available to Sikorsky, but it will be a race to see who uses them first because the deal won’t exceed $400 million.

McKinney pointed out that Sikorsky just laid off 600 employees.

Asked about the layoffs, Malloy blamed the federal government.

“The federal government has not done its job with respect to maintaining the orderly flow of orders for what’s made at Sikorsky in Connecticut,” Malloy said. “Hopefully, that’s in the process of turning itself around.”

He said the layoffs were “caused by federal government action, and not state action.”

Asked to comment on rumors that UTC is thinking about selling Sikorsky, Chenevert said he doesn’t “speculate on rumors.”

“Sikorsky is the best helicopter company on the planet,” Chenevert said.

Fred Carstensen, who heads up the Connecticut Center for Economic Analysis, praised the deal Wednesday.

“By converting retrospective tax credits into a prospective development credit, the state rewards companies (presumably UTC will not be the only company permitted to make this conversion) for renewing and often expanding their commitment to continuing to do business in Connecticut,” Carstensen said. “Because large companies such as UTC play such a powerful role in the health of the state’s economy, and because they have the option, over time, of moving some, much, or all of the operations elsewhere, designing a strategy that keeps a company here, even if the objective is to maintain steady employment, is vitally important.”

Even though job growth doesn’t seem to be the main objective of the deal, Smith said she thinks that “there’d be no chance of having this be a job-growing endeavor unless we did this deal.”

“By doing the deal, we’re solidifying and reaffirming their commitment to the state,” she said.

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(24) Comments

posted by: Noteworthy | February 26, 2014  9:36pm

Keeping it simple - this is a stupid idea. It’s a WTF moment. This governor and the dome dwellers have layered on history making tax increases upon tax increases on middle class families until our eyes are bulging and we’re having to make hard choices about our family budgets. Sales taxes on our homes, double and higher gas taxes; higher income taxes, sales taxes, fees and fines; tobacco taxes, booze taxes and more.

Even though he is facing a more than a billion dollar deficit and growing a year from now, Malloy is spending more than half the surplus, and now giving away what is approaching a half a BILLION DOLLARS. Can somebody find some common sense in this state? And by the way, this is a WTF moment for these companies too. Pathetic. Especially when the governor is proposing to cut mental health and addiction services by $30 million - something that directly impacts people like Adam Lanza and many other families in crisis.

posted by: Commuter | February 26, 2014  11:54pm

What a coup.

It would be almost impossible to overstate the importance of this deal to the state of Connecticut.

According to Chenevert, the growth in commercial aerospace over the coming five years is going to be historic. This locks Connecticut’s most important manufacturing sector into that growth.

This deal also means that the state’s economic future is not only bright, but more predictably so. That helps make Connecticut more attractive for additional business investment, and the state’s fiscal future similarly more stable and predictable.

And it demonstrates that state government’s relationship with industry has truly been turned around.

A phenomenal accomplishment for Malloy.

posted by: art vandelay | February 27, 2014  12:21am

art vandelay

To Commuter,
If Connecticut had a true business friendly tax structure & environment, we wouldn’t have to bribe companies to stay.

posted by: art vandelay | February 27, 2014  12:25am

art vandelay

I wonder if the WWF came knocking on Malloy’s door, would he cut them a check.

posted by: ocoandasoc | February 27, 2014  2:10am

So let’s be clear on this. UTC will get $360 million for creating ZERO new jobs… not even restoring the 600 jobs they just announced they are cutting. I think Chamberlain made a better deal with the Nazi’s in 1938. And if the Sikorsky layoffs had nothing to do with “State action” how come there were no layoffs in Alabama? There is no progress here… just the illusion of progress for a gullible electorate in an election year.

posted by: Connfusion | February 27, 2014  6:09am

The emperor fiddles in Hartford while Rome burns. $400 million in state tax credits for a company that lays off 600 MIDDLE CLASS workers at Sikorsky Aircraft. I’m sure Pratt layoffs are next based on the the Pentagon’s proposed budget cuts. Only in Malloyworld.

posted by: art vandelay | February 27, 2014  7:51am

art vandelay

My apologies the WWF is now the WWE.

posted by: christopherschaefer | February 27, 2014  8:38am

Sikorsky timeline: Feb. 1, 2011 Rosa DeLauro complains “Republicans aren’t willing to cut the defense budget!”  Jan. 22, 2014 Rosa DeLauro celebrates tax dollars going to Sikorsky which “makes sure that jobs are coming to Connecticut and staying in Connecticut.” Feb 21—only 4 weeks later!—Sikorsky announces 600 layoffs over next several weeks. Feb. 26, Malloy scrambles to announce bribe that potentially “keeps Sikorsky’s corporate headquarters in Stratford for a minimum of five years.” My prediction: in the next several days Rosa DeLauro will issue a statement celebrating this bribe that “makes sure that jobs are coming to Connecticut and staying in Connecticut.” Remind me why voters keep re-electing these dolts?

posted by: Just another CT resident | February 27, 2014  9:13am

Tax relief to businesses is a great idea if we want to grow CT’s economy. The last program of this type reduced taxes for TV and movie productions in the state and resulted in an increase in local jobs.
Christine, the next time you see Gov Malloy please ask him if this is such a good idea for UTC, why doesn’t he provide similar tax relief to all businesses in CT.

posted by: justsayin | February 27, 2014  9:16am

Commuter, Kool-aid? UTC played Malloy, laid-off Sikorsky people and made him pony up for a new building and fund the plans they already had in place. UTC does not operate for the next 5 years the run on the next 20. More wasted tax payer dollars.

posted by: Chien DeBerger | February 27, 2014  9:39am

**Connecticut Democrats and the SEIU**

Hey Christine-

I just saw this story on Townhall.com.
Why is our local news media not reporting this? (http://townhall.com/tipsheet/carolplattliebau/2014/02/26/connecticut-democrats-and-the-seiu-n1801203)

posted by: dano860 | February 27, 2014  10:41am

Ask Senator Tony Guglielmo how he feels about these tax breaks. He has been against them for years.
Here is an article from the The Palm Beach Post,
http://www.palmbeachpost.com/news/business/employment/gov-scott-united-technologies-ceo-to-announce-new-/nS7Bc/
They received $4.4 between the State of Florida and the county of Palm Beach. Florida is getting off cheap and getting jobs. The West Palm P&W facility was started in 1958 for the development of the J-58 engine used in the SR-71 Blackbird, since then it has gone through many changes, F-100 engine for the F-16 fighter, rocket engines for NASA and materials development.
You should know that P&W has over 50K employees in India too. At the UTRC facility they have many engineers from many countries that are developing many good technologies.
Starting around the mid-80’s P&W in East Hartford began the closing and consolidating of buildings and facilities. They closed the Roger Sherman Warehouse in E.H., shut the Manchester Warhouse, closed the Southington manufacturing plant, moved the North Haven plant to E.H. and closed that plant, began the destruction of buildings at the E.H. campus, tore down the high altitude test facility (Wilgoose) and gave about 700 acres to the State for what was suppose to be a technology park. We have a football field and Cabela’s so far.
ALL OF THIS WAS DONE FOR TAX REDUCTION PURPOSES! Ask the Town of East Hartford how much it has lost.
In the 60’s, at the height of the Vietnam conflict, P&W had over 30K employees. We came in one day to the news of a big move to West Palm. People were told that there jobs were going there and if they wanted to keep them they needed to move too. About 25 years later many of the people in West Palm were told just the reverse, head north or find a new job. Now it looks as though things are changing again.
P&W has known for years that the campus in E.H. is aging, the engineering building on Main St. is literally sinking into the earth.
Will this money be used for brick and mortar? Will it be used to fund projects? will it be used for employees?
Many questions remain, they only have two big engine programs, the geared fan and the F-35. The geared fan hasn’t been proven yet and the F-35 is under attack from the Feds.
There is more than they are claiming behind all this wonderfulness.

posted by: Just Thinking | February 27, 2014  10:45am

Let’s see…whenever a company threatens to leave the state the response is to offer some scheme to lower taxes…Hmm…at what point will our Governor and Legislature realize that LOWER TAXES in general might be the key to attracting businesses?

posted by: art vandelay | February 27, 2014  11:31am

art vandelay

@dano86,
Excellent response.  You left out the point that Pratt also closed it’s Southington facility as well.  With the current business climate in this state, the best thing UTC can do for its stockholders is LEAVE.

posted by: Commuter | February 27, 2014  12:48pm

Any chance at all that the trolls will stay on topic and get their facts straight?

The company is applying tax credits it already earned. It will invest a half billion dollars in constructing a new headquarters. And it will make four billion in capital expenditures and research during the next five years.

Take a peak:
http://www.governor.ct.gov/malloy/lib/malloy/2014.02.26_connecticut_aerospace.pdf

Everybody wins here. Except the trolls.

posted by: Greg | February 27, 2014  3:14pm

This is simple: The taxpayers are paying UTC $360MM to not add one job, only keep existing jobs here.  Furthermore, I’m sure the company’s number crunchers have figured each employee’s break-even point to where they can forego each incremental dollar of tax credit against each employee’s comp costs…thus this sliding scale nonsense will be managed very closely against their payroll.

Sure, call me a troll for not finding this to be the greatest deal ever, but let’s bet a tidy sum there are more UTC jobs added in GA/Singapore/low cost juristiction than here in CT, of which UTC has not been shy as calling “too expensive”.  And when the layoffs inevitably happen in 2-3-4 years from now in CT facilities this little deal will be conveniently forgotten.

I’m still waiting for someone to call for UTC to pay their “fair share” of taxes…

posted by: dano860 | February 27, 2014  4:14pm

@Art V., I did mention it in there. What I am not positive about is if the Newell St. Facility is still there? They had two places about 1/4 of a mile apart, one for manufacturing the other was engine assembly that I think went to Cromwell and that is closed too. I did forget the Rocky Hill facility that was shuttered and moved to Alabama…and lest we forget, they had corporate offices in Hartford, once upon a time, but they shuttered them too. Can’t say I blame them there, those taxes exceeded any credits.
The topic should be ‘unused tax credits that they should have never received’. Oh, by the way, where do these ‘credits’ come from? Can you say ‘middle class taxpayers’.

posted by: RichTut2014 | February 27, 2014  9:24pm

Why is information on taxes
proprietary ? Heard from inside source that they bought 400 acres in Pennsylvania for future e growth !  Adding 2% engineers (100) and 2% (300) 0ther employees over 5 to 10 to 15 years !  GEE THANKS ! Where does current 600 terminations come into play ... before or after 400 additions ?  Explain unused tax credits !  Citizens get short sale ,.... AGAIN !  From A Connecticut Yankee.

posted by: Commuter | February 28, 2014  12:56am

@ Greg - at least you’re on topic. The point is not keeping every job that exists at the moment, or trying to bring every UTC employee to Connecticut, the point is to preserve and extend the state’s position as a destination for the aerospace industry, and to attract and retain the jobs that can be in Connecticut, which is the high end corporate, research, and engineering functions that the UTC document lays out.

You also raise an interesting point about the tendency of some persistent critics to contradict their own argument. The state has a very attractive corporate tax rate, and works with companies that have earned tax credits to put them to work in the state, and people complain that the company isn’t paying its fair share or that the (other) taxpayers are bearing the burden.

These same people will complain that government should get out of the way, but turn around and complain that companies are making business decisions to close facilities, exit businesses, and expand in other locations, as if someone should do something about it.

posted by: dano860 | February 28, 2014  2:16pm

Commuter, the back story to my story telling is that P&W has been removing structures and buildings at the E.H. campus for over ten years. All the while the intent was to construct the corporate offices , research etc because of the lower tax rate in E.H. and the helicopter pad. (Cannot land on the Gold Building anymore) Those plans have been physically drawn for more than five years, I have seen them.
I offer no opinion on this being a good or poor piece of legislation. As they said it would be new legislation that, presumably, many others would be able to avail themselves of also.
When, at Pratt, we chose a facility or operation that possibly needed restructuring or moving it was because of aggregate cost. Without a doubt many cost calculations came into the equation. We were supplied the cost per square foot numbers but we had the manufacturing numbers. More often than not the deciding factor was the cost per square foot and that was heavily impacted by the local tax rate. Corporate taxes in Ct may be good, I don’t know, but other items must be considered.
The building in No. Haven was 1Milion sq/ft and when we mapped the manufacturing process we utilized less than 1/3 of it. Thus the consolidation into E.H. was kicked off. It allowed for new technologies to be implimented and the goal of one piece flow and just-time manufacturing to be realized. They also took advantage of many tax reduction policies. The same was true with the moving and consolidating of Southington into the Middletown facility. (It’s really in Haddam but who knows where that is?) local taxes are lower though.
I don’t know if it’s as wonderful as Fred C. believes…no I don’t care for his input, he has yet to get a base hit on anything as far as I know.
I will ask that the legislators give it a fair public hearing and look at it from every conceivable angle. I.E. How would or would a small, 150 person, operation be able to utilize it? Would it be available to a company moving into Ct?
Let’s give it a better review than they gave the bogus firearm legislation. We have to live with it for a long time.

posted by: Commuter | February 28, 2014  11:21pm

@ dano860 - instructive comment. A few things in response, in no particular order:

Fred has been advocating for the use of these credits for some time. Evidently the CEO of Connecticut and the CEO of UTC have found some practical merit in his view.

I suspect smaller companies (as in the bulk of the over 2,000 suppliers UTC identifies as part of their supply base) won’t be able to take advantage of it, at least in the way that UTC can, because R&D is generally something that only large outfits (UTC, Boehringer, et al) can engage in. But, we’ll have to see what the legislation actually says.

Local taxes are beyond the control of state government, and are largely (typically @ 70%) a function of the town’s education budget; although that is less true in the urban towns, where municipal side spending is a bigger portion of the budget and the state’s contribution is a larger component of revenue.

That’s a major reason that greenfield development (i.e. acreage in central Pennsylvania, or central Florida, or Haddam) is cheaper than Middletown per se, or East Hartford. That said, exemptions for capital equipment and other considerations (as you allude) complicate the calculations.

I am surprised, given the general tenor of your comments and the reality of a part-time legislature with a great deal to do in a short session, that you would urge we rely on public hearings to properly vet something that the administration and the company have clearly devoted considerable time and expertise to evaluating and negotiating. In any case, it will pass with flying colors.

In my observation, the accounting basis for decisions such as you describe is different from strategic decisions such as this one. So it is possible that from your perspective this doesn’t necessarily add up, and at the the same time it might also be true that, strategically, this is a huge win for UTC.

There can be no doubt, however, that - strategically speaking - this is a huge win for the companies supplying UTC and its competitors, and for the state of Connecticut.

posted by: Commuter | March 1, 2014  1:05pm

@ Art Vandelay - Let’s try this. Show me three states that have never offered any tax, financial, or other efforts to attract or retain an industry or a business.

posted by: Lawrence | March 1, 2014  8:54pm

May 25, 2011
examiner.com

Volkswagen opened its new $1 Billion auto plant on May 24th in Chattanooga, finally completing construction after a long fight between the states of Tennessee and Alabama, both of which offered massive tax incentives and state and federal aid to attract the automaker to their locale.

Tennesse provided more than $570 Million in tax incentives and aid from several sources, beating out the proposal from the state of Alabama, who could only offer $385 Million in incentives.

The construction of a new factory in the south is good news for the economically stricken area, and an interesting dichotomy to the American landscape. As General Motors, and other American manufactures move away from their traditional bases of operation in Michigan, Ohio, and other Midwestern states, the South is becoming the mecca of foreign carmaking, as seen by the plants built in 2008 and 2010 by Nissan.

The question that must be asked in the bidding for the newly opened Volkswagen plant, is whether the state of Tennessee paid too much in taxpayer incentives to employ just 1700 workers. The amount provided by the state comes out to right around $200,000 per worker, and this means in a roundabout way, the state is paying for their employment until the incentives expire in a number of years.

posted by: dano860 | March 3, 2014  10:19am

Commuter, busy weekend, sorry for the late reply.
I am all for them using something that doesn’t require us bonding any more money to pay a ransom to any business.
I mentioned the land for the Tech Center, sort of like the ones the President is advocating, was given to the State for UCONN to use. They are now doing that project at the Storrs Campus. It was intended to be at the cross roads (Rts 84 & 91) of Ct in the center of the State not out in the woods.
I do understand the local tax system and know that approx. 70% is directed to education, I spent 3 terms on the BOE.
The supplier increase began in the late 70’s, the folks at UTC started with the cleaning crew there. They went to a contractor for those services. Then the internal manufacturing went out to suppliers, one process at a time. Gear making to Utah, magnesium cases to Italy etc. and they count the prime supplier as one but they off load work so P&W counts them too. Sort of the same job counting method that Dannel uses, created or saved. The buildings that had housed the manufacturing and groups like millwrights, electricians and plumbers are the ones that have been torn down.
In Georgia we built the blade manufacturing facility the the disk gatorizing (P&W propitiatory process). Then the sold the blade mfg. facility to a group from Israel to take advantage of the federal E-5 tax program.
They have a large manufacturing facility in Pa. already, they do a huge amount of blade manufacturing there.
The Courant on Sunday, in their “Our View” response said, “this should end fears of those aerospace operations leaving Ct, in the near future”. Well that doesn’t say that they will keep mfg’ing here, just the home office and some research. General Electric meets that definition too. They also mention that P&W is the largest “private” employer, they used to be the largest in the State, now it’s the State that gets that title.
Yes, send it to committee and hold public hearings. Fred’s lob was finally caught by someone but that doesn’t mean it’s good. We will be living with this legislation for a long time to come and it shouldn’t apply to only one company.
So far it looks good but it needs review though many different scenarios.