Data center deals can hurt more than help, report finds

October 11, 2016

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By Bruce Krasnow

The wealthiest technology companies in the United States are receiving generous subsidies from taxpayers for data centers, such as the one that Facebook plans to build in Los Lunas. But a study released Tuesday says communities aren’t likely to see enough economic benefits to justify the deals.

Government leaders eager to promote job creation have awarded $2 billion to Google, Apple, Microsoft, Amazon and Facebook for 11 data centers built in nine states. The facilities house long rows of servers and hard drives that store and process vast quantities of highly secure information powering everything from online shopping to streaming movies, but do not require a large workforce.

“The average cost of their megadeals is astronomical: $1.9 million per job,” writes Kasia Tarczynska, a research analyst with Good Jobs First. “At that price, taxpayers will always lose.”

New Mexico and the city of Los Lunas just signed a deal with Facebook for construction of a data center in that community south of Albuquerque. The total cost of the subsidies involved is not included in the newly released analysis because agreements were finalized only last month. But the New Mexico project was mentioned as one in which Facebook was able to leverage competition between two states — New Mexico and Utah — to maximize tax breaks, which benefit shareholders of the publicly traded company.

“Facebook has sought large subsidies for every single data center it owns,” the report says. “The company has learned that by playing two locations against each other, it can gain expedited permitting and approvals for its data centers.”

The Washington, D.C.-based Good Jobs First has been at the forefront in tracking the cost of economic development subsidies and promotes best practices in both business and government. Its subsidy-tracking website attempts to document all the incentives given to firms that are part of a public record.

The organization’s look at economic-incentive programs in the state of New Mexico concluded that a disproportionate share of money went to large, out-of-state companies instead of locally grown firms.

Greg LeRoy, executive director of the group, testified before a legislative committee in July to make a case for more investment in smaller firms who want to grow and expand in the state. “Is New Mexico overspending on subsidies for companies that don’t need government assistance while shortchanging small businesses that might?” he asked lawmakers.

Others who spoke said that doesn’t mean the state should abandon efforts to attract large corporations such as Facebook because New Mexico should not pick and choose between large and small firms, but should be ready to help all businesses.

The Facebook project here is backed by the Los Lunas Village Council’s pledge to approve $30 billion in industrial revenue bonds, a mechanism to lower the company’s borrowing costs. Buyers of the public bonds would be repaid by Facebook.

But since taxpayers essentially own the land and improvements for 30 years, Facebook would not pay any property taxes to the state, the school district or local governments.

Instead, the Menlo Park, Calf., company has agreed to make a $100,000-a-year contribution to the city to help support services such as police, fire protection and roads.

As part of the agreement, the state of New Mexico also pledged $10 million to pay for public amenities the company needs to prepare the area for construction. The money will be provided under a program known as LEDA, the Local Economic Development Act.

A key element of the deal with Facebook was Public Service Company of New Mexico’s commitment to provide 100 percent of the facility’s electrical power from renewable energy sources, a factor that will lower the data center’s electricity costs as long as the facility operates.

Los Lunas officials could not be reached Monday. The village has called the Facebook project “an economic development game changer for the state of New Mexico,” in part because it can help attract other data centers and large manufacturers who can share the energy grid.

But a key finding in the report is that data centers, including the Los Lunas center, have relatively few employees. The city estimates 30 to 50 jobs in the initial phase, with 300 construction jobs.

Nationally, “data centers have a small employment impact,” said the report. “An operating data center requires few permanent workers: an average of just 30 to 50 permanent jobs, with larger facilities creating up to 200 jobs. Facebook’s original data center in North Carolina, for example, created 500 temporary construction jobs but only about 42 permanent positions.”

And because there are so few jobs, the public’s cost per job is very high.

The report cites Google’s efforts in 2007 to wring incentives from both North and South Carolina before the company went ahead and built one in each state. “Believing there was only one data center on the table, officials in both states pursued the deal aggressively,” the report says. “Only after both states approved large subsidy packages did Google reveal its secret.”

Twenty-seven states have established specific incentive programs to attract data centers. Good Jobs First maintains these centers can have a positive economic impact and makes the following recommendations:

• Cap government subsidies at $50,000 per permanent job. “Only by capping subsidies at this level or below can taxpayers reasonably expect to ever break even.”

• Embrace transparency. The organization said it is nearly impossible to know the value of many subsidies and urges state and local governments to disclose all the costs, including utility power-rate discounts, “so that ratepayers can see how much electricity or water is not being taxed or how much it is being discounted — and therefore how much of a burden shift is being placed upon them.”

• The group also urges that states be “absolutely stingy” in that these companies need to expand and grow their storage capacity and they should to do it in a way that doesn’t burden taxpayers.

“Data centers can have a large, positive impact on collected taxes, but only if they pay them,” states the report. “When state and local governments abate sales, property and even income taxes, those benefits can evaporate.

Contact Bruce Krasnow at 505-986-3034 or [email protected].