Bill Would Keep $60 Million Special Deal in Place for Hemlock Semiconductor
General Motors, other companies against subsidizing special electric deal
Hemlock Semiconductor Corp., one of Michigan's most favored corporate welfare recipients, wants to be billed for just two-thirds of the electricity it uses.
For years, the state of Michigan has obliged by setting up a 32 percent discount rate for the Saginaw County company, which saves it roughly $60 million annually.
This sweetheart deal for Hemlock is scheduled to end soon, but if passed, House Bill 5013 would allow Hemlock to continue getting the lower rate indefinitely.
In addition to its electricity rate discount, Hemlock has received — and continues to receive — hundreds of millions of dollars in subsidies and tax breaks from the state and from local governments. However, because the state's corporate welfare arm, the Michigan Economic Development Corp., does not provide full information about deals it makes, it is not possible to report the total dollar amount of these subsidies and tax breaks.
According to the Mackinac Center for Public Policy, what has been established is that Hemlock Semiconductor was offered at least $26.75 million in Michigan Economic Growth Authority (MEGA) credits in four projects from 2004 to 2008.
The company also got an "Anchor Jobs Credit" and an "Anchor District Credit" in 2008. When the legislature passed these credits it was not known what they were going to cost. Six years later, the totals are unreported. Hemlock also is getting a MEGA polycrystalline silicon credit, which will be worth $29,000 next year and is supposed to be worth $357 million over the life of the credit.
There has also been at least $300 million in local property tax abatements for the company and $40 million in State Education Tax abatements and other incentives.
James Hohman, assistant director of fiscal policy with the Mackinac Center, said lawmakers need to research and evaluate the full track record of Hemlock Semiconductor's special subsidies and tax breaks to put House Bill 5013 in perspective.
"Government officials have already given a tremendous amount of incentives to this one firm," Hohman said "The Legislature should insist on analyzing the results of those expenditures before agreeing to give further favors to the company."
Hemlock Semiconductor is a joint venture of Dow Corning, Shin-Elsu Handotai Company and Mitsubishi. It produces polycrystalline silicon, which is used for solar panels and electronic devices.
The company is the largest electricity customer at a single site in Michigan. According to Hemlock, at full production, it uses about 420 megawatts of electricity, which is estimated to be three times the electricity used by all of the households in Lansing and Ann Arbor combined.
Several years ago, the state Legislature provided significant tax abatements as an incentive for Hemlock Semiconductor to expand in Michigan. The incentive package included an agreement under which the Michigan Public Service Commission allowed Consumers Energy to provide electric service at a significantly reduced rate.
In 2008, Public Act 286 changed the way electricity rates for customer classes are set. Before the 2008 legislation, large commercial and industrial customers subsidized residential rates. The 2008 legislation required the MPSC to set electric rates so that each customer class pays its true cost of service. That change would have put an end to Hemlock's special deal on its electricity rate before now. But, in 2010 the state Legislature enacted legislation that allowed Hemlock to continue to receive its special lower rate until the legislation expires on Dec. 1, 2015.
House Bill 5013, sponsored by House Majority Floor Leader Jim Stamas, R-Midland, would eliminate the automatic "repealer" provision from the 2010 legislation making Hemlock's lower rate permanent. The legislation is before the House Energy and Technology Committee and hearings on it are ongoing.
Speaking on behalf of Hemlock Semiconductor at a hearing earlier this month, Andy Colouris, area vice president for area public affairs with Dow Corning, told the committee that 1,700 jobs at Hemlock were "at stake" if the company lost its special lower electricity rate. The implication was that Hemlock might consider moving to Tennessee if it loses its special electricity rate deal in Michigan.
However, some major businesses and business groups oppose letting Hemlock keep its discount. Representatives from the Michigan Chamber of Commerce and General Motors have testified against House Bill 5013, arguing that other businesses shouldn't be subsidizing a lower electricity rate for Hemlock Semiconductor. According to testimony given by representatives of General Motors, the subsidizing of Hemlock's lower electricity rate is costing the Detroit automaker about $1 million annually.
Neither Colouris nor Rep. Stamas responded to requests for comment.
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See also:
Energy Expert: Michigan Should Eliminate Its Utility Monopoly For Lower Prices
Expert: Utilities Distorting Electric Choice Track Record
Bill Would Open Up Competition In Michigan's Electricity Market
With Competition Diminished, Michigan Citizens Paying High Price For Electricity
Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.
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How Politicians Game the Pension System
There are few political gains from properly funding a defined benefit plan
No one questions that employers should pay the pensions that its employees earn. Yet in Michigan and across the country, government pensions systems have failed to set aside the money required to pay those pensions.
Michigan's recent discussion of education funding reiterates that there are few political incentives to ensure that pensions are properly funded.
The state has increased its support of government schools in Michigan. The school aid budget, which pays for government schools, increased by roughly $800 million from the budget passed before the Snyder administration to the most recently approved budget. Yet, some school administrators and union officials deny this by complaining that the money is not going into districts general coffers, but instead is going to pension funding.
The state runs the pension system and assesses the costs of the system on districts. Due to $24.3 billion in unfunded liabilities, these costs have been increasing and school officials have rightly complained about it. The complaints, however, are not about the long-term health of the plan, but about the contribution rates required by the state.
It's unclear exactly why so much emphasis is put on the annual contributions into the pension system. Perhaps the state's constitution, which makes the pensions earned by government employees a contractual obligation, provides apparent protection of pensioners. This would provide the contradictory effect of encouraging underfunding even though the intent of the provision is to adequately fund earned pensions.
Regardless, because the focus is on the short-term contributions into the pension system, there are few rewards or punishments for failing to properly fund pension benefits. There are some things that can be done to put off today's costs to the future.
Indeed, politicians have embraced attempts to manipulate the pension system to lower annual payments.
In 2007, the Legislature voted to mark their assets to market rates. This accounting gimmick allowed them to lower their annual payment into the pension system. Putting less money into the system has the obvious effect of leaving the system with less money. (Policymakers also marked the system's assets up to market rates in 1997.)
The state legislature approved an early retirement incentive for members in 2010. The idea was that it would save districts in their operating costs as employees on the higher end of the union salary schedules retire and are replaced with employees on the lower end. This gap doesn't account for the increased longer-term liabilities added to the pension system. State analysts expected $169 million to be saved on salaries, but the pension system added an additional $1 billion in unfunded liabilities to the pension system.
The new Legislature isn't immune to incentives to kick the can down the road. Normally, unfunded liabilities from early retirement incentives are paid off over five years. The 2012 reforms kicked those payments down the road by requiring them to be paid off in 10 years instead.
Another way policymakers can defer payments is by paying off unfunded liabilities over an extended period. If unfunded liabilities develop in a system, they don't have to be paid off all at once but can be paid off over a series of years. Policymakers chose 30 years for the school pension system, longer than the average working lives of the system's members.
Legislators face a different dynamic when the system is in the rare instance when it is overfunded. When the system is overfunded there is pressure to increase the benefits of retirees. This is politically appealing because an overfunded system requires no additional cash. They can score points with system beneficiaries without diverting funds from other priorities. Yet this decision costs plenty if markets drop later.
Indeed, while it's been a long time since the school pension system has been overfunded, legislators have increased benefits in the system. It happened from 1983 through 1986, and again in 1990. These were permanent increases in pension benefits not earned by service but delivered to pensioners anyway. Those actions have long-term effects since some of those increased liabilities remain part of the system today.
This "heads-I-win," "tails-you-lose" approach to pension funding is dangerous and Michigan is suffering the consequences.
A better approach would be to close the defined benefit system completely and switch to defined contribution retirement benefits, which do not put taxpayers and school districts on the hook tomorrow for political decisions made today.
Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.
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