The proposed Galloo Island wind farm and its associated Payment in Lieu of Taxes (PILOT) agreement has been one of the most controversial topics in the press for several weeks. On Tuesday, the Jefferson County Board of Legislators voted in favor of the agreement. I am not going to write about this particular PILOT, but I think it might be illuminating to look at PILOTs in general and the role they play in regional economic development.
A PILOT is basically an agreement by some entity to pay fees to a government — Jefferson County and certain townships and school districts — in lieu of property or other taxes.
In some cases, the entity is a not-for-profit agency, such as a church or a school, that would not have paid any taxes at all. Because they occupy land that might otherwise be taxed, and they use municipal services such as fire protection or police, the not-for-profit entity agrees to pay the community some money in consideration. There is not a legal requirement to do this, but it is considered good form among financially sound not-for-profits that want to remain on good terms with their communities.
In the case of Galloo Island, or other wind farm developments in the region, the developers are for-profit corporations and would normally be subject to full property and sales taxes. They ask for relief from those taxes, in return for paying a lesser amount of money in lieu of those taxes. This is effectively a tax reduction for the developer.
The argument from the developer's standpoint is that they cannot afford to make the investment if it is fully taxed — or that they will make the investment elsewhere, where they can get a tax deal. From the standpoint of the county and its economic development specialists at the Jefferson County Job Development Corp. (JCJDC), the argument is that we give up some of our tax revenues to help spur the development of our economy and the creation of jobs.
If the full taxes due would be $8 million across the life of the PILOT, but the developer is given a PILOT that only requires payment of $5 million, the county looks at the deal as being worth $5 million — assuming that they were never going to get the full $8 million because the developer would never make the investment without the PILOT agreement. It is $5 million or nothing.
The developer sees the PILOT as being worth $3 million — the amount it knocks off the full tax bill. In theory, both parties get a valuable deal, something negotiators call "win-win."
Of course, as with any negotiation, there is infinite room for third-party second-guessing and kibitzing. If you have ever bought a used car from a dealership, only to have a friend tell you that he would not have paid that much, you get the idea. Because we do not know exactly what would have happened if a different deal had been proposed, neither side is ever completely sure they got everything they could have, if they had only pushed a little harder.
The situation in a case like wind farms in Jefferson County is exacerbated by something economists call asymmetrical information — the developers know more about the deal than do our economic development officials or legislators. The developers know what their real costs are, as well as the next best opportunities they will have if the deal doesn't go through.
The county does not know when or if other developers will appear, or what they will offer or demand if they do appear. That makes the negotiation very high-risk for us, but relatively easier for the wind farm developers. They know exactly when to hold 'em and when to fold 'em. We have to take a deep breath and follow our instincts.
Of course, the developers will always say that they need a generous PILOT to make the deal work. Wouldn't you if you were in their shoes?
And our economic developers, charged with the near-impossible job of generating outside capital investment in the region, have every incentive to be generous with prospective investors.
The county legislature routinely asks the JCJDC to be accountable for the tax money it spends searching for new developers and job-creating deals, so legislators should not be surprised when those economic development folks try extra hard to land a new wind farm.
If we want to avoid repeating this circus over and over again, there are a few things we might try:
■ Decide where we want wind farms and on what terms.
This will let individual towns and villages decide where they want windmills, if they want them at all, before the developers show up and everything gets ugly. Each municipality then needs to pass a local ordinance that limits wind farm development to those areas.
If JCJDC wants to help with this, they can do two things: fund a community survey by the Center for Community Studies at Jefferson Community College to determine prevailing opinions and concerns about wind farms, and develop a draft ordinance that each municipality can use in creating its laws. I am sure the Jefferson County Planning Department or even the Tug Hill Commission could help with those things as well.
■ Approve a proposed standing PILOT agreement for all wind farm developments in the county. County legislators can provide their input to without getting tangled in the specifics of an impending deal. That will avoid having to treat each prospective developer differently. It can also be used to help market the region to wind developers in a rational fashion.
■ Get a lot smarter on the economics and industry dynamics of wind power and wind farming. We need to start comparing notes with other regions that are experiencing or seeking development like ours and we need to start collecting information on the primary actors in the business. That asymmetrical information problem can be licked if we try.
I have to agree with John Droz, whose letter to the Watertown Daily Times last month said that wind developers are here because they can make money. Right now, thanks to tax incentives and public policy, wind power is profitable in New York state. We have exactly what the wind farm investors need — rural land, strong winds and a reasonable proximity to large electricity markets downstate. They have fewer choices than they might want us to believe, and for every deal we lose, another will come to take its place.
If wind farms are coming, or at least prospective wind farm developers, we need to be ready for them and reap the benefits on our terms. To them, it's just money. To us, it's our home.
Greg Gardner is an associate professor of business at SUNY Potsdam. His column on business issues in the north country is published monthly in Money Matters. E-mail him at ggardner@wdt.net.
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