Mill loads a cost on taxpayers

With OK, outlays to top $132 million

— The $1.1 billion steel mill that Big River Steel LLC wants to build near Osceola is expected to cost taxpayers in Arkansas more than $132 million.

But the state considers it a worthwhile investment in return for Big River Steel’s promise of an annual payroll of $39.4 million for 525workers and potentially hundreds more jobs generated from ancillary businesses, said Grant Tennille, the executive director of the Arkansas Economic Development Commission. The mill’s workers are expected to earn on average about $75,000 a year, the company said.

It will take almost two years to build the steel mill, John Correnti, Big River Steel’s chief executive officer, said Tuesday, when the project was announced. Work could start as early as August if Big River Steel gets approval from the state Legislature, a requirement before the project moves forward, as well as construction and other permits.

The state will issue $125million in general obligation bonds to provide incentives to Big River Steel - a $50 million loan to the company, $70 million for site preparation and $5 million to cover the cost of issuing the bonds.

Here is the breakdown on the estimated cost to taxpayers:

The debt service on the principal and interest on the state’s share of the bond issue - worth $75 million - will be about $5 million a year, depending on the interest rate for the bonds, for the 20 years of the issue, for a total estimated cost to taxpayers of about $100 million, said John Shelnutt, the administrator for economic analysis and tax research for the state’s Department of Finance and Administration.

The state has agreed to pay interest on the $50 million loan for the first two years - at a cost to taxpayers of about $8 million - and then Big River Steel will take over all payments on the loan, Shelnutt said. If Big River Steel pays off the loan in the first four years, it will receive a $5 million discount, Tennille said.

A total of $10 million in incentives from the state to train workers for jobs at the steel mill. Big River Steel will pay for the training but the state will reimburse it for the cost, Tennille said.

In addition, $12 million will be provided by Mississippi County and $2 million by Osceola to buy the land where the plant will sit and to extend a natural-gas pipeline 16 miles to the plant site, said Clif Chitwood, Mississippi County’s economic development director. The money comes from a half-percent sales tax for economic development in the county, Chitwood said.

The costs of other incentives the project will receive could not be estimated. They include tax credits, which will reduce either sales tax or state income tax.

The credits aren’t issued until after companies reach predetermined thresholds of employees hired or money invested in projects. Because of that, it isn’t possible to measure the amount of some of the incentives before the project begins, said Joe Holmes, a spokesman for the Arkansas Economic Development Commission.

Those incentives include programs that pay a 4 percent credit on income tax on the basis of payroll for new jobs for five years; sales-tax refunds on building materials, taxable machinery and equipment; state income-tax credits equal to 30 percent of eligible costs for recycling equipment; and legislation to provide a full exemption of sales tax related to the sale of natural gas and electricity.

What makes the funding for this project interesting is that it replaces previous types of incentive programs with a bond issue, Shelnutt said.

“This spreads payments out over a longer period of time,” Shelnutt said, making it easier on the state’s budget.

On the basis of projections, the state expects the project will be “cash flow-positive”in at least six years, Tennille said.

“We make this investment because we feel like it is going to generate activity that will cause us to collect more taxes than we’re putting out,” Tennille said.

Big River Steel will put $300 million into an escrow account and borrow another $700 million to fund the project, Correnti said Tuesday.

The $300 million in the escrow account will be cash and letters of credit “that will be as good as cash,” Tennille said.

One of Big River Steel’s partners is expected to be the Arkansas Teacher Retirement System, which has said it wants to invest $60 million in the project.

Tennille said he is not at liberty to disclose the other partners but they will “become apparent pretty quickly.”

“They are still trying to get their deals done,” Tennille said.

None of the proceeds from the bonds will be released until Big River has spent $250 million of its own money held in the escrow account on the project, Tennille said.

“That is the second level of protection we insisted on,” Tennille said. “Because if something happens and they never turn the first shovel, we can take our money back.”

Tennille said he cannot disclose how Big River Steel will borrow the $700 million to fund the rest of the project. The collateral for the $700 million loan will be the machinery and equipment Big River Steel buys, Tennille said.

“But they have a very reputable source of financing that they are working very closely with,” Tennille said. “It will be announced long before this deal is finalized.”

Tennille said he expects the deal to close in the fall.

At that point, Big River will contact its partners and the $300 million will be placed into the escrow account, Tennille said.

Then the state will sell the bonds, he said.

“We don’t sell the bonds until their $300 million is [in the escrow account],” Tennille said. “That gives us a level of protection that we insisted upon.”

The proceeds from the bond sale will then also go into the escrow account, Tennille said.

“They will begin construction at that point,” Tennille said. “We assume they will begin making payments on the equipment. The equipment is the real big, heavy cost in this whole thing.”

Front Section, Pages 1 on 02/01/2013

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