Dell Deal Oversold in Tennessee

Benefits of incentives package there were exaggerated, costs underestimated

By Paul Chesser

RALEIGH — A special session of the General Assembly convenes today to vote on incentives that Gov. Mike Easley and the N.C. Commerce Department have cooked up to entice Dell Computer Corp. to build a manufacturing plant in the Triad.

Easley’s office wouldn’t comment on the state’s negotiations with Dell, but some legislators said the incentives package is likely to total as much as $250 million over 15 years, the News & Observer of Raleigh reported Wednesday.

Five years ago Tennessee and the city of Nashville offered Dell $166 million in tax rebates, plus free land, in exchange for building manufacturing facilities there. Then-Nashville Mayor Phil Bredesen, now Tennessee’s governor, touted the agreement as a can’t-miss deal for his state. He garnered local support based on an analysis by Middle Tennessee State University’s Business and Economic Research Center, which provided an economic evaluation of the package proposed to the company. The center determined that a Dell deal would benefit Nashville to the tune of $97 million over 40 years.

But within weeks The Tennessean, the capital city’s major newspaper, commissioned another analysis of the deal “with the assistance of disinterested economists.” The study concluded that the costs caused by the Dell development and employees would exceed its benefits by at least $74 million. Bredesen’s said the newspaper’s analysis was “dead wrong.”

“This is what happens when you get somebody in a room,” Bredesen told the newspaper in June 1999, “and they are trying to prove something and they come up with stuff and check the math 42 times but never look up and see if what they said in the end makes any sense.”

However, The Tennessean’s analysis, developed with the assistance of state and national economists, was submitted to the MTSU economist, Reuben Kyle, who calculated the benefits of the Dell deal for Bredesen in the first place. Kyle’s response, after reviewing the newspaper’s work, was “I have looked at your analysis and can’t fault it.”

The difference between the initial study for Bredesen and The Tennessean’s review was that Kyle failed to include indirect costs to the city in his computations.

“Nashville would spend more than $171 million over 40 years in indirect costs,” the newspaper reported, “such as educating the children of Dell employees who are newcomers to Davidson County and providing those families with police and fire protection and other city services.”

Bredesen had said in previous discussions about indirect costs that “it doesn’t meet the sensibleness test. The argument would be that you should never have a new job in town.”

Other economists corroborated Kyle’s opinion on The Tennessean analysis. Malcolm Getz, director of undergraduate studies in economics at Vanderbilt University, told the newspaper that other Nashville taxpayers would end up subsidizing the cost of public services provided to Dell employees. Other economists consulted for the analysis expressed similar views.

“That almost certainly is a massive giveaway that will have a major negative fiscal impact on the community,” said Roger Noll, a Stanford University economist.

But The Tennessean reported that many economists said calculating indirect costs for incentives is an imprecise science. Still, the newspaper’s counter-analysis caused the MTSU Business and Economic Research Center to backpedal on the way the center evaluates incentives and costs.

“During the Dell study, we discovered that there was an inadequacy in the way these studies were undertaken,” the center’s director, Albert DePrince Jr., said at a Vanderbilt University Regional Planning Summit in December 1999. “The conventional approach leaves out the direct, indirect, and induced public expenses that are necessitated by the expanded population base. In the future, we should try to take these added costs into account.”

Bredesen also tempered his enthusiasm over the Dell agreement, although he is still glad the company came to Tennessee. Like Easley is hoping now, Bredesen once envisioned more than 8,000 new jobs coming to the Nashville area because of associated economic development with Dell. The company now employs about 3,000 people in Tennessee.