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Foxconn and CEO Terry Gou guarantees up to $1.5 billion to back pledge for Wisconsin plant

Foxconn and CEO Terry Gou guarantees up to $1.5 billion to back pledge for Wisconsin plant

Foxconn (copy)

Foxconn Chairman Terry Gou, left, and Gov. Scott Walker hold the Wisconsin flag on July 27 at the Milwaukee Art Museum to celebrate the company's proposed $10 billion investment to build a display panel plant in Wisconsin.

Foxconn chairman Terry Gou will personally guarantee 25 percent of the clawbacks his company would face if it violates the terms of a $3 billion contract with the state of Wisconsin set to be executed later this week. 

At most, Gou and his company could be on the hook for $500 million if job creation thresholds aren't met, and $965 million for violating other requirements. The company must bring a minimum of 6,500 jobs to the state to avoid clawbacks, but has projected it could create as many as 13,000 jobs.

Members of the Wisconsin Economic Development Corporation's board approved the terms of the deal on Wednesday after a brief disruption by a group of protesters. The deal was approved with an 8-2 vote, with Sen. Tim Carpenter, D-Milwaukee, and Rep. Dana Wachs, D-Eau Claire, voting against it.

The contract will be signed on Friday. 

"Our goal in this whole transaction ... has been to provide the company the kind of flexibility, the kind of latitude they need to invest up to $10 billion to create 13,000 jobs, and at the same time create certainty around the protection for the taxpayers," said WEDC CEO Mark Hogan.

Some Democrats have criticized the agency for not releasing the contract publicly, but officials said they followed standard practice by keeping it under wraps during negotiations. 

A previously scheduled vote on the deal was delayed last month when WEDC officials spotted an unspecified problem in the contract that Carpenter referred to as a "nuclear bomb." 

Wisconsin Technology Council president Tom Still told reporters earlier Wednesday the personal guarantee from Gou is an unusual component in such a deal, and may have contributed to "defusing" the so-called "nuclear bomb" that would leave taxpayers unprotected.

Hogan would not say when the personal guarantee was agreed to, but said it had been "part of the deal for a long time."

"To have Terry personally guarantee this really speaks to the level of commitment and confidence that he has that this is going to be a great investment, not just for him but for the state of Wisconsin as well," Hogan said.

Friday will mark 28 weeks since Gov. Scott Walker and other state officials met with Gou at the White House to discuss the Taiwanese company's plans to build an LCD panel manufacturing plant in the United States. Foxconn has since pledged to invest $10 billion to build the massive facility in the southeastern Wisconsin village of Mount Pleasant, employing up to 13,000 people. 

In exchange, the company is eligible for up to $3 billion in refundable state tax credits — the largest subsidy to a foreign company in U.S. history.

Wachs, who is running in the Democratic primary for governor, said he opposed the deal because "$3 billion spent on one company within one industry is a risk that is too much for our taxpayers."

Asked whether he thinks the contract adequately protects taxpayers, Wachs said, "in some circumstances yes, in some not."

Walker and WEDC officials have emphasized that the credits are doled out on a "pay as you grow" basis. According to an analysis by the nonpartisan Legislative Fiscal Bureau, the state will break even on the deal in 2043, about 10 years after the life of the contract. 

Construction on the facility is expected to take five years, with a 2022 completion date. Foxconn is eligible for up to $1.35 billion in credits tied to capital investments and job creation over a seven-year period, with a maximum of $193 million in credits per year. The company is also eligible for a sales and use tax exemption on building materials, supplies and equipment used for construction of the facility, amounting to about $139 million.

To earn the full $193 million in credits available 2019, Foxconn would have to make $1.29 billion in capital expenditures and employ 520 people. If the company employs less than 520 people or invests less than $1.29 billion, the size of the credit awarded would be reduced accordingly.

The job creation thresholds increase in each of the seven years. To earn the full $1.35 billion, the company would have to spend $9 million on capital investments over the seven-year period and employ at least 8,450 people by 2025. 

Foxconn is eligible for another $1.5 billion in tax credits tied solely to job creation, distributed over a 15-year period. Those credits can be earned on wages for employees earning between $30,000 and $100,000 per year. 

The company is required to pay an average annual salary of $53,875 in order to qualify for credits; however, officials acknowledged the WEDC board would have the discretion to award credits if the annual salary came reasonably close to that mark. 

Foxconn is required to employee a minimum number of people in each year of the deal in order to receive the jobs credits, starting at 260 in 2018. The minimum threshold increases each year until 2027, when it reaches 10,400. If, in any year, the company does not reach the minimum employment numbers, it will not receive the jobs credits. 

In order to receive the maximum credits of $1.5 billion by 2032, the company must employee 13,000 people. If Foxconn were to only meet the minimum thresholds, it could earn up to $1.06 billion. 

Under state law, most companies in an enterprise zone can earn tax credits of up to 10 percent of capital expenditures and 7 percent of wages. Under the Foxconn contract and the legislation that made it possible, the company's credits are set at 15 percent of capital expenditures and 17 percent of wages.

The contract requires Foxconn to submit annual performance reports verified by an independent certified public accountant, whose services will be paid for by Foxconn and approved by WEDC. 

If, in the first five years of the contract, Foxconn gives misleading or false information, leaves the enterprise zone to conduct the same business elsewhere or shuts down operations within the zone and doesn't restart within a year, the company can be declared in default. In that case, the state would revoke and claw back any tax credits that had been issued. 

Starting in 2023, if the company violates any of those provisions or fails to maintain capital investment levels, the state could claw back up to $965 million. Starting in 2026, the amount that can be clawed back reduces each year, down to $386 million in 2032. 

Also starting in 2023, the company would be required to maintain a minimum job threshold — 5,850 in that year, and 6,500 in each following year through 2032. If those jobs are not retained, the state could claw back up to $500 million from 2023-2025. The amount that can be clawed back reduces each year, down to $250 million in 2032.

In the case of default, Hon Hai Precision Products, also known as Foxconn Technology Group, would pay back 75 percent of the clawback amount. The remaining 25 percent would be guaranteed by Gou through a private company. 

Legislation paving the way for the deal was approved largely along party lines, with just five Democrats — all of whom represent the area where the campus will be built — joining Republicans in supporting it. Three Republicans opposed it. 

Wachs, who was appointed to the WEDC board last month, spent Tuesday tweeting titles of children's books that are longer than the 29-page Foxconn contract, arguing the document should "have more detail."

The new law expedites the legal appeals process for court cases related to businesses within the enterprise zone created for Foxconn. Appeals would first be processed by appellate courts, then sent to the state Supreme Court. The Supreme Court could either hear the case or send it back to an appeals court. If a circuit court judge's decision is appealed, the judge's ruling would automatically be put on hold.

The law also exempts the project from state wetlands regulations and from preparing an environmental impact statement required by the state for some other projects. If wetlands are destroyed, mitigation efforts will be encouraged to take place within the same watershed. Wetland mitigation will be required to be done on a 2:1 ratio.

Wachs said he might have been comfortable supporting the deal if it had not included those environmental changes. 

Supporters of the deal say it is a rare opportunity that will benefit the entire state for years to come. Opponents generally say they welcome the creation of jobs, but that the arrangement raises too many concerns.

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Jessie Opoien is the Capital Times' opinion editor. She joined the Cap Times in 2013, covering state government and politics for the bulk of her time as a reporter. She has also covered music, culture and education in Madison and Oshkosh.

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