Layoffs at the Fortune 500 energy firm could be a blow to Allentown’s Neighborhood Improvement Zone program.
We’ve been reporting a lot on Allentown’s Neighborhood Improvement Zone, an unusual economic development incentive plan that’s bankrolling the city’s revitalization. The zone includes a brand new $200 million arena, PPL Center, home to the Philadelphia Flyers’ top minor league hockey team, the Lehigh Valley Phantoms.
The arena is financed using state and local tax dollars, including about $22 million a year paid by businesses that have been in the neighborhood since before the NIZ existed.
The public authority that owns the arena is counting on future tax revenue from those businesses to pay off the construction debt.
Fortune 500 energy firm PPL Corp. is one of those companies. And now PPL is cutting about 300 jobs in its downtown headquarters, eliminating some of that tax revenue. The company made the announcement Tuesday.
A PPL spokesperson said the company will lay off fewer than 200 workers and eliminate more than 100 vacant positions. (This summer, the company also gave voluntary severance to more than 100 workers at power plants outside of the city.)
The layoffs are part of PPL’s decision to spin off its competitive power generation business, merge it with private equity firm Riverstone Holdings, and create a new company called Talen Energy. PPL expects to close the deal in the first or second quarter of 2015.
Once PPL cuts these 300 jobs, it will be contributing fewer dollars in wage taxes to the city and state. The public authority that owns the arena was counting on those tax dollars.
Things could get worse. PPL says it will locate Talen Energy’s headquarters somewhere in the Lehigh Valley, but it hasn’t chosen a location yet. A company spokesperson said a few hundred employees will move to the new company. If the headquarters aren’t in the zone, the authority will get even fewer of the tax dollars it was expecting.
Five employers in the Neighborhood Improvement Zone, including PPL, contribute a total of 72 percent of the tax dollars that are paying off the arena debt. If even one of those firms decides to relocate, the authority could fall short on its bond payments.
Pennsylvania taxpayers probably shouldn’t panic, though.
The way the legislation was written, if at any point the NIZ doesn’t bring in enough tax revenue to pay for the arena debt, the city and state don’t have to pay the difference. The bondholders would lose out. That’s one reason the bonds were rated baa2 — moderate risk.
If the authority doesn’t have enough tax dollars to pay off the debt, the city could have trouble borrowing using similar funding models in the future. And the government might choose to bail out the authority.
To be clear, there’s no indication that the authority is about to default on the arena bonds. There are other sources of revenue, besides companies like PPL. Those can also fluctuate.
But PPL’s decision to lay off hundreds of workers and spin off its one of its business segments shows what could go wrong in the Neighborhood Improvement Zone, as well as the risks that arena bondholders were willing to accept.
Allentown Mayor Ed Pawlowski says he’s expecting PPL to consider locating Talen’s headquarters in the city. In an email from his office, Pawlowski wrote: “The city has a lot to offer and the benefits of locating in the NIZ are definitely attractive. I would expect that proposals from developers [to build an office for Talen] in Allentown would be given very careful consideration.”
Pawlowski’s office wouldn’t elaborate on whether the city is offering PPL financial assistance or additional tax incentives to stay in the NIZ.
Allentown is the third largest city in Pennsylvania, and its downtown has been struggling for years. Half of downtown residents live below the poverty line, and the unemployment rate in the area is more than twice the state average. The management company at the city’s new arena has hired about 300 employees, and new restaurants have hired dozens more.