How Virginia sealed the deal on Amazon’s HQ2, ‘the biggest economic development project in U.S. history’

BY MICHAEL MARTZ, RICHMOND TIMES-DISPATCH, November 16, 2018.

As autumn began, Virginia lawmakers were not completely sold on the deal they had been putting together for a year to land Amazon’s second headquarters in the Northern Virginia suburbs.

The lure of a $5 billion investment and 50,000 high-paying jobs was powerful, but so was the fear of having to justify $1 billion in direct state incentives to a company valued at $1 trillion.

Members of the Major Employment and Investment Project Approval Commission also were concerned about the ability of any community in Northern Virginia’s already teeming and traffic-clogged suburbs to handle the massive influx of people.

That’s when Amazon made a pivotal decision to divide the project in half, ultimately awarding 25,000 new jobs and up to $2.5 billion in investment each to Virginia and New York about six weeks later.

“That’s when I knew I could support it,” said House Appropriations Chairman Chris Jones, R-Suffolk, who acknowledged last week that until the decision, “I wasn’t there yet.”

House Finance Chairman Lee Ware, R-Powhatan, resigned from the MEI commission in February “because of the size of the subsidy we were offering Amazon.”

“I couldn’t justify taxpayers subsidizing one of the wealthiest companies in the world,” said Ware, who intends to vote against the proposed incentives when the General Assembly considers them in January. “The company picked two prime development sites it might have picked without inducements.”

Ware said he was not alone in his concern, even though the state had fashioned a package of direct incentives less than one-third of the size promised by New York with the requirement that Amazon produce the jobs and additional tax revenue before it would get any money from Virginia’s general fund budget.

“I think there was a collective sigh of relief that we were now dealing with something more manageable,” Appropriations Director Robert Vaughn said in an interview the day after Amazon announced it would build half of HQ2 in Arlington County in Crystal City and Pentagon City next to Reagan Washington National Airport.

The package that MEI approved unanimously on Oct. 25 ultimately amounts to $1.85 billion, but more than two-thirds of it represents long-term state investments in higher education and regional transportation projects that Virginia policymakers already were committed to doing to establish the state as a leader in the high-tech economy.

The commission — made up of key lawmakers from the House and Senate, working with members of Gov. Ralph Northam’s Cabinet — played a pivotal role in shaping a package that didn’t obligate the state to support affordable housing initiatives in the region or use statewide funds to pay for transportation improvements in Northern Virginia.

Legislators and members of the administration tutored the Virginia Economic Development Partnership on the realities of the state’s general fund budget, which they were reluctant to use to pay for incentives without a measurable payout for the entire state.

“VEDP’s role was to get the deal done,” said Secretary of Finance Aubrey Layne, who sits on the panel as a nonvoting member. “My role was to make sure we were partners and kept in communication with MEI and the money committees.”

Most important to legislators, the final package didn’t commit general fund dollars as incentives until Amazon has hired people at salaries averaging $150,000 a year and generated new revenue to pay for them.

“The positive factor was we had to have the money in our checking account before the check went into the mail,” said Sen. Frank Ruff, R-Mecklenburg, chairman of the commission and a longtime representative of rural Southside localities that will want to know how they will benefit from the deal with Amazon.

State officials estimate the Amazon project ultimately will generate net tax revenue of $3.2 billion over 20 years, after subtracting the $550 million Virginia has committed to paying the company as direct incentives for creating 25,000 jobs. Even after accounting for investments in higher education, transportation and the expected growth in K-12 enrollment, the state expects to receive a net tax benefit of at least $1.2 billion.

“We have positive revenue from day one,” Stephen Moret, president and CEO of the Virginia Economic Development Partnership, told members of the House Appropriations and Finance committees on Tuesday, hours after Northam and Amazon officials announced the deal in Arlington.

For Moret, the Amazon deal represented an economic development triumph that was impossible to imagine when he took the helm of the embattled state authority less than two years ago as General Assembly leaders and then-Gov. Terry McAuliffe were preparing sweeping reforms of the way it operates.

“To the best of our knowledge, this is the biggest economic development project in U.S. history, certainly in Virginia,” he told the House committees at their annual retreat in Harrisonburg.

Former Secretary of Commerce and Trade Todd Haymore pushed for hiring Moret two years ago, even though legislators wanted to wait for the adoption of reforms at VEDP.

“This would not have happened if not for the reforms,” Haymore said, “and it would not have happened if Stephen had not been the quarterback.”

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McAuliffe and Haymore were flying to Southwest Virginia in a state helicopter on Sept. 7, 2017, when they got the word that Amazon had launched a North American sweepstakes for HQ2, a mammoth attempt to match the company’s main headquarters in Seattle.

“I said, ‘We’ve got to win this!’ ” the former governor recalled. “Literally, it would finish what we started in diversifying and building a new economy.”

McAuliffe directed Haymore to arrange plane tickets to fly to Seattle the next day and set up a meeting with Jeff Bezos, founder and CEO of the company, as well as owner of The Washington Post and a home in the District of Columbia.

Haymore called Holly Sullivan, an Amazon official whom he and the governor knew from their successful bid three months earlier to establish the company’s East Coast hub for Web Services near Washington Dulles International Airport in Fairfax County.

Sullivan, who previously had worked as economic development director in Montgomery County, Md., one of the 20 finalists for HQ2, advised McAuliffe to stay in Virginia.

“She said, ‘Maybe we’re not ready for him to come just yet,’” the ex-governor recalled with a chuckle in an interview on Friday.

Haymore, who had worked as secretary of agriculture under McAuliffe before taking the commerce and trade post, joked, “It’s one of the only times in four years of working with Governor McAuliffe where I told him, ‘You will not do this’ … and he listened!”

Instead, McAuliffe and Haymore began a feverish attempt to pull together a package of potential sites for the project from all across the state’s urban crescent, not just Northern Virginia, to meet Amazon’s Oct. 19 deadline for proposals.

But first, McAuliffe said, he used his contacts at the company to ensure that the Richmond area and Hampton Roads wouldn’t be wasting their time by investing resources in a search that ultimately would lead to Northern Virginia.

“I was 100 percent assured there were no preconceived notions,” he said.

McAuliffe’s next move was talking to new Richmond Mayor Levar Stoney, a protégé who had served in his Cabinet, and Virginia Beach Mayor Will Sessoms about their regions’ interest in competing for the project.

The state needed professional help to pull together such a complex package in such a short time, so it turned to McKinsey & Company, a global management consultant company, to run the process.

That required money, so Haymore worked with then-Finance Secretary Ric Brown to find dollars they could use from the governor’s contingency fund to pay McKinsey.

But McAuliffe wasn’t willing for the state to foot the entire bill.

“If people want to get involved in this thing and they’re serious, they’re going to have to pony up some money,” he said.

The state staked $1 million, with an additional $1 million raised from economic development partnerships in the Richmond, Hampton Roads and Northern Virginia areas, including $150,000 from Virginia Tech.

“We had a coalition of the willing,” Haymore said. “We reached out to the universities, and Virginia Tech stepped up to the plate.”

Tech, which announced last week that it would build a $1 billion Innovation Campus adjacent to Amazon in the Potomac Yard area of Alexandria, also was the only university to submit a complete financial model for the bid, Moret said.

The final package includes $250 million in state funds for Tech, as well as $125 million to help George Mason University expand its existing Arlington Campus with a new digital innovation institute and school of computer science. The master’s level projects are part of a higher education strategy that includes $710 million to help finance an additional 12,500 to 17,500 undergraduate degrees in computer science and related fields at institutions across Virginia.

“If the Tech piece had not been there, I probably would not have been a big supporter,” said Del. Steve Landes, R-Augusta, one of five House members on the MEI commission.

Virginia pitched 10 potential sites — including three in the Richmond area — in the initial round of proposals from 238 metropolitan areas across North America. The Richmond-area sites were Tree Hill Farm in eastern Henrico County, city-owned land on North Boulevard in Richmond, and the site of the former Galleria project in Chesterfield County.

When Amazon revealed its short list in January, only Northern Virginia was on it, with four potential sites, including the one in Crystal City that won the project last week. The remaining 20 metropolitan areas also included Montgomery County, Md., and Washington, D.C.

Haymore believes the effort and money spent in the Richmond area and Hampton Roads could still pay off, just as it did in Nashville, Tenn., which Amazon chose last week for its East Coast operations hub with 5,000 jobs.

Think of HQ2 as the homecoming queen, he said. “There’s also going to be a lot of very attractive economic development projects that will be part of the court.”

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On March 2, about six weeks after Amazon narrowed the field, Northam, Maryland Gov. Larry Hogan and Washington Mayor Muriel Bowser sent a letter to Bezos that offered “a shared vision of the future” among the three competing jurisdictions.

“We recognize that if one of our jurisdictions earns the honor of being selected for HQ2, we all win,” they wrote.

The HQ2 sweepstakes forced Virginia, Maryland and Washington to cooperate for a project that would employ people from around the region in high-paying jobs that would benefit all of their economies.

“We decided it was a very big opportunity for the region,” said Jason Miller, executive director of the Greater Washington Partnership, a group of corporate CEOs for a region stretching from Richmond through Washington to Baltimore that produced 11 proposals in the first round of bidding for HQ2.

With all three jurisdictions in the second round, they focused on fixing a public asset critical to their hopes of landing the project — the Metro transit system, which needed a $15.5 billion repair job over the next 10 years.

“Every physical site [considered by Amazon] in Maryland, the District and Northern Virginia was next to a Metro stop,” Miller said.

Virginia’s decision to contribute an additional $154 million a year as its share of the $500 million required annually to repair the system was a crucial moment in the region’s bid for HQ2, he said. “Once we achieved the full amount, it was a pretty clear signal that because of the importance of the system to both the economy and Amazon, the region can come together and tackle its most pressing issues.”

The budget adopted by the General Assembly on May 30 and signed by Northam on June 7 also included $28 million to boost production of undergraduate degrees in computer science and other technical fields and $25 million for CyberX, an ambitious idea conceived by Del. Jones and Virginia Tech President Tim Sands. Both investments are central to Virginia’s effort to jump-start a talent pipeline for Amazon and other potential projects that rely on highly skilled workers in emerging technologies.

“CyberX showed Amazon we’re serious,” said Vaughn, staff director of Appropriations, who was part of the meetings between Jones and Sands that led to the surprise initiative in the budget initially approved by the House in February.

Those commitments ultimately may have been more important to Amazon than the direct incentives to the company for the jobs it created, said Layne, a former Virginia Beach businessman and state transportation secretary.

“Incentives didn’t really drive the decision,” he said. “At the end of the day, it was the workforce development and education pieces, which we already had decided were going to happen regardless.”

The MEI commission voted unanimously on Oct. 10, 2017, on an initial proposal that would have paid $22,000 a job — almost one-third of what Virginia promised Micron Technologies to add 1,100 jobs at its Manassas plant and, more importantly, keep the 1,400 jobs already there.

The commission never wavered on its position, Jones said. Instead, it improved the deal by negotiating for the average salary to increase from $100,000 to $150,000 a year, plus benefits.

“We were not going to take extraordinary measures to land the company,” he said.

The commission balked at a proposal for $100 million in state subsidies to maintain affordable housing in the region — which both legislators and administration officials agreed is the proper role of local governments and private developers.

It also made clear in September — the day Northam ordered an emergency evacuation of the Virginia coast for Hurricane Florence — that it wouldn’t allow money from the general fund or statewide transportation fund to pay for projects in Northern Virginia for Amazon.

Instead, the state is using a combination of federal money restricted to Northern Virginia and money from the toll concession for express lanes on Interstate 95 to pay for five projects, including new entrances to two Metro stations, improvements to U.S. 1 and a pedestrian bridge from Crystal City to Reagan National Airport.

“It was not taking any money from anyone else in the commonwealth — that was key,” Layne said.

Still, the scope of the project and the $1 billion incentive for 50,000 jobs was daunting both for legislators and some members of the administration, so Amazon’s message that it was considering splitting the project was welcome in Richmond.

“We felt that half was a better fit for us because it was more digestible,” Jones said.

Senate Finance Co-Chairman Emmett Hanger, R-Augusta, said splitting the project allowed him to vote for the final package on Oct. 25.

“It helped me because of the reduced level of incentives,” Hanger said Thursday.

Virginia still has a chance to get more jobs out of the deal because the state committed up to $200 million in incentives for a second phase with an additional 12,850 jobs — or $15,000 a job, almost a third less than the first phase.

“Having MEI as part of economic development is a very, very positive thing for the commonwealth,” Haymore said. “I would put it on the list of reasons we landed Amazon.”

mmartz@timesdispatch.com

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