Highway to the Danger Zone? PILOT Program Set to Shortchange Taxpayers

Trevor W. Lewis and Zachary D. Cady Dec 14, 2023

Responding to The Buckeye Institute’s economic concerns regarding low statutory limits placed on a “green energy” payment-in-lieu-of-taxes (PILOT) program, Open Road Renewables has asserted that Frasier Solar’s PILOT is a “clear winner” for Knox County. To address Open Road’s concerns, The Buckeye Institute modeled additional scenarios with a wider range of economic assumptions in accordance with the federal standards. Doing so only further supports the original conclusion that the PILOT program is not a “clear winner” for Knox County and that its commissioners should be mindful of the program’s short- and long-term tradeoffs.
Open Road Renewables overstates the benefits of Ohio’s PILOT program because it utilizes a real discount rate of zero percent and fails to make adjustments for inflation. This mistaken approach effectively ignores the standard practice of utilizing net present value (NPV) analysis to account for changes in real financial benefits and costs that accrue over time due to changes in the real value of money, risk, and uncertainty. The federal government’s best practices and guidelines routinely require regulators to assume, at a minimum, a three percent real discount rate and inflation-adjusted dollars in order to accurately appraise future costs and benefits. The Federal Bureau of Land Management, for example, adjusts wind and solar producer’s acreage rents by inflation every year and, in June 2023, the agency proposed increasing acreage rents on solar and wind by three percent per year to account for higher inflation. After the adjustments for inflation were made, income from these acreage rents were then discounted at the required three and seven percent real discount rates. And although the Office of Management and Budget (OMB) requires using three and seven percent real discount rates, federal agencies, states, and renewable developers commonly use higher rates ranging from three percent to rates in the double digits. Importantly, federal standards require that all cost and benefit streams be discounted at the same rate, and comparing costs and benefits discounted at different rates is forbidden. 

In its initial analysis, The Buckeye Institute assumed that Open Road had adjusted its projected figures for inflation, so Buckeye replicated that analysis, but applied the minimum standard practice of including a three percent real discount rate (percentage not rounded).  But Open Road Renewables had not in fact adjusted its PILOT payment figures for inflation, which guaranteed overstating the purported real benefits to Knox County and its schools. 

Open Road Renewables separately asserted that The Buckeye Institute erred by excluding needs-based funding from its analysis. Local government funding decisions ebb-and-flow, however, and should not be an assumed constant. Economist Howard B. Fleeter summarized the methodological rationale as follows:

 Estimating the impact of the increased property valuation from the Frasier Solar project on Mt. Vernon [City School District]’s state aid is inherently challenging. The 2022-2023 (FY23) school year was the second year of a planned 6-year phase-in of a new state school funding formula in Ohio. However, at the time [my] memo was prepared Ohio’s state legislature was still deliberating between 2 different versions of the school funding formula to be implemented for the FY24 and FY25 school years. As a result, it is currently difficult to know for certain what Ohio’s school funding formula will look like next week, and essentially impossible to know what form it will take 10, 20, 30 or 40 years from now. 

Contrary to Open Road’s recommendation, Ohio county commissioners should carefully consider whether including uncertain needs-based funding revenue reductions will help assess the tradeoffs between accepting long-term PILOT program income and conventional property taxes. If the expected $214,386 annual reduction in school funding never materializes, then NPV scenarios will have assumed something that never happens—significantly overstating the value of PILOT payments and severely understating the real value of property tax revenues. Commissioners should also remember that property tax revenues will deliver more funding to the county sooner rather than later—$6 million more by 2036.

As a robustness check on The Buckeye Institute’s initial findings, Buckeye researchers modeled four additional scenarios that adjusted for future inflation, incorporated low-end and moderate-end real discount rates, and included a (questionable) $214,386 annual reduction in county need-based-funding revenue. 

The first scenario assumes a two percent rate of inflation (Figure 1) and the second assumes a modestly higher three percent rate of inflation (Figure 2) at a lower-end three percent real discount rate. Both scenarios demonstrate that PILOT payments fail to adequately compensate Knox County for lost property tax revenue even when accounting for need-based-funding revenue losses. Complying with the federal government’s best practices, The Buckeye Institute calculated two more scenarios using the initial inflation forecasts, but at a moderately higher seven percent real discount rate as OMB routinely requires (Figures 3 and 4) (Three and seven percent discount rates are not rounded. Note: Federal standard dictates the real discount rates must be uniformly applied to cash flows. Cash flows discounted at separate rates cannot be compared).  Under all four scenarios, Knox County would receive more revenue with property taxes than the proposed PILOT payments.

Cost-benefit analysis research should always adjust for inflation and use real discount rates to account for the real value of money over time, risk, and uncertainty. A proper estimate of these costs and benefits once again demonstrates that the real value of Frasier Solar’s PILOT payments made to Knox County falls short of purported promises.