New PILOT Assumptions Still Flawed

Trevor W. Lewis Feb 12, 2024

Ohio’s Payment-in-lieu-of-Taxes (PILOT) program allows local communities to forego property tax revenue and instead collect a lower fixed, non-inflation adjusted annual payment from wind and solar energy developers over the project’s decades-long duration. Unfortunately, the General Assembly capped the program’s allowable payments, making it harder for communities to determine whether long-term PILOT plans offer a fair return compared to the true value of the forfeited taxes. The Buckeye Institute initially raised this concern regarding Frasier Solar’s plan to situate a 120-megawatt solar farm in Knox County, suggesting that officials ought to reassess the long-term tax revenue projections and, perhaps, wait until the state raises the statutory cap.

Responding to that advice, Frasier Solar re-ran its own numbers. That reassessment, however, included some flawed assumptions, and The Buckeye Institute stood by its original and justified concern.

Now, Frasier Solar points to new analysis by an Ohio State University professor—shared on an affiliated university website for “independent work”—that the company claims confirms the benefits of Frasier’s proposal and “directly refutes” The Buckeye Institute’s caution to Knox County. The professor’s analysis hinges upon two unrealistic assumptions: first, the Biden administration’s inaccurately low real discount rate; and second, a future with low-to-no inflation projected.

The new analysis presents five economic scenarios, two of which assess Frasier’s proposal using either no discount rate at all or the Biden administration’s two percent inflation-adjusted discount rate that replaced the standard three and seven percent rates in November 2023. Discount rates are important because they highlight the short-term value of money versus the money’s value if and when received in the future. An inflation-adjusted—or real—discount rate of two percent is inappropriate for Knox County. An October 2023 report for the Utility Reform Network recommended a three percent minimum real discount rate for public utility projects. Anything less than a three percent real discount rate is Pollyannaish and risks shortchanging the community and its taxpayers in the long-run.

The professor’s other too-optimistic scenarios do not include a realistic inflation expectation and thus understate its impact on later cashflows. Two scenarios ignore inflation entirely, contrary to current and traditional federal guidelines that require all future cashflows to be adjusted for inflation. The remaining scenarios use a meager two percent inflation, which risks overstating the value of future PILOT revenue. Concerned about the impact of higher inflation on wind and solar energy leases, the Bureau of Land Management, last year, suggested increasing lease rentals by three percent per year. Likewise, PILOT payments cashflows should be analyzed using at least a three percent inflation rate. Without properly adjusting future PILOT cashflows for inflation, Knox County cannot determine whether the purchasing power of the PILOT income will hold steady and keep pace with inflation-adjusted property taxes over the next 40 years.

Although PILOT payments to Knox County would be “somewhat better” under a three percent discount rate/two percent inflation scenario, county officials should still understand that the PILOT payments’ value will not break even with the needs-based funding reduced property tax revenue until the 2050s. Even when needs-based funding is included, it is not a clear economic win for Knox County.

Knox County needs property tax revenues today to help close its $950,000 budget deficit. Granting the solar farm its PILOT tax breaks will maintain that deficit and ensure that the county’s property taxpayers ultimately pay more in the future. Knox County officials should at the very least critically consider the fatal flaws in this latest analysis and act based upon realistic projections and sound calculations that account for the realities of inflation.

Trevor W. Lewis is an economic research analyst at The Buckeye Institute.