With South Philly refinery closing, questions about taxpayer subsidies that kept it going
The South Philadelphia refinery was on the brink of closing in 2012, but politicians scrambled to keep it open with the aid of taxpayer subsidies. Now some are questioning whether that was a good decision.
In 2012, after officials from City Hall, Harrisburg, and Washington orchestrated a last-minute deal to keep Sunoco’s South Philadelphia refinery from closing, the new company managing the facility wrote in its application for a state grant that it needed taxpayer support to sustain the 845 jobs at the refinery, create 200 permanent positions, and support thousands of other temporary and indirect employment opportunities.
The deal, which was applauded as a rare moment of bipartisanship during a time of political gridlock, involved $25 million in state grants. The firm also received environmental liability waivers, local and state tax breaks, and the transfer of federal emissions credits from Sunoco’s defunct Marcus Hook refinery.
Seven years later, with the refinery set to close following an explosion and fire, and with progressives newly ascendant in local politics, some economists, environmentalists, and politicians are questioning whether the all-hands-on-deck effort to keep the refinery open was an effective use of taxpayer resources.
“I’m tired of our government giving public money to corporations that make big profits,” said State Rep. Elizabeth Fiedler (D., Phila.). “We should not allow companies to both pollute communities and get away with not paying workers what they are owed.”
Christina Simeone, a senior fellow at the University of Pennsylvania’s Kleinman Center for Energy Policy who has studied the refinery’s finances, said the state should not have spent money to keep the facility open.
“You’re taking that public money and throwing it at a company that’s just going to funnel it to shareholders," she said. “If you take that taxpayer money and reinvest it into other training programs, job programs for union workers, [and] economic development opportunities, we’d be somewhere different, somewhere better than we are today.”
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The refinery has long been mired in economic struggles. Sunoco’s plan to shutter the facility came after it failed to attract a buyer that could find a way to profit from the refinery, parts of which have been operating for 150 years. The 2012 deal involved the creation of a new corporate owner, Philadelphia Energy Solutions, that was a joint venture between the Carlyle Group, a Washington-based private equity firm, and Sunoco, which retained a minority share. The company declared bankruptcy in 2018, and a majority of the stock was taken over by Credit Suisse Asset Management and Halcyon Capital Management.
Many of the reasons the refinery became uncompetitive, including the collapse of crude oil prices in 2015 and the lifting of a ban on U.S. oil exports, were outside the company’s control.
Despite those financial woes, the investors behind the 2012 deal have been able to squeeze large amounts of money out of the business. Carlyle and other equity partners collected $400 million in dividends before the 2018 bankruptcy.
Although most of the state grant funding cannot be recovered, the state Department of Transportation is investigating whether the company failed to fulfill its promises for receiving a $10 million state grant to expand the facility’s rail capabilities. If so, the state may attempt to recoup some of that money, said Michael Gerber, spokesman for the Department of Community and Economic Development.
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City Democratic leader Bob Brady, who as a congressman played a central role in making the 2012 deal, including getting the White House involved, said critics are benefiting from hindsight. At the time, he said, it seemed unlikely the refinery would fold in a few years.
“Nobody thought that. No governors, no mayors, no presidents, no vice presidents,” Brady said. “I wouldn’t give people money to be open for five years."
The goal was to save the jobs at the refinery and protect the region’s economy and energy market. “It was a disaster to lose this refinery, and that’s what everybody thought. And it may still be a disaster," Brady said.
Before deciding whether to invest more public money in the facility, Brady said, officials need to determine whether the refinery’s problems were outside of its control or the result of poor management.
“Last time it was the right thing to do. But, hey, if there’s mismanagement, there’s mismanagement,” he said. “We have got to find out whether it was bad management or if it just can’t work. We’re not going to throw good money at bad.”
Officials are investigating whether deferred maintenance contributed to some of the plant’s problems and the explosion and fire. Philadelphia Energy Solutions did not respond to a request for comment.
While the effort to save the refinery involved cooperation at the city, state, and federal levels, most of the public money came from Pennsylvania taxpayers.
From 2012 to 2014, the refinery received $15 million in grants from the Redevelopment Assistance Capital Program under Gov. Tom Corbett’s administration to rebuild its outdated catalytic cracker, which separates crude oil into gasoline and other products. The project cost $85 million overall, according to Philadelphia Energy Solutions’ application for the state grant.
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“The [catalytic cracker project] will employ approximately 1,200 contractors during the construction process, is critical to the ongoing viability of the refinery complex, and thus helps protect the 845 permanent positions currently in place,” the company’s 2012 application said.
Through the Rail Transportation Assistance Program, taxpayers also covered $10 million of the $186 million expansion and improvement of the refinery’s rail head, a project designed to help the facility transition from relying on more expensive foreign oil arriving by sea to more affordable oil from the Bakken Formation in North Dakota.
“If you don’t spend it on the grants, we’re going to spend it on unemployment compensation. We’re going to spend it on welfare," Corbett said in a Temple University report on the 2012 deal. He did not respond to an interview request.
PennDot’s investigation will look into whether the company completed required maintenance and whether the traffic at the refinery met a minimum number of rail cars loaded.
The question of when it is effective to direct public resources to private companies is a complicated one. Holger Sieg, a University of Pennsylvania economist who studies public sector investment, said subsidizing refineries is “probably not a good use of taxpayers’ money.”
“It only makes sense for local governments to subsidize firms if these firms create large-enough spillovers or positive externalities for the local economy,” Seig said. “It’s probably better urban fiscal policy to create a tax environment that is attractive for new and existing firms."
Brady, however, said the spillover benefits from the project would have more than justified the public investment if the plant were not shutting down.
“It’s not 1,000 people, it’s more like 5,000 people, the economy driven, the taxes people pay that work there, people that buy cars, buy clothes, buy food, the Teamsters that drive the trucks,” he said. “I don’t know how to put a dollar price on it.”
In 2012, there was no significant opposition to the deal Brady brokered. That wouldn’t be the case in today’s political environment, said Joseph McLaughlin, director of Temple University’s Institute for Public Affairs.
“The view at the time was, we used to be a great port and a great manufacturing city and the world changed dramatically against us, but now it looks like we might be able to recover at least some of that past,” McLaughlin said.
McLaughlin pointed to the increased focus on fighting climate change as part of the Democratic agenda and to the left’s souring on economic development spending that benefits corporations. There is also a sense, he said, that Philadelphia’s economy has improved to the extent that the city does not need to cling to every employment opportunity.
Still, McLaughlin said the deal was a good one, given what officials knew in 2012.
“Our problem isn’t that we’re not growing, our problem is that the growth is unequal. There’s more concern about the distribution of the city’s resources and the fact that we have this very high poverty rate,” he said. “A lot of these jobs were going to be very well-paying blue-collar jobs."