In 1995, the same year Avesta Sheffield made a half-billion dollars' profit, the steel company came to Maryland taxpayers, asking for a little bit more. xxIf Maryland would just ante up $1.1 million in special incentives, Avesta executives promised, the company's stainless-steel mill in Baltimore County would continue operations, make new investments and nearly double its work force to 350.
Maryland delivered. Gov. Parris N. Glendening took credit for the "rebirth" of the old factory, which once employed 1,500 and stamped out artillery shells during World War II.
It was not to be.
The mill stopped production last year, and last week Avesta put it up for sale. The jobs no longer exist, at least in Maryland, and Avesta still has a half-million of Maryland's dollars.
And at the same time that it was shrinking its Maryland work force, Avesta negotiated another round of incentives in Indiana worth hundreds of thousands of dollars -- partly for machinery and jobs taken from Baltimore County.
So goes the economic civil war: Governments in two states are poorer. A private corporation is richer. And the United States as a whole is no better off.
In the past decade, in the name of creating jobs and being "business-friendly," states have given companies such as Avesta billions of dollars in taxpayer-funded economic development incentives.
So common have these inducements become that they amount to a separate, sweetheart tax code, far more generous than the rigid brackets and schedules governing other taxpayers. By demanding incentives with the threat of moving jobs elsewhere, companies have learned to do what you can't: Haggle over their contribution to the public purse.
The deals are struck in secret, often hidden even from elected officials and frequently tinged with deceit by corporate executives. Once restricted mainly to state governments, they're now costing cities and counties billions of dollars, too.
For all their cost, corporate incentives add little to America's economy, critics contend. Incentives shuffle jobs among states, often promoting layoffs. They sap government treasuries. They boost taxes for others -- including other businesses.
What they don't do is create many jobs that wouldn't have ended up somewhere in the United States anyway. And, as the Avesta deal shows, often they don't yield much even for the governments that slash taxes and "win" jobs.
Maryland's government alone provides more than $50 million annually to dozens of selected businesses. Handouts from the state and its localities keep growing.
Marriott International's $44 million package this year was the state's biggest incentive deal ever, except those for sports stadiums. Two weeks ago Maryland's Supreme Court upheld $75 million in city tax breaks for a Baltimore hotel, legalizing the kind of tax concession here that has ravaged municipal budgets in Tennessee, South Carolina and elsewhere.
In a yearlong examination into the use of public funds to attract and retain businesses, The Sun interviewed scores of incentives recipients, real estate brokers, site consultants, legislators and economic development professionals across the country. It reviewed contracts, e-mail records, letters, court transcripts, tax records and other documents relating to incentives in a half-dozen states.
Bluffing for dollars
Among the findings:
* Companies routinely mislead government officials about their location searches, feigning interest in some sites simply to extract lucrative deals from the state they would have chosen anyway. As reported by The Sun this year, Marriott International chose Maryland over Virginia but asked Virginia officials to keep the decision secret so a worried Maryland would deliver the biggest possible giveaways. "This goes on all the time," said Alton P. Hatcher Jr., former chairman and chief executive of Pittsburgh-based Robertson Seko Corp., who admitted in a North Carolina court case that the manufacturing company bluffed to get incentives. "I think everybody knows this."
* Elected officials who approve or reject incentives are, at best, semi-informed about the projects they're voting on. In at least half of 24 Maryland deals examined closely by The Sun, legislators approved special giveaways for supposedly "at risk" companies that had already decided to locate or remain in the state. At least seven projects were well under construction when legislators voted on them. Two were finished and occupied.
* Consultants frequently get a secret percentage of the taxpayer subsidy they negotiate for corporate clients. Fantus Consulting broke new ground in 1992 when it received a lucrative fee tied directly to the $140 million in subsidies it negotiated for BMW's South Carolina auto plant. Such "pay for performance," now common, is "disgusting," unethical and expensive for taxpayers, said Jeff Finkle, executive director of the National Council for Urban Economic Development.
* Consultants hired to help states navigate the incentives battlefield are often the same people representing businesses in incentives negotiations. The Wadley Donovan Group negotiated taxpayer grants worth more than $1 million for Chubb Group and Avis Rent A Car System, which moved to the Norfolk, Va., area in 1995 and 1997. Last year, the region's local governments paid Wadley thousands of dollars for business recruitment advice. One of Wadley's recommendations: Offer more incentives.
* States use a flawed method to evaluate incentives' costs, assuming that jobs lured through taxpayer giveaways cause little or no population growth. That assumption is wrong, and it is leading high-growth states such as South Carolina into fiscal jeopardy as they underestimate future expenses of roads and schools even as they give away tax revenue.
* Companies and government officials often exaggerate the number of jobs gained and the level of wages -- the politicians, to reap political credit; the companies, to ensure they receive the incentive. Medical Consumer Media, which moved to Virginia in 1997 with 12 employees, was promoted in a state press release as a company "expected to create 100 jobs." This claim was written after a state spokeswoman, Jill Lawrence, urged a colleague in e-mail that "the higher we can stretch the job and investment numbers, the better." More than two years later, Medical Consumer employs 64 people.
Gov. Parris N. Glendening defends Maryland's incentives as a crucial economic weapon. Halting corporate giveaways would leave Maryland vulnerable to job raids by other states, he said. Some subsidies -- for companies in impoverished areas, for small, high-tech firms, for worker training -- can be "very good public policy," he said.
And he understands, he said, that businesses owe it to shareholders to demand available giveaways.
But Glendening quickly added that he's "concerned and frustrated" about incentives' growth and frequently talks to other governors who feel the same way.
"I think the whole system has gotten out of control," he said last week. "Companies put states and local jurisdictions in a horrible position. If you don't compete [by offering incentives], you lose. And if you do compete, you are often subsidizing companies that have huge bottom-line profits. What we really need is some type of change in the rules of the game."
Nationally, the debate over incentives has been dominated by enormous giveaways to sports teams and auto plants. Maryland paid more than $300 million for two football stadiums and a baseball park. Mercedes-Benz got more than $200 million over several years for going to Alabama. Chrysler Corp. got $200 million over time for keeping its Jeep plant in Toledo, Ohio, last year.
But those packages are dwarfed by the collective heft of thousands of smaller, unscrutinized deals.
Together, states are providing more than $3 billion each year in exclusive corporate grants, tax cuts and loans, unavailable to most businesses, a state-by-state survey by The Sun found. That doesn't count billions from localities.
Two-thirds of the states created incentive programs in the past two years or increased money for existing ones, The Sun found.
"I'm hearing that everybody's going to cooperate, that the governors are saying, 'Enough,' that 'We're not going to do it anymore,'" said Kate McEnroe, a corporate location consultant based in Atlanta. "I'm not seeing that."
Business incentives take many forms: tax discounts, payroll rebates, cash grants, training funds, low-cost loans and leases, free buildings, free land. Usually they're tied to corporate expansions, relocations or renovations. They are always paid by taxpayers. They always cut taxes, directly or indirectly, for a select class of mobile, relatively big employers who have learned that state and local tax laws don't have to mean what they say.
One local example: The Baltimore Sun Co., parent of The Sun, benefited from millions of dollars in road improvements and other subsidies when it opened its printing complex in Baltimore's Port Covington section in 1992.
"It's a vast, zero-sum game," said Robert Reich, a former labor secretary in the Clinton administration and now a professor at Brandeis University. When one state offers incentives, "every other state around it is under pressure to do exactly the same thing. They rob the public of funds that otherwise could be used to pay for better schools and roads."
To see what people across the political spectrum find reprehensible in the jobs war, consider Sunlite Casual Furniture Co. Sunlite negotiated more than $8 million in state incentives for what a local newspaper called "creating" 900 jobs recently in Paragould, Ark.
The jobs weren't created.
They were taken from Texas and Georgia, where Sunlite closed factories and laid off more than 1,000 experienced workers to cut costs and consolidate operations. The company hired inexperienced Arkansans as replacements -- and then billed Arkansas taxpayers for training them.
"It's no net gain for the nation here," acknowledged Joe Max Higgins, director of the Paragould-Greene County Chamber of Commerce.
That's the distilled case against business giveaways.
"I see it as one of the dumbest damn things to come along in government lately," said William Maready, a Republican lawyer who recently sued to stop North Carolina's awarding of incentives and lost. "I see it as bribery. And I see it as everybody losing."
Concern over "corporate welfare" has been growing for years, but much of the criticism has been speculative. Skeptics assumed that corporations weren't telling the whole truth about their site searches, that state officials weren't doing their homework, that other taxpayers were paying the price, that one state's gain was another's pain, that deals weren't turning out as advertised.
The evidence, often found in dusty government development files and tax ledgers, confirms their fears.
'Purely a ploy'
Bluffing about moving to other states is a routine trick for corporations seeking free money, interviews and documents show.
"I have seen instances -- I won't cite names -- where it was purely a ploy, where a company up and threatened to go to another state, and I don't think they had any intention of going there," said Ernest Pearson, a North Carolina lawyer who helps companies negotiate tax breaks. "They just wanted the incentives."
Despite Marriott's secret decision to scratch Virginia off its list this year while negotiating with Maryland, the company denies that its threat to move 3,500 jobs from Montgomery County across the Potomac was anything but serious.
Others scoff at that assertion.
"Marriott played this thing to the hilt," said Eric Smart, a partner at Bolan Smart Associates, a real estate consulting firm in Washington. "All their employees are already in Montgomery County. The thought of them taking all their employees over to Virginia and have them hang out on the American Legion Bridge [to Virginia] was pretty ridiculous. ... I don't think you have to be a cynic to see how leveraged and absurd that was."
Virginia economic development officials themselves concluded that Marriott played them for pawns.
"To me, this confirms that they were merely using us for leverage" against Maryland, Virginia official Bob Gibson wrote to a colleague the day Marriott rejected them. The Sun obtained a copy of Gibson's notes.
Alton P. Hatcher Jr., the former chairman of Robertson Seko Corp., admitted to bluffing for bigger incentives in a sworn deposition for a North Carolina court case.
When his company was moving a plant to Dickson, Tenn., in 1990, "we had about 10 west Tennessee municipalities chasing us with all kinds of offers, although we knew through the whole process it was going to be Dickson," Hatcher testified. "As bad as it sounds, we used the others to get what we could out of where we were going in the first place."
And when Hatcher was responsible for locating a Varco-Pruden plant in North Carolina, "we narrowed it down to Kernersville rather rapidly," he testified. However, he added, the company "spent a lot of time in Siler City and Asheboro and other communities hearing their story, primarily to use as leverage to get all we could" from the preferred location.
Nobody knows how many incentive deals are built on bad faith and dubious assumptions about corporate intentions. But evidence casting doubt on companies' threats to go elsewhere isn't hard to find.
Magellan Health Services got approval last December for $2 million in Maryland incentives to put its headquarters and 600 additional jobs in Columbia. According to a letter that legislators received from state development officials, Magellan needed big subsidies because it had considered going to Utah or Missouri.
If so, that was news to economic development officials in those states.
In Utah, Magellan "was so under our screen that we missed it. We didn't actively work on it," said Richard R. Nelson, director of the state's incentive funds. Likewise, in Missouri, "the state was not involved," said economic development spokeswoman Kristi Jamison. "We hadn't been contacted."
Charles Kanach, executive vice president for Magellan's mental health unit, said he spoke to Missouri officials by phone and visited with Utah development officials while in town on other business. He didn't remember their names.
"An existing relationship" with Maryland development officials led naturally to a deal in this state without much contact elsewhere, Kanach said. Incentives, he added, "played a factor" in the decision to locate in Maryland.
Even when firms are frank about their preference for a state, they pocket lucrative incentives anyway from politicians eager to be "pro-business" and from agencies created to give away money.
Caulk-maker DAP Inc. received a $425,000 conditional grant from Maryland and a $250,000 loan, of which $75,000 may be converted to a grant if employment goals are met, from Baltimore for moving its headquarters from Ohio to the city last year.
"None of them contributed to us coming here," said John McLaughlin, DAP's chief executive. "We did receive some, but we would have come without them."
James Fielder, who was Maryland's deputy economic development secretary when the DAP deal was negotiated, defended it. Companies' true intentions are rarely clear during negotiations, and calling apparent bluffs can be risky, said Fielder, now a vice president at Towson University.
"I don't think that's what my job is," he said before he left the agency. "I don't think my job is to be so Scrooge-like that companies will choose to go elsewhere."
Little or no return
Many states' economic development "victories," big and small, have gone badly wrong.
Dozens have paid for jobs that disappeared, as Avesta Sheffield's did, or never showed up.
Fruit of the Loom had obtained more than $10 million in tax breaks from Louisiana before it closed several plants there and laid off more than 4,000 in the past three years. Rite Aid Corp. is laying off 600 and closing a West Virginia distribution center that received more than $2 million in low-cost loans, which have been paid back. Many of the jobs are coming to Maryland -- where Rite Aid is getting $7 million in new incentives.
Fulcrum Direct shut down in New Mexico and laid off 700 workers last year after costing the state $1 million in training funds.
This year Technimar Industries folded in Cohasset, Minn., after saddling local taxpayers with $3 million in incentives liabilities. Technimar never produced one job, but Cohasset homeowners will get socked with a temporary property tax increase next year of as much as 50 percent to pay its bad debts, said Mayor Jeff Walker.
Montaire Corp.'s beef-processing plant in Salisbury, Md., shut down in late 1995, two years after it got $4 million in state-backed loans. Maryland is still trying to get the money back.
Maryland legislators approved $500,000 in 1997 "for the purpose of assisting in the retention of the headquarters of Fidelity and Guaranty Life Insurance Co. in Baltimore City," according to state documents. Earlier this year F&G; Life was preparing to move out of the city to Baltimore County -- with economic development officials' approval and with its incentives intact.
After The Sun questioned the move, F&G; Life decided to stay in Baltimore.
Last year the Maryland Casualty unit of Zurich Financial Services Group got approval for more than $6 million in subsidies from Baltimore and Maryland "as an inducement to persuade Maryland Casualty to retain its headquarters operations in Baltimore City," according to a memo prepared by state officials for legislators. Last January Zurich announced it would move large portions of the Maryland Casualty operation -- including some headquarters functions and hundreds of jobs -- to Schaumburg, Ill.
As a result, Maryland has revoked its incentives of more than $1.5 million. Baltimore, however, is committed to give Zurich $5 million in special breaks on property taxes over 25 years. Baltimore economic development chief M.J. "Jay" Brodie said Zurich is still obligated to maintain 500 jobs in the city.
In December, auditors found that $2.3 million in Maryland economic development funds had been invested in a radio station chain in California and a food-processing business in Texas. Helping economies of states on the other side of the country "is contrary to the ... mission" of Maryland's economic development officials, state auditors noted dryly.
The former Parks Sausage plant in Baltimore has been perhaps the least productive money hole for Maryland taxpayers.
Sold this year to Philadelphia-based Dietz & Watson, the plant has flirted with bankruptcy for years and recently received its third round of incentives in a decade after failing to reach its goals on previous packages. Parks has cost taxpayers more than $2 million, and Maryland recently agreed to give an additional $750,000 to Dietz & Watson if it employs 150 people by 2001.
Of all recipients of Maryland largess, however, only Avesta Sheffield collected incentives in two states for some of the same operations.
'Business is difficult enough'
When business setbacks compelled Avesta to cut employment in Essex and move some production to Indiana, the steel maker refused to return a $1.1 million Maryland grant and got angry when the state sued to get it back.
"Business is difficult enough," Roy Cooke, head of Avesta's U.S. operations, said in an interview last year. "The last thing we want to do is be spending time on something like this." Avesta eventually agreed to return $600,000 of the $1.1 million after it mothballed the Essex mill last year.
Cooke denied that jobs were moved from Maryland to Indiana.
But Avesta's own press release said: "The production of plate in Baltimore will be transferred to New Castle, Indiana." Indiana tax records show that three steel manufacturing machines were switched from Essex to New Castle. There, Avesta received a lucrative tax abatement for the equipment in June 1997, five months after it started to lay off employees in Maryland.
"They lied from the get-go," said Gene Schroeder, 63, a now-unemployed Avesta forklift and bulldozer operator. He ought to know; he helped load the Indiana-bound equipment on trucks. "It's tough for a lot of these guys. They're in their 50s, and all they knew all their lives was the mill."
Cooke said the transferred equipment was relatively unimportant. "We didn't move the mill," he said. Indiana's Henry County values the equipment at more than $1 million.
And those are just the deals that didn't pan out.
States spend billions more on incentive packages that hit promised job and investment goals but which add nothing or next to nothing to their economies.
Governors everywhere now take credit for "jobs retained" through incentives. What that means: A company threatens to leave, receives tax breaks and then keeps jobs where they already are.
Maryland is a champion in job retention. In the past four years, it has agreed to provide more than $50 million to companies that were already here -- just to keep them from leaving. And every time a giveaway is announced, established Maryland companies clog the phone lines at the Department of Business and Economic Development, looking for their own cash.
Employers even get lavish subsidies these days for shrinking. Maryland is giving Bethlehem Steel Corp. a $5 million conditional grant for cutting 900 jobs in Baltimore County while keeping 4,400 others.
Many subsidized employers don't pay workers very well.
MEDO Inc., a Quaker State Corp. unit that makes car air fresheners in Baltimore, got approval for more than $800,000 in conditional grants and other subsidies from Maryland and Baltimore last December even though more than 100 of its 340 jobs paid less than $6 an hour, documents show. That violates state guidelines recommending that subsidy-linked jobs pay at least 150 percent of the minimum wage, which was $7.73 at the time of approval.
State officials granted MEDO an exception, noting the need to preserve inner-city jobs. But last summer, after it had moved machinery to Baltimore, Quaker State got a competing giveaway offer from Ohio and is negotiating to keep jobs there instead of expanding in Baltimore, said Brian Sokol, president of Quaker State's Blue Coral division.
John H. Harland Co., which got $1.1 million in grants for a Glen Burnie check-printing plant in 1997, paid 72 of its 250 workers $8.75 an hour at the time of approval and 81 workers only $7.50 per hour.
Solo Cup, which got a $500,000 grant for a plant in Harford County, paid many employees less than $8 an hour when it was approved in 1997.
Bending the rules
"If you're the chief financial officer of a company and you don't try to extort a state, the shareholders have some claim of action against you. You'd be a fool," said Richard La Vay, a Republican state delegate in Montgomery County. "I know people personally who have gotten Sunny Day [incentive] funds who had no business getting it."
By many accounts, states are trying to improve giveaway enforcement and analysis. Maryland and many states, for example, now require firms to sign contracts requiring repayment if job and investment goals are missed.
But, as shown by the recent F&G; Life, Zurich and Parks Sausage deals, states and localities are still willing to bend the rules or offer new incentives when companies don't meet promises. General Motors, for example, can get out of repaying a $2.3 million state grant, approved in July, if "extenuating circumstances" prevent it from hitting job targets on time at its planned Baltimore County plant, according to the contract.
What's worse, states don't monitor job levels.
Last year, Maryland officials forgave businesses from repaying $4 million in economic development incentives but never even verified whether the firms had created the required number of jobs, state auditors found. Economic development officials said they were installing a verification system while the audit was being conducted and have one now.
Richard C. "Mike" Lewin, Maryland's economic development secretary, talks about incentives as "investments" and emphasizes that his department is careful to aim them at "companies within Maryland that are on fast-growth ramps."
But even better design and execution of incentives won't fix the fact that negotiable tax laws, crafted in secret, are increasingly funneling public money into private pockets, critics argue.
Incentives aren't "investments," opponents say. Government officials like to show that giveaways are eventually "paid back" with the reduced taxes that new corporations bring. That's not the point, critics say. What ought to be looked at is the billions that states are losing, not the sharply reduced taxes that they do eventually collect.
While some defend incentives as healthy economic competition, critics claim that corporate handouts represent the free market in action about as much as bribing a lawmaker does. Both involve special payments shrouded by secrecy; both disrupt the rational process of allocating resources; both violate the ideal of equal treatment under the law.
Indeed, incentives are unfair to firms that play by the rules and compete against subsidy winners for workers, customers, land and capital, critics argue.
"A lot of existing firms have not figured out why incentives hurt them," said John Hood, president of the John Locke Foundation, a conservative North Carolina think tank. With incentives, "existing firms essentially are going to pay for other firms to come in and bid their wages up."
A tale of three companies
Maryland provides more than $50 million in economic development incentives each year to dozens of companies. Marriott, DAP, and Parkes Sausage all received incentives from localities as well as the state.
Sector: Hotel Management
1998 profit: $390 million
Incentives: $44 million, Maryland's largest corporate giveaway ever, except for sports stadiums.
Background: Threatened to move 3,500 workers to Virginia if it did not receive tax breaks.
Sector: Caulk manufacturing
Incentives: $425,000 and a $250,000 loan ($75,000 of which may be converted to a grant)
Background: The company was brought last summer by RPM Inc., maker of Rust-Oleum. The sale will have no impact on the company's Baltimore employment or incentives, according to DAP officials.
Sector: Meat processing
1998 Profit: None
Incentives: More than $2 million
Background: Recently sold to Dietz & Watson, the plant had been close to bankruptcy for years and now is on its third round of incentives.
ABOUT THIS SERIES
Today: Pitting state against state, companies are increasingly negotiating their own private tax laws.
Tomorrow: How one firm laid off hundreds and scored $7 million from Maryland taxpayers at the same time.
Tuesday: The damage. Corporate giveaways have ravaged one state's tax base when it can least afford it.
Wednesday: Incentives are financed by taxpayers, but taxayers are usually the last to find out about them.
Pub Date: 10/10/99