$7 million buys Pa. jobs for Md.; One firm's deal: How Rite Aid got tax breaks and put its plant where it probably would have gone anyway.

THE BALTIMORE SUN

When managers from Rite Aid Corp. flew into Harford County on a helicopter and pored over maps on the hood of a Ford Crown Victoria, they weren't seeking just flat land and wide roads for their distribution warehouse.

They were looking for money. The drugstore executives wanted Maryland taxpayers to write a big check to help pay for the warehouse.

And they had a game plan to get it.

What happened next shows why many economists and policy experts want the federal government to call a truce in what some call the economic civil war -- the competition in grants, exclusive tax cuts and other business subsidies that has gripped state governments.

By pitting Maryland against Virginia in a politically charged giveaway contest, Rite Aid obtained millions of dollars in grants and tax breaks last year that weren't available to other businesses.

Maryland won the warehouse and its 850 jobs -- but Rite Aid's secret, two-stage auction prompted the state to pay almost double what Virginia was offering, documents, interviews and e-mail records show.

Most of the jobs are coming from Pennsylvania and West Virginia, where Rite Aid is closing warehouses and laying off longtime workers.

Rite Aid's Maryland facility, which recently opened, is getting $7.1 million in Maryland incentives, including a low-tax "Enterprise Zone," created for the company in the Harford County farm field where the plant was built.

For what? For eliminating hundreds of Pennsylvania and West Virginia jobs. And, many interviews show, for putting the new distribution center where it probably would have gone anyway.

Because Maryland is much closer to most of Rite Aid's stores than the Virginia site, "I really felt Rite Aid's interest was in the [Interstate] 95 corridor" in Maryland, said June Wilmot, economic development director for Winchester and Frederick County, Va., and a key participant in the negotiations. "I know one thing about distribution facilities: If you're out of the transportation radius, you're really at a cost disadvantage."

Rite Aid declined several requests for comment. But documents and interviews reveal the inside story of its deal.

It is a deal that is absolutely routine -- repeated hundreds of times a year as states have piled on giveaways and companies have exploited them. But it shows much of what critics find alarming in the economic war: soaring bids, taxpayer-subsidized layoffs and, for the companies, huge subsidies for conducting business as usual.

"Sometimes the incentive is enough to sway a decision; usually it's not," said Don Carrington, a fiscal analyst with the John Locke Foundation in North Carolina and a former economic development official. "I think they're often like gift certificates given to people at the checkout line once they've already made their decision to buy something."

Maryland suffers fiscal needs common to many states: subpar schools, crowded roads in need of repair, police shortages, the homeless. Why would its leaders donate $7 million to a drugstore company that made a $144 million profit last year and needed to be in the state anyway?

'Pillage and plunder'

On Oct. 18, 1996, a nine-page letter from Rite Aid's real estate broker scrolled from Virginia and Maryland fax machines. It got quickly to the point.

"The company is looking for help from state and local government to reduce the substantial site acquisition, construction and work force recruitment and training costs attendant to this project," the letter said. "Please identify the financial incentives available" from taxpayers.

By now, government officials were getting used to these queries.

Like many states, Virginia and Maryland had grown more aggressive in the economic civil war. They had suffered painful losses to states with bigger incentives checkbooks, and now they were building their own reputations for corporate subsidies.

Each had a governor who advertised himself as "pro-business" and who delighted in corporate groundbreaking and ribbon-cutting ceremonies.

Virginia Gov. George F. Allen had bragged the previous May about "transforming the economy." Virginia legislators had tripled the state's industrial giveaway pot a few weeks earlier after an Allen Cabinet member warned that "North Carolina and Maryland will be watching" the vote, hoping "to pillage and plunder Virginia's jobs."

Maryland Gov. Parris N. Glendening wasn't just pro-business; he called himself "unabashedly pro-business."

He had quadrupled Maryland's "Sunny Day" corporate inducement fund after incentives pulled a Starbucks coffee warehouse across the border to Pennsylvania.

In recent months Glendening had provided more than $10 million to Staples Inc., Saks Holdings Inc. and McCormick & Co. All were building distribution centers in Maryland, drawn by wide highways, the port and proximity to big cities.

Both states knew they were in a horse race. Rite Aid, based in Camp Hill, Pa., made sure to tell them there were two "prequalified" finalists.

"From very early on," Virginia was aware of Maryland's interest, said G. William Bailey, who was national project manager for the Virginia Economic Development Partnership, that state's business recruitment agency.

The result, everybody involved knew, would be an interstate bidding war, a contest in exclusive grants and one-company tax discounts.

Such a competition "is good business sense on the part of the companies," said Kate McEnroe, an Atlanta-based incentives consultant not involved in the Rite Aid project. "The kind of money these companies are investing, if they were spending it on anything else, we would think it absurd not to negotiate for the best deal, not to take competitive bids."

Over the fall, state employees on both sides of the Potomac prepared their giveaway pitches: zoning research, incentive preparation, courtesy calls to politicians.

With 850 jobs and $63 million in investment promised, Rite Aid's warehouse was guaranteed to fetch public officials' attention.

Heading toward $12 billion in sales last year, the chain had outgrown its system for getting Prozac, Tylenol, shampoo and candy to shoppers. By consolidating into fewer but bigger shipping centers, such as the one offered to Maryland and Virginia, Rite Aid could get the room it needed, install new sorting technology and cut costs.

Governors in both states contacted Rite Aid. Glendening wrote a personal letter to Rite Aid Chairman Martin Grass, who had donated $4,000 to Glendening's campaign two years previously and whose wife, Jody Grass, would give $4,000 to Glendening's 1998 campaign.

A dinner at Josef's in Fallston to discuss routine building permits included Harford County's top official, then-County Executive Eileen M. Rehrmann.

"Obviously, we pulled out all the stops," said Paul Gilbert, who was chief of economic development for Harford County at the time. "We said, 'It can't go out of Maryland.'"

"It was a project that any community would like to have and any state would like to have," said Virginia's Bailey, who is now economic development head in Prince George County, Va.

'Doesn't really jibe'

The bids went out Christmas Eve.

Virginia, the city of Winchester and Frederick County offered Rite Aid $3.1 million, including a $400,000, unrestricted grant, $1.1 million for worker recruitment and training and $763,000 in tax cuts, according to documents obtained under public information laws.

Maryland's proposal was even better: $5.2 million in state and local incentives, including $1.5 million in "Enterprise Zone" tax credits available to businesses in economically distressed areas.

There was one problem, however: Rite Aid's preferred site wasn't in an Enterprise Zone. But Harford County officials promised to fix that. At Rite Aid's request, they'd have the state draw new boundaries so the property would fall inside a zone and qualify for the tax breaks.

Such a practice "doesn't really jibe with why Enterprise Zones were designed" and would be prohibited in many states, said Michael Allan Wolf, director of an enterprise zone research institute at the University of Richmond in Virginia. Zones are supposed to draw jobs to a previously identified, obviously needy area. In creating custom zones like Rite Aid's, "we've really lost the notion of this being a geographically targeted program," Wolf said.

Rite Aid also asked Virginia for a new Enterprise Zone, documents with the Virginia Economic Development Partnership show. The state refused.

Both Virginia's and Maryland's offers were "a lot more generous than they would have been 10 years ago," before incentives wars escalated, said John Skowronski, an incentives consultant in the Parsippany, N.J., office of accountants Grant Thornton International.

But not generous enough.

On Jan. 15, 1997, Rite Aid Senior Vice President Wayne Gibson called Virginia's Bailey with the news.

Virginia's incentives were more than $1 million behind Maryland's, Gibson said, according to notes Bailey made of the conversation. But we're giving you an opportunity to enhance your bid and catch up, he said.

Bailey: How much did Maryland offer? Can you give me a target?

Gibson: No. But if you respond with a better deal, we might be able to give more guidance later.

Bailey knew what he had to do:

"I would suggest that we get on a conference call with June Wilmot and discuss where we can come up with more money," he said in an e-mail to his boss, referring to the Winchester/Frederick County economic development director.

Similar conversations were heard a few dozen miles northeast, where political pressure for a Maryland victory was reflected in a January Washingtonian magazine story titled "Job Wars: George Allen chalks up some big wins as Parris Glendening tries to gain solid footing."

Virginia was upping its offer, Rite Aid told Maryland officials. Besides, Maryland had given Staples' warehouse a package of more than $6 million, Rite Aid pointed out to both states. Surely Rite Aid was worth "the Staples deal."

Maryland, too, was getting "the opportunity to enhance its bid."

It grabbed the chance.

Virginia drops out

In late 1998, Rite Aid opened a cavernous distribution center near Interstate 95 in Harford County.

The $7.1 million incentive package it got from Maryland is $1.9 million more than the state's initial offer. It is almost twice as high as Virginia's final bid of $3.8 million, a bid substantial enough for some Virginia officials to start calling the Rite Aid project "Operation Slam Dunk."

Maryland's incentives include $400,000 in training grants; a Sunny Day grant of $2.25 million; another state grant of $850,000; $400,000 for road rights and water-line extensions; $1.7 million in state job-creation income tax credits; and $1.5 million in Enterprise Zone tax credits. Some grants would convert to low-cost loans if Rite Aid fails to meet its expected employment targets.

The Enterprise Zone credits could end up as high as $2.6 million, according to an internal Harford County document.

Such a deal "is on a pretty middle level, a little on the high side" for an 850-job project like Rite Aid's, said George Tobjy, an incentives consultant with KPMG Peat Marwick in New York. "We've seen bigger."

Middle level or not, it was too rich for Virginia, officials there said.

"We said, 'OK, this is a good deal, but there is a point beyond which we're not going to go,'" said Wilmot. "Don't ever forget the word 'economic' in economic development. How can you give away the tax revenues that are going to pay for education and training when the company's going to turn around a year later and say, 'Why can't you supply us with trained workers?'"

Maryland officials defended their package.

Rite Aid's tailor-made Enterprise Zone is close enough to a pre-existing Aberdeen-Havre de Grace zone to justify the resulting tax breaks, said Gilbert, the former Harford County official. He's now economic development director in Cecil County.

"A project that might [assist] the creation of a thousand jobs -- it does just what an Enterprise Zone is supposed to do," Gilbert said.

While Maryland's offer was much higher than Virginia's, "we did not overbid," said James Fielder, Maryland's former deputy secretary of economic development and a key player in the Rite Aid deal. "The economic impact is so strong when you create 850 jobs and you have an investment of $63 million" that it repays the incentives through income taxes of new employees, equipment taxes, property taxes and so forth, he said.

"If that facility stayed in business only one year, we would still be in a positive situation," Gilbert said. "The new taxes, the new direct taxes, would actually exceed all of what we would be on the hook for."

But judging giveaways by measuring them against the benefits of new jobs misses the point, critics say. States shouldn't corrupt their tax structures with special deals, they argue.

New jobs bring economic costs, too -- for schools, roads, police and fire services. Special corporate handouts hurt governments' ability to pay those costs. And sweetheart deals are unfair to all other taxpayers: They have to pay more.

The simple appearance of new revenue doesn't prove the benefits of incentives, critics argue.

"Incentives do represent very steep tax cuts for very specific firms," said Sam Staley, vice president at the Buckeye Institute for Public Policy Solutions, a Dayton, Ohio, think tank. "Why does the firm that's proven it's footloose and willing to move every 10 years qualify for a tax break, and the guy who runs a dairy and has stayed in the same place for 100 years has to foot the bill?

"You don't know how many of these jobs would have been created anyway," he added.

In Rite Aid's case, probably 850.

Virginia, it turns out, was a long shot to get the warehouse all along.

Off Interstate 81 in the Shenandoah Valley, Rite Aid's proposed Virginia site is about 100 miles farther than Harford County from the large majority of stores that Rite Aid's warehouse supplies, according to interviews, documents and regulatory filings.

That's a huge handicap, experts said.

"There are far more stores that they have that are north of the [Washington] beltway than south," said Jack Kuchta, a vice president with Gross & Associates, a Woodbridge, N.J., firm that bid unsuccessfully on the interior design of Rite Aid's project. "A truck costs about $1 a mile to operate." With an extra 100 miles to Virginia, "that's $200 per day per truck" round trip. "And they've probably got 70 trucks on the road a day. So that adds up over time."

Up to millions annually -- enough to wipe out Virginia's proposed giveaways in a year or two.

For a company like Rite Aid, focused on Northeast markets, "any time you're on the south side of that [Potomac] river and you've got a lot of trucks running, you've got a problem," said Mike Mullis, a corporate site expert who has handled several projects in Harford County, including Frito-Lay's plant and distribution center.

Maryland's advantages over Virginia are "significant," said Thomas Craig, president of LTD Management outside Philadelphia, another distribution consultant.

"That extra hundred miles means the inventory isn't in a store. It's on a truck. You want it in the store."

Winchester's Wilmot wasn't surprised by where Rite Aid landed.

"There's one thing we can't overcome," she said, "and that's being 'X' miles away from where they wanted to be, transportation-wise."

Subsidizing job layoffs

On March 21, 1997, Glendening announced "wonderful news for Maryland." Rite Aid was bringing 850 "family-supporting jobs" to the state, he said. It was "one of the most significant job-creation announcements in the last five years."

He left out a few details, how-ever.

He didn't mention how expensive Maryland's Rite Aid bid was compared with Virginia's, or how Rite Aid probably would have come to Maryland without incentives.

He didn't point out that the news was not wonderful for hundreds of workers in Harrisburg, Pa., where Rite Aid shut down an older facility in April, and in Putnam County, W.Va., where a warehouse will be closed next year. They're losing their jobs, and their inexperienced replacements are being trained using $400,000 in Maryland taxpayers' money.

And Glendening made no reference to Don Bixler, a longtime truck driver for the Harrisburg warehouse, who was making more than $45,000 a year before he was laid off April 14. Bixler's job is being handled by an outside contractor in Maryland.

"There are a lot of senior people, people with 20, 30 years seniority here," Bixler said. "Most of the people have resigned themselves to the fact that there's nothing they can do about it. The people are in pretty good spirits, considering.

"I like my job. I really ... " he paused. "I've been there 22 years. ... I hate to see it go. Forty-seven years old. I've got to start over."

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