Consultants' flexible fees trouble critics; Advisers have stake in driving incentives as high as possible

THE BALTIMORE SUN

Pomona, Calif., wanted Familian Corp. so badly that it spent $3.2 million in incentives to get the plumbing supplier to pick up stakes and desert nearby Van Nuys.

Three-point-two million is what Pomona taxpayers gave.

What Familian ultimately got was less.

Unknown to Pomona officials, consulting firm Kosmont & Associates got a fee linked to the incentives in return for negotiating the highest benefits possible for Familian.

Such "pay for performance" is the most disputed facet of a little-known business: the incentives consulting trade.

"It's disgusting," said Jeff Finkle, executive director of the National Council for Urban Economic Development. "It's troubling that the benefits are not going to the business. Many communities hold their noses when they do these deals, anyway. To think a large percentage of it is going into the pocket of some profiteer ..."

As states have piled on economic development incentives, a multimillion-dollar industry has grown up to steer employers through the maze.

Many of the firms working for businesses also sell advice to states and counties, often recommending that they increase incentives to be competitive against neighbors. Critics say that's a conflict of interest that has helped to escalate the national incentives war. But the profession's most controversial aspect is the flexible fee, in which a consultant's extra compensation can run from 3 percent or 4 percent to as much as 30 percent of incentives or portions of incentives extracted from taxpayers.

Hidden agendas

Such an arrangement, critics argue, is an unethical kickback that inflates incentives, essentially steers public money secretly to the consultants and potentially compromises a consultant's advice.

"I feel a lot better when I'm dealing with a fixed-fee consultant. There's no hidden agenda," said Jim Mooney, a Valparaiso, Ind., consultant who represents communities in incentives negotiations.

Incentives negotiators who take performance bonuses defend the practice as routine compensation similar to real-estate and legal commissions.

"There are expenses to every transaction," said Larry Kosmont, head of the Burbank, Calif., firm that bears his name. "Everyone has overhead. Whether that overhead is defined as a flat fee or an hourly rate or performance bonus, people are basically going to get paid for what they do."

Kosmont's bonus for the Familian deal was in "the low six figures," he said, and depended on getting zoning changes and redevelopment approval in addition to a lucrative incentive payout. The bonus wasn't a percentage of the $3.2 million incentive, he said. Instead, it was a fixed fee that kicked in when certain targets were met.

Even other incentives consultants harshly criticize "pay for performance," which they said damages relationships with government officials and might induce a consultant to steer a project to the wrong place just to obtain higher pay.

"We negotiate incentives. We do not participate in any kind of kickback," said L. Clinton Hoch, director of location advice for DCG Corplan Consulting in West Orange, N.J. "It's sort of prostitution, in a way."

"Contingency fees in incentives are unethical," said Dennis Donovan, co-chief of the Wadley-Donovan Group, an incentives consultancy in Morristown, N.J. Fees linked to incentives' size are not an isolated practice.

Of 16 major incentives consultants interviewed by The Sun, five said their pay is sometimes linked to incentives' size: Arthur Andersen, Cushman & Wakefield, Kosmont, Mintax, and Julian J. Studley Inc. Another, KPMG Peat Marwick, is "trying to become more involved with fixed fees" but still works deals where "you revisit the fee" if the incentives don't reach a certain height, said consultant George Tobjy.

Another firm, Fantus Consulting, has taken incentives-tied pay in the past -- when it negotiated subsidies for BMW's auto plant in South Carolina, for example -- but not recently, said James A. Schriner, director of location strategies.

One firm declined to comment.

"I'm not saying we do or we don't," said James Semradek, head of Semradek & Co., a Boca Grande, Fla.-based site consultancy. "Personally, I don't think it's any of your business. It's something I really don't want to discuss."

Conflict of interest

Many consultants who work for private firms seeking incentives also sell advice to states or localities offering incentives.

Semradek did a study for North Carolina and Carolina Power & Light a few years ago. One recommendation, he said, was "that North Carolina improve their incentive package."

Incentives consultants who work for both states and companies raise ethical concerns, said Daryl Koehn, director of the Center for Business Ethics Studies at the University of St. Thomas in Houston.

"If they're negotiating incentives for the businesses and they're setting up the incentive structure [for states], I would begin to wonder if they were really acting in the best interest of either," she said. "It's a little bit akin to an attorney representing both sides in a divorce issue."

There are many examples of incentives consultants working for clients in both government and private industry. In one, Pennsylvania significantly increased its incentives a few years ago after Fantus Consulting analyzed the state's economic strategy.

Fantus, now a unit of Deloitte & Touche, "identified some of the tools that we didn't have at that time," said Steve Kohler, head of the state's economic "Action Team." "One of the things Pennsylvania did not have was the ability to provide grants."

Now Pennsylvania awards millions in cash grants each year to companies arriving or threatening to leave. One recent recipient is Haribo, a German candy maker getting $635,000 in grants and tax credits for building a plant in Pennsylvania.

Haribo's adviser: Fantus.

Consultants' defense

Maryland has provided business for site consultants selling advice to both government and industry. Both Howard and Calvert counties have hired Wadley Donovan as an economic development consultant. For Howard County, Wadley addressed mainly marketing issues, not taxes and incentives. In Calvert, Wadley urged the county to scrap its tax on manufacturing equipment, which it did.

Consultants representing both states and industry defended the practice, saying that they scrupulously pursue the best interests of whichever client they have at the time and that recommendations about incentives are only small aspects of broad state economic strategies.

"We are there to serve our client, but we have an equally good relationship with the states and the communities that we work for," said Semradek, who said his firm does relatively little government work.

"It doesn't matter who you've done the study for," Donovan said. "The client always drives the decision."

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