Taxpayers get no voice in billions for businesses; Governments side with companies seeking economic assistance in secrecy, with some officials not knowing what they're voting on.


It's Tuesday night in Papillion, Neb., time for a public hearing on ADT Security Services' plan for a 700-job telephone center in America's heartland.

ADT has many demands. It wants a 25 percent, $125,000 discount on the land, which is owned by Papillion, an Omaha suburb. It wants the site rezoned -- the subject of that night's hearing. It wants taxpayers to cover $1 million in street and utilities expenses. It expects millions more from the state in tax credits.

And one more thing. ADT wants to stay anonymous. Even though the home security company seeks millions in public dollars, it doesn't want taxpayers to know anything about its project until it's too late to stop it.

Papillion officials go along, and the result is an amazing spectacle, a "public hearing" in April in which residents were invited to comment but weren't told just what it was they were supposed to comment on. Even the Papillion planning commissioners didn't know ADT's identity, but that didn't stop them from approving the rezoning, and it didn't stop ADT from getting the other incentives, too.

"There were a lot of people with big grins on their faces, playing 'I've Got a Secret,' and the public is supposed to be making an informed comment," said Mike Riddle, a commissioner who voted for the rezoning but was disturbed by the process. "We don't really think that's a good way of doing business."

Maybe not. But the kind of secrecy surrounding the ADT case is typical when state and local governments give economic development incentives to corporations, and it ranks among the most compelling reasons for the federal government to step in and ban state and local handouts, many analysts believe.

As special, narrowly targeted incentives to private companies have swollen to more than $3 billion a year from states alone, public disclosure and discussion of specific deals is scant and shrinking.

A week ago in Maryland, economic development secretary Richard C. "Mike" Lewin proposed scrapping legislative oversight for all but the biggest business-incentive giveaways, a move criticized as "a step backward" by Senate Republican leader Martin G. Madden.

"The taxpayer who foots the bill very rarely gets a place at the table when these negotiations are going on," said Paul McMasters, First Amendment ombudsman for the Freedom Forum media foundation in Arlington, Va. "Public officials routinely cite the need for secrecy as a precursor to closing the deal. And then after the deal is already closed, the need for secrecy is cited again as a way of negotiating the next deal."

How many jobs are created by an incentive package? Would an employer create jobs without incentives? Is a subsidy fair to other companies in the same industry?

Taxpayers and policy-makers need honest answers and free debate to make smart decisions. What they usually get -- from politicians eager to cut ribbons and corporations interested in special handouts -- is much less. And several states besides Maryland are moving to block public inquiry into incentives deals even further.

Economic development officials argue that it's unrealistic to expect sensitive incentives deals to be aired in open legislature. But as giveaways have increased, so have the public dollars changing hands under wraps.

"There are lots of reasons to believe we need a lot more sunshine," said Greg LeRoy, director of Good Jobs First, a Washington nonprofit group doing incentives research. "A number of state auditors and comptrollers have done studies on various economic development programs and have had very critical findings on wasted money and outcomes not being monitored and political favoritism tied to giveaways."

Uninformed votes

Confidentiality shrouds every step of the incentives process.

Corporate giveaways are crafted in secret by a few professionals reporting to a governor or mayor. They're generally approved with little or no debate by small committees of legislators or appointed officials -- often after a company has already started construction on its project.

In many states, incentive deals are exempt from public disclosure laws. But it's not just the public who's kept in the dark.

Lawmakers themselves are often grossly uninformed about the grants and subsidies they're voting on.

Commissioners in Colorado's Jefferson County approved a $3 million tax cut last year for Nike Inc. without a public hearing and without even knowing the company's identity.

Maryland's economic development department routinely forbids, in writing, "any public communication" by the incentives candidates, including "letters to legislators," without the department's approval. Why? "Erroneous or premature publicity could affect the composition and approval of the incentives under discussion."

In other words, the less public debate, the better.

Companies seeking handouts learn that the legislators elected to shepherd taxpayers' money often aren't tthe people who matter. Instead, if the companies can sell the governor and a few deal makers in a state's development agency, elected officials will almost always fall into line.

Maryland's Legislative Policy Committee has voted on dozens of "Sunny Day" incentive packages worth almost $100 million in the past five years. Committee members can remember none that was ever rejected outright and only a handful that were withdrawn or delayed.

"Jack Cade always used to say, 'Hey, we're going to the Legislative Policy Committee. Grab your rubber stamp,'" said Del. Robert H. Kittleman, a Howard County Republican who sits on the committee and often votes against incentives. "Think about the process. Think about the negotiating. It's all semi-secret."

He was referring to state Sen. John A. Cade, a Republican who sat on the committee and who died in 1996.

Over and over again, the Legislative Policy Committee, a joint panel of senators and delegates, votes on deals that are effectively signed, sealed and delivered already.

In December 1997, the committee approved a $500,000 conditional grant for Fidelity and Guaranty Life Insurance to move its offices to downtown Baltimore's Pratt Street. But F&G; Life had moved to Pratt Street in September 1996, more than a year previously, "begging the question of whether the company actually needs the state's assistance to complete its relocation," according to analysis by Karl S. Aro, director of the Maryland Department of Legislative Services.

Aro's study, done just before the LPC vote, found the timing "troubling." The LPC approved F&G; Life's package anyway.

Approval after the fact

In at least half of two dozen Maryland deals examined by The Sun, companies receiving taxpayer giveaways had already decided to locate or remain in the state by the time the LPC considered their projects. In at least seven, the companies or their landlords had already begun construction. In some cases, including F&G; Life's, they had finished.

For example, the LPC considered a $1.15 million package last December to keep Merkle Direct Marketing from moving 442 jobs from Maryland to Virginia and to grow to a total 1,083 Maryland jobs by 2003. But Merkle, based in Prince George's County, had scratched Virginia off its list and had moved into new Maryland offices in the summer of 1998. The LPC approved the grant anyway.

Maryland and Merkle are now renegotiating their deal, after the wages of some new Merkle jobs weren't high enough to satisfy its incentive agreement, said Robert Brennan, assistant secretary for finance of Maryland's Department of Business and Economic Development.

In June, the LPC agreed to lend MICROS Systems $1.2 million at 2 percent interest for moving its headquarters from Prince George's County to next-door Howard County. But at the time of the vote, the steel frames for MICROS' new home were already rising in Columbia.

'Not there early enough'

"We are not there early enough in the process," admitted state Sen. Barbara A. Hoffman, a Legislative Policy Committee member. She added, however, that the economic development department is doing a better job recently of keeping the committee informed of forthcoming deals.

"I hear about things as they begin to percolate," said Hoffman, a Baltimore Democrat. Still, she acknowledged that complete information on incentives -- generally six or eight companies at a time -- usually arrives only days before a vote.

How does she digest it all and vote intelligently?

"I'm a fast reader," she said.

A rare look at one corporation's attitude toward incentives came in a letter sent in 1996 by Watson Wyatt & Co., which was applying for $1.3 million in Maryland incentives to move its offices from Washington to Montgomery County.

When the Legislative Policy Committee took the unusual step of questioning the incentive package, Watson Wyatt executive Michael J. Malesardi fired off an angry note revealing a presumption about taxpayer grants that critics say is typical of both corporations and state bureaucrats.

"While we understood all along that this approval was a necessary step in the process, we were also clearly told that it was primarily a formality," Malesardi wrote James T. Brady, Maryland's economic development secretary at the time. "Decorum prevents me from writing what I really feel about this turn of events. However, I can state that we expect appropriate pressure will be placed on the LPC to abide by the terms of our agreement."

The Legislative Policy Committee eventually approved Watson Wyatt's package as proposed, although the company later decided, for unrelated reasons, that it didn't want the money.

At least Maryland tries to involve legislators in some of its business giveaways. In most states, The Sun's review showed, governors or economic development bosses can unilaterally dispense incentives without ever checking with law makers or voters.

Even after governors call news conferences and announce giveaways, the resulting information is limited and sometimes misleading.

"It was pretty puffy," said Don Carrington, an economist who helped write job announcements when he did economic development in North Carolina. "We'd get numbers out of the companies, but who could verify them?"

For example, when Internet firm Medical Consumer Media moved from Maryland to Reston, Va., in 1997, with thousands of dollars in Virginia-paid training assistance, former Virginia Gov. George F. Allen's press release declared: "Move creates 100 jobs." It went on to say in smaller print that Medical Consumer was "expected to create 100 jobs."

What it didn't say was that Medical Consumer had only 12 jobs at the time. Allen's public relations people knew Medical Consumer had only a few workers, but they optimistically inflated the company's size for his announcement.

"The higher we can stretch the job and investment numbers, the better," spokeswoman Jill Lawrence told a colleague at the Virginia Economic Development Partnership via e-mail obtained by The Sun. "The governor's office prefers at least $1 million and 100 jobs, but we understand that is not always the case."

Medical Consumer now has 64 employees. Company spokeswoman Heather Grant said a recent merger will push the employee count over 100, "probably by the end of the year."

In another Virginia case, Gov. James S. Gilmore III told voters last year in a press release that the state "successfully competed with locations in Maryland" for a Value City Furniture distribution center. Value City got a $350,000 Virginia grant.

Gilmore didn't tell people, however, that the "competition" from Maryland consisted of just a few phone calls from economic development officials to a Value City executive more than two years previously, according to state documents. Maryland never offered Value City any incentives, documents and interviews show.

Secrecy after the deal

It's not just negotiations that are done in the dark. States and communities shield information on corporate giveaways even after they're approved, signed and paid.

Privacy laws in almost every state keep the public from making sure companies hold up their end of a jobs bargain -- even though government agencies don't always blow the whistle when incentives recipients fail to deliver.

It took a formal complaint by the United Paperworkers International Union to get Illinois to revoke a special tax abatement in 1995 when A.E. Staley Co. failed to maintain its promised, 766-employee level in that state.

A confidential 1996 audit of Maryland's Department of Business and Economic Development, obtained by The Sun, showed that the state had completely lost track of a dozen companies that received $50,000 loans in the early 1990s. Two of the firms, Thinx Software of Virginia and Biological Waste of Pennsylvania, had never even created Maryland jobs, according to the audit.

Some states do much more than shield incentives negotiations from public inspection.

Florida, often praised for open government, seals all documents related to incentives negotiation for five years and bans public officials from commenting on pending deals.

"The company does the announcing," said Catherine Deans, spokeswoman for Enterprise Florida, the state's economic development wing. "We cannot talk until they do. ... It is drummed into our heads. We cannot violate it."

BrandsMart USA was ready to accept $1 million in Florida tax breaks to move 200 jobs from Miami to next-door Broward County last summer. The deal stopped only after Frank Nero, head of a Miami economic development group, investigated and protested about BrandsMart's apparent violation of a ban on using incentives to move jobs in-state.

"To move companies for the sake of a politician's announcement and to use taxpayer dollars for that is unconscionable," said Nero, president of Miami's Beacon Council. "We called them accountable to it."

But most officials in Nero's position don't investigate or don't protest when they find something amiss.

Economic development professionals contend that secrecy and privacy are crucial to one-company incentives negotiations.

Airing of giveaway offers would let other states make higher bids. Premature disclosure of corporate plans would upset employees, tip off competitors and drive up land prices. Companies can't wait for democracy's full deliberation, developers argue. "You cannot negotiate a real estate transaction in a public hearing format," said Richard W. Story, economic development director for Maryland's Howard County. "Even if [a company] were willing to subject themselves to the process, by the time you're through that process, they're gone."

State-employed economic development professionals say they can be trusted to rigorously evaluate incentives deals, that the bad deals are rejected long before they get to legislators.

"I can't tell you all the businesses that come in here" that are rejected for incentives, said Brennan, the Maryland economic development official. "We weren't born yesterday."

Even many critics of incentives concede that some secrecy is often necessary. But that's a terrific reason for states and localities to end special, targeted handouts, they say. Like gasoline and matches, private business deals and government should be mixed as little as possible.

Now that states are vying against each other in confidentiality and greased legislation as well as in giveaway size and volume, the federal government should restrict the practice, they say.

"The solution is, Congress just says no more of this stuff," said Arthur Rolnick, an economist and senior vice president with the Federal Reserve Bank of Minneapolis.

Rep. David Minge, D-Minn., has introduced a bill in the House of Representatives that would discourage such corporate favors by levying a high excise tax on them. Broadly available benefits such as road improvements, general tax cuts and training programs would be exempt; companies that got exclusive giveaways would essentially have to give them back through the federal tax.

"We're saying that you should be treating everybody equally under the tax code," Minge said. "When I get the subsidy and you don't, then this is going to affect that."

Minge's proposal, supported in Maryland by Gov. Parris N. Glendening, is controversial. But proponents of congressional peacekeeping argue that there's no choice.

States have demonstrated time and again that they can't reach truces or can't keep them if they do, they said.

A cease-fire between New York and New Jersey a few years ago lasted only a few months before New Jersey tried to poach the Coffee, Sugar and Cocoa Exchange, costing New York $90 million in subsidies to keep it.

John Engler sharply criticized incentives as governor of Michigan a few years ago, only to ask the legislature to boost incentives when Michigan started losing businesses to neighbor states.

Supporters contend that Minge's idea leaves room for plenty of interstate competition -- as long as it's broadly applied, not negotiated one company at a time.

"We ought to cut taxes for all businesses and then let them go out and compete," said Kittleman, the Howard County Republican.

Absent a ban on exclusive incentives, states can still do a much better job of telling taxpayers what their handout money is paying for, disclosure advocates say.

Even if negotiations stay secret while they're happening, governments should disclose deals' details immediately after a development agency signs a letter or intent and before legislators vote on it, they say. Minnesota recently passed what Greg LeRoy of Good Jobs First called the best incentives disclosure law in the nation. The measure, which took effect Aug. 1, requires public hearings and votes by elected officials on each deal over $100,000 as well as disclosure on wages, benefits and other community impact.

Many states and localities, however, are moving in the opposite direction.

"More and more public officials are understanding that this is a way they can conduct business outside the sunshine," said Sandra Chance, assistant director of the Brechner Center for Freedom of Information in Gainesville, Fla.

Virginia's incentive-granting agency, the Virginia Economic Development Partnership, has become a quasi-private agency, spending public dollars but shielded from open-meeting and other open-government laws that apply to the rest of state government.

"It's almost no accountability to the state treasury for that organization," said Robert E. Leak, a Raleigh, N.C.-based consultant who advises companies in negotiations on sites and incentives. "We can't believe it's happening, but it is. They can go behind doors and negotiate an incentive. It's a private organization, so it doesn't have the glare of the public spotlight on it."

Pub Date: 10/13/99

In a series published Oct. 10-13 about government incentives to recruit and retain businesses, The Sun erroneously included F&G Life of Baltimore in a list of firms that violated the terms of their agreements with state and local officials. A review of the record shows F&G did not break its promise.The Sun regrets the errors.
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