Economic Development

Hush Money

Earlier this summer, residents of Lenoir, North Carolina, a small town about 70 miles northwest of Charlotte, gathered for a community picnic. Under a white tent,...
July 31, 2008

Earlier this summer, residents of Lenoir, North Carolina, a small town about 70 miles northwest of Charlotte, gathered for a community picnic. Under a white tent, a cover band belted out crowd favorites while kids played carnival games and sampled Sno-Cones. This was no ordinary town festival. It was Lenoir's first peek at the community's newest business addition: Google. The Internet behemoth had selected Lenoir to site a vast warehouse filled with the servers that power its Web search, e-mail and video sites. Although the massive facility is still under construction, Lenoir residents turned out in droves for the center's official unveiling.

As openings go, this one wasn't so grand. No one was allowed to look inside the building, which is surrounded by barbed wire and a high wall. And throughout the day, picnic attendees were ushered through the grounds by uniformed security guards. The air of confidentiality was fitting. The deal to bring the $600 million data center to this struggling area in the Blue Ridge foothills had been shrouded in mystery since the beginning.

When negotiations began, Google insisted that more than 70 local officials sign non-disclosure agreements forbidding them to talk about the matter. So when two public hearings were held in December 2006 to discuss tax breaks for the company, elected officials weren't allowed to utter Google's name. What's more, local officials helped Google quietly buy up land in the area through a newly created nonprofit that concealed the company's identity. In all, Google won more than $260 million worth of state and local subsidies -- and all of it was worked out behind closed doors.

The secrecy surrounding Lenoir's dealings with Google may sound obsessive, but it isn't unusual. States and localities hand out $50 billion in corporate tax breaks each year, and much of that pie is served in private. Not only is the public unaware of backroom economic development deals until they are done; often, government officials don't even know what company they're bargaining with or what states or cities they're competing against. That's because these high-stakes negotiations are almost always driven by site-location consultants, whose code is to keep their clients' identities secret while playing governments off each other.

It's easy to see why companies prefer the covert treatment: They don't like tipping off competitors about their expansion or relocation plans. What's harder to understand is why governments almost always go along with the ruse. Anonymity only weakens government's hand in negotiations -- it's hard to know what to offer if you don't know with whom you're dealing. What's more, all this secrecy flies in the face of the idea that public dollars be spent in a transparent way. "The incentive process is the least understood, most under-wraps aspect of the entire budget process," says Rachel Weber, a professor at the University of Illinois at Chicago, who has studied the intricacies of corporate subsidies for a decade. "You're keeping some pretty major investment decisions out of the hands and away from the eyes of the people who are actually funding them. The lack of transparency for these deals really stands to alienate the public."

An Etiquette of Quiet

Economic development's hush-hush traditions go back to Felix Fantus, who pioneered the site-location consulting business 80 years ago. Fantus' firm established the system as it exists today: If you're on the short list for a new business site, you can't discuss it with the public -- or with competing cities. The consulting industry has since fragmented into niches and grown as a whole (Deloitte & Touche bought Fantus' company in 1996), but the basic tenets of secrecy have remained an accepted -- and largely unquestioned -- part of the site-location business.

Ted Levine thinks it's better that way. Levine is chairman of Development Counsellors International, a firm that does marketing work for cities. As he sees it, secrecy is simply part of the incentives game. If governments want to attract companies by throwing money at them, then they've got to play by private-sector rules. "Look, we live in a capitalist country," Levine says. "That may be good or it may be bad. But cities need businesses. Getting them takes a lot of work, and you can't have people looking over your shoulder."

The way Levine figures, there are roughly 15,000 different governmental units -- from states to regional economic development groups to local utilities -- vying to attract companies. And his research suggests 1,500 companies relocate every year. In other words, there's a lot of competition out there. Insisting on negotiating in public, while everyone else is willing to stay mum, would be one sure way for a city to scratch itself off a prospective company's short list, Levine says. "You've got a situation where you have 10 salesmen chasing one customer. It's tough enough without throwing in the transparency."

Land acquisition is another factor. When a large firm moves into a new area, it may need to amass a large plot of land from dozens of property owners. If the company's plans become public knowledge, buying up all those pieces of property can get really complicated -- and expensive, too, as speculators jump into the market and opportunists jack up their asking prices. In Lenoir, landowners who sold (unknowingly) to Google later complained that they would have held out for more money had they realized that they had such a deep-pocketed buyer.

From a public-sector perspective, there are reasons why secrecy could be considered a good thing. For example, a city that is in the running for a new auto plant could be embarrassed and demoralized if the car company ended up choosing a different site. Or, in the case of a company that may be moving away, it's not good for business -- or civic pride -- to sit in protracted limbo while the company shops around for better offers. In such cases, secrecy isn't about gaining an advantage. It's about saving face.

To Greg LeRoy, those potential upsides aren't worth it. LeRoy, a longtime critic of tax incentives and the author of "The Great American Jobs Scam," says the confidentiality surrounding tax breaks "is corrupting the process by giving all the information and power to the private company." He argues that it's time to pull back the curtain on these negotiations. "Competing public officials should be allowed to talk to each other and compare notes about the claims being made by a company," says LeRoy. "This etiquette that's evolved is just really stupid policy."

Rays of Sunshine

Thanks to the efforts of LeRoy and others, there is some momentum toward transparency with corporate incentives. Some 26 states, including three this year, have enacted rules requiring disclosure of which companies are receiving tax breaks and how much they are getting. Those regulations are limited in scope, however, and often cover only one type of subsidy program. What's more, the disclosure requirements all focus on the back end -- reporting subsidies after the deals are done. When it comes to the actual wheeling and dealing, the public and those negotiating on behalf of the public are usually in the dark.

Is the current method of doing business likely to change? Probably not. Absent a national sunshine law requiring full disclosure during negotiations, the incentives process will remain a private affair. Some places have experimented with regional pacts designed to shine light on the process and prevent nearby cities from eating each others' lunch. Member cities of the Metro Denver Economic Development Corp., for example, are required to come forward if they're approached by a company in a neighboring city. At some point, though, nearly all of these types of compacts fail, says Rachel Weber. "Eventually, someone defects and the pact falls apart." She points to a 1991 agreement among New Jersey, Connecticut, New York State and New York City. Their "non-aggression" pact was designed to set limits on the subsidies those jurisdictions could offer to attract businesses. Within a year, all four players had violated the agreement, and the deal fell apart.

For all the complaints about the secrecy surrounding subsidies, the reality is that nobody seems able to come up with a better alternative. Even advocates of increased transparency acknowledge that privacy plays an important role in economic development. Take Bob Phillips, executive director of the North Carolina chapter of Common Cause, the national advocacy group for accountable government. When he thinks about last year's Google deal, he says he still has some "real concerns" about the secrecy of it all. "But we understand the way the game is played. I believe there has to be as much transparency as can be allowed, but you don't want to harm a government's effectiveness at doing business."


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