Thursday, December 20, 2012

Lines Blur as Texas Gives Industries a Bonanza

Good to know this. -Angela

The New York Times

December 2, 2012

Lines Blur as Texas Gives Industries a Bonanza

DALLAS — The Preston Hollow neighborhood has been home to many of Texas’ rich and powerful — George and Laura Bush, Mark Cuban, T. Boone Pickens, Ross Perot. So it is hardly surprising that a recent political fund-raiser was held there on the back terrace of a 20,000-square-foot home overlooking lush gardens with life-size bronze statues of the host’s daughters.
The guest of honor was Gov. Rick Perry, but the man behind the event was not one of the enclave’s boldface names. He was a tax consultant named G. Brint Ryan.
Mr. Ryan’s specialty is helping clients like ExxonMobil and Neiman Marcus secure state and local tax breaks and other business incentives. It is a good line of work in Texas.
Under Mr. Perry, Texas gives out more of the incentives than any other state, around $19 billion a year, an examination by The New York Times has found. Texas justifies its largess by pointing out that it is home to half of all the private sector jobs created over the last decade nationwide. As the invitation to the fund-raiser boasted: “Texas leads the nation in job creation.”
Yet the raw numbers mask a more complicated reality behind the flood of incentives, the examination shows, and raise questions about who benefits more, the businesses or the people of Texas.
Along with the huge job growth, the state has the third-highest proportion of hourly jobs paying at or below minimum wage. And despite its low level of unemployment, Texas has the 11th-highest poverty rate among states.
“While economic development is the mantra of most officials, there’s a question of when does economic development end and corporate welfare begin,” said Dale Craymer, the president of the Texas Taxpayers and Research Association, a group supported by business that favors incentives programs.
In a state that markets itself as “wide open for business,” the lines are often blurred between decision makers and beneficiaries, according to interviews with dozens of state and local officials and corporate representatives. The government in many instances is relying on businesses and consultants like Mr. Ryan for suggestions on what incentives to grant and which companies should receive them, as well as on other factors that directly affect public spending and budgets, the interviews show.
Mr. Ryan does not claim to be neutral on where the money should go. “It’s widely known that I represent a lot of taxpayers,” he said in an interview. “I have client relationships with people who hopefully, if they invest in Texas, they’ll receive incentives.”
Granting corporate incentives has become standard operating procedure for state and local governments across the country. The Times investigation found that the governments collectively give incentives worth at least $80 billion a year.
The free flow of tax breaks and subsidies in Texas makes it particularly fertile ground to examine these economic development deals and the fundamental trade-off behind them: the more states give to businesses, the less they have available in the short term to spend on basic services, a calculation made more stark by the recession.
To help balance its budget last year, Texas cut public education spending by $5.4 billion — a significant decrease considering that it already ranked 11th from the bottom among all states in per-pupil financing, according to recent data from the Census Bureau. Yet highly profitable companies like Dow Chemical and Texas Instruments continue to enjoy hefty discounts on their school tax bills through one of the state’s economic development programs.
In the Manor school district, which comprises the town and part of Austin, Samsung has been awarded more than $231 million in incentives from state and local officials. But the recent budget cuts have left the district with crowded classes and fewer programs.
Mr. Perry, who took office at the end of 2000, has been a longtime proponent of lowering taxes. He said in an interview that companies could put the money to better use than the government and would spend it in ways that would create jobs and help Texans.
“Facebook, eBay, Apple — all of those within the last two years have announced major expansions in Texas,” Mr. Perry said. “They’re coming because it is given, it is covenant, in these boardrooms across America, that our tax structure, regulatory climate and legal environment are very positive to those businesses.”
He acknowledged that the state’s job growth was not erasing persistent poverty, saying that “we are going to have people that fall through the cracks.” He said creating jobs was the best way to help Texans, who “don’t want government assistance when they can do it themselves.”
But relying on companies does not always turn out well. When Amazon set up a distribution center outside Dallas, it received incentives from the state. Six years later, when the company got into a tax dispute with the state, it shut the warehouse, which employed as many as 2,000 people during its peak season.
Nationwide, a whole industry of consultants has grown up around state efforts to lure companies with incentives. Companies like Ernst & Young, Deloitte and Automatic Data Processing, a payroll company, have divisions dedicated to helping companies search for the best deals.
Mr. Ryan’s Dallas-based firm, Ryan LLC, operates in 27 states and seven countries and represents numerous Fortune 500 companies. Texas alone is a big source of business for Mr. Ryan, who has won tax refunds of more than $20 million each for ExxonMobil and Raytheon. This year, he sought similar amounts for Verizon, Freescale Semiconductor and several other companies, according to state documents obtained through an open records request.
At the same time, Mr. Ryan has become one of the state’s most generous political donors. He co-founded a political action committee last year that supported Mr. Perry’s bid for the Republican presidential nomination and donated $250,000.
Even as business leaders press local governments to give out more incentives, they warn against requiring too much in return.
In Travis County, which includes Austin, commissioners recently passed new rules for companies that receive tax abatements. One requires paying employees $11 an hour, an amount the county considers to be a living wage.
The rules had been contested by the business community. “The more stipulations you put into an agreement, the more complicated it becomes and the less competitive we become,” Gary Farmer, a local business leader who runs an insurance company, told the county commissioners at a hearing. “We’re concerned about including a living wage into the policy, as we believe that could have a chilling effect on certain companies.”
The Money Starts Flowing
When Mr. Perry became governor in 2000, Texas was not a major player in the incentives game. He quickly got his first taste during a bidding war among states when Boeing was hunting for a new location for its headquarters.
Texas ultimately lost to Illinois, which awarded Boeing $52.5 million in incentives, but the episode was a turning point. “We came back in here after we lost that,” Mr. Perry said, “and we analyzed our economic development efforts, and that’s when we started making some changes.”
Mr. Perry got the money flowing through two new cash funds created to recruit businesses. One, the Texas Enterprise Fund, awarded more than $410 million over eight years, according to the governor’s office, and the recipients said they would create more than 54,000 jobs. The fund requires companies that do not meet their job targets to return incentive money.
The state has also embraced a popular program that establishes enterprise zones where companies can receive refunds on some taxes they pay in exchange for moving there. The exemption has added up to big money for retailers like Walmart. Not coincidentally, the company has opened stores in similar enterprise zones across the country.
Walmart owed some of its other tax savings to Mr. Ryan, who counted the retailer among his earliest clients in the 1990s. Once an accounting firm, Ryan LLC transformed itself in recent years into a powerhouse focused on corporate tax breaks.
Mr. Ryan is a familiar presence at the state comptroller’s office in Austin, which must sign off on many tax breaks. He is known there for his laser focus and forceful negotiating skills. “It’s gloves-off, full-frontal assault,” said a former official, who requested anonymity because of state confidentiality rules.
Mr. Ryan agrees that he is aggressive, saying that “guys like me are all that stand between the government fleecing taxpayers.” He has at times filed lawsuits over tax rules he does not like, including one against the head of the Internal Revenue Service and Treasury Secretary Timothy F. Geithner.
In one of his most lucrative deals, Mr. Ryan in 2006 helped Texas Instruments win tens of millions of dollars in tax refunds, according to the comptroller’s office. Ryan LLC often gets to keep around 30 percent of its clients’ awards, according to former employees.
That same year, Mr. Ryan was a top donor to the campaign of the comptroller at the time, Carole Keeton Strayhorn, personally giving $250,000, according to campaign finance records. Over the course of Ms. Strayhorn’s tenure, Mr. Ryan, his employees and his company’s PAC would donate nearly $3 million, including when the comptroller ran for governor, the records show. He and his employees have made campaign contributions to the current comptroller, Susan Combs, totaling more than $600,000.
Ms. Strayhorn declined to comment, and a representative for Ms. Combs said the donations did not affect her decisions.
Since 2000, Mr. Ryan and his wife, Amanda, have contributed over $4 million to a variety of state officials and political causes, including the governor. Mr. Perry declined to comment on Mr. Ryan, but at a local event in 2010 he called him “the type of visionary that every community wants to have,” according to The Abilene Reporter-News.
Mr. Ryan said that he gave to candidates in many states and that his donations brought extra scrutiny, not favorable treatment.
Others see it differently. “When you give money to a state regulator who you appear before, there are potential conflicts of interest,” said Craig McDonald, the executive director of Texans for Public Justice, a liberal watchdog group. “And Texas law is way too weak in allowing those conflicts to exist.”
Mr. Ryan set his own sights on public office in 2009, running for the Dallas City Council on a platform that pushed cutting public spending. Simultaneously, Mr. Ryan was pursuing state aid for his own company, applying for an enterprise zone designation for his business.
Mr. Ryan lost the race but won the incentive. “In these tough economic times, our city officials must use every tool available to ensure job growth and expand the tax base,” he said of the award in a news release.
Mr. Perry has made corporate recruitment a hallmark of his administration. The governor frequently makes trips to cities like Chicago, New York and San Francisco to lure prospective businesses.
During a visit to San Diego in June, he proudly told local officials that about a third of the companies moving to Texas were from California, said Ruben Barrales, the chief executive of the San Diego Regional Chamber of Commerce.
“Governor Perry is here quite a bit,” Mr. Barrales said. “He meets with companies. He’s letting people know if they’re interested in further growth, Texas will greet them with open arms. He’s not very shy about it.”
Asked if he had qualms about taking jobs from other states, Mr. Perry said, “Competition is what drives this country.”
A nonprofit group called TexasOne recommends potential businesses to the governor and then pays for his travel and other expenses during the recruiting trips. The group is financed by large corporations like Shell and AT&T, as well as by consultants like Ryan LLC.
The governor’s office allocates the awards, which state records show amount to millions of dollars each year. In the enterprise zone program, 82 of the 222 awards granted from March 2008 to June 2012 went to companies represented by Mr. Ryan’s firm, according to public records provided by the governor’s office. The list included General Motors, Tyson Foods and the German chemical giant BASF.
Until recently, the cash incentives were overseen in Mr. Perry’s office by a top aide, Roberto De Hoyos. In September, Mr. De Hoyos took a new job — at Ryan LLC.
Companies Gain, Schools Lose
Lines of new students show up each August at the public schools in Manor. The town is mostly rural, with fields of hay and cattle in every direction. Some of the students’ families came to double up with relatives or friends, others were pushed outward by Austin’s gentrification.
Downtown Manor consists of a couple of blocks lined with spots like Ramos Cocina and a smoke-filled convenience store. There are few doctors and no real place to buy groceries.
About six miles away, a fabrication plant for the South Korean company Samsung looms over one of Manor’s elementary schools, a symbol of corporate interests juxtaposed with a pillar of public spending. The complex, which makes memory chips for smartphones and other products, includes some of the largest buildings in the area: one covers 1.6 million square feet, or about nine football fields.
Since Mr. Perry took office, companies have seen a drop in their school property taxes because of a special incentives program, as well as an across-the-board cut in the school tax rate. The recession has made the squeeze all the more difficult for schools.
In the Manor district, spending shrank by about $540 per student this year, according to the Equity Center, an advocacy group for Texas schools. The cuts came even as school enrollment has nearly tripled since 2000.
The cracks in financing were on display this summer, as families filled a school cafeteria to register for a prekindergarten program with shortened days. For parents like Tommy and Melissa Sifuentes, the cutback means they have to leave work early or hire a baby sitter. “It’s harder,” said Ms. Sifuentes, who is still grateful that her son will learn socialization skills at school.
About 80 percent of Manor’s students are low-income, according to the E3 Alliance, a nonprofit group in Austin that focuses on education. For about a third of the 8,000 students, English is a second language.
In 2005, Manor’s school board gave Samsung eight years of tax abatements worth $112 million as part of the company’s incentives package for its fabrication plant. Under the special incentives program, known as Chapter 313, school boards approve tax abatements for companies. The state then reimburses the district for the amounts they give up.
In many districts, the awards were granted after little review. Robert Schneider, a member of Austin’s school board, said the district was nonchalant when it gave an abatement to Hewlett-Packard in 2006.
“The board took it as ‘we don’t lose in this deal,’ because we knew we were going to get reimbursed by the state,” Mr. Schneider said. “I can tell you there wasn’t any analysis done that said, ‘Ten, 15 years from now, they will be here and we’ll get such and such out of it.’ ”
School boards statewide have approved abatements worth at least $1.9 billion through the program, according to the comptroller’s office. Although the districts are not paying for the abatements themselves, budget experts point out that the reimbursements come from the state’s general fund, which like most state treasuries is running low.
In Texas, tax revenues for schools took a direct hit when Mr. Perry created a commission in 2005 to evaluate the state’s tax system. The State Supreme Court was questioning districts’ property tax rates and warned of a school shutdown if legislators did not intervene. The tax rates had been criticized for years by businesses and residents, but some districts countered that they could not afford to cut them without additional state financing.
Mr. Perry turned to John Sharp, a Democrat and former comptroller, to lead the commission. At the time, Mr. Sharp worked for Ryan LLC. The commission called for districts to cut school property taxes by around one-third. To make up for some of the lost revenue, it recommended adding a business tax, as well as increasing some sales taxes.
“I did what I thought was the best for the state of Texas,” said Mr. Sharp, adding that his position at Ryan LLC did not affect his decisions. “We saved the state of Texas from complete collapse of the school system, and I’m very proud of that.” Mr. Sharp left Ryan last year to become the chancellor of Texas A&M University.
In 2006, the Legislature largely adopted the commission’s proposals and required the state to give districts billions of dollars to allow time for the business tax to make up the difference.
Some six years later, things have not worked out as planned.
The business tax has not yielded anywhere near what Mr. Sharp’s panel projected, and the state has cut its aid to the districts by $5.4 billion. A spokeswoman for Mr. Perry noted that one of the state’s cash incentive funds was also cut back.
Leslie Whitworth, who oversees the curriculum in Manor, said that the district was doing its best to make do with less, but that “it wears on people, the constant crisis, the constant increases in students and constant pressure on budgets.”
Among other things, the cuts have meant overcrowding across Texas: the number of classrooms over the state’s student limit nearly quadrupled last year.
Some companies recognize the trade-off. Daimler, the German maker of the Mercedes-Benz, accepts incentives in the United States but tries to avoid ones that come out of school budgets, said David Trebing, who manages the company’s relationship with local governments. “We want to make sure they have enough money for their schools,” Mr. Trebing said. “Our workers send their kids there.”
Even members of the Austin Technology Council, which includes Samsung, identified an educated work force as among their biggest concerns for the area, according to a recent survey.
Of the $231 million in incentives Samsung received, it donated $1 million back to Manor for a scholarship fund. The company also mentors district students.
Catherine Morse, Samsung Austin’s general counsel, said the abatements from the Manor school board were crucial because of the company’s expensive machinery. Samsung also received $10.8 million from Mr. Perry’s cash fund, but Ms. Morse said the money had not swung the decision. “It was more like it showed respect,” she said.
Ms. Morse noted that Samsung was still the county’s largest taxpayer and that locating the facility in Texas had been a tough sell inside the company. “It was very unpopular to take jobs out of South Korea,” she said.
Samsung said it had created 2,500 jobs on its payroll and 2,000 more for contract employees. Ms. Morse said that 495 of those on its payroll lived in the Manor school district. The company is currently seeking additional incentives for a $4 billion retooling of its facility, though it is not expected to add many jobs.
Amazon Plays Hardball
Tarik Carlton gathered with other workers in February 2011 to hear the bad news: Amazon was shutting its distribution center in Irving, where he loaded trucks for $12.75 an hour.
Business had been strong, but the online retailer did not want to pay a $269 million tax bill from the state comptroller. A standoff with the state ensued, and Amazon laid off the workers. “They didn’t have our interests in heart, truth be told,” Mr. Carlton said.
Amazon opened the distribution facility in 2005 in Irving, near Dallas-Fort Worth International Airport, and local officials awarded the company tax breaks on its inventory.
Positions at the warehouse included product pickers, dock crews and truck loaders. The employees were typically on the young side, and some had served in the military. The warehouse churned through workers because many could not meet the quota of products they were supposed to move each day, according to Frankie Lloyd, who helped Amazon find temporary workers to fill many of the jobs.
“It’s all about what you can do physically,” Ms. Lloyd said. “Like manufacturing, but without the great pay.”
The distribution business grew as manufacturing moved overseas and online shopping boomed. It is big in the Dallas area because two main train lines run here from Long Beach, Calif., where goods arrive from Asia.
The work is highly physical. One Amazon worker wore a step counter that logged five miles during one shift, according to Mr. Carlton, who only recently found a new job. He was among 12 former Amazon workers, including two warehouse managers, who agreed to be interviewed.
There was no air-conditioning in the warehouse, and Mr. Carlton and others said the temperature could reach 115 degrees. They said it was difficult to take breaks given the production quotas.
The pay was typically $11 to $15 an hour, Ms. Lloyd said. Amazon gave out small shares of stock and some bonuses, but the amounts were minimal, she said.
Amazon said it had been working to upgrade its warehouses, which it calls fulfillment centers. The company has installed air-conditioning in all its centers over the past year, said Dave Clark, the vice president for global customer fulfillment.
Mr. Clark said workers always received breaks, and sometimes free ice cream when the facilities did not have air-conditioning. He said the quotas were akin to “expectations that go along with every job, mine included.”
“I really do think these jobs get a bad rap,” Mr. Clark said. “They’re great jobs. They’re safe jobs.”
Mr. Carlton said he had no idea the company was being partly subsidized. “If you give them money, I think more should be expected,” he said, adding that Amazon should have been required to hire more people to handle the heavy workload.
John Bonnot, the director of business recruitment for the Irving Chamber of Commerce, said the city did not impose wage or benefit requirements on companies that received incentives. Irving had required that Amazon create only 10 jobs to receive the tax break.
Mr. Bonnot said Amazon “would have nothing but praise” for the original assistance from the state and the city, which outsources its economic development to the local chamber.
Things began to slide downhill in late 2010 when the state comptroller, Ms. Combs, demanded that Amazon pay the $269 million sales tax bill. The retailer had never charged its Texas customers the tax, giving it an advantage over on-the-ground competitors.
The company hired three powerful advocates with ties to the governor, according to state lobbyist disclosure records. One, Luis Saenz, had been the director of Mr. Perry’s political operation. Days after the warehouse closed, Mr. Perry said he disagreed with the comptroller’s decision to demand the taxes.
As it was battling with the comptroller, Amazon began negotiating with the Legislature, which was debating whether online businesses should be required to charge sales tax. The company told lawmakers that it would create up to 6,000 jobs in exchange for delaying sales tax collections, similar to a compromise it had struck in states like South Carolina and Tennessee.
The lawmaker with the most power in the decision was John Otto, a Republican member of the Texas House of Representatives. Like all Texas legislators, Mr. Otto’s government job is part time. He also works at Ryan LLC — a job that is not disclosed on his legislative Web site.
Mr. Otto drafted legislation that said online retailers like Amazon would not have to charge sales tax as long as it did not have distribution facilities in Texas. By then, the company had already shut the Irving warehouse.
Mr. Otto and Mr. Saenz declined to comment about the legislation. Amazon would not comment on its negotiations with Texas.
In July, Amazon began collecting sales tax from customers in Texas after the comptroller agreed to release the company from most of its $269 million bill. The company has also promised to open new distribution facilities and hire 2,500 workers. Amazon will owe the state a $1 million penalty if it fails to deliver.
The math on the new deal angers former Amazon workers, especially those who are still unemployed. For Texas to give up more than $250 million in tax revenues in exchange for 2,500 jobs amounts to about $100,000 per job. Most distribution workers are paid $20,000 to $30,000 a year. The rest benefits the company’s bottom line, which generally increases executive bonuses and shareholder returns.
King White, a consultant who helps Amazon choose locations, would not comment on the online retailer but said that companies in general had come to view incentives as entitlements. “Everybody thinks they deserve something,” Mr. White said. “ ‘If I’m creating jobs, what’s in it for me?’ ”
The deal on the sales tax did not require Amazon to reopen the Irving facility. That touched off the latest state competition to win over Amazon.
Last month, the city of Schertz beat out neighboring San Antonio for one of Amazon’s warehouses. The company is currently in negotiations with Coppell, outside of Dallas, about an additional center. Like Schertz, Coppell has offered Amazon a deal to keep a part of the sales tax it collects there, among other incentives.
If Amazon accepts, it will be located near Irving and many of its former workers. Sharon Sylvas, 47, had moved from Kansas seven years ago to help Amazon set up the Irving facility. She lives nearby in a one-bedroom apartment with her partner, daughter and two grandchildren.
After Amazon closed, she was out of a job for over a year. With limited options, Ms. Sylvas took a temporary position in October at another company’s distribution center. It is a tougher job than the one at Amazon, and it pays less. For $11 an hour, Ms. Sylvas moves heavy inventory and other items.
She said that if Amazon returned to the area, she would work there again, despite the rigors of warehouse jobs. “It’s real miserable,” Ms. Sylvas said. “But you do it to make a living.”
Both Player and Referee
For the past few months, a commission created by the Texas Legislature has been taking a broad look at the state’s economic development efforts. It will report back in January with recommendations. Four members of the commission are specifically focused on evaluating the state’s cash grants and the school tax abatement programs. This means that companies in Texas have a lot at stake in the panel’s work.
So does at least one of the commissioners: G. Brint Ryan.
He was appointed to the commission by the state’s lieutenant governor, David Dewhurst, who has received more than $150,000 in campaign donations from Mr. Ryan.
At a meeting in mid-September, the panel invited business representatives to testify. Among them was Ms. Morse, the general counsel at Samsung Austin, who urged the commission to continue the school property tax program that benefits her company in the Manor district.
During Ms. Morse’s testimony, it went unmentioned that Samsung is a Ryan client. Ryan LLC had helped the company gain designation as an enterprise zone in 2010, enabling it to receive sales tax refunds from the state on many of its purchases, according to documents obtained by The Times under a public records request.
Mr. Ryan said the commission had never asked him whom he represents.
No representatives from Texas schools spoke at the hearing. But Mr. Ryan said in an interview that school financing and poverty could best be addressed by emphasizing economic activity. He noted his own humble beginnings. “Frankly, I never got one single government handout,” he said.
Over the years, of course, Mr. Ryan has profited by helping many companies obtain checks from the government. In at least one instance, he was more eager to get the money than his client was.
The client, a computer chip maker called Advanced Micro Devices, had hired Mr. Ryan’s firm to review its books. But when the firm found what it believed would be a way to save more than $30 million in taxes, the chip maker decided it was not worth pursuing. Ryan LLC responded by suing its client, saying AMD owed it to the firm to seek the money. Ryan LLC would have received a cut of the savings.
AMD declined to comment on the case, which was settled last year. But in a deposition contained in the court filings, a representative of the chip maker described numerous e-mails and phone calls by Mr. Ryan, who was trying to persuade the company to file for the refunds.
“It’s continuing evidence that they’ve placed their interest above our own and continued to press this issue,” the representative said. The company said Ryan LLC’s behavior “bordered on harassment.”
At one point, Mr. Ryan wrote to the chip maker’s chief financial officer. “At stake is tens of millions of dollars in tax recovery and future tax savings on an issue I have WON for other fabs in Texas,” he said, referring to fabrication facilities.
The company’s choice not to seek the tax break, Mr. Ryan said in a deposition, was an “irrational and unreasonable decision.”
Lisa Schwartz and Lauren D’Avolio contributed research., @louisestory

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