Incentives - good or bad business
The state uses millions in tax dollars to help certain companies create jobs. But does that strategy pay off for taxpayers?
By SYDNEY P. FREEDBERG and CONNIE HUMBURG
Published April 10, 2005
To government officials, the giant factory south of Orlando had long been more than a microchip plant.
It was the crown jewel of Florida's high-tech future, an economic engine that would generate good jobs and help transform the home of Mickey Mouse into "Silicon Valley East."
So when AT&T threatened to move the plant to Spain in 1995, state and local government swung into action.
They trained workers, bought equipment, slashed the company's taxes and even wrote new laws - all in an effort to get the plant to stay and create new jobs.
Between 1995 and 2003, they gave the plant more than $49-million in tax breaks and benefits, promised still more and credited AT&T and its successors with creating 864 jobs and investing $1.2-billion in construction and new machinery.
Today, however, some of the plant's equipment has been shipped overseas. Many of the jobs are gone. Employment, which climbed from about 890 in 1995 to 1,869 in March 2000, is down to about 600. Unless a buyer materializes, the plant will close by the end of the year.
The nearly empty factory could be a symbol for the flaws that beset what government and business leaders call "economic development."
Since the mid 1990s, state and local governments in Florida have showered hundreds of millions of dollars in tax breaks, cash and other incentives on companies like AT&T that promise to invest and create jobs here.
In 2004-05 alone, an examination by the St. Petersburg Times shows, Florida's economic development efforts could cost state government more than $900-million.
In a state with a $61-billion proposed budget, $900-million could pay for nearly 11,000 new teachers, prekindergarten classes for 150,000 4-year-olds and all of next year's tuition increase for more than 250,000 university students.
Supporters say they need incentives to overcome bids from other states and countries that spend even more than Florida to meet companies' demands.
Incentives generate tens of thousands of high-wage jobs, they say, billions in state investment, a business-friendly image and a higher living standard for Floridians.
But such boasts by government officials from Gov. Jeb Bush on down gloss over some fundamental problems:
* Much of the largesse appears to go to a fraction of Florida's 1.5-million businesses, and some of the recipients are large, prosperous companies that wield the most clout and are least likely to need help.
Wal-Mart, for example, stands to gain $51.4-million in local and state incentives for seven Florida projects, a study by a Washington labor group found last year. The incentives range from free land and discounted utility hookups to $1.5-million to remove a bridge and $200,000 worth of dirt.
* Thousands of jobs created with the help of incentives, like the ones at the Orlando chip plant, materialize briefly, then disappear. Some are wiped out by cost-cutting moves, bankruptcies or mergers. Other jobs go overseas.
Example: JPMorgan Chase. Over a period of 16 years, state and local governments paid or promised the financial services giant that is today known as JPMorgan Chase more than $21-million in benefits, plus a tax break of up to $74.5-million over 20 years, to create more than 2,800 jobs in Tampa. In January, the company announced it would lay off 1,900 employees.
* A key goal of incentives is to raise wages statewide. Yet a decade after the Legislature began ramping up its corporate benefits, Florida's 2003 average wage - $34,520 - still trails the national average and may have lost ground. By one measure, Florida's average wage has slipped from 24th place among states to 26th.
* Florida's incentive laws are riddled with vague language and loopholes that allow businesses to collect for low-paying jobs, too. All a company has to do is hire a few highly paid executives, skewing the average wage upward.
Take AT&T. In 1995, economic development officials told Orange County commissioners that the plant would create 600 new high-wage jobs that would have an average salary of $34,200, according to the Orlando Sentinel . That was well above the county's average wage.
What they did not say: More than half the workers started at less than the county average, and a smaller number of higher-paid administrative and engineering jobs skewed the average.
* From a warehouse in Miami to a call center in Palatka, some companies that have received incentives pay so little that workers or their dependents qualified for state-financed health care or food stamps.
Put simply, taxpayers sometimes pay hidden costs: They subsidize the company to create jobs, and they subsidize workers who need public assistance to make ends meet.
* State and local officials are sometimes so eager to award incentives that the application process is perfunctory, decisions are rushed and oversight is questionable.
Some local governments write checks without independently verifying that companies have met employment goals. Essentially operating under an honor system, auditors rely on information submitted by businesses. The state's monitoring process has come under criticism as well.
In 2003, the city of Clearwater and Pinellas County were baffled when the state reminded them to pay their share of incentives for CGI Group, a computer technology firm. The company was closing its operation in Clearwater.
"We question whether this company is creating jobs in Pinellas County," Danielle Weitlauf, finance officer with the county's economic development agency, told the state in an e-mail. "The last the city checked, the company's employment numbers were around 100 and their building is for sale."
CGI, which took over IMRglobal in 2001, didn't get any more cash, but it left town with $354,318 in previously awarded incentives.
* Florida's incentives include dozens of tax breaks that are embedded in the tax code rather than paid outright. Because businesses claim them as credits, deductions or exemptions on their tax returns, which are confidential, these tax breaks often fall outside the scrutiny of the public and even state legislators.
So, the state Revenue Department can confirm that some banks catering to foreigners will be excused from an estimated $9.8-million in corporate income taxes in 2004-05. The agency can say that some entertainment firms will be exempted from more than $60-million in sales taxes and that 346 companies reduced their insurance premium taxes by $176-million.
But by law the tax agency is not allowed to identify them (and in some cases may not know who the recipients are or how much money they get unless there is an audit).
* Although the Legislature keeps adding incentives and loosening rules for those already on the books, it rarely checks to see if they are paying off.
A recent report for the state's main economic development group concluded that Florida's most widely used incentive program is a good deal for taxpayers. But the program could be improved by publishing lists of companies getting tax refunds, increasing monitoring and requiring firms to provide health insurance, the report said.
Other studies have found no direct link between incentives and the creation of jobs.
"Most incentives are outright corporate welfare," said Bruce Nissen, a labor economist at Florida International University. Often, they create low-wage jobs from a public purse that would have gone to cash-strapped schools, Nissen added.
"As taxpayers, we have the right to know where our money is going," said Sen. Mike Fasano, R-New Port Richey, chairman of the Senate Committee on Transportation and Economic Development Appropriations.
Fasano recently requested information about the trophy deal to bring a branch of California's Scripps Research Institute to Palm Beach.
Bush persuaded the Legislature to earmark $310-million (plus $59-million in interest) for Scripps, which has promised to buy scientific equipment, create 545 jobs over seven years and help wean Florida from its dependence on low-paying tourism jobs. Palm Beach has pledged an additional $200-million.
A litany of successes
Florida hails the Scripps deal as a shining success, a true partnership between government and industry bringing high-wage jobs in the new economy.
In glossy brochures, incentive supporters cite a litany of similar success stories - from Fortune 500 climbers like Fidelity National Financial, which relocated its headquarters to Jacksonville from California in 2003, to companies like Nestle, the Swiss conglomerate that recently opened a bottled-water plant in North Florida.
Yet, ask them how many jobs created with the help of incentives have come and then gone abroad, and there are no numbers. And they don't track how many of the new employees or their dependents get health benefits.
In 2003, they even had trouble locating companies that the state had certified for incentives.
When the staff of a state Senate committee sent surveys that year to 183 businesses eligible for tax refunds, only 38 responded. Thirty-nine came back "return to sender."
The Senate review was largely positive, but it glossed over a surprising fact: More than half the companies that did respond to the survey said they probably would have located or expanded in Florida without the incentives.
In a statement, the governor's office accused the Times of focusing on the negative and neglecting the good that has come from the Bush administration's economic development policies..
The governor's office and Orange County also defended the incentives awarded to the struggling Orlando microchip plant, whose owners have increasingly relied on contract manufacturers in Asia.
"We are disappointed any time jobs leave Florida," said Scott Openshaw, a spokesman for the governor's Office of Tourism, Trade and Economic Development. "But as in any free market and business industry, there is always risk."
Debra Aul, who was hired to work at the plant in 1997 for $6.91 an hour plus benefits and dismissed with hundreds of co-workers four years later, sees the incentive game differently.
"I would think the government would have gotten outraged at what happened," said Aul, 47, who got steady raises and assumed the company was there to stay. "But it seemed like the only people who were concerned about jobs going to Singapore were the people losing their jobs."
High-stakes bidding war
Ever since the 1850s, politicians in Florida have given free land and tax breaks to their favorite industries, notably citrus companies and tourism businesses.
It wasn't until the mid 1990s, however, that Florida joined the high-stakes bidding war that pits state against state for jobs.
A turning point came when Alabama lavished $253-million on a proposed Mercedes-Benz plant near Tuscaloosa.
Under pressure from Florida companies to level the playing field, then-Gov. Lawton Chiles agreed to give business a stronger hand in economic development.
To that end, the Legislature created Enterprise Florida, a tax-exempt, nonprofit group that operates with corporate contributions and about $11-million a year in state money. Its board is led by the governor but dominated by executives from banks, utilities, real estate and large firms that sometimes benefit from incentives themselves.
Throughout the 1990s, dozens of similar public-private partnerships grew up across the state as the roles of industry and government became intertwined.
By the time Bush took office in 1999, broken jobmaking promises and public opposition to "corporate welfare" had tempered some states' zeal for the incentives game.
In Alabama, a coalition of religious and community groups began battling corporations that grabbed incentives but failed to pay their fair share of taxes. In Nebraska, lawmakers demanded greater public disclosure of business tax incentives.
And in Ohio, small businesses convinced a U.S. appeals court last year that a tax incentive given to DaimlerChrysler was discriminatory and unconstitutional.
In Florida, Bush has pressed for more tax incentives, helped establish more training for workers and personally intervened, like Chiles, in big-ticket deals.
Today, the governor presides over an economic development spending program so vast that no one seems to know the total bill.
Shrouded in secrecy
The state's share of the total bill could top $900-million in 2004-05, according to a Times analysis.
Most of that will come from tax breaks designed to encourage companies to plow money into plant expansion, new equipment, people and research and thus spur growth in the businesses and the economy. But the state seldom evaluates whether the tax breaks are working.
Over the years, the Legislature has created more than 50 of these tax breaks, sometimes at the behest of a business or a few businesses lobbying for incentives. Combined, the tax breaks could mean a loss of more than $792-million in revenue this year.
(When the governor's office tallies the cost of economic development, it omits many of these tax subsidies, saying they are not incentives but part of Florida's business friendly tax structure available to any company.)
Since tax returns are confidential, the state Revenue Department is not allowed to say - and in some cases doesn't even know - which companies benefit or how much they get.
The governor's office does, however, identify businesses that get some of the tax breaks, including firms that promise to create jobs in special low-tax areas designated by the state.
Among past recipients: Home Depot, Winn-Dixie, Publix and Wal-Mart, the world's biggest retailer with $285-billion in revenues last year and a workforce larger than those of General Motors, Ford, General Electric and IBM combined.
Wal-Mart says incentives are "a jackpot investment" because it pays far more in state and local taxes than it gets in tax breaks and other forms of government aid.
With 91,000 Florida employees, the company reported paying $58.7-million in state and local taxes last year.
In addition to the $792-million in tax breaks, Florida has earmarked $119-million this year for the economic development bureaucracy and a raft of incentives for individual companies. They range from outright cash payments to training grants to road-building funds given to local governments on behalf of companies that promise to create jobs.
Only about 800 - less than one-tenth of 1 percent of all the businesses in Florida - have received funding in recent years from 10 of the most widely known programs, according to records released by the state. More than 400 of those companies have gotten a tax break designed to encourage businesses to donate to community development and low-income housing projects. Between 1997 and 2002, the Times Publishing Co., publisher of the Times, received $402,500 for making donations to local museums and community organizations.
There is also a third kind of spending that puts Florida's total well above $900-million. The state will distribute about $21.7-million this year in sales tax revenue on behalf of the World Golf Hall of Fame north of St. Augustine, the International Game Fish Association Fishing Hall of Fame and Museum in Dania Beach and pro sports facilities, notably those for the Florida Marlins, Jacksonville Jaguars, Tampa Bay Devil Rays, Tampa Bay Lightning, Florida Panthers, Tampa Bay Buccaneers and Miami Heat.
The $900-million tab does not include the incentives provided by local and federal government. Businesses can get everything from free land and wastewater treatment plants to federal training funds. Something as simple as a change of zoning from "rural" to "business" can increase the value of a property a thousand-fold.
The total cost of federal, state and local incentives is hard to track because Florida apparently does not keep a combined list of costs.
Florida does publish a yearly report disclosing federal, state and local costs of incentives used in "enterprise zones," the low-tax areas that get special programs to spur jobs and investment there.
In 2003-04, the tab came to $87.7-million for 7,702 promised jobs in 51 zones. The cost per job: $11,392.
A lead player in the deal making is the governor's Office of Tourism, Trade and Economic Development, an 8-year-old agency with about 20 employees. It works with the Legislature, business leaders and economic development groups like Enterprise Florida to set policy. It oversees some but not all incentives and approves deals recommended by Enterprise Florida.
By law, the trade office, known in government and business circles as OTTED, doesn't have to disclose key information, including the wages and taxes that companies getting incentives pay.
"For these programs to be effective incentives, businesses using them must not feel that their detailed records are being exposed to public dissemination where they will be available for their competitors to see," the governor's trade office wrote in a report to the Legislature in 2001.
Some small businesses say, however, that incentive deals themselves give unfair advantages to the firms chosen to get them - often at the expense of homegrown companies that never threaten to leave town.
"It's robbing from the poor to give to the rich," lawyer Michael Woodward told the Putnam County Commission in May 2000 before it gave 22 acres and millions of dollars for Sykes Enterprises to build a call center in Palatka. "If you want to help someone, help your own people."
Four years and many incentives later, Sykes eliminated its Palatka workforce and put its building up for sale.
The same fate
Hundreds of newly hired workers at the chip plant near Orlando met the same unhappy fate.
The factory processes silicon wafers, the millimeter-thick plates that are cut into the tiny chips inside desktop computers and cell phones.
AT&T's equipment subsidiary, Western Electric, announced it would build the plant in 1980 and hire at least 1,500 employees and possibly more later.
From the start, there were generous incentives: $5.5-million for roads and sewer upgrades; $184,535 for water mains extensions; generous permits so the plant could use huge quantities of water and wastewater; a new electric substation built on Western's property - with enough juice to power 38,000 residential customers.
Despite the concessions, the plant never operated at full capacity. First, the project was put on hold as AT&T fought to preserve its telephone monopoly in court. Then, after the breakup of the monopoly, AT&T struggled with layoffs, corporate upheavals, younger, more feisty telecom rivals and cheap chips from Japan.
More government aid was on the way, however: Three times in the 1990s, AT&T and its corporate offspring dangled the possibility of a major plant upgrade with more jobs or hinted that the plant would leave town - or both. And each time, state and local government scrambled to come up with more incentives - all the while reassuring taxpayers that the factory was turning a region of low-paying tourism jobs into a high-tech, high-wage mecca.
"The investment will include three to four generations of technology, thus guaranteeing a commitment to Florida and Orlando of many years to come," a local business group wrote on behalf of AT&T in July 1995.
From that point until 2003, Florida, Orange County and the city of Orlando passed new incentive laws, relaxed rules, signed at least 10 agreements and dispensed an assortment of benefits worth at least $49-million. The benefits included tax breaks, cash, training aid, sewer discounts and high-tech equipment.
Exactly how much public money was pumped into the plant isn't clear, however, because Florida didn't keep (or won't disclose) a list of combined costs for this or any other incentive deal.
Before Chiles' administration approved the first deal in 1995, a key deputy said his staff had done a thorough review and had a stringent system in place to ensure that the company fulfilled its promises.
Yet over the years, the state relied heavily on the word of AT&T and its successors. There were no safeguards against layoffs, no provisions to give hiring preference to local vendors and no requirement that the plant owners retain the new jobs for any prolonged period.
By July 2001, less than two years after the last incentive agreements, high tech had hit the skids. Lucent Technologies, which had taken over the plant and was spinning it off to its Agere Systems subsidiary, had gotten a junk-bond credit rating.
The Orlando Sentinel reported that the plant had fallen below the minimum threshold of jobs needed to qualify for county incentives.
Even so, Bush's top trade deputy, Dr. Pamella Dana, approved tax refunds for $856,250, saying that the plant had met all of its previous-year state job commitments. Her approval letter, dated Aug.20, 2001, came with a handwritten note: "Congratulations on your continued success!"
In September, Agere's executives told the state they couldn't meet the terms of their agreements. They worried they would have to return the money.
Dana told them not to worry.
"There is no statutory requirement, nor is it ... (the state's) practice, to require qualified applicants to forfeit prior year award payments if they cannot meet current year requirements," she said in a letter dated Oct.22, 2001.
Agere put the factory up for sale in January 2002, but a year later Dana endorsed a new round of sales tax breaks for Agere.
Now, unless the company can find a buyer by the end of the year, it will close the plant.
A megaboost or bust?
So were all the incentives worth it?
Yes, says the state, which denies its treatment of the plant was too lenient. In fact, Openshaw, the governor's trade office spokesman, said that Florida's use of incentives in the case of the plant and other companies is conservative by comparison to other states.
He also said that, unlike some states, Florida hands out benefits only after companies create jobs and pay taxes.
"You might argue that the state didn't maximize its investment, but neither did it lose money," Openshaw said. Florida enjoyed 500 new jobs paying $20,000 above the county average for a long time, he said.
Agere says it and its predecessors made up for all the inducements with a $100-million payroll, at least $66-million in local taxes and at least $31-million in donations to public universities, schools and charities.
"There is no doubt that the investments made by the community have paid off many times over," said Steven Goldsmith, a spokesman for Agere.
John Lewis, Orange County's economic development administrator, said the deal paid off because the county crafted "smart agreements" with safeguards so that the company got paid only for goals it met. The county paid $3.1-million of the originally promised $22-million, he said.
"We did not "give away the farm,' as they say," Lewis said, noting that Orange could have lost all the jobs and millions in tax revenue if the plant had moved out of state in 1995.
The largest beneficiaries were USF and UCF, where administrators say Lucent's deep pockets brought new state-of-the-art labs stocked with high-tech equipment, training and research programs for future engineers and a new day for university-industry partnerships.
But even at the schools, the incentives had a downside. The universities spent much of the corporate money - which was matched by state funds - on commercial equipment of little use to most students. Some of the costly machines were leased back to the company and installed at the plant for commercial chipmaking operations.
When the leases are up, the universities could end up selling much of the aging equipment for a fraction of its original value.
Some former chip workers, who lost their pensions as well as their jobs, say government wasted millions on a mirage of job creation.
"The company had a plan to sell these jobs overseas, and it seemed like it accelerated and happened under our noses," said Nicholas Frisco, a former union leader who earned about $42,000 a year plus benefits working in the plant's maintenance storeroom. He resigned in 2002 at age 56 after 35 years with the telephone company.
Debra Aul, who went back to school after she was laid off in 2001, now teaches and does freelance editing. She said the company should be held accountable for not keeping its part of the bargain. She wonders when the government first noticed that tax breaks were subsidizing the moving van.
"Those jobs are now in Singapore," she said. "When did they find out? Did they turn a blind eye? Or were they truly clueless?"
-- Times researchers Kitty Bennett and Carolyn Edds contributed to this report.
[Last modified April 10, 2005, 10:57:08]
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