ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Sunday, June 30, 1996 TAG: 9606280020
SECTION: BUSINESS PAGE: 1 EDITION: METRO
SOURCE: JEFF STURGEON STAFF WRITER
B.B. Thomason has a $2 million job, but it pays her $8.30 an hour.
Virginia taxpayers helped create the job by subsidizing her employer, Hanover Direct Inc. The catalog merchant was given financial incentives that helped the New Jersey company develop its year-old warehouse in Roanoke County, where Thomason drives a forklift.
Thomason, who formerly earned $4.75 an hour as a temporary worker in the Elizabeth Arden Co. cosmetics factory in Roanoke, couldn't be happier. The 31-year-old Roanoke woman drives a better car, lives in a better apartment and can afford to plan the wedding "of my dreams."
Roger Flippen is another indirect beneficiary of tax-funded grants. The former Roanoke Times press mechanic now works at Arkay Packaging Corp., which was lured to the Roanoke Valley with incentives. The company's newly constructed cosmetics packaging factory in Botetourt County is to begin production in September. Flippen, 35, is socking away part of his bigger paycheck to fatten a reserve for his kids' education.
"Maybe my wife won't have to work," he said.
Thomason and Flippen are representative of many who have received jobs because of incentives offered companies. Taxpayer-supported companies provide a growing share of jobs in the Roanoke region. Most every company providing at least 25 new jobs gets something from the public trough, in return for creating jobs and becoming a new taxpayer.
But Thomason, a single mom who just lost her father and stepmother, and Flippen, a husband and father who rides a motorcycle, put human faces on the national debate over whether private companies should get public funds just for operating and expanding their businesses.
Two prominent Minneapolis bankers and a Winston-Salem, N.C., lawyer have said loudly that paying companies to expand or relocate is a bad idea, because it diverts money from governments' traditional jobs - running schools, police departments and sewer systems, helping the poor and the like.
The bankers are both from the Federal Reserve Bank of Minneapolis - Melvin L. Burstein, the bank's general counsel, and Arthur J. Rolnick, its research director. They have won the attention and limited support of Labor Secretary Robert Reich, two North Carolina Supreme Court justices and a state senator from Ohio. Minnesota Public Radio sponsored a debate on the issue last month in Washington, D.C., at which Reich said:
"These tax abatements, these subsidies, can be the most insidious forms of corporate welfare because they are difficult to see at the state and local level, unlike some big federal government giveaways," Reich said, "because they do put competitors at a competitive disadvantage if they do not get the same largess [and] because they rob local jurisdictions and states of the resources that they otherwise might have to invest in people and in infrastructure."
"They are often, in the classic sense of the term," he said, "zero-sum games in which jobs are simply moved from one place to another and there is not a net improvement in job growth or in the quality of jobs."
Critics say companies accept incentives to pull off expansions they would have undertaken anyway without public money or without as much as they eventually got. They worry that money is paid without adequate standards or adequate disclosure to the public about what is being spent and received in return.
As long as a company intends to expand in the United States, they add, it's senseless from the perspective of U.S. society as a whole for any community to pay for industry to create jobs when money is scarce for broader public needs. In the long run, the nation can't compete as well in the global economy, the critics say.
They want the subsidy programs banned, by congressional mandate or treaties among states.
All this outcry has stirred up some alarming debate about just how far incentive-giving might go if it continues. Some of the arguments have raised questions about possible misuse of funds for executive frills.
The Supreme Court justices spoke up in a case that weighed the constitutionality of deals North Carolina gave 24 companies between 1991 and last summer. The question was whether the public derived meaningful benefits from the distribution of incentives that included loans, free construction assistance, training for workers and even funds for moving wives of company executives. The court ruled 5-2 that the expenditures provided sufficient benefits.
Calling attention to the money for helping executives' wives, Justice Robert Orr asked in his dissent whether there was any limit to how far a community might go to court corporate growth.
"If a potential corporate entity is considering a move to Winston-Salem but will only come if country club memberships are provided for its executives, do we sanction the use of tax revenue to facilitate the move?" asked Orr, whose dissent also was signed by Justice I. Beverly Lake Jr. They took the position that the incentives provided too little benefit to justify spending the public's money.
They said, essentially, that the benefits that incentives provide to people such as Thomason and Flippen - and government tax collectors - are too remote from the general public welfare. |n n| Government leaders and economic developers make an equally detailed defense of incentives. They say they don't like paying incentives, but because almost every other community pledges them, they must, too. If one state or locality stopped, it would mean a severe decline in the creation of jobs in that locale, they say. The way incentives are handled in this area, they added, governments more than recover the value of the incentives provided through property and income taxes.
Incentives are legal in many forms, including free land and grading of building sites, grants to train workers, property and corporate income tax breaks, cash, installation of utilities and spurs connecting to railroad tracks. Although such subsidies go back decades, their use has ballooned to billions of dollars per year in recent years and spread to states such as Virginia that until the early 1990s flatly refused to provide incentives to lure companies.
Five projects scattered over the region between Botetourt and Henry counties have received more than $8 million in incentives pledges this year, including $5.7 million to R.R. Donnelley & Sons Co. of Chicago for a planned book plant in Roanoke County. In return, the five companies vowed to create 1,000 jobs, and possibly more. The deals that benefited Thomason and Flippen predate these.
In a sixth case, Roanoke County recently awarded ITT Night Vision - already in business here - incentives worth $300,000 with the goal to strengthen the company at a difficult time in an ongoing process of converting defense products for sale in commercial markets. In return, ITT is planning to expand existing manufacturing and research activities, which support 625 jobs locally. The company had asked for help.
Neither Virginia nor the Roanoke region has been singled out for any recent criticism about the award of development incentives. Practices here generally coincide with methods the national experts consider responsible if incentives are given. For instance, a significant portion of the money committed goes to worker training and infrastructure development, investments that stay in the community no matter what a company does.
According to interviews with state and local officials, there is little reason to believe that the abuses raising the most concern nationally are occurring in Western Virginia - companies that take incentives and drop their end of the deals, heavy payments that entice firms to shuffle jobs from one community within a state to another, and bidding wars between cities, counties and towns that drive up the incentives price tag.
Instead, local and state governments in Virginia often bind companies in writing to produce the jobs and investment that they promise, meaning incentives can be recovered if protections are not met. Robert Skunda, secretary of commerce and trade, said last week he personally sees that localities do this when state funds are involved.
That sort of guidance won't be needed in the Roanoke Valley, however, because this area used binding agreements before many others, according to Beth Doughty, executive director of the valley's Economic Development Partnership.
Roanoke County enforced one against Allied Signal, which had to give back a gift of land when it shelved a factory project on the western Roanoke County site later given to Donnelley for its book factory.
And in another seven months, Thomason's job will be counted when Hanover Direct comes up for its review over whether it hired enough workers. Officials already think it has. Arkay Packaging's review will come later.
Nor is Doughty swayed by the bankers' claim that U.S. society loses in the incentives game. Take the case of Roanoke County's incentives to R.R. Donnelley & Sons Co. Society didn't pay for them, she said; Roanoke County did, for the most part. For its payout, the county gets to collect the taxes on the factory and becomes the hub of many new jobs, she said.
"I think what's being done on the local level, which is all I can see, is responsible," she said.
To their credit, Roanoke Valley communities tend not to bid higher and higher amounts of incentives against one another to land a company project, Doughty said. That's because companies tend to prefer one site in the valley to the others.
Were a company to try to auction itself to the highest bidder, good communication between government officials probably would head it off, said Elmer Hodge, Roanoke County administrator. The communities are poised to compete for corporate expansions, but only to an extent, he said.
Before getting Virginia incentives, companies must promise in writing that all new jobs will be genuinely new, rather than positions simply moved from somewhere else in the state, Skunda said. R.R. Donnelley & Sons signed such a promise recently, providing assurances its Lynchburg and Harrisonburg plants won't lose employees to the new facility to be built in this area. |n n| A new law, effective Monday, prohibits the governor from overextending the Governor's Opportunity Virginia Fund by promising funds not yet budgeted, Skunda said. The opportunity fund is a multimillion-dollar pile of cash the governor can use to close business development deals.
"We are continuing to do everything that we said a year ago and two years ago regarding improving the state's use of incentives," Skunda said, "to not only achieve our overall economic development objectives and to be competitive, but to assure the public the incentives are being used wisely and we're getting a good return on the incentives and, as much as possible, building protections in so we are not holding the bag."
Skunda said jobs created with incentives-driven deals generally pay above the state average for all industries - $12.68 - although he could not quote any of the figures he said he has seen to support his claim. The incentives promised from the deal-closing fund averaged $1,800 per job, about half a national estimate of $4,000 calculated by the W.E. Upjohn Institute for Employment Research, a nonprofit group in Kalamazoo, Mich.
Deals to win three multibillion-dollar semiconductor chip factories averaged a much higher $13,000 per job, but the state promised the builder of the second factory fewer incentives per job than the first and the third factory builder fewer still, Skunda said. The cost ranged from a high of $17,500 for the first factory - a Motorola project in Goochland County - to a low of $10,000 for the most recent project, announced in May, by Motorola and Siemens A.G. in suburban Richmond. Pay is above average, too, at about $35,000 per year.
The state, in wanting to start a semiconductor industry here, dangled the biggest incentives before Motorola, which took the risk involved in being first. From that point on, Skunda said, Virginia was like the maker of a new car that proved popular. It didn't need to offer as many discounts to attract buyers.
Roanoke County officials said they do extensive background checks on companies and subsidize only those with good reputations and track records. Flippen, the Arkay employee, has reason to believe Botetourt County did its homework in striking a deal with Arkay.
The company seeks quality in every thing it does, right down to the tiling in the bathrooms in the new plant.
"We got the little borders around the edges. Blue in the boys. Mauve colored in the girls," Flippen said. "It's just first class front to rear."
If a company is truly a good corporate citizen, why can't it pay its own way? Roanoke County's Hodge said the companies won't ignore available incentives to reduce their costs.
"They're good business people, just like we are," Hodge said.
But Roanoke County sets limits on what it will do for companies or pay in grants, drawing the line at whatever amount a company is likely to be able to repay in property taxes in three to five years. The payback requirement also exists in other valley communities. One company that Roanoke County sent packing with no incentives was Bacova Guild Ltd. of Bath County, which looked at a parcel in Valleypointe business park but sought more gifts than the county thought it could afford, said Tim Gubula, the county's economic development director. Bacova built its factory in Alleghany County, a community hungry for jobs. Bacova, a manufacturer of home decor items, opened its new factory last month at Low Moor.
"I've actually had [another company] ask if we would waive pollution-control requirements," said Hodge, declining to name the company. "We said no."
At Arkay Packaging, Flippen calls the deal a good one for the community in light of what he called the low level of incentives. "A quarter million bucks? Sounds to me like chump change," he said, when taking into account the new payroll dollars Arkay will put into the economy.
Thomason agrees with steps that will keep tax dollars flowing to companies such as Hanover Direct that will create jobs.
"As far as I'm concerned, at least my tax dollars are going toward something useful, something constructive," she said. "I think if they keep giving people jobs here, they won't need to worry about welfare in Roanoke."
LENGTH: Long : 237 lines ILLUSTRATION: PHOTO: WAYNE DEEL Staff 1. B.B. Thomason at the controls ofby CNBher forklift at Hanover Direct in Roanoke County. Her job is one of
many made possible by incentives given to Hanover to locate in the
county. 2. business incentives (chart) 3. Real deals (chart) color. KEYWORDS: MGR