By Cezary Podkul
Georgia rolls out a red carpet for them at the Masters Golf
Tournament. Kentucky gets them tickets to the Kentucky Derby.
Arkansas takes them on a private duck hunt with the governor. Utah
recently arranged a private ski trip with an Olympic medalist.
Such is the life of site selectors -- consultants who jet around
the country helping corporations decide where to build new
headquarters, factories or expansion projects, often pitting
communities against each other in multistate bidding wars to
maximize tax breaks, grants, land deals and other incentives.
As communities across America race to win such marquee projects,
these middlemen have quietly become some of the most powerful
consultants in corporate America.
There are about 500 site selectors active in the U.S. and a 2017
survey found that 54% of companies plan to outsource part of their
next corporate location search, according to consulting firm
Development Counsellors International.
Amazon.com Inc. retained a site selection advisor, Alex Leath of
law firm Bradley, to work with its in-house team to sift through
238 proposals during its recent search for a second headquarters.
Site selectors from Ernst & Young LLP helped Foxconn Technology
Group secure the richest incentive package in Wisconsin state
history for its now-delayed liquid-crystal-display manufacturing
plant. Foxconn selected Wisconsin's package, which totaled more
than $4 billion in state and local support, after a multi-state
bidding war in which states jockeyed to sweeten their offers.
In some ways, the site selectors act like lobbyists, interacting
with government officials as they help their clients obtain
favorable deals that sometimes require legislative and regulatory
changes. Unlike lobbyists, site selection consultants often work on
commission, which is frequently tied to the size of the incentive
package they negotiate for their clients. That fee structure has
drawn criticism from some of the very economic development
officials who are competing against each other for the
projects.
Lee Crume, who heads an economic development group in Northern
Kentucky, thinks site selectors provide a valuable service to
companies, but they shouldn't be paid based on the size of the
incentives they negotiate.
Site selectors' ability to shape billions in public spending
decisions has also sparked criticism that the industry operates
with little oversight or disclosure requirements that apply to
corporate lobbyists.
"Winning legislative actions for discretionary incentives...I
think that's lobbying," said Greg LeRoy, executive director of Good
Jobs First, a nonpartisan policy group that is critical of
incentives. "They know that and legally don't want to be treated
like lobbyists."
Moreover, in the vast majority of cases, firms that receive
public incentives for opening factories, expanding headquarters or
creating jobs would have taken those actions even without a
sweetener, according to a pair of 2018 studies by the W.E. Upjohn
Institute for Employment Research.
Despite that, Upjohn research shows that the state and local
costs of incentives have at least tripled since 1990, reaching $45
billion annually as of 2015. Average incentive awards have also
tripled in size as a percentage of business taxes owed by the
companies receiving the perks.
What the incentives can alter, in some cases, is the location of
the project. That's fueling competition that has helped turn site
selection into a booming cottage industry.
"Kentucky Derby. Mississippi governor's quail hunt. Georgia
quail hunt...I've been to all of them," said Mike Mullis, a
Tennessee-based site selector. He works alongside his fiancée,
Denise Mott, at a site selection firm he founded in the 1970s, J.M.
Mullis Inc. The firm completes an average of about 50 projects a
year, according to its website.
Mr. Mullis has developed a reputation for being a tough
negotiator on incentives. When he represented Jeff Bezos's rocket
company, Blue Origin, on a site-selection search in 2016, a
Washington state official told the Puget Sound Business Journal
that Mr. Mullis "constantly hammered" the state to see what
incentives they could offer. Mr. Mullis told the paper that the
characterization was "pretty consistent with how we operated."
Blue Origin didn't respond to a request for comment.
Mr. Mullis was also an early member of an exclusive club of
consultants known as the Site Selectors Guild. New guild members
have to be approved by a committee, and every member is required to
attend a conference where government officials and other attendees
pay $2,000 a ticket for a chance to hobnob with them.
Guild members also get treated to extravagant parties and perks
by local communities that host the events. Like the hunting trips
and other events, they're often public-private partnerships.
Last year's festivities, held in Cincinnati, featured a private
reception at Paul Brown Stadium, where the Cincinnati Bengals play.
Site selectors were greeted on the field like NFL stars: plumes of
fire shot in the air and a squad of cheerleaders waved pompoms as
site selectors ran onto the field dressed in personalized Bengals
jerseys that awaited them when they arrived in the team's locker
room. One site selector, Jay Garner, got a chance to conduct the
string section of the Cincinnati Pops at a private event with the
orchestra. Mr. Garner, who describes himself as the conference's
"de facto entertainment guy," conducted Mozart's "Eine kleine
Nachtmusik."
Since its founding in 2010, the Guild has grown to include 50
consultants and now attracts 355 paid attendees at the marquee
event, which usually sells out within an hour, according to the
guild's executive director, Rick Weddle. Mr. Weddle says the
industry's mantra is that "incentives can never make a bad location
good. They can make a good location better." He said site selectors
help companies weigh a variety of factors, such as the availability
of qualified workers, access to infrastructure, proximity to
customers and suppliers, the cost of utilities and other production
inputs.
When the U.S. arm of Czech firearm maker Česká Zbrojovka began
looking for its first U.S. factory site last year, the company had
already committed to the expansion. Even if the subsidiary, called
CZ-USA, received no incentives, it still would have proceeded with
the project, said CZ-USA's chairman, Bogdan Heczko.
Still, he decided it would make sense to "see how much we can
get."
Mr. Heczko's company was originally deciding between two states
-- Kansas and Missouri -- which have a long history of competing on
incentives. Then CZ-USA hired Mr. Mullis to help with the search.
Mr. Mullis advised CZ-USA to broaden the search to more states,
according to Mr. Heczko. Mr. Mullis said he helped the firm scout
locations in a dozen states, including Arkansas.
In early December, Mr. Mullis and a handful of other site
selectors spent the day hunting at a private retreat with Arkansas
Gov. Asa Hutchinson. Mr. Mullis said events like these are good
"relationship-building" opportunities.
At the end of the day, as Mr. Mullis relaxed on a couch in a
spacious hunting lodge in Northeast Arkansas, Mr. Hutchinson
approached him to ask for his advice on how to attract the gun
manufacturer to his state.
"What do we need to do to close this deal? We want this
project," Mr. Hutchinson said, according to Mr. Mullis.
Mr. Hutchinson confirmed in an interview that Mr. Mullis gave
him advice on how to "fine-tune" Arkansas' pitch to his client. He
also said Mr. Mullis "is a very good shot."
Mr. Hutchinson -- who has okayed 435 incentive deals since
becoming governor in 2015 -- ultimately allocated $4 million from a
fund he controls, the "Quick Action Closing Fund," to pay for
improvements at the site in Little Rock selected by CZ-USA. That
was in addition to more than $20 million of loans, rebates, tax
breaks and other incentives Mr. Mullis helped negotiate. The
company pledged to invest $90 million and create 565 jobs,
according to a press release.
Site selectors sometimes explicitly ask for legislative changes
to accommodate their clients. And when the deal is big enough,
officials move quickly to act on those demands.
In the spring of 2017, Ernst & Young sent Wisconsin and
other states a request for proposals for an investment opportunity
it identified only as "Project Flying Eagle." The document included
an explicit request that governments "provide offsets to all taxes
levied at the state and local level" and "propose potential
administrative and/or legislative changes" if they are "unable to
close the cost differential" with the company's existing
manufacturing facilities in Asia.
At least three states -- Wisconsin, Ohio and Michigan -- made it
to the final round of bidding for what turned out to be the Foxconn
plant, according to interviews and documents disclosed under public
records requests.
After back-to-back pitches from the states' governors, Ernst
& Young worked with state officials to help the company
maximize incentives, according to a person involved in the
confidential negotiations.
"All they did was ask for more money," the person said.
Michigan raised its offer twice, according to documents the
state provided under a public records request. The state's package
of discretionary incentives rose from about $1.7 billion in May
2017 to $4.4 billion to about $4.5 billion by late June. Including
other available exemptions already on the books, Michigan package
totalled around $7 billion, although many of the promised tax
breaks would have paid out later than Wisconsin's package.
Correspondence between Wisconsin and Ernst & Young shows
that state also sweetened its offer during the process. A spokesman
for the state's economic development arm said the boost was
justified because the scope of the project had increased.
The administration of Wisconsin's then-Gov. Scott Walker relied
on an economic-impact study provided by E&Y to craft a package
of tax credits, infrastructure improvements and other incentives
for Foxconn, emails show. The state's share was about $3 billion
and wouldn't result in a positive return to taxpayers until 2042,
according to a state review of the incentives published by
Wisconsin's Legislative Fiscal Bureau. But if everything would pan
out as expected, Wisconsin would gain 13,000 jobs and be home to a
$10 billion liquid crystal display manufacturing plant, the first
in the U.S.
Ernst & Young's study was cited by Wisconsin officials as
they sold Foxconn's incentive package to the state legislature.
Gov. Walker called a special legislative session to pass the bill,
which became law in seven weeks.
Ernst & Young executives said in a 2018 article on
maximizing incentives that such studies can be useful as a "public
relations tool" to "build support" for a project.
Timothy Bartik, a senior economist at the W.E. Upjohn Institute
for Employment Research, reviewed Ernst & Young's economic
impact study of Foxconn's investment in Wisconsin. Mr. Bartik said
the study wrongly assumed that the added jobs wouldn't result in
any additional costs to governments, such as increased costs to
schools or added spending on roads. Additional costs like these can
overshadow the value of any incremental tax revenues generated by
the employment.
"I think a true fiscal analysis would show that this project
will NEVER break even fiscally, until the Sun turns into a red
giant," Mr. Bartik said in an email.
Since Wisconsin inked the deal, Foxconn has scaled back its
ambitions in Wisconsin. The company said in a January letter to the
Wisconsin Economic Development Corp. that it has "adjusted our
recruitment and hiring timeline" and had created fewer than 200 of
13,000 jobs it had promised.
Foxconn also said it would forgo the $9.5 million of job
creation credits the company was eligible for in 2018 under its
contract with Wisconsin. The company declined to comment.
Wisconsin Economic Development Corp. Chief Executive Mark Hogan
said in an interview that Foxconn's incentives are
performance-based and meant to provide the company flexibility to
adapt to changing circumstances. "We came up with what we felt was
the best deal for the state of Wisconsin and the taxpayers," he
said.
In a meeting with the Journal, Ernst & Young's site
selection leader, Paul Naumoff, declined to comment on his
company's work for Foxconn, citing client confidentiality. A
spokeswoman who attended the meeting advised him not to answer when
a reporter asked if site selection work bears similarities to
lobbying.
Incentives aren't always the key factor in companies' relocation
decisions.
When Amazon searched for a home for its second headquarters, the
availability of a skilled workforce was the top concern. "This was
really about talent," Holly Sullivan, Amazon's head of world-wide
economic development, said at the Site Selectors Guild's annual
conference in March.
The event was held at the Grand America, a luxury hotel in Salt
Lake City featuring a landscaped garden and harp concerts in the
lobby. Perks included a cowboy attire-themed dinner with Utah Gov.
Gary Herbert at the Grand Hall of the Union Pacific Depot and a
site selectors-only ski trip with a two-time Olympic medalist,
Shannon Bahrke. There was also a dance party featuring a Motown
band. Mr. Garner, the site selector who conducted Mozart in
Cincinnati, sat in to play drums to Duke Ellington's "Don't Get
Around Much Anymore."
It was hard to find any part of the event that didn't have a
state logo on it. Louisiana paid for the Wi-Fi; South Carolina paid
for breakfast. Each cost $10,000. A chance to spend an hour at a
private cocktail party with the guild's members also cost a good
amount. "I paid $20,000 to go to this thing," said one state
official as he waited to go in to the "silver sponsors"
reception.
Like the competitive bidding process used by site selectors, the
selection of the conference location itself was conducted via a
request for proposals. A winning bid can cost upward of $100,000,
according to two economic development officials who hosted past
conferences.
Val Hale, executive director of the Utah Governor's Office of
Economic Development, said it is money well spent. "This is the
Super Bowl of economic development events," he said.
The conference was the brainchild of Robert Ady, an industry
veteran who founded the Guild in 2010 after realizing that economic
development officials would pay for the privilege of spending time
in the presence of site selectors. (Mr. Ady died in 2012, the first
year the annual conference was held.) The Guild runs as a
for-profit corporation owned by members and the annual event is its
main moneymaker.
True to its founder, incentives remain an agenda item at the
conference. According to Mr. Ady's daughter, Janet Ady, he used to
say that "you'll never know if you paid too much in incentives.
You'll only know if you didn't pay enough."
Write to Cezary Podkul at cezary.podkul@wsj.com
(END) Dow Jones Newswires
May 18, 2019 00:14 ET (04:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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