Ethics officials look at consultant fees tied to tax breaks

Pay linked to deals as corportations move

October 29, 1999|By Jay Hancock | Jay Hancock,SUN STAFF

Consultants who get paid extra to negotiate bigger tax breaks for corporate clients have sparked concern among state ethics officials, who say the practice may violate laws banning contingency compensation for some people dealing with government.

Even if consultant bonuses linked to tax breaks are found to be legal in Maryland, ethics officials are talking about changing state law to outlaw the practice.

"I'm troubled by contingent-fee compensation with respect to these [tax] incentive deals," said Donald B. Robertson, chairman of a state task force on lobbying practices. "I'm certainly going to bring up this subject" with the task force.

"It's something I need to take a look at, to see to what extent the law might apply or, if it doesn't, why maybe it should apply," said John E. O'Donnell, director of the State Ethics Commission.

The scrutiny follows a series of articles on business tax breaks published by The Sun this month. In a process best known in Maryland by the $44 million in government benefits recently won by Marriott International, corporations increasingly negotiate their own taxes by moving operations to another state or threatening to, sapping state finances and fostering unequal tax burdens.

One of The Sun's articles focused on the common practice of flexible fees, in which consultants' pay is secretly tied to the size of government incentives they negotiate for corporate clients.

The bigger the tax break, the bigger the consultant's paycheck. Sometimes consultants get as much as 30 percent of all or part of taxpayer-financed incentive packages.

The practice prompts harsh criticism from some government officials and even many consultants. They call contingency pay an unethical kickback that forces up taxpayer costs, cuts benefits for employers and could induce a consultant to steer a client to an unsuitable location just to obtain a bigger paycheck.

"I definitely do not agree with that," said Mike Mullis, head of a corporate location consultancy that bears his name in Memphis, Tenn. "Why wouldn't a consultant lean more to a location that paid a higher inducement package, if there's money tied to it? I think that takes some of the objectivity out of it."

Maryland prohibits contingency pay for lobbyists and certain others involved in state procurement. If you're a lobbyist, for example, your client can't pay you a bonus if his bill passes the legislature or if the governor or some other state official decides in his favor.

Ill-defined law

What is unclear is whether incentives consultants are lobbyists under the law, O'Donnell said, and whether incentives deals fall under procurement rules. Often, consultants negotiate directly with Maryland economic development officials on behalf of corporate clients. Some incentives, such as "Sunny Day" grants and loans, also require legislative approval.

Because consultants are paid confidentially, it is unclear how many in Maryland have received inducements to negotiate the biggest possible tax breaks for business clients.

Ioanna Morfessis, chief executive of the Greater Baltimore Alliance economic development group, said she knows of at least one Baltimore-area deal in which the consultant would get more money as the incentives went up. She declined to identify the consultant or the client.

Of 16 national consultancies interviewed by The Sun for its series, five said their pay is sometimes linked to the size of incentives.

Nationwide, one incentives deal with contingency pay was the $150 million that helped induce car-maker BMW to build a factory in South Carolina in 1994. Fantus Consulting earned huge fees by linking its pay to the size of BMW's package. Fantus hasn't been paid on a contingency basis for incentives negotiation in recent years, said James Schriner, director of location strategies.

Behind the scenes

Precisely what happens behind the scenes in Maryland is almost impossible to determine.

One incentives consultant that sometimes works on contingency is Julian J. Studley Inc., a New York-based firm that helped engineer Marriott's $44 million Maryland incentives package. Marriott threatened to move to Virginia without it.

With "more than half our clients, we have incentivized contracts" with a base fee plus contingency pay tied to several aspects of a real estate deal, often including economic development inducements, said Peter Capuciati, a corporate managing director at Studley.

This week The Sun asked Marriott if Studley got contingency pay for the Marriott tax breaks.

"Marriott has a confidential agreement with Studley, and because of that we have not and will not disclose the terms of that agreement," said Marriott spokesman Nick Hill.

Studley also declined to comment on its Marriott compensation.

`A form of lobbying'

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