O'Malley had little choice but to give Bechtel $9.5 million

October 24, 2011|Jay Hancock

Can you challenge the logic behind Gov. Martin O'Malley's decision to give $9.5 million in taxpayer money to Bechtel Corp.?

No governor wants to lose 1,250 jobs to a neighboring state. Especially if he's a Democrat and the neighbor, Virginia, has a Republican governor bragging about low taxes. Especially if he recently lost another economic development contest when Northrop Grumman chose Fairfax County, Va., instead of Montgomery County, Md., for its headquarters.

This time O'Malley won! In return for the dough — Maryland's biggest economic development deal in years — Bechtel agreed to keep its power division and all those jobs in Frederick County until 2019. And to say nice things about Maryland.

"We first moved to Frederick in 1999 and have found it to be a welcome community to locate our power business," Bechtel President Bill Dudley was quoted as saying in O'Malley's press release.

But it wasn't welcoming enough to keep Bechtel from looking south for its next home. Bechtel spokeswoman Michelle Michael declined to give details on the company's search and negotiations with Virginia. So did Suzanne West, spokeswoman for the Virginia Economic Development Partnership, that state's business promotion agency.

This summer, however, Maryland officials heard through real estate sources about a mysterious "Project X," with hundreds of jobs, whose agents were looking for offices in Montgomery County and Northern Virginia, said Christian Johansson, secretary of Maryland's Department of Business and Economic Development.

As soon as they identified Project X as Bechtel's Frederick County operation, with nearly 2,000 jobs paying six-figure salaries on average, "the governor was calling the decision-makers at Bechtel," Johansson said in an interview. "I was out there the next day."

Maryland isn't exactly flush with money. Without cuts or new taxes, the state will miss meeting budget commitments next year by $1 billion, officials estimate. Nine million dollars could pay for a school.

Bechtel, for its part, booked $27.9 billion in revenue last year. The San Francisco-based engineering and construction company is privately held, so its profits aren't published. But with an order backlog for roads, railways, environmental cleanup, power plants and mining facilities of more than $70 billion, Bechtel probably wasn't citing financial distress as a reason for taking Maryland's money.

The company agreed to keep its power division, which designs and builds all kinds of electricity-generation facilities, in Frederick County. It gets $2 million from Maryland upfront and about an additional $1.1 million a year if it employs at least 1,250 at the facility through the end of 2018 — for a total of $9.5 million. If employment falls below 1,250 Bechtel must give some of the money back.

So O'Malley can boast that he "retained" high-paying Maryland jobs. Bechtel gets a little extra capital to invest in projects or to return to shareholders. The company's other 700 or so Frederick positions, assigned to corporate work or reporting to its government services division, will probably end up in Virginia. "We have not yet finalized plans" for those jobs, said Michael.

Presented with a choice of bribing a company such as Bechtel to keep operations in-state or letting it ship jobs across the border, governors will choose the payoff every time. It's not their money, after all. And even for taxpayers and state bean counters, it's the better of two bad options.

Most of Bechtel's 1,250 power-division employees live in Maryland, Johansson said. They pay $4.5 million a year in income tax and an additional $2.5 million in sales tax, state officials estimated. Localities get an additional $2.8 million in taxes.

Some surely would have kept Maryland homes even if their workplace had moved south. (It would have been interesting to see how commuting to Virginia via the gridlocked routes 270 and 15 affected their productivity.)

But many would have become Virginia taxpayers. So the state figures it will "pay" for what it's giving Bechtel and still come out ahead by keeping the company and its workers north of the Potomac.

"Is this the type of deal you would like to do every day of the week? No," Johansson said. "You're technically not adding jobs to the mix."

But Maryland can't disarm when other states are poaching its companies, he said.

Seemingly sensitive to the fact that Virginia's personal and corporate income taxes are lower than Maryland's, Johansson claimed that Bechtel's roving eye wasn't prompted by taxes or regulation. It had to do with an expiring lease in Frederick, available Virginia real estate and the desire to be closer to Dulles airport and federal customers, he said.

Perhaps. I'm guessing that Virginia wasn't confident enough in low taxes alone to attract Bechtel. It probably dangled its own incentives.

This is how the game is played. Footloose employers pit one state against the other. Because they can. Governors write big checks and put out triumphant news releases. Because they must.


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