When companies seeking tax breaks or financing dangle the prospect of new jobs in front of states like Texas and California, they often aren't the only ones standing to profit from taxpayer-funded competition for economic development.
In many cases, site selection consultants are helping guide companies through the application process, showing them how to squeeze out the best possible deal.
And how much the companies pay those consultants, in turn, is often based on a percentage of the deal they help cut.
The widespread use of consultants working on commission is raising concerns about whether that affects the advice they give clients.
“We just don’t think that taxpayers should be paying windfalls,” said Greg LeRoy, executive director with Good Jobs First, a nonprofit that tracks economic incentive programs. “It’s not an appropriate structure for the use of a public incentive.”
He added, “I have problems with commissions because I think they create an incentive for the consultant to steer people to the most lucrative discretionary package that will get them the commission rather than the best location.”
In August, California Gov. Jerry Brown sided with critics, tweaking the rules of that state's largest economic incentives program to bar applicants from paying consultants a commission based on the size of the tax break.
The lawsuit from a politically connected Texas consultant came three days later. Dallas-based Ryan LLC, one of the most successful site selection consultants in the country, argued that the change violated the California Constitution and described it as “regulatory overreach.”
“Ryan often utilizes success-based fee agreements. … The 2014 Regulation impairs Ryan's privilege to conduct business and reduces the profitability of its business,” the lawsuit reads.
In Texas, viewed as one of the most generous states when it comes to incentives, Ryan LLC has also drawn scrutiny for its various connections to state officials. The company has represented companies receiving nearly 60 percent of all incentives approved by the state’s Enterprise Zone Program, and many clients that have received subsidies from other Texas incentive programs, according to The Dallas Morning News.
Employees of Ryan LLC were also major campaign contributors to Sen. Glenn Hegar’s successful campaign to replace Susan Combs as comptroller. The comptroller’s office oversees many of the state’s economic incentives programs.
Under California Competes, that state's largest incentive program, companies receive breaks on the state’s income tax to create jobs. The program has $151 million in credits to award this fiscal year, and $200 million next fiscal year, according to Brook Taylor, deputy director for the California Governor's Office of Business and Economic Development.
About half of Ryan LLC’s clients prefer “performance-based” pay arrangements to an hourly rate, according to Tom Stringer, with Ryan LLC’s credits and incentives division. He said California’s rule change will block otherwise eligible companies from taking advantage of the state’s largest incentive program. Smaller firms interested in moving or expanding often can’t afford to pay a consultant upfront, particularly if they are still deciding what they can afford, he said.
“We see it as frankly a fairness issue,” Stringer said. “You're going to disenfranchise a substantial number of business owners.”
Taylor declined to explain the state’s explicit reasons for changing the rule, but noted that his office has simplified the application process for the California Competes program.
“California is changing the economic development game,” Taylor said. “We have lowered the barriers to entry, developed a user-friendly website for tax credit requests and created a 25 percent set-aside for small businesses.”
No matter how simple the application process, Stringer said, navigating the different economic incentives available in multiple states is challenging. That’s where consultants come in, he argued.
“Any time you marry government and you work with government, it is not easy,” Stringer said. “And that goes with every state.”
In Texas, economic incentive programs have been under a particularly harsh spotlight since September, when a scathing state audit of the Texas Enterprise Fund found troubles with weak oversight. Yet any regulation of site selection consultants appears unlikely.
A select House Committee studying the programs has held six meetings since July. Last week, committee chairwoman Angie Chen Button, R-Richardson, led a discussion on several proposals to improve fund management, including merging programs like the Texas Enterprise Fund and the Emerging Technology Fund, providing clearer standards for issuing incentives and streamlining the application process.
The issue of paying site selection consultants did not come up, according to Amanda Willard, Button’s chief of staff. She said Button did not believe Texas should be telling private businesses how to spend their money.
“It looks like another example of California micromanaging,” Button said in a statement.