Published Online: March 19, 1997

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Despite Rhetoric, Businesses Eye Bottom Line

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Second of two parts

In the tense weeks before Cleveland finally snagged the Rock and Roll Hall of Fame, the local school board objected to giving up some $800,000 a year in property taxes--a critical incentive to help build the music shrine.

Board members opposed the plan, which called for diverting taxes on another property to help finance the construction. Business leaders fumed that school officials would stall a project that might polish the city's "mistake on the lake" image. The mayor and a local congresswoman intervened and lobbied the board.

In the end, the district went along. Its compromise--a 6 percent slice of admission tickets instead of the property taxes--brought in $455,000 last year.

"I didn't want to stand in the way of progress, but I understood the loss to schools," said Gerald C. Henley, a board newcomer in 1991 who cast the swing vote. "In the end, half a loaf was better than no loaf."

At the Bargaining Table

Schools across the country and in Cleveland, where the city schools lose about $10 million a year to property-tax breaks granted to businesses, certainly have suffered worse outcomes. In fact, school officials are usually not even at the table when property taxes--the foundation of local school budgets--are reduced or completely abated for businesses.

"It's an unusual business official who says that it's OK to pay property taxes because they go to schools," said Betty McIntosh, the associate national director for KPMG Peat Marwick's business-incentives group in Atlanta. Her office helps orchestrate tax deals for companies nationwide. "They may digest it a little better if a tax goes to schools."

While business leaders often talk about the importance of good schools, they sing a different tune when it comes to their bottom lines. Many companies move to take advantage of favorable business climates. And corporations often flirt with the idea of leaving a town to get government officials to see their way at the bargaining table. In most of the deals, one of the first points is lower property taxes.

"Business will plead with local government to get tax breaks, and that's the nature of the entrepreneur system," said John Ellis, a former New Jersey state schools chief, who argues that businesses need to include schools in their bottom line calculations. "But business is shortsighted because investment in the young people of America is in their long-term interest."

Interviews with politicians, school officials, corporate spokesmen, and economists make clear that corporate tax deals--breaks that homeowners, small businesses, and farmers seldom get--are costing schools hundreds of millions of dollars a year. ("Schools' Taxes Bartered Away To Garner Jobs," March 12, 1997.)

One response is to make sure school officials have a role in the process--a position many school officials are denied and many more never ask for.

"Some see taxes as a marginal issue and just say, 'Go for it.' Others want to be seen as players in their communities," said Jeffrey A. Finkel, the executive director of the National Council for Urban Economic Development in Washington. "If schools are not at the table, it means that superintendents and board members are asleep at the switch."

Elbowing for a Seat

The first battle for schools is elbowing their way into economic-development decisions.

The big players in this process include development professionals, whose job it is to recruit businesses. Local elected officials, guided by what is allowable under statutes, usually make decisions on local tax breaks. Governors and state legislators also weigh in on high-profile deals, even passing last-minute legislation to sweeten packages.

But only a handful of states give school boards or their representatives voting power or a seat in the negotiations, even when deals involve school taxes. In most cases, schools must make their cases at public hearings, often after most of the negotiating is over. There are exceptions, however. Some cities won't exempt companies from school taxes, and others work with schools to negotiate fees as a substitute for lost taxes.

Tax negotiations often get so complicated that it is hard to get local school officials to push for a bigger role, said Steve Williams, the government-relations director for the New York State School Boards Association.

"This is so convoluted that people sometimes have a hard time making the connection," he said. "But we're all part of paying for public schools, and when somebody gets an exemption it's a tax shift from one taxpayer to another."

The New York school boards' group has tried for several years to get school officials a seat on local industrial-development bodies. The makeup of the state-chartered panels varies, but the members are usually local elected officials. These powerful panels granted businesses $737.5 million in property-tax breaks between 1987 and 1991, according to a study by the Fiscal Policy Institute in Albany.

For their part, New York lawmakers have declared that it is "proper and appropriate" to appoint school board members to development boards. But just five of the state's 125 boards include school representatives.

Sometimes, schools get involved because tax breaks hit too close to home.

Last fall, the school board in Greenville County, S.C., protested after learning that county commissioners were working on a deal to divert school taxes to help repay $8.5 million in bonds for construction intended to lure companies to the county.

The board's opposition got the school district off the hook.

"Schools were being set up to lose a large part of the revenue the district would have received," said Robert Galloway, the district's bond counsel. Last month, the school board went a step further, voting to seek state legislation that would require formal notification and public hearings on such deals.

State business officials are cool to that idea.

"We always look for education to play a more dynamic role," said Helen Munnerlyn, the spokeswoman for the South Carolina Department of Commerce. But businesses, she said, want to negotiate with "informed economic-development allies."

Wisconsin school officials get one seat on five-person local commissions that review so-called tax-increment-financing projects. These tax deals let communities divert school taxes back into economic-development projects, usually in poor areas. Tax-increment financing is used in 44 states, only five of which give schools a vote.

'So Much Pressure'

But even with the school role, the Wisconsin commissions granted $50 million in school tax breaks last year. John T. Benson, the state schools chief, is so disillusioned that he has joined with the Wisconsin School Boards Association in asking legislators to exempt schools from the deals.

He may have good reason if Madison school board member MaryJan Rosenack is right. A member of the local tax-review commission, she says the panels rubber-stamp city projects.

"There's so much pressure. Who wants to go against the city and be anti-development?" she said.

Ms. Rosenack set off a firestorm of protest in December by opposing a 30-year, $34 million tax package--half of which would be school revenue--to pay for roads and other infrastructure near a new medical center, basketball arena, and retail stores. She said the schools should not give up funding for projects that are being built. It was the first time in anyone's memory that a Madison school board member opposed such a deal.

Wisconsin businesses oppose the bill being advanced by the school boards' group.

"There's more political power that feels we need that tool to help economic development," said Jerry Tucker, who heads the tax-increment-financing program for Madison's economic-development department. "Schools want to opt out of the cost but opt in for the benefits."

Often with no role at all in hammering out tax deals, the financial relationships between schools and their wealthiest potential taxpayers are informal and awkward.

The Walt Disney Co. threatened to vacate Mickey and Minnie's Disneyland home in Anaheim, Calif., if the company did not get tax breaks for a 147-acre expansion that will include a new Disney's California Adventure theme park. Last fall, city leaders approved $546 million in spending on public works projects to help the $20 billion company with its venture.

Two local school districts approached the situation quite differently.

The Anaheim City elementary schools, frightened by the surge in enrollment that could come with the new jobs, wanted cash from the company to help it deal with the growth. It even threatened a lawsuit to stop the project.

In the end, the district backed off after Disney agreed to give the district a one-time payment of about $1 million. Elementary school officials said that as part of the deal they agreed not to talk about it, but they said they are still concerned about coping with growth in the 18,148-student system.

The Anaheim Union High School District, however, took a different route. Instead of pushing for money, it has been working on a series of commitments from Disney on partnerships to help with everything from job training and art instruction to free time at Disney's local ice arena for the district's 24,000 students.

"Let's just say that the elementary district went after money while the high schools sought services," said Harald G. Martin, a local police officer who serves on both school boards. "If it's just being bought off, I don't want that. It could take a lot of time to build back the goodwill."

Cleveland Tempest

When school boards get involved in development debates they generally become more sophisticated, Ms. McIntosh of Peat Marwick said. In her experience, however, many newcomers are overzealous and uncooperative, she said. "More than anything, you have to have a dialogue--'We're not saying yes, but we're not saying no, either,'" she said. "Like any public official, you have to do your homework, know the numbers, and have alternatives."

School boards may think that nothing gets more heated than negotiations over teacher salaries. But officials who have tried to gain a voice in tax deals say the heat in the economic-development kitchen can be downright scalding.

An Ohio law lets school boards vote on property-tax deals that would abate 75 percent or more of school taxes. Talks about the Rock and Roll Hall of Fame put the Cleveland board in the middle of such a tempest.

Board members recall the near-daily phone calls from Mayor Michael White. And then-U.S. Rep. Mary Rose Oakar, D-Ohio, showed up at a school board meeting to lobby the board, which had threatened to sue to stop the project.

Finally, the deal began to take shape during a questionable private meeting. The three-hour session involved four board members, Mayor White, and William Hulett, now the chief executive officer of the hall of fame.

Board members contend that the meeting was not a violation of the state's open-meetings law because no decisions were made. "It was shady more than illegal," Mr. Henley, the Cleveland school board member, said. The get-together, he added, was probably ill-advised. The session boosted the pressure on the board and left four Cleveland school board members with their backs against the wall.

Mr. Henley remembers that Mr. Hulett charged reluctant board members with trying to pick the hall of fame's pocket: "I told him I resented that. It got testy."

A spokesman for Mr. Hulett said that "to the degree that the school board wanted to file suit to stop the finance deal, you could say it was tense." Mr. Hulett insists that the rancor is ancient history.

Today, the hall gives Cleveland schools:

  • 6,000 free tickets each year. Regular admission is $12.95.
  • Lectures on music history and workshops on using rock and roll in the curriculum for teachers.
  • The James Brown minority-internship program, sponsored by ABC/Capital Cities records.
  • And the slice of ticket revenues.

'Pummeled' in Utah

Larry Newton, a tax expert for the Utah education department, said that he, too, has experienced the overwhelming pressure to put aside any reservations about school losses in tax negotiations. In his case, the debate was over a proposal to give a Salt Lake City developer a $7 million deal to build the proposed 45-acre Cottonwood Corporate Center.

When Mr. Newton met last fall with representatives of the project, which is still pending, he said the lobbying was intense.

"They took me to lunch at their office and pummeled me," Mr. Newton said. "Three guys leaned over the table and said, 'Here's what you don't understand.'" Meanwhile, other developers complained they had never gotten such concessions. "I got calls every day from other developers who said it was outrageous because they had bought land without asking for a handout."

Mr. Newton explained that the negotiations are about more than reducing overhead costs for the corporate center. "What it amounted to was taking money from schoolchildren to build sidewalks and lights," he said.

School officials appear to be at their strongest in negotiations when they are backed up by city officials.

In contrast with the situation in Cleveland, where teachers are circulating petitions that would require business to reimburse exempted school taxes, Cincinnati excludes school taxes from most business deals. The city gives tax breaks, but not the 60 percent of property taxes that goes to schools. Businesses still get a 40 percent break. In one incident, the city threatened to sue a company that tried to withhold the school tax it had agreed to pay.

School officials say it is refreshing to get that kind of support.

"This doesn't seem to give other areas a competitive advantage, and it protects the schools," said Cincinnati schools Treasurer Richard Gardner.

The city's biggest business, the Procter & Gamble Co., will pay school taxes worth $12 million over 10 years on a new $116 million plant where it will produce its Olean fat substitute.

Squeaky Wheel

In Sandoval County, N.M., they say it is not just the school districts where businesses are located that have to worry about the effects of tax breaks. After getting huge tax breaks that included a free ride on property taxes, the Intel Corp. agreed to build a new $30 million school in Rio Rancho, an Albuquerque suburb, to help even the score.

But the corporation's 30-year, $458 million property-tax abatement has a ripple effect far beyond the immediate Rio Rancho district. Outlying schools also anticipate Intel-induced growth that will not be compensated by county tax revenues.

"I tried informally to talk with Intel, but they were set on dealing with Rio Rancho," said Gilbert Sena, the former superintendent of the Bernalillo school district. "But the impact was countywide."

The rural Bernalillo district has just 3,600 students, 80 percent of whom qualify for the federal Title I program for poor children.

Mr. Sena persuaded his school board to hire a lawyer to explore legal options. The move lured Intel and county officials to the table with Mr. Sena and officials from other schools. "At our meeting, I talked about corporate citizenship and corporate responsibility," he said. "The people at Intel were upset for a while because they felt it was their prerogative to talk to who they wanted to."

Intel officials say that they are reluctant to give away cash. But in this case, Intel immediately began working to set up a county technology commission. One of the panel's goals remains connecting schools and public offices to common databases.

"The important thing is that we have a dialogue, and we can express our need," said Joe Lopez, the superintendent of the 800-student Cuba schools, 60 miles north of Rio Rancho. "That was not always the case."

Some Left Out

When Micron Technology Inc., a memory-chip manufacturer, announced it would build a $1 billion plant in Lehi, Utah, the local Alpine school district was elated. In order to get school officials from the 43,000-student district to approve the company's 12-year, $125 million tax-incentive package, Micron agreed to pay $10.4 million to the Alpine schools over that span.

But school officials in surrounding districts were less excited. While their schools would be sure to serve children from the plant's projected 3,000 employees, they were left out of the discussion. And the final deal could drain about $75 million in state taxes for school aid in a state that already ranks dead last nationally in per-pupil spending.

While Utah requires that two school officials serve on the local eight-person commission that grants tax incentives, Micron only had to deal with the Alpine district.

Next door in the Nebo school district, Superintendent Dennis P. Poulsen was realizing how much the company was going to mean to his schools. "If it's going to be that big," he said, "we're going to become a bedroom community."

The growing, 20,000-student Nebo system has issued $76 million in bonds since 1992 to pay for five new schools and 20 additions. But Mr. Poulsen does not blame Alpine officials. He admits that his district would have done the same if given the chance.

Mr. Newton, the tax expert for the state education department, was less forgiving. "Micron went to the [Alpine] school district and bought them off."

Mr. Newton represented the state school board on the tax commission that reviewed the project, which is still under construction. "It was one of the unusual times that I didn't vote with other districts," he said. "But I thought the impact was going to be broader [than just Alpine]."

How BMW Decided

Observers argue that a familiarity with economic-development issues--and knowledge of the ins and outs of tax deals--gives schools a better sense of where they fit into the economic food chain.

For example, manufacturing operations look for strong vocational-training programs and the availability of trained labor.

"Education becomes important not as a measure of quality of life but more of a skills base for the labor pool," said Larry Moretti, a senior manager at Fantus Consulting, an international firm in Princeton, N.J., that helps companies relocate.

And a company that is relocating executives and researchers is more likely to put a premium on the schools for its employees.

Still, in making the call on the best place to do business, good schools are more a fringe benefit than a necessity. And companies are rarely willing to pay taxes at the same nondiscounted rate as local businesses.

When Intel shopped for a site to build its $1 billion computer-chip manufacturing plant, it looked only at states that first met its list of basic demands. Near the top of the list was a 100 percent, 30-year property-tax exemption on land and equipment.

Both Arizona and New Mexico agreed to the demands, and Intel finally picked Rio Rancho, N.M.

Officials at the the BMW Manufacturing Corp. say that school programs in South Carolina, along with a generous tax deal from local officials, led the company to Spartanburg in 1993 to open its first U.S. plant.

South Carolina's nationally recognized Special Schools program, a branch of the state's adult-technical-education system that provides specialized workforce training, screened and trained most of BMW's 1,900 workers. Bobby Hitt, the plant's spokesman, called the program "the single most important reason why BMW located in South Carolina."

The German motor company, whose first cars rolled off a Spartanburg assembly line in 1995, also received a 20-year property-tax discount on its land, which the state donated, and plant equipment.

In 1995, the tax bill came to $4.9 million, about half of which went to Spartanburg School District No. 5. Most South Carolina industrial property is taxed at 10.5 percent of assessed value; bmw is taxed at 6 percent. At the full rate--without the discount and at the full assessment--BMW's bill would have been $37 million, according to the county auditor's office. A new state law will tax BMW's new $200 million expansion at 4 percent, the same rate as residential property.

Mr. Hitt insists that the education component was more important than the tax deal. "If we had located the plant where we would have received the most financial incentives, we wouldn't be in South Carolina," he said.

But for all the talk about the importance of schools, BMW officials did not speak with K-12 school officials about education quality during the talks. For information about the schools the company turned to other businesses. "We go to the employers," Mr. Hitt said. "The bottom line is that it's not a theoretical process. It's based in reality."

Happy, With Qualms

While he was not at the table and the negotiations mean that his district got about $16 million less than it might have last year, District No. 5 Superintendent Marvin C. Woodson is happy that BMW picked his town. He says it is a clean business that creates good jobs, generates a host of spinoff businesses, and pays about $2.5 million a year into the local school budget.

Still, Mr. Woodson has his qualms about the economic-development process in general. New and old businesses alike may rush to take advantage of a new state law that makes it easier for companies to qualify for discount assessments.

"What do you say to the old standbys when some new business gets the lower rate?" Mr. Woodson said.

The implications of more tax breaks are huge for the burgeoning 4,800-student district, which grew nearly 10 percent in two years--$14.3 million of its current $23.3 million budget comes from property taxes.

Mostly, Mr. Woodson isn't happy about being left out of all the deal-making.

"I knew what was going to happen with BMW after the fact," he said. "I don't think you could ever say I'd be an obstructionist to a deal ... but there are a lot of people who don't understand school finance. I think that's something that I could bring to the table."

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