Just how sleazy was that AMG tax break, again?

The tax break at issue is called the Economic Development Incentive Program, or EDIP, under which companies receive significant breaks on the taxes they would otherwise have to pay in exchange for locating their businesses in certain “economic target areas” or “economic opportunity areas.”  When AMG wanted to relocate its operations from downtown Boston to Prides Crossing, it proceeded under the latter, seeking and obtaining designation of its 88-acre site in Prides Crossing as an “economic opportunity area” or “EOA.”  AMG claimed that the Prides Crossing land was “decadent” under the relevant statutes and regulations, which qualified the land for EOA designation.  AMG bought the land in 2000, and construction on AMG’s new headquarters was already well underway by the time AMG’s tax break was approved in March of 2001.

According to the application for EOA designation, a “decadent” area is an area that is

detrimental to safety, health, welfare or sound growth of a community because of the existence of buildings which are out of repair, physically deteriorated, unfit for human habitation, obsolete, or in need of major maintenance or repair; or because much of the real estate in recent years has been sold or taken for non-payment of taxes or upon foreclosure of mortgages; or because buildings have been torn down and not replaced and in which under existing conditions it is improbable that the buildings will be replaced; or because of a substantial change in business or economic conditions; or because of inadequate light, air, or open space; or because of excessive land coverage; or because diversity of ownership, irregular lot sizes, or obsolete street patterns make it improbable that the area will be redeveloped by the ordinary operations of private enterprise; or by reason of any combination of the foregoing conditions.

“Decadent areas,” in other words, are supposed to be slums – as the word “decadent” suggests.  They are supposed to be areas that are “detrimental to safety, health, welfare or sound growth of a community.”  This definition of “decadent area,” along with the similarly vague but generally slum-like definitions of “substandard area” and “blighted open area,” have been at the heart of urban renewal and slum clearance and urban redevelopment programs for decades.

Now, Prides Crossing is not a slum.  It’s just not.  And it never has been, at least not in living memory.  Nonetheless, AMG got approval from the town and the state economic development agency to designate not the entire area of Prides Crossing, but just the parcel of land that AMG had bought, as a “decadent area.”  And as a result, it got a tax break for relocating its business there that was worth about $1 million.

Enter Gregory Sullivan, the state’s Inspector General.  Sullivan had figured out by late 2002 that the EDIP program suffered from “poor accountability,” as well as from “insufficient reporting, a lack of a comprehensive program evaluation, and the lack of data to support the programs reported success.”  He agreed with a Senate Post Audit Committee report identifying serious problems in the program, and “strongly suggest[ed] that immediate action be taken to ensure program integrity and to protect the interests of the taxpayers.”

Predictably, nothing happened.  But Sullivan kept looking.

By early 2004, Sullivan had enough information to go public with specific complaints about the EDIP program.  He wrote a ten-page letter to Alan LeBovidge, the Commissioner of the Department of Revenue, outlining several obvious abuses of the EDIP program and explaining how much they had cost the state.  He was particularly harsh in his description of AMG’s $1 million tax credit (bold emphasis mine; italicized emphasis in original):

Example Two: Affiliated Manager’s Group [sic] receives a tax break for moving to one of the wealthiest areas in Massachusetts.

On March 29, 2001, the EACC [Economic Assistance Coordinating Council, a state agency] approved the creation of the North Beverly EOA as a “decadent area.” This EOA encompasses a single 88-acre site in the Pride’s Crossing section of Beverly including the historic Loeb estate. The EACC declared this site a “decadent” area that could not be developed through the ordinary operations of private enterprise. At the same time, the EACC also approved a 15-year tax credit agreement between the City of Beverly and the site’s owner, Affiliated Managers Group Incorporated (AMG).

In the City’s application for the creation of a North Beverly EOA, it contended that: “it is unlikely the area will be redeveloped by the ordinary operations of private enterprise” and that the property is in effect “not developable.” According to the EACC’s March 29, 2001 meeting minutes, it did not discuss or dispute this contention.

This EOA encompassed only a single, large estate in the affluent “gold coast” community of Pride’s Crossing. The tax credits would, in effect, subsidize the renovation of the Loeb mansion. The City’s assertion that the area remained

undevelopable is false. In 1998, Toll Brothers Incorporated, “the nation’s leading builder of luxury homes,” purchased an option to build a 58-lot subdivision of luxury homes on the site. The area is zoned for one-family residential housing and “enjoys commercial grandfather status.” After having approved a preliminary proposal the year before, in January 1999, the Beverly Planning Board rejected the Toll Brothers proposal. The Toll Brothers appealed and in early 2000, during the appeal process, the site’s owner sold the property to AMG.

… From information reviewed by the OIG [Office of Inspector General], … it appears that AMG planned to move to Pride’s Crossing with or without a tax break…. Since AMG already planned and promised the facility to its shareholders, the statement in the EOA application that: “it is unlikely the area will be redeveloped by the ordinary operations of private enterprise” without the tax credit is clearly false.

Having blown out of the water the notion that Prides Crossing could come close to qualifying for this program, Sullivan goes on to blast AMG for misusing the program simply to give itself an advantage over its competitors, which is obviously not the EDIP program’s purpose:

The AMG application also stated that: “AMG is seeking project certification because the incentives offered under this program will allow AMG to remain competitive and expand its operations by reducing some of the company’s associated business costs. The reduction in overhead will provide AMG with the financial resources necessary to target additional mid-sized investment firms, expand its operations, add additional employment and boost the local economy in Beverly.” Notwithstanding whether or not AMG would gain a competitive advantage over other investment companies through a large tax break, the statutory requirement for the awarding of a state tax credit requires that the applicant demonstrate that the site cannot be developed through the ordinary operation of private enterprise.

He sums up:

Based on the facts stated above, this location fall
s under neither the spirit nor letter of the statutory definition of a “decadent” area. Pride’s Crossing is one of the wealthiest areas in the Commonwealth, and it was not improbable that the site would be “redeveloped by the ordinary operations of private enterprise.” The EACC stretched the definition of “decadent” area to accommodate AMG. Toll Brothers had a development proposal on the table. The agreement between AMG and the City, signed by AMG’s Chief Financial Officer, attested falsely that AMG met the criteria for EOA designation.

Finally, Sullivan noted that the EACC should have been aware of questions surrounding AMG’s tax break, since the press had reported on them in 2002, but did nothing, and concluded by recommending that AMG be barred from the EDIP program.

Of great concern to the OIG is the fact that the EACC took no action concerning serious questions raised by the press in 2002 concerning the validity of AMG’s tax break. According to EACC meeting minutes, neither the EACC nor DBT took action to investigate the allegations. The serious issues raised would have refuted the contention that the area was undevelopable by the ordinary operations of private enterprise and would have provided grounds for the EACC to revoke the EOA designation.

As a result, the use of the tax credit for AMG was unjustified. The OIG believes that DOR should disallow all future EDIP tax credits for AMG and take appropriate actions to recoup the more than $1 million in tax credits given AMG to date.

A day or two after Sullivan sent this letter, the Globe wrote a story about it.  AMG vigorously defends the tax break in the article.  The story noted AMG’s “stellar Republican credentials” (“In addition to Sean Healey, state GOP chairman Darrell W. Crate is the company’s chief financial officer, [ex-Gov.] Weld now sits on the firm’s board of directors, and [AMG spokesman Ray] Howell is Weld’s former press secretary”), and reported a particularly hilarious exchange with the Mayor of Beverly, who defended the tax break:

Beverly Mayor William F. Scanlon Jr., whose administration helped AMG apply for the tax credit in 2001, defended the deal, saying in an interview last week that the AMG project was popular with area residents, that the Toll Brothers plan was not, and that he was extremely interested in helping any firm willing to locate its corporate headquarters in Beverly.

But Scanlon acknowledged that the property is “finer than any palace I’ve seen in Europe,” and hardly blighted, as the firm’s application for tax credits asserted.

He also said AMG would probably have developed the site without the tax credit, but “that’s Monday morning quarterbacking.”

Scanlon, in other words, wanted the company to move to Beverly, and was happy to make shit up on the tax break application in order to make it happen.  Terrific.

The story takes a fascinating turn a little over a year later, when the Globe gets a hold of a couple of state reports on abuse of the EDIP program.  According to the Globe story, DOR Commissioner LeBovidge filed a report with the legislature echoing many of Sullivan’s criticisms of the EDIP program, including specifically the criticism that EDIP tax credits are “handed out as favors” to companies that don’t deserve them.  The report also criticized the practice of designating individual parcels – like the 88-acre AMG parcel – as “decadent” areas, saying instead that “the tax credits are meant to encourage development of entire neighborhoods or regions that are designated as blighted or decadent.”  The report

said a designation should include at least several properties, to meet the intent of the law. The report states further that a parcel-specific designation ”may instead be a benefit that a developer seeks when it already has a specific parcel and project in mind.” Affiliated Managers Group was well into completing its development in 2001 when it got its tax credit.

The really interesting thing about that report is that, five days after Commissioner LeBovidge filed it with the legislature, he withdrew it, saying that he had “inadvertently” filed a “draft” report.  However, the Globe story notes that “nothing in the department’s report indicated that it was a draft, despite LeBovidge’s assertion.” 

And a couple of days later, the Globe published another story reporting an email trail making it pretty obvious that the Department of Revenue was under constant monitoring and “pressure” from “high-ranking Romney administration officials” with respect to DOR’s investigation into the EDIP program.

The e-mails cover a period from August 2004 to September 2005. Revenue Commissioner Alan LeBovidge and his staff submitted a critical report on the program on Oct. 1, 2004, and then withdrew it after a flare-up with the state economic development office over the document’s conclusions. The Revenue Department prepared a new, far less critical report that was released last month.

The e-mails reveal that the department’s initial criticisms of the program created a storm at the highest levels of the administration. One revenue official said in e-mail Nov. 29, 2004, that [Secretary of Economic Development Ranch] Kimball “was over the top” because the initial report had been submitted without his review. Kimball’s office administers the development program.  LeBovidge’s top aides expressed concern that same day about the “onslaught” that they and the commissioner expected from other disagreements with Kimball’s office….

The inspector general also speculated that “some kind of influence” was involved in changing the Revenue Department’s initial position. The e-mails appear to bolster Sullivan’s position.

Through all of this, AMG continued to strongly defend the propriety of its receiving the tax break.

At this point, the story had gotten hot enough that Kerry Healey could not stay out of it any longer.  And she made a big, big mistake.  When finally forced to talk about this whole mess, the obvious thing for her to have done was outlined by Brian McGrory:

She should have correctly reminded voters that she had no role whatsoever in the incentives. She should have announced that her absolute first obligation is to the taxpayers of Massachusetts. She should have said that the program is obviously not working in the way it was intended. And she should have publicly directed state tax officials to do whatever they could to recoup misappropriated funds. And she might have added that if her husband, who happens to be willing and able to finance her political campaigns, was involved, then so be it; modern life is complicated, and she hoped the public would understand this. The applause that followed would have been for a principled politician willing to take a tough stand.

Instead, she foolishly attacked the Inspector General – despite the convincing evidence he had laid out many months before that AMG didn’t qualify for this tax break – and she deferred to the “expertise” of the economic development agency and of DOR – DOR by now having been chastened and having fallen into line defending the tax break, despite its initial highly critical report.  Simultaneously, she
criticized the “expertise” of Inspector General Sullivan.  Yet, as McGrory noted,

Expertise? He’s the inspector general, emphasis intended. His expertise is taxpayer abuse, and Sean Healey’s tax incentive appears to fall right within his wheelhouse. Beyond that, Sullivan, a Harvard grad, holds a master’s degree from MIT’s Sloan School of Management with a concentration in finance. Short of having Alan Greenspan investigate tax breaches in Massachusetts, I’m feeling pretty good about the guy we have.

Result: Healey ends up looking like she’s defending her husband’s fairly clear abuse of a program designed to redevelop slums in order to save a few bucks moving his company’s headquarters to a place where he can bike to work.

And then, amazingly, the company threw in the towel.  The heat apparently had gotten so intense that they could no longer stand it, and a few days after Healey’s vigorous defense of how appropriate the tax break was and how there was no basis to “second-guess” its having been awarded, AMG announced it was returning the million bucks and withdrawing from further participation in the EDIP program.

The decision represented a major reversal for Sean M. Healey and his company, Affiliated Managers Group, which had refused to return the money despite criticism that the multimillion-dollar company was unfairly benefiting from a government program designed to lure firms to locate in what the state called blighted or decadent areas. But with Kerry Healey preparing a run for governor, the tax break had become a focus of attention from Democrats and the media.

Kerry Healey’s own statement is particularly hilarious:

“While the Economic Development Incentive Program was created prior to this administration, we do support using tax incentives as a vital tool for maintaining and attracting jobs to Massachusetts,” Healey said. “That being said, it is at each company’s discretion whether or not to participate in tax incentive programs. Affiliated Managers Group, a publicly traded company, has decided to no longer participate in this particular program.”

You gotta love how that statement is worded so as to suggest that AMG was just another publicly-traded company with which she has no particular connection – rather than being the no-limit ATM that is funding her campaign for Governor.

And thus ends a sad and sleazy story of corporate welfare, influence peddling, insider hackery, and political cowardice.  The Republicans (in the person of Tim O’Brien, then the state GOP’s executive director and now Kerry Healey’s campaign manager) did get it right once: O’Brien said the situation was “politics at its worst.”  He was right, but not in the way he meant.  Kudos (again) to the Globe, and to Frank Phillips in particular, who brought the sordid details of this story to light.  To date, neither Sean nor Kerry Healey has ever acknowledged the slightest possibility that maybe, just maybe, Prides Crossing wasn’t exactly the kind of “decadent” area that the “economic opportunity area” tax incentive program had in mind.