The Difference Between Incentives and Private Investment – Disclosure

April 26, 2012

Investigative Reports

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Business PlanImagine being an investment broker without the information necessary to keep clients apprised of how their assets are performing: no price-to-earnings data, no quarterly profit statements, no tax liability numbers.

Hardly any objective measurements for investors – just your word that their money is paying dividends and is expected to keep doing so.

Doesn’t sound like a very promising career path as a financial adviser, does it?

Well, when it comes to many state incentive deals, that’s precisely the kind of shaky guarantee South Carolina taxpayers receive for their unsolicited stake in these government-brokered economic development agreements.

It’s a far cry from the way things work in free market finance.

Indeed, interviews with some private money managers across the state, including the chairman of the state retirement systems board, reveal a stark contrast between the depth and breadth of information they’re given to work with and what’s provided to taxpayers concerning incentive deals.

“Which is sort of amazing, given that it’s a public action,” Jeremy Strickler, vice president of investments for Williams Wealth Management of Greenville, says of the latter.

And it’s public money, after all, that pays for economic development incentives.

In private investment management, the risk-versus-return relationship exists between the broker and the client. And brokers say they learn all they can about their clients and investment options available to them.

“I initially spend a long time questioning them,” says Keith Barron, CEO of Barron Financial Group in Columbia. “I’m interested in what their concerns and questions are, and also what their goals are.”

“Then,” Barron says, “I go look for those products which potentially match what they are concerned about. At any given moment, rates are changing, products are changing.”

Once he’s matched a client’s interests with the appropriate investments, Barron says he reports the returns on a regular basis. “Yeah, it’s due diligence,” he says. “It has to be in their best interests.”

Manuel Martinez, a certified financial planner with Charleston Wealth Advisors, takes a similar approach.

“To do my job effectively I need all of their (clients’) financial information,” Martinez says. “We look at everything, the whole picture.”

In terms of where to put investors’ money, he says, “We basically look at what their risk profile is.”

The level of investment detail he provides varies, Martinez says. “It just depends on the client – whether they’re a passive investor or active investor.”

Allen Gillespie works the financial world as both a private investor and as a government official overseeing the state retirement systems. Gillespie owns GNI Capital of Greenville and serves as chairman of the S.C. Retirement System Investment Commission.

For private companies, the sky’s the limit on investment information, Gillespie says. “I mean obviously when you own a private company you can basically request everything that would help you make a decision.”

Understanding an industry and a company’s position within it, along with the firm’s strategy and capacity to succeed, help inform investment decisions, Gillespie says.

Strickler, of Williams Wealth Management, says he wants to know as much as possible about the companies in which he invests, and many factors shape those decisions. “Rarely does one tactic in a company’s strategy affect whether we buy it or not,” he says.

No doubt, the elements of a company or other asset that investment advisers might consider are practically endless. Examples include:

  • Audited financial statements;
  • Total assets and a breakdown of them;
  • A business plan;
  • Risk factors, such as competitors and their offerings;
  • Interviews with the chief executive and chief financial officers;
  • Number of years in existence;
  • Lawsuits or other legal exposure; and
  • Employment base along with pension and other benefits liabilities

With public companies, in fact, much of that information must be disclosed under federal law.

With incentives, by contrast, government officials or state legislators act as the broker while taxpayers serve as the investor, bearing the risk while companies get the reward.

But are lawmakers really experts in such matters? And do they really seek and obtain such information when running incentives through the legislative process?

Rhetorical questions, it would seem.

Yet, Palmetto State taxpayers do not have a direct say in which firms the state subsidizes or what legislators and other government officials opt to give them.

Moreover, under current law it is virtually impossible for taxpayers to find out if such investments made on their behalf are paying off, because these types of economic development deals are negotiated, executed and monitored in secret.

On the front end, incentive negotiations between government officials and company representatives take place in private under the auspices of recruitment.

Then, once a deal is inked, many of the cost-benefit details remain forever undisclosed, the suppression justified as protecting proprietary trade secrets and confidential taxpayer information.

A study released earlier this month by the Pew Center on the States, and a 2010 report by Good Jobs First, confirm that South Carolina does a poor job of monitoring and disclosing incentives.

It’s no wonder, if the culture of state government is more focused on protecting companies than looking out for taxpayers.

“We work with companies, and I’m going to err in favor of the companies’ comfort level,” state Commerce Secretary Bobby Hitt said when The Nerve asked him, at a recent legislative hearing, about releasing incentives information.

Hitt, previously the longtime corporate affairs manager for BMW of South Carolina, runs the state’s largest economic development agency, the S.C. Department of Commerce. The department plays a leading role in many state incentive deals.

In other cases, like subsidies The Nerve conservatively valued at $500 million for Boeing’s 787 Dreamliner plant in North Charleston, legislators take the lead. Senate Finance Committee Chairman Hugh Leatherman, R-Florence, has touted his part in the Boeing deal.

Elaborating on the secrecy of incentive agreements, Hitt said:

“The private sector operates in a very competitive environment. The company I worked for for all these years is the largest-selling premium (car) brand in the world. They didn’t get to be that way by being very public about all of their activity.”

But BMW did get state incentives to locate in the Spartanburg area, rivaling Boeing’s as the largest subsidies package in South Carolina history.

The Commerce Department’s practice of concealing incentives agreement information has been evident when releasing documents about the deals to The Nerve in response to S.C. Freedom of Information Act requests.

Commerce routinely blacks out such basic details as the average salaries and types of investments by companies that receive subsidies.

But although secrecy is the order of the day with incentives, several state lawmakers are fighting to pry open the subsidies lid.

Sen. Tom Davis, R-Beaufort, is chief sponsor of the “Economic Incentive Transparency Act.” The bill, S. 206, would vastly expand the amount of subsidies information required to be disclosed.

But the Davis bill, and others like it, have gone nowhere.

As long as taxpayers – the investors – accept at face value the state’s financial advice that its incentives create jobs, that doesn’t seem likely to change.

Reach Ward at (803) 254-4411 or eric@thenerve.org.