2008 file photo A $9.5 million state loan helped persuade Bechtel to keep its power division headquarters in Frederick.

More News

Takoma Park police aim to catch fleeing thieves

State chamber: Income tax hike will unfairly hurt Montgomery

Push for Shady Grove arena refueled

Montgomery County executive: Rapid Transit Vehicle system will be built

PSC weighs whether utility customers can reject smart meters

Related story: Maryland wins this round of Project X

This story was clarified on Oct. 31, 2011. An explanation follows.

The state’s $9.5 million conditional loan being made to help keep some 1,250 Bechtel Power employees in Maryland is questionable policy, some lawmakers and corporate watchdogs say.

But others herald the deal as necessary to retain a significant employer, as the battle for valuable companies continues between Maryland and nearby states, especially Virginia.

“Once you offer this kind of cash to one company, that makes more want to do this,” said Sen. Brian E. Frosh (D-Dist. 16) of Bethesda, one of only three out of 23 legislators to vote against the Bechtel subsidy last week in a meeting of the Legislative Policy Committee.

“You can’t afford to pay off every business that is located in the state and says it’s thinking of moving,” Frosh said.

A key problem is that neighboring states such as Virginia and North Carolina offer such incentives, said House Majority Leader Kumar P. Barve (D-Dist. 17) of Gaithersburg, who voted for the loan.

“We live in a time when a bordering state will think nothing of paying a large sum of money to get a company to move to their state,” Barve said.

He added that loan conditions requiring Bechtel to repay money if it fails to retain the required number of employees “were sensibly crafted.”

To avoid repayment, Bechtel must keep 1,250 full-time jobs in Frederick through 2018. If work force levels fall below that threshold at the end of each year, the company must repay a certain amount.

The loan was not the deciding factor in keeping the privately held engineering giant’s power division headquarters in Frederick, said Michelle Michael, a spokeswoman for Bechtel, whose corporate headquarters are in San Francisco.

“A number of factors were considered in deciding to keep our power business in Frederick,” she said. “I wouldn't say there was one deciding factor.”

Such incentives are not generally the main reason most companies choose to remain in the state, said Jim Henry, director of finance programs for the state Department of Business and Economic Development, who worked on the deal. A high-quality work force, good schools, shorter commutes for employees and the costs of moving factor into such decisions, he said.

“The incentive gives some certainty of where the business will be operated for the near future,” Henry said.

Bechtel has a history of obtaining incentives in other states and even received a $2 million conditional loan from Maryland after it moved to Frederick in 1999, said Thomas Cafcas, a research analyst with Good Jobs First. The Washington, D.C., watchdog group examines corporate and government accountability in economic development.

Loans and tax incentives don’t “move the needle” for many companies, as they also factor in real estate and labor costs, infrastructure and more, he said.

“I’m not certain [Bechtel] needed this, because so many other factors are far more important,” Cafcas said.

Frosh, for one, agreed, saying that “$9.5 million is a relatively small amount for a company that has annual revenues in the billions.”

Whether Bechtel needed the money or not, the company has been a great citizen in Frederick, and the state had little choice but to offer the loan, said Sen. David R. Brinkley (R-Dist. 4) of New Market. Brinkley said he “held my nose and voted yes.”

“It’s a sad state that the state has to bribe a company with a loan to stay here,” Brinkley said.

Largest Sunny Day deal in years

The deal is the largest from the Sunny Day economic development incentive program in years, said Karen Glenn Hood, a DBED spokeswoman.

Morgan Stanley received $7.5 million in conditional grants from the Sunny Day fund, along with other state and local credits and loans, when the financial services giant agreed to add hundreds of jobs in Baltimore. That deal was hatched in two parts in 2003 and 2008.

In 1999, Marriott International inked a conditional deal to receive $14 million in Sunny Day funds, along with millions more from the state and Montgomery County, as the Bethesda hotel giant threatened to move to Virginia. The state award from Sunny Day was later reduced to $9 million as Marriott was not able to meet employee growth stipulations following the 2001 terrorist attacks.

Bechtel is not unhappy about anything the city and county of Frederick or state of Maryland has done, Michael said. Besides its power division, Bechtel has two other units in Frederick, Government Services and Enterprises, with about 750 employees between them.

Access to key customers is a factor Bechtel is considering in a potential move of its government unit, Michael said. Bechtel's customers include the Defense Department in Northern Virginia.

“We have to figure out what are the best advantages for the business and our customers,” she said.

Plans for those two units have not been finalized, Michael said Thursday.

“We are still looking at the advantages of staying in our current location or relocating within the Washington, D.C., area,” she said.

The power division has no such constraints, as it works with customers worldwide, Henry said.

“They can do that from Frederick,” he said.

The average annual salary for Bechtel power employees is $125,000, according to the state.

Goldilocks syndrome

State officials contacted Bechtel executives in July to work on retaining the power division. Officials with Montgomery County, which is closer to key customers such as the Pentagon than is Frederick, started working with Bechtel executives through the state to try to find a suitable site about two months ago, said Steven A. Silverman, director of Montgomery’s Department of Economic Development.

“We had communicated with Bechtel through the state and were prepared to offer incentives,” he said. “But we could not locate a site in Montgomery County that met their needs in the short time frame they had.”

It was a similar situation to last year, when the county tried to find a site for military and aerospace giant Northrop Grumman’s headquarters, Silverman said. Northrop eventually chose Northern Virginia for its move from Los Angeles.

“I call it the ‘Goldilocks syndrome,’” Silverman said. “We have buildings that are too big and too small, but not just right in these cases for the time period they have. It’s not that we don’t have enough available space. We have 4 million square feet of class A space. But they have 15 million across the [Potomac] river.”

In another key economic development deal last year, Montgomery County officials successfully retained the headquarters of Choice Hotels International, which is moving from Silver Spring to Rockville in 2013. Choice executives searched throughout the Washington region and could have moved across the Potomac, where President and CEO Stephen P. Joyce lives, Silverman noted.

“They had a longer time frame,” Silverman said.

State and local government provided Choice with $4.3 million in conditional loans and grants, and the lodging company is eligible for tax credits and other incentives.

The Sunny Day program has not been used frequently and hadn’t received new funding for several years during the past decade, Henry said. The program supports “extraordinary economic development opportunities that create and retain employment as well as create significant capital investments,” according to DBED.

There is some merit to the argument that this type of deal opens the door to other corporate requests, Henry said.

“After the Marriott deal, we heard from several companies who said they wanted the Marriott deal,” he said. “Now, we will probably hear from some that they want the Bechtel deal.”

The state decides to award incentives on a case-by-case basis, looking at criteria such as size, revenues and number of employees, Henry said. Many awards are relatively small, he said.

Transparency and accountability are crucial in such deals, said Carly Mercer, an associate with Maryland Public Interest Research Group. “It’s really important that someone is keeping track of what happens,” she said.

The state does issue annual reports on incentive programs. Some, such as the Marriott deal of 1999, are later altered.

“After Sept. 11, the worldwide market changed dramatically,” Henry said. “We restructured that deal to accommodate the changing business world.”

Frosh doubted that Marriott officials were really thinking of moving to Virginia back then. In Bechtel’s case, he said, it was hard to tell.

“My instinct was that it was a bluff,” Frosh said. “But I have no way of really knowing.”

Barve agreed that officials were largely in the dark as far as knowing if Bechtel was bluffing.

“We are flying blind,” he said.

Should feds step in?

Many states have rules about counties actively stealing companies from other counties within that state, Cafcas said. But he didn’t know of any agreements between states not to do that.

“A lot of economic development officials express a need for a federal solution,” Cafcas said.

The federal government needs to stay out of this issue, Brinkley said.

“Maryland needs to get on the side of employers,” he said. “The state needs to have a better tax and regulatory environment.”

But federal regulation in this case makes sense, Barve said, calling it a constitutional matter.

“The federal government needs to do its job,” Barve said. “It needs to put an end to this insane 50-state bribery.”

Bechtel

Headquarters: San Francisco.

Industries: Engineering, construction, energy, transportation, government services.

Annual revenues, 2010: $27.9 billion, down 9.4 percent from 2009.

Employees: 52,700 worldwide, 2,000 in Maryland.

Founded: 1898.

Signature projects: Hoover Dam, Trans-Alaska pipeline, Channel Tunnel between England and France, Hong Kong International Airport.

Source: Bechtel

kshay@gazette.net

Clarification: This story originally reported that Bechtel spokeswoman Michelle Michael said the Defense Department is a key company customer. It is, but Michael did not say that.