June 6 (Bloomberg) -- Mitt Romney likes to say that “government does not create prosperity.”
His record in the private equity industry shows otherwise.
During Romney’s years as chief executive of Bain Capital LLC, companies owned by the firm received millions of dollars in benefits from a variety of state and local government economic development programs.
In California, taxpayer money built one Bain company a conveyor bridge between two of its buildings. New York City gave another Bain company tax breaks and lower energy bills to discourage it from moving to New Jersey. And in Indiana, a county government issued bonds to help buy new equipment for a Bain-owned steel plant -- a business success featured in a Romney campaign ad touting his private sector prowess.
“From a national perspective, this makes no economic sense to allow cities and states to do this,” said Arthur Rolnick, former director of research for the Federal Reserve Bank of Minneapolis. “In general, you want the market to be making these decisions -- not the political system.”
The public-private agreements, which began in the first decade of Romney’s tenure as CEO, show that government played a supporting role in establishing Bain as among the nation’s most successful private equity firms and enabling him to accumulate a fortune his campaign says could reach $250 million.
Criticizing Government Involvement
On the campaign trail, the presumptive Republican nominee has hammered at President Barack Obama for favoring an unhealthy government role in the economy.
“When government, rather than the market, routinely selects winners or losers, or puts its hands on the scales of justice then enterprises and entrepreneurs can’t predict their prospects,” Romney said in a March 19 speech at the University of Chicago.
Asked about the disconnect between Romney’s free market rhetoric and Bain’s track record, Amanda Henneberg, a campaign spokeswoman, said: “It’s not at all uncommon for state and local governments to use competitive incentives and programs to create a favorable business climate.”
Yet in his Chicago speech, the former Massachusetts governor decried the “endless subsidies and credits intended to shape behavior in our economic society,” and assailed government “intrusion in the workings of the free marketplace itself.”
Exhibit A in Romney’s attack is the Obama administration’s investment in the failed solar power company Solyndra, which could cost taxpayers more than $500 million.
Massachusetts Investment Bankruptcy
Romney’s effort to capitalize on the administration’s stumbles was complicated this week by the June 1 failure of a Massachusetts clean energy company that received state financing while he was governor.
As a private equity investor, Romney showed no reluctance to accept help from government coffers -- on one occasion even becoming partners with taxpayers.
In October 1994, a Connecticut state fund made a $500,000 equity investment in Environmental Data Resources of Milford, Connecticut, which Bain had helped start. The state’s Connecticut Innovations agency the previous year also had given the firm a separate $500,000 to be paid back with royalties from its software products.
The company used the money to hire several technologists and digitize old maps of industrial sites, according to Rob Barber, the company’s chief executive.
Beginning in 1991, Bain had invested $2.3 million in the company, which produced software for environmental site assessments, ultimately recording a 35.7 percent return, according to a Deutsche Bank prospectus that detailed the performance of Bain’s funds through 1999. Starting with just three employees, EDR grew to about 50 workers by the middle of the decade, Peter Cashman, the company’s founder, said in an interview.
Victor Budnick, who was then Connecticut Innovations’ director of investments, says the company obtained better terms for the public funds than it likely could have received from private investors. Private money would have been “disadvantageous from the perspective of ownership,” Budnick said.
The deal ultimately profited both the government and EDR. The state got back $3.8 million in return for its $500,000 equity stake plus an additional $1 million from its royalty-linked investment, according to Pamela Hartley, a spokeswoman for Connecticut Innovations.
There is no indication that Romney, who became CEO of Bain Capital in 1984, was directly involved in any of the individual companies’ negotiations with government officials. Such operational issues were typically left to the management of companies Bain acquired.
“I never heard of Bain Capital,” says Walter Sprouse, who was president of the Randolph County Economic Development Corporation in North Carolina when it ponied up $375,000 to help lure Sealy Inc.’s corporate headquarters.
Even so, Romney benefitted from the incentives, along with other Bain investors. When the Internet advertising company Double Click Inc. considered moving its Manhattan-based corporate headquarters, New York City’s Economic Development Corporation in 1999 provided a $4 million package of sales and energy tax breaks tied to the company’s payroll.
The company reported a loss of $56 million that year and was acquired by Google Inc. in 2008. Bain realized $88.6 million on its initial $8.5 million Double Click investment, made in 1997, according to the Deutsche Bank prospectus.
Bain Portfolio Returns
Bain’s investments in the companies that benefited from government actions were part of a portfolio that earned an 88 percent average annual return through the end of 1999, the prospectus said.
The two-time presidential candidate says his business experience qualifies him to turn around the troubled national economy. He accuses government of “standing in the way” of recovery.
Yet, government officials employed a variety of techniques to help Bain-owned companies. In Kansas City, city officials issued industrial revenue bonds as part of a financing arrangement that saved a Bain-owned steel company about $3 million in property taxes over five years, according to the Kansas City Business Journal.
Decaying Steel Plant
The GS Technologies facility, dating to the late 19th century, had employed around 4,500 workers at its peak. By the mid-1990s, the plant, which produced wire rods for the auto and furniture industries, cried out for modernization.
“Really, it was in bad, bad shape. It looked like something out of a Dickens novel,” said Mario Concha, who headed the company’s international division at the time.
To help fund a $70 million updating, the city in October 1993 authorized a $45 million industrial revenue bond, which GS Technologies was to purchase. Kansas City issued the first $5 million the following year and used the proceeds to buy steel-making equipment and lease it back to the company. That arrangement was designed so that the city could cut the mill’s property tax bill by 50 percent, according to the Kansas City Business Journal.
New equipment didn’t solve all the company’s problems. Foreign competition and a two-month strike in 1997 fueled a downward spiral, which led to bankruptcy in 2001. The Obama campaign has featured GS Technologies in a political ad that includes one former mill worker accusing Bain of “vampire” capitalism.
Industrial Revenue Bonds
Industrial revenue bonds, typically repaid with money generated from the project they fund, act as a subsidy for private business, reducing either their financing costs or their tax bill, said Timothy Bartik, senior economist of the W.E. Upjohn Institute in Kalamazoo, Michigan.
One of Bain’s companies drew government benefits on two coasts. In 1993, when Leiner Health Products of Torrance, California, was looking for a new home, officials in nearby Carson, California, agreed to construct a $500,000 conveyor bridge linking two buildings the maker of vitamins and nutritional supplements was eyeing.
“Our construction guys were in awe of how fast the turnaround time was for permits,” Giffen Ott, the former Bain executive who was the company’s vice president of manufacturing, told The Los Angeles Times.
Ott didn’t respond to e-mail and telephone requests for comment.
Upgrading Public Roads
Five years later, Leiner decided to move a portion of its manufacturing operation from Ohio to a new site in York County, South Carolina. State and local officials provided a package of benefits that included worker training, upgrades to public roads, water and sewer facilities, and tax breaks. Officials with the state’s Employment Security Commission even handled inquiries from would-be job applicants, according to a July 21, 1998 article in The Herald of Rock Hill, South Carolina.
The county cut Leiner’s property tax assessment by 43 percent, saving the company “millions of dollars,” according to Mark Farris, York County economic development director.
Leiner has since been acquired by NBTY Inc., which itself was acquired by the Carlyle Group in 2010. Michael Collins, NBTY’s chief financial officer, didn’t respond to e-mail and telephone requests for comment.
Free market purists object to such government aid to business, saying profitable companies don’t need it and unprofitable ones should be allowed to fail.
A Corporate Gift
“It is a gift to the corporation,” says James Bennett, eminent scholar at George Mason University in Fairfax, Virginia. “The American welfare queen is the American corporation. All they’re doing is grabbing for taxpayer benefits and taxpayer dollars.”
The attractiveness of such deals can be glimpsed in cases where the marriage of public and private resources pays off for both sides. In 1998, state and local officials in Indiana assembled a package of incentives to convince Steel Dynamics Inc. to locate a $341 million steel plant in Whitley County, in the state’s northeast corner.
Whitley County issued a $13 million taxable industrial revenue bond to buy the giant caster at the heart of the steel-making operation along with a separate $10 million bond for sewer and water improvements. State officials kicked in workforce training aid.
In the intervening years, the company has expanded its Whitley County facility twice and now employs 596 workers. Last year, it produced 876,000 tons of structural steel beams for the construction industry and rails for the nation’s railroads, according to the company’s filings with Securities and Exchange Commission.
“It was a fabulous opportunity. Jobs have developed beyond our expectations,” said Jeff Gage, who was the county attorney at the time.
In an ad entitled “American Dream,” the Romney campaign boasts of the role his “private sector leadership team” played in Steel Dynamics’ success.
Some of his allies acknowledge that a savvy public sector deserves some of the credit.
“The government was trying to help out,” real estate developer Donald Trump, a Romney supporter, said during a May 14 appearance on Fox News, “and sometimes, that’s not the worst thing in the world.”
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