Sunday, July 13, 2003

Convergys: Council agonizes over take-it-or-leave-it deal

City weighs incentives' true costs

By Gregory Korte
The Cincinnati Enquirer

On Tuesday, Cincinnati City Council will vote on an unprecedented package of tax breaks to keep the giant Convergys Corp. from moving to Northern Kentucky.

The city has given numerous tax breaks over the past seven years to keep big business happy and in the city. Procter & Gamble, Delta Air Lines, Saks Fifth Avenue, Fifth Third Bank and the Kroger Co. have all benefited.

But a $63.4 million deal now on the table to keep the the billing and customer-service company downtown is bigger than all those deals combined.

    Click here to read the city's 8-page proposal to keep Convergys downtown. Acrobat PDF file (124k).
The package is unprecedented because of its scope. The previous record was $18 million for P&G's Olestra plant in Winton Place. It's also unprecedented in form. Convergys would be given a 75 percent refund on earnings taxes paid by its 1,500 current Cincinnati employees.

It is council's most important economic-development decision since the post-midnight 1998 roll call that guaranteed construction of Paul Brown Stadium.

Coming just three weeks after a controversial agreement to build a $15 million parking deck for Kroger Co. and 16 weeks before November's election, the vote will test City Council's answer to the $64 million question: How far will the city go to keep major downtown employers?

The take-it-or-leave-it deal has ramifications for Cincinnati, Northern Kentucky and Convergys. And council members, under pressure from Gov. Bob Taft, Mayor Charlie Luken and company lobbyists, admit they're in a quandary. Here's why:

• A vote to keep Convergys ensures the company's employees won't leave - and brings a promise of 1,450 new jobs by 2018.

But the deal will have an almost immediate impact on the city's bottom line, siphoning as much as $2.8 million a year from city coffers. Curbside recycling and a nature education program, contained in the two-year budget approved by City Council in December 2002, would be the most immediate targets. City layoffs, already possible, would be almost certain.

Even more ominous, officials say, is the possibility that a "yes" vote will encourage another major employer to seek a similar package to expand or stay in the city.

• But if council rejects the deal, the city risks losing Convergys and its workers. Together, they contribute about 1.3 percent of the city's $305 million general fund - the pot that pays for basic services such as police and fire protection, garbage pick-up and street repairs.

The $4 million annual loss in city revenues would force budget cuts. Also, some businesses that supply Convergys or cater to its workers - restaurants, accounting firms and retailers - would likely have to close or shrink, increasing the impact.

So tough are the choices that there are no more than three likely votes for the deal. Council's other six members are publicly agonizing over every facet of the deal, from the fine print to the big picture, as the Tuesday deadline looms.

"This isn't economic development strategy," complained Councilman David Pepper. "It's crisis management."

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Lobbying war erupts

The stakes are so high and the vote so uncertain that the deal has touched off the most intense corporate lobbying campaign City Hall has seen in half a decade. Since Tuesday, a team of three Convergys lobbyists has worked the historic Plum Street building daily.

"We're just here to answer questions, to make sure people understand the deal," said William H. Hawkins, Convergys' vice president of governmental relations, in between meetings Thursday.

The deal is not subject to renegotiation, he said.

Winning council approval is critical for Convergys. A "yes" vote means the company could consolidate its scattered downtown offices into a single 18-story building, keeping costs low at a time when its stock price is flat and it's fighting to maintain market share.

Part of the deal would allow Convergys to reinvest $8 million in property taxes into the Atrium One tower, which the company would transform into its new world headquarters.

Gov. Bob Taft has called the two Republicans on City Council, urging them to approve the package. The Taft administration approved $131.5 million in matching state incentives last month. With $12.7 million in additional state loans and grants still subject to state approval, the cost to state and local taxpayers exceeds $200 million over 15 years.

City Manager Valerie Lemmie said the city's package mirrors the state's. Indeed, the state's deal persuaded the city to offer job retention tax credits - a step it has never before taken as a matter of policy.

The job retention tax credits are perhaps the most controversial part of the deal. While the other incentives help the city by tying the tax break to job growth and increased city revenue, the retention credits give Convergys a direct city subsidy for jobs that already exist.

The city manager estimates the package approved to keep Kroger will cost the city $4,900 per job over 15 years. The cost to keep Convergys: $17,800 per job.

That makes Pepper wonder: Will that tax incentive make other downtown companies think about looking elsewhere and start a bidding war? And what happens when another major employer asks for the same consideration?

Officials say Cincinnati won't have the wherewithal to offer anything like the Convergys package to the next company to come along.

"What we have told City Council is that you set no precedent by saying yes to a given deal, or no to another deal," Lemmie said. "We're under no obligation to commit city money to every project."

Like it or not, Taft says, tax incentives have become an important part of growing the state's economy.

"When it comes to economic development, we have to play by the rules as they are today," said Taft spokesman Orest Holubec. "And we're in competition not just with other states, but with the rest of the world."

Convergys is important to Taft because it's the kind of high-growth information technology company that can help transform the state's sluggish Rust Belt economy. The former Cincinnati Bell subsidiary is the world's largest provider of billing and customer-relations services to other companies. It has 44,000 employees at 47 sites worldwide with annual revenues of $2.3 billion.

Click to view an Acrobat PDF file (324k) showing a chart comparing incentives, offers, promises, costs & benefits.

Cincinnati vs. Kentucky

In mid-2001, when Convergys started looking to consolidate its scattered downtown offices into a new world headquarters, Cincinnati officials knew they were competing against Northern Kentucky.

Development officials in the Bluegrass State have pursued Convergys in hopes of landing the corporate headquarters of a company with 1,500 local jobs paying an average $71,000 a year. That includes compensation for CEO James Orr, who was paid $1.2 million in salary and bonus in 2002, and other executives.

With just two New York Stock Exchange-listed companies calling Kentucky home and a state constitution that historically gave the state a business-unfriendly reputation, boosters have made the addition of white-collar jobs a priority.

By the time Convergys allowed Cincinnati to match Kentucky's offer, Luken knew the city would pay dearly to keep the company. But to this day, no one at City Hall knows exactly what they are competing against. Economic development officials in Kentucky are staying mum on what they offered Convergys and what sites the company was looking at, saying only that 10 of the 76 regional sites the company scouted were south of the Ohio River.

Convergys told Cincinnati officials they had narrowed the search to a site in Boone County. They would not disclose what Kentucky was offering them to leave.

"We had to go around and around on that. They didn't show us the Kentucky proposal, but we had a generally good idea of what it was and they told us we were in the right ballpark," said assistant city manager Timothy H. Riordan, the city's primary negotiator in Convergys talks. He would not say what the Kentucky package was worth.

Regardless, Kentucky could offer one thing Ohio couldn't: cash.

While most of Ohio's incentives would be paid over 15 years, Kentucky could offer most of its incentives up front. A 2000 law allows Kentucky to issue bonds for a new basketball arena - or corporate headquarters - based on future taxes from a development.

Cincinnati's mayor doesn't think Kentucky is playing by the rules.

"When Kentucky takes a state law intended to lure an NBA franchise to Louisville and uses it to take Convergys out of downtown, I have a problem with that," Luken said. He wants the Greater Cincinnati Chamber of Commerce to mediate a truce in the incentive war.

Kentucky officials downplayed the cross-river competition, saying Convergys approached them.

"To have Convergys as a corporation in your region or in your state would be very beneficial," said Dan Tobergte, senior vice president at Northern Kentucky Tri-ED, the region's economic development recruitment agency. "But we still benefit by their presence in downtown Cincinnati."

About a quarter of the company's workers are Kentucky residents, he said.

Setback for neighborhoods?

The Convergys package is so large it offsets the impact of the $54 million "windfall" the city received last year when its health insurer, Anthem Inc., went public. By converting the city's insurance policies into stock, the city ended up with 870,021 shares of Anthem stock. Under state law, the city could not hold stock and had to sell it. The windfall has been earmarked for neighborhood improvements.

To some, the impact on city services is less than academic.

"It's a head-to-head confrontation between downtown and neighborhoods," said Councilman David Crowley.

Business leaders say doing business downtown increasingly requires some kind of city subsidy - be it a Central Parkway parking garage for Kroger, site acquisition for Delta's calling center on Plum Street or tax credits for Convergys. Even with the subsidies, downtown businesses themselves help pay for neighborhood services, they said.

"Once you start losing headquarters, the city has to raise taxes. Once you raise taxes, you're in a spiral because you can't compete," said Laura Long, executive director of the Cincinnati Business Committee, an influential group of the city's top CEOs. "So without the growth of jobs downtown, there isn't the growth of income tax to put back into the neighborhoods."

So far, the Convergys deal hasn't stoked the outcry many previous subsidies have. Council members said they got more calls last week about a $50 increase in home security alarm fees than the $63.4 million for Convergys.

And Luken's office got just three e-mails from city residents (and a fourth from Clermont County). Of the residents, one supported the deal, one asked questions, and one asked for a city subsidy to continue living in Cincinnati.

Asked how he would defend the deal to other taxpayers - including companies that stay downtown without the benefit of tax credits - Hawkins was matter-of-fact.

"If someone is willing to put a major commitment in terms of dollars and jobs in this city, the City Council should consider that proposal on its own merits," he said.

Key players

The $63.4 million deal to keep Convergys Corp. downtown has resulted in the most intensive corporate lobbying campaign at City Hall since taxpayers approved a stadium financing deal in 1996. Here are some of the players:

Bob Taft, governor of Ohio

Taft, who paved the way for the city deal with $131 million in state tax credits, has lobbied some members of City Council personally.

"It's clearly very important to the region. The high-paying jobs like Convergys provides are the kinds of jobs the governor is looking to grow in the state," said spokesman Orest Holubec.

Charlie Luken, Cincinnati mayor

Behind the scenes, Luken has been preparing City Council for the Convergys sticker shock for months. He's cast the package as an up-or-down vote on the city's future - and too important for politics.

"The business of the city is not going to hold up for an election," he said. "Yes, it's difficult. Look at the decisions Cincinnati faces every week. If it's not Convergys, it would be some other issue."

Valerie Lemmie, city manager

Lemmie negotiated the deal personally, with the help of assistant city manager Timothy H. Riordan and other staffers.

"(The deal) does impact the existing revenue base of the city," Lemmie said. "But you have to balance that versus what happens if you lose 100 percent of the jobs."

George A. Schaefer Jr., chairman, Fifth Third Bank

Schaefer, who co-chaired the mayor's Economic Development Task Force, has called council members this week urging passage.

If the city isn't able to retain large employers downtown, all of the other reforms proposed by the task force to attract new businesses won't work, he told them.

Laura Long, executive director, Cincinnati Business Committee

The influential group of the city's top CEOs says the Convergys request is reasonable.

"What Convergys is asking the city to do is become a partner so they can grow and be in the city. It's an appropriate thing for them to ask," Long said.

William H. Hawkins, lobbyist, Convergys Corp.

Hawkins, the company's vice president of governmental affairs, and assistant Erik Kirkhorn have been walking the corridors of City Hall every day for the last week.

"It's an issue that's important to the community, and obviously important to Convergys," Hawkins said between meetings with council members. "This package as a whole is an economic benefit to the city."

Highlights of the deal

Keeping Convergys Corp. in downtown Cincinnati will cost taxpayers more than $200 million, through a combination of incentive packages offered by the state and the city of Cincinnati. Here's a closer look:

What Ohio approved

The Ohio Tax Credit Authority has given its OK to a package of $131.5 million in tax breaks. The state's Controlling Board still must approve $6 million in loans and $6.7 million in grants. In all, the deal would cost Ohio $144.2 million.

What Cincinnati is considering

City Manager Valerie Lemmie has proposed a $63.4 million package of tax credits and grants. Five of nine council members must vote for the deal if it is to pass.

When the city will decide

City Council will meet in a special session 3 p.m. Tuesday and vote on the package. Council chambers are on the third floor of City Hall, 801 Plum St. The meeting will be broadcast live on Citicable Channel 23.

The Convergys debate - a three-part series


The deal to keep Convergys, and what's at stake.


Cincinnati isn't the first city Convergys pressured for tax incentives.


Is the cost of keeping Convergys worth it? Taxpayers weigh in.



Enquirer reporter Patrick Crowley contributed.

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