Local incentives pit one town against another with little gain for R.I.

IN THE WORKS: Citizens Financial Group Inc., much to the chagrin of a group of local residents, has obtained the rights to build a 420,000-square-foot corporate campus on roughly 108 acres in Johnston. / ARCHITECT'S RENDERING COURTESY OF CITIZENS FINANCIAL GROUP
IN THE WORKS: Citizens Financial Group Inc., much to the chagrin of a group of local residents, has obtained the rights to build a 420,000-square-foot corporate campus on roughly 108 acres in Johnston. / ARCHITECT'S RENDERING COURTESY OF CITIZENS FINANCIAL GROUP

Political signs for local elections scatter the well-kept lawns alongside Route 5 – also known as Greenville Avenue – a two-lane state highway in Johnston.

Robert V. Russo is running for re-election in District 4; Robert Civetti is vying for District 5.

Traveling north past Interstate 295, a variation of Romans 12:15 comes into view, mounted on a changeable letter board outside the Greater Rhode Island Baptist Temple: “Rejoice with them that do rejoice, and weep with them that weep.”

The scripture befits this mostly residential part of town, where Citizens Financial Group Inc., much to the chagrin of a group of local residents, has obtained the rights to build a 420,000-square-foot corporate campus on roughly 108 acres.

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A half-mile west of the Baptist temple there already is evidence of development. Citizens excavated a more than 50-year-old capped dump that occupied a section of the land. The handful of nearby construction vehicles portend change for a neighborhood now dominated by ranch-style homes.

By 2018, more than 3,000 new employees will likely work there.

“We had to find that perfect place,” said Michael Knipper, executive vice president and head of property at Citizens. “We spent an enormous amount of time – well over a year – looking for a location and talking to towns. … Johnston happened to offer a complicated but fantastic site.”

The thought of so many new, daily commuters, however, has evoked outrage among Greenville Avenue residents, who say the augmented traffic volume will disrupt the quality of life in the historically residential part of town.

“It’s a mess,” said Claire Montecalvo, who lives across the street from the planned site. “There’s going to be more traffic than Atwood Avenue,” which is the main commercial strip that runs through town.

Headquartered in Providence, Citizens, the nation’s 13th largest retail bank, is one of several Rhode Island-based companies this year to announce a move from one municipality to another within the state. Each company’s reason is different, and how that company is welcomed into each community differs, but business leaders are always in search of an edge – be it better space or a more favorable tax deal – and will keep an eye out for such opportunities whenever they are available.

“There’s an ebb and flow of companies within a state that’s not unique to Rhode Island,” said R.I. Secretary of Commerce Stefan Pryor, who’s in charge of the state’s economic-development efforts.

Intrastate movement, however, raises questions about what type of value it adds to municipalities in a state eager to boost job creation and spur economic development. It also puts pressure on state officials – such as Pryor – to decide what type of resources should go toward preventing companies from leaving the state in search of a better deal.

“The chief objective is to ensure the company remains in Rhode Island,” Pryor said. To build a healthy state economy, “it’s important to focus simultaneously and vigorously on the retention and growth of existing businesses, on the one hand, and the attraction of new businesses on the other.”

DOMINO EFFECT

Intrastate movement in Rhode Island and nationwide has become easier in the private sector, according to Saul Kaplan, executive director of the Business Innovation Factory and former economic-development director for the state.

“The challenge for companies in the past has been that there’s a lot of stickiness in communities. The possibility of moving created the potential for distraction and disruption,” Kaplan said. “That stickiness has always made it very hard for companies to decide to relocate, but I think that’s changing. Companies are more mobile, and they are better today at putting different parts of their company in different places.”

Citizens, for instance, is consolidating back office and call center operations in Johnston. That means it will vacate office space in Cranston, East Providence, Smithfield and Warwick. And the planned exodus, mostly from Cranston, is having an effect on commercial real estate in the state.

“[The Cranston property owner] would have liked us to stay, as it’s the simplest answer for all landlords,” Knipper said. “But all parties recognized that we were trying to do something different.”

The Citizens move, however, is creating opportunities for other Rhode Island companies to fill related space that will be vacated. For example, the fast-growing Neighborhood Health Plan of Rhode Island earlier this year moved its headquarters from Providence to Smithfield, into space that’s also occupied by Citizens. When the bank moves to Johnston, the health insurance provider plans to expand its offices into the vacated space.

Neighborhood Health, named the state’s fastest-growing company with revenue greater than $75 million by Providence Business News in 2015, will maintain some operations in Providence, but the space it’s leaving at the Foundry in Providence has opened the door for A.T. Cross Co. to move its headquarters from Lincoln and consolidate its roughly 104 employees.

“We made a concerted effort and worked hard to identify [companies] … to sublease the space we had so the city wouldn’t have vacated space,” explained Peter M. Marino, president and CEO of Neighborhood. “We delivered on that.”

Both Neighborhood Health and A.T. Cross plan to increase the number of employees, which would add to state coffers through payroll taxes. Economists consider this type of intrastate movement a net gain for the state. Citizens’ move to Johnston also will be beneficial in the short term, as the state will benefit from temporary construction jobs and construction costs.

But Citizens isn’t slated to expand its existing workforce, and for companies that simply move from one municipality to another without building something new or adding jobs, the economic impact is minimal.

“Other than the moving, and any construction costs, there’s generally not much of a net benefit for the state,” said economist Leonard Lardaro of the University of Rhode Island. “Ideally, you have people come in from other states and locating here – that would be really good – but to the extent that they are relocating and expanding the scale of their operations, that’s a nice second best.”

Intrastate movement also creates competition between municipal leaders, and while there are state laws in place designed to prevent this type of competition, the reality is that it still happens, Kaplan said.

“There’s always going to be competition,” he added. “Businesses have a lot of choices of where to invest.”

HEALTHY COMPETITION?

Businesses move around for different reasons, but recurring themes among companies interviewed by Providence Business News include facility needs, better accessibility, parking, tax demands and financial incentives.

“It’s all driven by growth, availability and space,” said Michael L Hanna, partner at BlumShapiro of Rhode Island.

The Connecticut-based accounting, tax and business consulting firm in August moved its Rhode Island offices from Holden Street in Providence to 1 Capital Way in Cranston and plans to grow its workforce from 80 employees to more than 100. BlumShapiro will move into space that has sat empty for more than two years since Coastway Community Bank moved its headquarters to Warwick. BlumShapiro is receiving a real estate tax break from Cranston.

In the search for new space, it’s typical for company leaders to sit down and negotiate with local leaders to discuss what advantages there might be to a company moving into the new community. In turn, community leaders – keen to add to their commercial tax base – do what they can to try and incentivize a move.

Unlike the state, however, which has some money to offer companies looking to move and grow, cash incentives are atypical at the municipal level due to budgetary constraints.

“It’s very hard for them,” Lardaro said. “A lot of them have such high unfunded liabilities for pensions and must consider fixed costs first.”

The most common type of municipal incentive in Rhode Island – beyond maintaining a low commercial tax rate – is a tax-stabilization agreement. State law allows municipalities to exempt or “stabilize” taxes on property used by manufacturing, commercial and residential purposes, should that purpose benefit the municipality.

The agreements, known as TSAs, afford municipalities an economic bargaining tool to help attract companies, and are becoming increasingly popular among local lawmakers. Besides Providence, which has offered companies TSAs for decades, other municipalities are using the tool, including Cranston, East Providence, Johnston, Warwick and Woonsocket

But the incentives aren’t meant to be used to lure already-existing companies from one Rhode Island municipality to another, as it’s illegal and known colloquially as the “anti-poaching law.”

The Johnston Town Council in April unanimously approved a 20-year TSA for Citizens, which allows the company to reach a final $5 million property tax levy by the end of the period by increasing its annual payment in $250,000 increments. Despite the company moving from a handful of other municipalities into Johnston, however, the town says it isn’t breaking the anti-poaching law for a number of reasons, including that Citizens’ consolidation of operations and personnel “does not constitute the relocation of a commercial concern from one city or town” to another, according to the tax-treaty agreement.

Johnston Mayor Joseph M. Polisena says none of the other towns has raised any objection to the approved tax treaty, and that he’s certain the town hasn’t broken any state laws.

“If it couldn’t be done legally, I wouldn’t have put the town in that [position],” he told PBN. “I wouldn’t put the taxpayers on the hook to be sued and lose a case.”

Cranston Mayor Allan A. Fung said it wasn’t “pleasant news” when he heard of Citizens’ plan to move 3,000 jobs from Cranston to Johnston. But he remains upbeat, as the city already has approved rezoning for the commercial area with the hope that a new tenant will be ready to move in within a couple years.

Also, he adds, Citizens isn’t moving far.

“Here’s the good news: They’re only going to Johnston,” Fung said. “Those employees are still going to live in Cranston, and it’s a short enough distance away that they will still be shopping here. … All of the work that we’ve done since I’ve been in office has safeguarded us against the blow of losing those jobs. And because [Citizens] is staying in Rhode Island, it’s not a net negative for the state.”

Mark F. Huang, director of economic development in Providence, said he didn’t know the specifics of the deal in Johnston but said the anti-poaching law is warranted in a state that should be working together to expand its economic footprint.

“It’s a good policy,” Huang said of the law. “Rhode Island should try to do as much as we can to grow in a regional, national and global economy and not focus on fighting with our brothers and sisters. We should be expanding the pie by attracting investment to come in and for companies to grow out.”

EXPANDING THE PIE?

Citizens’ first-year tax payment of $250,000 is a boon to town coffers compared with the property’s current annual tax payment of $10,588.

Polisena says the tax agreement shows a clear benefit to town taxpayers, and despite some local distaste for the project – which he says comes from a “small group” of residents – he’s bullish on the new corporate campus.

“It’s a great company coming into town, and it’s obviously going to put us on the map in a positive way,” he said, adding that other large employers he declined to identify have since approached him about the possibility of coming to town.

But beyond Johnston, the added benefit to the state is minimal. Citizens has no immediate plans to augment its workforce, and state officials have agreed to pay $3 million toward construction of new on-ramps and off-ramps at the intersection of I-295 and Greenville Avenue.

Citizens Chairman and CEO Bruce Van Saun earlier this year told PBN the company “never shopped” outside of Rhode Island in its search for new space, but for state officials the fear of losing any large employer – big or small – is nerve-racking.

Gov. Gina M. Raimondo on multiple occasions has pointed to the Citizens decision to keep those 3,000-plus jobs in Rhode Island as a win for the state. That makes sense in a market where the unemployment rate still exceeds the national average, and the labor force is stagnant, according to the state’s most recent jobs report for July.

Rhode Island’s slow rebound from recession gives companies a powerful bargaining chip when it comes to negotiating deals with the state.

“It’s easy for us sitting outside to [criticize],” Kaplan said. “But when you’re sitting on the inside, and you risk losing all of those jobs, what’s the public going to say when you play hardball and they leave?”

The R.I. Commerce Corp. earlier this year awarded A.T. Cross $1.9 million in state subsidies, as company executives at the time told state officials the incentives would help dissuade it from relocating the company to Connecticut, where it could be closer to New York and its parent company, Clarion Capital Partners.

In return for the awarded incentives, the company agreed to stay in Rhode Island, move to Providence and add 35 new, full-time employees over the next five years.

So how does the state know if a company is bluffing?

Pryor said the state follows a “due diligence” process.

“In the case of A.T. Cross, the new CEO of the company lives in Connecticut, and there were specific conversations the company had with the state of Connecticut, so there was a process through which our team was able to assess the credibility of the company’s assertions,” he said.

Lardaro, however, questions this tactic – especially when it involves Connecticut, which is struggling financially and has lost several employers since the Great Recession, including the behemoth General Electric Co.

“People are running away from [Connecticut], which is doing much worse than Rhode Island – they are doing horribly,” he said. “We probably had to keep [A.T. Cross] here, but were they really going to flee to Connecticut? Seriously?” An A.T. Cross representative could not be immediately reached for comment.

Both Lardaro and Kaplan agree Rhode Island cannot effectively expand its economic pie without investing in new business from outside the state. Both think it’s going to take more than financial incentives to improve the state’s business climate.

“We need to do a lot more to stop being such a sluggish, lagging economy,” Lardaro said. “All of these legislative achievements you hear touted, these are things that other states have been doing since the financial crisis. We’re in the first inning, and we have a long way to go.” •

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