IG says tax breaks granted as 'favors'

Massachusetts Inspector General Gregory Sullivan is calling on the Department of Revenue to revoke $10.5 million in "questionable" tax credits that he says the state "handed out as favors" to Bay State companies, including an asset management firm whose top executives include Lieutenant Governor Kerry Healey's husband and other top Republicans.

In a letter sent Friday, Sullivan highlighted $1 million in state tax credits awarded to Affiliated Managers Group Inc., whose president is Sean Healey, and as much as $7 million in credits made available to the Canadian insurance giant Manulife, which is building its US headquarters on the South Boston waterfront, considered home to some of the state's hottest, most expensive real estate. Sullivan says neither firm met the state's criteria for receiving the tax incentives.

Established in 1993 by then-governor William F. Weld, the Economic Development Incentive Program was created to attract out-of-state firms to develop blighted properties. But in both cases cited by Sullivan, he said, other firms were interested in the properties, making it clear the tax incentives were unnecessary to encourage private development.

Sullivan criticized Governor Mitt Romney's administration for approving credits in May 2003 for Manulife. He said the South Boston site was sought after by five other companies when the Massachusetts Port Authority put it out to bid in 2000.

Furthermore, the credits were approved by the state after Manulife purchased the property. Manulife did not apply for the tax credit until last year, even though construction commenced in 2001, Sullivan said.

"Manulife's assertion that the property could not be developed by ordinary operations of private enterprise is self-evidently false," Sullivan wrote in the letter. While Manulife has qualified for the credits, it has not yet received them, as they only become available with the filing of its 2003 tax returns.

The $1 million AMG credits, meanwhile, have already been paid out for the company's development of an 89-acre estate located in a tony neighborhood in Beverly, 1.6 miles away from AMG executive Sean Healey's oceanfront home. The credits were awarded nearly two years before Romney and Kerry Healey took office, however.

In an interview, Sullivan called the AMG and Manulife credits "favors to developers of extremely valuable real estate already under development," a contention that officials at AMG and Manulife vigorously dispute.

"The questionable application of EDIP tax credits undermines the intended purpose of the program and hinders true economic development," Sullivan wrote to Department of Revenue Commissioner Alan LeBovidge. The department "should immediately investigate the examples provided in this letter as well as other tax credit cases to ensure that the tax credits were lawful and that the recipients of these credits kept their promises to the Commonwealth," Sullivan wrote. "DOR should disallow credits taken falsely and should seek to recoup these funds for the Commonwealth."

Tim Connolly, a spokesman for LeBovidge, said department officials were still evaluating Sullivan's 11-page letter Friday, and could not comment on the specifics. However, he did say that "we're definitely going to look into the inspector general's concerns."

Since the grant program's inception, the state has waived about $45 million in taxes for Bay State firms, many of them located in ailing neighborhoods of Worcester, Boston, and New Bedford. Usually, municipal officials, working with the state, label certain vacant or dilapidated properties as "target areas" so they can lure prospective developers by promising them a break on municipal property taxes, and a 5 percent state investment tax credit over a 10-, 15-, or 20-year period. In return, the firms typically pledge to create a certain number of jobs, recruited locally, and to renovate the property.

But Sullivan said the state has increasingly failed to oversee the program, in part because staffing has fallen from 38 employees to 18, drastically reducing the state's ability to audit companies to ensure that they conform to requirements for the tax credits.

A top official in the Romney-Healey administration, who asked to remain anonymous, said Sullivan's attack appears purely political. Sullivan is a Democratic former state representative, and Romney targeted his office for elimination in last year's budget. The official said Romney will once again attempt to shift the inspector general's responsibilities to the state comptroller's office when he unveils his fiscal 2005 budget on Wednesday.

Officials at Manulife and AMG said they stand by their participation in EDIP, saying both projects are a boon to the local economies.

Heather Randolph Carter, a Manulife spokeswoman, said the company was intent on seeking a tax credit when it chose to move to South Boston, and intends to put in for the credit on its 2003 tax return.

"In selecting the site of our new building in the Seaport District, the opportunity to qualify our project for economic development tax relief was an important consideration," Carter said. "Manulife is excited about helping to revitalize this area both through the addition of our new building and through the presence of Manulife employees. We're also grateful for the support and the partnership of city and state officials, and we are confident that the project merits the consideration it was given."

AMG spokesman Ray Howell defended the tax credit and said the firm has "met and even exceeded its promises and has generally been a great corporate citizen to Beverly." When it received its tax break, AMG said it would add 30 new jobs over three years, and has so far brought on 25.

"Given that AMG has more than upheld its part of the bargain, we would hope the state would honor its commitment as well," Howell said.

Howell said politics had nothing to do with AMG getting its tax credits, or holding onto them during the Romney administration: "This tax agreement was sought by the city of Beverly, and it was approved by the state long before the present administration took office."

In his letter Friday, Sullivan pointed to $10.5 million in tax credits that the state Revenue Department should recoup, in the case of AMG and other firms that have already received the credits, or refuse to honor going forward, in the case of Manulife. Of the $10.5 million total discussed in Sullivan's letter, $2.5 million of the credits were scattered among several businesses across Massachusetts.

Most of the letter, however, dwelled on the development deal involving AMG, which was reported by the Globe in May 2002 as the gubernatorial campaign began to heat up. The Globe reported at the time that AMG bought the property for $4.5 million. The company expected to save $19,000 in Beverly property taxes and $956,000 in state taxes over 15 years, but gave tens of thousands of dollars to the local library in nearby Beverly Farms to offset its local tax savings.

AMG has stellar Republican credentials. In addition to Sean Healey, state GOP chairman Darrell W. Crate is the company's chief financial officer, Weld now sits on the firm's board of directors, and Howell is Weld's former press secretary.

In addition, Lieutenant Governor Healey lists an AMG e-mail address on her contact information on the state Republican Committee's website, and Healey and Scanlon have both used the same campaign manager in the past. (Healey ran two unsuccessful campaigns for the Legislature in 1998 and 2000).

In his letter, Sullivan pointed out that the firm did not even apply for the $1 million credit until after it had already begun construction on the 89-acre estate -- which is in the exclusive Beverly neighborhood of Prides Crossing.

And while the property had been damaged in a fire several years earlier and might have been regarded as difficult to develop, Sullivan contended that there were other companies already interested in the estate, namely the homebuilding giant Toll Brothers Inc., and thus the site should have been ineligible for a credit.

Despite that, Sullivan argued, the state's Economic Assistance Coordinating Council, which decides which projects deserve tax credits, "did not discuss or dispute" assertions that the site was unlikely to be developed "by the ordinary operations of private enterprise," and OK'd the credit in March 2001.

Romney and Kerry Healey did not enter office until 2003.

Beverly Mayor William F. Scanlon Jr., whose administration helped AMG apply for the tax credit in 2001, defended the deal, saying in an interview last week that the AMG project was popular with area residents, that the Toll Brothers plan was not, and that he was extremely interested in helping any firm willing to locate its corporate headquarters in Beverly.

But Scanlon acknowledged that the property is "finer than any palace I've seen in Europe," and hardly blighted, as the firm's application for tax credits asserted.

He also said AMG would probably have developed the site without the tax credit, but "that's Monday morning quarterbacking."