May 23
2024
Harris Beach, Hodgson Russ profiting off IDAs
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A meeting of the Erie County IDA board of directors. Photo by Garrett Looker.
When New York’s industrial development agencies grant tax breaks, it’s not just local companies that benefit — two upstate law firms walk away with major paydays, too.
Hodgson Russ and Harris Beach — based in Buffalo and the Rochester area, respectively — earn millions of dollars in fees each year, according to research from the watchdog groups Reinvent Albany and Good Jobs First.
That report comes on the heels of state Comptroller Thomas DiNapoli’s annual IDA report, also released Wednesday. The comptroller’s report showed that for fiscal year 2022, IDAs in Western New York granted $153.1 million in tax breaks in exchange for $12.2 billion in investment and nearly 25,000 jobs. The tax breaks meant schools and municipalities lost out on a total of $119.7 million in revenue.
Of that total, the Erie County IDA granted $25.4 million in tax breaks in fiscal year 2022, netting 14,000 jobs and reducing revenue to local schools and governments by $15.2 million. The watchdog report estimates that the Erie County IDA’s general counsel — Harris Beach — earned as much as $824,000 in fees.
Hodgson Russ serves as bond counsel to the Erie County IDA. Bond counsel fees are not readily available and not included in the watchdog report.
Together, the pair of reports on New York’s IDAs illustrates how money flows through local economic development deals: Companies looking to locate or expand pay an IDA and its lawyers a fee after receiving property, sales and mortgage tax breaks for a specified number of years. Those breaks reduce revenue to local schools and governments. The companies in return agree to create or retain jobs and spend their money locally.
“This explains a lot in terms of the politics of IDAs,” said John Kaehny, executive director of Reinvent Albany.
In their report, the watchdog groups estimate that Hodgson Russ and Harris Beach have earned as much as $39 million in general counsel fees in recent years from nine of New York’s largest and most active IDAs, including Erie County’s. Harris Beach serves as general counsel to seven of the nine, while Hodgson Russ is general counsel to the other two. Both are associated with dozens of other IDAs not included in the study.
The groups’ report studied fees collected by the law firms and political donations made by the firms between 2017 and 2022.
The report found that the two firms made $1.1 million in campaign contributions in the geographic areas of the nine IDAs — those in Albany, Erie, Nassau, Monroe, Onondaga, Orange, Suffolk and Westchester counties, as well as Yonkers — over the six-year period.
In Erie County, the groups estimated that Harris Beach earned between $3.7 million and $4.9 million as general counsel and made $80,000 in campaign contributions to parties and candidates within the county over that period. Hodgson Russ made $135,000 in local contributions over those years.
“It's a closed loop,” Kaehny said. “This guy's making lots and lots of money — very, very lucrative fees — and then keeping that racket, and even expanding it, by just making campaign contributions that are like a fraction.”
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In Albany County, the report estimated that Hodgson Russ earned up to $2 million in general counsel fees from the IDA and gave $18,700 in campaign contributions. In Nassau County, Hodgson Russ is one of two firms sharing $4.9 million in fees. The groups did not find any Nassau County campaign contributions from Hodgson Russ.
A Hodgson Russ spokesperson, in a statement, refuted the notion that the firm’s work with IDAs in New York is motivated by politics.
“The cost and fees, including legal fees, for these transactions are paid by the project applicant seeking financial assistance from the IDA — not the IDA,” spokesperson Catherine McDonald said. “Hodgson Russ has strong, long-standing relationships with our IDA clients — many spanning decades — because of the exceptional services Hodgson Russ provides, not based on political considerations.”
A Harris Beach spokesperson did not return a request for comment.
An Erie County IDA spokesperson said the agency takes care to select a knowledgeable law firm to handle the complex subsidy deals. Spokesperson Robbie-Ann McPherson said the agency currently uses Harris Beach, which bills the companies directly and not the IDA. In a statement, John Cappellino, IDA President and CEO, said both that firm and Hodgson Russ are vetted via a request-for-proposal process as well as by an agency committee.
“There is absolutely no relationship between RFP respondent law firms awarded ECIDA legal services contracts, and any political donations given to any candidate by the law firms who submit proposals,” Cappellino said. “These events are totally unrelated.”
Both Hodgson Russ and Harris Beach are major political donors in Erie County, giving money to the Erie County Democratic Committee as well as campaign funds of County Executive Mark Poloncarz and Mayor Byron Brown, who sit on the IDA board of directors, Investigative Post found.
Groups request reforms
Reinvent Albany and Good Jobs First, in studying IDAs in recent months, first found what they called a “perverse incentive” at the heart of the agencies: IDAs earn most or all of their operating revenue from the fees they collect from companies, meaning they’re incentivized to grant tax breaks to earn their budgets. Six of the 15 Western New York IDAs earn their entire budgets from fees. The Erie County IDA earns about 70 percent of its revenue from fees.
In that report, issued last month, the groups called on New York lawmakers to fold the function of IDAs into local government to ensure tax breaks are issued to grow a local economy, not for an agency to make its payroll. A spokesperson for the comptroller’s office said while DiNapoli will not make policy recommendations, the fact companies pay IDAs for tax breaks is “a fundamental aspect of the structure of IDAs and how they function in New York State.”
“Comptroller DiNapoli would encourage the legislature and the executive to consider these complex issues in their legislative deliberations,” spokesperson Jennifer Freeman said.
The groups are now calling on the state to require IDAs to report the amount of money the law firms they employ collect from each deal. Kaehny said the groups struggled to find the information in their report because the fees collected by the lawyers are “off the books.”
“If the 107 IDAs disclosed how much deal fees their lawyers were getting, or consultants, I think it would create public outrage,” Kaehny said, referring to the total number of IDAs throughout New York.
Freeman said the comptroller generally favors increased transparency for IDAs.
The fees collected by IDA lawyers vary by agency. Some grant their attorneys a percentage of the fee the company pays to the agency — in some cases one-third of a 1 percent fee. Others, like Erie County, have a tiered fee schedule. That schedule ranges from $2,000 for small projects to $28,000 for projects worth $10 million or more.
The report found that lawyers working for the Erie County IDA collect the second-most of the agencies studied. Topping the list is Monroe County, where Harris Beach collected as much as $9.3 million from the IDA between 2017 and 2022. During that same period, the report said, the firm made $207,000 in donations to Monroe County politicians.
IDAs by the numbers
The comptroller’s report shed additional light on other IDAs across Western New York.
Cattaraugus County topped the list for most tax breaks granted during 2022, the report showed, awarding 50 projects a total of $41.8 million. Those subsidies netted 991 jobs but cost local schools and governments $41.1 million in lost revenue. The IDA collected just $740,000 in payments-in-lieu-of-taxes, the lowest out of the 14 agencies that reported data in Western New York.
Corey Wiktor, Cattaraugus County IDA executive director, said the numbers in the comptroller’s report are skewed because it’s a snapshot in time, meaning that project totals — meaning the project cost and the amount of tax breaks — were captured, but not PILOT payments to schools and municipalities, which have not yet started.
“Those reports are going to look a little skewed because those PILOTs haven’t started yet,” Wiktor said. “That report doesn’t tell the story on manufacturing and solar.”
Erie and Niagara county IDAs rounded out the top three in the region for granting tax breaks. In 2022, Erie County granted $25.4 million in tax breaks while Niagara County granted $18.5 million. Those subsidies resulted in $15.2 million less for Erie County governments and schools and $10.7 million less for those in Niagara County. Together the agencies supported nearly 300 companies and helped create more than 16,000 jobs.
