Fuzzy Math

The RCGA flushed away its credibility in the city earnings-tax debacle

When it comes to boosterism, nobody hypes the St. Louis area more than our local chamber of commerce, formally known as the Regional Chamber and Growth Association. It promotes the hell out of our town, not just to out-of-towners but to all of us as well, as it did with its recent "We Got It Good" media blitz, corny as it was. Presumably the group is good at providing services for its member businesses, staffed as it is with 58 employees and a $9.2 million annual budget. And it lobbies in favor of or against legislative proposals, representing the interests of businesses: yes to tax abatements for companies' properties in the city, no to a living wage for employees of such companies and so forth. One may disagree with the group on such issues, but the disagreements are usually over legitimate matters of public policy.

But when it comes to crunching numbers, which ought to be any business group's forte, the RCGA is damn near nonsensical.

In 1998, the group calculated that Mark McGwire's home-run streak added between $50 million and $60 million to the area's economy. One imagines an RCGA economist trying to figure out just how many of the hotdogs consumed during the baseball season could be attributed to McGwire's drawing power. When Pope John Paul II was coming to town in January 1999, the RCGA predicted that the region would see a net gain of $25 million. It also predicted that the NCAA Men's Final Four basketball tournament in 2005 will result in a cool $90 million in "direct" and "indirect" spending. And let's not forget the Rams' super season last year, which, said the RCGA, generated $111.3 million for area businesses.

But the granddaddy of them all was the RCGA's "analysis" that the value of St. Louis' "exposure" time during the Super Bowl last year was -- take a deep breath now -- $344 million. This came directly from the RCGA's "economic-development department," which tallied the actual mentions of St. Louis on- or offscreen and the number of times the words "St. Louis" appeared onscreen. It added up to 86 minutes. And, making a grand leap, the RCGA economists multiplied that figure by the going rate of airtime during the game -- $2 million for a 30-second spot -- and, voilà!, you have $344 million worth of "exposure." So quit yer bellyachin' about the $240 million public cost of building the Trans World Dome.

All of those projections are laughable, partly because they're inconsequential.

But the RCGA recently made another financial projection that can no longer be dismissed as harmless, ludicrous as it was. It had to do with the city's 1 percent earnings tax as it applied to stock options given to executives of companies. Last fall, the RCGA lobbied the city to eliminate the tax on stock options, and it put out an estimate that the city would lose a mere $350,000 annually by doing so. The number is ridiculously low, and there was plenty of hard evidence in plain sight to show that the financial impact on the city would run into millions and millions of dollars.

There is only one reasonable answer as to why the RCGA, the city's booster, gave such a low figure: It intentionally set out to hoodwink the city.

The recent saga of the city's earnings tax is filled with juicy tidbits and a ton of irony, not the least among which is that in the 1950s, the city's large companies -- under the aegis of Civic Progress -- gave birth to the earnings tax. Those were the days when most captains of industry had close ties to the city and lived in the city, when their corporations didn't relocate at the drop of a hat, when they felt that what was good for St. Louis was good for Ralston Purina or Anheuser-Busch. So the newly formed Civic Progress pushed to establish a 1 percent earnings tax, and it was done in 1959. Four decades later, the same corporations (albeit with a new generation of CEOs) are trying to avoid paying that very tax.

In early 1997, Ralston executives leaked word that the company was considering moving out of the city, perhaps to Clayton. But neither CEO William Stiritz nor anyone else from Ralston would speak directly to the matter, although public officials openly suggested that "the earnings tax has always been an issue with Mr. Stiritz."

That April, Clarence Harmon was elected mayor and immediately appointed a committee to study replacement of the earnings tax. The committee came back with the not-so-surprising conclusion that the city could not do without the tax. The arithmetic of city taxes dictated that view: The earnings tax provides about one-third of the city's approximately $340 million annual budget, generating about three times what property taxes bring in and more than twice what the sales tax brings in.

At about the same time, Ralston and its executives went to court to argue that the city should not apply the earnings tax to stock options, which are generally given to top executives as a sort of bonus. In short, an executive is given an option to buy a certain number of shares, usually at the price of the stock at the time the option is given, and he or she can exercise the option years later (when the stock price has gone up) and earn a nice chunk of change. This has been standard practice in large companies and, more recently, in high-tech startups, the so-called dot-coms. The underlying assumption has always been that stock options serve as an incentive to executives to improve the company's performance, thereby increasing the value of the company's stock.

But that assumption was, amazingly, turned on its head when Ralston executives, represented by the silk-stocking law firm of Bryan Cave, argued in the city's Circuit Court that the stock options weren't really "earned income" and therefore were not subject to the earnings tax. They brought in expert testimony to show that no correlation existed between the top management's performance and the rise or fall of a company's stock -- which, of course, begs a question: If that is so, then why give only top executives stock options? Why not give all -- or none -- of the employees stock options?

The court documents also revealed that Ralston and its executives, who were paying the tax on stock options under protest, paid the city $950,000 between 1997 and last summer. (In 1998, August Busch III earned $10.8 million by cashing in his stock options, presumably paying the city $108,000.)

In any case, the suit was won by the city. Ralston appealed, and, last June, the Missouri Court of Appeals upheld the ruling. Ralston appealed to the state Supreme Court. In September, the high court declined to hear the appeal. Ralston now faced a dead end. In the meantime, Ralston executives also faced the likely -- and happy -- prospect of a buyout by the Nestlé Co.

Within just a few months, City Hall handed the company what it couldn't win in court.

Ald. Lyda Krewson (D-28th Ward) introduced a proposed ordinance last fall exempting stock options from the earnings tax. Aldermanic President (and now presumptive Mayor) Francis Slay co-sponsored the bill along with a few others. Heavily backing the bill were the RCGA and another group called the Center for Emerging Technologies, an incubator for high-tech startups. The sponsors and the backers argued that the bill was necessary to attract new high-tech companies to the city and to retain existing ones. These dot-coms and other startups use stock options a lot as a way to supplement the wages of key players who are lured by the prospect of high payoffs when the company succeeds in the marketplace. But the backers could only point to one startup that had moved out of the city claiming the stock-options tax was a factor.

That's when the RCGA cooked up the $350,000 estimate of what such an exemption would cost the city. That estimate was the only one repeatedly tossed around -- by RCGA reps lobbying the aldermen, by Krewson and Slay, and, of course, by the Post-Dispatch, which has parroted every RCGA estimate as gospel, never stopping to question whether it had any basis in reality.

It was the only estimate being tossed around, because the city itself has no way to figure out what such an exemption would do to its coffers. Budget director Frank Jackson says the city does not track earnings from stock options. Larry Unger, assistant collector for the earnings tax in the office of the Collector of Revenue, says companies pay the earnings tax quarterly and file the W-2 form with the city. The W-2 does not break down an employee's total compensation to show how much of it is salary, how much is a bonus and how much is a cashed-in stock-option earning. And there has never been any reason to break out the stock-option earnings from an employee's total earnings. After all, the IRS and the state of Missouri consider stock-option earnings as compensation and tax it as earned income.

Both Jackson and Unger, being prudent public servants, are loath to criticize the RCGA, other than to acknowledge that the $350,000 figure seems awfully low.

So just how did the RCGA come up with the estimate? For two weeks we pressed them to explain the methodology; as we were going to press Tuesday, we finally got Ronnie Bryant, vice president for economic development and the man responsible for the study, on the phone. He gave us an explanation that would be laughed out of any M.B.A. class at any local university.

Here's his explanation: The RCGA contacted the 17 largest publicly traded companies in St. Louis. Five of them volunteered information on stock options paid to their executives. Bryant won't identify the companies, saying the information is confidential, but says, "They're five large companies." During a three-year period, options cashed in by executives at the five companies averaged $8 million annually. That generated $120,000 in earnings taxes (1 percent, or $80,000, paid by the execs, plus a half-percent payroll tax, or $40,000, paid by the companies).

The RCGA then made several assumptions. It assumed that most stock options are awarded primarily by large, publicly traded companies. It assumed that the 17 biggest public companies and their executives paid "the overwhelming majority" of the city's tax on stock options. It also assumed that because the five companies generated more than half of the total earnings taxes paid by the 17 companies, it was reasonable to conclude that the five also paid at least one-third of the city's tax on stock options. On the basis of these assumptions, the RCGA multiplied $120,000 by three and came up with a $360,000 annual figure (which lost $10,000 on its way to public consumption).

What about the privately held companies in the city? Because no information is available on them, Bryant says, we didn't factor them in. What about the dozens, if not hundreds, of other publicly traded companies in St. Louis? Those are negligible. Was the RCGA aware that Ralston and its executives paid the city $950,000 between 1997 and last summer, related to stock-options earnings? No, says Bryant. Was Ralston one of the five companies? "I cannot tell you that," he says. And now that he knows Ralston and its execs alone paid almost the amount he estimated for the entire city, does he believe his estimate is still accurate? "The number itself is only accurate to the degree of the accuracy of the information," Bryant says. "If you plug in new information, you could definitely get a different number.

"Within the full universe, I think [the number] is still relevant, in terms of what we attempted to accomplish at that particular time," he adds. "Definitely, if you bring more information into the equation, things can be done different."

Krewson's bill moved on the fast track, coming up for final approval at the Dec. 15 aldermanic meeting. Opening the discussion, Krewson told her colleagues that the stock-option exemption to the earnings tax was a way to protect the tax itself. Her logic, echoing the RCGA's mantra on the matter, was this: If we exempt the stock options, then these new startup companies will be more likely to do business in the city, thereby keeping jobs in the city, jobs in which the employees will at least be paying the earnings tax on their salaries. "We're losing business to Maryland Heights and Brentwood," Krewson said on the aldermanic floor. "We believe exempting the stock options from the earnings tax is one way to send a very inexpensive message to the business community that this city is willing to change the business climate" [emphasis added].

What would such an exemption cost the city? "The RCGA has done a study and estimated that this is about $350,000 a year."

Ald. Steve Conway (D-8th Ward) wasn't buying it. He blasted the bill, saying it was a handout to wealthy corporate executives. The minimum-wage-earner or even the middle-management employee is never given stock options but must pay the same 1 percent earnings tax on his or her wages, Conway said. "The people who can least afford it get no breaks," he said.

All of this fell on deaf ears. Slay himself took the floor to support the bill. "We may lose in the short run about $350,000 or whatever that may be. That's a small price to pay," he said. He urged his colleagues to pass the bill "so we can tell the business community that we are open for business."

The bill passed on a 23-4 vote, with Conway, Ald. Sharon Tyus (D-20th), Ald. James Shrewsbury (D-16th) and Ald. Terry Kennedy (D-18th) voting against it.

Within minutes of the bill's passage, Slay signed it, flanked by backers including RCGA president Richard C.D. Fleming. The same day, the RCGA issued a press release in which Fleming eerily echoed Slay's words, saying, "This legislation sends a very strong, very positive message that the City of St. Louis is open for business."

Four days later, on Dec. 19, Mayor Harmon signed the bill into law, effective immediately.

On Jan. 24, David Nicklaus of the Post-Dispatch reported that six top Ralston executives "stand to cash in $118 million of stock options and restricted stock when their company is sold to Nestlé." Nicklaus calculated that had it not been for the bill signed into law in December, the city would have picked up $1.77 million from those six executives and their company.

Perhaps it is time to connect the dots.

In early 1997, Ralston makes noises about moving out of the city, hinting that the earnings tax is an issue. A city committee studies the matter and concludes that it's best not to mess with the earnings tax. By fall, Ralston is in court, arguing that stock options ought to be exempt from the earnings tax. In 1998, the city wins the case. In 1999, Ralston loses its appeal. In September of that year, Ralston fails to get the state Supreme Court to hear its appeal. Soon the Board of Aldermen takes up a bill to exempt the stock options. The RCGA, which represents the interests of businesses such as Ralston, puts out the $350,000 estimate. In December, the bill becomes law, completely reversing the city's hard-fought victory in court. Now Ralston execs stand to cash in $118 million in stock options, saving themselves and their company $1.77 million in taxes to the city.

Coincidence or conspiracy? It really doesn't matter.

The bottom line is that the city stands to lose millions of dollars in coming years by giving a tax break to top executives. When Slay tries next year to balance the city's budget as mayor or Krewson and her colleagues look for money to meet crucial needs for their constituents, they ought to be reminded of what they have wrought.

And the next time the RCGA talks numbers, everyone ought to play deaf.

Scroll to read more St. Louis Metro News articles (1)


Join Riverfront Times Newsletters

Subscribe now to get the latest news delivered right to your inbox.