Jonathan Starkey

The News Journal

Political supporters of Gov. Jack Markell and former members of his administration are benefiting, some handsomely, from the state's growing reliance on cash from out-of-state corporations.

A Wilmington law firm managed by Markell's former chief of staff received nearly $2 million from the state in the last two years to help collect money owed by businesses under a program he helped create while working for the governor. State officials picked the firm, which has hired other Markell staffers, even though it received lower marks than two other bidders competing for the work, records show.

Nearly $1 million more went to Markell's campaign finance chairman to represent the state in a Chancery Court case filed by the office supply chain Staples. The company settled its lawsuit challenging a state audit that demanded millions from the business.

In addition to Markell supporters and former staff members, state officials also have paid $120 million to a Massachusetts-based corporate auditing business that has hired two high-ranking Delaware officials.

Nothing about the relationships and contracts is illegal. But the contracts raise questions about how Markell, who came into the governor's office critical of backroom deals that benefit insiders, runs the program that collects so much state revenue.

James Browning, regional director of state operations for the good government group Common Cause, said the deals around the state program prove Delaware needs stronger laws preventing state officials and employees from profiting from their public jobs. And the state should require better lobbying disclosures for those seeking public business, he said.

"This program is a cash cow," Browning said. "There's so much money here it raises the question, 'Can we let a bunch of friends and colleagues regulate themselves or do we need stronger public-interest laws?'"

Cash addiction

The big-money contracts are part of the state's growing reliance on hundreds of millions of dollars from businesses that call Delaware home. The money comes from things like abandoned accounts, unused gift cards and uncashed corporate checks that businesses must turn over to the state as unclaimed property.

The collections, which now make up about 15 percent of the state's $3.7 billion budget, increased nearly 50 percent since Markell took office, growing from $450.3 million in 2009 to $670.6 million in 2013.

Last year, lawmakers used $670 million in abandoned property collections to help pay for critical state operations, road improvements and debt payments.

As recently as last year, Markell said the state relies too heavily on this corporate revenue to balance the budget each year. But Markell has increased the state's reliance on the abandoned property money after a recession that caused key revenues like personal income taxes to flatten and increased the demand for expensive government services.

"If you have someone who has been incorporated in this state for 50 years and has never filed, it's our duty to say we need to look at them," said David Gregor, the deputy secretary of the Delaware Department of Finance, who runs the program to collect the money.

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Markell has taken steps intended to address the state's reliance on abandoned property, placing a cap on the amount that can be used to pay for operational costs and, in years of surplus, directing the money to one-time items.

The firms connected to the governor's supporters and former staff members received the state contracts through a competitive process, Markell spokesman Kelly Bachman said in a written response. "The governor did not direct hiring anyone," she said.

Creating business

In June 2012, with the Markell administration facing criticism from businesses that argued the collections program was too aggressive, the governor persuaded the General Assembly to approve a new program that allowed companies to voluntarily disclose how much they owed in return for concessions. Secretary of State Jeff Bullock runs that effort..

Tom McGonigle, who served as Markell's chief of staff, helped craft the legislation that created the new program. In July 2012, Bullock awarded the contract to run the new program to Drinker Biddle & Reath, a Philadelphia-based law firm with 11 offices nationwide. In November 2012, McGonigle left his job with Markell to join Drinker Biddle as a regional partner managing the Wilmington office.

Geoff Sawyer, a former deputy to McGonigle in Markell's office and a lawyer experienced in abandoned property matters, also works at Drinker Biddle. He was in negotiations to join the firm as the state contract was being considered, joining the office in October 2012. Greg Patterson, another former deputy chief of staff to Markell, joined Drinker Biddle this year to launch a new lobbying practice for the firm's clients.

State records show that other bidders seeking the contracts received higher marks than Drinker Biddle when state officials reviewed the proposals. The state received six bids in July 2012, and three were chosen as the top contenders. A division of Xerox Corp. and a Delaware firm headed by Brenda Mayrack, a lawyer and Democratic candidate for state auditor, scored higher marks, the reviews show.

Gregor, who runs the abandoned property program for the state finance agency, expressed concerns in his review of the bids that Drinker Biddle could have a conflict because the firm represented businesses that could be affected by the program.

"Practically speaking, high likelihood of conflict," Gregor noted on the contract review. He also gave them lower marks than other firms on "experience and reputation" in the area, their depth of marketing experience and in demonstrated financial and analytical capability.

Bullock, who had worked with McGonigle when the two served former Gov. Tom Carper, said he attempted to recruit Mayrack to work with Drinker Biddle but failed. Drinker Biddle was a better pick because of its size and infrastructure, he said. Drinker Biddle ultimately hired a partner of Mayrack's to work on the voluntary program.

"The best person technically, I thought, was Brenda [Mayrack]," Bullock said. "But Brenda did not have the infrastructure, she didn't have the kind of wherewithal. She was basically all by herself."

Good faith

McGonigle said he played no part in the bidding process while working for Markell and does not work on the state program at Drinker Biddle.

"I was aware of it because it was a legislative initiative that I was involved with," McGonigle said. "I haven't billed any time to the matter since I came to the law firm."

Joseph Schoell, a former aide to Gov. Ruth Ann Minner who works at Drinker Biddle and helped land the contract, said the firm bid on the state work in good faith.

"Although we were not privy to the decision-makers' thinking, my impression at the time was that Drinker had advantages in terms of size, capacity, and ability to finance a quick ramp up of a major initiative for the state," Schoell said by email.

He said the firm discussed with the state potential conflicts it could have with its clients who could be affected by the program and vowed to resolve any issues or have the Attorney General's Office step in if conflicts can't be resolved.

Drinker Biddle's lawyers bill the state between $355 and $436 an hour for the program, according to the state contract. Lawyers working on the program include Sawyer and Schoell.

More than 470 companies have signed up to voluntarily disclose previously unreported unclaimed property revenue, but fewer than 20 cases have closed. Bullock said he expects to send $50 million from the program to the General Fund before June 30. The administration is promoting legislation that would extend the period under which companies can sign up for the program and give officials another year to close agreements and collect revenue.

Personal favor

Stuart Grant, one of Delaware's most successful plaintiff's lawyers and a Democratic donor who has helped raise money for Markell and Attorney General Beau Biden, also has received state work. He was paid a total of nearly $1 million in 2011 and 2012 fiscal years by the finance agency to defend the state in Chancery Court against Staples, which ultimately agreed to pay $8.9 million to the state in abandoned property payments it owed.

Grant said he was asked by state officials "as a favor" to handle the Staples case because of his experience in Chancery Court. He said he cut his normal $965 hourly rate in half and took the case because of its importance to the state.

"The fact that we billed over a two-year period just under $1 million wasn't exactly something that wowed anybody in the firm," Grant said. "Not only did we cut the rates, but it sapped up a disproportionate amount of my personal time because it was an important issue to the state.

"People use political influence to gain business. It is true that I have political influence and it is true I have business from the state. But it is not true to connect those things," he said. "I didn't want this business. I didn't ask for this business."

Grant also has filed a whistle-blower lawsuit, recently joined by Biden's office, that accuses more than two dozen well-known Delaware corporations of scheming to deprive the state of "hundreds of millions of dollars" in unreported abandoned property revenue in the form of unredeemed gift card balances.

Grant filed the lawsuit under seal in Superior Court last year. Grant and his client, the whistle-blower William Sean French, stand to make millions if the lawsuit is successful. The lawsuit names Netflix, Shell Oil, Skechers USA, California Pizza Kitchen and other household name corporations.

Corporate consultant Bob Peters, with the firm Duff & Phelps, said the case is just another example of Delaware's aggressive pursuit of corporate cash.

"While the governor will espouse that it is a business-friendly state and will go on national TV to make that statement, more and more corporate officers of Fortune 1000 corporations are re-examining that based on this very type of behavior," Peters said.

Recruiting workers

Over the past decade, more than 80 percent of the state money paid for audits that led to collections of owed abandoned property payments from businesses has gone to Massachusetts-based Kelmar Associates.

Mark Udinski left his state job last year, accepting a job in the Pennsylvania offices of Kelmar. Udinski's move raised eyebrows in the corporate community because, while employed by the state, he ran the state's abandoned property program from a perch in the Delaware Department of Finance. Patrick Hurley, a deputy attorney general who worked on the abandoned property program, also made the move to Kelmar.

"Here's a guy who has been administering the program, who has hired Kelmar, who has helped Kelmar make millions of dollars. It looks like a payout," said Doug Lindholm, president of the Council on State Taxation, which represents corporations.

State officials and Kelmar dispute the charge as ludicrous and unfounded. "Mark Udinski is a bright guy. Pat Hurley is a bright guy. They went job hunting and I'm glad, I'm happy, I'm excited that they both decided to come here," said Mark McQuillen, Kelmar's president.

They also say that state taxpayers have benefited far more than Kelmar through the abandoned property program.

"This is one of those things that does keep Delaware taxpayers' rates low overall," said Finance Secretary Tom Cook, who noted that, to replace abandoned property, "you'd have to triple the gross receipts tax" on Delaware businesses.

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Bachman, the governor's spokeswoman, said there are times when the state loses its workers to competitors.

"The governor understands that experienced state employees are sometimes going to be recruited by employers with whom they work, but he expects all former employees to comply with the law prohibiting them for two years from working on matters for which they were directly responsible," she said.

Udinski's move came despite Delaware's two-year revolving door law that prohibits state officials from leaving public service to represent a private business on any matter for which they were "directly and materially responsible" while collecting a state paycheck.

But it's nearly impossible for state officials to get snagged by the law because the "directly and materially" language "has been interpreted somewhat narrowly," said Deborah Moreau, the lawyer for the Public Integrity Commission, the state's ethics office.

Former state officials only must avoid working on the "exact same matters" they worked on as a state employee, Moreau said, offering an example. A transportation department employee who helped design U.S. 13 while collecting a state paycheck could go to work immediately for a transportation contractor seeking work on Del. 1, she said, so long as they're not working on U.S. 13.

'Free money'

Over the last decade, the state has collected more than $4.3 billion in abandoned property revenue, with more than $1.6 billion coming from audits of corporations.

Lawmakers have used $3.8 billion to balance the annual budget, also using the revenue to fund road improvements, retirement health benefits for state employees and debt reduction efforts, according to data from the state Finance Department.

"It's free money. How can you turn it down?" asked John Flaherty, president of the Delaware Coalition for Open Government. "A lot of other states wish they did have that abandoned property money. The unpredictability of it is certainly there, but it's enabled the state of Delaware to do a whole lot more with a lot less taxes."

The state collects the money through a combination of voluntary reporting and audits, conducted primarily by Kelmar. More than 65 percent of Fortune 500 companies call Delaware their legal home.

In fiscal year 2013, which ended last July, Kelmar received more than $53 million in state work. The next highest-paid state auditor last year earned just $2.2 million.

In 2010, Kelmar signed a contract to perform the audits for the state until 2019, with potential extensions that would take the contract out to 2023.

Traditionally, state contracts run no longer than five years, according to a spokeswoman for the Office of Management and Budget. But there are no rules that agencies must follow on contracting periods, she said. Finance officials say the term is proper because audits can last three or more years, and changing auditors in the middle of the process could present problems.

Sen. Greg Lavelle, a Sharpley Republican who, along with other party members, is pushing for reforms, called the contract a "sweetheart deal." Others share the concerns.

"NFL football players don't get those types of contracts," said Harold Kim, executive vice president of the U.S. Chamber of Commerce's Institute for Legal Reform, which has been critical of the way Delaware runs its abandoned property program.

Contact Jonathan Starkey at (302) 983-6756, on Twitter @jwstarkey or at jstarkey@delawareonline.com.