May 19, 2013

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House Committee looks for ways to improve Quality Jobs program

January 28, 2013 By

A House Committee has held its first hearing digging into the Quality Jobs Program.

Representative Jay Barnes (speaking) says the committee on Government Oversight and Accountability will meet Friday, February 8 in Kansas City to talk about the Quality Jobs program and "What to do about Kansas."

Representative Jay Barnes (speaking) says the committee on Government Oversight and Accountability will meet Friday, February 8 in Kansas City to talk about the Quality Jobs program and “What to do about Kansas.”  (Photo courtesy; Tim Bommel, Missouri House Communications.)

The House Committee on Government Oversight and Accountability was originally formed to study the failure of a project to bring a sucralose refinery and more than 600 jobs to Moberly. Its chairman, Representative Jay Barnes (R-Jefferson City), acknowledges the Quality Jobs discussion began with the Mamtek investigation.

“It was just a catalyst to allow myself a platform to get people asking the first real questions about the Quality Jobs Act.”

Jones says Quality Jobs is has suffered from a low success rate. He says up until two years ago for projects of $1 million annually or more, about the jobs created matched the number of jobs promised about 35 percent of the time. More than 46 percent of those projects yielded no jobs at all. He says smaller projects met their job promises only about 20 percent of the time while creating no jobs nearly 76 percent of the time.

Barnes notes there have been some success stories, however, and says his goal is to find how to have more of those and fewer failures.

He says one way to achieve that might be to give the Department of Economic Development more discretion in what projects are approved for Quality Jobs incentives.

“Right now, as we heard the testimony, there is no discretion. You come in, you make certain promises, you get the tax credit automatically. What we know happened in Mamtek is the executives from Mamtek used that and some other things as leverage to put pressure on local communities for the offering of local government bonds which ended up in a tremendous failure.”

Proponents of Quality Jobs argue that in failures such as Mamtek, the project received no incentives because certain thresholds in job creation and other factors were not met. Barnes says there’s more to it than that.

“There’s two responses to that. The first is that the Quality Jobs Act authorizations are used in some scenarios to leverage local government resources or other resources in which taxpayer money is expended up front. We know from Mamtek that is what happened. The second issue is that these programs have caps … and every dollar authorized for a business that has no business receiving the authorization is a dollar that can’t be spent on a business that might actually create jobs.”

He also says the time spent by Department employees on failed projects is also wasted.

The committee also heard from the Director of the Institute for the Study of Economics and the Environment at Lindenwood University, Professor Howard Wall. He told the committee that academic economists view tax credit programs as “completely ineffective.”

He says the Department’s claim that Quality Jobs has created more than 11,000 new jobs over its life is hard to back up.

“There’s a credit authorized and a factory is set up then people are employed. That’s usually what’s called ‘jobs created.’ Maybe those were created by the credit, maybe they would have existed anyway. Also, that’s not taking into account the negative effects on employment everywhere else because those workers typically came from other jobs, other employers who might now shut down because they can’t get workers.”

Wall recommends that Quality Jobs be scrapped, but Barnes says realistically, that won’t happen.

“Politically speaking I believe it would be impossible. I have much sympathy for the professor’s position that it ought to be scrapped in total. However, I know that it has bipartisan defenders in [the Capitol] and I know that’s not going to happen.”

Barnes says the next step for the Committee will be a hearing at Union Station in Kansas City to discuss, “What to do about Kansas.”

He says the two topics are, “absolutely related, because the Quality Jobs Act is used as a measure of competition with the State of Kansas.”

Barnes says discussion of improving the quality jobs act will be one of the subjects at that hearing, as well as reducing taxes, which he says would do more to create jobs than all jobs tax credits combined.

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Auditor: DED must improve due diligence, understand its role

September 25, 2012 By

An audit that began with the investigation into Mamtek says the Department of Economic Development (DED) has taken some steps to improve its due diligence procedures, but could take more.

The Mamtek facility sits empty at the north end of Moberly.

The Department’s Division of Business and Community Services is responsible for due diligence and reviewed Mamtek in the spring of 2010. Mamtek was offered $17.2 million in incentives and Moberly issued $39 million in bonds to finance a sugar refinery. The project failed in September 2011.

Then Secretary of State Steven Tilley late last year asked State Auditor Tom Schweich to investigate the deal. State Auditor Tom Schweich began the review late last year into that and other projects.

Schweich notes the Department already updated its due diligence procedures in February 2011 and he says the improvements were significant. He says there are still some things that aren’t being done that should be.

“One area that’s of particular interest to me coming from the private sector is whenever due diligence is done in the private sector, especially for a startup company, you don’t just look at the entity because it’s new. You go to the principals … the people. The CEO, the principal shareholders, whoever it is that’s really running the show and you look and see what’s their criminal history, what’s their financial history, and determine whether they’ve had failed projects in the past. So those are a few holes in the new procedures that we think could be tightened up.”

Specific to the Mamtek project, the audit says state and local officials could have done a better job evaluating the claims made by the company, such as the existence of a plant in China and the existence of company equity or ability to raise it.

Schweich says prior to February 2011, the agency wasn’t following its own procedures. He says now they are following their own updated procedures, and his office has recommended more steps that he is confident will be implemented.

He isn’t satisfied with the Department’s response to the audit, however.

Read the audit summary and the full report (pdf).

DED points out, as it has in the past, that no incentives were ever awarded to Mamtek because it never met job creation and investment requirements. Schweich says that’s not enough.

“Taken to its extreme, then why do any due diligence? Why not just give everybody tax credits and wait until the jobs materialize. The fact of the matter is (DED is) more than just a switch that turns on and off tax credits. They have expertise in that department. They are supposed to look into the viability of projects before they award even contingent tax credits.

“People rely on them. Maybe not legally … I’m not going to get into the legalities of it. I don’t know if Moberly was legally allowed to rely on BCS or not, but a small city which doesn’t have a whole room full of financial analysts and experts and tax credit experts sees that DED said, ‘Yeah, we think this is a good project,’ and even if they’re not legally allowed to rely on it, as a factual matter they’re going to.”

The audit also looked into the “stacking” of economic incentives:  when one project claims multiple incentives for the same work. It was calculated the state issued tax credits totaling more than $134 million to project costs claimed under more than one program between fiscal years 2000 and 2011. For every $1 of project costs, a developer could be issued up to $3.27 in federal and state tax credits.

The Tax Credit Review Commission recommended the legislature bar projects from claiming multiple tax credits, and the auditor’s office recommends BCS develop cost containment measures with the legislature.

Another finding was that the Governor’s Office in fiscal years 2010 and 2011 paid more than $149,000 for about 160 flights for the Governor’s Office, circumventing the legislative appropriations process. Many of those flights were for media appearances by the Governor promoting economic development incentive awards and projects that were predicted to create jobs. 22 flights costing more than $6,000 are reported to have had no clear benefit to DED or BCS.

A DED spokesperson declined to speak to Missourinet about the audit, referring to the Department’s response found in the report. An e-mail to the Governor’s office seeking a response was not answered.

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State auditor slams management of Missouri Quality Jobs program (AUDIO)

July 3, 2012 By

The State Auditor says the economic development department is mismanaging the Quality Jobs tax incentive program and overplaying its results.

Deputy State Auditor Harry Otto

Quality Jobs tax incentives are available for employers who create or retain full-time jobs, pay at least half the health insurance premium for them and pay at least the average wage in the county. Employers can receive tax credits or hold onto income tax withheld from the employees it keeps or hires.

Deputy Auditor Harry Otto says when an employer applies to the program it offers an estimate of the number of jobs it expects to create or retain. “Later the employers have to report the actual numbers of jobs retained, jobs created, dollars spent. What we’re saying is when you look at the actual numbers after the fact they are less than the projected numbers.”

The audit says those are the figures used to measure the economic impact of the program and calls them “significantly overstated.” 

Since the program was launched in 2005 DED has approved projects touted to create 45,646 jobs. According to the annual report on the program that estimate has been reduced by 18,960. So far, just over 7,000 jobs have actually been created.

It also says DED is not providing enough oversight into whether companies getting the credits are eligible for them. Otto explains, “We, I think, pointed out one where there’s still a disagreement as to whether or not the jobs were rolled I think from a parent to a subsidiary or from a subsidiary to a parent, that we don’t think that really the jobs were created. They were moved from one company shell to another.”

The auditor’s office also didn’t like how the employers DED authorizes to retain the income taxes they withhold account for it. Otto says, “The employer then reports to Department of Revenue … they’re the ones that are the tax collectors of the state. We think there should be more communication between DED and DOR to determine that the proper amount of withholding occurred and that the employer who created and/or retained jobs has retained the proper amount.”

See the “Citizen’s Summary” of the Auditor’s report here.

The auditor’s office gave the program’s administration a “poor” rating, making it the first state program to recieve that rating. Otto empasized that isn’t an assessment of the program, but how it’s been run. “That they could do a better job by acting responsibly with respect to a quicker turnaround or reporting of the information and then giving the General Assembly updated information all the time and not just relying on the initial estimates that were projected by the employers who said they would create or retain jobs.”

Otto says the findings were not well received by the Department. “We were told by DED in some cases the entire program hasn’t unfolded yet, so you can’t really look back and tell the entire thing is over but we say they should update their numbers … the numbers that they give to the General Assembly, because the General Assembly’s making decision based on these projections and if the projections turn out fo be inflated or too high, the General Assembly ought to know that.”

The auditor’s office also says data should be reported in a more timely manner. Otto says, “(DED) has established a November date for receiving information from employers and we think that’s too much time … we think that they could improve reporting by establishing an earlier date to have that information submitted to them.”

Missourinet’s call to the Department of Economic Development has not been returned. View its response to the audit along with the rest of the report from the Auditor’s Office here.

AUDIO:  Mike Lear interviews Deputy State Auditor Harry Otto, 10:09

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Senate committee continues Mamtek discussion

January 19, 2012 By

The Chairman of the Senate Committee on Governmental Accountability says he questions whether the Department of Economic Development has the safeguards in place to protect Missourians.

The Senate Committee on Government Accountability hears testimony from representatives of the Department of Economic Development.

Senator Jim Lembke’s Committee has again heard from Department representatives about its involvement in the Mamtek sucralose plant project at Moberly, this time with new e-mails obtained from DED. Lembke says the e-mails reflect that some in the Department were asking “the right questions” about Mamtek and its executives, but he wants more.

Lembke told the Department’s Director of Legislative Affairs Jason Zamkus, “We’ve got to come up with some type of process…you say to the person that has an interest in coming to Missouri and starting a business that we need to have your financials before we can take it to the next step.”

He emphasizes that he is not suggesting background checks be conducted with all companies and all projects. Those with a more established background, with examples given in the hearing being Coca-Cola and Ford, would not be subject to the same inquiry as someone from a relatively unknown company, as was the case with Mamtek. “The bottom line for me is,” Lembke says,” how do we keep this from happening to another community.

Lembke wants to meet with DED in a different setting to discuss new approaches to prevent more Mamtek-like situations in the future. “Let’s learn from it and put some things in place that will actually protect the taxpayer and our Missouri communities.”

The House Committee looking into the Mamtek deal, the Special Standing Committee on Government Oversight and Accountability, is scheduled to meet at 12:30 p.m. Thursday. Chairman Jay Barnes anticipates long-awaited witnesses Tom Smith, who was Mamtek’s site consultant and Mike Wise, a patent attorney who claimed to have been to Mamtek’s plant in China.

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Proposals would slow down Mamtek-like bond arrangements

January 17, 2012 By

Two measures have been proposed in the House by a member of the committee that has looked at the Mamtek situation that would take some grease off the wheels in future, similar deals.

Representative Chris Kelly (D-Columbia)

Representative Chris Kelly (D-Columbia) says right now when communities want to issue bonds for industrial development, bond advisors & lawyers might advise the city’s credit be used, such as what happened in Moberly with Mamtek. His proposals target such arrangements.

“That is a, I think, kind of a sneaky method to avoid the Missouri Constitution, because what it does is it requires that one city council effectively bind the appropriations of further city councils without a vote of the people, and the Constitution prohibits that.”

The plan regarding communities would require a change to state statute, found in House Bill 1304, while the prevention of such state-backed bond deals requires a constitutional amendment found in House Joint Resolution 58.

Kelly acknowledges his proposal would put communities in Missouri at a disadvantage when competing with those in other states to bring in new industries, because those deals sometimes develop very quickly. Having to put certain elements before a vote of the people will significantly slow the process down. ”That’s one of the things that the cities won’t like about this, but if the only thing that my bill does is it makes cities more aware of this problem, I will think that that in-and-of-itself is a good thing.”

On that line of thought, Kelly says his bill would not have to pass to sound an alarm. “I want to raise the consciousness about the danger here.”

Kelly says if his bill had been law when Mamtek was developing, the deal would have been aired better and might not have reached the stage it has. He notes, he is not critical of the people with the City of Moberly. “I am morally convinced that they did not realize that they were binding the credit of the City. The people I find fault with are the bond advisors and the bond lawyers.”

While discussing who was at fault in the Mamtek deal, Kelly says he thinks the state handled it “probably, actually about right. There’s a lot of political motivation to blame (The Department of) Economic Development because the governor’s a Democrat. But I think the Department of Economic Development handled this under (Governor Jay) Nixon the same way that they handled these under (Governor Matt) Blunt and it’s just handy now that this one went south, to try to find a political way to blame Nixon.

Kelly is not saying that DED could not have done better in certain areas involving communication or contributions to due diligence. “At any given time in any operation … you can find ways to make improvements.” He adds, “if there were sins here, they were pretty venial sins.”

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