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 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.