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Commerce Department addresses audit criticism

Molly Hulsey //August 28, 2020//

Commerce Department addresses audit criticism

Molly Hulsey //August 28, 2020//

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Commerce Sec. Bobby Hitt speaks at a BMW Manufacturing event. The plant is one of the state's recruitment successes, originally promising 2,000 jobs and creating 11,000. (Photo/Ross Norton)Over one month after the release of a legislative audit critiquing the Commerce Department for its lack of oversight and transparency with money funding economic development projects, the agency has adopted some recommendations as state lawmakers prepare to address corresponding budgetary concerns in September.

The S.C. Legislative Audit Council report, released in early June, argued that the Commerce Department should up the ante on developing and publicizing performance criteria, such as new jobs created, for job development credits and grant projects.

“This is really the first audit to go into depth on these things,” Eric Douglass, audit manager with the Legislative Audit Council, told GSA Business Report. He and Earle Powell, director of the Legislative Audit Council, noted that during the auditing process, the Commerce Department was interested in making some changes to their procedures.

According to Alex Clark, spokesperson for the Commerce Department, the agency has started to report performance measures beyond the initial investment and job-creation baseline required to receive grant funding. Following the audit’s recommendations, performance measures also will be recorded for job development credit recipients.

“Adding information to our database in excess of the required amount will further demonstrate that the state often gets a better benefit for its bargain when companies create additional jobs above the minimum committed to in an RVA (revitalization agreement) or performance agreement (for grants),” Clark told GSA Business Report in a written statement.

She also said the department will account for the wages of new jobs when assessing grant eligibility, another suggestion found in the audit. Clark added that wages have always been reported with job development credit documentation.

In a move toward greater transparency, the agency also will add clawback amounts — the money collected from failed or underperforming economic development projects — in annual reports.

According to the audit, from 2009 to 2019, the S.C. Coordinating Council for Economic Development approved 972 total projects including 557 grants, adding up to $526.2 million, and 415 job development credits worth up to $6.2 billion if reimbursements are claimed and 66,684 jobs are created. Roughly $223 million in tax credits has been claimed so far.

Of the 248 grants closed since 2009, roughly 92% of required jobs were created. Grant recipients also exceeded the investment requirement by about $1.8 million.

The audit report launched late last year, entreated the Commerce Department to update the agency’s cost-benefit model, require additional documentation and vetting for grant applicants and enhance verification measures for grant and tax credit programs.

“We had found that that particular analysis was outdated,” Douglass said concerning the agency’s current cost-benefit model. “And the formula for that was implemented in the mid-1990s. And Commerce, in their response, agreed to try to update that.”

The Commerce Department says it is revising the current model in conjunction with a third party, along with compilation of a manual charting the impact analysis process for future use.

Highlighting what one Commerce Department employee called the “honor system,” or relying on businesses to self-report investments, jobs created and other measures, the Legislative Audit Council report found that the agency deferred to Revenue Department audits to verify that job-development credit recipients claiming more than $10,000 a year had actually created those jobs.

The Coordinating Council certifies job minimums through payroll records, according to Clark.

However, some companies never received the mandatory triennial audit, and according to the Department of Revenue, for the up to 184 companies that claimed a job development credit during the past four years, only 14 or 29 audits were conducted per year over the past three years.

The Revenue Department confirmed those numbers with GSA Business Report and echoed concerns that with only two job development credit auditors and one manager, the department wasn’t able to keep up with the to-do list — a job that would require $389,576 for four full-time auditors according to the Legislative Audit Council report.

Department of Revenue spokesperson Bonnie Swingle verified that the suggested funding has not yet been put aside for the additional auditors — a move supported by the Commerce Department — nor has the suggested audit fee increase to $2,000 taken place.

“There has always been strong and continuous communication between the Coordinating Council and the South Carolina Department of Revenue,” Swingle said in an email. “We will continue to work closely with the Coordinating Council to ensure all Job Development Credit recipients are complying with state law and revitalization agreements.”

When asked about measures to mitigate the risk of fraud as suggested by the audit, the Commerce Department said it will continue site visitation after the threat of COVID-19 passes and acknowledged the Revenue Department would be increasing its auditing ability.

The Legislative Audit Council recommended that, when applying for a grant, all applicants submit verified bank statements, loan guarantees, audited financial statements or reports and returns subject to review by the Internal Revenue Service or Securities and Exchange Commission.

Clark said the verified bank statements and loan guarantees are already required by the council if there is any doubt that a company will be able to financially support a project.

Commerce Secretary Bobby Hitt expressed concerns in a response letter published with the Legislative Audit Council report that audits would be prohibitive for small or new companies.

“And this recommendation does not acknowledge that these types of companies typically are approved only for JDCs (which a company only receives if it performs as promised) or grants with extra stipulations requiring achievement of certain investment and/or job creating thresholds before any grant funds may be distributed,” Hitt said in the letter.

State Sen. Dick Harpootlian, D-Columbia, — one of several politicians, including Sen. Wes Climer, R-Columbia, who called for the audit after the General Assembly passed a bill to unlock financial incentives used to move the Carolina Panthers’ headquarters to South Carolina — had not heard of any of the changes at the Commerce Department and continues to call for Hitt’s resignation.

“Frankly speaking, I’m shocked that in a state run by a conservative, Republican government, that we give away taxpayer dollars in such a flagrant and disingenuous way,” said Harpootlian, a former chairman of the S.C. Democratic Party.

The Commerce Department estimated that the football team’s relocation would create 6,000 jobs, but a former economist with the agency informed Harpootlian that the 20-year-old cost-benefit model inflated the 200 jobs that would actually be created, according to Harpootlian.

“Not once could they find in the last six years that the Coordinating Council turned down a project, so there’s no oversight of how these dollars are spent, who gets the money, whether it’s spent correctly,” Harpootlian said.

He argued the Palmetto State’s Commerce Department is one of the least transparent in the nation.

In discussion with Climer and others, Harpootlian said he hopes to make some changes to budget allocations for the revenue and commerce departments in September.

“I’m not going to go into detail on those, but we’ve got to have more accountability, more transparency,” he said.

This story originally appeared in the August 10, 2020, print edition of the GSA Business Report.