Auditor general: Pennsylvania needs to better monitor corporate tax incentives

     Auditor General Eugene DePasquale discusses the details of an audit at the State Capitol. (Marielle Segarra/WHYY)

    Auditor General Eugene DePasquale discusses the details of an audit at the State Capitol. (Marielle Segarra/WHYY)

    Pennsylvania gives out hundreds of millions of dollars to companies each year. Now, the state auditor general says the state needs to do a better job making sure companies are creating the jobs they’ve promised.

    Every year, Pennsylvania gives out hundreds of millions of dollars in grants, loans, and other financial help to companies. In exchange, the companies promise to invest. Maybe they’ll build a new office, or create a certain number of jobs, for instance.

    The Department of Community and Economic Development gives out this money, and it’s also responsible for holding companies to their promises. 

    The state auditor general recently came out with a report saying DCED needs to do a better job. The audit looked at how DCED monitored nearly $213 million it gave out in five of its programs from 2007 to 2010. 

    The findings

    According to audit, 44 percent of the companies given state assistance under these programs didn’t meet the job creation requirements in their contracts. Maybe a company was supposed to create 50 jobs, and it created 30. Or none.DCED says people should look instead at its overall job creation numbers. Out of the total number of jobs pledged by all the companies in these programs, almost 97 percent were actually created or retained. Auditor General Eugene DePasquale says looking only at total job numbers allows some companies that exceeded their promises to compensate for the ones that fell short. And he says that’s a problem, because “anytime a grant contract doesn’t meet its projected total, we should try to find out why, so we improve it and don’t make that same mistake moving forward.”
    DCED has requested $10.9 million in penalties from companies that didn’t meet job promises, but up to the end of the audit period, it had only collected about $4.5 million. A chunk of that money probably will never come back to the state, because some of the companies have declared bankruptcy. But this is an area where the auditor general’s office says DCED has improved since the last audit.
    DCED relies on companies to submit signed statements saying whether they’re meeting their job creation requirements, but requests the detailed records from only one out of every 10 companies, and only in some programs.

       DCED says the signed statements are enough of a safeguard. “There’s penalties, basically falsifying state government documents if they lie on these forms,” said DCED spokesperson Steven Kratz. “Company officials, we feel, would not put themselves in that type of risk by lying about the job creation and retention numbers.

      But DePasquale disagrees. “Is that better than nothing? Sure,” he said. “But the idea that no one would lie. Jeez. I mean, does anyone have to look at the financial meltdown in 2008 to realize that some people lie?”

    DCED defends its record

    In its official response to the audit, DCED wrote that “the report is peppered throughout with general statements that seem more like opinion than fact, incongruous in an audit and, in many cases, are not supported by the facts.”

    The auditor general’s office responded saying that they “strenuously disagree with this DCED comment and note that DCED provides no foundation to support its opinion.” The statement goes on to say the auditors followed auditing guidelines and gave evidence for their findings.

    If you’re getting the hint, the back-and-forth was tense.

    DCED’s Kratz said the auditors aren’t getting the full picture. He says DCED sees things the auditors don’t, like related jobs and development that happens because of the companies that get state money. “The whole neighborhood starts to be redeveloped. That’s really stuff you can’t measure,” Kratz said. “But when you go out and see these projects and talk to our local economic development partners, and you talk to the businesses in the community, you can really see the impact.”

    Kratz gave the Philadelphia Navy Yard as an example. The Navy Yard was a shipyard dating back to the 1870s, but it closed in 1996. Since then, the state has given corporate incentives to several companies located at the old site. Then other companies,  including Flat Rock Health, Independence Imaging and a Courtyard By Marriott, moved in without state funding. Now, Kratz said, there are 143 companies operating at The Navy Yard, employing more than 11,000 people. He said 70 percent of those companies are new to Philadelphia.

    “Without the state’s partnership with [Philadelphia Industrial Development Corporation], the developer on specific, anchor projects, the demand for housing and amenities such as hotels, restaurants, health facilities, etc. would not be there,” Kratz wrote in a follow-up email.

    DCED doesn’t have to follow the recommendations in the audit. But the department has improved the way it holds businesses accountable since its last audit in 2007, and that could happen again.

    Also, things may change when Governor-elect Tom Wolf takes office in January. Wolf has said he will get rid of any corporate incentive programs that don’t create jobs in the state.

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