State Audit Faults EDA for Not Making Sure Companies Qualify for Awards

Colleen O'Dea, Senior writer | January 24, 2017 | Politics
Although ‘adequate controls’ are in place, according to audit, Economic Development Authority needs to do better job determining, following up on tax breaks, credits

The EDA awarded $82 million to Goya Foods to move from Secaucus to Jersey City.
The agency responsible for awarding New Jersey’s multibillion economic development incentives does not always ensure that the recipients of these tax incentives actually qualify for them, a state audit has found. In many cases, the audit reports, the Economic Development Authority doesn’t make sure that the companies it works with meet the requisite financial hardships or job promises before approving aid or awarding grants and tax credits.

The audit found “adequate controls” exist overall, but the problems it discovered raised questions about how well the state’s largest program, Grow NJ, is serving economic development. It also took issue with how well New Jersey officials hold companies accountable when they obtain tax credits.

State Auditor Stephen Eells reviewed three of the state’s major business incentives programs administered by the New Jersey Economic Development Authority: the Business Employment Incentive Program, Business Retention and Relocation Assistance Grants, and Grow New Jersey Assistance Program. These are responsible for $5.5 billion in grants, designed to prevent companies from leaving the state or encourage them to expand here, dating back to 1996. The largest portion of that amount — $3.9 billion — is from Grow NJ, created by a 2013 law, under the Christie administration.

The audit concluded that “adequate controls” were in place for most programs, but the exceptions were troubling. These include not adequately reviewing and verifying the cost of a business moving out of New Jersey against the benefit of it staying here, not properly verifying the existence of at-risk jobs before approving a grant to a business, and a weak system of monitoring businesses’ compliance with grant terms.

“The state auditor’s report on New Jersey’s tax-subsidy programs echoes some of the concerns we’ve raised, particularly about the 2013 legislative changes that greatly expanded the tax breaks’ generosity to corporations while removing essential fiscal safeguards,” said Jon Whiten, vice president of New Jersey Policy Perspective, a progressive think tank. “It’s just further proof that New Jersey needs a smarter, more comprehensive approach to economic development — not one that leans so incredibly heavily on these flawed subsidy programs.” 

NJPP has been railing against these programs for years, saying tax breaks that can total hundreds of millions of dollars given to companies often do not pay off. They have also drawn the ire of some local officials, particularly when companies use the program to only move from one New Jersey community to another: $82.5 million to Pearson to move from Upper Saddle River to Hoboken, $82 million to Goya Foods to move from Secaucus to Jersey City, $102 million to Panasonic Corp. of America to move from Secaucus to Newark.

The EDA touts the programs’ benefits to the economy, saying on its website, for instance, about the largest program: “Since the enactment of the N.J. Economic Opportunity Act of 2013, 220 active projects have been approved under the Grow NJ Program for a total award amount of more than $4 billion. This assistance will support the creation of more than 27,800 estimated new jobs and the retention of 27,100 existing jobs at risk of leaving New Jersey.”

According to the audit report, not all of those claims may be true.

In the case of jobs at risk of being lost under the BRRAG program, which is no longer accepting applications, the audit concludes that “Procedures need to be implemented to verify the existence of at-risk jobs prior to grant approval.”

Under BRRAG, businesses can get at least $1,500 and as much as $3,000 per job retained for up to six years. Businesses have to certify the number of jobs retained and the name, address, and hire date of the people in those positions. Companies that don’t maintain all their jobs are to have their awards reduced.

But the EDA does not do any additional work to verify this information, according to the audit report. The auditor checked the employee information of four businesses that got grants against state Department of Labor and Workforce Development wage reports and found that “three of the four businesses had numerous employees with no earnings” and “the average quarterly employment of the three businesses was between 26 and 38 employees less than reported by the businesses and incentivized by the NJEDA.” The auditor also found that four of seven businesses reviewed had fewer employees than they needed to receive a full grant but their awards had not been adjusted.

“Although the NJEDA is no longer accepting applications for assistance under the BRRAG program, executed grants are still ongoing and the Grow New Jersey Assistance Program is now providing similar tax credits,” the report states, adding, “the NJEDA needs to strengthen procedures to verify recipient compliance throughout the entire grant period and ensure the efficient use of taxpayer dollars.”

For the Grow NJ program, the audit says that the “cost benefit analysis detailing the difference in cost between staying in New Jersey and moving out-of-state needs to be adequately reviewed and verified.” In checking four projects, the audit found that the EDA had not gotten “adequate documentation” to support 11.5 percent of rent, property taxes, and utilities costs, and 8 percent of such upfront costs as building renovations and equipment purchases were either unsupported or went unverified by the EDA.

“The cost benefit analysis is a critical factor in determining whether or not to award tax credits under GROW,” the audit states. “All reported costs associated with locating a proposed project in New Jersey or out-of-state must be verified to ensure a business is seriously considering relocating out-of-state to a lower cost alternative.”

The audit also had several criticisms of the Grow NJ program’s benefits for projects in Camden, where businesses can get tax credits worth “significantly” more than elsewhere. It cited the case of one business, which got $107 million to relocate 250 workers from a community less than 20 miles from Camden. Had the business moved 249 jobs, it would have been eligible for only $50 million and had it moved its 250 workers to a different town, it would have gotten only $37.5 million at most.

“The rationale behind a tax credit funding methodology that allows for such an increase should be questioned and revisited as it may not be in the best interest of the state,” the auditor suggested.

Additionally, the report states that using corporate business tax revenue to determine the net benefit for intrastate relocations to Camden “may be questionable” and allowing businesses in Camden to project a 35-year net benefit to the state even though they could leave after 15 could mean the state would realize no net benefit at all.

Finally, the audit found that in at least one case, the amount of tax credits a company received was nearly $400,000 less than the amount of income tax generated by the 367 positions the credits supported because they were low-wage jobs.

“Although an approved project’s total net benefit is measured by many factors other than gross income tax, the state can substantially increase its benefit by offering a tiered level of tax incentives under the GROW,” the auditor suggests. “For example, a position being paid the minimum wage should not be incentivized at the same level as a higher paying job.”

Melissa Orsen, CEO of the EDA, wrote in a response appended to the report that she would not comment on such suggestions as providing different levels of incentives based on wage levels of jobs because that is a change the Legislature would need to make. She did, however, discuss the other findings.

She pledged that the EDA will retain more complete files for Grow NJ projects. But she said the auditor had reviewed “less than two percent of the program portfolio” and that for the four projects checked, the auditors had confirmed that 88.5 percent of annual costs and 92 percent of upfront costs were supported.

Orsen wrote that “the NJEDA undertakes the highest level of due diligence to understand and compare locations proposed by applicants” but that “direct outreach to competing states for verification purposes could put New Jersey in a weaker position as it is likely to prompt more competitive offers from those alternative states, perversely resulting in a loss of businesses and jobs from New Jersey.”

She wrote that any changes to at-risk job verification under BRRAG is unnecessary because that program has expired, but said EDA has strengthened its verification process for Grow NJ, saying it now requires businesses to submit additional documentation, including the Department of Labor’s wage report for employees, as well as an additional worksheet.

Additionally the EDA has established an “internal auditor function: for programs and will have independent auditors doing spot checks on information companies submit,” she added.

“As the agency charged with administering the State’s business incentive programs, the NJEDA takes its fiduciary responsibility very seriously and our obligation to protect the public interest continues to be our primary focus,” Orsen concluded, adding “the NJEDA consistently reviews best practices and utilizes its transactional experience to improve and strengthen policies and processes where the statute allows.”