Audit Raises Red Flags over Control of NJ’s Massive Tax-Incentive Programs

John Reitmeyer | January 10, 2019 | Budget
Troubling questions about oversight and value to taxpayers of multibillion-dollar awards that are supposed to incentivize job creation and retention

Credit: NJTV
Gov. Phil Murphy raised wider concerns about the effectiveness of tax incentives.
A new audit of New Jersey’s lucrative tax-incentive programs, which have the potential of costing residents up to $11 billion, raises troubling questions about the state’s long-term oversight of the tax breaks and calls for new protections to prevent abuses from occurring in the future.

The Office of the State Comptroller reviewed several of the state’s tax-break programs aimed at rewarding companies for either creating or retaining jobs in New Jersey over the last decade.

The agency gave closest scrutiny to a sample group of a few dozen companies that were awarded incentives, and it found nearly 3,000 reported jobs were not substantiated as having been created or retained even though the companies in that group redeemed their incentives.

The audit suggested a new state policy was needed to “establish adequate job-reporting requirements and obtain sufficient supporting documentation from recipients to ensure that jobs were actually created or retained in accordance with incentive agreements.”

The audit also called into question the actions of the Trenton-based Economic Development Authority, which administers the incentive programs. The EDA responded in a letter that a large percentage of the issues flagged in the audit date back to the state’s oversight of programs that are no longer open to new applications; it also noted many oversight procedures have already been upgraded as much as current law allows.

The programs are up for renewal in July

The release of the audit comes as the latest generation of tax-incentive programs are up for renewal in July. What happens to them promises to be hotly debated by Gov. Phil Murphy and Democratic legislative leaders, some of whom are responsible for designing the very programs the audit criticizes. The debate over the future of the tax incentives — which Murphy has already signaled he wants to rein in — will also come amid a broader discussion of fiscal policy and spending that is expected to take place in Trenton before July 1, the deadline for adoption of the next state budget.

The state has been offering some form of tax incentives for over two decades, but the programs were significantly overhauled in 2013 in the wake of the Great Recession by then-Gov. Chris Christie, a Republican. He negotiated the agreements with Democrats who control the Legislature, in an effort to jumpstart job growth. Changes under Christie included allowing companies and developers to get more generous tax incentives, while also reducing their requirements for investment and job creation. This was especially true in places like Camden, where South Jersey Democrats like Senate President Steve Sweeney determined the most significant economic boosts were needed.

The pace of the incentive awards was also ramped up in the wake of the recession; an estimated $8 billion worth of tax breaks were pledged during Christie’s tenure. But protections were also put in place to ensure companies at least would have to meet some baseline standard before they could redeem their tax breaks.

Still, the incentive programs have been a source of controversy in recent years and several reports have taken issue with their administration, including a 2017 analysis released by the State Auditor that called on the EDA to “strengthen procedures to verify recipient compliance.” Last year, a review released by Rutgers University’s Bloustein School of Planning and Public Policy questioned the per-job cost of some of the tax breaks, particularly in Camden, where they soared past $30,000 in some cases.

The audit released yesterday noted 1,000 incentives have been pledged under five different programs, some of which are no longer active, going back to 2005. Some $34 billion in investment would be generated in New Jersey if all the standards for receiving the incentives are ultimately met, the audit said.

Did companies get money without meeting targets?

But in 24 of 37 “sample projects” that drew closer scrutiny in the audit, the agency had concerns that companies were not actually meeting all the required standards to receive a tax incentive even though the auditors said that incentives had already been provided or were in the process of being provided to them.

“EDA’s current monitoring and oversight process lacks sufficiently detailed data to confirm whether jobs were actually created or retained and has led to overstated and overpaid incentive awards,” the audit went on to say.

The names of any companies that may not have lived up to their job creation or retention obligations were not made public yesterday. The auditors also cautioned that a “non-statistical sampling approach” was used and that “the results of our testing cannot be projected over the entire population.” But Murphy administration officials said they were still confident the audit demonstrated significant oversight problems at EDA and revealed that adequate corrective actions were not taken by the Christie administration.

Murphy seized on the release of the audit yesterday to raise wider concerns about the effectiveness of providing tax incentives as an economic-development policy, given the state could still forgo billions of dollars of revenue as it pays out the incentives — no matter how closely the programs are watched. While he has favored continuing the incentives in a more limited and targeted fashion, Murphy said they shouldn’t represent the state’s entire economic-development strategy.

“When economic incentives are used they must be forward looking, they must be precise . . . but they also must be handed out responsibly and with the knowledge of both parties that someone is watching to make sure promises made are promises kept,” Murphy said during a news conference in Trenton.

‘…corporate cronyism at its worst’

Groups that have long criticized the incentive programs, particularly after the ramp-up that occurred during Christie’s tenure, also weighed in yesterday.

“The lack of oversight and monitoring undermines the integrity of a tax subsidy program, and more importantly, trust in state government,” said Sheila Reynertson, a senior policy analyst from New Jersey Policy Perspective, a liberal think tank.

“The findings highlight corporate cronyism at its worst,” said Erica Jedynak, state director for the conservative Americans for Prosperity organization. “This issue unites people across the political spectrum.”

Analilia Mejia, the leader of the New Jersey Working Families Alliance, suggested a series of open hearings should be held as lawmakers work with the governor to determine the best way to move forward in the run-up to July 1, when the existing programs are due for reauthorization.

“Irrespective of which side of the aisle anyone is on, this is a massive program that will require full transparency and I think greater participation from stakeholders, communities and taxpayers to ensure that New Jerseyans are not continuing to be fleeced,” Mejia said.

Lawmakers blame the EDA

For their part, lawmakers largely took aim at the EDA’s actions while also saying this year presents a good opportunity to make improvements.

“The new incentives must include significant oversight and accountability so that the programs maximize their effectiveness and do not squander resources,” said Senate President Steve Sweeney (D-Gloucester). “Recommendations from the comptroller’s report should be used to make the current programs function more efficiently and should be considered to ensure the new programs are well implemented.”

“Wasting taxpayer money is unacceptable and cannot be tolerated,” said Assembly Speaker Craig Coughlin (D-Middlesex).

The EDA referred all questions about the audit to Murphy’s office yesterday. But a letter from agency chief executive Tim Sullivan that was included with the audit took issue with some of the findings, saying some of the recommendations may go beyond what current statutes allow the agency to do.

Billions in incentives yet to be redeemed

Sullivan’s letter also noted that more than $7 billion in incentives have yet to be redeemed by the companies they have been pledged to, suggesting it’s now up to the Murphy administration to ensure those funds will be closely guarded.

Murphy spokesman Matthew Saidel credited Sullivan, who was the governor’s pick to lead the agency, for launching new efforts to improve oversight.

“The Administration looks forward to working collaboratively to build out a new, more effective tax incentive package with improved monitoring capabilities to ensure that results are achieved on behalf of New Jersey’s taxpayers and business community,” Saidel said.

During his news conference yesterday, Murphy also didn’t rule out taking legal action against any companies that may have accepted incentives without meeting the actual requirements.

“I’m not a lawyer, but if we do have grounds to reclaim (funds) we will aggressively pursue those,” he said.