Audit Sparks Overlapping Probes Into State Business Incentive Programs

Colleen O'Dea | January 25, 2019 | Budget, Politics
Two investigations — a task force empaneled by Gov. Phil Murphy and a joint hearing scheduled by the Legislature — are announced hours apart

Credit: NJ Governor's Office
Gov. Phil Murphy outlined his plan to revamp the incentive programs in his recent State of the State address.
Two branches of government announced new plans to conduct overlapping probes of New Jersey’s system of business tax incentives, despite — or due to — a recent State Comptroller audit that raised troubling questions about oversight of the incentives and their effectiveness.

The two investigations, one by Gov. Phil Murphy’s administration and another by the Legislature, also point to the continued divide between the separate branches of government, both led by Democrats.

Murphy, who has proposed new incentive programs to replace the ones in question, signed an executive order Thursday creating the Task Force on EDA’s Tax Incentives to “conduct an in-depth examination of the deficiencies in the design, implementation, and oversight” of the state’s two major incentive programs. The task force will have subpoena power and its legal team will include the former co-chair of a commission that investigated public corruption in New York.

About two-and-a-half hours later, the leaders of the state Senate and Assembly announced a joint legislative hearing for mid-February “to review the operations, oversight and effectiveness of the New Jersey Economic Development Authority and its tax incentive programs.” That hearing will delve into the audit released earlier this month by the State Comptroller, as well as other assessments of the incentives.

These will bring to three the number of investigations spurred by the audit. Last week, state Attorney General Gurbir Grewal said his office was probing whether any wrongdoing had occurred.

Audit: Promised benefits were not delivered

Credit: Governor's Office/Tim Larsen
Former Gov. Chris Christie revised the incentive programs with the cooperation of Democrats including Senate President Steve Sweeney.
New Jersey has offered tax incentives for over two decades, but the programs got a major facelift in 2013 by former Republican Gov. Chris Christie, working with Democratic legislative leaders, in an attempt to add jobs and boost economic growth in the wake of the Great Recession.

One of Murphy’s earliest actions on taking office was to order the audit of the incentives — the Grow New Jersey Assistance and the Economic Redevelopment and Growth Grant programs that remain in place, as well as earlier incentives — to determine their effectiveness.

“The audit released earlier this month unfortunately validated my long-standing concerns that New Jersey’s tax incentive programs gave out billions of dollars in tax breaks but failed to deliver the promised economic benefits,” Murphy said in a statement announcing the task force. “The idea that up to $11 billion was awarded without so much as basic verification of claims regarding job creation and retention should shock and appall every New Jersey taxpayer.”

While $11 billion in incentives has been approved, some dating back to the early days of the programs, most of that has not been handed over yet to businesses. Of roughly $8 billion actually ratified by the EDA, less than 9 percent, or close to $700 million, has been paid out. (The earliest $3 billion was allotted before the existence of the EDA.)

The audit came to some troubling conclusions, particularly regarding job creation and retention — major requirements of GrowNJ and some of its predecessor programs. Businesses can receive annual tax credits of up to $5,000 per job created or retained, with additional bonus credits possible. The audit cited the EDA for “a failure to properly analyze recipient performance data to determine whether the incented jobs were actually created or retained pursuant to the award terms.” In a sample of projects examined, the audit could not find proof that almost 3,000 jobs were created or kept — about 20 percent of those promised.

EDA logo
Additionally, the audit found that the EDA did not use the proper statute and regulations in evaluating five commercial projects and so improperly awarded them $179 million in incentives. It also cited the agency for inadequate monitoring, for lacking an adequate process to determine whether the state realized promised economic benefits and for failing to assess and collect appropriate fees from all applicants.

In total, 1,000 projects approved for almost $11 billion over the life of the incentive programs were to have created or retained about 240,000 jobs and resulted in $34 billion in capital investments. The way the audit was conducted, it was impossible to determine whether its finding that one in five jobs may not actually have been saved or created applied to all projects.

Murphy: ‘Taxpayers deserve a full explanation’

Murphy said he is pleased that the EDA, which disputed some of the audit findings, has put some policies in place, and pledged others, to address some of the deficiencies found by the comptroller’s office.

“But taxpayers deserve a full explanation of how and why these massive shortcomings in performance existed,” Murphy said. “The Task Force I am establishing today will give the public that explanation, and help provide a roadmap for how tax incentives can be responsibly designed and implemented going forward.”

Murphy has his own plan for revamping the incentive programs, which expire mid-year. First announced last fall, it envisions programs to provide gap financing to projects, reward businesses that create jobs in certain areas, encourage the redevelopment of brownfields and preservation of historic sites and help boost the state’s startup sector.

The agency’s board approved Murphy’s choice of Tim Sullivan to lead the EDA last February.

Ronald Chen
To chair the new task force, Murphy tapped Ronald Chen, dean of Rutgers Law School in Newark and a former state public advocate. The governor did not name any other members, but announced that the group will have legal counsel from Walden Macht & Haran LLP of New York. Its lead attorneys will include Jim Walden, a former Assistant U.S. Attorney for the Eastern District of New York, and Milton L. Williams, former co-chair of the Moreland Commission created in 2013 by New York Gov. Andrew Cuomo to investigate public corruption.

“We look forward to undertaking an objective and straightforward investigation to determine whether New Jersey’s tax-credit programs were misused,” Walden said in a statement.

Murphy’s office did not answer questions about whether the state has entered into a contract with Walden Macht & Haran or how much they expected to pay the firm and its attorneys for their work.

The governor’s task force will hold public hearings. If necessary, it can refer matters to the state comptroller’s office to exercise its subpoena authority, or to the EDA to exercise its authority over the incentive programs.

Meanwhile, in the Legislature

The legislative hearing is scheduled for February 11 before the Senate Economic Growth and the Assembly Commerce and Economic Development committees. Lawmakers issued no comment on either Murphy’s task force or their hearing. The notice of the hearing states that the committees’ findings “will be used to inform the Legislature on how to improve the state’s incentive programs, how they should be structured and implemented, and what oversight controls are needed to ensure full accountability.”

Murphy’s recent criticisms of the incentive programs have seemed to exacerbate his ongoing feud with Sen. President Steve Sweeney (D-Gloucester). Following the governor’s State of the State address last week, half of which Murphy devoted to the audit, Sweeney defended the programs.

“To say the programs we did were bad is just wrong,” he said. “It was the enforcement within the agency … I can point to Subaru and many others who would have left the state if not for these programs.”

Sweeney worked with Christie on revamping the programs six years ago. Some of the changes allowed 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 Sweeney and other South Jersey Democrats determined the most significant economic boosts were needed.

Any changes to the programs will require Murphy to reach accommodation with the Legislature, as he will have to gain the support of Sweeney and Assembly Speaker Craig Coughlin (D-Middlesex) to get his proposals or other program revisions enacted.