Auditor recommends changes in Vermont's VEGI tax incentive program

Vermont Employment Incentive Growth Program Audit

June 12, 2008
State Auditor Tom Salmon Reviews First Year of the "Vermont Employment Growth Incentive" Program Says New Policies Could Reduce Excessive Incentive Awards MONTPELIER - A prominent new State economic development assistance program is in general compliance with State law, says State Auditor Tom Salmon, but several policy changes to the program could save the State millions. For the full report, go to www.auditor.vermont.gov and click on "Audits and Reports" and then click on "Special Audits." The Legislature asked the Auditor to review the first year of the Vermont Employment Growth Incentive program - VEGI, or the "Veggie" program as it's sometimes called - which began in January 2007.The Vermont Economic Progress Council (VEPC) authorized $9.7 million in incentives to 13 companies in 2007. Incentive authorizations ranged from a low of $71,302 to a high of $1.9 million; the average was about $750,000. If the companies meet their job creation, payroll and investment targets for the previous calendar, they receive a cash award from the Dept. of Taxes that is paid out in installments over 5 years. The 13 companies were projected, over the next 6 years, to create 1,310 qualifying jobs, $60 million in total new qualifying payroll, and to make $116 million worth of new capital investments.
The report found the program in substantial compliance with rules and regulations, but noted that policies affecting how awards are calculated may result in the State subsidizing some economic activity that would normally occur at a company."It's not a good use of scarce State funds to subsidize growth that is likely to happen anyway," Salmon added. The Auditor is recommending that the Council change its policy so that it can use a company's own growth rate - rather than the "industry sector" growth rate which includes similar companies - in its incentive award calculations. "The current approach to evaluating a proposed development is to exclude the normal business growth of a company from the award calculations because the purpose of the program is to encourage economic activity that is above and beyond the growth pattern in an industry sector," Salmon said.Salmon noted that using the "industry sector" growth rate, instead of a company's own historical growth rate in the calculations, is an approach that has been approved by the Legislature's Joint Fiscal Committee. "However, the 'industry sector' approach is costing us money," he said. Salmon said, "We could save money by doing more to ensure we are subsidizing only 'stretch goals' - the jobs and investments that are above a company's normal growth trends.""We reviewed the applications of two companies with employment history in Vermont and found in both cases that the company's particular growth rate was much higher than the industry sector growth rate," Salmon said. "Using the industry growth rate, a lot of the company's typical expected growth was included in the award calculations," he noted, "and new payroll is the key factor in determining the total incentive amount." "In one company, the payroll to be subsidized over the award period was a total of $819,148 using the industry growth rate, but only $56,138 using the applicant's own growth rate," he said.In another award, the projected payroll that qualified for an incentive over the award period was a total of $12 million using the industry average growth rate, but just $1.5 million using the company's own growth rate," Salmon said. Since incentives are largely based on a project's payroll that is above the background growth rate, the choice of growth rates is important. The Auditor estimated that if historical growth rates were used in these two applications, the incentive authorizations could have been reduced by approximately $1.2 million. "There seems to be strong evidence that the State is paying for significant activity that probably would have happened anyway based on a company's history; it's just being masked by using a combined industry sector growth rate," Salmon noted. "This is a policy that should be reviewed by the Joint Fiscal Committee," he said. The report also found that the State's consultants operating the cost-benefit model for the Council used an outdated industry classification code in calculating one company's award. Using the wrong code resulted in employing a 1.6 percent growth rate in the award calculations, rather than the correct industry classification code which had a growth rate of 4.2 percent. The effect of this error was to award $484,000 in additional incentives over what would have been awarded had the correct industry code been used. "The Council has declined to address this error, but it is an honest mistake that should be corrected," Salmon said. "The Council should quickly approve a policy which allows it to revise awards based on inadvertent errors," he urged.Auditors also found that: one company had begun making project investments before final approval by the Economic Progress Council, contrary to guidelines;a checklist to guide the review of information submitted by a company about why incentives are necessary is not being used by VEPC staff;of three companies reviewed that said they had to choose between Vermont and out-of-state locations offering assistance, only one provided required contact information on the agency offering incentives, making it extremely difficult to verify "but for" statements of the two other applicants; there is no requirement for a company to maintain pay at 160 percent of the minimum wage if the minimum wage increases beyond the hiring year; in one case, it was not evident that the individuals signing an application were authorized to sign on behalf of the company; and the $10 million annual cap on incentive awards and the 80 percent ratio applied to the preliminary fiscal benefit amount are important safeguards for prudent fiscal management. Salmon said the Employment Growth Incentive program appeared to be much simpler to administer than a previous tax credit incentive program, and focuses more directly on supporting the creation of good-paying jobs with benefits. However, Salmon noted that a critical decision to award incentives is difficult to audit. "The nine volunteer Council members must, to the best of their judgment, vote on whether or not a proposed project would likely happen without incentives," Salmon said. "If they determine that a project is likely to occur without the incentive award, the company's application is denied. It's a difficult decision to make," he noted. Salmon added that the decision becomes more important considering that the awards are not based on a company's financial need and that companies are not required to furnish financial statements, business plans or tax returns with applications. Salmon said the report also recommends that the Council get an assessment from an independent source to help members address the question of whether or not projects might proceed without State support. "It's somewhat unfair to ask the staff that advertises the program and encourages companies to apply to also provide an impartial evaluation of the company's application," Salmon noted.