Vermont Business Magazine Vermont State Auditor Doug Hoffer has released the final findings of a three-part investigation of the Vermont Economic Progress Council’s (VEPC) administration of the Vermont Employment Growth Incentive (VEGI) program.
Part Two of the evaluation focuses on VEPC’s due diligence and Part Three focuses on structural weaknesses of the program and how it’s reported.
Among the key findings of the investigation were: 1) VEPC does not verify whether VEGI applicants would undertake the proposed economic activity without the incentive, and 2) when VEPC’s actions are inconsistent with law or the interests of taxpayers, there is no accountability since their decisions cannot be appealed.
No only is Hoffer questioning the number of jobs gained by the program but he suggests the VEGI jobs are lower paying than expected.
Putting aside questionable claims about the benefits of the program and excluding the cost of administering it, Hoffer said, VEGI and its predecessor program – the Economic Advancement Tax Incentive – have cost Vermonters roughly $90 million over the last 22 years (without adjusting for inflation).
The VEGI program hinges on a claim that recipients would not have created new jobs and made capital investments “but for” the awards.
This claim, however, can’t be evaluated by the public, legislators, or other state officials other than the State Auditor because of confidentiality provisions.
“There is no transparency to how VEPC makes VEGI awards, and the program’s supposed safeguards are nonexistent or flawed,” Hoffer said. “My examination of confidential records found that VEPC made virtually no effort to verify ‘but for’ statements by applicants. This is in stark contrast to what is required of low-income families seeking public assistance. Vermonters deserve better for the millions spent on this program every year.”
The first part of Hoffer’s investigation centered on VEPC’s $4.5 million award to Marvell Technology (which acquired a spinoff of GlobalFoundries in Essex Junction for $740 million in July 2019) at roughly the same time it laid off nearly 80 Vermont employees.
That investigation (available here) raised questions about the legality of the 2019 award. It also spotlighted the program’s lack of accountability.
“According to statute, decisions by VEPC are not subject to administrative or judicial review,” the report noted. “This is very unusual. The idea that a group of appointed officials can make costly decisions about the use of public dollars with absolutely no accountability is antithetical to Vermont’s representative form of government and to the expectations of Vermonters.”
The final part of Hoffer’s investigation – Part Three – centers on structural weaknesses of the program, specifically:
• The average wage for new hires of firms receiving VEGI awards has declined over five of the last six years, and the average inflation-adjusted wage of these jobs is 37 percent lower today than in 2012.
• The wage distribution of new jobs at firms receiving VEGI awards tracks low. VEGI ceased reporting on the distribution of wages years ago. When it last did so in 2016, almost 1/3 of new hires were paid less than $15/hour.
• Awards are geographically concentrated in areas of the state with greater economic activity. There are no active or complete applications in five of Vermont’s 14 counties –Addison, Bennington, Essex, Grand Isle, and Rutland. This trend calls into question whether VEGI can help improve the urban-rural disparity of Vermont’s community and economic development.
• The VEGI calculation to assess a firm’s rate of growth is flawed. Awards are given based on industry average growth rates rather than a company’s specific growth rate. This calculation leads to wasted taxpayer dollars for faster-growing firms.
• The program does not control for applicants who have laid off Vermonters. VEGI incentives are not intended to reward firms for recreating jobs lost during the prior two years, but the devil of this provision is in the details. VEPC’s rules for the program effectively limit the adverse impact of this “lookback” calculation on applicants that have laid off Vermonters.
On behalf of VEPC, Executive Director Megan Sullivan took issue with essentially every aspect of Hoffer's report (see letter below).
In part, Sullivan wrote, "Generally, I am concerned about the number of serious allegations in this document reached without clear evidence and without important steps taken in this review process. I have found many of the representations in this document are not an accurate reflection of events. Given this and in light of the fact that global, national, and state economies are contracting at a rate none of us have seen in our collective lifetimes, it is unclear what the goal of this document is."
To view the full report, click here.
The Vermont Employment Growth Incentive (VEGI) is the State’s flagship business grant program and is administered by the Vermont Economic Progress Council (VEPC).1 The Legislature created VEGI in 20062 to replace the Economic Advancement Tax Incentive (EATI), which ran from 1998 - 2006.3
“[VEGI] provides incentives from the State…to businesses to encourage prospective economic activity…that is beyond an applicant’s “organic” or background growth [and] that would not occur, would not occur in Vermont, or would occur in a significantly different and less desirable manner, except for the incentive provided...Once authorized, the incentives are earned, and installments paid when performance requirements are met and maintained.”4
From the program’s inception through December 2019, VEPC authorized $90.4 million in VEGI awards.5 Of that, $38.5 million has been rescinded or forfeited. The remaining $51.8 million has been paid out or is available to eligible companies. In addition, $34 million in tax credits have been applied to offset income tax from the EATI.6
VEPC claims there is no cost to taxpayers because the incentives are paid from tax revenues derived from economic activity incentivized by the program that would not have occurred “but for” the awards.7
The “but for” criterion is the touchstone of the program. In theory, it protects taxpayers. But, in practice, VEGI’s effectiveness cannot be determined because applicant self-attestations about intent (the “but for”) are based on corporate decisions that cannot be independently tested or verified. Therefore, it is impossible to validate VEPC’s claims about job creation purportedly resulting from the awards.
There has long been uncertainty about the effectiveness of incentive programs that rely on “but for” attestations. In a recent literature review, a leading economist Timothy Bartik8 reported that:
“Based on a review of 34 estimates of “but for” percentages, from 30 different studies, this paper concludes that typical incentives probably tip somewhere between 2 percent and 25 percent of incented firms toward making a decision favoring the location providing the incentive. In other words, for at least 75 percent of incented firms, the firm would have made a similar location / expansion / retention decision without the incentive.”9 (emphasis added)
Putting aside claims about the “but for,” the cost of the two programs – VEGI and EATI – is approaching $90 million over the last 22 years, and that does not include the cost of administering them, which is not insignificant.
In the absence of direct evidence on the veracity of the “but for” attestations, we’ve chosen to review the award authorized last year for Marvell Technology (Part I), VEPC’s due diligence in administering the program (i.e., examining application materials, public statements, VEPC staff analyses, and other relevant information; Part II), and some other issues uncovered during the research (Part III).
1 32 V.S.A. § 3325
2 Act 184 (2006) and Title 32 Chapter 105.
3 Act 71 (1998) Sec. 48.
4 2020 VEGI Annual Report, page 1.
5 2020 VEGI Annual Report, page 14.
6 2016 EATI Annual Report.
7 2020 VEGI Annual Report, page 7 and VEGI “But For” Approval Criterion, page 1.
8 Mr. Bartik’s work has been cited more than 3,000 times since 2015.
9 Bartik, Timothy. Upjohn Institute Working Paper 18-289, July 2018.
19 32 V.S.A. § 3331
20 2017 VEGI Annual Report, Table 5, page 20.
Source: MONTPELIER, VT – Vermont State Auditor 12.2.220