Audit: Job-making lags promises

Wages higher than forecast at firms getting state incentives

A special report from the state Legislative Audit Division showed the state awarded more than $540 million in economic incentives over the past decade, with the projects delivering fewer jobs than anticipated but at higher wages than forecast.

The report, which will be presented Friday to the Legislative Joint Auditing Committee, examines incentive programs lumped together under the 2003 Consolidated Incentives Act. It's the first audit in the 10 years since the act was passed to look at the results of the incentives, instead of looking at how the incentives are managed by state agencies. The audit reviewed a random sample of 45 companies out of the hundreds of companies that have applied for or received the incentives.

Audit officials did not reveal the names of the companies, saying the information is exempt from the state's open-records laws.

Grant Tennille, executive director of the Arkansas Economic Development Commission, said he asked the auditors to expand the scope of their annual audit to look at the results of the individual incentives.

"Our incentive programs are given to us by the taxpayers and we need rigorous auditing, and we need to be as results driven as we can be because [the incentives] aren't inexpensive," Tennille said.

Of the companies studied, the audit found that 21 did not report job creation as a result of the incentives, and only 10 of the remaining 24 created as many or more jobs as promised. Overall, the 45 companies estimated that they would create 3,466 jobs but reported creating 2,859.

The audit was unable to quantify the positive economic benefit from the InvestArk incentive, which is designed to keep businesses in Arkansas. InvestArk allows existing companies that invest $5 million or more in building expansion or equipment to claim a credit on their sales and use taxes.

"Of the 45 projects reviewed, 21 had unfavorable cost-benefit ratios, as calculated by [audit] staff; all 21 were InvestArk-only projects. The primary reason is that job creation is not required to receive this incentive," auditors wrote in the report. "Staff concluded that the economic incentive projects resulted in a positive benefit to the State, with the exception of InvestArk-only projects."

But Tennille said the InvestArk numbers may be misleading. He said the businesses that reported no job creation may have added workers but weren't required to report the jobs under the rules of the InvestArk incentive.

He also noted that the 45 projects in the audit received more than $64.6 million in incentives and contributed more than $127.9 million in revenue to the state, according to the report.

"I'm not going to say this isn't an accurate picture of what these programs do, but the more important thing from our perspective, is even with the InvestArk projects, the ratio of incentive to tax dollars was 2-to-1 over the life of the projects," Tennille said.

He added that the companies receiving other incentives were creating higher-paying jobs, increasing their $108.8 million in projected salaries to $138.8 million.

"In terms of job creation, the salaries created were much higher than projected. So, these companies were hiring fewer people but for better salaries."

Of all the incentives awarded over the past decade, the study showed the largest portion went to wood, paper, petroleum, coal and chemical manufacturers -- almost $251 million-- followed by metal, machinery and electronic manufacturers -- about $127 million. The mining and extraction category, along with the "wholesale, warehousing and transportation" category received the two lowest portions of incentives with a little less than $4 million each.

The study also showed that more than 69 percent of the incentives were given out through the state's statutory incentive programs -- those required by law. The remaining 30 percent were given out through discretionary programs, which allow the Arkansas Economic Development Commission to perform a cost-benefit analysis before approving the application for the incentive.

Applications for the statutory programs -- like InvestArk -- cannot be turned down if the companies meet the program requirements, regardless of any cost-benefit analysis.

Tennille said there was some room for improvement in the InvestArk incentive program, and his staff would be working on ways to bring the incentive -- created in 1985 -- more in line with the commission's goals.

He'd like next year's General Assembly to make it harder for companies that provide low-paying jobs to get the tax credits.

"I think probably one place where we're likely to have discussion during the next legislative session is around that [InvestArk] incentive," he said. "It's not tied to wage levels in any way. And one of the ways to get the numbers a little more under control and bring it more in line with our overall mission and goal to increase the per-capita income of Arkansans is to include an average wage requirement."

Right now, there's nothing preventing companies that apply for the incentive from paying employees minimum wage. Originally the program was designed to keep manufacturing companies from leaving the state. In the modern economy, the program aims are to retain companies or help companies trying to expand.

Matt DeCample, a spokesman for Gov. Mike Beebe, said the governor thought much of the audit report reaffirmed the importance of the programs for Arkansas. Beebe, who leaves office in January, also would support Tennille's proposal to include a wage requirement for the InvestArk program, he said.

The governor's quick-action closing fund, an economic development incentive created using General Improvement Funds in 2007, is not included in the Act and was not included in the audit study.

A section on 06/05/2014

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