Arizona Commerce Authority Fudges Job Numbers

The recent report by the Arizona Auditor General of the Arizona Commerce Authority highlights the all too common phenomenon of economic and business development agencies focusing more on promoting themselves and the need for the services rather than filling the need for which the agency was created.

While the agencies have had a great deal of success winning continued public funding, they have had far less success winning companies that actually provide those economic and business opportunities. From the Sun Corridor, formerly known as Tucson Regional Economic Opportunities (TREO) to the Arizona Commerce Authority over the years, the organizations fall short of expectations and the lowest goals.

As expected, the Arizona Auditor General found that the Arizona Commerce Authority had fudged its performance numbers. According to the report, when the Authority reported “on its progress toward achieving its 5-year goals, which are to create 75,000 higher-wage jobs, increase average wages of jobs created, and increase capital investment by $6 billion between fiscal years 2013 and 2017,” it used the numbers based on “commitments companies announce rather than the actual jobs created or capital investment made.”

The Auditor General recommended that the Authority “clearly indicate in its reports whether the information presented for jobs, wages, and capital investment represents actual results or commitments,” in the future.

The Auditor General also recommended that the Authority develop “a consolidated report that summarizes the amount of financial incentives Arizona provided compared to the actual economic benefits the State has received.”

Such was the case with Sun Corridor/TREO, in 2012 it came under scrutiny after a San Diego boondoggle turned into a small sex-alcohol scandal.  Back then, now Pima County Supervisor Ally Miller was a candidate for the Board and questioned why the director, Joe Snell, was paid a salary of $313k per year, while the community got little “return on investment to justify this salary.” TREO received $936,000 in public money in 2012, and Miller also questioned TREO’s self-issued report card. “I can find no concrete performance data aligning with this “report card” promised to the community. I see an annual report of bumper sticker slogans with nice pictures and little substance. I want performance metrics and those responsible for them held accountable.”

In 2012, Marana Town council member, Roxanne Ziegler, said that in ten or fifteen years, TREO had brought Marana “one company and had about 250 people there, but it has gone out of business.” Maran figured it out early and terminated the TREO contract in 2007. TREO simply turned around and asked for more money from the government entities too corrupt or careless to protect taxpayer money.

Since 2012, nothing has changed at TREO except its name.

TREO under microscope after San Diego junket

In fairness, while the warm climate should be a powerful economic driver in of itself, the marginally business friendly tax system does not make Arizona an easy sell. According to the Tax Foundation’s 2015 State Business Tax Climate Index, Arizona ranks 23rd among the states in terms of business climate.

The Tax Foundation notes that Arizona ranks 49th in regressive sales taxes. Currently there is a push to raise those even higher.

Arizona’s property taxes are very low, ranked as the 6th lowest, and unemployment earned 4th place.

Still, the Foundation notes that “Arizona is in the process of phasing down its corporate income tax (which currently stands at 6.5 percent) to 4.9 percent in stages between 2015 and 2018. Once implemented, these reductions will improve Arizona’s score on corporate income tax.”

The Foundation finds:

The absence of a major tax is a common factor among many of the top ten states. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate tax, the individual income tax, or the sales tax. Wyoming, Nevada, and South Dakota have no corporate or individual income tax; Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire and Montana have no sales tax.

But this does not mean that a state cannot rank in the top ten while still levying all the major taxes. Indiana and Utah, for example, have all the major tax types, but levy them with low rates on broad bases.

In Arizona it appears that the chambers of commerce have pushed for increased regressive sales taxes, and decreased corporate taxes rather than a more balanced like that found in Indiana and Utah.

Related: 2015 Arizona Department Of Commerce — Monies Awarded

The Office of the Auditor General has conducted the performance audit as part of the sunset review process prescribed in Arizona Revised Statutes (A.R.S.) §41-2951. The Auditor made recommendations for improving the Authority, but many say legislators should push to let the sunset on it.

Table 1. 2015 State Business Tax Climate Index Ranks and Component Tax Ranks

Overall Rank

Corporate Tax Rank

Individual
Income
Tax Rank

Sales Tax Rank

Unemployment Insurance Tax Rank

Property Tax Rank

Alabama

28

27

23

41

25

10

Alaska

4

30

1

5

24

32

Arizona

23

24

19

49

4

6

Arkansas

39

40

28

44

39

19

California

48

34

50

42

14

14

Colorado

20

12

16

43

35

22

Connecticut

42

32

34

31

20

49

Delaware

14

50

33

1

2

13

Florida

5

14

1

12

3

16

Georgia

36

8

42

17

36

30

Hawaii

30

9

37

15

28

12

Idaho

19

21

24

22

46

3

Illinois

31

47

11

34

38

44

Indiana

8

22

10

10

7

5

Iowa

41

49

32

23

33

38

Kansas

22

38

18

30

9

28

Kentucky

26

29

30

11

45

17

Louisiana

35

23

27

50

6

24

Maine

33

45

22

9

42

40

Maryland

40

16

45

8

21

41

Massachusetts

24

37

13

21

48

45

Michigan

13

10

14

7

47

27

Minnesota

47

44

46

37

29

34

Mississippi

18

11

21

28

8

33

Missouri

17

4

29

29

12

7

Montana

6

18

20

3

18

8

Nebraska

29

31

25

27

13

39

Nevada

3

1

1

39

43

9

New Hampshire

7

48

9

2

44

43

New Jersey

50

41

48

48

32

50

New Mexico

38

35

35

45

10

1

New York

49

20

49

40

31

46

North Carolina

16

25

15

33

11

29

North Dakota

25

19

36

20

16

2

Ohio

44

26

47

32

5

20

Oklahoma

32

7

40

38

1

11

Oregon

12

36

31

4

30

15

Pennsylvania

34

46

17

24

50

42

Rhode Island

45

43

38

26

49

47

South Carolina

37

13

41

18

40

21

South Dakota

2

1

1

35

41

18

Tennessee

15

15

8

47

26

37

Texas

10

39

6

36

15

36

Utah

9

5

12

19

22

4

Vermont

46

42

44

16

17

48

Virginia

27

6

39

6

37

26

Washington

11

28

6

46

19

23

West Virginia

21

17

26

25

23

25

Wisconsin

43

33

43

14

27

31

Wyoming

1

1

1

13

34

35

District of Columbia

45

38

35

42

27

44

Note: 1 is best, 50 is worst. Rankings do not average to total. States without a tax rank equally as 1 for that component. D.C. score and rank do not affect other states. Report shows tax systems as of July 1, 2014 (the beginning of Fiscal Year 2015).

Source: Tax Foundation calculations.

Audit highlights:

Authority focuses on economic growth— One of the ways the Authority promotes economic growth is to offer grants to attract or retain companies that may relocate to or expand within Arizona and that will provide benefits to the State such as high-quality jobs and/or increases in capital investment. In fiscal year 2014, the Authority reported that it awarded $4.3 million in deal-closing grants to four companies. These companies committed to create a total of 2,217 jobs in Arizona with an average wage of more than $67,000. The grant money is paid when grant recipients meet specified milestones.

The Authority also awards grants to start-up and early-stage companies seeking to commercialize innovative technologies, and to rural communities to develop their infrastructure to help strengthen their competitiveness for economic growth.

Authority should enhance its reporting— The Authority reports on its progress toward achieving its 5-year goals, which are to create 75,000 higher-wage jobs, increase average wages of jobs created, and increase capital investment by $6 billion between fiscal years 2013 and 2017. The Authority developed a summary document that reports this progress, but this document is not broadly distributed to the public. In addition, its reports generally provide information based on commitments companies announce rather than the actual jobs created or capital investment made. The Authority should clearly indicate in its reports whether the information presented for jobs, wages, and capital investment represents actual results or commitments. In addition, the Authority has not developed a consolidated report that summarizes the amount of financial incentives Arizona provided compared to the actual economic benefits the State has received.

Authority should include additional statutorily required information in the annual report for the Arizona Competes Fund (Competes Fund)— The Competes Fund provides monies for deal-closing grants, innovation grants for start-ups and early-stage companies, and rural infrastructure project grants. As required by statute, the Authority reports specific information for each deal-closing grant recipient, including the number of jobs each recipient committed to create, the jobs actually created, and the amount of capital investment each company committed to and actually made in the State.

However, for the innovation and rural grants, the Authority presents the combined information from all grant recipients rather than for each recipient individually as statute requires. Additionally, although statute requires the Authority to report median wages, it reports average wages.

Authority has adequate grant-selection processes but should formalize and better document compliance with them— The Authority has established various processes to help ensure it meets statutory requirements for awarding Competes Fund grants. Each of the three grant types has its own process for selecting eligible recipients. For example, for the deal-closing grants, the Authority reviews the entity’s    financial statements and/or credit reports and independently prepared economic impact statements. For the innovation grants, a panel of judges evaluates and scores the applications as part of a competitive process. For the rural grants, the Authority has developed a checklist to ensure that applicants meet established eligibility requirements. All grant agreements must include performance targets that recipients must meet in order to receive grant payments.

Although these processes are consistent with statutes and/or best practices, the Authority should continue with its efforts to formalize them by developing and implementing comprehensive, written procedures and better document its compliance with the grant-selection processes.

Authority should strengthen its grant-monitoring processes— Although the Authority monitors grant recipients, it has not done so in a consistent manner, lacks uniform monitoring processes, and inconsistently documents its verification efforts. For example, for its deal-closing grants, the Authority reported that it typically spot-checks the grant recipients’ self-reported outcomes and verifies them by comparing the outcomes with recipient-supplied employee lists, wage reports, and invoices. However, until June 2015, the Authority did not have a written procedure for verifying reported information for deal-closing grants and lacked documentation that it consistently performed these steps. For innovation grants, the Authority lacks a formal process for verifying self-reported milestone and outcome information. For rural grants, the Authority verifies that milestones are met by checking the submitted receipts or invoices for infrastructure project costs, but does not verify outcomes, such as the number of jobs created or capital investment that resulted from these infrastructure improvements.

Finally, the Authority has not developed guidance for how it will address recipient noncompliance or partial compliance with the grant agreement. For example, for three of eight innovation grants we reviewed, the Authority reduced the amount of the grant payments when milestones were changed to better meet opportunities presented to the companies, but the corresponding grant files did not indicate how the modified payment amounts were decided. In addition, the Authority does not always document its decisions to not enforce reporting requirements for companies that take longer to meet outcomes or milestones. For example, one-deal closing grant recipient did not submit required quarterly progress reports. When asked, the Authority could provide only limited documentation regarding the recipient’s failure to file quarterly reports.

Recommendations

The Authority should enhance its reporting by:

  • Posting its summary report that shows its cumulative progress toward its goals on its Web site;
  • Clarifying in its various reports whether the information reported represents companies’ announced commitments or actual results;
  • Developing a summary report that compares the cost of the financial incentives

Arizona provided to the actual economic benefits the State has received; and

  • Ensuring that its annual Competes Fund report includes the statutorily required information.

Competes Fund grant-selection processes generally align with statutes and best practices, but should be formalized and monitoring processes can be improved

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