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April 26, 2004

 

Testimony of New York State Comptroller Alan G. Hevesi on Empire Zone Program Reform

Before the Assembly Standing Committee on Ways and Means, Assembly Standing Committee on Economic Development, Job Creation, Commerce & Industry, Assembly Standing Committee on Corporations, Authorities and Commissions, and Assembly Standing Committee on Labor

 

Empire Zone Program Reform

Good morning. I would like to thank Chairs Denny Farrell, Robin Schimminger, Richard Brodsky and Susan John, and other members of the Committees for inviting me to testify before you today.

New York’s Empire Zones program has been the subject of extensive criticism in recent months.  Newspaper stories, investigative reports, and the audits I conducted in response to a request from Speaker Silver, have identified flaws in program administration that create opportunities for businesses to receive benefits without being held accountable for meeting their goals. 

A discussion of the program’s problems is both healthy and essential as the sunset date of its enabling legislation approaches, but it is equally important that we recognize the value of the Zones program.  It is a critically important tool to keep New York competitive and to spur economic development and employment opportunities in the areas of our State that need it most.

New York State was late to the zone game.  By the time our Economic Development Zones program was created in 1986, some 37 other states already had established zones.  As a result, we were playing catch-up with areas of the country that had more experience and more attractive proposals to lure businesses making location, relocation or expansion decisions.

As established in 1986, the program was intended to stimulate economic growth in communities characterized by pervasive poverty, high unemployment and overall economic distress by offering incentives to businesses willing to relocate or expand in up to 40 designated zones.  Over the past 18 years, what is now known as the Empire Zones program has grown significantly, with 72 active zones throughout the State.  The program has changed substantially as well, with increased benefits providing essentially tax-free destinations for businesses to locate or expand, and relaxed criteria for zone designation that have moved the program away from its original focus on economically distressed areas. 

New York is not unique in changing its Zones program.  Over the past 15 years, many states altered the configuration of their “enterprise zone” programs, relaxing their eligibility requirements and shifting the focus away from poverty reduction to business development.   The changes that states have made to their programs include expanding zones from targeted geographic areas to the entire state, altering zone criteria for business eligibility and zone designation, adding noncontiguous land to a zone and/or allowing businesses outside of a zone to be eligible for tax credits and increasing the size of zones.   However, according to a national study, New York is the only state that has altered its zone program in three of these four categories.[1]

Five amendments to the Zones program since 1990 have placed it in an ongoing state of flux.[2]  The resulting program revisions have taken their toll on the monitoring and evaluation that is routinely needed for programs of this nature.  Perhaps unavoidably, implementing changes has become more important than evaluating the program’s effectiveness and measuring its success.  The most damaging result of our inability to clearly illustrate how the program has helped businesses, communities and their residents is that millions of dollars in taxpayer dollars may have been wasted.

The most solid number we can associate with this program is an estimate of its costs in terms of lost State tax revenue.  In 2004, the Budget Division and Department of Taxation and Finance put that figure at $291 million.  But this estimate does not include local property and sales tax abatements or utility rate reductions, which accounted for two-thirds of the credits claimed by businesses during the 1993-1995 tax years.  When we want to shout to the world that New York is willing to invest in businesses that locate in the areas that most need them, we should be able to use precise and specific information about the benefits, not only to selected businesses, but to job seekers, investors and communities.  This we cannot now do.

The Department of Economic Development (DED) has made substantial claims about the program’s success, but the audit I am releasing today concludes that the data is lacking to support such claims.  This is not a problem that started with Chairman Gargano.  In fact, this is the sixth audit of the program conducted by the Comptroller’s office and I am the third State Comptroller to point out flaws in oversight of the Zones program.  In addition to our audits, the bi-partisan Legislative Commission on Expenditure Review (LCER) and Program Evaluation and Management Research, Inc. (PEMRI), an independent consulting firm hired by the Department of Economic Development to evaluate the program, have also released reports on the program.  Each study has raised substantial concerns about the State’s inability to calculate the cost of the program or establish the number of jobs it has created. 

These reports contain over 75 recommendations to both DED and local zones aimed at facilitating the collection of reliable job creation and tax data, as well as creating an evaluation system to monitor the effectiveness of the program.  The reason these problems persist is that the ultimate responsibility for tracking and verifying program costs and results has not been clearly defined.  After reviewing the operations of 11 individual zones and the oversight of the program by DED, my auditors found many different views and one significant consistency:  each level of program administration believes a different level is responsible for compiling relevant data, and therefore, no one does it.   Repeated recommendations to solve this fundamental problem have been ignored. 

Reforms that I am proposing today are designed to correct the flaws in program administration and reporting identified through our audits.  Beginning with a clear delineation of roles, our reforms will strengthen the accountability of DED, the zones and participating business for program results. 

Other reform programs have been introduced this year.  The Executive Budget expanded upon a nine-point reform plan offered by DED in November.  The Assembly is revising its Zone reform legislation and the Senate’s NextGen Task Force has proposed using the program as means to spur growth in high-technology or biotechnology manufacturing.  I believe the following proposals complement elements of other recommendations under consideration, and provide structural changes that are essential to successful continuation of the program.

Elements of the Executive Budget reform plan with which I agree include the proposed reduction in the benefit period from 15 years to 10 years for new businesses entering the program.  Requiring local administrators to develop and comply with Zone Development Plans will help ensure that zone benefits are used strategically to reward businesses creating new jobs and making vital investments that will help renew distressed communities.  Similarly, although I propose a different approach, I also agree that increased coordination with the Departments of Taxation and Finance and Labor will improve annual reporting on the program.

In renewing the Zones program legislation, we need to refocus the program back to its core mission cited in the General Municipal Law – to create jobs and stimulate private investment to alleviate problems in impoverished areas of the State.  In doing so, we must keep in mind that the Empire Zones program should be a job creation program with an emphasis on poorer neighborhoods. 

Under our plan, the existing Zone Designation Board would be renamed the Empire Zone Oversight and Designation Board (Board) to reflect expanded responsibilities including evaluation of zones and certified businesses.  Ultimately, the Board would be responsible for monitoring and reporting on the overall effectiveness and cost of the program to the State.  The Board would develop and implement standards of performance for recipients of zone benefits, and determine a process for recouping benefits given to business that do not meet these standards.  To my knowledge, there has never been a decertification of any business because it systematically failed to meet the performance requirements of the program.[3]  

Our recommended Oversight and Designation Board would be responsible for decertification of both zones and businesses demonstrating a substantial and persistent inability to meet standards, based on a biennial review of participating businesses.  In providing for performance reviews, we want to make sure that businesses and zones that do not achieve their goals due to factors beyond their control are not punished.  Therefore, the Board would develop a series of steps before decertification that will be clear to all zone administrators and businesses at certification.  The decertification process would involve the advice and guidance of zone administrators, where appropriate.

Consistent with corporate governance standards that dictate the separation of roles, no one employed by DED or ESDC or serving on a board related to either entity should serve on the Zone Board as a voting member.   Similarly, while the Budget Director, Commissioner of Taxation and Finance and Labor Commissioner would continue to serve on the Board, providing insight and guidance, they would be made ex-officio members.  The Board, including non-voting ex-officio members, would be structured into two committees, one for designation of zones and one for evaluation of the program and participating businesses.  Each committee would make recommendations to the full Board.

The primary functions of the local Zone Administrative Boards should be to market the zone for investment and promote business expansion and job creation.  The Executive recommendation for local Zone officials to devise Zone Development Plans is consistent with this view.

Under our plan, there would also be significant changes in the reporting process that will help to finally add accountability and improved performance information that would be used for a thorough cost-benefit analysis of the program.  The format of the Business Annual Reports should be changed to capture more relevant data such as the average wages for newly created jobs, the number of targeted employees hired, actual new employment numbers vs. gross employment, the number of jobs lost during the reporting period and actual tax credits claimed in the prior year, as well as estimated future tax credits, which is currently the practice.

Responsibility for compiling Business Report  data into the Zone Annual Report would be transferred from Zone Coordinators to DED.  Within each zone, DED staff would work with staff from the Departments of Taxation and Finance and Labor to verify Business Report  information, thus achieving the data reliability that is currently lacking. 

This verification would be facilitated by one of the most significant elements of our reform proposal: the provision for participating businesses to waive their rights to privacy of information submitted to the Departments of Taxation and Finance and Labor.  This provision must include appropriate safeguards to ensure that data is only accessible to the public in aggregate form, and that proprietary information is not at risk.  Students receiving thousands of dollars in grants from the State’s Tuition Assistance Program are required to release their tax data, so we believe that businesses with the potential to receive millions of dollars in tax breaks and other benefits should be willing to do the same.

Fifteen other states with comparable programs require the state agencies charged with overseeing their enterprise zone programs to compile and submit annual reports on their programs’ effectiveness.[4]  While each state’s reporting structure varies, legislative mandates exist to ensure a thorough level of analysis, transparency, oversight, and interagency cooperation.

As part of our reform agenda, I propose that on an annual basis, DED should produce a report on the Empire Zones program. This report with improved and verified data would aggregate zone and business specific information, providing a report card on the program as a whole.  However, the report would also provide data on each zone presented as a separate chapter.  This zone specific information would be presented in the context of economic indicators for the region where the zone is located.  Again, presenting results in this context recognizes that there are economic factors beyond the control of individual businesses or zones.  Additionally, zone level data would be provided to local zone officials and other interested parties on an annual basis.

These reforms are concentrated on areas where the need for improvement is evident through audits and reviews of local zone administration and DED’s administration of the program and reporting requirements.  They are consistent with the existing law’s mandate that DED develop “an evaluation system, which is capable of compiling and analyzing accurate and consistent information necessary for an assessment of whether [the program’s] statutory objectives are being met.”[5] 

As renewal of the Empire Zone program is considered by the Legislature, the time is right to discuss reforms in program benefits, zone designation and other program areas.  Thoughtful consideration should also be given to revising zone and business criteria to incorporate the environmental record of businesses seeking certification, as well as the environmental impact of proposed projects on zone boundaries.  Such considerations may appropriately be included in the Local Development Plan with necessary input from local environmental groups and the State Department of Environmental Conservation.

I also urge you to consider restrictions on recertification of businesses that do not meet objective measures of fair labor practices. Currently, the Department of Labor certifies that businesses applying for certification meet certain standards.  We should ensure that each firm’s approach to its employees doesn’t change once certification is achieved.  Likewise, now is the time to build in safeguards to prevent offering benefits to companies that may displace existing businesses and their employees.  Again, it is possible that such safeguards could be incorporated into the Local Development Plans required by the Executive Budget legislation. 

Finally, while other program enhancements may not be feasible in the short term, they should be part of this ongoing debate and analysis. Among these would be consideration of offering increased benefits for businesses offering health insurance to their employees and the use of zone benefits in a way that complements the brownfields redevelopment legislation enacted last year.  

New York’s Empire Zones program has the potential to benefit communities in need, their residents, businesses and the State.  There is agreement among those with the power to change the program that reforms are necessary and, while details may vary, all agree that better accountability and reporting are essential.  The sunset of the enabling legislation provides an historic opportunity for all of us with knowledge of the program and a vested interest in its success to enact meaningful reforms.  When we improve it, the Empire Zones programs will serve as a valuable marketing tool for our State and the areas in greatest need of economic growth.  Thank you.



[1] Talanker, Alyssa, et al. Straying From Good Intentions: How States are Weakening Enterprise Zones and Tax Increment Financing Program. Good Jobs First. 2003.

[2] Amendments passed in 1990, 1993, 1999, 2000 and 2002.

[3] DED’s system for tracking business decertifications includes codes for various reasons such as out of business, failure to submit business report and moved out of the Zone.  There is no code to decertify businesses for underperformance, despite provisions in the General Municipal Law to do so.  

[4] These states include California, Connecticut, Florida, Georgia, Illinois, Maryland, Michigan, New Jersey, North Carolina, Ohio, South Carolina, Tennessee, Texas, Virginia, and Wisconsin.

[5] General Municipal Law, Article 18-B, Section 959, (l).

 

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