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May 16, 2006


Hevesi Audit Finds Only a Third of IDA Projects Across State Met Job Creation Goals, Details Lack of Effective Processes to Evaluate Activities and Verify Reported Data


Accompanying Report Outlines Accountability Improvements
Including IDA Report Cards, Objective Project Evaluation
Criteria and Clawback Provisions

 

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Only a third of the projects supported by six Industrial Development Agencies (IDAs) around New York met their job creation goals, none of the IDAs had ever attempted to reclaim benefits from projects that did not meet targets and only one had standard evaluation criteria that was applied to all potential projects, according to an audit released today by State Comptroller Alan G.. Hevesi.

In a policy report and draft legislation issued with the audit, Hevesi outlined a number of steps to improve IDA operations and accountability, including:

  • Annual “report cards” from each of the State’s 115 IDAs in a standard format, with detailed information on job creation, tax breaks to companies and actual Payments in Lieu of Taxes (PILOTs) made by projects.
  • Standardized IDA project applications.
  • Objective criteria for review of IDA projects.
  • A uniform project agreement that requires projects to provide job data to IDAs or lose benefits.
  • Provisions to recapture, or “clawback,” benefits if projects do not meet job creation goals or other terms of their agreements with IDAs.
  • Increasing financial caps on IDA projects for “civic facilities” such as dormitories for educational facilities, hospitals and senior citizen housing.

“There is no question that IDAs are a vital and important part of local government efforts to support economic development and job creation,” Hevesi said. “Giving companies tax breaks is giving away real money, and some of these companies are creating jobs and generating economic activity. In order to make these programs as effective as possible, we need to know what is and is not working and look at how we can make improvements.

“New York’s 115 IDAs are local authorities with significant powers and great autonomy, and they operate very differently from place to place,” Hevesi said. “We are calling for new measures to provide the public with more data about IDA projects, standardize IDA practices across the State and give IDAs the power to require repayment of benefits from businesses that do not deliver promised results. These are fundamental, essential changes that would protect taxpayers and level the playing field for businesses.”

IDAs are independent public authorities that offer real property tax abatements, sales and mortgage recording tax exemptions, and low interest rate bonds to attract, retain and expand businesses and thereby expand economic activity and job opportunities for local residents. IDAs engage in both single unit projects with one particular company and speculation, or “spec” building projects, in which developers get IDA incentives to build a facility that will later be leased to commercial tenants.

The six IDAs audited were Erie County IDA, Town of Amherst IDA, Suffolk County IDA, Ontario County IDA, Onondaga County IDA and Tompkins County IDA. For the year ending December 31, 2004 (June 30, 2005 for Onondaga County IDA) the six audited IDAs reported a total of 750 active projects.

Job creation
Auditors looked at 96 single unit projects at the six IDAs and found that 33 percent (32 projects) met or exceeded job creation goals; 33 percent (32 projects) did not meet job creation goals but did increase jobs or had no change in jobs; and 33 percent (32 projects) actually reduced the number of jobs. Overall for the projects examined, only 55 percent of expected job growth was achieved.

The only IDA that met and exceeded job creation goals for single unit projects was Suffolk County, which exceeded its target by 16 percent (314 jobs). The Town of Amherst IDA projected increasing jobs by 51 percent (1,205 jobs) but instead the number of jobs went down by 14 percent (324 jobs). Ontario County IDA projected increasing jobs by 51 percent (542 jobs) but instead went down by seven percent (73 jobs). Although they did not meet targets, Erie County IDA added 75 percent of projected jobs, Onondaga County IDA added 62 percent of projected jobs, and Tompkins County IDAs added 15 percent of projected jobs.

Auditors also examined 14 spec projects at four of the IDAs, and found that only Erie County IDA’s spec projects met or surpassed job creation goals, generating 228 more jobs (28 percent) than expected. Town of Amherst IDA spec projects added 19 percent of projected jobs, Ontario County IDA spec projects added 41 percent of projected jobs and Suffolk County IDA spec projects added 80 percent of projected jobs.

Auditors noted that IDA job creation numbers are an imprecise measure of project performance, because the information is supplied by participating businesses and is not verified by other sources such as tax records or payroll documents. The Onondaga County and Erie County IDAs did ask businesses to submit backup data for job creation numbers, but Onondaga County officials said they did not review the figures unless statistics differ significantly from the previous year, and Erie County officials reported receiving the backup data from only 11 of 48 projects reviewed. The other four audited IDAs did not have systems for verifying job creation numbers.

State law requires all IDAs to file annual financial statements with the State Comptroller. The statements include data on assistance provided and jobs created by each of the projects supported by the IDA. IDAs that do not submit these reports as required can lose their ability to grant tax abatements and exemptions. Over the past three years, the Comptroller’s office has worked to improve the quality of these reports by highlighting and offering additional explanation in areas where mistakes are frequently made, providing more training to IDA officials, and developing a manual to guide IDA reporting.

“We have made significant progress in improving IDA reporting, but now is the time to take it to the next level,” Hevesi said. “We are proposing that IDAs publish an annual ‘report card’ that would make their operations more transparent, and we are also calling for participating businesses to provide more information or risk losing their benefits.”

“Clawback” provisions
Four of the six audited IDAs – Tompkins, Suffolk, Onondaga and Ontario – have provisions to recapture, or “clawback,” benefits given to projects if they do not achieve job creation or other goals. However, officials from these four IDAs told auditors that they have never pursued recapture of benefits from any projects, despite the fact that all had some projects that did not meet their goals.

Auditors found that Tompkins County IDA was the most actively involved in monitoring projects. The IDA’s clawback policy allows for acceptable explanations – such as loss of a major customer or supplier or natural disasters – for failure to reach project targets, but there was no formal process for verifying the explanations. The IDA’s board would only consider clawback when projects were referred to it by the IDA administrative director, and auditors determined that no projects had been referred.

The Erie County and Amherst IDAs do not have clawback provisions, and officials from the two IDAs told auditors that adopting such policies would put them at a disadvantage relative to other IDAs in the county. Town of Amherst IDA officials also stated that they believed it was bad public policy to take back incentives.

“Some businesses make honest and diligent efforts to succeed, but are negatively effected by changes in market conditions or other unforeseen circumstances. Our concern is a business that may create unrealistic plans for expansion to take advantage of programs that offer financial assistance. Clawback provisions protect taxpayer dollars by giving IDAs a way to stop benefits or pursue repayment of benefits when they believe that businesses have not made good-faith efforts to meet the goals they set for themselves,” Hevesi said. “Clawbacks simply send the message that IDA benefits are not just give-aways, and they should be in place at all IDAs.”

Project evaluation criteria
Auditors found that only the Ontario County IDA had formal evaluation criteria for evaluating potential IDA projects, including a detailed cost-benefit analysis. For each project, the IDA makes a three-year comparison of costs to the community including real property, sales and mortgage recording tax abatements with benefits such as increased tax revenues generated by new jobs, to estimate the value of the project to the community. The other IDAs may have considered some of these factors, but did not have specific written criteria to evaluate each project.

Auditors also found:

  • IDA projects are required to report sales tax savings to the State Department of Taxation and Finance, and all of the audited IDAs require projects to provide that information to the IDAs as well. However, the IDAs did not always receive this information. For example, the Town of Amherst IDA had the data for only one of four tested projects and Onondaga County IDA had the data for two of four tested projects.
  • Actual sales tax exemptions for particular projects sometimes turned out to be far higher than originally estimated. IDAs were generally not comparing estimates and actual results, which would help them investigate especially large variances and make more accurate estimates on future projects.
  • None of the six audited IDAs verified application information submitted by potential projects before presenting the material to their boards of directors for consideration.
  • None of the six IDAs had a formal procedure to verify whether projects would have proceeded without IDA support.

In their responses to the audit, IDA officials often disagreed with the audit’s conclusions, but indicated that some of the findings would be useful in helping them make improvement in their operations. Some of the officials questioned whether job creation should be the sole or most important criteria on which the IDAs are judged. There was a wide range of comments regarding clawback provisions. A sampling of the responses is included in the audit. The complete responses from each of the audited IDAs are available on the web at http://www.osc.state.ny.us/localgov/pubs/research/idaresponses.pdf.

IDAs were first established under New York State law in 1969, and their role is detailed in Article 18-A of the General Municipal Law. IDAs do not pay taxes or assessments on property under their jurisdiction, and this benefit is passed on to participating IDA projects. Businesses that receive real property tax abatements through the IDAs generally enter into PILOT agreements so that affected localities recover some of the lost property tax revenue. IDAs receive application and administrative fees from participating businesses, which are usually based on the size of the project.

Hevesi’s proposed IDA reform legislation also includes provisions to increase the cap for IDA investment in facilities such as dormitories for educational institutions, hospitals and senior housing developments. The current cap of $20 million would be permanently increased to $50 million, and additional provisions would be added to prevent splitting a project into smaller components to get around the cap.

Click here for a copy of the audit.

Click here for a copy of the IDA responses.

Click here for a copy of the policy report.

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