Little tracking of results from state corporate incentives

DOVER, Del. — When the state gives millions to companies like JPMorgan Chase, Incyte Corp. or Discover Bank for jobs, the announcement is treated as reason for celebration.

But try tracking whether high-dollar economic incentives actually improve the economy. Delaware doesn't make it easy, a News Journal review shows.

Since mid-2009, Gov. Jack Markell's administration has committed $213 million to companies for jobs-related grants and loans through the Delaware Economic Development Office's Strategic Fund.

Award recipients must report job creation to the state. But virtually no reports are available online, earning Delaware a dead-last rating from a group studying economic development transparency.

State lawmakers, who appropriate millions each June for corporate grants and loans, receive little more than quarterly summaries of incentives that include jobs companies promise but don't deliver.

And Delaware does not require regular, independent evaluations of economic development programs to determine the state's return on investment.

Now, lawmakers are reviewing the performance of the Delaware Economic Development Office formally under the authority of the Legislature's Joint Sunset committee.

Among lawmakers' concerns is whether the economic development office should do more to test how its investments are working and whether its incentives deliver a strong return on taxpayer dollars.

"I have questions about how effective they've been, and I believe there needs to be more community awareness and involvement in the process," said state Sen. Bryan Townsend, a Democrat from Newark, Del. "I very much want to see information that justifies continuing the program."

During Markell's six-year tenure, 64% of grant and loan commitments , or $136.7 million, went to 10 companies representing just 5% of total award recipients, according to a News Journal analysis of Delaware economic development grants and loans.

The analysis did not include tax credits or abatements but focused on grants and loans disbursed through the development office's Strategic Fund, Markell's primary economic development tool.

Among the 10 biggest winners are familiar names: PBF Energy's (NYSE: PBF) Delaware City Refinery, $42 million; Wanxiang Group's Fisker Automotive, $21.5 million; JPMorgan Chase (NYSE: JPM) , $11.6 million; Discover Financial Services (NYSE: DFS), $7.3 million; Sallie Mae (NASDAQ: SLM), $8.8 million; and Ashland chemical (NYSE: ASH), $10 million.

In an interview, Markell said the pace of job creation and falling unemployment demonstrate that his economic development strategy is working. He noted that Delaware's rate of job growth outpaced all other states in the region during the past year.

The research firm Gallup recently recognized Delaware for its quickening pace of job growth.

One reason: Other states are doing it

Firms like DuPont (NYSE: DD); Ashland; and JPMorgan Chase, the largest U.S. bank, have options on where to grow, and Markell said Delaware must offer incentives to remain competitive.

"I would be very happy if Delaware and other states, instead of competing on the basis of incentives, competed on business climate, responsible government, workforce development and the like," Markell said. "But that's not the world we live in.

"We're never going to have the biggest checkbook," he said. "Other states spend a whole lot more on incentives than we do."

The governor called grants and tax breaks "necessary but insufficient," saying the state also must continue to invest in education, job training, environmental protection and infrastructure.

Fisker is a notable stain on Markell's economic development record.

Delaware taxpayers spent $20 million on the electric carmaker, but Fisker filed for bankruptcy protection in November 2013 after losing federal financing. The company never created the 2,500 production jobs it pledged to fill at a former General Motors plant near Newport, Del.

Other projects have raised questions about the program's effectiveness in driving job creation.

In September 2012, Delaware offered specialty chemical maker Ashland up to $10 million in subsidies in return for the company's pledge to maintain at least 501 workers in Delaware through June 2017.

But in August, Ashland sold its Delaware-based water technologies unit and restructured its remaining businesses. The Covington, Ky.-based company said it would cut up to 1,000 jobs worldwide in 2014 as part of the restructuring and has been slow to his its job-creation mark.

In October, state officials agreed to extend the deadline from Jan. 31 to May 1 for Ashland to meets its benchmarks, said Bernice Whaley, deputy director of Delaware's economic development office. Ashland's award remains in escrow.

No cash up front — anymore

Since Fisker's fallout, development office leaders say they've stopped giving companies cash up front. The practice now is to set incremental benchmarks for job creation or relocation before writing a check.

Companies still can claim they're having difficulty creating the jobs or raising capital and ask for more time to fulfill the requirements.

Bloom Energy, recipient of a $16.5 million state grant in 2012, had not met salary benchmarks at its Newark fuel-cell factory as of the end of September, but the state didn't penalize the private company.

Bloom was supposed to spend $12 million on salaries at the plant in a 12-month period. According to Bloom's filing, compensation paid to workers at the factory from Oct. 1, 2013, to Sept. 30, 2014, was $9.55 million.

Economic development officials said Bloom technically has missed its target on salaries but has until 2017 to cure any shortfall before financial penalties.

In February 2011, Markell and DuPont Co. officials celebrated a five-year plan to expand biotech soybean research in Newark. A $1.5 million state grant aided the company's plans. But DuPont never touched the grant.

State officials now say that money remains in escrow awaiting a disbursement request with an April 2016 deadline.

In March 2014, operators of World Cafe Live at The Queen in Wilmington, Del. approached state officials to request a modification of the terms under which they'd received $500,000 in grants and loans in 2011.

The state permitted the theater to count as full-time employees those clocking only 20 hours a week to avoid triggering a "clawback" provision allowing the state to recoup its investment.

The development office also approved a two-year forbearance on principal payments on The Queen's then-$236,000 loan balance, according to meeting minutes.

Since St. Francis Hospital in Wilmington took out a $4 million no-interest loan from the state in 2007 to help make payroll, The state twice has agreed to defer payments, first to December 2013 and then to December 2015.

Livonia, Mich., based Trinity Health, a Catholic health-care non-profit with facilities in 21 states, owns the hospital.

Audit findings show problems

The Delaware Economic Development Office's balance sheets also have been the subject of some criticism.

Independent reports covering fiscal years 2011 and 2012 show inadequate controls over internal accounts, including no managerial oversight of financial information or reporting. Auditors also identified five properties deeded to the agency that had not been disclosed previously or valued as assets.

The most recent audit of 2013 statewide spending found that office had miscalculated and understated the reserve set aside to cover loan defaults and delinquent accounts by $12.3 million. The error was corrected, state officials said.

Bernice Whaley, the agency's deputy director, said officials there properly track grants and loans.

Economic development staff evaluates each project up front for its anticipated affect on the economy, personal income-tax collections and job creation. That information is presented publicly to the Council on Development Finance, an advisory panel, for approval, Whaley said.

Economic development officials also provide updates to the council on Strategic Fund performance and report annually to the entire state General Assembly.

Grants and loans from the state's Strategic Fund are part of the reason why the jobless rate has fallen from a high of 8.4% at its peak in 2010 to 5.4% in December, said Alan Levin, the agency's director since 2009.

"The results speak for themselves," he said.

In January 2014, Good Jobs First, a Washington watchdog group, said Delaware and three other states "still keep taxpayers completely in the dark" about economic development incentives.

Citizens and the press must submit a formal records request to obtain grant applications and to learn which companies followed through on its promised employment levels. The Delaware Economic Development Office requires a records request for any document not posted on its website.

A questionnaire from the Sunset Committee asked about transparency, to which development office officials replied:

"Although DEDO understands the purpose, the push for increased transparency is often a challenge when attracting prospects to the state, due to their privacy and confidentiality concerns."

Advisers to Markell attempted to shield the agency from legislative review last year, asking for a pass so as not to disrupt "significant and tangible" work on economic development projects.

The newest legislative review comes as lawmakers elsewhere have demanded more information about economic development efforts.

Between 2012 and 2014, 10 states and the District of Columbia have instituted new requirements for regular and independent reviews of tax incentives and other subsidies, according to Pew Charitable Trusts.

Few states meaningfully track return on investment for public economic development spending, said Josh Goodman, who studies economic development programs for Pew.

"They don't really know what's working, what's not," Goodman said. "It's really been difficult for lawmakers to figure out which programs work, which don't, and figure out the best return on investment."

The best evaluations of economic development subsidies attempt to determine whether government incentives are causing companies to hire or retain employees or whether corporate executives are making those decisions based on other factors, he said.

Companies have many reasons to locate and stay in Delaware, and it's not the subsidies, said Research Director Philip Mattera of Good Jobs First, a watchdog group critical of corporate giveaways. Think relatively little regulation, low taxes and corporate secrecy.

"They'd be setting up an office there anyway," Mattera said. "There's a residual fear of being unfriendly to business. A lot of economic-development folks dread that brand, but I think it's kind of obsolete."

Discover Bank was offered $7 million in state grants in 2011 in exchange for not moving 956 jobs out of state for at least 10 years. The state also underwrote $387,000 in capital expenditures for the company in New Castle.

"Keeping jobs in Delaware was always our No. 1 priority," said spokesman Robert Weiss, who noted that Discover has added 300 full-time positions.

Last year, the state approved a $1.9 million grant to entice the student-loan servicing firm Navient (NASDAQ: NAVI) to create 167 new jobs in Delaware. After separating from Sallie Mae in May, Navient opened its new headquarters on Wilmington's Riverfront last month.

A company spokeswoman called the state incentives a significant factor in Navient's decision to invest in Delaware but not the only factor.

"We found ideal space in Newark and Wilmington, central to a productive and skilled workforce, the Amtrak train station and other quality of life benefits for our employees," said Nikki Lavoie, a spokeswoman for Navient.