You asked for a summary of the Office of the Auditors of Public Accounts' July 3, 2001 report, "Performance Audit: State Financial Assistance Monitoring, Department of Economic and Community Development (DECD)," particularly with regard to issues relevant to the Labor and Public Employees Committee. You also requested a discussion of remaining issues following DECD's response that may be of relevance to the committee. OLR Report 2001-R-0834 describes several of the report's findings in greater detail, and discusses issues identified in the report that fall within the Planning and Development Committee's jurisdiction.

SUMMARY

The audit covered financial assistance DECD provides under several economic development programs, focusing on its monitoring efforts. The auditors found that DECD had several noteworthy accomplishments with regard to its financial assistance monitoring. But they made 20 findings, many of them critical of the way DECD monitors its assistance.

Among other things, they found that DECD (1) has few standardized monitoring procedures for its economic development programs and (2) routinely puts millions of state dollars at risk by subordinating the state's lien position in favor of other funding sources. Of particular interest to the Labor and Public Employees Committee, the auditors found that (1) there were sometimes huge differences between the number of jobs that a DECD-funded project was projected to create and retain and its actual accomplishments; (2) 32% of the projects involving for-profit companies that received DECD funding that was tied to creating or retaining jobs did not have job audit requirements; and (3) if a recipient is unable to attain the employment requirements, DECD's policy is to allow it to change the requirements. DECD contested many of these findings. The auditors provided recommendations for all 20 findings.

The auditors also raised several issues that went beyond assistance monitoring. These include the effectiveness of the Manufacturing Assistance Act (MAA), one of DECD's primary economic development programs. They also raised questions regarding how DECD selects projects for funding, and how it determines which costs are eligible for funding.

Other issues the committee may wish to address include:

1. the number of times job creation or retention goals were presented to the Bond Commission as part of the funding rationale, but not included in the DECD contract providing funding for the financial assistance recipient;

2. the number of times DECD allowed recipients to change their jobs goals and the difference between the original goal and the actual number of jobs retained or created; and

3. steps DECD has taken since the report to address the auditors' findings.

AUDITORS' REPORT

Scope

The audit covered DECD monitoring procedures and practices for loans and grants provided under the MAA, Urban Act, Regional Economic Development Act, and various special acts. For-profit companies, nonprofit organizations, and municipalities are eligible recipients under these programs. In addition to looking at the department's overall monitoring practices, the audit examined nine specific projects taken from a list of DECD projects receiving payments exceeding $ 100,000 during FY 1997-98.

The report begins by describing (1) DECD's structure and the statutory authority for the programs, (2) the process for providing financial assistance under the programs, and (3) how the state's Single Audit Act applies to such funding.

According to the report the auditors' primary objectives were to determine if (1) the DECD's monitoring procedures as a funding agency are reasonable and (2) the Single Audit Act provides an adequate monitoring tool for DECD as the supervising agency for local housing authorities, to assure that program goals are met. The fieldwork for the report was conducted between August 1999 and August 2000.

Findings

The auditors found that DECD had several noteworthy accomplishments with regard to the monitoring of the financial assistance it provides. For example, it found that the audit guide that DECD provided for its programs was comprehensive, clearly written, and readily available. According to the auditors, it appears that DECD staff are conscientious in their auditing efforts, which covers the time period after a project is completed.

Nonetheless, the auditors made a series of critical findings. Among other things, the auditors found that:

1. DECD has few standardized monitoring procedures for its economic assistance programs, and fewer written procedures especially during the projects' active phase;

2. the controls DECD uses to monitor funding it gives to for-profit companies are weaker than the controls it uses to monitor funding given to non-profit and governmental clients;

3. audit report reviews are not always timely, and no one is held accountable for following up on audit findings;

4. there are no written guidelines as to what constitutes matching funds, which are required for several DECD programs, nor on other matters regarding matching funds; and

5. DECD routinely puts millions of state dollars at risk by subordinating the state's lien position in favor of other funding sources.

Several of the auditors' findings are of particular relevance to the committee. The auditors found that employment goals are sometimes not formalized and therefore cannot be monitored. It cites the case of an old manufacturing site that received DECD funds to be used for light manufacturing. The project proposal and the presentation to the Bond Commission estimated the project would create 1,250 new jobs. However, the final DECD assistance agreement did not include any specific number of jobs to be created or retained. (The Bond Commission approves bond funding to DECD, which then, through the assistance agreement, actually provides the money to the project. ) According to a January 2001 DECD report, the project had resulted in the creation or retention of only 62 jobs. Another project received a $ 4. 5 million grant based on a projection that it would create 221 short-term construction jobs and 25 full-time jobs. These numbers were reduced to 20 and 5 jobs, respectively. Again, in the case of both projects, the final assistance agreement did not include specific numbers of jobs to be created or retained.

The auditors also found that while many of the loans and grants provided under the MAA require the recipients to create or retain jobs, DECD does not require job audits for all such recipients. In particular, the auditors found that 32% of the for-profit recipients that received such state funding did not have job audit requirements. In addition, DECD did not begin formal job audits for those entities requiring job audits until July 1999.

The auditors found that most financial assistance contracts that have job creation or retention requirements also require the recipient to pay back part of the assistance for each job below the minimum that it fails to create or retain. The auditors found that if a recipient is unable to attain the employment goals, DECD's policy is to allow it to change the jobs requirements. They note that while the law allows this, it distorts DECD's record of accomplishments.

Recommendations

The auditors issued recommendations for each of the 20 findings they made. In many cases, these recommendations were general in nature. For example, the auditors recommended that DECD should continue its efforts toward timely and complete job audits. Others were hortatory,

such as recommending that DECD keep its policy of subordinating the state's lien position when choosing which projects to fund, but to select such projects with extreme care.

The auditors also made several specific recommendations. They recommended, among other things, that DECD:

1. should not change the job requirements established in the assistance agreement;

2. should include in the assistance agreement any job creation and retention terms that were presented to the Bond Commission and presented in the project proposal as the reason for the project; and

3. should define what counts as matching funds, especially with regard to non-cash contributions.

DECD Response

DECD's responses to the auditors' initial findings are summarized in the auditors' report. DECD agreed, in part, with several of the auditors' findings and recommendations. For example, it acknowledged the backlog in reviews of audit reports for economic development projects. But DECD disagreed with the auditors' findings over a wide range of issues, including those regarding the jobs requirements of DECD-funded projects. In addition, DECD commissioner Abromaitis sent the auditors a September 28, 2001 memo (enclosed) responding to the report.

REMAINING ISSUES

Issues Raised But Not Addressed in the Report

The report raises several issues that were beyond the scope of the audit. Several of these deal with the MAA program. The auditors note that the ability to measure the success of the program has been limited. They suggest asking:

1. whether the objectives of the program have been met;

2. are the jobs created under the program "quality" jobs, as required under the MAA; and

3. whether the quality and quantity of jobs created justify their costs.

A second area where the auditors suggest review is in the determination of which project costs should be eligible for funding under DECD's programs. They note that DECD does not have standards for which costs are eligible and which are not.

A third area of concern for the auditors was the project selection process. They found that in many cases the process did not seem to follow logic or DECD's own guidelines. They also noted that in many cases the financial assistance agreement was not signed until long after the project had begun.

Other Potential Issues

The legislature may wish to learn from DECD what steps it has taken since issuing its memo in response to the audit. It may want to obtain follow-up information on several of the auditors' findings, including:

1. the number of times that goals for the creation or retention of jobs were presented to the Bond Commission, but not included in the final financial assistance agreement with the recipient;

2. the number of times DECD has allowed funding recipients to change their jobs goals, the number of jobs to be retained or created under the original agreement, the revised goal, and the actual number of jobs retained or created;

3. what sanctions, if any, have been imposed on recipients that have failed to meet the jobs requirements specified in their assistance agreements;

4. the average delinquency of job audits that are currently past due; and

5. the number of times that DECD has subordinated its lien position to another lender and the amount of money DECD has lost when a project has failed and DECD had to buy out the other lender's position to preserve its investment.

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