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Quarterly: Spring 2020 - Matt Weller

Economic Development Agreement Administration Needs Attention


By Matt Weller

New economic development projects can be exciting to governing bodies, citizens, and government employees. They are often a sign of belief by businesses and developers in a government’s vision for a jurisdiction and the potential that vision holds. However, excitement over “getting the deal done” can overshadow administering the agreement after the fact and expose jurisdictions to risks that could diminish citizen confidence and affect support for future initiatives. Created jobs not being of the quality anticipated, or property and/or sales tax bases not increasing as anticipated are a few of the potential negative outcomes. Additionally, staff responsible for administering the agreements may be limited since economic development is not a core function in most jurisdictions. Such circumstances were encountered during a recent audit of economic development expenditures in Oklahoma City.

It’s a Compliance Audit…How Complicated Could It Be?

Oklahoma City spent nearly $80 million on economic development activities in just under a three-year period. Those expenditures consisted primarily of $39 million in job creation incentives funded through General Obligation Limited Tax (GOLT) bonds and $33 million in financing to developers for projects in tax increment financing districts. Since state law allows cities to use property tax only for debt service, forcing reliance on sales tax for operations, the remaining $8 million included incentives specifically to attract retailers. Besides involving significant dollars, the number of agreements and number of distinct, sometimes complex conditions within the agreements to ensure objectives were achieved was also a significant risk. Additionally, limited staff was a risk factor with a single employee responsible for the entire function for most of the audit period. The following concerns were identified during our audit.

Are Incentive Payment Conditions Being Met…Before We Pay?

Our audit found that controls ensuring all economic development agreement payment conditions were satisfied before expenditures were made were not adequate. The following payment conditions are examples of those for which compliance was not always confirmed before incentives were paid.

  • Minimum capital investment requirements were included in most of the agreements. The agreements required those receiving incentives to provide documented proof of having made a minimum capital investment before incentives would be paid.
  • Minimum occupancy requirements were included in tax increment development financing agreements for apartment redevelopment projects. The agreements required developers to provide documented proof of having completed a minimum number of occupiable units and that a minimum number were occupied before development financing would be paid.
  • Subordination agreements were required from lienholders on properties redeveloped using tax increment development financing. The agreements with developers required that agreements be obtained from lienholders that their liens would be secondary to minimum annual property tax payments due to the City, before development financing would be paid. Development financing provided is recovered for reinvestment through receipt of minimum annual property tax payments.

What About Other Agreement Conditions…Are Those Verified?

Other agreement conditions were not enforced because methods for verifying compliance had not been developed before the conditions were included in the agreements, the conditions were later deemed unnecessary, or enforcement was never intended. The following conditions are examples of those for which verification did not occur in accordance with the related agreements.

  • Expense reimbursement limitations in a retail incentive agreement were not calculated as specified in the agreement because a way of obtaining the unavailable information necessary to perform the calculation had not been developed.
  • Minimum annual property tax payments required by tax increment development financing agreements were not collected by due dates specified in the agreements because a method for ensuring those payments were received when due had not been developed.
  • Minimum taxable market value requirements included in tax increment development financing agreements were deemed unnecessary since the developers agreed to make minimum annual property tax payments regardless of taxable market value.
  • Incentive payment application deadlines were included in certain job creation agreements to encourage timely submission for cash flow forecasting purposes, but with no intention of enforcement.

Do Original Agreements Need Amendment…After Related Agreements Are Finalized?

Tax increment development financing agreements required that developers submit signed covenants attaching minimum annual property tax payment requirements to the property before development financing would be provided. Those covenants were also referenced by related subordination agreements obtained from property lienholders and submitted by the developers. The following are examples of amendments that were not made to original agreements after related agreements were later finalized or amended with differing terms, potentially affecting agreement administration. 

  • Dates that properties were expected to be added to the property tax roll within related covenants, which is when minimum annual property tax payments were expected to begin, did not agree to such dates specified in original agreements. Because the dates in the original agreements had not been amended to agree to the covenants, it was not clear when minimum annual property tax payments would begin, and development financing would begin to be recovered for reinvestment.
  • Revised subordination agreements were not obtained from lienholders for redeveloped properties when the covenants referenced in the subordination agreements were amended. Recovery of development financing through minimum annual property tax payments was at risk because the subordination agreement referred to covenants that had been superseded.

What If There Are No Agreements…Is That a Problem?

GOLT bond funds totaling $23.5 million were spent to participate with another local jurisdiction and a federal agency in a land purchase for construction of a maintenance facility by the federal agency. Our governing body’s resolution authorizing the expenditure contemplated recovery of nearly 90% of the funds through future state job creation incentives after the facility was constructed and new jobs were created. The resolution also included an expectation that agreements would be negotiated amongst the involved parties directing repayment of the funds. However, agreements directing those repayments were not in place, putting recovery of those funds at risk.

What Should Be Done Differently?

Strategies for administering economic development agreements needed to be developed before the agreements were made to better ensure accountability was maintained for how the funds were used. For every prospective agreement, each condition considered for inclusion needed to be assessed for necessity and whether and how it would reasonably be verified, and then a systematic process developed for tracking the status of whether the conditions have been verified. Determining how agreements would be administered after the fact was simply not practical given the importance of reducing the risk of failed projects. Citizens who believe such incentives are wasted trying to achieve a result that should occur naturally will be anxiously awaiting such an occurrence. Such slim margins for error, after all, are common in local government where we may only be one failed project away from losing the citizen confidence needed to get the next public financing proposal approved.

 

About the Author

Matt Weller joined the Oklahoma City Office of the City Auditor in 2000 and has over 24 years of auditing experience. He has previously served on the ALGA Board of Directors and on the ALGA Peer Review Committee in various capacities including Chair. Matt has also previously served as President, Treasurer, and on the Board of Governors for the IIA's Oklahoma City Chapter.