Friday, May 10, 2013

Outrage Over WEDC Failure Grows

The following is from the weekly e-newsletter from State Senator Chris Larson:
Outrage over Governor Walker's Wisconsin Economic Development Corporation's (WEDC) repeated missteps continues to grow as more and more information comes to light through audits, press conferences, and public hearings. Last week, the nonpartisan Legislative Audit Bureau released its findings on WEDC's performance thus far, which were then taken up this week in the Joint Legislative Audit Committee and the Joint Committee on Finance. The audit confirms what legislative Democrats and concerned citizens have been saying from the beginning. Although it has been given great authority over our tax dollars, WEDC lacks the necessary accountability and transparency measures that should accompany such obligation.

Click here to view the WEDC audit in full.

While Democratic legislators offered extensive suggestions to improve accountability and transparency when WEDC was created, most of these protections and safeguards were rejected by legislative Republicans. By refusing to adopt commonsense transparency and accountability amendments, Republicans provided the avenue for WEDC to waste our tax dollars and fail to create Wisconsin jobs.

This public-private agency has had persistent problems since its inception in 2011. These include circumventing Wisconsin's fair and competitive bidding process and ignoring federal and state laws when giving out grants. The final straw was losing track of over $50 million in loans, including about $12 million that were overdue.

Unfortunately for taxpayers, it appears WEDC's problems have not been relegated to the past. In fact, the revelations made in four audits of the agency, particularly the newly released report, are nothing short of shocking. Continue reading for more details on the latest audit findings of WEDC.

Failing to Track Job Creation
WEDC is currently tasked with administering many of the state's economic development programs, including grants, loans, bonding authorization, and tax incentives. However, the audit shows that WEDC has been failing to properly set goal objectives for job creation programs, follow-up with program participants, and ensure these businesses or organizations receiving taxpayer dollars are living up to their contracts to create jobs. Below are just some of WEDC's insufficient policies, which prevented them from administering their grant and loan programs effectively.

  • Had no policies for making awards through some of its programs, including the Capital Catalyst, Minority Revolving Loan Fund Expansion, or the WEDC Partner Operations Assistance programs. As a result, it is unclear how WEDC was able to award funds through these programs.
  • Had no policies for analyzing the risk of default by issuing new loans to recipients that did not repay prior loans, leaving taxpayer dollars in jeopardy and betting on a company that likely is unable to create jobs. For example, a business awarded a $100,000 loan from the former Department of Commerce was delinquent on its loan payments from 2005 to 2008 and again in 2011, taking the company 14 years to repay the loan. WEDC ignored the company's repayment history and issued it a $200,000 loan in January 2012.
  • Had no policies for determining when an applicant was eligible for a forgivable loan and conflicting policies related to recipients awarded match program funds. One policy required recipients to provide a three-to-one match, while a second policy stated that a one-to-one match was acceptable.
  • Did not always perform the analysis necessary to determine if an applicant's proposed project was eligible for a grant, loan, or tax credit. As a result, WEDC made some awards to ineligible recipients, for ineligible projects, and ineligible amounts. For example, in October 2011 and November 2011, WEDC awarded business loans that were respectively $100,000 and $360,000 more than the maximum allowed.
  • Allocated tax credits for economic development projects that occurred before the contracts were executed and in ways that violated state law or program policies. This included issuing a $250,000 contract through a Jobs Tax Credit program without requiring the company to create any jobs.
  • Recipients of 59 awards submitted 45% of the contractually required progress from July 2011 through December 2012. WEDC also violated state law by not independently verifying the performance information reported by a sample of grant and loan recipients.
  • WEDC's governing board did not establish expected results for 10 of 30 economic development programs in the 2011-12 fiscal year.
  • Provided grants to companies tasked with creating family supporting jobs, ignoring the fact that half of the employees at such a company earned less than 150% of minimum wage.
  • Failed to collect funds from businesses that did not meet their contractual obligation, such as creating jobs. 

WEDC's inability to set goals, monitor programs and participants, and follow state statutes have made it nearly impossible for the Legislative Audit Bureau, or anyone else, to gauge the extent of its failure to create jobs and spur economic development. It is no wonder why Wisconsin currently ranks 44th in the nation in job growth, 45th in wage growth, and dead last in short-term job growth, given that its job creation agency is failing in just about every measurable way possible.

Potential Political Payback, Conflicts of Interest
The audit also revealed that some WEDC policies give the appearance of favoritism. One example of this is found in the administration of Wisconsin's tax credit programs. Some of the tax credits require the creation of Enterprise Zones based on an area's level of economic distress, which takes such factors as unemployment rate and percentage of families with incomes below the poverty line into account. The goal is then to provide loans to attract businesses to these distressed Enterprise Zones. However, rather than creating these zones based on demographics and economic distress factors, WEDC simply designated zones based on the locations of businesses that applied for tax credits. Such irresponsibility has likely impeded job growth in the areas that need it most, keeping those Wisconsinites in an unrelenting state of hardship.

Instances of conflicts of interests were also found within the audit. Unlike other state agencies, WEDC is not required to solicit bids before contracting. As a result, WEDC was able to hire the firms Baker Tilly and Schenck to help the agency with its IT systems and in conducting an internal audit respectively. However, it was since discovered that while Baker Tilly was under contract, WEDC offered a $750,000 loan to a  to a firm represented by Baker Tilly. When they rejected the initial offer, WEDC then increased its offer to a $1 million forgivable loan that would not need to be repaid if the firm fulfilled its contractual obligations. A similar situation was found to have occurred with Schenck as well. During WEDC's contract with Schenck for an independent audit of the agency, Schenk was also representing a firm and negotiating a financial award with WEDC, which offered the firm $900,000 in tax credits and a $237,000 grant. After a request for additional assistance, WEDC allocated the firm $1.1 million in tax credits and a $300,000 grant.

Additionally, unlike other state agency employees and elected officials, all WEDC employees are not currently required to follow state ethics laws, and are therefore allowed to accept gifts. However, the amount of gifts they have received is staggering. In a report to the Government Accountability Board, WEDC reported receiving 40 gifts totaling $55,100 from July 2011 to December 2011.

Such practices leave WEDC susceptible to becoming more beholden to businesses than the taxpayers they were hired to serve. As a result, the audit recommended that WEDC develop policies outlining in which situations multiple vendors should be solicited, evaluated, and conflicts of interest addressed.

Poor Staff Vetting and High Turnover
Since its creation, WEDC has demonstrated a failure to properly vet job candidates and retain staff once they are hired. WEDC's first chief financial officer departed the agency in July 2012. That individual's replacement, the former chief operating officer, then left in October 2012. In September 2012, Secretary Paul Jadin announced his resignation following the governor's appointment of Ryan Murray, a Republican political operative with no private-sector or economic development experience, as chief operating officer.

The drama continued this year when WEDC's third chief financial officer resigned in April after only one day on the job. Trouble continued this month when the agency's spokesman, John Gillespie, resigned after it was discovered that he had unpaid back taxes totaling over $36,000, among other outstanding debts.

The staggering number of turnovers and level of embarrassment resulting from poor hiring choices has made it difficult for the agency to effectively implement and manage job creation and economic development programs. Additionally, WEDC's floundering reputation and repeated failures likely make it difficult for the agency to hire and retain quality executive staff with experience in both the private-sector and economic development.

Questionable Use of Taxpayer Dollars
WEDC's economic development programs are not the only thing that lacks set policies and procedures in the agency. WEDC has also failed to set policies for its staff to ensure that taxpayer dollars are not being misused.

Most of the staffing problems revolved around agency purchasing credit cards. According to the audit, in September 2012, 77 purchasing cards had been issued to 76 of WEDC's 90 staffers. This number later increased to 83 cards, some of which had a credit limit of $20,000. After delving into the purchases further, some seem like an inappropriate way to use taxpayer dollars. These include spending our tax dollars on Badger tickets, alcohol, and iTunes gift cards. Further, taxpayer dollars were also spent on purchasing train tickets in China and meal expenses in India for two family members of the former chief executive officer. These funds were only reimbursed by the former employee in question after the Legislative Audit Bureau inquired about the charges and whether or not WEDC had been reimbursed.

The purchasing cards were also used to buy such things as gasoline, gifts, and meals. Such card purchases were banned under the former Department of Commerce because it could allow cardholders to commit fraud by double dipping as they could use their purchasing cards for the expenses and also request reimbursement for the same expenses, which is often difficult for agencies to detect. Yet WEDC still allowed staff to purchase such items on their cards, including $10,300 worth of gasoline.

Finally, WEDC ignored its own personnel policy related to iPhone purchases, which indicates that WEDC provides cellular phones to staff and owns the phones, which must be returned to WEDC upon termination. Yet documents that turned-up in the audit show a different story. Ignoring this policy resulted in WEDC paying for the following for each employee that requested an iPhone from WEDC:

  • Up to $150 to break existing cell phone contracts to purchase an iPhone and enter a new contract
  • Up to $210 to purchase an iPhone
  • Up to $35 to activate a new iPhone
  • $1,068 annually to cover the service charges

Additionally, iPhones were never returned after employment termination and were allowed by WEDC to be used for personal use. As a result, taxpayers are sinking thousands into each participating employee to provide them with a personally owned iPhone, rather than one belonging to WEDC.

Minor Changes, More Money?
Today, in a stunning move during a JFC budget hearing, Republican JFC members rewarded WEDC with more money than even Governor Walker asked for in his budget, despite their bad behavior. Republican members did grudgingly introduce a few minor changes in a small step towards greater accountability, but fell well short of the reforms needed to salvage the governor's floundering flagship agency.

Next Step
The scathing audit was the last straw for my colleagues and I regarding the failing WEDC. Apparently, we were not the only ones bothered by it as even a Republican Senator was quoted saying "I hope they can get their act together, but this is pretty darn bad. I'd say the jury is out whether this was a good idea to create this whole entity . . . I don't think there can be any more excuses. They've got to fix this thing."

Therefore, we hope Republicans will join us in our request to stop giving any new taxpayer dollars to this money pit until they have adequately addressed the concerns in the audit, and bring about greater accountability and transparency to this PUBLIC-private agency. We deserve better. Losing track of taxpayer dollars during difficult economic times is unacceptable. We cannot allow WEDC to continue this fraud, waste, and abuse at a time when neighborhood schools are not able to spend a single new dollar in the classrooms and 90,000 Wisconsinites are being cut from BadgerCare. Until accountability and transparency measures are enacted, no new taxpayer dollars should be wasted at WEDC.
I would point out that there is one flaw with Larson's analysis of the situation regarding WEDC. A system that is designed to be broken cannot be fixed. The only solution to WEDC is to put it back on the junk pile from whence Scott Walker picked it up.

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