GCN GUEST OPINION
No Oversight of Economic Development Incentives
State Auditors Office Failed to Adequately Monitor Program
Special to GCN: Filed 1/22/05
For the past several months several state officials have had the Economic Development Incentive Pie all over their faces. However, these officials have feigned little knowledge, and the fingers are being pointed in all directions.
One of the sweetest pies is the Mississippi Beef Processors pie. This is the one that, according to news reports, is currently costing Mississippi taxpayers $37,733.22 per week. It could end up costing taxpayers in excess of $54,000,000 (yes millions). Your public officials, including your State Auditor, Phil Bryant, are trying hard to make lemonade out of this lemon. And seeks to pull the wool over the public’s eyes and continue more of the same.
A Clarion Ledger article dated January 7, 2005, titled, “Deadline up; beef plant faces foreclosure,” reveals that the plant closed Nov. 17, and represents a setback to the state of at least $54.06 million. The article went on to say, “State Auditor Phil Bryant has asked lawmakers to draft legislation to ensure state investments into private business ventures are handled in a more businesslike way, preventing such occurrences.”
According to the article, Bryant said, “I have sent a letter to the lieutenant governor and to the speaker of the House.” “Bryant’s letter tells lawmakers to “set a higher standard of review prior to funding speculative projects for any individual or corporation.”
“Bryant asked lawmakers to require of future applicants:
§ A completed application with a detailed business plan including application with a detailed business plan including a resume indicating past work history relevant to the business being proposed;
§ A credit review of the individuals and/or businesses involved;
§ A market analysis by an independent firm with necessary expertise for the specific projects;
§ An independent CPA firm’s review of the financial records of the recipients and, if applicable, any others providing funding to evaluate stability and accountability;
§ Matching funds or a letter of credit for working capital and construction should be mandatory with any future alliances.”
By implication, the above proves proper due diligence had failed on this project by state officials. Why? Because those elementary things had not been done.
Asking for the above now is tantamount to “closing the barn door after the horse is already out.” The above requests are very elemental. A financial institution would not even talk to anyone about a loan without at least the above information and would probably ask for a whole lot more and then would closely monitor the situation.
The big question is why did the State Auditor wait this late in making his recommendations? The second big question is, was somebody in state government so incompetent as to guarantee such a loan without the proper due diligence, or was there some other influence brought to bear? (See Royce Hignight’s article, “Mississippi’s Open Wound" on this website).
The above five paragraphs appeared in a Gulf Coast News article, by Royce Hignight, dated January 9, 2005, titled Economic Development Incentives-Do They Work?
State Auditor Phil Bryant has received accolades for his recommendations, including a laudatory editorial in the SUN HERALD, titled, “State auditor seeks ‘full disclosure’ before tax money is handed out to anyone.” The editorial said in part, “Bryant also stressed the need “to assure total accountability” by providing “total disclosure of all information surrounding economic development projects funded by the taxpayers. If the people of Mississippi are to become shareholders in these speculative efforts, they deserve to be informed. I believe the public funding of these projects demands no less than full disclosure of all information that is not otherwise protected by law.”
The editorial went on to say, “As it says on the state auditor’s official Web page: ‘In God We Trust, All Others We Audit.’”
The editorial said, “Bryant’s recommendations deserve the attention of legislators now in session. The recommendations should be made the legal standard for the use of public money by any agency of government.” What public servant wouldn’t glow if such lofty words were used about his guardianship of the public purse.
“The rest of the story”
Now as Paul Harvey says, “Now for the rest of the story.” But first let’s put a few facts on the table.
The legislation, which authorized some of the funding for the Mississippi Land, Water and Timber Resources Fund so that loan guarantees, such as those made for the Mississippi Beef Processors, was passed in the 2003 Regular Session of the Legislature and signed into law by the Governor on April 15, 2003.
A Memorandum dated June 4, 2004, from the OFFICE OF THE STATE AUDITOR, titled “Bond Monitoring Program Land, Water and Timber Resources” revealed the following:
“The Mississippi Land, Water and Timber Resources Act created the Land, Water and Timber Resources Board. The purpose of the Board was to “assist the Mississippi agricultural industry in developing, marketing, manufacturing, producing and distributing agricultural products in 2000.”
The “Powers and duties of the Board were established with the Executive Director of the Mississippi Development Authority (MDA) and the Mississippi Department of Agriculture and Commerce Commission (JDAC) serving as co-chairman of the fourteen member board.”
“The Board files an annual report with the Governor, Secretary of the Senate, and the Clerk of the House of Representatives not later than December 1, each year.”
“The Screening/Finance Committee considers requests from grantees and makes recommendations to the Board regarding project requests.”
“The Board meets at least once quarterly to consider projects recommended for approval by the Steering/Finance Committee.”
“Upon approval of a project, the Board and the grantee enter into an agreement. MDA and the Board prepare closing documents and disburse funds on a reminbursement or service rendered basis.”
Grant and Loan Availability
“The Board may provide funds to public and private entities through loans, grants, contracts and any other manner the Board determines appropriate for the purposes of carrying out the provisions of the ACT. The project must demonstrate viability for success with the necessary experience and managerial expertise to justify the investment.”
The State Auditor’s memo went on to say, “Recent experience has shown that while the cost of hiring contractors with specific expertise may be high, the benefits received merit the expense incurred. Utilization of experts at the onset of projects allows for the addressing of problems and issues, and therefore, provides the Board with better information on which to base decision.”
The memo goes on to describe how cost overruns at the Mississippi Beef Processors led the Mississippi Land, Water and Timber Resources Board to identify and solve problems by hiring a consulting group, which was charged with two major responsibilities.
The memo states, (1) “They were reviewing the project and determining the total cost to build a facility. (2) In addition, the facility should meet the estimates given and comply with requirements of the targeted buyers of the product.” (According to a Clarion Ledger article dated January 5, 2005, titled, “State tab for beef facility at $54M,” reflected that a $3.5 million consulting fee was paid to Georgia-based Facility Group in March of 2003.)
The State Auditor memo continues, “In addition, the facility should meet the estimates given and comply with requirements of the targeted buyers of the product.” In these lines the State Auditor seems to be giving his “blessing,” in effect, leading anyone who read the memo dated June 4, 2004, to believe the problems were being handled. This is well before the Mississippi Beef Processors fully became known to the public starting in November 2004.
This leads to a question. How did the State Auditor come by all of the above information set forth in the June 4, 2004 memo?
Office of the State Auditor-Monitoring
The State Auditor’s memo states, “Additionally, a member of the Office of the State Auditor (OSA) staff is present at committee and board meetings to assist in the evaluation of proposed projects.”
“Monitoring of projects after approval is a vital part of assuring that projects approved under the Act are beneficial to Mississippi and are functioning in compliance with agreement terms. The absence of such monitoring could result in the loss of internal controls and a lack of contractual compliance.”
“The OSA, in cooperation with staff members of MDA, is involved in making periodic on-site visits to review activities of projects.”
It would appear that the State Auditor’s Office was doing their job, if you just read their memo. But that was not the case.
Funds for OSA Monitoring
“In August, 2003, the State Auditor released a limited review of the Mississippi Land, Water and Timber Resources Act in which OSA offered to monitor projects authorized by the Board. In September, the Board at it regular meeting authorized the expenditure of previously appropriated funds to OSA for these purposes. The monies, made available in House Bill 1596, 2003 Regular Session, authorized OSA’s reimbursement at actual costs.”
“The OSA will continue to monitor the MBP and other projects approved and funded by the Mississippi Land, Water and Timber Resources Board.”
The above mentioned funding in House Bill 1593, designated $50,000 for the State Auditor’s Office for the purpose of monitoring the Mississippi Beef Processors and other projects approved and funded by the Board.
On February 22, 2005, State Auditor Phil Bryant was questioned by the members of the House Ways and Means Committee. Reportedly, Bryant was questioned about the oversight of the beef plant and what had become of the $50,000 they had authorized for his agency to use to pay for that purpose. Reportedly, his answer was that $40,000 of the money had not been used.
Now, you know the rest of the story.
When this writer wrote the article, “Economic Development Incentives – Do they Work?, and posed the question, “why did the State Auditor wait this late in making his recommendations to the lieutenant Governor and the Speaker of the House, the writer did not know “The rest of the story.”
Apparently, the Clarion Ledger did not know, “the rest of the story” either when the above mentioned Clarion Ledger article dated January 7, 2005, was written, which noted that Phil Bryant had sent his letters to the lieutenant governor and to the speaker of House making his recommendations that would prevent any more fiasco’s such as the Mississippi Beef Processors economic development project.
Apparently the Sun Herald did not know the rest of the story either when it wrote the editorial that was laudatory of Bryant and his recommendations to safeguard taxpayers money in the future. The Sun Herald editorial ended the editorial by saying, “Obviously, much more light needs to shine on the process of handing out taxpayers’ money.” Yeah, Sun Herald you are right. The “rest of the story” is that was Phil Bryant’s job all along, and he failed to do it.
It is readily apparent that not only did Phil Bryant fail, but all of the other government entities, which were charged with oversight, failed as well. This article shows the pure folly of putting public funds into economic development. The controls put over such public investments are only as good as the people and institutions who oversee them and those people and institutions have failed miserably.
In the GCN article titled, “Economic Development Incentives-Do They Work?” The article quotes Arthur E. Fowlkes, an economist who says in regard to economic development incentives, “The most glaring flaw in these programs is that they increase a behavior known to economists as 'rent seeking,' a euphemism for business efforts to secure government favors.Businesses pay lobbyists, lawyers and consultants large sums of money to help them obtain economic-development funds. Unfortunately, this makes less money available for higher priorities, such as capital investment."
In addition, this causes a strong imbalance of power in the political process, in favor of such businesses over ordinary citizens. This imbalance of power is, in effect, paid for with the public’s very own funds.
(See the full article titled, “Economic Development Incentives-Do They Work?” and see how the legislature and the people of Mississippi were deceived in the grand-daddy of all deceptions in regard to the Northrop Grumman bonds. Also see the “Mississippi’s Open Wounds” article to see why the state’s weak institutions have lead Mississippi to the bottom.)