Lawmaker Says ‘Willful Neglect’ Is the Rule at Embattled State Agency

The state's "flagship" economic development program may have doled out an estimated $150 million in tax credits erroneously in the last five years to companies that didn't meet the criteria due to a lack of oversight, according to State Rep. Tom McMillin, R-Rochester Hills.

McMillin met with the state Auditor General's office after it released a report this week that said the state didn't follow up on company job projections that often fell short of required triggers to receive tax credits but still received the money.

The report comes a little more than a month after it was learned that the Michigan Economic Growth Authority board approved a $9.1 million tax credit to Richard Short, a convicted embezzler who was CEO of a company named Renewable and Sustainable Companies LLC. The Flint Journal reported that at the same time he was working on the MEGA deal, Short was scamming thousands of dollars from an 86-year-old neighbor with dementia.

The Auditor General report found several problems with the Michigan Strategic Fund's oversight of the MEGA tax credit program. The audit concluded that the MSF's procedures were "moderately effective."

McMillin said he was considering calling for legislative hearings to get more information and wouldn't rule out getting the companies to return the unearned tax credits.

The Michigan Economic Development Corp. didn't dispute many of the findings and vowed to fix the oversights.

"MEDC has implemented enhanced pre- and post-audit procedures, which include conducting onsite visits and validating individual payroll records, such as W-2s," MEDC spokeswoman Bridget Beckham wrote in an e-mail.

But critics were skeptical.

"The MEDC is failing in administrating the MEGA program," said James Hohman, a fiscal policy analyst with the Mackinac Center for Public Policy.

Hohman said the MEDC failed to verify the jobs claims made by companies and still gave out tax credits that were not justified by the agreements.

"Here's the state's flagship economic development program, the Auditor General is showing clearly the MEDC is not a good administrator, and are likely to have wasted taxpayers money," he noted.

McMillin called the Auditor General report "extremely troublesome."

"There was certainly a level of willful neglect," he said. "They certainly celebrated when people said they created jobs, whether they were actually created or not."

McMillin said he realized some of the errors may not have been on the scale of RASCO, but said he was concerned that there were similar attempts to defraud the state of money.

Beckham stated in an e-mail that the MEDC awarded about 600 MEGA tax credits and never encountered a situation like RASCO.

But McMillin said the Auditor General report shows that the state wasn't even looking for fraud.

"If you don't actually look at the documents, then you are not going to find anything," McMillin said. "When you turn a blind eye, anything can happen. They haven't seen it, but they weren't looking. ... It was the fox guarding the henhouse."

Among the findings in the Auditor General's report:

One company didn't meet the wage requirement to qualify for the tax credit. Instead, the company used its own projections to boost the average wage high enough to qualify and was awarded a tax credit of $185,675. The audit found that this happened with 3 of the 40 tax credit certificates reviewed. The Michigan Strategic Fund didn't dispute the finding in the Auditor General's report. Instead, they said they would amend their policy to allow projections to be used. (McMillin states that a single quarter's worth of higher wages were being extrapolated out as if the wage payments had been maintained for a full year.)

The MSF didn't get the detailed data necessary to validate tax credit certificates given to companies. The audit found 10 of the 15 companies reviewed didn't submit required information.

The MSF didn't always check data provided by companies through a third party or by requesting detailed employee records. The audit found that as many as 26 percent of the employees were potentially ineligible for the tax credits in the 15 audits reviewed. The audit states that the MSF approved $2.6 million in tax credits for potentially ineligible employees. The MSF didn't dispute the finding.

The original version of this story was posted online on April 27, 2010.