For Delaware, $200M in corporate giveaways, little transparency

When Delaware gives millions to companies like JPMorgan Chase, Incyte Corp. or Discover Bank for jobs, the announcement is treated as reason for celebration.

But try tracking whether high-dollar economic incentives actually improve the state's economy.

Delaware doesn't make it easy, a News Journal review shows.

Since mid-2009, Gov. Jack Markell's administration has committed $213 million to companies for jobs-related grants and loans through the Delaware Economic Development Office's Strategic Fund.

Award recipients must report job creation to the state. But virtually no reports are available online, earning Delaware a dead-last rating from a group studying economic development transparency.

State lawmakers, who appropriate millions each June for corporate grants and loans, receive little more than quarterly summaries of incentives that include jobs promised by companies, but not delivered.

And Delaware does not require regular, independent evaluations of economic development programs to determine the state's return-on-investment.

Now, lawmakers are formally reviewing the performance of the Delaware Economic Development Office under the authority of the Legislature's Joint Sunset committee.

A public hearing is scheduled for Thursday in Dover.

Among concerns raised by lawmakers is whether, in its quest to strengthen Delaware's economy, the economic development office should do more to test how its investments are working and whether its incentives deliver a strong return on taxpayer dollars.

"I have questions about how effective they've been, and I believe there needs to be more community awareness and involvement in the process," said Sen. Bryan Townsend, a Newark Democrat.

"I very much want to see information that justifies continuing the program."

Sixty-four percent of grant and loan commitments during Markell's tenure, or $136.7 million, went to 10 companies representing just 5 percent of total award recipients, according to a News Journal analysis of Delaware economic development grants and loans.

The analysis did not include tax credits or abatements, but focused on grants and loans disbursed through DEDO's Strategic Fund, Markell's primary economic development tool.

Among the 10 biggest winners are familiar names: the Delaware City Refinery ($42 million), Fisker Automotive ($21.5 million), JPMorgan Chase ($11.6 million), Discover Bank ($7.3 million), Sallie Mae ($8.8 million), and Ashland Inc. ($10 million).

In an interview, Markell said the pace of job creation and falling unemployment demonstrate that his economic development strategy is working. Markell noted that Delaware's rate of job growth outpaced all other states in the region during the past year. The research firm Gallup recently recognized Delaware for its quickening pace of job growth.

Markell says firms like DuPont, Ashland and JPMorgan Chase, the largest U.S. bank, have options on where to grow, and Delaware must offer incentives to remain competitive.

"I would be very happy if Delaware and other states, instead of competing on the basis of incentives, competed on business climate, responsible government, workforce development and the like," Markell said. "But that's not the world we live in."

"We're never going got have the biggest checkbook," Markell said. "Other states spend a whole lot more on incentives than we do."

The governor called grants and tax breaks "necessary but insufficient," saying the state must also continue to invest in education, job training, environmental protection and infrastructure.

Fisker is a notable stain on Markell's economic development record.

Delaware taxpayers spent $20 million on the electric carmaker, but Fisker filed for bankruptcy protection in November 2013 after losing federal financing. The company never created 2,500 production jobs it pledged to fill at a former General Motors facility near Newport.

Other projects have raised questions about the program's effectiveness in driving job creation.

In September 2012, Delaware offered specialty chemical maker Ashland Inc. up to $10 million in subsidies in return for the company's pledge to maintain at least 501 workers in Delaware through June 2017.

But in August, Ashland sold its Delaware-based water technologies unit and restructured its remaining businesses. The Kentucky-based company said it would cut up to 1,000 jobs worldwide in 2014 as part of the restructuring and has been slow to his its job-creation mark.

Last October, DEDO agreed to extend the deadline from Jan. 31 to May 1 for Ashland to meets its benchmarks, said Bernice Whaley, deputy director of Delaware's economic development office. Ashland's award remains in escrow.

Since Fisker's fallout, DEDO leaders say they've stopped giving companies cash up front. The practice now is to generally set incremental benchmarks for job creation or relocation before writing a check.

Companies can still claim they're having difficulty creating the jobs or raising capital and ask for more time to fulfill the requirements.

Bloom Energy, recipient of a $16.5 million state grant in 2012, had not met salary benchmarks at its Newark fuel-cell factory as of the end of September, but wasn't penalized by the state.

Bloom was supposed to spend $12 million on salaries at the plant over a 12-month period. According to Bloom's filing, compensation paid to workers at the factory from Oct. 1, 2013 to Sept. 30 2014 was $9.55 million.

DEDO said that Bloom has technically missed its target on salaries, but has until 2017 to cure any shortfall before there are financial penalties.

In February 2011, Markell and DuPont Co. officials celebrated a five-year plan to expand biotech soybean research in Newark. The company's plans were aided by a $1.5 million state grant. But DuPont never touched the grant.

State officials now say that money remains in escrow awaiting a disbursement request by an April 2016 deadline.

Last March, the operators of World Cafe Live at The Queen approached state officials to request a modification of the terms under which they'd received $500,000 in grants and loans in 2011.

The state permitted the theater to count as full-time employees those clocking only 20 hours a week to avoid triggering a "clawback" provision allowing the state to recoup its investment.

DEDO also approved a two-year forbearance on principal payments on The Queen's then-$236,000 loan balance, according to meeting minutes.

Since St. Francis Hospital in Wilmington took out a $4 million no-interest loan from the state in 2007 to help make payroll, DEDO has twice agreed to defer payments – first to December 2013 and then to December 2015.

Audit findings

DEDO's balance sheets have also been the subject of some criticism.

Independent reports covering fiscal years 2011 and 2012 show inadequate controls over internal accounts, including no managerial oversight of financial information or reporting.

Auditors also identified five properties that had been deeded to the agency, but which had not been previously disclosed or valued as assets.

The most recent audit of 2013 statewide spending found that DEDO had miscalculated and understated the reserve set aside to cover loan defaults and delinquent accounts by $12.3 million. The error was corrected, state officials say.

Bernice Whaley, deputy director of DEDO, said the agency properly tracks grants and loans.

Economic development staff evaluates each project upfront for its anticipated affect on the economy and personal income tax collections and job creation. That information is presented publicly to the Council on Development Finance, an advisory panel, for approval, Whaley said.

Economic development officials provide updates to the council on Strategic Fund performance and report annually to the entire General Assembly.

Whaley said the advisory council "exists to do formal comprehensive evaluations and approvals of every DEDO Strategic Fund transaction."

Alan Levin, director of DEDO since 2009 and a member of Markell's cabinet, said he stands by his office's efforts to encourage businesses to hire, locate and expand in the First State.

Grants and loans doled out by the state's Strategic Fund are part of the reason why the jobless rate has fallen from a high of 8.4 percent at its peak in 2010 to 5.4 percent in December, Levin said.

"The results speak for themselves," he said.

Good Jobs First, a Washington watchdog group, said in January 2014 that Delaware and three other states "still keep taxpayers completely in the dark" about economic development incentives.

Citizens and the press must submit a formal records request to obtain grant applications and to learn which companies followed through on its promised employment levels. DEDO requires a records request for any document not posted on its website.

A questionnaire by the Sunset Committee asked about transparency, to which DEDO officials replied:

"Although DEDO understands the purpose, the push for increased transparency is often a challenge when attracting prospects to the state, due to their privacy and confidentiality concerns."

Advisers to Markell attempted to shield DEDO from review by the Sunset Committee last year, asking for a pass so as not to disrupt "significant and tangible" work on economic-development projects.

"We respectfully request the [Joint Sunset Committee] defer reviewing DEDO at this time to permit the agency to fully pursue these and other opportunities," then-Deputy Chief of Staff James Collins wrote to lawmakers last summer.

Committee members weren't convinced. Their review began in the fall, and a public hearing is set for 6 p.m. Thursday at Legislative Hall.

"This is not a slight – or our committee looking to say the governor has done something he wasn't supposed to do," said Sen. Nicole Poore, co-chair of the Sunset Committee. "This is allowing the agency to live up to its potential and its bylaws."​

The legislative review comes as lawmakers elsewhere have demanded more information about economic development efforts.

Between 2012 and 2014, 10 states and the District of Columbia have instituted new requirements for regular and independent reviews of tax incentives and other subsidies, according to Pew Charitable Trusts.

Few states meaningfully track return on investment for public economic development spending, said Josh Goodman, who studies economic-development programs for Pew.

"They don't really know what's working, what's not," Goodman said. "It's really been difficult for lawmakers to figure out which programs work, which don't, and figure out the best return on investment."

Goodman said the best evaluations of economic development subsidies attempt to determine whether government incentives are causing companies to hire or retain employees. Or are corporate executives making those decisions based on other factors?

There are many reasons that companies locate and stay in Delaware, and it's not the subsidies, said Philip Mattera, research director for the group Good Jobs First, a watchdog group critical of corporate giveaways. Think relatively little regulation, low taxes and corporate secrecy.

"They'd be setting up an office there anyway," Mattera said. "There's a residual fear of being unfriendly to business. A lot of economic-development folks dread that brand, but I think it's kind of obsolete."

Discover Bank was offered $7 million in state grants in 2011 in exchange for not moving 956 jobs out of state for at least 10 years. The state also underwrote $387,000 in capital expenditures for the company in New Castle.

"Keeping jobs in Delaware was always our number one priority," said spokesman Robert Weiss, who noted Discover has added 300 full-time positions.

Last year, the state approved a $1.9 million grant to entice the student-loan servicing firm Navient Corp. to create 167 new jobs in Delaware. After separating from Sallie Mae last May, Navient opened its new headquarters on Wilmington's Riverfront last month.

A company spokeswoman called the state incentives a "significant factor" in Navient's decision to invest in Delaware, but not the only factor.

"We found ideal space in Newark and Wilmington, central to a productive and skilled workforce, the Amtrak train station and other quality of life benefits for our employees," said Nikki Lavoie, a spokeswoman for Navient.

Contact Jonathan Starkey at (302) 983-6756, on Twitter @jwstarkey or at jstarkey@delawareonline.com.