Money for Nothing
The Texas record on "enterprise funds" is even worse than meets the eye
By Richard Whittaker, Fri., Oct. 31, 2014
Isn't Texas supposed to be the state of "government accountability"? A place where businesses know they compete on a level playing field? Where incentives are plentiful but well-regulated, allocated through a sensible, transparent, and enforceable system of verifiable metrics?
Maybe not so much.
In 2013, Sen. Wendy Davis, D-Fort Worth, authored Senate Bill 1390, a moderate and reasonable request for an audit of the Texas Enterprise Fund. The TEF is a government-run business incentive program; from 2003 to 2013, it distributed $507 million to 115 private and public/private ventures, and in return the firms claim that they have created 48,317 jobs (as of December 31, 2012). Well, that's what they say. Astoundingly, even though TEF regularly received appropriations via the state budget, according to House Appropriations Committee member Rep. Dawnna Dukes, D-Austin, "We have no clue what's going on with it. Both sides of the [party] ticket have demanded to know more, to have more sunlight, to no avail."
In September of this year, the State Auditor's Office issued its report, and called the TEF a "key economic development tool" in attracting employers to Texas. That was the good news. The bad news was that there were "control weaknesses" in the system, and "it was not always possible to determine whether award decisions were supported, or to determine the number of jobs that recipients of awards from the Texas Enterprise Fund have created." In short, the agency was handing out cash, but did not know whether it was getting its money's worth.
It gets worse. The report found that, since 2010, the management has become better and more rigorous. However, there are serious troubles in the basic operational framework: Paperwork for many incentive agreements was flawed, and so questionably enforceable. For example, in 107 agreements requiring the creation of full-time positions, there was no definition of "full-time." There were basic failures of due diligence, errors in cost-benefit analyses, incomplete paperwork, missing documents, and failures to provide sufficient documentation to the lieutenant governor and the House speaker who, along with the governor, are supposed to oversee the fund. Most troublingly, between 2004 and 2005, 11 projects either never actually submitted formal applications, or were not required to create new jobs – or, in some cases, managed to do neither. Those projects, which were among the earliest recipients, accounted for $222 million – almost half of the $506 million handed out by the TEF in its first decade of operation – with no terms and conditions. How could that happen?
The TEF was founded in 2003 under Senate Bill 1771; it was authored by Davis' Fort Worth senate predecessor, Republican Kim Brimer, and co-authored by Sen. Rodney Ellis, D-Houston. The fund's original purpose was to keep semiconductor firm Sematech from taking Texas jobs to its facilities in Albany, N.Y. However, it was expanded to become a general commercial incentive fund, with grant recipients providing an agreed-upon number of jobs in return for state cash. Explaining his role, Ellis said, "I wanted Texas to be able to compete with other states in attracting businesses to relocate or expand here."
Run as a trusteed program out of the governor's office, it is one of a word jumble of acronym-heavy commercial subsidy funds in Texas government. That makes it hard to separate out from the ETF (Emerging Technology Fund), the METF (Major Events Trust Fund), CPRIT (Cancer Prevention & Research Institute of Texas), and TMIIIP (Texas Moving Image Industry Incentive Program).
Every single one of the programs has endured some sort of scandal. In 2009, Republican lawmakers howled over Perry's unilateral decision to shift $120 million from the unemployment insurance fund to the ETF (see "State Budget Budges Forth," April 3, 2009). The METF has been bludgeoned by critics in principal for subsidizing the Circuit of the Americas' application fee to host Formula One, and in practice for failing to require the necessary paperwork (see "Public Notice: Putting the Trust in Event Trust Funds?" Sept. 24). The CPRIT scandal went one step further: Last December, former Chief Commercialization Officer Jerry Cobb was indicted by a Travis County grand jury after he rubber-stamped an $11 million grant application by Dallas-based Peloton Therapeutics that did not go through the required scientific or business review. TMIIIP experienced a reversal, when the Texas Film Commission rejected a grant application from Robert Rodriguez for Machete after a deluge of angry letters from Alex Jones supporters, who claimed it would start a race war (see "Is That a Wrap for Incentives?" Jan. 28, 2011).
In sum, the TEF is only the latest fund to come under a shadow.
Rick Perry's Baby
None of this is news to Texans for Public Justice. In 2010, the watchdog group issued a scathing report on the TEF. Looking through information pulled in under open records requests, TPJ Research Director Andrew Wheat said, "The results consistently over a few years were fairly horrendous." Over a third of the companies were failing to meet their job creation commitments – so the state would simply change the terms of the deal. "The governor's office would frequently amend the contract, and the amendments would be to the benefit of the private companies, and to the detriment of the tax-paying public."
Wheat sees a simple pattern: "The bigger the job claim, the bigger the fraud." Take the mouse genome program at Texas A&M, a joint public/private venture that received $50 million and was reported to have created "thousands of jobs. The reporter dropped by to see this job miracle, and saw seven people in lab coats." Basically, every related biotech job in the state was being attributed to the TEF grant. Similarly, the MD Anderson Cancer Center claimed every new hire after its grant was as a result of the grant. "That's absurd on its face," said Wheat.
Even the original Sematech deal was virtually a bust, with Texas spending $40 million to maintain – not add, just maintain – 400 jobs in Texas. Wheat said, "There are people on the left and people on the right who are skeptical of the notion of government entities handing out taxpayer money to a select elite of private companies. But if you are going to have such a program, then there is a commonsense need to insulate it from the political process."
However, that's exactly the opposite of what happened. With CPRIT and the METF, the beneficiaries were major corporations. With the film production funds, blocking Machete's application placated the lunatic fringe of the Republican base. In the case of the TEF, corporate recipients were major donors to both Perry's campaign and the Republican Governors Association, which also happens to be a major donor to those same campaigns. "A tidy little package there," said Wheat, who easily ascribed culpability. "This was a Governor Perry program from birth," he said. "He administered it from his office, and he used it as a centerpiece of his campaign to be governor of Texas and then president of the United States."
Even if Perry wasn't actively involved in the mismanagement of the TEF, he has undoubtedly worked to ensure that lawmakers could not improve oversight. "We have tried," Rep. Dukes said, adding that there has been "an ongoing conflict" during the last three sessions between the Legislature and the governor's mansion. "There have even been efforts by [House Appropriations Committee Chair Jim Pitts] and the Republicans to zero out the budget. The governor's office came down with threats."
|Entity||Filed Application||Required to create new direct jobs||Total Grants|
|University of Texas System for UT Dallas||no||no||$50 million|
|MD Anderson Cancer Center/UT Texas Health Science Center||no||yes||$25 million|
|Lonestar Education and Research Network||no||no||$9.8 million|
|Texas Energy Center||no||no||$3.6 million|
|Baylor College of Medicine||no||no||$2 million|
|Vought Aircraft (now Triumph Aerostructures)||no||yes||$35 million|
|Citgo Petroleum Corporation||no||yes||$5 million|
|Maxim Integrated Products:||no||yes||$1.5 million|
|The Texas Institute for Genomic Medicine (TIGM)||yes||no||$50 million|
Mend It ... or End It?
Now, at least lawmakers have the numbers to back up their concerns. Ellis praised Davis for initiating the audit, adding that it "is extremely comprehensive and gives the public an excellent overview of where the fund's governance fell far short of what's expected." However, the question now is what will be done with that information in the next session. Ellis is optimistic there will be meaningful reform, not least due to Perry's imminent retirement. Ellis said, "I think there's been some reticence on the right to attack what is a signature piece of legislation for the governor. With him leaving office, folks that might have bitten their tongues in the past probably don't feel they have to anymore."
House Speaker Joe Straus has convened a Select Committee on Economic Development Incentives, with the TEF, ETF, and METF squarely in its sights. Rep. Eddie Rodriguez, D-Austin, is a member of that committee, and said that, so far, it has engaged primarily in "sit-down learning sessions" with the fund administrators, beneficiaries, and critics.
Rodriguez said he is not dogmatically opposed to such incentives, but he worries that the state has never undertaken serious cost-benefit analyses, measuring not just how much money for how many jobs, but the total cost to taxpayers – state and local incentives, lost taxes, and added expenses. The auditors' report, which he called "damning," has certainly added urgency to the questioning. While he agrees with Wheat that the office has improved, he still wants it to adopt best practices, and believes that the political climate next session will be more inclined to enact reforms than under Perry. Among moderates in both parties that want reform, and the hardliners in both parties that want government out of the incentives game, he expects an omnibus reform bill. Ultimately, he would like to see something closer to the performance-based process adopted by the city of Austin. "Year one, you get this amount of money. Year two, you don't, depending how it goes."
Some Democrats may also argue that the GOP is late to the party. In 2011, Davis challenged her Republican colleagues on why they were so determined to protect the TEF when they were slicing billions from public school funding. More recently, she has questioned exactly why Attorney General Greg Abbott failed to investigate whether these failures were signs of incompetence or malfeasance. Moreover, like Perry's, Abbott's donor list includes TEF recipients such as Bank of America. In an October 8 statement, Davis said, "Greg Abbott has taken more than $1.4 million in campaign contributions from the very companies he's supposed to be watching."
Democrats argue that this wasn't a simple failure to do his job. In 2004, responding to a public information request about the fund from the Dallas Morning News, Abbott issued an opinion that the state could withhold applications from the media, as they might contain commercially sensitive information. However, included in that initial DMN request were questions about Vought Aircraft – one of the firms that never submitted a formal application – leaving Abbott in the absurd position of sealing documents that didn't actually exist. Six Texas Congressional members have recently penned a letter to the U.S. Attorney General's office, requesting a full investigation of potential criminal malfeasance at both the TEF and Abbott's office.
Meanwhile, Dukes voiced her own frustration that Abbott's office has spent time on nuisance lawsuits against the body politic, such as prosecuting Planned Parenthood with claims of Medicaid fraud, or defending the state's voter ID law, rather than investigating serious allegations of white collar crime perpetrated against the state. Wheat echoed Dukes' concerns, with an added tone of wry disbelief. He said, "This attorney general has spent an inordinate amount of time bragging about suing the federal government over EPA regulations about greenhouse gases and Obamacare and this and that. Would some of that time have been better spent looking at things in his own backyard?"
So the big question remains: Should legislators try to fix the program, or get out of business incentives altogether? That's where Wheat and many other critics of the TEF diverge. Ellis said that, while there are lawmakers who want to end state incentives, he leans toward simply cleaning up the process. Likewise in the House, the main thrust of Speaker Straus' Select Committee on Economic Development Incentives seems to be to reform rather than dismantle the fund. Similarly, Democratic comptroller hopeful Mike Collier has campaigned that he would be the best candidate to fix a "broken financial compliance system." Even Davis has been too moderate for Wheat – he sees her, like so many of her colleagues, as more likely to aim at amending the state's system of corporate welfare, rather than simply to end it altogether.
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