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On October 15, the House Select Committee on Economic Development Incentives met to discuss financial tools, the permitting process, and key tax incentives.  They also addressed the needs for small businesses.
 
Josh Goodman, The Pew Charitable Trusts

  • Pew focuses on research that helps states evaluate their incentive programs
  • Since the start of 2012, nine states have approved legislation requiring annual reviews of their incentive programs
  • Three things to ensure a review program is successful:
    • States first need an evaluation plan; states generally give the responsibility to legislative fiscal staff or legislative audit staff
    • A schedule is necessary; most states use cycle schedules so that all incentives are not studied at once
    • States need to determine the factors that incentives will be evaluated against ; costs, benefits and consequences
      • High quality evaluations do not stop with a simple yes or no verdict; they focus on ways to make improvements to get the best possible results
      • Need to ask if an incentive is a cost appropriate option over other strategies such as broad based tax cuts
  • Rep. Drew Springer asked about a state changing their focus to smaller companies to have a greater impact
    • Instead of focusing on larger corporations they began focusing on more specific smaller industries such as firearm manufacturers

 
Audrey O’Neal, State Auditor’s Office

  • Recently conducted an audit of the Texas Enterprise Fund from 2003-2013
  • The office clawed back over $14 million of rewards when it was determined agreements weren’t followed
  • The absence of an adequate control structure impaired the office; control weaknesses
  • The office did not maintain key documentation, did not adopt rules in the Texas Administrative Code, did not incorporate an objective scoring tool, did not consistently provide decision makers with complete and accurate information related to potential awards
  • Also identified weaknesses in award agreements; could not provide documentation that amendments in agreements were complied with
  • Fifteen award agreements that were tested included a provision that allowed all funds to be disbursed before all aspects of the agreement were complied with
  • Identified weaknesses in the office’s monitoring processes; affected the office’s ability to impose clawback penalties
  • Office made errors in termination repayments; collected around $4 million less than they should have
  • Did not report the amount of capital investments that recipients were supposed to create
  • Recommends other reporting requirements be put in place to ensure correction of the issues that were identified
  • Rep. Jason Villalba asked about the process of the audit; is the audit different for a program that is designed as a deal closing fund and very flexible over a program where subsidies are determined through a formula
    • Yes; procedures for the TEF audit were first to gain a thorough understanding of the process then to gear the procedures to that process
  • Villalba asked if the audit was comparable to the TEF program
  • Yes
  • The disbursements were in compliance with the statute that provides criteria for those disbursements; the awarding process is not really laid out in statute
  • For those eleven award agreements they did not follow the formal application process; not saying they did not submit any papers
  • Three awards were made to recipients that did not submit any type of written requests or submit applications
  • Villalba asked if the problems were basically with administrative protocols; reporting issues not quality issues
  • Villalba noted media reports that showed rewards were given without the needed applications
  • Texas Government Code and the Office of the Governor
  • Villalba asked if any company received funds without submitting a written form requesting funds that included information that would be submitted on an application
  • Villalba noted there was a rider in the budget regarding one of the disbursements; is there an amendment process where the auditor can go back and tell the world this was already considered by the legislature; the report was misleading
  • There aren’t any outstanding clawbacks, only termination funds that should have been collected
  • If company did not meet job requirement they should have paid a clawback
  • Not recommending flexibility be taken away from the office just recommending that more adequate controls be put in place
  • There is one more report in the works for the Chapter 313 program; the Emerging Technology Fund recently had an audit report put out in 2011
  • Villalba noted it may have been good in the audit to note that many of the entities requesting funds may not have submitted a formal application but did submit some type of request that may not have been considered a formal or complete application; also that some of the entities requesting funds may have done so before a formal process was put in place
  • Rep. Poncho Nevarez asked where the criteria of the audit came from
  • Nevarez made the point that the audit was not done with a political end in mind; it was done based on parameters established by the Governor’s Office  and the Government Code and issues were revealed within the process
  • Rep. Trent Ashby noted he feels confident that the report will be seriously considered by the committee
  • Springer asked about clawbacks that have not been recaptured that should have been
  • Chairman Angie Chen Button asked about adequate controls being put in place
  • Button asked if any audits have been scheduled for other incentives

 
Jonathan Taylor, Office of the Governor, Economic Development and Tourism

  • The SAO did a very thorough review and it was a very difficult task
  • The report makes it clear that the governor’s office disbursed funds in accordance with the law
  • The report also made it clear that every entity that received incentive funds had a contract
  • An audit is a document of absolutes; the audit determined there were inconsistencies but those were spread over an 11 year time frame; very careful wording was used to ensure nothing in the report was actually wrong but some of it may have been misleading
  • Ashby asked about the oversight role of the Speaker and Lt. Governor; the audit noted they were not involved in approving amendments to agreements
    • The legislation requires notification not approval
  • Ashby asked why that wouldn’t be a best practice
  • They often get involved in negotiations; speed is also a key issue in most of these contracts; it is difficult enough with two approvals and if that number was bumped up to four it would be near impossible to get things done timely enough
  • Button noted she thinks some additional criteria and requirements probably should be put in place and she doesn’t think that would prevent flexibility within the program
  • The Office can handle all of the recommendations made by the auditor except for a few; posting of scoring criteria would be a problem
  • Villalba noted that posting an objective scoring guide would make the program far less flexible
  • Button noted the committee does not intend to micromanage every program; considering the audit report results, the intent is to reform and safeguard the program to ensure its success
  • Nevarez noted the problem lies within the fact that the program is resisting change to keep its flexibility; that could be the death of the fund because flexibility and transparency do not always go hand in hand
  • The Office posts a lot of information online for the public to view
  • Consistency for consistency’s sake is a waste of taxpayer money
  • Nevarez noted things fall in the cracks when a level of flexibility is reached and there is nobody to answer to anymore
  • Fearful that an objective scoring tool is created and is the only thing an applicant is judged by, and put online, then a company can come in and say they meet the requirements but they are not approved, then having to justify that decision
  • Nevarez noted that flexibility for the sake of flexibility is malfeasance
  • Rep. Rene Oliveira asked what the witness would be fearful of as far as additional requirements of the program
  • Oliveira noted that is done in government grants all the time
  • In many states a company can come looking for funding and know how much they will receive in incentives based on a formula; in Texas there is an additional piece in that the Governor’s office and the Speaker and the Lt. Governor also have to agree; using just a straight formula program would cost Texas far more money per job
  • Oliveira noted a comprehensive scoring tool would only end with a recommendation for funding it does not mean that they would have to be funded; does not understand where the loss of flexibility would come from
  • Rodriguez noted that consistency in the review does not result in a particular outcome
  • Villalba asked what makes the program work well

 
Robert Wood, Director of Economic Development and Analysis, Office of the Comptroller

  • Came to discuss the San Antonio news article that said the F1 track made a verbal application for Major Events Trust Fund incentives
  • There are multiple references to an application within the METF statute; the application referenced is the actual application that is made to a site selection committee for an event
  • Those applications might include an exchange of proprietary business information that those entities may not want subjected to the open records laws
  • Oliveira noted the city is the one making the application so there shouldn’t be any proprietary information
    • It was only speculation that there may be proprietary information; could be wrong
  • The information that the legislature and the public may be more interested in is the documents showing what the cities are providing, what the state is providing and what the event brings to the area
  • The state has to break even in no more than twenty-five years under the new statute
  • Under Ch. 313 Springer asked how are wind farms able to pay back the amount; at some point do we switch over to a revenue system
  • Different projects should be valued based on generated revenue over time
  • For each event an account is set up but not set aside account for METF

 
Dale Craymer, Texas Taxpayers and Research Association

  • Overall Texas is low tax state for individuals but – business pay about 2/3 of property tax and 45% of sales taxes – Texas is not low tax state for businesses
  • Would like to see Texas to get to consistent set of evaluation in all factors
  • Establish a uniform definition of an economic incentive considering Texas’ definition has been misinterpreted and hurt us in the past – should be rephrased to reflect lowering the cost for services to incentivize companies to operate in Texas; companies still write us a check
  • When someone applies for a grant, association does an analysis to recognize the ROI – economic evaluation restrictions are necessary to keep Texas profitable
  • Economic (does it bring jobs), fiscal (how much taxes/money coming back into the state) and intangible factors (another benefit not solely based on economic payback) all benefit economic development
    • Formula One does not pay for itself in terms of taxes pays and what local government spends, but this event has intangible benefits bringing Europeans to Texas – should not always focus on being paid back
    • Tesla would have brought 6,500 jobs that could have incentivized growth in the economy
    • Evaluating programs is as much an art as it is a science
  • Average Texan employer pays $6,100 in state and local taxes for every employee – any company that will pay more than that rate is considered a winner – one criteria to look out
  • Spend so much time looking at value of incentive but benefit of that investment should be focus
  • Louisiana Department of Economic Development provides eligibility lists for companies based on qualification requirements
  • So could be as simple as a webpage but also said there is great value to bring all these things under one roof
  • By consolidating if not programs then just applications, could reduce duplicative information requests with multiple forms
  • Yes, there are skilled consultants in the area – there needs to be more economic standards to apply to the review and analysis of companies seeking funding
  • 313 should be scored based on how much revenue the state received and the total costs spent
  • Ashby asked what Craymer was envisioning about providing a single-point of contact to assistant applicants  
  • Oliveira asked if there are private companies assisting other companies and then taking a percentage of the amount of grants acquired
  • Button asked for economic objective analysis to include consideration of the type of business and length of economic impact 

 
Bryan Daniel, Texas Department of Agriculture

  • Texas Capital Development Fund earmarks portion of funds for rural communities to build new or expand old small business facilities  ($19 million)
  • Jobs for Texas developed in 2010 to make direct investments in small businesses ($46.5 million)
    • Funds must be combined with privately invested funds in a 10:1 ratio – $10 private funds for every $1 TDA and SSBI funding
    • $4.8 million returned to the state through interest and acquisitions
  • Money invested and returned to the fund by 2017 will be used for similar economic development purposes
  • Community banks rely on Loan Guarantee Fund to extend their line of credit into agricultural business
  • Committee member asked if Jobs for Texas equity is set by the outside market
  • Each individual investment determines what the return will be – between investment firm and company

 
Terry Zrubek, Texas Economic Development Bank

  • Gave overview of top three programs
    • Enterprise Zone Program – 105 designations per biennium
    • Texas Leverage Fund –  awards up to $5 million in loans
    • Product Development and Small Business Incubator Fund
  • Oliveira asked for the default-rate – there should be very little risk based on collateral
  • Oliveira asked for more details on the programs such as the default rates and which ones Sunset
  • Information needed by November 10
  • Button asked for written report on the programs to be submitted to the committee

 
Robert Martinez, Texas Commission on Environmental Quality 
·        Provided overview of TCEQ environmental permitting process
·        In regards to expedited permitting (SB 1756 – 83rd) TCEQ on agenda for final approval of the rules during the Oct. 22 meeting and if approved will have an effective date of Nov. 13
o   Still working on what surcharge would be assessed  
·        Members inquire about other states moving faster on permitting process because they do not have contested case hearing process and asked about our application prices vs other states
o   SB 1756 does allow state to move faster – time frame will be quicker but not sure if Texas will be on par with Louisiana in regards to time frame
o   Will have to get to committee on price comparison question
o   Committee wants further details on how state compares to time frame in Louisiana for permitting
§  Information is needed by November 10
o   Witness does point out that contested cases going over to SOAH is not a large subset which would extend the process by about 1 year – 1 ½ years
 
Annie Spilman, National Federation of Independent Business

  • Incentives for small businesses are not as effective as reducing regulation through lower taxes and less unfunded mandates
  • Large business incentives hurt small businesses from competing in the market – small businesses need to be protected through the enterprise fund
  • Button agreed local government involvement in small business is important

 
Desi Martinez, Martinez and Associates

  • Texas Department of Agriculture needs to be included in the 2020 funding plan – majority of funds come from the federal government instead of the state
  • State government needs to target the border areas – there needs to be greater emphasis on small business in these areas to afford the costs for security
  • Texas needs to improve its technological advances in rural areas instead of solely relying on oil and gas exports

 
Public Testimony
 
Ed Heimlich, Self

  • Small businesses need to be governed by the rule of law in Texas before economic development incentives truly matter

 
Sondra Maxwell, Self

  • More incentives need to be put toward renewable energy

 
Jim Yohe, Economic Development for Nocona Texas

  • Economic development funding should begin in the school system to motivate students to create their own businesses

 
Next meeting will be November 10 to discuss findings and recommendations – open to the public.