Spending from the state fund tapped by governors to lure business to Old Dominion has hit a two-year high under Virginia’s dealmaker-in-chief, Gov. Terry McAuliffe.
But a deal gone bad is drawing lawmakers’ scrutiny to the agency that administers the discretionary development money drafted by McAuliffe and a half-dozen governors before him.
Virginia and its Governor’s Opportunity Fund bet $1.4 million on a failed business deal near…
More than $36 million has been spent from the Commonwealth’s Opportunity Fund since McAuliffe took office Jan. 11, 2014. That’s roughly one-third higher than the previous two-year spike of $27.1 million in fiscal years 2011 and 2012 under Gov. Bob McDonnell.
One of the McAuliffe grants went to a Chinese-owned business venture in Appomattox that received $1.4 million from the fund but produced no jobs or investment. An investigation by The Roanoke Times published Jan. 17 found that state officials tasked with vetting the deal relied on false information posted to a company website that listed a physical address where the business never had been located.
The governor and others are quick to point to the opportunity fund’s successes. In the cases of more than 500 grants paid since the fund’s inception in 1992, companies have delivered on their promises to create jobs and invest capital.
Opportunity fund money, usually paid up front before the project occurs, has gone to roughly 100 other projects, about 15 percent of the total, that did not hire as many workers or invest as much capital as pledged, or produced no results, Virginia Economic Development Partnership records showed. In those instances, the state sought repayment of the grant money.
The latest venture to falter was the one in Appomattox. The disclosures in The Roanoke Times about the partnership’s failures in vetting the deal triggered dismay last week during the General Assembly session under way in Richmond.
Del. Chris Jones, R-Suffolk, said the deal confirmed the need for a previously planned audit of the partnership, the state agency that advises the secretary of commerce and trade and governor on where to invest opportunity fund dollars.
The planned study is expected to also focus on the state’s economic development incentives programs and the wide discretion given to Virginia’s governors to manage the opportunity fund, which is replenished annually. The current appropriation is nearly $21 million, up from $10 million in 1995.
Under the program formerly known as the Governor’s Opportunity Fund, the state’s chief executive approves grants with the money first going to a local government agency to pass on to a company planning to locate or expand in a Virginia community.
The grant’s purpose is to induce economic growth by defraying corporate expenses related to infrastructure and worker training. Local governments, which must match the grant, often tie their contributions to the companies meeting jobs and investment objectives.
McAuliffe, who pledged to make economic development a cornerstone of his administration, has announced more than 60 opportunity fund grants two years into his four-year term.
He has said he sees expanding private industry as an antidote to shrinking federal spending in Virginia. The McAuliffe administration has given preliminary, nonbinding approval for an additional 38 opportunity fund grants totaling $50 million, according to partnership records.
That exceeds the $22 million now available in the fund. The state can commit more than the fund actually holds because about 40 percent of preapproved grants do not result in a payment, officials said.
Five of the preapproved grants are for $5 million and earmarked for potential business deals with companies in the health care, energy, automotive, services and manufacturing sectors, according to partnership records.
Lindenburg Industry, which announced plans in November 2014 to hire 349 workers and invest $113 million in an idled Appomattox furniture plant, is, so far, the only recipient of a grant paid during McAuliffe’s term to not perform.
There is a lag of up to several years between the issuance of grants and the state’s accountability process, meaning that sometimes deals don’t turn sour until after a governor leaves office. The state originally gave Lindenburg until 2018 to achieve its targets. After 13 months, state officials determined the project was unlikely to go forward and directed the company to repay the $1.4 million by March 7.
Neither the town nor the county in Appomattox gave Lindenburg money. The localities had conditioned their support of Lindenburg on the company meeting its hiring and investment targets. Had Lindenburg performed as expected, the company was in line to receive total incentives worth $12 million.
All told, $227 million in grant money has been issued from the opportunity fund. Officials have recovered $20.8 million from 76 grant recipients who did not perform as expected. Of those, 26 repaid their grants in full after producing little or no jobs and investment. Fifty made a partial repayment after they produced some jobs and investment but fell short of their targets, according to partnership records.
The recipient companies have generated more than 120,000 jobs and invested more than $20 billion, according to the partnership, whose data covers only state-funded incentives.
When companies that receive opportunity fund money perform as pledged, the grants can be offset by new taxes in later years. The partnership said $12.57 in new state tax revenue is generated for every dollar spent on the agency’s budget and the incentives programs it manages.
Virginia for years has made a point of trying to recover opportunity fund money when companies miss their targets. By policy, the state treats the failure to meet jobs and investment targets as a broken contract and requires repayment of opportunity fund money.
The process isn’t foolproof. Since it began giving out opportunity fund grants, Virginia has been unable to recover $5.8 million from 25 companies involved in failed ventures, according to the partnership. Bankruptcy is among the reasons companies did not fulfill repayment demands, the partnership said.
Steven Chu, a Lindenburg official, said by email that the company asked for more time to repay. Virginia officials have said the March 7 deadline is firm.
The Roanoke Times investigation found that staff at the partnership did not properly vet Lindenburg before recommending the company receive an opportunity fund grant.
When told by a reporter that Virginia relied on false website information, Secretary of Commerce and Trade Maurice Jones said the partnership would reduce its reliance on outside information, such as corporate site consultants, and the agency would do more independent vetting. That will include the requirement that private foreign companies submit audited financial statements for state review, Jones said.
The commerce secretary told lawmakers this past week that his review of the Lindenburg deal found evidence of “human error” in the partnership’s preparation of the offer and incentives contract. In addition, he said, the deal would be reviewed for possible “fraud.”
The General Assembly is considering a bill to ask the Joint Legislative Audit and Review Commission to audit the partnership. Such a review could be completed between October and December.
The McAuliffe administration has proposed keeping the opportunity fund budget level at $20.75 million a year but raising the partnership’s budget by 43 percent to $27.6 million during the upcoming two fiscal years.
Administration officials said this would fund more efforts to attract businesses from overseas, support growth in international trade among businesses and expand Virginia’s ability to compete with other states for new business locations and expansions.
The Lindenburg project shouldn’t be “something that clouds the investment that we still need to make in economic development to keep the state moving forward,” Jones said.
Del. Scott Garrett, R-Lynchburg, said lawmakers will consider the budget request carefully. Even without the questions the Lindenburg project raised, the proposed increase for the partnership will trigger scrutiny because of its size and the fact that it is part of an 11 percent overall state spending hike sought by McAuliffe at a time when revenue is “fairly flat,” Garrett said.
The McAuliffe administration must present the proposed budget increase to the House Appropriations Committee, which is chaired by Chris Jones. House Speaker Bill Howell, R-Stafford County, shares the concerns of the committee chairman regarding the Lindenburg deal, said Howell spokesman Matthew Moran.
Howell believes “we need to carefully review not just this individual deal but the entire process,” Moran said.
The General Assembly session runs until mid-March.