Senator Frantz Questions Proposal to Loosen Legislative Oversight of Economic Development Assistance [Hartford Business Journal]

March 4, 2013

Article as it appeared in the Hartford Business Journal on March 4, 2013

Relax oversight on tax incentives?

By Greg Bordonaro

State economic development officials are looking for more freedom to offer incentive packages — some as large as $40 million — to Connecticut businesses without legislative approval, raising questions among some lawmakers about the extent of the executive branch’s powers in doling out taxpayer money to private companies.

The issue ultimately raises the question of whether major economic development incentives offered by state government to businesses should be done at the sole discretion of the executive branch or face public scrutiny through the legislature.

The push is being made in the form of two legislative proposals in the Commerce Committee.

One bill, from the Department of Economic and Community Development, would allow DECD to provide up to $40 million in urban and industrial site tax credits to a company without getting legislative approval.

That would double the current $20 million exemption threshold.

DECD is also asking lawmakers to increase the legislative approval exemption threshold on financial assistance provided to businesses through the state’s Manufacturing Assistance Act (MMA) from $10 million to $20 million.

Funds provided through the MMA include grants and forgivable loans that do not have to be repaid to the state.

Meanwhile, Connecticut Innovations, the state’s quasi public investment arm, is pitching legislation that would allow it to make investments of up to $300,000 without getting approval from its 17-member board of directors.

The proposals come at a time when the state’s economic development agencies — under the purview of Gov. Dannel P. Malloy — have increased in a significant way the amount the grants, tax credits and loans being provided to businesses in an effort to stimulate Connecticut’s sluggish economy.

Since taking office in 2011, Malloy has said his administration has provided more than 600 companies some type of government incentive, which is more than double the number of businesses that received funding during the entire tenure of former Gov. M. Jodi Rell.

Some lawmakers are raising concerns about the proposals.

“It is always disconcerting to me to see too much control given to a single person or a single agency when it comes to millions of dollars in economic development assistance,” said Sen. Scott Frantz, a Greenwich Republican who is a ranking member on the Commerce Committee.

DECD Commissioner Catherine Smith said her office is pushing for the changes so the state can remain competitive in luring or keeping larger companies in the state.

She said some businesses — particularly publicly traded firms — that are offered larger economic development packages are skittish about going through a public approval process that could force them to reveal internal information they wouldn’t want made public.

“It is extremely challenging for public companies to make big decisions part of the public debate,” Smith said. “We could lose out on some larger transactions,”

Smith said the DECD proposal was conceived out of the agency’s recent experience in negotiating deals under Malloy’s “First Five” program, which later became “First 15.”

That program, which was originally approved by the state legislature in 2011, allows the state to offer larger incentive packages to companies by combining various tax credit and incentive programs.

So far nine companies have received $185 million in state tax credits, grants and loans, under the program, in exchange for a promise to add hundreds of jobs in Connecticut over the next few years.

But Smith said “First 15” will eventually go away, and DECD needs to retain the ability to put together larger incentive packages without having to go through the legislative approval process.

The issue over public disclosure of financial information from firms that receive aid from the state has been controversial in the past.

For years, the Connecticut Development Authority, which was recently merged into Connecticut Innovations, or CI, was criticized for not following a law that required the agency to disclose certain financial data from companies to which it lends money. CDA defended its actions by arguing the release of such information would put companies they are investing in at a competitive disadvantage and make them skittish about taking the money.

That is part of the argument Smith is making in trying to raise the legislative oversight threshold for certain economic development programs.

Smith also said DECD’s proposal is reasonable because it largely updates laws that were written 10 to 20 years ago and didn’t take inflation into account.

The urban and industrial site tax credits, for example, were established in 2000, and since that time projects have increased dramatically in size and scope, Smith said.

If that tax credit program was increased by a rate of inflation, Smith said, the trigger for the exemption would be $26.7 million.

“The limits currently set only constrain the agency’s ability to negotiate agreements in a timely and effective manner,” Smith said.

Claire Leonardi, the CEO of Connecticut Innovations, said her agency’s proposal to allow CI to do deals of $300,000 or less without board approval is a result of the much larger deal flow recently.

As part of the 2011 Jobs Bill, CI got a $125 million cash injection from the state, which has doubled the quasi-public agency’s annual deal flow.

Leonardi said the average loan or equity investment made by CI is between $500,000 and $1 million, and the CI board would rather focus on scrutinizing larger deals then every single small investment that is made.

If the measure in the Commerce Committee passes, Leonardi also said the board would approve a due diligence process that CI staff would need to follow when doing those smaller deals.

“The board will have oversight over the programs,” Leonardi said. “It’s not like the staff will do deals in a vacuum.”

Frantz, the Republican lawmaker, said he is less concerned about CI’s proposal, then he is with the idea of letting DECD do deals up to $40 million for the urban and industrial site tax credits, arguing such wide ranging power could lead to abuse.