State jobs program can’t validate tax credits, comptroller says

By Bill Heltzel

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When Muller Quaker Dairy began building a $200 million yogurt manufacturing plant in Batavia in western New York three years ago, Gov. Andrew Cuomo cited it as an example of the state partnering effectively with the private sector to create jobs.

State support included more than $550,000 in tax credits approved by Empire State Development, the state’s chief economic development agency, from the Excelsior Jobs Program.

But the dairy, a joint venture of PepsiCo Inc. in Purchase and Theo Muller Group in Germany, closed operations in December. Now state Comptroller Thomas DiNapoli says Muller Quaker got at least $247,000 in excess tax credits.

That was one of several findings in the comptroller’s recently released audit of the Excelsior program. What’s more, DiNapoli accused Empire State Development of failing to exercise due diligence in running the program and of impeding auditors who reviewed it.

The agency responded tit for tat. The auditors don’t understand the Excelsior program, Benson V. Martin, Empire State Development director of compliance, commented in the final audit, and all of the comptroller’s findings are “factually incorrect.”

“Auditors willfully chose to ignore key facts,” ESD spokesman Jason Conwall said by email.

The Excelsior program was established in 2010 to spur industrial growth and replaced the state’s similar Empire Zone incentives program for companies. Companies that create an agreed-upon number of new jobs or that make significant capital investments can receive credits to reduce their state taxes.

The program has admitted 434 businesses, including 32 companies in the mid-Hudson region comprising Westchester, Rockland, Putnam, Orange, Dutchess, Sullivan and Ulster counties. Companies have pledged to create 44,445 new jobs, retain 158,000 existing jobs and invest $4.2 billion.

Auditors sampled 25 companies that were authorized to receive $4.8 million in credits, including biotech firms Anellotech Inc. in Pearl River and ContraFect Corp. in Yonkers.

The audit concludes that Empire did not exercise due diligence in approving any of the 25 companies. It did not follow its own protocols. It couldn’t verify that companies had met all eligibility requirements. It didn’t support calculations for $4.6 million in credits.

The audit does not accuse the companies of wrongdoing or say that they didn’t earn credits. Rather, it says that Empire had insufficient documentation on which to select companies for the program and to accurately calculate credits.

According to the Empire State Development spokesman, “Auditors did not find a single instance where incentives were improperly provided.”

In fact, the audit does cite instances where companies may have received too much.

For example, when three companies failed to hit their job creation targets, Empire Statre Development retroactively lowered their targets. That enabled the companies to receive credits worth $358,329 that they were not entitled to under their original deals.

Muller Quaker was one of those companies.

The dairy committed to creating 186 full-time jobs in 2013. It had to achieve at least 75 percent of its benchmark, 140 jobs, to claim even a portion of the authorized credit. Muller Quaker fell short, at 127 jobs.

Unforeseen circumstances, such as construction delays, could justify changes, the audit says. But auditors could find no request on file from Muller Quaker asking for a revision. Instead, Empire officials retroactively changed the job target to 127 and authorized a full credit of $247,082.

Empire responded that no law or regulation prevents it from retroactively changing job targets. The state auditors agreed, but added that to unilaterally reduce the target without documentation to justify the change “circumvents the intent of the law.”

ESD officials said the revision didn’t matter because the five-year job target remained the same and taxpayers incurred no financial risk.

But the audit says a company must fulfill at least 75 percent of its annual commitment to receive credit in any year. Muller Quaker failed to do so in 2013, and the company didn’t last five years.

“The public funded tax credits of more than $550,000 for a business that no longer employs any New Yorkers,” the audit says.

PepsiCo did not respond with a comment on the report.

Dairy Farmers of America, a milk cooperative based in Missouri, bought the Batavia facility and plans to reopen it soon, a Genesee County Economic Development Center official said.

Another case cited by the comptroller concerns Xerox Commercial Solutions LLC in Webster, near Rochester, which may have received an extra $360,000. Empire State Development calculated credits with different numbers than those submitted by the company, according to the audit, and did not have enough information to identify who could be counted as new employees.

Empire State Development responded that the agency discovered a mistake in Xerox’s information and corrected it with state employment and tax records.

Xerox did not respond to a request for comment.

The audit also says the state agency typically relied on self-reported information from businesses and did not corroborate the details. For example, the agency did not check whether jobs classified as new had actually been shifted from existing positions at affiliated companies.

The report has strong words about the agency’s conduct. Many of its responses are inaccurate, it claims, and in some cases include false statements. The agency repeatedly delayed the process, withheld information, limited access to staff and avoided addressing specific audit recommendations.

ESD administrators demonstrated “an intentional lack of transparency and accountability,” the comptroller says in the report.

ESD officials in response said the agency could use a more formulaic approach to running the program to insulate itself from charges by the comptroller. Instead, it uses discretion and sound decision-making and it makes better deals.

Empire State Development has 90 days to report to the governor, comptroller and state legislature on the steps it is taking as a result of the audit issued July 7.

The comptroller has no enforcement power but could review the Excelsior Jobs program in a year, said spokesman Mark Johnson in the comptroller’s office.

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About the author

Bill Heltzel
Bill Heltzel has covered criminal justice, courts, government and sports – as a beat reporter and investigative reporter – for daily newspapers in Florida, Indiana, Ohio, and Pennsylvania. He worked for Bloomberg LP in training and sales. He joined The Business Journal in 2016.

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