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Auditors fault DECD for mishandling of grants during Malloy era

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The Connecticut Department of Community and Economic Development did not comply with state law when awarding millions of dollars’ worth of financial assistance to companies during the Dannel Malloy administration, according to a report by state auditors.

The report by the bipartisan Auditors of Public Accounts said two companies received $16 million and $20 million, respectively, when they were each eligible for just $10 million.

The DECD also changed some assistance agreements with reduced job creation and granted $67 million in loan forgiveness to corporate recipients during 2015 and 2016, the report states.

During that period, the DECD – then overseen by Commissioner Catherine Smith – distributed $112 million in grants and $324.5 million in loans to 576 companies in a number of programs designed to encourage relocation to, or expansion in, Connecticut by small businesses and major corporations.

The plan was a central component of Malloy’s “First Five” initiative, designed to provide significant financial incentives to companies creating at least 200 full-time jobs in the state over a two-to-five-year period.

But the new report states that job creation goal was not always met and that the DECD altered the assistance agreements for two unnamed companies to change their initial job creation requirements.

“These changes resulted in the companies receiving loan forgiveness that they would not have been entitled to under the original assistance agreements,” the auditors said. “DECD did not conduct an updated economic impact analysis to determine whether it was in the best interests of the state or the host community to revise such job goals.”

As an example, the report cited one company whose agreement called for it to maintain an average of 2,000 full-time employees between 2012 and 2016, by which time the DECD would forgive that company’s entire $20 million loan. But in June 2015, the department signed an amendment allowing for loan forgiveness in phases rather than at the end of the loan, and extended the employment obligation to 2021.

It also allowed for partial loan forgiveness even if the company reduced its workforce to 1,000 employees. By Dec. 31, 2018, the company reported 1,264 employees, or 1,326 less than six years earlier, according to the auditors. Under the original agreement, the company would have been assessed with a $1.5 million penalty, but with the amended agreement, DECD forgave $11.4 million of the company’s loan.

In another incident, the auditors said that the DECD awarded $16 million in assistance to another unidentified company during Malloy’s “First Five Plus” program, an extension of the original initiative, to create 200 jobs in five years. While that firm should have been required to invest at least $25 million, it was allowed to invest just $9.1 million, according to the report.

In a response included in the audit, DECD maintains that it acted within the law to amend a financial assistance agreement and that it evaluated the potential impact of losing all jobs due to a relocation of the company. It also used an economic model that projected a “significant negative financial impact on the state from the loss of jobs had the financial assistance agreement not been amended,” it said.

The agency further said that it has developed new policies and procedures regarding loan amendments, requiring legal staff to review all amendments.

As opposed to the Malloy approach, Gov. Ned Lamont and DECD Commissioner David Lehman have said they favor rewarding companies after they have created promised jobs, not before.

“Rather than rely on risky up-front grants to lure out-of-state companies, we’re introducing performance-based incentives and rewarding companies that create good-paying jobs here in Connecticut – all at less risk to taxpayers,” Lamont said during his Feb. 6 State of the State address.

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