JLARC issues scathing report on economic development agency

“In my 22 years, I’ve never seen an agency with this level of dysfunction,” Hal Greer, director of Virginia’s Joint Legislative Audit and Review Commission (JLARC), said Monday in teeing up a scathing report on Virginia’s primary economic development agency.

The 132-page report on the Virginia Economic Development Partnership (VEDP) detailed an agency hobbled by a lack of vision or even a clear marketing plan. It cited unclear performance measures and questionable job data — data often repeated by Gov. Terry McAuliffe in public statements about business growth in Virginia. And JLARC warned that VEDP’s  “unstructured and inconsistent approach to state incentive grants leaves the state vulnerable to fraud …”  

Overall, the report depicts VEDP as lacking in “fundamental components of organizational management needed to operate efficiently and effectively and to coordinate well with external entities. Key elements missing from VEDP’s operations include a deliberate strategy to meet its statutory responsibilities, adequate operational guidance for staff to carry out their job responsibilities, effective accountability mechanisms, useful performance measures, reliable data upon which to evaluate performance, and effective coordination with external partners.”

One bright spot was VEDP’s international trade division. JLARC said it was doing a good job and is a model for other states. “VEDP’s export promotion programs are viewed positively by customers and external stakeholders.” The unit was supposed to be spun off as a separate agency by April, but JLARC’s report may put a brake on those plans.

Del. Kirk Cox, R-Colonial Heights, a longtime JLARC member, said he was very disturbed by the culture at the agency revealed in remarks from VEDP staff members, which came from interviews by JLARC. “ ‘Our manager does not care how we spend our time, our marketing efforts are horrible, a number of the staff shows up late.’ To me, it’s the biggest failure of an agency I have ever seen,” Cox said. 

Some General Assembly members of JLARC’s  board said they were so taken aback that they would embrace one of the report’s 35 recommendations to withhold additional funding to VEDP until the agency can fix some of its problems. 

Much of the angst by legislators is related to JLARC’s portrayal of how VEDP administers 10 incentive grant programs. According to the report, VEDP has awarded $384 million in state incentive grants during the past decade to many companies. In the Commonwealth’s Opportunity Fund (COF), the largest and riskiest incentive program where money is paid up front, VEDP awarded $116.7 million. Yet the report notes that prior to January of this year, the awards were made without a formal, written, due-diligence process, even though VEDP’s research staff raised concerns about this lack of diligence as early as 2011.

The agency’s approach to administering grants “has exposed the state to avoidable risk of fraud and financial loss, and has increased the potential that state grant funding is not efficiently allocated,” the report said.

Furthermore, many of the projects that get incentives don’t meet contractual performance requirements related to employment. For instance, the state statute on grants requires that they be for projects creating at least 50 full-time jobs (in areas that are not economically distressed), with salaries at no less than the prevailing average wage. However, JLARC said VEDP couldn’t always distinguish between full- and part-time jobs reported by companies.

Once an award is given, JLARC says VEDP staff does not enforce COF contract provisions that require companies to report annually on performance. Until 2016, staff waited “three to five years to check project performance, increasing the state’s exposure to financial loss in cases of non-performance,” the report said.

Along those same lines, VEDP did not enforce clawback provisions on 23 projects that received COF grants between 2006 and 2015 but did not meet performance requirements. This meant that $8.7 million was not sought by VEDP. Of those 23 projects, JLARC said 13 met job requirements but did not pay their employees the expected average wages.  

Such lack of enforcement leaves the program “wide open for criminal activity,” said Del. Robert D. Orrock, R-Caroline, chairman of JLARC.

Del. Chris Jones, a JLARC member, noted that the report showed that VEDP had hired external consultants to review its management practices in 2012, 2014, 2015 and 2016, and all four identified problems. Three of these four reviews were not made available to all VEDP board members or to the public.

“What was the board doing during this time frame in the last four or five years, when they got these consultant reports?” asked Jones. “Where was the board’s responsibility? Was anyone doing their job?”

The JLARC report said the board, consisting of 24 members, has played a minimal role in holding the agency’s 100-member staff accountable, although recent changes in the board have begun to improve this engagement. Jones said in a later interview that  the board is too large and unweildy, and that a more reasonable size might be about nine members. 

Founded in 1995, VEDP was created as a state authority, rather than a state agency, and therefore enjoys more autonomy and pays higher salaries than other state agencies. Its board is supposed to serve in a supervisory capacity and has with the power to hire and fire the agency’s CEO. Yet in the past the board seems to have played more of an advisory role, JLARC said.

Currently, VEDP is headed by an interim CEO, Dan Gundersen. In mid- August, he implemented a controversial reorganization that addresses some of the ills outlined in the report.  However, Greer made clear in his remarks that the reorganization has not addressed all of the challenges. “The board has taken steps to improve its effectiveness, and that is a good start …” he said.  Overall, though, he said he found VEDP leaderships’ response to JLARC’s report “disappointing. We strongly disagree with the claims made by VEDP that the agency has already made great progress in implementing many of the report’s recommendations.''

VEDP released a statement Monday in response to JLARC’s report. “VEDP and its board of directors accept the conclusions of the Joint Legislative Audit and Review Commission and view the report as validation of many of the organizational changes and management improvements that VEDP and its board have implemented since March 2016. VEDP and its board are committed to using JLARC’s recommendations as a blueprint for VEDP’s continued path forward.”

The statement went on to say that the board  “recognized major shortcomings and the need for marked change and improvement and took significant action in March 2016 to replace the president and CEO. VEDP’s recent reorganization addresses many of the issues identified in the JLARC report, including new structure, new management and new operational procedures.”

VEDP is budgeted to receive $27.4 million in fiscal year 2017, and that doesn’t include money for the 10 incentive programs.  Ninety-eight percent of its funding comes from the state.

“This report is damning on its face,” said Jones, who also serves as chairman of the House Appropriations Committee. “We spend a boatload of money on VEDP every year, and we’re told what a wonderful job we’re doing on the jobs front. To read this made me sick to my stomach.”

During a press conference following the report’s presentation at the General Assembly building in Richmond, Del. Kathy Byron, R-Lynchburg, who along with Jones had requested the JLARC study, said, “It was a lot worse than we had anticipated.” 

She said there had been warning signs that things were amiss at VEDP earlier this year. In January, the Roanoke Times reported that the agency had awarded a $1.4 million grant in 2014 to a Chinese-led company for a manufacturing center in Appomattox County that never materialized.  Lindenburg Industry LLC failed to meet its pledge to invest $113 million and to hire 349 people, and the state has yet to collect on the grant. 

The Roanoke Times investigation reported that VEDP’s vetting process on Lindenburg had relied somewhat on a company website that contained false information and listed a North Carolina address where the company had never had a location. 

In its 35 recommendations, JLARC recommends these legislative actions:

• Require the VEDP board of directors to develop and regularly update a strategic plan for VEDP.

• Direct the VEDP board of directors to ensure that the agency executes its statutory responsibilities efficiently and effectively.

•Make any additional VEDP appropriations contingent on implementation of report recommendations.

• Establish a statewide entity, a board of economic development, to improve systematic coordination across state’s economic development programs. 

Byron, Jones and Del. Steven Landes, R-Weyers Cave, the patron on the bill to spin off VEDP’s trade division, said they all wanted time to digest the report before moving forward.  Jones said it was not the time for VEDP to hire a new CEO, which the agency was hoping to do by yearend.

“We will have to look at the whole system,” Landes said, and major change might be difficult to implement during the assembly's upcoming short session in January 2017. As for delaying action on the new trade unit and leaving it for now within VEDP, “We’ll have to have a discussion and talk with the business community,” he said. “Why does JLARC want to keep what appears to be the only thing that’s working with a broken agency?”