SC Commerce lacks transparency, oversight and competition in job incentives, audit finds
South Carolina has handed out millions of dollars in lucrative tax breaks to companies since the launch of the state’s economic boom more than two decades ago, promising hundreds of jobs and higher wages to keep the economy rolling.
But now, a new state audit released Thursday says that the practice of S.C. Department of Commerce’s of handing out tax breaks to incoming companies has little transparency, accountability or oversight that would let the public and lawmakers know how to evaluate its work. In return for the tax breaks, the companies are supposed to create jobs and help the state’s economy. The audit covered state tax breaks to companies back to 2009.
Also Thursday, two state senators who asked for the audit by the Legislative Audit Council said the flaws at Commerce are so great that the agency secretary, Bobby Hitt, needs to resign.
Hitt, who has been secretary for 10 years, makes $199,857 a year. He had no immediate comment on the call to resign. The senators also said that Gov. Henry McMaster, who oversees Commerce, should institute immediate reforms to make the agency more transparent and accountable.
“The governor needs to clean house,” said Sen. Wes Climer, R-York, who asked for the audit in April 2019.
State Sen. Dick Harpootlian, D-Richland, who requested the report with Climer and a handful of other senators, said, “This report clearly shows that Bobby Hitt has been presiding over a catastrophe that wastes taxpayer dollars. ... The governor needs to appoint a business person to head this agency — not a public relations person.”
Brian Symmes, spokesperson for Gov. Henry McMaster, said “periodic transparency and accountability check-ups” are always a good thing, whether it’s for a state agency or the Legislature.
“But the evidence here stands on its own,” Symmes said. “Secretary Hitt has been in his role since 2011 and has served under two governors. Since then, the Department of Commerce has announced over 116,000 new jobs and over $31.5 billion of capital investment, and South Carolina’s unemployment rate reached its lowest point in history before the COVID-19 pandemic.”
Before becoming Commerce agency head in 2010, Hitt, 70, was a journalist and public relations spokesperson for BMW.
But a senator who also signed onto the audit letter — state Sen. Brad Hutto, D-Orangeburg — said he does not agree Hitt should be removed.
“I’ve watched Secretary Hitt work over the years, and he believes in South Carolina,” Hutto said. “I think the report does point to some shortcomings at the department, but I don’t think that means it’s necessary to change (the director). It’s up to the governor of course, but I am not joining in that call. I think this will give him a roadmap of things that need to be changed, some of which he probably knew. I would not suggest that. He’s a great salesman for South Carolina.”
And Senate Finance Committee chairman Hugh Leatherman, R-Florence, said he has complete confidence in Hitt.
Calls for Hitt’s resignation are one of the most “appalling things I’ve ever heard,” Leatherman said, adding he believes Hitt “will do what needs to be done” to fix transparency issues raised in the report.
The audit is the result of a controversy last year that arose after lawmakers examined Commerce’s role in getting roughly $115 million in tax breaks for the Carolina Panthers football team to locate in York County. Besides Climer and Dick Harpootlian, eight other senators signed a bipartisan letter to the LAC requesting that an audit examine the tax breaks Commerce passes out.
The audit found:
▪ The state’s Commerce Department does not do a fiscal impact study after awarding incentives to companies to see whether projects were successful;
▪ Commerce does not verify jobs numbers companies submit, outside of using a company’s own documents;
▪ The cost-benefit model the agency uses is 25 years old, potentially inflating employment numbers for companies;
▪ The opportunity to apply for job incentives is not open to the public. Instead, Commerce “only provides applications to companies for which DOC’s Secretary will recommend approval of incentives.”
▪ The state Department of Revenue is not completing audits of all companies that get job development credits with claims in excess of $10,000 per year at once every three years as required by state law.
“The report confirms my worst fears and that is that the Department of Commerce is not validating the information that they give to the public or the Coordinating Council at the front end,” said Harpootlian, who is personally suing Commerce over a Chester County project. “And they do a worse job of validating it after we’ve given hundreds of millions of dollars ... to see if they’ve met their commitments.”
The audit, stretching from January 2009 to September, shows Commerce approved tax breaks for 676 different companies.
Commerce approved $6.2 billion worth of job development credits for 415 businesses of those companies — though $223 million was actually claimed. Another $526 million in business development grants were approved for 557 companies.
Of the companies that received credits reviewed in the audit, 31 have closed while 174 remain open, creating more than 34,000 jobs and investing $8.4 billion, the audit said. The remaining projects have yet to be certified.
“However, DOC (Department of Commerce) does not record the actual jobs created in excess of the project’s minimum requirement,” the audit said.
Of the 557 companies that got grants, 309 projects are still open and active. But 248 projects have closed, are pending close out or are in maintenance status, according to the audit, which adds the 248 projects created more than 31,000 jobs — 92% of its goal — and invested $11.8 billion, exceeding the total $10 billion goal, the audit said.
State lawmakers have skewered the state’s willingness to hand out tax breaks to companies, particularly those run by multi-millionaires or billionaires. Such was the case when the Legislature handed out $115 million in tax breaks last year to the Carolina Panthers. The NFL team headed by billionaire David Tepper, plans to expand its North Carolina operations into Rock Hill.
Specifically, lawmakers have been critical of whether the state has actually gotten a return on its investment.
And the audit says that may be unclear.
“We found that DOC and the Coordinating Council do not include actual figures related to the projects’ performances or the number of projects that were not successful in job creation efforts in annual reports,” said the LAC report. “Additionally, DOC does not conduct any fiscal impact analyses after the initial cost-benefit analysis performed prior to an award to determine if the projects were successful.”
The Audit Council also wrote that the cost-benefit model used by Commerce is 25 years old, adopted in the mid-’90s.
“Using outdated economic data could lead to DOC approving incentives for projects that would have fewer estimated benefits to costs if the analyses were conducted using current data,” the audit said.
All 32 cost-benefit analyses reviewed by the council showed Commerce’s outdated formula “potentially inflated new employment numbers for companies seeking incentives and provided an inaccurate evaluation of the economic effects of a proposed project,” the audit said.
In a response included in the audit, Hitt said that despite the Council’s acknowledgment of the “overall effectiveness” of the cabinet agency’s discretionary incentive programs, many of the council’s proposals “translate into exactly that — more bureaucracy, with more cost, but minimal benefit.”
The Legislative Audit Council “may not fully appreciate how Commerce’s relationship and interaction with prospective companies plays a key role in attracting economic development projects that could locate anywhere,” Hitt wrote.
“If Commerce cannot sell South Carolina as business-friendly, our incentive programs never come into play.”
As an example, the audit states there have been three known cases of fraud involving companies that received breaks.
All three companies were privately-held, and the LAC proposed that the Coordinating Council require all companies, whether publicly traded or private, to submit audited financial statements as proof of a project’s financial state.
Hitt countered that the cost of such a requirement would be “prohibitive for smaller or new companies, and this recommendation does not acknowledge that these types of companies typically are approved only for JDCs ... or grants with extra stipulations requiring achievement of certain investment and/or job creation thresholds before any grant funds may be disbursed.”
Furthermore, to the LAC’s proposal that the Coordinating Council for Economic Development provide applications for job development credits and grants to all businesses that have met eligibility requirements, Hitt wrote: “... If we simply allow any qualifying business to apply for discretionary incentives, then there is no need for South Carolina to have a Department of Commerce with an experienced professional staff.”
Asked whether Commerce wanted to comment further, a spokeswoman said Hitt’s letter will “stand on its own.”
It’s also important to note, the governor’s spokesman Symmes said, “that this report was conducted by the Legislature’s auditors, who are routinely called upon to deliver a political result.”
Sen. Climer, who is a member of the Legislative Audit Council, said the report shows Commerce is “flying blind.”
“From a public policy standpoint, there is no way to know as a legislator or as a taxpayer, ... to gauge the efficacy of these things,” Climer said.
Climer and Harpootlian called for a complete overhaul of the agency, asking McMaster get involved to ensure reforms are made.
Other senators signing the letter include Republican Sens. Chip Campsen, R-Charleston; Tom Davis, R-Beaufort; Shane Martin, R-Spartanburg; Shane Massey, R-Edgefield; and Scott Talley, R-Spartanburg; and Democratic Sens. Brad Hutto, D-Orangeburg; John Scott, D-Richland; Sen. Scott Talley, R-Spartanburg; and Sen. Vincent Sheheen, D-Kershaw.
“The governor didn’t create this problem, but he can solve it,” Harpootlian said.
This story was originally published June 11, 2020 at 11:12 AM.
