But Team ACA has done little to ease concerns over its secrecy. Efforts to obtain the foundation’s public tax forms resulted in a labyrinthine pursuit.
“This money is coming in from the private side supporting the public sector Commerce Authority side, and then the Commerce Authority is handing out money to whatever it deems is a good use of that money,” said Chad Campbell, the state House minority leader. “But we have no idea where that money is coming from in the private sector foundation. And they’re just unwilling to be transparent about it,” he said. “Is somebody giving $10,000 in here, and then getting $50,000 out the back end in public sector money? I’m not saying it is, I just don’t know.”
In addition to the Team ACA money, the Commerce Authority received $50,000 this year from Arizona Public Service, the state’s largest utility.
Brewer’s office did not respond to requests for comment. But when the Arizona Republic editorial board asked the governor if the Commerce Authority had a transparency problem, she said she was “committed to ensuring the ACA adheres to all legal requirements related to financial disclosure and transparency. The ACA's meetings are open, as are its books as it pertains to the authority's use of taxpayer funds.”
While the authority does post much of its financial data on a state website and publishes an annual report, lawmakers including Campbell and Eddie Farnsworth, a House Republican, have said the reporting and oversight are inadequate. Campbell introduced a bill this year that would have increased reporting to the legislature and required the authority to make public all grant and incentive recipients; the measure also would have required the state auditor to perform a review every three years. Currently, the authority submits a private, independent audit. The auditor general has 30 days to initiate its own review, but it has declined to do so. The bill never saw a vote.
Despite these controversies, the Commerce Authority has plenty of backers. “It’s put Arizona on par with some of the best states for business,” says Ioanna Morfessis, who founded the Greater Phoenix Economic Council, a local public-private partnership, and is also a paid consultant for the authority. In its year-end report for fiscal year 2013, the authority said it assisted 104 planned projects that will create 15,262 jobs.
Doug MacEachern, a member of the Arizona Republic editorial board, in August 2012 wrote that while the authority needed to improve transparency, it was “far better” than the Commerce Department it replaced.
It has also taken some steps toward transparency, by announcing quarterly the recipients of the “deal-closing fund,” for example. The most recent report shows three grants, including $1.5 million given to the Go Daddy Group, Inc., an Arizona-based company, to help with an expansion that is supposed to create 300 jobs. None of the tax incentives were public under the old Commerce Department either. Serena Unrein, the public interest advocate at Arizona PIRG, said there’s been no evidence of malfeasance, but that without full transparency, it’s impossible to know for sure.
“When half of the incentive programs that they control are behind this veil of secrecy,” she said, “it’s hard to tell if there is any sort of reason to be concerned.”
A lack of transparency in the Buckeye state
As Brewer was privatizing economic development in Arizona, Republican colleagues in three other states were on similar paths. Gov. John Kasich’s efforts in Ohio have been especially controversial.
Within weeks of taking office in 2011, Kasich was pushing legislation that eventually created JobsOhio, an independent nonprofit corporation that assumed economic development responsibilities for the Buckeye State from the old Department of Development in July of that year. The organization is led by a nine-member private-sector board, appointed by Kasich. It is not subject to open records laws. After the state auditor, a Republican, threatened to subpoena records for an audit this year, the legislature passed a bill, pushed by Kasich, to shield the entity from any future audits. JobsOhio has argued that its funding is private: for $1.4 billion, it purchased a 25-year lease of the state’s liquor sales profits, worth about $100 million a year. The deal was funded with a bond, issued by JobsOhio.
It, too, has received private donations both directly and through a related nonprofit, the JobsOhio Beverage System — a total of $6.9 million from five anonymous donors in its first year of operation, according to the Columbus Dispatch. One of those donors, according to the Dispatch, was American Electric Power, based in Columbus, which gave $2.45 million.
In July, the Dayton Daily News reported that six of the nine board members had financial ties to companies that have received incentives from the state, though several of the deals in question were approved before JobsOhio began operating. The organization also helped secure hundreds of thousands of dollars in incentives for Worthington Industries, which continued to send deferred payments to Kasich through 2012 for his former role as a director of the company. Employees of the firm have donated hundreds of thousands of dollars to Kasich’s campaigns, including $10,000 from CEO John McConnell one week after JobsOhio awarded Worthington a tax break worth more than $100,000.
The Kasich Administration, which did not respond to requests for comment, has said the governor is no longer linked with Worthington — a statement supported by the state Ethics Commission — and that the criticism over the deals are a political ploy by Democrats.
A recent review by the Ethics Commission found that nine directors and employees of JobsOhio had financial ties to entities that have either received incentives from or had contracts with the organization. JobsOhio has not replied to phone calls or emails, but a spokeswoman, Laura Jones, has said publicly that all staff and directors comply with a conflict of interest policy. She said the financial ties do not represent conflicts because the interests are small and because directors do not decide which companies get money; agency staff make recommendations to a separate state agency, which makes the ultimate decision.
While that is true, an August report by the Columbus Dispatch found that since 2009, the five-member government board that makes the final decision has not cast a single vote against the recommendations it received.
Newspaper editorials have generally supported the idea of a streamlined, public-private JobsOhio, but criticized its secrecy. “A state-authorized corporation whose operating funds derive in part from a bond issue underwritten with public dollars needs to be more transparent, not less so,” the Cleveland Plain Dealer wrote in a March editorial.
Watchdog groups have been less circumspect. “What they’ve done is taken a system that didn’t have a whole lot of disclosure and wasn’t that great a system under any governor,” said Brian Rothenberg, executive director of ProgressOhio, a liberal group, “and they’ve privatized it so that you don’t know what’s going on with all those public dollars.”
ProgressOhio has sued the state, arguing the liquor sales lease is illegal.
Wisconsin Gov. Scott Walker also created a public-private entity, the Wisconsin Economic Development Corporation, in 2011. While the corporation is subject to the state’s public records laws, it’s suffered a stunning string of mishaps, detailed in a series of news reports and two public audits over the past two years. A May 2013 legislative audit found that WEDC gave money to ineligible businesses, didn’t require financial statements from some incentive recipients and didn’t check whether companies were creating jobs. The corporation hired its fourth CFO in June (one of them lasted only 24 hours), only to see its third controller resign the same month.
Corporation officials said they were committed to improving their operations, but an October report by the Milwaukee Journal Sentinel found that one in five companies receiving incentives still were not reporting their activities to the corporation.
Iowa created a public-private partnership to take over business incentives as well, leading to some of the same controversies that have surfaced in Arizona, including allegations of excessive pay and poor transparency and oversight.
Most states have created public-private organizations to market the state to business while retaining control over incentives within a government agency. Those arrangements have drawn their own scrutiny. Two funds under Texas Gov. Rick Perry’s control have spread hundreds of millions of dollars to corporations over the past several years, much of it to companies that have also donated heavily to Perry’s political campaigns and the Republican Governors Association, which he once led and which gave his campaign $1 million in 2006. The arrangement drew criticism that Perry was rewarding companies for political support. Watchdogs and lawmakers from both parties have also questioned whether the funds are effective and have called for independent audits. Perry’s office has countered that the funds have created tens of thousands of jobs and that legislative leaders must approve each deal, providing adequate oversight.
Proponents of public-private partnerships say they streamline economic development work. Morfessis of the Greater Phoenix Economic Council says they show the business community that government is prepared to work with the private sector, and that the groups are actually less prone to abuse than their fully-public counterparts because the private sector demands strong accounting practices. Quasi-public entities also allow the organizations to pay higher salaries, theoretically allowing them to compete for top talent in a competitive field.
But there’s no evidence that public-private partnerships are any more effective, says Jeff Finkle, president and CEO of the International Economic Development Council, a membership group of economic development agencies. The advocacy group Good Jobs First, which supports transparency in economic development, issued a report in 2011 that found deficiencies in each of the eight states that, at the time, had given some or all of their business recruitment activities to quasi-public or private entities — deficiencies that included conflicts of interest, misuse of taxpayer funds and excessive bonuses. An updated version, released today, argues that private economic development agencies are “inherently corrupting.”
“There are plenty of problems even when government agencies do this kind of thing,” says Philip Mattera, the organization’s research director, “but those problems are compounded when you privatize that kind of function.”
A harvest in the desert?
About 50 miles west of Phoenix, over a spine of jagged peaks called the White Tank Mountains, empty desert spotted with creosote bushes and the occasional saguaro cactus stretches to the horizon. But the city’s real estate titans see a future there, and they own the land that could make it happen. A handful of private developers have bought tens of thousands of desert acres that local municipalities have annexed to make way for sprawling developments. Douglas Ranch, as one of the properties is called, covers nearly 34,000 acres and is slated to house 300,000 people and include 55 million square feet of commercial space.
The plans have sat idle for years, victims perhaps of the recession-fueled real estate bust. But the developers see hope in a proposal to build a new interstate highway that would connect Phoenix and Las Vegas and serve as part of a “CANAMEX” route linking ports in Mexico with the Pacific Northwest.
Several of the project’s biggest supporters now sit on the board of the Commerce Authority, which has been one of several state agencies pushing over the past couple years to make the road a reality. Douglas Ranch is owned jointly by JDM Partners, Jerry Colangelo’s development company, and El Dorado Holdings, which is led by Mike Ingram, another authority board member. JDM Partners owns a second, smaller property that borders Douglas Ranch. Four other current or former board members either have direct financial interests in building the road or are otherwise involved in pushing for its construction.
While the Commerce Authority has expressed support for the road, its exact role is unclear. In March 2011, before the authority was fully operating, Colangelo told a local government group that board members had already been discussing the project. As of publication, the authority had not responded to a public records request filed September 3 seeking details on its support for the proposed road, known as Interstate 11.
It’s also true that, because the Brewer administration is a strong proponent of the project, even a fully public agency would likely play a similar role. The state Department of Transportation, along with its Nevada counterpart, recently funded a study arguing the economic benefits of the road.
But the melding of public and private interests raises questions about whether board members can make independent decisions for a quasi-public agency. In April 2012, Colangelo gave a presentation at an economic development summit for the West Valley region where he pressed the need to improve the area’s transportation. He showed an image of Douglas Ranch with a bright yellow dotted line cutting through the middle, representing a proposed interstate route. The road would surely boost the value of the land. For his presentation, Colangelo was introduced as both the co-chairman of the Commerce Authority and as a principal partner with JDM.
Colangelo has not publicly addressed the potential for a conflict of interest. None of the board members with a stake in the road agreed to an interview. While it would be years before the road is built — if it is built at all — last year Congress designated the road as an interstate corridor, a largely symbolic gesture that gives it a number but does not promise funding.
The proposed interstate is not the only issue raising questions about possible conflicts-of-interest at the Commerce Authority. The authority has given about $13,000 in grants to two small arms manufacturers owned by board member Gary Abrams. It also contributed an undisclosed amount to help sponsor the Basketball Hall of Fame’s second-annual Jerry Colangelo Golf Classic, which took place in September.
“If you’re able to pick winners and losers like this with the Commerce Authority, the winners are always going to be the people who are better connected to the people on the board and the politicians calling the shots,” said Scot Mussi, executive director of the Arizona Free Enterprise Club, a free-market advocacy group.
The authority has a conflict of interest policy that says directors and employees must disclose potential conflicts and cannot vote on matters that affect their financial interests. However, the authority would not respond in regard to whether any board members have announced conflicts or recused themselves from votes, and none of the public board meeting minutes make any mention of the issue.
Other states have had more glaring potential conflicts. In Florida, for example, where many board members have donated $50,000 to the public-private Enterprise Florida, several incentives have gone to companies that are represented on the board, according to reports by good-government group Integrity Florida and the conservative Americans for Prosperity Florida.
A close cousin
Over the past decade, a few states have eliminated public-private partnerships for economic development after determining they were ineffective, including California, which abandoned its effort in 2010. Others, such as Connecticut, have considered the proposition only to study it and abandon the idea.
North Carolina is currently in the process of transferring at least some of its economic development work to a new public-private entity, but the transition has been bumpy.
Earlier this year, a bill that would have created a public-private partnership appeared ready for passage when at the last minute, someone attached an amendment that would have allowed for hydraulic fracturing, the controversial oil and gas drilling technique which is not yet in use in the state, scuttling the bill.
It was unclear why fracking was included in the bill, but a clue emerged in July, when Commerce Secretary Sharon Decker told a group of business and community leaders that she wanted to create an incentives fund, similar to those in Texas, with proceeds from a tax on fracking. Decker promised that, unlike Perry, she wouldn’t “go as crazy” with the fund, adding, “I’m glad the press isn’t here.” But a reporter from the News & Observer in Raleigh was, in fact, there to report the comment.
The bill contained some provisions that watchdogs welcomed, such as a ban on board members’ companies receiving grants. After it failed, Gov. Pat McCrory won language in the budget allocating money for the Commerce Department to begin the process anyway. Decker, the commerce secretary, has said she will use the legislation as a guide, but it’s unclear whether those provisions will survive. In September, the state filed papers for a new nonprofit corporation that Decker said should be operating by March.
In Arizona, the controversy had largely died down until the Capitol Times reported in June about a line in the state budget that allows the authority to loan $2 million for a specific rural railway project. The arrangement, and the authority’s activities in general, have rankled the state’s vocal libertarian contingent. Byron Schlomach, the director of the Center for Economic Prosperity at the Goldwater Institute, said he’s skeptical of economic development initiatives. “To me, all it is is a very expensive ticket for politicians to show up at a ribbon cutting ceremony,” he said.
He characterizes the authority as a form of “soft corruption,” with public money being allocated to powerful corporations. “Is it anything you can directly call bribery?” he said. “No. But it’s a close cousin.”
Chris Zubak-Skees contributed to this report.