State audit: Department of Economic Development doing little oversight over funds earmarked to attract businesses, marketing

(From State Auditor Nicole Galloway)

State Auditor Nicole Galloway today released an audit of the Economic Development Advancement Fund (EDAF), which is primarily overseen by the Department of Economic Development (DED). The fund supports an exclusive contract with the Hawthorn Foundation for business development and marketing, but the audit found little oversight or accountability in how taxpayer dollars are spent.

Approximately 86% of spending from the EDAF goes to the Hawthorn Foundation and its subsidiary, the Missouri Partnership, which manages nearly all of Missouri's efforts to recruit new businesses to the state. During the past three fiscal years, 45% of the Hawthorn Foundation's income came from the EDAF. Other revenues include grants, membership dues and foreign trade office income.

 

"It is essential that Missouri is competitive nationally, and this public-private partnership is helping meet that important goal. However, that does not mean taxpayers should give up the right to have their dollars used efficiently and transparently," Auditor Galloway said. "In this case, the state is not doing its due diligence to ensure accountability for millions in taxpayer dollars."

The Department of Economic Development is responsible for administering the contract and is required to provide oversight on how state funds are spent by the Hawthorn Foundation and the Missouri Partnership. However, the DED only receives general information about expenditures. During the audit, the State Auditor's Office requested details to review, but the DED declined to ask the Partnership for specific documentation on spending.

The lack of specific information on expenditures means the DED is not adequately overseeing the use of state funds. For example, over a three year period, approximately 60 percent of Partnership expenditures were for payroll and bonus payments, but the department did not receive itemized salary information for how more than $4.3 million was spent.

Additional concerns were identified in the way incentive payments were awarded by DED. Under the contract, these incentives are based on the number of jobs announced per year, but it appears the per-job performance rate was adjusted to ensure the Hawthorn Foundation received the maximum payment every year. The DED also did not independently verify the number of new jobs announced, which resulted in inconsistencies in these numbers.

"When it comes to performance-based incentives, the Department of Economic Development is simply not administering the contract effectively, instead awarding the maximum payment without verifying if the results are correct," Auditor Galloway said. "Relying on news clippings from when new businesses are announced is not an effective solution to ensure accuracy. There needs to be a better system in place."

The report also detailed actions taken by the DED to use funding from the Missouri Development Finance Board to continue to make payments to the Hawthorn Foundation, despite funding being cut from the budget. These payments were not required to be approved by the legislature, listed on the Missouri Accountability Portal or disclosed to the public. The department reimbursed the Missouri Development Finance Board after lawmakers approved funding for the Hawthorn Foundation in a supplemental budget bill.

The full report on the Economic Development Advancement Fund can be found here.