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An Audit Report on Selected Major Agreements Under the Texas Economic Development Act

August 2015

Report Number 15-042

Overall Conclusion

The Texas Economic Development Act (Texas Tax Code, Chapter 313) has encouraged capital investment and job creation by businesses that have appraisal limitation agreements (agreements) with school districts. Oversight of those agreements relies primarily on self-reported information that businesses certify.

To determine whether businesses with agreements complied with Texas Tax Code, Chapter 313, the three school districts audited relied primarily on the certification of the annual eligibility reports and biennial progress reports that businesses submitted to confirm (1) the businesses' capital investment and (2) the number of jobs the businesses committed to create or had created. Statute does not require school districts to verify that information, and the school districts audited did not perform verifications.

School districts provide the information that businesses submit to the Office of the Comptroller of Public Accounts and the Texas Education Agency as the basis for additional state aid paid to the school districts for (1) property tax revenue losses associated with agreements and (2) tax credits associated with applicable agreements.

Each of the three school districts audited hired the same consultant to compile information that businesses reported and to prepare revenue protection payments and payments in lieu of taxes that are required by the agreements.

Based on the information in their annual eligibility reports and biennial progress reports, the businesses with agreements certified that they met certain elements and complied with various requirements of Texas Tax Code, Chapter 313. The school districts associated with the agreements accepted the submissions.

Auditors identified certain aspects of the overall accountability and transparency associated with the agreements under Texas Tax Code, Chapter 313, that could be strengthened. The State Auditor's Office previously reported similar issues for other school districts in a November 2014 report:

- Verification of information. The three school districts audited relied primarily on certifications that businesses submit and information prepared by their consultants. Statute does not require school districts to verify that information, and the school districts audited did not perform verifications.

- Developing agreements. The agreements included all statutorily required provisions and were approved by the school boards. However, the agreements did not consistently:

-- Specify the agreed-upon investment amounts and the anticipated number of jobs to be created. (That information was in the applications for agreements.)

-- Describe how school districts would determine and issue tax credits to businesses.

-- Require school districts to determine the eligibility of any new business to which an existing agreement would be transferred. For two of the three agreements audited, businesses transferred the agreements to affiliates.

- Issuing tax credits. Texas Tax Code, Chapter 313, requires a school district to direct its tax assessor-collector to apply tax credits to a business's future property taxes. Southwest Independent School District (Southwest ISD) complied with those requirements and directed the county tax assessor-collector to apply $1,851,148 in tax credits to the business's future property taxes. However, as the State Auditor's Office reported in November 2014, at the direction of the Texas Education Agency, other school districts paid tax credits directly to businesses. Specifically, the Blackwell Consolidated Independent School District (Blackwell CISD) and the Jim Ned Consolidated Independent School District (Jim Ned CISD) paid tax credits totaling $1,175,434 directly to the businesses. As of December 31, 2014, businesses associated with 287 executed agreements and 15 applications for agreements may be entitled to receive an estimated $688 million in tax credits from tax year 2006 through tax year 2031. See Appendix 3 for more information on tax credits.

- Disclosing conflicts of interests. The school districts' conflict of interest policies included all statutory requirements in the Texas Local Government Code, Chapters 171 and 176. However, the policies for each school district audited varied, and the policies did not require disclosure of potential conflicts of interest on a regular, periodic basis or affirmations that no conflicts existed with the businesses and the consultants associated with the agreements.

This audit identified additional areas that could be strengthened, including the following:

- Multiple agreements for the same project. Blackwell CISD and Jim Ned CISD did not (1) verify whether a business counted the same jobs toward two different agreements related to the same project or (2) require the business to demonstrate that it was not counting the same jobs to meet the eligibility requirements. (The project was physically located in both school districts.)

- Records retention. There is no records retention policy for all school districts to follow regarding the supporting documentation for agreements. Certain documentation was unavailable to auditors at Southwest ISD because the school district had destroyed that documentation in accordance with its record retention policy.

- Incorrect billing amounts. Southwest ISD and Blackwell CISD billed the businesses associated with their agreements for incorrect amounts of revenue protection payments and payments in lieu of taxes. As a result, Southwest ISD did not receive $358,063 in required revenue protection payments and Blackwell CISD did not receive $2,143 in required revenue protection payments and payments in lieu of taxes. That occurred because the school districts did not review their consultants' calculations of those payments.

Opportunities also exist to improve certain administrative processes at each school district audited. While the issues identified in those processes may not be material to determining compliance with Texas Tax Code, Chapter 313, they are significant to each school district's management of agreements.

Auditors also communicated other, less significant issues separately in writing to each school district audited.

Contact the SAO about this report.

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