Workplace

Audit slams Kansas incentive program, charges it does little for rural Kansas

Updated: 2013-10-12T22:17:50Z

By KEVIN COLLISON

The Kansas City Star

It may be called Promoting Employment Across Kansas, but a critical new audit of the PEAK program shows that Johnson and Wyandotte counties are the overwhelming beneficiaries of the incentive tool at the heart of the metropolitan economic border war.

All but a handful of the 38 companies using PEAK tax incentives to move since the program was enacted in 2009 have moved to Johnson County, according to documentation in a recent performance audit commissioned for the Kansas Legislature.

About 1,550 jobs went to Johnson County as of December 2012, the period covered by the audit. All but 110 were from Missouri.

Four companies moved about 1,200 jobs to Wyandotte County. However, almost 1,100 were described as moving from Michigan and Canada to the Fairfax GM plant.

Only one Kansas county outside the metro reported any jobs relocated by PEAK during the audit period. Cherokee County, in the southeast corner of the state, lured the 47 employees of Orthopaedic Specialists of the Four States LLC — also from Missouri.

The PEAK audit, commissioned by the Kansas Legislature, paints a picture of an understaffed office within the Kansas Department of Commerce that has done a poor job monitoring companies receiving millions of dollars of tax incentives.

PEAK allows a firm creating jobs to keep 95 percent of those employees’ state income taxes for up to seven years. The state auditors estimated it has created 5,200 jobs in Kansas, 2,800 of them moving from outside the state, in exchange for $21 million in forgone withholding taxes through December 2012.

“Our conclusion is this program has grown faster than people expected, and it doesn’t appear to have the horsepower to administer it,” said Scott Frank, legislative post auditor.

Commerce officials acknowledged that their primary emphasis has been on making deals, but defended their management of the incentive tools.

“No incentives were awarded or misappropriated because of a delayed review by us,” said Pat George, state secretary of commerce. “They can’t find a place where a dollar was misspent.”

And despite the criticism by the auditors, who said poor record keeping prevented them from determining whether the job-creation program was working as intended, it’s unlikely any significant changes are in the works.

The two lawmakers who requested the study, Sen. Kelly Kultala, a Democrat from Kansas City, Kan., and Sen. Tim Owens, a Republican from Overland Park, lost their bids for re-election last year. And lawmakers in charge of overseeing the PEAK program think only minor tweaks are necessary.

“My main interest is is how successful the Commerce Department has been in landing new jobs in Kansas,” said Rep. Marvin Kleeb, an Overland Park Republican who is chairman of the House Commerce Committee. “That’s the benchmark we should look at.”

Not that Kansas is alone in poorly monitoring the new generation of incentive programs that have caused so much tension within the Kansas City metropolitan area in recent years.

An audit a year ago of the Missouri Quality Jobs program, which allows firms to keep up to 100 percent of their employee withholding taxes for a set number of years, also found inadequate recordkeeping and other problems, rating its overall management by the state Department of Economic Development as poor.

“Data used to project the economic impact of the Missouri Quality Jobs program are significantly overstated,” the state auditor concluded.

“Significant weakness also exist in the manner in which actual program data are obtained.… As a result of these deficiencies, the overall economic impact of the Quality Jobs program cannot be accurately assessed.”

A follow-up audit released last month found limited progress by the Missouri Department of Economic Development in correcting problems. Two of the audit’s seven recommendations were implemented. The rest were either partly implemented or not at all.

Similar paperwork problems were found in Kansas with PEAK.

“Assessing the benefits of the PEAK program is difficult because the Department of Commerce has not compiled meaningful information on the program,” the audit found.

Auditors also said the Commerce Department acknowledged “lack of staff and frequent changes to statutory requirements contributed to the delay” in filing annual reports to the Legislature about PEAK. The auditors reported the department was more than a year behind filing reports.

George admitted that his staff put deal-making first, saying it was “all hands on deck” when it came to pursuing opportunities for new jobs.

In its formal response to the audit, the department said it plans to beef up its PEAK administrative staff. Because of “the popularity and success of the program,” the department said, “additional resources have become necessary.”

Plans call for increasing the number from the equivalent of two full-time and one part-time employees to four full-time staffers.

As for why rural and small-town Kansas have experienced scarce benefit from PEAK?

“We would love it if it did,” George said.

“The requests for PEAK are a little less for rural counties.… It’s aligned with where the economic activity has taken place. The greater growth has been in the Kansas City metro, Lawrence, Manhattan and Topeka.”

The biggest disagreement between auditors and the Department of Commerce was over whether the department had exceeded a mandated cap on the amount of PEAK incentives authorized for existing Kansas companies adding jobs.

Auditors said the law was clear that a $6 million annual cap had been placed by the Legislature on incentives to existing companies.

Based on their analysis, auditors said that cap would be exceeded by $1.5 million in the current fiscal year and was on track to be exceeded by $22.5 million over the next 10 years based on contracts already agreed to by the department.

Auditors called for a moratorium on any further PEAK incentives for existing companies to expand until the matter was resolved.

George said his department already is working with lawmakers to clarify the law. He said that a $6 million cap would make the program practically useless for encouraging existing companies to hire new workers.

“I’ve spoken to other legislators and the governor’s office and we plan to clarify that,” George said.

The department also disputes whether the statutory cap has been violated, noting only $2.24 million in PEAK incentives were actually released this year for that aspect of the program.

Kleeb, who is described as the “godfather” of PEAK, described the audit report as a “small cloud” that he wants to have lifted quickly. The lawmaker said he’s had no problem obtaining reports from the Department of Commerce about the program.

“I’ve asked for reports from Commerce on incentives and I was able to get reports,” Kleeb said. “That’s what surprised me about the audit.

“The auditors are saying in short there wasn’t a button to push, a quick way to get information. That being said, the information is there.”

Frank said auditors were hampered from doing their job by the poor recordkeeping at Commerce.

“We were disappointed to see the kind of information the department compiled,” he said.

“We had to dig the information out of the files ourselves. We’d prefer to verify information and analyze it, but we had to start from square one.”

Bill Hall, president of the Hall Family Foundation and one of the area’s more high-profile critics of the border war, said he’s also had problems getting information.

“They are not as transparent as the program is intended to be,” Hall said. “I’m not surprised about the auditors’ concerns.”

The former legislators who commissioned the PEAK audit were not surprised at the results.

“It answered our questions to the point that we don’t have the data,” Kultala said.

“It looks as if the Department of Commerce has mismanaged the program and doesn’t have the material to determine whether it’s working or not.… It also doesn’t help rural counties; it’s been all metro counties.”

Owens observed if the PEAK program was not monitored properly, the state wouldn’t know whether it had achieved lasting economic growth.

“Will the company stay in the state or take the money and run?” he asked.

Finally, auditors said the PEAK program’s attractiveness might fade as a result of another major economic development initiative being pursued by Kansas — cutting income taxes.

“As income tax rates are reduced, the tax incentives companies receive under the PEAK program will also decrease,” the audit said.

For example, a company pockets $2,300 annually in withholding taxes for a $50,000 PEAK job now; that figure is expected to drop to $1,500 by 2018 when that income tax bracket drops from 6.45 percent to 3.9 percent.

George responded that rather than being a drawback, it would only make his job easier.

“We’ll have a great incentive program plus lower taxes,” he said.

To reach Kevin Collison, call 816-234-4289 or send email to kcollison@kcstar.com. Follow him on Twitter @kckansascity.

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