EDA Task Force’s final report identifies nearly $600M in incentives N.J. could claw back

The state could claw back nearly $600 million in tax breaks from 12 companies that were given incentive awards to stay in New Jersey that they did not need.

This was one of the biggest takeaways from the third and final report by the EDA Task Force, which was released Thursday.

The report said a willingness of companies to misrepresent their intentions to the New Jersey Economic Development Authority and of consultants to advise them on how to game the system, combined with the failure of the EDA to properly vet applications, led to the misdeeds.

The report concludes an 18-month investigation into how lucrative incentives were paid out by the EDA. But the matter appears to be far from over.

Jim Walden, the chief counsel of the task force, said a total $578 million in awards were identified for further investigation, with some being referred to law enforcement.

The report said the task force has referred the following incentives awards to the EDA with recommendations that it consider certain action as it may deem appropriate — including further investigation, potential termination or more:

  • Conner Strong & Buckelew Cos. LLC;
  • Cooper Health System;
  • Creative Management Services LLC;
  • Holtec International;
  • Key Food Stores Co-Operative Inc.;
  • Lonza America Inc.;
  • The Michaels Organization LLC.
  • NFI L.P.;
  • Rainforest Distribution Corp.;
  • Safilo USA Inc.;
  • Sandoz Inc.;
  • TDAF I – Pru Hotel Urban Renewal Co. LLC.

In addition, the report noted that 15 companies were approved for tax incentives from 2013-19 based on applications that said they would move to the Blue Hill Plaza complex in Pearl River, which is in Rockland County, New York — less than a mile from the state’s border.

Gov. Phil Murphy, who ordered the creation of the task force, released a three-paragraph statement.

“I ordered this review 18 months ago based on the troubling findings in a report issued by our independent state comptroller. I knew then that our system of corporate tax incentives was not producing the promised jobs, but I had no idea of the ugly reality waiting to be uncovered.

“This administration will not tolerate fraud or self-dealing, and we will ensure that every dollar of taxpayer money is spent wisely and effectively. Moving forward, any incentives offered must produce the number of promised jobs for our state.

“With the information gleaned from this investigation, we can move forward with a new incentives program and ensure it is run effectively and efficiently with the proper safeguards in place.”

You can read the 110-page report here.

Below are excerpts from the principal findings in the executive summary (edited for clarity):

  1. Professional consultants played a role in the EDA awarding tax credits to companies that were not actually at risk of leaving New Jersey and which, therefore, did not qualify for incentives.

When the Grow New Jersey program was in effect, between 2013 and 2019, the vast majority of companies that applied to the EDA for incentives under the program did not handle the process alone, but rather engaged the services of professional consulting firms.

These consulting firms included specialist firms dedicated to incentives programs; larger firms offering a broad spectrum of services, including but not limited to incentives; real estate brokerage firms offering incentives consulting services to complement the primary brokerage role; and law firms that advised clients related to incentives programs. The EDA’s senior leadership at times maintained a close relationship with certain consultants who frequently represented companies that appeared before the EDA.

  1. Grow NJ applicants exploited an office complex in New York state to make misleading claims to the EDA about the “at risk” nature of their jobs.

Safilo’s Grow NJ application claimed that, if the company did not receive incentives to locate in Secaucus, it intended to relocate to an office complex in New York — specifically, the Blue Hill Plaza complex in the municipality of Pearl River, in Rockland County, New York, which is situated less than a mile from New Jersey’s northern state border.

Safilo was not alone in claiming the Blue Hill Plaza as the “alternative site” on its Grow NJ application. In fact, between 2013 and 2019, the EDA approved a total of 15 companies for tax incentives under the Grow NJ program based on their claims that, absent incentives, they intended to relocate to the Blue Hill Plaza. Unique among real estate options outside New Jersey, no other alternative site so frequently appeared on Grow NJ applications submitted to the EDA during the life of the Grow NJ program.

  1. Deficiencies in the EDA’s implementation of the ERG Program.

The task force identified certain deficiencies in the EDA’s implementation and oversight of the Economic Redevelopment & Growth program.

The task force previously examined the effect that insufficient guidance for EDA staff had on the implementation and oversight of the programs, primarily with respect to Grow NJ. Similar to the EDA’s process for the Grow NJ program, ERG EDA business development officers and underwriters use a checklist to assess whether applicants have submitted all the required materials. However, the task force found that the EDA provided little to no written guidance on how to assess or review the materials submitted by applicants.

As a result of the lack of centralized guidance for review of projects under the ERG program, there is a risk that ERG business development organizations and underwriters could inconsistently assess critical ERG requirements, which could result in inconsistent determinations of whether ERG applicants satisfy the program’s requirements. For example, as discussed further in Section V, the task force found that EDA staff at times lacked an understanding of their respective responsibilities for reviewing the required “project financing gap.”

The ERG statute’s definition of “project financing gap” requires the developer to certify that it cannot raise additional capital from other sources on a non-recourse basis, even after good faith efforts. The Task Force found that not all EDA underwriters requested the required certification that the developer had made the required good faith efforts, which was evidenced by the absence of the required certification in certain EDA project files reviewed.

  1. The task force’s ARP review identified additional deficiencies in the EDA’s oversight.

The task force’s account reconcilement plan facilitated the review of the EDA’s oversight of the programs with respect to the EDA’s consideration of specific applications and its ultimate approvals and certifications with respect to those applications. Through that review, the task force identified additional areas of deficiencies in the EDA’s oversight and administration of the programs.

In particular, the task force observed consistent flaws with the EDA’s collection and maintenance of critical supporting documents for projects within project files. For certain documents critical to the EDA’s analysis of out-of-state locations under Grow NJ — such as a term sheet, lease, contract, letters of intent, offer to purchase, broker request for proposal response or other proposals for a company’s alternative site — the task force identified project files lacking this documentation. In some instances, the task force confirmed with the ARP participant directly that the documentation did not exist, and that the EDA had not requested it at the time of application.

Regarding the maintenance and organization of the EDA’s files, the task force also identified a pattern of poor record-keeping of crucial decision-supporting documents. Specifically, there are certain EDA analysis documents — such as the cost benefit analysis and jobs report for Grow NJ applicants, the pro forma analysis for ERG applicants and the net benefit test for both programs — that help demonstrate an applicant’s compliance with program requirements.

The EDA files for a given award recipient frequently contained multiple copies of these types of decision-supporting documents, without a clear record of why the analysis changed, who had changed it and which version was the final version supporting the decision to approve or certify.