Maryland economic development programs relied too much on information provided by companies getting state benefits and too little on rigorous documentation, according to a highly critical audit released Monday.
Legislative auditors found 11 categories of lapses during their examination of the state Department of Business and Economic Development, which was renamed the Department of Commerce by Gov. Larry Hogan as of Oct. 1.
Thomas J. Barnickle III, the General Assembly's chief auditor, said many of the conclusions in the audit came down to a matter of "trust but verify" — the adage popularized by President Ronald Reagan to explain his approach to nuclear arms agreements with the Soviet Union.
"We're saying you need to do a better job verifying that information," Barnickle said.
The findings covered the period between November 2010 and June 2014, when Martin O'Malley was governor. Barnickle said none of the findings involved corruption or verifiable waste of state funds but did highlight flaws in record-keeping and a failure to adopt written procedures.
The job of answering the auditors' criticism fell to state Commerce Secretary R. Michael Gill, a Hogan appointee who agreed with some of the audit findings but took issue with several others.
In particular, the department disputed the auditors' criticism of the way it conducted an auction of $100 million worth of tax credits under the Invest Maryland venture capital program, which was intended to help start-up businesses.
Under that program, insurance companies were offered the opportunity to buy credits and reduce their tax liability by a percentage determined by that auction, which was held in 2012.
In the auction, 11 companies submitted winning bids and received tax credits that would let them pay 84 cents on the dollar into the state-run venture capital program — avoiding taxes that added up to $100 million for all the bidders.
The auditors said the department couldn't show why it chose the method used to determine the cost of the tax credits. A different method could have brought in $1.1 million more, ausitors said.
In its reply, the department said that wasn't necessarily true. The department said bidders prefer the method that was used, and it isn't likely that as many companies would have bid or that they would have bid as much if the other rules were in place.
Barnickle said the department never gave auditors that explanation in the months they were examining the program. The audit criticized department officials for having to refer the examiners to the company that conducted the auction to answer basic questions about procedures for the sale.
"[The department] had little specific knowledge regarding how the vendor conducted critical functions of the auction," the auditors wrote.
Karen Glenn Hood, the department's spokeswoman, said it was difficult to respond to some of the auditors' criticisms because the people involved in the programs had left the agency.
In addition to the auction, the auditors focused on the One Maryland Tax Credit Program, which is intended to spur job creation in economically depressed areas such as Baltimore and Western Maryland. They found the department couldn't verify that the companies had hired all the workers needed to receive tax credits within the time allotted.
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The report said that nine companies were given credit for creating 473 jobs, but that 427 of the hires did not take place within the time spelled out in the rules. Many, it said, were hired before the tax credits were awarded.
The department insisted there was nothing nefarious going on and that it was a matter of when the clock started on allowing jobs to qualify for the program. It said in its reply that it counted all positions created after the company declared its intent to use the tax credit program.
"Clearly all of these entities did have a sufficient number of qualified positions," Hood said. "I think it was just that the auditors had a question of the timing of that."
The department said it would rewrite the rules governing the program to make them more flexible. It also promised to conduct more of its own audits to verify companies' employment claims.
"In broad terms, we agree with most of the findings," Hood said. "We've either implemented procedures for correcting these issues or are in the process of doing so."