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Audit faults SC Commerce for lack of transparency, oversight over business incentives

Bobby Hitt.jpg

A new Legislative Audit Council report is calling into question oversight of corporate grants and tax incentives awarded by the S.C. Department of Commerce, which is led by Bobby Hitt (above). File/Lauren Petracca/Staff

State lawmakers are calling on Commerce Secretary Bobby Hitt to resign after an audit suggested his agency failed to properly oversee millions of dollars in grants and tax incentives that are used to lure businesses and jobs to South Carolina. 

The new report criticizes officials with the S.C. Department of Commerce for a lack of transparency, failing to scrutinize companies that receive taxpayer money and for allowing businesses to keep millions of dollars even when they don't create the number of jobs they promised. 

The audit provides an inside look at Commerce's largest economic incentive programs over the past decade, from 2009 to 2019. Over that time period, state officials on the S.C. Coordinating Council for Economic Development approved hundreds of businesses for state assistance.

That included paying out more than $526 million in grants to help develop property and upgrade buildings. 

The council, which is led by Hitt, also signed off on $6.2 billion in potential job development credits, which allow qualifying companies to keep a portion of their employees withholding taxes if they create a set number of jobs. 

The new audit, which was conducted by the S.C. Legislative Audit Council, was requested by a bipartisan group of lawmakers last year. They asked for the review after the Legislature voted to extend millions of dollars to persuade the NFL's Carolina Panthers to build its headquarters and practice complex in York County. 

The findings are likely to set off a fresh debate in the General Assembly about the effectiveness of incentive programs and Commerce's oversight of taxpayer money.  

And it is prompting some lawmakers to call for Hitt to step down from his post, which he has held for 9 years.  

"Secretary Hitt needs to resign or be fired," said Sen. Wes Climer, R-Rock Hill. "Either he didn't know, or he knew and he didn't care. And from my vantage point, neither of those are acceptable."

Gov. Henry McMaster, who appoints the commerce secretary, showed now signs of abandoning Hitt on Thursday.

Brian Symmes, the governor's spokesperson, emphasized the number of jobs Hitt has announced as commerce secretary since 2011. He painted the legislative audit as politically motivated. 

“The Department of Commerce has been delivering wins for South Carolinians season after season," Symmes said. "The governor believes our time and energy is best spent on winning more games by recruiting more employers like Samsung, BMW, Volvo, and Continental Tires — not fewer.”

Senate Finance Committee chairman Hugh Leatherman, R-Florence, said calls for Hitt to resign are "absolutely ludicrous," though he said he had not yet had a chance to read the audit.

One of the more concerning issues the auditors found was that state officials did not take back taxpayer money from companies that failed to meet the job and investment requirements included in their contracts. 

According to the audit, the coordinating council could have clawed back nearly $17 million in grant money over the past decade. Instead, the council often chose to go easy on companies and allowed them to keep the additional money even though they didn't fully meet their job and investment requirements. 

That enabled corporations to retain $7.6 million that the state could have legally recovered from them, according to the audit. 

The auditors also found another $5.2 million in grant funding that Commerce officials failed to recoup from companies that went bankrupt, were suspected of fraud, or simply stopped responding to state officials. 

The Legislative Audit Council asked Hitt's department why it didn't go after more of those companies in court. Commerce officials told the auditors they were concerned the agency would spend more money on legal fees than it would recover. 

Department spokeswman Alex Clark said any negotiations related to repayment of grant funds are handled on a case-by-case basis.

She said state officials don't always want to be hard on the companies, especially businesses that made a "good faith effort." Holding them to strict performance goals, she said, could cause some businesses to fail.

The loss of that taxpayer money, however, has largely gone unreported because the Commerce and the Coordinating Council often operate in secrecy.

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The meetings where state officials discuss whether to approve incentives for companies are held in executive session, which is not open to the public.

Commerce has also charged The Post and Courier and The Nerve up to $45 per hour to collect, redact and copy public information on the business incentives. 

The auditors faulted state officials for that lack of transparency too. 

The audit noted that Commerce never discloses in public how many jobs each business actually creates. The agency puts out press releases on the initial job projections, but does not disclose how many positions the companies create over the life of their contracts.

That makes it impossible for taxpayers and lawmakers to independently determine if the companies are actually meeting their job creation goals. 

"Since public funds are utilized to provide grants and job development credits to companies, it is important for the general public and policy makers to know whether those funds are being used effectively," the auditors wrote. 

The audit said other states in the Southeast don't have that problem. It points out that Tennessee, Virginia and North Carolina all provide more detailed information about their economic incentives online.  

In South Carolina, Commerce officials aren't even collecting all of the reports that companies are required to submit to the state. 

The auditors reviewed the paperwork for a number of companies that received grants or tax incentives, and they found that many of them were missing quarterly reports. 

Even more, the audit found that department officials don't independently verify the information that companies are providing to the state. One official explained that the agency relies on "the honor system" for businesses to self report. 

The auditors pointed out that opens up the possibility of companies taking advantage of the state and cashing in on more tax incentives than they were eligible to receive. 

That lack of oversight outraged the lawmakers who called for the audit. Sen. Dick Harpootlian, D-Columbia, said the findings made it clear that Commerce officials weren't actually interested in monitoring the deals they make with companies. 

"No business in this state or country would operate with this type of blind eye," said Harpootlian, who also wants Hitt to step down. 

Commerce officials reportedly told auditors that there was little risk of fraud involved in the job development credits because the state Department of Revenue is supposed to audit those deals. 

But that's not happening either.

The auditors found that DOR officials were not able to conduct audits on companies every three years, as required by law. They also noted that some companies receiving the incentives have never been audited.

When the audits are conducted, the Department of Revenue said they find "discrepancies" in 95 percent of the reports the companies are submitting to the state. 

Sen. Brad Hutto, D-Orangeburg, said the audit highlighted a need for more oversight at Commerce. But he was not ready to call for Hitt's head just yet. 

“There are people in South Carolina working at great jobs right now that have benefited from actions that Commerce took to recruit them," Hutto said, "and then there are other times when Commerce obviously dropped the ball and didn’t follow through with what was supposed to happen and the state ended up spending money on jobs that do not exist." 

Jamie Lovegrove contributed to this story. 

Reach Andrew Brown at 843-708-1830 or follow him on Twitter @andy_ed_brown.

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