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South Carolina’s Scout Motors Deal Needs Transparency, Further Review

The Palmetto State’s taxpayer-funded incentive agreements should not be rubber stamped …

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Probably most South Carolinians are now aware that their General Assembly has appropriated $1.3 billion for infrastructure investment to attract Scout Motors (an affiliate of Volkswagen) to build electric vehicles in this state. The bill comes in the form of a Joint Resolution – H. 4088.

This is a project negotiated by the state’s Department of Commerce (the “DOC”). The details of its agreement with Scout have not been publicly released; this is typical of the DOC, which usually asserts reasons of confidentiality. The stated purpose of the bill is “to appropriate funding for certain infrastructure and purposes to foster economic development.”

This bill was introduced by House Speaker Murrell Smith on March 7 and rammed through his chamber in record time (it passed on third and final reading by a 100-14 vote on March 13), all without meaningful floor debate. The same thing happened in the Senate, in which the Finance Committee used a parliamentary maneuver called “strike and replace” to take another bill (H. 3604) which had already passed the House and the Senate on second reading, strip out its contents and replace them with the text of H. 4088.

This bill (as amended) passed the Senate 36-4 with one abstention (the only ‘nay’ votes were by Cash, Corbin, Martin, and Verdin) and was returned to the House where it passed on March 15 by a vote of 100-12.

The bill appropriates $1.091 billion “to provide funding to Project Connect for the following purposes:

      (1) bridge to support rail spur construction;

       (2) land acquisition;

       (3) required site improvements and mitigation;

       (4) road access and improvements;

       (5) soil stabilization;

       (6) training center;

       (7) water and wastewater infrastructure; and

       (8) any such other purpose as is necessary and recommended by (DOC) for Project Connect. Such other purpose is subject to review and comment by the Joint Bond Review Committee.

Note especially No. 2 on that list (land acquisition): Apparently the state is purchasing the land for this project. The bill does not specify whether that land is to be sold to Scout or donated to it by the state; however, I’ve spoken with a state legislator who informed me that the plan is for the state to buy and improve the land and then donate it to Scout. We won’t know for certain until the terms of DOC’s agreement with Scout are released.

The donation of land by the state to a private company would be unconstitutional. Article III, Section 31, of the S.C. Constitution provides: “Lands belonging to or under the control of the State shall never be donated, directly or indirectly, to private corporations or individuals … or sold to corporations … for a less price than that for which it can be sold to individuals.” Of course, this doesn’t prevent the state (acting through the Commerce Department) from granting cash to Scout for its direct purchase of the land – but that is not what this bill says will happen.

This bill also provides for a $200 million loan to Scout, the terms of which are not specified.

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It is worth recalling Volkswagen has a history of fraud. In September 2015, the U.S. Environmental Protection Agency (EPA) found many VW cars being sold in America had a “defeat device” – or software – in diesel engines that could detect when they were being tested and change their performance accordingly to improve results. Volkswagen has since admitted to cheating on emissions tests in the United States.

Also, as a European company Volkswagen is subject to the European Union’s laws mandating compliance with its draconian ESG (Environmental, Social, and Governance) regulations – which includes insisting that its subsidiaries, affiliates, vendors, and suppliers also comply with these measures. The effective implementation of ESG at this facility will have a profound effect on South Carolina companies seeking to do business with Scout.

What needs more examination is the agency responsible for these incentive packages given to big business. What do we know about the Department of Commerce, which is the agency responsible for negotiating these deals for our state, and what is its track record?  Also, is there adequate follow-up evaluation to be sure that companies which receive taxpayer incentive packages actually deliver on their promises? In June 2020, the Legislative Audit Council (the investigative arm of the state legislature) conducted an audit of the DOC (linked here) and issued a 108-page report highly critical of the DOC’s discretionary incentive programs.

That audit, which covered the period from 2009 through 2019, identified some significant weaknesses in the DOC’s administration of those programs. That audit has never received much public attention, and as far as I am aware the DOC has not implemented any material changes in response to it.

The DOC administers two separate incentive programs designed to attract business and industry to the state. These consist of: (1) job development tax credits (“JDCs”); and (2) business development grants. These incentives are not offered to all businesses, but only to those which obtain approval from the Coordinating Council for Economic Development (the “Coordinating Council”). The Coordinating Council consists of 11 individuals specified by statute (SC Code §13-1-1710), mostly cabinet officials and the heads of government agencies or entities. Only the Commissioner of Agriculture is an elected state officer; all the others are political appointees.

JDCs are tax rebates that businesses can take against employee withholdings on their quarterly state tax returns. Companies receiving JDCs are required to sign an agreement which specifies the number of jobs the company must create and the amount of capital it must invest in order to qualify. They have five years to satisfy those requirements, and once that is completed (and certified) they take the credits over 10 years. Business development grants are for specific economic development projects, and are cash awards to the county in which the project occurs. Here, too, the business is required to meet certain job creation and capital investment targets, and once the project is completed the county reimburses it from those funds.

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During the audit period the DOC awarded 557 business development grants totaling $526.2 million, and approved 415 JDCs potentially worth as much as $6.2 billion. Collectively, the approved projects were required to create over 153,000 jobs. These are not small programs.

The report was highly critical of the agency’s effectiveness and transparency. The DOC does not have performance measures to determine these programs’ overall effectiveness; it does not examine their fiscal impact; and does not publicize the number of jobs created or the amount of capital actually invested by the recipient companies. Furthermore, the DOC refused to allow the auditors complete access to its internal reports due to alleged “confidential taxpayer information”, which made it impossible to verify the accuracy of some of the data provided.

The audit was also critical of counties’ compliance with their legal requirements concerning job development grants. Counties are the actual recipients of these grants, which they then disburse to the company upon its achievement of certain objectives. They are required to provide to the DOC quarterly progress reports on project performance, as well as an audit of each project upon completion. This information is necessary to ensure that the projects are on schedule and the grant conditions are being met. However, a very large percentage of counties are simply ignoring these requirements, which is entirely the fault of the DOC since it makes no effort to enforce them. Their excuse is lack of staff, which is hardly acceptable and is indicative of management failure.. 

The DOC is also doing nothing to verify compliance with job creation targets. The only information it receives is reporting by the companies themselves. These could be verified by comparing them to returns filed with the Department of Employment and Workforce (“DEW”), but the DOC does not do so and apparently doesn’t even have a data-sharing agreement with DEW. Interestingly, the heads of both the DOC and DEW are members of the Coordinating Council, yet their departments don’t communicate with each other.

Finally, the audit revealed that the DOC does a poor job of attempting to “claw back” grants and tax benefits from companies which default on their job creation and/or capital investment obligations. Not only is the Coordinating Council very lenient in excusing non-compliance, and forgoing attempts to recover unearned grants, but the DOC simply writes off millions of dollars owed to it. Some of those write-offs are legitimate (as where the debt has been legally discharged in bankruptcy), but in many cases the DOC simply determines that pursuing the money is not worth the effort. Filing lawsuits might not be appropriate in some cases, but there exist collection agencies which would do the work, even on fairly small claims, for a percentage of recoveries. And there also are investors who would purchase the debt for pennies on the dollar. Either of these approaches could net the DOC at least some partial recoveries, but it chooses to use neither, simply writing off 100 percent of the obligation. This is ludicrous, and more evidence of bad management.

The audit report contains numerous other criticisms and recommendations, but in my opinion the foregoing are the most significant ones.

In summary, for the last decade, while the DOC has done a fine job of doling out grant money and tax credits, it has done a poor job of tracking compliance, measuring program results, coordinating with sister agencies, aggressively pursuing recoveries for contractual breaches, and especially being transparent about its activities and results.

Perhaps things at the DOC will begin to improve. In the months since the audit report was issued there seems to have been no progress toward responding to its criticisms and improving agency performance. However, the DOC recently underwent a leadership change. Bobby Hitt, Secretary of Commerce for most of the audit period, resigned from that position a few months ago and has been replaced by Harry M. Lightsey III, formerly a senior executive with BellSouth and AT&T. Mr. Lightsey has impressive credentials, and hopefully he will bring some long-needed management improvements to this agency. Time will tell.

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ABOUT THE AUTHOR ...

Laird Minor (Provided)

Laird Minor is a retired businessman and former lawyer from New Jersey who has lived in Greenville County for the past quarter century. He is currently president of the South Carolina Public Interest Foundation (SCPIF). SCPIF is a tax-exempt 501(c)(3) public service organization working to uphold our State’s adherence to the law and accountable governance. We use litigation as our primary tool to ensure government compliance with the state’s laws and constitution.

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