Joint Audit: A sour state investment in private business | Arkansas Blog

Friday, November 4, 2016

Joint Audit: A sour state investment in private business

Posted By on Fri, Nov 4, 2016 at 10:22 AM

With Issue 3 before voters, the Legislative Joint Auditing Committee turned in a report today on the poor results of a foray into state-subsidized venture capital.

Issue 3 would unleash city, county and state officials to issue unlimited taxpayer-backed bonds to support private business investments. Are public officials up to the job?

Worth studying is the look at the results of the Venture Capital Investment Act of 2001. It created the Arkansas Venture Capital Investment Trust and then the Arkansas Institutional Fund — funded by private capital and with a line of credit secured by $10 million from Arkansas Development Finance Authority reserve funds and $60 million in transferable state income tax credits.

Net result as of Dec. 31, 2015? Net position of related investment activities was a NEGATIVE $7.6 million. Noted: The state ended its relationship with Cimarron Capital Partners, the original private partner, Dec. 31.

Auditors concluded that the plan brought some investment to businesses in the state and no collateral had been expended as yet. But ...

* If the performance of the investment fund does not continue to improve, the solvency of the trust will become at risk. Collateral would have to be tapped, meaning a loss of general revenue dollars.

* The deal was better for Cimarron Capital Partners  than it was for the state. Cimarron made $5.1 million in fees and retained ownership in investments, plus its losses were capped at $100,000.  The state fund is left with a $24.2 million loan balance and investment equity of $16.6 million, producing the $7.6 million negative position.

* Constitutional questions remain about using a state agency, ADFA, and its employees, to essentially hold an equity position in a private business. Auditors suggest getting an attorney general's opinion.

* A potential $60 million contingency exists for the state from the tax credit program. This could come into play if the fund has losses not covered by the line of credit or reserve funds.

The link provided above on the audit includes a list of funds and individual businesses in which the state-backed money has been put to use.

It raises again the question: Do we really want to EXPAND government investing in private business, even at the city level?

Vote for private enterprise and a free market.


PS: In a related matter, the auditors reviewed cost-benefit analysis of the various direct subsidies and tax breaks handed out to private business as economic incentives. The study covered 46, not all, recipients of state money. It didn't attempt to evaluate job creation of the 22 that only received sales tax rebates on new equipment and buildings. Of the others, most had favorable cost-benefit ratios, the report said. An exception was money given for in-house research and development projects. In the 24, the state invested more than $10,000 in each of 1,400 new jobs, or about $14 million for a payroll that reached $66 million in the final year of the projects financed. Unexplored is whether those investments would have come to Arkansas without the public money.

PPS: The committee also got its report on the outcome of matters referred to prosecuting attorneys around the state in 2015. Some charges filed; no action in some cases; some cases remain under review. In Pulaski County, the prosecutor reported, for example, that he was still awaiting work by "other agencies" on a dispute over radiology billings concerning UAMS, UAMS employees and private entities. Prosecutor Larry Jegley also  said criminal perjury charges were "not viable" over questions of Joint Audit testimony from the state treasurer's office in 2013. He noted: "The perpetrator is in federal penitentiary for related criminal activity." This refers to Martha Shoffner, the former treasurer, convicted of accepting bribes in return for state bond business.

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