Auditor: Business incentives program a waste
Doug Hoffer, the state auditor, has been criticizing the Vermont Employment Growth Incentive Program, or VEGI, for more than 20 years.
Hoffer wrote about the program in 1999, back when it was called Economic Advancement Tax Incentive, or EATI. Back then, he was working for his predecessor in the auditor’s job, the late Ed Flanagan. Hoffer campaigned on the issue in 2010.
Now that he’s the state auditor, Hoffer’s still working to modify VEGI, saying it’s impossible for the state to prove the job-creation program actually has any value. In his latest report, issued Aug. 24, Hoffer uses an award to Burlington-based Marvell as an example of how he believes the Vermont Economic Progress Council, which administers VEGI, is overreaching its authority.
Hoffer says the progress council broke the law when it authorized an award of up to $5.3 million to Marvell, a company that bought a former GlobalFoundries division called Avera in 2019.
Hoffer has made this charge in previous reports, but said he now has new information, drawn from Marvell’s VEGI application. He said he couldn’t disclose the details.
“What I have done this time is different from what I have ever done before,” he said. “There’s a lot I can’t talk about, because it is proprietary.”
Vermont’s business incentive program
The Vermont Economic Progress Council is an independent entity, housed in the state Agency of Commerce and Community Development, that serves as an approval and authorization body for VEGI and for the state’s Tax Increment Financing District program — another frequent Hoffer target.
State incentive programs that pay companies money to move in, stay, or expand are both common and controversial. The national watchdog group Good Jobs First, which examines subsidy programs in economic development, this year published a report that lists Vermont among seven states that spent a collective $7 billion “putting corporate welfare before pension security for public employees.”
They also have their defenders. Tom Torti, president of the Lake Champlain Chamber of Commerce, said programs like VEGI are vital to economic development.
“Since the program’s inception, those who oppose it on philosophical principle search to find empirical evidence to support their pre-ordained conclusions,” said Torti in response to Hoffer’s latest report. “Awards such as these are not an exact science. They are based on projections of market conditions, the competitive landscape and the ungainliness of capitalism. Some work marvelously while others fall short.”
In its 2019 annual report, VEGI said it has paid out $25 million in incentives between 2007 and the end of 2017. As a result, the report says, 6,795 jobs were created, with payroll of nearly $400 million and an average wage of $58,427.
Hoffer said the program has authorized only two awards larger than Marvell’s, one to Mylan for $5.7 million in 2012 and one to Dealer.com for $4.9 million in 2010. The amounts include an estimated award and a maximum, based on company performance; Marvell’s estimated incentive is $4.4 million and its maximum is $5.3 million.
Hoffer contends that there’s no way of knowing whether any of the companies authorized for VEGI awards would have stayed in Vermont and created the jobs anyway — a “but for” clause that is a critical element of the enabling legislation. And he thinks VEGI is a waste of state money that would better be spent on things like child care, broadband and affordable housing.
“It’s pretty well understood this is not the most cost-effective thing to do with your scarce resources, and anyone who isn’t already in the game and a beneficiary will say the same thing,” Hoffer said.
A scramble to react
State and local officials reacted quickly when California-based Marvell announced in 2019 that it planned to buy Avera for $600 million from the Essex Junction-based GlobalFoundries. With 2,300 employees after the sale of the division, GlobalFoundries was and is one of Vermont’s largest employers. The new division had about 800 employees in Vermont and elsewhere.
“I got called by someone at GlobalFoundries telling me they were going to be selling the company, and that this company was a serious flight risk, and that we could lose all of the jobs,” said Frank Cioffi, president of the Greater Burlington Industrial Corp., a non-profit that promotes economic development.
“There were no customers for this company in Vermont, and Marvell had multiple locations globally,” Cioffi said. He asked the state Agency for Commerce and Community Development and the Vermont Economic Progress Council to meet with company officials, and they invited Marvell to apply for a VEGI grant.
Employment numbers are private, and neither Hoffer nor Economic Development Commissioner Joan Goldstein would say exactly how many people still work at Marvell. Cioffi put the estimate at 200.
At the heart of Hoffer’s complaint about the Marvell award is that the progress council offered Marvell an incentive without knowing if the company, once it was sold, would leave Vermont, taking high-paying jobs with it.
Hoffer contends Marvell wouldn’t have left Vermont after the sale, even without a VEGI grant, because its most valuable asset is its highly skilled engineers. The designer doesn’t have any kind of fabrication plant or machinery in Vermont.
“This is not like a company that could pick up their machinery and equipment and rent some place outside of Houston and start over,” he said. “When you have this kind of human capital, why would you risk breaking it up?”
Hoffer added that VEGI is authorized in statute to encourage job creation, not job retention — yet the Marvell award came at a time when there were fears Marvell would move all its jobs out of Vermont. The progress council got around that by defining the existing Avera jobs as new jobs once Marvell took over, Hoffer said.
“Assuming the plant would close and then restart, VEPC was able to offer a huge gift to Marvell,” said Hoffer. “But the law does not appear to permit this, and this action was taken before the company had even announced its intentions or expressed an interest in or a need for a VEGI award.”
Goldstein disputed that, saying the progress council acted correctly in offering Marvell an incentive to stay before the company announced plans to leave. Once it had made that announcement, she said, an incentive would have been too late.
News of the VEGI grant was released just as Marvell announced in November 2019 — immediately after purchasing the former division — that it was laying off 78 people from the Essex Junction company. Marvell has since signed a lease at the Innovation Center of Vermont in Burlington, Cioffi said Aug. 31.
In her response to the report, Goldstein also noted that companies aren’t awarded any money up front. VEGI authorizes an award based on performance measures, such as job creation or capital investment, and those goals have to be met over a matter of years for the state to award the money. Marvell hasn’t received any money yet, she said.
“Lots of states have incentive programs, and we have a program that is really, really prudent with taxpayer money,” she said Aug. 31. “We make them maintain that for five years. It’s very ironclad.”
Cioffi considers the VEGI award a success.
“A 200-person company is not a small company in Vermont, and these are really, really good jobs,” he said. Megan Sullivan, executive director of the progress council, “was doing her job, and the council did their job. The application was in full compliance with Vermont’s laws.”
A focus on the progress council
Hoffer, whose office has examined dozens of different state programs, has long been determined to get the attention of lawmakers who could at least modify the VEGI program, which approves awards to companies based on job creation.
He insists that his beef is with the VEGI program, not with Marvell or any other company that has benefitted from it. He also takes issue with its lack of accountability — he said statute doesn’t allow the progress council’s decisions to be challenged, either by state officials or the courts. He plans to release two more sections of the reports in coming weeks that outline the remedies he’d like the Legislature to authorize.
So far, lawmakers haven’t shown that they share Hoffer’s conviction that VEGI must be modified. Hoffer acknowledged it’s unlikely they will do so in the immediate future, as they’re consumed by matters related to the budgetary fallout of the Covid-19 pandemic. But he’s holding out hope that the next two phases of the latest VEGI report, due to be released in the next few weeks, will gain some attention in the Statehouse.
“Am I frustrated they seem unwilling and unable to take this seriously? You bet I am,” said Hoffer. “A lot of people are concerned about this program, and believe other types of investments would make more sense.”
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