Audit raises questions about city’s economic development program

Houston runs a key economic development program without formal procedures or sufficient oversight, and in some cases officials cannot prove that the companies involved met the terms of their agreements before being reimbursed with tax dollars, an audit by the city controller’s office has found.

The City Council approved 27 so-called Chapter 380 agreements between 2001 and 2015, using a chapter of state law that lets cities lend or grant public funds to private companies to spur economic activity.

Houston typically has used the tool to get companies to improve infrastructure on or around their properties and then reimburses them for the work.

As of last July, the city had paid $55.1 million under 24 active projects, the audit states.

“It’s a good economic development tool, but we want to make sure we’re properly documenting all this stuff so that it’s fair and transparent. The big key from the controller’s perspective is, this is a lot of money we’re giving out,” Controller Chris Brown said. “We want to make sure we’re following all the rules we established in the ordinance because we don’t want to say we’re giving money out willy-nilly and we sure don’t want to say that we’re not checking that they’re actually doing the things that are in the agreement.”

Mayoral Press Secretary Mary Benton noted that the audit period concluded before Mayor Sylvester Turner took office in 2016, and said the city has improved its processes surrounding the program in recent years. There may be ways to improve documentation and the program’s internal controls, she said.

In general, the auditors state, Houston’s Chapter 380 program is being administered within state and city rules, but a review of 10 of 27 such deals found that the city’s economic development office lacked formal procedures governing the program and that documentation related to its deals was in many cases “inadequate or non-existent.”

In some cases, the audit showed, the city lacked documentation of how it evaluated proposed projects, had inadequate paperwork to prove that applicants were eligible to participate, had no record the firms had paid the required $500 application fee, and lacked proof that companies had met the terms of their agreements — or that city staff had monitored compliance — in order to receive reimbursement from the city.

“Some projects only had handwritten notes as documentation which at times were illegible,” the audit states.

The auditors also reviewed five agreements for compliance with the detailed terms of each agreement. In four of the five cases, companies did not meet at least some of their commitments before being reimbursed.

The economic development staff drafted written procedures for the program while the audit was being conducted, the auditors wrote, but those new rules were not formally approved and had no specified effective date.

Documentation concerns

That detail was particularly revealing to Greg LeRoy, of Good Jobs First, a Washington, D.C.-based nonprofit watchdog group monitoring state and local economic development programs.

“Houston taxpayers should be alarmed,” LeRoy said. “The fact that consistent, transparent paperwork wasn’t created at the beginning of every one of these deals is the same as them saying, ‘Oh, we lost the files,’ because either way taxpayers can’t see and, therefore, they can’t tell if the program is being run evenhandedly or whether they’re just throwing money out the window.”

The city’s 380 program is run by Chief Development Officer Andy Icken’s office, which accepts applications and negotiates with participating firms.

“With respect to the ordinances, with respect to the contracts, we’re in compliance, with no deviations found,” Icken said. “I believe they identified a few of these contracts that go back several years that they think we should have had better documentation, and we’ve agreed. We’ll find some better documentation.

“Can we do a better job of documenting what we did and why we did it?” he continued. “Yes, and we’re going to put procedures in place.”

In the report, however, his office disputed that documentation surrounding the program had been inadequate, saying that the city council often approved deals with language waiving requirements included in the 1999 ordinance governing the program that the developer or city failed to fulfill.

Brown and his auditors took a dim view of that defense.

“It’s just loose,” Brown said. “If it’s all waived, then, basically, what we’re saying is, ‘We’re going to give you this money regardless of what you do,’ which isn’t the intent of the program.”

Icken said the waivers were to ignore certain requirements listed in the 1999 city ordinance, such as environmental studies and land surveys, which he said were not needed for every deal.

“In all cases, the reimbursements met what council passed as an ordinance for that specific project,” he said.

‘Just giving money away’

The nonprofit Texas Organizing Project cheered the audit, pointing to a study its staff completed two years ago criticizing the program. TOP long has said companies receiving incentive agreements should offer job training, living wages, and other community benefits.

“We gave the city a D on transparency, an F on enforcement. None of the findings are surprising,” TOP spokeswoman Mary Moreno said. “We’re just giving money away to corporations without any accountability.”

The auditors also flagged language in several agreements in which the city agreed to rely solely on information the companies reported about their own compliance with the terms of each deal. Icken said he is comfortable with that practice, noting that falsifying government documents is a crime.

In one case, a company was sent its full reimbursement despite compliance paperwork showing that it had fallen short of the agreed-upon job creation target; Icken said his office caught that before the auditors did and said the city has received a partial refund. In another, Brown said, a company’s proof that it had met its jobs target included decades-old data.

“It was just, ‘This company has been in business 28 years, we’ve produced lots of jobs,’” Brown recalled. “Well, this $5 million we gave you, how much incrementally did this benefit the Houston economy? ‘Well, we can’t document that.’ ”

Icken’s office said the firms in question met their reporting obligations under their agreements. mike.morris@chron.com twitter.com/mmorris011