The Arizona Commerce Authority could not show it confirmed companies that received nearly $11 million in incentives proved they invested the money or hired workers as promised, a new audit reveals.
"ACA's lack of verification documentation increases risk of fraud and waste of public money,'' State Auditor General Lindsey Perry said in her report to the Arizona Legislature.
The agency "lacks oversight and accountability mechanisms for ensuring businesses meet job creation and capital investment requirements," she said.
Confirming such information is a key goal set for the Commerce Authority. Not doing so — or at least being unable to prove it — brought a sharp rebuke from former Gov. Jan Brewer, who championed the authority's creation by the Legislature in 2011.
"That's wrong,'' Brewer told Capitol Media Services in an interview last week. "We need that data to see what our return is, and if you don't have it, obviously you can’t prove anything, right?''
The former governor is a fan, however, of Sandra Watson, president and CEO of the authority.
It was Brewer, a Republican, who named Watson to head the agency when it was created as part of a package of laws that eliminated the old Department of Commerce. Brewer and the Legislature replaced that department with the unusually structured Commerce Authority, charging it with luring new business to the state. That package also included a big corporate tax cut.
"It was a new public-private partnership — that was a big thing for Arizona when I did that,'' Brewer said. "It was huge, and it was the right thing to do. But you have to keep good records.''
The Commerce Authority started out getting $25 million a year in state funds and now receives as much as $100 million a year to hand out to companies through various grant and incentive programs it runs.
The new deep-dive audit into the Commerce Authority was part of a so-called "Sunset Review'' done in advance of the Legislature debating next year whether to reauthorize the agency or allow it to "sunset" and be eliminated.
It's the third audit the ACA has undergone in the past eight years, and the previous reviews found no similar issues. Normally, agencies have just one audit in that time period.
The report found that although Watson's agency met some legal requirements for overseeing $100 million in federal money Arizona received in 2022 to expand broadband internet service in the state, it lacked the required documentation for some companies receiving the money. It also lacked rules for evaluating grant applications and written policies and procedures for overseeing that pool of cash.
And nearly two years after receiving the $100 million, it had yet to finalize policies and procedures for the grant program, the audit concluded. The agency could not even show auditors drafts of those items.
The Commerce Authority runs the state broadband office. In June, Gov. Katie Hobbs announced the state was getting another $993 million in federal money that would be doled out by the agency. Watson was one of just a handful of agency directors Hobbs retained in their jobs when she took office in January.
Not having rules in place, said Perry, means there is an increased risk of the money being misused or of inaccurate reporting. That could come back to bite the Commerce Authority and the taxpayers who fund it.
"Ultimately, the ACA could be responsible for repaying any questioned costs to the federal government,'' the audit said.
The ACA agreed to a series of recommendations made by the auditors. But Watson’s pushback began even before the report was released a week ago.
In her written response to the auditor's report, Watson praised Perry for her "service to our state and coordination over the last year,'' as Perry’s staff did the audit. Watson then turned that praise inward, touting ACA talking points that her agency "has successfully won 1,180 competitive projects, representing a projected 267,000 new jobs with average wages of $60,000 and over $113.4 billion invested in Arizona communities across the state.''
But the formal response went on to contradict several of Perry's findings, insisting the ACA did indeed have documentation showing that companies that won grants and tax credits created the jobs and made the investments they were required to make.
Perry, however, in an unusual "comments to the ACA response,'' wrote that Watson was deflecting from the findings.
"The ACA has included certain statements in its response that misrepresent our work, mislead the reader, and deflect attention from the message that the ACA needs to improve its performance in various areas,'' she wrote.
Comments by the auditor on an agency’s response are sometimes included in a final report — that's happened in three of the 30 audits it released in the past two years. But none were so blunt in calling out what the auditor general called misrepresentations.
For instance, the ACA included in its response a table showing it collected all necessary information on one big grant program. But Perry said none of the 21 granted tax credits the auditor reviewed showed evidence that was done.
Former Arizona House Speaker Kirk Adams questions the audit findings. The Republican was speaker when the law creating the ACA was enacted.
He noted in a Friday interview that the auditor general is an office of the Legislature and, as such, can sometimes be influenced by lawmakers.
"So just color me skeptical a little bit about the independence of this audit, because I know the sort of back-end politics of how this works at the legislative level,'' Adams said. "This reads to me like they were trying to reach a conclusion for a policy purpose, or a policy debate, rather than sort of a straight-laced independent audit.''
Current House Speaker Ben Toma and Senate President Warren Petersen, both Republicans, declined to comment on the new audit, saying they had not yet reviewed its findings.
Adams suggested there might be some politics involved, noting that some conservative groups dislike the ACA because it grants incentives.
More importantly, he pointed out, similar audits in both 2015 and 2017 found no similar issues. And this audit, he noted, did not find any money was actually misspent.
"They didn't find any misuse of funds or fraud,'' he said.
"They said that there is a risk, but they didn't even identify the risk,'' Adams continued. "I'll just say it's not thorough. It's not a thorough finding.''
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The conclusions of the audit aside, Adams said the Commerce Authority — and the grants and tax incentives it oversees — have been a key factor in the state’s economic revival in the wake of the Great Recession. Major companies have moved to or expanded in the state, and the economy is no longer dependent on new home construction to the degree it was before the 2011 law creating the agency.
"If you look at what's happened, you can make an argument it’s the most successful economic policy that the state has ever done,'' Adams said. "I mean, the state economically has been completely transformed.''
