Audit shows improper loan forgiveness, excessive tax credits by DECD

The Department of Economic and Community Development, which awards low-interest, forgivable loans and tax credits to businesses, has been all too forgiving and generous, according to a new audit.

Loans and tax credits made to small businesses, manufacturing companies and corporations by the DECD are tied to job retention and growth, but auditors found the department modified and forgave loans even as companies failed to meet their hiring requirements. 

According to the audit, DECD forgave $97 million in loans over a three-year period, including $1.7 million in loan forgiveness for companies that failed to meet hiring goals and even reduced their workforce.

“DECD granted $1,719,219 of loan forgiveness that the companies would not have been entitled to under the original assistance agreements,” the auditors wrote. “In 2 cases, the changes allowed the companies to receive loan forgiveness for reducing their workforce.”

Auditors also found DECD dished out $1.5 million more than allowed under state statute to a company under the First Five Plus program and awarded $49.4 million more in film production tax credits to Blue Sky Studios in Greenwich.

Disney-owned Blue Sky Studios recently announced it was closing permanently and laying off more than 450 employees after receiving nearly $95 million in state assistance between 2017 and 2019.

The DECD disagreed with many of the auditors’ findings, alleging that without offering loan forgiveness to those companies, the businesses likely would have failed, and the state would be unable to collect anything. 

The department also argued that the nearly $50 million in film tax credits were made under two film tax credit programs – the film production tax credit and the digital animation tax credit — and were therefore allowable under state statute.

The latest audit is just one more instance over the course of many years in which the DECD’s loan programs have come under scrutiny for not meeting job growth requirements, modifying loans for delinquent companies, over-awarding of loans and tax credits and improperly forgiving loans.

Although the various business loan, grant and tax credit programs have been used extensively throughout the past 12 years in an attempt to grow Connecticut’s economy and lure businesses to the state, Connecticut’s economy has largely stagnated and many of the incentives are geared more toward keeping businesses from leaving the state or closing. 

However, bills before the General Assembly that are supported by DECD Commissioner David Lehman would curb some of the state’s old lending practices. 

House Bill 6440 would establish a tax rebate program that caps financial assistance for jobs, requires employers to actually meet their job goals before receiving tax rebates and not require additional state bonding in order to assist companies.

A second bill – House Bill 6467 – would alter Connecticut’s Small Business Express program to partner with private lenders to help businesses obtain loans.

Lehman testified that the Small Business Express program was never meant to be a long-term program, but rather offer support to businesses in the wake of the 2008 recession.

Although Gov. Dannel Malloy’s administration doubled down on business grants, loans and assistance, numerous studies have shown that state business incentives have no effect on the overall state economy. Connecticut has bonded money extensively to support its various business incentive programs.

The auditors also cited inadequate financial review process, program monitoring and providing an additional $150,000 loan to a company that never made a payment on its first loan. The first loan to the company was forgiven.