Audit reveals repeat DECD inadequacies

The Department of Economic and Community Development (DECD) may have improperly awarded over $100 million in a film production tax credit according to a recent audit from the state’s Auditors of Public Accounts. The finding is just one of the findings that relates to improprieties surrounding tax credits the agency oversees.

In addition, the audit, which covered fiscal years 2020, 2021, and 2022, uncovered a number of inadequacies in how DECD oversees several of its programs and internal operations.

Auditors found DECD issued a digital animation production company roughly $94.4 million in film production tax credits between fiscal years 2016 and 2020 and roughly $50 million for fiscal years 2021 and 2022.

Connecticut statute prohibits digital animation production companies that receive a digital animation tax credit from being eligible to apply for or receive a film production tax credit. As a result, the audit finds, DECD may be allowing ineligible digital animation companies to receive film production tax credits.

This is not the first time an audit of the agency has found potential improprieties in DECD’s awarding of film credits. An audit for fiscal years 2017 through 2019 reported the same finding. At the time, DECD said it would seek legislative clarification about whether a digital animation production company that receives a digital animation production tax credit can also receive a film production tax credit.

However, the current audit notes that DECD did not do so. It also recommends DECD now seek clarification from the legislature.

DECD disagrees with the audit’s finding. It told auditors that it interprets statute to mean that a production company cannot simultaneously apply for a film production tax credit and a digital animation tax credit. However, the agency does not believe that prohibits a production company from applying for one tax credit and then subsequently applying for another for a separate production. DECD said it will seek to amend the statute and clarify its language.

The audit also found inadequacies and insufficiencies in DECD’s control over a number of other programs including tax credit fees for the Urban and Industrial Site Reinvestment program, the Small Business Express CT Recovery Bridge Loan Program, and in program monitoring of grants, loans, and loan setup. It also found inadequacies in the agency’s control over its internal processes, including relocated businesses, asset management, overtime pay, regular agency reporting, and over its financial review process.

The Urban and Industrial Site Reinvestment (URIS) program gives taxpayers who invest in eligible urban reinvestment and industrial site investment projects a rebate equal to the amount of their investment. Participating in the program requires applying to the DECD commissioner, who can impose an application fee. Recipients of the tax credit may also be required to pay a fee with the submission of their annual certification.

Auditors reviewed five companies that collectively received $39 million in tax credits through the program and found DECD failed to collect $19,000 in application and annual fees before issuing tax credits worth $18.3 million. As a result, the audit found DECD did not receive all the funds it was entitled to because it does not have an adequate process for tracking whether it has collected fees. The finding is a repeat from the 2017 to 2019 audit.

DECD said it has updated its internal control procedures.

The audit also found that DECD failed to inform four recipients of URIS credits of statutory requirements relating to DECD loans. State statute requires that, as a condition of receiving state financial assistance, business organizations do not relocate out of state for ten years following a loan or during the term of the loan, whichever is longer. None of the four contracts, totaling $37.4 million, auditors reviewed required them to repay the tax credit when they relocated out of state.

This is also a previous finding from two prior audits, covering fiscal years 2015 through 2019.

DECD said it disagrees with the finding, arguing that tax credits are not state financial assistance.

Other repeat audit findings include inadequate program monitoring of grants and loans, improper loan setup, inadequate control over job audits, and lack of monitoring of lending partners.

Auditors also reviewed 26 of the 46 reports DECD is statutorily required to produce and found the agency failed to submit four semi-annual reports, submitted 6 required reports late, and misstated contractual obligations, interests, and late fees in other reporting forms.

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