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State Auditors: Virginia Has Been Vulnerable to Fraud For More Than 20 Years 

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Mismanagement and lax oversight at the state’s primary agency for spurring business expansion have left Virginia vulnerable to fraud for more than two decades, according to an audit released Monday.

The Virginia Economic Development Partnership, which doles out millions in economic development incentives, ignores basic management and marketing practices and uses an inconsistent and unstructured approach to grant programs that exposes the state to potential fraud, according to the report by the Joint Legislative Audit and Review Commission, a state legislative watchdog agency.

The development agency also failed to seek repayment from companies that received grants but didn’t meet performance requirements or create the promised number of jobs, according to the report.

A “significant” number of the agency’s staff members don’t work full eight-hour days, the report found, because there’s no system to track their leave.

“It is damning on its face – the practices at VEDP,” said Del. Chris Jones, R-Suffolk, chairman of the budget-writing House Appropriations Committee and a audit commission member. The report “really just made me sick to my stomach.” (Link to audit report).

Most of the economic development agency’s budget comes from the state’s general fund. That includes $27 million in fiscal year 2017 for a 111-member staff and marketing. Most staff members earn higher salaries than similar state employees, and the previous CEO’s base salary was about $279,000. A 24-member supervisory board is appointed by the governor and General Assembly.

The authority, created by lawmakers in 1995, awarded $384 million in grants through 10 incentive programs during the past decade, according to the report. For example, two of its programs contributed a total of $6.8 million to a deal this year in Norfolk for the company ADP to create a regional customer-service center with 1,800 jobs.

After a 90-minute presentation about the audit Monday, lawmakers said that they want to take a deeper look at how the state handles economic development and that they might scale back the authority’s budget.

“They’ve got a lot of proving to do before I’m willing to allocate any more dollars to them,” Jones said.

Gov. Terry McAuliffe, who is in Tokyo on a trade mission that includes members of the authority, issued a statement saying he hoped a new CEO would improve accountability. He said he wanted to work with lawmakers to reform the economic development agency.

“I have instructed Secretary of Commerce and Trade Todd Haymore and other members of my administration to review the JLARC report and identify opportunities, either through legislative or executive action, to maximize the impact of Virginia’s economic development efforts,” McAuliffe said.

Lawmakers passed a resolution this year asking for the audit.

Drew Dickinson, a principal legislative analyst with audit committee, outlined the report at a hearing that included few positives.

The agency’s “approach to administering incentive grants has exposed the state to avoidable risk of fraud and financial loss, and has increased the potential that state grant funding is not efficiently allocated,” the report said.

Going back to 1995, the authority awarded grants without a process to protect the state from fraud and financial loss, the report said.

A widely reported example stemmed from a 2014 upfront grant from the Commonwealth’s Development Opportunity Fund of $1.4 million to a Chinese company that then failed to build a manufacturing plant in Appomattox County, east of Lynchburg. Referring to that company as “illegitimate,” the audit says the agency lacked a structured approach to validate legal and financial information about such companies.

The problems at the authority weren’t exactly a secret to its leadership. Staff members notified management in 2011 about the lack of due diligence in awarding investments, according to the report.

The authority hired consultants to review its organization and management in 2012, 2014, 2015 and 2016.

All four reports identified management problems, and most problems remained unaddressed, the audit found. Three of the four reports were not made available to all of the authority’s board members or the public.

Martin Briley, who was hired as the agency’s CEO in 2011, left in March after news of the botched Appomattox County deal. A Virginia State Police investigation of the project that began in mid-March continues.

Senate Majority Leader Tommy Norment, the audit committee vice chairman, said the audit found the agency was overstating the value of its marketing efforts. He asked Dickinson, the committee analyst, whether the watchdog review detected any sense that the economic development agency needed to overstate successes as a result of the governor’s focus on job creation.

“There may be pressure there,” Dickinson replied. “I think this is something that can be addressed with just some more transparency on what’s being done and what value they’re providing.”

This story originally appeared on PilotOnline.com.

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