photo by: Mike Yoder

Lawrence City Hall, 6 E. Sixth St., Thursday, July 7, 2016

The city auditor issued 14 recommendations to alter Lawrence’s practices for giving subsidies for economic development, including consistently gathering information from the companies seeking them.

After looking into the city’s economic development incentives over the past several months, Auditor Michael Eglinski will present an audit report Tuesday to the City Commission. Overall, Eglinski said, Lawrence is already following many of the best practices established for deciding on — and monitoring — incentives. But, he said, “there are some gaps.”

“A lot of the recommendations in there are intended to add in some of the best practices that maybe we’re not doing,” he said.

Besides gathering the same information from every company seeking incentives, Eglinski is recommending city officials communicate more about the risks associated with economic development incentives, scrutinize business-provided data and more logically set application fees.

The audit report is being released during a time when commissioners must decide whether to eliminate the position of city auditor for budgetary reasons. In his 2017 budget proposal, Markus recommended cutting the city auditor position, along with eight other full-time positions and one part-time position.

The recommendations also come as two city boards are in the process of providing commissioners their thoughts on proposed changes to the city’s incentives policies. The Joint Economic Development Council and the Public Incentives Review Committee have cited concerns about some of the commission-initiated changes, which include a cap on the amount of tax abatement projects can receive.

Ideas from the boards will be sent to the City Commission, which will have a work session on the issue. City officials have said the session would take place after the city budget is voted on in August.

One proposed change is to increase application fees — an action city staff is recommending. Eglinksi said “there’s not currently a logic” to the fees, and the city should set them based on the costs they want to recover for staff time spent reviewing and analyzing applications.

While reviewing incentives granted in the past few years, Eglinski found city officials were collecting disclosure information, such as bankruptcies and ongoing litigation, from “some, but not all applicants.”

In his report, Eglinski noted Neuvant House Inc., an assisted living community, provided disclosure information for industrial revenue bonds it received from the city in 2013. In 2015, owners of The Eldridge Hotel were not asked to provide disclosure information in an application for industrial revenue bonds and a tax abatement, the report shows.

“Before you do business with someone, you want to know if they’re bankrupt, if they’re on default of something,” Eglinski said. “I’m not saying a decision would be different, but if we think this information is useful and we think the Neuvant House should provide it, then we should also think The Eldridge Hotel should provide it.”

In a response to Eglinski’s report, City Manager Tom Markus wrote he agreed “disclosure information should be provided related to projects requesting up-front incentives, such as loans or grants.” With other, pay-as-you-go incentives, such as tax increment financing — in which the city diverts collecting property taxes on the increased value of a developed property — “staff does not believe that additional due diligence work would add value,” Markus wrote.

“In these cases, no incentives are provided until the project has been completed and annual performance is shown,” he said. “Staff believes that the analysis and due diligence should be commensurate with public risk.”

When combing through staff reports and listening to City Commission meetings about four recently granted incentives, Eglinski said he did not see that risks regarding the subsidies were consistently identified and communicated.

“Risks, to me, are not communicated as well,” Eglinski said. “I went through every staff report, listened to every City Commission meeting; I wanted to hear what we say.”

According to the Government Finance Officers Association, which Eglinski used as a resource for his recommendations, some risks involved with economic development projects are: project failure, not achieving results within the desired timeframe or with the desired outcome, revenues falling short and negative environmental effects.

In his response, Markus wrote that “pay-as-you-go” incentives, which require companies to perform in order to receive incentives, “really carry no risk to the city in the event of underperformance.” He went on to say that Eglinski’s recommendation to analyze risks and uncertainties, and provide them to decision-makers, should be a “case-by-case determination, not a blanket requirement.”

“When they’re systematically communicated in a process, you can say, ‘OK,’ or you can look at it a little closer and say, ‘Maybe we need to think about a way to manage the risk,'” Eglinski said. “That’s a best practice. If we want to aim higher, we can do that.”

In annual reports about economic development incentives — which Markus said in his response is “extensive, thorough and informative” — city officials include information on how companies receiving incentives are performing. Eglinski said city officials should “take steps to verify” the data in those reports, which is self-reported from the companies.

When submitting the data, companies are currently asked to sign a statement that the information is correct.

“In some performance agreements, the city has access to records that could help verify reported information,” Eglinski wrote in his report. “Verifying data helps improve the reliability of the reporting.”

Markus noted the city could verify information when a question arises about the reliability of a company’s information. But the cost of additional staff time to look at every company’s information likely outweighs the risk that a company is reporting inaccurately, he wrote.

The City Commission will see a presentation with all 14 recommendations at its Tuesday meeting. Commissioners convene at 5:45 p.m. at City Hall, 6 E. Sixth St.