State pro-business organizations are publicly funded, but privately controlled

The offices of the Arizona Commerce Authority are housed in downtown Phoenix at the Freeport-McMoRan Center, the gleaming glass headquarters of an international mining firm of the same name. The authority, which oversees state corporate tax incentives and grants worth hundreds of millions of dollars, is not quite a public agency, as its location two miles east of the state government complex suggests. It’s led by a board of directors run by the governor and Jerry Colangelo, who, after four decades as an Arizona sports and real estate mogul, is a local icon.  Sixteen other corporate executives also sit on the board, including Richard Adkerson, President and CEO of Freeport, to which the authority paid about $411,000 in state funds last fiscal year for renting the space.

There’s a name for this arrangement. The Commerce Authority is a “quasi-public” entity, or a public-private partnership. About 10 other states have also given control over lucrative corporate tax incentives to similar organizations, which are often run by the states’ most influential businessmen, generally at the pleasure of the governor. Supporters say these partnerships are more nimble than government bureaucracies and are insulated from the vagaries of electoral politics. But both liberal and conservative watchdog groups say the practice takes a government function already prone to mismanagement and obfuscation and makes the situation worse by giving oversight of business incentives to businesses themselves.

“There’s a lot of potential for powerful special interests to abuse the public purse,” says Phineas Baxandall, a senior policy analyst at US PIRG, a liberal advocacy group. In recent years, state governments have been racing to out-spend their neighbors wooing corporations — they’ve nearly doubled their number of economic incentive programs since 1999 to about 1,800, according to the Council for Community and Economic Research, an economic development membership group. But much of this spending remains shrouded in secrecy. Even most public agencies do not disclose the recipients of all the incentives because of tax privacy laws. But privatization raises a unique set of concerns.

Ohio, for example, created JobsOhio in 2011 as an independent nonprofit, exempting it from most state ethics and open records laws and, as of this year, from government audits. Other states, including Arizona, have applied ethics and freedom of information laws to the entities but have carved out exemptions for cases in which board members decide that disclosing information could divulge confidential corporate data. Florida, Michigan, Indiana, Wisconsin, Iowa, Wyoming, Rhode Island and Virginia have also created similar entities, from the fully independent, like Ohio’s, to quasi-public agencies. Most have also established related private foundations that receive anonymous contributions, which eventually fund travel for public officials or entertainment for business executives. In each case, states have given oversight of millions of dollars in public money to entities led at least in part by corporate leaders — while shielding some of their activities from public view.

“Here are people who are put in charge to make decisions that were never elected,” said Farrell Quinlan, Arizona state director for the National Federation of Independent Business. “Is that really proper to have someone not accountable to voters making decisions about public money?”

The Commerce Authority says it is committed to transparency, but officials declined repeated requests to interview its CEO, Sandra Watson, and did not respond to a set of emailed questions. When approached by a Center reporter at a breakfast for business leaders at the JW Marriott Desert Ridge Resort & Spa, Watson cheerily declined to speak. Jerry Colangelo also declined to comment through his assistant, as did each of the other four board members who were contacted by the Center.

While there is no evidence of corruption or direct conflicts of interest for board members, the authority has given a handful of small grants totaling nearly $13,000 to companies owned by director Gary Abrams. Additionally, board members’ private interests have occasionally aligned with official policies of the authority, as with a proposal to build a new interstate highway from Phoenix to Las Vegas. But good-government groups say it’s impossible to know for sure whether there are more serious conflicts because the authority, like most of its peers in other states, does not make public all the recipients of tax incentives.

“It’s hard to imagine a situation more ripe for potential abuse,” Baxandall says.

Letting business do business

The Arizona Commerce Authority is one of Gov. Jan Brewer’s signature achievements, but its public face has been Jerry Colangelo, the former owner of the Phoenix Suns and Arizona Diamondbacks. Colangelo is widely praised for helping transform Phoenix into the sprawling, cosmopolitan urban center that it is today. The glass-encased arena and stadium he helped build sit side-by-side, anchoring downtown just four blocks from the authority headquarters. Since selling his interests in the Suns and Diamondbacks in 2004, Colangelo has led a successful career in real estate development and has run the U.S.A. national basketball program. In 2006, President George W. Bush named him to the President’s Council on Service and Civic Participation.

Soon after assuming office in 2009, Brewer, a conservative Republican, asked Colangelo to help her remake the state’s Commerce Department, which had been criticized as ineffective. The Great Recession wreaked havoc on Arizona’s real-estate-dependent economy and Brewer was keen to show she would bring jobs to the state.

In early 2010, Colangelo led a governor’s council that recommended eliminating the department and replacing it with a quasi-public entity. By June, Brewer created the Commerce Authority via executive order and appointed Colangelo as co-chairman. In February 2011, the legislature authorized the authority to replace the Commerce Department. Sixteen other business executives populate the board, with nine appointed by the governor, who serves as chairwoman; the rest of the board is named by the Senate president and speaker of the House, who also sit on the board as two of 13 non-voting members from the legislature, state universities and other government commissions.

Five board members or their companies have contributed a total of $25,684 to Jan PAC, Brewer’s super PAC, or political action committee, over the last three years, including $5,000 from Colangelo last year. In her 2010 campaign, Brewer used Arizona’s matching campaign finance system and as a result was limited from receiving large direct contributions.

“What we’re hoping to do is privatization,” Colangelo told the Arizona Capitol Times in February 2011 about his plans for the authority, months before the first official board meeting. “It’s the business community and leaders who are out there making business decisions.”

The legislation that created the authority also boosted economic development funding, increasing the authority’s budget to $10 million, a 64 percent hike over the Commerce Department budget, and allocating tens of millions of public dollars to new grant programs. Among those programs: a $25 million “deal-closing fund,” from which the authority’s CEO, who is appointed by the board, can write checks to companies willing to relocate to the state.

The authority started with a bang, just not the one Brewer wanted. The board of directors awarded a three-year contract worth about $1 million to its first CEO, Don Cardon. That worked out to almost twice Cardon’s previous annual salary of $183,000 as director of the old Commerce Department, to which Brewer appointed him to oversee the transition. Legislators from both parties were outraged, so Colangelo and Cardon announced that about half of the pay would come from a private foundation they had established: Team ACA.

Team ACA

Brewer had initially mentioned Team ACA in August 2011, at the Commerce Authority’s first official board meeting, when she announced that the authority would create a private “investment” arm, with Colangelo as chairman. The papers were filed the next month, but hardly anybody noticed until Colangelo announced in January that the privately-funded group would pay half of Cardon’s salary.

Rather than quiet the furor, that move only raised questions about who was funding Team ACA, which was run at the time by Cardon, Colangelo and executives from Alliance Bank of Arizona, one of the state’s largest, and Apollo Group, which owns the for-profit University of Phoenix. The office that Team ACA listed on its state filings until this month is on the seventh floor of a boxy, sand-colored building in downtown Phoenix, currently occupied by a company called Marketplace One. When a Center reporter visited in September, a receptionist said Cardon is a friend of the owner and that he briefly rented the space but left years ago.

Team ACA has declined to make all of its donors public, but Cardon told the Capitol Times in October 2012 that the organization had secured a three-year $600,000 commitment from Alliance Bank and Apollo Group. The controversy over Team ACA funding only grew worse when Cardon abruptly announced his resignation as CEO of the Commerce Authority in January 2012, only to quietly stay on as director of Team ACA.

Through a spokesman, Cardon said he is no longer involved with Team ACA and declined to comment further. But he did defend Team ACA last year to the Capitol Times: “The reality is you have private sector [sic] that are funding thousands of dollars to help support this state, help families,” he said. “And I am trying to understand what the downside of that situation is.”

But Team ACA has done little to ease concerns over its secrecy. Efforts to obtain the foundation’s public tax forms resulted in a labyrinthine pursuit.

“This money is coming in from the private side supporting the public sector Commerce Authority side, and then the Commerce Authority is handing out money to whatever it deems is a good use of that money,” said Chad Campbell, the state House minority leader. “But we have no idea where that money is coming from in the private sector foundation. And they’re just unwilling to be transparent about it,” he said. “Is somebody giving $10,000 in here, and then getting $50,000 out the back end in public sector money? I’m not saying it is, I just don’t know.”

While the authority does post much of its financial data on a state website and publishes an annual report, lawmakers including Campbell and Eddie Farnsworth, a House Republican, have said the reporting and oversight are inadequate. Campbell introduced a bill this year that would have increased reporting to the legislature and required the authority to make public all grant and incentive recipients; the measure also would have required the state auditor to perform a review every three years. Currently, the authority submits a private, independent audit. The auditor general has 30 days to initiate its own review, but it has declined to do so. The bill never saw a vote.

Despite these controversies, the Commerce Authority has plenty of backers. “It’s put Arizona on par with some of the best states for business,” says Ioanna Morfessis, who founded the Greater Phoenix Economic Council, a local public-private partnership, and is also a paid consultant for the authority. In its year-end report for fiscal year 2013, the authority said it assisted 104 planned projects that will create 15,262 jobs.

A lack of transparency in the Buckeye state

As Brewer was privatizing economic development in Arizona, Republican colleagues in three other states were on similar paths. Gov. John Kasich’s efforts in Ohio have been especially controversial.

Within weeks of taking office in 2011, Kasich was pushing legislation that eventually created JobsOhio, an independent nonprofit corporation that assumed economic development responsibilities for the Buckeye State from the old Department of Development in July of that year. The organization is led by a nine-member private-sector board, appointed by Kasich. It is not subject to open records laws. After the state auditor, a Republican, threatened to subpoena records for an audit this year, the legislature passed a bill, pushed by Kasich, to shield the entity from any future audits. JobsOhio has argued that its funding is private: for $1.4 billion, it purchased a 25-year lease of the state’s liquor sales profits, worth about $100 million a year. The deal was funded with a bond, issued by JobsOhio.

It, too, has received private donations both directly and through a related nonprofit, the JobsOhio Beverage System — a total of $6.9 million from five anonymous donors in its first year of operation, according to the Columbus Dispatch. One of those donors, according to the Dispatch, was American Electric Power, based in Columbus, which gave $2.45 million.

In July, the Dayton Daily News reported that six of the nine board members had financial ties to companies that have received incentives from the state, though several of the deals in question were approved before JobsOhio began operating. The organization also helped secure hundreds of thousands of dollars in incentives for Worthington Industries, which continued to send deferred payments to Kasich through 2012 for his former role as a director of the company. Employees of the firm have donated hundreds of thousands of dollars to Kasich’s campaigns, including $10,000 from CEO John McConnell one week after JobsOhio awarded Worthington a tax break worth more than $100,000.

The Kasich Administration, which did not respond to requests for comment, has said the governor is no longer linked with Worthington — a statement supported by the state Ethics Commission — and that the criticism over the deals are a political ploy by Democrats.

The article was published at State pro-business organizations are publicly funded, but privately controlled.

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