Incentive program: Behind on audits, but ahead on jobs, so far

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Back East Brewing Company

Back East Brewing Company is based in Bloomfeld. The Craft brewery is among the thousands of businesses in the state that received a loan through the state's Small Business Express program.

A small business loan and grant program appears to be succeeding — even exceeding its goals — at creating and retaining jobs in Connecticut. But that’s based on relatively sparse data because of a backlog that has left most of the projects unaudited.

The Department of Economic and Community Development’s Small Business Express program has amassed more than 1,500 contracts requiring small businesses to create or retain more than 22,000 jobs in exchange for $232 million in loans and grants, according to a statement by Gov. Dannel Malloy in March.

Contracts with each business set project-specific goals for job creation and retention and a target date by which those goals must be met. There may be penalties for failure to meet the goals, such as an increased interest rate on loans or returning grant money. There may also be bonus incentives for companies that reach their goals.

Overseeing the contracts requires auditing the companies as their target dates come due, and the state is behind on that.

Catching up

Trend CT’s analysis found that as of March 1, there were 826 DECD-overseen projects with target dates in the past, but of those 647 had not been audited. There are additional contracts overseen by third-party lenders, but records on those projects did not include target dates, so Trend CT focused on DECD-administered projects in order to determine how far behind the audits were. We used March 1 as the cutoff because the most recent public data from the DECD was updated mid-March.

For most of the backlogged projects — 520 out of the 647 — more than 180 days had elapsed between their contract’s target date and March 1. The average unaudited project was more than a year (385 days) past its target date as of March 1. Twenty-five projects were more than two years past their target date.

The DECD said the backlog built up in part of because of the unexpected growth of the program.

“The reason for this backlog is a matter of timing. With the creation of the Small Business Express program, we had a dramatic and sudden increase in the number of projects in our portfolio,” said James Watson, a spokesperson for the DECD, in an April email. “This created a large wave of job audits due in a very short time frame – with no additional staff to perform the work. We actually lost one staff member in the same period, which did add to the challenge.”

Watson said the department was aggressively working on ramping up audits.

“We have developed and are implementing a plan to address the backlog, which entails a redeployment of resources internally.”

He said last month that 115 new audits had been initiated with another 500 to be started by mid-April.

David Treadwell of the DECD said on Monday that all of the 647 assistance recipients have been contacted for information about their jobs creation status.

Costs of the backlog

Because incentives and penalties are related to meeting contract deadlines, the backlog can have a cost to both parties. A project that fails to meet its job goals but doesn’t get audited could benefit from continuing to pay the lower interest rate. Conversely, a project that has met its goals might lose out on a bonus incentive, like a reduced interest rate, if it goes unaudited.

“Penalties for failing to create the required number of jobs per the contract come in the form of a 1 percent interest rate increase on loans. A delay in the imposition of this hike will result in minimal unrealized revenue to the state (we estimate in the range of $80,000 to $135,000 for the entire backlog),” Watson said in an April email.

“Another potential impact is delayed loan forgiveness for companies that have met or exceeded their contractual obligations,” Watson said. “However, it is unlikely this will positively impact revenues given companies are more inclined to proactively reach out to the department to realize this contractual benefit.”

Success, nonetheless

Despite the backlog, the program appears to be exceeding its job creation and retention goals.

As a whole, the audited projects had a combined obligation to create 2,744 jobs, but 2,774 were created – exceeding the goal by 30 jobs. That record has improved to 71 jobs above the goal, according to Treadwell.

Since it’s possible that companies that meet their job creation goals are more likely to contact the state proactively, it’s hard to say whether that success rate will hold as the rest of the projects are audited.

That success was in spite of the fact that some 35 percent of audited projects failed to satisfy their goals while 64 percent succeeded, according to the March data. (That success rate is now around 70 percent, Treadwell said). That means that the projects that met job goals more than made up for the projects that didn’t.

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