By Joshua Burd
It was only late last year that Christopher Porrino had defended a small handful of companies that were facing so-called claw back proceedings from state officials, who alleged that the firms had come up short in creating jobs tied to a tax credit incentive.
He now expects that number to grow significantly.
Since then, the state comptroller has blasted the Economic Development Authority’s oversight of the incentive programs, while Gov. Phil Murphy has lashed out at the subsidies and ordered a task force to probe the alleged mismanagement. The state’s attorney general also pledged to ask “tough questions” and recover any taxpayer funds that were improperly doled out.
“This is a much more aggressive stance,” said Porrino, himself a former attorney general, who now chairs the litigation department at Lowenstein Sandler LLP in Roseland. “It’s not something we saw a lot of, but we would see it from time to time. This is going to be a much more thorough review and I suspect that a number of investigations will flow from it.”
It’s why Porrino has begun to alert clients and other companies: If you’ve begun to collect tax credits under Grow New Jersey and other state incentive programs, now is the time to be proactive and verify that you have met your commitments for job creation and retention.
The advice has “definitely generated a lot of interest and attention,” he said, given the rhetoric by Murphy and his administration in the wake of the audit.
“The human reaction to this kind of thing is often to just hunker down and hope they don’t call,” said Porrino, who was Gov. Chris Christie’s attorney general from 2016 to 2018. “And my advice is to resist that temptation. Whether you do it through your own staff or you have an outside professional do it, it makes good sense to take a look, audit your own compliance and, if there are issues, deal with them proactively.”
“Depending on the nature of the issue, if there is a situation where a company is out of compliance, it’s going to be much easier to manage that proactively by reaching out to the EDA or the AG’s office, rather than waiting for the AG’s office to come knocking on your door.”
The audit, released in early January by state Comptroller Philip Degnan, criticized the EDA for its management of incentives such as Grow New Jersey and the Economic Redevelopment and Growth program. After studying the awards of 48 recipients, the report found the agency lacked “an adequate monitoring system” to assess whether a recipient is creating or retaining the jobs that are tied to an incentive package, which in turn prevents it from providing “accurate and reliable” results to assess the programs’ effectiveness.
The comptroller also faulted the EDA for relying on recipient certifications about job creation “without any independent verification of the data with supporting documentation or confirmation” from other state agencies. The findings drew a harsh response from Murphy, who had ordered the audit, and subsequently blasted Christie, his immediate predecessor, for the volume of tax breaks awarded under his administration and for the lack of oversight.
The EDA has promised to improve oversight in line with Murphy’s own pledge to overhaul the incentives, which sunset on June 30. At its last monthly board meeting, the authority approved the framework for a data sharing agreement between its staff and the state Department of Labor and Workforce Development, which calls for the latter to provide the EDA with quarterly wage and employer data information in a searchable format.
But the EDA has also highlighted what defenders of the programs have repeatedly noted: A company does not begin to collect any piece of its tax credit award until it certifies that it has satisfied its commitment for jobs and capital investment. What’s more, a recipient must retain those jobs for a period that is one and a half times the length of the award, such as a 15-year period for a 10-year tax credit.
The EDA also noted that, of roughly $8 billion in tax credits approved for projects under the state’s three largest incentive programs, less than 9 percent has actually been paid out to date.
Chris Murphy, an attorney who practices real estate and incentives, said it is “essential that companies take the compliance component of the program seriously,” noting that recipients are required to submit annual reports showing compliance with the program. He added that the EDA “is a sophisticated organization, with skilled professionals handling every aspect of the incentive procurement process, including compliance.”
“No one who has gone through the compliance process would say that it is not rigorous,” said Murphy, a partner with Murphy Partners LLP. “That being said, I have no doubt that the process is about to get even more complicated.”
Since the comptroller’s report was released, the Newark-based attorney said he has heard from multiple companies that are interested in reviewing their incentive award to ensure they are fully complying with all necessary requirements.
“While they do not believe they have done anything wrong, they want to make sure they are checking every box,” he said.
Firms that have received tax credits are taking cues from not only the comptroller, but from the state’s top law enforcement officer. Attorney General Gurbir Grewal said last month that the audit raised concerns about the EDA’s internal controls when it came to more than $11 billion of tax credits it awarded between 2005 and 2017, while he vowed to investigate whether there was wrongdoing by award recipients and recover funds, if necessary.
The governor, meantime, has also created a task force to further investigate the comptroller’s findings.
Porrino said the responses from both Murphy and Grewal have “gotten the attention of the business community.” He now believes that companies that have begun to collect tax credits should be on alert.
“People don’t know in which direction the task force will focus, but I think ultimately if it comes down to recovering dollars that either were overpaid or should have been paid, that’s going to come from businesses that are operating in New Jersey,” he said. “So they are right to be concerned, because very often these grants are not small.”