Bureau of Audit
Audit Report on the New York City Industrial Development Agency’s Project Financing, Evaluation, and Monitoring Process
March 19, 2012
AUDIT REPORT IN BRIEF
Download the Complete Report (pdf 574KB)
The New York City Industrial Development Agency (NYCIDA) was established in 1974 to promote, retain, and develop an economically sound commerce and industry base to advance job opportunities in the City and its five boroughs. The organization and powers of NYCIDA are governed by the General Municipal Law (GML) of New York State. Key provisions of the GML allow NYCIDA to establish its own Uniform Tax Exemption Policy (UTEP) guidelines to make project approval or denial decisions. In addition, NYCIDA has the ability to create payments in lieu of taxes (PILOT) and grant Mortgage Recording Tax (MRT) and Sales Tax exemptions.
NYCIDA is managed by a Board of Directors (Board) consisting of 15 members, including representatives from each borough. The president of the New York City Economic Development Corporation (NYCEDC) also serves as the chairman of NYCIDA Board. The GML also provides the Board with the authority to recapture economic benefits or impose sanctions or penalties on projects that are not in compliance. Imposition of the recapture provisions can require the project owner to return all or part of the value of the tax exemption benefits received. NYCIDA contracts with NYCEDC for staffing and administrative services.
NYCIDA is required to comply with certain reporting requirements, including the submission of the Public Authority Reporting Information System (PARIS) report. Industrial Development Agencies are required to file this performance report with the Office of the State Comptroller within 90 days after the close of their Fiscal Year. In its 2009 PARIS submission, NYCIDA reported a total of 576 projects with total PILOT payments in the amount of $345.7 million and $497.3 million in tax exemptions, including State and City Sales Tax and MRT exemptions.
Audit Findings and Conclusions
NYCIDA generally complied with the Public Authority Accountability Act reporting requirements and filed its PARIS report on time. However, our review found several deficiencies in NYCIDA's review, evaluation, and monitoring of its sponsored projects. Specifically, contrary to NYCIDA's own internal Project Checklist, NYCIDA did not conduct independent analysis of the applicant's ability to meet all equity and debt requirements associated with the projects. In addition, our review found no evidence that NYCIDA verified the accuracy of the data submitted in the project applications. As a result, NYCIDA could not be assured that certain proposals were viable and able to achieve the employment goals established in their project applications.;
We also found that NYCIDA did not follow its own internal procedures to properly monitor project compliance to determine whether companies reported accurate employment data and Sales Tax exemption benefits and whether the projects were operating as intended. As a result, NYCIDA could not be assured that certain significant projects have fulfilled their promises and were entitled to retain their City benefits.
Further, NYCIDA did not initiate the benefits recapture process and ensure that projects were terminated in a timely manner and according to provisions of the project agreements. As a result, the City did not receive the anticipated return on the benefits it invested in the projects and continued to provide benefits to projects in default. Based on our review of NYCIDA's financial records and related project files, we estimate that at least $16,184,760 in unclaimed recapture benefits involving five companies was lost.
To address these issues, we make seven recommendations, including that NYCIDA:
- Ensure the project financial data received is sufficient and independently verified before a project is submitted for Board approval.
- Perform an independent analysis of the applicant's ability to meet all equity and debt requirements associated with the project and to ensure projects meet the intended purposes, sustain the operations as proposed, and meet the employment expectations to justify all the benefits received.
- Monitor project compliance report submissions to ensure the projects comply with their job retention and creation requirements as established in the application.
- Conduct adequate reviews of project data to ensure Sales Tax exemptions are appropriately claimed and accurately reported.
- Establish internal controls to avoid unauthorized use of Sale Tax Letters.
- Conduct periodic site visits to verify project operations and compliance status.
- Enforce the recapture provisions of the project agreements to ensure City forgone revenue and employment benefits are not lost, and document its decision-making process and the specific criteria used to decide whether or not to enforce the recapture provisions of project agreements.
In their response, NYCIDA officials disagreed with the report's findings and asserted that:
- "Agency Staff and Outside Experts Conduct Significant Financial and Other Due Diligence Prior To Presenting Any Project to the NYCIDA Board of Directors."
- "The Agency Rigorously Monitors all Existing Projects."
- "The Agency Aggressively Pursues its Legal Remedies When Projects Fail to Meet Their Obligations."
Contrary to these assertions, we found that NYCIDA project files lacked required information and adequate project data, which precluded NYCIDA from conducting meaningful analyses of prospective projects. Furthermore, NYCIDA did not adequately monitor project compliance because it failed to ensure that required employment reports, forms, and certificates were submitted. Moreover, even when documentation was submitted, NYCIDA staff did not visit project locations or undertake due diligence testing to verify the accuracy of reported data.; As a result, NYCIDA was unaware that a significant number of projects were not compliant with the terms of their agreements. Finally, NYCIDA failed to seek appropriate remedies when projects were in default or otherwise failed to meet their contract obligations. Most notably, nearly $14.4 million was foregone because NYCIDA did not enforce "recapture and termination" provisions in the case of Bear Stearns, one of the entities that defaulted.
NYCIDA also contended that:
"In addition to its own due diligence, as a conduit issuer, NYCIDA relies on technical expertise provided by underwriters, placement agents, third-party advisors and bond purchasers. . . . The Agency and its legal counsel believe that, as a conduit issuer, it would be inappropriate for Agency staff to usurp the role of the professional, expert consultants, financial advisors, underwriters, placement agents and borrowers who together produce the materials upon which lenders or bond investors make a determination as to the financial viability of a particular project."
NYCIDA's concern that it may be inappropriate to "usurp" the role of consultants, financial advisors, underwriters, placement agents, and borrowers is misplaced. First of all, entities such as these have a vested interest in obtaining City benefits. Furthermore, NYCIDA's reliance on underwriters, placement agents, third-party advisors, and bond purchasers to perform financial analyses fails to provide adequate assurance to safeguard the City's interests in ascertaining the economic viability of prospective projects. Moreover, our audit found that many project analyses were insufficient, unsubstantiated, or unsound. For example, the Bronx Parking Feasibility Study was flawed because projected revenues were based on questionable occupancy rates and inflated attendance figures and did not account for demand fluctuations that would result from price increases and competition. Accordingly, NYCIDA must conduct independent analyses to ensure that City tax benefits are granted only to those companies that will, in fact, create jobs and comply with their financial obligations.