Georgia Department of Audits and Accounts Performance Audit Division Greg S. Griffin, State Auditor Leslie McGuire, Director

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1 Special Examination Report No December 2013 Georgia Department of Audits and Accounts Performance Audit Division Greg S. Griffin, State Auditor Leslie McGuire, Director Why we did this review This review of Georgia s local development authorities was conducted at the request of the House Appropriations Committee. The Committee requested an overarching review of local development authorities. As a result, we reviewed 1) how many development authorities exist in each Georgia county and municipality, 2) if DCA ensures that all development authorities comply with registration and reporting requirements, 3) if development authority board members receive required training, and 4) if there are adequate financial controls to ensure the appropriate expenditure of state funds by development authorities. We limited our review to controls related to state law and state funds. About Local Development Authorities Development authorities are separate entities created by local governments to promote the general economic welfare within their jurisdiction. Development authorities receive the majority of their operating revenue from local government grants or special local option sales tax revenue. Georgia also sponsors several state grant programs to encourage economic development. Although they may support private projects, most grants are typically applied for and made to development authorities rather than to the private entities to avoid the state constitutional prohibition of gratuities. Local Development Authorities Further strengthening of controls would improve transparency and accountability What we found Local economic development authorities are an important component of the state s economic development efforts. In order to create or retain jobs, development authorities attempt to attract, retain and expand businesses within their jurisdictions by providing financial incentives to private entities. DCA provides state funds to local governments and/or development authorities who then provide the assistance to the private entities. There are approximately 487 economic development authorities in the state. Currently, 192 of 682 Georgia counties and municipalities are members of multiple development authorities and five municipalities are members of more than one development authority. Of the 192 local governments with more than one development authority, 139 (72%) are a member of at least one single-jurisdiction and at least one multi-jurisdiction or joint authority. One reason local governments participate in a joint development authority is to take advantage of job tax credit legislation. Counties and municipalities may be a member of more than one development authority for a variety of reasons such as the need for varying powers and board membership requirements due to each development authority s method of creation or different jurisdictional boundaries. A contributing cause for membership in multiple development authorities is that laws affecting the creation of development authorities have evolved over the past 60 years. Despite the large number of local development authorities, we did not find that this necessarily results in a duplication of effort. 270 Washington Street, SW, Suite Atlanta, Georgia Phone: (404)

2 There are various state laws intended to ensure local development authorities are transparent and accountable. In addition, state grant program requirements are also designed to ensure the appropriate award and expenditure of state grant funds. Combined, these provide for a system of controls. There are a number of ways in which compliance with these controls could be strengthened to ensure greater accountability and transparency. Recommendations for improvement include: 1. Better local development authority adherence to executive session requirements in Georgia s Open Meeting law. 2. Local development authorities should adopt ethics and conflict of interest bylaws and policies. 3. DCA should develop internal procedures to ensure that development authorities receiving state grant awards undergo annual financial audits that specifically include a review of these state grant funds. 4. DCA should require authorities to provide plans of corrective action regarding inadequate financial controls. 5. Development authorities should ensure that development authority board members receive the training required by state law. 6. DCA should consider requiring that authorities provide a current property appraisal validating the authority s purchase price is in line with the fair market value when state funds are used in the project. DCA Response: DCA plays an important role as a partner with local development authorities in the vital task of creating jobs, new businesses and industries for our state. We of course share with DOAA the common goal of maintaining a high standard of transparency and accountability for public funds. At the same time we are committed to ensuring Georgia s development authorities have the ability to be as efficient and effective as possible whenever job creation opportunities arise in our state.

3 Local Development Authorities 1 Table of Contents Purpose of the Special Examination 2 Background 2 Purpose of Development Authorities 2 History 3 Economic Development Activities 5 Activities and Financial Information 6 Governance and Oversight 8 Findings and Recommendations 10 While DCA and OneGeorgia's policies and procedures generally ensure that state grant funds awarded to development authorities are appropriately awarded and expended, further strengthening of controls could improve accountability and transparency. 10 While development authorities generally complied with relevant state laws, improvements are needed to maximize accountability and transparency. 14 DCA should develop procedures to ensure that registration and financial information submitted by development authorities is accurate and complete. 18 Development authorities should ensure that development authority board members receive the training required by state law. 21 Local governments are members of multiple development authorities for a variety of reasons; the multiple memberships do not necessarily cause a duplication of effort. 22 Appendix A: Objectives, Scope, and Methodology 25 Appendix B: Registered Local Development Authorities by County 28 Appendix C: Registered Local Development Authorities by City 35

4 Local Development Authorities 2 Purpose of the Special Examination This review of Georgia s development authorities was conducted at the request of the House Appropriations Committee. The Committee requested an overarching review of local development authorities. Because the committee specifically requested a review of local development authorities we limited our review to economic/industrial development authorities (LDAs) and downtown development authorities (DDAs). 1 In addition, we limited our review to controls related to state law and state funds. We did not review other types of local government authorities such as water/sewer, hospital, and airport authorities. Specifically, the review objectives were to determine: 1. If DCA and OneGeorgia Authority have adequate controls to ensure the appropriate award and expenditure of state economic development grant funds. 2. If development authorities have financial and management controls that provide transparency, avoid or mitigate conflicts of interests, and ensure the appropriate expenditure of public funds. 3. If DCA has appropriate procedures to ensure that registration and financial information submitted by development authorities is accurate and complete. 4. If the Georgia Department of Community Affairs (DCA) has appropriate procedures to ensure that all development authority board members receive the training required by state law. 5. The number of development authorities that exist and are active in each of Georgia s counties and municipalities and if there is any duplication of effort among these authorities. This special examination generally covered activity related to the registration and financial reporting of development authorities to DCA and state economic development grants and loans awarded to these authorities from , with consideration of earlier or later periods when relevant. The audit team visited 11 development authorities located within six Georgia counties and reviewed 14 state economic development grant projects awarded to these authorities during fiscal years A detailed description of the objectives, scope, and methodology used in this review is in Appendix A. A draft of the report was provided to DCA and to relevant development authorities for their review, and pertinent responses have been incorporated into the report. Background Purpose of Development Authorities Development authorities are separate entities created by local governments to promote general economic welfare in their jurisdictions. Development authorities can be created to serve a single jurisdiction or may be established to provide services to multiple cities or counties (joint development authorities). The General Assembly has authorized two types of development authorities local economic development 1 Throughout the report we will collectively refer to these two types of authorities as development authorities or LDAs.

5 Local Development Authorities 3 authorities (LDAs) and downtown development authorities (DDAs), which we will refer to collectively as development authorities or LDAs for purposes of this report. The purpose of LDAs is to develop trade, commerce, industry, and employment opportunities. The purpose of DDAs is similar to that of LDAs but is more narrowly focused on the revitalization and redevelopment of the central business districts of the municipal corporations of this state. In order to create or retain jobs, development authorities attempt to attract, retain and expand businesses within their jurisdictions by providing financial incentives to private entities. These authorities can buy, sell or lease property and can also provide tax exempt financing. Property owned or controlled by such authorities is generally exempt from property taxes with this benefit being passed through to assisted businesses. Development authorities are typically authorized to issue revenue bonds that do not constitute an indebtedness of the state. This allows authorities to issue bonds that do not count toward their local government s debt limitation. History State Law As shown in Exhibit 1, Georgia law affecting development authorities has evolved over the past 60 years. These changes include the creation of general enabling legislation for development authorities and passing laws related to tax credits for certain economic development projects. State law requires that development authorities annually register with and report financial information to the Georgia Department of Community Affairs (DCA). DCA also manages several economic development grant and loan programs, including those funded by the OneGeorgia Authority, that are awarded to development authorities. Exhibit 1 Timeline of State Law Affecting Local Development Authorities From 1950 s to current

6 Local Development Authorities 4 Creation of Development Authorities Changes in state law have impacted the method by which development authorities have been created. Development authorities have been established through the following mechanisms: 1. Local resolution citing a state statute: Two statutes 2 have been enacted by the General Assembly which allow for the creation of development authorities in each city and county in the state. Local governments can create these authorities by passing a local resolution to that effect. 2. Local law: Local governments may create authorities through a local law subsequently approved by a resolution of the General Assembly. 3. Local amendment to the State Constitution: Prior to 1987, development authorities could be created through a local amendment to the State Constitution. Such amendments required approval from the city or county s electorate in a referendum. As shown in Exhibit 2, most development authorities registered with DCA were created using the Development Authorities and the Downtown Development Authorities Laws. Exhibit 2 Number of Local Development Authorities by Method of Creation Authorities Registered with DCA as of June 2013 Method of Creation LDAs DDAs Local Resolution Citing General Statute Local Law Local Amendment to State Constitution Total Source: DCA Records As shown in Exhibit 3, prior to the passage of Georgia s Development Authorities Law in 1969 and the Downtown Development Authorities Law in 1981, many local governments had already created economic development authorities through a local amendment to the state Constitution or a local law passed by the General Assembly. The number of LDAs and DDAs created through these laws peaked immediately after their passage (in the 1970s and 1980s). In addition, the trend data in Exhibit 3 shows a dramatic decline in the number of LDAs and DDAs created by constitutional amendments after passage of the development authority laws. In 1981 the Development Authorities Law was amended to authorize the creation of joint development authorities, which are authorities with jurisdictions covering the 2 O.C.G.A The Development Authorities Law and O.C.G.A The Downtown Development Authorities Law

7 Local Development Authorities 5 territories of more than one local government. The slight increase in the number of LDAs created during the 1990 s is mostly caused by the creation of joint development authorities in response to passing the Business Expansion Support Act of 1994 and amendments to the act in This Act encouraged local governments to create and participate in joint economic development authorities by increasing job tax credits by $500 per employee for economic development projects located within the jurisdiction of a qualified joint county development authority. Exhibit 3 Number of LDAs and DDAs Created by Method and Decade (1950-current) Local Economic Development Authorities 1950s 1960s 1970s 1980s 1990s 2000-current Local Constitutional Amendment General Statute Local Law Downtown Development Authorities 1950s 1960s 1970s 1980s 1990s 2000-current Local Constitutional Amendment General Statute Local Law Source: DCA Registration Database Economic Development Activities State and local governments administer economic development programs to create new jobs and retain existing jobs by attracting new businesses and encouraging the expansion of existing businesses. These programs provide financial assistance to private business in the form of (1) grants or loans to offset the cost of acquiring necessary land, buildings, or equipment, (2) state tax credits for jobs created, (3) local property tax abatements, (4) and issuing either tax-exempt or taxable industrial development bonds to be repaid by the private business. While state agencies including the Georgia Department of Economic Development (GDEcD) and

8 Local Development Authorities 6 DCA provide state funds to assist specific businesses in their relocation to or expansion in Georgia, these funds are actually provided to local governments and/or development authorities which then provide the assistance to the private entities. The General Assembly shall not have the power to grant any donation or gratuity or to forgive any debt or obligation owing to the public Georgia Constitution Article III, Section VI Although they support private entities, state economic development grants are typically made to development authorities rather than directly to the private entities to avoid the State Constitutional prohibition of gratuities. The Attorney General has opined (1995, and 1993, 93-14) there is no gratuity if a public grantor accepts in-kind consideration of equivalent value in lieu of money. The in-kind consideration may take the form of a promise by the grantee (the private company) to assist the grantor (the development authority) in performing its governmental mission. Since the common mission of development authorities is to promote trade, commerce, industry, and employment opportunities, the provision of state grant funds through the development authority to the private entity assists the authority in performing its governmental mission. Prior to granting public funds to a private entity, the authority must adopt an inducement resolution which states that the authority s financing of the project will induce the company to locate or expand within the territorial area of the development authority. Until the public benefit has been attained, the asset or improvement funded by the state must be owned by the development authority and leased to the private entity. Activity and Financial Information Development authorities receive the majority of their operating revenue from local governments through local government grants or special local option sales tax revenue. The primary activity of development authorities is issuing revenue bonds for private entities. Besides issuing bonds, development authorities apply for state grants and loans. These activities are discussed below. A bond is an obligation to repay borrowed money. Private Activity Revenue Bonds Issued by Local Development Authorities Development authorities issue industrial development revenue bonds to promote economic development by financing the acquisition, construction, renovation, expansion, improvement or modification of plants, factories, mills, machinery, equipment or any other property which an industrial concern might desire to acquire or lease in connection with the operation of such a facility within its jurisdiction. The development authority that issues a private activity bond is not liable for the repayment of that bond. The authority only acts as a conduit for the company s financing. The primary benefit of revenue bonds issued by development authorities is the abatement of local ad valorem taxes for real and personal property operated by participating companies in an authority s jurisdiction. In Georgia, property owned by public entities such as development authorities are exempt from taxation. To transfer ownership of a private facility, such as a manufacturing plant, to a development authority, the authority issues private activity bonds for the company s facility. The authority then leases the facility to the company. The lease payments are used to pay back the bond, with the entity purchasing the facility at the end of the lease. During the period of the lease, a portion or all of the property s value is exempt from ad valorem taxation.

9 Local Development Authorities 7 As shown in Exhibit 4, over the past ten years, local development authorities issued over $34.2 billion in revenue bonds with approximately $2.2 billion issued during the most recent year (2012). Exhibit 4 Revenue Bonds Issued by Development Authorities Calendar Year Dollar amount of Bonds Issued 2003 $3,026,850, ,891,956, ,497,315, ,185,607, ,127,733, ,264,295, ,417,023, ,569,502, ,117,662, ,168,358,872 Total $34,266,305,239 Source: DCA Records

10 Local Development Authorities 8 State Grant and Loan Awards Georgia sponsors several grant programs to encourage economic development. Exhibit 5 shows over the past 10 years DCA has awarded 504 grants and loans totaling $323,422,987 for economic development and downtown development projects. Exhibit 5 State Economic Development Grant and Loan Awards to Development Authorities ( ) State Award Program No. of Projects Total Award Amount Downtown Development RLF 1 50 $8,284,025 Georgia Cities Foundation RLF 74 13,449,063 Appalachian Regional Commission RLF 11 1,833,950 Life Sciences Facilities Fund 6 6,369,645 OneGA-AirGeorgia 5 5,696,697 OneGA-Bridge 10 6,589,392 OneGA-E Fund 3 1,600,000 OneGA-Edge Fund ,686,487 OneGA-Equity Fund ,409,175 OneGA-Strategic Industry Loan Fund 3 3,758,300 Regional Economic Business Assistance 63 81,746,254 Total 504 $323,422,987 1 RLF is an acronym for Revolving Loan Fund Source: DCA Records A fiduciary duty is an obligation to act in the best interest of another party. Governance and Oversight Each LDA or DDA has a board of directors, whose role is to set policy and to oversee and monitor the operations of the development authority. Both the Development Authorities Law and the Downtown Development Authorities Law include requirements related to board composition, appointments, and term lengths for authorities created through these statutes. Development authorities established by constitutional amendment or by local law also have boards of directors; however, the specific amendment or law creating each of these authorities defines the membership requirements of each board. Development authorities are local governmental entities independent of the State, and their governing boards have a fiduciary duty to ensure they make decisions and act in a manner that safeguards public assets and contributes to the efficiency and effectiveness of the authorities operations. In performing this duty, the primary responsibility of the board of directors is overseeing the authority s chief executive in the effective and ethical management of the authority. In addition, the board establishes and adopts the policies which guide authority activities. In performing these activities, boards of directors convene in public meetings to discuss and vote on authority business such as the adoption of budgets, formation of operational

11 Local Development Authorities 9 policies and procedures, and reviewing financial reports and audits. The boards of directors also discuss and vote on activities associated with specific economic development projects such as the acquisition, sale, or lease of property, issuing revenue bonds, and the acceptance of state grant and loan funds. State law requires all local development authorities to report certain information to the Department of Community Affairs (DCA). The General Assembly passed the Local Government Authorities Registration Act (O.G.G.A ) during the 1995 legislative session. This act requires local government authorities to register annually with the DCA beginning January 1, The act also specifies that local government authorities may incur no debt or credit obligations after January 1, 1996, unless they are registered. Prior to this legislation, there was no official record of how many authorities were operating within the state. In addition, state law (O.C.G.A ) requires development authorities to annually submit a financial report to DCA that includes the total number and value of outstanding revenue bonds. Authorities are prohibited from receiving state grants and loans and from issuing new debt until these reports are submitted. Bond attorneys review DCA reporting records during the bond issuance process and include an attestation in the bond package that the authorities are compliant with these reporting requirements. Development authorities are also required to submit information detailing bond issuances exceeding $1 million within six months of the issuance date.

12 Local Development Authorities 10 Findings and Recommendations While DCA and OneGeorgia s policies and procedures generally ensure that state grant funds awarded to development authorities are appropriately awarded and expended, further strengthening of controls could improve accountability and transparency. The REBA, EDGE and Equity programs have adequate controls to ensure the appropriate award and expenditure of state grant funds. These grant programs provide development authorities funds for economic development. Each program has criteria for applications and award decisions (see page 13 for specifics). Development authorities must meet these specific criteria to be eligible to receive grant funds. We found that both DCA and OneGeorgia generally adhere to their policies and procedures, but in limited instances improvements could be made. Criteria for Applications and Award Decisions In order to determine if DCA s and OneGeorgia s award selection criteria were applied, we reviewed project award databases, DCA s local authority registration database, and project files for a sample of awards. The results of this review related to award decisions is discussed below. Applicant Eligibility: All development authorities that are party to an application must be currently registered with DCA and must be current in their report of local government finances. Both DCA and OneGeorgia typically ensure that all development authorities applying for program funds meet these eligibility requirements. However, we identified several in which an authority received an award but did not register with DCA the year in which the loan or grant was awarded. Thirteen of 267 development authorities awarded state funds between 2007 and 2012 lacked a current registration. Location Eligibility: Only counties that meet population, poverty and geographic location criteria are eligible for EDGE and Equity funds. OneGeorgia ensures that only those projects in eligible and conditionally eligible counties receive EDGE and Equity funds. In all 14 project files included in our review, the projects met location eligibility requirements. Project Selection: Only projects designed to increase economic opportunities for the community are eligible for program funding. Application review and assessment procedures employed by both DCA and OneGeorgia ensure that only those project types which are eligible for EDGE, Equity, and REBA funding receive those awards. DCA and OneGeorgia application review procedures assess the relative merits of each project s economic development opportunities including but not limited to the following factors: o Numbers and types of jobs retained and/or created; o Total private capital investment; o Impact on the state, regional and community economy and tax base; o Degree of local commitment; consistency with local and regional development goals and objectives; and, o Project readiness and feasibility.

13 Local Development Authorities 11 In all 14 project files included in our review, the projects met project selection requirements. Fund Disbursement and Expenditure Controls We reviewed project documentation at DCA and at development authorities for a sample of 14 awards to determine if DCA s procedures related to the disbursement and oversight of grant funds were applied. Cost Documentation: DCA requires development authorities to submit draw requests with third-party cost documentation supporting fund disbursement requests. Our review of project files confirmed that DCA ensures that development authorities submit adequate cost documentation prior to disbursing grant funds. In all 14 project files included in our review, we found that DCA staff received and reviewed cost documentation prior to disbursing grant funds. Submission of Financial Audits: Our review found that DCA does not ensure development authorities submit the required financial audits or the financial audits that are submitted include the necessary information. At the time of our review, annual financial reports with grant revenue and expenditure information should have been submitted to DCA for 13 of the 14 projects reviewed. Funds for the remaining project had not yet been disbursed as of the last audit reporting period. However, documentation of DCA s receipt and review of development authorities financial audit reports was evident in only four of the 13 project files. Because DCA s files did not include the required annual financial audit for nine of the projects included in our sample, we obtained these financial audits directly from the development authorities awarded the grants. Our review of the financial audits found that audits associated with four of the 13 projects lacked the information that accounts for the receipt and expenditure of grant funds (i.e., a Project Cost Schedule and a Source and Application of Funds Schedule.) DCA staff stated they will not formally close a project until they have received the required annual financial audit that documents the appropriate expenditure of state grant funds. However, we found that the receipt and review of such audits by DCA staff is not included in the standard form completed by DCA staff during the grant closeout process. Files for three of the four projects in our sample formally closed by DCA included documentation that DCA staff received and reviewed financial audit reports. Performance Controls We reviewed project documentation at DCA and at development authorities for a sample of 14 awards to determine if the required performance clawback agreements were executed and enforced. The purpose of these agreements is to ensure that the agreed upon public benefit, such as job creation, is obtained for the provision of state grant funds. We found evidence in files for all 14 of the projects reviewed that DCA ensures these agreements are executed and follows up with the development authority throughout the award process to document the status of these goals. DCA accepts an attestation from the development authority that the public benefit goals have been met.

14 Local Development Authorities 12 Usually, the development authority will obtain and forward to DCA a letter from the business stating the number of jobs created and the private investment made. DCA s project closeout procedures do not include an independent verification of this information. RECOMMENDATIONS While DCA and OneGeorgia s policies and procedures generally ensure that state grant funds are appropriately awarded and expended, further strengthening of controls could improve transparency and accountability. 1. DCA should ensure all development authorities are properly registered prior to being awarded a grant. 2. DCA should develop internal procedures to ensure that development authorities receiving state grant awards undergo required annual financial audits that specifically include a review of these state grant funds. In addition, DCA s project closeout form should include a section which indicates whether the necessary financial audits have been reviewed and that the audits account for the appropriate expenditure of the grant funds. 3. DCA should consider implementing procedures to independently verify that job creation and private investment goals have been attained. DCA Response: The DOAA report notes that 13 authorities were found that received an award of state funds in a year for which they were not registered, but the critical distinction for the purposes of complying with O.C.G.A (c)is not whether DCA conferred an award but rather the disbursement of funds from an award to a local authority. DCA withholds grant award funds to local authorities if they have not complied with the registration requirement of state law.

15 Local Development Authorities 13 State Economic Development Grant and Loan Programs: REBA, EDGE, and Equity REBA (Regional Economic Business Assistance) Program: A state grant program administered by DCA that is used to help "close the deal" when companies are considering Georgia and another state or country for their location or expansion. REBA funds may be used to finance various fixed-asset needs of a company including infrastructure, real estate acquisition, construction, or machinery and equipment. A local development authority must be the applicant for a REBA application and the application must be supported by a recommendation letter from a state agency, typically the Georgia Department of Economic Development. EDGE (Economic Development, Growth and Expansion) Fund: A OneGeorgia Authority program that is utilized when one rural Georgia community competes for business location and/or expansion with another community from outside the state. The Equity Fund: A OneGeorgia Authority program that provides financial assistance to rural communities to help build the necessary infrastructure for economic development. Equity funds are also available as loans for several different types of projects, such as constructing speculative buildings in order to attract additional industries to these regions. Criteria for Applications and Award Decisions: Applicant Eligiblity: All development authorities that are party to an application must be currently registered with DCA (O.C.G.A ) and must be current in their report of local government finances (O.C.G.A (b)). Location: The OneGeorgia Authority recognizes counties as directly eligible for EDGE and Equity Funds if they have a population of 50,000 or less, a poverty rate of 10% or greater, and are located outside the boundaries of a metropolitan area. OneGeorgia recognizes additional counties as being conditionally eligible if they have a population of less than 500,000 and share a border with a directly eligible rural county. For the purposes of awarding REBA funds, DCA does not have location restrictions. Project Selection: Only projects which are designed to increase economic opportunities for the community are eligible for program funding. Program funds may be used to finance various fixed-asset needs of a private business including infrastructure, real estate acquisition, construction, or machinery and equipment. Fund Disbursement and Expenditure Policies and Procedures: Cost Documentation: DCA requires development authorities to submit draw requests with third-party cost documentation supporting fund disbursement requests. Examples of cost documentation include closing statements for real estate transactions, purchase orders, contracts, receipts, or invoices. Evidence that Program Funds Were Appropriately Used: DCA requires development authorities receiving program funds to provide a copy of the annual financial audit that reports the receipt and expenditure of state grant funds. Performance Clawback Agreements: Beginning in 2006 DCA and OneGeorgia implemented the Accountability Policy which requires each business assisted with state economic development grant to be accountable for the delivery of public benefits that were specified in the grant applications. These benefits include the proposed number of jobs created or retained and the proposed amount of private capital investment. To accomplish this, DCA and OneGeorgia require local development authorities applying for grant funds to execute a standard clawback agreement with the business. This agreement specifies that the assisted business deliver at least 70% of the committed benefits within an established performance period which is generally defined as 24 months after completion of the funded activity. Businesses that deliver less than 70% of the committed public benefits are subject to a prorated repayment requirement.

16 Local Development Authorities 14 While development authorities generally complied with relevant state laws, improvements are needed to maximize accountability and transparency. Although LDA s are subject to local governance and oversight, these authorities must also comply with various state laws intended to promote accountability and transparency in government. These include Georgia s Open Meetings Law, Georgia s Code of Ethics, and requirements for an annual financial audit. In addition, there are best practices intended to promote accountability and transparency that development authorities could adopt, such as requiring board members to complete annual financial disclosure statements and requiring property appraisals before acquiring real property. In addition to promoting accountability and transparency, these laws and best practices assist development authority board members in performing their fiduciary duty. In general, the development authorities we reviewed complied with state law, but we noted potential improvements. Open Meetings With the exception of complying with the executive session requirements, the development authorities we reviewed generally adhere to Georgia s Open Meetings Law (O.C.G.A ). We found of the eight authorities reviewed that entered into executive session that five failed to properly record board discussions and decisions made during executive sessions (the portions of board meetings that were closed to the public.) Examples of non-compliance are discussed further below. Georgia s Open Meetings Law Georgia s Open Meetings Law (O.C.G.A ) requires that all meetings of local development authority board members satisfy the following requirements: All board meetings must be open to the general public. All meetings must have pre-posted agendas. Minutes of meetings must be maintained. All votes at any meeting must be taken in public and minutes must record the names of persons voting against a proposal or abstaining when a vote is taken by roll call and not unanimous. State law identifies specific circumstances under which certain board discussions, called executive sessions, can be closed to the public. State law defines the subject matter that may be discussed in executive session: Matters encompassed by the attorney-client privilege. Matters involving real estate. Deliberations regarding employees, agents, or members. Incidental conversation unrelated to the business of the agency. When an authority board enters into executive session, state law requires that meeting minutes of the closed session be taken. In addition, state law requires the board to execute an affidavit documenting the reasons for the executive session and certifying that only those matters within the stated exception were discussed.

17 Local Development Authorities 15 Minutes of Board Meetings While 10 of 11 development authorities reviewed maintain adequate minutes of the portion of board meetings open to the public, the remaining board s minutes do not contain adequate information. Regular public meetings of this authority (Authority A) are held in tandem with the jurisdiction s other economic development authority (Authority B). Authority A s minutes only show that members of Authority A were present and participated in a joint meeting with Authority B but do not detail what was discussed or how board members voted. Therefore, the actions or votes of the board for Authority A are not maintained in any minutes. Executive Sessions Five of eight development authorities that reported having entered into executive sessions during the period of our review (calendar year 2010 to 2012) did not record the specific reasons for those sessions, nor did they execute an affidavit for the sessions. State law requires that if board members adjourn to a private meeting, the specific reasons for such meeting shall be entered into the official minutes. In addition, state law requires the board to execute an affidavit documenting the reasons for the private meeting and certifying that only those matters were discussed. The remaining three authorities in our review noted the specific reasons for these sessions and executed the required affidavit. Code of Ethics State law (O.G.G.A ) establishes a code of ethics for members of boards, commissions, and authorities created by state statute, and O.C.G.A A-1 requires development authorities created under local constitutional amendments and by state statute to comply with the code of ethics. Among other items, this law prohibits board members from taking any official action regarding any matter in which they know or should know they have a direct or indirect monetary interest in the outcome of the official action. Only two of the 11 authorities reviewed include a formal conflict of interest policy in their bylaws or policies and procedures. Both of these development authorities model their policies after, or refer to, Georgia s Code of Ethics law. Only one of these development authorities requires board members to formally acknowledge and agree to the ethics policy. This is accomplished by requiring each board member to sign a Compliance and Conflict of Interest Statement. Although the other development authorities reported they do not have a specific ethics policy in their bylaws or rules and regulations, they all noted they knew of and followed the state law regarding conflicts of interest. O.C.G.A 36-62A-1 provides a safe harbor for development authority board members by allowing transactions that may present a conflict of interest with a current board member if (1) these transactions are disclosed in advance to the other board members of the authority and the disclosure is recorded in the official meeting minutes of the authority and (2) such transactions with a value over $200 per calendar quarter are published by the authority in the county s legal organ (newspaper) at least 30 days prior to the transaction. The safe harbor law also prohibits board members having a substantial personal interest in any authority transaction from

18 Local Development Authorities 16 being present at the portion of the authority meeting during which discussion of the matter is conducted and from voting on the matter. While all authorities stated they know of and follow Georgia s Code of Ethics Law and the related safe harbor provisions, we found that one authority did not ensure these standards were met. An authority failed to maintain sufficient records of its open board meetings identifying issues discussed and how individual board members voted on each issue. We determined that Authority A used local funds to acquire land from a charitable foundation whose president was also a board member of Authority A. However, as previously discussed, Authority A did not record how individual board members voted on this issue, or even that they voted on the issue at all. As a result, there is no record that this board member followed the state s safe harbor provisions by acknowledging publicly his potential conflict of interest, not participating in the portion of the meeting during which the matter was discussed, and not voting on the matter. Conflicts of Interest While board members of local development authorities are not required to complete and file Personal Financial Disclosure Statements with the Georgia Government Transparency and Campaign Finance Commission, state law (O.C.G.A ) requires all board members and executive directors of state boards, commissions, and authorities to complete the statement. The statement discloses personal financial interests for the preceding calendar year including information such as all fiduciary positions, direct ownership interests in any business entity, direct ownership interests in real property, spouse s direct ownership interest in real property, the filer s employment and family members information, filer s investment interests and known business or investment interests of spouse and dependent children. These statements make it easier to identify possible conflicts of interest before a potential issue could develop. Financial Audit Georgia s Development Authorities Law (O.C.G.A (f)) requires development authorities to undergo an annual financial audit and to submit a copy to the local governing body. Annual financial audits are conducted for 10 of the 11 development authorities included in our review. While the remaining development authority does not undergo an annual financial audit as required, its accountant prepares monthly financial statements which are regularly presented at public board meetings. Segregation of Duties- Those that keep the books shouldn t keep the money and vice versa. The financial audits for eight of the development authorities reviewed did not include significant findings regarding financial controls. Annual financial audits for two of the 10 development authorities reviewed that undergo such audits included findings related to inadequate financial controls. One of these authorities was cited for inadequate segregation of duties for five consecutive years. During the last audited period, an employee from this authority was found to have potentially misused agency funds. The 2011 financial audit for the other authority cited for inadequate financial controls included the finding that due to the small size of the Authority s staff, controls are not practical to provide adequate segregation of duties in cash receipts

19 Local Development Authorities 17 and disbursements functions. According to Institute of Internal Auditors, One internal control above all others can make fraud more difficult to commit: segregation of duties. Those that keep the money shouldn t keep the books and vice versa. In performing their fiduciary responsibilities, board members should act upon such findings in financial audits to ensure they are resolved in a timely manner. Appraisal Report- A written statement independently and impartially prepared by a qualified appraiser setting forth an opinion of the defined value of the property. Property Appraisals None of the 11 authorities in our review have formal policies or procedures that require appraisals of the value of real property prior to acquiring such property. In addition, regulations for each of the state grant and loan programs included in our review do not require property appraisals for locally funded land acquisitions associated with state funded projects. Property appraisals are a component of the real estate acquisition process because they document the fair market value (FMV) of the property and serve as the basis for the initial offer to property owners. State agencies, such as the Georgia Department of Transportation (GDOT), require property appraisals prior to purchasing real estate. We reviewed four projects that used local funds and two projects that used state funds to finance at least a portion of the real estate acquisition costs. We found that authorities did not obtain current appraisals for all four of the projects using local funds to purchase property. In addition, we found that while authorities did obtain and submit to DCA appraisals for the two projects using state funds, the purchase price for the property associated with one of the projects exceeded the appraised value. RECOMMENDATIONS Prior to awarding state grant and loan funds to development authorities, DCA should require these authorities to provide evidence that basic internal controls are in place that safeguard state and local investments in economic development. 1. All authorities should provide evidence they meet Georgia s Open Meetings law by properly recording board discussions and decisions made during executive sessions (the portions of board meetings closed to the public). 2. All authorities should be required to include a formal conflict of interest policy in their bylaws or policies and procedures. In addition, during the award application process board members of development authorities should be required to complete and submit to DCA Personal Financial Disclosure Statements similar to those required of members of State boards and authorities (O.C.G.A ). 3. Prior to awarding state grant and loan funds to development authorities whose last financial audit includes findings regarding inadequate financial controls, DCA should require those authorities to provide plans of corrective action. 4. Prior to providing state funds for projects involving property acquisition, DCA should require the authorities to provide a current property appraisal validating the authority s purchase price is in line with the fair market value of the land.

20 Local Development Authorities 18 DCA Response: DCA agrees with the recommendation of the DOAA report that governance and oversight of development authorities are largely the responsibility of local authorities themselves, and their compliance with various state laws intended to promote transparency and accountability are in the best interests of the state. While the potential for improvements in the transparency and accountability of local development authorities exists, as noted in the DOAA report, state law does not authorize a regulatory role for DCA with regard to these public entities and therefore can only be a partner with them and other relevant state agencies in any improvement process. An example of how DCA could assist in an effort to maximize accountability of local development authorities is enhanced public reporting of the results of local development authority projects funded with state grants or loans on an annual basis. DCA should develop procedures to ensure that registration and financial information submitted by development authorities is accurate and complete. While state law 3 requires development authorities to submit operational and financial information to DCA, it (DCA) lacks procedures to ensure the accuracy and completeness of this information. To collect and report the information, DCA has developed the necessary forms and online reporting tools as well as maintains multiple databases. We reviewed these databases and found examples of inaccurate, inconsistent, and incomplete information. The three databases we reviewed are discussed below. Annual Authority Registration Database State law 4 requires development authorities to provide DCA with basic information such as the authority s legal name, members, function, date and means of creation, address, and telephone number. Authorities provide and annually update this information on DCA s online Annual Authority Registration database. The information in this database is available to the public via DCA s website. While the registration database meets all statutory requirements, we found inaccurate and incomplete information within the registration database. DCA has no procedures to ensure that all authorities register and maintain a current registration. As of the 2012 registration period, DCA s database contains records for 1,241 local authorities. None of these authorities have been reported as dissolved. By the end of the 2012 registration period, approximately 20% (241) of these authorities had failed to submit a current registration. In fact, 41 of these authorities have submitted registration information only once since To enforce the registration requirements, development authorities not registered are prohibited from issuing debt and from receiving state appropriated funds. Most development authorities awarded state funds and reporting debt on the Debt Issuance Reports had a current registration in the year of the award and debt issuance. However, as 3 O.C.G.A , , and The Local Government Authorities Registration Act (O.C.G.A ) enacted in 1995 requires all Georgia local government authorities to register annually with DCA.