Economic Development Initiatives Fund: Evaluating the State’s Accountability Over the Use of EDIF Funding

Introduction

Senator Julia Lynn and Representative Jim Gartner requested this audit. The Legislative Post Audit Committee authorized our division to conduct the audit at its April 30, 2019 meeting.

Objectives, Scope, & Methodology

This report answers two questions:

1. Does the state’s process to administer the Economic Development Initiatives Fund (EDIF) follow best practices?
2. Are the programs that receive EDIF funding consistent with the intended use of the fund?

We compared economic development best practices to how the state administers EDIF. We also reviewed state law and fiscal year 2014-2018 EDIF appropriations to determine whether programs that receive EDIF funds aligned with legislative intent. We did not evaluate spending within those programs. That work was beyond the scope of this audit. The report includes more details about our work as needed.

Important Disclosures

We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. Overall, we believe the evidence obtained provides a reasonable basis for our findings and conclusions based on those audit objectives.

Audit standards require us to report limitations to our audit. In this audit, we could not determine why the Legislature administers and distributes the EDIF as it does. That is because we cannot objectively evaluate the causes of legislative decisions as legislative staff.

Audit standards also require us to describe any internal controls we reviewed. We reviewed controls for ensuring EDIF funding matches legislative intent. We also reviewed whether the EDIF’s administration follows best practices and state law.

Kansas does not administer the Economic Development Initiatives Fund (EDIF) according to best practices for economic development.

The Legislature created EDIF to aid economic development in Kansas.

• The Legislature created EDIF in 1986 to help improve the Kansas economy. K.S.A. 79-4804 funds EDIF using part of the state’s annual lottery and gaming revenues.
• State law requires that EDIF be used for economic development. Specifically, it should be spent to support and enhance new and existing Kansas businesses and to foster new industry growth.
• State law also requires all EDIF funds to flow through three accounts. Those accounts require EDIF funds be spent specifically to support:
  1. innovative Kansas companies or products
  2. research and development
  3. community infrastructure development

• The Legislature distributes EDIF funds through the state’s annual budget request process. This means it gives out EDIF funds the same way it does state general funds. Agencies request EDIF funds based on information from the Division of the Budget about how much funding is available. The Legislature gives EDIF funds to specific agency programs through its appropriations bills.

In fiscal year 2018, the state spent about $42.3 million of EDIF funds.

• We reviewed accounting data to see how much EDIF funds agencies spent in fiscal year 2018. We also looked at appropriations bills to see how much money the Legislature transferred to other funds. We focused on fiscal year 2018 because it was the most recent data available.
• As Figure 1 shows, five agencies spent about $20.2 million on 17 programs during fiscal year 2018. The figure also shows the Legislature transferred $22.1 million to other funds in fiscal year 2018.
• EDIF spending was similar in fiscal years 2014 through 2017. The same agencies generally spent similar amounts of EDIF funds. The Legislature made generally similar transfers as well.

The state does not design and award EDIF funds according to best practices.

• We identified best practices for economic development fund oversight from the National State Auditors Association and the Government Finance Officers Association.
• To understand how EDIF works, we looked at state law and appropriations bills. We also interviewed agency officials to learn how they request and use EDIF funds. We interviewed officials from the Kansas Legislative Research Department, the Office of the Revisor, and the Division of the Budget. Finally, we compared the best practices we identified to how the state distributes EDIF funds.
• Figure 2 shows key best practices relevant to economic development programs like EDIF. Best practices emphasize designing programs and awarding funding based on recipient performance. For example, programs should have clear and measurable objectives. There also should be an application process to establish clear expectations and to help select recipients. This sets up the process for checking how well funding recipients are performing.
• The EDIF statute lacks criteria to help pick the agencies that should receive EDIF funds. The statute does not specify how to judge potential recipients. The state also does not have a documented economic development plan to help the Legislature set objectives for EDIF spending.
• As a result, the state distributes EDIF funds like state general funds. Officials at three of the five agencies we visited said they view and manage EDIF funds like state general funds. This may allow EDIF funds to go to things that do not align with legislative intent.

Additionally, the state does not track EDIF recipients’ performance or evaluate whether EDIF is effective.

• Figure 2 also shows key best practices for monitoring economic development programs. Someone should be responsible for making sure recipients submit required information. This information should show things like whether recipients are meeting their performance targets and whether programs are having the intended effects. This helps program management see if recipients meet expectations and if programs are effective.
• The EDIF statute does not specify who should oversee EDIF to ensure funds are used properly and effectively.
• Neither the EDIF statute nor appropriations bills include processes for monitoring funding recipients. They also do not include processes for checking whether EDIF is effective in supporting economic development.
• Agency officials told us they track information about their EDIF programs. Officials said this information is not required to get EDIF funds. For example, Commerce officials said they track the number of applications received for the Rural Opportunities Zones program. They also track how much this program contributes to recipients’ student loan payments. Wildlife, Parks and Tourism officials said they track the effects of tourism advertising on Kansas. However, no oversight body reviews that program data to decide if it is an effective use of EDIF spending. This may allow EDIF funds to go to things that do not help Kansas grow.

The Children’s Initiatives Fund statute follows best practices more closely than the EDIF statute.

• We looked for other Kansas funds that are like the EDIF. We identified the Children’s Initiatives Fund (CIF), which also is an appropriated fund. Its statutes (K.S.A. 38-2102 et seq.) provide guidance on how to use funds.
• CIF is not an economic development program. It funds programs beneficial to the health and welfare of Kansas children. The Legislature appropriated about $41.7 million from this fund in fiscal year 2018. The way this fund operates aligns better with the best practices we identified:
  • The Children’s Initiative Fund statute more clearly defines how the fund should work. It focuses on the importance of using data to decide how to distribute funds. It directs the Legislature to strongly consider funding data-driven, outcomes-based programs.
  • The statute requires programs to show they have a performance assessment process. The assessment must be able to show how well a program is doing. It should also show when a program should not receive funds because of poor outcomes. This assessment must exist before a program gets funding.
  • The statute requires an oversight board (called the Children’s Cabinet) to review the state’s use of Children’s Initiative funds. The statute also gives the Children’s Cabinet the authority to request an audit from our office. The Children’s Cabinet uses this information to advise the Governor and the Legislature on how to use funds. However, they do not have to follow this advice.

Only about $7.8 million (18%) of fiscal year 2018 EDIF funds went to programs consistent with specific legislative intent.

Only about $7.8 million (18%) of EDIF funds in fiscal year 2018 went to programs meeting specific requirements in state law.

• State law requires that EDIF be generally used on economic development. The EDIF statute also requires all EDIF funding to go through three accounts. Each account has a specific purpose.
  1. The capital formation account should help finance innovative Kansas companies or products. This might include helping companies get private financing. It might also include giving state funding to higher risk companies.
  2. The research and development account aims to support research and development. This includes collaboration between private industry and Kansas universities. This might include university research that helps Kansas businesses succeed. It might also include companies and universities doing joint research to create more competitive products.
  3. The economic development endowment account can be used for any economic development activity. However, it requires at least some money to be used for community infrastructure development. This might include helping local communities pay for things like roads, sewers, and industrial parks. These are important for economic development.
• We used these accounts to define legislative intent. That is because they provide the most detailed view of how the Legislature wants EDIF money to be used. They are also state law.
• We reviewed each EDIF program’s purpose to determine whether it met the requirements in state law. We reviewed agency documents and talked to agency officials to learn about their EDIF programs. We then used our judgment to determine if these programs aligned with the specific economic development purposes of the three EDIF accounts. We did not evaluate spending within these programs. For example, we did not look at whether the salaries or supplies covered by a given program’s EDIF funds met legislative intent.
• Figure 3 shows eight disbursements to programs or funds that aligned with legislative intent in fiscal year 2018. This accounts for about $7.8 million (18%) in EDIF funds.
  • For example, the Department of Agriculture’s Agriculture Marketing Program spent about $1.1 million in EDIF funding. This program supports farmers, ranchers, and agricultural businesses. This support may include providing investment-related mentoring and connections. It is also involved in agricultural research at Kansas universities. For example, this program supports wheat, dairy, and sorghum research at Kansas State University. We think this aligns with the intent for funding innovative companies and research and development.
  • The Kansas State University Extension Systems and Agricultural Research Programs spent about $300,000 in EDIF funding. This program researches agricultural science and technology. It includes research centers and experimental fields across Kansas. Five colleges at Kansas State University take part in this research. We think this aligns with the intent for research and development.

About $14.4 million (34%) of EDIF spending in fiscal year 2018 related to economic development but not to the accounts’ specific purposes.

• As Figure 4 shows, 10 disbursements to programs or funds supported economic development but did not align with legislative intent in fiscal year 2018. This accounts for about $14.4 million (34%) in EDIF funds.
• For example, the Department of Commerce spent about $200,000 in EDIF funding on the Older Kansans Employment Program. This program provides training and job-matching services to Kansans age 55 or older.
• Additionally, the Department of Wildlife, Parks and Tourism spent about $1.7 million in fiscal year 2018 on travel tourism. This program promotes tourism destinations in Kansas. It also advertises activities in Kansas through the publication of ‘Kansas!’ magazine.

$20.1 million (48%) of EDIF spending in fiscal year 2018 did not appear to relate to economic development.

• The Legislature’s broad intent is for EDIF funding to support and grow economic development in Kansas.
• However, the $20.1 million the Legislature transferred to the State General Fund is likely not related to economic development. Because state general funds are further disbursed to fund many different state purposes, we could not determine whether the $20.1 million transfer ended up being used for economic development purposes. Giving EDIF funds to specific programs is the only way to make sure they go toward economic development.

We could not determine if EDIF funds are disbursed across Kansas as required by law.

• The EDIF statute also has a geographic distribution rule. The rule says the state should distribute at least half of EDIF funding equally across the state’s four congressional districts.
• State law does not currently require anyone to track or report on whether this rule is being met.
• No state agency or legislative staff agency we talked to currently tracks whether this rule is being followed. Additionally, no single EDIF recipient could track this by itself. This is because funding recipients get only part of annual EDIF appropriations. Each agency would have to track what all the others are doing.
• Because no one tracks this information, we could not determine whether EDIF funding is distributed equally across the state’s congressional districts.

The Legislature has not used the three EDIF accounts specified in state law in recent years.

• The EDIF statute says all funding must go into one of three EDIF accounts. There is no mechanism in place to make sure this happens automatically.
• It is up to the Legislature to appropriate money to these three specific accounts. The Legislature must also decide which agencies can spend the money in these accounts.
• The Legislature has not distributed EDIF funding to these three accounts in recent years. Instead, it made direct appropriations to individual agency budgets.
• Agency, Kansas Legislative Research Department, and Division of the Budget officials we spoke with were unaware of what statute says about these accounts.
• We could not determine why the Legislature distributes EDIF funding as it does. That is because we cannot objectively evaluate the causes of legislative decisions as legislative staff.

Conclusion

The Legislature created the EDIF to provide dedicated funding for economic development in Kansas. It has been more than 30 years since its creation, but there is still very little guidance or oversight of the fund. The Legislature currently transfers a significant portion of EDIF funds to the State General Fund, which is not reserved for special economic development activities. As a result of missing oversight or controls, the state may be missing out on opportunities to use the fund more effectively for its intended purpose.

Recommendations

1. The Legislature should consider creating an oversight body to ensure the state uses EDIF funds according to legislative intent and best practices.
2. The Legislature should consider using the three EDIF accounts in state law. Or, it should consider amending state law to reflect its current intent for EDIF.

Agency Response

On August 30, 2019 we provided the draft audit report to the Department of Agriculture, Department of Commerce, Department of Wildlife, Parks and Tourism, Kansas Board of Regents, and Kansas State University. Each agency except Wildlife, Parks and Tourism submitted a formal response. These responses are below.

Agency officials generally agreed with our findings and conclusions. Department of Agriculture officials also submitted an attachment providing additional information about the Agriculture Marketing Program. This attachment is available from LPA upon request.

Appendix A – Cited References

This appendix lists the major publications we relied on for this report.

1. Administering Economic Development Agreements (September, 2018). Government Finance Officers Association.
2. Best Practices in Carrying Out State Economic Development Efforts (2004). National State Auditors Association.
3. Establishing an Economic Development Incentive Policy (September, 2017). Government Finance Officers Association.
4. Evaluating and Selecting Economic Development Projects (September, 2017). Government Finance Officers Association.
5. Monitoring Economic Development Performance (September, 2015). Government Finance Officers Association.
6. Negotiating Economic Development Agreements (September, 2017). Government Finance Officers Association.