Sunday, October 11, 2009

The Wizard Of KOZ

In a recent column by Sam Galski for the Times Tribune Dr. Robert Childs wanted to revisit a vote on some KOZ (Keystone Opportunity Zones) extensions granted by the Hazleton Area School Board. For those not so familiar with the battle you can review the board's past actions here.

The point Dr. Childs missed in his argument over the vote is exactly the vote. Six directors approved the KOZ extensions although Childs and Steve Hahn voted against them. Carmella Yenkevich was not present for the vote last October. Does Dr. Childs want all the votes of the Hazleton Area School Board revisited? It happened last October and it is done.

But the bickering between members of the Hazleton Area School Board, which by the way should stop immediately, is not the purpose of this post. In Harrisburg there is more "stinkin thinkin" that we, as taxpayers, should tolerate from overpaid legislators. This report from the Legislative and Budget Finance Committee fails to support the need or the purpose of KOZ designation.

Deficiencies in program data prevent a comprehensive assessment of the KOZ Program’s effectiveness. The findings in this report are based largely on data from CY2006, as 2007 and 2008 data did not become available until the very end of our fieldwork. We also found significant problems with the reliability of the 2006 data we reviewed, including certain data that appeared to be duplicative and/or a mix of actual and esti-mated/projected figures. These and other data problems are detailed in the report.

Using 2006 DCED records, we found about 75% of KOZ participants reported no job creation activity. While to some extent the lack of job creation can be attributed to definitional reasons (e.g., what constitutes a “participant”), we found other examples of KOZ participants, including financial and investment services firms, where KOZ tax benefits are being re-ceived, but where no jobs have ever been created and no capital investments have ever been made.

DCED needs better guidelines and procedures to ensure that a KOZ participant is a qualified business. By law, KOZ businesses are to be “engaged in the active conduct of a trade or business.” This phrase has never been defined, and apparently no business has ever been deemed “not qualified.” As a result, KOZ partic-ipants include “businesses” such as real estate investment trusts, venture capital funds, and hedge funds that have FEIN numbers, but no employees.

The total cost of the KOZ Program is not known and currently cannot be reliably estimated. The major cost component of the KOZ Program is the amount of state and local tax exemptions, credits, and deductions that are granted to KOZ businesses, residents, and property own-ers. Neither DCED nor any other state or local agency currently knows what these tax abate-ments amount to, although a similar program in New York has estimated annual costs in excess of $650 million.

Most (70%) KOZ acreage has not yet been developed. Of the 46,853 acres included in the KOZ Program, only 13,944 (30%) has been de-veloped. Poor infrastructure, costly remediation, and inadequate marketing are some of the rea-sons for the lack of development.

DCED does not adequately track and monitor “relocation” and “residency” aspects of the program. Deficiencies were found in the DCED’s efforts to ensure that existing PA businesses that relocate to a KOZ meet statutory re-quirements and verify that PA residents living and receiving tax breaks in a KOZ comply with the statutory 184-day residency requirement.

Before taking any actions to further expand or extend the KOZ Program, the General Assembly should require that new participants make specific commitments to create jobs and/or make capital investments and that new KOZ zones be truly deteriorated rather than merely “underutilized.”

July 9, 2009

The Legislature was so consumed with the budget process that this report probably fell through the cracks. It is time to revisit KOZ and correct its severe deficiencies or end it altogether.

The total cost of the KOZ Program is not known and currently cannot be reliably estimated.  If they can't define the total cost that problem should send up a big red flag.

That is the argument Childs should have put forth, not digging up old wounds. Childs characterized this report as downplaying KOZ. This report is more than a downplay.

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