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A new audit reveals the City’s Economic & International Development Department lost millions of dollars because of systemic failures in its handling of Chapter 380 Agreements with developers and did not properly report contractual violations to City Council.
Mayor Pro Tempore Brian Kennedy, who is Chair of the Financial Oversight and Audit Committee, prioritized auditing the 380s shortly after assuming office in January 2023.
We previously reported that Rep. Joe Molinar, who sits on the same committee, sponsored item 7 on the May 17, 2023 agenda requesting that an audit be conducted.
Chief Internal Auditor Edmundo Calderon and his staff completed work last week and published Audit No. A2023-07 on the City’s internal audit webpage. Their conclusions are nothing short of mind-blowing and paint a picture of financial mismanagement and absence of oversight.
According to the Texas Comptroller, “Chapter 380 of the Local Government Code authorizes municipalities to offer incentives designed to promote economic development such as commercial and retail projects. Specifically, it provides for offering loans and grants of city funds or services at little or no cost to promote state and local economic development and to stimulate business and commercial activity.”
According to the new audit, the City began signing Chapter 312 tax abatement agreements and Chapter 380 incentive agreements with developers beginning in 2006, shortly after Joyce Wilson was hired as the first City Manager.
In January 2020, David Crowder published a report for the El Paso Inc in which he revealed the City of El Paso had 96 incentive agreements rebating $231 million in property and sales taxes that developers would pay over the life of their agreements.
As of August 23, 2023, there were 65 active 380 Agreements, 21 of which require that a certain number of jobs be created or retained. However, only seven 380s were audited for compliance with applicable 380 policies, including the projects for Paul Foster’s Plaza Hotel and Kress Building, Jim Scherr’s Texas Tower and downtown hotel, and WestStar Tower. Five agreements were reviewed for compliance with job targets. Four were reviewed for proper closure after receiving rebate payments while failing to comply with contractual terms.
The audit revealed five significant findings. A “significant finding,” to be identified as such, “has a material effect on the City of El Paso’s financial statements, identifies an internal control breakdown, is a violation of City procedure, or a violation of a law and/or regulation.”
1. In 2021, while Tommy Gonzalez was City Manager, the Incentives Policy of the City was revised, reducing the effectiveness of monitoring. The provision requiring a business to prove its financial stability and capacity to complete the project was weakened. The provision requiring biennial review of the agreement was removed and replaced with “periodical” review. The provision requiring an annual report from Economic Development was eliminated.
2. The City failed repeatedly failed to confirm that the businesses applying for incentives were financially stable. Six of seven of the 380s that were reviewed did not provide documentation of the requisite financial stability to complete the project as required by City policy.
3. The Economic & International Development Department failed to report to City Council the true dollar amount of its incentive agreements and the actual job counts for each project. In the five agreements that were reviewed, the office reported to City Council that a total of $5,344,991 in incentives were paid but failed to include $1,222,967 in waivers and reimbursements. The latter figure includes $623,983 paid out to Foster’s Plaza Hotel project (which was awarded $21,969,915 in incentives) and $177,562 paid out to WestStar Tower (which was awarded $14,034,955).
4. Economic Development failed to track and update “key dates” for 380 agreements, to document deadline extensions for incentive reimbursement requests, and to process incentive payments per the deadlines specified in the agreements.
5. Four 380 agreements received incentive payments without abiding by the contractual terms. Of these, two did not have a “recapture clause” and received $1,346,322 in incentive payments anyway, with the City unable to seek reimbursement. Of that figure, $1,343,690 went to UTEP for the development of a technology innovation center, but the university withdrew from the agreement without explanation and the City was unable to recover the lost funds.
It is sobering to realize that only a small fraction of the 65 agreements were reviewed for this audit and that the amount of money that was lost or unaccounted for is much larger than indicated, well into eight figures.
We can thank Reps. Cassandra Hernandez, Isabel Salcido, and Henry Rivera for voting to support every 380 Agreement that came before them during the Tommy Gonzalez years. We have meticulously documented every one of their votes.
In response to the alarming findings of the audit, FOAC Chair Kennedy issued a statement today decrying the lack of oversight of the previous administration and affirming that “FOAC is now working with current City Management to enforce controls and provide a regular reporting structure to ensure that contractual benchmarks are being met by our business partners and that we are correctly disbursing incentives.”
Kennedy should run for Mayor.
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