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Report to the Arizona Legislature
By the Auditor General
DEPUTY AUDiiOR GENERAL
April 27, 1993
Members of the Arizona Legislature
The Honorable Fife Symington, Governor
Mr. James E. Marsh, Director
Department of Commerce
Transmitted herewith is a report of the Auditor General, A Performance Audit of the
Department of Commerce. This report is in response to a December 13, 1991,
resolution of the Joint Legislative Oversight Committee.
We found the Department's efforts to assist businesses in relocating to Arizona are
rated favorably by the vast majority of those businesses contacting the Department.
However, we found the Department needs to better monitor its efforts to determine the
actual impact of its assistance on relocation decisions. We also found the Department
can make several changes to improve its other operations. It can ensure greater long-term
economic benefit to the State by awarding more of the Commerce and Economic
Development Funds to existing small Arizona businesses. It can improve the Small
Business Administration loan program by privatizing the function. Finally, it can help
avoid controversy by developing more specific policies governing entertainment and
promotion expenditures.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on April 28.
Douhg ! R . Norton
Auditor General
The Ofice of the Auditor General has conducted a performance audit and Sunset
Review of the Department of Commerce, pursuant to a December 13, 1991,
resolution of the Joint Legislative Oversight Committee. The audit was conducted
as part of the Sunset Review set forth in Arizona Revised Statutes $ 541- 2951
through 41- 2957.
The Department of Commerce, formerly the Office of Economic Planning and
Development, was established in July 1985. The Department is charged with
promoting and enhancing the economic growth and development of the State. The
Department's responsibilities and activities range from attracting new business to
the State and assisting communities in their economic development efforts to
promoting energy conservation and technology development.
The Commerce And Economic Development
Commission Needs To Improve The
Controls Governina Its Award Decisions ( see pages 7 through 16)
The Commerce and Economic Development Commission ( CEDC) needs to improve
the controls governing its decisions to award State economic development funds. In
1989, the Legislature created the CEDC to oversee the Department of Commerce
in administering the Commerce and Economic Development Fund ( which receives
between $ 3 million and $ 5 million annually from the State Lottery scratch games).
The fund was established to expand economic activities in Arizona by providing
financial assistance for business expansion, retention, and location in the State.
CEDC has inconsistently applied its loan criteria, which at a minimum gives the
appearance of unfairness. For example, some applicants have been denied funds for
reasons such as not having 50 percent bank participation or for having less than
two years of operating history ( considered a start- up business), while other
businesses were approved when they did not meet those same criteria. Further,
although Commission guidelines indicate that 64 percent of Fund receipts will be
targeted for existing small- to medium- sized Arizona businesses, less than 21
percent of the funds committed as of February 1993 had gone to such businesses.
The Commission should develop Administrative Rules that clearly state its
application and decision- making process, and award criteria.
State- Run Loan Pro ram
Should Be privatize8 ( see pages 17 through 23)
The State is paying too much for a program that issues too few small business
loans. The U. S. Small Business Administration ( SBA) authorizes local Certified
Development Companies ( CDCs) to administer its 504 loan program, which provides
low interest loans to small businesses. The statewide SBA 504 program is overseen
by the Arizona Enterprise Development Corporation, a CDC which is a private
nonprofit corporation. However, the program is housed in and staffed by the
Department of Commerce; thus, the operating expenses of this nonprofit corporation
are primarily State funded. Historically, this CDC has been extremely
unproductive, issuing a total of two loans in 1990- 91. Although it increased its loans
to 11 in 1991- 92, a similar- sized- private CDC to which we compared it issued 38
loans per year. Because the volume of loans has been low, Arizona has not been
getting its fair share of SBA 504 loans - leaving Arizona businesses underserved.
Further, Commerce's cost per loan is nearly $ 13,000, or over twice the $ 4,000 to
$ 5,500 cost per loan experienced by three private CDCs we reviewed. For the
benefit of both taxpayers and small businesses in Arizona, the State should
privatize the function.
The Department Of Commerce Should
Identify And Pursue Changes That
Positively Influence Businesses'
Decisions To Locate In Arizona ( see pages 25 through 29)
The Department of Commerce should continue to identify and pursue changes that
would convince businesses to move to or expand into Arizona. In recent months, the
Department has seen an increase in the number of businesses that have announced
moves to Arizona. Because so many factors and players impact businesses' location
decisions, it is difficult to pinpoint the Department's impact on these decisions.
However, by surveying clients, the Department would be better able to monitor
changes needed to improve its service, as well as being able to identify changes
needed to improve Arizona's overall business climate.
Policies Are Needed To
Govern Entertainment And
Promotional Ex~ enditures ( see pages 31 through 35)
The Department of Commerce lacks well- defined policies for handling unique
expenditures. Because the Department is charged with promoting and enhancing the
economic environment of Arizona, it has traditionally been allowed to expend State
funds in areas ( such as entertainment and promotion) that are generally prohibited
in other State agencies. However, we found that these expenditures frequently do
not include a business client, but instead involve board or commission members, and
economic development or utility officials. Other states also expend monies for
entertainment and promotion, but often restrict these expenditures to instances
wherein a prospective business client is included. The Department should develop
specific policies to govern these unique expenditures.
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Broad Guidelines May Result In
Inconsistent Loan Award Decisions . . . . . . . . . . . . . . . . . . . . . . .
CEDC Funds Are Not Getting To The
Businesses That Most Benefit
TheState . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
More Commission Involvement
Needed In Decision Making . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Commission Needs
To Adopt Administrative Rules . . . . . . . . . . . . . . . . . . . . . . . . . .
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commerce Produces Low Volume Of
Loans, Leaving Arizona Businesses Underserved . . . . . . . . . . . .
High Cost For
Substandard Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State Funding Should Be
Eliminated And The Program
Should Become Self- supporting . . . . . . . . . . . . . . . . . . . . . . . . .
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TABLE OF CONTENTS ( Con't)
FINDING Ill: THE DEPARTMENT OF COMMERCE SHOULD
Commerce Has Seen An Increase In
Businesses Announcing Moves . . . . . . . . . . . . . . . . . . . . .
Many Factors Affect
Business Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outcome Of Program Should
Be Monitored To Improve
Service And Address Barriers . . . . . . . . . . . . . . . . . . . . .
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Need For Policies
To Define Appropriate Uses . . . . . . . . . . . . . . . . . . . . . . .
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Department Of Commerce
Energy Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Department Of Commerce . . . . . . . . . . . . . . . . . . . . . . . .
Economic Planning And
Development Advisory Board . . . . . . . . . . . . . . . . . . . . . .
Arizona Solar Energy
Advisory Council . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TABLE OF CONTENTS ( Concl'd)
CEDC Loan Portfolio Categories
APPENDIX Ill:
Department of Commerce Memorandum Regarding
Promotional and Entertainment Expenditures
TABLE I: Department Of Commerce
Actual And Estimated Expenditures
Appropriated Funds
Fiscal Years 1990- 91, 1991 - 92, And 1992- 93
( unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . .
TABLE 2: Department Of Commerce
Actual And Estimated Expenditures
Nonappropriated Funds
Fiscal Years 1990- 91, 1991 - 92, And 1992- 93
( unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . .
TABLE 3: CEDC Loans and Grants Awarded
November 1989 Through February 1993 . . . . . .
TABLE 4: Annual SBA 504 Loans Per Million In Population
Comparison Of Three Arizona CDCs To
Region And Nation . . . . . . . . . . . . . . . . . . . . .
TABLE 5: Cost Per SBA 504 Loan
Department Of Commerce And
Three Other CDCs . . . . . . . . . . . . . . . . . . . . .
TABLE 6: Department Of Commerce
Business Recruitment Activity
From July 1, 1992 Through December 31, 1992
The Office of the Auditor General has conducted a performance audit and Sunset
Review of the Department of Commerce, pursuant to a December 13, 1991,
resolution of the Joint Legislative Oversight Committee. The audit was conducted
as part of the Sunset Review set forth in Arizona Revised Statutes $ 541- 2951
through 4 1- 2957.
The Department of Commerce, formerly the Governor's Office of Economic Planning
and Development, was established in July 1985. The Department is charged with
promoting and enhancing the State's economic growth and development. Its
responsibilities and activities range from attracting new business to the State and
assisting communities in their economic development efforts to promoting energy
conservation and technology development.
To perform its responsibilities, the Department is organized as follows:
BUSINESS DEVELOPMENT - This division's efforts focus on attracting new
business and industry, and supporting the retention and expansion of existing
FINANCIALS ERVICEASND HOUSINGD EVELOPMEN- T T his division's function
is to advocate improved infrastructure and housing throughout the State and
coordinate the availability of Federal and State financing programs available
for businesses.
COMMUNITYA SSISTANCES ERVICE- S This division provides technical
assistance, direct hands- on assistance, and training to communities in a
variety of areas.
8 COMMUNICATIONASN D RESEARCH - This division provides research,
information, and marketing services for the Department of Commerce.
ENERGY OFFICE - This office consists of four units, whose activities include
energy conservation and education programs and technical assistance to the
State and businesses for developing energy- efficient technologies. It also
oversees grants and the use of millions of Federal and oil overcharge monies.
INTERNATIONALTR ADE AND WE~ ME- N ThTis division's objective is to
facilitate job growth in Arizona by assisting in developing exports and
promoting reverse investment from outside the United States.
MOTION PICTURDEE VELOPMENTO FFICE - This division was created to
encourage the motion picture and television industry to film in Arizona. The
Motion Picture Development Ofice provides a wide range of services and
information to production companies who are filming or considering filming in
OFFICEO F SPORTDSE VELOPMEN- T T his ofice works to attract and retain
professional sports teams and sporting events making Arizona a major site for
sporting activities.
ADMINISTRATIONA ND FINANCE- The division supports the department's
planning and operational needs. It includes the director's ofice and
administrative support services such as personnel, management information
systems, and fiscal services.
In addition to the Department's internal organization, there are several advisory
groups assisting the Department. Some of these groups include the Commerce and
Economic Development Commission ( CEDC), the Solar Energy Advisory Council,
and the Governor's Motion Picture and Television Board and Advisory Committee.
The CEDC has oversight authority for the CEDC loan program and the Solar
Energy Advisory Council assists the Department in establishing and implementing
solar energy policy for the State. The Governor's Motion Picture and Television
Board and Advisory Commission assists in developing policy and promoting and
expanding the film industry in Arizona.
Budclet and Personnel
The Department's operating budget consists of both appropriated and
nonappropriated funds. The Department expended approximately $ 5 million in
appropriated funds and $ 17.5 million in nonappropriated funds in Fiscal Year
1991- 92. Of the appropriated monies, approximately $ 3.6 million was from General
Fund monies and $ 1.1 million from lottery revenues, with the remaining coming
from specific funds such as bond and housing trust monies.
Actual and Estimated Expenditures
Appropriated Funds
Fiscal Years 1990- 91, 1991 - 92, and 1992- 93
( unaudited)
( Actual) ( Actual) ( Estimated)
FTE Positions 72.0 69.0 67.0
Personal Services
Employee- Related Expenses
Professional 8 Outside Services
Travel, In- State
Travel, Out- of- State
Other Operating
Capitalized Equipment
Below- the- Line Expenses( a)
( a) These wBelow- the- Line" expenses include salaries, grants and matching funds, consultant
costs and promotional expenses for more than a dozen special programs ranging from the
Asian Pacific Trade Office to solar energy projects.
Source: Department of Commerce Executive Budget Request for Fiscal Year 1992- 93 and
Fiscal Year 1993- 94
In Fiscal Year 1991- 92 the nonappropriated funds accounted for 78 percent of
expenditures. ( See Table 2, page 4.) Approximately one- half of the FTE positions
are budgeted from the nonappropriated funds. The three largest sources of these
monies were Federal funds ($ 8.5 million), the Oil Overcharge Fund ($ 4.4 million),
and the State Housing Trust Fund ($ 3.3 million). These funds generally have
designated purposes outlined in statute, by grant, or in the settlement stipulations.
More than one- half ( approximately $ 9 million) of the expenditures were pass-through
monies going largely to non- State entities, such as grants to local
communities and private organizations.
Actual and Estimated Expenditures
Nonappropriated Funds
Fiscal Years 1990- 91, 1991 - 92, and 1992- 93
( unaudited)
1990- 91 1991 - 92 1992- 93
( Actual) [ Actual) ( Estimated)
Personal Services
Employee- Related Expenses
Professional & Outside Services
Travel, In- State
Travel, Out- of- State
Other Operating
Capitalized Equipment
Below- the- Line( a)
Indirect Costs
Transfer & Refunds
Pass- Throughs( b)
Pass- Throughs( c)
Land & Capital Projects
( a) These " Below- the- Line" expenditures include CEDC loans and Housing Trust Fund awards.
( b) To other State Agencies
( c) To non- State agencies.
Source: Department of Commerce Executive Budget Request for Fiscal Years 1992- 93 and 1993- 94.
Audit Scope
Our audit report of the Department presents findings and recommendations in four
The need for improvement in the CEDC loan program
The need for improvement in the Small Business Administration loan program
The need to strengthen the business recruitment program
The need for policy and better documentation for entertainment and
promotional expenditures
In addition to these audit areas, we present a section of other pertinent information
that includes information on the Energy Office and needed changes with the
depletion of the oil overcharge monies ( see pages 37- 39). In addition, the report
contains a response to the 12 Sunset Review Factors for the Department ( see pages
41- 45), and also Sunset Factors for the Economic Planning and Development
Advisory Board ( see pages 47- 49) and the Solar Energy Advisory Council ( see pages
51- 53).
This audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the Director and staff of the
Department of Commerce for their cooperation and assistance throughout the audit.
The Commission needs to improve the controls governing its decisions to award
State economic development funds. The Commission has inconsistently applied its
loan criteria and is not awarding sacient funds to the small Arizona businesses
for which it is intended. Additionally, the Commission should become more actively
involved in the program it is charged to oversee. To ensure that applicants are
guaranteed a fair review and that funds are reaching the appropriate businesses,
administrative rules should be developed.
In 1989, the Legislature created the Commerce and Economic Development
Commission ( CEDC) to oversee the Department of Commerce in administering the
Commerce and Economic Development Commission Fund.' The Fund is to expand
economic activities in Arizona by providing financial assistance for business
expansion, retention, and location in the State. According to CEDC guidelines, the
majority of funds are intended to provide low- interest loans to for- profit businesses.
However, statutes additionally allow loans, grants, and other types of assistance to
nonprofit economic development groups, political subdivisions, the State, tribal
governments, and the universities. According to Commission reports, from the
Fund's inception through February 1993, the Commission has had $ 9,189,909
available for financial assistance, of which they have committed $ 6,046,030 to 26
organizations.? Approximately $ 5 million is expected from Lottery revenues in Fiscal
Year 1992- 93 ( of which $ 1.4 million was appropriated to the Commerce operating
budget). Although Lottery revenues are not certain, the Fund is expected to receive
between $ 4 million and $ 5 million annually. Return of the principal and interest
also adds to the Fund balance.
1 The Commission consists of four members appointed by the Governor, as well as the director
of the securities division of the Corporation Commission, and the director of the Commerce
Department, who, by statute, is the CEDC chairman.
2 In addition to the funds available for business assistance, over $ 2.7 million in CEDC funds
were appropriated to the Department of Commerce budget and another $ 850,000 of the funds
went to one- time mandated economic development activities.
Arizona statutes are very broad with regard to the use of the CEDC Fund, giving
the Commission almost total discretion in its decisions. However, the Commission
has adopted program guidelines designed by a consultant from the National
Development Council in Washington D. C. The guidelines, based on input from
economic development experts around the State, provide an overall structure for the
award decisions, defining the categories of businesses the funds should go to, and
general criteria the businesses must meet. However, the guidelines are not binding
and do not restrict the commission from making selected awards which may not fit
the loan criteria.
Broad Guidelines May Result In
Inconsistent Loan ward Decisions
Operating with broad guidelines leads to inconsistencies in CEDC loan decisions
that at a minimum, give the appearance that some award recipients receive special
consideration. Because Arizona statutes mandate that all information in the CEDC
loan application files is confidential, specific references to individual companies or
an analysis of each award is not presented. However, the similar characteristics of
businesses denied and receiving loans, and the violation of CEDC guidelines in some
cases, gives the appearance of unfairness in award decisions.
Commission loan awards aDDear inconsistent - The Commission lacks written
criteria as to what criteria must be met to receive a CEDC award. However,
through our review of applicant files and loan denial correspondence as well as
interviews with Commerce loan staff and applicants, we found the following criteria
are commonly used as the basis to deny or disqualify applicants:
The company must not be a start- up operation;
CEDC funds must be leveraged by 50 percent private sector participation;
Funds are not for working capital but must be used for and collateralized with
fixed assets;
The company must show that it has adequate cash flow and profitable
operations; and
Funds are to provide capital to businesses that cannot get funding from other
During our review of loans, however, we identified businesses a ~ ~ r o v feodr loans
who did not meet the criteria applied to other applicants who were denied loans.
For example, in our review of eight companies receiving CEDC awards, we found
one or more of the following characteristics:
The company was being newly created;
The company did not have 50 percent private sector financing;
The company's debt was not collateralized with land, building or equipment;
The company had a history of operating losses; or
The company had existing available credit and as such did not need the loan.
In addition to appearing inconsistent, in a few cases the process followed produced
an appearance of special treatment, as illustrated in the following examples.
1 One applicant, who appeared to be a viable candidate for a loan, told us that
he had decided to drop the process, in part because of the amount of effort it
would take to complete the tax revenue calculation required in the application.
( Applicants are asked to project the increase in tax revenues to the State and
local jurisdictions if their loan is awarded.) However, we identified loan
recipients who did not complete this section of the application, and it appeared
Commerce calculated it for them.
An internal memo suggested discussing a loan with the Commission prior to
the applicant submitting an application to determine whether the CEDC
members " supports the idea in concept, and if so, have the staff begin the credit
review. "
An applicant approved for a loan was taken at his word that other funding
sources had been exhausted, while other applicants provided documentation
( such as letters from banks) as required by the application.
Any appearance of favoritism or special treatment may reduce the program's
effectiveness by discouraging existing small Arizona businesses from applying for
the very funds created to assist them.
CEDC Funds Are Not Getting To The
Businesses That Most Benefit The State
CEDC ' s guidelines were designed to direct monies to those businesses that would
most benefit the State. CEDC's guidelines, based on input from economic
development experts throughout Arizona, suggest that most funds should be directed
to existing small- to medium- sized Arizona businesses. However, our analysis shows
that less than 21 percent of the $ 6.04 million committed has gone to these
Guidelines designate the maioritv of funds for existing Arizona small
businesses - Prior to the development of the Commission's guidelines, a consultant
with the National Development Council interviewed businesses, lenders, and
economic development experts across the State to assess Arizona's needs. According
to the consultant, the majority of the CEDC funds should be made available to the
companies that are going to benefit the State the most in the long run, which are
the small, expanding Arizona businesses. The guidelines state that over 80 percent
of all new jobs come from firms employing less than 100 people, and the cost of
creating these jobs in Arizona is 10 percent the cost of creating a job in a large
corporation. The guidelines suggest that approximately two- thirds of the CEDC
funds be dedicated to existing Arizona small- and medium- sized businesses.
Specifically, the Commission's guidelines state:
... The greatest part of the fund, then, is designed to provide expansion
capital for existing Arizona small businesses who need affordable
financing to invest in plant and equipment. These firms will have the
greatest impact on Arizona's tax base, and t h q will ~ roduceth e greatest
number of permanent private sector lobs.
In addition to funding existing small- and medium- sized businesses, the guidelines
also provide goals for other loan types. These loan types include:
Business location assistance to provide financial assistance for out- of- state
firms wanting to locate or expand in Arizona;
Venture capital for Arizona businesses; and
Project monies for disadvantaged areas of the State, or for taking defensive
action to keep a company from moving out of Arizona.
However, the guidelines intentionally emphasize aid to existing small- and
medium- sized businesses over funding for these other loan types.
Less than 21 vercent of funding getting to existing Arizona small businesses - The Commission's goal is that approximately 64 percent of CEDC funds will go
to healthy Arizona small- and medium- sized businesses needing money for
expansion.' However, as shown in Table 3 ( see page 121, our review of CEDC loans
shows that less than one- fourth of the $ 6.04 million in Fund commitments have
been made to these businesses. Instead the majority of the CEDC Fund dollars have
gone to large businesses ( 24.4 percent) or businesses expanding or relocating to
Arizona from other states ( 42.8 percent).
Commerce has increased efforts to market CEDC loans - According to
Commerce officials, efforts are being made to market the CEDC program throughout
Arizona. The Commerce Director stated that he and other Department oficials tout
the program in speeches made throughout the State. In addition, the Department
has hired a marketing representative to identify appropriate businesses for CEDC
funds, and to encourage these business owners to apply for such funds. The
Commerce Director indicated, however, that few Arizona small businesses are
applying for these loans.
Because the Department does not track the number of inquiries, applications, or
denial reasons, we were unable to determine whether the volume of small
businesses applying was indeed low. However, because most of the Statewide
visibility of the program has occurred when the Department made loans to major
large corporations, small business may perceive the program as being oriented to
large businesses. Therefore, more action may be needed to enhance the program's
1 The goal of 64 percent includes the goal of 55 percent in the Retention category and 9 percent
in the Production Financing category, another type of loan designed to assist existing small
businesses in Arizona.
CEDC Loans and Grants Awarded
November 1989 through February 1993
Aaaiabnoa to WMng 5Wt AWna B W m :
Fermll Secakuku $ 42,000
K- Tronics 70,000
Project PPEP 157,500
Smith and Bell 85,000
Urban Coalition West 80,000
Yavapai Block 300,000
Signature Industries 76,000
Navi- Hopi Tours 25,530
Riotech, lnc. 100,000
Bamjo, Inc. 50,000
Jack of All Trades 25,000
Lakeside Entertainment Group, Inc. 150,000
Crossroads Automart 105.000
Percentage of Awards to Cafegory: 20.9 Percent
Assistan~ eto WMng Large Mzmab usi~ ssses:
Evergreen Air Center $ 230,000
Capin Mercantile 250,000
America West Airlines 1.000.000
Percentage of A wards to Category: 24.5 Percent
Assistance to Wsinesses Relocating Fr'otn Uthar States; 1
Eurofresh, Inc. $ 400,000
AACCO Foundry 140,000
Muscular Dystrophy Association 1,000,000
Atlas Headware 100,000
Monsey Products 250,000
McDonnell Douglas Travel 700.000
Percentage of Awards to Category: 42.8 Percent
Dthet: 1
Arizona Economic Council $ 60,000
Arizona Technology Incubator 300,000
Coronado Venture Fund 200,000
First Commerce and Loan 150.000
Percentage of Awards to Category: 11.7 Percent
Source: Auditor General Analysis of loan information provided by the
Department of Commerce.
credibility. One national expert cautions that unless the program is perceived as a
program which is truly open and supportive of small businesses, most small
business owners will not bother to apply. Thus, the Department needs to continue,
and expand, its efforts to deliver CEDC loans to small businesses.
More Commission Involvement
Needed in Decision Making
The Commission should have a more active role in the award decisions. In the
current process, the Commission may not see important information that could
affect its decisions. Additionally, - Commerce staff appear to be taking actions that
should be reserved for the Commission.
Commission mav not see im~ ortanitn formation - The Commission may not
be aware of important information in the applications of the businesses it approves
for loans. Our review of loan files revealed the following instances where
information that may have affected the Commission's decision to approve a loan was
not brought forward.
Example 1 - Between the time of Commission approval and the disbursement
of funds, a loan applicant was required to notify the Commission of any
changes affecting the status of another funding source. Although a major
change did occur with regard to capital requirements, it was not reported by
the applicant, and the Commerce loan officer had documentation that the
applicant had been informed of the change. The loan officer advised Commerce
management, recommending that it be brought to the Commission. Commerce
management chose not to bring the matter to the Commission and the funds
were disbursed the next day.
Example 2 - In another loan, in which the applicant had a three- year history
of operating losses, internal Commerce documentation differed from that
presented to the Commission. There were three different versions of the credit
analysis prepared ( all on the same day) by Commerce business finance staff.
The first stated as an unfavorable factor that there was " insufficient cash flow
to service aisting or proposed debt." The final version presented to the
Commission on that same day stated, " There is adequate projected cash flow
to repay existing and proposed CEDC obligations. "
In addition, Commerce staff sometimes act as the decision maker in place of the
Commission. For example, Commerce staff amended the terms and conditions of a
CEDC loan without Commission approval. The Commission awarded a loan to a
business which operated a small- business loan program. The second distribution of
funds to the loan recipient was contingent upon satisfactory performance in the first
phase of its small business loan program. The terms of the CEDC loan document
specified the definition to be used by the loan recipient to qualify loans from its
program as delinquent and specified the maximum percentage of delinquent loans
allowed in order to receive the second CEDC distribution. Commerce staff amended
these conditions, making them more lenient to the loan recipient. We asked if the
amended document had been brought to the Commission and were told that the
changes were not of sufficient materiality to require them to go to the Commission.
However, there are no written policies that define what parts of a loan agreement
are considered material.
Finally, Commerce staff have significant control in determining who will get CEDC
funds. Commerce staff select the applications to be presented to the Commission
and have the authority to disqualify and deny CEDC applicants. Since there is no
scoring of applications and the guidelines are flexible, the staff have a great deal
of discretion in which loans will be presented to the Commission. Further, there are
no standard record- keeping mechanisms documenting these decisions and no
required reports to the Commission that summarize the number of and reasons for
the denials.
The Commission Needs
To Adopt Administrative Rules
Administrative rules are needed to provide structure and direction for the State's
multi- million- dollar economic development fund. The Commission currently has no
written policies or rules that govern the decision- making process other than general
guidelines that the Commission is not bound to adhere to. Rules will help ensure
that award decisions are based on objective criteria and protect the Commission
from criticism and potential lawsuits.
Rules are needed for CEDC proaram administration - The agency's Attorney
General representative made a written recommendation to the Commission in July
1992 that administrative rules were necessary to establish the procedures and
criteria governing the award decisions. The attorney advised the Commission to
suspend additional awards until the rules were adopted. After discussions with
Commerce and the Commission, the Attorney General representative withdrew the
recommendation that the Commission cease making awards, but advised: 1) that
they begin developing rules and 2) in the meantime, adhere as closely as possible
to the National Development Council guidelines. As of December 1992, little work
has been done in the drafting of rules.
Not only would rules improve the perception of fairness, they would reduce the
likelihood that the Commission could be successfully sued for discrimination or
other legal violations. Already a group of taxpayers who question the
appropriateness of a CEDC loan decision has hired an attorney and filed a Taxpayer
Request questioning the constitutionality of the CEDC Fund and the Commission's
operations. One of the contentions of the affidavit is that Administrative Rules are
Rules should define the award process and the criteria - Much of the content
of administrative rules can reflect and give teeth to the guidelines currently in
place. However, some program aspects will need to be more clearly defined. Rules
should address the following program areas:
APPLICATION AND DECISION- MAKING PROCESS - Rules should define the
process through which an application is evaluated and reviewed by the
Commission. If Commerce staff have authority to pre- screen and disqualify
unsuitable applicants, the criteria must be clearly specified and auditable
records should be kept of pre- screening decisions. Rules should outline
procedures for processing applications for Commission review, specifying the
decision points and the authority for such decisions. Record- keeping
requirements should be delineated.
AWARD CRITEW - The evaluation criteria should be specified for each
program category. The Commission should consider which of the current
criteria they will require, versus those which are less important and, although
preferred, may be waived under specified circumstances ( such circumstances
should be outlined in written policy). Key terms used to describe the criteria
should be defined, such as: small business, start- up, profitable operations,
acceptable collateral, etc.
- Using the current guidelines as a framework, the program categories and
funding goals for each should be clearly defined. The Commission should
consider measures to force stronger adherence to its funding goals for program
1. The Commission should immediately begin to draft administrative rules
governing the application and decision- making processes used to award CEDC
funds. The rules should include ( but not be limited to) the following:
Definition of the authorities of the Commerce staff and the authorities of
the Commission, i. e., what decisions can be made by Commerce and what
decisions must come to the Commission.
Definition of the award criteria for each category of business eligible to
receive awards. The criteria should be sufficiently objective that minimal
discretion is needed to determine if a business is qualified to apply. If
some criteria may be waived, for example, the requirement of 50 percent
bank participation, the rules should specify under what conditions the
criterion may be waived.
2. The Commission should be more involved in denial decisions. At a minimum,
the Commission should be informed of those businesses denied funding, and
the reasons for denials.
3. The Commission should begin to emphasize loans for the smaller Arizona
businesses for which the funds are intended.
The State is paying too high a price for administration of Arizona's SBA 504 small
business loan program. Additionally, small businesses in Arizona are underserved
due to the low volume of loans produced by the Commerce- staffed organization. For
the benefit of both taxpayers and small businesses in Arizona, the State should
privatize the function.
The U. S. Small Business Administration ( SBA) authorizes local Certified
Development Companies ( CDCs) to administer its 504 loan program that is an
important source of capital for small businesses. The 504 program provides low-interest
loans to small businesses for purchases of buildings, land, or equipment up
to $ 2 million.'
The Department of Commerce houses and staffs the statewide SBA 504 loan
program. Although no State funds are used for the loans, the majority of the
program's operating expenses, including salaries of more than four staff positions,
are State funded. The entity authorized by SBA as the statewide CDC, however, is
not Commerce but the Arizona Enterprise Development Corporation ( AEDC), a
private, nonprofit corporation. While the activities of the statewide 504 loan function
are carried out under the auspices of AEDC, AEDC is essentially a small board
with no operations or revenue outside the Commerce- staffed pr~ grarnT.~ he current
president and executive director of AEDC are Commerce employees.
Arizona has two other CDCs. Both at one time received government support but are
now self- supporting. The Business Development Finance Corporation ( BDFC),
headquartered in Tucson, has concurrent jurisdiction with Commerce for areas east
and south of Phoenix. The Phoenix Local Development Corporation ( PLDC) provides
1 Construction and remodeling expenditures may also be funded by a 504 loan. Additionally, in
specially designated rural areas, the loan amount may be as high as $ 2.5 million. Loan
amounts are typically between $ 500,000 and $ 2 million.
2 AEDC generates revenue from the fees it is allowed to collect from origination and servicing
of SBA 504 loans. However, it is State- funded loan officers who currently perform the loan
origination and servicing functions.
504 loans for businesses within the city's boundaries. The Commerce program has
exclusive jurisdiction in the portion of the State not served by the other CDCs.
The Certified Development Companies serve two primary functions for the SBA
program. First, they get the funds to the designated businesses through their
marketing and outreach efforts. Second, the CDCs underwrite the SBA portion of
the loan, protecting the SBA funds by ensuring the applicant's creditworthiness.'
Commerce Produces Low Volume of Loans
Leavinrr Arizona Businesses Underserved
The Commerce CDC has been extremely unproductive through the years, leaving
Arizona businesses underserved by the SBA 504 program ( although increasing the
volume of loans in 1992). The SBA has put the CDC on probation, giving them two
years to increase the volume of loans. Additionally, there are quality problems with
the loan packages submitted.
Commerce produces extremelv few loans - Historically, the volume of
Commerce 504 loans approved by SBA has been low. Although there are
approximately four staff positions dedicated to the program, with the exception of
this past year ( Federal Fiscal Year 1991- 92) in which 11 loans were approved,
Commerce has not had more than 7 loans approved by SBA annually.' During the
three Federal Fiscal Years 1989- 90 through 1991- 92, Commerce had 3, 2, and 11
loans approved, respectively. In Federal Fiscal Years 1985- 86 and 1987- 88, only one
loan per year was approved.
In July 1992, the SBA categorized the Commerce 504 program as ' marginally active'
and gave it two years to increase the volume of 10ans.~ T he following analysis was
included in the SBA decision:
The SBA provides up to 40 percent of the funding. Fifty percent of the project funds are
provided by a bank or financial institution that is protected by having the first lien position
on the fixed assets required as loan collateral ( generally land or buildings). No State monies
fund the 504 loans; the remaining 10 percent is provided by the applicant.
This is based on Federal Fiscal Years 1984- 85 through 1991- 92. Data from earlier years were
not provided by SBA
3 The Phoenix Local Development Corporation was also given two years to increase its loan
Annual SBA 504 Loans Per Million in Population
Comparison of Three Arizona CDCs to Region and Nation
Fiscal Commerce Phoenix Tucson
Year ( AEDC) jPLDC1 ( BDFCI Arizona Reaion
Source: U. S. Small Business Administration
Although Commerce increased its 504 approvals significantly in Federal Fiscal Year
1991- 92, its productivity is still far less than some other CDCs.' The average
number of loans per staff position at the other three CDCs is between 8 and 12."
Commerce, on the other hand, is generating less than three loans per staff position
annually. Furthermore, in the two Fiscal Years prior to 1991- 92, the average
number of loans was less than one per staff position annually.
Commerce 504 Drogram leaves Arizona businesses underserved - SBA
officials expressed concern that Arizona was not getting its fair share of SBA 504
loans. According to an SBA oacial in Washington, most of Arizona's activity is
attributable to the CDC in Tucson ( BDFC). Commerce, however, is chartered as the
statewide CDC; and prior to July of 1992, had exclusive jurisdiction in all areas of
the State, except the City of Phoenix and Pima County. When the Commerce
program was put on probation for low loan volume, the SBA expanded the territory
of the Tucson- based CDC, which now shares territory with Commerce in much of
southern Arizona and parts of Maricopa County.
There are still a number of counties in the State for which Commerce is the only
source of SBA 504 loans; for example, Yuma, Coconino, and Yavapai. Commerce is
also the only source of 504 loans for cities in the northern and western Phoenix
1 Commerce management attributes the improvement to increased marketing efforts and to
increased management commitment to the 504 program.
Table 5, page 21, shows the number of loans generated by Commerce and three other CDCs
for Federal Fiscal Year 1991- 92 and the staff positions dedicated. Dividing the number of loans
by the stafF positions results in the following annual loan volume per staff position; Commerce
- 2.7, Tucson- based BDFC - 8.0, Nevada statewide CDC - 9.6, and the Utah statewide CDC -
Metropolitan area, such as Glendale, Scottsdale, Peoria, etc. According to SBA
historical data, only three 504 loans have been made in Coconino County and only
three in Yuma. In 1991, a California CDC requested SBA permission to serve Yuma
and La Paz County, but although SBA acknowledged that the counties had not
received the appropriate attention, it decided to give Commerce the opportunity to
prove they can effectively cover the market. The California company was told that
Commerce should be producing about six loans a year in this area of the State.
Qualitr of work is also an issue - The low volume of loans is not the only
concern with the Commerce 504 program -- there appear to be significant quality
concerns as well. We interviewed people in the district SBA office who were in a
position to review Commerce's product as well as the product of the other Arizona
CDCs. The Commerce work is viewed as substandard. One official said that the
local SBA office spends four to five times the effort on a Commerce loan compared
to that on a loan from the Tucson- based CDC, and that there are questions on 70
to 90 percent of the Commerce loans.
During the audit, we reviewed correspondence ( obtained from the department)
between SBA and, Commerce pertaining to loans approved in State Fiscal Years
1990- 91 and 1991- 92. We found that the local SBA has regularly pointed out
deficiencies in the quality of Commerce work. The following are examples from this
correspondence. Each case pertains to a different loan application.
One SBA letter to Commerce had four pages detailing loan application
deficiencies, including such problems as an applicant being ineligible as the loan
was structured, lack of clarity as to whether one of the parties was a start- up
or a franchise, and the SBA was unable to determine what businesses were to
occupy the building.
A letter from SBA points out that although the CDC is responsible for an
accurate credit and financial analysis that " in this case, little i f any financial or
credit analysis was presented for review. " The letter points out that the financial
statements were more than 90 days old, and one of the balance sheets was
inaccurately completed.
One memo from a Commerce loan officer to Commerce management detailed a
telephone call from a local SBA representative after receipt of a 504 loan
application wherein Commerce had listed pillows and linens on a balance sheet.
The SBA official was reported to have said, " Does anyone over there ever read the
SOPS ( Standard Operating Procedures)? Do you think these items will last ten
High Cost For
Substandard Program
The State's cost to produce an SBA 504 loan through Commerce is two to three
times greater than the cost at other CDCs. We calculated the cost per 504 loan at
Commerce, at BDFC headquartered in Tucson, and at two productive statewide
CDCs in Utah and Nevada.' As shown in Table 5, based on the number of loans
approved by SBA in Fiscal Year 1991- 92 and the salaries of the staff positions
dedicated to the programs, the Commerce cost per loan is $ 12,813-- far more than
that of the other CDCs.
Cost Per SBA 504 Loan
Department of Commerce and Three Other CDCs
Number of Loans Number of
Development Approved by SBA Staff Positions Gross Cost Per
Com~ any Federal FY 1991 - 92 Dedicated Annual Pay Loan
NSDC- Nevada
( Statewide CDC) 38
Deseret- Utah
( Statewide CDC) 93
Source: Auditor General staff analysis. Annual loan volume provided by SBA in Washington.
Staffing and salary information provided by individual CDCs.
State Funding Should Be Eliminated And
The Procrram Should Become Self- Sup~ orfinq
State funding for the SBA 504 program should be phased out. The program is
poorly serving Arizona small businesses and the function could be performed more
effectively and at a lower cost by a private organization. According to one SBA
BDFC and the Utah CDC ( Deseret) are self- supporting, private nonprofit companies. The
Nevada CDC ( NSDC) is a private, for- profit organization, also self- supporting. The Nevada and
Utah CDCs were selected because of their proximity to Arizona, and their similar nuallurban
business loan needs and characteristics.
representative, the healthy evolution of a CDC involves gradually lessening its
government support until it is self- supporting.' While an SBA official in Washington
said the SBA is reluctant to compare the productivity of government- run CDCs to
private CDCs, he said that of the top 20 producers in the country, he could think
of only one with ties to government.
The State should eliminate funding for the 504 function within Commerce, which
would force AEDC to become self- supporting. Both of the other Arizona CDCs began
using government funding but are now independent of government support. Both
the statewide CDCs in Nevada and Utah, which are far more productive, ( see Table
51, are also independent of government support. Since AEDC is a nonprofit entity
given CDC status by the SBA, the State cannot abolish AEDC. However, since
AEDC is almost totally dependent on State funding, the elimination of State
funding would essentially force AEDC to become self- supporting.' AEDC has at least
two alternatives to serve statewide 504 needs independently of State funding:
One is a voluntary merger between AEDC and BDFC. This option has the
advantage of increasing the territory of an already successful organization
that is interested in servicing statewide 504 needs. If this option were chosen,
the State might want to consider providing subsidy to the consolidated CDC
for a limited period of time to assist with travel costs associated with serving
the rural areas.
w On the other hand, the AEDC Board might choose to begin an organization
independent of government support, as was recently done by PLDC. In part,
to address its problem of low loan volume, in February 1992 PLDC broke ties
with city government. According to one of the PLDC board members, a loan
officer will perform better if his salary is totally dependent on the production
of loans, and that City employees often were called upon to do tasks other
than loan work. In PLDC's case, as well as in the start- up of the Tucson and
Utah CDCs, government monies helped with the transition to a fully self-supporting
Regardless of whether the AEDC merges with the Tucson organization or eliminates
its association with Commerce, State funding assistance can be eliminated entirely
over a short period of time.
A CDC may charge a servicing fee of between .50 and 2.0 percent on its outstanding loan
balance. Additionally, it may charge a fee of up to 1.5 percent of the SBA portion of the loan
upon origination. Because Commerce has had so few loans, its fees cover a small percentage
of its costs.
* AEDC remits $ 2,500 per month to Commerce from the monies it receives for loan- servicing
fees. As of December 1993, AEDC had a checking account balance of $ 45,000 earned from
SBA origination fees.
1. The State should develop a plan to privatize the AEDC SBA 504 program 1 and begin its implementation.
( This Page Intentionally Left Blank)
FINDING Ill
The Department of Commerce should continue to identify and pursue changes that
would convince businesses to move or expand to Arizona. In recent months, the
Department has seen an increase in the number of businesses who have announced
moves to Arizona. Because so many factors and players impact businesses' decisions
to locate in Arizona, it is difficult to pinpoint the Department's impact on these
decisions. However, by surveying clients, the Department would be better able to
monitor changes needed to improve its service, as well as being able to identify
changes needed to improve Arizona's overall business climate.
The Department of Commerce has established a National Marketing Unit whose
mission is to promote the State and to serve as a point of contact for businesses
interested in locating in Arizona. The Division employs six representatives who
interview prospective businesses to identify their needs, provide requested
information, arrange visits to potential sites, and maintain contact with company
representatives to ensure they obtain necessary assistance. In providing this
assistance, the Department representatives frequently work with other economic
development agencies, utility companies, and local community leaders.
Commerce Has Seen An
Increase In Businesses
Announcing Moves
The number of Commerce- assisted businesses announcing moves into the State have
increased. According to Department of Commerce records, in Fiscal Year 1990- 91,
24 companies assisted by its business representatives publicly announced decisions
to locate a new business facility in Arizona, and another 21 companies did so in
Fiscal Year 1991- 92. As indicated in Table 6 ( see page 26), during the first six
months of Fiscal Year 1992- 93, the number of location announcements by client
firms is more than the total announcements in either of the two previous Fiscal
Business Recruitment Activity
From July 1,1992 through December 31,1992
Number of Number in Jobs Amount to
Status of Proiect Projects Rural Area Involved be Invested
Move Has Been
Publicly Announced 30
Move Has Been
Committed, Unannounced 18
Arizona Is A Finalist 4 1
Site Vsit To Arizona
Is Expected
Source: Arizona Department of Commerce, Monthly Prospect Report, December 1992 ( unaudited)
Many Factors Affect
Business Decisions
Although the number of Commerce- assisted businesses moving into the State
appears to be increasing, Commerce's impact on those decisions is difficult to
measure. Business location decisions are impacted by a variety of factors. Further,
a number of different agencies may be involved in efforts to recruit firms. Thus,
pinpointing responsibility for what factor or group was responsible for a location
decision is a difficult task.
Number of factors a- ffect location decisions - Professional writings and studies
indicate that the factors affecting business location decisions are numerous. One
report notes, for example, that while such traditional factors as access to markets
and suppliers, availability of financing alternatives, transportation systems, qualified
sites or existing facilities, and costs of labor and utilities are still taken into
consideration, nontraditional factors are becoming increasingly important. These
include labor productivity and reliability, quality of life, an area's educational
systems, overall costs of doing business, quality of telecommunication systems,
spousal employment opportunities, environmental factors, and local inducements.
The ability of business recruitment programs to affect business location decisions
at any given time depends, therefore, not just upon the recruitment services
provided but upon the particular mix of factors that determines the overall business
climate as well.
Array of ~ a r t i c i ~ a nint sv olved in recruitment efforts- Not only do a number
of business climate factors impact decisions, but a number of participants may be
involved in influencing business decisions. Efforts to attract new businesses to the
State often involve local economic development agencies, utility companies,
universities, community colleges, banks, other public agencies, and the private
sector. Therefore, a number of entities may actually share the credit for businesses'
decisions to move into the State.
Outcome Of Program Should
Be Monitored To Improve
Service And Address Barriers
The Department needs to monitor its program to determine the impact of its efforts
as well as any problems with Arizona's overall business climate. Arizona, like most
states, lacks the information necessary to evaluate the effectiveness of its
recruitment programs. Because the Department has little data regarding the
outcome of its programs, we conducted a client survey. Although the results are
limited by the response rate, we did identify potential areas to be addressed.
States lack data regard in^ Drograrn effectiveness - According to an official with
the National Association of State Development Agencies, states are searching for
ways of determining the effectiveness of their business recruitment programs. In
response to this need, the Urban Institute and the States of Maryland and
Minnesota undertook the task of designing a performance- monitoring system to
monitor both the quality and results of economic development programs; their
recommendations were summarized in a manual entitled " Monitoring the Outcomes
of Economic Development Programs." The manual recommends the use of periodic
client surveys to provide on- going monitoring information at regular intervals, and
to provide year- to- year comparisons of performance.
Survev results inconclusive. vet show potential areas - As with most states, the
Department lacked detailed information regarding its performance. Therefore, using
a modified version of the client survey instrument recommended by the Urban
Institute, we sent surveys to approximately 1,100 businesses who had been assisted
by the Department's National Marketing Unit in Fiscal Year 1991- 92.' In addition,
we also surveyed the 45 companies that had publicly announced a move to Arizona
in Fiscal Years 1990- 91 and 1991- 92.
See Appendix I1 for a copy of survey instrument.
Our survey response rate was lower than we would have liked -- we received
responses from 188 ( or 17 percent) of those contacted. Although our survey results
must be tempered by the response rate, they do point to some areas where the
Department is performing well, as well as identifying potential areas for
improvement. Over 71 percent of respondents rated the assistance received by the
Department of Commerce as excellent or good. Further, nearly 90 percent of those
responding felt that the Department was performing as well as or better than other
states they had contacted. Positive comments cited staff professionalism, helpfulness
and overall quality of service as positive factors.
In addition, comments were received regarding areas where the Department could
improve its service. For example, the Department should better track and follow up
on contacts to ensure that the businesses receive the type of information they need.
Eleven respondents noted that the Department never provided the information they
requested or that the information was slow in coming, while 21 respondents
indicated that the information they received was either too general, insufficient, or
outdated. Further, 16 respondents commented on a general lack of follow- through
to requests for assistance. The following quotes from respondents illustrate these
" Weak information received on sites1 buildings - very generalized and lacking
detail necessary for sound business decisions."
' 7 was ( and am) interested in the Prescott and ncson areas - availability and
costs of housing, workers' taxes, climate, business demographics - All I got was
less than I could have gotten in a travel agent's brochure."
" In the course of this project I have dealt with numerous economic development
authorities who were extremely helpful - yours seemed relatively uninterested
and gave me the impression that Arizona is not economically competitive."
" After 3 phone calls to the Department it took 2 112 months to get any
information at all."
The Department is currently in the process of implementing new tracking software
which could help its ability to follow through on companies who have contacted the
Department. The software tracks client contacts and automatically schedules
follow- up. The Department expects full implementation of the software by March
The survey also notes areas where the State appears to be performing well, as well
as noting potential areas for improvement in Arizona's overall business climate. The
factors most frequently rated as positively impacting businesses' decisions to locate,
or consider locating, in Arizona included: quality of life, cost of labor, suitability of
site, labor supply, and physical environment. Conversely, the factors most frequently
rated as negatively impacting businesses' consideration of Arizona as a business
location included: State and local financial incentives, business tax and personal tax
levels, availability of private financing, and training andlor recruitment incentives.
The following quotes illustrate businesses concerns with locating in Arizona.
' You have few incentives to offer a corporate headquarter seeking to relocate."
" In comparison, others offer far greater financial assistance."
" Arizona's package needs to be more aggressive ( competitive with Nevada)."
" No job- training funds available. Few state incentives to offset company costs."
" When industry looks at Arizona, water access, affordability, and long- term
outlook is always in question. Any reassurance or guarantees/ forecasts, etc.,
would be beneficial in your literature."
" We are still considering the move, but -- sales tax on leasing a commercial
building -- . . . not right, not fair, discriminatory against business - needs
change. Leasing rates are better in Arizona, but add tax and there isn't much
difference, if any."
" Review other states' packages and get aggressive. Jobs will mean balanced
growth for Arizona. Focus should be on more incentives and start- up
" Property tax rates and business sales tax rates are very much a disincentive
to operate in Arizona. Should be reevaluated."
The Legislature is taking action to address some of the concerns noted by
respondents. For example, legislation was recently enacted which adds a job- training
program to the State. Further, a tax reduction package is being considered which
would phase out the State's commercial- real- estate lease tax and reduce the
personal property tax on commercial, industrial, and agricultural improvements. In
addition, the Legislature is establishing a committee to review the State's regulatory
environment to make it less complex and expensive.
1. The Department of Commerce should develop a survey mechanism to monitor
the quality of service it is providing to clients. Further, the Department should
take action in those areas identified by the survey as being deficient.
2. The Department of Commerce should continue its efforts to track businesses
who have contacted the Department to ensure they are obtaining the needed
information and assistance.
The Department of Commerce lacks adequate policies for handling unique
expenditures. Although allowed to use State funds for entertainment and promotion,
the Department has come under fire for such expenditures. Policies are needed to
ensure the appropriate use of State funds.
The Department of Commerce is charged with promoting and enhancing the
economic environment of Arizona. To accomplish this goal, the Department has
traditionally been allowed to expend State funds in areas that are generally
prohibited in other state agencies ( such as entertainment and purchasing
promotional items). For example, the Department may give a gift to a business
executive who is considering Arizona as a site for business expansion or relocation,
or Commerce employees may take the individual to dinner. Use of promotional
items and entertainment are typical for economic development offices or
departments of commerce across the country.
Although these types of purchases may be typical, they may appear to conflict with
State gifting provisions. The State Constitution and Arizona Revised Statutes
preclude gifting1 which can be construed to mean the purchase of meals as well as
items which are used as promotional gifts. However, courts have concluded that if
the gift has a public benefit and this benefit is not greatly outweighed by the cost
of the gift, certain expenditures may be allowable.
The Department does not have well- defined policies regarding promotion and
entertainment expenditures, and as a consequence has come under scrutiny. In
1992, various expenditures were the subject of news articles and legislative
hearing^.^ During this time, the Department issued guidelines addressing some
aspects of promotion and entertainment expenditures and documentation. ( See
Appendix 111.) However, these guidelines are general in nature and do not address
some current Department practices. Developing policies to more clearly define when
such expenditures are appropriate could help avoid controversy in the future.
1 A. R. S. Const. Art. 9, $ 7, and A. R. S. $ 38- 601.
2 Subsequent to an article which appeared in the New Times describing questionable
expenditures, a legislator began inquiring into Commerce's expenditures. This process
continued as a part of the Director's confirmation hearing. This review covered expenditures
from July 1991 through April 1992. These expenditures included memberships in a private
club, reimbursement to State employees for working lunches and dinners, undocumented
travel claims, and promotional items.
practices. Developing policies to more clearly define when such expenditures are
appropriate could help avoid controversy in the future.
Need For Policies
To Define A~ propriate Uses
The Department's practices and lack of policies regarding its unique expenditures
contribute to continued questioning of these areas. Our review' indicates that a
policy is particularly needed to govern the use of State funds for entertainment
expenditures when no prospective business client2 is in attendance. Other states
have measures that control these expenditures. In addition to policies, proper
documentation is essential to ensure the appropriate use of State funds.
No ~ ros~ ectibvues iness client - As stated previously, entertaining clients may
be considered a normal part of doing business for economic development offices or
commerce departments. However, there is no clear benefit to the State in instances
where no prospective business client is present. The following are examples of the
entertainment expenditures we question. While the individual amounts of the
expenditures are not always large, the nature of the expenditures makes them
subject to question.
Commerce employees entertain guests who are not prospective clients.
Commerce staff charged lunches ( ranging from less than $ 10 to more than $ 75)
to entertainment although no prospective client attended. Instead, the lunch
guests included local economic development people, utility representatives, or
a member of the Governor's staff.
Comment: Commerce has stated that meals with persons who are not
prospects may involve discussions of economic development topics and are work
related. We question whether there is a public purpose that would justify the
use of State funds for entertainment where no prospect is involved. As
mentioned earlier, the State may lawfully give its funds to individuals where
there is a public purpose. However, a State employee is employed for the
purpose of benefiting the public. Therefore, it does not appear consistent to
make gifts ( meals) to a State employee for doing his or her job. Further,
1 We conducted several reviews of expenditures. First, for Fiscal Year 1991- 92, a random sample
of several expense categories was selected. These categories include: Out- of- State Per Diem,
Out- of- Country Per Diem, Conference Facilities/ Miscellaneous, Entertainment, Promotional
Items, and Other. Secondly, a judgmental sample was also selected From all non- payroll
expenditures in 1991- 92. Finally, for the current Fiscal Year 1992- 93 all claims for the first
quarter were reviewed. This review began on October 19, 1992, and any first- quarter claims
not filed by that date were not reviewed.
We define " prospective business client" as an individual who represents a company that is
considering locating in or expanding hisher business in Arizona.
providing funds for meals where no prospective client is present may be a
violation of A. R. S. $ 38- 60 1.
Commerce employees entertain members of boards or commissions. Lunch and
dinner expenditures between Commerce employees and members of Commerce
boards or commissions ranged from approximately $ 30 to more than $ 135.
Comment: Again, Commerce contends that these are work- related luncheon
or dinner meetings. However, it is questionable whether State funds should be
used to entertain State employees and Board members. Furthermore, in some
instances the employee was not in travel status and therefore not eligible for
reimbursement of meals. In other cases, the employee was in travel status and
eligible for per diem amounts; however, these amounts are limited to $ 5 per
person for lunch and $ 10 per person for dinner. In these instances the full
amount of the meal exceeded the allowed per diem but the excess was paid
and was covered by claiming it as an entertainment expense.'
Commerce employees or other State employees are the majority in attendance.
For example, expenditures ranging from approximately $ 20 to nearly $ 200
were claimed for a banquet meeting, a working lunch, and meeting
refreshments even though the expenditures were primarily for State employees
in non- travel status.
Comment: We believe these entertainment expenditures are unjustified
because the majority of the individuals in attendance were State employees
who were not in travel status. Although Commerce maintains these were work-related
functions, we question the appropriateness of using State funds to
entertain State employees.
Other States - We surveyed seven other states' commerce departments which, like
Arizona, have entertainment and promotional expenditure^.^ We found that
1 Members of boards and commissions are also eligible for per diem expenses. However, in these
examples the members did not submit claims for these expenses; instead, these meals were
claimed by the Commerce employee as an entertainment expense.
The states surveyed include Colorado, Utah, Georgia, Maryland, North Carolina, Tennessee,
and Texas. We also contacted Nevada and New Mexico but they are not used in this
comparison because Nevada no longer has a budget for these expenses, and New Mexico has
an anti- donation clause in its constitution which prohibits employees from entertainment and
gift purchases.
the majority of these states have either legal restrictions or informal guidelines that
control these types of expenditures:
8 THES TATOEF TEXAS may not purchase gifts/ promotional items. The state will
pay for entertainment expenses only when they occur while entertaining an
individual( s) who represents a company that is not currently located in the
state. The only allowable entertainment expenses are meals.
NORTH CAROLINA, GEORGIA, AND MARYLAND allow entertainment and
promotional expenses for prospective clients only.
UTAH AND TENNESSEE report prospect entertainment expenses as a separate
line item in the budget to allow for a more careful accounting of these types
of expenditures.
uses a promotional stamp that flags all promotional expenditures.
Only those expenditures that are approved as appropriate promotional
expenditures receive the stamp.
Lack of documentation - Once policies are established, there is a need for
s6cient documentation and internal review of these expenditures. To ensure
compliance with gifting statutes and the agency's own policies once developed,
adequate documentation is necessary. Expenditures should be documented by the
agency in such a manner that a public purpose and codbenefit analysis are clear.
In our review, several expenditures were questioned because of inadequate
documentation. Although some claims were adequately documented, many were not.
Several entertainment claims did not specify the purpose of the meeting or the
entertainment expense. Some promotional items were not accounted for because of
inadequate inventory controls. Claims for many of the previously cited examples had
a list of attendees attached, but no agenda or purpose was given. In a few cases,
receipts were missing. Unless proper documentation is provided, the economic
benefit to the State cannot be determined.
Lax documentation requirements may result in expenditures that are clearly a
violation of gifting statutes and are potentially fraudulent. In our review we noted
a claim for airfare to San Francisco. The employee occasionally traveled to the San
Francisco area as part of his work duties, so this was not an unusual claim.
However, no travel authorization was attached to the claim. ( We found several
instances in which claims included only the travel invoice without authorizing
documentation.) We requested the supporting documentation for the trip. In its
effort to provide the documentation, Commerce learned that the trip was not work
related but personal. Because Commerce did not require appropriate documentation,
it was not reimbursed for the plane ticket until almost four months after the trip
was taken.
In addition, internal Department policies and reviews are critical with the
conversion to the State's new accounting system, AFIS 11. With AFIS 11, agencies
and departments are responsible for inputting claims and maintaining supporting
documentation. The General Accounting Office will no longer be reviewing claims
to determine if expenditures comply with State statutes and policy. In most cases,
the only review will be within the Department.
1. The Department of Commerce should establish well- defined policies regarding
promotional and entertainment expenditures, such as allowing these expenses
for prospective clients only, stating what type of documentation is required,
and instituting a clear method for describing the public benefit of such uses
of public monies.
During the audit we obtained other pertinent information regarding the Energy
Depletion Of Energy
Office Funds Expected Soon
As a result of a Federal lawsuit, Arizona received oil overcharge monies. These
monies were used to fund the Department of Commerce's Energy Office. Because
this office receives no General Fund appropriations and the existing funds will be
depleted by 1996, the Legislature needs to decide whether it wants to continue the
Arizona received $ 37.8 million to fund Enerrrr Office and related activities
- Beginning in 1986, the State received $ 37.8 million from a settlement wherein the
Federal government had alleged that oil companies had overcharged consumers. The
monies were provided to Arizona with the stipulation that they be spent for energy-related
work. These monies were deposited with the State Treasurer to be invested
and disbursed. Over the years, the funds have earned approximately $ 13 million in
interest. The court order establishing the overcharge monies requires that the
monies be used by 1998, or the State loses the remaining funds. Although an
estimated $ 24 million remains in the fund, the Energy Office Director indicated that
these funds are designated for specific projects and for administrative costs, and
that these monies will be depleted by 1996.
The Office has approximately 40 full- time employees. Approximately 75 percent of
the positions are funded by oil overcharge monies and the remaining 25 percent are
funded by Federal energy grant monies. In addition, 7 additional positions located
elsewhere in the Department are funded with oil overcharge monies. These positions
include employees that provide support services ( such as accounting and computer
services) to the Energy Office as well as other divisions. In Fiscal Year 1991- 92,
$ 1.35 million in oil overcharge monies and an additional $ 291,000 from Federal
grant monies were expended for personnel- and employee- related services.
The Office has four units:
COMMUNITYE NERGY- T his unit has three principal responsibilities: it assists
Arizona communities regarding energy questions and issues; it is involved in
transportation issues such as mass transit and ride sharing; and it works to
influence the building community to improve the energy efficiency of homes
and other buildings.
ENERGYC ONSERVATIOANND EDUCATIO- N T his unit has three main program
areas. First, the weatherization program makes monies available to low- income
people to improve the energy or water efficiency of their homes. The Office
contracts with private service providers to perform the work, and staff monitor
and inspect the work. Second, the institution conservation program provides
monies for energy conservation improvements for schools and hospitals through
matching grants. Third, the unit offers educational seminars on energy
conservation and encourages and coordinates programs to improve conservation
m PLANNINAGND POLICY - This unit was established approximately three years
ago in response to a legislative mandate that the Office develop a policy on the
energy supply and its use. T- he unit has served as a resource and staff to the
public committee that formulated the policy and a new committee charged with
implementing it. This unit also is responsible for emergency preparedness as
it relates to energy emergencies and fuels. They also collect data on gas usage,
prices, etc., and prepare a quarterly report.
SOLARA ND ENERGYE NGINEERIN- G T his unit serves as technical support to
the Office. It evaluates grants, participates in demonstration projects ( such as
solar recharging stations), and monitors the Solar Energy Commission projects.
It also evaluates products and in some cases has gone to the Attorney
General's office when products appear to be fraudulent.
De~ letiono f overcharge monies rnav mean considerable changes are needed
for Enerpv Ofice in the future - With the depletion of the oil overcharge monies,
the Office will likely see considerable changes in the number of personnel and
functions. Several options will need to be considered as to the future purpose, size,
and funding of the Office.
Because approximately 75 percent of the Energy Office's staff and programs are
currently funded with oil overcharge money and these monies are scheduled to be
depleted by 1996, the Legislature and Department will need to decide the future
direction of the Office. The Energy Office Director suggests the Office be reduced
to approximately 20 full- time employees at a cost of $ 1 million per year. According
to him, there are at least four possible sources of revenue to finance the Ofice.
FEDERAL GRANTS - Assuming that the Office continues to receive Federal
grants at current funding levels, approximately $ 250,000 would be available
for administering the grants. The grants would provide some funding for FTEs.
However, the direction of the office would be largely dependent on the nature
of the grants.
PARTNERSHI- P ASc cording to the Energy Office Director, the Office has begun
to investigate and enter into partnerships with government or
quasi- government agencies, utility companies, and national labs. The Ofice
would contract with these organizations to perform tasks such as monitoring
the agency's energy contracts, research and development of energy conservation
technologies or devices, and educational efforts. As with the grants, the
number and availability of FTEs and nature of the Ofice's activities would
depend on the individual partnerships.
TAX - Some states have placed a tax on energy bills to help fund their energy
STATE APPROPRIATIONS - Should the State wish to continue the Ofice, State
appropriations may be necessary if alternative funding sources are insuficient.
In accordance with A. R. S. 541- 2954, the Legislature should consider the following
12 factors in determining whether the ARIZONA DEPARTMENOFT COMMERCE
should be continued or terminated.
1. The obiective and ourRose in establishing the mencv
The Department of Commerce serves as the lead economic development agency
for the state of Arizona. Fofmerly the Governor's Office of Economic Planning
and Development, the Department was established in 1985
" to facilitate the beneficial economic growth and development of the
state and to promote and encourage the prosperous development and
protection of the legitimate interest and welfare of Arizona business,
industry and commerce, within and outside this state."
To further meet its objective, the Department staff, along with volunteers from
both the public and private sector, completed Arizona's new long- range
economic development plan. The Arizona Strategic Planning for Economic
Development process, or ASPED, developed a plan to provide guidance
regarding the State's economic growth into the 21st century. According to
Department officials, this strategic planning document has become the
cornerstone of its operations.
Additionally, the Department acts as the State's designated clearinghouse for
review and coordination of Federal programs, facilitating the development of
low- and moderate- income housing, promotion of Arizona's energy programs
( including solar), and promoting international trade and tourism. These
activities are statutorily mandated.
2. The effectiveness with which the mencv has met its objective and
gumose and the emciencv with which it has o~ erated
The Department's effectiveness in meeting its overall objective appears to be
improved based on the recent adoption of ASPED. An Auditor General
Performance Audit released in 1981 ( Report 81- 3) severely criticized the agency
for not having a statewide economic development plan. ASPED appears to
deliver an economic planning model and strategic plan that places a specific
focus on the State's efforts. ASPED serves as the cornerstone for future
economic growth and development efforts and focuses economic development
in Arizona on nine industry clusters. The nine clusters identified in ASPED
are aerospace, agriculture/ forest and food processing, business services, health
and biomedical, information, mining and minerals, optics, tourism, and
transportation and distribution.
Consideration of ASPED's initiatives is being coordinated by the Governor's
Strategic Partnership for Economic Development ( GSPED). GSPED is directed
by a board of individuals from the public and private sectors. The Director of
Commerce is a member of the Board, but the precise role of the Department
in the formulation and implementation of the initiatives has not been defined.
In practice, the Department has largely been involved with communication and
administrative support; whereas cluster group activities and the coordination
of efforts are overseen by an executive director chosen from and supported by
private sector participants.
Although the Department has accepted the ASPED strategic plan, its overall
effectiveness appears hampered due to its poor performance in delivering
financial services to Arizona's small businesses. ( See Finding I, page 7 and
Finding 11, page 17.) In addition, the Department's lack of complete and
accurate information regarding its national marketing and business recl- uiting
activities eliminates the potential for measuring the overall effectiveness of its
efforts. ( See Finding 111, page 25.)
3. The extent to which the agencv has o~ eratedw ithin the ~ ublicin terest
Aside from the problems that have negatively impacted the Department's
effectiveness in meeting its objective, the Department may not have acted in
the public's interest in providing proper financial management over State
monies. ( See Finding IV, page 31.) Also, the Department has failed to comply
with the Open Meeting Law regarding the Housing Development Advisory
Committee ($ 41- 1505[ D]). The Committee meets about four times a year to
award contracts to various housing entities around the State; however, the
public is not informed of the meetings. Also, no formal agenda is followed and
no minutes are kept. According to commission members and staff, everything
is handled very informally.
We found no Open Meeting Law problems or violations with the Department's
other nine boards or commissions.
4. The extent to which rules and re~ ulations~ rornulpatedb v the agency
are consistent with the le~ islativem andate
The Department has been given statutory authority under A. R. S. 541- 1504 ( B)
to adopt rules " deemed necessary or desirable to govern its procedures and
business." According to the Department and the agency's Attorney General
Representative, all rules that have been adopted by the Department of
Commerce are consistent with its legislative mandate.
5. The extent to which the agencv has encouraged i n ~ uftro m the vublic
before vromuleatinn its rules and reeulations and the extent to which
it has informed the ~ u b l i cas to its actions and their ex~ ectedi mnact
pn the ~ u b l i c
According to the Deputy Director, no rule changes have taken place during his
one and one- half- year tenure. Currently, the Department is preparing several
new rules. According to the Department, in the past, when proposed rules or
rule changes have been considered, the agency has advertised them and holds
preliminary meetings with the general public and interested parties for input
prior to submission to the Governor's Regulatory Review Council. The
Department plans to continue this process.
In addition, the Department publishes an annual report that summarizes its
major accomplishments and activities as required by statute. This document
is submitted to the Governor, the Legislature, and the general public.
6. The extent to which the wencv has been able to investigate and resolve
com~ laintsth at are within its iurisdiction
This factor is not applicable since the Department of Commerce does not have
investigative or regulatory authority.
7. The extent to which the Attornev General or anv other a ~ ~ l i c a b l e
nc o tat -
under the enabling le~ islation
This factor is not applicable because the Department of Commerce is not a
regulatory agency with enforcement or oversight responsibilities.
8. The extent to which the wencv has addressed deficiencies in its
enabling statutes which vrevent it from fulfilline its statutorv mandate
To fulfill its legislative mandate, the Department is seeking the following
legislation during the 1993 legislative session:
JOB- TRAINIPNRGO GRA- TMhe Work Force Recruitment and Job- Training
Program will provide training and retraining for specific employment
opportunities for new and expanding businesses, as well as companies
undergoing economic conversion.
ENVIRONMENTATLE CHNOLOGIE MS ANUFACTURING INCENTIVES - If
approved, this program will be established in the Department of
Commerce to promote business and economic development by recruiting
and expanding companies that manufacture solar and other renewable
energy products and recycle materials.
S w C OMMUNITYA FFORDABLEH OUSING STUDYC OMMITTEE-Proposed
legislation will establish a study committee to examine the
housing needs of small communities and draft legislation on a
State- sponsored program to stimulate the development and financing of
affordable housing in small communities.
9. The extent to which changes are necessarv in the apencv's laws to
adeauatelv com~ lvw ith the factors listed in the Sunset law
Although not specifically addressed in the body of this report, certain statutory
provisions regarding committees which fall under the Department's
responsibility should be eliminated because the activity is being conducted
administratively within the Department.
The Main Street Program Advisory Committee as referenced in A. R. S.
$ 41- 1505.02C and the Rural Economic Development Program Advisory
Committee as referenced in A. R. S. $ 41- 1505.03C should be eliminated. The
Main Street Program Advisory Committee was established to provide advice
to the Director on the selection criteria to be used for selecting " main street
communities" and to assist in the selection of a minimum of five communities
per year. Similarly, the Rural Economic Development Program Advisory
Committee was formed to provide advice to the Director regarding selection
criteria for determining awards to rural communities, and to assist in selecting
a minimum of three communities per year to receive these awards.
According to the Department, the committees are no longer necessary because
the selection process for participation is now being made administratively. In
the past, the committees operated as mandated by statute. However, the
committee members recommended that the Department eliminate the
competitive selection process because it was viewed as ineffective. Thus,
committee meetings are not presently being held. According to the Department,
the Appropriation Committee's chairpersons were informed about this change.
10. The extent to which the termination of the apencv would significantlv
harm the ~ ublic health. safety. or welfare
Because other private and public sector agencies are involved in promoting
economic development statewide, we believe that terminating the agency would
not significantly harm public health, safety, or welfare. However, the
elimination of the Department could eliminate equity and balance for the rural
areas in terms of attracting and relocating new businesses, since these areas
are less likely to have the resources available for economic development or
business recruitmenthetention programs.
11. The extent to which the level of regulation exercised bv the agency is
g z ~ ~ r o ~ r iaantde whether less or more stringent levels of regulation
would be a ~ ~ r o ~ r i a t e
The Department of Commerce is not a regulatory agency, thus this factor does
not apply.
12. The extent to which the mencv has used vriuate contractors in the
performance of its duties and how effective use of ~ rivateco ntractors
could be accom~ lished
The agency extensively uses the services of outside contractors in the
performance of its duties. Examples include: the execution of most of its
marketing and advertising programs, consulting services for the lending
programs for both housing development and business finance, the performance
of its energy programs, managing its foreign trade offices, and other
specialized studies.
According to the Department, to the extent possible, the agency seeks to
contract out a significant part of its activity so that the need for direct
employees is somewhat limited to the areas of management, oversight, client
contact, and administration.
In accordance with A. R. S. 541- 2954 the Legislature should consider the following
12 factors in determining whether the ECONOMICPL ANNINAGN D DEVELOPMENT
ADVISORYB OARD( BOARDs) h ould be continued or terminated.
1. The obiective and oumose in establishing the Board
The Economic Planning and Development Advisory Board was created in 1984
to advise the Governor and the Department of Commerce " on policies which
encourage orderly planning and stimulate economic activity" in the State. The
Board was charged with recommending programs to assist communities in
planning for growth. It also had responsibility to " review policies to ensure the
proper utilization of this State's energy and other natural resources." According
to the Department of Commerce, the Board is actually a holdover from the
Of'fice of Economic Planning and Development Advisory Board that was
originally established by executive order.
2. The effectiveness with which the Board has met its objective and
P. u r p p d
According to staff at the Department of Commerce, the Board has not met in
four years. As a result, we have determined that the Board has not met its
objective and purpose.
3. The extent to which the Board has ooerated within the public interest
Because the Board has not met its objective and purpose, it has not operated
within the public interest.
4. The extent to which rules and re~ ulationso romulgated bv the Board
a l
The Board does not have authority to promulgate rules and regulations.
5. The extent to which the Board has encouraped i n ~ uftr om the ~ u b l i c
before ~ r o m u l z a t i nit~ s rules and regulations and the extent to which
it has informed the as to its actions and their ex~ ected impact
on the public
This factor is not applicable because the Board has no authority to promulgate
rules and regulations and it has not met in four years.
6. The extent to which the Board has been able to investigate and resolve
com~ laintsth at are within its jurisdiction
The Board has no statutory - authority to investigate or resolve complaints.
7. The extent to which the Attornev General or anv other a~ plicable
cwencv of State government has the authoritv to prosecute actions
pnder the enabling legislation
This factor does not apply.
8. The extent to which the Board has addressed deficiencies in its
enabling statutes which ~ revenitt from h l f i l l i n ~ its statutorv mandate
For at least the past four years the Board has not sought to make statutory
changes regarding its mandate.
9. The extent to which changes are necessarv in the laws of the Board to
adeauatelv com~ lvw ith the factors listed in the Sunset Law
Our review indicates no statutory changes are necessary for the Board to
comply with its mandate. However, see Factor 10.
10. The extent to which the termination of the Board would siznificantlv
harm the ~ u b l i che alth. safetv. or welfare
Because the Board has not met for the past four years nor has the Governor
appointed any members to the Board during that time, it appears there would
be no harm to the public if the Board were terminated. In addition, according
to the Department of Commerce, the Board has been superseded by the newly
designated Governor's Strategic Partnership for Economic Development. The
Partnership will work to implement the Arizona Strategic Plan for Economic
Development. Therefore, there is no need for the Board to continue.
11. The extent to which the level of regulation exercised br the Board is
go~ ro~ riaatend whether less or more stringent levels of regulation
would be a ~ ~ r o ~ r i a t e
The Board has no regulatory power and has no need for such authority.
12. The extent to which the Board has used Private contractors in the
performance of its duties and how effective use of ~ rivateco ntractors
could be accom~ lished
Again, the Board has not functioned over the past four years and therefore
this factor does not apply.
In accordance with A. R. S. $ 41- 2954, the Legislature should consider the following
12 factors in determining whether the ARIZONA SOLAR ENERGY ADVISORY
COUNCILsh ould be continued or terminated.
1. The objective and pumose in establishing the Arizona Solar Ener~ y
Advisorv Council
The Advisory Council was originally established in 1975 as the Arizona Solar
Energy Research Commission. The Commission had its own staff and funding.
In 1987 statutes were amended and the Commission was incorporated within
the Department of Commerce. It was also renamed the Solar Energy Advisory
Statutes specify a 15- member council and 2 advisory members who are not
eligible to vote. The statutes also outline the council's duties, which include
advising the Department on disbursement of Federal and State funds for solar
purposes, identifying solar energy technologies that are feasible in both short-and
long- term applications, encouraging cooperation among academic, business,
professional, and industrial sectors that have expertise of solar energy
technology, and recommending to the Department standards, codes,
certifications, etc. necessary for commercialization and growth of solar energy
use in the State.
2. The effectiveness with which the Council has met its objective and
pumose and the efEciencv with which the Council has overated
According to the Council and the Department's Energy Ofice, the Council has
successfully worked on many programs and projects, including the solar
village, a solar hotline, the solar emergency generator, and the John F. Long
solar project. In addition, the Council has been involved with and supported
legislative initiatives and solar tax credits in an effort to encourage use of
solar technology.
3. The extent to which the Council has 0- verated within the public interest
See Factor 2.
4. The extent to which rules and regulations ~ romulgatedb v the Council
% re consistent with the legislative mandate
The Council has no statutory authority to promulgate rules and regulations.
5. The extent to which the Council has encourmed i n ~ uftro m the public
before promulgating its rules and reyulations and the extent to which
it has informed the ~ ublica s to its actions and their emected impact
9n the ~ ublic
Although the Council has not promulgated rules and regulations, it does
regularly hold meetings to discuss planning and implementation of solar-related
policies, activities, and projects. According to the Department, these
meetings are advertised and are open meetings. In addition, members of the
Council have made presentations to other solar interest groups, homebuilder
associations, schools, and other entities regarding Council activities and
projects. According to the Council it also encouraged statewide public hearings
during the development of the State energy policy.
6. The extent to which the Council has been able to investiyate and
resolve com~ laintsth at are within its iurisdiction
This factor is not applicable because the Council has no statutory authority to
investigate and resolve complaints.
7. The extent to which the Attorney General or anv other applicable
apencr of State government has the authoritr to rose cute actions
under the enabling legislation
This factor does not apply.
8. The extent to which the Council has addressed deficiencies in its
enabling statutes which re vent it from fulfill in^ its statutory mandate
According to the Council, ' Ttlhere are no significant defects in the enabling
statutes which prevent the Council from fulfilling its statutory mandate."
9. The extent to which changes are necessarv in the laws of the Council
to adeauatelr com~ lrw ith the factors listed in the Sunset Law
Our review indicates no statutory changes are necessary for the Council to
comply with its mandate. However, see Factor 10.
10. The extent to which termination of the Council would significantly
harm the ~ ubliche alth. safety. or welfare
It appears there would be no harm to the public health, safety, and welfare if
the Council were terminated. According to the Department, ' Ttlermination of
the Council will have little public effect, since there no longer exists a
corresponding funded staff to carry out their suggestions" due to legislative
elimination of the solar budget. However, the Council maintains termination
could impact the State economically by removing " the only organized body left
in Arizona that is working to revitalize the solar industry in Arizona." Also it
contends that the Council is the only group " which has the broad technical
knowledge to understand, evaluate and recommend actions related to the
myriad of solar- related technologies."
1 The extent to which the level of regulation exercised bv the Council is
avvrovriate and whether less or more stringent levels of re~ ulation
should be a ~ ~ r o ~ r i a t e
The Council has no regulatory authority and has no need for such authority.
12. The extent to which the Council has used vrivate contractors in the
performance of its duties and how the effective use of vrivate
c g d
The Council is not funded and does not contract for s e ~ c e s .
BUSINESS LOCATION ASSISTANCE - Provides financial assistance for out- of- state firms
wanting to locate in Arizona. The category is described as business attraction/ recruitment,
the traditional glamour area of economic development. The investments are not
necessarily risky but can consume capital quickly, and it is not the greatest area of
capital need. The guidelines caution the Commission that these projects be carefully
considered and assistance be rationed or this category will quickly consume the money
available for Small Business Expansion and Retention. Medium- sized businesses should be
the target of the location assistance category.
Category Goal: 22%
BUSINESSE XPANSIONAN D RETENTION- Assistance to Arizona- based small- and medium-sized
businesses. Per the guidelines, " the expansion of small- and medium- sized companies
will play a leading role in Arizona's economy in the next decade." Over 80% of all new jobs
come from firms employing less than 100. The cost of creating these jobs in Arizona is
about 10% of the cost of creating a job in a large corporation.
Category Goal: 55%
PRODUCTIONF INANCING - Another category to assist small- and medium- sized locally
based businesses. Provides financing for companies needing to increase production capacity
as a result of receiving large orders.
. Category Goal: 9%
SPECIALI NCENTIV- E SA small category for projects in disadvantaged areas of the State,
and for projects where the State wants to take some defensive action to keep a company
from moving out.
Category Goal: 8%
CO- VENTURE FUND - Provides venture capital to Arizona businesses through a
partnership with specialists in the field. This is a category of high risk and the guidelines
have only a small percentage of total funds dedicated to this area.
Category Goal: 6%
( This Page Intentionally Left Blank)
Please Circle The Number Which Applies
and/ or Mark The Appropriate BoxIBlank
1. What initially led your company to consider Arizona as a place to locate a facility?
Dept. of Commerce advertisement in a publication 1
Dept. of Commerce information obtained at a trade show 2
Personal Contacts with staff of the Dept. of Commerce 3
Company analysis that indicated Arizona should be considered 4
Other ( please specify):
2. Please rate each of the four following characteristics for each service you received from the
Arizona Dept. of Commerce as: 1. Excellent, 2. Good, 3. Fair, 4. Poor, or NIA for Not
Applicable. ( PLEASE CIRCLE A NUMBER FOR EACH CHARACTERISTIC, OR NIA, AS
Information on Arizona's
economic and social conditions
Information on sles and
buildings in Arizona
Personal assistance of Arizona
Dept. of Commerce staff
Financial assistance or
Job tnining/ empbyment
recruitment assistance
Assistance in coordinating with
bcal economic devebpment
Other ( Please Specify)
Timeliness of
Overall Helpfulness
of Assistance
. Fair
Please Circfe The Number Which Applies
and/ or Mark The Appropriate BoxlBlank
h. If you rated any of the above as Fair ( 3) or Poor ( 4), would you please explain why? I
i. Overall, how would you rate the assistance you received from the Arizona Department of
Commerce? ( PLEASE CIRCLE ONE.)
j. If you contacted economic development agencies of any other states, how would you
compare the assistance provided by the Arizona Department of Commerce to that provided
by the other states? ( PLEASE CIRCLE)
Services provided by the Arizona Department of Commerce were:
1. Excellent
3. What is the status of the project for which you requested assistance? ( PLEASE CIRCLE and
2. Good 3. Fair 1
1. Much Better 2. Somewhat Better 3. About the Same 4. Somewhat Poorer 5. Much Poorer
4. Would you please indicate the extent to which each of the following factors may have had a
positive or negative impact on your decision to locate, or to consider locating, in Arizona.
4. Poor 5. Don't know
( Go to Question 4)
( Go to Question 4)
( Skip to Question 6)
( Skip to Question 7)
( Skip to Question 7)
( Skip to Question 7)
Located in Amona
Project still active but no decision yet
Located ekewhere
Propct is on " Hold'
No bnger planning to move or expand
Don't know
Please Circle The Number Which Applies
andlor Mark The Appropriate Box/ Blank
Suitability of site
Labor supply
Cost of bbor
Proximity of markets
Physical environment
Business tax level
Personal tax kvel
Provisions of needed
Help of Arizona Dept.
of Commerce staff
Help of bcal
community staff
Help of Arizona
Business people
Statekcal financial incentives
Training/ rectuitrnent incentives
Availability of private
financing in Arizona
Quality of life in
Arizona ( education.
housing, recreation.
cost of living, etc.)
Other ( pkase specify)
Very Positive
No Effect
Please Circfe The Number Which Applies
andor Mark The Appropriate BodBlank
5. If you have located your project in Arizona:
a. In what city or county did you locate?
b. Approximately how many full- time equivalent employees work at your facility in Arizona as of this
date? ( PLEASE CIRCLE)
0 1
1 to 10 2
11 to 20 3
21 to 50 4
51 to 100. 5
101 to 500 6
501 or more 7
c. What do you estimate is the total capital investment your firm has made at this Arizona location
to date?
Less than $ 1 00,000
$ 100,000 to $ 499,000
$ 500.000 to s999,000
Over $ 1,000,000
Please Circle The Number Which Applies
andlor Mark The Appropriate BoxlBlank
6. If your project is located elsewhere:
a. In which jurisdiction did you locate?
b. Please circle the three major reasons why you selected that jurisdiction. ( PLEASE CIRCLE NO
7. Do you have any other comments or suggestions on the services you received from the Arizona
Department of Commerce that might help improve the Department's assistance to companies
considering a location in Arizona?
Could not find a suitable site in Arizona
Supply of labor not as adequate as other options
Cost of labor was more expensive than other options
Not close enough to markets
Physical environment not as attractive as other options
Taxes were higher than other options
Did not receive needed information on Arizona or on specific sites
The attitude or behavior of business people in Arizona with whom you dealt
The attitude or behavior of government personnel in Arizona with whom you dealt
Received more incentives elrewhere ( such as financial or fraining assistance)
Could not obtain competitive private financing in Arizona
Quality of life ( such as education, housing, cost of living, etc.) more attractive in other locations
Other ( please specify):
December 2, 1992
Dear Business Official:
Our Office is conducting a Performance Audit of the Arizona Department of Commerce.
This is a routine review which State agencies periodically undergo to evaluate
performance and note any areas needing improvement.
We are very interested in obtaining information and comments from business officials
like yourself, who are considering locating, or have located a facility in Arizona. Your
response to the enclosed survey will help us to determine: ( 1) what programs and
services are needed in Arizona to help recruit and retain businesses, ( 2) the overall
effectiveness of the Department's marketing programs, and ( 3) what changes may be
needed in our State's approach toward economic development in order to foster a more
healthy business climate.
Would you please take a few minutes of your time to fill out the enclosed survey?
Responses from business leaders like yourself will allow us to more accurately assess
the business communities' opinions and needs.
As with your interaction with the Department during the process, your company's
identification and comments will be treated with strict confidentiality. Thus, the survey
does not request the identification of an individual company, business, or location.
Please complete and return the questionnaire by December 15, 1992. Thank you very
much for your help.
Debbie Klein
Performance Audit Manager
ARIlOMA DBPART)( ENT O? CO#( mCB
3800 N. Central Avenue, Suite 1500
( 602) 280- 1335
TO : Dave Guthrie, Dorothy Bigg, Sara Goertzen, Jack
Haenichen, Deborah Howard, Bill MacCallum, Paul Pugmire,
Bruce Sankay, Pat Schroedar, Lois Yates
Jim narsh
PATI: June 16, 1992
SUBJECT: Promotional Itus, Conferences and Intertainrent
Based upon the discussions we had at our staff meeting on
June llth, I am asking that the following guidelines be utilized on
the above referenced expenses:
1. The purchase of any new promotional items not currently
being used should be authorized by me beforehand.
2. Each purchase request should be documented with a letter
attached explaining the reason for purchasing the items
and the affiliation of the intended recipients.
3. Keep inventory records of all items purchaaed and the
names and affiliation of each recipient. If tha items
are given out to groups, each group should be identif fed.
1. Other than events sponsored by your respective divisions,
travel to conferences uhould be limited to yourself and
at a maximum, one other employee.
2. When conferences are scheduled which cover several areas
of Coruerce activity, we should discuss these situations
at a staff meeting so that the department 8 attendance is
not excessive.
3. Try to spread out the scheduling of out- of- town
conferences or business meetings so that in any given
week the major portion of your time is spent in the
off ice.
June 16, 1992
Page 2
1. Document the reason, the persons hooted and their
affiliations on all expenses.
2. Keep the expenses at a reasonable level.
We have been the subject of criticism for the above referenced
activities. Hopefully, these guidelines will help minimize this
problem in the future. But remember, our task i8 to market this
great State! Let's continue to use these resources in a positive
I ARIZONA Department of Commerce
Fife Symington
Governor of Arizona
James E. Marsh
April 22, 1993
Mr. Douglas Norton, Auditor General
Office of the Auditor General
2700 North Central Avenue, Suite 700
Phoenix, Arizona 85004
Dear Mr. Norton:
In response to your audit, I have attached a detailed examination of a number of the
findings of the audit that your agency conducted. However, before I outline these specifics,
I would like to commend your staff for conducting themselves in a most professional manner.
Each individual was very sensitive to and cognizant of the daily operation of the Agency. I
appreciate you and your staff respecting the time and workload of all Commerce employees.
It is most heartening that your audit shows that nearly 90% of companies that the
department assisted found that our agency is performing as well as or better than other state
commerce departments. This finding clearly recognizes that under this administration's
leadership, and with the positive marketing approach under which the Department of
Commerce now operates, there is a significant increase in not only prospective companies
considering moving into the state, but actual locates that have settled in Arizona. Your audit
also suggests and recommends that the Department should track and follow up on contacts
to ensure that the businesses receive the type of information requested. I wholeheartedly
agree! A new tracking program is in place and will allow the Department a very defined
process on follow up. Also, the Legislature has provided the Department with additional
resources in next year's budget to allow for this most essential component of the marketing
Additionally, your audit suggests that the CEDC should improve the controls governing
its decisions to award state economic development funds. Your report also suggests that the
Commission develop administrative rules that clearly state the Commission's application and
decision- making process and award criteria. I do concur with the latter recommendation of
adopting administrative rules but do not agree with the audit's opinion that the CEDC has
been inconsistent in applying its loan criteria nor with the subjective opinion that the process
gives an appearance of unfairness. Please note that the attached response delineates a
factually based rebuttal to the audit's findings. Having said that, I do accept your
recommendation to improve this relatively new program.
Your audit also recommends that the state- run program, which administers the SBA
504 loans, be privatized. Although the program has increased its loan portfolio and
production three fold over the last year, I too believe that this function should be privatized.
3800 North Central Avenue, Suite 1500, Phoenix, Arizona 8501 2, ( 602) 280- 1 300, TDD: ( 602) 280- 1 301, Fax: ( 602) 280- 1 305
Mr. Douglas Norton
Auditor General
April 22, 1993
Page 2
Again, the attached response will expand on a few of the shortcomings of the program, but
let me just add that it is quite difficult to run any successful program when the destiny of it
is controlled by an outside entity, namely, in this case, the local SBA office.
Your audit's recommendation that the Department of Commerce needs structured
policies to govern entertainment and promotional expenses is well taken and well advised.
However, I have developed such a policy and it was given to all Agency directors in June of
1992. 1 concur that the guidelines could be more specific concerning the appropriate
individuals who can be entertained, although, as your audit correctly points out, the
Department of Commerce is a bit of an anomaly from a typical state agency.
In closing, I would like to add that the leadership of the Arizona Department of
Commerce underwent almost continual change for several years prior to my appointment in
July 1991. This produced considerable instability in the Department with no sense of
direction. Since becoming Director, it has been my primary goal to get the Department into
a productive and results orientated mode and to resolve the issues that have produced
criticism in the past.
Thank you for your detailed review of our activities and I look forward to implementing
the positive improvements with which I have concurred in the above remarks.
Ja es E. Marsh e-
JEM1DG: tt
The Department concurs that Administrative Rules should be developed for the
CEDC Program.
The Department also agrees that 13 of the 26 CEDC projects are Arizona small
business expansion projects. It is relevant to note that the Department has also
done 15 An'zona small business expansion projects through its SBA 504 program
during the past 18 months, totalling more than $ 3.8 million in loans.
The Department has been consistent in applying loan criteria to CEDC applicants.
Flexibility is a key component of the CEDC. The CEDC Guidelines clearly state
that the CEDC should " maintain a flexible, entrepreneurial response" to business
investment in Arizona.
Attachment A is a detailed response to this finding.
STATE- RUN LOAN PROGRAM ( SBA Program) SHOULD BE PRIVATIZED
The Department concurs that the SBA loan program should be privatized,
even though, as the Audit Report recognizes, the volume of loans has increased
dramatically. This increase in volume has occurred because the program has
become well- marketed , pro- active and results- oriented , providing more loans for
Arizona's small businesses. Loan volume went from three loans in FY91 to 11
loans in FY92. It is estimated that this loan program will do 20 loans in
FY93, resulting in Arizona Enterprise Development Corporation, being one
of the top ten statewide CDC's in the nation in FY93.
Attachment B is a detailed response to this finding.
We agree and appreciate the findings of the Auditor General's survey that
indicated that "... nearly 90% of those responding felt that the Department was
performing as well as or better than other states they had contact with." Clearly
this factual survey does suggest that the Department's impact on the site selection
process is significant.
We also concur that the Department should better track and follow- up on contacts
to insure that businesses receive the type of information they need. The new
computer tracking system which has recently been installed in combination with
additional resources in next year's budget will allow us to better perform this
most essential component of the marketing process.
In addition to its marketing efforts, the Department has taken a proactive
approach to establish a positive business climate in the State. The Auditor
General's report does not take into consideration the significant impact that the
Department of Commerce has made in public policy formation to attract
businesses to Arizona through legislative efforts such as Defense Restructuring,
Job Training, R & D Tax Credits, Double Weighted Sales Factor, Commercial
Leasing Tax, Accelerated Depreciation, CWIP and the recently passed
Environmental Technology Manufacturing initiative.
In the Auditor General's survey, some negative comments received were extracted
and noted in its report. It would be helpful to have access to some of the positive
comments received from the 90% of those favorably responding so that the
Department could emphasize these activities in the service it provides.
On June 16, 1992, a memorandum was distributed to a l l Commerce division
heads issuing guidelines for promotional items, conferences, and entertainment.
These guidelines clearly establish the framework for handling these types of
expenditures. The Department concurs that these guidelines could be more
specific for expenditures when no prospective business client is present, and will
address this issue. The Department also concurs that the expenditures should
contain sufficient documentation to establish a public purpose.
To ensure that these types of expenditures are not excessive, the Department also
contacted the commerce departments from the states contacted by the Auditor
General's staff, and a few other states as well to ascertain the policies from these
respective states. Although the policies differed somewhat from state to state, the
Department's guidelines regarding entertainment and promotional expenditures
were similar in nature to those in other states and not unusual.
The Department concurs with your recommendations concerning the Department
of Commerce Energy Office ( pages 37 through 39). We have for some time
recognized the need to downsize the staff and to look for alternative funding
sources for the long term.
When the current management put in place by Director Jim Marsh assumed
responsibility of the operation, the active head- count ( people on board) was 46.
In addition, there were ten approved new FTE's for the energy office. The
department immediately recognized the need to downsize, and embarked upon an
aggressive program to do so by attrition. At the time of the interviews with the
Auditor General's staff, the Energy Office was down to 40 employees, as stated
in their report. Since that time, the division is now at 34 FTE's. Additionally,
one of the management sections has been eliminated.
Our goal is to reduce the Energy Office to approximately 20 full time employees.
That size of operation can carry out the work necessary to provide an effective
energy program.
The Department concurs with the recommendation that the Legislature in the
future needs to consider permanent funding for the Energy Office.
The Department concurs that Administrative Rules should be developed for the CEDC Program.
The Department also agrees that 13 of the 26 CEDC projects are Arizona small business
expansion projects. It is relevant to note that the Department has also done 15 Arizona small
business expansion projects through its SBA 504 program during the past 18 months, totalling
more than $ 3.8 million in loans.
The Department has been consistent in applying loan criteria to CEDC applicants. Flexibility
is a key component of the CEDC. The CEDC Guidelines clearly state that the CEDC should
" maintain a flexible, entrepreneurial response" to business investment in Arizona.
I. " Broad Guidelines May Result in Inconsistent Loan Award Decisions"
To state that broad guidelines l1mayI1 have resulted in inconsistent loan award decisions is a
purely subjective and speculative suggestion. The Audit Report ignores the fact that every
CEDC project is different. Each CEDC request must be evaluated on its individual merits. The
guidelines must be applied to each loan request with the goal of achieving the legislative intent
of the program. Each guideline element by itself does not make or break a project. It is the
overall package with all its elements that is examined for adherence to generally accepted credit
underwriting standards and CEDC program goals and objectives.
To state that " Commission loan awards appear inconsistent" is again subjective and speculative.
The Audit Report alludes to five criteria listed on page 8 which are commonly used as the basis
to disqualify applicants and then states that other businesses were approved for loans did that did
not meet the same criteria. We will demonstrate below that the five examples given in the
Report are not black and white issues and that they should continue to be used only as
" guidelines. "
1. " The Company must not be a start- up"
One of the program guidelines is that the CEDC will not assist start- up businesses. The
CEDC portfolio includes only one start up project. This project was approved prior to
this administration and existing management. However, there were specific reasons why
it was funded. It was a Small Business Investment Corporation and it was chartered by
it was funded. It was a Small Business Investment Corporation and it was charte
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