REPORT DIGEST

ECONOMIC DEVELOPMENT FOR A GROWING ECONOMY
(EDGE) TAX CREDIT PROGRAM

PERFORMANCE AUDIT
AUDIT PERFORMED IN ACCORDANCE WITH HOUSE
RESOLUTION NUMBER 381

Release Date:  June 2020

State of Illinois, Office of the Auditor
General
FRANK J. MAUTINO, AUDITOR GENERAL

To obtain a copy of the Report contact:
Office of the Auditor General, Iles Park
Plaza, 740 E. Ash Street, Springfield, IL
62703
(217) 782-6046 or TTY (888) 261-2887

This Report Digest and Full Report are
also available on the worldwide web at
www.auditor.illinois.gov

On June 1, 2019, the Illinois House of
Representatives adopted Resolution Number
381, which directed the Office of the
Auditor General to conduct a performance
audit of the Department of Commerce and
Economic Opportunity’s (DCEO) Economic
Development for a Growing Economy (EDGE)
tax credit program (see Appendix A).  The
audit found:

• DCEO did not maintain documentation to
adequately and accurately administer the
EDGE tax credit program.  Auditors tested
EDGE program applications approved by DCEO
in 2018 and found incomplete files and
missing documentation required by the EDGE
Tax Credit Act (35 ILCS 10/5) (Act),
Administrative Code (14 Ill. Adm. Code
527), and the EDGE tax credit program
application.  All 39 of the EDGE program
application files tested were missing
required documentation.

• DCEO did not adequately monitor the EDGE
program.  When requested by auditors, DCEO
could not produce two necessary pieces of
basic information related to the EDGE
program: (1) the number of active
agreements in 2017; and (2) the number of
tax credits issued in 2018 (the tax
credits issued in 2018 are primarily for
meeting the necessary requirements in
2017).

• In addition to determining that there
was not a consistent source of EDGE
programmatic information at DCEO, auditors
also determined that the information
reported in the 2018 Annual Report was
incomplete and inaccurate.  The report
contained information that could not be
verified by any data source provided to
auditors by DCEO.

• While DCEO was meeting many of the basic
requirements of the EDGE Tax Credit Act,
it was not in compliance with several
applicable sections of the Act due to a
lack of internal controls.  Additionally,
DCEO did not have any policy or procedure
manuals to help employees administer the
EDGE program.  Noncompliance with the Act
included missing information required by
the Act, a lack of required staffing, and
the use of a Business Investment Committee
not consisting of the statutorily required
members.

• A biennial report assessing the
effectiveness of the program has been
required since 1999.  DCEO produced its
first biennial report on October 31, 2019.

• The Act includes requirements and
practices no longer used by DCEO.  This
includes changes related to how the tax
credit amount is determined and the
inclusion of copies of agreements in the
EDGE Annual Report.  In addition, the Act
did not include specific information
necessary to adequately administer the
EDGE program including specific guidance
on what evidence is necessary to determine
proof of incentives available from other
states and guidance related to residency
requirements.

AUDIT SUMMARY AND RESULTS

Auditors determined that DCEO did not
maintain documentation to adequately and
accurately administer the EDGE tax credit
program.  Auditors tested EDGE program
applications approved by DCEO in 2018 and
found incomplete files and missing
documentation required by the EDGE Tax
Credit Act (35 ILCS 10/5) (Act),
Administrative Code (14 Ill. Adm. Code
527), and the EDGE tax credit program
application.  Additionally, DCEO did not
adequately monitor the EDGE tax credit
program.  While DCEO was meeting many of
the basic requirements of the Act, it was
not in compliance with several applicable
sections of the Act due to a lack of
internal controls.  According to DCEO, it
did not have any policy or procedure
manuals to help employees administer the
EDGE program.

On June 1, 2019, the Illinois House of
Representatives adopted Resolution Number
381, which directed the Office of the
Auditor General to conduct a performance
audit of the Economic Development for a
Growing Economy tax credit program. The
Resolution contained several
determinations.  Our assessment of these
determinations is shown in Digest Exhibit
1. (pages 2-4)

Background

According to the Illinois Department of
Commerce and Economic Opportunity (DCEO),
the Department provides economic
opportunities for businesses,
entrepreneurs, and residents to improve
the quality of life for Illinoisans.
According to DCEO, the Economic
Development for a Growing Economy (EDGE)
tax credit program provides for annual tax
credits to businesses to help with job
creation and capital investment to improve
the standard of living for all Illinois
residents.  The EDGE tax credit program is
a business development investment tool
used by Illinois to encourage new business
development and business expansion in
Illinois rather than choosing another
state or country.  According to DCEO’s
most recent Annual Report (2018), almost
$1.5 billion in tax credits have been
issued since the program began in December
1999. (page 6)

Issues with the EDGE Tax Credit Act

The EDGE Tax Credit Act (35 ILCS 10/5)
(Act) includes requirements and practices
no longer used by DCEO.  This includes
changes related to how the tax credit
amount is determined and the inclusion of
copies of agreements in the EDGE Annual
Report.  Additionally, the Act does not
include specific information necessary to
adequately administer the program.  This
includes specific guidance on what
evidence is necessary to determine proof
of incentives available from other states
and guidance related to residency
requirements. (pages 13-14)

Similar Programs in Other States

Auditors determined that all of the
surrounding states had a business
incentive program similar to Illinois’
EDGE program.  House Resolution Number 381
asked the Auditor General to determine
whether the EDGE tax incentives in
Illinois are similar to programs in
surrounding states.  The surrounding
states and programs identified consisted
of the following:

• Indiana -Economic Development for a
Growing Economy Tax Credit (EDGE);
• Iowa -High Quality Jobs Program;
• Kentucky -Kentucky Business Investment
Program;
• Missouri -Missouri Works Program; and
• Wisconsin -Wisconsin Business
Development Tax Credit Program.
(pages 16-17)

Incomplete EDGE Program Documentation

DCEO did not maintain documentation to
adequately and accurately administer the
EDGE tax credit program.  Auditors tested
EDGE program applications approved by DCEO
in 2018 and found incomplete files and
missing documentation required by the EDGE
Tax Credit Act (35 ILCS 10/5),
Administrative Code (14 Ill. Adm. Code
527), and the EDGE tax credit program
application.  All 39 of the EDGE program
application files tested were missing
required documentation including two
program application files that were not
provided by DCEO.

DCEO did not provide an application for 7
of the 39 projects (17.9%) approved in
2018.  For the remaining 32 projects
approved in 2018, auditors found required
information to be missing.  Without the
required documentation, it is unclear how
DCEO was able to make the appropriate
eligibility decisions for the EDGE
program.

Auditors found that in 4 of the 32 files
tested (12.5%), the allowable tax credit
percentage stated in the EDGE tax credit
agreement was different than what was
stated in the project application.  While
the application stated that the business
was in an underserved area, the agreement
indicated that it was not.  Auditors did
not find any documentation that supported
this change. (pages 19-24)

EDGE Monitoring Documentation

DCEO did not adequately monitor the EDGE
program.  When requested by auditors, DCEO
could not produce two necessary pieces of
basic information related to the EDGE
program.  DCEO could not provide auditors
with: (1) the number of active agreements
in 2017; and (2) the number of tax credits
issued in 2018 (the tax credits issued in
2018 are primarily for meeting the
necessary requirements in 2017).  A DCEO
official told auditors it would require
comparing the customer relationship
management system with the hard copy files
and with the electronic documents.  The
official noted this would likely take four
weeks to complete.  Therefore, auditors
concluded this information was not
maintained by DCEO for use in the day-to-
day operations and monitoring of the EDGE
tax credit program.

DCEO did not assign unique tracking
numbers to each applicant.  As a result,
it was extremely labor intensive to match
businesses between the various sources and
lists of information.  This was most
difficult when one business had multiple
projects.  Therefore, we recommend that
DCEO create a unique project numbering
system and maintain complete and accurate
programmatic documentation necessary to
report on effectiveness such as jobs
created or retained and the revenue impact
of the program.

In addition to determining that there was
not a consistent source of EDGE
programmatic information at DCEO, auditors
also determined that the information
reported in the 2018 Annual Report was
incomplete and inaccurate.  A list of 248
tax credits awarded in 2018 was provided
by DCEO; however, it did not agree with
information contained in the 2018 Annual
Report.  The list also did not agree with
a separate dataset provided from the
customer relationship management system.
Thus, the report contained information
that could not be verified by any data
source provided to auditors by DCEO.

DCEO provided businesses with a required
monitoring spreadsheet to use annually to
verify employment of new and retained
employees that included incorrect policy
criteria and an incorrect formula.  DCEO
relied on the attestation from the
business for the accuracy of the
information submitted and did not require
proof of employment, wages, or Illinois
withholding amounts.

DCEO did not maintain all documentation
required for projects awarded a tax
credit.  Auditors requested and DCEO was
not able to provide all documentation
required for monitoring the capital
improvement costs and independent
attestation agreements, known as “Agreed
Upon Procedures” (AUP).  Based on a review
of the AUP’s for a sample of 50 tax
credits issued in 2018, auditors found
that AUP’s were missing from 6 of the 50
files tested (12%).  An additional 1 of
the 50 tested (2%) did not support that
the required capital improvement
investment was met.  According to the DCEO
EDGE agreement, capital improvement
requirements must be met before receiving
the first tax credit.  In total, 7 of the
50 files tested (14%) did not support that
the capital improvement costs were met.
(pages 24-30)

Compliance with Laws, Rules, Policies, and
Procedures

While DCEO was meeting many of the basic
requirements of the EDGE Tax Credit Act,
it was not in compliance with several
applicable sections of the Act due to a
lack of internal controls.  Additionally,
DCEO did not have any policy or procedure
manuals to help employees administer the
EDGE program.  Noncompliance by DCEO was
identified in several areas, which are
listed below.

• Missing application documentation -every
application file tested by auditors (39 of
39) was missing an application or was
missing some required documentation.
• Evaluating the tax credit program -DCEO
was not in compliance with State law and
did not report on the effectiveness of the
program for approximately 20 years as
required.  According to DCEO, it produced
its first biennial report on October 31,
2019.  The biennial report has been
required since 1999 and is required to
assess the effectiveness of the program in
creating new jobs in Illinois and the
revenue impact of the program.
• Insufficient personnel -the former
Program Manager suggested that 2-3 full
time staff in addition to the Program
Manager position are needed to properly
administer the program.  The manager noted
that EDGE is a huge program, and to be
timely, more staff are needed.
• Use of the Business Investment Committee
-the Committee is not made up of the
statutorily required members; it is solely
comprised of DCEO officials and employees.
According to DCEO, there is a committee,
but it has not included the members
required by the Act.
• Missing verification of prospects from
other states -the Committee is required to
determine that, if not for the credit, the
project would not occur in Illinois.
During our review of application files,
DCEO did not have verification of
prospects from 37 of the 39 (95%)
agreements approved during 2018.
• Inaccurate Annual Report -several
numbers reported in the 2018 EDGE Annual
Report were not supported by DCEO.

DCEO’s tax credit program did not meet
time requirements identified in the EDGE
agreements.  Our review found that
businesses did not issue the required
proof of compliance within the required
timeframes in 33 of the 50 tax credits
sampled (66%).  The average number of days
to submit the proof was 82 days.  Our
review also found that DCEO did not issue
the tax credit to the businesses within
the required 60 days in 20 of the 50 of
the tax credits sampled (40%).  The
average number of days it took DCEO to
issue the tax credit was 97 days.
(pages 31-37)

AUDIT RECOMMENDATIONS

The audit report contains six
recommendations directed to the Department
of Commerce and Economic Opportunity.  The
Department agreed with the
recommendations.  The complete response
from the Department is included in this
report as Appendix C.
This performance audit was conducted by
the staff of the Office of the Auditor
General.

Joe Butcher
Division Director

This report is transmitted in accordance
with Sections 3-14 and 3-15 of the
Illinois State Auditing Act.

FRANK J. MAUTINO
Auditor General


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