Tramontina memo outlines “irregularities” in Iowa film program

Below is the memo written by (now former) Iowa Department of Economic Director Michael Tramontina on Wednesday. The memo was handed to members of the Iowa Economic Development Board as they left their meeting this week in Des Moines and it was released to Radio Iowa this evening.

Memorandum
September 16, 2009

TO: Jim Larew, IGOV Chief of Staff; Dick Oshlo, Director, Dept of Management; Bob Bocken, Chair of DED Board

FROM: Michael Tramontina, Director Dept of Economic Development

RE: Film Program Status

DED management is investigating several reported irregularities in the handling of the Film program. At the same time we are: Adapting to the explosive growth of the program; responding to Legislators’ and IDRF’s evaluation of the impact of the program on the state budget; amending administrative rules to tighten eligibility to assure maximum impact on in-state workers and film industry; promote a permanent film production industry in fixed locations. This memo will attempt to bring IGOV, IDOM and the board up to date on each of these issues.

Background

From July 1, 2007 until June 30, 2009 twenty film projects have been awarded a total of $31 million of tax credits. From May until August 2009 approximately $100 million of projects have been induced by the DED board. Of those, approximately $33 million would be applied toward the new cap on DED issued tax credits. The DED board has allocated $50 million of cap toward the film program.

Currently there are four projects being filmed in the state, three in Des Moines area and one in Council Bluffs. During the past week Business Development staff has met with representatives of 20th Century Fox and CBS TV. On Friday we are meeting with a British film maker who is planning to move into a former auto dealership building in West Des Moines to shoot six projects. Other permanent office or studio facilities are currently under construction or planned for South Ridge Mall in Des Moines, and a former Maytag warehouse in Newton.

Investigation of Reported Irregularities in the program

We have heard reports of two vehicles purchased through the tax credit program that were not used directly on a film. Upon learning this management dug into those two projects and was not satisfied with the explanation or the condition of the files and records and determined that procedures had not been followed. We thought the situation serious enough to: Hire an outside CPA firm to serve as internal auditor to do a thorough search of the twenty projects that have been awarded tax credit certificates to date; put on-hold all contracts and tax credit certificates then pending; improved internal controls by reassigning staff duties to put someone other than the Film Office director on reviewing ledgers and receipts; Division Coordinator took control and exercised oversight of every decision.

The Code clearly authorizes the purchase of vehicles but the fact they were luxury vehicles (Mercedes and a Land Rover) were not used directly on the film and the amount of credits claimed was the full purchase price rather than the lease cost during the project were judged to be abuses.

Current administrative rules permit DED to request records for a three year period.

The internal auditors determined:

• Files on each film were inadequate. Most of the necessary information was in unsorted email archives.
• Contracts were amended, often to increase amount of credits requested substantially, after Director/Deputy approval. Signature pages appeared shuffled among versions of contracts.
• A custom database that had been built within the past year specifically to keep track of film projects and their status was never used;
• The instruction to have DED staff from Accounting Team review all receipts as not followed.
• There were only receipts for two of eighteen film projects. Some receipts were obviously prepared in a single batch by the filmmaker who claimed for all of their vendors on identical receipts which were usually not signed.
• Ledger sheets that were accepted as claims were vague and overly broad. It appeared everything was allowed. Tax Credit certificates were issued for the full amount requested. It appeared nothing was ever disallowed.
• Many vendors clearly resided outside of Iowa.
• Some film makers were allowed to claim payment for several roles in a production leading to very high payments. Some of the roles played by a single individual such as Accountant/CPA should have held an arms length relationship but did not. Large payments were also made to family members.
• Interpretations of the law and rules given to film makers often originated from IDRF but it was not clear that they were given enough information to understand the full implications of the response. One instance was the interpretation of an Iowa domiciled company.
• Some of the claimed services where not actually paid for. The vendor deferred payment until credits were sold or film was sold.

Following a meeting with the Program administrator at which he as asked to respond to the findings he was immediately put on paid administrative leave for 7 days and told to be available by phone during working hours

Next Steps

• We have already sent correspondence to the claimants of the two vehicles demanding a return of the value for the credits.
• The internal auditors are preparing a list of documentation to request from each previously approved project. Due to volume we may determine it is a better use of time to visit their office to review the receipts. In that case the visit will be scheduled immediately.
• After reviewing the detailed records we expect to call in at least two individuals to justify their charges. Following that meeting we expect to disallow at least a portion of the claims.
• The Division Coordinator has taken over day-to-day duties of the office including client meetings.
• We have interviewed and expect to hire a new Film Office Director to manage the customer relations.
• We are working on revised administrative rules expected at October, 2009 DED Board meeting including: Setting a sliding scale for the award of credits based on the percentage of Iowans hired; requiring bonded budgets, defining Iowa domiciled company; clarifying use of Deferred Payments of Services in Kind.

Additional issues

Some of the problems eminate from the statute that specifically identifies a very broad list of eligible expenditures and allows a credit that is comparatively lucrative.

The cost of the program is increasingly a problem in a time of declining state revenue.