Time to look at the Tobacco Commission again

The Tobacco Region Revitalization Commission (TRRC) has again demonstrated that the legislature needs to re-examine its operations and, perhaps, overhaul it altogether.

First, a little background. TRRC was established in 1999 to revitalize Virginia’s tobacco region and compensate tobacco farmers for the decline in tobacco production. Funding for these activities was to come from the Commonwealth’s share of the Master Settlement Agreement between 46 state attorneys general and large tobacco manufacturers. Through a complex “securitization” of half of its future settlement payments, the amount available for TRRC was capitalized at $1 billion. In 2032, the MSA payments will resume.

TRRC has had a checkered past. Its service area is comprised of 41 cities and counties in Southside and Southwest Virginia. The governing body is comprised of legislators and citizen members from those areas. In its early days, the commission had a reputation for making grants to bodies or localities with political connections. It also did not diligently monitor how its grants were being used  For example, a former Secretary of Finance, during his tenure as a member of the commission, and then continuing with his appointment as executive director of the commission, stole $4 million in commission funds  by funneling grant funds through front organizations into his personal bank account. He was sentenced to 10 years in federal prison. In 2014, a Democratic state senator from that area abruptly resigned his seat, giving Republicans control of the Senate. He announced that he was taking a position as assistant director of the TRRC.  Amid the uproar and claims that the job was a quid pro quo by Republicans for his resignation, he decided not to take the position.

In 2011, JLARC issued a lengthy report on TRRC. While it recognized the value of grants expanding broadband, of “deal-closing” funding, and of grants for workforce training and higher education, the report was generally negative. It pointed out that outcomes for about 89% of the commission’s spending were not well documented. And, in typical polite JLARC terms, it commented, “[TTRC] has also funded many small local projects that had only a marginal potential for economic revitalizations.” The report concluded, “The aggregrate impact of the commission’s $756 million in economic revitalization grants does not appear to have substantially improved economic conditions in the region.” One of the report’s major recommendations was, “If [TTRC] is to maximize the impact of its remaining assets, it should consider spending greater resources on the tobacco region’s workforce, such as sponsoring a strategic initiative to identify and disseminate best practices in workforce training and high school completion.”

In 2015, the General Assembly enacted legislation deleting the compensation of tobacco farmers from the mission of TRRC and requiring more accountability for its spending.

TRRC does not seem to have learned from this report and GA actions. Instead of spending greater resources on improving training and education in the region, in 2018 only $12.6 million (21 percent) of the $60.6 million of TRRC grants were for education.

It still is making small local grants. For example, in 2017, the town of Big Stone Gap requested a $500,000 grant to develop playing fields in order to attract softball and baseball tournaments. Despite finding it “difficult to determine how reasonable the [economic impact] estimates were,” and that there was no marketing plan to show how the town  intended to recruit the 15 tournaments it expected in the first year, the staff recommended a grant of $150,000. (Perhaps the town was operating on the premise that “if we build it, they will come.”) In 2018, it gave the William King Museum of Art a grant of $26,550 for a project called, “Enhancing the Cultural Heritage Gallery to Maximize Visitor Experience.” (That institution seems to have been the recipient of several grants over the years.)

In 2013, the General Assembly enacted legislation directing the Office of the State Inspector General to “review the condition of the Tobacco Region Revitalization Commission’s accounting, financial, and administrative controls….” OSIG issued reports in 2014, 2015, and 2016. The 2016 report was dedicated to the use of Commission funds in the abortive attempt to establish a medical school in Southwest Virginia. OSIG found that the Commission had spent almost $1 million, with nothing to show for the expenditures. Furthermore, although “OSIG did not discover circumstances suggesting a reasonable possibility of fraud… the level of oversight and documentation supporting disbursements and matching funds created an environment where a fraud could occur and not be detected in a timely manner.”

The most recent OSIG report, issued last month, found that TRRC was not complying with state law and was still deficient in areas highlighted in previous reports. For the most part, the responses of TRRC to the various findings was cavalier. Here are the most significant findings along with the TRRC responses:

Financial viability—Virginia law requires TRRC to “enter into a contractual or employment agreement with a financial viability manager. The management agreement shall require the Manager to provide a written financial viability and feasibility report to the Commission as to the financial propriety of certain loans, grants, or other distributions of money…. The Commission shall not make any loan … grant; or other distribution of money until the Manager has provided the Commission with a written recommendation as to the financial viability and feasibility of the proposed distribution of funds.”

Despite this requirement, OSIG found, “The Commission is reviewing grants and loans for which there is no documented evidence of an objective analysis for financial viability.” As OSIG pointed out, a viability evaluation independent of the grant and loan management process is important to ensure objectivity.

TRRC response: The Commission felt that it was neither efficient nor cost-efficient to contract with an outside entity for such evaluations. Consequently, it assigned that responsibility to its Grants Program Director. It contended that this arrangement was in compliance with the state Code because that individual was in an “employment agreement” with the Commission. As for objectivity, the grants staff are professionals and, thereby, are objective. Finally, with respect to the requirement that there be a written recommendation on the financial viability for each loan or grant, that seemed sort of silly. “When financial viability is a concern, it is highlighted in staff recommendations, and when is it not, then it is not generally mentioned, as an exhaustive listing of all non-concerns would be foolish.”

Monitoring of outputs—OSSIG: “Monitoring of project outputs and related metrics did not occur other than through review of reimbursement requests and a limited number of site visits.” Furthermore, “specific parameters to use in determining if the outputs are met do not exists” and “there was no documentation in the grant and loan files that shows TRRC staff reviews and tracks project outputs and related metrics.” In summary, TRRC staff are not trying to determine if the grants and loans are having the effects they are intended to have.

TRRC response: Monitoring of the expenditures, as well as annual reporting is an adequate way of monitoring grant progress. “Between direct reimbursements and match documentation, grants staff has a clear window into project expenditures.  [That begs the point of whether those expenditures are having any beneficial effect.]

Site visits—OSSIG: Site visits had not been performed or, if performed, not documented for 23 out of the 30 grant files reviewed.” Furthermore, “there are no standards for when to make site visits, what TRRC staff are supposed to do when they go out on a site visit or how to document site visits.”

TRRC response—“Absence of (documentary) evidence is not evidence of absence.” Besides, “grants staff visits nearly every project that occurs in a physical location, often multiple times.” Furthermore, not all grants require site visits “as there is not anything to see.  [Conclusion: Trust us; we know what we are doing.]

Disbursal of funds without approval—OSSIG: The TRRC Executive Director approved a $1.5 million loan, after it had been turned down by the Commission’s underwriter, without notifying the full Commission. According to TRRC policy, the Executive Director did not have the authority to approve such a loan.

TRRC response—The situation was an emergency. “A significant organization that had received tens of millions of public dollars … was in danger of failing to meet payroll and ceasing to be a going concern.’’ Besides, the loan was secured by $3 million in collateral (equipment) and the full Commission retroactively approved the loan.

My note: The circumstances surrounding this loan are interesting in any event. The OSIG report does not name the loan recipient, but a newspaper in the Commission service area identified it  as the Commonwealth Center for Advanced Manufacturing in Prince George County. That entity was originally established to provide workforce development for the Rolls Royce jet engine factory in Prince George. Its mission seems to have been broadened. The Virginia Economic Development Partnership had a general fund appropriation of $1.0 million in FY 2017 and of $925,000 in FY 2018 to support the operating costs of the facility. Why the organization was having a cash-flow problem in 2018 and might have folded without a $1.5 million loan is a question beyond this blog post and one that Stephen Moret might be able to answer. Another question is why TTRC would feel obligated to come to the rescue for an organization that is not within its service area.

Conflicts of interest—OSSIG: “Grant agreements do not prohibit the grantee from entering into contracts with individuals or entities where there may be a conflict of interest.” Conflict of interests has been a problem with TRRC grants in the past. For example, in the case of the Executive Director who eventually went to jail, TRRC grants were made to an organization of which his wife was the executive director with an annual salary of $130,000.

TRRC response: “It is somewhat regular practice in business—particularly in small towns or in the agriculture industry—to do business with friends and relatives.”

On my Soapbox: The General Assembly should consider breaking up this clubby arrangement. The TRRC had an endowment, as of June of this year, of $233.9 million. A major concern of the Southside and Southwest regions is retaining its kids after they grow up. TRRC currently has scholarship programs for the children of the area and its leaders have discussed setting up a loan repayment program. With a big chunk of that endowment, those programs could be expanded under the administration of SCHEV or the Board of Community Colleges. An alternative would be to retain the TRRC, but restrict its authority to promoting education and training.

The portion of the endowment that is allocated for economic development should be administered by the Virginia Growth and Opportunity Board (GO Virginia). The Go Virginia program consists of nine regional councils, two of which largely coincide with the service area of TRRC. The GO Virginia Board would be required to limit the use of the funds from the Tobacco Settlement endowment to projects in localites in those two regions. Those funds would be in addition to any other funding the GO Virginia Board had available for those regions.

Unfortunately, any attempt by the General Assembly to overhaul TRRC would likely take on partisan overtones. Because the Code requires that all the members of TRRC, with the exception of the Governor’s Cabinet representatives, reside in the Southside or Southwest regions, all the legislative members are Republicans. However, that should not deter the legislature from trying to improve efforts to revitalize those areas of the Commonwealth.

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6 responses to “Time to look at the Tobacco Commission again

  1. Steve, Good piece. When I worked at Virginia Business nearly 20 years ago with Jim Bacon we did a lengthy story on the commission. I can’t find the link, but here is a later piece I did on it for the Post:

    https://www.washingtonpost.com/opinions/virginias-tobacco-commission-needs-a-makeover/2014/09/19/35e3f6c0-3514-11e4-8f02-03c644b2d7d0_story.html

  2. Good article Dick and … Peter….

    One would think that distributing these funds would be a no-brainer. That they should go to pay for health care or education for the rural counties. The nexus to health care to me is stronger than the nexus to economic development … the “settlement money” is basically intended to make amends for the impacts that tobacco smoking had on people – and diverting it from health care to sketchy economic development has a bad, scandal like feel to it.

    What NOT use it to reduce the Medicaid bite in the budget?

    or why NOT use it to fund college for kids from rural areas?

    anytime I see loose money and folks with economic development “ideas” for it – I shiver because the outcome is fairly predictable.

  3. Good overview, Dick. The Tobacco Commission could have done so much good for Southside and Southwest Virginia. Sadly, it became in part a source of patronage for local legislators, so for years the investments never added up to much.

    The Commission does have a “strategic plan” now that outlines investment priorities, which include:

    – education and workforce development
    – infrastructure (primarily broadband and industrial sites)
    – entrepreneurship
    – access to healthcare
    – cultural and recreational assets that will attract visitors from outside the regions

    This is an unimaginative but defensible set of priorities. It would be interesting to see how well grants match up to these priorities.

    There is one big flaw in the way the Commission is structured. The incentives are strong to spread the grants over the entire region, giving every jurisdiction its piece of the pie. Invariably, that means funding many projects with lower Return on Investment. I would argue that the Commission needs to concentrate its investments to grow the region’s smaller urban centers. The single biggest thing the region can do to transform itself is to concentrate its population. Micropolitan areas have consistently enjoyed positive rates of job creation. Small metros have enjoyed higher rates of job creation than micropolitan areas. If the region can evolve from a predominantly rural (extremely low density) population to a micropolitan or small metro population, it can increase the size and depth of its labor pools and improve its attractiveness to outside corporate investment. While some localities would benefit, however, others wouldn’t get their “fair share.” Therefore, it will never happen.

  4. The Virginia Way meets the last vestiges of the Byrd Machine.

    1. The people who grew the plants that became the cancer sticks which still kill 480,000 Americans per year (per the CDC) needed to be compensated. Why?
    2. The politicians who took over the funds turned out to be criminals. What’s new?
    3. The distribution of funds was incompetent and used more to buy votes in rural Virginia rather than create any real economic benefit.
    4. The General Assembly remains asleep at the switch while the money is wasted on one half assed scheme after another.

  5. 5. – these are the same fools who supposedly are in charge of the Budget for the State!

    There MUST be SOME adults in the GA… perhaps they’re in charge of the things that matter and they leave things like the Tobacco Commission for the miscreants to busy themselves.

    I sure as hell don’t want he folks in charge of the Tobacco Commission also involved in anything of importance for the state…

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