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EO MEDIA GROUP - An audit of the Department of Energy's Business Energy Tax Credit program found no direct evidence of fraud, but 76 instances of 'suspicious behavior' have been forwarded to the Department of Justic.SALEM — Finding no direct evidence of fraud, Oregon Secretary of State Jeanne Atkins nevertheless has forwarded “circumstantial evidence of suspicious behavior” in 79 projects that received business energy tax credits to the Oregon Department of Justice.

The Secretary of State’s Office released Thursday the results of an independent audit of record records kept by the program, which was administered by the Oregon Department of Energy.

The tax credits became mired in controversy after allegations of fraud and other suspicious activity surfaced; the program ended in 2014 at the behest of the legislature.

Between 2007, when the program was expanded, and 2014, when it ended, the department issued more than $1 billion in business energy tax credits.

In a letter to the state Legislature Thursday, Atkins said there was about $347 million worth of tax credits where records contained evidence of risk factors that were concerning to auditors.

The auditors, a private vendor contracted for the service earlier this year, performed a forensic data analysis of the 14,494 projects that received business energy tax credits between 2007 and 2014.

Auditors found conflicts of interest, insufficient documentation, projects that never got off the ground, businesses that closed or failed, and “illogical projects,” among other issues that were concerning.

The auditors examined most of the large projects — those with costs exceeding $1 million — individually. Of the 311 large projects they examined, more than 25 percent showed one concerning characteristic, according to Atkins’ letter.

Auditors also reviewed a small sample of smaller projects and extrapolated their findings to the rest of the projects, estimating that about $7.2 million of tax credits issued for smaller projects was concerning.

Atkins also said that the department left itself vulnerable to financial risks by doing only what statute required when it came to “major program controls.”

“The records show that the priority for Department management was achieving the goals of the program as directed by state leadership,” Atkins wrote. “Past leadership of the agency did not further refine the boundaries of the program by employing formalized risk management assessments or by establishing management controls to assure that projects and credits met high standards of financial management. As a result, there were many financial risks for which there were no adequate controls.”

Atkins also released a slate of recommendations for improving financial controls at the agency.

The audit of the records kept about the program, which is also referred to by its acronym, BETC, was announced earlier this year.

Energy department director Michael Kaplan, who has acknowledged problems with the program and the department’s management of it, wrote in a response to Atkins:

“We take full responsibility for BETC’s problems in light of glaring and years-long evidence that shows unequivocally that ODOE simply did not manage BETC well,” Kaplan wrote in a letter to Atkins that was also released Thursday.

However, auditors also concluded that ODOE lacked the necessary internal support to reduce possible financial risks posed by the program.

“The ODOE is an energy agency, not a financial agency, and lacked functional roles reasonably needed to mitigate the BETC risks,” the report states.

But Kaplan also said in his response to Atkins that, despite those structural challenges, the agency did not require legislative changes to fix its management problems.

“It is not enough for a state agency to merely flag problems and expect solutions; ODOE also had the responsibility to solve those problems using a variety of tools, including better in-house oversight and management,” Kaplan wrote. “Requesting fixes in the legislature is a resource to address policy issues and not a mechanism to correct systemic management challenges.”

Auditors could not find a risk assessment or internal or external audits specific to the BETC program.

According to the auditors’ findings, the agency also faced political pressure to keep the tax credit program rolling.

Both governors who were at the helm during the era of expanded BETC saw renewable energy as a legacy initiative, especially former Gov. Ted Kulongoski, according to the auditors’ report.

State leaders also rested some hope for economic development on renewable energy. The tax credit program expanded in the midst of the state’s economic slowdown.

“The BETC program aimed not just to incentivize businesses to perform energy projects, but also to incentivize economic growth and job creation goals,” the report states. “...the inherent risk of the poor economic situation applied pressures to the BETC program that lacked a fully controlled environment, resulting in the program being vulnerable, and deficiencies in controls especially exploitable.”

Proposed legislation that would have imposed stricter financial controls stalled or were killed in the lawmaking process. The extant statutes and administrative rules also weakened the agency’s ability to deny tax credits.

The energy industry — including companies that were in a position to benefit from the tax credits — also weighed in on state work groups and voiced opinions on proposed rule changes that would have limited or ended the BETC program before 2011, when the Legislature reached agreement on a 2014 sunset date.

The Oregonian reported in 2009 that in early 2007, state officials purposely underestimated the expected impact on state revenues, which turned out to be dramatic.

The estimate of the program’s impact on revenue leapt from $1.9 million to more than $68 million between 2007 and 2008, according to the report.

Legislators and energy officials tried to staunch the flow of lost revenue, but some legislative efforts were more successful than others.

Project owners could use the credits to reduce their taxes; or they could sell the credits at discount to raise capital.

In 2012, officials at the state’s revenue department were discouraged from scrutinizing companies that weren’t paying taxes on capital gains from those sales of credits because the administration of former Gov. John Kitzhaber was aiming to retroactively exempt those sales from being taxed via legislation in the 2013 session, according to archives of the EO Media Group / Pamplin Media Group.

That bill — which according to the report conflicted with federal tax code — failed to make it through. And the report found that the failure to tax those returns on special projects “exposed Oregon to lost opportunities to collect tax revenue from adjustments of errors.”

The secretary of state noted that scope of the office’s audit was limited, and did not evaluate whether the program met the goals laid out by the legislature to produce energy savings, increase sources of alternative energy and create jobs.

Atkins also said that she hoped the recommendations would be incorporated into future legislative proposals regarding tax credit programs.

Kaplan said in his reply that his department would implement the secretary of state’s recommendations at his department to the extent possible. However, he also said that the expiration of the department’s existing tax credit programs with their expected sunset dates was “appropriate.”

Gov. Kate Brown sent a letter to state lawmakers in June calling for those programs to end, according to Kaplan’s Sept. 8 letter.

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