A recent corruption story in rural Virginia is rather stunning. The state is usually thought to have relatively clean government, but a Washington Post investigation by Antonio Olivo reveals something far different. The story—excerpted below—describes a wide-ranging scandal surrounding the Economic Development Authority (EDA) of Warren County, VA.
Local governments across the nation have EDAs, a key purpose of which is to hand out subsidies to favored businesses. EDAs are structured as quasi-independent from city and county governments to reduce transparency, and so they are ideal platforms for cronyism or corruption.
In a broad sense, subsidizing specific businesses is corruption in itself, even when local politicians and bureaucrats don’t line their own pockets. But they often do. This article regards an EDA official in Maryland stealing $6.7 million. In both the Virginia and Maryland scandals, it took years for the corruption to be uncovered. Why aren’t state governments auditing EDAs?
I have two solutions for this sort of local government corruption:
First, state legislatures should abolish EDAs and ban local governments from handing out narrow tax credits, loans, and other subsidies to companies. Having an in-government agency to help local businesses navigate tax and regulatory compliance might be a good idea, but having a secretive outside entity with little oversight handing out special favors is asking for trouble.
Second, Congress should repeal the tax exemption for municipal bond interest. These bonds create a strong incentive for businesses to lobby EDAs for loans rather than getting them in private markets. I understand that tax-exempt muni bonds are a core mechanism used by EDAs, and they create a bias favoring local government socialism over private enterprise.
Here are portions of the excellent Washington Post story:
Twenty-five years later, with the land cleaned up and Front Royal increasingly attractive to tourists and former city dwellers, officials announced plans for a data center and retail complex that would bring 600 jobs and act as a catalyst for other projects.
… The deal was brokered by Jennifer McDonald, a longtime Front Royal resident who directed the Warren County economic development authority. Washington-area developer Truc “Curt” Tran pledged to finance it with $40 million from wealthy immigrant investors and a $140 million federal contract his technology company had secured. As an added bonus, Tran would fund a police training academy overseen by longtime Sheriff Daniel T. McEathron.
But those were lies, documents in Warren County Circuit Court allege.
Tran never had the money to build the data center project on the 30 acres his company bought from McDonald’s agency for $1, a civil lawsuit alleges. And the training academy was one of several hoaxes that, prosecutors and civil lawsuits claim, allowed Tran, McDonald, McEathron and others to siphon away millions in public funds, which they allegedly used to buy properties, pay bills and gambling debts, and enrich relatives and friends.
… Now McEathron is dead, Tran is being sued by the economic development authority and there are state and federal investigations underway. McDonald faces 28 state counts of embezzlement, money laundering and obtaining money through false pretenses. She has denied the allegations and did not return interview requests, while Tran declined to comment through his attorney.
The claims against them, industry groups say, reflect the perils of weak oversight in economic development agencies — quasi-public entities that oversee large, complicated transactions, and whose boards often lack the financial savvy and investor scrutiny that protect their corporate counterparts. In Montgomery County, Md., an economic development official pleaded guilty this year to embezzling $6.7 million. The head of economic development in St. Louis pleaded guilty to steering lucrative contracts to the county executive’s political donors. In New Jersey, a grand jury is investigating how $500 million in tax incentives went to firms that, in part, allegedly lied on their applications.
… On Tuesday, the Virginia State Police announced that 14 current and former local officials — including all five county supervisors — were charged with misdemeanor misfeasance and nonfeasance “based on the individuals’ knowledge of and inaction [regarding] the EDA’s mismanagement of funds.”
… A soft-spoken resident of upscale Great Falls, Va., whose website boasts of contracts with the U.S. Office of Management and Budget, Tran wanted to turn part of the former Avtex Fibers manufacturing campus into a hub for cloud computing, with a three-building, $40 million complex that according to its business plan would include a restaurant, a coffee shop and a music store.
McDonald’s board approved a $10 million, 90-day loan. Tran promised funding from 80 foreign investors enrolled in the federal EB-5 visa program, which offers applicants and their families a path to citizenship in exchange for the jobs their money helps create. Officials and residents gushed over the plan.
“This is our first step into a new era,” then-Mayor Timothy Darr said at a 2015 groundbreaking, as McDonald, Tran and [Rep. Bob] Goodlatte smiled nearby.
The regional Criminal Justice Training Academy was announced the following year. McDonald said an anonymous donor would provide $8 million, and told her board the donor was Tran, the civil lawsuit says. McEathron, a fellow Rotarian, would be in charge.
… It all seemed incredibly fortunate. Until late 2016, when some town officials and residents looked up Tran’s company online.
They found it hadn’t yet been allowed to solicit investments under the EB-5 program. The $140 million federal contract appeared to be a mirage, with Tran receiving no payments from it. Skeptics asked increasingly pointed questions at public meetings, sparking warnings from Town Council members that the naysayers would blow Front Royal’s big chance.
… The Town Council authorized $1.7 million of infrastructure improvements for the Avtex site, and according to the lawsuit, McDonald allegedly paid Tran at least $1.5 million for construction costs without informing her board.
… In 2018, Front Royal’s finance director discovered a bigger red flag: The authority had overbilled Front Royal nearly $300,000 for its portion of debt service related to the Avtex site and a road improvement project. At a meeting about the discrepancy, McDonald nonchalantly said she had mistakenly falsified some invoices, Town Attorney Doug Napier recalled.
“She was not at all contrite,” Napier said. “It just shocked me.”
The revelation prompted a call to state police and an independent review of the authority’s books that uncovered a dizzying array of phony invoices, phantom projects, secret land deals and bank wire transfers to entities controlled by McDonald or her friends, according to a copy of the review completed in May by the Cherry Bekaert accounting firm. The probe was commissioned by the authority and is the basis of the criminal and civil proceedings.
McDonald allegedly billed the authority more than $50,000 to pay for renovating a vacant inn, then used those funds to pay credit card bills, according to the review. She is accused of doctoring invoices to secure $4.6 million for purchasing tax credits, then embezzling that money.
A plumbing company owned by her husband, Sammy North, allegedly collected at least $66,200 in secret payments, the review found. North has also been arrested, as was Donald F. Poe, a family friend accused of conspiring with McDonald to funnel $841,409 to his solar panel installation company for work the board didn’t authorize.
North did not return messages seeking comment. Ryan Huttar, an attorney for Poe’s company, said that his client performed the work it was hired to do and that it reimbursed the authority $335,000 when one job was canceled.
Attorneys in the civil lawsuit say McDonald allegedly convinced the authority to buy land from her aunt and uncle for a workforce housing project without disclosing that they were her relatives, and billed the authority an additional $130,000 in the transaction, most of which went to pay off what appeared to be her mortgage.
… McEathron wasn’t charged. But he may have felt the tide turning against him. He and McDonald had launched a real estate investment company called DaBoyz LLC in 2016, shortly after they announced the police academy. The firm used $3.5 million in authority funds to buy four properties, the independent review found. McDonald and McEathron also bought a three-bedroom home in Virginia Beach, which they rented to McEathron’s son and daughter-in-law, court records in the civil lawsuit show.
In one curious transaction, which lawyers for the authority say may have been an attempt to launder money, DaBoyz paid Rappawan, a construction company, $1.9 million for a large tract of land and then sold it back a month later for $1.3 million. Rappawan owner William T. Vaught Jr. declined to comment, citing the criminal investigations.
… McDonald was charged this summer with additional counts of money laundering and grand larceny. Her husband was arrested on counts of money laundering and obtaining money by false pretenses. The local grand jury, which was initially set to finish its work this month, requested another six months to investigate.
… Local activists, who had called for the state and federal investigations to be expanded, rejoiced at Tuesday’s announcement. “Somebody is finally listening,” said Salins, co-founder of the Warren County Coalition watchdog group. “It’s not every day that your entire government gets arrested. It’s so shameful.”
… And they had been demanding answers from Supervisor Tony Carter (R-Happy Creek), another of the people charged in the recent indictments. Carter works for his mother’s insurance company, Stoneburner-Carter, which holds insurance policies on four properties owned by the authority and has collected about $46,000 in premiums since 2015, according to records obtained through a Freedom of Information Act request.
For years, the local government “has been skewed [in favor] of the elite and the ‘good ol’ boys’ club,’ ” [Kristie Atwood] said. “With luck, and these indictments, our community is going to turn around for the good.”
I hope she is right. But to make sure the “good ol’ boys’ club” is gone for good, Warren County citizens should press to abolish their EDA and to rely on clean and efficient government with equal and low taxes for all businesses to encourage growth and development.
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