State audit quantifies Iowa Film Office misspending: $25 million-plus

Tuesday's release of a state audit detailing $25.6 million in state tax credits allegedly issued to film projects improperly touched off civil litigation to recover taxpayer money and political sniping over the long-awaited report's arrival a week before a hotly contested election.

In issuing the 273-page report, State Auditor David Vaudt said his office determined $15.2 million of the questionable claims were for expenditure tax credit certificates and $10.4 million were for investment tax credit certificates. Iowa's tax credit program provided a 25 percent tax credit for production expenditures made in Iowa and a 25 percent tax credit for investors for projects that spent at least $100,000 in Iowa.

The auditor's findings prompted Iowa Attorney General Tom Miller to file a civil lawsuit in Polk County District Court against the five principal individuals and four entities involved in producing or pursuing 15 movie projects, including “The Scientist.” The civil action named as defendants Wendy Weiner Runge, Matthias Saunders, Zachary LaBeau, Chase Brandau, Chad Witter, Maximus Production Services LLC, The Scientist LLC, Polynation Pictures LLC, and Witter Consulting Group Inc.

The lawsuit alleges that the defendants conspired to defraud the state out of film tax credits and seeks a minimum of $5.5 million in damages, as well as attorney fee costs, unspecified punitive damages and forfeiture of any property and proceeds related to the defendants' films. In reviewing the new state audit report, Miller said he will carefully review the findings and pursue any additional appropriate actions and remedies, both civil and criminal, in connection with the Film Program.

New criminal charges are likely, Miller's office said. Runge and Saunders are scheduled be tried early next year on one class B felony count of ongoing criminal conduct and 11 class C felony counts of first-degree fraudulent practices for allegedly making false and inflated claims for state tax credits involving multiple film projects. LeBeau, a Minnesota resident who faced multiple criminal counts, had his charges dropped in exchange for agreeing to cooperate with the state's ongoing investigation and the prosecution of Runge and Saunders.

Vaudt said the $25.6 million in state tax credits that were improperly issued to film projects represent the largest amount of alleged financial abuse uncovered by in any special investigation conducted by his office. He said he was surprised to find that about 80 percent of the nearly $32 million tax credits that were granted to 22 film companies that made claims with the state involved payments for expenditures where there was no proof or inadequate documentation.

“This is the largest,” the state auditor said in an interview, “especially when you look at the 80 percent improperly granted without the appropriate documentation or support, it's a pretty significant number.” The report noted instances where former film office leader Tom Wheeler – who is facing a misdemeanor criminal count – did not verify expenditures before issuing tax credits and often conducted “spot audits” on claims he received.

Vaudt said the special investigation uncovered $6.3 million deferred payments, along with claims for in-kind contributions that filmmakers received in exchange for notations in the film credits, and other expenditures that could not be verified with support materials.

Deferred payment amounts were based on “deal memos” promising payment to an individual, such as an actor, contingent on the sale of the film for a specific amount, he said. However, in a number of cases, there was no documentation the films were sold and no documentation the individual was paid. Therefore, the amount claimed does not qualify for the expenditure tax credits, he noted.

“Obviously, those dollars haven't been paid and, in many cases, never would be paid, but they were still granting credits on it. They collected it as if it had been paid,” Vaudt said.

In one case, auditors found a letter from an individual who alleged Runge told him “they put millions of dollars in phony deferments with people they know and then gets tax credits to cover it,” according to the audit.

“We had a lot of costs to go through and try to analyze and figure out what was taking place,” the auditor said. “It was not an easy task. It was tough. We looked at 22 film projects – 14 of them in-depth – and we requested the records from the film production companies, so we had boxes upon boxes upon boxes of records to go through.”

The largest chunk of the $18.4 million in unqualified expenditures – 73 percent -- was $13.4 million of in-kind expenditures claimed by “Changing Horses,” a series of television shows and DVDs on training horses produced by Changing Horses Productions.

In-kind investments are an allowable form of investment only if the investor receives an equity investment in the project rather than goods or services. However, the auditors found several production companies claimed in-kind investments from outside parties to whom they, in turn, provided goods or services, such as sponsorships, and claimed the value of the goods or services as a qualified expenditure – valuations that Vaudt said “looked pretty questionable and weren't permissible because there were no payments made.”

In the case of Changing Horses, an expenditure tax credit certificate was issued for $3.35 million more than was qualified.

In one case, Changing Horses claimed $3.45 million of in-kind expenditures for Featherlite, an Iowa trailer manufacturer. Featherlite wanted exposure to generate sales leads. The company said it doesn't place a value on those agreements because it's difficult to measure the sales leads generated.

Therefore, auditors concluded Changing Horses had no basis for assigning a value to the contract and should not have claimed the in-kind expenditures.

The audit covered the period from May 17, 2007, through Sept. 21, 2009, when Gov. Chet Culver suspended the tax credit program and requested the state audit of the state Department of Economic Development's film office and the state's Film, Television and Video Production Promotion Program.

The governor suspended the program as a result of concerns identified when DED personnel determined the cost of luxury vehicles purchased by production companies and transported to California for personal use had been included in the total expenditures reported by the production companies and were used by DED staff to determine the amount of tax credit certificates to issue, Vaudt said.

After the scandal broke last year, six people lost their jobs within the state Department of Economic Development -- including Wheeler, who faces trial next month on a misdemeanor charge of non-felonious misconduct in office.

Miller said investigators have significantly reduced the state's potential liability from improper claims made for tax credits from would-be filmmakers by revoking 73 registered film projects that carried a potential cost of $225 million. The AG's office also is reviewing submissions of expenses by other film projects to determine whether they are verified and substantiated before determining whether they qualify for film tax credits.

The audit “confirms that the quick and decisive action Culver took more than a year ago was the right thing to do,” his campaign manager, Donn Stanley, said about the report.

Stanley said Culver acted as soon as he found out about the film office problems. Culver ended the program, fired the head of the Iowa Film Office, and replaced the management at IDED.

Culver also asked the Auditor, Attorney General, Department of Revenue, and the new leadership at IDED to review the program. Over the last year, IDED took steps to protect taxpayers by implementing new safeguards within the Department, Stanley said.

Vaudt reported detailed records were requested from the production companies for 14 projects, each of which received over $500,000.00 of tax credit certificates. The records provided were reviewed to determine if the expenditures reported and used to calculate the tax credits qualified for expenditure tax credits and to determine if the investment tax credit certificates issued were properly supported and correctly calculated.

For the remaining eight projects, the production companies' records already available at the DED were reviewed to determine if the expenditures reported qualified for expenditure tax credits and if the investment tax credits were calculated in accordance with the Iowa code.

The only downside of the audit was the timing, Stanley said.

“When Terry Branstad is in a free-fall in the polls, Vaudt issues this report in a failed attempt to distract and embarrass the Culver administration one week before the election,” the campaign manager said.

Jeff Boeyink, manager for the Gov. Branstad 2010 campaign, said Tuesday's audit results marked the latest episode “in long line of reasons” why Iowa needs to return to open, honest government once again.

“This unfortunately is what we have come to expect from the Culver administration,” Boeyink said. “The failure to provide adequate oversight to this program is costing Iowa taxpayers tens of millions of dollars. Chet Culver's four year history of mismanagement of Iowa government has put Iowa on the wrong path, and with a state budget that is unsustainable. Terry Branstad is the proven leader and effective manager we need to put the state on a new path for honest, open and stable government.”

Comments: (515) 243-7220; rod.boshart@sourcemedia.net; james.lynch@sourcemedia