Harsh audit questions Iron Range agency's accountability, constitutionality

Despite spending up to $80 million a year, the state's Iron Range economic development agency cannot show that it's creating jobs and its board structure, consisting solely of Range lawmakers, may be unconstitutional, the Office of Legislative Auditor says.

The report from Legislative Auditor James Nobles criticized the Iron Range Resources and Rehabilitation Board (IRRRB) for inadequate oversight and evaluation of its loans and grants, and it questioned the agency's management of Giants Ridge, a public golf and ski resort in Biwabik.

In April, the Star Tribune reported that Giants Ridge had lost nearly $40 million in the past decade.

The Eveleth-based agency has generated controversy almost since its formation in 1941, but Friday's audit strikes at the heart of its mission and its very design. The review comes as the Iron Range struggles with a deep economic downturn blamed on a glut of low-cost foreign steel that has caused more than 2,000 layoffs at Range taconite facilities in the past year.

Rep. Rick Hansen, DFL-South St. Paul, a member of the bipartisan Legislative Audit Commission, called the report "stunning."

While the governor appoints a commissioner to oversee the IRRRB's operations, one of the agency's most distinctive features is that by law its board is made up of lawmakers from the region, which is heavily DFL. Currently, nine DFL legislators sit on its board, including Senate Majority Leader Tom Bakk of Cook.

The board's lineup has opened the IRRRB to criticism of being a Democratic slush fund.

"This arrangement is vulnerable to a challenge under the Minnesota Constitution's separation of powers clause and its prohibition against legislators holding another public office," the report stated.

Hansen described the constitutional questions as "significant."

"If the legislative branch doesn't correct it, and the executive branch doesn't correct it, the judicial branch will correct this," Hansen said. "When you add together the basic accountability and oversight questions, the uniqueness of things like Giants Ridge, and the constitutional question — I don't think we've heard a report like this in my tenure here."

In an interview, Nobles said it is the first time in his more than 30 years at the Office of the Legislative Auditor that the agency has dealt with such a constitutional question.

But he called the IRRRB "an important toolbox" for improving the Range economy.

"I think they, certainly the chair, heard this report and said absolutely, we've got to be more efficient, more effective," Nobles said.

The IRRRB is primarily funded by a production tax that taconite companies pay in lieu of property taxes with a goal of helping the Range diversify from mining. It has an annual budget of about $40 million to make various loans, equity investments and grants, but it actually spends much more than that in most years, the audit found, because the agency also pulls from several special statutory funds. Last year, the IRRRB spent $85.8 million.

The audit found that from 2006 to 2014, the IRRRB subsidized Giants Ridge operating losses by an average of $1.9 million a year. That doesn't include $6.7 million for capital investments and nearly $20 million to retire debt.

Auditors questioned whether Giants Ridge fits with the agency's mission.

But the problems go well beyond the resort. Nobles' staff found that the IRRRB didn't adequately monitor millions of dollars in loans and grants to ensure they met job-creation targets. Just three of 20 grants auditors reviewed had mandated progress reports, and five of 19 grants that were required to have final reports did not, the audit found.

Of 16 business loans the agency reviewed, 10 of the loan contracts did not require the borrower to create jobs. When it does collect information on jobs, it e-mails a questionnaire to companies but doesn't require a response and doesn't do an outside check of the numbers.

"With the exception of forgivable loans, the IRRRB does not have reliable records of numbers of jobs created or retained by projects it has funded," the audit found.

An "archaic" loan database exacerbates the problem, and fixing or replacing it should be a priority, it said.

Rep. Tom Hackbarth, R-Cedar, who chairs the House Mining and Outdoor Recreation Policy Committee, said he's "very concerned."

"They've made bad loans, and these things need to be looked at, and they need more oversight, and if that's legislative oversight, so be it," Hackbarth said.

In an interview at the State Office Building, IRRRB commissioner Mark Phillips said he welcomed a review. His agency is already working on the recommendations about oversight and accountability, he said, and can implement them without the help of the Legislature with the possible exception of changes to the management of Giants Ridge.

"We haven't looked at ourselves since 1985, so this was a timely thing to do," said Phillips, who became commissioner last year. "The longer things aren't looked at, things get looser, sloppier, however you want to put it … things slide, loan files slide."

As for a constitutional challenge to the board's structure, Phillips said he is not concerned. But the matter is up to the board and the Legislature, he said.

In a statement, the Iron Range legislative delegation praised IRRRB staff members as hardworking and dedicated, and it said they are taking the audit's findings seriously.

"There is no 'magic wand' to achieve the complex goals of economic development and diversification," the statement said.

Jeff Manuel, author of "Taconite Dreams" and an associate history professor at Southern Illinois University Edwardsville, said the audit is the latest installment in a decades-old debate about the Range institution. However, the more sustained focus on Giants Ridge is new, he said.

"The IRRRB has always been an odd, hybrid agency that's been questioned by a lot of folks in state government," Manuel said. "It's sort of an ugly duckling administratively."

Tom Rukavina, who served on the IRRRB board for 26 years and is now a St. Louis County commissioner, dismissed the audit as another "bad report" from the Office of the Legislative Auditor.

"Any time they're bored and don't have anything to do they attack the IRRRB," Rukavina said. "It's kind of like death and taxes, it comes around often enough."

"Nobody wants to talk about the good things it does."

Jennifer Bjorhus • 612-673-4683

J. Patrick Coolican • 651-925-5042