The timing couldn’t be much worse for supporters of Louisiana’s film industry.
As the state stares down a $1.6 billion budget shortfall, one due in part to the spiraling cost of corporate giveaways, a fresh wave of scandals has erupted around the film program, giving new ammunition to critics at a moment when the program is under scrutiny as never before.
Most recently, Stephen Street, the state’s inspector general, confirmed that his office has opened an investigation into a firm that appears to have claimed it spent more money making films in Louisiana than it actually did, landing tax credits it didn’t earn, according to recent reports by New Orleans’ WVUE-TV.
That news came on top of the recent revelation that the state had been ordered by an arbitrator to issue $6.5 million in disputed tax credits to a firm co-owned by former lawyer Malcolm Petal, who admitted bribing the state’s top film official in 2004.
The bribes were intended to ensure that the official, Mark Smith, would interpret the film program’s rules leniently, thus generating more money for Petal, and the arbitrator relied in part on one of Smith’s rulings in ordering the credits to be issued.
Both of those scandals are unfolding as the curtain is about to rise at the federal courthouse in New Orleans on a high-profile trial over alleged fraud in the film tax credits program. The trial, as it happens, is set to begin the same day the Legislature convenes — April 13 — in a session where many believe the program will be a ripe target.
The wave of bad publicity “certainly doesn’t help,” said Sherri McConnell, who oversaw the state’s film program for years and now serves on a panel recommending changes to it. While she thinks the program is still relatively popular, she adds that “there are probably some sharks in the water who just don’t like it and want to get rid of it — particularly those who don’t see any real benefit in their areas.”
Cuts to the film incentives were noticeably absent from the budget proposal unveiled by Gov. Bobby Jindal on Friday, which proposed nearly $600 million in cuts to refundable tax credits but spared film — in part, perhaps, because it would be difficult to achieve any savings from the program in the current budget year.
Trimming the sails of the film program also could cause the governor to run afoul of a no-tax pledge he signed that is promulgated by the anti-tax lobby Americans for Tax Reform. The film tax credits are transferable but not refundable, though those who receive them may sell them back to the state for 85 cents on the dollar.
Even if Jindal has left them alone, the film incentives are hardly safe from the ax, and supporters of Louisiana’s film industry are scrambling to craft a proposal that will rein in the program’s excesses enough to satisfy those who say it is a fraud-laden boondoggle.
“Right now, film is like the stepchild of the tax credits,” said state Sen. J.P. Morrell, D-New Orleans, an avowed fan of the program who has drafted legislation to curb abuses. “Film is the one everyone points to as to how tax credits are full of fraud. I promise you if you look, you’ll find it in other programs. But film is the one everyone talks about.”
‘It’s kept us very busy’
Street, the inspector general, confirmed this past week that his office has opened a probe into Horizon Entertainment, which was at the center of recent reports by WVUE-TV that raised pointed questions about expenses the company claimed in connection with a handful of projects that received tax credits.
The film program has repeatedly drawn the attention of Street’s office, resulting in at least nine federal indictments. “It’s kept us very busy in recent years,” Street said in an interview last fall.
State records show Horizon got tax credits totaling $3.1 million for five different projects: “Saintsational,” “The Sean Payton Show,” “Emancipated,” “Big Easy Funny” and a series of ads for EA, the video-gaming firm. All told, the company reported spending nearly $10 million in Louisiana to qualify for those credits.
“Saintsational,” which focused on the New Orleans Saints’ cheerleading squad, reported Louisiana expenses of $3.5 million, qualifying it for $1 million in tax credits.
WVUE-TV’s reports quoted John Beyer, a video editor on the production, saying many of the expenses were questionable. For instance, he told the station that the film’s producers reported using five editing systems when only three were used, and they said they rented a “jib camera” at a cost of $111,600 when the production didn’t require one. Beyer estimated the total cost of the show — which, according to WVUE, never aired — at $250,000 or less, perhaps a tenth of what the producers claimed.
In making “The Sean Payton Show,” Horizon claimed to have paid one employee $1,300 a week, but the employee told WVUE that he got only half that much. And a producer of “Emancipated” told the station that the cost reports Horizon submitted to the state in connection with that program — a TV pilot — also appear to be inflated.
Meanwhile, Horizon has claimed that it split the tax credits it received with Saints owner Tom Benson’s Louisiana Media Co., which owns WVUE-TV, the station reported. But a Benson spokesman said the company got none of the proceeds.
The state’s economic development arm, which oversees the film program, issued a news release Friday noting that in 2010, the state’s film office, run by Chris Stelly, had requested a probe by the inspector general of some Horizon productions. That inquiry did not result in any prosecutions, the release said. The office asked the IG to take another look at Horizon based on WVUE’s stories, the statement said.
Walter Becker, a defense lawyer and former federal prosecutor who represents Horizon and its owner, Jason Sciavicco, issued a statement saying his client did nothing wrong.
“Once Horizon finished work on the productions, an independent certified public accountant thoroughly audited Horizon’s expenditures on all of these productions,” Becker said. “The independent CPA followed the state’s rigorous audit guidelines that applied to these productions.”
He said Stelly signed off on the release of the tax credits, and added: “Our clients believed then and continue to believe that the state properly certified these credits.”
Becker’s response highlights one common criticism of the film program — that the audits are not rigorous enough and that the auditors who perform them are not truly “independent” because, under the current state law, they are hired and paid by the producers seeking the credits.
Some of Horizon’s reports were audited by Mock & Associates, of Baton Rouge, while others were audited by Malcolm M. Dienes, of Metairie; neither uncovered any questionable expenses.
Mock sent a statement to The Advocate saying, “We were provided with ample and sufficient documentation to render our opinion that the productions were in full compliance with the audit guidelines that LED (the state) has set forth.” The Dienes firm did not respond to a request for comment.
The two firms handle a large proportion of film audits in Louisiana, with Mock’s firm specializing in that arena. A review of 50 film files by The Advocate found that roughly 70 percent were handled by either Mock or Dienes.
A June report by the consultant Alvarez & Marsal aimed at finding savings in the state budget said film audit reports are generally of “mixed quality” and sometimes “substandard,” though it didn’t single out any particular firm.
Improving the quality and independence of the audits is one focus of draft legislation proposed by Morrell and state Rep. Julie Stokes, R-Kenner. One crucial change would be having the state, rather than the filmmakers, hire the auditors.
“Audits should be conducted in a way that’s consistent, by quality people, and the state needs to be a party to those engagements,” Stokes said. “For me, it’s about accountability, trying to eliminate fraud. We’re trying to bring as much good government into this program as we can.”
Haircut on the way?
Those who say the program needs more good government need only point to recent headlines. Not only has a new probe into the program been opened, but many critics of the program were outraged to learn that state taxpayers have been ordered to issue $6.5 million in disputed tax credits to LIFT, the firm at the center of the program’s first major scandal.
If the credits are issued, Petal, a co-owner of LIFT, will be one of two major beneficiaries, along with fellow owner John Anderson, according to Anderson.
Petal pleaded guilty to bribing former film commissioner Smith in 2004, the same year Smith wrote a letter that essentially granted the credits Petal and LIFT are now due to receive. It’s not clear whether the arbitrator who ruled in favor of Petal considered the bribery scandal; a spokeswoman for the firm that handled the case said arbitrators are barred from discussing their deliberations publicly.
Meanwhile, a California film producer and a local lawyer are set to stand trial in April on charges that they gamed the film program by shifting money among companies they controlled, thus inflating the cost of a studio they were building and receiving more than $1 million in unearned tax credits.
Morrell’s proposed legislation seeks to deal with such abuses by retroactively denying credits to anyone caught corrupting the program. But as the debate on his and Stokes’ bills is set to begin, film boosters are working on a counteroffensive aimed at protecting the program in something close to its current form.
The Louisiana Film Entertainment Association, which represents the industry, will release a study sometime before the session begins that undertakes a new analysis of the program’s benefits.
State studies have consistently found that the program returns less than 25 cents to state coffers for every dollar taxpayers invest. But film boosters question those studies and finally decided to underwrite their own.
While the group’s final report isn’t ready, LFEA President Will French released some preliminary findings in a recent appearance before the Baton Rouge Press Club. The biggest takeaway: The group’s research found that seeing Louisiana in film or on TV drove roughly one in seven tourists to the state to visit here. If that level of tourism were counted as a benefit of the film program, the program likely would easily pay for itself — although that conclusion will face plenty of skepticism.
On the chopping block?
“My gut feeling is it’s ridiculous,” said Greg Albrecht, chief economist for the Legislative Fiscal Office, who serves on a panel with Stokes and Morrell that is recommending changes to film and other entertainment subsidies. “New Orleans is an international city with tons of tourism. I don’t think it would matter if we didn’t have a single movie shot here.”
The biggest change proposed by Morrell and Stokes is to set a cap on the program’s cost: $300 million a year. That exceeds by about $50 million what the film program has cost the state in any given year to date, and some critics have said the cap is far too high.
Morrell says he fears if the program’s worst abuses aren’t trimmed, it will be gutted entirely, as happened last year in North Carolina — which had been a leading competitor with Louisiana for landing “runaway” film productions.
Even if the Legislature follows Jindal’s lead and takes a hands-off approach to film this year, Morrell and others believe a day of reckoning is on the way. The next governor — who will take office in January — is likely to call a special session to discuss tax breaks.
“If anyone thinks film can stay the way it is, and that it can survive a special session targeting tax credits, they’re crazy. If we don’t address film now, the first credit on the chopping block will be film,” Morrell said. “I think people in the industry understand that, and they’re saying, ‘Let’s get ahead of this.’ Instead of film being the biggest bull’s-eye, why don’t we fix the film program and then do this to all the other tax credit programs?”
Follow Gordon Russell on Twitter, @gordonrussell1.