Audit Finds Unexplained Bonuses and Overstated Numbers in $100 Million Taxpayer-Backed Investment Fund | Buzz Blog

Audit Finds Unexplained Bonuses and Overstated Numbers in $100 Million Taxpayer-Backed Investment Fund

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A legislative audit of Utah's peculiar taxpayer-backed venture capital fund known as the Utah Fund of Funds, found the program had been overstating its ability to create jobs and bring capital into the state. All of this was done while the fund had acquired $100 million in debt, with losses having to be paid by taxpayers in 2017 when the banks would collect on loans th e program has drawn on since 2006.


The Utah Fund of Funds got started in 2006 with the idea of funneling millions to venture capital firms to invest in startup companies—especially those in Utah—with any losses to be paid off with taxpayer-backed credits. That optimistic plan was implemented back when the economy was paying off like a broken slot machine and before the 2008 recession.

Since then lawmakers have become increasingly skeptical of government subsidizing venture capital investments that can often be very risky.

Utah Fund of Fund managers told City Weekly in the August 2013 cover story “Going for Broke” that the investments had paid off with solid job creation in the state and helped bring venture capital money into the Utah economy.

But a legislative audit released Tuesday showed that the fund had overstated the impact of the program and its job creation.

“Over the years the venture capital market in Utah has done very well,” said auditor Brian Dean. “Utah was ranked 18th in the nation the program made its first investment in 2006 and Utah is currently ranked 15th.”

But according to the audit, the Utah Fund of Funds appeared to take credit for Utah's already strong venture capital market in claiming the fund helped bring $723 million in aggregate investments to Utah as of 2013.

While the fund had claimed to have created 2,700 direct jobs, auditors found over half of the fund's employment records were outdated and therefore unreliable.

The audit also says the fund can't validly claim that the jobs created by the fund had resulted in $37 million in tax revenue for the state since the job numbers were suspect and reported by unreliable measures.

Beyond that, the fund's report for 2012 also showed 70 Utah companies as having received investments thanks to the program, while failing to mention that 12 of those companies had gone belly up.

“It seems like a puffing up compared to what the reality is and that concerns me,” said legislative audit committee member Sen. Gene Davis, D- Salt Lake City.

The audit also found concerns of fat bonuses paid to managers of the fund without the documentation necessary to explain why a small number of fund directors and staff deserved to be paid $330,000 in bonuses and severance payments between 2005 and 2013.

While the fund is obligated to report in it's official minutes all compensation matters, auditors couldn't find the records explaining the need for the payments to the executives.

Bret Jepsen, who took over as the head of the fund in September 2013, says he has embraced the majority of reforms recommended by auditors and acknowledged that his predecessors had a different approach to the fund then he does. He's also grateful that the fund will no longer rack up more debt to finance future investments. Thanks to legislation passed in the 2014 session, the fund's future investments will be done through equity financing, meaning future investors will pay off new debts as they go by becoming limited partners with the fund.

The biggest concern for legislators on the committee, however, was understanding how much money taxpayers might be on the hook for when the fund's original loans would come due in 2017.

Jepsen explained that the current fund is at $100.7 million—slightly above the $100 million debt to be paid in 2017. Hopefully he says with new policies and procedures the fund will stay in the black.

“As long as we can keep this steady revenue stream we can honor the financial obligation we were encumbered with several years ago,” Jepsen said. 

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