“Invisible Kingdom” has $1.5B in Operating Revenues Since 2010
Would you be surprised to learn that the legislature created a state agency in 1983 using taxpayer money that then spun-off a nonprofit business so successful it has operating revenues of $435 million in FY 2015-16 alone and whose leadership regularly receives yearly bonuses in the hundreds of thousands of dollars?
Would you also be surprised to know this same agency gives none of that money back to the state’s general fund, has an annual payroll of more than $11.2 million (its spokesperson makes more than DOT Secretary Christy Hall) and hasn’t been subjected to legislative oversight since 2005?
And would you be further surprised to learn that guiding this same agency are the most powerful men in South Carolina state government, higher education and the private sector, that its spin-off group, Advanced Technologies Institute, has operating revenues of $1.5 billion since 2010 according to documents obtained by The Nerve through the Freedom of Information Act and pays nothing in either state or federal income, sales or property taxes?
If you’re not surprised, you follow South Carolina politics closely.
If you are, you should start paying attention.
Now.
SCRA: PUBLIC OR PRIVATE?
Is the South Carolina Research Authority (SCRA) a state agency?
Its leadership certainly doesn’t think so, repeatedly referring to the SCRA as “an applied research corporation” in its press releases and on its website.
“SCRA does not receive tax appropriations from South Carolina and is an enterprise corporation, not a cabinet agency,” said spokesperson Micki MacNaughton.
As further proof, MacNaughton points to the fact that the agency does not appear on the state of South Carolina website listing state agencies.
The SCRA does, however, appear on The State newspaper’s list of state agencies here, and in August 2005 the General Assembly’s Legislative Audit Council investigated it to learn “how the SCRA has benefited the state and how those benefits could be increased,” the summary read. The audit, available online here, lists the SCRA as a state agency.
But that’s hardly all.
No less an authority than the State Supreme Court ruled in 1986 that it was an agency in Nichols v. South Carolina Research Authority (290 S.C.415, 351 S.E. 2d 155). In its opinion about SCRA in section 1 it notes, “Research Authority is an agency of the state, considering that the Authority is a corporation owned completely by the people of the state, and that the Authority is empowered to issue revenue bonds under the Advanced Refunding Act, which is applicable to public agencies.”
In Section 3, the ruling goes on to set limits on what it may and may not do as a state agency.
“Research Authority, as a state agency, may not enter into joint ventures with private firms, in view of section of the Constitution clearly prohibiting public agencies from engaging in joint ownership with private parties,” it reads.
And while not run by a cabinet-appointed director (the majority of state agencies aren’t), it is governed by a Board of Trustees including, but not limited to, Sen. Hugh Leatherman (R-Florence, chairman of Senate Finance Committee and Senate president pro tempore) and Rep. Brian White (R-Anderson, chair of the House Ways and Means Committee).
That means it is state-created (established in 1983 with $500,000 of taxpayer money and 1,400 acres of donated land, valued at $10.7 million at the time), is state-controlled and subsequently is a state agency subject to Freedom of Information requests such as the ones it complied with from The Nerve, including requests for copies of financial documents going back to 2010.
Why is that important? Because it means the SCRA should be accountable to the public for its expenditures, including on salaries, contracts and real estate, to determine whether its economic activity benefits the citizens of South Carolina who created it or the select few at the top of its food chain.
“It seems to me they’re as public as you can be,” said John Crangle, an attorney and executive director of the government watchdog group Common Cause SC. “It’s reasonable to wonder whether they’re just lining their own pockets or benefiting the public they were created to serve.”
ADVANCED TECHNOLOGIES INSTITUTE
Created as a 501c3 spinoff of SCRA in 1998, Advanced Technologies Institute, or ATI, constitutes the vast majority of SCRA’s operating revenues, profits and economic activity.
It does this as a federal contractor, acting as a broker between branches of the military (mostly the Navy) and competing defense contractors bidding on the most expensive projects in the military (such as shipbuilding).
A former SCRA executive who did not want his name shared for fear of reprisals explained how ATI works.
“Boeing wants contracts, Northrup Grumman wants contracts, hundreds of companies want contracts and ATI acts as a trusted third-party consortium between defense contractors and the military to communicate technological needs on a range of projects,” he said. “The military doesn’t have the internal resources to do the consortium work, so ATI becomes their project manager.”
For its role, the SCRA – through ATI – takes a fee, generally a 1-2 percent cut of the overall contract.
In that 2005 audit, the Legislative Audit Council noted that such federal “Contracts comprised more than 96 percent of SCRA’s revenue’s for FY2003-04.” Then, the SCRA reported annual revenue in 2004 of $68.2 million, with a 2007 goal of revenues “greater than $80 million.”
Those goals have been exceeded, by far, in the years since it last came under legislative scrutiny.
For fiscal year ending 2016, SCRA shows operating revenues of $435.3 million, with a “funded backlog” totaling $452.1 million and a “total backlog” of $931.4 million. As it stands, the SCRA is scheduled to over-perform on its 2016 goals by 109 percent in operating revenue and 136 percent in net earnings.
“The military consortium business is going gangbusters,” said the source. “Naval research is huge, Army munitions is a cash cow and there are interests in other industries as well such as a nutrition consortium in the food industry. It’s been incredibly successful.”
SCRA also has significant real estate holdings it has profited from in addition to its original 1,400-acre gift.
In 2012, Boeing paid the SCRA $23.5 million for three North Charleston offices the SCRA held on land owned by the Charleston County Aviation Authority. At the time of the sale, Mahoney confirmed SCRA had five current contracts with Boeing’s defense division and the chairman of SCRA’s board at the time was Boeing executive Marco Cavazzoni.
In its 2014 IRS Form 990 filing, the latest available online, the SCRA reported $27,781,915 in”land, buildings and equipment.”
Records obtained by The Nerve show SCRA with FY 2016 net assets of $65.5 million and total assets of $216.5 million.
“Over years they’ve accumulate millions and millions in reserves,” the former SCRA executive told The Nerve. “They’re sitting on a gold mine in assets, and when I was there leadership did not want to do anything with them other than keep re-investing it in the business despite the fact than the universities and the legislature wanted a piece of it, which is why you saw that audit in 2005 in the first place and then the creation in 2006 of SC Launch.”
SC Launch awards $6 million a year in funds it generates not through the proceeds of ATI but solely from individual contributions that are 100-percent tax-deductible.
“SC Launch really just became the public relations arm of the SCRA to make it look like they were serving South Carolina when that $6 million was just a drop in the bucket, a way to draw people’s attention away from the hundreds of millions they were making from ATI for themselves.”
In fact, the former executive told The Nerve that the name ATI was created in the first place to throw government contractors and politicians off the scent of SCRA.
“Defense contractors from around the country weren’t crazy that a little firm in South Carolina tied to state government was monopolizing the action,” the source said. “SCRA wanted a buffer that wouldn’t spook people, a name that sounded like it could be from anywhere. That’s where the name ATI came from, and it worked.”
ATI operated from 1998 to 2011, when the name was changed – again – back to SCRA Applied R&D. MacNaughton cited brand consolidation as the reason for abandoning the ATI moniker.
“Because ATI is an SCRA affiliate and supporting organization … SCRA and ATI have incorporated the information concerning ATI’s leadership team and board of directors, along with other ATI information, under the ‘SCRA Applied R&D’ portion of the SCRA’s website.”
FOLLOW THE MONEY
Who has the SCRA benefited, then, if the public-facing SC Launch makes and distributes its own revenue?
Itself.
Of the agency’s 141 full-time employees, 101 make $50,000 or more and 46 make $100,000 or more. By contrast, that’s twice as many people making $100,000 or more than the Department of Corrections, almost three times more than the Department of Education and three-and-a-half times more than at the Department of Social Services. At $144,200 per year, MacNaughton’s annual salary tops DOT Secretary Christy Hall ($139,167) but doesn’t crack the agency’s top 20 highest-paid employees. Two executive assistants make more than $90,000.
What’s more, those figures do not include bonuses, some of which exceed even those of the most-successful athletic coaches.
According to its 2014 IRS Form 990, Mahoney made an additional $234,140 in extra benefits ($139,722 in bonuses, $38,274 in deferred compensation and another $14,430 in nontaxable benefits), making his total income $481,686 over a then-base salary of $247,546.
CFO Julia Martin wasn’t far behind, earning $88,738 in bonus money, $44,416 in “deferred” and “other” compensation and another $20,867 in “nontaxable benefits” for a total package of $336,356 over her base salary $182,335.
Using such incentives and bonuses, many executives at SCRA nearly double their annual salaries. Following are the other top beneficiaries of SCRA’s bonus structure, all from 2014:
- Robert Kiggins, COO: base $86,350, total package $157,427
- Chris Van Metre, Chief Officer: base $171,552: total $336,072
- Natalie Corella, Exec. V.P.: base $124,988, total $252,507
- Ambrose Schwallie, Exec. V.P.: base $219,597, total $295,393
- Greg Hillman, Director: base $130,095, total: 186,157
- Daniel Nagy, Director: base $201,690, total $211,690
- Scott Savoie, V.P.: base $114,704, total $190,826
- Deborah Davidson, V.P.: base $105,077, total $200,108
- Matt Ettlemyer, V.P.: base $133,654, total $190,577
- William M. Housely, Sr., Program Manager: base $113,247, total $176,530.
In 2014 alone, the total amount of money paid just to 13 senior personnel in bonuses, deferred compensation and other benefits was $1.28 million. Not listed monetarily on the Form 990 but noted was that “Social Club dues were paid on behalf of or reimbursed to certain officers and key employees per company policy.”
So what happens to the hundreds of millions of dollars earned by ATI for its role in organizing meetings between the military and its contractors besides exorbitant salaries and eye-popping bonuses?
“In accordance with SCRA’s Enabling Act, the South Carolina Nonprofit Corporation Act, and Internal Revenue Code Section 501 (c)(3), ATI’s net income is applied by the ATI Board of Directors, in consultation with SCRA’s Board and Executive Committee, to support the mission of SCRA,” MacNaughton wrote.
The money, millions upon millions upon millions, does not return to the taxpayers who started the agency as a public charity with $500,000 and 1,000 acres in 1983. Instead, it stays mostly in-house and out of sight.
“It’s one of those invisible kingdoms you find in state government where you have a bunch of insiders making a killing and no one wants the public to know what they’re doing,” Crangle said. “I bet if you asked 10 people on the street if they heard of SCRA, they’d all say ‘no’.
“I knew they existed, but I had no idea what they did and how much they were making. I guess I’m like 99.9 percent of the people of South Carolina that way.”
Which is how SCRA likes it. Rather than acknowledge SCRA’s public status and hence it’s being subject to Freedom of Information Act, MacNaughton took a different approach to granting The Nerve‘s FOIA request.
“We are providing you with this information in the spirit of cooperation,” MacNaughton wrote. “In return, we would respectfully request that The Nerve and its affiliated organization take care to ensure that your use of this information does not in any way harm SCRA’s ability to carry out either its contractural obligations or its Public Mission.”
Mahoney declined multiple interview requests to explain exactly what aspects of that “Public Mission” SCRA and ATI serve.
Reach Aiken at 803-254-4411 or email ron@thenerve.org. Follow him on Twitter @RonAiken and @TheNerveSC.