Gov. Bobby Jindal’s administration “misclassified” a $34.6 million default payment that Northrop Grumman Ship Systems made to Louisiana Economic Development in 2011 after the shipyard failed to meet certain hiring obligations, according to a newly released audit of the state’s Executive Department by the Louisiana Legislative Auditor.
Instead of using the money to pay off equipment the state had financed for Northrop Grumman, the audit says the Division of Administration “swept” the money when it was balancing the budget. As a result, the state has already paid some $2 million in interest and administrative costs on the equipment, and is potentially on the hook for some $6.2 million more.
“The state will continue to incur additional interest and administrative costs until the debt (on the equipment) is defeased,” the audit reads. “If not defeased before the Oct. 2022 … the state will incur more than $6.2 million in additional interest and administrative costs.”
The issue dates back to the early 2000s, when LED entered into a Cooperative Endeavor Agreement with Northrop Grumman, which had acquired Avondale Shipyard in Jefferson Parish. Under the terms of the deal, Northrop Grumman agreed to maintain employment levels of some 3,500 jobs a year with an economic impact of $1 billion. In return, the state agreed, among other things, to issue bonds to finance more than $34 million worth of cranes and equipment that would modernize the shipyard.
But Northrop Grumman fell short of its job requirements and in early 2011, LED notified the company it wasn’t living up to its employment obligation. Northrop Grumman did not disagree and agreed to settle with the state for $34.6 million, which represented the acquisition cost of the equipment. It wired the money to LED in March 2011, the report says.
But the state didn’t use the money to pay off the debt on the equipment, nor did it set the funds aside in an escrow account to pay it off in the future. Instead, it “swept” the money into the Louisiana Medical Assistance Trust Fund, which was created during the 2011 session to help supplement the state’s Medicaid program.
As a result the state is still on the hook to pay off the equipment, and has already spent some $2 million in interest and administrative costs.
“The funds should have been segregated into a sinking account for defeasement of the debt, not a statutorily dedicated fund account that could be swept by legislative action,” the audit says.
In a written response to the audit’s findings, Commissioner of Administration Jay Dardenne takes issue with the findings. Dardenne says the state’s agreement with Northrop Grumman didn’t contain any stipulations for the classification of any potential default payments to be received from Northrop Grumman.
“The administration’s decision to use the funds for other purposes was not prohibited by the terms of the (agreement) with Northrop Grumman,” he says, adding that the Legislature approved of moving the money.
It is unclear whether any action will result from the findings of the audit.