HOLLAND, Mich. (WOOD) - LG Chem Michigan has repaid $842,000 in federal funds after an audit prompted by a Target 8 investigation that raised questions about how the Holland plant was spending a U.S. Department of Energy grant.
That's about half the $1.6 million that auditors determined was spent on employees who watched movies, played games and volunteered on company time, according to the audit released Wednesday. The federal government says it is only getting half of the money back because the government and LG Chem shared employment costs.
"We were unable to calculate the exact loss to the government because LG Chem Michigan did not track labor activities in detail," the audit report states.
Statement from LG Chem (pdf)
The U.S. Department of Energy Inspector General's report said it confirmed allegations raised in a Target 8 investigation in October 2012.
"Specifically, LG Chem Michigan inappropriately claimed and was reimbursed for labor charges incurred by a variety of supervisory and staff employees for activities that did not benefit the project," the report states.
The feds said that "corrective action" has been taken to address the issues.
In a statement released late Wednesday afternoon, LG Chem spokesperson Randy Boileau said, "To ensure the review would be complete and factual, LG Chem Michigan cooperated fully by providing all requested documents and making our facility and team members available to the office of the Inspector General. During the course of the review, the government concluded that we had applied $842,000 of Recovery Act funding to employment costs that were not allowed under the terms of the grant. LG Chem Michigan has accepted the government's decision and has reimbursed the government for the full amount. LG Chem Michigan has also established internal safeguards to prevent this from happening again."
The report said that despite spending $142 million of a $151 million grant so far, "LG Chem Michigan had not yet achieved the objectives outlined in its Department-approved project plan."
"For instance, even though the facility had produced a large number of test cells, the plant had yet to manufacture battery cells that could be used in electric vehicles sold to the public," according to the federal report.
The report blamed the problems, in large part, on "grant monitoring issues with LG Chem Michigan and the Department."
Auditors also said they were "concerned" that the goal of the grant "may not be fully achieved due to lower than expected demand for electric vehicles."
While the company maintained that the plant was "critical" and "would eventually succeed," auditors questioned the spending of tax dollars.
"Until the company begins production at the Michigan plant or develops some alternative use for the plant, U.S. taxpayers will receive little direct benefit from a plant for which they provided at least half of the funding," they wrote.
While LG Chem reported spending 94 percent of the $151 million grant, it has built only 60 percent of the "construction capacity." Auditors blamed that, in part, on LG Chem "significantly" underestimating labor costs.
Auditors reported that LG Chem had created less than half of the 440 jobs it had expected by the end of last year.
Auditors questioned why the federal government issued the grant without a promise from LG Chem to shift battery production to Michigan from South Korea.
"Language requiring the shift in production had not been incorporated into the grant," auditors wrote. Without that, the government "had no leverage to require the shift in production to the Michigan plant."
They also questioned whether the government should have stopped funding the plant once it was known that LG Chem couldn't finish all the production lines within budget and would continue to "fill U.S. demand with battery cells made in South Korea."
"At the time these factors became known, in our judgment, business risk for the endeavor should have shifted to LG Chem Michigan and should not have been borne, even in part, by the U.S. taxpayer."
The DOE Inspector General began auditing the company in November 2012 in response to a Target 8 investigation into the plant.
Target 8 in October 2012 revealed that some workers, with little else to do, were spending hours playing cards and board games or watching movies on company time. Others spent their days working for area non-profits, also while being paid by the company.
Federal officials said the Target 8 investigation's findings raised questions about how LG Chem was spending the DOE grant that was key to building the plant.
The plant started with a presidential groundbreaking in July 2010, with plans to produce lithium-ion battery cells for the Chevrolet Volt. But with sluggish Volt sales, the plant hasn't produced a single cell for sale.
The Korean-based company last year claimed that as many as 100 of its employees were paid for with those federal grant
dollars. In its latest report, filed at the end of last year, it reported 76 jobs were created by the DOE grant.
In that same report, the company stated: "Start of has been delayed due to the slow market."
Two sources in the plant told Target 8 that the DOE showed up in early November, interviewing workers and checking records, including time slips.
The auditor questioned them about how they're spending their time, including their work for the non-profits.
The sources say the company in early November ordered an end to that non-profit work.
Based on interviews with employees, auditors wrote that "we believe it is likely that the total amount of charges that included at least some non-productive work exceeded $1.6 million" during the third quarter of 2012.
LG Chem reimbursed the government $842,000 of that. That reimbursement was based on the assumption that "LG Chem complied with the terms of its grant to share costs on an equal basis, an aspect that we did not confirm."
"Through interviews with LG Chem Michigan management and other staff, we confirmed that employees spent time volunteering at local non-profit organizations, playing games and watching movies during regular working hours," the audit report states.
Auditors said that 16 of the 26 employees they interviewed had "participated in various volunteer activities during normal work hours in recent months." Some volunteered one day, while others volunteered five days a week.
They found that the volunteer work began around August 2012 and continued until November.
"While our interviews demonstrated that these activities had taken place, we were unable to quantify the number of days spent on volunteer work because the company did not track labor activities to this level of detail."
Also, the report says, 13 of the 26 workers interviewed had "participated in various activities at work that were not appropriate for reimbursement by the Department, including watching movies and playing board, card and video games."
They found this started before the volunteer work and continued "until just before the time of our review."
However, the auditors weren't able to "quantify" the amount of time watching movies and playing games "because the company did not track labor to this level of detail."
"Finally, the audit surfaced issues relating to the management of this grant which transcend the reimbursed amount in importance," auditors wrote.
U.S. Department of Energy's Office of Energy Efficiency and Renewable Energy response to the Inspector General's report:
"The Office of Energy Efficiency and Renewable Energy (EERE) appreciates the opportunity to respond to this audit report:
EERE's investment was to partially fund an advanced battery manufacturing facility, and it's simply unacceptable that any of those funds were used to pay for other work in the community, or for any other purpose. Immediately upon learning of these allegations, EERE took swift action to stop further payments, secured a refund for taxpayers on $842,189 in questionable costs, and report the matter to the Department's Inspector General. In addition, EERE is taking a series of steps to strengthen project management in the future, including a reorganization within EERE, an updated grants management process, increasing the number of site visits each year to large projects, and centralizing the review of project invoices. A more complete summary of these actions is below.
While the demand for electric vehicles hasn't grown quite as quickly as expected and there will likely be some more challenges in the next few years, electric drive vehicle sales tripled last year and are expected to continue growing rapidly. EERE's investment in this battery manufacturing facility – matched dollar for dollar by LG Chem Michigan Inc. – is helping to put Michigan and the United States in a prime position to capture a rapidly growing global market. This is part of an overall effort to make sure that America's auto manufacturing base continues to adapt to the most innovative technologies, deliver the gasoline-saving vehicles that consumers increasingly want, and to continue to grow the manufacturing sector in the United States.
While the Department has no tolerance for and moved swiftly to correct this case of inappropriate billing, it's also critical that the United States continue to compete aggressively for the clean energy jobs and industries of the future. Ultimately, the choice comes down to whether the United States should lead what will become an enormously valuable and growing market, or whether we will give up this industry because sales 'only' grew 200 percent last year. Emerging technologies and industries often face struggles early on, but the race will be won by those who remain focused and committed to the end goal."
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