CT auditor: Blue Sky got $49M in excessive tax credits

As Walt Disney backs up the trucks in Greenwich to load up the remnants of Blue Sky Studios — the animation studio is set to close next week — is it making off with $49 million in Connecticut incentives that never should have been awarded?

State officials disagree on that point. But Connecticut’s lead auditor claims the Department of Economic and Community Development misinterpreted state law in approving excessive tax credits to Blue Sky over three years spanning the administrations of Gov. Ned Lamont and his predecessor, Dannel Malloy.

A DECD spokesperson did not comment Thursday beyond an initial statement provided to Connecticut state auditor John Geragosian, which described the film production tax credits awarded to Blue Sky as “a statutorily qualified medium,” given that the studio produces feature films for theatrical release.

Geragosian disagreed, stating that the company should have qualified for a digital animation tax credit only, which is capped at $15 million. He does not mention Blue Sky by name in the report, but the company was the only one in Connecticut to receive the digital animation tax credit prior to flipping to the more generous film tax credit in July 2017.

“Since the General Assembly established a separate program for digital animation companies, it does not appear that it intended for digital animation companies to be eligible for film production tax credits,” the auditor’s report states. “If the digital animation company was eligible for film production tax credits, it is unclear why DECD did not award film production tax credits for the first 7 years that the company received credits.”

DECD approved the tax credits both under current commissioner David Lehman as well as under Catherine Smith, who led the agency for the duration of the Malloy administration.

DECD told the auditor it will seek a clarification from the state legislature. But with no other digital animation company in Connecticut qualifying for more than the $15 million cap, the issue would appear to be moot going forward.

In the fiscal year ending in June 2019, DECD approved $157 million in tax credits for prior film and TV production work totaling $531 million in spending in Connecticut.

The department’s awards under the program average about $73 million annually over the past decade. DECD has yet to post its 2020 annual report covering the subsequent 12 months. Companies can

Hearst Connecticut Media file photo Former Connecticut Gov. Dannel P. Malloy, center, in June 2011 at Blue Sky Studios in Greenwich, alongside Catherine Smith, who led the state’s Department of Economic and Community Development during Malloy’s administration, and Brian Keane, then chief operating officer of Blue Sky.