Déjà Vu All Over Again For Auditor General Report On Select Subsidy Programs

It became prominent state news last week when a performance audit of state subsidy program showed overstated job creation.

The state subsidy program reported to the Legislature that 75 percent of projected jobs came to be, but the Auditor General report says that, at most, only 19 percent of the original jobs projected came to fruition.

The program is the 21^st Century Jobs Fund, which is administered by the Michigan Strategic Fund. The fund oversees several programs that give grants and loans to certain businesses in Michigan, including high-profile failures like the battery-maker A123 Systems, and the biofuels company Mascoma Corp. 

But perhaps the media and politicians should not have been surprised. A look at past reports shows that Michigan programs administering select subsidies have continually had problems finding out how many jobs are at businesses supported by taxpayer money.

The most recent report in September said: "We determined that the completed grants, excluding the bankrupt company (A123), met only 19% of the original jobs projection." It also found that the Michigan Economic Development Corp. had not been reporting on the actual jobs created by companies in some of its programs, nor verifed company claims about their job creation. 

But this is not uncommon for select subsidy programs.

• A January 2013 Renaissance Zone program audit found that the MEDC doesn't follow-up on what the state gets for its money: "We concluded that the MEDC's efforts to evaluate the [program's] impact on creating new jobs, retaining jobs and stimulating capital investment within the state were not effective."
• A June 2011 Brownfield Redevelopment Financing Program audit found that the managers did not collect the appropriate information from participants nor submit an annual report to the Legislature: "We could not conclude on the effectiveness of the [program] because of a lack of available performance information for assessing effectiveness." The MEDC noted that it was the Treasury Department that did not collect the appropriate information.
• An October 2010 Auditor General report found that the MEDC did not follow up on what the state gets for its money. The Michigan Strategic Fund "did not sufficiently document its review of eligibility requirements for the Centers of Energy Excellence (COEE) Program … we sampled eight of 27 proposals and noted that MSF did not document its review of eligibility requirements in any of the eight proposals reviewed."
• An April 2010 MEGA audit found that the MEDC did not follow up on what the state gets for its money: "MSF's post audit procedures were not sufficient to validate the summary information submitted with the companies' requests for tax credit certificates to the detail job claim and wage data maintained by the companies … MSF did not audit the business activity credit portion of the MEGA tax credit certificates when conducting audits."
• A September 2007 21^st Century Jobs Fund audit found that it was too soon to judge the effectiveness of the program. The MEDC had made some awards and listed them, but because these projects take a while to complete, it wasn't time to figure out whether the MEDC tracked progress adequately.
• An August 2003 Office of the Attorney General report examined a job training program administered by the MEDC. Although the program had been alleged to have created 635 jobs, the Attorney General's office found that total employment had actually decreased by 222. The OAG criticized the MEDC for not independently verifying jobs claims submitted to the MEDC by companies that had received job training subsidies. The errors were discovered after a review of one small MEDC program.
• In 1993, the Michigan Strategic Fund was found by the OAG to have "overstated by 39 percent, the number of jobs created by the selected companies that received financial assistance from ... two programs [the MSF administered] in its 1991 annual report to the Legislature."

"Policymakers should question why the state hands out hundreds of millions in incentives," said James Hohman, a fiscal policy analyst at the Mackinac Center for Public Policy. "A good start of that conversation would be to demand accurate reporting of what these incentives produce and cost."

Kathleen Fagan, spokeswoman for the MEDC, said the organization was given "moderately effective" ratings for each of the above reports as it relates to monitoring the programs.

Fagan also said that the audits "have completely disparate findings."

"Each one cites a unique situation, with no consistency that indicates a recurring issue," she said.

But Hohman said the two common themes are not meeting expectations and not checking up to make sure that job creation actually happens.

"The MEDC has repeatedly failed to accurately track what taxpayers get for their money," Hohman said.

Several studies have also critiqued the programs.

A 2009 study from the Mackinac Center for Public Policy criticized the reporting of the MEDC: "In the past few years … the information contained in MEGA's various reports has become increasingly vague and incomplete. The total value of MEGA business-tax credits awarded each year to each project is now unavailable, for instance, while the value of any MEGA-related local government business incentives has often been left out of the reports. These and other omissions have made it increasingly difficult to measure MEGA's cost and effectiveness."

A 2005 study from the Mackinac Center of the entity’s MEGA program found that only 44 percent of the agency’s agreements actually happened and, of those that did, only 18 percent were “shown to have created the number of direct jobs originally projected within the expected time frame.” The study also noted, “MEGA apparently caused a temporary shift to higher construction employment without increasing overall employment. One temporary construction job was created for every $123,000 in MEGA credits awarded; 75 percent of these jobs disappeared after one year, and the remaining 25 percent fell away after two. There was a concurrent, statistically significant decline in construction wages as a result of MEGA credits, but it was too small to be economically meaningful.”

A 2010 study from the Anderson Economic Group on the MEDC found that MEGA, the Renaissance Zones and the film incentive program cost the state 25,000 jobs and $85 million in annual tax revenue. Furthermore, eliminating the tax incentives and instituting a statewide 2 percent across-the-board tax cut would have resulted in a gain of 12,806 jobs.

The Michigan Strategic Fund program began in 1984 and was expanded under House Bill 5047 of 2005. About $1 billion has been approved for the program with $619.8 million spent since 2005. The program also gives out refundable and assignable tax credits and is expected to hand out $577 million in MEGA credits alone in the upcoming fiscal year.

Many bills have been introduced in recent years that increases the amount of money for the program. Senate Bill 269, sponsored by Sen. Mike Kowall, R-White Lake, would eliminate a 2015 sunset on funding for the program and make the program permanent.

Michigan Capitol Confidential did a series of articles on the program last summer which found that the jobs projections from MEDC programs consistently fell short of reality.

"The MEDC's output is not supposed to be press releases, it's supposed to be jobs at businesses that receive state assistance," Hohman said. "Its reports rarely contain this information and even in the rare instances that it is included, these performance audits should question their accuracy."