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Original article URL: http://bridgemi.com/2012/12/state-bets-big-for-jobs-gains-are-expensive/
4 December 2012
An economic development program created by Gov. Jennifer Granholm’s administration has spent more than $400 million in creating about 2,300 jobs.
That’s about $175,000 per job.
Rather than kill the program that critics said has a poor job-producing record, Gov. Rick Snyder is expanding the scope of the 21st Century Jobs Fund.
The Jobs Fund began in 2006 as a 10-year, $1 billion economic development fund that Granholm mostly used to commercialize new technologies and finance young, technology-based businesses.
It draws funds, currently $75 million a year, from Michigan’s share of the 1999 federal tobacco lawsuit settlement.
A 2011 report to the Legislature shows companies receiving Jobs Fund assistance since the program began in 2006 added about 2,300 jobs, far short of the 7,600 jobs that the companies expected to create.
One of its high-profile programs, the Centers of Energy Excellence, awarded $67 million to 12 alternative energy companies, which had created just 588 jobs as of Sept. 30, 2011, or nearly $114,000 a job.
Those companies also received a total of $211,527,402 in federal grants and raised $365,371,591 in private investment.
The largest state Centers of Energy Excellence program grant went to Waltham, Mass.-based Mascoma Corp., which received $20 million from the state in 2008 to help it build a cellulosic ethanol plant in Michigan’s Upper Peninsula. The plant has yet to be built.
Reporting across the eight programs that gave financial assistance to companies wasn’t consistent, making it difficult to assess exact job impacts.
For example, the Michigan Supplier Diversification Fund was expected to create 1,158 new jobs. But the exact number of jobs created by the $48 million loan guarantee program wasn’t reported.
The Jobs Fund had spent $415 million in loans, grants, equity investments and loan guarantees through Sept. 30, 2011, according to the legislative report.
Critics say the Jobs Fund’s modest job creation record shows that government is ill-equipped to predict which companies will succeed financially and create jobs.
Major 21st Century Jobs
“The fundamental question is, how can the central planner know the best use of these resources,” said Gary Wolfram, a Hillsdale College economist.
“Why do I need the 21st Century Jobs Fund to subsidize something the market is going to produce if there is a need for it,” said Wolfram, who served as a deputy Treasury director during the administration of Gov. John Engler.
Originally, the Jobs Fund was mostly aimed at aiding start-up and early stage companies in the life sciences, advanced manufacturing, homeland security and clean energy industries.
Under Snyder, any business that can “demonstrate significant advancements in any innovative technology,” is eligible to tap Jobs Fund assistance.
That’s in keeping with the governor’s philosophy of not favoring certain industry sectors for assistance.
But legislation signed last year by Snyder also specifically singles out information technology and agricultural processing companies as eligible to compete for Jobs Fund cash and assistance.
“Michigan is already a major producer of agricultural products, and we can add a step in the value chain by doing more of the processing here in-state,” said Sen. Mike Green, R-Marysville, who sponsored the legislation.
Lawmakers in both houses overwhelmingly adopted the legislation. It won unanimous approval in the Senate and passed 104-to-5 in the House.
The Michigan Economic Development Corp., which administers the Jobs Fund, says it no longer invests directly in companies.
“Philosophically, our approach to using funds from the 21st Century Jobs Fund has changed,” said Martin Dober, senior vice president of entrepreneurship and innovation at the MEDC. “Instead of investing directly in companies, we’re investing more into an ecosystem to support entrepreneurs.”
The Jobs Fund this year is allocating $25 million to each of these three programs:
* The Pure Michigan tourism advertising campaign.
* The Michigan Business Development and Michigan Community Revitalization programs, which fund business attraction incentives and urban revitalization projects. (An additional $75 million for these programs comes from the state’s general fund.)
* About a half dozen entrepreneurship and innovation support programs, which the Snyder administration collectively calls “economic gardening.”
Republicans like to criticize Democrats such as Granholm for handing out targeted economic development incentives that pick “winners and losers” in the economy.
But the 21st Century Jobs Fund was an outgrowth of Republican Engler’s effort that used tobacco settlement cash to create a “life sciences corridor.”
Legislation creating the Jobs Fund was introduced by a conservative West Michigan lawmaker in 2005 and was passed with near unanimous support by the Legislature.
Spending on targeted economic development programs was one of the few areas where Granholm and the Republican-controlled Legislature found common ground.
Then-Rep. Bill Huizenga, a Zeeland Republican, said in a 2005 radio interview with WJR’s Frank Beckmann the Jobs Fund was needed to diversify a state economy that was sagging because of a shrinking manufacturing industry.
“We felt we needed to do some things to boost the economy and to help build the financial infrastructure the state needs,” said Huizenga, who now is a member of Congress.
Huizenga’s bill allowed the state to “securitize” or sell about a third of its $6 billion from future tobacco settlement payments to investors in order to generate about $1 billion for the Jobs Fund.
The Jobs Fund’s first two programs were competitions in 2006 and 2008 in which 52 young technology companies and nearly two dozen universities, research groups and local economic development agencies were awarded $177.1 million in grants and loans.
MEDC records show that 1,199 new jobs were created from those awards, about a quarter of the 4,570 projected jobs.
Of the $40 million loaned to 22 companies in the 2008 competition, $12.7 million in loans were rescinded or later withdrawn from five of the companies that either failed or couldn’t meet loan requirements.
Among them was Fisher Coachworks, a defunct hybrid bus manufacturer that was loaned $2.6 million from the Jobs Fund in 2008.
Fisher Coachworks received $1.6 million from the fund before the state stopped making payments to the company in 2010 when it failed to meet loan requirements.
A123 Systems, which makes lithium-ion batteries for the electric vehicle industry, was awarded $10 million in 2008 from Jobs Fund’s “Centers of Energy Excellence” program.
It filed for bankruptcy in October and the Centers of Energy Excellence program has been discontinued.
Dober acknowledged the financial awards in the Jobs Fund were risky because they were given to start-up and other early stage companies that have high failure rates.
“When you’re investing in the early stages, you’re going to have some good ones and some bad ones,” he said.
MEDC records show that nearly $33 million of the approximately $130 million in Jobs Fund loans has been repaid and is being reused in other Jobs Fund programs.
Dober said the state is confident that it will get back most, if not all, of the loan money.
Nevertheless, the state will no longer directly finance on its own in start-up companies.
“We don’t have any intention of doing programs like that again,” Dober said.
The Jobs Fund also stepped in when giant drug maker Pfizer Inc. announced in 2007 that is was closing its sprawling Ann Arbor research center, and various operations in Kalamazoo and Holland, eliminating thousands of jobs in the state.
It loaned $7.7 million to dozens of Pfizer scientists looking to remain in Michigan and to pharmaceutical startups in an effort to soften the blow of Pfizer’s departure.
Those loans resulted in the leveraging of $30.5 million in additional private sector financing, the creation of 118 new jobs and the commercialization of 55 new products, according to MEDC records.
But Jobs Fund spending in the two business competition programs and the Pfizer employee retention effort had little statewide benefit. Virtually all of the awards went to companies in the Ann Arbor and Kalamazoo areas.
During its first six years, the Jobs Fund grew to include about a dozen multimillion-dollar spending programs. They included investments in venture capital funds, an auto supplier diversification program and direct investments in businesses.
One program, called Investment Fund I, invested $109 million in venture capital funds that in turn invested the money in young technology companies.
Those investments have resulted in 267 new and retained Michigan jobs. Just over $1 million of the money has been returned to the Jobs Fund.
Dober said it will likely take four or five more years to judge the job creation impact of those venture capital investments.
In addition, the Jobs Fund gave $35.5 million to support the work of various local economic development agencies and nonprofit groups engaged in helping entrepreneurs and technology companies, or to administer Jobs Fund programs.
Charles Owens, director of the National Federation of Independent Business-Michigan, said his 10,000 members are more excited about the business climate reforms Snyder has undertaken than programs like the Jobs Fund.
“Our members don’t have much enthusiasm for these initiatives,” he said.
Rick Haglund has had a distinguished career covering Michigan business, economics and government at newspapers throughout the state. Most recently, at Booth Newspapers he wrote a statewide business column and was one of only three such columnists in Michigan. He also covered the auto industry and Michigan’s economy extensively.