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The Politics of Economic Development: Let’s End Taxpayer Support of Crony Capitalism & Chart A Better Course

The Michigan Economic Development Corporation is taking a beating in the Press. In case you don’t know, the MEDC is a state-funded entity that gives tax credits and tax dollars to venture capital firms, individuals and businesses through a variety of programs aimed at job creation. The results, alas, have been uneven. The MEDC did create in-house jobs for two local politicos — 53rd District House Wanna-be Ned Staebler, and Fifth Ward City Council member Carsten Hohnke.

As if my natural proclivities toward the sensible use of tax money weren’t sufficient, it was revealed in March 2009 that the MEDC had approved giving $9.1 million in tax credits to the business of a convicted embezzler. Mistakes happen, and less than a week after the national media got hold of that bit of news and used it to make MEDC look as though it were run by the Three Stooges, the Michigan Legislature rushed through a bill that called for background checks of applicants who want to live large off of MEDC largesse. Now no crooks needs apply. At least crooks with criminal records. Crooks who haven’t yet been caught, and crooks-in-training are still welcome to fill out the application, go through the process, and take their chances in the MEDC multi-million dollar giveaway sweepstakes. 

In November of 2009, I blogged about the tendency of the people at the MEDC and it’s creation, Ann Arbor SPARK, to focus on “promised jobs” when putting out press releases and glossy annual reports. Since the whole point of the billion dollar job creation machine is to create jobs, the jobs damn well better be created, right? Why is focusing on “promised jobs” a problem? Because to quote (with a slight variation) Samuel L. Goldwyn, promised jobs are as good as the paper they’re written on. The latest newspaper piece about Michigan’s billion dollar corporate welfare industry was published on May 23, 2010 in the Detroit Free Press. Titled “Bold experiment produces few jobs,” reporter Katherine Yung writes: 

Four years after Michigan launched the 21st Century Jobs Fund to diversify its economy and create jobs, the first of two major initiatives under the 10-year, billion-dollar program have generated mixed results so far. A handful of small companies that received loans look promising, a handful have failed and only a small number of direct jobs have been created. Venture capital firms outside the state that were awarded millions have been slow to invest in Michigan businesses. And the majority of the grants, loans and investment dollars went to recipients in one city: Ann Arbor.

According to research published in the Free Press, only 1,147 direct jobs had been created, about 33 percent of the jobs promised, according to a report from the MEDC. Free Press reporter Yung writes, “Excluding jobs created by the research projects, most of which are temporary, only 935 direct jobs have been added.” 

In 2006, Ann Arbor SPARK received $8 million dollars from the MEDC under the auspices of the $134 million dollar 21st Century Jobs Fund. Between 2006 and 2009, according to a March 2009 presentation to City Council by then LDFA Chair Richard King (the LDFA contracts with SPARK and sends tax dollars to SPARK through a tax increment financing scheme), about 600 direct jobs had been created in Ann Arbor, all of which would have otherwise been created without giving a dime to the LDFA and SPARK. According to information from the Michigan Department of Energy, Labor & Economic Growth, since 2008 Ann Arbor has experienced a net loss of 5 percent of our city’s jobs. Since 2006, the year Ann Arbor SPARK received its $8 million dollar grant from the MEDC, Ann Arbor has lost 9.5 percent of its jobs. 

In this election season, local politicos will tout the fact that Ann Arbor’s economy isn’t as bad off as it could be thanks to their valiant efforts. The Detroit Free Press and reporter Yung offer an alternative plot-line. Since 2006, the MEDC has funneled two-thirds of the $137 million dollars spent in 21st Century Fund business loans, and millions in grants to one city in the state of Michigan: Ann Arbor. Since 2006, Ann Arbor’s economy has, in part, been propped up by state tax dollars in the form of loans and grants to local start-up businesses, only  handful of which, according to the piece published in the Detroit Free Press, are doing well. State revenue sharing might have fallen by $350,000 per year between 2006 and 2009, but over the same period the MEDC poured millions in tax dollars per year into Ann Arbor via the 21st Century Jobs Creation loan/grant programs.

These are tax dollars that could have gone instead to education, infrastructure (think Stadium Bridges and the state’s crumbling roads) or been spread among the state’s established small and medium-sized businesses to foster expansion. Instead, millions were given in corporate welfare to start-ups in just four industries: advanced manufacturing, alternative energy, life sciences, homeland security and defense. The result was that Ann Arbor came away with a net 9.5 percent loss of jobs in our city, while ex-Pfizer employees and University of Michigan faculty members who launched businesses that were funded through the MEDC “jobs creation” program promised to create new jobs, until their start-ups crashed and burned. Since 2006, local politicos have dined out and run on the successes and expansion of Ann Arbor’s labor market—including those promised jobs. The thousands that have been promised, but have not yet materialized. 

On June 3rd, I’ll be speaking to the members of the Main Street Area Association. In preparation for the meeting, I’ve been talking to the Main Street business owners. I wanted to know whether the merchants who own small and medium-sized local businesses think our city is a place that works to foster the expansion and growth of established businesses. The word from Main Street? A resounding “No!” Ann Arbor’s city government, according to many of the Main Street merchants, works against local business. All whom I spoke with pointed to most recent obvious bungle: the extension of enforcement of metered parking. Many also believe the Downtown Development Authority is failing in its mission to support the downtown business district.

So what can be done to make Ann Arbor a more attractive home to existing local small and medium-sized businesses, and a magnet community where existing small and medium-sized businesses would choose to relocate and bring with them actual new jobs?

First, we can reverse the wrong-headed extension of parking meter enforcement before it damages the bottom lines of businesses in Ann Arbor. In Oakland, California, the City Council there extended parking meter enforcement until 8 p.m. in July of 2009. The move was reversed in October of 2009 after a recall effort to oust the entire city council was launched, and 5,000 signatures quickly collected. According to a piece published in the San Francisco Chronicle on October 7, 2009, an Oakland, California council member was quoted as saying, “Clearly, the parking regimen has been very unwelcome. As bad as our budget problems have been, it’s clear this is unacceptable. People don’t like feeling we’re balancing the budget on their backs.”

According to research on local economic development from the World Bank, most local economic growth is generated by small- and medium-sized businesses that are already established in the community, not from throwing money at start-ups, regardless of the industry. What our city government can do in Ann Arbor is to provide a helping hand to these existing local small and medium-sized businesses in the form of advice, support and resources. Ann Arbor doesn’t need to offer tax breaks, or subsidies through the Downtown Development Authority, the city shouldn’t be in the business of floating loans or handing out grants. Rather, local government should focus on making sure that merchants needs are clearly understood, and that our local government works with established small and medium-sized businesses and not against them:

1.  For starters, the city needs to survey existing firms to figure out exactly what the challenges are that these local companies face doing business in our city. I got an earful going shop-to-shop, and that’s cathartic for the merchants, but an actual needs-based survey would give us a solid beginning toward a more synergistic relationship between local government and local business.

2.  Next, Ann Arbor should implement a program to streamline local bureaucracy. We should begin by reviewing existing regulations and laws, consult with stakeholders and develop necessary remedial plans. A program to minimize the complexity, costs and bureaucracy associated with permit approval processes, for example, will improve the chances for our local small and medium-sized businesses to thrive and grow.  

3.  Another opportunity to help existing local businesses thrive is to offer technical advice and assistance. This can include broad-based management and marketing programs, to more specialized support. The focus here should be on providing accredited, demand-led, technical assistance that can be paid for on a fee-for-service basis. 

4.  As opposed to skimming tax dollars from education, and spending the bulk of our economic development money on launching start-ups, almost half of which fail after 5 years, money that has been allocated from the General Fund to SPARK and the LDFA should be spent on recruiting established small and medium-sized businesses to Ann Arbor.

The MEDC isn’t taking the criticism of its lack of results, and failure to create large numbers of actual jobs, quietly. On May 26, 2010, the entity’s 17-member executive committee issued a statement which read, in part:

“We are deeply concerned that the recent surge of unwarranted criticism leveled against the MEDC will undermine Michigan’s efforts and ability to attract business investment,” MEDC’s executive committee said in a statement issued to the Michigan Legislature and the media. “All states are in fierce competition for stable, well-paying jobs – across all sectors and industries. Political in-fighting is a clear warning to business that a state lacks a cohesive climate for economic development and a clear signal to invest elsewhere.” 

The state-wide media have finally clued into the fact that the Emperors at the MEDC have no clothes, and are beginning to question whether these tax dollars could be better spent. I’m still waiting for the local media to notice the naked truth about Ann Arbor SPARK, but I have my doubts this will happen any time soon. On May 20, 2010, it was announced that AnnArbor.com Executive VP Laurel Champion was named the Treasurer of the Ann Arbor SPARK Board. On May 23rd, the MLive.com site picked up Yung’s May 23rd Free Press piece and reprinted parts of it on the MLive.com Michigan Job Search page. Interestingly, all mention of the MEDC’s funneling of two-thirds of the 21st Century Jobs Fund money to Ann Arbor start-ups/companies was edited out of the MLive.com piece.

On May 25, 2010, AnnArbor.com’s business reporter Nathan Bomey posted a piece titled, “MEDC says ‘unwarranted criticism’ threatens economic development efforts.”  Bomey’s post made no mention of the May 23, 2010 Free Press piece, nor did it link to the May 23rd MLive post. 

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Short URL: http://www.a2politico.com/?p=3653

8 Comments for “The Politics of Economic Development: Let’s End Taxpayer Support of Crony Capitalism & Chart A Better Course”

  1. “Harbor Shores HV Construction – The project will redevelop approximately 13 acres of property as part of the larger Harbor Shores project in Benton Harbor. It will include approximately 200 condominiums and townhouses and 34,000 square feet of commercial and retail space. Also included in the project is a portion of the 12-mile trailway system with public access to a river walk, marina and commercial areas. Based on the MEDC’s recommendation, the MEGA board today approved a state brownfield tax credit valued at $10 million to support the project, which will generate $95.8 in capital investment and create 20 jobs.

    Harbor Shores BHBT Land Development – The project will construct new residential condominiums as part of the larger Harbor Shores project in Benton Harbor. Based on the MEDC’s recommendation, the MEGA board today approved a state brownfield tax credit valued at $2.6 million to support the project, which will generate $27 million in capital investment and create 25 jobs.”

    http://www.michigan.gov/gov/0,1607,7-168–227979–,00.html

    This is one of the most egregious examples of public money spent on gratuitous private development. This project also includes a Jack Nicklaus golf course. Not mentioned is the value of the land—Lake Michigan shoreline. “Donated” by the poorest city in Michigan—Benton Harbor. The state of Michigan facilitated the take over of part of Jean Klock Park—Benton Harbor’s lakefront public park. In return, the citizens of Benton Harbor get jobs—the MEDC brags about 45 jobs and of course there will be other jobs to come—caddies, golf course maintenance workers, club house service employment. I believe the state also gave this development money for “job training”. We wouldn’t want those links to be gouged by unprofessional mowing practices.

    The Harbor Shores project: http://www.harborshoresresort.com/golf/index.cfm

  2. #6 AnnArbor.com did indeed prove today that a paper can provide worse political coverage than the old Ann Arbor News. Hieftje lies and scams his way through ten years without comment from the local rag, and the minute someone asks tough questions, out come the baseball knives. I have a feeling, though, Lesko might just be the kind of candidate who’s gooing to take a gun to this knife fight. I look forward to watching the powers that be fall. Support is mounting for Lesko because she’s a great candidate. Her facts address some important issues: employee pay, spending, the sneaky destruction of our police and fire services to get some bucks to spend on that ugly city hall. These guys are going down in flames finally.

  3. Robert C. Smith

    I saw the piece on AnnArbor.com today. Do you think this was retaliation for your questions aimed at Laurel Champion? It’s no wonder Bomey’s piece didn’t mention Spark, he would have had to mention Champion is on the Board. You’re doing a great job, and AnnArbor.com just proved that a paper can provide worse political coverage than the Ann Arbor News.

  4. GREAT post!!!!!! Rapundalo is going to have a fit if there is a move to cut off money to the LDFA. I look forward to seeing it. There’s a giant web of connection between Rapundalo, MichBio, LDFA, SPARK and MEDC. Calling this connection crony capitalism doesn’t begin to do justice to the level of cronyism that’s been reached with this thing. There’s no reason to give money from the city to the LDFA. Get rid of the LDFA TIF and let’s see how long SPARK lasts. I’m betting we’ll see a tremendous fight before this much needed change is made.

  5. Thanks very much for this thoughtful post that gives us some good insight into what you’d do, if elected. I think your desire to focus economic development support on existing businesses is exactly what Ann Arbor needs. It’s as if we take the businesses that have been stalwart anchors downtown for granted. I’m not at all sure AnnArbor.com skips critical coverage of Spark because VP Champion now sits on the board as treasurer. I believe she has been on that board for several years. The Ann Arbor News was equally neglectful in its coverage of Spark. What amazes me is that the local press don’t connect Rick Snyder with the MEDC and Ann Arbor Spark. He is neck deep in the MEDC/Spark messes he helped create. I noticed when reading the press release linked to that the mayor and Leigh Greden were both named to Spark boards. If this isn’t reason enough to extricate the city from any financial relationship with Spark, nothing is. Leigh Greden is bad news, IMHO.

  6. WDC you are right that the Dev Council predates AASpark, but I believe that Spark was created when the MEDC created the so-called smart zone. In essence Spark was the creation of the MEDC through the smart zone. If I’m mistaken, I apologize in advance, but I do really believe this was the sequence of events. This was a wonderful piece that once again connects the dots. Though I can understand perhaps why Ms. Champion sits on the Spark Board, it is clear that she has a professional conflict. I read the MLive.com piece linked to and, indeed, all mention of the money diverted to Ann Arbor was edited out. I had hopes AnnArbor.com would be more reliable than the old Ann Arbor News (sigh).

  7. money&buildings

    Great post, Ms. Lesko. It’s more than refreshing to read excellent
    writing exposing the truth. Sad that annarbor.com drops the ball
    regarding the huge issue of misuse of tax money. And lots of it.
    Cronyism lives, to the detriment of all of us.

  8. Great article. You are incorrect on one minor point. Ann Arbor SPARK is not a creation of the MEDC, if anything it is the opposite. Before it was AASPARK, there was the old Washtenaw Development Council – which, I believe, actually predates the creation of the MEDC by a good bit. The county was in the economic development business (through a non-profit organization, before the state ever decided to muscle in……

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