by Rob Smith

In an August 28, 2012 video interview, Michigan’s Republican governor told WaPo interviewer Nia-Malika Henderson that he and Presidential candidate Mitt Romney “have a lot of similarities.” Snyder urged Romney to “get a positive message out there.” Several times during the interview, Snyder talked about “job creation” and “a future for our kids.” He pitched Michigan as “the comeback state.” Michigan, he suggests, is a “great role model” for Washington, D.C., “which is a mess.”

Interestingly, Snyder told the WaPo “government doesn’t create jobs. We create an environment for jobs to flourish.” Someone needs to remind Snyder that the State of Michigan is spending tens of millions of dollars each year on 12 regional “job creation incubators,” such as Ann Arbor SPARK, which was most recently fingered for having spent $7.7 million in Michigan tax dollars in order to create only 79 jobs.

I wrote in a June 2012 post for A2Politico:

Over the past several years, Ann Arbor SPARK has siphoned millions of dollars away from the public schools through a TIF scam approved by Ann Arbor’s Mayor and City Council. First a financing authority was created (the local LDFA), then the LDFA is funded through tax-increment financing (TIF) similar to the way the Ann Arbor Downtown Development Authority is supported. A TIF district allows authorities like the LDFA and the DDA to skim the property taxes levied in the TIF district. The local LDFA then contracts with Ann Arbor SPARK for “business development services.”

Looks great on paper. Sounds good at a cocktail party. Jobs. Jobs. Jobs. In practice, the LDFA and Ann Arbor SPARK have done little but rob taxpayers, public schools and the District library of millions of dollars. SPARK’s job creation numbers are suspect because the company has never allowed an outside audit, but rather fills out its own report and hands that over to the LDFA.

Keeping those facts in mind, in August 2011 Daily Beast ranked Michigan #1 on a Hit List of the Best States for Job Growth. The online news mag. pointed out, “With job creation shaping up to be one of the core issues of the 2012 presidential race, Newsweek/Daily Beast finds the boom states for business.” So how did DB evaluate states? “To find the 20 best states in America for job growth we considered three factors. First, a new poll and index from Gallup, which asked more than 100,000 employed people whether their companies are expanding or contracting, and provides an index score from the difference between the two; second, the change in seasonally adjusted unemployment rates, from the annual average for 2010 to the annual average to date, with data from the U.S. Bureau of Labor Statistics; finally, each state’s 2010 average annual income, also with BLS data. Using z-scores (a measure of each state’s performance relative to the mean), each factor was equally weighted. The first two data sets examine opinions on job creation and raw unemployment numbers, while the third takes into account how well, in general, jobs in each state tend to pay. The result is a ranking of the states where, despite the recession, job growth is actually happening.”

Using these criteria, Michigan came out on top.

In May 2011, the right-leaning Mackinaw Center presented a somewhat different view of the same job creation data. Writer James Hohman linked the job creation numbers with the job loss numbers for an interesting interpretation. He writes:

Most news stories focus on the net job gains or losses because these are good indicators of whether an economy is improving or falling. There is a substantial lag to the release of gross job figures, however, making them less important to the day’s news. The monthly net job reports tend to show a state that is fairly stagnant — rarely adding or losing more than 2 percent of jobs in any year.

But the gross job creation and loss figures show the incredible amount of turnover in Michigan. In a given year, the state can add and lose 1 million jobs in gross, leaving no net gain. This means around one out of every four jobs is created and lost in the state every single year.

The latest release from the Bureau of Labor Statistics showed that there were 216,561 private-sector jobs created in the third quarter of 2010, a gain of 6.8 percent of total jobs, or an increase of one job for every 15 existing jobs. The state also lost 191,483 private-sector jobs, a loss of 6.0 percent of total jobs, or a loss of one job for every 17 existing jobs.

Hohman points out that most of the jobs being created in Michigan are not the result of incubators, such as SPARK, but “from expansions and contractions of existing businesses….The state’s economic development programs are targeted at select industries and specific companies. The key areas of job growth and loss, however, are deep and broad and across industries. Incentive programs that look to assist with hundreds and sometimes thousands of jobs simply cannot keep pace with an economy that turns over hundreds of thousands of jobs every quarter.”

Hohman’s analysis explains why while there is job creation in Michigan and unemployment is down from 14.2 percent to 9.4 percent, childhood poverty is still a huge problem. In January 2012, about 6 months after Daily Beast tagged Michigan the best state for job growth, the HuffPost reported that:

An annual report examining the living conditions for children across Michigan finds high poverty rates satewide, and even bleaker news for kids living in the city of Detroit. The most recent Kids Count in Michigan Data Book shows a 13 percent jump in the number of kids living in poverty in the city between 2005 and 2009. It also finds that more than 80 percent of children in Detroit Public Schools now qualify for free student lunches. Jane Zehnder-Merrell, the study’s project director at the Michigan League for Human Services, told HuffPost children in both Detroit and around the state are suffering the impacts of the long recession. ”The general situation [in Detroit] pretty much mirrors what’s happening in Michigan in terms of trends, [but] the level of economic distress in the city is much more acute than the state as a whole,” Zehnder-Merrell said.”

As of January 2012, 23.5 percent of all Michigan children lived below the official U.S. poverty threshold. The 2012 report from the Annie E. Casey foundation indicated that extreme childhood poverty in Michigan has doubled since 2005, and that Michigan’s childhood poverty rates are among the highest in the nation. In Washtenaw County, where Governor Snyder lives, the percentage of kids who qualified for a free or reduced price school lunch rose from from 10,225 in 2005 to 13,886 in 2010. Unemployed adults rose from 8,795 to 14,782 during the same period, and unemployment rose from 4.2 percent to 8.1 percent.

Basically, Snyder suggested that Mitt Romney focus on jobs and kids, kids and jobs. After all, it’s what Snyder focused on in 2010 when running for governor and won. Political pundits rarely agree on everything, but in discussing the 2012 presidential election there is consensus: if Mitt Romney takes Michigan, he will take the White House. There is one other point of agreement between political observers writing about the 2012 election and that is this: Michigan’s governor will be of little use to Romney as he tries to flip the state. Snyder, a GOP outsider, can offer little in the way of an established political base or machine. In fact, Snyder has his own worries. While he has seen improvement in his poll numbers over the last few months—voters are now almost evenly divided on him with 42 percent approving and 44 percent disapproving—he could find himself with a Democratic legislature to work with next year. Democrats lead the generic legislative ballot in the state by a 45/37 margin, numbers that could translate into them regaining control of the State House.

by P.D. Lesko

Groupon was founded and is headed by graduates from the University of Michigan. In January 2012, former AnnArbor.con business reporter Nathan Bomey wrote a glowing piece about Groupon, its founders and their connection to the local “job innovator” scene. The Groupon “success story” should be seen as more of a cautionary tale about how “job creation” is not really about creating jobs, but rather creating wealth for “innovators.” The local “job creation” scene includes the University of Michigan which, Ward 2 Council candidate Sally Hart Petersen repeatedly told voters, “spins off a new company every few weeks.” As A2Politico revealed in February 2012, when President Obama’s $2.4 billion dollars in stimulus money landed in Wayne County, the bulk of the money went to the county’s k-12 school districts—Detroit Public Schools got over $200,000,000 dollars. In Washtenaw County, when the Obama administration’s $767,000,000 in stimulus funds hit, the University of Michigan, rather than local K-12 school districts took in stimulus funds hand over fist.

The University of Michigan has developed another clever way to tap into the state’s tax coffers: Ann Arbor SPARK. Steve Forrest, modestly referred to on SPARK’s website as simply being associated with the University of Michigan, headed SPARK’s Executive Committee in 2011. Forrest is the University of Michigan’s Vice President for Research. According to a press release sent out when Forrest was elected to head SPARK’s Executive Committee, “Forrest was appointed U-M?s vice president for research in September 2005 and is a professor in the departments of physics, electrical engineering, and computer science. He personally holds more than 185 patents and has co-founded several private companies. He has been a driving force behind the university’s recent efforts to strengthen ties with business and industry.”

Many of the spin-off companies from the University of Michigan referred to by Sally Hart Petersen, get taxpayer-financed help, office space, business plan evals and money from Ann Arbor SPARK. Not only is the University of Michigan hitting up taxpayers directly for billions of dollars to fund research and development in-house, once the companies created to develop and market the patented products are spun off, Michigan taxpayers continue to foot the bill—while the University of Michigan collects the patent revenues.

Patents are huge business in higher education. In 1980, the U.S. Congress passed the Bayh-Dole Act, allowing universities to cash in on research conducted by campus brainiacs. For the smartest of the bunch, those royalty streams mean big money. According to a 2008 piece about the top 15 universities that rake in patent revenues published in Forbes, “The big brains behind these discoveries typically bag one-third of the licensing revenues, which can range from .05% to 15% of the revenues that licensees generate from the patent. The royalty rate depends on the industry and how much additional research is needed to commercialize the product.” The universities, on the other hand, rake in the lion’s share. n 2008, NYU spent $210 million on research related expenditures and took in $157 million dollars in research-related income for an investment yield of 75 percent.

That same year, the University of Michigan spent $875,000,000 on research-related expenditures and took in $25,000,000 in research-related income, for a yield akin to panning for gold in Grayling. Michigan officials spent $35 dollars for every $1 dollar earned in research-related revenue, for a 2.8 percent return. Michigan taxpayers could have deposited the money in a certificate of deposit and earned 4 percent that year. However, research and patents have turned into a gambling addiction for many large public American universities. There’s always the next hand of poker that could be the Big Win. In 2008, Northwestern spent $824,000,000 million on research related expenditures and raked in a whopping $368,000,000 in research-related income.

Then there are the tech and social media companies that the University of Michigan wants to help get off the ground, such as Groupon. U of M has set up the $5.5 million dollar Wolverine Venture Fund, advised by (among others) Brad Keywell, a U of M grad and one of the original three founders of Groupon. The fund focuses specifically on social media start-ups. The Groupon “success story” AnnArbor.com writer Nathan Bomey wrote about in January 2012 should be seen as more of an economic cautionary tale. However, the media (certainly not local media) and investors just weren’t listening. In June 2011 a TechCrunch.com piece guest writer named Rakesh Agrawal penned a piece titled, “Why Groupon is Poised for Collapse.” In that piece Agrawal writes: “Groupon is not an Internet marketing business so much as it is the equivalent of a loan sharking business. The $21,000 that the business in this example gets for running a Groupon is essentially a very, very expensive loan.  They get the cash up front, but pay for it with deep discounts over time.  (This post applies to Groupon operations in the United States and Canada; it’s different in other parts of the world.) In many cases, running a Groupon can be a terrible financial decision for merchants. Groupon’s financials also raise questions about its ongoing viability. Buying Groupon stock could be as bad a deal for investors as running a Groupon offer is for merchants.”

Bomey skips mention of the June 2011 TechCrunch piece in his glam coverage of Groupon. However, the TechCrunch article was a damning bit of brilliant analysis that hit before Groupon’s November 2011 IPO. While the company raised close to $1 billion in cash 10 months prior to the IPO. By the end of March 2011, it had only $209 million in cash. What happened to all that money? The company’s IPO filing spills the beans: $810 million was paid out to CEO Andrew Mason and some of his backers, including Eric Lefkofsky, whom AnnArbor.com’s Nathan Bomey holds up a shining example of Ann Arbor grown business done right. Lefkofsky and his wife Elizabeth made off with over $310,000,000 from the money-losing company through various limited liability corporations they set up as early as 2007.

Groupon was dogged by controversy even as Nathan Bomey’s coverage gushed.

First, there was the class-action lawsuit that slammed the company for violating a variety of federal gift card regulations. Groupon settled. Then, Groupon got hit with an insider trading lawsuit by new shareholders who were, understandably, irate that the stock, that debuted at just under $30 per share, plummeted in value as insiders made off with sacks of cash. The value of Groupon has fallen 80 percent (to under $5 dollars per share) since the IPO, and the bad press is almost unrelenting. The Sunday August 19, 2012 edition of the Wall Street Journal detailed the pull-out of several of Groupon’s major pre-IPO investors who are, it appears, getting while the getting is good. On that news, the company’s stock dropped another 2 percent.

There have been repeated problems with Groupon’s accounting and the company was forced to revise its earnings statements—unusual for newly-minted public companies. This slip-up resulted in an April 2012 piece published in Forbes magazine titled: “Groupon: Where were the auditors?” It’s ironic (or perhaps prophetic) that a company nurtured by Ann Arbor SPARK should have auditing irregularities. In 2008, an audit of SPARK’s finances found “accounting problems that led to overbilling and underbilling due to geographic ineligibility. It also found conflicts of interest during its 2008 fiscal year,” reported the Ann Arbor News. SPARK officials now refuse to release financials to the public, including audits. In late 2011 and early 2012, A2Politico filed Freedom of Information Act requests with all local and county government entities that funnel public money to SPARK, and none of the city and county governments had copies of Ann Arbor SPARK’s recent audit statements, budgets or 990 tax return forms.

If only Groupon had that luxury.

In a piece posted on August 20, 2012 at InvestorPlace.com, writer Jeff Reeves has this to say about Groupon: “The company continues to see growth headwinds and suffer from messy accounting and the general impression of mismanagement.”

Groupon, located in Chicago, can’t even catch a break from the Chicago Tribune. The day after the Wall Street Journal’s August 19th published that investors were pulling out of Groupon, the Trib published: “Why Groupon is over and Facebook and Twitter should follow.” In that piece, writer Peter Cohan doesn’t mince words: “In June 2011, I wrote that the SEC should spare investors the agony of losing their money when Groupon sold its shares to the public. The SEC did not listen to me (no surprise there); Groupon went public in November 2011, and that day’s Groupon stock buyers are now 82% poorer….But Groupon’s biggest victims are the small businesses that get suckered in to accepting Groupons. Restaurants lose money on them because consumers flood the restaurants, order very low priced meals, strain waiters and cooks, get lousy service, and never return. Examples abound. As I wrote in June 2011, a restaurant in Portland, Ore. believes its decision to work with Groupon was its worst business decision ever – costing it $8,000. And according to the New York Times, Muddy’s Coffeehouse –it serves coffee and granola – had to take out a loan to cover its Groupon losses.”

Groupon’s biggest victims? That Bernie Madoff-sized vitriol.

In the January 2012 AnnArbor.com interview, Brad Keywell wouldn’t talk about Groupon’s “corporate strategies.” It’s possible, based on the reporting of business writers at publications with higher editorial standards than AnnArbor.com, Keywell had no idea what Groupon’s corporate strategies were. In AnnArbor.com’s groupy Groupon interview, Keywell coyly refuses to say whether his company might open an office in Ann Arbor. He does, however, say “ Michigan’s economy is ripe for an entrepreneurial turnaround. If Michigan gets it right, it can become a home to innovators and risk-takers and a home that embraces those that are out to change the world and tries to provide a super friendly home for their journey.”

Yeah. Right. Innovators and risk-takers? Biznobabble.

The Groupon Three have overseen a very public and embarrassing social media industry belly flop. The IPO lured rubes into investing in a company whose business model (as TechCrunch writer Rakesh Agrawal pointed out in June 2011) analysts have called “fatally flawed”—a model that is a “bad deal” for most merchants. Just as Governor Snyder did when he went on a trade mission to Europe and pitched investment in a failing Michigan tech company that had already lost $412.3 million dollars, Keywell pitches Groupon as a “fabulous business model” overseen by a “spectacular” CEO. Did the Groupon Three learn this scam in Ann Arbor at the knees of the master boondogglers running Ann Arbor SPARK (starting with Governor Rick Snyder, who headed SPARK until 2008)?

Slate.com writer Farhad Manjoo posted “The thrilling (and welcome) demise of Groupon.” It is a nail pounded firmly into an e-coffin. Manjoo writes:

Now, after a spectacular debut on the Nasdaq, Groupon is a public company. This week, it reported its second-quarter earnings results. The numbers were dismal. They paint an unmistakable picture of the future of Groupon and similar sites: The daily deals industry is drying up. Groupon reported that its customer growth slowed substantially over the second quarter, the amount of money that each customer spends on the site tanked, and the company’s “guidance” for the current quarter suggests that things are going to get a lot worse.

The spin from Groupon’s executives was not very encouraging. In a conference call with analysts, the CEO Andrew Mason kept talking up Groupon Goods, a service in which Groupon sells discounted merchandise to customers — in other words, something completely different from the coupons that earned the firm its IPO.

The fact that even Groupon is no longer banking on Groupons is fantastic news for everyone, especially all of us who are sick of morning email deal spam. But the biggest beneficiaries of Groupon’s problems are the world’s small-business owners, people who will no longer be taken in by its terrible deals. This week, Groupon’s stock was down nearly 30 percent. Its demise may not be imminent, but it seems assured. Let’s all rejoice.

Of course, in June 2011 Rakesh Agrawal suggested how small business “victims” could get back at the Big Bad Groupon:

Hacking Groupon

How would you exploit an overpriced loan? Don’t pay it back.

Assume that you’re a business that is unscrupulous and you’re looking to make a quick buck. You could create a wildly generous deal that would sell like crazy. In about 30 days, you’ll have 2/3 of your share of the deal. Then you shut down operations.

It also works for businesses that are just having a tough time. As critical as I am of Groupon, the slam dunk case is to sign up with Groupon if you’re going bankrupt. I strongly encourage every business that is about to go under to call Groupon. (Don’t tell them Rocky sent you.) It makes total financial sense—as a Hail Mary play. If you’re lucky, the upfront cash will be enough to help you stay afloat. If not, well, you were already going out of business. It may be your best option.

If hacking Groupon strikes you as sleazy, think of the Groupon Three, Keywell, Mason and Lefkofsky, making tracks with close to $500,000,000 of the almost $1 billion in capital raised prior to their company’s IPO. Don ‘t forget to add in a sprinkling of alleged insider trading, and a dollop of documented poor accounting practices. Ask yourself this: since when do the definitions of “entrepreneurialism” and “innovation” include taking advantage of small business owners and loan-sharking? Since forever, if we’re taking about organized crime. Who knows? Perhaps Keywell was suggesting Michigan is ready to be pillaged by entrepreneurs whose business models are based on time-honored methods employed by crime syndicates? I hope not. If Michigan’s economy is ripe for an “entrepreneurial turnaround,” as Keywell suggests in his AnnArbor.com interview, local business leaders and local venture capital firms (including the University of Michigan’s Wolverine Venture Fund) have to do a better job sniffing out the obviously flawed and even predatory (as The Chicago Tribune suggests about Groupon) social media and tech business models. The chances of that, alas, are slim to none. It would be better to simply strip all of these Michigan “job creation” hucksters of access to public money. Then, they can engage in all the risk-taking they want—with their own millions. Guys like Michael Finney, former Ann Arbor SPARK CEO and now head of the Michigan Economic Development, would be out of his $250,000 per year job.

If that happens, let’s all rejoice.

I’m hoping Groupon modifies its business model (a larger split with participating businesses and more restrictions on users come immediately to mind) and pulls through. After all, the company employs around 10,000 people. However, I’m cashing in my Groupon deals ASAP. Analysts predict that Groupon’s stock will fall to $3 a share before summer is over. From there, it could be all downhill.

by Rob Smith

The 1 percent here in Ann Arbor are just different than us. They look at out-of-work folks and hungry children, homeless men and women tossed out of Camp Take Notice, struggling small businesses and cash-strapped school districts, and then light their clove cigarettes with other people’s $100 dollar bills. They feel good about the work they’re doing to “create jobs” here in Ann Arbor and Washtenaw County.

Whether you’re a Dem or a GOP supporter, jobs and the Michigan economy are probably close to the top of your list of what you’d like to see Michigan pols work on. Our state has lost hundreds of thousands of jobs over the past decade—most of them in the manufacturing field. While Ann Arbor’s unemployment rate has never rivaled that of, say, Detroit, the local economy is not particularly diversified, with the University of Michigan keeping the city afloat. The loss of Pfizer, still felt, is proof enough of that. Unfortunately, Michigan officials have spent, literally, boat loads of money to pick winners in the job creation field, and the taxpayer money giveaway is not creating jobs.

In Ann Arbor, the results are comical. The members of the SPARK Board, self-styled and mostly white captains of industry, real estate, music, publishing and even job creation, have never been able to get actual jobs created. First, these community leaders relied on cranking out annual reports that read like Fairy Tales.”Yo, Mofos, us Big Shots created thousands of jobs for your sorry unemployed Ph.D.ed asses. Here in Ann “We Be Better Than Detroit” Arbor we got us some J.O.B. S.” Cue up the news cameras.

The annual reports cranked out by Gov. Snyder and his boy Michael Finney were Pure Michigan Fiction.

When Gov. Rick Snyder was the head of SPARK, he claimed the group helped create and retain over 12,000 jobs in Washtenaw County over a two year period. That claim was a exploded by a feature in a Detroit newspaper that revealed the state’s “job creation engines” including SPARK, had helped create fewer than 800 jobs, total, in the two year period Snyder’s bogus claim of 12,000 was included in SPARK’s 2009 annual report. A2Politico reporting has helped push Ann Arbor SPARK into producing less fanciful job creation numbers, finally. Jobs created went from 12,000 in 2009 to 600 in 2011. There are many reasons to doubt even the 600 number.

Over the past several years, Ann Arbor SPARK has siphoned millions of dollars away from the public schools through a TIF scam approved by Ann Arbor’s Mayor and City Council. First a financing authority was created (the local LDFA), then the LDFA is funded through tax-increment financing (TIF) similar to the way the Ann Arbor Downtown Development Authority is supported. A TIF district allows authorities like the LDFA and the DDA to skim the property taxes levied in the TIF district. The local LDFA then contracts with Ann Arbor SPARK for “business development services.”

Looks great on paper. Sounds good at a cocktail party. Jobs. Jobs. Jobs. In practice, the LDFA and Ann Arbor SPARK have done little but rob taxpayers, public schools and the District library of millions of dollars. SPARK’s job creation numbers are suspect because the company has never allowed an outside audit, but rather fills out its own report and hands that over to the LDFA.

How’s that working out for ya, Ann Arbor?

Cap Con reporters Jarrett Skorup and Matthew Needham took a close look at the latest Michigan 21st Century Jobs Fund annual report. It was some interesting reading and should be on the summer list for everyone concerned with cuts made by the local school district. Here are the results of $8 million in taxpayer money going to SPARK, according to the Cap Con reporters:

A state fund intended to create 390 Michigan jobs has loaned $7.7 million to 35 companies and created 79 jobs — only 20 percent of the number initially promised.

Ann Arbor SPARK received an $8 million grant in 2006 to create the Michigan Pre-Seed Capital Fund, which used $7.7 million of that amount. The grant was awarded as part of the Competitive Edge Technology Grants and Loans program, which exists “to encourage the development of competitive edge technologies to create jobs in the state.”

Since 2006, Ann Arbor SPARK has created six figure paying jobs for their own employees, and with the $8 million in taxpayer money only created a fraction of the jobs promised. The problem is, obviously, a total lack of accountability. Politicians appointed to the SPARK Board of Directors, including the Mayor of Ann Arbor, the Mayor of Saline (now looking to head to Lansing and the State House) have done nothing to protect the interests of the taxpayers from the multi-million dollar scam that is Ann Arbor SPARK. Instead pols rub elbows with the head of the University of Michigan Musical Society, as well as the VP of AnnArbor.com, pat each other on the backs, and together piss away millions like there’s no tomorrow.

Cap Con reporters asked SPARK VP Skip Simms about the fact that only 20 percent of promised jobs had been created. Here was Simms’s biz-no-babble answer: ”We saw a need for early stage capital for start-up technology based companies, which the private sector wasn’t providing at the time.”

That’s biz speak for: “Hands in the air, Big Boy. This is a stick-up.”

Representative Jeff Irwin, a Democrat, served for a decade as a Washtenaw County Commissioner. In January 2011, he began his first term in the Michigan House of Representatives. In his regular column, House Calls, A2Politico will pose a single question to Representative Irwin and he will answer it. The questions will focus on his work in Lansing and, of course, his efforts to bring the “progressive agenda” to state government that he told voters in Ann Arbor he intended to work on during his time in office.

Representative Jeff Irwin answers: We’re shaping up for an interesting election year.  Michigan Republicans must contort and bend like a pretzel to convince voters both that Obama is hurting our economy and that Michigan Republicans are improving our economy.  Really, it’s an incredible sleight of hand that they are attempting, and I’m eager to see what millions of dollars can do to create this fictive reality.

I think they’ve got their hands full.

First, most voters know intuitively that the big trends in our economy have very little to do with state government. We know that trade policy, tax policy and infrastructure are only part of the equation, and most of that is handled at the federal level. Most of all, Michigan voters know that our Michigan economy is tied closely to the auto industry.

When the autos are booming, Michigan is booming. When the Detroit Three are faltering, Michigan struggles.

This is the crux of the GOP problem this year in states like Michigan and Ohio. President Obama came to the aid of the Detroit Three and by many estimates saved the domestic auto industry.  People in Michigan know that our recent economic recovery is closely tied to President Obama putting his Presidency on the line for the upper Midwest. People in Michigan also know that the Republicans — after spearheading the bank bailouts — turned their back on manufacturing and that Mitt Romney famously took the position that letting our domestic auto manufacturers go bankrupt would be the best course of action.

“Let Detroit Fail,” is a hard sell in and around the Motor City.

Second, the numbers do not support the Republican argument. The economic recovery in Michigan is unquestionably led by growth in manufacturing and specifically the auto sector. In fact, gains in auto manufacturing are greater than the net job gains in Michigan during the recovery. In other words, auto-related job growth exceeds total net growth, and our state unemployment figures would be far lower if we had not fired thousands of teachers, firefighters and police officers. If anything, Michigan’s economic recovery has been slowed by Republicans in Lansing.

I’m not surprised that my Republican colleagues are trying to once again convince voters that raising taxes on seniors and low income workers in order to fund a tax cut for the wealthiest residents is sound economic policy.

However, trickle down hasn’t worked for the middle class before and I’m hopeful that voters will resist the snake oil salesmen this time around.

A2P Notes: In Fall 2010, A123 Systems opened what the company touted as the “world’s largest lithium ion automotive battery manufacturing plant in North America” in Livonia, Michigan. According to a September 13, 2010 piece in the New York Times, the company was able to open the plant thanks to the fact that the move was “financed in part by a $249 million federal stimulus grant from the Energy Department.” A123’s federal grant in 2010 was augmented by $125.2 million in state incentives. Michigan wooed the company with a tax credit worth $25.2 million over 15 years and refundable battery cell production credits worth $100 million over four years. Former Governor Jennifer Granholm “predicted that they (A123) would create 62,000 jobs over the next decade,” the New York Times reported. The owner announced at the plant opening that A123 expected to create “thousands of jobs” in the greater Detroit area over the next few years. Thirteen months later, A123 was laying off Michigan employees.

On September 29, 2009, David Vieau sold 186,485 shares of A123 stock at a price of $13.50 per share. One year later, the federal government and the state of Michigan poured $374 million in grant money and tax credits into Vieau’s company. At the moment, A123 stock is valued at $1.70 per share. Why? Since January of 2009, A123 has lost $412.3 million dollars. However, over the same time period, David Vieau has sold over 250,000 shares of A123 stock and taken millions in profits from those sales. In fact, several insiders at the company have dumped significant chunks of stock and realized large profits from investment in a failing company, according to SEC records.

Now, Governor Rick Snyder is on a “trade mission” to Italy and Germany and incredibly he’s talking up A123. Kai Petainen writes about finance for Forbes and lives in Ann Arbor. He wonders why Michigan taxpayers (and the state’s Governor) are promoting a company that had insider selling, tax breaks that haven’t resulted in significant financial gains, lay-offs and dismal shareholder returns.

A while ago, I wrote an article titled “Insider Selling, Government Money and Layoffs at A123” at Forbes online and I spoke about the layoffs, the government money and the insider selling at A123 Systems (NASDAQ:AONE).  Back in 2010, AONE was trading at $20 and as the stock fell, the company insiders would sell shares in the company.  Ironically, according to the “A123 Code of Business Conduct and Ethics” that was posted on A123s webpage, it stated:

“Employees, officers and directors who have material non-public information about the Company or other companies, including our suppliers and customers, as a result of their relationship with the Company are prohibited by law and Company policy from trading in securities of the Company”

At its highest point, AONE would close at $25.77 on Oct. 2nd, 2009 (it would hit an intra-day high of $28.20 on Oct. 5th 2009).  As of the close of March 20th, 2012, AONE was trading at a closing price of $1.70 (it would hit an intra-day low of $1.53 on March 8th, 2012).  What was once a $25 stock had fallen to a price below $2.  Quite a number of shareholders would lose money as the stock would fall about -93% (from high to low) over the next few years.

Although that article would focus in on the insider selling, recently AONE released its annual report and so I wanted to see what they were saying about employees and the tax credits.  After all, my Forbes article was inspired by the article “A123 Systems layoffs high challenges for Michigan’s budding battery industry” by Nathan Borney at AnnArbor.com, and I wanted to revisit this idea of government money, insider selling and layoffs.

Let’s start by going back to the 2010 annual filing; it notes how the company has not met some conditions to receive some benefits:

“In May 2010, the Company entered into a Renaissance Zone Development agreement with the Michigan Strategic Fund and the property owners for the site leased by the Company in Romulus, Michigan. Under the terms of the agreement, the Company may receive exemptions, deductions, credits or other benefits if it invests a certain amount of capital and creates a certain number of jobs related to its facility in Romulus, Michigan. As of December 31, 2010, the Company has not yet met the conditions to be eligible to receive any of the Renaissance Zone benefits.”

As of the 2011 annual filing, A123 was still not meeting the conditions for the benefits:

“In May 2010, we entered into a Renaissance Zone Development agreement with the Michigan Strategic Fund and the property owners for the site we lease in Romulus, Michigan. We may receive exemptions, deductions, credits or other benefits if we invest a certain amount of capital and create a certain number of jobs related to the facility in Romulus, Michigan.  As of December 2011, we have not yet met all the conditions to be eligible to receive the Renaissance Zone benefits.’

In the 2010 annual report they spoke about how they wanted to hire some people:

“In the near term, we expect research, development and engineering expenses to increase in large part due to personnel-related expenses as we seek to hire additional employees, as well as contract-related expenses as we continue to invest in the development of our products.”

But, in the 2011 annual report they would change the wording as they removed the company’s desire to ‘seek to hire additional employees’.

“In the near term, we expect research, development and engineering expenses to increase modestly as we continue to invest in the development of our products.”

In 2010, A123 had 2,032 employees.  In 2011 they had 1,983 employees.  As they were laying-off employees, their revenues increased from $97.3 million in 2010, to $159.1 million in 2011.

From the 2010 report:

“We increased our number of full-time employees from 904 at January 1, 2008 to 2,032 at December 31, 2010, and our revenue increased from $68.5 million in 2008 to $97.3 million in 2010.”

From the 2011 report:

“We increased our number of full-time employees from 904 at January 1, 2008 to 1,983 at December 31, 2011, and our revenue increased from $68.5 million in 2008 to $159.1 million in 2011”

But, a lot of their employees are in Asia.  As stated by the annual report

“As a result of our foreign operations, we have significant expenses, assets and liabilities that are denominated in foreign currencies. A significant number of our employees are located in Asia.”

According to the annual report, there are also risks associated with conducting business in China:

“The legal regime protecting intellectual property rights in China is weak. Because the Chinese legal system in general and the intellectual property regime in particular, are relatively weak, it is often difficult to create and enforce intellectual property rights in China. Accordingly, we may not be able to effectively protect our intellectual property rights in China against business entities, individuals and current and former employees.  Enforcing agreements and laws in China is difficult and may be impossible because China does not have a comprehensive system of laws.”

The Pure Michigan tourism campaign runs through the MEDC.  Does AONE relate to the Michigan Economic Development Corporation?

Yes.  According to http://www.michiganadvantage.org/Michigan-Economic-Growth-Authority-MEGA/

“The Michigan Economic Development Corporation (MEDC) serves as staff to the MEGA Board and administers the activities and programs.”

What does the annual report say about MEGA (MEDC)?

“In October 2009, we entered into a High-Tech Credit agreement with the Michigan Economic Growth Authority, or MEGA, pursuant to which we are eligible for a 15-year tax credit, beginning with payments made for the 2011 fiscal year.”

Note, according to the 2010 report, “this credit has an estimated value of up to $25.3 million, depending on the number of jobs we create in Michigan.”

The report goes on to list another credit that they receive:

“In November 2009, we entered into a Cell Manufacturing Credit agreement with MEGA pursuant to which we are eligible for a credit equal to 50% of our capital investment expenses commencing January 2009, up to a maximum of $100 million over a four-year period related to the construction of our integrated battery cell manufacturing plant.  The tax credit proceeds shall not exceed $25 million per year beginning with the tax year of 2012.”

How many jobs does AONE need to create? “We are required to create 300 jobs no later than December 31, 2016 in order for the tax credit proceeds to be non-refundable.” So, they only need to create 300 jobs. But how many jobs need to stay in Michigan? “The tax credit is subject to a repayment provision in the event we relocate 51% or more of the 300 jobs outside of the State of Michigan within three years after the last year we received the tax credit.”

A123 Systems needs to keep 153 jobs in Michigan.

Has the insider selling continued after my Forbes article? Yes. On March 1st, Riley Gilbert sold 20,000 shares of AONE at $2.01. http://finance.yahoo.com/q/it?s=AONE+Insider+Transactions

Has the stock price fallen? Yes. When I wrote the article AONE was trading around $2.20.  Now it’s around $1.70.  That’s a drop of about -20 percent for shareholders.

As AONE has company layoffs, insider selling, and a limit of creating just 153 jobs in Michigan, does the MEDC promote AONE as a Michigan asset?

Yes.

At the moment MEDC officials are participating in a European Trade Delegation trip to Italy and they are promoting AONE.

The trip was featured in the article, ‘Photos Reveal Michigan “Trade Delegation to Europe “Exploring Growth Opportunities” – At Italian Art Museums’ by Rob Smith at A2Politico.  The article highlighted the museum tour photos that were posted on MEDC’s Facebook page from their trip to Italy.  Shortly after that article, the MEDC removed the museum photos and they kept the marketing-friendly photos. (This was a good lesson on Facebook and marketing for the MEDC).

A123 is promoted multiple times in this presentation slide by MEDC head Michael Finney. (The company’s logo, reproduced at left, is clearly in view multiple times in the “Michigan Assets” slide, below.) The following photos come from the MEDC’s Facebook page:

Pure Michigan in Italy:

Was the trip sponsored by taxpayers?

Although MEDC and Pure Michigan (as demonstrated by the sign above) would sponsor the event, according to MEDC Facebook page:

“No taxpayer dollars were used for this trip for either the Governor, his staff or MEDC personnel.”

So I need to ask this question:

Why should the Michigan EDC (also known as MEGA and Pure Michigan), promote a company that had insider selling, tax breaks, lay-offs and poor shareholder returns?