Score one for accountability. Effectiveness of public investment? Well...
Even though a new report on JOBZ likely provoked some heartburn for supporters and raised serious questions about its cost-effectiveness, the report provides a useful look into the pitfalls that can afflict well-meaning economic development programs.
Last month, we outlined some concerns about the state's JOBZ program designed to aid distressed areas of Minnesota by providing state and local tax breaks to selected businesses. Today, the Office of the Legislative Auditor released its report. An online summary is available here, and a PDF of the full 129-page report is here.
The report says the JOBZ program has some value as an economic development tool and has attracted or kept some businesses in the state, but it has not been adequately focused or administered.
The amount of value is difficult to isolate precisely, the report says.
Weighing the effectiveness
JOBZ businesses received an estimated $46 million in tax reductions over the first three years of the program, averaging about $75,000 annually per business during the 2004-06 period. The actual size of tax reductions varies widely. About 4 percent of the JOBZ businesses accounted for 49 percent of the total reported tax reductions, while about 44 percent accounted for less than 2 percent of the total.
Although state reports have put the cost per job created at $5,000, or about $2,400 in recurring annual costs, the Legislative Auditor calculated the average annual cost per new job created by JOBZ at about $26,900 to $30,800. Under more generous assumptions, the average annual cost per job would be about $11,300 to $12,900. The average annual wage paid to JOBZ employees is $30,700.
Among the shortcomings highlighted:
- Subsidies have not been targeted at areas most in need of assistance; counties with greater economic needs have actually experienced lower job growth since JOBZ was introduced
- The value and number of jobs created have been overstated by as much as 20 percent
- Follow up on whether companies have met their obligations has been slow, and some have continued to receive benefits they did not qualify for
- There's no statewide review or budgetary constraints exercised over the local deals
- Businesses that have received tax breaks might otherwise have expanded without incentives
- The program has helped some businesses that compete with existing Minnesota businesses for the same Minnesota customers.
Accepting responsibility
Dan McElroy, commissioner of the Department of Employment and Economic Development (DEED) that administers JOBZ, acknowledged shortcomings and agreed with "the findings that significant changes need to be made to increase state oversight and accountability for program performance." For its part, the Department of Revenue expects to address many of the report's recommendations in its forthcoming tax bill.
While better oversight is a state agency responsibility, the report also makes clear that local government administration plays a major role in the program's lack of focus. Basically any community in Greater Minnesota can apply, and "local governments, not state agencies, determine what job growth and capital investment obligations companies must meet to participate in the program."
Local officials evaluate potential JOBZ companies primarily on their likely effect on the local economy and not on the broader impact on Greater Minnesota. Furthermore, local officials do not consider the full cost of providing JOBZ subsidies, since most of the tax breaks are funded by state government. Some cities find it hard to turn down requests from local businesses for JOBZ assistance and sometimes feel obligated to offer it in order to compete with other Minnesota communities.
[...]
JOBZ is not focused on those businesses likely to contribute to substantial economic growth in Greater Minnesota. In addition, nearly half of the businesses participating in JOBZ are obligated to hire 5 or fewer new full-time equivalent employees.
The audit found some agreements between the localities and participating companies obscure job creation obligations. "A few agreements set no deadlines for companies to meet their hiring commitments. Over 60 agreements do not require businesses to maintain the jobs they promise to create for as long as they are receiving tax breaks."
Now what?
There's plenty of ammunition to be found for partisan sniping, but it's important to note the report does not call JOBZ a total failure. JOBZ started with a decent intent; now we have solid information with which to judge it — and to improve it.
But if tax reductions delivered such sketchy results in better times, how much will they accomplish when Minnesota's economy is looking increasingly troubled? Lawmakers will have to weigh JOBZ's relative effectiveness in stimulating economic growth in the targeted regions — and decide whether tightening program criteria and holding businesses to their side of the bargain can reduce the cost per job to something less than an outright subsidy.
Finally, thanks to the Legislative Auditor's office for a tough and timely report, and to Gov. Pawlenty's administration for accepting criticism of a favorite program in the right spirit. The public benefits when government focuses on ensuring the accountability and effectiveness of public investment. And it makes us more willing to consider prosperity-creating ideas the next time we're asked.
— Charlie Quimby
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