State Reps call for greater transparency or elimination of program
The Michigan Economic Development Corp., the state of Michigan's promotional and corporate welfare arm, recently responded to questions posed to it by Michigan Capitol Confidential nearly six months ago.
For an article posted July 25, Capitol Confidential asked the agency four questions pertaining to problematic job creation numbers reported in April 2013 for A123 Systems, which was a lithium battery company. A123 Systems was approved for $100 million in MEGA (Michigan Economic Growth Authority) tax credits and another $41 million in tax breaks and subsidies from a separate program.
In June 2012, A123 Systems announced it was hiring 400 new employees at a rate of 100 per month. As of Sept. 30, 2012, at the conclusion of its hiring campaign, the company reported that it had 844 employees; three weeks later A123 Systems declared bankruptcy. Six months after that, in April 2013, the MEDC reported to the state legislature that the company had 844 employees, a number that was based on its Sept. 30, 2012 total.
When the MEDC responded in July to questions, it sent a link to one of its websites and said anything that couldn't be found on the website should be pursued through a Freedom of Information Act request.
About six weeks after the July 25 article, an Auditor General Performance Audit was issued that found that the MEDC had not been reporting on the actual jobs created by companies in some of its programs, nor did it verify company claims about their job creation.
On Jan. 13, Capitol Confidential submitted four questions to MEDC, three of which were the same as in the July 25 article and one new question. This time the MEDC responded.
Q: Could a company game the MEDC job count system by making sure its employment figures peak at just the right time during a reporting period?
"Generally, the contracts include periodic reporting requirements that include current job information," said Kathy Fagan, a communications specialist with the MEDC. "This allows the MSF (Michigan Strategic Fund) and the MEDC to see more than just a snapshot in time of the company's jobs numbers. In addition, the contracts generally include specific job creation or retention milestones that are validated prior to a disbursement or a credit issuance. It would be difficult for a company to game the system as you describe."
Q" If a company hired a certain number of employees temporarily and then showed the MEDC its short-term payroll numbers, and then laid off the employees, would the MEDC still count those employees in its official report?
"For the most part, the contracts require periodic reporting that includes current job numbers so we can see trends over time," Fagan said. "Any significant change in employment numbers would raise a red flag for us to investigate further."
Q: Is taking advantage of temporary peak employee counts something the MEDC recommends to the companies with which it is involved?
"Absolutely not," Fagan said.
Q: Companies like A123 Systems know at any given point in time how many employees they have on their payroll. These companies have received millions of dollars in taxpayer provided subsidies. Does the MEDC receive payroll reports from them on a monthly basis?
"The MEDC does not receive monthly payroll data. However, it does receive periodic progress reports from companies under the loan and grant incentives," Fagan said. "These progress reports generally contain information on current job numbers for the company. This allows the MEDC to understand current job conditions on an ongoing basis and not just at the point of disbursement of funds or credit issuance. In addition, the MEDC receives supporting information when a company submits a disbursement request or requests its tax credit certificate, and validates such information prior to releasing funds or issuing a credit certificate. For the job creation programs, this includes validation of jobs."
Rep. Jon Switalski, D-Warren, the ranking Democrat on the House Commerce Committee, said lawmakers should adopt stronger legislation to assure a greater degree of transparency at the MEDC.
"Clearly, as the Auditor General's report revealed, there is a significant lack of transparency at MEDC," Rep. Switalski said. "What we need is a full clawback provision to return 100 percent of the dollars spent on failed projects back to the taxpayers. We need to make sure these abuses of the 21st Century Jobs Fund can never happen to the taxpayers again."
Rep. Pat Somerville, R-New Boston, who also is on the House Commerce Committee, said he doesn't think Michigan should even have the MEDC.
"The A123 Systems situation not only serves to show that there was no transparency and no accountability, but it brings to light why we should never have had something like MEDC to begin with," Rep. Somerville said. "In the private sector, if someone was even thinking of investing their own money in a company, they would make sure they knew everything about what was happening with that company. They have to look at that way because they stand to lose their own money if the investment turns out to be a bad one. But when an investment is being made by government, the money involved comes from the taxpayers. Those making the investment, in a sense, don't really have much skin in the game. It's not their money that is at risk.
"Another problem with agencies like MEDC and government investing taxpayer dollars is that those who are connected with government are always favored," Rep. Somerville continued. "The little guy who doesn't have the right connections is pushed aside."