State Business Handout Program Wastes Another $2 million

Another state subsidy deal fails to deliver

The state’s Michigan Business Development Program, a creation of the Gov. Rick Snyder administration, was meant to replace the demonstrably failed Michigan Economic Growth Authority program and — presumably — have more success at creating jobs. The Legislature should shut down the MBDP in its entirety, but short of that, cut the program’s annual budget at least by the amount of taxpayer dollars it loses to bad decisions.

One such bad choice involved RNFL Acquisition LLC, which was located in Marquette County in the Upper Peninsula. This firm did business as “Michigan Renewable Carbon” and was a subsidiary of Biogenic Reagents. It was given $2 million in state subsidies through the MBDP and a “Renaissance Zone” designation, which exempted it from real and personal property taxes. State officials did this for a firm that they knew was “in a pre-revenue stage” and that, without the subsidy, the “project could be at risk.”

The state subsidy deal required RNFL to create 27 new jobs and comply with “revenue participation” terms, which mandated it to pay back to the state 112 percent of the subsidy — that, is, a profit. Michael Finney, then CEO of the Michigan Economic Development Corporation, said that several subsidy deals, including this one, “demonstrate growing momentum of real opportunities here[.]” The MEDC serves as an administrative arm of the Michigan Strategic Fund and recommends MBDP deals to the strategic fund’s board.

But it was not to be. RNFL Acquisition laid off its employees in June 2016, according to Development Specialist’s Inc., which was hired to help solve the company’s debt-related issues. The company pursued a state-level proceeding that is very similar to Chapter 7 federal bankruptcy law by becoming an “assignee for the benefit of creditors.” This arrangement, according to one description, is “an interesting alternative to a bankruptcy proceeding where the parties’ primary goal is designed to liquidate and distribute assets.”

A March 2018 report to the Legislature from the MSF and MEDC acknowledges that the company defaulted on its deal and that “the MSF is currently in discussion with the company regarding a repayment of funds.”

The discussions must not have gone well. The MEDC’s spokeswoman, Michelle Grinnell, said, via email, “We have not received any repayment, and at this point don’t expect that we will. The asset sale was not sufficient to cover all of the creditors, including MSF.” Despite this failure, the company deal still appeared on an MEDC webpage as late as June 7, 2018, under the heading “Pure Michigan’s Business Success Stories.” In summary, state taxpayers ponied up $2 million in job creation subsidies that didn’t create any jobs.

The choices made by the state’s economic development agencies frequently fail to work out as advertised. RNFL is just one company in the suite of bad decisions made by state officials, joining others such as Cherry Growers Inc. of Traverse City, Spiech Farms of Paw Paw and Suniva Inc. of Saginaw.

The Mackinac Center’s research has found that one-third of the Michigan Business Development Program deals approved between 2012 and 2016 either were or are in some stage of default or had been dismissed from the program outright. Failed deals, it seems, are a regular occurrence. Even those that don’t face a formal or quasi-bankruptcy may be a drag on the economy.

As part of our analysis, Mackinac Center scholars created a statistical model to isolate the impact of the program. We found that for every $500,000 in grant or loan subsidies, there was a corresponding loss of 600 jobs in the counties in which these projects were located. In other words, the program did more harm than good.

Biogenic is just another failed subsidy deal. State bureaucrats thought it was a good vehicle for risking taxpayer dollars, but it didn’t pan out. A larger review of deals approved between 2012 and 2016 show the whole program is ineffective and expensive.

The MBDP should be eliminated and its current appropriations used to fix roads, or cut taxes for everyone, not a favored few. Short of that, lawmakers may wish to consider reducing annual appropriations to the MBDP by the amount it loses in bad deals.