State Corporate Welfare Agency Picks Winners That Turn Out To Be Losers

Program officials subsidize Cherry Growers, Inc., company goes bankrupt

This morning the Michigan Strategic Fund board hosts its monthly meeting to discuss new and old corporate handouts and very likely approve deals to subsidize more corporations with taxpayer dollars. Its use of the Michigan Business Development Program is a case in point. Mackinac Center research shows this subsidy program to be ineffective, and it should be closed.

The MBDP — which is run by the Michigan Strategic Fund with help from the Michigan Economic Development Corporation — gives cash subsidies, loans and other help to businesses it thinks are real winners. From early 2012 through September 2016, the state approved — by my count — 319 deals with an incentive value of more than $300 million, though only a little more than half has been disbursed.

One of those payouts was worth $2.5 million and went to Cherry Growers, Inc. of Grawn, near Traverse City. In 2012, the MEDC recommended that Cherry Growers receive the grant for adding 72 new jobs or more. The grant was to be repaid through "profit-participation." The MEDC projected at the time that these new jobs and related investments would yield a 3-to-1 return on the state’s investment.

Michael Finney, then president and CEO of the MEDC, used a press release to announce a deal with Cherry Growers as well as another company. It read, “The expansion of these companies further exemplifies Michigan’s improving economy and its strategy to help companies flourish and grow.” But the “winner” picked by the MEDC has since closed and is in liquidation proceedings. (As an aside, the other MBDP grant winner, in the words of one official, later “withdrew the request for the grant.”)

Cherry Growers filed for bankruptcy protection in late 2017, and has since closed and begun a liquidation process. According to the Traverse City Record Eagle, some 80 employees were let go. The sale of company assets will help compensate creditors, but how much of anything will the state claw back?

Remarkably, the MBDP subsidies were not the only taxpayer dollars at risk. As part of its deal with the state, Cherry Growers was also approved for a tax abatement by Green Lake Township. In addition, Cherry Growers has participated in a different (loan) program with the state — also in 2012 — that may further expose taxpayers to losses.

The Mackinac Center has analyzed the MBDP’s performance — not just one company — from 2012 through 2016 and finds it to be a big failure as measured by job creation.

By our count, one-third of the program’s project approvals have been or are in some stage of default or have been dismissed from the program. Some failures may be temporary and due to trivialities, such as an inability to locate the right building for the project. Others are not, however, and it appears the state is willing to amend many original agreements and lower performance thresholds.

The study also includes a statistical analysis of the program with data from the state and United States Census Bureau. We find that for every $500,000 in disbursements from the state, there is a loss of some 600 jobs in the average county hosting MBDP projects.

But the official economic development bureaucracies tell the Legislature and the state otherwise. With each deal, the MEDC or MSF prepare a forecast of how valuable their subsidy or loan will be to the state. They do so using a software package known as “REMI.” The user inputs expected performance data and the software attempts to predict detailed economic and fiscal impacts. The problem is the output may, at best, be only as good as the inputs.

In the case of Cherry Growers, the model was fed assumptions through 2022. That raises a question: Why do state officials think they can predict the economic performance of one company 10 years out when they can’t do so successfully just one month, one year or five years out?

By August 2012,  a large cherry crop failure was national news. The apple crop was bad too. Yet this is just one month after MEDC jobs czars declared Cherry Growers a big winner with its grant. It was bankrupt by 2017 due in part to that bad crop.

So, we are left with the following irony. The state’s REMI software model can’t project the future because the people using it can’t do so either. This is not the first time state officials predicted great things from a subsidized company — and with the help of REMI — that went belly up not long afterward.

It must be hard to see the future when you have egg (or in this case, fruit) on your face. The state should stop trying. The market has been creating jobs and wealth long before Lansing politicians ever thought it a good idea to take everyone’s money and give it to their favored few.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.