In a scathing critique of what Gov. Tim Pawlenty has described as “the state’s marquee economic development program,” the nonpartisan Office of the Legislative Auditor cited JOBZ for lacking appropriate oversight, issuing unnecessary or ineffective subsidies, overstating its accomplishments and failing to target the distressed communities the program was designed to assist.
These findings, along with a list of 30 recommendations for changing the operation and oversight of the Job Opportunity Building Zones program, are contained in the auditor’s 109-page report. Legislative Auditor James Nobles and project manager John Yunker delivered the report and a verbal summary Friday at a Legislative Audit Commission hearing at the State Capitol. The full report is available here.
A prominent component of Pawlenty’s first successful campaign for governor in 2002, JOBZ was enacted by the 2003 Legislature, which, despite wrestling with a $4 billion deficit at the time, agreed to grant state and local tax breaks to qualified businesses that agreed to expand, start up or relocate in economically distressed zones of outstate Minnesota.
These breaks can include property, sales, corporate franchise and individual income taxes, plus a refundable jobs credit. Originally estimated to deprive the government of $9.3 million a year in foregone tax revenue, JOBZ has in fact led to $46 million in tax reductions from 2004 through 2006. The program is scheduled to conclude at the end of 2015, but Pawlenty and other supporters have already proposed extending it.
Put simply, the auditor’s report chronicles a JOBZ Program run amok. Among the findings:
• Despite the fact that 93 percent of the tax forgiveness is borne at the state level, local government officials make nearly all of the key decisions on which businesses qualify for the program. There is no cap on how many “business subsidy agreements” these local officials can negotiate. There is no review of these subsidy agreements by officials at the Minnesota Department of Employment and Economic Development.
• There is no formal mechanism within JOBZ for evaluating whether a subsidy is needed, and, if so, whether a more limited subsidy could achieve the same business expansion. There is no cost-benefit analysis on the impact of the subsidy, either statewide or upon neighboring communities. This is important because the auditor’s office found that some JOBZ businesses directly compete with other businesses in nearby towns yet enjoy an unfair tax advantage.
• Within the business subsidy agreement itself, there is no deadline for creating the promised jobs, and no requirement to maintain the jobs through the life of the tax forgiveness.
• The state’s monitoring of business compliance with these loosely written subsidy agreements is slow and ineffective, taking years for noncompliance to be detected. Businesses do not have to certify the results they report and there is no penalty, beyond repayment of the tax forgiveness, for failing to live up to the terms of the subsidy agreement.
• Using state unemployment tax data submitted by the firms benefiting from the program, the auditor’s office found that the increase in employment at JOBZ businesses was 20 to 30 percent lower than what DEED was reporting. In addition, the report claims that one-fifth of the businesses would have expanded just the same without the business subsidy, and half would have expanded less, but still expanded. And, the report notes, this doesn’t count the job losses that may occur at businesses in neighboring communities to the job zones.
• Although JOBZ was supposed to target economically distressed areas for business tax relief, need has not been a factor in designating JOBZ zones. “Some economically distressed areas have not benefited much from JOBZ,” Yunker said in his presentation, adding that, “Economic benefits could be greater if JOBZ were targeted to areas with higher unemployment rates.”
In a written response to the report and in testimony at Friday’s commission meeting, DEED Commissioner Dan McElroy agreed with most of the auditor’s recommendations. Specifically, he went along with recommendations for more meaningful review of the program at the state level, including better cost-benefit analysis of the subsidy agreement with respect to neighboring communities, and whether the existing business plan and proposed job expansion warrants the subsidy.
McElroy also agreed that a firmer and more detailed template for the subsidy agreement be implemented, along with tighter monitoring for noncompliance. But McElroy objected to a cap being placed on the amount of the JOBZ subsidies, writing that enforcing such limitations in a specific time period would be “unwieldy or create the potential that the necessary projects would not be served.”
“This was kind of the governor’s flagship development program. Thirty recommendations are a lot of amending. Is this program fixable?” Rep. Rick Hanson, DFL-St. Paul, who chaired Friday’s commission, asked McElroy.
“Very fixable,” McElroy replied.
But after the meeting, Nobles warned, “Those who strongly support this program need to heed this report. There have been a lot of claims that haven’t been supported by the facts.”