Report: Many Subsidy Recipients Didn’t Produce Jobs

The Star Tribune found that state and local subsidies given to businesses often fail to create the jobs that are promised-but officials contend that not giving them out would put Minnesota at a disadvantage given that other states do offer such incentives.

More than 650 deals gave companies state or local job-creation subsidies between 2004 and 2009-but 125 companies didn't fulfill their hiring commitments, according to a new report by the Star Tribune.

Approximately 17,300 jobs were created in Minnesota by companies that received state or local subsidies within that six-year window. But at least 46 companies that received tax breaks, low-interest loans, grants, or other benefits during that time produced no lasting jobs, according to the report.

Economists say the results demonstrate that government programs intended to jumpstart companies and jobs have limitations.

The report indicated that since the state launched the Job Opportunity Building Zone (JOBZ) program in 2004, 77 companies have been dropped from it for not meeting hiring goals. Those companies together secured at least $7 million in JOBZ state tax breaks and have since been forced to repay just $285,000, according to data that the Star Tribune obtained.

Meanwhile, 56 companies that collectively received $37 million in subsidies outside of the JOBZ program-in the form of loans, local tax abatements, land writedowns, and other benefits-together created 551 of the 2,111 jobs that they promised, translating to an investment of $66,725 per new job, according to the report. By contrast, similar deals that reached or exceeded their benchmarks yielded an investment of $14,676 for each job.

But the report indicates that the system for tracking subsidies beyond the JOBZ program isn't complete because half of the cities required to report on such subsidies don't. Additionally, the state's subsidy reporting requirement ends after two years if a company meets hiring goals, meaning that the state often isn't informed if workers are laid off after that period.

The report cited several companies that received investments and didn't fulfill the commitments they promised in exchange for the funding: /> ¥ Excelsior Energy promised 150 jobs and a new power plant on the Iron Range in exchange for $9.5 million in state loans in 2002 and 2004-but the plant hasn't yet been built. /> ¥ Faribault Woolen Mills promised to keep operating with the help of $575,000 in state and local loans-but the factory closed in 2009, leaving its 36 employees without jobs. /> ¥ Arctic Cat got a $500,000, no-interest state loan, tax breaks, and other subsidies in 2005 in order to build an all-terrain vehicle engine manufacturing plant in St. Cloud-and in exchange promised to employ 50 people; today, it employs 35. Under state rules, Arctic Cat is losing its Minnesota tax breaks four years earlier than what was planned, but local officials agreed in December to partly replace the lost state subsidies with city and county property tax abatements.

According to the Star Tribune, state officials have acknowledged that there's no overarching strategy when it comes to giving out subsidies-and most other states likewise don't have a policy on how to best dish out economic development dollars.

Mark Lofthus, director of business development for the Minnesota Department of Employment and Economic Development, told the Star Tribune that “historically, we have done pretty well having projects achieve their goals,” but he acknowledged that subsidy deals over the past couple of years have been hindered by the recession. Lofthus and other state officials said that most companies that didn't meet their job goals still added some jobs-and they argued that subsidy programs are needed to protect Minnesota against other states offering similar incentives.

Art Rolnick, an economist formerly with the Federal Reserve who's now a fellow at the Humphrey School of Public Affairs, has opposed such subsidies for a long time. He maintains that many companies would expand without them but admitted that Minnesota can't stop offering them unless other states do the same.

“There is something flawed in this whole game we are playing,” he told the Star Tribune.