Where are the jobs?

125 businesses got subsidies tied to job creation but didn't deliver.

Millions of dollars in subsidies to boost hiring among private employers throughout Minnesota have often come up short of jobs, a Star Tribune analysis has found.

More than 650 job-creation deals were put together from 2004 to 2009 that handed companies state and local tax breaks, low-interest loans, grants or other benefits. Of those, 125 companies didn't meet their hiring commitments as business stalled, early jobs gains were wiped out by recession or firms failed entirely.

At least 46 of the subsidized companies produced no lasting jobs.

Overall, 17,300 jobs were created in Minnesota by companies receiving an array of state or local subsidies during the six-year period, while the state's private sector employment declined by 77,200. The results show the limitations of government programs to spur business and jobs, economists say.

"Government is not a very good venture fund -- it is not very good at picking the winners," said Prof. Mark Partridge, an economist at Ohio State University who studies subsidies and reviewed the newspaper's findings.

Excelsior Energy, for example, promised 150 jobs and a new power plant on the Iron Range in return for $9.5 million in state loans in 2002 and 2004. The plant has yet to be built.

Faribault Woolen Mills promised to keep the state's oldest factory operating with the help of $575,000 in state and local loans. In 2009, the factory was closed, sending the last 36 employees out the door.

Hungry for jobs, especially in outstate communities, state and local officials have subsidized big publicly traded companies, tiny start-ups and midsized firms facing financial problems or even bankruptcy.

But evaluating the performance of such initiatives is tricky business. The newspaper analyzed business subsidy data collected by the state. But Minnesota does not track every subsidized firm beyond two or three years, making outcomes difficult to measure. It's impossible to track the cost of individual job-creation deals involving state tax breaks because they are treated as confidential tax return information.

State economic officials acknowledge that there's no overarching subsidy strategy. "There is no piece of paper that says, 'Here are your goals,'" said Mark Lofthus, director of business development for the state Department of Employment and Economic Development (DEED).

Legislators, local leaders and businesses all share their views with the agency, Lofthus said, and officials try to respond "to that sometimes-amorphous collection of thoughts about what we should do."

Like Minnesota, most states have no policy on how best to spend economic development dollars, said Greg LeRoy, executive director of Good Jobs First, a nonprofit group that tracks business subsidies.

"It's frighteningly common, in fact," he said. "And that is the big mission-drift problem with economic development. It often amounts to political pork being doled out on a geographic or political basis rather than on a strategic basis."

Expensive deal, no jobs

As jobs disappeared in the mining industry early in the last decade, a start-up electric company, Excelsior Energy, said it could put 150 people to work at a coal power plant on the Iron Range. Another 1,000 workers would be needed during construction.

Minnetonka-based Excelsior borrowed $9.5 million from the Iron Range Resources and Rehabilitation Board, a state development agency funded by mining taxes. It got another $32 million in grants from the federal government and a utility renewable energy fund to develop clean-coal gasification technology.

After nine years, nothing has been built.

"Lawyers, lobbyists and consultants have been the beneficiaries of this $9.5 million," said state Rep. Tom Anzelc, DFL-Balsam Township, whose district includes a preferred site for the proposed plant. He also serves on the Iron Range agency board, where he has been a lone vote against the plant.

The loan has been extended, but Anzelc said he doubts the agency will get all the money back. Company executives are not personally obligated to repay it.

Excelsior executives have contributed $134,000 since 2001 to political candidates and groups of both parties. Congress enacted one law to help the project. The Minnesota Legislature passed two bills benefiting the company and is considering a third.

Tony Sertich,, commissioner of the Iron Range development agency, had supported the loan a decade ago, but said recently that the deal might not pass the board today.

Excelsior executives said they remain committed to building a power plant and now are seeking legislation for a natural gas project that could be converted to coal gasification. "We think there will be customers for it," said Tom Micheletti, the company's co-president and CEO.

Price of failure

In outstate Minnesota, the state also has tried to boost hiring through the Job Opportunity Building Zone (JOBZ) program. Since the program's inception in 2004, 77 companies have been booted from JOBZ for not meeting hiring goals. Those unsuccessful firms received at least $7 million in JOBZ state tax breaks, but have been forced to repay just $285,000, according to "clawback" data obtained under the state public records law.

The newspaper analyzed data on subsidy deals that didn't involve JOBZ benefits. Those recipients also committed to specific hiring goals in return for loans, local tax abatements, land writedowns and other benefits, often a package of benefits.

The data showed that 56 companies received $37 million in such subsidies but created just 551 of the 2,111 jobs that they promised -- or $66,725 per new job. By comparison, the investment per job in similar deals that reached or exceeded their benchmarks was $14,676.

Yet the state tracking system for subsidy deals beyond JOBZ doesn't tell the whole story. Half the cities required to report on business subsidies don't. And the state reporting requirement on local subsidies ends after two years if a company meets hiring goals. If the workers are laid off later, the failure often goes unreported to the state.

Officials note that most loans are paid back, and loan losses in state-financed programs are comparable to those of private banks.

"Historically, we have done pretty well having projects achieve their goals," said Lofthus. "The last couple of years have been much more difficult."

He and other officials say subsidy deals have fared worse because of the recession. Most companies that didn't meet job goals still created some jobs, they said. And such programs are needed, they argue, to protect Minnesota against other states offering similar enticements.

Art Rolnick, an economist formerly with the Federal Reserve and now a senior fellow at the Humphrey School of Public Affairs, has long opposed such subsidies. He said many subsidized companies would have expanded without government incentives. But he concedes that the state couldn't end them unless other states did.

"There is something flawed in this whole game we are playing," he said.

Partridge, of Ohio State, said most economists do not think such programs work, but the word hasn't gotten out to political leaders. "They feel that if they give a lot of tax incentives, if anything good happens, they can take credit," he said. The problem, he said, "is that the public does not quite fully appreciate the cost."

In a recent report on state spending, six economists and the Minnesota Revenue Department urged the Legislature to enact a law disclosing beneficiaries of economic development tax credits, as is done in Oklahoma.

"What would be even better is to look at all the business subsidy programs together and figure what exactly is the goal and evaluate them for effectiveness," said Laura Kalambokidis, an associate professor of applied economics at the University of Minnesota who helped write the report.

Aid during bankruptcy

In McGregor, Minn., businessman Wayne Floe has been building his company for more than 25 years. He holds patents related to aluminum docks and snowmobile trailers. One sign of his success is that competitors have tried to pirate some of his inventions.

When he confronted the copycats of one patent, Floe said, all but one company stopped: Newmans Manufacturing Inc. of Royalton, Minn. Floe sued Newmans and won a $1.9 million federal court award in 2006. A jury concluded that Newmans "willfully" infringed on a Floe trailer component patent.

Instead of paying the damages, Newmans filed for bankruptcy. Then the owner turned to the government for help. Using a $250,000 state loan and other financing, businessman Joel Newman bought the company out of bankruptcy, shedding liabilities including the patent award. Under the loan terms, he agreed to save 33 jobs and create five new ones in the town of 966 people.

Newman said that if he hadn't put the company in bankruptcy and then bought it back, "it would have been lights out." The firm did stop using the patented component.

Royalton officials defend the deal as good for the community. State officials didn't look into the patent case or the effect the deal might have on a competing employer located 95 miles away. Floe said he understands that Royalton officials wanted to save jobs at Newmans and probably didn't care about his company and its struggles during the recession.

"I don't think we will ever see a dime," Floe said of the patent victory.

Lights out, no recourse

At Faribault Woolen Mills, the lights turned off despite repeated government loans to the long-struggling business.

When it folded in 2009, the mill was Minnesota's oldest continuously operating manufacturer, making wool blankets since the Civil War. It lost money for years.

State and local loans totaling $575,000 since 2001 helped for a time. Its last owners made an ill-fated expansion, buying a shuttered South Carolina textile mill in 2003 to produce cotton blankets -- a deal made possible by $1 million in government loans in that state. A nonprofit investor pumped millions more into the company.

Former CEO Michael Harris said the company had pending orders but no money when it failed, and he largely blames outside forces, including unfair foreign trade.

Others say the business was not well managed, especially the expansion, which more than doubled the number of employees. Dennis Melchert, former manufacturing supervisor at the Faribault mill, said the company grew too big, too fast. "If it had stayed just at Faribault, it probably would have been successful," he said.

The company defaulted on $1.25 million in government loans in two states. The city of Faribault has a $305,000 judgment against the former CEO.

When a deal partly succeeds

Not every unsuccessful subsidy deal is a total failure. But the government rarely claws back money when hiring falls short.

In 2005, Arctic Cat got a $500,000, no-interest state loan, tax breaks and other subsidies to build an all-terrain vehicle engine manufacturing plant in St. Cloud. The company promised to employ 50 people and, for a time, it did. Then the recession stalled the motor-sports industry, and employment dropped. Today the workforce is at 35 and climbing.

Under state rules, Arctic Cat is losing its state tax breaks four years earlier than planned. Yet local officials, anxious to keep the company, agreed in December to partly replace the lost state subsidies with city and county property tax abatements.

The revised deal offered benefits to Arctic Cat for its "relocation of the engineering division to St. Cloud" in a future phase, according to a city memo. That news didn't go over well in Thief River Falls, Minn., home of Arctic Cat's engineering division. Mike Moore, that city's economic development director, contacted the company for an explanation.

"Maybe there was a misunderstanding," said Paul Fisher, Arctic Cat vice president for manufacturing, in an interview with the Star Tribune. Arctic Cat, he said, never promised to move engineers from one city to another if more expansion occurs in St. Cloud.

Officials say the Arctic Cat incentives were a good deal, even if fewer jobs resulted right away.

"It was the first new engine plant in the United States in anybody's memory, and this is work they were bringing back from Japan," said Lofthus of DEED.

If Minnesota hadn't made the bid, Arctic Cat had another offer -- from Wisconsin.

dshaffer@startribune.com • 612-673-7090

howatt@startribune.com • 612-673-7192

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    Saturday March 26, 2011

    125 businesses got subsidies tied to job creation but didn't deliver.

  • Dennis Melchert was the director of design and corporate development for Faribault Woolen Mill Company.

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