JOBZ program has major flaws, state auditor finds

The state's leading program to create rural jobs gives tax breaks where they aren't needed while overstating what it has accomplished and understating the cost, the legislative auditor reported Friday.

The auditor recommended better oversight and capping the program's size.

The Job Opportunity Building Zones (JOBZ) program is due to expire in 2015, but Gov. Tim Pawlenty has promoted it and wants to extend it for new entrants.

About 350 businesses have participated in the program since 2004, getting more than $50 million in tax exemptions of all types.

"Public money is being spent here, and it should be spent effectively," Legislative Auditor Jim Nobles told members of a House-Senate panel examining the program. "What's lacking here is any sense of prioritizing or strategy."

The report allowed that the program "has some value as an economic development tool" in attracting some out-of-state businesses to Minnesota and retaining other firms.

But mostly, the report detailed a program that doesn't target the distressed areas it was designed to help and forfeits millions of dollars in tax revenue by granting breaks to firms that admit they don't need them.

Auditors also said JOBZ is exempt from the accountability typically expected of government programs, in part because the Department of Employment and Economic Development (DEED) delegates control of it to local officials who don't have a political stake in spending state subsidies.

Administration reaction

Responding to the report, Pawlenty spokesman Brian McClung said the governor "is committed to using everything in our toolbox to grow jobs, and JOBZ can be a useful tool" in a troubled economy. "We ... look forward to working with the Legislature to strengthen JOBZ and make it more effective."

Added DEED Commissioner Dan McElroy: "We agree that more meaningful state-level review is required."

However, McElroy objected to the report's recommendation that the state cap the level of subsidies or number of new businesses entering the program. McElroy said DEED will work with cities and economic-development leaders to design a new system for awarding tax breaks.

DFL legislators seized on the report to repeat demands to overhaul or kill the program, which Pawlenty created. "I think Mr. Nobles was very blunt," said Rep. Rick Hansen, DFL-South St. Paul. "This was the governor's flagship economic program. Then it was kind of hands-off by the administration." He said some legislators "will say end it, some will say mend it."

DFL Sen. Tarryl Clark, the assistant majority leader from St. Cloud, where firms have received JOBZ breaks, said she favors trying to salvage the program. "There may be some ways we can put that accountability back in it."

The report said the administration failed to consider whether tax breaks for some firms could hurt other businesses. "The increase in employment at subsidized businesses could be offset by job cuts at their competitors," it said.

It also said the program "does not require businesses to demonstrate that they would have located elsewhere or not expanded without the ... tax breaks."

About 11 percent of the businesses told DEED that they would have made the same expansion at the same location without tax breaks. Another 8 percent said they would have made the same expansion elsewhere in outstate Minnesota without the breaks. An additional 50 percent said they would have expanded at a reduced level outstate without the breaks.

The report said DEED substantially overstates the number of jobs created by allowing businesses to report retained jobs twice. "DEED does not generally check the accuracy of the numbers," auditors said.

The report also disputed DEED's claim that the average annual cost of a new job created by JOBZ is about $5,000. The legislative auditor put the cost at $26,900 to $30,800, and the average annual wage paid to JOBZ employees at $30,700.

The report recommended 30 changes in the JOBZ program, several requiring changes in the law. The report said the Legislature should consider Pawlenty's proposal to extend the period of benefits for new applicants by at least 10 years, but only if the program caps the subsidies or the number of new businesses each year that can participate and if it adopts other recommendations in the report. The proposal would apply to firms that enter before the end of 2015.

The legislative auditor's report follows one last year by Douglas Petty, an economic development consultant, which made similar findings. "JOBZ appears primarily to attract business expansions to areas already poised for business growth, not the most distressed areas of the state," Petty wrote.