MEGA, the MEDC and the Loss of Sunshine

Executive Summary

In recent years, opinion leaders and government officials have called on government agencies to provide readily available and easily accessible information about the agencies' projects, operations and spending. This emphasis on government "transparency" has led to the publication of an increasing range of useful data on Michigan state government. One state agency, however, has bucked this trend: the Michigan Economic Growth Authority.

MEGA is a state "economic development" program run by a board of political appointees and authorized by state government to select businesses to receive credits against the Michigan business tax in exchange for creating or retaining company jobs that allegedly would not exist otherwise. MEGA was established in 1995, and in its early years, the program produced reasonably detailed data on the businesses selected for the tax credits, the jobs created, the total business incentives provided and so on.

In the past few years, however, the information contained in MEGA's various reports has become increasingly vague and incomplete. The total value of MEGA business-tax credits awarded each year to each project is now unavailable, for instance, while the value of any MEGA-related local government business incentives has often been left out of the reports. These and other omissions have made it increasingly difficult to measure MEGA's cost and effectiveness.

This failure in government transparency is ultimately the responsibility of the Michigan Economic Development Corp., a state-chartered entity charged with creating and retaining jobs in the state and with administering the MEGA program. The corporation is subject to government reporting requirements and the Freedom of Information Act.

It is therefore particularly troubling that obtaining explanations of MEGA's various project reports — including an annual report to the Michigan Legislature required by state statute — can require a detailed knowledge of the program's inner workings and weeks of e-mail exchanges and phone calls. A series of basic questions that an MEDC spokesperson encouraged the author to submit remain unanswered more than six weeks after her last e-mail and more than eight weeks since the questions were first submitted.

State legislators from both major parties have decried the MEDC's lack of transparency, and the Michigan Office of the Auditor General has criticized the agency in the past for significant inaccuracies in its reports and for its failure to verify key data. Unsurprisingly, at least one bill currently in the Michigan Legislature would require the MEDC to provide greater disclosure.

MEGA should be subject to a number of reporting mandates, such as regularly publishing for each MEGA deal the value of any local government incentives and any state education-tax abatements, state job-training subsidies and community development block grant infrastructure improvements. MEGA should also be required to publish each month the MEGA jobs tally by year by project for companies that have actually provided jobs and earned MEGA tax credits, and it should report each company's estimated cost disadvantage in locating in Michigan rather than a competing location. In addition, the Michigan Office of the Auditor General should provide annual audits of MEDC job claims, and the MEDC should be required to post its general ledger on the Web. (A full list of recommendations appears in "Michigan's Economic Performance.")

Tracking the progress of the MEDC and of MEGA, the state's highest-profile targeted "jobs program," is particularly important in light of Michigan's economic performance during the last decade. Michigan was ranked 16th among the 50 states in per-capita state GDP in 1999, the year the MEDC was formed and began to administer MEGA; since then, the state has tumbled to 41st. Against this backdrop, state policymakers will need to address MEGA's growing lack of transparency — or consider ending the program altogether.

The Trend Toward — and Away From — Transparency

The need for greater transparency in government programs has been widely recognized. President Barack Obama as a U.S. senator co-authored a law to place more federal spending data online. The Michigan Education Association, the state's largest school employee union, has called for better reports on the results of Michigan's economic development programs.[*] The Mackinac Center for Public Policy, a nonpartisan research and educational institute (and publisher of this Policy Brief), has initiated a "Show Michigan the Money" project that has encouraged scores of the state's municipalities, elected officials and local school districts to place their check registers online. The result of this consensus has been a general increase in the publication of detailed reports on governmental operations.

The trend toward transparent government appears to have been reversed, however, in the case of the Michigan Economic Growth Authority. MEGA is an "economic development" program in which the governor and the Legislature have empowered a board of political appointees to select businesses to receive tax credits against the Michigan business tax in exchange for creating or retaining jobs in their workplace that allegedly would not exist otherwise.[†] MEGA was established in 1995, and in its early years, the program produced reasonably detailed data on the businesses it selected, the jobs created, the incentives provided and so on. In the past few years, this data has become increasingly vague and difficult to obtain.[‡]

A similar loss of transparency appears to be occurring with the organization that oversees MEGA: the Michigan Economic Development Corp., a state-chartered entity charged with creating and retaining jobs in the state. Despite its quasi-private status, the MEDC is subject to government reporting requirements and the Freedom of Information Act. Still, it has become less forthcoming with information about the agency itself and about the high-profile Michigan Film Incentive subsidy, another economic development program under its supervision.

Measuring MEGA’s Efficacy

Although MEGA provides Michigan business-tax credits, the MEDC also arranges for companies receiving MEGA credits to benefit from other government incentives, such as job-training subsidies, infrastructure grants and local property tax abatements. Indeed, under its original authorizing statute, MEGA could provide Michigan business-tax credits only if the local government of the business's municipality provided a business incentive of its own.[*] This local government incentive is frequently the "plant rehabilitation and industrial development" property tax abatement permitted under Public Act 198 of 1974.[†]

Through 2008, the MEGA program agreed to provide, by its own estimates, $3.3 billion in state tax credits, all of which come with additional packages of other state and local incentives.[‡] The tax breaks are conditioned on beneficiaries creating or retaining certain numbers of jobs agreed to in advance.

Determining how many of those jobs have actually been created and the size of the credits granted is central to determining the program's success or failure. Specifically, a number of measures make sense in tracking the program's efficacy:

• The number of jobs created or retained for a MEGA project in a particular year and over the life of the agreement. MEGA enters into contracts with various businesses to provide them with Michigan business-tax credits in return for the creation or retention of jobs over an agreed-upon number of years. To gauge the success of a particular agreement, it is necessary to know just how many jobs a business has in fact created or retained during that period, since some businesses do produce the jobs that were originally projected. It is also helpful to know how many jobs may have been created in a particular year, since this can help ascertain the local effect of the MEGA project on jobs in an area.



• Total Michigan business-tax credits awarded by MEGA per project. Since many businesses that receive MEGA agreements do not produce all the jobs originally forecast, the businesses will receive only a portion — or none — of the business-tax credits originally envisioned during the years of the MEGA contract. The dollar value of the tax credits actually awarded to the company represents the amount of revenue forgone by the Michigan Treasury in return for the jobs allegedly created or retained. This, in turn, helps determine just how "costly" the jobs created or retained proved to the Michigan Treasury. The value of the forgone business-tax revenues is particularly important in instances when a company creates the jobs and collects the credits only to eliminate the jobs later, as happened when Kmart went bankrupt.

  Note that it is important to know the total tax credits awarded per project. A particular company, such as General Motors or Kmart, may receive a number of MEGA agreements to create or retain jobs at different facilities. To determine the efficacy of a particular agreement, it is necessary to know the jobs created and tax credits awarded for each project — not just to know the total jobs created and tax credits awarded for a given company.



• MEGA tax credits awarded by year by project. Knowing the tax credits awarded for each project in each year allows a measurement of not only the total tax credits that MEGA awards in that year, but also how much any given project contributes to that total number of credits. In some years, for example, one project might represent much of the value of the total tax credits awarded, meaning that the efficacy of the other agreements was not as high as the total MEGA credits might otherwise suggest. In any event, these are figures that should be provided if MEGA's operations are to remain transparent to the public.


• The value of any local property tax abatement or other incentive provided by local government. As mentioned above, the state law that created the MEGA program stipulated that MEGA agreements could not be completed unless the business's local government also provided a business incentive. One common local incentive was a property tax abatement; others include the paying of fees, work-training subsidies or road improvements. Knowing the size of any local tax abatement or other subsidy is essential to determining the cost of a MEGA project.

Graphic 1: Breakdown of MEGA Grant Requests
Top Reasons Why Companies Said They
Might Locate or Expand Elsewhere



Source: Mackinac Cdenter calculations based on collected MEGA briefing memoranda, 1995-2004.

• The value of any other state incentives provided to the business. MEGA deals often include other state subsidies and tax abatements for the business that is offered the MEGA business-tax credits. These state incentives may involve job training, state education-tax abatements and community development block grant infrastructure improvements. As with the other local government business incentives discussed above, these incentives add to the cost of the project.


• The business's purported cost disadvantage in locating in Michigan rather than a competing location in the absence of MEGA tax credits. A business may conclude that it faces a higher cost — perhaps because of higher taxes or higher wages, for instance — if it locates in Michigan rather than somewhere else. State law requires that the Michigan Economic Growth Authority consider this potential cost disadvantage before reaching a MEGA agreement with the business. This process serves as a safeguard, however weak, against frivolous MEGA agreements, and the resulting information is valuable in determining what factors are making it unattractive for businesses to locate in Michigan.

  For example, a review of statements of cost disadvantages in MEGA "briefing memoranda" (see Graphic 1) permitted a Mackinac Center analyst in 2006 to determine how frequently businesses cited higher taxation, higher labor costs, higher worker compensation costs and so on in claiming the need for offsetting tax credits before locating in Michigan.[1] These are often matter-of-fact statements like, "When comparing the Michigan and Tijuana locations, the company estimates that wage rates in Tijuana are significantly lower."[2] Such information can help state lawmakers determine which tax, regulatory and policy reforms might help Michigan's business climate.

In the past, the data described in the six bullet points above has been available to anyone willing to request and sift through a stack of documents produced by the Michigan Economic Development Corp., the organization that oversees MEGA. Specifically, the documents are:

• Briefing Memoranda. Each MEGA deal is summarized by the MEDC in a "briefing memorandum." These memoranda have typically provided for each MEGA project the purported cost to a business of locating in Michigan rather than elsewhere. The memoranda have also shown the value of any local property tax abatements, the value of any other local incentives[§] and the value of other Michigan business incentives apart from the Michigan business-tax credits provided under the MEGA deal. The latter figures are necessary to any calculation of the total value of the state and local business incentives offered in a particular MEGA project.


• "All MEGA Projects" Spreadsheet. Since the program's launch in 1995, the MEDC has tracked MEGA data with two sets of spreadsheets. The first, labeled the "All MEGA Projects" spreadsheet (see Graphic 3), listed each MEGA project recipient and effectively summarized many of the expected benefits of the MEGA deal in direct jobs, indirect jobs and estimated personal income generated by the project. The spreadsheet also provided costs to the state in MEGA business-tax credits.[¶] Indeed, before November 2001, the spreadsheet also included the value of other MEGA-related state business incentives, such as state education-tax abatements or job-training subsidies.


• The "MEGA Credits" Spreadsheet. MEGA has also issued this spreadsheet since the program's inception. It details "qualified new jobs" — in other words, the number of jobs that a business creates (or retains) and that fulfill the original MEGA project agreement — and the number of Michigan business-tax credits the firms actually earn as a result of that job creation (or retention). The data on this spreadsheet have typically permitted the calculation of the number of jobs created at a MEGA project, the value of the Michigan business-tax credits awarded by year by project, and the total value of Michigan business-tax credits awarded by project.


• MEGA Annual Reports to the Legislature. Part of the law authorizing MEGA[3] mandates that MEGA provide an annual report on its activities to the state Legislature. In past years, these annual reports were rich in detail and nuance. They contained a written executive summary, tables summarizing the details of each new MEGA agreement, and a project description for each deal (see Graphic 2 for an example). Also included in the report was a set of very important data about the local incentive contributions associated with each MEGA deal. Together with the briefing memoranda (see above), this report allowed a tally of the overall state and local contributions to a MEGA deal, not just the value of state-level incentives.


• MEGA Tax Credit Agreements. Each MEGA deal involves a binding but amendable agreement between MEGA and a representative of the business receiving the state tax credits. These documents provide important basic information about the mechanics of the agreement, such as the formula for calculating the MEGA credits to be awarded and the minimum number of jobs required to actually receive a MEGA tax credit of any size. The agreements also prove helpful in cross-checking information from other source documents.


• Economic Effects Report. This report involves technical economic modeling output and is therefore of less immediate use to the nonprofessional in determining the efficacy of a MEGA agreement. Nevertheless, the document does help provide some sense of the expected economic impact of a particular agreement. The MEDC generates the data in the report either by using REMI economic modeling software — a well-known proprietary program — or by hiring outside economists to use the software to calculate the anticipated economic impact of the jobs that each MEGA deal is expected to create or retain.[**]

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[*] This requirement was suspended for certain types of MEGA credits in 2004, and it was eliminated altogether in 2008.

[†] MCL § 207.559. In their study "Current Practices and Policy Recommendations concerning Public Act 198 Industrial Facilities Tax Abatements," Gary Sands of Wayne State University and Laura Reese of Michigan State University show that from 1980 through 2001, the popular local tax abatements so frequently used by local units — and employed for MEGA deals — "fail to show a clear, consistent relationship between abatement activity and change in economic health" [emphasis Sands and Reese]. (Gary Sands and Laura A. Reese, "Current Practices and Policy Recommendations Concerning Public Act 198 Industrial Facilities Tax Abatements," (Land Policy Institute, 2007), http://www.mml.org/advocacy/resources/lpi_pa198_policybrief.pdf, (accessed July 25, 2009).)

[‡] This tally of MEGA credits may differ from the MEDC's due to differences in methodology. For instance, if MEGA determined that a company failed to meet the requirements of its MEGA agreement, the MEDC historically zeroed out the dollar figures on its "All MEGA Projects" spreadsheet. In contrast, the $3.3 billion figure includes the tax credits pledged in these cases.

[§] Currently, the value of the local property tax abatement or other local subsidy is provided only in the briefing memorandum and in many cases is absent. Previously, this information was available in the briefing memoranda and the MEGA annual report. Ideally, the data provided would explicitly state that this value is not just the number stated in the original agreement, but the amount that was actually awarded. It would also show the amount provided on an annual basis, not just a total. Nevertheless, the data that MEGA provided in the past was helpful, and it was much better than the patchy and sporadic information provided now. See "The Recent Reduction of Information" below.

[¶] Forgone state taxes are generally considered a "cost" by state officials, and to the extent that they are monies that would have otherwise been collected — i.e., in those cases when the firm would have located in Michigan anyway — there is some basis for this view. That said, we would not concede that allowing people to keep more of their own money is somehow a "cost" to the state.

[**] It is worth noting that if forecasters' assumptions about a recipient firm's performance are off, so too are claims that depend on this, particularly "spin-off" (or "indirect") jobs. In an earlier Mackinac Center Study, the authors determined that through 2004, MEGA deals should have produced 127 fully employed facilities. The authors found that only 10 deals produced the number of jobs promised; inevitably, claims of associated spin-off jobs were even more wildly overstated. (See Michael D. LaFaive and Michael Hicks, "MEGA: A Retrospective Assessment," (Mackinac Center for Public Policy, 2005), 22.) In fact, following the compilation of these figures in 2005, several of the 10 "success stories" stumbled badly — Kmart being one of them.

The Recent Reduction of Information on MEGA

Information on MEGA has never been free or easy to obtain. A government agency can take up to 15 business days to respond to a request under Michigan's Freedom of Information Act and may charge the requester an amount equal to the cost of, in the case of the MEDC, the "lowest-paid MEDC staff capable of performing the tasks to process" the request.[4] At the MEDC, that amount typically exceeds $40 an hour.[5] In the past, however, information was eventually forthcoming.

This has changed for the worse. MEGA's data sources have become much less detailed and helpful in recent years, rendering many measures of MEGA's efficacy impossible to calculate. These changes and their effects on monitoring MEGA's progress are described in the sections that follow.

Graphic 2: Sample Project Description
From 1998 MEGA Annual Report

Source: Michigan Economic Growth Authority, 1998.

MEGA Summary Spreadsheets

The "All MEGA Projects" and "MEGA Credits" spreadsheets have generally been a trove of information on MEGA projects. After 2001, however, the MEDC truncated its "All MEGA Projects" spreadsheet to exclude three useful columns of information.

These columns provided the value (if any) of three additional state financial incentives sometimes offered as part of a MEGA deal (excluding the actual MEGA business-tax credits): the state's "job training commitment"; the state's "Community Development Block Grant" commitment; and the "State Ed Tax Amount," a state-level property tax abatement. Graphic 3 is the first sheet of a 2001 "All MEGA Projects" spreadsheet used between 1995 and 2001. Graphic 4 is the first sheet of a 2009 "All MEGA Projects" spreadsheet. Note that several columns of data in the first spreadsheet are missing in the second.

Graphic 3: 2001 “All MEGA Projects” Spreadsheet (Page One)

Source: Michigan Economic Development Corp., 2001.

Graphic 4: 2009 “All MEGA Projects” Spreadsheet (Page One)

Source: Michigan Economic Development Corp., 2009.

At the time, this loss of information was not critical, because other complete sources for the data existed. This is no longer the case now that some briefing memoranda fail to report information consistently and the MEGA annual reports to the Legislature include far less data (see "MEGA's Annual Reports").

Recent changes to the spreadsheets are even more troubling. Current MEGA reports involve older projects in which business-tax credits were granted against Michigan's previous business tax, the single business tax. Under the SBT, there were two ways businesses could earn business-tax credits in a MEGA deal: through jobs added or retained (an employment credit), or through new capital investment (a business-activity credit). The "MEGA Credits" spreadsheet formerly detailed the precise value for each year of a company's employment credit and business-activity credit, but for the past year, this information has been deemed "confidential" by the MEDC, and only a total business-tax credit is provided.[*]

This, too, occurred without warning after some 13 years of releasing the data to the public on request. This data was always vital to analysis of the MEGA program, because it allows an analyst to determine the precise tax revenue forgone as a result of the MEGA credit on a per-project basis.

For example, when Kmart filed for bankruptcy and ultimately moved its headquarters out of Michigan, it was possible to determine precisely what tax relief the firm enjoyed for creating jobs that were ultimately eliminated. Based on data from the discontinued "MEGA Credits" spreadsheet, it is clear that the company received five sets of MEGA credits worth more than $6 million in total over three years, and that after 2003, the company was no longer qualified for the credits.[6] The author has recently been unable to obtain such data from the MEDC, and this informational detail will no longer be available, according to MEDC documents obtained through the Michigan Freedom of Information Act. MEDC employees apparently consider these details confidential because of restrictions in the state Revenue Act.[7]

Moreover, after April 2008, compilation of the "MEGA Credits" sheets was abandoned by the MEDC in favor of a new computer database that omits some previously provided information (such as actual tax relief per company). In addition, the new reports are roughly 400 pages, while the old spreadsheet never exceeded 12 pages and was far more useful.[†]

It is difficult to see why the data previously provided on these spreadsheets was omitted when a new computer software program was adopted. There seems little justification for installing a new system that provides less data and fewer details.

MEGA’s Annual Reports to the Michigan Legislature

As mentioned earlier, this annual report to the Legislature used to be one of two sources of data concerning local government incentive contributions. This information made it possible to tally the overall government assistance to a MEGA project, not just the value of state-level incentives.

The report no longer provides this information, however, and the briefing memoranda (the other traditional source for such data) have become so much vaguer recently that it is nearly impossible to consistently and confidently measure the total costs of a MEGA deal.

The richly detailed 1998 edition of the annual report can be seen in its entirety at www.mackinac.org/10795. The summary spreadsheet from that 1998 report is reproduced in Graphic 5 to show the detail once provided by the MEDC in its MEGA annual reports. In contrast, the heart of the 2008 annual report is a limited two-page spreadsheet without narrative. Page One of the 2008 report is reproduced in Graphic 6.

Graphic 5: 1998 MEGA Annual Report Summary Spreadsheet

Source: Michigan Jobs Commission, 1998.

Graphic 6: Fiscal 2008 MEGA Annual Report (Page One)

Source: Michigan Economic Development Corp., Oct. 1, 2008.

The full reports are markedly different. The 1998 edition contains a narrative of the company's history and the MEGA deal; an executive summary of the report; the project location, including the city and county; the location of the company's headquarters; the expected total jobs (both direct and indirect) to be created over the life of the deal; the average weekly wage, including the benefit package value as percent of total; the capital investment expected; the estimated net positive state government revenue impact over the life of the MEGA project, showing both the estimated state revenue forgone and the estimated state revenue gained; the projected state personal income generated over the life of each MEGA deal; and the explicit value of the local government's contribution to the MEGA deal through various local government business incentives.

The nine-column 2008 annual report contains only the company name; the company location; the project city; the project county; the company's capital investment; the total years approved (of MEGA credits); the maximum credit authorized; the jobs to be created; and the jobs to be retained.

Note in particular that the "Jobs to be Created" column in the 2008 report does not explain if the figures refer only to workers directly employed by the company, or if the figures also include alleged "spin-off" jobs forecasted by the REMI model and detailed in the MEDC "economic effects" reports. (In contrast, the 2007 report was explicit, labeling the jobs column as "Jobs Impact/Direct Jobs.") I have patiently attempted to clarify the meaning of this "Jobs to be Created" column and acquire an explanation for missing data. Unfortunately, there has been no constructive response to this simple query.[*]

Making matters worse, the columns "of the annual report of the activities of the Michigan Economic Growth Authority to the Michigan Legislature" required by law have actually changed from fiscal 2007 to fiscal 2008, although they were published only six months apart.[†] For instance, the fiscal 2007 report provides the column "Revenue Forgone: (MEGA Costs)," while the fiscal 2008 edition does not have that column. Conversely, the fiscal 2008 report contains several columns that are not found in the 2007 report. For example, the 2008 report contains a column for "Maximum Credit Authorized," a term whose meaning is unclear. The 2008 report also includes a column for "Jobs to be Retained," a term whose meaning seems reasonably clear, but whose purpose is unclear, since this figure did not appear in the 2007 report.

Nor was the 2007 report a model of clarity. A reader cannot tell explicitly, for instance, whether the "Revenue Forgone" column in that report is referring to the amount of tax revenue forgone in fiscal 2007 alone, or to a total amount of tax revenue forgone over the life of the MEGA credits, which could be many years into the future. A close inspection suggests it is probably the latter, but if so, legislators should realize that MEGA is providing the same piece of information as "Estimated Credit Amount" in the "All MEGA Projects" spreadsheet, as "Revenue Forgone/(MEGA Cost)" in the fiscal 2007 annual report, and as "Maximum Credit Authorized" in the fiscal 2008 annual report. In other words, like other elements of the report, this column is inconsistent, unclear and unaccompanied by any explanation. In short, the key component of the annual report to the Michigan Legislature raises more questions than it answers.

The remainder of the annual report lists little more than the company name and top officers at the firms in question, something that wasn't included in the older reports. This new information is trivial in comparison to the information that has been lost.

A Summary of the Loss of Available MEGA Data

As noted in the preceding sections, nearly every major document furnishing important information about the MEGA program has become less detailed and less useful. Graphic 7 helps indicate what information is no longer available.

Graphic 7: Sources of MEGA Data, Past and Present

The first column of the graphic lists the information in essentially the same categories that appear in "Measuring MEGA's Efficacy" above. In Graphic 7, the columns "Previous source document" and "Current source document" refer, respectively, to where the information was originally located and to where the information is now located — if it is available at all.

Note that in several instances, the "current source" column indicates a particular piece of information is available only a certain percentage of the time (the percentage is calculated for MEGA briefing memoranda produced from July 2008 to December 2008). The percentages range from 8 percent, for local property tax abatements, to 73 percent, for other state business incentives other than MEGA's Michigan business-tax credits. All of these figures used to be 100 percent.

As the graphic makes readily apparent, much of the basic, necessary information about MEGA is now unavailable or no longer readily accessible.

A History of Murkiness at the MEDC

Concerns over the omissions and reductions of information at MEGA are heightened by the MEDC's past track record in providing accurate and timely information. 

Bipartisan and Nonpartisan Concerns

Criticism of the MEDC itself has been bipartisan. During the administration of Gov. John Engler, Democratic Party members expressed pointed concerns about the inability of the Legislature to provide proper oversight of the MEDC.

According to a February 1999 Gongwer News Service article concerning the Michigan Jobs Commission, the predecessor to the MEDC, then-state Sen. Alma Smith, D-Salem Township, complained about the transparency problem, saying, "I don't think the Legislature should have to FOIA a department or agency to find out how money is spent."[8] Smith — now a state representative — has remained a consistent critic of the MEDC. In 2009, when asked by the Michigan Information & Research Service what she would do if she were elected governor, she replied: "One of the early things I would do is reorganize the MEDC (Michigan Economic Development Corporation). I have a problem with the unlevel playing field we create from business to business in Michigan, where we create some winners and some losers."[9]

There have been other Democratic critics as well. In 2000, state Rep. Joseph Rivet, D-Bay City, echoed Rep. Smith's sentiments and argued that the MEDC should lose its state funding, telling the Lansing State Journal, "Every time we try to hold these guys at MEDC accountable to the taxpayers, they claim to be a private agency outside the realm of public scrutiny."[10] Rivet was particularly angered by a Lansing State Journal report that the MEDC had bought each of its employees three monogrammed shirts from an out-of-state vendor. The purchase was apparently made to "boost morale"[11] and market the MEDC.

After Gov. Jennifer Granholm was sworn into office, members of the GOP sought greater transparency from the MEDC, most notably state Rep. Jack Brandenburg of Harrison Township. A frequent critic of the MEDC, Rep. Brandenburg called for its outright elimination in 2007. He argued that the MEDC was ineffective, contrasting the state's poor economic performance with the corporation's supposed success. He also complained that the MEDC was top-heavy with management, calculating that it had one vice president for every 10 employees at the time.[12]

To make the MEDC more transparent, Brandenburg successfully inserted two mandates into state law in 2006: a requirement that the MEDC cooperate with the Michigan Office of the Auditor General on audits of jobs the corporation had claimed to have created or influenced, and a requirement that the MEDC report annually to the Legislature how many of its staff made more than $80,000 per year.[*]

Republican state Sen. Nancy Cassis of Novi has likewise sponsored several pieces of legislation that would require additional information from MEGA. Senate Bill 71 would make MEGA more transparent and appears to address some of the concerns expressed earlier. For example, a summary of the legislation outlined by the nonpartisan Senate Fiscal Agency indicates that Senate Bill 71 would:

• "Require MEGA to include additional information in its annual report to the Legislature.


• "Beginning October 1, 2009, require MEGA to report to the chairpersons of the Senate Appropriations and Finance Committees and the House Appropriations and Tax Policy Committees, and the directors of the Senate and House Fiscal Agencies.


• "Require the [Michigan Office of the] Auditor General to review MEGA's annual report to the Legislature and include comments with the report before MEGA could submit it."[13]

According to the SFA, Senate Bill 71 would also require the following in addition to the data that already must be included in the MEGA annual reports:

• "The amount of capital investment required and the number of jobs required to be created or retained for each authorized business to be eligible for the tax credits under the Act.


• "For each written agreement with each authorized business, the actual number of jobs created or retained, the total capital investment at that facility, and the total value of the tax credits received for that year and all previous years under the written agreement.


• "The total capital investment for the credit under new written agreements entered into under Section 8(5)."[14]

The legislation passed the state Senate Feb. 12, 2009, and was ultimately referred to the state House New Economy and Quality of Life Committee on Feb. 18.[15]

The state Office of the Auditor General, a nonpartisan government agency, has also expressed concerns about the job creation figures reported by the MEDC and its alter ego, the Michigan Strategic Fund. In 1993, the Michigan Strategic Fund was found by the OAG to have "overstated by 39 percent, the number of jobs created by the selected companies that received financial assistance from ... two programs [the MSF administered] in its 1991 annual report to the Legislature."[16]

Then, in August 2003, the OAG examined a job-training program administered by the MEDC. Although the program had been alleged to have created 635 jobs, the OAG found that total employment had actually decreased by 222. The OAG criticized the MEDC for not independently verifying jobs claims submitted to the MEDC by companies that had received job-training subsidies. These errors were discovered after a review of one small MEDC program.[17]

Dubious Claims and Reluctant Disclosure

The MEDC has not just filed inaccurate reports; it has also made questionable claims. For instance, in a November 2004 Op-Ed in Business Direct Weekly, former MEDC Chief Executive Officer Donald Jakeway asserted that the MEGA program had created more than 28,800 jobs.

The number was implausible given the MEDC's other published data, but obtaining an explanation for the discrepancy launched me on a months-long odyssey of requests for information.[18] Ultimately, a legislative subcommittee of the Michigan House felt moved to ask Jakeway to respond.

He eventually complied, and I was able to determine that the MEDC had produced Jakeway's 28,800 job figure by using an estimated REMI job multiplier out of context. For a detailed explanation of the problems with the jobs figure and my extended endeavors to procure information from the MEDC, see Pages 23-25 and Appendix B of the Mackinac Center Policy Study "MEGA: A Retrospective Assessment."[19]

Concerns and Recommendations

The five months it took to obtain the truth about Jakeway's claims made it difficult for policymakers and taxpayers to assess MEGA's real impact. Jakeway's flawed figures received public attention, while a discussion of the problems with those figures received little or none.

Indeed, this delay raises a key concern. If an agency finds that it can release optimistic but dubious claims that cannot be investigated without weeks of FOIA requests and phone calls, the agency will reap false public relations victories that may never be publicly exposed as hollow. In effect, there would be no penalty — and indeed, there would be an incentive — for the agency to make exaggerated claims and then drag its feet in answering information requests from policymakers, reporters and residents attempting to determine the truth.

As noted earlier, persistent delays have become a problem at MEGA. Some sense of the difficulty can be gleaned from the author's correspondence with the MEDC concerning the meaning of the phrase "Jobs to be Created" in MEGA's new spreadsheets. Parts of that correspondence are reproduced in "Appendix B: A Sample of Correspondence With the MEDC."

Concerns over transparency in the MEGA program involve more than an insistence on accepted norms of good government. Assessing the program's effectiveness, especially in light of some its less credible claims, has become increasingly important given the state's recent economic decline.

Michigan’s Economic Performance

For much of the new millennium, Michigan has been an economic laggard, while the national economy has expanded. From 2002 to 2007, Michigan's real state gross domestic product declined by 1.7 percent, while the average U.S. state's real gross domestic product expanded by 14.4 percent.[20]

Michigan was ranked 16th among the 50 states in per-capita state GDP in 1999,[21] the year the MEDC was formed; ironically, it has since tumbled to 41st.[22] During that time, the state has lost a staggering 728,100 jobs — though to be fair, many of these were lost in recent months, during the general national economic decline.[23]

Against this backdrop, the priorities of the MEDC have sometimes seemed as questionable as its approach. In 2002, the MEDC explicitly stated in a published brochure that its first goal that year was its own survival — specifically, to "Ensure the Continuity of the MEDC."[24] This goal effectively elevated the retention of MEDC jobs above the retention of jobs for state taxpayers.[*]

The possibility that the MEDC might pursue political goals, rather than economic gains, is one reason why good public policy requires that the MEDC become more transparent. Another is simply determining whether MEGA and other MEDC programs work.

These concerns lead to a number of policy recommendations.

1. MEGA should be required to do the following:


1. Restore to its "All MEGA Projects" spreadsheet (or any equivalent report) the three columns of incentive data that disappeared after 2001 — specifically, state education-tax credits, the value of any state job-training subsidies and community development block grant infrastructure improvements — and add a column for the value of any other state incentives associated with each MEGA deal.
   
   The recent loss of MEGA summary spreadsheet information increases the risk that MEDC and MEGA officials will not exercise care in handing out MEGA tax credits. With the current lack of transparency, MEGA officials face the perverse incentive of being able to publicize their successes and hide their failures. If a company receiving a MEGA credit should become successful, MEGA officials will be able to issue news releases about MEGA's economic benefits, but if the company or the plant should later close down, MEGA officials can make it difficult for anyone to determine what the state's treasury has forgone from tax credits granted to the firms.


2. Publish the value of local government incentives offered to each MEGA project for each year of its life, distinguishing local property tax abatements from other local government incentives.


3. Publish the restored spreadsheet and the local incentives on the MEDC Web site after each month's official MEGA meeting, providing easy access to the public, media and legislators.


4. Publish each month the MEGA jobs tally by year by project for companies that have actually provided jobs and earned MEGA tax credits (as opposed to simply promising jobs and signing conditional MEGA tax-credit contracts).


5. Publish briefing memoranda with project details that are in a consistent format, and ensure that the memoranda include both the value of all incentives offered by state and local governments and the company's quantified cost differential between Michigan and the best competing state.


6. Publish detailed annual reports to the Legislature, similar to those of the late 1990s. Specifically, the reports should include:


1. A narrative of the company history and the MEGA deal;


2. An executive summary of the report;


3. The project location (including the city and county);


4. The location of the company's headquarters;


5. The expected total jobs — distinguishing both direct and indirect — to be created over the life of the deal;


6. The average weekly wage, including the benefit package value as percent of total;


7. The capital investment expected;


8. The estimated net positive state government revenue impact over the life of the MEGA project, showing both the estimated state revenue forgone and the estimated state revenue gained;


9. The projected state personal income generated over the life of each MEGA deal; and


10. The explicit value of the local government's contribution to the MEGA deal through various local government business incentives.

A sample page from a 1998 MEGA annual report that provided such data can be found in Graphic 2.


7. Publish in each annual report a list of companies that formally applied for MEGA consideration but either withdrew or were rejected by the MEGA at any point in the application and approval process.
   This final point is vital for assessing the program. When signing a MEGA tax-credit agreement, company executives are explicitly stating that the MEGA credits are needed to address the cost disadvantages they face in expanding in, or moving to, Michigan. By surveying the ultimate expansion and location decisions of companies that were rejected by MEGA, it should be easier to determine the degree to which MEGA tax credits truly affect business calculations.


2. The Michigan Office of the Auditor General should provide annual audits of MEDC job claims. The OAG's findings, described above, on a small MEDC job-training program suggest a full-scale audit of MEGA, the state's highest-profile jobs program, is appropriate.


3. The MEDC should be required to publish its general ledger on the Web each year so that legislators and the public alike can get a more detailed understanding about where state and other MEDC monies flow.

Conclusion

The withheld MEGA information is critical. Without this data, it becomes increasingly difficult to determine whether MEGA actually stimulates economic growth and represents a worthwhile investment of state resources.

Such a lack of transparency cannot benefit the public; it can benefit only those who profit directly from the existence of the program, beginning with MEDC officials themselves. In this sense, MEGA's loss of transparency becomes an inversion of the principle that government exists to serve the people, not the other way around. As James Madison put it:

"A popular Government, without popular information, or the means of acquiring it, is but a Prologue to a Farce or a Tragedy; or, perhaps both. Knowledge will forever govern ignorance: And a people who mean to be their own Governors, must arm themselves with the power which knowledge gives."[25]

State policymakers serious about serving the public will need to address MEGA's growing lack of transparency — or consider ending the program altogether.

Appendix A: A New Mackinac Center Database on MEGA

In light of the growing secrecy surrounding the Michigan Economic Growth Authority, the Mackinac Center has posted on its Web site a public database on MEGA-related deals. The database, posted at https://www.mackinac.org/depts/fpi/mega.aspx, represents a convenient repository of original information on deals made and jobs promised by MEGA and MEGA recipients. Much of the information, secured from dozens of FOIA requests, is not readily available to the public or to state policymakers.

The data go back to April 1995 and it will be updated by Center staff on a regular basis. The database consists of the primary informational paperwork for each MEGA deal, including:

• Briefing memoranda (an MEDC summary of each deal);


• "Economic effects" reports (summaries of economic impact analyses made primarily by University of Michigan economists under contract with the state); and


• MEGA tax-credit agreements (the binding but amendable agreement between MEGA and each corporate or business recipient's representative).

Visteon as an Example

Here's an example of one way the database can be useful: Consider the announcements that Lear, Visteon and Metaldyne corporations have filed for bankruptcy. Reporters, legislators, bloggers and taxpayers can learn from the database that all three firms had been declared MEGA "winners" by the Authority's board and the MEDC. (General Motors itself has probably achieved MEGA's all-time "winner" status, having been offered a record 10 deals.)

From the database, users could also discover that failure to achieve job goals was not a new thing for these firms, and that MEGA officials erroneously predicted that the 2001 Visteon deal would result in 75 net new jobs by 2005[26] and 475 new jobs by 2008.[27] University of Michigan economists, under contract with the state to forecast the "spin-off" jobs associated with the deal, predicted that the economic activity surrounding this deal would result in 808 new jobs through 2016.[28]

See Graphic 8 for output from MEGA's "economic effects" report for Visteon. These figures provide a baseline for determining Visteon's success or failure after it received its MEGA deal.

Graphic 8: Sample “Economic Effects” Report (Visteon Corp.)

Source: Michigan Economic Development Corp., 2001.

In particular, look at the predictions of year-by-year job creation. We now know that in reality, each of these lines in the original report should have said "0." (Arguably, the numbers should even be negative, because the state spent millions for road improvements specifically benefitting the firm — money that could have been spent creating actual jobs elsewhere.)

Under the terms of MEGA agreements with firms, tax credits are delivered as rewards for actually creating promised jobs. Visteon never collected a single one of those tax credit rewards, because it never created any of the promised jobs. As shown in the MEDC summary "MEGA Credits" spreadsheet[29] and "MEGA Credits vs. Conversions — All Companies for all Years"[30] report, the record is clear, though the former spreadsheet is easier to read. We have posted a copy on the Center Web site as an example.

Despite the fact that Visteon claimed no credits, this MEGA deal wasn't "free" to taxpayers. As mentioned, part of the agreement included the MEDC using its authority to arrange up to $5 million in road improvement work at the new Visteon facility.[31]

Moreover, the MEGA statute originally mandated that local units of government make incentive contributions too. As part of the Visteon deal, Van Buren Township offered property tax relief worth up to $31.1 million over 12 years,[32] and Visteon was able to start claiming that relief immediately for a jobs deal that failed to materialize.[*] To date, Visteon has enjoyed more than $9.6 million[33] in local abatements resulting from the failed MEGA deal.

Of course, MEGA's poor performance in these cases has been influenced by the general decline in the automobile industry. Still, the job of MEGA and the MEDC is to assess the marketplace and determine which businesses to help in order to promote state economic growth. It hardly reflects well on the program that MEGA officials and state-hired economists, who sometimes provide MEGA forecasts stretching out 20 years, cannot envision MEGA firms filing for bankruptcy as little as 15 months after winning a MEGA deal, as occurred with Kmart.

The preceding suggests why a database like the one created by the Mackinac Center is desirable — and why government transparency on the MEGA program should remain a priority for policymakers.

Appendix B: A Sample of Correspondence With the MEDC

The e-mails below show correspondence between the author and an MEDC public relations officer concerning several questions the author had about recent MEGA reports. One of these questions involved the meaning of "Jobs to be Created" data (see the discussion under "MEGA's Annual Reports to the Michigan Legislature" in the main text above — particularly the first footnote). Although the final e-mail is dated June 16, no MEDC official has responded as of July 28.

From: LaFaive, Michael D.
Sent: Monday, June 01, 2009 4:29 PM
To: 'beckmanb1@michigan.org'
Subject: Questions
Importance: High

Trace Graham:

Are MEDC (including "Corporate") expenditures fed into the state's MAIN computer system? In 1999 the then spokesman James Tobin said they would be excluded from the system.

Does the MEDC need to run its contracts through the State Administrative Board for approval? That was not the case in 2000 and I have seen nothing to suggest a change mandating that they be run through the State Administrative Board.

All MEGA Projects Spreadsheet and MEGA Credits spreadsheet had been abandoned in April 2008 according to past correspondence with Trace Graham.

The fiscal 2008 annual report, published in October is almost identical to the All MEGA Projects Spreadsheet. Who is responsible for creating this spreadsheet and why would it be so hard to update this monthly for those request it? Can that be done for us? Only three columns are really missing when you compare it with the All MEGA Projects Spreadsheet.

On the annual report to the legislature regarding the MEGA program (see attached) there is a "jobs to be created" column, which is good. But it doesn't say whether those are direct, indirect, or both. Can you clarify what that represents please?

I have been informed that the per-company detail for the value of abatements received by company and by year are now considered confidential and that this order came from Treasury. Can you please tell me who gave this order and why, after 13 years such data must be held in confidence?

Why do the columns in the April 2008 and October 2008 annual reports to the legislature actually change? For instance, the last column in the April spreadsheet reads "Revenue Foregone: MEGA Costs" and the October edition does not have that column.

Moreover, is this EXPECTED revenue foregone or actual? I find it hard to believe that 100 percent of the deals that took place during the period. OR...

Does this report represent ONLY those MEGA deals that resulted in claimed credits? You will notice that the October 2008 doesn't have a column for foregone revenue.

Does the MEDC/MEGA maintain a document or documents that tracks the precise incentives offered up by local units of government? I used to pull them from annual reports and Briefing Memos but the numbers aren't in the annual reports anymore and the briefing memos  have become increasingly vague-perhaps that's on purpose.

Thank you for your time and attention in these matters.

Michael LaFaive

Director
Morey Fiscal Policy Initiative
Mackinac Center for Public Policy
Phone 989-631-0900
Fax 989-631-0964
E-mail: lafaive@mackinac.org
www.mackinac.org
www.michiganvotes.org

Endnotes

1  Michael D. LaFaive and James Hohman, "MEGA Grant Requests: What Companies Say," (Mackinac Center for Public Policy, 2006), (accessed July 24, 2009).

2  Mark Morante and Toni Brownfield, memorandum with Michigan Economic Growth Authority, January 16, 2007.

3  MCL § 207.810.

4  Adam Robach, Freedom of Information Act correspondence with James Hohman, July 22, 2009.

5  Ibid.

6  Trace Graham, Freedom of Information Act correspondence with James Hohman, April 3, 2008.

7   Karla Campbell, e-mail correspondence with Trace Graham and Mark Morante, February 13, 2009.

8  "Report: Tracking Jobs Commission Spending to Become More Difficult," Gongwer News Service, February 19, 1999.

9  "An Interview With Alma Wheeler Smith," Michigan Information & Research Service, July 2, 2009.

10  Paul Egan, "Democrats: MEDC Should Lose State Funds," Lansing State Journal, Feb. 12, 2000, 1A.

11  Ibid., 5A.

12  "Brandenburg: Big Cuts Possible for MEDC," Gongwer News Service, April 20, 2005.

13  Suzanne Lowe, "MEGA: Annual Report -- S.B. 71 (S-1) Summary as Passed by the Senate," ed. Michigan Senate Fiscal Agency (Michigan Senate Fiscal Agency, 2009), 1.

14  Lowe, "MEGA: Annual Report -- S.B. 71 (S-1) Summary as Passed by the Senate," 2.

15  "State of Michigan Journal of the House of Representatives: 95th Legislature, Regular Session of 2009,"  (2009), 167.

16  "Performance Audit of the Michigan Strategic Fund Oct. 1, 1988 Through Oct. 31, 1992,"  (Michigan Office of the Auditor General, 1993), ii.

17  "Performance Audit of Selected Training Related Programs: Michigan Economic Development Corporation,"  (Michigan Office of the Auditor General, 2003), 13.

18  LaFaive and Hicks, "MEGA: A Retrospective Assessment," 98-102.

19  Ibid., 23-25.

20  Author's calculations based on "Bureau of Economic Analysis Regional Economic Accounts: Gross Domestic Product by State," Bureau of Economic Analysis, http://www.bea.gov/regional/gsp/ (accessed July 1, 2009).

21  Ibid.

22  Ibid.

23  Author's calculations based on "State and Area Employment, Hours, and Earnings: Michigan (Statewide, Total Nonfarm, Seasonally Adjusted)," Bureau of Labor Statistics, http://data.bls.gov/PDQ/outside.jsp?survey=sm (accessed July 21, 2009).

24  Rick Haglund, "Will Agency Survive under New Governor?," The Grand Rapids Press, November 7, 2001.

25  James Madison, "Letter to W.T. Barry," in The Founders' Constitution (University of Chicago Press, 1822).

26  "Adopted Minutes," ed. Michigan Economic Growth Authority (2001).

27  George A. Fulton, Ph.D., Peter Nicolas, and Donald R. Grimes, "The Economic Effects on Michigan of the Visteon Corporation Location Decision,"  (University of Michigan, 2001).

28  Ibid.

29  Graham.

30  "MEGA Credits vs. Conversions - All Companies for all Years,"  (Michigan Economic Development Corporation, 2009).

31  Kathy Blake, MEDC senior vice president, business development, correspondence ("Briefing Memorandum - Visteon Corporation") with Michigan Economic Growth Authority, November 13, 2001.

32  Ibid.

33  Susan Ireland, e-mail correspondence with Michael D. LaFaive, June 1, 2009.