State Audit Questions MEDC Job Claims

In August, Michigan’s Auditor General released a performance audit of selected job-training programs funded through the Michigan Economic Development Corporation (MEDC). The MEDC is the semi-public agency charged with the task of helping "create" or keep jobs here in Michigan. Our organization, the Mackinac Center for Public Policy, has called the agency Michigan’s "department of corporate welfare and discriminatory tax policy." Among its activities is the distribution of grants to subsidize job training.

The audit showed that the MEDC handed out 1,350 Economic Development Job Training grants between October 1998 and July 2002, which together totaled some $120 million. The Auditor General attempted to review the job-creation performance of 68 out of the 493 grants, which have, as their stated goal, to increase employment throughout the state.

Grantees are required to "provide the MEDC with ongoing reports gauging compliance." Out of the 68 grants audited, only 12 of their recipients had completed the training and job-placement activities required as a condition of receiving the grant money. Of those, the Auditor General was able to examine records of only seven against the records of the Michigan Employment Service Agency (MESA), to see whether claims of increased employment were valid.

The original goal of these seven grantees was to increase employment by 775 workers, a goal that was revised downward by the MEDC, due to the downturn in the economy, to 458. The final report of these seven grantees stated that there had been a combined increase of 635 employees, beating the goal by 177.

Yet, when compared to the records of MESA, the Auditor General discovered that there was actually a net loss of 222 jobs at these seven firms.

The MEDC disagrees with the Auditor General’s recommendation that it also use MESA’s data to monitor grants, contending that policy-makers should instead rely on the agency’s own figures. But it is difficult to avoid the conclusion that, at best, the MEDC is not using all the data available for purposes of evaluating job creation claims. At worst, this incident bolsters the argument of those who say that nobody should accept MEDC’s job-creation claims at face value.

The MEDC issues a steady stream of press releases claiming that its economic handouts are responsible for 225 jobs created here, and 700 jobs created there. We believe that because of incidents such as the improprieties uncovered by the Auditor General’ report, these claims should be taken with a large grain of salt. News media, whose objectivity demands that they not be used as mouthpieces by self-interested government agencies, should be extremely wary of uncritically repeating these MEDC claims, whether they come directly from the agency, or from press releases issued by legislators to whom the agency has fed the information.

Of course, this isn’t the first time the MEDC’s employment-creation claims have come into question. In May of 1998 and again in August of 2000, the Michigan Economic Growth Authority (MEGA), an MEDC program, arranged for K-Mart to receive a total of $19 million in state and local incentives. For both projects combined, MEGA officials promised more than 1,470 new jobs for Michigan by the year 2019, 925 of which were to be created by the company directly by the year 2002.

But a funny thing happened on the way to economic nirvana: K-mart declared bankruptcy. This is what happens when government bureaucrats in Lansing think they can pick economic winners and losers and forecast the future economy. The state has forgone more than $6 million in single-business-tax revenue to K-mart since 1998 for jobs that no longer exist. In addition, the city of Troy provided K-Mart with approximately $3.2 million-worth of incentives in the form of landscaping, road improvements, and waived permit fees. These are financial incentives that clearly might have been put to better use elsewhere.

Neither is it the first time a state audit has raised questions about how job-training funds are used (or misused). In 1988, the Detroit News reported that state auditors found more than $400,000 in ’"questionable, unallowable and undocumented’ spending in a tax-funded job training program." The 1988 article did not say whether or not the state auditors recommended changes to guard against future problems.

What is clear, however, is that re-distributive programs such as this — either corporate or human welfare — are subject to abuse. Rather than continuing to invent and reinvent state job-training programs, maybe government should get out of these programs entirely and let people and businesses make job-training decisions based on their own calculus, their own funds, or those of charitable organizations. All of these parties have a much bigger stake in ensuring a positive economic outcome.

The Mackinac Center for Public Policy has been a frequent critic of the MEDC and the programs it oversees, and maintains a web module dedicated exclusively to its analyses of government economic development initiatives. It can be found on the World Wide Web at www.mackinac.org/depts/ecodevo/.

Note: Michael LaFaive is fiscal policy director and Jack McHugh is legislative analyst for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich.