ISBN: 1-890624-87-X
SKU: S2009-06

The Michigan Economic Development Corporation: A Review and Analysis

August 31, 2009 | Facebook X Email Print

Contents

Appendix A: 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 Aug. 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

From: LaFaive, Michael D.
Sent: Thursday, June 11, 2009 3:30 PM
To: 'beckmanb1@michigan.org'
Subject: Questions
Importance: High

Bridgett,

Regarding the MEGA program: Does your new database system down there give you the ability to extract the value of local incentives offered by some local unit/agency as part of the overall MEGA deal in a report that I could request through FOIA? Typically, these incentives come in the form of property tax abatements, but not always. I've seen local incentives that included landscaping and golf members too. If it does not, is it tracked in a way that would allow me to obtain the data in some other format? For that matter, the same question applies to subjects such as the state's CDBG/RF commitment, any state education property tax relief and job training commitment.

You may recall that I had long been waiting for whatever new software was going to allegedly replace the "All MEGA Projects" and "MEGA Credits" spreadsheets used by MEDC/MEGA. In response to my requests I was sent a 300+ page report that contained a lot of data found in the "MEGA Credits" spreadsheet (but not all), and an even smaller percentage of what could be found in the "All MEGA Projects" spreadsheet.

I suspect you'll have to talk to your computer guys - Eric Hanna? - before you can get back to me.

I thought it might be easier to contact you or Eric directly for answer, rather than issue a FOIA. I'll call too, just to see if you need any clarification.

Michael LaFaive

From: LaFaive, Michael D.
Sent: Friday, June 12, 2009 12:15 PM
To: 'beckmanb1@michigan.org'
Subject: Return 1:30

Hi, Bridgett,

My voicemail to you said I'd be back at 1:00.

Actually, it has been extended to 1:30.

If you could call me after 1:30 I would appreciate it.

Thanks.

Michael LaFaive

From: Bridget Beckman [mailto:beckmanb1@michigan.org]
Sent: Friday, June 12, 2009 5:36 PM
To: LaFaive, Michael D.
Subject: RE: Return 1:30

Hi Mike,

We've had several similarly worded questions and requests come in multiple ports of entry recently from you/your staff and it's caused some confusion as to who's responding, whether they're currently in the FOIA queue or if they've already been handled. We don't want to waste your time nor duplicate efforts on our end, so we'll be sorting through these early next week, cross-checking for duplicate inquiries, reconciling with pending FOIA requests, etc. and then we'll get back with you.

Thanks.

Bridget

From: LaFaive, Michael D.
Sent: Tuesday, June 16, 2009 11:50 AM
To: 'beckmanb1@michigan.org'
Subject: Email

Bridget,

I received your Friday e-mail. Naturally, I am a bit disappointed, since my questions were submitted to you on June 1.

When might I expect a response this week based on your meeting? Today? Tomorrow?

The good news is that after months of being told that "All MEGA Projects" spreadsheet no longer exists, we learned yesterday that it is still maintained. That's good news for all of us.

Michael LaFaive

Appendix B: 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 Freedom of Information Act requests, is not readily available to the public or to state policymakers.

The data go back to April 1995, and the database 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 and 475 new jobs by 2008.[212] 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.[213]

See Graphic 15 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 15: Sample "Economic Effects" Report (Visteon Corp.)

Graphic 15: Sample

Source: Michigan Economic Development Corp.

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[214] and "MEGA Credits vs. Conversions - All Companies for all Years"[215] 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.[216]

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 $31.2 million over 12 years,[217] 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[218] 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 less than 17 months after winning a MEGA deal, as occurred with Kmart.

The preceding example 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.

[*] This was not the only MEGA agreement with which Visteon was associated. In 2004, MEGA offered a deal to Atlantic Automotive Components LLC, a company that was 70 percent owned by Visteon, according to MEDC documents. This firm too has been unable to collect on the employment tax credit it was offered.

[212] Kathy Blake, "Briefing Memo — Visteon Corporation," (Michigan Economic Growth Authority, 2001).

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

[214] "MEGA Credits Spreadsheet."

[215] "MEGA Credits vs. Conversions — All Companies for All Years."

[216] Blake, "Briefing Memo — Visteon Corporation."

[217] Ibid.

[218] Susan Ireland, township assessor, Van Buren Township, e-mail correspondence with Michael LaFaive, June 1, 2009.

Appendix C: Technical Appendix for Shift-Share Analysis

A shift-share analysis of a region's employment growth (or decline) breaks down the change in employment that is attributable to three different sources of growth. The three sources of growth (or decline) in employment are:

  • change in employment due to the growth of the overall economy of the state or nation (the growth of Michigan employment was used in our analysis);
  • change in employment due to the growth of the overall industry in the state relative to the growth of the overall economy of the state (also referred to as "industrial mix"); and
  • change in employment due to characteristics of the region or county (also referred to as "competitive share").[*]

Mathematically, this relationship is expressed by the identity:

click to enlarge

The second term on the right side of the equation is often referred to as the "industrial mix," while the final term on the right side of the equation is often referred to as the local area's "competitive share." This language is adopted in Graphic 16.

The impact of MEGA credits cannot be directly measured from this shift-share analysis. However, MEGA credits are meant to have a positive influence on an area's economy independent of overall trends in state employment or in the shift of the industrial mix in manufacturing. Consequently, MEGA credits in recent years should be strongly positively correlated with a local area's manufacturing employment growth. That can be tested statistically.

From 1995 through 2000, there were 107 MEGA deals, and the life of the credits ranged from five years to 20 years into the future. For the purpose of this analysis, only deals that resulted in the start of operations prior to 2001 were included. Hence, if a deal was approved by MEGA in 2000, but operations did not begin until 2003, that case was excluded from the study.

The shift-share analysis was performed for each of Michigan's counties from 2001 through 2007 using the state of Michigan as the region of comparison. The results of that analysis are presented below for manufacturing employment by county. The "Michigan's growth" column represents the change in employment or "jobs" from 2001 to 2007 attributable to Michigan's overall economy. The "industrial mix" column represents the change in jobs attributable to the growth (or decline, in this case) of statewide manufacturing. Finally, the "competitive share" column represents the change in the county's manufacturing jobs due to characteristics of that particular county.

Graphic 16: Shift-Share Analysis of Manufacturing Employment Changes From 2001 to 2007 With the State of Michigan as the Region of Comparison

Graphic 16: Shift-Share Analysis of Manufacturing Employment Changes From 2001 to 2007 With the State of Michigan as the Region of Comparison - click to enlarge

Graphic 16: Shift-Share Analysis of Manufacturing Employment Changes From 2001 to 2007 With the State of Michigan as the Region of Comparison - click to enlarge

Graphic 16: Shift-Share Analysis of Manufacturing Employment Changes From 2001 to 2007 With the State of Michigan as the Region of Comparison - click to enlarge

Source: U.S. Bureau of Labor Statistics, Michigan Economic Growth Authority, and calculations by Michael Hicks. The MEGA tax credit data was filtered to separate manufacturing facilities from nonmanufacturing facilities. The MEDC included Standard Industrial Classification codes for most credits, and only the manufacturing SIC codes were included. There were seven instances where SIC codes were absent. In these cases, the credits were sorted by scanning the credit's Briefing Memo for a description of the facility. Only facilities primarily engaged in the creation of goods were included, meaning that some companies with SIC manufacturing codes were excluded.

This shift-share analysis is useful in further testing the effect MEGA grants have actually had on manufacturing employment in Michigan counties. The first test performed by Hicks determined whether a MEGA grant provided to a business in each of the 83 Michigan counties prior to 2001 was associated with subsequent employment change attributable to county-specific competitive-share job growth in manufacturing. In this statistical test, Hicks found that the MEGA grant was correlated with a reduction in manufacturing employment. Every $1 million in MEGA credits awarded was associated with a reduction of 95 manufacturing jobs. The decline in manufacturing employment related to MEGA tax credits was strongly statistically significant. A t-test also indicated it was extremely probable that the relationship between MEGA credits and changes in the county's manufacturing employment is negative.

A scatter plot of this relationship is telling. In Graphic 17, county-level changes in manufacturing employment attributable to county-specific conditions appear on the vertical axis, while the total MEGA credits from 1995 through 2000 appear on the horizontal axis. There is no clear linkage between the two, and the fact that the statistical relationship is negative strongly discounts the argument that the MEGA program is improving employment in manufacturing.

Graphic 17: Michigan Counties' 1995-2000 MEGA Manufacturing Tax Credits and 2001-2007 County "Competitive Share" of Manufacturing Job Changes Against the State as a Region

Graphic 17: Michigan Counties' 1995-2000 MEGA Manufacturing Tax Credits and 2001-2007 County

Source: Calculations by Michael Hicks.

Statistical tests point to a strong negative relationship between MEGA and manufacturing employment changes attributable to county specific competitiveness. While this model does not assert causation - i.e., the model does not imply that MEGA grants are destroying manufacturing employment in the counties the authority targets - it is clear that MEGA's efforts to promote manufacturing employment have not been successful. This relationship is surprisingly strong in statistical terms and suggests MEGA has no positive effects on manufacturing job growth in Michigan (see Graphic 18).

Graphic 18: Results of Statistical Tests

Graphic 18: Results of Statistical Tests - click to enlarge

Source: Calculations by Michael Hicks.

To check that the county competitive shares were representative of changes unique to the counties themselves, rather than an accidental product of the choice of the state of Michigan as the region of comparison, we recalculated the shift-share analysis using the United States as the region.

The results of that analysis appear in Graphic 19.

Graphic 19: Shift-Share Analysis of Manufacturing Employment Changes From 2001 to 2007 With the Nation as the Region of Comparison

Graphic 19: Shift-Share Analysis of Manufacturing Employment Changes From 2001 to 2007 With the Nation as the Region of Comparison - click to enlarge

Graphic 19: Shift-Share Analysis of Manufacturing Employment Changes From 2001 to 2007 With the Nation as the Region of Comparison - click to enlarge

Graphic 19: Shift-Share Analysis of Manufacturing Employment Changes From 2001 to 2007 With the Nation as the Region of Comparison - click to enlarge

Source: U.S. Bureau of Labor Statistics, Michigan Economic Growth Authority, and calculations by Michael Hicks.

Graphic 20 shows a scatter plot of the relationship between the county's "competitive share" from 2001 through 2007 with the nation as the region and the claimed MEGA manufacturing credits in the years 1995 through 2000. Note that the negative relationship is roughly the same, indicating that the earlier analysis of the county competitive share was not an artificial result of using the state of Michigan as the region for comparison.

Graphic 20: Michigan Counties' 1995-2000 MEGA Manufacturing Tax Credits and 2001-2007 County "Competitive Share" of Manufacturing Job Changes Against the Nation as a Region

Graphic 20: Michigan Counties' 1995-2000 MEGA Manufacturing Tax Credits and 2001-2007 County

Source: Calculations by Michael Hicks.

[*] For a concrete example, suppose manufacturing employment in County X rose from 1,000 jobs to 1,050 jobs over one year — an increase of 5 percent. Is this rate of growth in manufacturing "good"? It depends on how fast the larger economy was growing and how fast the larger manufacturing sector was growing. A 5 percent increase in jobs might not be very good if manufacturing in the state increased by 8 percent over that year. This is where a shift-share analysis can help shed some light. Assume that annual state employment growth was 2 percent and that annual state manufacturing employment growth was 3 percent. A shift-share analysis of County X's change in manufacturing employment would say that of the 50 new local manufacturing jobs:

  • Overall growth in state employment was responsible for 20 of the jobs (2 percent divided by 5 percent — 40 percent — of the 50 jobs);
  • Relative growth in state manufacturing employment was responsible for 10 of the jobs (3 percent minus 2 percent — 1 percent — divided by 5 percent, yielding 20 percent of the 50 jobs); and
  • Characteristics specific to County X's manufacturing environment were responsible for the remaining 20 jobs, which are 40 percent of the 50-job total.

In this case, the 50-job increase in County X's manufacturing sector was pretty good, since 20 of the jobs, or 40 percent, are due to purely local trends that were independent of statewide employment and manufacturing growth.