State debates MEDC’s value

Job retention agency fights to keep its own

This news story appeared in the May 5-11, 2003 issue of Crain’s Detroit Business.
Copyright 2003 Crain’s Detroit Business.

LANSING – The Michigan Economic Development Corp. is used to making a case for investment in Michigan.

It’s not so used to having to make a case for itself. But that’s the situation the business-attraction agency finds itself in as the state wrestles with its worst budget crisis in years.

Lawmakers faced with competing funding priorities are scrutinizing the best use of $123.5 million proposed for the MEDC in the 2004 budget.

As both those who support and who question the MEDC’s value are backing cuts that go deeper than Gov. Jennifer Granholm’s, placing the agency in a fight for its funding.

“When you get right down to it, it’s not the marketing glitz and consulting service that sells a company on Michigan. It’s whether or not they can be competitive by either staying here or moving here,” said Bill Nowling, press secretary for Senate Majority Leader Ken Sikkema, R-Wyoming. He said Sikkema supports cuts that go beyond Granholm’s proposed 12 percent general-fund decrease from the current fiscal year.

“I think that there are other needs more pressing, but I also think that there are other needs in economic development that are more pressing . . . like good roads. That’s an investment in jobs right there,” Nowling said. “We’re not saying that no marketing needs to go on, but we also have to view the priorities in light of that.”

The full Senate is scheduled to take up the MEDC budget this week. The Senate Appropriations Committee last week recommended general-fund support of $29.8 million, nearly $5.7 million less than Granholm’s $35.5 million recommendation. The MEDC’s current-year general-fund support is $40.4 million.

In the governor’s original budget proposal, a little over half of the MEDC’s proposed budget is restricted, coming from federal pass-through funding for Community Development Block Grants, tobacco-settlement money and other revenue. The remaining $59 million would come from state general funds and Indian casino money.

Former Republican House Speaker Paul Hillegonds said it’s difficult to attribute job creation to a state agency. But Hillegonds, president of Detroit Renaissance Inc. and a member of the MEDC executive committee, said the agency makes its case.

For example, in fiscal 2002, the MEDC assisted in nearly $6.5 billion in projects that created 18,524 jobs and retained 71,775. Besides meeting with 5,717 Michigan companies to retain business and attract investment, MEDC staffers met with national and international companies and with 53 corporate site consultants. The company visits produced 233 leads and landed 46 projects, while the site-consultant visits generated 58 leads and 26 projects.

Site Selection magazine last week named Michigan’s economic development agency the second-most competitive in the nation, after Tennessee. The award, which honors the accomplishments of state economic-development agencies, considers 10 criteria, including jobs and new investment, the number of metropolitan areas and towns cited for business growth in Site Selection annual rankings, and business climate.

Following Michigan were Illinois, North Carolina and New York.

“The irony is, as the MEDC is coming under scrutiny, nationally, it’s recognized as one of the best,” Hillegonds said.

But critics say it is the private sector that creates jobs and holds the expertise that businesses need to succeed. The MEDC is an expensive bureaucracy and “arguably the least necessary entity in state government,” said Michael LaFaive, director of fiscal policy for the Midland-based Mackinac Center for Public Policy.

The center and others fault the MEDC for picking winners and losers, through programs that award tax credits or other help to businesses in targeted sectors or to non-Michigan companies that locate here and compete with existing businesses.

An oft-cited example is Cabela’s, which built a hunting, fishing and outdoor-gear store in Dundee after being offered a $27.8 million package of federal, state and local assistance. Included was a $509,500 Travel Michigan package that entailed joint marketing and advertising, such as a $100,000-a-year, three-year purchase of advertising in Cabela’s catalogs.

The Mackinac Center says businesses should do their own marketing, and the state should not “reach into the pockets of small and medium-size sports retailers to subsidize the operations of the state’s biggest sports retailer.”

But Jeff Mason, senior vice president of public affairs at the MEDC, said Michigan could have lost the giant outfitter – and its economic spinoff in sales-tax revenue, wages and property taxes – to Toledo. The project created 660 jobs. No other economic-impact information was available.

“To not do that seems like a bad long-term economic strategy for the state of Michigan,” Mason said. “It certainly forces competition to a Jay’s Sporting Goods or Dunham’s, but competition is coming whether we like it or not.”

He said that of the $21.5 billion in private investment in which the MEDC has been involved since its inception in 1999, 92 percent has involved expansions by Michigan-based companies or out-of-state companies’ operations here.

“We set an economic-development strategy years ago: Take care of the Michigan companies that are here, and then win our fair share of attractions,” Mason said.

Economic-development agencies in competitor states are also seeing budget scrutiny.

Doug Garver, assistant director of the Ohio Department of Development, said his 466-employee department, which has a few functions different from the MEDC, took a 19 percent general-fund hit in the 2003 budget year and is seeing further constrictions in the current budget debate. Ohio’s economic-development programs depend largely on general funds, which make up about 20 percent of the department’s $1.5 billion budget.

One company helped by the MEDC is Livonia-based Applied Process Inc. CFO Kathy Oleski said that when the company began looking at an expansion, the MEDC brought in utility representatives to assess energy programs and local officials to help with a property-tax abatement. The MEDC also put the company in touch with a workers’ compensation specialist to review its costs.

“The MEDC certainly made a big impact on us for our expansion in Southeast Michigan,” she said.

House Appropriations Chairman Marc Shulman, R-West Bloomfield Township, said the MEDC’s services, job-training grants and business attraction and retention record show its value.

“We need to have an entity like the MEDC that can play a real important role in collaboration with a lot of the local companies,” Shulman said. However, he plans to look at MEDC operations to see what areas might be consolidated or produce a more efficient use of state dollars. That might free up money that could be reallocated to other uses, such as venture capital, Shulman said.

He said the MEDC, like any department, “has to be looked at for its fair share of budget cuts. But the issue is how much and where should they be.

“These are hard times, and hard decisions have to be made. I think it is incumbent upon the MEDC, just like other departments, to show their worth and justify their budgets.”

Created under former Gov. John Engler, the MEDC is a quasi-public corporation unlike any other in state government. Its roots are not in executive order but in contracts with local-government agencies throughout Michigan. The local partners would have to agree unanimously to change or abolish its structure, but its legislative funding makes it vulnerable.

It has come under fire for the salaries and bonuses paid to noncivil-service executives of the agency. For fiscal 2002, 39 noncivil-service employees received bonuses totaling $355,812.

The agency employs 272, 234 of whom are civil service.

Granholm thinks that “given the lean times that we are in,” the end of performance pay for other state employees should apply to the MEDC as well, said Press Secretary Liz Boyd. “As in all areas of state government, we believe the MEDC should look closely at compensation, in the budget crisis.”

MEDC officials have said compensation, such as the $198,000 salary and $59,500 bonus paid to former President and CEO Doug Rothwell in 2002, is designed to be competitive with those in the private sector and in economic development. However, Mason said that “given the economy and the budget environment,” the MEDC compensation committee and its 20-member executive committee are likely to review the issue.

Amy Lane is a Capitol Correspondent for Crain’s Detroit Business. She may be reached at 517-371-5355 or alane@crain.com.

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