By Alan Greenblatt, November, 2015
Several states have decided the way to juice up economic development is to turn it over to a corporation outside the government bureaucracy. Is it working?
Parma, Ohio, could use some help.
The Cleveland suburb is still recovering from a plague of foreclosures, and deep cuts in state aid have made it difficult to keep the local budget in order. General Motors remains the city’s largest employer, but it long ago shuttered a 750,000-square-foot powertrain and transmission plant in the heart of the city’s industrial section. Under the circumstances, Parma officials were more than delighted when they heard a trucking company called Pitt Ohio was interested in expanding its operations, hiring hundreds of people and taking over a good-sized chunk of disused GM property.
Working with JobsOhio, the state’s economic development corporation, city officials put together a package of incentives that convinced the firm to consolidate truck terminal operations at the Parma site. Construction is just getting underway on a 23-acre complex where Pitt Ohio will eventually employ 240 workers. Parma Mayor Tim DeGeeter hails the facility as the city’s largest job creation project in a decade. “JobsOhio was a very helpful intermediary with the Ohio Department of Transportation, so we could get a [$180,000] grant,” says Shelley Collins, an economic development officer for the city.
It’s the sort of thing that makes for a great press release. Out on the presidential campaign trail, Gov. John Kasich loves nothing more than touting the number of jobs created in Ohio since he took office in 2011. Overhauling the state’s economic development effort is central to his claim. One of his earliest acts in office was abolishing the state Department of Development and handing its functions over to JobsOhio, a private nonprofit.
Putting the chamber of commerce or other private groups in charge of economic development has long been common at the local level and has been tried in some states, but just over the past few years it has gained popularity in states with Republican administrations, including Arizona, Indiana, Iowa and Wisconsin. Illinois and Oklahoma are also considering a similar move. “If the goal is marketing and engaging with business relocation entities, there’s an intuitive belief that the private sector can do that more effectively than a government agency,” says Leonard Gilroy, director of government reform at the libertarian Reason Foundation.
JobsOhio, which works on roughly 250 projects a year, has brought in big deals for the state, involving the likes of Amazon, General Electric and Fuyao, a Chinese automotive and industrial glass company. The private development corporation gets money from the state’s wholesale liquor profits. It works with state agencies, but it doesn’t answer to any of them. John Minor, the president of JobsOhio, says the company has been more proactive in seeking out-of-state deals than the old state-run effort, and can plan across a longer time frame. “When a CEO or board of directors can talk with someone and speak more peer to peer, someone who understands their business, that makes a difference,” he says.
People who work in economic development are boosters by nature. They have to be. But while JobsOhio is happy to brag about its success stories, it’s also come under lots of criticism. Along with other privatized economic development agencies, the nonprofit has been accused of favoritism and sweetheart deals. Critics have pounced on these problems as proof that the privatizing approach is just a scheme to funnel more money to campaign contributors. “We think it’s a recipe for mischief, if not corruption,” says Greg LeRoy, executive director of Good Jobs First, a liberal policy center that has published several studies pointing out problems with the privatization model.
Of course, commerce departments and other public agencies have been guilty of incompetence and malfeasance as well. Perhaps the most notorious example in recent years involves 38 Studios, a video game company founded by former Boston Red Sox star Curt Schilling, which went bust after receiving a $75 million loan from the state of Rhode Island. Economic development is run by a quasi-private agency, but “all the evidence points to political interference,” says John Marion, executive director of Rhode Island Common Cause.
At the same time, purely public agencies continue to be responsible for some of the biggest scores in development, including Nevada’s billion-dollar deal with Tesla last year to build a ginormous battery factory outside Reno. This points to what may be the fundamental problem with the whole privatization push: There’s no proof that this approach works any better — or really all that much differently — than old-fashioned development agencies. The type of arrangement that Parma made with Pitt Ohio — offering up payroll tax breaks at the local level, getting the state to kick in funds to help ease traffic in and out of the site — has happened countless times courtesy of public agencies.
Once a state goes down a certain path,
it’s impossible to prove what would have happened if instead it went down another. But the reality is that a change in governance structure doesn’t eliminate the challenges inherent in economic development work, such as ensuring transparency or designing sanctions with real teeth if companies fail to keep their job creation promises. “It’s not a silver bullet,” Gilroy says. “The challenges are inherent to the overall project of economic development, as opposed to whether the entity’s public or private.”
Go down the list and every apparent advantage of privatization seems to have an equal and opposite downside as well. Proponents claim that private economic development corporations are more responsive, but looser rules open up the possibility that they’ll cut corners in dubious ways. And they may not be more nimble at all, since new entities add their own layers of bureaucracy to the mix. The privatized entities typically are more flexible when it comes to managing their own personnel, but there have already been examples of staff being grossly overpaid as a result.
In short, while it might make sense to give development officials a leash longer than is the norm for government work, that approach offers no guarantee of success. “There is no evidence that privatizing economic development either helps or hurts economic development,” Timothy Bartik, an economist at the W.E. Upjohn Institute for Employment Research, says flatly.
There are, however, potential pitfalls. Putting private-sector actors in charge of deciding which private companies receive government funds has created situations that suggest foxes are guarding the henhouse. In 2013, JobsOhio had to return more than $8 million to the state after media outlets and the state auditor raised questions about public funds the nonprofit had received without the legislature’s knowledge. Its board of directors, picked by Kasich, includes a number of the governor’s donors or their employees. Also in 2013, the Ohio Ethics Commission found that more than a third of the JobsOhio officials senior enough to have to file financial disclosure forms had possible conflicts of interest in regard to companies that had received incentives through the agency.
JobsOhio is now shielded by law from most investigations by the state auditor. Kasich and legislative leaders concluded that JobsOhio is a private enterprise and the auditor shouldn’t be undermining its work. Minor insists that transparency remains a front-and-center concern, with the details of concluded deals shared publicly on the JobsOhio website. “We are probably one of the more heavily regulated nonprofits I know of, in terms of the activities we need to report to the state,” Minor says. “We have a policy that every project has to go through a conflict–of-interest review.”
Other states have had some eyebrow-raising difficulties in this regard. Last year, auditors from the U.S. Treasury Department found problems with a company hired by Indiana’s privatized economic development corporation to manage millions of state and federal investment dollars. That company had improperly given $500,000 in federal funds to a startup managed by its own chairman. An audit this spring of the Wisconsin Economic Development Corp. (WEDC), created by Gov. Scott Walker in 2011, found that the partially privatized agency “did not require grant and
loan recipients to submit information showing that jobs were actually created or retained” and “awarded tax credits without attempting to verify the accuracy of information submitted by businesses.”
The public-private economic development entity in Wisconsin has handed out a total of $124 million in state grants, tax credits and loans without a formal staff review. Much of its largesse has gone to Walker campaign contributors. In the fiscal year
that ended in June, WEDC expended $246 million on incentive deals — a 57 percent jump over the previous year — “yet those awards are expected to create or retain almost 6,000 fewer jobs and result in $400 million less in capital investment” than the previous year’s totals, according to
The Wisconsin State Journal.
It’s the sort of thing that generates awful press. “The WEDC has been rife with corruption and cronyism,” says Matthew Rothschild, executive director of Wisconsin Democracy Campaign, a watchdog group in Madison. “It has failed to do basic due diligence on some of these loans, and this combination of cronyism and ineptitude has cost the taxpayers millions and millions of dollars.”
The moral of every privatization story
seems to be that, while it can sometimes be effective to outsource projects and services, good contract management by public officials remains a necessity. Every deal is a negotiation. It can obviously present a problem when taxpayer dollars are at stake yet no one at the table truly represents the public.
Putting scandal aside, it’s difficult to tease out how much any formal economic development effort actually helps move forward a state’s economy, which is inevitably far larger and more complicated than the relatively small corner involving companies receiving incentive packages. The newly privatized agencies cite numerous success stories, but all of these have taken place within the context of state economies that have been growing anyway. Minor, the JobsOhio president, readily concedes that his job of selling Ohio depends on a host of factors outside his control, including infrastructure, access to markets and the state’s tax and regulatory policy.
Privatization does have some demonstrable upsides. Because privatized economic development corporations or public-private partnerships receive exemptions from normal civil service rules, they have more flexibility in creating or eliminating job positions as needs arise and fade away. Being able to redeploy resources outside the sphere of the legislative process is a definite advantage, says Ken Poole, CEO of the Center for Regional Economic Competitiveness, an economic strategy consulting firm. At the same time, he notes that setting up a new entity can be disruptive, taking time to develop both capital and an internal pool of talented workers. “They do need to have the skills and capacity that come from a government background,” Poole says. “Private companies do not have the same things like sunshine laws and procurement laws, procedures that are required under state law.”
Privatization advocates claim their method allows economic development corporations to “move at the speed of business,” as Gov. Kasich likes to say. They don’t have to sit around waiting for the legislature to approve project funding as part of the state budget. But sometimes their ability to act fast is based on bypassing safeguards designed to keep things on the up and up.
And even when deals are completely kosher, they can go bad. Betting on a company to prosper and provide promised jobs is just that: a bet. Giving money to a company because it promises to invest and create jobs is inherently speculative. The economy can sour or there can be honest misjudgments about what the marketplace actually wants. It’s the nature of the field to overpromise and overpromote. And the whole question of whether economic development packages are effective is always going to be harder to measure than many other government functions. “This is different because this is much more subjective,” says Illinois state Rep. Jack Franks. “With a Medicaid contract you can ask, ‘Did you take people off the rolls who weren’t supposed to be there?’ With this, there’s no objective criteria.”
In August, the U.S. Governmental Accounting Standards Board issued its final guidance on a rule that for the first time will require states and localities to disclose information about the tax breaks they give businesses. That could help. Evaluating economic development programs has always been problematic. It’s easy to point to anecdotal successes or failures, but hard to get a sense of the bigger picture.
In part, that’s because the economy itself is so complex. A set of tax breaks might be useful to a company, but its fortunes are determined more by customer taste and whether the economy as a whole is growing or slipping into recession. Logistics and labor ultimately matter more to the bottom line than some savings on taxes. No control group studies exist to show that a state or region’s economic development strategy and expenditures have been more effective than those of its neighbors. “A lot of the incentives being used, particularly tax expenditures, are designed in ways that are wasteful,” says Bartik, the Upjohn Institute economist.
For that reason, there’s always a chorus of voices calling for states and localities to quit their poaching and get out of the incentives game. The argument is that they’re just being suckered by corporations looking for tax incentives to do what they’d been planning to do anyway, playing neighboring or similar jurisdictions off one another. “This is the darkest side of federalism as it applies to economic development,” says LeRoy of Good Jobs First. “Companies are totally in the catbird seat in their ability to whipsaw state government.”
No matter how much economists might hate the tax incentives game, however, cities, counties and states will continue to play it. No one government will be able to resist looking to land employers this way unless all governments stop. Unilateral disarmament will not happen. If anything, the reverse is true. States have ramped up their efforts at smokestack chasing in recent years, partly in response to the recession and long, slow recovery, but also because of the intense desire among political actors to be abl