Governor's rural jobs program under fire at Capitol

One of Governor Tim Pawlenty's most treasured initiatives, the JOBZ rural economic development program, is on the chopping block at the Capitol this session.

In its three years of existence the Job Opportunity Building Zones program has granted various types of state and local tax exemptions to 350 companies statewide. In return they've agreed to move into economically challenged rural areas, or expand existing operations in those areas.

"Together they have created about 5,500 jobs and companies that have expanded have maintained 11,000 jobs," Economic Development Commissioner Dan McElroy told KARE 11.

"They pay better than we ever thought they would pay. They pay on average more than $12 per hour, and they represent about $650 million in aggregated investment in Minnesota."

Commissioner McElroy, a former lawmaker, has been forced to defend JOBZ more than ever since the Legislative Auditor released a very unflattering report about the program in February.

The report concluded taxpayers aren't getting the best bang for their buck, in this case $46 million worth of tax breaks handed to companies enrolled in JOBZ.

"We found that JOBZ has been used appropriately in some cases and helped create jobs," Legislative Auditor James Nobles wrote lawmakers, "But we also found significant problems with the program's design and implementation, resulting in some cases of ineffective and inappropriate use of tax subsidies."

Most troubling to legislators is the auditor's opinion that four out every five jobs credited to JOBZ would've been created anyway without it. That would mean, the report suggests, local units of government are in many cases giving up sorely needed property tax revenue to companies that don't actually need that help.

"The question is would it have happened anyway?" McElroy asked rhetorically, "And our honest response is some of it may have, much of it would not."

The Cambridge Case

In small town main street Minnesota good jobs are at a premium, especially in places where a commute into the Twin Cities metro area isn't practical. Cambridge, 60 miles north of the Minneapolis, is no exception.

"Trying to find a decent paying job is kind of hard to do in the small communities," welder Louie Garski told KARE TV Tuesday.

Yet he and 70 co-workers at Cambridge Metals and Plastics learned last year they'd be losing theirs.

"They came out and just told us basically we're going to have 60 days and they're going to shut down."

But they're still there churning out parts for ATVs, snowmobiles, plumbing fixtures, plows or whatever else is in demand for the high precision fabricating they can do. A Saint Louis Park company bought the plant with the help of the JOBZ program to keep it open.

"Our commitment is to keep 60 jobs or more in the facility, to keep it open," said company president Jim Shear, "If we do not meet that, then we have to pay the sales tax."

With JOBZ the company's new production equipment is exempt from the state's 6.5 cent sales tax, which is a significant when you're talking about a $1 million five-axis tube laser. One of just handful of such machines in the nation it uses automation and lasers to cut steel tubes and drill holes in them, saving several steps in production.

More significantly, the whole place is exempt from local property taxes until the JOBZ contract expires in 2015, a break worth $120,000 per year to Cambridge Metals and Plastics.

Sure, that's money the Cambridge and Isanti County will have to live without for now. But the alternative to JOBZ in this case?

"These jobs would've been gone," Shear told KARE, "They were going to close the plant in 60 days and all 70 to 80 people would've been terminated at that point."

Jerry Mueller, a welder who has worked there on and off since 1988, hopes legislators keep JOBZ alive.

"It helped us here because we'd be closed down if they wouldn't have got the tax break to take over here."

Now, he says, if people will just start buying ATVs and big sleds again.

"We need people to buy again, to get over that fear. We need the work."

Across town MAPE USA is also taking advantage of the JOBZ tax exemptions to launch a new operation in Cambridge making and processing parts for ATVs and other power sports vehicles.

The Italian based company already had a Twin Cities distribution facility, but the expansion to Cambridge will enable it to initiate a manufacturing operation. The first production line will constitute a $5.5 investment, and it could lead to much more.

"We already have plans on filling this building in the next year," the operations manager Bob Hoover told KARE, "With any luck we'll be looking at the next step, acquiring more."

MAPE USA agreed to add five people to its small Minnesota payroll immediately and already met that target.

"We will be far and above the JOBZ requirements so we won't have any trouble meeting that," Hoover said.

Hoover and Ettore Giambetti, MAPE's division manager, said Cambridge is a strategic location for supplying its Minnesota customers. Giambetti told KARE it's hard to say just how much the company would've invested without JOBZ, but it made the decision much easier.

As Hoover put it, "With JOBZ we can do things a little differently, a little better, knowing that tax is not there in the equation on the cost side."

Lawmakers wary

"I have to say that of all the legislative audits I've read in the 10 years I've been here this one's the most scathing by far, of showing a program not working," Representative Ann Lenczewski told colleagues Monday night at the Capitol.

The Bloomington Democrat heads the House Tax Committee, which is taking a hard look at all business subsidies in light of the state's projected $1 billion deficit. Lenczewski was among those who voted against starting JOBZ in the first place.

"People either hate the program or they love the program," Lenczewksi said, "And I just hope that no matter which camp you're in you recognize that if you want to keep it it's got to get fixed."

John Yunker, who headed the Legislative Auditor's JOBZ study team, told lawmakers that the Department of Employment and Economic Development, or DEED, has overstated the number of jobs created and saved.

"But it is very difficult to know exactly how many jobs are created," Yunker explained, "It's not clear you can even go by the surveys that DEED has done."

"Some said they would've gone ahead without JOBZ. You suspect that possibly there actually were more that would've gone ahead without JOBZ than really reported on the survey."

The auditor's report also noted those subsidies are often going to businesses with existing competitors, who stand to lose business and workers.

"Does that really create jobs if we subsidize one business and it has competitors nearby who are potentially hurt by that effort?"

Lunker said the system's badly in needs of caps, either on the number of companies who can enter the program, and perhaps the total size of the subsidy.

"I would say the alternative is to go on as you have, where it's basically an unlimited program," Yunker told the House tax panel.

"Our experience looking at this program suggests that's not a good idea, that there needs to be some priority setting, more careful examination of businesses that are asking to participate in the program."

Representative Lenczewski also looks at the projected price tag over the life of the program, pegged at $215 million by legislative research staff.

"The way I think of that as a Tax Committee member is that $215 million could do something else for rural Minnesota."

Keep it but tweak it

A program could not have better cheerleader than Dan McElroy, who can sit in interviews and legislative committee hearings and recite success story after success story.

"Ones of the ones talk about most often is Suzlon in Pipestone, which committed in 2005 to create 50 jobs in a factory that makes blades for wind turbines," McElroy remarked, "As of last Friday morning they had 480 employees and are trying to hire an additional 220 to get to 700 employees by July."

He's urging lawmakers not to scrap the program, but to extend its life beyond 2015.

"We see a need for good paying jobs in most corners of the state," McElroy argued, "It isn't good to have two different economies, one in the Twin Cities and another in the rest of the state."

But the Commissioner agrees with critics, including the Legislative Auditor, that the program needs better focus and more state control of which areas are targeted for JOBZ. Currently local government entities approve which areas become enterprise zones.

"It was set up with less central control than I would like to have," McElroy conceded, "There have been a couple of JOBZ projects that probably wouldn't' have been approved if the Department of Economic Development had authority to approve projects."

By John Croman, KARE 11 News

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