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The Mechanics
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Economic Development Fri Oct 31 2014

How an Overlooked Rauner Job Creation Plan Caused Problems Across America

Plenty of words (and dollars) have been spilled over Bruce Rauner's Illinois gubernatorial campaign.

But for all the attack ads and in-depth exposés, one significant Rauner policy proposal has managed to evade scrutiny, even though it would forever change the state's relationship to the private sector.

Buried in the billionaire candidate's now-infamous endorsement in the Sun-Times is the following:

In addition to modernizing the tax code, Rauner would turn the state's primary economic development agency, the Illinois Department of Commerce and Economic Opportunity, into a creative public-private partnership.

Tax code policy, sure. But turning which agency into what?

DCEO is the department responsible for fostering Illinois job creation, from attracting large businesses to guiding first-time entrepreneurs.

A public-private partnership (P3) is a joint venture between a government entity and one or several companies to carry out a task normally associated with the public or private sector alone. Typically, these let private investors accept the financial risks of a project in return for a slice of future revenues.

P3s have dramatically expanded across the United States in the wake of the recession and dwindling state and federal funds that used to fuel infrastructure spending. Fittingly, our state's experience with P3s range from the Public-Private Partnerships for Transportation Act and the Chicago Skyway toll, to the controversial Chicago parking meter privatization deal and Ventra fare payment system for the CTA, Pace, and Metra.

These P3s, however, were made to fund projects. So how will Bruce Rauner apply this to a statewide government agency?

Rauner's P3 Plan for DCEO
On page 11 of his economic plan [PDF], Rauner proposes turning DCEO in a P3 that can combine privately raised and state money, so it "would be able to operate with the speed and efficiency of the private sector, without many of the encumbrances that currently keep Illinois from being able to compete with other states."

The plan correctly notes that several states have turned their economic development agencies into P3s. However, what it doesn't mention is that these hybrid organizations created major problems in their respective states at the expense of taxpayers.

Two studies by policy research group Good Jobs First in 2011 [PDF] and 2013 [PDF] analyzed the impact of states that turned their economic development agencies into P3s. Together, they paint a sobering picture worthy of any Cook County or Springfield scandal.

Rhode Island
Four years after the Rhode Island Economic Development Corporation formed in 1995, its director resigned over reports that agency employees were misusing state credit cards. But this was nothing compared to what happened a decade later.

In 2010, the agency was blasted by both gubernatorial candidates for a giving a risky $75 million loan guarantee to a video game company led by former World Series-winning Red Sox pitcher Curt Schilling (which actually totaled to $112.6 million after factoring in the bond's interest payments).

After the high-profile collapse of Schilling's 38 Studios in 2012, the state only managed to settle with the bankrupt studio for $4.4 million. The loan program was terminated and all of the RIEDC board members were subsequently asked to resign.

A 2012 report by the Rhode Island Public expenditure Council later blamed the 38 Studios loan fiasco, in part, on RIEDC's P3 structure, but taxpayers will remain on the hook for this extravagant loan for years to come.

Utah
In 2005, then-Governor and future Republican presidential candidate Jon Hunstman Jr. awarded a contract to the Economic Development Corporation of Utah to handle the state's business recruitment, then abruptly fired 32 employees of the previous economic development agency. EDCU's chief executive also happened to be Huntsman's chief economic adviser.

A legislative audit [PDF] that year raised concerns that the contract's standard of evaluating the EDCU's performance was based on "contractor output (activity), not outcome or results (number of companies relocating to Utah)," but the agency remains in its role to this day.

Wyoming
The Wyoming Business Council took over the state's economic development role in 1998. Two years later, the state legislature canceled the WBC's entire budget due to performance problems, questionable calculations of state economic gains, and revelations that state pilots were flying WBC employee spouses and given unauthorized bonuses.

WBC remained unfunded until its chief executive -- who previously received a $30,000 bonus on top of a $135,000 salary -- resigned.

Florida
Enterprise Florida was created in 1992, and expanded when the state abolished its Department of Commerce four years later. Ever since, the agency has been embroiled in controversy:


  • In 1999, the state inspector general found -- among other accountability issues -- that EF's president received reimbursement for his wife's travel expenses, and received over $171,000 in bonuses over three years with no performance evaluation, on top of a $200,000 salary.

  • Ten years later, a different EF president made a $90,000 bonus on top of a $199,521 salary.

  • One report in 2001 accused EF of using taxpayer funds to lobby and pay for memberships at private clubs.

  • Another criticized the organization for exaggerating its own job creation claims, and for only using $1.8 million of its $65 million in privately-raised funds on its operational costs.

  • A 2006 St. Petersburg Times investigation found that companies who contributed to the EF's business development fund later "received substantial state subsidies from programs promoted by EF."

  • A 2011 report by the Florida's Department of Economic Opportunity, which oversees EF, found that "one-third of the 729 subsidy contracts that Florida had signed with businesses over the past decade did not bring promised results."

  • Negative publicity prompted the Florida legislature in 2012 to shorten the confidentiality period of deals negotiated between EF and private businesses.

  • Last year, Integrity Florida discovered that EF had failed to raise enough to meet its 50% private-funding requirement. Rather, 80% came from the state (as opposed to the 2% that actually came from private investment.

  • Additionally, Integrity Florida found that EF gave $20 million in subsidies to companies with EF board members, including Publix, Darden, and Lockheed Martin, and had approved vendor contracts between the Department of Economic Opportunity and other board members' companies such as Blue Cross Blue Shield (Florida Blue) and Wells Fargo.

Michigan
Emerging from the reorganization of the Michigan Jobs Commission in 1999, the Michigan Economic Development Corporation sparked several high-profile scandals of its own:


  • In 2010, the MEDC awarded $9 million in subsidies to a company headed by a convicted embezzler on parole. A year later, Michigan cut many of MEDC's subsidies and economic development programs.

  • In 2013, Michigan Auditor General report found that MEDC claimed its Michigan Strategic Fund created 75% of a projected job creation goal, when the number was actually closer to 19%.

  • Earlier this year, the Detroit Free Press obtained emails from Gov. Rick Snyder's administration, showing MEDC's role in helping a Dearborn-based steelmaker's attempt to alter its permitted pollution limits in "an area that is home to the worst air quality in the state, with a toxicity score 45 times the state average. " In spite of the initial objections of the Michigan Department of Environmental Quality, records show that MEDC officials took the lead in negotiating with the environmental agency on the steelmaker's behalf, leading critics to wonder if MEDC crossed a boundary in its "advisory" role.

  • Just in time for Halloween, MEDC made a popular haunted house take down its website and billboards for use of phrase "Pure Michigan Fear." It just so happens that "Pure Michigan" is a trademarked phrase by MEDC for its public-private tourism campaign in cities like Chicago.

Notably, Gov. Snyder -- whose own businessman-to-governor success story surely serves as a model to Bruce Rauner -- served as MEDC's first chairman in 1999.

Wisconsin
The Wisconsin Economic Development Corporation was created in 2011 under the initiative of Gov. Scott Walker to help meet his campaign pledge of creating 250,000 new jobs.

Since then, WEDC has already been caught up in several controversies, including:


  • Subsidizing a company simultaneously bidding on a $15 million state contract

  • Accusations of illegally spending $10 million in U.S. Department of Urban Development funds

  • Failing to track 99 past-due loans worth $12.2 million

  • Hiring an executive who owed state back-taxes

  • Two state audits showing a lax organizational culture that bred poor accounting methods, unapproved state credit card use, and a failure to actually determine whether companies receiving subsidies bothered to meet their job creation pledges

  • a WEDC-subsidized company donating $429,060 to Walker's re-election campaign, prompting calls from several Democrats for a criminal investigation.

These all led to a reform bill in July 2013 that forced the WEDC to abide by state ethical standards.

Ohio
During the 2010 Ohio gubernatorial race, Republican John Kasich advocated replacing the state's Department of Development with a private corporation.

After he won, Gov. Kasich created JobsOhio in 2011 and staffed the board with campaign contributors and businessmen whose companies had received state subsidiaries. JobsOhio soon came under scrutiny over its organizational structure, including its exemption from the state's public records and open meeting laws, and a controversial funding plan to "lease" profits from state-controlled liquor sales.

In 2012, Kasich was accused of using JobsOhio funds to bolster his re-election prospects with a $1.4 million ad campaign about the state's job growth.

Despite receiving OhioJobs subsidies during this period, Bob Evans announced the closure of two Ohio plants to move food production to Texas.

According to a ProgessOhio report [PDF], only 8% of JobsOhio's reported spending between July-December 2013 went to economic development programs. In JobsOhio's 2013 annual report, private donor lists were withheld, lists of cancelled projects were redacted over "trade secrets" claims, and certain employees were revealed to be making over $225,000 a year. Meanwhile, a KPMG audit found the agency spent over $1 million on office expenses -- more than the startup funds the agency was provided in 2011.

However, a Columbus Dispatch investigation found discrepancies between what JobsOhio claimed it received in startup funding and what a subsidiary filed in federal taxes, and ultimately discovered that JobsOhio was given a $5.3 million grant without the knowledge of the Ohio legislature.

A subsequent subpoena for the agency's financial records by the state auditor sparked debates over whether JobsOhio was exempt as a private corporation due to an inability to determine what was public vs. private funding. Later, the state legislature pushed a law prohibiting a state audit, forcing auditor Dave Yost to narrow his investigation to assessing the agency's compliance with state ethics laws.

This issue is currently fueling the (improbably) high-profile Ohio Auditor race, with Yost's Democratic challenger arguing that he should have finished the audit before the law was passed.

This comes weeks after the Ohio Ethics Commission informed two JobsOhio board members that the four-year, $3.9 million tax credit extension given to their company, Marathon Petroleum Corp., may be a potential conflict of interest. One of the board members, Steven Davis, also serves on the board of Walgreens Co., which received a $200,000 grant from JobsOhio earlier this year.

A year prior, the Ethics Commission found potential conflicts of interest with 22 JobsOhio employees, including six board members. This triggered calls for an ethics probe from Cuyahoga County Executive Ed Fitzgerald "to determine whether board members of JobsOhio illegally benefited from financial incentives awarded by the private entity."

Fitzgerald is currently facing off against Kasich in the Ohio gubernatorial election.

Indiana
The Indiana Economic Development Corporation was created in 2005 under Gov. Mitch Daniels, and has been cited as an inspiration behind similar agencies in Arizona, Iowa, and Wisconsin.

  • In 2010, WTHR reporter Bob Segall's award-winning series, "Reality Check: Where Are The Jobs?" found that many of the positions cited in IEDC's job creation numbers didn't exist or couldn't actually be substantiated. The IEDC and Daniels administration refused to discuss details due to "competitive reasons."
  • A 2011 state audit found that 44% of the jobs at IEDC's deemed "Indiana Economic Successes" were never created.
  • An IEDC"special assistant" Monica Liang, operating under a $100,000 contract, was caught soliciting bribes from Chinese companies she was assigned to recruit.
  • Despite transparency reforms to the IEDC under Gov. Mike Pence in 2013, a state legislator's son's company received $345,000 in subsidies.

In October 2013, a Ball State University report claimed that the "state of Indiana should maintain the current scale and scope of its efforts to attract new businesses through the Indiana Economic Development Corp." The study was co-sponsored by the IEDC.

Just a few weeks ago, Rauner told the editorial boards of Bloomington, Illinois' Pantagraph and the Decatur Herald & Review that he wanted replace DCEO with a P3 agency like IEDC.

Choose Chicago
Rauner's own claimed P3 expertise lies is his 2010-2013 stints as chairman of the Chicago Convention & Tourism Bureau and later of Choose Chicago, a non-for-profit tourism advocacy group. His economic plan boasted a 20% increase in Chicago tourism during his tenure, and a recent press release claims the city has just seen its six-straight month of setting hotel occupancy records.

However, a Sun-Times report this week uncannily echos the same problems seen in other states:

  • Choose Chicago received $28.4 million in state and city funding for 2013-2014.
  • At least six of its board members are paid over $200,000 and have donated to political campaigns ranging from Bruce Rauner to Attorney General Lisa Madigan.


  • During Rauner's tenure, Choose Chicago used lobbying groups with ties to powerful state Democrats, including former Mayor Richard Daley, Illinois House Speaker Mike Madigan, and Cook County Assessor Joe Berrios.


  • Despite receiving 85% of its budget from taxpayers, Choose Chicago claims it does not have to disclose the names of nine employees making between $125,000 and $180,000, as the organization is not actually a government agency, nor is it subject to the Illinois Freedom of Information Act.

However, this isn't the only economic development P3 in Chicago.

World Business Chicago
Mayor Rahm Emanuel chairs the agency created in 1999 by his predecessor, Richard Daley, to bolster Chicago's international profile. WBC's vice-chairman, Michael Sacks, is the CEO of Grosvenor Capital Development, whose employees and spouses donated over $447,000 to Emanuel's election campaign.

To his credit, Emanuel reduced city funding to WBC from 60% to 30%, and approved an ethics policy preventing the organization from making any economic incentive recommendations after complaints over CME Group and United Airlines receiving Tax-Increment Financing (TIF) money as an incentive to stay headquartered in Chicago.

Conclusions
So with all these examples in mind, is Rauner's plan worth it?

Proponents will argue that since Illinois competes with the aforementioned states, along with other P3-driven places like Iowa, Virginia, Arizona, and Kansas, Springfield ought to follow suit to make sure Illinois has every competitive advantage possible in drawing businesses courted by multiple locations.

But without transparency, oversight, and measures in place to prevent conflicts-of-interest in awarding funds, transferring Illinois' economic development to a quasi-private organization may just trigger an otherwise preventable wave of corrupt insider deals in an already scandal-plagued state.

Plus, there's the added twist of giving opportunists license to flout watchdog safeguards like audits and FOIA requests by arguing that they're not a part of government -- like the state has already seen with Choose Chicago.

It's also important to realize that the idea of replacing DCEO with a P3 won't stop with the Rauner campaign. P3s have bipartisan across Illinois, and should Gov. Pat Quinn be re-elected, future Republican (and perhaps certain Democratic) candidates will likely revive the concept with the same selective ignorance of other states' costly scandals.

Also, DCEO as an institution is already well-aware of the existence of public-private partnerships. The agency currently works with Choose Chicago and World Business Chicago, and one current DCEO official even praised a P3 project in Southern Illinois to build a roadway near Benton Airport this week. Just yesterday, the Rauner and Quinn campaigns publicly clashed over who should get credit over the upcoming Digital Manufacturing and Design Innovation Institute in Chicago, which received federal, state, local and private funding.

With President Obama's recent Build America Transportation Investment Center (BATIC) initiative, P3s have become an unavoidable part of the American economic fabric.

The question now is whether they'll become an unavoidable part of Springfield.

 
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AJ / November 5, 2014 4:13 AM

And, something tells me that under Rauner's governorship, Illinois's about to have a VERY rough time getting things done.

Brian / November 6, 2014 9:20 AM

Fantastic and well-detailed rundown of the widespread effects of the notoriously questionable job creation plan. Thanks for sharing.

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