Iowa business subsidies yield just 21 of 1,388 promised new jobs3/6/2013
DES MOINES — At least 44 companies owe Iowa nearly $8 million for loans they received in exchange for a promised 1,388 new jobs that never materialized.
The companies, instead, produced a total of 21 jobs, an Iowa Watchdog analysis found.
As of the end of June, the state wrote off $2.7 million in bad loans made to 16 of the companies, leaving taxpayers on the hook to cover the debt. The remaining businesses either face lawsuits from the state to recoup lost funds or have been ordered by a court to return the money, the analysis showed.
Cities across the state lost out on capital investments worth more than $195 million, despite increased efforts by Iowa Economic Development Authority’s to safeguard taxpayer money, according to state figures from fiscal 2012. The investments would have flooded state and local coffers with hundreds of thousands of new tax dollars each year.
In all, the loans account for roughly 2.5 percent of the total direct aid given to companies, said Tina Hoffman, spokeswoman for the authority.
“The market is supposed to take care of itself,” said Dave Swenson, economics professor at Iowa State University. “Most of the money that we allocate in the name of economic development in Iowa is wasted. It’s become a corporate entitlement. All these firms have to do is we are thinking about expanding, what can you do for us? That’s a waste of scarce resources.”
Competition among states, including Iowa, to lure new businesses or have others expand their operations increased in recent years as the economy soured, some say. That has led them to sweeten the deals they make with companies, which some economists say would have set up shop regardless of the incentives offered.
The economic downturn also left more companies with loans in Iowa unable to make good on their job creation promises, said David Bernstein, who heads the authority’s board. A majority of those companies were granted extensions of six months to a year during the height of the recession in 2008 and 2009, he said.
The number in collections has since improved, he said.
The figures from the latest reports are down from the previous year, when 49 loans worth $17.9 million were in collections. Companies awarded $16 million in tax credits owed the state a remaining $6.3 million, according to state figures.
Another $4.3 million in state awards were in default of their contract with the state to create 1,344 jobs, according to state reports. Figures for loans in default for fiscal 2012 were not available.
“We are doing a good job of putting safeguards in place to get our money back,” Bernstein said. “We have the most stringent safeguards in place today to protect the taxpayer money we are investing with businesses.”
A majority of the businesses that receive loans from Iowa to expand or move their businesses either take the money once their projects are completed, or they receive backing from banks that promise to repay the money if the company isn’t successful. That makes it easier for the state to recoup its losses in most cases, Bernstein said.
All companies go through what Bernstein and Hoffman described as a rigorous process before being granted awards. The process includes doing a thorough background check on businesses, including an in-depth look at their financial statements, pending lawsuits and the types of jobs being created.
Companies typically whittle their list of potential locations before contacting the state, Hoffman said. They then approach state leaders regarding incentives and provide a full application. Those typically include a summary of the project and the company’s history, among other things.
From there, it moves to the authority’s due diligence committee, in which one member is assigned a company and thoroughly backgrounds businesses and their proposed projects, said Hoffman and Bernstein. That process includes looking at the company’s financials and those of its competitors, the average wage of jobs they plan to create and the benefit packages offered to employees, Hoffman said.
That process, however, doesn’t always work.
The state recently gave $200 million in subsidies to Egyptian company Orascom Construction Industries, which sought to build a $1.4 billion fertilizer plant near Burlington.
It later became public that a subsidiary of the company, Contrack International, faced a lawsuit for allegedly defrauding U.S. taxpayers out of $332 million in construction contracts in Egypt. Debi Durham, head of the Iowa Economic Development Authority, told state lawmakers last week her staff kept her in the dark about the lawsuit, although it most likely wouldn’t have changed the state’s action in awarding incentives.
Critics have accused the state agency of failing to properly vet the company before making the deal. Durham told lawmakers she doubted if it would have made a difference in the state’s final offering to the company.
“The local and state government are acting like they are getting some kind of return on investment,” Swenson said. “There is no way over the entire course of this plant that the taxpayers will be paid back. This is nothing but a 10 or 20 year subsidy. That’s not called economic development. It’s called exploitation by our elected officials. They aren’t investing their money. They are investing taxpayer money. And they are fools.”
The fact that it’s taxpayer money makes the authority’s board members even more diligent in protecting the investments they make, Bernstein said.
“There will still be, at some point, oddball scenarios where we have to go through the collections process,” Bernstein said.