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Senator John Hottinger, MN
The Problem: Billions in public dollars are doled out to private companies with little oversight and few mechanisms for ensuring the creation of good quality jobs.
Every year, New York’s state and local governments hand out hundreds of millions of dollars in corporate subsidies. Tax breaks, low interest loans, and other types of development assistance are meant to spur job creation and retention and fuel economic growth. Yet despite the taxpayer-sponsored bounty for business, Upstate New York in particular has suffered devastating job losses and economic decline. Reports by the State Comptroller’s office and independent organizations have uncovered widespread failure to meet job creation standards in the state’s Empire Zones, Industrial Development Agencies, and other development efforts, as well as the subsidization of poverty-level jobs and even subsidies for companies moving jobs out of the state. How can economic development dollars be spent more effectively? Minnesota’s experience shows how legislating greater transparency and accountability – from wage standards to penalties for failing to meet job creation goals – can help to ensure that communities see real benefits in exchange for business subsidies.
The Minnesota Solution: Subsidy Accountability
Minnesota’s first-in-the-nation subsidy accountability law requires:
∑ Communities and public agencies that provide economic development subsidies must develop uniform criteria for all their subsidy deals, including a specific wage floor for these jobs;
∑ Public hearings must be held before business subsidies worth more than $100,000 are awarded;
∑ All businesses receiving more than $75,000 in loans or $25,000 in other subsidies must enhance jobs or create a net increase in jobs in Minnesota within two years; subsidies to retain existing jobs are permitted only if the job loss is “specific and demonstrable;”
∑ Businesses receiving subsidies must continue operations on the site for at least five years;
∑ Businesses that fail to meet job creation and wage goals must repay the subsidy with interest and face other financial penalties, and be barred from receiving future subsidies in the state;
∑ Subsidy agreements, including the type, public purpose, and amount of assistance, as well as specific job and wage goals and the date they need to be reached must be disclosed annually to the public;
∑ Progress in achieving the goals of each subsidy and information on businesses that did not meet goals must also be disclosed.
How Minnesota Passed the Law
According to State Senator John Hottinger, the impetus for Minnesota’s subsidy reform effort came in the 1980s when Triangle Tool Company tried to move their operations out of state just a few years after receiving $10 million in industrial revenue bonds to overhaul its plant in Duluth. The city sued and succeeded in retaining some jobs at the factory until the bonds expired. But the fight against Triangle had galvanized community leaders, who felt that a stronger mechanism for protecting the public interest in subsidy deals was needed. In the early 1990s, as the nation was dominated by talk of welfare reform and increasing the personal responsibility of poor women receiving public assistance, the effort to create accountability for corporate welfare began to gain traction in Minnesota.
The Minnesota Alliance for Progressive Action, a coalition of unions, environmental organizations, and other advocacy groups, pushed for legislation. In 1995, Senator Hottinger and his counterpart in the State House of Representatives, Karen Clark, sponsored a bill requiring that any business receiving state or local government assistance worth more than $25,000 create a net increase in jobs in the state within two years or pay the money back. The law also required public reporting of subsidy deals, including the goals of the subsidy and the results.
The reports disclosing the details of subsidy deals stimulated further reform. A 1999 study by Good Jobs First, a national public policy center, found that two-thirds of subsidy deals statewide were for jobs that paid less than the local market levels for their industry, while some the state and local governments had approved deals offering $100,000 or more in subsides for each job. At the same time, record-keeping in compliance with the law was erratic.
The Minnesota legislature created a Corporate Subsidy Reform Commission, which held hearings on how to improve the law. In 1999, Senator Hottinger and Representative Clark led the effort to pass a more comprehensive subsidy accountability law that closed many loopholes in the earlier legislation. In addition to clarifying the previous legislation and including more detailed reporting requirements on subsidy deals, the new law mandated public hearings before subsidies could be awarded and required agencies to develop criteria for public subsidies that would apply to future agreements. The law also imposed financial penalties on businesses failing to comply with their subsidy agreements and barred non-compliant businesses from receiving any additional subsidies for five years.
The Results So Far
An assessment of Minnesota’s subsidy accountability law conducted in 2003 by Good Jobs First [1] found that the law had fostered more media coverage of subsidy deals and greater civic engagement with economic development efforts. The process of awarding subsidies became more transparent and citizens became more involved in discussions of how public money was being spent. As a result, localities’ overall approach to economic development shifted, focusing more on the public purpose of subsidy deals. Communities sought more high-wage deals and industries and increasingly used pay-as-you-go financing rather than taking on additional public debt. The increased awareness of subsidy issues has also been credited with benefiting activist efforts such as the Duluth Living Wage campaign.
While it is difficult to attribute job gains directly to the accountability law, a 2006 study by the Center for Rural Policy and Development found that, as a whole, businesses that had received subsidies through the state’s Job Opportunity Building Zone (JOBZ) program in 2004 exceeded their two-year job creation and wage standards by 2006. While 1,985 jobs were pledged by companies receiving subsidies, 2,601 full-time jobs were actually created. These positions had an average hourly wage of $14.86.[2]
Regardless of whether the subsidy accountability law contributed to the job creation or quality, there is no question that data gathered as a result of the law made it possible to evaluate the JOBZ program.
The law has no requirement for reporting on public funds that are returned when businesses fail to meet their obligations under subsidy deals, so there is limited information about how this “clawback” requirement is functioning. However, the state’s Department of Employment and Economic Development confirmed that between 2000 and 2004, out of $15 million in business assistance funds awarded by the Minnesota Investment Fund – just one of the state’s economic development initiatives – nine companies were compelled to return a total $1.2 million for failing to fulfill the requirements of their deals.[3]
Minnesota’s subsidy accountability legislation cannot guarantee that every economic development deal perfectly embodies the public interest. Instead, as the bill’s sponsor Senator Hottinger argues, “[it] is a stepping stone to continue discussions over the economic equity that we have in our society.”[4]
Beyond Minnesota
Minnesota is far ahead of New York when it comes to transparency and accountability for economic development subsidies. But the state’s success raises deeper questions about the public payoff for investing in big deals aimed at attracting or retaining a single company rather than broad-based efforts to build quality infrastructure and invest in a skilled workforce. If New York were to seriously consider this question, the state could improve on the Minnesota model.
Additional Resources
DMI’s September 2006 Marketplace of Ideas event: Watch or listen to MN State Senator John Hottinger discussing the implications of his subsidy accountability legislation for New York with NY State Assemblyman Richard Brodsky, New York Daily News columnist Errol Louis, and Adrianne Shropshire, DMI Fellow and Executive Director of New York Jobs with Justice
For more on
Anne Nolan and Greg LeRoy “Get Something Back! How Civic Engagement is Raising Economic Development Expectations in
Click here for text of
For more on the problems posed by economic development subsidies in
“Getting Our Money’s Worth: The Case for IDA Reform in
Alan G. Hevesi, “Industrial Development Agencies’ Project Approval, Evaluation and Monitoring Efforts,” Office of the New York State Comptroller (2006)
Alan G. Hevesi, “Assessing the Empire Zones Program: Reforms Needed to Improve Program Evaluation and Effectiveness,” Office of the New York State Comptroller (2004)
Stephanie Greenwood and Bettina Damiani, “Know When to Fold ’Em: Time to Walk Away from NYC’s Corporate Retention Game,” Good Jobs New York (2004)
“It’s Time to Reform the Development Subsidy Game,” Good Jobs New York (2000)
For more on the work done by DMI’s Marketplace of Ideas panelists, see:
NY State Assemblyman Richard Brodsky
New York Daily News columnist Errol Louis
Adrianne Shropshire, Executive Director of
[1] Ann Nolan and Greg LeRoy, “Get Something Back! How Civic Engagement is Raising Economic Development Expectations in
[2] “The Job Opportunity Building Zone Program: Assessing Employment and Wage Outcomes,” Center for Rural Policy and Development (2006)
[3] Associated Press, “Some say JOBZ enforcement language has no teeth,” Minneapolis Star Tribune April 5, 2004.
[4] DMI’s Marketplace of Ideas, September 18, 2006.