Audit: Michigan inflates benefits of business subsidies; job verification questioned

Beth LeBlanc
The Detroit News
James Hohman is director of fiscal policy for the Mackinac Center for Public Policy

The Michigan Strategic Fund inflates the potential benefits from its business subsidies and needs to be more thorough in verifying the jobs created by firms receiving taxpayer money, according to an auditor general report released Wednesday. 

The audit found that the Strategic Fund, a quasi-government agency that dispenses taxpayer subsidies to businesses, did not have adequate documentation for six percent of the qualified new jobs Auditor General Doug Ringler reviewed and overstated its projected return on investment 30 percent in 2016.

But the audit said the issues were "reportable conditions," which are not considered as concerning as "material conditions." The report said the Strategic Fund was "moderately effective" in monitoring compliance with tax subsidy promises and "sufficient" in its processes for awarding taxpayer money.

The problems identified in the audit are “perennial” issues linked to state business subsidy programs like the Michigan Business Development Program, said James Hohman, director of fiscal policy for the Mackinac Center for Public Policy.

“It shows that the state taxpayers could be paying for phantom jobs for projects that have received state subsidies,” Hohman said.

The Michigan Strategic Fund works with the Michigan Economic Development Corporation to administer the Michigan Business Develop Program, which was created in 2011 to provide grants, assistance and loans to companies that make new investments and create jobs in Michigan.

In a Wednesday statement, the Strategic Fund and MEDC said the audit “confirms the overall execution of the program is fundamentally sound."

“The audit also highlights additional opportunities for improvement, many of which are in the process of being adopted,” said Otie McKinley, a spokesman for the MEDC.

During the audit period from Oct. 1, 2014 through June 30, 2017, the Strategic Fund entered 196 agreements for a total investment of $179.1 million, according to the report. This covered former Gov. Rick Snyder's tenure. 

The auditor general reviewed a sampling of the agreements and found the program overall maintained adequate documentation, application criteria and approval processes.

But the report noted the agency failed to crosscheck the new jobs companies reported against state records; didn’t keep track of the new jobs through the entire agreement period; and maintained incomplete, redacted records verifying those jobs.

“For example, to support Michigan residency, one business submitted copies of driver’s licenses with the employee’s picture, name, and license number redacted,” the report said.

The Strategic Fund countered that it used many different ways to verify the jobs and that employment records provided by companies were redacted by the agency when they were archived.

“This is done to protect the security of the data and to meet project agreement requirements to preserve employee confidentiality,” the Strategic Fund said in its response.

The auditor general report also alleges the Strategic Fund overstated the potential return on investment expected from the projects and failed to check the estimates against the actual returns.

The strategic fund noted that it would tweak its projection evaluation and that, in one instance, some math errors had resulted in a higher expected return than intended. The agency argued that the short lifespan of the program so far had not given officials time to analyze actual return on investment, but a fiscal year 2018 study would look at just that.

The auditor general report argued the strategic fund had 34 completed projects by June 30, 2017, more than enough to analyze the actual return.

“Measurement of actual results for these 34 projects could have assisted management, the MSF board and others charged with governance with making program decisions,” the report said.

The findings were unsurprising, said Hohman, especially those about skewed projections.

“The state has a terrible record of overstating the economic records of the business subsidies it operates,” he said.

(517) 371-3661