How far should the state of Illinois go to attract investment within its borders? How much should it spend to create a single job? What guidelines should it impose for grants and loans? Should it be in the job-creation business at all?
Out of a $22 billion state budget for fiscal 1990, $1 billion was allocated to the Department of Commerce and Community Affairs. This money–most of it received from the federal government–will be spent on promoting tourism, on job training, on keeping businesses afloat and in Illinois. A lot of it, according to critics, will be spent on good old-fashioned pork.
In 1989, the Illinois office of the auditor general examined DCCA. The official synopsis of their report reads like the basic case against the department:
The Department of Commerce and Community Affairs (DCCA) is responsible for State assisted economic development in Illinois. The Department, however, has not adequately planned or managed many of its various development programs.
Subsidies were awarded non-competitively without targeting specific industries. In some cases, subsidies were given to firms that did not need them.
DCCA frequently overstated claims of jobs created or retained.
Subsidy cost per job guidelines were often exceeded, and in the case of Diamond-Star Motors, exceeded $86,000 per job in direct and related State subsidies.
In some cases, program requirements were waived or subsidies were awarded without statutory authorization.
Many of the problems noted in this audit centered on capital subsidy programs (loans and grants to private firms). As a result of these problems–and the equity issue raised by awards of public money to subsidize some firms but not others–the General Assembly may wish to consider curtailing DCCA’s capital subsidy programs.
Audit manager C. Edward Gilpatric of the auditor general’s office called it “the most consuming and demanding audit I’ve ever worked on. I’ve never done one on this level. It’s complex; they’ve got more than 100 programs.”
To Gilpatric, the question was, “Does the department know what it’s doing?” He said, “We found it deficient. It’s necessary that the agency pull its programs together–they’re pretty feeble.”
Other critics ask whether the state should be doing this at all.
There are a lot of reasons to question a program like DCCA. There’s the argument that Illinois is robbing Peter–ABC Company–to subsidize Paul–XYZ Corporation. There’s the argument that if this were a well-managed state, XYZ wouldn’t have to be bribed to be here. Some people get indignant at the idea of tax dollars that could support social programs supporting private businesses. And some people with sensitive noses detect the scent of corruption in DCCA’s many highly political decisions–and in the General Assembly’s mandates to the agency.
DCCA’s mandate from the governor and legislature can be reduced to three basic areas: marketing, which means selling Illinois to everyone from tourists to filmmakers to foreign countries and companies; capital subsidies,”designed,” says the auditor general’s report, “to entice individual firms to locate, expand or remain in Illinois by reducing the cost of doing business for the firm either by awarding grants or below market interest rate loans for plant, equipment, training or operations”; and tax expenditure programs such as “enterprise zones” and Tax Increment Financing (TIF) districts. The latter, though, are usually run by local towns and other agencies, and not by DCCA.
The auditor general’s staff was generally pleased with the tourism program, finding it “well managed in terms of research, planning, and execution.” Perhaps DCCA should also be lauded for its romantic way with the facts. Consider this ad, placed in a European magazine: Over a photograph of a pensive Ernest Hemingway, the legend reads, “This is dedicated to everybody who thinks Chicagoans can only write cheques.” Below is copy speculating that the mature writing of Hemingway–who grew up in Oak Park, and promptly left it–was inspired by the young Ernest’s visits to the Field Museum and its Hall of African Mammals. “Chicago. The American Renaissance” reads the tag line.
Otherwise, DCCA’s marketing activities left the auditor general’s office uneasy. “The absence of written materials defining the foreign office goals, procedures, and priorities may indicate a less than systematic approach to management of foreign office activities,” says the report, which suggests that DCCA do comparative analyses of its overseas activities–its trade shows and trade missions–to find out what they’re really costing and accomplishing.
Steve McClure, head of DCCA since last November 16, hotly contested the proposition that overseas money might be wasted. “There are over 40 states with offices in Brussels. Illinois was the first–it was opened over 20 years ago, under Governor Kerner. We’re an envied state with an envied office.” But McClure conceded that the return on DCCA’s foreign activities–on all its activities for that matter–is hard to quantify in terms of jobs and investment.
The auditor general had the most trouble with DCCA’s capital subsidies. Take the case that comes up in any conversation about DCCA: that behemoth of subsidized industry, the Diamond-Star Motors Corporation, a joint venture of Mitsubishi Motors of Japan and Chrysler Motors. Located in Normal, Diamond-Star has cost Illinois taxpayers a bundle, the only question being just how big that bundle is. The summary accompanying the auditor general’s report says, “The estimated direct and related costs to the State included $64.2 million in training and labor, $132.3 million in transportation and infrastructure improvements, $15.8 million in financing, and $34.1 million in tax credits and abatements.” Also taking into account subsidies to be footed by local and federal agencies, the auditor general’s report estimates a public cost of $86,669 per job created.
In an interview, former DCCA director Jay Hedges put the cost per job at a considerably lower $40,000, and in another publication he said it was only $29,000. Steve McClure lowered it still further, to “around $10,000 if you count DCCA’s contributions only, and about $20,000 figuring the contribution of both IDOT [the Illinois Department of Transportation] and DCCA.”
None of these figures would appease the auditor general. “The guideline setting a maximum cost of $5,000 per direct job created was exceeded,” says the report. “Had the guidelines been followed, the upper limit of DCCA’s subsidies to DSM would have been less than $15 million.” Furthermore, “DCCA’s file for Diamond-Star Motors did not contain the standard application and review documents that normally accompany grants and loans. DCCA’s rules and administrative processes were bypassed. There was no assessment of need . . .
“Under its contract with the State, DSM’s sole obligation was to construct an automotive assembly plant in Normal,” the report continues. “DSM made no enforceable commitment to the State to hire any specific number of employees, to produce a minimum number of vehicles, or to remain in operation for any stated time period. There was no requirement that workers be hired locally or that parts be purchased locally.
“Of the $40 million provided for training, $30 million was labeled ‘flexible.’ The money was used among other purposes, to transport American workers to Japan to learn Japanese management and assembly techniques, to teach English to Japanese trainers, and to conduct a language school for children of Japanese executives working at the plant. DCCA’s guideline of a maximum of $1,000 per employee for training was exceeded. DSM spent $27 million in training funds before 1,000 workers were employed for an average of greater than $27,000 per employee.”
“There’s no relationship between their so-called planning documents and what they actually do,” said Ed Gilpatric. “There was no serious analysis on DSM, whether it would cost $88 million or $400 million. There was no research on the Sox stadium–they just said, ‘We’re going to keep the White Sox in Illinois,’ and went from there. It was the same thing with Sears; the only question they ask is, ‘How much money will it take?’ ” In the case of Sears, the original answer was an estimated $61 million, recently increased by $19 million for road work, and with even greater road-work costs–due to what northwest suburban leaders call shortsighted traffic planning–a near certainty.
Gilpatric said DCCA’s bureaucrats are seriously short of business experience; he pointed out that most of them–members of a breed that another observer of state politics calls “public service entrepreneurs”–were fund-raisers for Thompson’s gubernatorial campaigns. “There was not a single person we could identify with big-time experience in business, or in operating a manufacturing plant.”
DCCA gave Caterpillar $3 million for job training in a year when Caterpillar gave $3 million to charity. “They gave Ford a training grant, $750,000 in 1988; Ford had $856 million in profits for the quarter, and annual profits over $3 billion that year. Why is the state supporting enormously profitable firms?” said Gilpatric.
Then there’s the question of the selection process.
“At Allstate Venture Capital [for example], they’re funding a couple of every one hundred applications they receive–even though they know there’ll be some losers. DCCA’s funding of applicants is in the 90 percent level–there’s a world of difference. A lot of people have found this an interesting source of unfinished stories.”
Jay Hedges doesn’t think he or DCCA has reason to apologize. When interviewed, Hedges was the outgoing director of DCCA; he’s now in the private sector. He accused the auditor general’s office of writing a confrontational, politically motivated report that was commissioned by Democrats to embarrass Jim Thompson.
“I think the policies followed during the 13 years of this administration have been very positive. If we’ve been guilty of anything, it’s in not articulating our strategies and successes. . . . Government’s being involved in attracting industry in Illinois has been the cornerstone of this administration’s economic policy–we believe our first role is to market the strengths that Illinois has.”
He wasn’t apologizing for who got what, or how easily: “We have been reluctant to establish some of the cumbersome processes that the Department of Revenue would have to have. In business, we believe, that would be too bureaucratic. . . . Our results have been much better than private lenders’. Delinquencies have not been a serious factor.” Conceding that loans haven’t been monitored adequately, Hedges says the reason is the legislature’s failure to give DCCA money to monitor them.
What about that $80 million Sears “incentive package”? Hedges said, “This is a good opportunity for the public, newspapers, and legislature to debate the merits of the system. I have yet to hear anyone say that Sears would have stayed in Illinois if it weren’t for our package. Compared to South Carolina or Texas, the costs [of doing business] are much greater here. But we have a skilled labor force and transportation. We pushed hard that Illinois was where Sears belonged, but in the end it came down to economics. There are a lot of good reasons why Sears should have moved south. I guess the question is, do you want to be a purist, or let 6,000 jobs move out of state?” According to Hedges, the Sears package will bring money back in after the 49th month, “and after that, it’s gravy.”
What about that $3 million to Caterpillar? “I can assure you that if we had not given our funds, Caterpillar would still have given $3 million in charity. This was an enormous retraining program. They would have done it without us–but they never would have gone as far without us. Once an employee is retrained, he becomes an asset to the state as well as to Caterpillar. [Money for retraining] is the most important tool we’ve had in the last years; we’ve got the largest state program in the country.”
Said Hedges, “Thirty-eight states give economic-development incentives–I think we need them to compete effectively.” A self-described conservative Republican, he’s not willing to go along with laissez-faire economics. “As long as the playing field isn’t even–and for more than ten years the south has been going after industry in the midwest–we can’t give [incen- tives] up.”
“The auditor general’s report reminded us that [DCCA’s] mission is mixed, is messy, is muddled. It’s meant to do 542 things, so it’s no surprise that it doesn’t do any of them well,” said Democratic state representative Barbara Flynn Currie, a DCCA critic. “The people running it are not economic-development specialists. They give grants to people who are politically well connected, even when their enterprise seems unlikely to reap economic rewards.”
Said Currie, “We’re talking about, primarily, Republican pork. Thompson created it–but he didn’t put behind it the will or expertise to make it succeed. . . . [Various aspects of the report] give rise to speculation that people are rewarded for their political connections.” Currie was reminded that in 1986 Illinois House leader Michael Madigan, a Democrat, pushed through legislation authorizing a million-dollar DCCA loan, a quarter million dollars over the statutory limit, to Chicago Airlines, headquartered in Madigan’s district. The airline filed for bankruptcy within a year, something Currie dismissed. “When you do economic development, there may be some risks.”
Currie called for “tighter programs with clearer standards. Too many discretionary decisions [on funding] are based on politics. . . . I think the legislature will try to tighten up the rules and regulations in the program, and establish greater accountability. I would hope the governor himself would tighten the rules of accountability.”
Jay Hedges got vehement over this. “Republican pork hasn’t been suggested–legislative pork has been suggested. Legislation is an important process in economic development; [legislators] take active roles for their districts. Some of them are demanding, even threatening. I am conscientious in avoiding pork. I would categorically deny that we have ever given a loan or a grant for political purposes.
“You have to be active in the political process. There are liaisons–lobbyists–and it’s important to be active with them, to get projects. When they call us a political agency, that’s a compliment. If we weren’t good in politics, we wouldn’t be in business down here. Ten years ago, transportation was important–everybody wanted new roads. Today, everybody wants a new factory. We’re a service agency, working with local governments as well as the legislature. We don’t provide a loan because Senator [Pate] Philip or Senator [Philip] Rock calls and says, ‘Give this company a grant.’ I’m not going to say they don’t call–they do call. But we don’t give in to that pressure.”
Ed Gilpatric of the office of the auditor general: “[DCCA] claims the outcome was biased. . . . Jay Hedges claimed the audits turned into a confrontation. But Jay Hedges did not attend a single meeting with the auditors in 20 months. The auditors didn’t do anything–it was a one-sided confrontation. If Jay Hedges has any complaints, he ought to look to his own house.
“Everybody knows this is a pork barrel project–this isn’t an economic-development program. . . . In many grants the state legislature dictates the amount and recipient of the grant–‘Give $3 million to Caterpillar.’ It makes an interesting theory of economic development.”
“The auditor general’s report is not the Bible,” said Aldo DeAngelis.
DeAngelis, Republican state senator from Olympia Fields and cochairman the Legislative Audit Commission (now also the Republican candidate for president of the Cook County Board), has his own reservations about DCCA and its grants to industry. The latter, he said, “are like S&H Green Stamps–once everybody has them, they really don’t mean anything.
“For some time I’ve been critical of the DCCA program. However–we have to remember that DCCA is a creature of the Illinois General Assembly, and that they are carrying out the orders of the people who hired them.”
In his ten years on the commission, “I’ve never seen so much manpower put on an audit that produced so much erroneous information.” The audit was requested by Democrat Vince Demuzio, assistant senate majority leader; DeAngelis thinks that–speaking of partisanship–“there’s a political motivation here someplace.
“The auditor general went way beyond what is normally done. The conclusions weren’t consistent. . . . This report may have in fact compromised on the part of the General Assembly the perception that the auditor general’s office is a nonpartisan agency.”
For instance, in reviewing DCCA’s loans, the auditors did not choose cases at random, but picked a “judgmental sample.” “That’s an oxymoron,” charged DeAngelis. “They were out there trying to find what they could find, and when they found it, that was the sample.”
He also challenged the way in which the auditor general lumped all possible costs into the final figures: the figure of $86,000 per job at DSM “is so blatantly misstated, you have to wonder about the competence of the person who made it. They included $100 million of route 51, which has been under construction since 1967, as part of the Diamond-Star price! Well, it might serve Diamond-Star to some degree, but it still isn’t finished, and it wasn’t built for them. And they’ve charged other things to [DSM].” (The Illinois proposal to Chrysler/Mitsubishi, however, did cite the $100 million project to rebuild U.S. 51, although as a “related,” as opposed to “direct,” benefit to the Diamond-Star venture.)
“They thought the 90 percent award rate [for grants and loans] was too high–they totally ignored that all the applicants were qualified. I would never allow somebody to apply for a grant if they weren’t qualified–why go through the grief? Need has nothing to do with grants. The creditworthiness [of a firm] is not a factor unless you’re doing it as a loan. They’re criticized for being political and for being first-come, first-served. But how can you be both?”
DeAngelis thinks the DCCA grants, which don’t have to be repaid, should all be loans, which do. He thinks that DCCA “ought to be an administrative arm, rather than a decision maker in the public arena.” He thinks the various grant and loan programs have to be reviewed. But he believes that the state does need an economic-development agency. The sponsor of the Sears legislation, DeAngelis is certain that the commercial giant would have packed its bags without it; he lost some of his usual jocularity when questioned about that. And he thinks the auditor general’s office didn’t properly consider the lengths to which other states are going to attract businesses. “See, one of the things that bothers me about audits is that they don’t superimpose themselves onto the way things are done [elsewhere]. There are differences in the ways other countries, other cultures, do business. And we don’t adapt.
“One of the frustrating things, in fairness to the auditor, is that a lot of this is really nonquantifiable. How do you really measure [jobs and benefits gained]? We spend a lot of money on campaigns, but we never really know what works.”
Why not try rolling back taxes and other hobbles on business, and seeing if that works? Even the “playing field” that way.
“Roll back taxes?”asked Aldo DeAngelis. “Why not reduce taxes all the way–have no taxes at all–and see how many people we attract?”
Edwin Mills, a professor of economics at Northwestern University, thinks DCCA is a mess. “But that’s just the way state and local governments work. It didn’t start yesterday, and it’s not just happening in Illinois. I’m overwhelmed by a sense of how much expertise is brought to bear in the federal government–but the states just shoot from the hip. They don’t do any planning; they don’t do any follow-up. It’s just appalling. They’re dictated to by interest groups.”
Are the conclusions of the auditor general’s report accurate? “I’m confident that it’s true, just because I’m confident that it could be written at any time in the last 75 years for almost any state.”
Charles Leven, professor of economics at Washington University in Saint Louis, angered Aldo DeAngelis by testifying to the Legislative Audit Commission that payoffs to companies like Sears are not such a great idea. It’s not that he thinks DCCA is inherently bad. “I think it’s an agency which does some things quite well,” he said. “Most things it does enthusiastically, in an attempt to aid the Illinois economy.
“But they take an unfortunately narrow view of their role. In part, there are two problems. A firm will come to them and request assistance. The first problem is that they don’t do a terribly good job of independently determining if the firm really needs that assistance–like Sears. It’s not real practical to assume that what the recipient claims is actually the case. The second problem is that they don’t really look at the larger, more general effects on the state of Illinois. Say someone wants assistance to reopen a coal mine. It might be true that they really will reopen it, and it also may be true that they will hire people. It won’t make one bit of difference to the state of Illinois–it’ll just displace some other coal business somewhere else.
“I don’t think subsidies are necessarily evil or bad. There are many ways to justify using subsidies–but DCCA isn’t using them. A very large proportion of the people who apply are granted assistance; a large part of the problem lies in enabling legislation [mandating assistance for certain industries or companies] and guidelines.
“I would move away from programs where specific grants are made to specific recipients. Instead of giving grants and loans to firms, guarantee bank loans and make them go through the normal certification process. Stimulate capital development–lower corporate taxes. That’s not going to leave you as a hostage to the claims of potential [borrowers] you can’t validate. The state could finance a venture capital fund that would operate like a normal venture capital fund.”
Along with lowering taxes for business, Leven would work to improve the state’s health, education, and transportation services. He sees no need for most of the incentive programs. “Where’s the crisis? Illinois has a very low rate of unemployment overall. The economy’s growing. You look at the problems of blue-collar workers–well, life isn’t OK for everyone. I really don’t know where this psychology comes from. It’s kind of midwest psychosis, that the midwest entered the 1970s with this enormous supply of obsolescent capital that it had to shed, that labor had to be reallocated into new tasks. And it’s true–an adjustment had to occur, and it was not geographically random. But business service growth is as fast here as anywhere. The psychology of crisis seems misplaced.”
“The legislature is behind the times if they think that capital subsidies are a way to promote economic development in the state,” said Bruno Behrend, who at the time he was interviewed was a staffer at the Heartland Institute, a Chicago-based think tank specializing in free-market solutions to regional issues. “They’re giving subsidies to selected businesses, while other businesses have to pay taxes for those subsidies.
“A better way to attract business is to have a better business climate. Lower the tax rate for individuals and businesses. You have to look at the overall tax burden in the state. You have to look at the quality of public services, like schools–businesses are not necessarily going to want to locate in Chicago, because their employees aren’t going to be happy there. You have to look at public safety. You have to look at the level of regulation–how much does it cost to do business here? Illinois has very high workers’ compensation and unemployment insurance premiums–and those are usually two very big factors employers look at, especially manufacturers.
“If you’re paying $60 million to Sears, it’s proof of a bad business climate–you have to pay to keep businesses here. Instead of bragging about keeping Sears, they should ask themselves why Sears would want to leave.
“After the Sears deal was announced, Santa Fe asked for a TIF [Tax Increment Financing] district-financing deal. Companies are standing in line now, demanding the same thing Sears got.
“Twelve million people each give one drop of blood–well, that’s OK, that’s not so much, until somebody comes along and slurps it up. Then you have to keep giving more and more, until you’re anemic. Not that I’m trying to equate our state government with a vampire.”
Steve McClure knows he has a hard row to hoe. Director of DCCA since November 16, he was the assistant director for two years before that, “the number-two man, in charge of day-to-day operations. I knew what I was getting in for–basically, DCCA was at a point where we had had a lot of criticism in the media for a lot of months, about our management and our programs and the appropriateness of those programs.”
McClure’s first job was to set priorities while shoring up morale; he spent weeks on the road in DCCA’s various offices. He describes his priorities as “record keeping, monitoring loans, generally doing a better, more defined job.
“Basically, what the audit told me was that it simply was not enough to have successes, and create jobs, and save jobs in Illinois. We’re a public agency–we have an obligation to the taxpayers not only to have successes, but to explain those successes to them.”
One of Hedges’s last jobs was to establish, as of November 1, a new loan monitoring unit. The 1991 budget calls for more funding for auditors and monitors; but overall, it’s a shrinking budget of $753 million–nearly 25 percent less than the billion-dollar budget of ’89. The portion provided by the state is $100 million, down from $118 million this year and $141 million in ’89.
DCCA is cutting 20 programs, among them the “Clean and Beautiful” program, the enterprise zone loan program, the public infrastructure study . . . “We don’t want to have people’s expectations too high,” said McClure, “DCCA was created over ten years ago–and those were different times. We had a lot of different programs, and a lot of them were not adequately funded. There’s a false impression that DCCA is all things to all people. We need to refocus our energies on those things we do really well at.” McClure believes those are “export development and promotion, international tourism, technical development and modernization, target industry development, and rural diversification. . . . I want to clarify our mission. I want to do better.”
Although the auditor general’s report suggested cutting out incentives altogether, the concept of making Illinois so attractive to live and work in that companies will be happy here without them is one that DCCA’s proponents all seem to dismiss as naive.
“I maintain Illinois would lose a lot of jobs if we simply withdrew from offering incentives,” McClure said. “I thought that part of the audit was simply irresponsible. It’s no secret that we’ve been in head-to-head competition with a number of states, especially the Great Lakes states [to attract companies]. Every state in the nation–every state in the nation–has economic incentives. How they can say Illinois should simply withdraw is unbelievable.”
Jay Hedges can blow hot and cold on incentives in one interview. Early on, he declared, “The states who are conscientious [in the packages they offer] will still be in the business five years from now. . . . In Illinois, we have careful guidelines, careful benchmarks.” A few minutes later he saw “a backlash coming toward incentives; the economy is healthier–I think the state will back off from them.”
And he confided that there are “secret disarmament talks between the states [that offer incentives]–they’re very quiet.” Hedges predicted, “I firmly believe that in five years Illinois and most states will be out of this business. I just as firmly believe that it was important for us to be in it.”
Art accompanying story in printed newspaper (not available in this archive): photos/Charles Eshelman.