Report: JOBZ subsidy program unfocused and lacking oversight

John Yunker and James Nobles
John Yunker, project manager for the Office of the Legislative Auditor, and Legislative Auditor James Nobles, present a report critical of the JOBZ program.
MPR Photo/Tim Pugmire

Gov. Pawlenty won legislative approval in 2003 for his Job Opportunity Building Zones program, also known as JOBZ. The program offers tax breaks to businesses that start up, expand or relocate in designated zones outside the seven-county metro area.

Since 2004, 350 businesses have received a total of $46 million in tax reductions. But Legislative Auditor James Nobles said the program needs many improvements.

"We think that JOBZ is doing some good in some places," he said. "But we think the program at this point in its life really needs some re-tooling, some reform at the legislative level. And also some tightening up in its administration and particularly stronger oversight for the Department of Employment and Economic Development."

Jobz report
A new report by the legislative auditor criticizes the Jobz program's lack focus on the most needy businesses.
MPR Photo/Tim Pugmire

The report from Nobles' office says JOBZ has not met its goal of targeting areas that are considered economically distressed and in most need of assistance. In addition, the program has subsidized some businesses that are competing with existing Minnesota companies for the same customers. The report also raises questions about the true economic impact of JOBZ.

John Yunker, the project manager for the audit, said the Department of Employment and Economic Development, or DEED, has overstated the business growth by nearly 30 percent.

"One fifth of the businesses have reported to DEED in a survey that DEED does that they would have expanded to the same extent that they did even if they didn't get JOBZ," he said. "Another 50 percent said they would have expanded to some extent in Greater Minnesota even without JOBZ. So clearly some of the growth would have occurred anyway."

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The report recommends state officials improve their oversight of JOBZ agreements and limit the number of new businesses entering the program each year.

DEED Commissioner Dan McElroy welcomed the report and promised that improvements to the complicated JOBZ program are already in the works. McElroy said there's no reason to get rid of a program that has created new jobs.

"The program looks a little differently sitting in a conference room in St. Paul than it does when you're on the street in Redwood Falls, where Daktronics moved from Brookings, South Dakota, and created 270 jobs," he said. "And we talked to the Redwood Falls people this morning and how excited they are about having Daktronics and how convinced they are that Daktronics wouldn't be there but for JOBZ."

During last year's legislative session, Pawlenty fought off an attempt to to scrap JOBZ. But Sen. Tom Bakk, DFL-Cook, chairman of the Senate tax committee, said JOBZ could be in the cross hairs again this year. Bakk, who sponsored the the 2003 bill that created JOBZ, said he would prefer to keep the program, but only if it gets fixed.

"If we can get some additional state oversight and make sure that the projects happen clearly in economically distressed areas, I mean I'm not that interested in getting rid of the program," he said. "But if we're going to continue to run it just how we've been doing it, I'm not that interested in running it any longer."

JOBZ is also still facing a legal challenge from business owners who claim they've been harmed by the program. Attorney Rob Leighton said his clients own cabinetmaking, engineering, printing, telemarketing and trucking companies. Leighton said the legislative auditor's report confirms that JOBZ is creating some jobs at the expense of others.

"Direct competitors may be in the exact same town or the same county at least the same region are receiving these tremendous tax benefits when they're not," he said. "And they feel that it's unfair and what our compliant alleges is it's in fact an unconstitutional law."

The businesses filed the lawsuit last June. Leighton said the case is currently in the discovery phase.