State Records: Businesses Miss Job Pledges, But Taxpayer Money At Stake

By Andrew Staub | PA Independent

A Chinese food buffet in the city of St. Mary’s in Elk County won a $200,000 loan backed by the Bank of John Q. Public in 2009.

The loan from the Pennsylvania Department of Community and Economic Development, ChinAmerica Palace owner Chong Jin said, was instrumental for his business, but the return on the taxpayers’ investment hasn’t been of smorgasbord proportions.

While the restaurant pledged to create or retain nine jobs, it created just four, prompting the state to up the the interest rate of its Small Business First loan by a quarter of a percent.

“The business is just very slow. Very slow,” Jin said earlier this month.

Investing in a businesses can be a risky proposition – just ask any banking institution – and in the case of ChinAmerica Palace, taxpayers were the ones exposed.

It happens often.

Similar cases formed the foundation of a recent state audit that found Pennsylvania gave $93 million to businesses that didn’t meet job pledges.

Auditor General Eugene DePasquale didn’t name the businesses that fell short, but information obtained from DCED through an open-records request shed more light on the public funds and where the money went.

The data showed that ChinAmerica Palace was a modest example. ES3, a York County logistics company that received a $1.3 million grant in 2009, missed its job creation and retention pledge by 747 jobs, the most of any recipient for which jobs data was available.

In Allegheny County, Education Management,which operates private, for-profit colleges in the United States and Canada, received a $3 million grant in 2010. It fell 419 jobs short. The company has also run into well-publicized financial problems and has been the target of lawsuits and investigations about its recruiting practices.

ES3 officials did not return a message seeking comment, while an Education Management spokesperson declined to comment.

The DCED data covered 72 recipients whose cases were reviewed in detail as part of DePasquale’s audit, which examined 600 contracts awarded through five programs from 2007 to 2010. The statistical snapshot showed just 16 of the six-dozen recipients met or exceeded job pledges, though final job tallies for another 16 businesses were not available, meaning more could have reached their goals.

Still, the low number of recipients that hit their marks raises concern about the investments taxpayers are making.

Nathan Benefield, vice president of policy analysis for the Commonwealth Foundation, a free-market think tank, said the cost of the incentives drives up taxes elsewhere and makes the state less competitive.

“Press conference politics” keep the state pumping out the money, Benefield said. Ribbon-cuttings make for good headlines, regardless if a negative audit could come in the future.

“Those are the things that get headlines and draw praise,” Benefield said. “So, the political incentive of providing grant funding alone and saying that, ‘Hey, we created this job at this location,’ it’s good politics. It may not be good economics.”

DCED spokesman Steve Kratz said the department’s goals are similar to DePasquale’s. It wants transparency, accountability and a maximum return on investments.

The jobs data also looks more favorable when analyzed in different manner.  Even with incomplete records, the records show award recipients created or retained about 83 percent of the 27,405 pledged jobs.

“The majority of these loans were awarded during what many consider to be the second worst economic downturn in our nation’s history,” Kratz said. “Despite this economic downturn, the overall portfolio of projects achieved a significant percent of the created and retained jobs that were projected.”

Even some big misses brought big jobs numbers. ES3 managed 2,024 jobs and Education Management 2,894.

There also were stories of recipients having more success than projected. For example, the state invested $500,000 in a Fayette County project that yielded 1,576 jobs, 526 more than originally pledged. Two other western Pennsylvania projects exceeded their marks by 392 and 177 jobs, respecitvely.

And when recipients fell short, the state often took action, raising interest rates or seeking reimbursement, sometimes called “clawbacks.” Es3 paid back more than $57,000, and Education Management has refunded $319,332 of $798,329 due back, according to DCED. In some cases, extensions were granted or legal action was taken, the records indicated.

Gov.-elect Tom Wolf, who takes office on Tuesday, supports greater oversight and transparency over job-creation programs, said his spokesman, Jeffrey Sheridan.

Wolf has made clawbacks part of his plans for a “cash back” jobs creation program called Made in Pennsylvania. The program would send cash to manufacturing businesses that increase their annual taxable payroll by at least $1 million.

The companies would have to maintain full-time jobs with an average pay equal to or above its county’s wage and offer competitive health benefits. If they did not maintain the jobs for five years, they would have to return the cash to the state.

While the clawback provision was proposed as part of specific program, “that’s not to say it wouldn’t be broadened,” Sheridan said.

Still, measuring the success of job-creation incentives can be complicated, and bureaucrats and elected officials often make decisions based upon politics rather than sound business principles, Benefield said.

“No one is going to be more careful with other people’s money as they would be with their own money,” he said.

And when the risks don’t pan out, taxpayers are left holding the bill even if the state had the best of intentions, as was the case with ChinAmerica Palace. Kratz said the area’s unemployment rate peaked at more than 14 percent in 2009, and the project included the redevelopment of a building that sat unoccupied for more than three years.

There’s still time for the business to rebound. Jin, the ChinAmerica Palace owner, said he hopes business eventually picks up. He’s counting on it. Taxpayers are, too.