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Editor's Notebook: Economic incentives cost but few officials can afford to turn their backs on jobs

Peggy Boyer Long
WUIS/Illinois Issues

The late state Sen. Aldo DeAngelis may have put the matter most succinctly. In the summer of 1989, he was listening none-too-patiently to criticism of the state's decision to grant Sears, Roebuck & Co. a $61 million financial incentive package, sweetened by tax breaks and development benefits, when the company threatened to move its Merchandise Group to North Carolina or Texas. Critics, we reported then, were suggesting to the Legislative Audit Commission that Sears might have snookered the state out of a good deal of public cash. Finally, DeAngelis, a Republican who hailed from Olympia Fields, exploded in frustration. 

"I guess," he said, "you could have said to Sears, 'suck wind,' and see what happened."

That July, Sears represented only the most recent example of what at the time was a national trend: competition among the states to package financial deals aimed at attracting and keeping businesses — along with jobs and tax revenues. 

In fact, the bipartisan commission had scheduled that summer's meeting to review a critical audit involving economic incentives granted to another company: Diamond-Star Motors, now a division of Mitsubishi. Then-Auditor General Robert Cronson had just issued a scathing examination of the agency responsible for building Illinois' business climate. Cronson charged that the Department of Commerce and Community Affairs — recently renamed the Department of Commerce and Economic Opportunity — had an incoherent policy for offering financial subsidies, gave some companies incentives they didn't need and overestimated the number of jobs that could be created. As for the Diamond-Star deal, Cronson charged the state had shelled out $86,669 in public funds for each job created at the Normal plant, far exceeding the agency's own guideline of $5,000 per job. For his part, the agency director at the time, Jay Hedges, countered that it was closer to $29,000 in public funds for each job — a price he believed worth paying to land the 2,800 jobs promised by the joint venture between Chrysler Motors Corp. and Mitsubishi Motors Corp. of Japan.

But Cronson had a larger point. Capital subsidies given to individual companies, he concluded, "raise issues of both equity and public purpose." Why, in other words, should some companies get such public benefits and others not? How does the state decide?

In a sense, DeAngelis' response was that large companies threatening to relocate to states prepared to offer better deals have Illinois officials over a barrel. He was asking a more fundamental question: Can Illinois, and the state's municipalities, risk not offering financial subsidies? Can elected officials afford to turn their backs on potential jobs?

Through the past decade and a half, though the heyday of "smokestack chasing" is behind them, state officials continued to wrestle with this issue — and continued to provide public subsidies to private enterprises in an effort to boost economic development. 

Sometimes a deal was designed, in part, to bolster the state's sense of itself or to lubricate an already functioning economic engine. Jobs weren't the key to the state's desire to draw Boeing's headquarters to Chicago. Nevertheless, the aviation giant got $52.5 million in tax breaks and other incentives. The state's share was nearly $30 million with the city of Chicago kicking in the rest.

Sometimes a deal was designed, in part, to help an economically struggling region. The state distributed $6.9 million, for instance, to support aquaculture through the Illinois Fish Farmers Cooperative in Pinckneyville and to back the co-op's fish processing plant — before pulling the plug on the failing enterprise. The co-op was unable to make a go of the processing plan. And, as of last spring, it had $500,000 in outstanding debts and was trying to sell off equipment. Auditor General William Holland cited the Department of Agriculture for lax oversight. 

Illinoisans haven't always won this gamble. Mitsubishi Motors is now sending out pink slips. More than 1,000. And, according to the State Journal-Register of Springfield, some of those laid-off workers have been on the job since late 1989 when state financial support was in full swing. Now the state is putting up $1.5 million to help those employees laid off at Mitsubishi, as well as other dislocated workers. 

Maytag Corp. won more than $7 million in grants and loans, an effort to convince the company to keep its Galesburg plant. And local governments in Knox County threw in property tax abatements. Still, the company decided to shut operations in Illinois, meaning the loss of 2,000 jobs, some of which will be moved to Mexico. Last summer, Knox County State's Attorney Paul Mangieri was considering suing on behalf of local government bodies to recoup those abatements, according to the Peoria Journal Star. 

And Motorola Inc. won $36 million in state subsidies for a cellular phone manufacturing plant in Harvard before shutting operations there.

Last year, these moves inspired a state law aimed at holding firms that receive public subsidies accountable if they fail to follow through on promises. That was an idea the states were considering back in the 1980s, too. But former Gov. James Thompson told Illinois Issues at the time that contracts requiring companies to pay back the value of incentives if they fail or renege are "more show biz than reality." No corporation in America, he argued, can guarantee what its employment is going to be in five or 10 years. "We haven't," he said, "had enough bad experiences in Illinois economic development policy to be worrying about that as a priority at the moment."

To individual workers, and the communities where they reside, the bad experiences have mounted. Yet, if anything, the economic development issue has grown more complex, and the solutions less clear. As recently as a decade ago, Illinois was competing with Indiana, say, or Texas, engaging in what was called "border wars." But those borders have expanded. Today, the state is competing with Mexico and China. And, while business was once buffeted by national economic shifts, it must increasingly contend with global economic forces that can defy most long-term planning. The fate of the Mitsubishi plant in Normal, for instance, is dependent on the company's volatile fortunes in Japan. In this context, can the state realistically hold a company's feet to the fire in Normal, Harvard or Galesburg?

Business is built to maximize profits. And that's what it does. So if the public sector wants to intervene in the free-market sector, there are inevitable risks. Getting it in writing is worth a try. But beyond efforts to mandate "corporate accountability," the record shows there's room for "government accountability." Two state auditors general have said as much. 

Cronson's report on the state's role in economic development was the most comprehensive. He supported contracts when financial subsidies are given, and recovery if firms fail to comply with obligations. He also called for analyses of economic impacts and financial need. And he called for stronger oversight by the state. But he also suggested the General Assembly might want to eliminate subsidies to individual firms and concentrate development resources on programs that make Illinois a better place to do business for all firms.

We point to an encouraging step in this issue: a state-backed community and small business development program outlined by Stephanie Zimmermann. But a piece by Dori Meinert, noting the congressional rewrite of the corporate tax code, reveals elected officials' instincts. 

So will government officials say "suck wind" anytime soon? Not likely. As we reported 15 years ago this month, not many politicians are eager to be spoilers when jobs and benefits for favored businesses are at stake.

Peggy Boyer Long can be reached at Peggyboy@aol.com.

Illinois Issues, November 2004

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