Is There Value in the Iowa Values Fund?

Word that a Marshalltown factory that has received millions of dollars’ worth of state incentives will lay off 250 workers has sparked debate about the success of the Grow Iowa Values Fund.

Its promoters say it’s vital to Iowa’s economic future. Its detractors say it smells more like corporate welfare. But in the end, both sides agree that the true success of the program is difficult to measure.

The Values Fund, which is administered through the Iowa Department of Economic Development, is the brainchild of former Gov. Tom Vilsack. Its purpose is to make grants and give tax credits to businesses seeking to relocate and expand in the state. The money, which totals $50 million a year, goes to recruitment and retention, but also to things such as job training and research at Iowa’s regent schools.

For awards given from July 1, 2003, through June 30, 2007, the total number of projected jobs by project completion was 23,548, according to data compiled by The Iowa Independent. But critics are quick to point out that there is no way to determine if the money awarded to companies in any way affected their business decisions.

Lennox International, a maker of furnaces and air conditioners, announced last week that it will be laying off 150 employees this August and another 100 in the next year at its Marshalltown factory.

In 2006 the company signed an agreement with IDED to receive $6.6 million of forgivable loans from the Values Fund. Lennox received its first payment of $1.6 million in 2005, said Stephanie Bjornson, IDED’s public information officer. Starting in 2006, when the contract was officially signed, the company was to receive $833,333 a year until 2011 as long as it maintained at least 1,000 employees in Marshalltown. If the number of employees dropped below 1,000, the amount of money Lennox would receive each year would go down by the same amount.

Officials with Lennox did not respond to Iowa Independent’s attempts to reach them for comment.

A company receives millions of dollars in incentives by promising to stay in Iowa, then cuts its workforce. Critics say this is an all too familiar example of how the Values Fund has been a failure.

The Politics of the Values Fund

Since the day Vilsack announced plans for the Grow Iowa Values Fund in his 2003, Condition of the State address, it has been a controversial topic.

Originally, conservative critics argued that the Values Fund would not go far enough to boost the state’s economy, saying instead the fund should be wrapped in a bigger package of tax reforms and regulatory changes. Liberal critics said it was just another handout to big corporations, saying that throwing money at a company may keep it in the state for a while, but putting money into education or infrastructure is a better use of resources in the long run.

A version of the Values Fund was passed in special legislative session in 2003 but was struck down in 2004 by the Iowa Supreme Court over a dispute about Vilsack’s veto power. In a one-day special session in September 2004, the Legislature finally approved $50 million annually for 10 years for the Values Fund.

The fund became a topic for debate once again in the Democratic gubernatorial primary of 2006, with candidates Chet Culver and Ed Fallon voicing criticism of the fund and Mike Blouin, Vilsack’s former economic development director and architect of the Values Fund, arguing its merits.

Despite saying he wanted to tinker with the way the fund is administered during his campaign, Culver has suggested no major changes to the fund since taking office.

“The Jobs — Do They Stay or Do They Go?”

Colin Gordon, senior research consultant with the Iowa Policy Project, said the fear many critics of the Values Fund have is that once contracts expire and companies have received their last payment, the jobs that were created will disappear.

“We are encouraging companies to shop around with our economic policy,” he said. “It’s not in our long-term best interests.”

The fund’s formal rules offer only a weak guarantee that the recipients of awards be accountable for future wages, job creation or job retention, Gordon said.

“The value per dollar spent is hard to gauge,” said Dave Swenson, an associate scientist in the department of economics at Iowa State University. “The goal is to bring the jobs to Iowa and hold them forever. But there is no guarantee they will stay once contracts expire.”

According to IDED’s 2007 annual report, of the 441 contracts entered into for Values Fund money, only 19 are in default because companies failed to live up to their requirements. But these numbers reflect only companies that did not honor their commitments, not companies that have but are now not under contract.

Companies make location decisions based on infrastructure needs, available workforce, skill level of the workforce and amenities, to name just a few reasons, Gordon said.

“It does not follow – just because a firm pockets money from the Values Fund – that the Fund can claim credit for all the jobs and investment that come afterward,” Gordon said. “We have no way of knowing whether Values Funds money actually attracts these firms. Certainly the academic research on this question is unequivocal that firms make location decisions based on local suppliers, customers and workers. No one turns down subsidies or tax breaks being thrown at them, but these are rarely the keys to investment and location decisions.”

Competition is fierce among states, IDED’s Bjornson said, and if Iowa doesn’t pony up, other Midwestern states will.

Swenson called this a “race to the bottom,” with Midwestern states trying to beat their neighbors but only making matters worse.

“Infrastructure, amenities, education, it all suffers, and thus, the Midwest becomes a less desirable place to do business,” he said. “The Midwest, including Iowa, is doing more damage to itself than anything else.”

Hundreds of millions of dollars have been doled out by the Values Fund, Swenson said, but Iowa has still grown at only one-third the rate the rest of the nation has. In 1982 Iowans made 92 percent of the national average for earnings per job. Today that figure stands at 78 percent.

“We have a high percentage of employment, but we also have one of the highest percentages of elderly workers,” he said. “Some communities have added jobs, but the populations continue to go down. Less people are doing more work. Iowa’s economic policies have been an abysmal failure.”

Dave Maahs, executive vice president of the Greater Des Moines Partnership, travels the country pitching the Des Moines metropolitan area as a good place to do business. He said that while government economic incentives aren’t the biggest reason companies choose a location, they do play a part.

“When it comes to site selection, as companies narrow their options, they come to a point where costs are comparable for several different spots,” he said. “That’s when incentives come into play. It’s very competitive, and it’s important for us to have the tools to be in the running.”

Each Values Fund contract goes through a return on investment study to try to determine whether it is worthwhile, Maahs said.

“It has been a vitally important economic development tool for Iowa,” he said. “And IDED works very hard to ensure companies live up to their end of the bargain to ensure tax dollars are not wasted. If companies fail to meet requirements, they have to pay the money back.”

One of the first recipients of Values Fund money was Wells Fargo & Co. It received millions of dollars in incentives and tax breaks to expand in Des Moines and West Des Moines. Critics said this in an example of giving taxpayer money to a multibillion-dollar company that doesn’t need it, but proponents responded that Wells Fargo eventually created more than the 2,000 jobs it promised to produce as part of its Values Fund contract, with salaries averaging around $42,000 a year. An economic impact study commissioned in 2007 said that for every Wells Fargo job in Iowa, about two other jobs are sustained elsewhere in the state.

“The Values Fund has been a success and has brought a lot of high-paying jobs to the state,” Bjornson said. “It’s just one tool we have to keep and bring jobs in the state, but it’s an important tool.”

Gordon said IDED can point to a few scattered success stories, but in the end the true impact of the Values Fund is murky at best.

“It diverts money from improving the things that truly matter to companies, and that hurts Iowa in the long haul,” he said. “These incentives are a short-term, politically easy fix to a much bigger problem. If you ask a business, and they answer honestly, they will say these incentives make very little difference to their final decision of where to locate.”