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September 8, 2010

Phantom Jobs:
The Texas Enterprise Fund's Broken Promises

“It’s true that due to the economy, many of us have not created
the number of jobs that the state was hoping for.”
--Iga Hallberg, vice president of Enterprise Fund-recipient HelioVolt Corp.

I. Introduction;     II. The Enterprise Fund By the Numbers;     III. Company Profiles     IV. Clean-Up Recommendations

Have a look at our summary HERE.

I.  Introduction

Private companies took tens of millions of state dollars without delivering on related job promises as the global recession struck in 2008, a previous Texans for Public Justice study revealed.¹ As Rick Perry makes the Texas Enterprise Fund (TEF) a centerpiece of his reelection campaign, his office has politically manipulated the troubled jobs program. While Governor Perry convenes media events to unveil new TEF grants and job projects, his office works out of the limelight negotiating TEF amendments that rollback TEF job promises. TPJ predicted in its previous report that many more TEF recipients would default on job promises in 2009. Unfortunately for would-be Texas workers, that prognosis was dead on.

This report analyzes 2009 compliance reports filed by 50 TEF recipients that faced job targets by that year (this excludes recent grantees whose first job commitments arise thereafter). With notable exceptions, these 2009 compliance reports paint a dismal economic picture, raising questions about the return that taxpayers are receiving on the $368 million in state TEF funds. The Governor’s Office has pulled the plug on six of the 50 TEF projects studied here, terminating them outright. Thirteen more TEF grant recipients broke their original TEF job promises in 2009, when Texas needed jobs more than ever. Fourteen more TEF recipients persuaded the Governor’s Office to amend their original TEF contracts to reduce their job pledges or postpone hiring dates. TPJ classified four TEF projects as “troubled” (typically they could not meet their 2009 job commitments without drawing on surplus job credits accumulated in previous years).² TPJ classified two TEF contracts as “weak” as originally negotiated because these deals either failed to impose a job-creation deadline or allowed a recipient to take credit for jobs unrelated to their TEF grant. Finally, 11 TEF recipients kept their 2009 job commitments without signs of problems.

TEF Job Performances Plummeted From 2008 To 2009

In the space of one brutal year, the percentage of TEF job projects that were terminated, non-performing or crippled by amendments shot up from 42 percent to 66 percent. TEF failed to deliver on its promises in 2009—when Texas needed the jobs most. The governor and his staff share some of the blame. They repeatedly amended TEF contracts to lower the criteria used to measure success, saddling corporate welfare recipients with the poison of low expectations (although the governor, lieutenant governor and House speaker approve initial TEF grants, the Governor’s Office alone negotiates TEF amendments).

In its first four years of operation, TEF amended just one development deal.³ Today, the Governor’s Office has amended 14 TEF contracts at least once (see accompanying table).⁴ These amendments had a crippling impact on the number of new jobs that the affected companies were required to produce during the recession. The original TEF contracts of these 14 grant recipients required them to create a total of 9,793 new jobs by the end of 2009. As amended, the same recipients had to create just 6,017 jobs in that same period. These alterations vaporized 3,776 promised jobs in 2009, or 39 percent of what the parties originally promised. Over their entire lives, the 14 altered agreements originally promised a total of 17,614 new jobs. Amendments dropped these promises to 12,729 new hires, eliminating 28 percent of the promised jobs.

Amendments Gutted Job Targets For 2009,
When Texas Needed the Jobs Most

Note: Where original and amended job targets differ, the job number listed in bold is what the Governor’s Office claimed in a June 2010 report posted on its website.⁶
*Amendment contains a multiplier to generate phantom jobs (click through to see the Vought profile for more explanation).

 

The Governor’s Office has not come clean about the extent to which its job promises have receded during the recession. More often than not, it continues to tout the larger job numbers found in the original TEF contracts rather than the smaller, amended job targets that it has since negotiated. The last two columns in the accompanying table show five cases where amendments slashed a TEF contract’s total job targets. Although the last of these amendments were signed in late 2009, a June 2010 TEF report on the governor’s website continued to report the larger, outdated job numbers for four of the five projects. While political capital might be squeezed from phantom jobs, the charade breaks down for Texas families that can’t cash a phantom paycheck.

Governor Perry likes to boast about Texas’ economic performance, which he attributes to TEF and to state policies limiting regulations, torts and taxes. As the accompanying graph illustrates, however, Texas’ employment growth rate turned negative starting in February of 2009, according to Texas Workforce Commission data, and did not swing to positive growth until May 2010. Texas’ unemployment rate shot well beyond its peak during the dot.com-bomb,⁵ hitting 8.2 percent in July 2010 (below the U.S. unemployment rate of 9.5 percent). Whether measured by unemployment, job losses or Texas’ gross domestic product, it is Texas’ worst performance in 22 years, surpassing slumps in 1982, 1985 and 2001, according to a 2010 report by the Federal Reserve Bank of Dallas.⁷ Although it outperformed the national economy, Texas’ pain was tangible—with 350,000 jobs destroyed in 12 months. Many TEF-subsidized enterprises reported that they, too, have been hammered.

A June 2010 TEF report credits TEF for creating 53,625 jobs. Governor Perry similarly claimed in January 2010 that TEF has created 54,600 jobs since the program’s inception in 2003.⁸ Recent TEF compliance reports provide evidence of 22,544 jobs in which a TEF grantee employed new workers on a TEF-funded project by the end of 2009. This covers 41 percent of Governor Perry’s jobs claim. Three TEF projects made much sketchier claims for spurring 8,147 indirect jobs in 2009 (see profiles for the Center for Advanced Biomedical Imaging, Texas Energy Center and Texas Institute for Genomic Medicine). Combining these more nebulous claims yields 30,691 jobs,⁹ or 56 percent of the governor’s claim. Clearly, Governor Perry counts jobs before they hatch, confusing job promises with actual paychecks. This is problematic on two levels. First, as explored below, this recession is littered with the broken promises of dozens of TEF recipients. Second, the governor’s penchant for contract amendments has turned many TEF job promises into downward-moving targets. Taken together, Governor Perry is taking credit for creating tens of thousands of phantom jobs that are not now putting food on anybody’s table. TEF’s track record suggests that many phantom TEF jobs will never yield a paycheck.

While TEF touts job creation, it awarded $40 million to Sematech to maintain pre-existing jobs.¹⁰ Pre-existing jobs also are a concern with at least five TEF projects that belatedly established—or lowered—the baseline used to count “new” jobs (see profiles of Fidelity, HelioVolt, Motiva, Rockwell Collins and Vought). Nor are all TEF-subsidized jobs reserved for Texans. TEF’s $7 million contract with Tyson Foods expresses the “goal (but not requirement)” that 90 percent of the hourly workers at Tyson’s Sherman plant be “Texas residents.” Portugal-based Martifer Energy Systems reported in May that 11 of the 21 workers that it lined up for its TEF-subsidized plant in San Angelo were awaiting U.S. work visas.

The Governor’s Office does a better job of doling out state money than recovering it. TEF contracts contain liquidation clauses that grant the state the option of recovering all of its funds—plus interest—if a grant recipient falls woefully short of initial job targets. In a typical TEF contract the job “floor” that triggers this death penalty is defined as half of a recipient’s initial job promise. Albany Engineered Composites, for example, signed a January 2008 TEF contract that promised to produce a grand total of 337 new Texas jobs, including 55 jobs by the end of 2008. The liquidation clause allowed the state to demand a refund if Albany failed to produce 28 jobs by the end of the first year. Albany reported that it produced just 17 jobs, at the end of 2008. A year later, it reported that its Bourne plant now employed 13 fewer people than it did when it signed its TEF contract two years earlier. Instead of imposing the death penalty, the Governor’s Office amended the contract in late 2009 to retroactively relieve Albany of its obligation to produce any new jobs in 2008 or 2009.

As Albany’s profile reveals (see below), the recession has mercilessly hammered this manufacturer of aerospace materials. Yet the crisis also has been merciless to the other party to TEF contracts: taxpaying Texans. Job creation has been the primary justification for TEF awarding more than $300 million in scarce public funds to private enterprises. Suffering its worst economic crisis in decades, Texas desperately needs jobs today. More often than not, when TEF recipients qualify for the death penalty by failing to deliver promised jobs, the Governor’s Office shifts the goal posts with amendments rather than recouping the state’s money. TEF awarded more than $6 million to six companies that qualified for the death penalty in 2008 or 2009 (see accompanying table). So far the Governor’s Office has acknowledged terminating just one of these deals: Gulfstream Aerospace.

Recent TEF Contracts That Qualified For the Death Penalty

 

TEF agreements also contain “clawback” provisions that allow the state to impose financial penalties when recipients fail to meet contractual commitments. The Governor’s Office reported in June 2010 that it had imposed $2.8 million in such penalties on 17 of the 50 TEF recipients studied here (34 percent of the projects). These penalties amounted to less than 2 percent of the $116 million that TEF already had disbursed to these companies. Many of TEF projects also received other public subsidies in the form of property-tax abatements, job-training grants or tax credits.

Evaluating original TEF contracts, TPJ identified 50 TEF projects that faced some kind of job target by the end of 2009.¹¹ Eleven recent TEF awards could not be evaluated because their initial job targets come due in 2010 or thereafter.¹² TEF awarded the 50 projects analyzed here a total of $368 million to create or maintain 33,166 by the end of 2009. By that time they reported that they delivered 30,381 jobs; ¹³ this total drops to 23,678 if you throw out two projects that claim thousands of jobs nebulously linked to their TEF grant (Center for Advanced Biomedical Imaging and Texas Institute for Genomic Medicine). Over their entire lifetimes, these same 50 projects pledged to eventually create 49,581 jobs (at an average of $7,426 per job). As of the end of 2009, these TEF projects certified the existence of 61 percent of these jobs. Some of the remaining 19,200 promised jobs will be created in the future. Others will be wiped out by contract amendments and terminations, never producing a paycheck.

This report takes a closer look at TEF projects that the Governor’s Office has amended or terminated, as well as projects that are troubled, weak or non-performing. Comparing the original contractual promises of TEF grant recipients to the actual results that they have reported reveals that unemployed Texans share something in common with the Texas Enterprise Fund. They are both haunted by the specter of many thousands of phantom jobs.

Unemployment Insurance Has Funded the Enterprise Fund The severe recession quickly drained Texas’ Unemployment Compensation Trust Fund of sufficient funds to pay benefits to all the state’s laid-off workers. To prevent shortfalls, the Texas Workforce Commission has tripled the unemployment-insurance taxes paid by most employers in 2010.1 TEF exacerbated this problem. The state unemployment fund has transferred $161.5 million to Governor Perry’s job fund since the legislature authorized such funding in 2005.2 In other funding, the legislature has appropriated $577 million for TEF since 2003 (though it snubbed Governor Perry’s request for $261 million more in 2009).3 1 Jobless Taxes To Spike for Many Employers,” Dallas Morning News, December 9, 2009. 2. “Enterprise Fund Pulls Millions From Unemployment Taxes,” Associated Press, April 1, 2009. 3 “Perry, Dewhurst See Pet Projects Trimmed,” Dallas Morning News, May 20, 2009. The Legislature authorized TEF by passing HB 7 and SB 1771 in 2003.

TEF Penalties Amount To Just 2 Percent of State Funds Paid to Penalized Companies

Note: Penalties include repayment penalties, clawbacks and performance-based losses of additional disbursements.

 

Status of Job-Related TEF Contracts

*TPJ wrongly classified HelioVolt as “performing” in 2008 (explained in HelioVolt profile below).
Note: Table excludes recent TEF deals facing initial job targets after 2009. Job numbers and grant amounts reflect original TEF contracts—not subsequent amendments.

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