It’s there in big type at the top of SPARK’s latest annual report: “13,034 new jobs since 2006.”
Sumi Kailasapathy doubts it.
“The job creation claims for previous years made by SPARK have proven to be unverifiable,” asserts the Ward One councilmember in a recent email.
Other councilmembers share her doubts. Last May, Mike Anglin, Jack Eaton, Steve Kunselman, and Jane Lumm joined Kailasapathy in supporting a budget amendment that would have redirected $75,000 from the business development group to human services.
“We do a lot of pro-business stuff in this city, and $75,000 is not big money for SPARK,” Kailasapathy told the Ann Arbor News. “If they didn’t get $75,000, it is not harming them, but it would help more in other areas.”
Kailasapthy and her allies also offered another amendment to shift $125,000 from SPARK to infrastructure improvements. That was defeated on a six-five vote. By the same margin, SPARK’s supporters tabled the motion to redirect the $75,000.
As Kailasapathy said, it wasn’t big money to SPARK: in 2013, its operating budget was $5.9 million. But a much bigger showdown loomed. Fully one-third of that budget–roughly $2 million last year–comes from a contract with the Ann Arbor/Ypsilanti Local Development Finance Authority. And the LDFA’s power to “capture” local school taxes was due to expire in 2018.
The authority was seeking the city’s approval for a fifteen-year extension. Kailasapathy also opposed the LDFA renewal, she emails, because “in the next 15 years $60 million dollars will be diverted from the State School Aid Fund to SPARK. I do not believe that this is prudent when our schools are so underfunded.”
There were deeper issues as well. As Kailasapathy explains it, “My dealing with SPARK in the past few years has left me lacking trust in them.”
Motivated by the close call, SPARK staffers spent the summer making their case to councilmembers. When the contract and the LDFA extension came back before council in September, only Anglin, Eaton, and Kailasapathy voted no.
Ann Arbor county commissioner Andy LaBarre also handles government affairs for the Ann Arbor/Ypsilanti Regional Chamber of Commerce. Asked what the local economy would look like if SPARK never existed, he replies, “My guess is that the private sector would be perhaps not as strong. But, hell, I don’t really know. The critics are right in asking for more transparency.”
A local elected official who asked not to be named suggests that SPARK serves as a whipping boy for opponents of former mayor and board member John Hieftje. That seems plausible, since SPARK’s opponents also frequently opposed Hieftje. But the official also thinks SPARK aggravated the problem through what he calls its “arrogance.”
Ken Nisbet, director of U-M’s Department of Technology Transfer, was there at the beginning.
In a gleaming white conference room in the U-M’s North Campus Research Complex, the silver-haired Nisbet recalls a 2002 meeting when a member of his board asked what was needed to help accomplish the department’s mission: commercializing technology invented by U-M faculty and students.
“We need a great public/private partner to help with industry attraction,” Nisbet remembers replying. U-M president Mary Sue Coleman “heard my pitch and said ‘That’s a really good idea. I’d be willing to help.'”
So they put together a plan with input from a venture capitalist who would one day be governor. “Rick Snyder was the chair of my board,” Nisbet says. “We came up with what SPARK would look like, and Mary Sue shopped it around.”
Ann Arbor and the county agreed to fold their own economic development offices into the new group, and thirteen other communities signed on–along with EMU, WCC, and businesses like DTE and McKinley. SPARK opened in late 2005 with Snyder as its first board chair and Snyder’s venture capitalist friend Mike Finney as its president and first employee.
Former equity fund manager Skip Simms was the second. “I started in January of ’06 and was hired to put together the entrepreneur program,” SPARK’s senior vice president recalls.
“Not many economic development organizations are like us,” Simms says. While many compete to attract established companies, he says, few try to nurture local start-ups. “But we serve the entrepreneur with everything from incubators to accelerators–and we attract the Barracudas and Googles of the world.”
Six million dollars a year is real money. But SPARK’s leaders argue it’s worth it.
“I’ve been with SPARK since its inception,” says board chair and Bank of Ann Arbor president Tim Marshall. “We were one of the first companies President Coleman and Governor Snyder approached.”
In his downtown office, with construction noise in the background–the bank is adding a third floor–the bright-eyed Marshall says SPARK is “crucial to the city’s economic life. There’s no way the city could replicate the effort and the resources that SPARK provides for $75,000.”
“I joined the board three years ago,” says board vice chair Cynthia Wilbanks, U-M’s polished VP for governmental relations. She also thinks economic development organizations are crucial, citing examples like Oakland County’s Automation Alley and North Carolina’s Research Triangle.
SPARK’s most ardent advocate is its CEO. Paul Krutko was hired in 2011, after running economic development groups in Cleveland, Jacksonville, and San Jose.
When Rick Snyder was elected governor, he promoted Mike Finney to run the state’s version of SPARK, the Michigan Economic Development Commission; he’s now Snyder’s senior adviser for economic growth. Finney “took a lot of the organization’s leaders with him,” Krutko says. “I was tasked with rebuilding.”
Why does Ann Arbor need economic development? “The city’s costs are rising 2 percent a year,” he responds, “but its revenue base is rising 1 percent a year. If you do not have a growing economy, you will be faced with reductions of services.”
Krutko devoutly believes SPARK is making a difference. “Through the Great Recession, our region grew at 3 percent a year in terms of GDP, and our unemployment ran at significantly less than the rest of the state–and that was private sector employment. “
Sumi Kailasapathy’s not buying it. “Until SPARK can provide the City with independently audited job creation numbers, one has to accept their numbers based on pure trust,” she emails.
Krutko acknowledges that SPARK’s tally of jobs attracted is not independently verified. “We’re reporting what the company tells us,” he says. “When Toyota says ‘we’re moving 250 people here from Kentucky,’ I shouldn’t believe them?”
While SPARK doesn’t confirm the numbers, he adds, Michigan does. “The companies generally get assistance from the state, and the state’s assistance is based on performance. If you didn’t create [the jobs] you said you’d create, you’re not going to get the incentive from the state.”
He says that’s enough to satisfy everybody else. “I’ve got forty-five private sector funders. I’ve got three academic institutions. I’ve got two counties [Livingston joined in 2011] and a host of municipal governments. We have been and continue to be the recipient of state grant funds, so we report to the state.” And, Krutko says, no one but Kailasapathy and Jack Eaton has questioned their numbers since he joined.
But Krutko recognizes that SPARK can’t ignore the challenge. “The six-to-five vote last May was an indication that we hadn’t done a good enough job bringing council up to speed,” he says. “Since then there’s been a sea change in the board’s attitude about transparency and providing information. The outcome is we’re doing a much better job reporting all those metrics.”
“I do think SPARK heard the message” that it needs to be more transparent, says Andy LaBarre. “I don’t know if they’ll be successful or will please everyone, but they are making the effort.”
So did SPARK really create 13,000 jobs? The short answer is no.
At first, the organization took credit not only for jobs that were promised but for jobs that were already here: its 2008 annual report boasted of “7,054 new jobs and 5,740 jobs retained” at existing businesses. But as Kailasapathy points out, that wasn’t a net figure–SPARK didn’t count jobs lost, like the 3,100 positions eliminated when Pfizer closed its Ann Arbor labs (see “From Crisis to Opportunity,” p. 39).
There’s no count of jobs “retained” in the 2013 edition of the annual report. And while the tally of new jobs continues to rise, it’s now credited to “companies served by SPARK”–not to the organization itself.
“Businesses create jobs,” Krutko says. “We facilitate what businesses do. But you can’t say we didn’t have a part in it.”
To find out what part, we asked three companies SPARK says they’ve helped: Toyota, Barracuda Networks, and Menlo Innovations.
Bruce Brownlee, senior executive administrator at Toyota’s York Township Technical Center, confirms they’re “relocating 250 purchasing team members” here from Kentucky, and adds they’re “also adding eighty-five engineers [who will move] from California to Ann Arbor.”
What role did SPARK play? “In terms of decision making, that is done by Toyota” says Brownlee, “but clearly they are important to us … They’ve been instrumental in assisting us with the application to the state for tax incentives and abatements, and they’ve helped folks understand the value of living and working here.”
Rod Mathews, general manager of Barracuda’s storage business and its vice president of business development, says nearly the same thing. “When we expand, we have a bunch of choices because we have multiple locations around the country and the world. But we decided to expand here.
“When we made the decision to move downtown two and a half years ago, SPARK helped us find that building. When we had to figure out where people would park, they set up discussions with the DDA. And when we decided to hire more people, they tied us into the right programs with the state.
“When we moved, we had 150-ish people,” Mathews adds. “Now we have close to 300. As long as we can find folks to hire, we’re going to keep hiring in Ann Arbor. We enjoy being here.
“Companies create jobs,” Mathews concludes, “but SPARK created the environment that made it possible. We might very well have done this somewhere else, but we made a conscious choice for Ann Arbor. We see value in what SPARK is doing, absolutely.”
Rich Sheridan, CEO of local software design firm Menlo Innovations, likewise says SPARK enabled its growth.
“I have since our inception been enmeshed in the community, and I got to know Mike Finney,” Sheridan says. “I asked him, ‘What is your most frustrating moment with entrepreneurs?’ and he said, ‘You don’t ask for help.’
“One day a former boss of mine came into our small storefront office [on N. Fourth Ave.]. He had a potential project, but he said, ‘Where will you fit it in your tiny little storefront?’ No one had ever articulated that before, and I wondered how much business we’d lost and how much we didn’t grow because we were so small.”
Sheridan knew Menlo had to grow but didn’t have the income yet to support it. When he found a space three times bigger in Kerrytown, “I remembered my conversation with Mike Finney. So I went to him and explained the situation, and they got us a $50,000 loan” disbursed in installments of $2,000 per month.
“We took nine installments and didn’t need any more, so we paid it back with interest,” says Sheridan. “We grew and filled that space, and we tripled again” when they moved to Liberty Square. Menlo now has fifty people, he says–and “we can grow to 150.
“Criticism of SPARK is great soapbox fodder,” concludes Sheridan, who believes in SPARK so much he joined its board. “But when people say, ‘Show me exactly what happened,’ it’s more than just who we hire. It’s a network effect. Over 3,200 people came to visit us here at Menlo last year, and a lot of them stayed at hotels and all of them ate at restaurants.”
On top of 13,024 jobs at mature companies, SPARK figures it helped create 711 positions through loans and investments from the Michigan’s 21st Century Jobs Fund, and another 426 at companies that used its start-up programs.
Only that last number has been independently audited. The LDFA, which supports SPARK’s start-up services, asked a CPA firm to review its job-creation counts for 2013 and 2014. The auditors concluded that SPARK’s methodology is “reliable and consistent,” but their review found the actual number of jobs created was significantly higher than reported in 2013, and significantly lower in 2014. “As a result,” they wrote, “it appears that the job creation numbers should be regarded by users as an approximation and not necessarily an exact figure.”
That’s even more true of the 13,024 jobs SPARK says it attracted. It’s not just that the count doesn’t account for departures–it also doesn’t subtract shortfalls when companies hire fewer people than expected. When Google opened downtown in 2006, it projected that it would add 1,000 jobs in five years–and received approval for state tax credits based on that promise. Eight years later, Google says it has 400 people working here, and its landlord has just announced its space will be available soon.
Google says it’s still “committed” to Ann Arbor. And Krutko still describes it as a great victory.
“Google comes to town, and we have the worst recession since the Great Depression, right? And this is an ad workshop selling advertising. They filled the building and created the number of jobs they created, and in most communities that would be looked on as a great victory, a glass half full instead of half empty. And whatever number of jobs they created, that’s all the incentive the state gave them, right?”
Right–but taking credit for jobs promised but not delivered is the kind of talk that gets called “arrogant.”
Kailasapathy, a CPA, doubts the group’s business acumen as much as she doubts its job numbers. She emails that “in 2012 there was a portfolio loss of $4,142,820. This is a staggering loss given the total expenses of SPARK was $10.6 million.”
“The portfolio loss is fully related to the Michigan Pre-Seed [Capital] Fund,” emails SPARK chief financial officer Liz Perpich. “We had been given a series of state grants to operate the Fund throughout Michigan” by investing in early-stage startups. “We currently have $23 million in investments or loans. We’re doing it because they’re loans banks would find too risky. But the portfolio loss is not an actual loss. It is a reserve against loss. We take a fairly high risk and we reserve against that so we’re not overstating our assets.”
“You can’t just look at the $4.1 million loss in the financial statements,” adds Brian Dixon, the Yeo & Yeo accountant who prepares SPARK’s financial statements. “You have to read the footnotes.
“Some [loans] are risky, so some aren’t going to come back,” Dixon continues. “But some are going to come back. We’re going to have preferred stocks in some of these companies that go public. But it doesn’t come back to SPARK. It comes back to the Pre-Seed Fund, which is given out to more companies.”
What about Kailasapathy’s objection that the Local Development Finance Authority diverts taxes from the state’s school aid fund?
“It’s a traditional tax increment financing district,” Krutko says. “The legislature said create an [economic development] district around a major university to capture school taxes and provide them to the district. But the state will backfill dollar for dollar that investment.”
Kailasapathy doesn’t see it. “The school aid fund was never ‘reimbursed’ as the State calculates per pupil allocation and gives it to each school district,” she emails. “Talk to Tom Crawford [Ann Arbor’s chief financial officer. He] will be able to tell you there were never any ‘reimbursements’ checks cut for the amounts diverted by SPARK.”
Crawford agrees that the state doesn’t reimburse the school aid fund. But he stresses that the LDFA doesn’t hurt local school districts. Regardless of the tax capture, the state still provides the schools with their full foundation grant. “The schools have not been harmed by this in the past,” he says, “and they will not be harmed by it in the future.”
“I don’t think that’s inaccurate,” says Ann Arbor state representative Jeff Irwin. “But I also think it’s accurate to say that the tax capture taken to fund SPARK is reducing revenue to the statewide school aid fund … all of these favorable tax treatments that diminish revenue to the school aid fund are in effect diminishing the support that schools would get absent their existence.”
John Hieftje thinks Ann Arbor is getting its money’s worth from SPARK. “SPARK does a good job. We would feel the difference if we didn’t have SPARK. A lot of state money comes to our area because of SPARK through tax breaks.”
His successor, Christopher Taylor, likewise thinks “SPARK is worthwhile. It is very important that the city have an economic development organization. We need someone looking out for our city and our region’s interests.”
Taylor doesn’t buy the anti-SPARK arguments. “People criticize the numbers, but I’ve not yet heard a persuasive case against them.”
As mayor, Taylor will again support SPARK. “I don’t approach issues from an ideological basis, and supporting SPARK is not a question of ideology but of practicality. It has been of benefit to date, and I expect it to be a benefit going forward.”
But he figures funding SPARK will be an issue again in the 2015 budget talks. “Anytime you have a six-to-five vote there’s an opportunity for revisiting, and I suspect this issue will be revisited.”
What happened in Plymouth?
Along with questioning SPARK’s job creation claims, councilmember Sumi Kailasapathy criticizes its five-year involvement in a life-sciences incubator in Plymouth.
“SPARK’s 2012 financial statement states that there was a loss on sale of assets of $2,786,076,” the CPA emails. “This was due to the losses incurred by SPARK when they basically dumped their Life Sciences lab in Plymouth. There was a lot of PR about this project. But nothing was said when it went under.”
Fred Earl was facilities manager for the building when it opened in 2005 as a base for Esperion Therapeutics, then a Pfizer subsidiary. He still oversees it as the Michigan Life Science and Innovation Center–which, he says, was never dumped and didn’t go under.
“When Pfizer was leaving Ann Arbor, they were also leaving this facility,” Earl explains. “They wanted $10 million for the building, but we got it for $4.5 raised by a private foundation, Wayne County, the Michigan Economic Development Corporation, and Detroit’s New Economy Initiative. The founder of Esperion, Roger Newton, and I, looked for a partner, and we found the best marriage would be with SPARK. We think the partnership worked very well.” Including “virtual tenants” who drop in to use a shared workspace, Earl says, the incubator currently houses 160 people working for twenty-six companies.
Krutko stresses that none of the money to operate the lab came from Ann Arbor. And SPARK’s chief financial officer Liz Perpich says it didn’t actually lose $2.7 million from sale of assets.
“In 2006, Pfizer donated equipment worth $1 million for SPARK to pass along to incubating life science companies, and in 2008, they donated $2.9 million more,” Perpich says. “The equipment was leased out to companies at minimal amounts, and [they’d] own it at the end of three years for a small amount. That’s why there’s a large markdown amount in 2012.
“SPARK didn’t lose anything. SPARK got something for free and essentially gave it away.”