One of the unintended side effects of the auto industry’s rebound is that the celebrated comeback has stolen the thunder of another, less celebrated turnaround: Michigan’s middle-market reboot.
When Consumers Energy of Michigan recently agreed to double its spending with Michigan-based firms from $250 million to $500 million, it was perhaps no surprise that economic development executives from states far and near were abuzz. It seems that the jump in so-called “B2B spending” was yet more evidence that the program dubbed Pure Michigan Business Connect (PMBC) was succeeding not just on one level but on multiple ones — all of which has been good news for Michigan’s middle-market businesses.
“This has helped to create a pipeline for us to where we are now referring growth-stage companies into that pipeline for consideration by Consumers Energy and others for selling goods and services, allowing them to grow their companies,” says Michael Finney, president and CEO of the Michigan Economic Development Corporation (MEDC). Consumers Energy as well as DTE Energy — another Michigan utilities company — helped to kick off the “Business Connect” component of PMBC back in 2011, when the two companies each initially pledged to spend $250 million over a 5-year period. Consumers Energy has now doubled that commitment, and DTE, having already surpassed its own pledge, has demonstrated little inclination to draw back its Michigan B2B spending, says Finney, who adds that many other large Michigan-based companies have now made similar commitments to spend locally.
Finney identifies Michigan’s Business Connect as one of four primary drivers behind the state’s overall economic development efforts, the most ambitious of which, he says, are focused on talent and capital — a model that Michigan adopted after modifying its approach to creating jobs at a state level.
“Historically, Michigan operated like most other states: We would initiate discussions with companies looking to relocate, centered on tax cuts to lure their business growth and expansion. What we decided to do was move away from this tax credit model. This is not to say that Michigan doesn’t provide incentives. We actually have a pretty substantial pool of cash that we’ll provide to a company, but we provide it to deal with economic challenges or gaps that exist,” explains Finney, who notes that the State of Michigan had been awarding somewhere on the order of $500 million to $600 million a year in tax credits, whereas now its cash incentives amount to close to $150 million — with $50 million dedicated exclusively to the film industry and the remaining $100 million or so earmarked for various other types of industries.
“The net effect is that it requires a much lower consumption of actual cash at the end of the day,” reports Finney, who says that the departure from tax credits arrived as the state replaced a multilayered business tax with a flat 6 percent tax for C corporations. This excluded LLCs and S corporations, a move that eliminated nearly 100,000 companies from the state’s tax rolls.
Having set a new course with its tax legislation, Michigan then began to retool its economic development initiatives by adopting many of the precepts and best practices of “economic gardening,” through which a community becomes focused on the requirement for growing early-stage and second-stage companies. According to Finney, Michigan added some pieces and benefits to the original program, allowing it to evolve into PMBC, which he characterizes as a total business support initiative that supports big, small, and middle-market companies.
The state’s focus on growing companies has led PMBC to narrow is lens on access to capital. In addition to the cash incentives that Michigan now uses in lieu of tax credits to lure businesses, Finney says the state has set aside $100 million to loan to small and midsize firms.
“We will invest up to $5 million, along with a banking or a financial institutional, in companies that are looking for debt financing. Our capital serves to cover shortages of collateral or as collateral support or loan participation in deals where the cash flow isn’t sufficient to meet a bank’s requirements,” reports Finney, who says that the state has already invested in more than 300 deals and is currently averaging one loan per day. Still, Finney says, Michigan’s workforce is what ultimately will determine whether the state continues to rebound economically.
“It’s great to have these employment opportunities and for our employers to be able to bring things back to the state or stop what might be leaving the state because we may have lacked a ready-to-go workforce,” explains Finney, who has become increasingly focused on the state’s talent challenges.
“The workforce is probably the thing that we are concentrating on the most right now in terms of preparedness. We still think that being a state that makes things represents the greatest potential for us to be a vibrant economic engine. The knowledge economy is great. We want that knowledge to convert into things that are made by the people of the state of Michigan,” Finney concludes.