Michigan Bets The State Pension Fund On Hollywood Success, Ends Up Stuck With The Tab

Movie Industry

from the you-can-only-take-my-money-for-so-long,-before-you-take-it-all! dept

We’ve written before about cities and states luring Hollywood studios with multimillion dollar subsidies in the hopes of giving their local economies a bit of a bump. In nearly every case, this has been a money loser for the locale involved. A 2010 Tax Foundation study found that most states were lucky to see $0.20 in revenue from every dollar handed out. And yet, this surefire money loser remains incredibly popular.

The latest case of self-victimization belongs to the state of Michigan, which lured the production of “Oz The Great and Powerful” to the state with a $40 million subsidy.

Michigan has 4.5 million individual taxpayers, and the state gave the film studio $39.7 million to shoot the movie in Pontiac. That works out to a subsidy of $8.82 per taxpayer while average ticket prices nationwide are $7.96.

The subsidy was granted in 2010 when the program refunded up to 42 percent of Michigan expenses to film makers — essentially a check from the treasury to Hollywood studios. The program expired, but the Legislature, dominated by Republicans, overwhelmingly decided to keep it around.

As the article points out, the studio basically received paid admission from every taxpayer in the state. But that $40 million was apparently just a “good start,” because the state soon found the studio knocking at its door again, cap in hand.

As part of the financing process, the filmmakers wanted to borrow about about $18 million in municipal bonds. In order order to do that, they needed a backer. So the state stepped in, and agreed to use its state worker pension funds as a guarantee. “If the investors failed to pay,” the New York Times reported in a piece on the deal last December, “the retirees would be on the hook.”

One would expect a Disney-backed venture to be able to scrounge up payments on an $18 million loan simply by digging around in the couch cushions. But one would be mistaken.

Michigan Motion Pictures Studios, which is being celebrated in the local media for having made the movie, “Oz The Great and Powerful,” in Pontiac, has missed its last three payments on $18 million in bond obligations…

According to state officials, the state retirement system has made three payments since February of last year totaling $1.68 million.

This isn’t good news for the state’s pension fund, which is already underfunded by several billion dollars. It’s pretty much guaranteed that the state will never recover the entire $58 million given to Michigan Motion Pictures Studio, either in the form of added revenue or even loan payments, for that matter. And Michigan should know better. According to the study mentioned in the first paragraph, Michigan’s return-on-investment sits at $0.11 per subsidy dollar.

But Michigan Motion Picture Studios (formerly Raleigh Studios) can explain. You see, it was doing just fine… until the state decided to cut its allowance.

In March 2012, Raleigh Studio’s then-chief financial officer Steve Lemberg blamed the studio’s financial struggles on the film tax credit being reduced.

The state reduced the tax credit from $100 million when the studio was being built in 2011 to $50 million last year. Gov. Rick Snyder has $25 million budgeted for tax credits this year.

There’s something inherently flawed with a business model that relies heavily on being handed free money in exchange for the vague promise that a small percentage of it will be pumped back into the local economy. But I suppose it could be worse. Much, much worse.

The city of Allen Park recently requested an emergency manager after losing what will turn out to be tens of millions of dollars on a failed movie studio project that promised to create 3,000 jobs. It created none and left the town nearly bankrupt.

That’s the sort of thing that happens when politicians get stars in their eyes and roll out a red carpet made of constituents’ money. The best case scenario is still a money loser, as any economic effects are brief and underwhelming. The worst case scenario is taxpayers are on the hook to bail out their own pension funds or, in the case of Allen Park, their hometown.

Filed Under: failures, great and powerful oz, michigan, movie industry, subsidies