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Greater Minnesota Corporation: Structure and Accountability

Summary

March 1991


The Greater Minnesota Corporation (GMC) was established as a public corporation by the 1987 Legislature <FN - Minn. Laws (1987), Ch. 386, Article 2.> to foster economic development, especially in rural Minnesota. It was originally allocated $105 million and exempted from many controls that apply to state agencies.

The GMC quickly became controversial. Some people questioned its general strategy, while others criticized individual programs. Also, the GMC's first president was accused of sexual harrassment and misuse of public funds. He resigned on December 11, 1989.

Because it has been controversial the GMC has been subject to intense scrutiny. For example, between its creation and August 1990, our Financial Audit Division issued three reports on the GMC. In addition, the GMC has annually hired a CPA firm to audit the corporation.

Nevertheless, in December 1990 the Legislative Audit Commission directed the Legislative Auditor's Program Evaluation Division to review the GMC. Essentially, the commission wanted a broad assessment of GMC's history, structure, and accountability so that legislators could better understand why GMC got into trouble.

To conduct our study, we pursued the following questions:

  • Why was the GMC created as a quasi-public entity? What have been the advantages and disadvantages of the GMC's quasi-public status?
  • How have the GMC's structure and accountability changed since its inception? How do they now compare with other agencies?
  • What changes would make the GMC more accountable for the expenditure of public funds without limiting its flexibility and adaptability?

To answer these questions, we relied on interviews with people who are knowledgeable and thoughtful about the GMC and about business or government in general. We also reviewed relevant literature on organizational design and accountability.

Our most encouraging observation is about the GMC's current situation. We found that:

  • The GMC's new president is working, in concert with the board, to give the organization a more focused mission and to make it more accountable.

We think these efforts are essential and will, if successful, help correct the problems evident in the GMC's original design and initial experience.

We also found that:

  • Though the GMC is not subject to several significant controls imposed on a state agency, it now has many of the accountability measures typical of other quasi-public organizations.

Our only major concern about the current structure of the GMC is that no state elected official is accountable for its performance, even though the GMC was created by the state and is financed completely by state funds.

Going beyond the GMC, we found that:

  • Accountability for "quasi-public" organizations is often confused, since they operate under a variety of standards, procedures, and expectations.

Background

Legislation creating the GMC was introduced early in the 1987 Legislative session. The GMC was created as a public corporation, specifically exempted from most laws governing state agencies. A number of goals for the GMC were presented before and during hearings on the original bill. According to original supporters, one important goal was:

  • to create economic development in Minnesota, focusing on all areas of need in the state, including the inner cities.

The GMC would spur economic development by encouraging new forms of production, leading to increases in production and jobs. It would encourage joint ventures between universities, private corporations, and federal labs, and it would increase Minnesota's ability to compete nationally and internationally.

A second goal mentioned by supporters was:

  • to involve higher education in economic development by providing a linkage between universities and business.

A final goal presented by proponents was:

  • to achieve rural revitalization.

It would do so by fostering new industries in rural Minnesota, thus creating jobs and diversifying the rural economy.

Because of its mission to create economic development, the GMC's sponsors were convinced that it had to be created as an entity outside of state government. Its originators asserted that the GMC should behave like a private company because it would be expected to operate in the private sector and attract private capital. The GMC's creators further believed that it should be apolitical, while a state agency could not be removed from politics. By removing it from the political arena, its originators hoped to protect the GMC from short-term political or economic fluctuations, so it could accomplish its long-term mission. Finally, proponents argued that the GMC should be created outside of a state agency because it would need more flexibility than was available to a state agency.

But concern over accountability at GMC developed soon after its creation. Audits performed in 1989 and 1990 noted a lack of control within the organization and raised questions about excessive and inappropriate spending. Also, citizens and legislators, especially from rural Minnesota, began to question whether the GMC was fulfilling its mission in outstate Minnesota. Although the corporation spread offices and institutes around the state, the GMC--with headquarters in downtown Minneapolis--sponsored projects that did not seem to have the expected rural focus.

We think there are three answers to the question: why did the GMC get into trouble?

  • First, the GMC was created without a well-focused and clearly understood mission.

While proponents promised that the GMC would foster economic development in Minnesota, they did not have a plan for how that would be achieved. Nor did they articulate how the GMC's programs would be coordinated with other state and local economic development efforts. Moreover, after it was created, the GMC was quick to announce programs and raise expectations, but slow to develop a focused strategy.

  • Second, the GMC's status as a "quasi-public corporation" left its accountability unclear.

The GMC was exempt from many of the statutes and standards that constrain state agencies. But it was not clear what procedures and standards the GMC was supposed to follow in spending public funds. There are no common standards or procedures for "quasi-public" organizations. At the same time, because it was completely state-funded, the GMC did not face the market constraints that control spending in private industry and even at some other "quasi-public" organizations. Nor was the GMC accountable to a membership (like the Minnesota Historical Society, for example) or to shareholders.

  • Finally, the GMC's first president was not an appropriate choice.

The GMC's first president took advantage of GMC's "quasi-public" status and ignored his responsibility to spend public funds consistent with public sector standards of accountability. In addition, the president did not have adequate experience with new, small companies or expertise in economic development. Ultimately, he relied on a consulting firm to provide him with a strategy for the GMC. Finally, it must also be said that the GMC board was not able to overcome the former president's deficiences.

Changes in the GMC's Structure and Accountability

In response to problems that began to emerge at the GMC in 1988, the Legislature increased the corporation's statutory accountability through such actions as appointing the Commissioner of Trade and Economic Development to the board, limiting the president's salary, and including the GMC in the state accounting system.

More recently, GMC staff have also changed the organization, particularly since the new president arrived. The board recently approved a restructuring plan which calls for combining some programs, such as Business Innovation Centers and Technology Resource Centers, and cancelling others. The board and the new president are attempting to sharpen the GMC's focus on what they see as Minnesota's most pressing economic development needs: technology transfer and product development at the early stages of innovation. The new president has also reduced the size of the GMC staff by about 25 percent, and has completed new personnel policies.

The GMC Board of Directors became self-perpetuating following its 1987 appointment by the Governor. The evidence we reviewed indicates that the original board lacked adequate involvement to guide the GMC's formation or to forestall management problems. Our examination of board minutes and our interviews indicated that the current board is more active, works more closely with the president, and is focusing more on its oversight role.

The GMC Compared with Other Organizations

We compared the GMC's current structure and accountability with state agencies with a single executive, state agencies with a board of directors, other quasi-public organizations, and similar organizations in other states. Overall, we found that:

  • The GMC now has accountability measures typical of other quasi-public organizations, but it is subject to less control than a state agency.

The GMC is subject to the Data Practices Act, the Ethical Practices Act, Tort Claims law, budgeting and accounting controls, and auditing requirements. In addition, GMC directors must disclose political contributions. The GMC is also subject to open meeting laws, except when proprietary information is discussed.

In contrast to state agencies, the GMC is not subject to civil service requirements, purchasing laws, the Administrative Procedures Act, or contracting requirements.

Unlike state agencies with boards of directors, reimbursement of GMC board expenses is limited in statute only by an undefined standard of "reasonableness." State agency board per diems are limited to $55, and expense reim-bursement is the same as for executive branch employees. Moreover, we found that, because the GMC board now appoints its own members, and the board appoints the GMC president,

  • No elected official in state government is clearly responsible for the GMC.

The current board is working to increase its own accountability, for example, by requesting legislative representation on the board.

We compared the GMC with nine other Minnesota quasi-public organizations and two similar quasi-public organizations in other states. We found that:

  • Quasi-public agencies vary widely in organization, accountability, and degree of independence.

For example, several of the quasi-public organizations that we examined, including the GMC, are designated as "public corporations;" one is a private, non-profit corporation; and one is a state-private partnership. Some organizations have budgets approved by the Legislature or other elected bodies, while some, including the GMC, have their budgets reviewed only by their own boards. Like the GMC, many quasi-public organizations are exempt from civil service requirements, purchasing laws, the Administrative Procedures Act, and contracting requirements, although many of them, including the GMC, have substituted internal policies and procedures which are similar to state agency requirements.

In one area, the GMC is different from other quasi-public organizations, both in Minnesota and the other states we examined. We found that:

  • Only one organization has a board which is as independent as the GMC board, and that organization does not operate under state authorization and receives only a small part of its funding from the state.

Recommendations

The Greater Minnesota Corporation is an organization that got off to a bad start, but it has made progress in the last year toward correcting its problems. Through statute or its own initiative, the GMC today has most of the accountability measures found in other quasi-public bodies and some of those found in state agencies. To a great extent, all that remains is to institutionalize the new structure, so that it will survive changes in the board or the presidency. To that end we recommend:

  • The GMC should compile a comprehensive policy manual, incorporating its recently completed personnel policy manual.

Much of the necessary material already exists, but other important pieces still need to be formalized, so that the future of the organization is less dependent upon who is its president. We also recommend:

  • The GMC board needs to institutionalize its responsibilities to oversee the organization's operations.

For example, the board and president together should develop written position descriptions for board members. The board of directors should provide the president with an annual, written review of his performance, and should require the president as one of his duties to provide it with detailed work plans and budgets.

Many of the people we interviewed told us that--given the amount of public funds it handles--the independence of the GMC board was unusual and risky. Most similar boards in Minnesota and in other states include at least some members appointed by the Governor. We recommend:

  • All new members of the GMC board should be appointed by the Governor. Directors' terms should be staggered, so that a new Governor cannot replace the entire board at once.

The GMC board and staff have defined what they see as their role in economic development in Minnesota. It remains for the Legislature to determine whether that role is important to the state and at what level it can be funded. In making that determination, we recommend that:

  • The state should develop a comprehensive economic development policy, and determine the GMC's role within that policy.

One method for developing such a state policy would be through an appointed Governor's commission. The commission should be charged with arriving at specific recommendations, rather than simply theories.

We found that there is wide variation in the statutes that govern quasi-public agencies in Minnesota. In our opinion, Minnesota would benefit from a uniform "Quasi-Public Agencies" statute. The statute should establish uniform accountability measures for quasi-public agencies, require that state funds be spent only for public purposes, and establish some reasonable expenditure limits. Agencies seeking exemptions from the statute would bear the burden of proving that they could not accomplish their public missions within the statute's constraints.

Finally, we found no compelling evidence to suggest that the GMC's functions could not be carried out successfully by a state agency. If the Legislature plans to continue GMC programs, it could, if it wishes, move them to a state agency, such as the Department of Trade and Economic Development, or change the GMC into a separate state agency, similar to the State Arts Board. That option would bring the GMC under all of the accountability measures that apply to state agencies, while allowing for some flexibility in budgeting.

 

 

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