Friday, October 24th, 2014

Digging into Scott Walker’s talk of 17,000 job-producing new businesses

Gov. Scott Walker, shown here at the state GOP convention, has a new talking point: 17,000 new jobs-producing businesses. Is he right?
Gov. Scott Walker, shown here at the state GOP convention, has a new talking point: 17,000 new jobs-producing businesses. Is he right?

As the fall election nears and most everyone agrees his promise of 250,000 new jobs in four years won’t be met, Gov. Scott Walker is rolling out a bullish new measure of business growth -- and suggesting it shows Wisconsin could reach the mark by mid-2015.  

But his impressive-sounding talking point -- that 17,000 new ready-to-hire businesses have sprung up on his watch -- crumbles upon examination.

The count of newly registered "business entities" that Walker touts includes not only new ventures that bring new jobs, but thousands with no workers on the payroll at all -- and little if any prospect of hires to come.

An analysis by PolitiFact Wisconsin found Walker’s count includes:

-- Hundreds of nonprofit organizations, often volunteer-run, including Scout troops, condo associations, youth sports leagues, volunteer fire departments, historical societies, "friends" fundraising groups, scholarship funds and many more.

-- Thousands of limited-liability companies set up by real-estate investors solely to hold ownership of property or properties. Even investors as far away as Australia are on the list because they bought Wisconsin rental properties.

-- Out-of-state firms that registered in Wisconsin because they may want to do work here.

-- Startups that are just getting organized and not yet able to pay employees.

Certainly there are many job-producing startups on Walker’s list.

But Walker strongly suggests to audiences that all the new entities are, or will soon be, job producers -- and at a pretty healthy level. Here’s what he  told a Door County business group in April 2014, when the latest count of new business entities topped 17,000:

"On average -- some will do more, some will do less -- but if in the next year or so they each add up to 10 new employees, you add that to the more than 100,000 new jobs we’ve created and you see we surpass 250,000 new jobs."

Even if Walker were right, and every new filing represented a job-producing business, the PolitiFact Wisconsin analysis found this small army of eager entrepreneurs would have to create new jobs at a pace five times faster than the average for the last three years.

Doing the math

In the 2010 governor’s race, Walker promised not only 250,000 net new private-sector jobs by January 2015 (the latest tally on our Walk-O-Meter shows 105,800), but a gain of 10,000 new businesses.

We have rated the business promise "In the Works"  because other ways to measure "business" formations, such as through federal data on new "establishments," show far less progress.

In arguing he has exceeded the new-business figure, Walker points to tallies published by a state agency, the Department of Financial Institutions (DFI). It is the official repository for filings by newly formed business corporations, non-stock nonprofit corporations, cooperatives, limited partnerships, limited liability companies and partnerships, common law trusts, veterans organizations and certain religious corporations.

We requested DFI data running through March 31, 2014. More than 381,000 active entities were on file, up 16,751 when compared with December 2010, the month before Walker took office. That’s an increase of 4.6 percent in more than three years.

The net difference jumps around.

That’s because entities are created and dissolved by the tens of thousands every year (at one point in Walker’s second year, there had been a net loss of entities).

Walker spokeswoman Jocelyn Webster said the governor uses the figures only as hypothetical illustration, rather than a prediction that all these entities will create jobs.

"Governor Walker is talking about how this is one path to job creation," she said, noting the number of net new entities under Walker grew to 19,959 at the end of April.

There is no way to know for sure how many of the new entities are producing jobs. We located no research on point, and the state does not ask newly registered business entities about their employment plans.

Nevertheless, when the net increase topped 11,000 in late 2013, Walker touted the growth in an Oct. 2 speech before an audience at a  Wisconsin Manufacturers & Commerce event.

"Even if every one of them started out with just two employees, six months from now as we continue to improve the business climate in the state ... each of those two employees at each of those businesses becomes four, and then maybe six months later those four become eight and those eight become 16 and on and on down the line."

On the day of that speech, 122 entities registered with the state and are listed on the "creation" side of the equation in state records.

How many are job-producers?

We talked with a veteran attorney who handles business formations in southeastern Wisconsin and attempted to reach 33 of the registrants who filed the day of Walker’s speech. Of those, 13 responded, providing a glimpse of what lies behind Walker’s number.

Among the filers: The Revolution, a startup church which claims about 24 members and has no paid employees.

Stephen Feith, who works at Starbucks, said he hopes some day his church, whose members meet in each other’s homes, will grow large enough to acquire property for its "alternative expression of the Christian Church" in Madison.

"This is me in Madison, trying to get this thing launched," said Feith, who is not paid as pastor to the group.

That same day, Diane Dowland registered Cudahy Auto Repair as an LLC -- but that was simply a new corporate iteration of a family business in operation for 27 years, not a new business.

In any case, the shop closed a few months ago.

More positive word came from Waterford-based GFY Supply LLC, which already has two part-time employees. The company supplies materials to roofing and sheet metal contractors. It’s an offshoot of SRS Roofing and Sheet Metal Inc., said Michael Hurst, an owner of both firms. GFY plans to begin construction this summer on an 8,000-square-foot building.

"I suspect very strongly it’s going to have to have some warehouse people and some delivery people and purchasing agents and things of that nature," Hurst said. "In a perfect world anyway. I don’t have a crystal ball, but that’s kind of the plan."

Los Angeles-based Bergelectric Corp. also filed. The firm describes itself as "one of the nation’s top electrical contractors." But it is not moving jobs here and has no Wisconsin office.

Rather, the firm hopes to get work here, said Phil Mullane, a marketing representative for the company. As such, it was required to file.

Bob Denning, who also filed that day, told us he was not planning to open a new operation. Rather he was considering changing the name of his vinyl siding and roofing business --  Chippewa Falls-based Denning Construction. In the end, he decided to keep the name, so he did nothing further with the incorporation papers.

Risk takers we spoke to included Catherine C. Bruss, who is leaving a job with Aurora Health Care and starting Frameworks Group LLC. It’s a new business with no employees other than Bruss, a Brookfield-based writer and editor.

"I have one client and I’m doing a small amount of work for him," said Bruss. "I’m finishing up my job at Aurora Health Care in mid-June and then I plan to do this exclusively."

David Burg of Eau Claire said he incorporated his business, Elite Vending, for legal reasons. He owns and manages bowling centers, and has vending machines in other businesses that he does not operate.

Asked if Elite has any employees, Burg said: "Other than myself, no."

Properties and associations

The PolitiFact Wisconsin analysis showed nonprofits make up 5 percent of the 124,800 newly created entities on Walker’s watch.

Some have paid employees, others do not.

We counted more than 282 condominium associations, more than 600 athletic leagues or clubs and nearly 600 foundations. Liberal blogger Jud Lounsbury pointed out some of these categories last fall.

We spoke with the director and founder of Hybrid Pedagogy, a new "digital journal of learning, teaching and technology" that registered a nonprofit under that name Oct. 2.

"We are not likely to create any full-time jobs out of the gate," said Jesse Stommel, a University of Wisconsin-Madison liberal studies professor. "Currently, we are creating a few short-term contract positions for special projects. Ultimately, we are hoping to employ a full-time paid managing editor and assistant, but our growth plan is slow."

The Williams Bay Historical Society, another new nonrofit, has no paid positions and no plans to add jobs in the near future, said president Deb Soplanda.

More than 80 percent of the newly created business entities during Walker’s term are LLCs.

As PolitiFact Wisconsin has noted several times in evaluating Walker’s new-business promise, business experts caution that many LLCs are set up for tax and liability purposes and employ no one.

It’s impossible to say, without calling every person registering a new firm, exactly how many of the LLCs are just for parking properties as opposed to starting up an operating business.

But more than 2,000 are named using an address or the word "property," signalling they are for real estate. And that includes only a portion of the LLCs set up for that purpose.

Indeed, the properties themselves do not even have to be located in Wisconsin.

Among those who registered real-estate LLCs on the day of Walker’s speech were Daniel Cuskey of Rice Lake. He formed Heritage Bay LLC for a piece of real estate he bought in Florida.

Another property-related entity, First Weber Building Company LLC, was formed by First Weber Group, of Madison, which describes itself as Wisconsin’s largest real-estate firm. The firm’s chairman and CEO, James R. Imhoff Jr., told us he organized the LLC "simply to facilitate the build-out of a few subdivisions that were started before the real estate downturn."

It’s common for real estate investors to register a group of rental properties in separate LLCs to spread out liability in case of a lawsuit.

Attorney Scott Christian of Delavan, who has 23 years of experience in corporate business and real-estate work, said that businesses that intend to operate are more likely to form a corporation than an LLC. Only about 13 percent of new entities created during Walker’s term are some sort of business corporation.

Christian works on behalf of some mom-and-pop firms -- coffee shops, day-care centers and the like -- that are just getting started.

But a lot of his work is for passive investors, even a group from Australia who created several LLCs in Wisconsin as they purchased rental properties here as investments.

Some echo Walker at least to the extent that the increased filings are a signal of a pickup in economic activity.

"If folks are calling me it’s a good sign," Christian said. "Any type of filings, even passive real estate, mean that somebody’s doing something to move forward."