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New Tools Needed for Minnesota Economic Recovery Plans

January 15, 2009 By Lee Egerstrom, Economic Development Fellow

Federal rescue efforts are in the works but buckets of money won't kick start economic recovery if Minnesota and other states aren't positioned to receive and employ the federal help for long-term gain.

That was an underlying theme of a Baltimore conference this past weekend that explored business ownership tools and the role communities might play to spur economic development and to rescue socially beneficial amenities and businesses. The conference focused on the media industry, primarily struggling newspapers, but the tools discussed are not industry specific.

The same tools that could save a community's newspaper could be used to help communities save or improve community health, bring broad band services to remote areas, and develop incubator locations for starting businesses and entrepreneurs, said Robert Lang, chief executive officer of the Mary Elizabeth & Gordon B. Mannweiler Foundation and of the related L3C Advisors group.

His foundation was instrumental in developing the low-profit, limited liability companies legal code (L3C) that was adopted in Vermont this past year. It allows for nonprofit organizations, specifically foundations, to invest in socially beneficial enterprises consistent with the federal Program Related Investments (PRIs) regulations of the Internal Revenue Service.

That jargon out of the way, it means that a community based enterprise could incorporate an L3C in Vermont the way major corporations now incorporate in Delaware, and it means that foundations and nonprofit groups that promote economic development or community services could invest in the enterprise. By doing so, the nonprofit organization or foundation would, over time, recover its investment for other uses.

Two other tools are equally important. Employee Stock Option Plans (ESOPs) are a legal but an underutilized tool for employees to take ownership of companies and keep them working, and paying salaries, wages and taxes, in local communities. The even less well-known Minnesota 308B cooperative code, also underutilized, allows outside investors to team with co-op members in owning an enterprise that strengthens the community or the community's members in various ways.

Combined, these tools are making "socially beneficial" enterprise a companion to "value added" enterprise in the minds of people working on economic development issues.

Lang insists that states don't need to write their own L3C laws because the Vermont law makes these enterprises legal everywhere. That is true, but it would make good sense for Minnesota lawmakers to draft their own state L3C code to make such foundation investments in enterprises consistent with ESOP and 308B laws.

To this point, ESOPs are primarily tools for employees to become sole owners of enterprises. Going forward, ESOPs could be equity holding shareholders and stakeholders in a L3C or 308B enterprise.

Whole industry sectors are under stress and may find new uses for such creative business ownership tools. Among sectors reeling under economic pressure is media, and especially newspapers, that perform a public good in a democratic society by reporting news and analysis.

The San Juan Star in Puerto Rico has converted to cooperative ownership built around employees. Newspapers in Maine are lining up community investors and nonprofit support to form L3C companies with employees and other stakeholders to acquire stressed papers.

Hearst Corp. is shopping the Seattle Post-Intelligencer, prompting employees there to explore ownership options. Newspaper employees and community members in at least a dozen other states are studying ESOP, the Minnesota 308B and Vermont's L3C codes for ways to save newspapers.

Minnesota media and community people are among the latter. A podcast from the Baltimore conference, produced by California communications workers and the Twin Cities Newspaper Guild, is available here.

Meanwhile, getting Minnesota community investment tools in harmony is an urgent matter for state lawmakers.

It would allow communities to assess what amenities and business stimulus activities they might want, and either create or coordinate community stakeholder groups in legal ways to access federal economic rescue funds that are likely to become available. This is the opposite of the top-down approach used in the Great Depression era when communities waited to see what WPA or other programs might work for local benefit.

Second, the so-called "earmark" add-ons of special interest projects to major federal legislation are out of favor in Washington these days. But they haven't gone away, insists Chris Mackin of Ownership Associates, the ESOP consulting firm of Cambridge, Mass. Local projects will now come through the "front door," instead of the "back door," and will be part of stimulus and recovery packages prepared by the new Obama administration and Congress.

That means Minnesota needs to be prepared to participate in whatever programs become available. And it means that communities and nonprofit organizations and foundations should be coordinating efforts to make maximum and cost-effective use of these new federal resources.

Economic development needs to be the central theme for long-term meeting of human and social needs of the community.

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