Texas incentive funds touted by Perry draw praise, criticism

Posted Friday, Aug. 26, 2011  comments  Print Reprints
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When it comes to offering state incentives for businesses to relocate and add jobs, it truly has been bigger in Texas under Gov. Rick Perry.

The Texas Enterprise Fund, created in 2003 to provide money to attract companies to the state or help them expand, "is the envy of governors around the nation," said Terry Clower, director of the University of North Texas' Center for Economic Development and Research in Denton.

As of June 30, the fund had committed nearly $440 million to about 100 corporations, according to the governor's office. A separate Emerging Technology Fund has awarded $370.5 million to new ventures and university research programs since its formation in 2005.

As Perry campaigns for president, he is trumpeting Texas' unmatched success in creating jobs, and spokeswoman Catherine Frazier said he believes the two incentive funds are "a very important tool to maintaining Texas' competitive edge."

But the funds have also come under fire for falling short of delivering on promised job gains and creating an appearance of political favoritism because Perry has accepted campaign contributions from companies that received taxpayer funds. There are also complaints that Perry exercises too much control over the funds.

"The governor's office pretty much runs the program as a deal-closing fund," Clower said of the Enterprise Fund.

In 2010, Perry disclosed that a number of Enterprise Fund contracts, which carry clawback provisions if job goals aren't met, had been amended to make them more favorable for companies that struggled to meet targets during the recession.

And in April, a state audit faulted the Emerging Technology Fund, saying Perry's office did not monitor the state's investments adequately, needed more transparent decision-making and should prohibit advisory board members from investing in companies seeking money from the fund.

Frazier said "a lot of those recommendations were already common practice," and noted that Perry signed a bill this year that requires several new disclosures, including the number of jobs actually created by each project.

It also calls for the lieutenant governor and speaker of the House to each appoint two members to the Emerging Technology Fund's advisory committee, rather than the governor's office nominating all 17 members; sets new guidelines for recovering grant money when job targets aren't met; and requires committee members to file financial disclosures.

Critics say there are still inherent conflicts of interest.

"People on the left and right have questions about governments handing out money to private companies," said Andrew Wheat, research director at Texans for Public Justice.

Last year, the Austin group reviewed 45 Enterprise Fund contracts and found that only 13 met job targets.

"If you go down that road, you'd want to set it up to be as insulated from politics as [much as] possible and as transparent as possible. These programs fail miserably on both counts," said Wheat, whose group focuses on the impact of money in Texas politics.

Last year, The Dallas Morning News reported that the Emerging Technology Fund awarded more than $16 million to firms with investors or officers who are large donors to Perry's campaigns. One, David Nance, landed a $4.5 million award for Convergen Lifesciences in Austin without the approval of a regional screening board. Nance has donated about $80,000 to Perry in the past decade.

The New York Times reported Aug. 20 that John McHale of Austin gave Perry two $50,000 contributions, one before and one after G-Con, a pharmaceutical firm he helped launch, received $3 million from the Enterprise Fund.

In both cases Perry or his representatives said the grants and the contributions were not connected.

'Forced to compete'

From David Berzina's perspective as executive vice president of the Fort Worth Chamber of Commerce, the Enterprise Fund is crucial to competing for big economic development projects.

In May, Fort Worth landed a big plum with the state's help. GE Transportation announced plans for a locomotive manufacturing facility in far north Fort Worth, its first move outside Erie, Pa. in more than a century, aided by $4.2 million from the Enterprise Fund. The factory is expected to employ hundreds by the end of 2012.

"We'd love to have cities compete without incentives at any level -- federal, state or local," Berzina said. "But companies know incentives exist. Communities are forced to compete, or lose."

If that's the way the game is played, Berzina is glad to carry the biggest stick. "The Enterprise Fund, it's a big one," he said. Corporate relocation consultants and economic development offices around the country "all know about the Emerging Technology Fund and the Enterprise Fund."

The GE deal marked the seventh company with a Tarrant County location to win a grant from the Enterprise Fund. But according to the Texans for Public Justice study, four of the Tarrant deals -- plus another involving Vought Aircraft, now Triumph Aerostructures, just across the county line in Grand Prairie -- failed to meet job goals on schedule or were terminated, resulting in money being returned to the state.

The program's largest refund, according to a report posted by the governor's office covering the fund's activities through June 30, was Bank of America's $8.45 million giveback in 2009.

In 2004, Perry was joined by Angelo Mozilo, the now-disgraced leader of subprime lender Countrywide Financial, to announce a $20 million grant to Countrywide, which promised to add 7,500 positions to its North Texas mortgage operations.

After easily topping its job targets during the housing boom, Countrywide imploded when the housing bubble burst, and it slashed its workforce. It eventually was acquired by Bank of America during the financial meltdown in 2008.

Even with credits piled up when it was outpacing its job goals, Bank of America acknowledged it would not reach 7,500 new jobs and scrapped the Enterprise Fund contract in late 2009, according to the Texans for Public Justice study.

The history of refunds on Tarrant-area deals isn't necessarily representative of the Enterprise Fund in general. Of the 89 deals listed as of June 30, 31 have produced repayments totaling $25.8 million out of the $363 million that has actually been disbursed. Most repayments are for less than $200,000, although seven were for more than $1 million.

"There is a solid system in place to ensure funds go to companies that create jobs and generate capital investment for the state," Frazier said. If a company falls short, she said, it is expected to repay some of the money, plus interest.

Betting on new firms

While the Enterprise Fund is driven by job guarantees from existing companies, the Emerging Technology Fund bets on new companies and research projects with the hopes that they will spawn future employment.

It has made $197.3 million in "commercialization investments" in 133 young companies, and 34 research awards, mostly to Texas universities, worth $173.2 million, according to its latest report.

About half the commercialization investments go to biotechnology and life science companies. The state gains the right to an ownership stake in those firms if they achieve certain thresholds.

Four of those have been clients of Tech Fort Worth, a business incubator and development organization funded by the city and the University of North Texas Health Science Center in Fort Worth.

Darlene Ryan, executive director of Tech Fort Worth, says she supports the Emerging Technology Fund and has seen its workings firsthand.

"Texas made a big statement when it said it had $200 million [the fund's initial authorization] for this process," Ryan said. She said company officials benefit just by making formal presentations to the fund's reviewers, whether they are selected or not. But gaining an award is "a significant first step" for a new venture. "Because these companies go through such a thorough vetting process, venture capitalists look at them differently," Ryan said.

ZS Pharma CEO Al Guillem called his experience with the fund's reviews "fairly exhaustive." ZS Pharma, which moved to Fort Worth from Indiana, received $2 million last year to help develop a drug for patients with liver or kidney disease. The state received the right to buy 1 million shares of preferred stock in the company at a set price.

"It was difficult to get venture capital excited before we had clinical data," Guillem said. But with the state's investment, "now we have signed a term sheet with a venture capital firm" that will move the company along with clinical testing, which Guillem said will require "a few million dollars."

And that's just the start.

"By the time we get approval from the FDA, we'll probably spend $35 [million] to $40 million," he said. ZS Pharma already does work with the health science center in Fort Worth, and he expects the school to conduct its human trial studies. "The state requires that we, if at all possible, use vendors in the state," Guillem said, "and for the most part we have."

Although the initial research for ZS Pharma's drug was done in Indiana, which has a similar incentive program, Guillem said "Texas was much more friendly when it came to providing the infrastructure at Tech Fort Worth," so the company moved.

Neither Ryan nor Guillem said they have experienced any evidence of political favoritism in their dealings with the fund.

Jim Fuquay, 817-390-7552

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