The Generous Assembly

Pet projects quietly persist

Teapots. An automotive center. An ACC museum. Even if lawmakers wanted to kill some of the questionable programs they've created, they've lost track of their options.

Staff WriterJune 13, 2009 

  • With the budget in chaos, lawmakers and Gov. Beverly Perdue still resist serious changes to state policy and spending.

    In five parts, The News & Observer examines difficult decisions the state could make to save hundreds of millions.

  • $96 million Estimated annual savings from 2010 to 2015 if tax credits were repealed.

    $55 million Savings if seven of the state's agriculture research stations were closed and property sold. An additional $3.7 million would be saved annually by consolidating the remaining research stations under two UNC schools.

    $15 million State lawmakers' investment in the N.C. Center for Automotive Research, plus an additional $4.2 million in state, local and federal assistance.

    $16 million How much more center officials say they need to make the facility self-sustaining.

    $2 million Given to Greensboro in 2005 for a proposed $23 million ACC Hall of Champions. It has not been built and has received no private funding.

    $400,000 Given to Sparta in 2005 for a teapot museum that has been scaled back and turned into a planned arts and crafts facility. It has yet to be built.

Four years ago, state legislators gave $2 million to Greensboro to launch a "Hall of Champions" for the Atlantic Coast Conference. It was to showcase the ACC's athletic heroes, an idea pushed by Kay Hagan, then a state senator, and other legislators.

The project would cost $23 million, and the legislators initially asked the state for all but $3 million, which represented what the city would pay to buy an existing building that would become the hall's home.

Since that time, no additional money has been raised, even from the Greensboro-based athletic conference, which is among the wealthiest in the nation. According to the ACC's most recent tax return, it had $30 million on hand and paid its commissioner, John Swofford, $924,000 in salary, expenses and benefits.

The city bought the building but backed out of using it for the hall. Yet the Greensboro City Council recently voted to spend the $2 million to get started. Until that money is spent, city leaders can't get more cash from the state.

The ACC Hall of Champions is a relatively small project, so far a one-time cost in what was a $17.2 billion budget during better economic times. But it shows how the General Assembly's spending customs can get it into trouble when revenues start plummeting.

For the coming fiscal year, lawmakers are working to close a budget shortfall of more than 20 percent, or $4.5 billion, a reflection of the worst economic conditions since the Great Depression . And long gone is the money they gave to Greensboro, the $15 million they've given to an automotive research center that hasn't come up with the private partner it promised and the tens of millions in tax breaks they've given to companies that ended up cutting jobs.

These types of projects are often created or boosted by powerful lawmakers looking to take money home to their districts or to promote feel-good measures related to education and job creation that play well on the campaign trail. Sometimes the projects benefit special interests or a lawmaker's financial interest.

Typically, these projects are inserted into the annual budget bill, sometimes so late in the budget process, or in closed or unpublicized meetings, that they go unnoticed. Two years ago, for example, lawmakers spent $500,000 to create an athletic scholarship program at the state's 10 public and private historically black colleges and universities without any public debate.

"They often just don't get the attention they need in the budget process," said Sam Watts, a policy analyst for the N.C. Center for Public Policy Research, a nonprofit that examines government spending. It has offered several recommendations for cleaning up the way lawmakers hammer together budgets.

In the case of the ACC museum, the money was inserted into the 2005 budget. Amy Yakola, an associate ACC commissioner, said the conference was not involved in the development of the project and does not have the money to spare.

"It's a great opportunity from a branding standpoint," she said, "but at the same time, we were very clear upfront that we were not going to be able to allocate any dollars toward the project."

The hall lost its planned home last year, but in May, the Greensboro City Council authorized spending the state's $2 million to start the first phase of the museum, now to be in the Greensboro Coliseum Complex's special events center.

"We were advised by the state that we wouldn't get any more money until we spent the $2 million," complex Deputy Director Scott Johnson said.

Hagan, a Democrat and now a U.S. senator, declined to be interviewed. Her spokeswoman said Hagan requested the money in 2005, when she was a chief budget writer, to create a "national tourist attraction."

Two House members who also sought money for the hall, Greensboro Democratic Reps. Maggie Jeffus and Pricey Harrison, say they lost track of the project. They said that it wouldn't be right to take the money back but that the hall project exemplified the need to create performance benchmarks so that money can be recouped if a project stalls or is dramatically altered.

"We need to get more engaged," Harrison said.

A gift to businesses

Sometimes, the giveaways are far larger.

Each year, the state gives up roughly $50 million providing tax credits to hundreds of companies that have upgraded their facilities with the hope that the investments will lead to more jobs. But the evidence is that companies have shed jobs instead.

Ameritex Yarn was one of those companies. It received nearly $160,000 in tax credits earlier this decade for equipment investments in its Burlington plant, only to go out of business in 2006, leaving 125 employees out of work.

The company's former CEO, Rick Bullard, said the credits were "fairly meaningless" for a company that succumbed to foreign imports.

"The tax credits in the overall scheme of things of what was going on in that segment of the textile industry just didn't really mean anything," he said.

Numerous studies over the years have found the credits ineffective, particularly at growing jobs and businesses in the state's poorest counties. But this gift to companies, part of the "William S. Lee Quality Jobs and Business Expansion Act" of 1996, remains on the books, another expensive example of state programs and initiatives that won't die, no matter how much evidence exists that they are ineffective or counterproductive or that they duplicate another program.

These programs are so hard to kill because they quickly develop their own constituencies, which then fight hard to keep them alive.

State Sen. David Hoyle, a Gaston County Democrat and a co-chairman of the Senate Finance Committee, said he is feeling that heat on the Lee tax credits. His committee has put forward a plan to cut them and use the money to help reduce the corporate tax rate. He said he has heard from virtually every economic developer and chamber of commerce in the state asking him to preserve the tax credits.

"Any type of program you start, the minute it gets advocates, it is totally impossible to get rid of," Hoyle said.

The credits were part of the state's first foray into the economic incentives game. In its first 11 years, the Lee Act handed businesses $630 million in tax breaks. Cutting them would allow the state to keep $574 million over the next six years, according to a University of North Carolina study released earlier this year.

That's an average of $96 million each year, although most of the money would be reclaimed in the later years. The General Assembly's fiscal staff estimates less savings.

UNC researchers looked at companies that in 2004 took just the equipment incentive. Overall, their employment numbers dropped in subsequent years. The researchers suspect some of the credits might have been used to automate operations so the companies needed fewer workers.

The act's credits "are having little to no effect on employment growth and or a limited impact on company expansion/location decisions in North Carolina," according to the study by the university's Center for Competitive Economies.

But powerful lawmakers are trying to keep them alive.

"We're in such fierce competition with other states and other countries to create jobs and keep jobs that we need to keep everything in the tool box," said Rep. Bill Owens, an Elizabeth City Democrat and chairman of the House Rules Committee.

The Lee tax credits are part of a rapidly growing plethora of economic development programs that cost the state more than $1 billion annually. Despite that significant investment, North Carolina's unemployment rate is the sixth-highest in the country.

The UNC report said so many programs now exist across state government that lawmakers have lost track of what's actually working.

"In particular, the number of agencies and organizations funded by the legislature to perform economic development functions on behalf of the state has grown and the definition of economic development itself has expanded to near ubiquity," the report said. "Each of these organizations has its own agenda and in this mixture the broader interest of the state itself is often unaccounted for."

But it's difficult to cut programs billed as job creators when the economy's tanking.

Commerce Secretary Keith Crisco, like Rep. Owens, wants to keep the Lee credits available at least to the state's poorer counties so they have one more way to entice companies. He said his textile company, Asheboro Elastics Corp., was an exception to the UNC findings; it grew after using the credits.

"Now is not the time to talk economic theory," he said. "It's to get jobs here."

Political shellacking

John Turcotte has found it difficult to guide legislators toward cutting programs. In 2007, he became the first director of the legislature's Program Evaluation Division, an entity created to identify poor performance in state government.

One of the division's first reports suggested that the state could save $55 million, plus another $3.7 million in annual operating costs, by closing seven agriculture research stations and consolidating management. North Carolina has more agriculture research facilities than any other state, the report found, and several stations did far fewer research projects than the rest.

The research station report drew such ire that one lawmaker suggested the best way to achieve savings would be to cut the Program Evaluation Division.

"The legislators that listened to us and would do the smart thing with the money, they got shellacked politically for even considering it," Turcotte said. "So this isn't easy."

Part of the problem, he said, is that government does such a poor job of tracking state-funded programs that lawmakers don't know their options when it's necessary to cut the budget. The News & Observer learned this through a basic request to the governor, the legislature, the state auditor and the state controller for a list of all state-funded programs created over the past 10 years and how much money they received.

The response? There is no such master list. Gov. Beverly Perdue, a New Bern Democrat, has included $500,000 in her budget proposal to create a list.

"What I'm trying to do, quite frankly, is change the way we do business as a state, to make government more transparent on its face and make it more efficient and more thought-out strategically," Perdue said in an interview.

Turcotte said his staff would use that master list to begin targeting programs for review. "What we intend to do for the legislature is take that information, look at it very carefully and see if the program is actually accomplishing anything."

The lack of accountability allows past mistakes to fade from memory, often to be repeated. Consider the millions in museum money lawmakers have handed out over the years, such as for the ACC Hall of Champions.

A similar situation emerged in 2005 with a proposed teapot museum in Sparta. Lawmakers gave the project $400,000 that year.

The teapot collection went elsewhere, but organizers are keeping the money for a scaled-back museum that will feature arts and crafts. It has yet to be built, and the capital campaign was suspended because of the weak economy, said museum director Cynthia Grant. The town has turned a 1,500-square-foot gallery into a temporary home until the museum can be built.

When rules are bent

Sometimes, lawmakers don't follow their own playbooks in spending state money. In 2005, state lawmakers approved $7.5 million for what was then the Advanced Vehicle Research Center, but under the condition that the center partner with a private entity that would bring jobs.

The following year, the center (now called the N.C. Center for Automotive Research) announced an agreement with Lotus Engineering to bring 108 jobs. That agreement fell apart within months. Two state payments related to the agreement, a Jobs Development Investment Grant and a Golden Leaf Foundation grant, have been put on hold as a result.

But the center, in Northampton County, is spending the $7.5 million lawmakers approved, plus another $7.25 million appropriated in subsequent budgets. The money was released after Don Hobart, then the Commerce Department's counsel, wrote that the private partner requirement had been met when the center struck an agreement with a private firm to manage the facility.

That firm, MDE International, would bring up to 20 jobs, but the center would have to pay for at least half. The rest would be dependent upon business the center brought in.

But even that agreement never led to a contract. To date, the center has no contracts with any private entities to create jobs, said Gary Brown, a center board member and executive director of Northampton County's Economic Development Commission.

Still, the center broke ground last fall, with plans to spend the $15 million in state money to build and operate an initial phase that includes two miles of track and a 23,600-square-foot building for operations, engineering and garage space. The work should be finished this fall.

Even when that phase, called 1A, opens for business, Simon Cobb, the center's chief operating officer and sole employee, said it will not generate enough business for the center to sustain itself. It will need at least $16 million more to expand the track and add other facilities before it can become a break-even proposition.

"Phase 1A is not going to pay the bills," Cobb said.

The project has had a difficult history. Dick Dell, the man who envisioned the center and initially led it, said he was forced out three years ago. Brown said Dell left because of a contract dispute. Dell has started his own competing project and has kept the center's original name. He said he is building a 16,000-square-foot center in Danville, Va., and has six companies ready to rent space. He expects to open the center this summer and to have 35 people working there by next year.

Rep. Michael Wray, a Northampton County Democrat, has helped corral state money for the N.C. Center for Automotive Research. A May 2006 memo at the state Department of Commerce shows that he sought release of the $7.5 million so that he could persuade the state Senate to pony up more money.

He said in an interview the center will be a "magnet for automotive industries."

If so, that could help him sell an 86-acre site he co-owns adjacent to the center property. Wray said in the interview that he checked with then-Speaker Jim Black's office to determine whether it was a conflict of interest for him to be involved in the center project. He said Black's staff assured him it was not.

Wray later sought advice from Black's successor, Speaker Joe Hackney, an Orange County Democrat. Hackney, who called Wray a "straight shooter," said he advised him to bow out to avoid a potential conflict of interest. Wray has since removed his name from legislation that would spend an additional $18 million on the center.

Rep. Joe Tolson, an Edgecombe County Democrat, initially sought money for the center. He said he thinks it should go forward, despite the lack of a commitment of jobs from a private employer.

"We've got to give this project a little time to work," he said. "If we get the track completed and the facilities completed and we don't attract anybody for testing, then we've got a problem on our hands."

Joe Sinsheimer, a Democratic consultant turned government watchdog, said the museums and automotive center fit a classic "bait and switch" pattern.

"The state's asked for seed money, but the private capital is never raised, or the vision for it is never realistic, and so what happens time and time again is taxpayers are left holding the bag," Sinsheimer said. "And at a time when we have a $4.6 billion budget deficit, these kinds of projects turn the stomach."

One solution, he said, would be to create escrow accounts within the state Treasurer's office that would not allow money to be released until conditions are met.

"That's what's done all the time in the private sector," he said. "Money's escrowed, and then when you meet your part of the deal, the money's released."

Coming Sunday: In lieu of raises, expensive time off.

dan.kane@newsobserver.com or 919-829-4861

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