NC plans to adopt job recruitment strategy that has caused problems elsewhere

rchristensen@newsobserver.comOctober 26, 2013 

  • Problems with public-private partnerships

    A recent report by Good Jobs First cited several recent examples of problems with public/private partnerships. Among the findings in the report:

    • Enacted in 2011, the Wisconsin Development Corporation awarded a subsidy to a company that was simultaneously bidding on a $15 million state contract. It was accused of spending millions of dollars in funds from the U.S. Department of Housing and Urban Development without legal authority. It failed to track past-due loans. It hired an executive who owed the state a large amount of back taxes. Two legislative audits have revealed a loose organizational culture that is failing to perform basic “watching the store” functions on outstanding loans.

    • JobsOhio, created in 2011, assembled a board of directors whose members included some of the governor’s major campaign contributors and executives from companies that were recipients of large state development subsidies. It received a large transfer of state monies about which the legislature was not informed, intermingled public and private monies, refused to name its private donors, and then won a legal exemption from review of finances from the state auditor.

    • The first chief executive of the Arizona Commerce Authority was given a three-year compensation package worth $1 million. Even though he resigned after a year, he received a $60,000 privately funded bonus.

    • A Florida public-private partnership sent 20 of their staff for weeklong conference in Paris. Texas Gov. Rick Perry has used the private money to travel around the country giving speeches about how businesses need to relocate in Texas.

— Commerce Secretary Sharon Decker and her team presented a sober economic picture of North Carolina last week to several hundred business leaders and economic developers from the Triad.

The visual presentation showed the state shedding thousands of textile, furniture and tobacco jobs. Since 2000 alone, North Carolina had lost 42 percent of its manufacturing jobs.

But Decker, whose style is part business leader, part evangelist, was also there to sell attendees on the state’s new job recruitment strategy – moving the industrial recruiting, marketing, travel and tourism divisions from their traditional home in the N.C. Department of Commerce to a new public-private nonprofit corporation.

The N.C. Partnership for Prosperity has become the hot public policy idea among Republican governors in recent years, and it has been endorsed by both Republican Gov. Pat McCrory and, in concept, the GOP-controlled legislature.

Starting early next year, dozens of Commerce Department employees will transfer from working for a public agency and start working for a nonprofit corporation.

The idea is that the Partnership will provide a more coordinated, more nimble approach to recruiting new businesses and aiding existing businesses looking to expand, as well as helping boost the state’s exports. It will also allow for higher rewards for the top job recruiters.

But such public-private partnerships have had a mixed record across the country, according to a study released last week by Good Jobs First, a Washington-based group that has been critical of such arrangements. The group says the structure has led to abuses, including misuse of taxpayer money, conflicts of interest, excessive executive pay, and little public accountability.

Decker said she is aware of the criticisms and believes that North Carolina’s public-private entity will be set up to avoid the pitfalls of other states.

If the crowd at the Benton Convention in Winston-Salem is any indication, there is still a lot of confusion about what the biggest change in the state’s economic development system in decades will look like.

“The unknown is the big question,” said Bobby Dodd, president and CEO of the Yadkin Chamber of Commerce. “The sooner you can get everything in place, the better.’’

“The whole privatization decision scares me,’’ said Henry Fourrier, president/CEO of the Greensboro Convention and Visitors Center, who expressed concern that tourism funding would be reduced.

Marc Schaefer, chairman of the Winston-Salem Chamber of Commerce, said he needed to learn more about how the pubic-private partnership would work before judging it.

“We don’t know what it’s going to look like,” said Schaefer, who is president and CEO of Truliant Federal Credit Union.

McCrory proposed the revamp of the Commerce Department last spring as part of a larger effort to stimulate economic growth. His effort has also focused on cutting taxes and reducing government regulations.

In creating a public-private partnership, McCrory is following a well-worn path that has included Florida Gov. Jeb Bush and Indiana Gov. Mitch Daniels in the last decade, and Wisconsin Gov. Scott Walker and Ohio Gov. John Kasich more recently.

New entity still taking shape

The state has filed the articles of incorporation for the NC Partnership for Prosperity as a 501(c)(3) tax-exempt nonprofit. Decker said she hopes to hire a CEO to head the Partnership by the end of the year. She and her staff are working on the details of compensation and benefits, and staff for what she says is basically “a business startup.”

She is forming a temporary board, co-chaired by Charlotte’s John Lassiter, of Carolina Legal Staffing, and Jim Whitehurst, president and CEO of Red Hat, the Raleigh-based software company. Lassiter and Whitehurst are chairman and vice chairman of McCrory’s N.C. Economic Development Board.

Details on how private funds will be raised to supplement the taxpayer funding are still being worked out.

The staff will migrate from the public to the private sector incrementally, rather than all at once, with the industry recruiting section moving first. There are an estimated 71 positions in sections that will be moved to the partnership. But officials said it is likely that fewer positions will actually be moved because the staff will be reduced in the process.

As part of the revamp, the legislature defunded the 16 regional economic partnerships that have played a lead role in economic development. They are being replaced by eight new Collaboration for Prosperity Zones that would be under the authority of the Commerce Department – each a collection of state agencies housed in one office.

Decker said that some regional economic partnerships will be able to survive without state funding.

But she said the partnerships in more rural areas may have more difficult time continuing. She said the state would step up its effort at helping rural areas to fill any vacuum.

“It’s entirely up to them and their communities,” Decker said of the future of the partnerships.

Skepticims remains

There is skepticism about the value of such public/private partnerships.

Washington-based Good Jobs First last week issued a scathing 40-page report called “Creating Scandals Instead of Jobs,” which outlined broad problems with such partnerships.

“We find privatized development corporations have issued grossly exaggerated job creation claims, they have created pay-to-play dealings for insider dealings for subsidies or conflicts of interests,” Greg LeRoy, the group’s executive director said in a teleconference.

“They have paid executive salaries and bonuses far higher than governors,” LeRoy said. “They resisted basic oversight and reduced transparency. Some have allowed large secret donations or intermingle of public and private monies.”

Indiana is generally viewed as having among the best public-private partnerships. But even that state’s entity came under criticism when an Indianapolis TV station – and then a state audit – fofound that 40 percent of the promised jobs never materialized. It has also been rocked by allegations that its representative to China solicited bribes from companies.

More recently, the Indiana Economic Development Corp. has drawn criticism for running a digital billboard in Times Square in New York – it runs 15 seconds twice an hour – touting Indiana as “A State That Works.” The ad campaign costs $65,000 to run from mid-August through the end of the year.

The billboard is more likely to be seen by out-of-town tourists than by corporate CEOs, said Morton Marcus, an economist and former director of the Indiana Business Research Center of Indiana University’s Kelley School of Business.

Ryan Streeter, an adviser to Indiana Gov. Mike Pence, wrote in June that the public-private approach has helped transform Indiana’s job recruiting effort. As evidence, he noted that Indiana had risen from 16th place in the Best States for Business ranking by Chief Executive Magazine in 2010 to 5th place in 2012. (North Carolina was ranked third in the same rating.)

“It is always difficult to tell how well something is working,’’ said Marcus.

“The problem with an economic development agency is we don’t know how many of these jobs would be coming to Indiana without an economic development agency or one that was that was a little more forthright with the public,’’ he said.

LeRoy said that North Carolina is acting as if all the problems in the other states never happened. What is worse, he said, is that all the public safeguards that were built into the state legislation setting up the partnership never passed.

Missing safeguards

The General Assembly was on the verge of passing a bill setting up a corporation when it hit a snag at the end of the session. An amendment was added to the bill ending the moratorium on hydraulic fracturing, which hung up the bill. But a one-line provision in the budget bill gave McCrory the authority to proceed.

Those missing safeguards included provisions leaving final approval of subsidy programs with the state agency; a ban on board members or their families profiting from any action of the board; limits on the amount of public funds that could be used for salaries; a requirement the partnership be subject to the public records law; and a requirement to develop and publish a code of ethics.

Decker said even though the legislation setting up the partnership did not pass, the McCrory administration is acting as if it did. “We are following it to the letter,” she said.

“There have been some problems, no question about it,” Decker said of public-private partnerships in other states. “We have to be sure we have a strong contract between the Department of Commerce and this partnership and be real clear about what the accountability is. Our model – and this was learned from the problems in the other states – (is) the state grant-making dollars will stay on the public side.”

So incentive programs such as the One North Carolina Fund and Job Development Investment Grants, as well as grants formerly made by the now disbanded N.C. Rural Economic Center, will all be made by the Commerce Department, not by the partnership.

But the Budget and Tax Center, a liberal group in Raleigh, has pointed out that even with the safeguards there is still the possibility for conflicts of interest. The governor will chair the partnership, the center has noted, making it difficult for the Commerce Department to reject a partnership suggestion for a grant.

 

Christensen: 919-829-4532

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