The state is one vote away from pledging up to $125 million to a small-business investment program that has been slammed as a colossal waste of money in some other states that tried it.
Gov. Nathan Deal and backers say it will plow much-needed capital into emerging businesses. But critics call it a scam that has cost states more than $2 billion over 20 years.
“If they sold deals like this to naive little old ladies, they would go to prison,” said Republican state Sen. Glenn Grothman of Wisconsin, where a similar program has drawn criticism. “I don’t know what should happen to you if you sell deals like this to naive legislators.”
Supporters say these special investment programs have led to economic growth and job creation in other states and can do the same in Georgia.
“The purpose is to create long-term, sustainable, clean jobs,” said Rep. Ben Harbin, R-Evans, the bill’s sponsor. “It provides an immediate influx of money into the private sector.”
Harbin’s bill would create a “CAPCO” investment capital program. A CAPCO is a private investment firm sanctioned by the state to do business in the program as a “certified capital company.” In sum, the CAPCO gets money from insurance companies and invests it in small businesses.
The insurance companies get state tax credits — meaning they pay less money into the state treasury — and some return from CAPCOs for taking part. The CAPCOs get management and other fees, plus both the profit and the principal on their investments. And the small businesses get operating cash they can use to expand and create jobs.
CAPCO critics, however, say it’s difficult to discern what jobs CAPCOs have created — perhaps those jobs would have been created anyway, or perhaps they’re only temporary or even part-time positions. And they point to a new program in Maryland that cuts CAPCOs out of the process, enabling the state to get back its principal and most of the profit.
Almost passed
Harbin’s bill to pave the way for CAPCOs in Georgia stalled in the state House during the 2011 session but was quietly resurrected by supporters, passing the chamber on the second-to-last day of the session.
On the final day, Senate leaders didn’t bring it up for a vote. But because it was attached to a bill that had already passed the Senate, any member of that body may call it up for a final vote when the session resumes in January.
And it is likely to get the signature of Deal, who has been talking about CAPCOs since before he was governor. The chief lobbyist for the CAPCOs is a friend and former legislative colleague of Deal’s who served on his transition team.
“Gov. Deal has said that economic development tools such as CAPCOs could be an ingredient to help Georgia’s private businesses obtain the financial footing they need in order to thrive and expand,” said press secretary Stephanie Mayfield.
“This option has been well-vetted throughout the year by the governor’s Georgia Competitiveness Initiative,” she said. “Creating jobs for our state is Gov. Deal’s top priority.”
‘$200 million toilet’
With double-digit unemployment in Georgia, economists and business leaders have repeatedly cited the need for more investment capital to spur job growth.
But Julia Sass Rubin, an associate public policy professor at Rutgers University and a leading critic of the CAPCO model, said states have much more cost-efficient ways to invest in small businesses to create jobs.
“The CAPCO is the classic $200 million toilet,” she said. “You don’t ask, ‘Does it flush?’ You ask, ‘Why did you pay $200 million for a toilet?’ ”
In more traditional venture capital investing, the state — and not the CAPCO — would get the principal and the bulk of any profits, Rubin said.
CAPCO officials say they aren’t like traditional venture capital firms because they must invest in certain kinds of small businesses in set geographic areas, and they invest in companies that are not getting money from traditional venture capital firms or banks.
CAPCO watchers say states have invested more than $2 billion in such programs since the first one was started in Louisiana more than 20 years ago.
Colorado started a $200 million CAPCO program but stopped funding it in the early 2000s after state officials declared it a failure. The state treasurer at the time called it a scam. Florida has had one too, and officials there complained about the lack of jobs created.
Five years into Wisconsin’s $50 million CAPCO program, capital companies had invested in 19 companies and reported creating 316 new jobs, according to a state audit. A decade after the program started, an industry group said almost 900 full-time jobs had been created.
A New York-based financial management firm invested only about half of the $16.6 million it got under the Wisconsin program, according to the Milwaukee Journal-Sentinel. The paper said records show that many of the firm’s investments went into companies that either failed or fed the growth of the firm’s own parent company.
A proposal to resurrect the program has so far stalled.
“I think they are bunco artists,” Grothman, the Wisconsin legislator, said of CAPCOs.
54 jobs for $500?
Harbin said when CAPCO lobbyists came to him selling the program, they cited Texas as an example of CAPCO success.
Texas’ Legislature has authorized $400 million in tax credits for insurance companies over the past six years. CAPCOs reported to the state that almost 1,900 jobs were created and 4,400 retained with the first $100 million in tax credits.
But state officials told the Austin American-Statesman that there were no standards for reporting jobs created or retained. They said, for example, some jobs might not be full time or might not be attributable to the CAPCO investment.
An expert who studied the program said that in one case, a CAPCO reported that a $500 investment in power and communications construction company helped retain 54 jobs. That comes to about $9.26 per job.
But supporters say it does a lot of good in Texas.
A CAPCO-sponsored study concluded the state will wind up getting more than its money back through tax receipts from workers and companies.
“CAPCO accomplishes these goals by mandating the rapid deployment of funds, focusing 100 percent of the capital within the borders of Texas, and steering a sizable portion into early-stage companies as well as into economically under-served communities,” the study said.
A plan to put another $200 million into Texas’ program stalled after Lt. Gov. David Dewhurst raised concerns.
“Lt. Gov. Dewhurst’s primary concern with the CAPCO legislation was the return on investment for Texas taxpayers,” said his spokesman Mike Walz.
In contrast to CAPCO states, Maryland has set up a different venture capital program involving insurance tax credits, but the state will receive all of the principal it invests and 80 percent of any profits.
The genesis in Georgia
In Georgia, Deal began talking about CAPCOs during his campaign last year.
Advantage Capital Partners and Enhanced Capital Partners, two of the leading national investment companies in the CAPCO industry, hired the firm of top Capitol lobbyist Pete Robinson to push the idea.
Robinson served with Deal in the Georgia Senate during the early 1990s. Deal was elected to Congress in 1992, and Robinson left the Senate to lobby.
Robinson and his family contributed $14,250 to Deal’s campaign for governor, according to campaign disclosure reports. His law firm and its lawyers kicked in about $38,000. After Deal won election, he chose Robinson to be vice chairman of his transition team.
Robinson, who referred questions about the program to his clients, is noted for his ability to get bills passed at the last minute with little debate, according to Statehouse veterans.
Harbin’s original bill called for about $180 million in insurance tax credits. But Harbin said negotiations on the bill dragged on for several weeks, and the figure changed. The bill passed the House Insurance Committee, but never made it to the floor of the House.
That is, until it was tacked onto a Senate insurance licensing bill. It hit the House floor on the 39th day of the 40-day session, and passed overwhelmingly.
On the 40th day, Robinson worked to get the bill through the Senate, but the leadership held the bill and it never made it to the floor for a vote.
When the session opens in January, any senator may ask that the bill be put to a vote. It would then be debated on the floor of the chamber, without committee vetting.
Under the Georgia bill, CAPCOs won’t have to guarantee that any jobs are created. They will have to report where the money is being invested and whether those companies added or retained jobs.
But the state tends to give the public limited information to judge whether tax credits work the way they are supposed to. A panel studying Georgia’s tax system last year found that little research has been done on the value of jobs tax credits.
Harbin and CAPCO officials say they have learned from mistakes in other states and Georgia’s program will have improvements. For instance, CAPCOs will have to invest at least 50 percent of the money within four years, so they can’t sit on the capital. More than a third of the money would be invested before the state starts paying out tax credits, meaning state businesses could benefit before the state lays out any money. The investment couldn’t go to a CAPCO’s affiliate.
Still, Rubin, the Rutgers public policy expert, said the CAPCO program is a bad deal for taxpayers, no matter the improvements. The basic model, she said, is skewed to benefit CAPCO companies.
“The minute they pass the CAPCO bill, it’s like the state is writing a check of taxpayer money and handing it over to these out-of-state guys,” she said. “It’s like hiring someone to invest for you and you are letting them keep the investment.”
‘Politically agnostic’
Alan Essig, executive director of the Georgia Budget and Policy Institute, said if the state wants to invest $125 million in startup businesses, it should bid the work out to investment firms and work a deal so that the state ends up with the principal and at least some of the profits.
“The way this works, CAPCOs get all the money from the state and there is no risk on [their] end whatsoever,” he said. “Warren Buffet would not do a deal like this.”
But Tony Toupes, a senior vice president of Advantage Capital, said investment programs like the one in Texas provide “politically agnostic decision-making.” Professionals manage the money without political interference, so “you get true, private sector decision-making,” he said.
Harbin, the bill’s sponsor, said using CAPCOs is smart because it gets the money from insurance companies to small businesses quickly. The state doesn’t have to front the full $125 million because it pays out the tax credits to insurers over five years.
Harbin said if the investments create jobs, the state gets a return because employees spend money and pay taxes. So do companies that grow.
He said his hope is that CAPCOs would invest in “life sciences” jobs, which are generally higher paying.
“The CAPCOs, overall, with their expertise, they are going to make a better decision about where the money should go so we get a better return,” Harbin said. “The state should be in the business of helping to create jobs. Without that expertise, you are probably going to have more misses than hits.”
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