House Select Committee on Economic Development Incentives – August 12, 2014 Hearing

Below is the HillCo client report from the August 12 House Select Committee on Economic Development Incentives hearing.

The committee met to discuss the Texas Enterprise Fund (TEF) and the Emerging Technology Fund (TEF).

Harry LaRosiliere, Mayor, City of Plano

There are 31 companies in Plano with over 500 employees
- Businesses are here because of great services, educated workforce and low crime
Just over 50% of property tax revenues are generated from businesses
City services are mostly paid for by businesses in Plano so it is very important to maintain a good economic environment for those businesses
Rep. Trent Ashby asked if Plano has received any funds through TEF or ETF
- Toyota received around $40 million from the TEF to bring the new facility to Plano
Ashby asked if specific things need to be changed to make the fund more efficient
- The city allowed the process to move at the state level until the city was asked to join the effort
Rep. John Kuempel asked if Plano was in competition with any other cities
- Toyota was considering over 100 cities within many different states
Kuempel asked if the city was ever worried that the TEF timeline would become a problem
- Not necessarily; we always want the process to be faster
Rep. Jodie Laubenberg asked how much of a role the TEF played in bringing Toyota to Plano
- The company is better suited to answer that question; it would be hard to imagine their decision was based solely on the TEF investment
- In 2006 Plano started an economic development program that has since created around 18,000 jobs with a median salary of around $77,000; that was another of the great ingredients that helped bring Toyota to the table
Rep. Drew Springer noted Toyota has stated Texas did not offer the most money of other states

Jonathan Taylor, Executive Director for Economic Development and Tourism, Office of the Governor

TEF is administered by the Office of the Governor but it is not the governor’s fund; every application must also be signed but the speaker and the lt. governor
Around 89% of applications come into the office hand in hand with a local community; most of the time the office will not entertain an application without an endorsement of a community
Other times, a company can come in and have discussions with the office about what they need then go out and choose a city that will provide the services the company needs; either way, the office does not pick and choose cities
The most important number the office looks at when deciding to use TEF is 1.5% of gross salaries without benefits; that is the amount of money that comes back to the state
- That number multiplied by ten is generally the offer number for TEF investment; at the ten year mark the state breaks even
That offer is then sent to the speaker and lt. governor who can make negotiations as well; if all three offices and the company do not agree then the deal is dead
Many times two similar companies will get two totally different offers; the reason for this is that sometimes the office feels that they can offer a certain company less and still get the jobs to the state
To date, $426 million has been spent from the TEF; that was responsible for 50,000 verified jobs up to 2012; will be closer to 70,000 by the end of this year
The total return to the state from direct hires is around $204 million
Including indirect jobs, it would; be closer to $1 billion return to the state
If the fund stopped today, the taxpayers would break even after 9 years
The real question that needs to be asked is whether companies would have come to Texas without TEF investment; that is a hard question to answer without asking the companies and the site selectors
TEF is not the ingredient that brings companies to the table, it is the deal closing aspect
Texas loses more deals than it wins in bringing business to the state; Louisiana is very fast and takes a lot of business from Texas
The more competitive states are those with a good basic economy who can put together $5 million in around two weeks; they generally have larger fund balances than Texas
Texas has a slower smaller fund than many competitors but it hasn’t always been that way
Ashby asked about other states having faster funds
- In discussions with other states, they have said they can turn around $5 million in 14 days, it takes Texas 90 days; having local buy-in is a good thing so it shouldn’t be a state-only process but other states are doing it quicker
Ashby asked at what point the speaker and lt. governor are notified and involved
- Most of the time, due diligence is done by the governor’s office to find out what a ballpark figure would be for the offer then those other offices are brought in and given access to all the information gathered by the governor’s office; it is generally about two weeks after the process began; it depends on the speaker and lt. governor how involved they want to be, sometimes there are lengthy negotiations and sometimes they just sign off on the offer the governor’s office put together
Ashby asked how often the speaker and lt. governor do not sign off
- If an application makes it through the due diligence process at the governor’s office it gets speaker and lt. governor approval about 80% of the time
Springer asked if it would benefit the state to be proactive and showcase other communities that aren’t targeted as often
- That would be great but it has to be initiated by the local communities
Springer asked if information about the fund is transparent
- Very much so
For smaller communities, the job threshold is lowered; also, the multiplier (payback time) could be pushed from 10 to 15 or higher
Springer asked if companies are looked at from the asset heavy versus man power heavy standpoint
- That won’t necessarily affect the offer
Rep. Mary Ann Perez asked about the audit process
- There is a compliance division that does the auditing within the office; they review compliance of companies’ contracts and how well the governor’s staff complies with policies of the office
- Especially challenging to audit when companies hire from within for a new location; can be contentious, sometime employers have a different definition of an employee
- Sometime it can be difficult when the office attempts a claw back; can be brought to the attorney general if a company disagrees with the office
Rep. Poncho Nevarez noted $3 billion in infrastructure is needed for the border; one in four manufacturing jobs is tied to jobs in Mexico; when incentives are being considered the state should consider making infrastructure investments in communities that would directly benefit the company who may be considering coming to the state
- That’s a good thought but the governor’s office cannot build roads or make those types of decisions
Nevarez noted that would be different if the legislature was handling the fund
- The legislature meets only every other year
Nevarez noted it could be an attractive proposition to tell communities they would directly invest in their business while also investing in the community
- It would be hard for the legislature to budget for those types of things
Springer noted flexible legislation could be passed that would allow for that type of thing; flexible funds set aside that could be used for infrastructure and followed up by the governor’s proposal including those auxiliary investments
Nevarez noted it would be a good way to bring jobs and infrastructure to parts of the state that see no TEF investment
- Need to keep in mind that when a company is looking at relocation they are looking at what exists not what could exist
Nevarez disagrees, the state investment does not necessarily exist when the company is asking for it
Rep. Jodie Laubenberg asked where applications begin
- The actual application is directly started at the governor’s office; a vast majority of applications come in with a community in mind and community involvement
- Some come in and say they are interested in Texas but do not have a community in mind; they may give a list of needs that is sent out to communities and they can come back and show what they can offer, access to rail or ports or airports, roads, workforce, etc.
Rep. Jason Villalba asked how it works when the state goes out to find business
- A company will be contacted either from the office or through a visit by the governor; they will be provided with information that is available online along with a list of incentives
Villalba asked if during that process a business is directed to a community
- Absolutely not
Villalba asked if there has ever been an instance when a business was directed to a particular community by the governor’s office
- Have never seen or heard of that
Villalba asked what the mission of the TEF is
- To expand good jobs in the State of Texas
Villalba noted it would be outside of the current purpose of the fund and enacting legislation to build roads and other infrastructure; it would also add a significant amount of time to the process to involve that type of thing; the fund needs to be faster and simpler not slower and more bureaucratic to make it work better

Terry Chase Hazell, Director, Texas Emerging Technology Fund

The original purpose of the fund was to expedite innovation and commercialization of research and to attract and expand private sector entities; basically cluster development
Over half of ETF investments have come in the biotech field
Research capacity at universities has also expanded
Over $2.2 billion of follow up funding has been achieved through ETF investment
About $486 million has been appropriated to date; $86 million of which was the FEMA reimbursement
The investment pipeline starts with the research team, then moves through product development and finally commercialization
There are not enough spinout companies coming from ETF investment; only about 50 so far
A big part of the ETF is getting research from universities into business and products
Funds were dispersed from 2008-2013
There are really three separate funds in the commercialization applications
- Fund 1
  - The initial fund attempting to bring research and ideas to the state
  - About $40 million investment through this fund
  - About half is biotech
  - Have seen about 11 failures in fund 1
  - A 5% rate of return is a good outcome for this fund
- Fund 2
  - Innovation with a prototype; companies with a product already in development
  - Acts more like investment than a grant
  - Expect about 10 or more companies to have a good return
  - Companies have a 12-15 year turnaround
- Fund 3
  - Venture capital; investment in later-stage companies in job growth stage
  - These companies are much more closely monitored and investment in preferred shares of the company are made
  - Moving more from innovation to job creation
  - Most job growth in this fund
  - A good outcome would be 15% return
The fund was mainly dispersed before jobs were added as an index
In fund 3 a declaration of Texas residency is collected, drivers’ licenses, tax documents, etc.
When in contract, companies must report their number of jobs; this is unattractive to small companies who are also looking for other investments; it would be better to have total jobs in aggregate reported; once a contract is over, small businesses don’t like to disclose numbers of jobs and that is when the real job growth happens; still would like to have that data to study the impact to the state
ETF is about growing startups, university research and Texas competitiveness
Nevarez asked if the fund being used for investing in universities is distinguishable from other funds
- The half that goes to universities is mixed through all levels
Nevarez asked about American Stem Cell research
- Cannot disclose everything about a company; through today, the San Antonio location is their principal place of business according to the company; the state is looking into whether they have activity in other states
Nevarez asked what activities outside of Texas
- Their CEO lives outside of Texas and almost all of their employees are outside of Texas
Nevarez noted their San Antonio location is a horse pasture
- It is a rural residence
As soon as their activities outside the state were discovered, discussion and settlement agreements were entered into; the settlement will be announced in the next annual report
Nevarez asked what is being done to make sure companies like this aren’t invested in
- There are remedies in the contract to get investment money back; many startups cannot pay back their investment at the drop of a hat so it is better for the state to let a company stay in business and pay the state back on a payment plan rather than to send them into collections
Nevarez noted that perhaps the state should not be in the business of being in business; the government is a steward of taxpayer money
Ashby asked that something be presented to the committee regarding what changes would benefit the fund; two findings from a recent state auditor’s report showed that ETF conducts limited monitoring of expenditures and use of funds, second, the governor’s office does not report the value of the state’s investments
- Valuations are posted with fair value measures according to common practice, it is an estimate; also use GASB method which is cost based
- For monitoring, there is a full time compliance staff that looks at how awardees are following up on contracts as well as how the office complies with its own policies
Springer asked about fund 3 morphing into a job creation fund, was that a legislative change
- It was legislative performance index change made in 2011
Springer noted he sees the fund as an angel investor not a venture capitalist; angel investors look for a 10x return, that is not the return we are seeing; the return is not near what is being seen from the TEF
- The total fund has not gone into equity and loans, half has gone into university grants; also, equity valuations go down when cash is given back to the state so the number seems lower
Villalba believes that when compared with internal metrics, the ETF is not nearly as productive as the TEF; what about fund to fund models
- The office likes that model as well, investing in venture capital funds that invest in Texas companies
- You have to consider the aspect of the fund that invests in university research; it is too early to see large returns from this part of the fund
Villalba asked if the fund is a failure
- It is too early to determine that; biotech had no presence in Texas 10 years ago if you value that type of thing it is not a failure; the performance indices right now are not in line with the mission of the ETF
Villalba asked for a comparison of the success of ETF and TEF
- This fund is about innovation and cluster development; TEF brings in large consumers; if you look at performance indices that make sense for ETF it has been a success; it is not a jobs fund it is about ideas and growing companies
Rep. Borris Miles noted if the fund was being looked at from a business standpoint it would not be seen optimistically; it must be looked at from a standpoint that the government is a steward of taxpayer money, from that angle the fund is failing

Bill Sproull, President, Richardson Chamber of Commerce and Economic Development Partnership

Served on the ETF advisory board for quite some time
The State of Texas only became a significant player in economic development about 10 years ago
Communities do not have the resources to pursue competitive economic development without state partnership
Eliminating these programs would be a huge mistake and the quantity and quality of deal flows would significantly decrease
Cash is king and many states have a leg up on Texas because Texas has no income tax to leverage
Some consultants have suggested that the wage standard should be lowered for the TEF; that should not be done
Two national site selectors have expressed concern over the direction Texas is headed with regard to incentives
The idea behind the ETF was to double down on investment already being made in research universities and to benefit from commercialization
The research matching grants and research superiority portions of the fund are very important;
Jobs are not the metric that needs to be looked at; jobs are a byproduct of wealth creation
Florida has a version of the TEF and the governor can single handedly approve deals under $2 million; swift action on smaller deals could help the program in Texas

Lara Bell, Legislative Budget Board

TEF was established in 2003
Initial funding was provided out of the economic stabilization fund (ESF); funds have also been transferred from other accounts
Since 2008 it has been funded out of GR, unexpended balances and interest
TEF is currently valued around $126 million
ETF was established in 2005
Initial funding was provided out of ESF and GR; since 2008 has been funded solely from GR, unexpended balances and interest
ETF currently has $95.7 million available
ETF has funded around 184 projects for $120 million in awards
Springer asked if LBB can determine the cost of staffing to run the ETF and how much staffing to manage the existing portfolio would cost if no new funds were allocated

Carlton Schwab, President/CEO, Texas Economic Development Council

Organization has been around since 1961
Represents 850 members from around the state who implement economic development deals at the local level
TEF is helping to bring the highest quality jobs to the state from which all other economic development activity and jobs flow
Years ago, incentives were one of the last things companies looked for in site selection; it has since moved up around the top four
The state receives their full investment back on many incentives in less than two years
Of the 25 largest economic development deals done in the nation in the last two years the average cost per job was over $80,000 in investment and incentives; Texas averages $6,000 per job; the Toyota deal was worth $12,000 per job
Texas has the reputation for having the best business climate in the nation but Texas does not; really ranked about 9^th in business climate and 32^nd for property tax climate
For the Toyota deal, incentives were not the main driver for site selection; more important factors were the central location in the country, access to ports and rail, climate, and others
The exodus of primary jobs from California is a 30 year phenomenon
20-25 states vigorously recruit California; Texas should have a more targeted approach, for example, the aerospace industry
California is the largest destination state for Texans
Must continue to use the great tools Texas has for economic development; cannot disarm in the middle of a war
The cluster initiative could be revamped; TEF awards could be focused on having the greatest impact in those clusters
The press has mischaracterized the ETF as the governor’s slush fund and confused it with the TexasOne program which is a private entity
Springer asked how site selection companies are operating to close deals and why smaller communities aren’t targeted
- You can’t drive a company that wants to be in North Texas to Lubbock; the best thing communities can do is economic development at the local level to the best of their abilities
Springer asked if there are other ways than having large size that companies can be attracted to smaller cities
- If surrounding areas are doing well companies can be attracted to certain areas; you just can’t drive someone to Wichita Falls that needs to be in Austin

Scott Connell, President, Sherman Economic Development Corporation

Site selection consultants consider TEF as one of the best and worst programs around the nation; it is good in concept but other states have made their programs more responsive to business and more flexible
Businesses do not have the time to wait for long delays and missed deadlines
The improvement needed in Texas are only procedural
- Need to establish a pre-application process; addresses project parameters, jobs, wages, etc.; would allow the state to perform an analysis and shorten application time
- There should be a board comprised of public and private sector individuals to help provide oversight of the program and keep the response rate around 30 days
Texas incentive programs are already recognized as good programs they just need some process updates
Rep. Larry Phillips asked about the Sherman enterprise fund
- Tyson developed a case-ready meats division for beef and pork; they received large incentives from the community and TEF; now the largest employer in Grayson County

Tony Kaai, President, Denison Development Alliance

In May 2002 Denison made the short list for a Cardinal Glass plant; they wanted to generate 220 jobs; other finalists were in Oklahoma and Sherman, Texas; they had a plant in Waxahachie and wanted to be in Texas, however they decided to locate in Oklahoma; they determined a Texas site would be $1 million more expensive per year; Oklahoma had a program that gave a payroll rebate of up to 5% for ten years
The State of Oklahoma automatically gives a 5 year 100% abatement for property tax for every new business
- Oklahoma can do that because they assess a personal income tax
From the year 2000-2002 Texas lost at least seven companies ranging from $18 million to $163 million and 3,200 jobs because the state was not competitive
TEF is absolutely necessary for the state to be competitive in attracting business
Kaai discussed another project in which a similar situation occurred after the TEF was established and Texas won the business over Oklahoma
Incentives have to be an investment; there must be a return on investment
TEF does need to lower its wage requirements for rural communities

Paul Nichols, Founder/CEO, Cirasys, Inc.

Cirasys was a recipient of ETF funds and is a spinout from the University of Texas at Dallas
The company creates next generation power supplies and power models
First two products will be in audio space and IT/telecom/data center space
Products will be on the market in two months
Won $1 million in funding from ETF
Three patents have been issued and three more are pending
Over 90% of funds given to the company have been spent in Texas
In Texas there is not enough early stage venture capital for startup companies to be able to take a product to market
- Texas has a lot of private equity and a lot of later stage venture capital
- California does have a lot of early stage venture capital because they are used to those types of companies and situations
- ETF is filling that gap
Federal and state agencies have been supplying funds for companies to go out an attack specific technology problems for years; touch screen technology, the internet, big data supercomputers, voice recognition software, and Google all started with government funding
A strong differentiable technology, an experienced business team and a meaningful amount of funding are all necessary to make a positive return on investment in venture capital investments
- ETF already achieves these three factors
Just looking at universities in the state, Texas has an enormous research and science incubator; just need more commercialization application
26,000 companies have been founded by MIT alumni; these companies generate over $2 trillion; Texans just need resources, processes and mechanisms to take products out of the lab and make something more out of them
Startup companies are a valuable part of any economy, without them larger companies see the void and will not invest in a state
Villalba noted the real problem is the lack of very early stage investors; the witness believes the way to bridge this gap is to look to the government and the ETF; wouldn’t it be better to reseed the ecosystem of early stage private investors in Texas
- Yes but they are not mutually exclusive; those investors will not put money in Texas until they see a steady stream of ideas ready for investment and ready to take to market
Villalba noted there is a way to do that with the early stage fund to fund concept
- We definitely need outside firms to come in; they need to be shown that there is enough activity here for them to come to Texas

Leslie Ward, Chairman, Texas Economic Development Corporation

Established with the mission of bringing good jobs to Texas
Many of the major job expansions announced in recent years began at a TEDC meeting or event
Primary factors employers consider are taxes, judicial climate, workforce readiness and others
Incentives are playing an increasingly significant role
The five states Texas competes with most all have deal closing funds
We do not need to outspend other states in incentives because Texas has so many other good qualities
Elimination of the funds could send the wrong message to employers and site selectors and would be a boon to other states
It is troublesome that competitors know that Texas is nearing the end of the TEF and they have leverage until funding is replenished

Paul Mayer, CEO, Garland Chamber of Commerce and Economic Development Partnership

The number one issue when trying to bring companies to a region is location and access, then workforce, then tax climate, then energy and water
The way to really develop an economy is to use all of these things alongside incentives
Companies which should be focused on are those that have a value proposition for an economy
Springer asked about the state giving funds to retailers
- Most of what Mayer hears is that the focus is on new business coming to town and people don’t focus on those who are already there
- There is going to be frustration with incentivizing anything
Springer noted it is ok for community incentives to be given to retail because they are allowed to compete with other communities but the state should not be helping that along

Alex Frei, Cushman & Wakefield

Frei is a site selector for the most part
Companies don’t necessarily start off wanting to go to a certain state, they know what they want to achieve in utility costs, access to supply chain, workforce, taxation, transportation
Most companies put Texas on their list just because of the TEF and Governor Perry’s activities
The main negative with the TEF is that the review process takes far too long; no other states have the same 90 day three person review
The business community is beginning to get the feeling that with Perry leaving office, things are changing for the worse regarding economic development
Nevarez asked what would happen if Texas came to the table with no incentive packages and just tried to market the state for what it is
- There are other locations that can tout the same business climate and features that Texas can
Nevarez noted it is hard to fully buy-into what the witness is saying; obviously site selectors are going to say there needs to be funds like the TEF and ETF because it helps their clients; it would be nice to see what actually would happen without it
- The site selectors job is not to scheme; it is to find locations that will fit the project parameters
Ashby asked if a new TEF were being formed how should it be considered and reviewed against other states
- Other states have applications reviewed by a committee
- Other states give an offer letter that is also the approval letter
Ashby asked what a good timeline for a review period is
- Two weeks to get an offer is a good time period

Mike Wilson, Vice President of Operations, LegalZoom.com

Began the site selection process for the first expansion of the company in 2008
The number one priority for LegalZoom was workforce availability and quality of life for those employees

Public Testimony

Jim Wehmeier, President/CEO, McKinney Economic Development Corporation

Appreciates the Reps. looking out for the equity in the fund and looking for ways to improve the fund
McKinney has received TEF funds for two projects both are providing significant returns to the area and are significant taxpayers comparatively
Future conversations need to be about how to implement the TEF better not whether or not there should be one
Florida, Arizona, Louisiana, Oklahoma and North Carolina are extremely aggressive and are Texas’ major competitors for economic development

Amy Price, Workers’ Defense Project

It is important to make sure that companies coming to Texas through the use of Texas’ tax dollars are investing in the communities they are moving to
The construction industry in Texas provides low paying jobs with dangerous living conditions
Would like to see provisions for better construction standards on projects receiving state incentives

James Yohe, Executive Director, Nocona Economic Development Corporation

A firm believer in the ETF and TEF
An emerging community fund should be developed for smaller more rural communities that have a harder time accessing the ETF and TEF
Having a hard time providing affordable housing for potential employees of companies that would come to smaller communities
Education is also important; need to do more than just get kids ready to go to universities then get a job somewhere else
Need to be working more regionally
Springer asked about the witness’ experience with site selectors
- Small companies don’t generally use site selectors; those are the companies that would work well in smaller communities