NC Budget and Tax Center

The good, the bad, and the odd about the latest Commerce privatization proposal

Partial privatization of the N.C. Department of Commerce took another step closer to reality yesterday when the Economic Development and Global Oversight Committee (or EDGE Committee) reported out updated enabling legislation that authorizes the establishment of a nonprofit corporation to conduct significant pieces of the state’s business development activities. Using last year’s SB 127 as a template, the new version of the bill includes important changes—some for the better, some for the worse, and some that make us go “huh?”

In light of the checkered history of privatization efforts in economic development when tried in other states, it’s critically important that the General Assembly get the design and implementation of the new partnership right the first time. So it’s encouraging to see several provisions that change last year’s legislation for the better.

Most importantly, the new bill takes some important steps forward in ensuring some transparency and accountability related to conflicts of interest and ethical behavior.  While more work on this needs to be done, the bill now requires that all employees, officers, and board members be covered under the State Ethics Act—a mandate that will help reduce personal conflicts of interest—and that all gifts, services, and donations provided by any business, person, or outside entity be reported regularly on the new partnership’s website.

In another good step, the updated legislation includes an important overall accountability measure to protect taxpayers—the new nonprofit must raise at least $10 million from private sources before any state dollars can be obligated to it. This will ensure that the new partnership will live up to its much-heralded promises of private fund raising without putting taxpayers on the hook.

But the committee also included provisions that change the North Carolina economic development partnership plan for the worse. Perhaps most critically, the updated legislation does not fully address the problems arising from pay-to-play incentive granting. Rather than explicitly eliminating pay-to-play by prohibiting businesses that donate to the new partnership from receiving state incentive grants, the legislation simply “encourages the nonprofit corporation to seek private funds from businesses and entities that are unlikely to seek economic development incentives or contacts with the state.”

Although a step in the right direction, this “encouragement” is far too weak to adequately protect taxpayer dollars from companies that donate to the partnership solely to influence recommendations over incentive-granting. The Department of Commerce may well make the final determination over whether the company receives the incentives, but it appears unlikely that Commerce would ignore the recommendations of the partnership. As a result, the opportunity for pay-to-play remains intact.

It’s also worth noting that the legislation picks up where it left off last year in dismantling the state’s regional planning infrastructure. Certainly the creation of Prosperity Zones—intended to establish a one-stop shop for state services in a specific region—is a novel way for coordinating the delivery of economic development services from state agencies. But they do not replace the regional planning activities coordinated by the former Regional Economic Development Partnerships, which were abolished in the legislation. Coupled with the elimination of state funding for the Councils of Government (COGS), there appears little in the way of capacity or technical assistance to help county and municipal governments develop and coordinate regional economic development efforts. In turn, this seriously degrades the ability of local governments to coordinate regional solutions to regional problems.

Finally, we’re left with the things that make us say “huh?” In response to a question about employee compensation from Sen. Angela Bryant, the partnership’s new President, Richard Lindenmuth, made the surprising point that he felt tying incentive to employee performance wasn’t terribly effective at producing better organization-wide results. While the point is certainly fair, the need to provide incentive pay to the state’s business recruiters was a key justification for creating the partnership in the first place, since state government pay schedules prevented the kinds of performance-based pay she felt could give North Carolina a critical edge in industrial recruitment efforts.

Given these questions and concerns, it’s good news that the committee is taking the time and effort to stand up this public private partnership in the best possible way but there is much more work to be done.


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