NC Budget and Tax Center

House proposal for Commerce privatization better than Senate’s… barely

North Carolina’s economic development efforts took a turn for the worse last night, when the Senate passed a bill that privatizes the state’s business recruitment, retention, and development activities. A similar proposal will likely pass the House today, and while the lower chamber’s privatization plan is marginally better than the Senate’s scheme, both leave a lot to be desired in terms of ensuring more effective job creation and protecting taxpayer dollars.

Privatizing job creation efforts is hardly a new idea, although it’s proven to generate more scandals than results in the sixteen states that have experimented with this approach. According to the General Assembly’s own Fiscal Research Division, the kinds of economic development public private partnerships envisioned in the House and Senate bills haven’t proven themselves any more effective at boosting job creation in the states that adopted them than in those states that simply kept their job recruiting efforts inside agencies of state government.   At the same time, FRD and other researchers have found that these privatization schemes have been marked by financial mismanagement (Wisconsin), conflicts of interest and pay-to-play incentive-granting (Texas and Florida), and the inability to raise private funds, leaving taxpayers on the hook (Missouri).

The Senate bill largely ignores many of these problems. It allows partnership staff, officers, and board members to operate outside the ethics requirements of the State Ethics Act, simply requiring the new partnership to develop its own code of ethics. Thanks to a range of amendments offered during floor debate, the House version corrects this problem by covering the new partnership under the state ethics act, but is unclear whether this important provision will remain after both chambers negotiate during a conference committee.

Perhaps even more egregiously, the Senate bill permits pay-to-play incentive granting, whereby businesses can donate large sums to the partnership and still remain eligible for state incentive grants. In practice, this means that businesses can influence their likelihood of receiving taxpayer-funded incentive by donating money to the partnership—the very definition of pay-to-play. Senate sponsors have repeatedly claimed that this kind conflict of interest doesn’t exist since the partnership is forbidden from making actual incentive awards.

But this is really just a wink-and-a-nod towards accountability, while the reality of pay-to-play will continue. This is because the process of job recruitment and the process of granting incentives are tightly intertwined in North Carolina. When partnership staff are wining and dining prospective businesses considering locating or expanding in the state, the Commerce staff officially in charge of making incentive awards will almost certainly be in those meetings, rendering this distinction meaningless. It is inconceivable, moreover, that Commerce will refuse to grant incentives to the firms put forward by the partnership.

Lastly, the Senate version puts taxpayers on the hook for the new partnership’s activities much sooner than the House version. Under the Senate proposal, the partnership must raise $250,000 in the first year before the state will provide any funds, while the House requires $3.5 million in private donations before a single dollar of taxpayer money is granted. Both of these versions undercut one of the key justifications for creating this partnership—that a public private entity can raise private sector donations in ways that state government can’t. Yet by requiring only nominal amounts of private donations prior to allowing state funding, supporters of this proposal are tacitly admitting that they can’t actually raise the volume of private funds necessary to significantly expand the amount of resources available to the state’s economic development efforts.

So while the House proposal for privatizing the Department of Commerce is marginally better than the Senate’s plan, both represent a turn for the worse when it comes to state efforts to promote job creation and economic growth.

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