A tale of two closing funds, the Chinese Communist Party, and genetically modified mice

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Guest blog by Gene Perry, Oklahoma Policy Institute
reposted from OKPolicyBlog

As the state continues to grapple with severe budget shortfalls, Gov. Fallin’s agenda has mostly involved regulatory changes and managing additional cuts to state services. Yet the governor does have one major new program on her wish list: a deal-closing fund to entice new businesses to Oklahoma. The “Oklahoma Quick Action Closing Fund” would allow the Governor and Department of Commerce to help cover businesses’ relocation and expansion costs, pay for maintaining existing jobs that are at risk of termination, or invest in capital improvements requested by a company.

The concept has a few precursors. In particular, Oklahoma’s deal-closing fund is a descendant of two programs: the Oklahoma Opportunity Fund and the Texas Enterprise Fund. The histories of both programs should raise warning flags before we follow the same path.

The Opportunity Fund was Oklahoma’s first attempt at a deal-closing fund. The fund was created in 2006 at the request of Gov. Henry. At the time, Henry made many of the same claims as Gov. Fallin that the fund was needed for attracting business to the state. In its brief life, almost nothing went as planned.

In 2006, the Nanjing Automobile Group Corporation, which is owned by the Chinese government, was considering bringing a new MG auto plant to Ardmore. To facilitate the deal, Oklahoma used the Opportunity Fund to provide $15 million for improvements to the Ardmore airport as well as $5 million for a startup loan to MG. The company also promised to build a new headquarters in Oklahoma City and a research facility in Norman, all of which would receive public money under the Quality Jobs Act of up to 5 percent of the company’s payroll for 10 years.

MG North America CEO Duke Hale said at the time, “I mean when we compared yourselves in the total state offering to other states, man, I can tell you the incentive package offered by the state is superb.”

However, the deal ran into trouble when the Chinese Communist Party decided to consolidate its auto industry and scale back plans for manufacturing in the United States. Representatives from MG have never made a definitive statement that the deal was finished, but 5 years later and despite Oklahoma’s investment, MG has not come to Ardmore.

The Oklahoma Opportunity Fund soon ran into a trouble as well. In 2007, the Oklahoma Supreme Court ruled that the fund violated the separation of powers because the board to oversee it included legislators even though it was part of the executive branch. However, the court ruled that the fund could continue under the governor and Department of Commerce.

After the Supreme Court ruling, Governor Henry unilaterally awarded $15 million to the Oklahoma Medical Research Foundation. He also gave $10 million to build a new hangar and renovate another building at Tulsa International Airport on behalf of American Airlines and Spirit Aerosystems. Finally, he awarded $1 million to Sulzer Chemtech and $4 million to Oklahoma County (information on the purpose of these awards was not immediately available).

Today the fund still exists and contains just over $140,000, but the legislature has not appropriated additional money into it since 2008.

Another model for the Quick Action Closing Fund frequently mentioned by Governor Fallin is the Texas Enterprise Fund. Yet even as we move towards copying the TEF in Oklahoma, it is under attack in Texas. Senator Kay Bailey Hutchinson has called for an independent audit of the program, and a current proposal in the legislature would abolish it entirely.

This program has its own checkered past. Created in 2003 at the request of Gov. Rick Perry, it has handed out $412 million in subsidies. However, a report by Texans for Public Justice found that more than a quarter of the money went to companies that failed to create promised jobs, based on their own compliance reports. When job creation falls short, the state has the authority to terminate the agreement. However, that did not happen in Texas. Governor Perry ended agreements with two companies, but for 11 other non-compliant firms, only 1 percent of the $61.4 million they had been given was returned.

Other projects paid for by the Texas Enterprise Fund have brought charges of political cronyism. In 2005, TEF gave $50 million for a genetic research center to be operated as a public-private partnership between Texas A&M and Lexicon Genetics. The facility would develop genetically altered mice for researchers to study specific traits affected by changes to the genome.

The next year, failure to win a $50 million NIH grant put the entire project in jeopardy. The lab has required annual subsidies from Texas A&M to stay in operation, and the university also took on all of Lexicon’s job creation obligations until 2012 since they employ fewer people today than when they received the award. Critics pointed out that several Lexicon investors were also major financers of Governor Perry’s political career.

Oklahoma’s Opportunity Fund raised its own issues of conflict-of-interest, or at least the appearance of one. When Gov. Henry awarded $15 million to the Oklahoma Medical Research Foundation, his wife served on the board of directors.

All of these examples should raise serious concerns about the accountability and effectiveness of closing funds. The Supreme Court ruling prevents us from giving legislators direct oversight on where the money goes after it is appropriated. And if history is any guide, putting the fund at the discretion of the governor provides inadequate safeguards against political favors or unwise award decisions.

Political leaders may assure us that safeguards are in place, but by necessity any program meant as a last-minute deal closer will sacrifice oversight for speed. With the state budget already stretched to its limit, a closing fund is not a responsible use of limited public dollars.

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