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Julia Sass Rubin, Ph.D. Edward J. Bloustein School of Planning & Policy Rutgers University EARN Conference - September 13, 2011
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Insurance tax credit program Began in Louisiana in 1988 Between 1997 – 2005 diffused to: ◦ AlabamaColorado ◦ Florida Georgia ◦ MissouriNew York ◦ TexasWashington DC ◦ Wisconsin
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State provides $100 million in tax credits to insurance companies Insurance companies lend $100 million to CAPCOs CAPCOs invest $50 million in 10 year zero coupon bonds to repay that loan CAPCOs lend/invest other $50 million to in- state businesses, until amount loaned/ invested equals $100 million CAPCOs “de-certify” and keep all the money not repaid to insurance companies
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"I think this state would be hard pressed to design a program that cost the taxpayers more and delivered less.“ Bob Lee, head of Colorado's Office of Economic Development, which administered the CAPCO program "It's a scam…I don't think there's anyone who thinks this is a good deal for Colorado, with the exception of those companies who lined their own pockets.“ Mike Coffman, former Colorado State Treasurer who is now a Congressperson
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Poor quality loans/investments ◦ Demonstration of prior success not required for CAPCO managers ◦ Incentives for low risk and quick repayment Extraordinarily expensive ◦ Normal venture investors: repaid $100 million investment earn 80% of profits ◦ CAPCO states receive $0
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Empty promise to “create and foster a local venture capital infrastructure” ◦ Louisiana spent >$630 million 1989 to 1999 ◦ Attracted < 1/1000% of US VC $ from 2000 to 2003 May price out indigenous VC Effective alternatives exist ◦ Fund of Funds ◦ InvestMD
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Solution in search of a problem ◦ Venture Capital? Economic Development? Flexibility ◦ Change name and terms; keep basic model Legislators do not understand ◦ How venture capital works ◦ How CAPCOs work
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Expensive and effective lobbying ◦ Often well-liked former legislators Hard-ball politics ◦ Smear/threaten critics Timing ◦ Push through in final days of session
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Clear objectives ◦ Venture capital or economic development? ◦ Profits or jobs? ◦ Geographic focus: State wide? Rural? Low-income geographies? Clear criteria for selecting venture funds, based on program goals ◦ Financial returns ◦ In-state job creation ◦ Targeted economic development
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Prioritize ◦ VC funds w/ success investing in-State Transparent VC selection process Remove VC selection and investments from political oversight or input If using tax credits vs. direct appropriations, use competitive monetization process ◦ minimize cost to taxpayers – e.g., InvestMD
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State receive same terms as private-sector ◦ Full return of principle ◦ 80% of any profits Limits on fees to reflect VC norms Limited financial commitment up-front ◦ Can reassess before disbursing additional funds
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