Julia Sass Rubin, Ph.D. Edward J. Bloustein School of Planning & Policy Rutgers University EARN Conference - September 13, 2011

 Insurance tax credit program  Began in Louisiana in 1988  Between 1997 – 2005 diffused to: ◦ AlabamaColorado ◦ Florida Georgia ◦ MissouriNew York ◦ TexasWashington DC ◦ Wisconsin

 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

 "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

 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

 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

 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

 Expensive and effective lobbying ◦ Often well-liked former legislators  Hard-ball politics ◦ Smear/threaten critics  Timing ◦ Push through in final days of session

 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

 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

 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