Thomas Molitor
Last Friday night I watched “New Mexico In Focus,” a weekly round table discussion program on KNME, the PBS affiliate in Albuquerque, hosted by the excellent Gene Grant. One of the guest panelists was Allan Oliver, deputy secretary in the New Mexico Economic Department. One of the topics was sort of an update on how our state’s investments in economic development (read: placing bets with taxpayers’ dollars) were coming along. The guest panelists mentioned some recent crash-and-burners such as Advent Solar ($17 million in state money), Eclipse Aviation ($20 million in state money), and Earthstone International ($9 million in state money).
The latter company and its rather unsavory investment history with the state was the subject of a year-long investigation by regular panel guest Jim Scarantino, the inveterate investigative reporter. His three-part report appears here, on his blog, New Mexico Watchdog, and makes for some very provocative reading on the relationship between Governor Richardson, the State Investment Council, and the gullible decision-makers in between. According to Scarantino, “the Earthstone story is a $9 million loan that was a bad bet from the beginning, and only got worse once the taxpayer’s money was thrown down the rabbit hole.”
Doing due diligence
The term “due diligence” was used a lot on the show Friday night in several ways – sometimes as in “lack of doing due diligence,” other times as in “due diligence was done” and, in the case of Mr. Oliver defending the state’s investment in the kaput Advent Solar, “we did our due diligence along with several other co-investors in the project – top-tier venture capitalist firms I might add.”
So what is “due diligence?” It’s kind of like poking a long stick down a dark hole before you shove your hand inside. It’s doing your detective work. It’s forensic accounting. It’s Googling the people who are asking you for money. It’s not scavenging through their garbage cans for discarded documents; however, if you can pull it off without getting caught it’s not a bad idea.
The term “due diligence” first came into common use as a result of the United States’ Securities Act of 1933. The act included a defense referred to as the “Due Diligence” defense, which could be used by broker-dealers when accused of inadequate disclosure to investors of material information with respect to the purchase of securities.
So long as broker-dealers exercised “due-diligence” in their investigation into the company whose equity they were selling, and disclosed to the investor what they found, they would not be held liable for nondisclosure of information that was not discovered in the process of that investigation.
How savvy a buyer is the state?
Bernie Madoff is the poster boy for nondisclosure. Buyer beware. An investor is a buyer. Which raised the question in my mind as I watched the show: How savvy of a buyer is the state of New Mexico?
The primary responsibility of the State Investment Council is the management of New Mexico’s $13.5 billion permanent trust funds, which include the Land Grant Permanent Fund, the Severance Tax Permanent Fund, the Tobacco Settlement Permanent Fund and the Water Trust Permanent Fund.
In managing the billions of dollars under its care, the State Investment Council also dabbles in private equity. In other words, it plays the role a venture capitalist does: It tries to pick the winners and losers among business plans submitted by companies.
Is the state good at playing venture capitalist? Unfortunately for New Mexican taxpayers it is not so good. In a study conducted by the Rio Grande Foundation that you can read here, the program over the past 15 years has $378 million invested and is losing money. The number of jobs claimed to have been created is overstated. Only about 1,000 jobs in New Mexico today can be credited to the program. Those jobs were created at an embarrassing price tag of over $378,000 each.
The New Mexico In Focus show got a bit heated (sorry for the pun) when it turned to the topic of solar energy and the potential the industry has for New Mexico with its 310 days of sunshine a year. Mr. Oliver was particularly bubbly about the potential for job creation and how New Mexico could become the “Silicon Valley of solar energy, calling itself Solar Valley.”
The mission of the Economic Development Department is to make New Mexico shine. To build the New Mexico brand. To attract tourists, film production, retain existing jobs, attract capital investment, and nurture nascent startups.
As sunny as all this solar stuff sounded, the cynic in me imagined a dot.com version of Solar Valley with the Economic Development Department making all the wrong bets such as Silicon Valley VC firms did a decade ago. Remember WebVan, Pets.Com, or eToys?
Let’s not burn taxpayer dollars
Greg LeRoy, founder and director of Good Jobs First, argues in his book The Great American Jobs Scam how states, counties and cities can end up giving away the store to attract out of state companies to locate in their states by doling-out subsidies such as property tax abatements, corporate income tax credits, low-or-no-interest loans, free land and land write-downs, training grants, infrastructure aid – and just plain cash grants in exchange for the promise of jobs.
As an example, if New Mexico offers, say, $1 million in tax dollars to entice a manufacturer of solar panels to locate in Las Cruces, and the result is an increase in tax revenues for any sum greater than $1 million, then the state and taxpayers are better off for doing the deal. But if other states are competing for the same panel manufacturer (and you can bet they are) to operate in their states as well, the panel manufacturer will hold out for the best offer.
This forces states to take into consideration economic development packages being made by their competitor states. An aggressive state can win the firm’s favor, but the incentive package will cost more than the eventual return on the investment. For politicians, it’s a great money-drop and photo-op but a Pyrrhic act of economic short-sightedness for taxpayers.
I just hope state agencies and state lawmakers don’t make bad business deals trying to pay off a catchy PR phrase like “Solar Valley” that ends up burning taxpayer dollars in a heap of hope for revenue and jobs that prove non-existent.
Molitor is an adjunct scholar at the Rio Grande Foundation and a regular columnist for this site.
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