The Pew Charitable Trusts

The normally low-profile Ohio Development Department suddenly found itself at the center of gubernatorial politics this summer — and its very existence at risk — when Republican candidate John Kasich declared, "The days of trying to connect to business leaders through bureaucrats are over." His campaign unveiled a sweeping proposal to privatize the agency's core responsibility of attracting and retaining businesses.

Kasich argued that the department had largely failed at its core mission, pointing to an exodus of prominent employers as evidence. "We know all too well the story of NCR in Dayton, in which the Department of Development simply missed the warning signs and failed to act aggressively to keep the city's last Fortune 500 Company," said Kasich's running mate, Mary Taylor. NCR moved to the suburbs of Atlanta.

Democratic Governor Ted Strickland fired back, saying that privatization would be like tasking a fox with guarding a henhouse, and raising concerns about the transparency and accountability with which the proposed nonprofit would operate. "After years of supporting unfair trade deals and outsourcing that cost Ohio over 460,000 jobs and helped Wall Street, it's not surprising that Congressman Kasich wants to outsource economic development to corporate interests at the expense of working Ohioans," the Strickland campaign said in a statement.

Now that the election season is over, Kasich and other GOP gubernatorial victors will be faced with the daunting task of implementing the economic development privatization proposals they touted in their campaigns. Voter anger over lost jobs and fleeing companies helped these proposals play well on the campaign trail. But as Kasich, Terry Branstad of Iowa and Jan Brewer of Arizona move into implementation, they will be confronted with a range of tricky issues. So will Governor-elect Scott Walker of Wisconsin, who announced a similar privatization proposal this week for the Wisconsin Department of Commerce.

The question of how to empower business leaders to play a more meaningful role in state economic development efforts without sacrificing the accountability and transparency with which public funds are used is hardly a new one. A number of states — including Florida, Indiana, Michigan, Texas, Utah and Virginia — have privatized some aspects of their economic development functions in recent years, with mixed results. 

Range of options

The states that have gone this route have structured it in different ways. Some have used powerful public-private partnerships with minimal oversight. Others have used quasi-governmental authorities overseen by business-led boards. Still others have relied on more traditional commerce departments that rely on public-private partnerships for marketing and business attraction.

The structures may differ, but the governing principle behind all of these approaches is the same: Let local business leaders, rather than bureaucrats, take the lead on state economic development and marketing efforts. "This is one of those skill sets that government just doesn't have as a core competency in-house," insists Leonard Gilroy, director of government reform for the Reason Foundation, a free market think tank.

Arizona Governor Brewer's effort is already well underway. After conducting a review of approaches to privatization in other states, Brewer settled on a quasi-governmental authority structure that draws from approaches taken in Florida, Texas and Virginia, and created the new entity through executive order in June. The directive from the governor was to "privatize to the greatest degree possible but not to the degree that it's harmful for our ability to globally compete," says Don Cardon, who helped conduct the review and serves as president and CEO of the new authority.

In the end, if the governor succeeds in pushing through legislation necessary to implement the change, the new authority will be focused solely on recruiting and retaining businesses in Arizona. It will have far fewer employees than the old state bureaucracy, but the flexibility to compensate them based on performance and at competitive market rates. 

No panacea

While leaders in many of the privatized states credit the change in structure with improving their effectiveness and creating jobs, it's clear that privatization is not a panacea and comes with its own set of potential challenges.

In 2001, then-newly inaugurated Texas Governor Rick Perry found his state embroiled in a war with Illinois for the headquarters of Boeing. "What we found in that process is that we were very short-handed with ways to give incentives," he said in a recent interview with Stateline .

Texas lost that contest, prompting Perry to reorganize and partially privatize the state's economic development functions and arm the new entities with an arsenal of aggressive economic development weapons. The change in structure brought economic development directly under the governor's purview but largely outsourced marketing to TexasOne, a nonprofit public-private partnership to which companies contribute to in exchange for varying levels of decision-making authority. 

TexasOne gets involved in helping the governor "snitch," as he puts it, major corporations from states such as California and Michigan by operating in ways that a state agency simply cannot. For example, the governor notes that TexasOne uses sporting events as a tool to woo businesses and will have a box at the Super Bowl. "That's going to be a pretty hot ticket," he says. "The head of TexasOne is going to call up and say, 'Hey, Mr. X or Mrs. X who's the head of this corporation in California, we'd like you to come out to the Super Bowl.'"

Keeping watch

But even Texas, whose success in wooing Fortune 500 companies from other states has become the stuff of legend in state economic development circles, has encountered significant challenges in oversight and accountability under the new structure. Just last week, for example, news broke that the governor's office has asked a business leader who serves on a committee with decision-making authority over the state's incentive program for tech start-ups to consider resigning over a questionable stock deal.

Final sign-off authority over the Texas Emerging Technology Fund, which has distributed $334 million in grants to private companies and universities since its creation in 2005, lies with the governor and legislative leadership. But this, too, raises potential conflicts of interests. The state auditor has launched a review of the Emerging Technology Fund on the heels of a Dallas Morning News investigation that found that the fund has awarded $16 million to companies with ties to Perry supporters. On at least one occasion, a friend of Perry's received a grant even after his proposal was rejected by reviewers, the investigation found.

In Michigan, the semi-privatized Michigan Economic Development Corporation last year awarded $9.1 million in tax credits to a convicted embezzler. Rick Snyder, the state's governor-elect, served in 1999 as that newly privatized agency's founding chair, and he's proud of the long-term approach to development the board took under his leadership. Still, he has been a vocal critic of the politicized methods the board has employed in doling out tax incentives in recent years. " Unfortunately the political system got in the way with the MEDC," he said in an interview with Stateline . "They got away from the core mission and got too much into picking winners and losers in terms of different industries and different sectors."

The desire to operate with the flexibility of the private sector without sacrificing the controls and accountability that are characteristic of government agencies is taking center stage in the debate over Governor-elect Branstad's proposal in Iowa. The proposal is in large part a response to a series of scandals in the state's incentive programs for the film industry, which were housed in the agency that would be privatized under the proposal. A state audit released in October found that $25 million in tax credits had been improperly issued for film projects.

Iowa House Majority Leader Linda Upmeyer notes that the film incentive program was exempted from usual processes governing tax incentives — including review by a board made up of private-sector leaders-in the hopes of allowing the state to act more quickly when competing against other states for major films. The same desire for quick action is driving the governor's privatization proposal, and for that reason Upmeyer wants to proceed cautiously. "You would love to have the nimbleness, the flexibility that was clearly being used in the film program, but you've got to have some oversight," she says.

Upmeyer says that most state economic development programs are currently being conducted with a good mix of private-sector input and accountability and due diligence on the part of Department of Development staff. Still, she sees some merit in the governor's proposal, and thinks a well-designed public-private partnership could avoid the types of problems that have doomed the state's film program.

"There was nobody sorting through and setting the parameters of how dollars can be used," she says. "If you set some parameters and have somebody paying some attention, then you should be able to be nimble without being fraudulent."