Julia Sass Rubin


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: Alabama Florida Missouri Texas Wisconsin Colorado Georgia New York Washington DC

     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