Wisconsin Legislature bombs at the box office

If the latter portion of the 2011-2013 session of the Wisconsin Legislature were a movie, it would be a straight-to-DVD disaster, at least in economic development terms. If job seekers were hoping for a classic, they got 99-cent bin material, especially in an election year in which job creation should be the most important issue.

With the exception of some overdue workforce development legislation, which linked unemployment insurance claimants with job training (and, frankly, represented low-hanging legislative fruit), the 2012 portion of this session was one in which the big fish – mining jobs and state-leveraged, early-stage capital – got away.

When the type of mining jobs done safely in the neighboring states of Minnesota and Michigan are left by the wayside, and plans for start-up capital die, too, you have to wonder how clueless lawmakers are.

Don’t ask.

And that’s a shame because some important things, including tax and tort and fiscal reforms, were accomplished during the 2011 portion of the session.

Thanks to constituent and interest group blow back felt by Democrats, the mining legislation could still be revived in a special session called by Gov. Walker. We’ll see.

But the capital program, which supposedly died due to the emergence of a $143 million budget shortfall, did not have as many lives. I yield to nobody in my admiration for true fiscal hawks, but perhaps we need better ways of determining what adds to the state budget deficit. In the Republican majority, the shortfall made radioactive the notion of adding one more penny to the deficit. As such, any chance for a state-leveraged capital bill will have to wait until the next biennium.

The trouble is that Wisconsin already is 30 years behind states that are more forward thinking on this subject. There is a reason we’re a loser in the capital game, and it’s not all due to the indifference of coastal investors.

Short-term thinking is among the primary culprits. It takes time for early-stage investments to bare fruit in terms of business growth and job creation, but another election always is right around the corner, so the long view is obscured. It took Epic Systems 30 years to become an employer of 5,000 people and perhaps the nation’s pre-eminent developer of electronic medical records, but it doesn’t have to take that long for seed investments to produce results in industry sectors where we’re already strong, especially with a pretty well developed network of angel investors.

That was the thrust behind the most recent attempt to fashion some type of state-supported capital-deployment program. In this legislative session alone, another fund-of-funds approach was sunk by the budget shortfall, even after a good deal of chat-up from Senate sponsors like Alberta Darling and Tim Cullen and support from Gov. Scott Walker

A last-ditch proposal, which was developed by the Wisconsin Economic Development Corp., was the Angel & Seed Acceleration Program. ASAP would have monetized unused Act 255 tax credits at full value and used them for co-investments with Wisconsin angel groups. In the end, that approach, whether or not it’s funded by tax credits or general-purpose revenues, makes the most sense. We need to pump capital in at the seed and early-stage levels in order to foster growth in large numbers of promising young businesses. I also like the public-private partnership and leverage aspects of the state co-investing with angel groups.

Given Wisconsin’s dismal status in start-up business creation – the annual Kauffman Foundation entrepreneurial study consistently ranks Wisconsin low in that all-important metric – one would think this would this would be a higher priority. Now that the economy is picking up some steam, especially consumer confidence, it would be a good time to leverage that uptick.

Dynamic versus static

As proposed, ASAP would produce between 30 and 60 investments in new business start-ups per year, starting with $30 million this year and $20 million per year over the next nine years.

Since the tax credits would have to be monetized, traditional static budgeting analysis used in Wisconsin would have to assign only a cost to the General Purpose Budget. If a more dynamic analysis of fiscal impact of ASAP were used, we might get somewhere. Instead, it likely would be a straightforward cost analysis, not the dynamic variety that factors in the economic impact of job-creating investment.  The traditional analysis works perfectly well for spending but doesn’t reflect the benefits of investing in initiatives that have potential for long-term financial and economic returns to our state.

The source of the following information would like to remain anonymous (I’d call him Deep Throat, but it would go to his head), but an economic impact analysis of the ASAP initiative estimates that even a partial ASAP would be better than the rejected iron ore mine in three major categories. The analysis is based on investments in 40 companies a year over 10 years at an average of eight jobs per company, and its comparative findings are as follows:

• Total jobs – 9,280 (direct and indirect) for ASAP vs. 2,800 for the mine.

• Annual taxes from jobs – $46.4 million vs. $14 million.

• Implementation – immediate vs. 3 to 5 years (if we’re lucky).

Add to all that the likelihood of over $470 million in hard cash as a real return on investment to the state, and you would have a compelling case.

The analysis used a conservative economic multiplier of 2.9 (high-tech jobs with an average compensation of $75,000). The cash ROI was calculated using the Kauffman average return on aggregate organized angel investments (2.36X).

That’s not a knock on the ill-fated iron ore mine, only a way of illustrating the limitations of the analysis used by the State’s Legislative Fiscal Bureau. Many will argue that we can’t afford to make these investments right now, but since we never have enough start-up capital, we can’t afford not to.