O'Malley venture capital plan draws skepticism from legislators

By Aaron C. Davis
Washington Post Staff Writer
Thursday, February 17, 2011; B04

Maryland lawmakers are struggling with the centerpiece of Gov. Martin O'Malley's jobs agenda for the year, hearings on Wednesday revealed. Lawmakers said they weren't sure whether the governor's plan to raise money for high-tech startups would create a much-needed economic boost or a costly boon to insurance companies.

O'Malley (D) wants to raise $100 million from insurance companies to increase venture capital spending in the state by auctioning off to insurance companies up to $142 million in tax breaks.

"So you give the state $7 million and get back $10 million?" Senate Budget and Taxation Committee Chairman Edward J. Kasemeyer (D-Baltimore County) asked. "What does the state get?"

O'Malley testified Wednesday that the measure (SB180) could make the difference on whether Maryland or another state becomes the home of the next great high-tech, bio-tech or other "world-changing" company.

"In this changed economy, we are in a battle for jobs, in a battle for opportunity," O'Malley said. "We have the opportunity to remove what has been a major obstacle to really harnessing the full potential of Maryland's job-creating, innovation economy."

Money from insurance companies would be deposited in the Maryland Venture Fund. The state previously invested $25 million in the 13-year-old fund. The administration says the investment returned $61 million and helped support companies employing 2,000 people. O'Malley made no prediction of the number of jobs the new investment could create, other than to say it could be "thousands."

Several lawmakers, however, were skeptical.

In the Senate budget committee, members politely thanked O'Malley for his testimony - his first before the state's General Assembly since winning reelection last fall - but after the governor left began grilling his secretary for Business and Economic Development, Christian S. Johansson, about the details.

Details explained

Under the governor's plan, Maryland would collect about $100 million from insurance companies during O'Malley's second term. In exchange, the companies would be given vouchers for tax credits that would cost the state as much as $142 million over the course of six years after he leaves office.

Johansson said there was a rationale for the timetable: Maryland would use the money now to inject capital into early-stage ventures, such as those attempting to create commercial spinoff products from medical research being conducted at Johns Hopkins University.

By the time the tax breaks begin to eat into the state's budget, Johansson said, the investments hopefully would begin to pay off with new jobs and therefore fill the resulting budget gap with growing income tax receipts.

But Johansson also testified that it usually takes five to 10 years for early-stage companies to reach the point at which they can begin to repay the state.

"So all of our investments could be out there . . . when the bills come due," Sen. James E. DeGrange (D-Anne Arundel) said.

More than a dozen states have sought to marry investments from insurance companies with efforts to boost venture capital spending, but if adopted, O'Malley's plan would be slightly different because the state would play a more central role in distributing the investment funds.

Expert weighs in

Julia S. Rubin, a venture capital expert at Rutgers University who reviewed the plan at the request of the administration, said she thought O'Malley's plan contained advances from other state efforts. The auction would help ensure the state gets the most for its money, she said. And by playing a central role, the state would ease the flow of capital to companies. Like private venture capital investors, Maryland also would get back its full investment and a hefty share of companies' profits if they become successful.

Rubin, however, said she thought Maryland should expand the potential auction pool beyond insurance companies and let other companies and wealthy investors compete for the tax credits.

Johansson said the administration was studying that idea, but insurance companies were the most familiar with the investment strategy and eager to participate. Nationwide Insurance and GEICO wrote letters in support of the legislation, and a lobbyist for the Property and Casualty Insurers Association of America testified in favor of the plan.

Insurance companies and political action committees they control contributed $34,500 to O'Malley's reelection campaign last year, or 60 percent more than to Republican candidate Robert L. Ehrlich Jr., although they typically favor the incumbent.

House Republican Whip Jeannie Haddaway-Riccio (R-Talbot), said that lawmakers from both parties want to stimulate investment but that "there's no denying this is a new program and new spending when we're facing a $1.6 billion" shortfall.

Unlike some states that have issued bonds to boost venture capital spending, Maryland cannot borrow money because it is forecasted to exceed its debt limit in the coming years.

Montgomery County House delegation chairman Del. Brian Feldman (D), who has worked to pass similar legislation in prior years, said he was less concerned about the way the state raised money than making sure Maryland had a process in place to effectively deliver the capital where it's most needed. He said he wants to make sure the legislation is geared toward the early startup companies that have the most potential and the least ability to garner funding from big national investors.

Several venture capital experts also said that although there are always natural tensions between states wanting to spur economic development and recoup their taxpayer investments in venture capital, if Maryland adopts a plan, it should be careful to structure its program for long-term gain and to try to draw in top-tier private investors to compound the effect of its investments.

Loophole addressed

In addition to the venture capital testimony, O'Malley for the first time Tuesday backed legislation to close a campaign finance loophole that boosted fundraising totals for his campaigns during more than two decades of successful elections in the state.

O'Malley, who is term-limited out, said he supports efforts to prohibit the so-called "LLC loophole." The practice lets individuals and businesses contribute in excess of state limits by donating through multiple business interests, most often limited-liability corporations.

A Washington Post analysis of campaign contributions to O'Malley and his Republican challenger, Ehrlich, found flagrant abuse of the loophole during last year's gubernatorial contest.

In several instances, members of the same family or business in Maryland contributed through dozens of LLCs and other limited partnerships, far exceeding the state's contribution cap for businesses of $4,000 for a single political campaign and $10,000 in a four-year election cycle.

Last month, a campaign finance commission seated by Maryland Attorney General Douglas F. Gansler (D) weighed in, arguing that the gap in election law undermined the "core principle of campaign finance laws, that every person should be subject to the same contribution limits."

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