RICHMOND — During a trade mission to Asia that concludes Wednesday, Gov. Terry McAuliffe (D) has touted many of the assets that he says make Virginia a no-brainer for business: its tax base, location, regulatory environment, international airport and port.
But he is at risk of running out of another resource to lure employers to the state: cash.
In less than a year, the McAuliffe administration has committed and offered more than $68 million in state incentive grants. And it’s unclear whether the General Assembly will go along with replenishing it. The state faces a multiyear, $2.4 billion projected budget shortfall — and McAuliffe faces a newly Republican legislature that may not want to help the governor fulfill his campaign promise to create jobs.
Sen. John C. Watkins (R-Powhatan), chairman of the Senate Finance Committee’s subcommittee on economic development, said the state’s financial straits make doling out more cash “precarious.”
But he echoed McAuliffe’s call to diversify the economy to offset cuts in federal defense contracting.
“He got burned this year on the Medicaid thing,” said Watkins, referring to the failure of McAuliffe’s key initiative, an effort to expand health coverage for the poor under the Affordable Care Act. “I said to him, ‘Governor, you need to do what you do best.’ And that is drive economic development, jobs, relocations, companies moving into Virginia. He’s got a reputation for being someone who has a lot of contacts and knows a lot of people in a lot of different places and . . .Virginia can benefit from that.”
McAuliffe has tapped his global address book to help seal 191 deals with more than $4.7 billion in capital investment, according to the Virginia Economic Development Partnership, which set up his trip to China, Japan and Korea.
The agency, whose 25 board members are appointed by the governor, administers four discretionary programs that try to reel in companies by offering cash incentives in exchange for setting performance goals such as creating a specific number of jobs or investing a certain amount of money in a Virginia-based operation.
The best-known program is the Governor’s Opportunity Fund. In addition to about $24 million in announced grants, the partnership has committed another $26 million to projects that the state is keeping secret until they are finalized. Typically, about 60 percent of these tentative deals come to fruition, officials said.
For the same period under former Republican governor Robert F. McDonnell, the state awarded about $12.7 million in such grants, according to the partnership. Officials said that timing and outside factors have a significant influence on whether a deal happens.
Since taking office, McAuliffe has approved $5.3 million in Virginia Investment Partnership funds, $5 million in Virginia Economic Development Incentive Grant funds and nearly $8 million in Virginia Jobs Investment Program projects. The jobs program will reimburse companies for creating or retaining 11,185 jobs, according to VEDP data.
Still more grant programs are managed by the port, the Department of Agriculture, workforce development agencies and the Tobacco Indemnification and Community Revitalization Commission.
Martin J. Briley, president and chief executive of the partnership, warned state senators earlier this month that the Governor’s Opportunity Fund was “critically underfunded.” According to his presentation: “In the very near future, lack of funding will jeopardize viability of funds.”
Sandi McNinch, general counsel at the partnership, said it hasn’t helped that over the past four years governors and lawmakers have “raided” the fund, dumping $29 million into the general fund to meet other needs.
“We’ve been assured by the administration that they will find funds for us that will be put back into the GOF when we need it,” she said. “We don’t want to have to rely on the kindness of strangers.”
McAuliffe has said he is confident the General Assembly will keep the funds flush.
“They understand that you have to spend money to make money,” he said last week on a conference call from Asia with reporters. “If you look at the VEDP and the return on investment, you put [in] as much money as you possibly can. But if we have to go back and there’s a deal you have to make an argument for, we’re prepared to do that.”
The administration will have to do just that in its quest to secure a $20 million grant for Shandong Tranlin Paper Co., a Chinese manufacturer that has promised to build a $2 billion paper plant and create 2,000 jobs in suburban Richmond.
McNinch said that rather than lead with incentives, the partnership offers them to sweeten Virginia’s pitch to companies that have already narrowed their search to several sites that can match what the commonwealth has to offer. Only 17 percent of companies get incentive grants, though they tend to be the larger deals, she said.
“You play the game or you don’t,” McNinch said. “Go big or go home.”
The return on investment is obvious, she said.
“We think it’s worth the investment because we know that for those few projects that get incentives, they wouldn’t be here or growing here if it weren’t for the investment,” she said.
Not everyone is convinced.
A 2012 study from the General Assembly’s research arm, the Joint Legislative Audit and Review Commission, found incentive grants “in general appear to have a positive but small impact on the site selection decisions of businesses.”
(McNinch quibbled with the commission’s approach, which she said assessed the overall economic impact of all sorts of incentives beyond the partnership’s targeted grants.)
Nathalie Molliet-Ribet of the audit commission said although no one really knows if the grants sway companies, the state gets a return on investment on income and corporate taxes and benefits from the indirect impact that employees have on a community.
But Matthew Mitchell, a senior research fellow at the Mercatus Center at George Mason University, said incentive grants are problematic because they give the most well-connected companies an unfair advantage.
The deals also tend to favor companies “most likely to pull up stakes and leave,” he said.
In Mitchell’s ideal world, he said, states would make a free-trade pact and stop offering deals to companies simply because they may have caught a governor’s attention.
But the system is unlikely to change anytime soon.
Del. R. Steven Landes (R-Augusta), who sits on the House Appropriations subcommittee that handles economic development, bristled at the notion of corporate welfare. He said companies must have “skin in the game” before they’re approved for a grant.
“It’s a fine balance, but that’s what we shoot for,” he said.
McAuliffe plans to make his pitch to the General Assembly in December.