• U.S. Cities in Bad Shape Now, But 80% Say Next Year Likely to be Even Worse
• Signed Legislation Begins to Define Federal R&D and TBED Appropriations for FY10
• Newly Elected Governors Tout Energy Plans
• SSTI Review: Poorly Titled Boulevard Paves Road to Better Equity Programs

U.S. Cities in Bad Shape Now, But 80% Say Next Year Likely to be Even Worse
Mayors from across the nation anticipate their cities will be in worse financial shape next year as sales tax revenue, revenue from service fees, and property tax revenues all are expected to decline. Findings from the U.S. Conference of Mayors survey indicate that while two out of three mayors expect budget shortfalls this year, four out of five are projecting shortfalls in their next fiscal year and those shortfalls are expected to be the same or larger than this year’s experiences.

More than half of the 158 mayors surveyed say that despite the funding provided through the American Recovery and Reinvestment Act, the current budget situation has affected their ability to engage in job-creating projects. Moreover, the U.S. Conference of Mayors and IHS Global Insight project job losses will continue into 2010 and will not regain their 2007 peak until late 2012. The most common actions being taken by cities to avoid budget shortfalls this year include postponing projects or initiatives (81 percent), eliminating city positions through attrition (75 percent), and reducing purchasing and procurement (73 percent).

The full survey is available at: http://www.usmayors.org/pressreleases/uploads/SurveyonCityFiscalConditions11709.pdf.

Signed Legislation Begins to Define Federal R&D and TBED Appropriations for FY10
Exactly six weeks into the federal government's fiscal year which commenced on Oct 1, five of the 12 appropriations bills for FY10 have been signed into law by President Obama. The remaining seven bills are at various places in the appropriations process, none of which have emerged from conference committee for a final vote by each chamber.

This means the final appropriations for departments such as Defense, Commerce, Labor, Education, HHS and the NIH, and agencies such as NSF and NASA still need to be resolved. However, the budget bills that have become law, including the Energy and Water bill, the Interior and Environment bill, and the Agriculture bill, contain specific line-items which can be reported for various research, development, and TBED content.

Energy and Water Appropriations Bill
The Department of Energy(DoE) is set to receive $27.11 billion in FY10, a 1.2 percent increase from the previous fiscal year. DoE allocations include funding for the Department's Office of Science, energy efficiency programs, and various energy-related research grants. The Department also received a significant boost earlier in the year with $38.7 billion in funding from the Recovery Act (see the Feb 19, 2009 special issue of the Digest).

The Office of Science will receive $4.90 billion in FY10, a rise of 3.1 percent from FY09. The funds will be allocated as follows

• $1.64 billion for the basic energy sciences;
• $810 million for high-energy physics;
• $604 million for biological and environmental research;
• $535 million for nuclear physics;
• $426 million for fusion energy sciences;
• $394 million for advanced computing;
• $128 million for science laboratories infrastructure; and,
• $21 million for science-based workforce development.

The new Advanced Research Projects Agency for Energy (ARPA-E), which two weeks ago awarded $151 million in its first round of grants, received no funding for FY10. However, a transfer of $15 million from previous appropriation acts was specified.

While the DoE requested funds to create eight “Energy Innovation Hubs” in various topics, only three were chosen to be funded: one in solar energy, one in the design of efficient buildings, and one in nuclear energy modeling and simulation.

About $2.24 billion is allocated for various research initiatives under the heading of Energy Efficiency and Renewable Energy (EERE), including the following:

• $311 million for R&D in vehicle technologies;
• $225 million for solar energy systems;
• $210 million for the Weatherization Assistance Program;
• $220 million for biomass and biorefinery R&D with $35 million specifically for algae biofuels;
• $200 million for building technologies;
• $174 million for hydrogen technologies;
• $96 million for efficiencies within industry;
• $80 million for wind energy systems;
• $50 million for the State Energy Program (SEP);
• $50 million for water power and hydroelectric systems; and,
• $44 million for geothermal systems.

Research and development programs concentrating on fossil fuels will receive $672 million. Of that, $404 million will go to power systems research, including $154 million for carbon sequestration, $158 million for program direction, and $18 million for natural gas R&D.

The Innovative Technology Loan Guarantee Program, a newer loan program with origins in the Recovery Act to support renewable energy and transmission technologies, is slated to receive $43 million in FY10. The Advanced Technology Vehicles Manufacturing Loan Program will receive $20 million in FY10..

The Energy and Water Bill also outlines appropriations to various economic development regional commissions. For FY10, these funding levels include:

• Appalachian Regional Commission, $76 million
• Delta Regional Authority, $13 million
• Denali Commission, $12 million
• Northern Border Regional Commission, $1.5 million
• Southeast Crescent Regional Commission, $250,000

Interior and Environment Appropriations Bill
In the Department of the Interior, the U.S. Geological Survey (USGS) is allocated to receive $1.11 billion in FY10, an increase of 6.5 percent from FY09. Funds fall within the following categories:

• $249 million to investigate geologic hazards, resources, and process (2.9 percent increase from FY09);
• $232 million for water resource projects (4.9 percent increase);
• $205 million for biological research (10.6 percent increase);
• $146 million for geographic research, investigations, and remote sensing projects (2.4 percent increase);
• $106 million for USGS facilities (4.2 percent increase);
• $69 million for science support (2.7 percent increase);
• $58 million for global climate change research (43.3 percent increase); and,
• $46 million for enterprise information (7.7 percent increase).

The EPA is set to receive $10.3 billion in FY10, with $846 million going towards its science and R&D activities. This includes $248 million for human health and ecosystems research, $122 million for air toxins research, $110 million for clean water research, $104 million for clean air research, and $19 million for its climate protection program.

Agriculture Appropriations Bill
In the Agriculture bill, $1.18 billion is allocated for the Agricultural Research Service (ARS), and $788 million is allocated to the National Institute of Food and Agriculture (NIFA) for research and education activities.

The USDA's Rural Development initiatives have a handful of TBED-related activities, especially for distance learning, telemedicine, and broadband activities to improve access in underserved areas. Specific allotments include:

• $400 million broadband telecommunications loans;
• $29 million subsidies for broadband telecommunications loans;
• $38 million for distance learning and telecommunication grants; and,
• $18 million in broadband telecommunication grants.

The Library of Congress maintains a webpage with links to all twelve appropriations bills as they progress through both houses. It is available at: http://www.thomas.gov/home/approp/app10.html.

Newly Elected Governors Tout Energy Plans
All eyes are on New Jersey and Virginia as newly elected governors soon will unveil action plans and proposals for their first year in office. During the recent gubernatorial campaigns, Governors-elect Chris Christie and Bob McDonnell both outlined plans to transform their respective states’ economies and create high-paying jobs through targeted investments in renewable energy. The following is an overview of the energy proposals outlined during the campaigns.

New Jersey
Gov.-elect Chris Christie’s Energy as Industry plan focuses on re-branding New Jersey to promote the state’s resources to energy producers and providing incentives for renewable energy manufacturers to locate in the state and create high-paying jobs.

A major component of the Christie plan involves recruiting foreign and domestic energy companies to the state. To this end, the governor-elect announced a two-part marketing campaign, the “Choose New Jersey Energy” campaign and “Renew NJ” initiative. The first part is a re-branding effort to market and sell New Jersey’s resources to energy producers, innovators and developers. The latter component would move all economic development efforts related to renewable energy from the Board of Public Utilities to “Renew NJ.” This one-stop shop would serve companies working to promote the state and market to prospective energy manufacturers at home and abroad and deliver grants, loans and other state incentives in an efficient and timely manner, documents note.

To make the state more attractive to energy manufacturers, the Christie plan calls for a tax credit of up to 100 percent of the corporate business taxes or the insurance premium tax for any wind turbine manufacturing facility that locates in the state. The Christie plan also promises to create five higher-paying clean energy production jobs for every one lower-paying efficiency job in the first four years of the Administration.

Another component of the Christie energy plan deals with harvesting solar energy. The governor-elect wants to install solar farms on more than 10,500 acres of active and closed landfills throughout the state. The plan requires that New Jersey landfills regulated by the New Jersey Department of Environmental Protection install solar farms as part of their closure plans and on-going maintenance permits. Additionally, the plan allows Permanently Preserved Farmland to use up to 20 percent for solar panel installation.

The Energy as Industry plan is available at: http://www.christiefornj.com/images/energyasindustry.pdf.

Virginia
Three major components to Gov.-elect Bob McDonnell’s comprehensive energy plan include creating high-quality green jobs, leveraging resources to capitalize on traditional and alternative energy R&D, and becoming a global leader in university-based energy R&D. The plan, which relies on both traditional and renewable forms of energy, supports offshore exploration and drilling for oil and natural gas off the coast of Virginia. Following are selected specific action-items proposed in the plan.

Alternative and Renewable Forms of Energy and Creating Green Jobs:

• Establish Virginia as a “Green Jobs Zone” to incentivize companies to create quality green jobs. Under the plan, qualified businesses could receive an income tax credit equal to $500 per position created per year for the first five years (up to 350 jobs annually).
• Expand the Virginia Alternative Fuels Revolving Loan Fund to include infrastructure such as refueling stations, provide seed money, and aggressively pursue additional grants. No funds have been allocated thus far for the Fund, which was established to assist local governments that convert to alternative fuel system.

Leverage resources to capitalize on traditional and alternative energy R&D:

• Leverage the $100 million in funding made available through the Tobacco Commission by attracting private sector investment, seeking federal stimulus money, and coordinating grant opportunities with universities and community colleges.
• Establish a Virginia Energy Institute bringing together research capabilities of the state’s major research universities under one canopy to help focus efforts on developing energy technologies for the 21st century.
• Establish a Center for Energy as part of the Virginia Economic Development Partnership to work with local economic development organizations and Industrial Development Authorities to maximize the potential for energy related investment in Southside and Southwest Virginia.

Become a global leader in university-based R&D:

• Establish the Virginia Universities Clean Energy Development and Economic Stimulus Foundation to gain access to federal stimulus funds. The Foundation will identify, obtain, disperse and administer funding for R&D of alternative fuels, clean energy production, and related technologies, and assistance in commercialization of alternative fuels and clean energy technologies.

The full plan is available at: http://www.bobmcdonnell.com/images/site_images/PDF_Forms/More_Energy_More_Jobs_Fact_Sheet.pdf.

SSTI Review
Poorly Titled Boulevard Paves Road to Better Equity Programs
The fox pattern on his tie playfully conveyed Josh Lerner knew exactly where he stood as he looked out over the standing-room-only ballroom that served as the henhouse for SSTI’s annual conference two weeks ago. The audience, comprised mostly of practitioners from state, local, nonprofit and university-based TBED organizations, played its role as hens well – some nervous, some angry, all in fidgety anticipation of what the Harvard Professor was likely to say. SSTI fielded several questions before the conference as to why Lerner was invited as a plenary speaker based on apprehension from the title alone of his new book, Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed – and What to Do About It. As the book had just hit the streets the week before, we were all about to find out.

The resulting 90-minute session – with the sometimes-heated give and take among the audience, Lerner and ITIF Founder/CEO Rob Atkinson, who was invited to provide an oral review of the book following Lerner’s presentation – was one of several highlights from this year’s conference. More importantly, it was an unprecedented and critically timed event for charting the future of public equity initiatives.

It should be noted up front that Boulevard, whose poorly chosen subtitle is meant to be provocative but likely may drive away more sales than it generates, contains many nuggets that should be useful for public equity initiatives. Unfortunately, in a world where all discussion about policy is framed increasingly within the Twitter-delimited constraint of 140 characters, the subtitle announces a conclusion that isn’t supported by the 200 pages inside the book. More importantly it discourages meaningful discourse on the topic by its confrontational stance. The useful nuggets, as a result, could be forever separated from a significant portion of its intended market – state and regional policy makers and public equity program administrators.

The quickest solution is to lose the book jacket before even opening your hardcover copy of Boulevard (the title on the spine leaves off the unsupported subtitle). Barring that, this column is intended to point out some chosen morsels, either to help with the design or redesign of some activities or, as is more likely the case based on the public equity programs and policies with which SSTI is most familiar, to offer validation for your stakeholders that your initiatives are on the right course.

Note: all page numbers in parentheses below refer to quote locations within Boulevard. Also, bracketed inserts within quotes are added by SSTI, not the author.

Lessons for Legislators – the Argument for Public Involvement

• Public intervention to nurture and support new tech firms makes sense because (Chapter 3, pp 43-64):
• “The link between innovation and growth is well established.” (p. 63)
• “There is a powerful link between innovation and new firms.” (p. 63)
• “Venture capital clearly serves as an important source industry for innovation.” (p. 64)

• Another argument for public intervention: “By its very nature, entrepreneurship is an activity that feeds on itself, which means that a public ‘jump start’ may well be helpful.” (p. 65)
• Because of the beneficial spillovers to society from the success of innovation-based firms, “government may have an important role in priming the pump for additional entrepreneurial and venture capital activity during the industry’s inception.” (p. 68)

• A third argument for public intervention lies in government’s “ability to provide a stamp of approval”, or by providing a certifying effect. (pp. 69-70)
• Because venture capital only invests in a tiny, but important, fraction of technology-oriented firms that are highly concentrated in certain sectors, “many promising firms in other industries are not attracting venture capitalists notice… If government programs can identify and support these neglected firms, they might provide the stamp of approval these high potential, underfunded firms need to succeed” (p. 70)
• The stamp of approval “provided by government awards are likely to be particularly valuable in technology-intensive industries where traditional financial measures fall short.” (p. 71)

• The fourth rationale Lerner offers is the wide and significant types of knowledge spillovers associated with innovation. “In many instances, firms pursuing an innovation get fewer benefits than society as a whole. As a result, left to their own devices, companies will do less research than desirable. But with government subsidies, firms may be encouraged to invest the socially ideal amount of funds in R&D.” (p. 72)

But…
Lerner then lays out a case against government intervention. Sadly, this is where the book misses an important opportunity to be a standard bearer or manual for effective public equity policy.

The anti-argument boils down to a distrust of any government’s ability to enact and implement sound public policy to support entrepreneurship and venture capital. Not that the public sector shouldn’t be involved as Lerner laid out above, but that, based on a handful of anecdotal examples drawn from across the globe, the leap is made that no one can get it right. So the book’s subtitle is borne from the unsubstantiated generalizations made in Chapter 4 that all public equity programs will fail because some have suffered from incompetence or capture (an economist’s term for political cronyism and favoritism).

Despite this condemnation of government’s ability to do anything right, Lerner provides the reader with considerable passages elucidating the opposite stance – that public intervention can effectively support innovation and entrepreneurship if fashioned appropriately and implemented judiciously.

In fact, he goes so far as to advise politicians and public officials: “there has to be a commitment to be undaunted by initial failures – for example, the low rate of return that early publicly subsidized investments or funds garner – and instead to fine-tune programs in the face of early discouragements.” (p. 112)

More Lessons for Legislators – Appropriate Public Involvement

• Create a favorable environment to support and sustain entrepreneurship first – innovation-based entrepreneurship “doesn’t happen in a vacuum” (p. 181):
• “Ensuring that creative ideas can move easily from universities and government laboratories is critically important (p. 12, 182)
• For entrepreneurs coming out of a corporate environment, “the attractiveness of entrepreneurial activity is very sensitive to tax policy.” (p. 12)
• “Creating training opportunities in entrepreneurship for midcareer professionals is also likely to pay dividends.” (p. 12)

• Have patience. “Building a venture capital industry is a long-run investment, which takes many years until tangible effects are realized.” (p. 112)
• “No matter how promising the returns of entrepreneurial activity ultimately are, in a venture market’s early years, low returns are likely.” (p. 69)
• Building a vibrant entrepreneurial sector “is not a process that can be accomplished in a few years.” (p. 112)
• “A short-term outlook is fundamentally at odds with what we know about the entrepreneurial process.” (p. 116) It’s a “kiss of death.” (p. 117)

• Set realistic expectations, recognizing returns on investments or monetary payback are not the best measure of success for a public program: “in many cases, government officials proceed under the assumption that [financial] success is the typical outcome.” (p. 78)

• Scale investments appropriately: “reasonable programs have been too tiny to have an impact” (p. 13) but avoid being “so large that they swamp” the existing local private equity market and replace private investment with public dollars. (p. 124)
• “Some public programs have only invested a few million dollars. Such an effort is very unlikely to make an impact on a large and diverse economy” (p. 117) so either set expectation appropriately or strive to make a more significant investment in the effort.

• Do not over-legislate by defining too closely program activities and structure in enabling or authorizing legislation.
• “Realize that the programs to promote entrepreneurship need creativity and flexibility” to adapt to the needs of individual firms and market fluctuations. (p. 17)
• “In short, public venture capital initiatives should not be hobbled by excessive regulation.” (p. 128)

• Do not require funds to be spent within a certain time limit or certain geographic areas to discourage the need to invest in inferior opportunities out of necessity to draw down funding. (p. 120)

• Minimize opportunities for individuals, organizations, political parties, and industry sectors to use the program to benefit themselves, rather than supporting broader social goals. Build in transparency, accountability, and impartiality to program design, service delivery and evaluation. (p. 17)

• Do not require programs to become self-sustaining, evergreen or profitable as that is likely to distort or skew the program’s activities and interests away from the social goals and toward survival (leading to “capture” problems Lerner cites on pp 83-84). Instead reward performance along predefined societal goals. (p. 85)
• If the goal is to address failures in early-stage VC markets, then requiring programs to become profitable or evergreen is “quite out of line with the fund’s ultimate objectives.” (p. 116) Early-stage investments are particularly vulnerable to intensely cyclical periods of boom and bust. (p. 117)

• Avoid “mandates to local institutional investors [such as public university endowments and public pension funds] to make larger allocations to venture capital, regardless of the nature of the opportunities.” (p. 17)

• Avoid substantial up-front tax incentives for investments [for example, most CAPCO models – p. 141], which can introduce distorted incentives.” (p. 17, 189)

• Avoid bringing “in hired guns with poor incentives… Several reasons this decision [to bring in outside investment firm to manage the initiative] will probably be unproductive:
• These intermediaries frequently charge substantial fees…
• The investments by the intermediary may not be driven by the local government’s priorities.” (p. 190)

Lessons for Program Designers

• For equity investment programs, require “credible private sector players provide matching funds.” (p. 13)
• “In encouraging seed companies and groups, leaders should be aware that extensive intervention may be needed before they are ‘fund-able.’ Programs may need to work closely with the organizations to refine strategies, recruit additional partners (perhaps even from other regions) and identify potential investors.” (p. 184)
• Just as private investors do, build in performance incentives for public program participants [e.g., service deliverers, investment managers as well as portfolio companies] to access cash distributions so that they do not “do well [financially] even if the companies go belly-up.” (p. 14, 138)
• Allow program rules to evolve, “even if important classes of participants are thereby eliminated.” (p. 187)
• Stick to clearly articulately strategies and procedures for venture initiatives, “creating a firewall between elected officials and program administrators.” (p. 187)
• Foster and sustain connections between firms and funds: “Venture capital is a true ‘people business’ where personal connections are critical to overcoming the very substantial information gaps that surround these risky investments.” (p. 107)
• Evaluate program effectiveness at two levels: at the program level and at the individual fund manager and portfolio company level. (pp. 142-145, 186)
• Recognize the need to build a local entrepreneurial sector and venture capital industry with strong global ties.” Not having an international perspective “is a recipe for” irrelevance and failure. Encourage international participation. (p. 154-158)
• “Make education part of the initiative, including that of overseas investors, local entrepreneurs, and the public sector.” (p. 17)
• “Avoid a reliance on financial intermediaries to manage these programs, since they are likely to have different incentives.” (p. 17)