Resignation, Hazy Details Dog Rauner’s Move To Take Economic Development Private
The Rauner administration’s year-old move to privatize state economic development has been rocked by the sudden resignation of its CEO, a departure underscoring swirling questions about its effectiveness, transparency and efficiency.
Even before the departure announcement in late January by Jim Schultz, a veteran venture capital investor who said he was returning to the private sector, Intersect Illinois had come under fire for disclosing little about how it operates, its goals and how it planned to measure success.
Watchdog groups also raised concerns about whether Intersect was adding to bureaucracy rather than reducing it.
Schultz did not respond to multiple interview requests from the Better Government Association over more than a month’s time prior to his resignation, and he likewise did not respond to a new request to discuss his resignation.
However, he did speak to Crain’s Chicago Business and declared that the chronic Springfield budget stalemate made the state a difficult sell and that he had completed his objective of getting the startup up and running.
Intersect, launched by Gov. Bruce Rauner in early 2016, followed similar privatized initiatives in Wisconsin, Indiana, Michigan and Ohio. Many of those efforts quickly came under attack for a lack of transparency as well as controversies ranging from exaggerated job creation claims to cronyism.
With the state’s economic development efforts now at a crossroads, a looming question is whether Rauner remains committed to privatization and if Intersect will continue as it has been or change course.
Intersect’s structure and dependence on private capital presented the potential for conflict of interest. It raised capital from 41 private and public organizations in the state, but didn’t publish the amounts raised or disclose what, if any, benefits are conferred on its contributors.
Schultz told Crain’s the group raised or had commitments for $7 million, which would last it for a couple of years, and already had spent $1.6 million on establishing a Chicago office, hiring a staff of six and launching a marketing campaign.
Donors range from corporate giants such as Caterpillar, Walgreens and Commonwealth Edison, as well as banks and manufacturers and downstate economic development organizations such as the Greater Peoria Economic Development Council. Intersect has also taken in donations from individuals.
Intersect touted as a major accomplishment the decision by online retailing giant Amazon to open distribution centers in Monee, Aurora and Downstate Edwardsville near St. Louis. Left unsaid is that Amazon is in the middle of an aggressive nationwide expansion, so it’s not clear whether Intersect’s role in landing those facilities for Illinois was key or incidental.
Other deals for which Intersect claims involvement include an agreement by German pharmaceutical firm Vetter to build a plant in Des Plaines, and the purchase of the former Mitsubishi auto plant in Normal by electric car start-up, Rivian.
“They haven’t exactly hit the ground running,” Carol Portman, president of the Taxpayers’ Federation of Illinois said last year.
These businesses were wooed with tax incentives under the Illinois Edge program that provides credits for businesses creating new full-time jobs and making capital investments in the state. The incentives are administered by the state Department of Commerce and Economic Opportunity, which Schultz ran before shifting to Intersect.
So what is Intersect bringing to the table that the commerce agency could not already do?
Speaking to the City Club of Chicago shortly before his resignation, Schultz argued that operations like Intersect were better at creating jobs and luring investment than state run development agencies. Staff members at private agencies “are consistently in the market and out marketing to people,” he said.
Rauner in the past has said that development efforts primed with private money could be used to pay higher salaries and recruit better talent than more traditional efforts that relied on tax dollars.
“The rigid structure and suffocating bureaucracy of DCEO hinders our ability to attract businesses and drive economic development,” the Intersect website says, adding that just 14 percent of the state agency’s staff is dedicated to economic development. Left unsaid: what stopped the governor from reforming the government agency and adding more resources to the task?
Illinois, where Republican Rauner assumed power in 2015, is somewhat late to the game when it comes to public-private partnerships for economic development. A wave of such initiatives took hold in states after elections in 2010, ushering in new Republican governors pledging to make their governments run more like businesses.
Scandals were quick to mount. Some states exaggerated job-creation claims, misused taxpayer funds, paid questionable subsidy awards, or created appearances of insider dealing and conflicts of interest, according to a 2013 study by the Washington, D.C. -nonprofit Good Jobs First, which promotes corporate and government accountability in economic development.
“That put a damper on other states considering these kinds of partnerships,” said Philip Mattera, research director of Good Jobs First.
But Rauner, a wealthy private equity investor before turning to politics, was undeterred. He made privatization a centerpiece of his campaign, arguing that the state suffered from the lack of a pro-business mindset.
Since coming into office, Rauner has repeatedly butted heads with leaders of the Democratic-run General Assembly, and those differences helped doom his efforts to win legislative approval for a partial privatization of the commerce department.
Instead, the Republican issued an executive order to create Intersect, formally named the Illinois Business and Economic Development Corp., and picked Schultz to run it.
Video taken from Gov. Bruce Rauner's Facebook Live stream at Flexco manufacturing plant in Downers Grove - Oct. 6, 2016
One of Intersect’s first initiatives was to hire VisionFirst Advisors, a politically connected Florida firm, to help develop a business plan, design an organizational structure, recommend processes and establish a timeline. The professional fees to be paid to VisionFirst are redacted from the contract published on the Intersect web site.
“The staff brings years of experience in business development, corporate recruitment, economic development marketing and knowledge of best practices from multiple states,” said Kelly Nicholl, Intersect’s chief marketing officer, who responded to BGA questions by email in place of Schultz.
She added that before Intersect was established, “we studied what went right and what went wrong in other states that use a private economic development organization” to avoid mistakes.
VisionFirst is headed by Gray Swoope, former secretary of commerce in Florida under Republican Governor Rick Scott. The chair of VisionFirst is former Mississippi Gov. Haley Barbour, a onetime chairman of the Republican National Committee.
Swoope served as executive director of the Mississippi Development Authority when Barbour was governor. As commerce secretary in Florida, Swoope also headed the economic development organization Enterprise Florida Inc.
However, Enterprise Florida came under fire for cronyism and conflicts of interest and also was criticized for shortfalls in job creation, according to the 2013 report by Good Jobs First.
The report cited the work of the watchdog group Integrity Florida, which found that Enterprise was obligated by the state to raise half its funding from private sources but managed a scant 2 percent for the fiscal year 2013.
Integrity also alleged that the structure of Enterprise put it at risk for corruption because more than $20 million in subsidies went to board member companies ranging from defense contractors to the restaurant group that includes Olive Garden. “It gave the appearance that companies could pay to play in return for subsidies and vendor contracts,” Ben Wilcox, research director of Integrity Florida, said in an interview.
The Florida state legislature became wary of the way EFI handled public money for business recruitment, according to the report, and cut the partnership’s recruitment budget by more than half. After Swoope left in early 2015, Enterprise Florida was downsized after the Florida legislature rejected its big funding request.
Swoope did not respond to a request for comment from the BGA.
From the start, Intersect has been more a study in opaqueness than transparency.
Rauner initially said the partnership would be subject to open records requests under the Illinois Freedom of Information Act. Schultz also told The Chicago Tribune that the nonprofit, though not technically required to, would be publishing its board minutes, details of grants and tax incentives pledged to lure business, as well as the identity of its donors and donations.
It is a pledge that appears only lightly followed.
Board minutes published online for 2016 contain little more than procedural information, with the board routinely adjourning its meetings to executive sessions for which minutes are not released. The most recent board meeting minutes posted online are for August 25, and comprise all of two pages.
Nicholl said Intersect’s value comes with relationship building. “Amazon is an example of the type of concierge-level of service Intersect is trying to provide businesses looking at Illinois,” Nicholl said. “When they first approached us about opening a fulfillment center, we not only worked with them on that single project, but we began a dialogue about what their needs are as a company and how Illinois may be able to help.”
Illinois under former Gov. Pat Quinn negotiated tax credits for Amazon’s initial foray into the state at Joliet. Rauner has continued to offer the incentives as the retail giant this year ramped up and announced plans to build seven more warehouses, adding more than 6,000 jobs.
However, it’s likely that Amazon, which is on a tear building warehouses around the country to support its rapid-service delivery business, would have expanded in Illinois anyway. Amazon is in such a hurry to expand that it often leaves subsidy packages on the table even as governments have committed at least $241 million to the online retailer since 2015, according to a December report by Good Jobs First.
Tax incentives have been criticized in Illinois because companies such as Sears won them in the past after threatening to relocate out of state. Other corporate recipients of incentives later broke promises to maintain a certain level of jobs.
Even so, legislators and state officials consider them a necessary evil in order to compete with other states that use them.
Schultz noted in his talk at the City Club that his group doesn’t approve or negotiate grants or tax credits. But with the governor’s backing, Intersect is in a position to set the economic development agenda and recommend which businesses should receive incentives.
Disclosure of incentives has been spotty. Tax credit agreements for Joliet, Monee and Aurora—which extend for 10 years—were posted on the Intersect site only following inquiries by the Better Government Association. They show the number of jobs Amazon anticipates adding, but data on the company’s investments in each location has been redacted.
Meanwhile, the official commerce department website, which is supposed to track all recipients of state incentives and grants, has not been updated to reflect information for 2016.
Critics of privatization, largely Democrats, are skeptical of Intersect. They point to a lack of transparency about the donors, the initiatives underway and the decision making process. They note that Intersect is adding another layer of bureaucracy since decisions to use public dollars as incentives still must ultimately return to DCEO for review and approval.
“It’s unclear that the appropriate steps were taken to ensure oversight, transparency and accountability to achieve a public goal,” said Ralph Martire, executive director of the Center for Tax and Budget Accountability. “You have to be concerned whether financial incentives are being used to maximize public return rather than private benefits.”