Righting the ship?
Scathing report says state’s economic development organization needs a major overhaul
- November 30, 2016
For more than 20 years, the Virginia Economic Development Partnership (VEDP) has served as the state’s primary organization for building the commonwealth’s economy. In the last decade alone, it has overseen $384 million in state incentives to help attract and expand businesses, winning accolades for Virginia as a business friendly state.
Now VEDP is on the brink of a sweeping overhaul. In November, Virginia’s Joint Legislative Audit and Review Commission (JLARC) released a scathing report depicting the state-funded,
quasi-independent authority as so dysfunctional that it doesn’t even have a clear marketing plan. Furthermore, the report said an unstructured approach to administering state incentive grants leaves Virginia “vulnerable to fraud and poor use of financial resources.”
According to JLARC, concerns about VEDP’s operations were raised by outside consultants as early as 2012. JLARC’s new report says employees receive little training and are not held accountable for being productive. Interviews with VEDP staff showed that a number of workers “come in late and leave early. Many staff expressed apathy about meeting job expectations,” JLARC staffer Drew Dickinson told the commission during an overview on the report.
“So, we’re highly paying these individuals … and they’re not accountable to anybody, and they don’t even come to work on time?” asked Del. Steven Landes, R-Weyers Cave, a commission member.
The 132-page report outlined these other key findings:
- Until January of this year, state incentive awards were made without a formal, written due-diligence process.
- Companies that receive grants don’t always meet contractual performance requirements for receiving state money.
- When requirements aren’t met, VEDP does not always recoup grant money. As a result, $8.7 million in one fund has not been collected.
VEDP’s board of directors has tightened its vetting for incentives through a recent reorganization, but JLARC Director Hal Greer says many challenges remain. “This organization faces extremely serious management and accountability deficiencies that need to be addressed, and it has not fully met its statutory responsibilities,” he told the commission.
So the question now is: Where does VEDP go from here? JLARC made 35 recommendations, including executive and legislative actions. Ripple effects could spread to other agencies.
“This is a devastating report and the worst that I’ve seen in the 12 years I’ve been on JLARC,” said House Speaker William J. Howell, R-Stafford. “Part of what I see as our problem, and it’s not solely the VEDP, is that we have 80 entities working in the same waters,” he said referring to other state organizations involved in economic development. “If we’re going to try and reform, we need to look at the whole swamp.”
Other legislative members on JLARC said they were so disgusted by the report’s findings that they plan to embrace its recommendation to withhold any new funding for VEDP programs, including $1.5 million in the current state budget, until problems are fixed. “It’s the biggest failure of an agency I’ve ever seen,” said House Majority Leader Kirk Cox, R-Colonial Heights.
The politicians didn’t waste any time tying VEDP’s problems to Virginia’s jobs-oriented governor, Democrat Terry McAuliffe. Economic development has been the hallmark of McAuliffe’s administration. The governor keeps a running tally of how many new jobs (178,700) have been created in Virginia since he took office nearly three years ago.
“JLARC’s report on VEDP shows that the McAuliffe-Northam administration’s governance of VEDP has severely failed the commonwealth,” Cox said in a statement after JLARC released its report.
McAuliffe, who was out of the country on a trade mission when the report became public, said in a statement that he has instructed Todd Haymore, Virginia’s secretary of commerce and trade, and other administration officials to review the report and identify opportunities on how to maximize the impact of Virginia’s economic development efforts.
The scolding report comes at a time when VEDP already is at a crossroads. It just hired a new CEO after undergoing a major restructuring. Lawmakers also have voted to spin off its international trade division while launching a new, collaborative initiative aimed at boosting Virginia’s regional economies.
Del. S. Chris Jones, R-Suffolk, chairman of the House Appropriations Committee and a member of JLARC, says the report can be “a roadmap for how we can do a VEDP 2.0.” Jones welcomes more legislative oversight and told Virginia Business, “We still need to have that piece where we approve their budget and initiatives, and there needs to be checks and balances.”
Dan Clemente, chairman of VEDP’s board of directors, would prefer an organization less reliant on state funding. Why not reinvent VEDP as a private, nonprofit, he asks, with a dedicated source of funding, like other states have done?
VEDP, which administers ten 10 grant programs, gets 98 percent of its money from the state. In fiscal 2017, it’s budgeted to get $27 million. Making it less dependent on state appropriations would make VEDP less political, adds Clemente. “The way we get funding is we have to lobby the governor and make a case.” The governor’s budget reflects his priorities and when there is a revenue shortfall, like this year, agencies have to cut spending to balance the state budget. “How do you run a successful organization when you don’t know what money you have to deal with?” he asks.
Despite JLARC’s criticism, Clemente seems to take the report in stride. A lawyer and commercial real estate developer in Northern Virginia, he was appointed to the VEDP board in 2014 by then-Gov. Bob McDonnell and became chairman in June of this year. “Let me put it this way, I’ve done a lot of workouts in my career. Usually what you do when you take over a company in trouble, you hire somebody … and they come in and do a study and give you analysis and that usually costs me $300,000 to $400,000 to get that work done. This is great. I got it for free.”
Longtime VEDP board member David Hudgins hopes JLARC’s recommendations “will right the ship so we can move forward and know where we’re going … VEDP is too important of an organization not to be optimized. This thing has got to work; it cannot fail, because there is no replacement for it.”
Mark Kilduff, an economic development consultant who served as executive director of VEDP from 1999 to 2006, says the report is a “call to get back to basics. Let’s do marketing in an organized, first-class way. There’s a clear message on the need to coordinate economic development efforts in Virginia. And you have to be prudent with the resources that you’re given. … There’s a tendency to take a study like this and just look at the negatives and assume that everything is bad. I think we do need to remember that there’s an awful lot of good that VEDP does.”
As recently as 2013, Virginia ranked as a top state for business in several national surveys. By this year, however, Virginia had fallen to No. 13 in an annual survey by CNBC. While rankings may not be the best indicators of business climate, they influence perception. Virginia’s slide in rankings, says Hudgins, got attention and provided VEDP critics with ammunition.
Today, much is at stake. How JLARC’s proposed overhaul plays out will determine not only Virginia’s long-term strategy for economic development, but also its ability to compete. Other states already have implemented new operating structures. Fifteen have privatized economic development, setting up nonprofit organizations with dedicated revenue streams. (See page 29.)
Fight on trade?
One bright spot in JLARC’s report was VEDP’s international trade division. JLARC noted that VEDP’s export promotion programs are held “in high regard” by staff in other states and local and regional economic developers. Yet, JLARC’s recommendation to leave international trade within VEDP for now could spark a political fight. Earlier this year, the General Assembly approved legislation to spin off trade as a separate agency by April 1. That plan drew bipartisan support and backing from major business groups.
JLARC member Landes says the spinoff should not be delayed. “My personal belief is that we can’t wait a year or two and put our international assets in jeopardy and in question. We need to move forward with that piece,” says the delegate, the patron of the House bill.
Trade has become increasingly important as Virginia seeks to lessen its dependence on defense spending. Exports represented 30 percent of Virginia’s economic growth during the past five years, generating $2 billion in tax revenue in 2014, according to a recent report by the Virginia Chamber of Commerce.
The creation of Virginia International Trade Corp. would mean about 28 percent of VEDP’s current personnel and funding would move to the new agency. Despite the business community’s support for a separate agency, Clemente prefers to see trade remain with VEDP. “Why would you set up a whole new silo? A whole new board? It will cost thousands of dollars to make the change. They do a good job. I would be happy to keep it in VEDP.”
Haymore says estimated startup costs in the trade agency’s first year would run about a half million dollars. With the state facing a $1.5 billion shortfall over the next two years, legislators who initially backed the idea might be reluctant to move forward, especially in the 2017 short session, which precedes a gubernatorial election.
Another question is where to put the state’s seven international offices for agricultural exports. Haymore, who previously was secretary of agriculture and forestry, expanded the number of offices to broaden sales for Virginia’s $52 billion agricultural industry.
The Virginia Department of Agriculture and Consumer Services has until Nov. 1 to recommend whether the offices stay under its umbrella or move to the new trade agency. The state pays $1.3 million a year to promote agricultural products overseas.
Conceptually, it makes sense to have one agency dedicated to promoting Virginia in the global marketplace, says Haymore. Yet the secretary, an ex-officio member of VEDP’s board, wants assurances that there would be a dedicated agricultural component. “It takes a different skill set to market a soybean or a cow than a widget.”
Too many pots?
When Jones and Del. Kathy Byron, R-Lynchburg, first considered seeking legislation for a JLARC study 14 months ago, one concern was how state money for economic development and international trade is distributed. “There’s a lot of money here, a lot of money there, three or four pots,” says Jones.
JLARC’s report bears out those concerns, recommending that VEDP better coordinate its services. One recommendation calls for the General Assembly to create a board of economic development that would provide planning and direction for the state’s economic development system.
VEDP was launched in 1995 during Gov. George Allen’s administration. Chris Lloyd, a senior vice president with McGuireWoods Consulting in Richmond, wrote the legislation creating VEDP when he was an assistant secretary of commerce and trade. Virginia’s model was cutting edge in 1995, he recalls. As a state authority, it has more independence and statutory powers than an agency. It is run by a 24-member board of directors (appointed by the governor and General Assembly), with six of those members state officials, who serve as ex-offico members. The board has the power to hire and fire the CEO, who runs day-to-day operations.
VEDP staffers take pride in the fact that it is run more like a business than a government agency. Some resent the push to turn it into what they call “just another state bureaucracy.” They point out that recruiting businesses is not a 9-to-5 job. Sometimes employees work late in the evenings in the heat of closing a deal, and they say it was not unusual in the past for them to leave the office early when that occurs. Over the years, employees have been paid higher average salaries than other state employees, with 50 percent of VEDP’s budget going to employee compensation.
A database of state salaries recently compiled by the Richmond Times-Dispatch shows that senior VEDP managers typically earn more than $100,000 a year. Its previous permanent CEO, Martin Briley, earned nearly $305,000 a year. The annual salary for VEDP's newly hired CEO, Stephen Moret, is $340,000. In the 2016 fiscal year, VEDP assisted in 191 economic development decisions that are expected to create 18,511 jobs and $2.7 billion in capital investment. Yet those numbers are now under scrutiny, with JLARC questioning the accuracy of VEDP’s data collection. “VEDP’s reliance on expected jobs and capital investment instead of actual jobs and capital investment prematurely attributes success to the organization even though some of the new jobs and capital investment never actually materialize,” the report says.
An increased interest in regional collaboration has created a new economic development initiative and yet another pot of money. The General Assembly gave its blessing this year to GO Virginia. Backed by some of the state’s most influential business leaders — including Tom Farrell, the chairman and CEO of Dominion in Richmond and Ben Davenport, chairman of Davenport Energy Inc. in Chatham — GO Virginia is designed to create more high-paying, private-sector jobs.
Leading the charge is John O. “Dubby” Wynne, a retired Landmark Communications executive in Norfolk, who recently was elected chairman of GO Virginia’s 24-member board. Wynne says $4.5 million has been authorized to get the organization up and running in its first year, including the hiring of two staff members. Starting on July 1, $30 million in grants will be available to nine regional councils for projects encouraging collaboration between businesses, workforce development organizations and government.
Wynne says GO Virginia will be run out of Virginia’s Department of Housing and Community Development, with its director, Bill Shelton, serving as staff liaison. According to VEDP sources, when GO Virginia’s leaders began working on the initiative in 2014, they wanted their operations to fall under VEDP, but its leadership at the time was not interested.
Asked whether there could be confusion between the roles of VEDP and GO Virginia, Wynne says no. “The two organizations are entirely different. VEDP does three things: They recruit, retain and try to get expansion. We don’t do any of those three things. We don’t give a grant to any individual company … We’re at the regional level, with each region identifying its priorities and pursuing them.’’
Jones welcomes the business community’s involvement, but he understands how “it can be a little confusing.” One of the positive aspects of GO Virginia, he adds, is that it encourages localities and regions to collaborate, rather than compete.
A listening tour paved the way for some of the current changes at VEDP. In January Clemente; Dan Gundersen, VEDP’s chief operating officer; and Chris Lumsden, then-chair of the VEDP board, visited with 125 economic development officials throughout the state. Clemente used his plane and picked up the tab for the trip.
What they heard is that some officials, particularly in rural areas, aren’t getting enough attention from VEDP. Stakeholders wanted more business prospect leads directed to them, and they questioned the way VEDP deployed its resources.
After the board received a report on the tour on March 10, Martin Briley, VEDP’s CEO of four years, stepped down voluntarily, Clemente says, because he didn’t agree with the new direction the board wanted to take. (Virginia Business reached out to Briley who declined to comment.) The board then named Gundersen interim president and CEO.
Even before the tour, VEDP was under pressure because of a botched project. A Chinese-led company, Lindenburg Industry LLC, had missed a deadline to return $1.4 million in state incentive money it received in 2014 for an Appomattox County factory that never materialized. The company had pledged to invest $113 million and to hire 349 people. The incident, first exposed by the Roanoke Times, showed a poor job in vetting the company, and VEDP has yet to recoup the money. It’s a glaring example of one of the points made in the JLARC report.
In mid-August — three months before JLARC’s review was released — Gundersen implemented a restructuring that has left some of its 100 employees disillusioned. The reorganization dismantled the agency’s Business Attraction and Business Expansion divisions, consolidating them into a new Business Investment Division. Also created were two new divisions and industry-based teams to put more emphasis on business recruitment efforts in distressed areas.
When the restructuring was announced, two vice presidents with a combined 40 years of experience, Liz Povar and Mike Lehmkuhler, opted to leave. They had led the dismantled divisions. Another senior manager, Brent Sheffler, left this fall. Some current and former employees, who asked not to be identified, described VEDP’s work environment as “toxic.” They say staffers fear losing jobs if they don’t go along with reassignments that in some cases mean demotions in rank and salary. Others are concerned about how the work of the senior managers who have left will get done, with no transition plans in place to retain business relationships that were years in the making. These sources also say that three employees have been fired since October.
Gundersen declined to comment on the employee complaints. He did say via email that VEDP values employee input and is developing an employee opinion survey that would seek input annually.
Clemente says he is not surprised by dissension in the ranks. “Any time you make a change, 50 percent of the people think you’re an idiot, and the other half thinks you’re great. We have to do what we think is the best thing to do.”
A new CEO
In late November, VEDP's board moved forward with the hiring of a new CEO following an eight-month national search. It picked Stephen Morel, who headed up Louisiana's Department of Economic Development from 2008-2015. During that time, Morel is credited with implementing a new workforce initiative, securing more than $62 billion in new private sector capital investment and boosting the state's business climate rankings in national surveys. Clemente says the authority needs “a world-class, rock-star economic development executive who has experience in working out issues like we have before us today.," and he thinks Morel fits the bill.
Morel starts his job on Jan. 1. In addition to his $340,000 salary, he is eligibile to earn up to a 15 percent annual incentive bonus that's tied to performance review. Clemente says the timing on the hire is right because Moret will be able to help shepherd through changes expected to comefrom JLARC's audit.
But Jones, the House Appropriations chairman, and other legislator members of JLARC said they didn't think now was the time to be hiring a new CEO. The thinking was that with upcoming legislative tweaks to VEDP’s operations — an effort that could take more than one General Assembly session — the job gig a candidate might accept could be subject to dramatic change. Jones, contacted after the announcement of Moret's hiring, said, "I was unaware of how far along they were in the process. I spoke with Mr. Moret, and certainly I look forward to working with him in his capacity as the new president and CEO of VEDP. Certainly, there's much to do."
In the meantime, JLARC has formed a new subcommittee on economic development that will closely monitor incentives in Virginia. As Landes explains, “We’re slowly taking more of a role in economic development programs because they are so important.”
Economic development models in other states
A private nonprofit leads the state’s business recruitment and retention efforts. Funding comes from the organization’s operation of Ohio’s liquor stores, which in 2015 generated $90 million for economic development activities.
North Carolina: Economic Development Partnership of North Carolina
The state created this public/private nonprofit organization in 2014. About 85 percent of the partnership’s $24 million annual budget comes from a contract with the state of North Carolina. The rest of the funding comes from federal dollars and private funds.
South Carolina: Coordinating Council for Economic Development
The council falls under the umbrella of the Department of Commerce. In this centralized approach, the council consists of the heads or board chairs of the 11 state agencies concerned with economic development, including South Carolina’s Ports Authority and the Recreation and Tourism Department. Utility taxes provide a dedicated revenue stream, capped at $20 million a year, for a Set-Aside Fund that helps local governments develop infrastructure necessary for new and expanding business. State appropriations, $11 million in 2015-16, fund a Governor’s Closing Fund to help close deals. The council has the authority to transfer Set Aside funds to the closing fund with a majority vote of its council.
Source: Virginia Business and the state’s websites.