Delaware Public Media

State ready to spend more to lure business to Delaware

Jun 29, 2010

As a candidate for governor, Jack Markell campaigned against the idea that Delaware could afford to be a player in the high-roller nationwide bidding war to lure businesses here with princely financial incentives. "Delaware should not be in the business of picking new industries to bet on," instead focusing on making existing businesses stronger, he wrote in his 2008 book, Blueprint for Delaware.

But as governor, he and his economic team have had to grapple with the realities of job losses from major plant closings and what is thus far a relatively jobless economic recovery.

So the administration entered the fray, aggressively using the state’s Strategic Fund over the last 18 months to attract large companies to Delaware. Following a large depletion of the fund to seal the deals that brought Fisker Automotive and PBF Energy to Delaware, the General Assembly is expected to pass a substantial replenishment of the Strategic Fund. The $17 million in new funding is expected to be included in the Bond Bill when legislators wrap up the 2011 budget on Wednesday.

The governor’s office now unabashedly advocates for the use of the fund to bring big business back to The First State.

“If everyone’s doing it, you, unfortunately, have to join in,” said Alan Levin, secretary of the Delaware Office of Economic Development (DEDO), which administers the Strategic Fund. It uses grants, loans, and loans that convert to grants to lure attract companies to the First State or help existing Delaware companies expand.

DEDO has used nearly $68 million from the fund since January 2009. Levin says his agency has $12 million in approved commitments as well as $25 million in commitments awaiting approval.

Those are big numbers, but Levin believes the Strategic Fund is well worth the price.

“When the Governor came into office, unemployment was rising. We peaked at 9.2 percent,” said Levin. “The Governor and I, when we first sat down, decided we would seize the momentum, seize the opportunity, and do what we had to do to put Delaware back to work—which meant we had to spend a lot of money.”

The biggest expenditures for the Strategic Fund are the outlays helped clinch deals to bring Fisker Automotive to the shuttered General Motors Boxwood Road Plant and to attract PBF Energy to purchase the shutdown Valero refinery in Delaware City. Those two deals alone pulled $41.5 million from the fund.

“Those deals, which are really going help the state, were more significant than what that fund has ever done in the past,” said OMB Director Visalli.

Despite the celebrations over Fisker’s move into the former General Motors Boxwood Road plant and PBF’s purchase of the closed Delaware City refinery, not everyone supports the strategy behind the Strategic Fund. University of Delaware economics professor Jim Butkiewicz notes that the Strategic Fund places a burden of risk on the state.

“Four of five new small businesses fail within five years after startup," said Dr. Butkiewicz. "So the question is whether the state is taking reasonable risks or high risks.” (See Strategic Fund: Q & A.)

Levin yields that this is a “fair criticism in a lot of ways,” but he believes these are educated gambles—with a track record he’ll stand behind.

“If I didn’t believe in these companies, I wouldn’t recommend them. It’s my credibility that on the line as well,” Levin said.

"Obviously, it's our job to make sure those funds are invested wisely to create jobs in Delaware,” Gov. Markell said.

Those big-ticket deals have certainly helped make the case to legislators that feeding the fund is a sound idea.

“This Governor has shown he can bring businesses here. He’s done a fantastic job on that level,” said House Majority Leader Pete Schwartzkopf (D-Rehoboth Beach). “He was able to bring Fisker here, and he did the unthinkable and got somebody to move in here and take over Valero and saved all those jobs. I think this Governor has shown he can operate very well on that higher business level.”

“We think that certainly it’s healthy to have a good Strategic Fund because that’s part of the way we drive the economy in Delaware,” said House Minority leader Dick Cathcart (R-Middletown). “I think where we’re going have a positive effect is things like Fisker and some of the investments we’re doing to get the oil refinery started up."

But those big, headline-making deals are hard—and expensive—to come by. More often, the Strategic Fund works on a smaller scale. Since January 2009, allocations of as little as $45,000 have been issued to assist businesses in hopes that the state would reap jobs and revenue. (See Strategic Fund: big deal for small companies.)

“Every single job matters in Delaware," Markell said. "Sometimes I talk to companies who tell me that they talked to other states and other states are not interested in talking to them unless there are a couple of hundred jobs. In Delaware, it’s different because in Delaware, it’s personal. We all know somebody who is struggling, and isn’t working, and wants to be working.”

Levin notes that “93 percent of the businesses in the state constitute what would be called 'small businesses,' and they employ 47 percent of the workforce in Delaware. So to me they are a huge asset."

"As small businesses go, so does the state in a lot of ways,” he added. If small businesses begin to fail, “it becomes like a cancer. . . . You have to bolster them.”

Levin also points to the $5 million set aside from the Strategic Fund for the LIFT (Limited Investment for Financial Traction) program. So far, 43 businesses have received up to $12,500 a year for two years to help them with their lines of credit.

“It is not a gift. It is a loan. They will pay that back, albeit at zero percent interest, after that two-year period," Levin said. “I’m happy to report, of those 43 businesses, none of them have failed over the past year and a half.” (See Strategic Fund: Alan Levin interview.)

Nevertheless, Rep. Cathcart has concerns about the administration of the Strategic Fund.

“Spending little bits of money multiplied by a large number becomes a large number from a dollar and sense perspective,” Cathcart said. “What we are concerned about is how it’s being spent. We’d like to get a better understanding of that so that we can see if we should perhaps put some controls in.”

Levin counters that Strategic Fund spending is transparent and subject to the approval of Council of Development Finance, which includes two members of the General Assembly, State Senator Nancy Cook (D-Kenton) and State Representative Greg Lavelle (R-Sharpley).

Levin believes that what actually bothers critics is the confidential negotiations that lead to these deals.

“They’d rather hear it beforehand. Unfortunately, that’s not the nature of this beast,” he said. “This is a relationship business. A lot of companies don’t want it on the street they are looking for a new home or a new anything. They want to deal with states that they can have confidence in and deal with confidentially. ”

How confident is Levin that the DEDO’s use of Strategic Fund is going to yield results? Levin believes that once the jobs created by the big deals involving Fisker and PBF Energy start to show up, along with jobs created by the smaller recipients of funds, the result will be easily quantified.

“My prediction is that this state will be at around 6.75 [percent] unemployment by the end of the next fiscal year—that will be June 30th of next year,” Levin said. “It does not take a lot to affect Delaware. Just as a little affects it on a negative basis, a little can also affect it on a positive basis.

"I have no problem making that prediction. [That rate is] still too high, but it’s a helluva dent in where we were."