The Bredesen administration – with some complicit Republican sponsors in the legislature – is trying to expand the scope of the Tennessee Small Business Investment Company Credit Act, also known as the TNInvestco program.
The initial legislation and its expansion are trumpeted by the administration and some in the state’s venture capital community as a potentially “transformational” program that could change the face of Tennessee’s economy with new jobs and new businesses.
A closer examination of the law, an amendment offered by Rep. Charles Sargent (R-Franklin) and the Bredesen administration’s process to award $120 million in tax credits under TNInvestco all suggest an agenda that is as much about doing government business with taxpayer dollars in secret as it is about creating jobs.
Rep. Charles Sargent
Under the TNInvestco law passed in 2009, the state creates tax credits for insurance companies, a very valuable commodity. Major insurance companies like State Farm, Hanover or Progressive pay a tax on the premiums they collect when doing business in Tennessee.
Those tax credits are then issued to TNInvestcos, private equity and venture capital firms that apply for the credits through a process partially dictated by the law but largely determined by the administration, specifically Commissioner of Revenue Reagan Farr and Commissioner of Economic and Community Development Matt Kisber. The TNInvestco companies then sell their tax credits to insurance companies and are required to take the proceeds and invest them wisely in Tennessee small businesses.
While it seems simple enough, the Bredesen administration’s application of the original TNInvestco law should leave any Tennessean that holds dear the concept of open government horrified. The Sargent amendment would only make the situation worse.
The original law gives little procedural guidance on how these large dollops of precious tax credits – cash money to these venture capitalists – will be doled out other than to make clear Kisber and Farr are the final authority as to which TNInvestcos hundreds of millions of dollars in tax credits are issued.
The administration created the TNInvestco “process memo” setting out a largely bureaucratic process for a Part 1 and Part 2 evaluation process.
Under Phase 1, the state-charted non-profit Tennessee Technology Development Corporation is to cull a “narrative summary” on the “reputation” of the individuals in the companies applying for TNInvestco status.
“Part I of the application will be provided to the Tennessee Technology
Development Corporation (“TTDC”). Based on its expertise in the field of
business development, TTDC will provide a narrative summary of the
reputation of those individuals who are identified on the application as
managers, affiliates, or advisors of the applicant. In addition, TTDC will
provide any other information that it deems relevant to the application.,” the process memo states.
Yet, a survey of the Part 1 summaries written by TTDC shows little in the way of gauging the “reputation” of the players in the TNInvestco companies.
An open records request by Tennessee Watchdog of these Part 1 applications from both the Department of Revenue and the TTDC showed nothing more than biographical information on the players in the TNInvestcos pulled from their own company websites. Despite nearly 200 pages of information on the applicants, no primary source data or subjective judgment seemed to have been gathered or made by TTDC, only near advertorial content from the applicants’ own literature.
The initial list of applicants from Part 1 was then culled down in a Part 2 evaluation to 10 finalist and ultimately six TNInvestcos that were awarded $20 million each in tax credits by Reagan and Kisber. Two “alternate” companies wait in the wings for another $40 million the Sargent amendment would make available.
It is how Kisber and Farr arrived at these final awards of millions in tax credits that remain under a cloak or secrecy. In a well publicized lawsuit, a TNInvestco finalist passed over for the final cut of eight companies sued to get the Kisber/Farr scoring matrices – documents with subjective evaluations of the companies by the two long-time Bredesen appointees used to ladle out millions in tax credits.
Kisber triggered a little-known 1988 state law giving the ECD Commissioner the authority usually held only by a sitting judge to seal any document in his department deemed too “sensitive” for up to five years if the attorney general agrees. It was a choice by Kisber, not a requirement by law, to seal these documents.
The Sargent amendment makes the issue even worse, seeking to seal details about the applicants return on their investments as fund managers and the price they sell the tax credits for to insurance companies.
Furthermore, the Sargent amendment gives the TNInvestcos the ability to potentially throw good money after bad. The amendment if passed would allow TNInvestcos to invest money into companies they have already invested in with other venture capital funds they manage. So, if a venture capitalist needs to shore up an investment they have already made with one fund they manage – whether it is a good or bad investment, a failing or thriving company – they can do so with millions of dollars courtesy of the State of Tennessee. And, little of their activity of results will be known to the public that will bear the fiscal burden of these tax credits sold to insurance companies.
One of the major players in writing the TNInvestco original legislation – the TTDC – apparently championed an independent board to make the tax credit awards. It was advice ignored by the Bredesen administration. Now, the administration and a few loyal Republicans are trying to draw the shade even tighter on how and why people of already exceptional means are being given potentially hundreds of millions of dollars by the state to invest.
This is all being done in the name of good business. In this case, the administration’s version of good business is bad public policy and an affront to government transparency.