States Let Private Sector Seal Deals

By CONOR DOUGHERTY
Wall Street Journal

Some cash-strapped states have identified another job they want to shift to the private sector: economic development.

A number of governors are working to turn their development offices into some form of nonprofit private entity, a move that would transfer the task of giving out state grants, tax breaks and other economic incentives from the hands of government.

The idea, which has as much to do with economic philosophies as with saving money, is mainly gaining ground in states with Republican governors, including Ohio, Wisconsin, Iowa and Arizona.

"It's a matter of greater flexibility and the ability to act more like a chamber [of commerce] rather than a state agency," said Wisconsin's new Republican governor Scott Walker, adding that private groups are better equipped to create jobs and attract companies.

As tax revenue has shriveled in recent years, cities and states have moved to privatize various operations, such as state-run liquor stores, local libraries and parking meters.

Seven states, including Michigan and Florida, already have some form of private group filling the economic-development role. Critics say handing this power to a private entity can create conflicts of interest, because the nonprofits usually have boards made up of public officials and private business leaders. This can create conflicts as these boards help steer tax breaks and incentives.

Also, in many cases private economic-development agencies aren't subject to the same standards for public disclosure as government agencies, even though they receive government money. In Ohio, where newly elected Gov. John Kasich has proposed dissolving the state's Department of Development and creating an entity called JobsOhio, lawmakers have pushed to increase disclosures and allow the state's inspector general to investigate the proposed entity.

Advocates say it makes sense to separate the task of creating jobs from large government agencies that often have a broader mission. In Wisconsin, the current Department of Commerce has responsibility for regulation as well as economic development. Among the 400 employees in Ohio's Department of Development, 60 are focused on economic development; the balance handle areas including homeless programs, community development and home energy assistance.

The structure of private economic-development groups varies, but in general they are set up as nonprofit corporations that receive seed money and regular funding infusions from the state budget but are also free to solicit donations from corporations much like a chamber of commerce. Also, instead of reporting to the governor directly, they are usually run by a board of directors. By operating outside government, private authorities can make faster decisions, says Debi Durham, who was recently hired as director of the Iowa Department of Economic Development. Under a plan expected to be proposed by Gov. Terry Branstad on Monday, that department would be dissolved into a new entity called the Iowa Partnership for Economic Progress.

Jeffrey Finkle, president of the International Economic Development Council, a trade group for economic development agencies, including some nonprofit private groups, says there has been little to show that a private structure is better than an agency under the government's purview. "There is this naive assumption that a private-run state economic-development agency is better than a public one and I don't see evidence that that's true," he says.

The move to privatize economic-development agencies started two decades ago, according to Good Jobs First, a Washington nonprofit research group that monitors how states and localities use economic incentives. Several states have seen parts of their economic development agencies go from public to private and back to public again. "One of those was Wisconsin, where the concept is now being presented as something new," said a recent Good Jobs First report on the recent privatization trend.

Write to Conor Dougherty at conor.dougherty@wsj.com