The North Carolina General Assembly is considering funding a private nonprofit organization called NCInnovation to invest taxpayer dollars in risky for-profit startups. The state House of Representatives initially proposed giving the group $50 million. The state Senate, feeling flush and generous with the taxpayers’ money, thinks $1.4 billion would be better. That’s billion, with a “b.”
Some advocating this plan point to two Ohio programs with similar missions and public funding structures for support. But those programs — Third Frontier and JobsOhio — should give North Carolina policymakers pause, not something to emulate.
Third Frontier has been making taxpayer-funded investments directly into private for-profit companies in Ohio since 2002. Its latest annual report shows that it spent nearly $1.6 billion in state funds and created or retained slightly more than $1 billion in private-sector payrolls. Some of those state dollars, of course, did not directly target jobs, but it is impossible to say for which or how many of those jobs the Third Frontier subsidies are responsible.
And JobsOhio is a nonprofit economic development firm funded through a complicated contrivance based on the state’s liquor franchise, which provides steady, government-backed funding without the normal transparency or strings attached to most state-funded programs. That’s a problem, not a solution.
NCInnovation intends to use state funds to help commercialize new technologies developed at North Carolina universities. Ironically, the Senate’s proposal to create a $1.4 billion endowment to fund private-sector grants in perpetuity would endow NCInnovation with more money than all but a few of North Carolina’s colleges and universities — the very schools that will be developing tomorrow’s technology.
UNC-Wilmington’s endowment, for example, was $104 million just a few years ago. The total market value of East Carolina University’s various endowments was less than $290 million in 2022. And Appalachian State’s endowment recently approached only $125 million, less than 10% of what North Carolina senators suggest giving to NCInnovation.
Third Frontier, JobsOhio, and the proposed NCInnovation endowment, of course, essentially provide government subsidies to underwrite private for-profit enterprises. And more often than not, such subsidies are a mistake.
Governments should spend taxpayer money to pay for quintessential government services and public priorities. Governments should be in the business of building and maintaining roads, managing waste-treatment plants, fighting fires, protecting the community, and prosecuting criminals, not picking winners and losers in the hyper-competitive technology sector. Investing venture capital should be left to venture capitalists, who risk their own money — not the public’s — and have the resources, expertise, and profit motive to assess more accurately the merits of and markets for emerging technologies.
Like Ohio’s programs, government funding for NCInnovation has several pitfalls that North Carolina should sidestep. First, once the $1.4 billion of public money goes to NCInnovation, that money becomes private, which means that transparency and accountability for how the money gets spent will ultimately be at NCInnovation’s discretion. The proverbial fox will be guarding the hen house, free to present the public or government bean-counters whatever data best support the preferred narrative.
In Ohio, Third Frontier is part of the Ohio Department of Development, so its spending is reasonably transparent, the state can audit its books, and taxpayers can hold officials accountable for money misspent. But that’s not the case with the nonprofit JobsOhio. The Ohio General Assembly blocked the state’s auditor from looking into JobsOhio’s financial records, and following a lawsuit over transparency concerns, the Ohio Supreme Court ruled that the firm’s legal structure exempts it from the state’s public records laws. Regrettably, North Carolina looks ready to repeat rather than learn from the JobsOhio misstep. The state budget specifically exempts NCInnovation from North Carolina’s public-records and open-meetings laws. Again, that’s a bug, not a feature.
Second, North Carolina should be wary of giving NCInnovation a permanent $1.4 billion endowment that will spend taxpayer money for decades with little to no taxpayer oversight. The 25-year exclusive lease that JobsOhio holds on Ohio’s state liquor franchise similarly gives Ohio taxpayers no real mechanism to hold the program’s decision-makers accountable. The Senate’s oversized NCInnovation endowment looks even worse.
Finally, North Carolina policymakers will want to consider carefully who may sit on the NCInnovation board of directors. Allowing private-sector individuals to sit on the board of a nonprofit that directs such significant public sums to for-profit companies risks creating significant conflicts of interest. The Ohio Ethics Commission has expressed concerns about such risks because some JobsOhio board members had ties to companies that received the program’s funding. Given the proposed amount in play, North Carolina firms will be understandably interested in finding their way onto NCInnovation’s board and will bring all sorts of foreseeable and unforeseeable conflicts of interest along with them.
The Buckeye Institute has looked to and applauded North Carolina’s leadership and success in adopting broad-based tax reforms and other public policies designed to spur economic growth and opportunity for everyone. Unfortunately, a massive government subsidy that gambles taxpayer money on private, fledgling investments in a narrow corporate sector isn’t one of them.