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At a crossroads


Last week Mike Blouin and other Iowa Department of Economic Development officials had their outer doors propped open and fans blowing, as technicians worked on fixing the broken central air conditioning in their East Grand Avenue office suites.

“Looks like the power company’s not trusting us to pay our bills,” joked Blouin, the IDED’s director, who says his agency isn’t otherwise feeling much heat a week after an Iowa Supreme Court ruling invalidated the legislation that established the Grow Iowa Values Fund, the state’s predominant economic development incentive tool.

As the governor and legislators discuss their options, the IDED has been busy communicating with its constituents, both the agencies it works with as well as the businesses that have approached the state for funding, Blouin said.

“It’s been ‘Grand Central Station’ for information,” he said. “We’ve been talking with our various boards, to our colleagues around Iowa — the Professional Developers of Iowa, the Iowa Chamber of Commerce Executives, the utilities, the community colleges, all of the entities we work with at the local level — to give them as much information as we have, and to assure them that we’re still in business.”

The court’s ruling — which said Gov. Tom Vilsack’s line-item vetoes of provisions within the bill that cut taxes and modified the workers’ compensation system were unconstitutional and thus invalidated the entire measure — has sent Vilsack and legislators into negotiations over how to reinstate the $503 million fund. In the past year, the fund’s board has committed more than $50 million to 36 companies as incentives to expand or retain jobs within the state.

Besides contacting each of those companies within the past week, the IDED has also spoken with about 25 businesses that are ready to commence expansion or relocation efforts that would qualify them for Values Fund or other state incentive programs, Blouin said.

“What we’ve done is assure them that we’ve got enough resources immediately to deal with their needs,” Blouin said. Looking at the state’s set-aside account for federal block grant dollars and anticipated monthly loan paybacks, the department anticipates it has about $12 million in incentive funds available through the end of the year, in addition to the other tax abatement and jobs training programs that are still available, he said.

“When you put all those tools together, we’re still pretty aggressive, but we’re in a very limited mode when it comes to cash,” Blouin said. “And sooner rather than later, it’s going to start to have a negative effect on our prospecting.”

The IDED’s prospect list, which contained about 50 companies prior to the passage of the Values Fund legislation, has ballooned to nearly 380 prospects in the past year, which Blouin says is clear evidence the fund is working. About half those businesses are in-state companies, the remainder coming from outside the state.

“So far, nobody has said, ‘To heck with you guys, take us off your list,’” Blouin said. “ I think there will come a time when that will start to happen; I can’t tell you at what point that happens. If the legislators come to the governor with a proposal he can accept, I think folks will last a lot longer under that scenario than if there’s an impasse situation.”

Eric Hardgrave, managing partner of Acuity Ventures, a Silicon Valley venture capital firm, said the Values Fund ruling has “given us a degree of reservation” about referring a third software company to Iowa. Acuity has made investments of about $2.5 million in both GCommerce Inc. and Protocol Driven Healthcare Inc., two East Coast software companies that have relocated their headquarters to Des Moines in the past year as a result of Values Fund incentives.

That third company, Hardgrave said, is BayTSP Inc., a California-based maker of anti-piracy software for the music and entertainment industry. The company is considering an expansion that would create more than 100 software jobs within less than 18 months.

A spokesman for BayTSP declined to comment, other than to say that the company has been contacted by Iowa recently and that the CEO “always takes states’ calls because he doesn’t want to miss an opportunity.”

Despite the political uncertainties right now for Iowa’s economic development program, Hardgrave said the state remains his top choice for relocation. “From a business standpoint, this makes a lot of sense, and we’d like to continue to work with Iowa,” he said. “They’re going to have to tell us they don’t want to do business with us, let’s put it that way.”

From a site selector’s viewpoint, Iowa’s situation is serious but not critical, said Darrin Buelow, senior manager for Deloitte Consulting’s Fantus Group in Chicago, which often includes Iowa in site searches it conducts for its clients.

“What has happened (with the Values Fund) is quite interesting to us in the site selection world,” Buelow said. “I think that it slightly raises the level of risk for Iowa as a business location for our clientele. We like to find locations that are low-risk, that help lower costs.” If the Values Fund isn’t reinstated, “I think it would be notable for the site selection community,” he said.

Iowa’s Values Fund is relatively unique among the Midwest states, said Don Chaplain, senior program manager for the University of Northern Iowa’s Institute for Decision Making and current president of the Mid-America Economic Development Council, a membership group for economic development professionals in 10 Midwestern states.

“It seems (other states tend to use) the more traditional programs such as tax abatements and industrial revenue bonds,” Chaplain said. “Some of the states have passed legislation to incentivize bio-type operations. I’ve not had anyone tell me about a program in their state as innovative as the Values Fund. … There’s no doubt the Supreme Court decision is of great concern to economic development in the state of Iowa, because we have hung so many ornaments on that Christmas tree.”

The difference in the number of active leads the state has now compared with prior to the establishment of the Values Fund clearly demonstrates its attractiveness to companies, he said.

“That’s probably what hurts the most,” Chaplain said. “We’ve created this significant force in helping the state of Iowa, and now we’ve lost it. We just wouldn’t have been able to do what we did do for companies like Wells Fargo and Blue Bunny without it.”

In the short term, the Values Fund has helped the state leverage significant economic growth in the state, said Tom Slater, president of the State Public Policy Group, a consulting company that has advised state agencies in formulating their strategic plans. In the long term, the Values Fund needs to give more attention to the state’s rural areas, he said.

“This is not just about the businesses, but it’s about the regions that have the opportunity to grow their economies,” he said.

The lawsuit and Supreme Court decision may actually benefit the state by accelerating discussion about continued funding for the Values Fund, which otherwise wouldn’t have happened until January or February 2005, Slater said.

“It allows a healthy discussion about this early on,” he said. “One of the leverage points of this also is that it’s an election year. I think it puts them at the table in a more mutually beneficial situation. I’m an optimist; I think it allows them to talk about the long-term role of these dollars.”

Until the Values Fund’s future is resolved, Blouin said, the IDED board has invited the Values Fund due diligence committee and board to sit in on its meetings in an advisory capacity.

“We think it’s critical those components be present in all of these activities,” Blouin said. “There are very strong desires to keep everyone at the table, so when this thing is finalized, there won’t be any catch-up time.”

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