Julia Sass Rubin

Julia Sass Rubin, Ph.D.
Edward J. Bloustein School of Planning & Policy
Rutgers University
EARN Conference - September 13, 2011
Insurance tax credit program
Began in Louisiana in 1988
Between 1997 – 2005 diffused to:
New York
Washington DC
State provides $100 million in tax credits to
insurance companies
Insurance companies lend $100 million to
CAPCOs invest $50 million in 10 year zero
coupon bonds to repay that loan
CAPCOs lend/invest other $50 million to instate businesses, until amount loaned/
invested equals $100 million
CAPCOs “de-certify” and keep all the money
not repaid to insurance companies
"I think this state would be hard pressed to
design a program that cost the taxpayers
more and delivered less.“
Bob Lee, head of Colorado's Office of Economic Development,
which administered the CAPCO program
"It's a scam…I don't think there's anyone who
thinks this is a good deal for Colorado, with
the exception of those companies who lined
their own pockets.“
Mike Coffman, former Colorado State Treasurer who is now a
Poor quality loans/investments
◦ Demonstration of prior success not required for
CAPCO managers
◦ Incentives for low risk and quick repayment
Extraordinarily expensive
◦ Normal venture investors:
 repaid $100 million investment
 earn 80% of profits
◦ CAPCO states receive $0
Empty promise to “create and foster a local
venture capital infrastructure”
◦ Louisiana spent >$630 million 1989 to 1999
◦ Attracted < 1/1000% of US VC $ from 2000 to 2003
May price out indigenous VC
Effective alternatives exist
◦ Fund of Funds
◦ InvestMD
Solution in search of a problem
◦ Venture Capital? Economic Development?
◦ Change name and terms; keep basic model
Legislators do not understand
◦ How venture capital works
◦ How CAPCOs work
Expensive and effective lobbying
◦ Often well-liked former legislators
Hard-ball politics
◦ Smear/threaten critics
◦ Push through in final days of session
Clear objectives
◦ Venture capital or economic development?
◦ Profits or jobs?
◦ Geographic focus: State wide? Rural? Low-income
Clear criteria for selecting venture funds,
based on program goals
◦ Financial returns
◦ In-state job creation
◦ Targeted economic development
◦ VC funds w/ success investing in-State
Transparent VC selection process
Remove VC selection and investments from
political oversight or input
If using tax credits vs. direct appropriations,
use competitive monetization process
◦ minimize cost to taxpayers – e.g., InvestMD
State receive same terms as private-sector
◦ Full return of principle
◦ 80% of any profits
Limits on fees to reflect VC norms
Limited financial commitment up-front
◦ Can reassess before disbursing additional funds

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