March 21 (Bloomberg) -- Ohio Governor John Kasich wants to use about $100 million in annual liquor profits to retain and recruit businesses, a sum that may ignite a jobs race among states also hungry for employment.
Kasich’s two-year, $55.5 billion budget proposal calls for using profits from the state’s wholesale liquor distribution to fund job-creation and retention by JobsOhio, a private, nonprofit entity the Legislature created last month at Kasich’s behest to replace the Ohio Department of Development.
The estimated revenue stream would be larger than similar arrangements in Michigan, Kentucky and California, and it would be one of the biggest such dedicated funding sources in the U.S., said Jeff Finkle, president and chief executive of the 4,500-member International Economic Development Council in Washington.
“It’s a very big number,” Finkle said in a telephone interview. “You may see some other states using the argument, ‘This is what Ohio is doing. We need to do it.”
U.S. state budget deficits may reach $112 billion in the next fiscal year, and governors are pushing job initiatives to boost their economies. Ohio has lost 610,000 jobs during the past decade, a 10.9 percent decline, according to U.S. Bureau of Labor Statistics. Only Michigan had a deeper drop during the period, 17.8 percent. Ohio’s February unemployment rate was 9.2 percent, compared with 8.9 percent for the nation as a whole.
‘Compete and Win’
Transferring the liquor-distribution enterprise to JobsOhio will allow “revenue growth where we can actually go out there, compete and win against other states,” Kasich, 58, a Republican who took office in January, told reporters during a March 15 budget briefing.
“That’s huge,” said Nancy Sidhu, chief economist of The Los Angeles County Economic Development Corp., when told of Ohio’s plans for a $100 million funding source.
The state Legislature would have to approve Kasich’s proposal as part of the budget due by June 30, and the exact sum for JobsOhio hasn’t been determined, Kristi Tanner, assistant director of the Department of Development, said in a telephone interview.
JobsOhio will be led by an eight-director board appointed by Kasich, who will be chairman. Under the plan, it will acquire the state liquor-distribution system for as long as 25 years for a price to be negotiated, according to budget documents. Ohio doesn’t have government-run liquor stores; it buys and distributes alcohol to retailers.
Cleveland-based Policy Matters Ohio, a nonprofit research organization, and Good Jobs First, a Washington-based center that tracks economic-development deals, oppose private entities that seek jobs on government’s behalf. They say the model lacks accountability and transparency, and they’re skeptical about whether using liquor profits to fund JobsOhio is the best deal for taxpayers.
“It’s using one form of privatization to finance another,” Philip Mattera, research director for Good Jobs First, said in a telephone interview.
Ohio’s open meetings and public-records laws don’t apply to JobsOhio. After Democratic lawmakers complained about transparency last month, the bill creating the agency was changed to require the board to conduct public meetings, prepare an annual report and make certain other records public.
The agency would issue private bonds to pay the state at least $500 million for foregone liquor profits and use $700 million to pay off state bonds now backed by alcohol money, according to budget documents released by the governor’s office.
Profits averaged $221.9 million annually during the past three fiscal years, according to the Ohio Department of Commerce. The state expects about $100 million would be available each year for development work after debt-service payments on the new bonds, Tanner said.
The liquor profits may allow JobsOhio to take an equity position in companies for a return that can be reinvested in other projects, she said.
In 2004, the state made two loans totaling $20 million to First Solar Inc. of Tempe, Arizona, to encourage the company to expand a plant in Perrysburg, Ohio, near Toledo. Had the state been able to use $2 million of that for an equity stake, the investment would be worth $150 million today, Tanner said.
The key is a revenue stream that doesn’t fluctuate with the budget, said Mark Kvamme, a Silicon Valley venture capitalist who agreed to be Kasich’s development director this year for a $1 salary and now is director of job creation.
“When the economy is going down, you have less money to invest in job creation,” Kvamme told reporters during a March 15 briefing. “That’s the time you need it the most.”
Development entities including the Michigan Economic Development Corp. and the Northern Kentucky Tri-ED also use dedicated funding in lesser amounts than what Ohio is proposing.
Five Indian casinos in Michigan pay about $36 million a year from a tax on their revenue for development, which is less than 20 percent of the Michigan Economic Development Corp.’s budget, spokesman Michael Shore said in a telephone interview.
Northern Kentucky Tri-ED gets about $1.8 million a year from a 3 percent tax on car rentals at the Cincinnati/Northern Kentucky International Airport and from agencies in Boone, Kenton and Campbell counties, which accounts for about 75 percent of the group’s budget, Dan Tobergte, president and chief executive, said in a telephone interview.
The Los Angeles County Economic Development Corp. uses an endowment funded by proceeds from land sales to help pay operational costs, Sidhu said. She declined to disclose the amount, although she said it is less than $100 million a year.
A private entity needs a dedicated funding source for long-term sustainability, Donald E. Jakeway, president and chief executive of the Brooks Development Authority in San Antonio, said in a telephone interview. He has overseen both public and private models as head of both the Ohio Department of Development and the Michigan Economic Development Corp.
“If it’s going to be private, you need to have something that will support the activity rather than the state’s general fund,” Jakeway said.
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