A performance audit of the Oklahoma Capital Investment
Board released Wednesday afternoon shows the venture capital scheme is
"far from maximizing its efforts in venture capital investing," and
the significant portion of out-of-state investments is not consistent
with the organization's mission to diversify and stabilize the state's
economy.
"This report lifts the veil on many of the claims made by promoters of this program," said Paul Zemitzsch, a spokesman for the Growth Capital Alliance, a national organization supporting venture capital investment. "The most important aspect of this audit is that it highlights the significant cost and clear financial risk for the state - more than $50 million to date -- despite the proponents' longstanding contention that there is no cost or risk."
"The lack of transparency noted by the auditor is troubling, too," Zemitzsch added, "especially in the post-Enron environment. For years now, the true financial liabilities of this program have been hidden from the leadership and taxpayers of Oklahoma. At the same time, the National Association of Seed and Venture Funds, an organization with ties to the Oklahoma program manager, has tirelessly lobbied for this type of program all across the country based on what they characterized as the Oklahoma success story."
"Increasing the flow of investment capital for small business is a valuable economic development strategy for states," said Craig Casselberry, president of the Texas Coalition for Capital. "But no taxpayer should be asked to fund a program that primarily benefits businesses in other states."
"There are many effective state-focused venture capital programs," Zemitzsch said, "with annual audits by state regulators and fully disclosed costs and economic impacts. These programs have resulted in billions of dollars of investment flowing to entrepreneurs in those states, resulting in thousands of jobs and tremendous economic activity. Federal venture capital programs such as the Small Business Investment Companies program also have rigorous oversight."
Findings by the Office of the Oklahoma State Auditor indicate the state's investment board lacks transparency in its dealings, is more risky than taxpayers and legislators were led to believe when it was approved, and the economic impact of the program is modest at best. Of the 162 companies funded to date, only 18 were in Oklahoma - 11 percent of the total. Moreover, there is no evidence those investments resulted in any significant job creation, increased economic activity or increased tax revenue for the state.
In releasing the audit, State Auditor Jeff McMahan said Oklahoma is "far from maximizing its efforts in venture capital investing." The auditor warned of the program's growing debt and its inability to achieve diversification and stabilization of the state's economy as promised.
Shortcomings noted in the auditor's report included the following:
-- The program "was created with the premise that proceeds from investments ... would cover the costs to operate the program. To date, this has not proved to be the case as evidenced by over $31 million in debt ... with the debt increasing an average of $2.4 million each year." While no tax credits have been sold to date, "OCIB trustees are considering selling credits to cover the debt."
-- The program's investments and debts are not accounted for on publicly available financial statements. The program's true financial picture is only available on a very select, confidential basis. "The transparency ... is limited, making it difficult to get a clear indication of the financial condition."
-- The lack of transparency is a "significant issue" for policymakers, the auditor noted, recommending that "legislative leaders and decision makers should be made aware of the financial risk to the state." The auditor placed the financial risk to the state at $56.1 million, including $31 million in debt and nearly $24 million in unfunded commitments.
-- Since the program began, "OCIB has had an interest in 162 companies." Of those companies, 144 - almost 9 out of 10 -- were in states other than Oklahoma. Even with so few companies in its own state, the investment "provided by OCIB is unknown as this is a measure not tracked."
-- "While determining the amount of direct investments on a company-by-company basis is not considered significant to OCIB, we believe this is an important measure for the state's leadership and its citizens to have a clear indication of OCIB's direct involvement in Oklahoma companies."
-- In addition, seven of the 18 Oklahoma companies have either gone out of business or left the state. "These seven companies account for close to one-half of the total dollars invested in Oklahoma; therefore, it is unlikely these companies had any long-term economic impact on the state."
-- Finally, the lack of economic impact measurements is troubling. "Without adequate performance measures, it is not possible to make a judgment about whether the results of the program are worth the financial risk to the state." Indeed, the auditor characterized this as the program's "greatest weakness." "The mere fact that an investment was made should not be the only reward recognized by the state."
"From top to bottom, the program is flawed," Zemitzsch said. The auditor's findings echo conclusions of a 2002 study of the Oklahoma effort, he added. That analysis, conducted by Micrometrics in St. Louis, also noted that very few Oklahoma companies had benefited from the program and, of those that had, many had moved out of state or gone out of business.
"This certainly cannot be considered an economic development program and if the state sought above-market investment returns for its pensioners, it would be better served by investing in a top-quartile venture capital fund," Zemitzsch said. "It is easy to see why the auditor reached these conclusions and recommended the Legislature consider providing additional state oversight to OCIB's operations."
Oklahoma is not the only example of disappointment, he said. Arkansas enacted a similar program in 2001 and Iowa in 2002; both states hired firms connected with the Oklahoma program manager to run their programs, yet neither one has done more than dole out a small portion of the authorized funds to out-of-state fund managers.
"When you look at these states which passed these initiatives based on the purported success in Oklahoma, you see similar patterns," Zemitzsch said:
-- "Few, if any, dollars have been invested in local companies.
-- "There are no credible job creation metrics.
-- "The program managers have raised only a fraction of the total dollars envisioned; and there is no requirement to invest in the state.
-- "In addition, the liability for these so-called contingent tax credits is not budgeted and could come due when the states could least afford it.
"Fortunately, not every state has bought the sales pitch. Idaho's governor vetoed legislation based on the Oklahoma program in 2002, citing the state attorney general's concerns about the constitutionality of the state guaranteeing the investment of a private company or individual," Zemitzsch said. "The Idaho Statesman noted in a subsequent editorial that the program created substantial risk for taxpayers with little public scrutiny."
More recently, Zemitzsch added, Illinois Speaker of the House John Madigan, D-Chicago, wisely blocked a proposal to create a similar program. Speaker Madigan also cited the financial risk and lack of involvement by experienced private-sector investors.
The GCA was formed specifically to help small businesses address the issues of capital formation and supports small business incentive programs and the state and federal levels.
"This report lifts the veil on many of the claims made by promoters of this program," said Paul Zemitzsch, a spokesman for the Growth Capital Alliance, a national organization supporting venture capital investment. "The most important aspect of this audit is that it highlights the significant cost and clear financial risk for the state - more than $50 million to date -- despite the proponents' longstanding contention that there is no cost or risk."
"The lack of transparency noted by the auditor is troubling, too," Zemitzsch added, "especially in the post-Enron environment. For years now, the true financial liabilities of this program have been hidden from the leadership and taxpayers of Oklahoma. At the same time, the National Association of Seed and Venture Funds, an organization with ties to the Oklahoma program manager, has tirelessly lobbied for this type of program all across the country based on what they characterized as the Oklahoma success story."
"Increasing the flow of investment capital for small business is a valuable economic development strategy for states," said Craig Casselberry, president of the Texas Coalition for Capital. "But no taxpayer should be asked to fund a program that primarily benefits businesses in other states."
"There are many effective state-focused venture capital programs," Zemitzsch said, "with annual audits by state regulators and fully disclosed costs and economic impacts. These programs have resulted in billions of dollars of investment flowing to entrepreneurs in those states, resulting in thousands of jobs and tremendous economic activity. Federal venture capital programs such as the Small Business Investment Companies program also have rigorous oversight."
Findings by the Office of the Oklahoma State Auditor indicate the state's investment board lacks transparency in its dealings, is more risky than taxpayers and legislators were led to believe when it was approved, and the economic impact of the program is modest at best. Of the 162 companies funded to date, only 18 were in Oklahoma - 11 percent of the total. Moreover, there is no evidence those investments resulted in any significant job creation, increased economic activity or increased tax revenue for the state.
In releasing the audit, State Auditor Jeff McMahan said Oklahoma is "far from maximizing its efforts in venture capital investing." The auditor warned of the program's growing debt and its inability to achieve diversification and stabilization of the state's economy as promised.
Shortcomings noted in the auditor's report included the following:
-- The program "was created with the premise that proceeds from investments ... would cover the costs to operate the program. To date, this has not proved to be the case as evidenced by over $31 million in debt ... with the debt increasing an average of $2.4 million each year." While no tax credits have been sold to date, "OCIB trustees are considering selling credits to cover the debt."
-- The program's investments and debts are not accounted for on publicly available financial statements. The program's true financial picture is only available on a very select, confidential basis. "The transparency ... is limited, making it difficult to get a clear indication of the financial condition."
-- The lack of transparency is a "significant issue" for policymakers, the auditor noted, recommending that "legislative leaders and decision makers should be made aware of the financial risk to the state." The auditor placed the financial risk to the state at $56.1 million, including $31 million in debt and nearly $24 million in unfunded commitments.
-- Since the program began, "OCIB has had an interest in 162 companies." Of those companies, 144 - almost 9 out of 10 -- were in states other than Oklahoma. Even with so few companies in its own state, the investment "provided by OCIB is unknown as this is a measure not tracked."
-- "While determining the amount of direct investments on a company-by-company basis is not considered significant to OCIB, we believe this is an important measure for the state's leadership and its citizens to have a clear indication of OCIB's direct involvement in Oklahoma companies."
-- In addition, seven of the 18 Oklahoma companies have either gone out of business or left the state. "These seven companies account for close to one-half of the total dollars invested in Oklahoma; therefore, it is unlikely these companies had any long-term economic impact on the state."
-- Finally, the lack of economic impact measurements is troubling. "Without adequate performance measures, it is not possible to make a judgment about whether the results of the program are worth the financial risk to the state." Indeed, the auditor characterized this as the program's "greatest weakness." "The mere fact that an investment was made should not be the only reward recognized by the state."
"From top to bottom, the program is flawed," Zemitzsch said. The auditor's findings echo conclusions of a 2002 study of the Oklahoma effort, he added. That analysis, conducted by Micrometrics in St. Louis, also noted that very few Oklahoma companies had benefited from the program and, of those that had, many had moved out of state or gone out of business.
"This certainly cannot be considered an economic development program and if the state sought above-market investment returns for its pensioners, it would be better served by investing in a top-quartile venture capital fund," Zemitzsch said. "It is easy to see why the auditor reached these conclusions and recommended the Legislature consider providing additional state oversight to OCIB's operations."
Oklahoma is not the only example of disappointment, he said. Arkansas enacted a similar program in 2001 and Iowa in 2002; both states hired firms connected with the Oklahoma program manager to run their programs, yet neither one has done more than dole out a small portion of the authorized funds to out-of-state fund managers.
"When you look at these states which passed these initiatives based on the purported success in Oklahoma, you see similar patterns," Zemitzsch said:
-- "Few, if any, dollars have been invested in local companies.
-- "There are no credible job creation metrics.
-- "The program managers have raised only a fraction of the total dollars envisioned; and there is no requirement to invest in the state.
-- "In addition, the liability for these so-called contingent tax credits is not budgeted and could come due when the states could least afford it.
"Fortunately, not every state has bought the sales pitch. Idaho's governor vetoed legislation based on the Oklahoma program in 2002, citing the state attorney general's concerns about the constitutionality of the state guaranteeing the investment of a private company or individual," Zemitzsch said. "The Idaho Statesman noted in a subsequent editorial that the program created substantial risk for taxpayers with little public scrutiny."
More recently, Zemitzsch added, Illinois Speaker of the House John Madigan, D-Chicago, wisely blocked a proposal to create a similar program. Speaker Madigan also cited the financial risk and lack of involvement by experienced private-sector investors.
The GCA was formed specifically to help small businesses address the issues of capital formation and supports small business incentive programs and the state and federal levels.
© 2006 Business Wire
