Legislators Show Lack of SCRA Knowledge

June 1, 2011

Investigative Reports

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The NerveIf South Carolinians were asked in a poll to explain what the S.C. Research Authority is, the vast majority of them probably would be unable to do so.

That would not be surprising, though, as the SCRA is a unique, complex, secretive quasi-governmental entity that works hard to keep a low profile even as it labors just as intensively to expand its role in the state’s economy.

What might be surprising, however, is that a similar survey of state lawmakers likely would yield the same results.

That is true at least to the extent that members of the House Ways and Means Committee represent the General Assembly’s overall grasp of the Research Authority – what it is, what it does, why it does what it does, and how it receives and spends money.

No doubt, many of the committee’s 20-plus members sounded more than a trifle unaware of the SCRA when the panel recently took up a Research Authority bill.

Suffice to say, those legislators got a crash course in the enigma that is the SCRA.

But before delving into that, a few facts about the Research Authority and the bill are necessary. ThenThe Nerve will get out of the way and present excerpts from the committee’s back and forth on the legislation with SCRA chief executive Bill Mahoney – and you can judge for yourself whether lawmakers seem to have a handle on the entity.

Designed to rival the Georgia Institute of Technology and North Carolina’s Research Triangle Park, the Research Authority was chartered under South Carolina law in 1983 as something akin to a public-benefit corporation.

It was created “in all respects for the benefit of all the people of the state, for the improvement of their welfare and material prosperity, and is a public purpose and a corporation owned completely by the people of the state,” the SCRA’s enabling legislation says.

That section of the state code – Title 13, Chapter 17 – lays out the Research Authority’s mission: in short, to work with the state’s colleges and universities and its research community to grow a knowledge-based economy in South Carolina grounded in technological innovation.

To get the Research Authority up and running, the state gave it $500,000 in cash and 1,400 undeveloped acres. The Legislative Audit Council at that time valued the land at $10.7 million.

The SCRA makes its money primarily from contract management fees. The way that works is, the Research Authority wins contracts, often from the U.S. military, and brings together subcontractors to execute the deals.

One example Mahoney cited to the Ways and Means Committee is the development of composite materials to improve the performance of Navy submarines.

The SCRA’s gross revenue this fiscal year is expected to be $180 million, he told committee members.

Think of the Research Authority then as a middleman, a state-created and state-controlled technology and real estate company.

Yet, the SCRA has certain built-in advantages over private-sector firms with which it competes.

For one thing, it is exempt from income, sales and property taxes. In addition, while the Research Authority does not receive state funding directly, it does control a publicly supported venture capital fund that brings in $6 million per year.

Contributions to the fund, which was established under the Industry Partners Act of 2006, are good for a dollar-for-dollar credit against state income taxes. To oversee the fund, the SCRA created an affiliate it manages named SC Launch.

All of these details, and others that would take much longer to describe, help explain the weighty intricacies of the S.C. Research Authority.

PARTICULARS OF THE BILL

Concerning the bill the Ways and Means Committee recently debated, it features three main provisions:

  • an expansion of the SCRA board’s executive committee and its powers;
  • a requirement that the Research Authority inform its business partners in writing that it is prohibited from pledging the credit and taxing power of the state in its business deals; and
  • more leeway in how the SCRA can use its revenue and funding.

House Speaker Bobby Harrell, R-Charleston, is chief sponsor of the bill, H. 3743.

The Ways and Means panel, which originates South Carolina’s annual budget and wields immense authority over the state’s taxation and economic development policies, discussed the legislation on the morning of May 12.

But committee members, fumbling to wrap their minds around the Research Authority and the bill, adjourned debate on it.

That’s where things stand on the measure, and the committee is not scheduled to meet again this legislative session. That likely means the panel will have to make another run at the bill next year if the committee wants to move it.

To be a fly on the wall as Ways and Means chewed on the legislation that morning was sort of like watching a high school teacher live through the 1980s comedy classic My Science Project – in real life.

“What is the purpose of this legislation?” Rep. Dwight Loftis, R-Greenville, asked in the early goings of the debate. “What are we trying to do with SCRA? What are we trying to achieve?”

Somebody on the committee responded, “It’s basically a body that works with the three universities … ”

Proving to be the exception to the rule, Loftis interjected, “I know what it is, and I know there’s been some serious questions about it.”

Ways and Means Chairman Dan Cooper, R-Anderson, chimed in that the bill would bar the Research Authority from committing the credit and taxing authority of the state.

“They currently have that?” Loftis asked.

“It’s kind of ambiguous,” Cooper said, adding that the SCRA doesn’t but “this clears it up.”

Loftis, referring to three high-tech business incubators the Research Authority recently built and financed under the Innovation Centers Act of 2005: “Don’t they have some indebtedness that’s coming due, about $15 million pretty soon?”

Rep. Rita Allison, R-Spartanburg, proceeded to ask a few questions about the bill; and, amid confusion about it among the committee members, they agreed in a laughter-filled unanimous voice vote to briefly postpone their discussion of the legislation and take up another matter.

Cooper: “We’ll get back to that one after awhile. We’ve got to do some, we’ve got to clear some stuff up.”

Several minutes later the committee goes back to the bill.

“I don’t understand what this bill does,” Rep. Jim Merrill, R-Berkeley says, adding that he asked its sponsors “and not one of them can tell me. The staff says that they asked the Research Authority but they haven’t given a clear answer as to why they need it.”

Merrill added that the dearth of understanding “scares” him.

Cooper: “Is that a question?”

Merrill: “Yeah, what does it do?”

Rep. Harry Ott, D-Calhoun, then joins the exchange. With apologies for not remembering, Ott asks, “What are the Innovation Centers, and what are the Industry Partners Act? What do those two things do? Are those good things or are those bad things?”

Continuing, Ott adds, “I hate to say this but I’m getting to be a little bit like Mr. Merrill. I’m wondering what we are actually trying to accomplish in the big bill.”

Ott expands his query about the Industry Partners Act and the Innovation Centers Act, at which point Rep. Bill Herbkersman, R-Beaufort, says a committee staff member is “getting the code section right now and we’ll figure that out for you.”

Cooper, trailing off: “I wish I could spout off every section of the code; but, you know, it’s … ”

Rep. Jim Battle, D-Marion, gets into the mix next, asking whether the bill stems from the former SCRA chairman “saying that there were a lot of things going on (with the Research Authority) that the General Assembly and the governor did not know about and made some suggestions that there were some changes needed to be made.”

Cooper repeats the part about the state’s credit and taxation authority being off limits to the SCRA.

Battle: “They’re just kind of running themselves down there.”

MAHONEY CALLED TO ANSWER

About this time, Cooper called on Mahoney, the SCRA’s chief executive, to address the panel and clear things up for them.

On the credit and taxing power issue, Mahoney said the SCRA is “getting more and more involved with commercial finance private-equity firms.”

And the requirement that the Research Authority notify them in writing that it cannot pledge the state’s resources is necessary, he said, “so that they know there is not a state bailout behind us, and that we need to share the risk and have the same terms that any commercial enterprise would have.

“This will be good for us,” Mahoney added, “you know, because a lot of times we see terms that are assuming that we’re the state, when we are in fact, from a financial standpoint, not the state.”

Allison asks if the 1983 enabling legislation gave the SCRA authority to spend state money.

“No ma’am,” Mahoney replies. The Research Authority has been “100 percent self-sufficient” since its initial capitalization from the state, he says.

Ott: “Help me understand this, do you just act like a bank?”

Mahoney: “No.”

Ott: “Well, you mentioned $180 million worth of income.”

Mahoney: “Revenue.”

Ott: “Where does that come from?”

Mahoney: “We perform applied research and commercialization services contracts for people like the United States Navy, the Department of Defense, Boeing, Lockheed Martin, Northrop Grumman – companies large and small around the world.”

Ott asks him to elaborate.

“It’s basically taking prototypes and discoveries out of labs and off of benches and getting them into production and widespread use,” Mahoney says.

Rep. Bill Clyburn, D-Aiken, joins the fray with some questions about a bidding process for SCRA contracts and what exactly it is that the organization promotes.

Mahoney: “Well, we compete against companies like IBM, SAIC, MITRE Corp., the Battelle Institute and others.”

Clyburn: “And some of those contracts with the state, are they sole sources to the state?”

Mahoney: “No, no, we don’t contract with the state.”

Herbkersman, a little later: “I’ve dealt with SC Launch. I think they’re so unresponsive.” He described it as a “quasi-governmental agency” and reiterated that he’s “gotten terrible response from them.”

Mahoney: “Well, I’d be happy to take that offline and see what issues you had.”

Herbkersman: “I’d be happy for you to.”

Loftis, on SCRA’s contracts: “What is your ratio in-state versus out of state?”

Mahoney: “Approximately 30 percent of the work we do is in-state.” The other 70 percent takes place across the globe, he said.

However, Mahoney quickly added, the SCRA directly employs some 220 people. “About 70 percent of those employees are in South Carolina,” he said. “About 30 percent of our employees are out at our client sites where they need to be, under contract.”

With time running out, Cooper drew the proceedings to a close. “Perhaps, I don’t know if Mr. Mahoney wants to hang around but maybe he can answer some questions individually for members,” the chairman said.

“I’d be happy to,” Mahoney offered.

So, how do you think that whole thing about SCRA existing “in all respects for the benefit of all the people of the state, for the improvement of their welfare and material prosperity” is working out?

Reach Ward at (803) 254-4411 or eric@thenerve.org.