Michael O. Leavitt Center for Politics & Public Service

Project Prologue

Economic Development Report

Economic Development Report

I was involved from the industry side.  And as Rich Nelson, and you may want to talk to Rich and flesh it out and get more detail, he could direct you to other people.  The whole thing on the Fund of Funds was, Utah has been an innovator of ideas for many, many years.  A lot of new technologies came out of Utah and a lot of the computer related ideas and software companies and so forth started from people coming out of U of U’s computer science program.  But they didn’t stay in Utah.  The ideas were generated here, but they were developed and moved to California.  Part of that was the lack of venture capital.  You’d get this new technology that would be started, and when it would get ready for funding they couldn’t really get funding here so venture capital groups from California would come and find out about them and look into them and agree to fund them, but they would say, you have to move to California because we want you to be close by where we are so we can keep an eye on you.  So Utah, even though we were innovative with ideas, we were losing the jobs and the benefit that came out of those companies.  So the technology industry grew together with the state and started looking at and  how could we change that and they looked at a model, and I think it was Oklahoma where they had put together a state fund and we started looking into how could we do that.

You couldn’t go to the legislature and try to get them to appropriate actual funds because that would be very difficult to do.  So we came up with this idea of getting the legislature to authorize tax credits up to a hundred million dollars worth of state tax credits that you could use to fund this activity and the idea was that they would diversify over a lot of different firms so we would have this ability to put money into these venture capital firms and the idea was you wouldn’t put more than 10% of any one fund and you would try to get as much out of the fund as you could in terms of committing them to open an office in Utah or a minimum investigate or look into x number of start-up companies in Utah.  And by doing it that way, if you had a hundred million, let’s say you limited, that you would only put a maximum of say 10% of one firm, and you had a hundred million to divvy out, so if you put 10 million into a firm, it’s going to have another 90 million that goes with it and that’s going to be looking at Utah ventures.  So it really leveraged it out a lot.  But it was a difficult sell to the legislature, but the successful because of the state working together with the industry and the industry got all these CEOs of technology companies in the state of Utah up there lobbying, saying this is really important, it’s something that really has to been done and took a lot of work to make happen, lot of people participating.  Once you got the legislation passed, that was only a portion of the battle, then actually implementing it, trying to put together the infrastructure necessary to implement it and make it work.  It was a very difficult, time-consuming process, took close to 2 years just to get it put together and all the detailed procedures worked out on how it was going to work.

It’s been very successful.  In fact, I haven’t really looked, but I think this last year, last year’s legislative session, they were going back making some changes to it and trying to expand it, increase it, because it has been very successful.  Although, with venture funds, you can say it’s been successful, but to see financially how successful it was, you have to wait 10 to 15 years.

It definitely has increased the amount of private business.  You have a lot of motivation to change and innovate, because if you don’t, you die.  But in government where you have a monopoly, you don’t have that external pressure that’s pushing you to make those kinds of changes so you have to find a way to develop it internally.  That’s where Governor Leavitt was particularly good.  He is a very creative guy, had lots of ideas about why don’t we try this, why don’t we try that.  He needed people around him who could take those ideas and go try to figure out how to make them happen.  And in government it’s often difficult where you have to sell your idea and then you have to build you coalition of people to get behind it to make it happen.  And it’s more difficult in government, I’ve found, to do that than in a corporation.  In a corporation, if you can sell your idea to the CEO and board of directors, you’re pretty well done.  In government, you not only have to sell it to the governor of the state, but you have to sell it to the legislature and in that whole process, there are all these outside special interest groups that can come in and sideline, derail what you’re trying to accomplish.  And you don’t know, often times, where they’re coming from, so trying to fend all those off and respond to any of those issues that come up and keep enough of the legislature aboard agreeing that we need to do what we’re trying to do is a challenging process and quite interesting to participate in.

The primary thing to point out is what the constraints are that are holding Utah back. We identified those:  lack of support, lack of venture capital for start-up businesses was one of those constraints. Then we set out to say, what can we do to solve this problem?  The first thing to do to solve the problem is to look around, is there some idea that someone else has tried and we piggy back on that and maybe refine it, make it better or make it fit our environment in Utah. That’s what we did and we were successful in getting legislation put into place to make it happen and then actually getting an infrastructure implemented to make it happen and it’s working, helping Utah businesses.

The other, the next one that was on here was a similar one what kind of barriers and constraints are we running into in terms of getting intellectual capital or intellectual property out of the research universities and into the business community.  There were some problems there because the state constitution had a phrase, and I can’t remember exactly how it’s worded.  Basically, it was interpreted that the state really can’t own equity and that came about way back in the early days of the railroad where a lot of states got in trouble by buying bonds of railroad companies that went belly up and lost a lot of money.  So states put these restrictions in that you couldn’t do it.  A lot of the research universities were looking at that and saying, we can’t own equity, therefore, if I have a new technology or idea that has been developed in research and you’re a business and I want to transfer that to you, how do I get value for it.  But at that stage, it’s just an idea and no one knows what that idea is going to turn in to, value wise.  The easiest way to do it is to say, I’ll turn this over to you.  I’ll give you the license, the right to use this idea and I’ll take 10% of whatever you develop, I’ll take a 10% interest in your company that you’re trying to put together. They thought the state constitution prohibited them from doing that, so the only way they could do it was to negotiate some kind of license fee or royalty.  If you’re the business, first of all, entrepreneurs have no money to start with, so they don’t have much money to pay for a license and then the other problem is, at that stage of the whole process, no one knows how successful this idea is going to be, so what is a reasonable value.  There’s no way to determine a value because it too much of an [ ? ],  it hasn’t been developed enough.  So that became an obstacle to getting these intellectual properties out in the commercial centers and getting them developed.  So what we did was work with the universities.  The universities were very nervous about doing this because some of them had done some of these things, had taken some equity participation, and they were afraid that by lobbying to get this changed, it could go the other way and somebody could come and say you were doing things that were against the Utah constitution.  So it took a while to put together a coalition of people willing to go to work on it.  And I can’t remember the fellow’s name who was running Utah State University at the time, but he got very heavily involved and did an excellent job of helping market it to the legislature and resulted in the legislature passing some legislation making it clear that this kind of activity would not be in violation of the state constitution and it opened up an easier transfer of intellectual property from research universities to the commercial world.  So that was another key kind of constraint that we worked on knocking down.

The next one that was an obvious constraint that had been there for many years was in the business recruiting.  In business recruiting, one of the things we had to convince the legislature was that they were not buying the business.  People don’t move to Utah solely because of the financial incentives you give them.   They move to Utah because of some kind of strategic objective on the business end.  Let’s say I’m a business and I’m located in the Midwest or the East and I really don’t have any outlets in the West, so I decide that part of my strategy is I need an outlet in the West.  So then they go out and look around and they may decide that, Ok, Utah would be a good spot, Nevada could be a good spot, Arizona could be a good spot, and they narrow it down to several locations that meet their objective.  Then they start looking, and they say, Ok, if any one of these work well for me, I’m going to then start competing these against each other to see which one is going to give me the best economic advantage.  And in that process, if you want to play, you have to at least be competitive in incentives.  What I used to tell the legislature, if I could propose a package that was 80% of what Arizona was proposing or what Nevada was proposing, I could stand a chance to win.  But if it’s nothing compared to what they’re proposing,  then we were just out of the game, they won’t even pay attention to us.

At the time, Utah had, the only incentive tool it had was something called the Industrial Assistance Fund and it was all job based.  Basically it said, for every job you’re going to create, we’ll give you X amount of money per job. It was limited to, you could come up with a total incentive of 2-3 million dollars under that thing and it worked fine, but if you were working on a large project or maybe you needed 50 million, 60 million in the way of incentives over time, you’re just out of the running. Nobody would even talk to you.  So we came up with an idea of, why don’t we give back to the business a portion of the new value they create by coming here over a period of time.  That way the legislature doesn’t have to give up any of the funds it already has and so the idea was that if they don’t come here, the state’s not getting any new money.  If they do come here, give them back 30% of the new money they create in the state for X number of years.  So it creates an incentive that’s proportionate to the size of the project that’s being done.  I thought it would be a good tool to have across all industries, but people were nervous about it, so they…  I was working at the time on some aerospace-related businesses, trying to recruit them here and they said, well, let’s just start with aviation aerospace.  So we got legislation passed allowing us to apply that process to aviation aerospace businesses.  And it worked so well that then we expanded it to all industries.  And the problem was the expansion to all industries didn’t really pass.  Like the Leavitt/Walker administration ended the end of 2004 and that legislation passed in the 2005 session, but all the work was done during the Leavitt/Walker time.  And that’s the primary tool that’s used now for recruiting in the State of Utah.  The other thing we did was to change the Industrial Assistance Fund to make it more flexible so you could do more things with it.  That allowed us to do an experiment on incentives for film production in Utah.  We had lost out pretty severely to other states because they were offering incentives and we didn’t have any incentives.  But we used the Industrial Assistance Fund to set up a pro forma or test case, to say on a limited basis, let’s see what we could do and in using that [    ] to leverage that with the legislature and convince them to provide an assistance fund for film and that’s in place and working quite well.

The next one on here was developing the promotion of tourism.  This one was a very difficult, long-fought battle and the problem with was that there are tourism taxes that are primarily on hotel rooms, rental car tax, and others like that, but these tourism taxes predominately go to the counties and the counties have very limited, very general rules under which they expend it.  Then the responsibility for marketing or branding the state for tourism was put on the state, and part of the Department of Tourism was under Community and Economic Development.  The legislature each year would only appropriate maybe one or two million dollars to it.  So imagine trying to do an ad campaign to develop and promote a Utah brand for tourism on one million to two million dollars a year, it’s just impossible, you couldn’t even do it within the States, let alone internationally.  So basically, what we were limited to was some very targeted markets, you’d have to go after Southern California or some places like that, just do some radio ads or something to encourage people to come here.  Some people thought we should try to take the money away from the counties, and instead of having the money go to the counties, take that back and use if for promoting tourism on a state-wide level.  But politically, those counties rely on those funds, they had already committed them for parks and other kinds of things that they’re doing, and politically, just to make that happen, was not going to happen.  Then again we needed to find a way to have a self-funding mechanism.

We looked around at what other states were doing and we found a state that had used a kind of methodology where they identified certain SIC [Standard Industrial Classification] codes or industrial classification codes that were driven by tourism and said, let’s identify those revenues and if we can make that revenue grow faster than the inflation rate then give us a portion of that additional growth to fund the promotion.  So what we did was started working on selling the legislature on giving us 10 million dollars to fund tourism promotion, and the next year cut it to 9 million, the next year cut it to 8, 7, and so on.  So the amount coming out of the general fund goes away.  At the same time, put a bill in place saying that with that 10 million, if we can demonstrate to you that we can increase the revenue coming to the state by better promotion, give us a portion of that increase back to perpetuate the promotion.  That’s what we ended up doing.  It took us about 3 years to get it passed, and it’s another one of my biggest disappointments is I was out at the end of 2004 and it got passed in the February 2005 session.  But it’s been very beneficial to the State in terms of increasing tourism.

Again, your issue on politics and selling things and building coalitions, one of the most difficult things there is trying to get the hotels, the restaurants, all the people who benefit from tourism to work together.  And early on, they were so afraid that if they thought you are going to come out of this better than me, they would kill the whole thing just because they were worried about it.  So trying to get them to work together and see if we all work together, we can make something happen.  If we don’t, we have nothing.  And it took a long time to get it there because they wanted to get some funding for the sports commission because they were recruiting sporting activities and that breeds tourism, as well.  Trying to get everybody to play together just took a long time.

The whole state was targeted.  The ad program basically was intended to be a national and international marketing campaign to try to bring people into places like the national parks which are a great draw for international tourism.  The national parks in Southern Utah get a lot of foreign visitors. They’re very attractive.  This German friend of mine came to visit us, he and his wife went down through Southern Utah and they came up and spent some time with us in Odgen.  He said, “have you ever been to Ayres Rock in Australia?”  And I said,” no, I’d seen pictures of it, it’s just a huge, lone rock in the middle of nowhere.”  He said, “We went to see that in Australia, and had to drive for hours and hours to see this rock, but he said, you’ve got thousands of Ayres Rocks in Southern Utah.  You ought to just say, if you want to go see Ayres Rock in Australia, forget that, just go to Southern Utah.”

Tourism was slightly different with the Olympics.  The legislature gave a little bit of additional money for tourism, but it was like, instead of having a million dollars for promotion, it was 2 million.  It was peanuts.  And that was the other thing we were arguing, is, after the Olympics, we’re saying, look you had the Olympics, if you want to take advantage of the awareness the world now has of Salt Lake City and Utah, you need to follow that up with some promotion and advertising to take advantage of it.   Because over time it’ll just disappear if you don’t maintain it.  It was amazing that it took us 3 years from when we started, and a lot of these, and again it’s back to this whole thing if you’re looking at what other communities can learn out of this, I think like early on when we started talking about changing the business model for how tourism is done in the State of Utah.  Early on when we brought it up to people, everybody said, yeah, you’re right, it’s a stupid way that we do it, but that’s the way it’s been and it’s going to be really difficult to try to change it, politically.  So we said, Ok, it’s going to be difficult, but it’ll never change unless we take it on.  If we don’t do something, then it’s never going to change.  And I think too often, and I saw that in Ogden, too, communities and government, people are too willing to accept the status quo and they will make modifications around the fringes where something can get done in a fairly short period of time, but they will avoid tackling the big issues that are the major things that cause the problems. But I think as least during the time I’m familiar with in the Leavitt administration, we ended up getting more beneficial legislative changes for economic development than the State had made for many years prior to that, so it was very successful.

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Michael O. Leavitt Center for Politics and Public Service