Legislation that Gov. Scott Walker says will create jobs would provide hundreds of millions of dollars in tax breaks to insurance companies, while giving control of a $250 million fund to out-of-state financial management companies that would not have to pay back the fund's principal and would keep up to 80% of its profits.

The proposal is supported by a group of Republican lawmakers led by Sen. Randy Hopper (R-Fond du Lac) and Rep. Gary Tauchen (R-Bonduel). But some others - including at least one Republican legislator - are calling it a massive corporate giveaway.

The program is called the Jobs Now Fund and represents part of the $400 million Wisconsin Jobs Act. It aims to jump-start job creation in Wisconsin by promising $200 million in future tax credits in exchange for $250 million raised from insurance companies.

The money would be invested in Wisconsin businesses through management companies known as certified capital companies, or "CAPCOs." Those companies have been lobbying hard for the legislation; at least five lobbyists hired by the companies are registered in Madison.

Opponents say the proposal to give tax credits that guarantee the insurance companies will recoup at least 80% of their investment is no more than a handout from taxpayers. Sen. Glenn Grothman (R-West Bend) said the legislation mirrors an unsuccessful proposal in 2003 by then-state Sen. Ted Kanavas, who led discussions about Walker's venture capital strategy.

"The bill ... is the most dubious giveaway I've seen since I've been in the legislature," said Grothman, who has been in the Legislature for 17 years. Grothman was the only one of 26 people who testified at a joint committee hearing in Madison last week to voice objections to the plan.

In written testimony submitted for the hearing, Tom Hefty, the former chief executive of Blue Cross/Blue Shield of Wisconsin, called the program "the largest special interest Wisconsin tax cut in history masquerading as an economic development initiative."

The $200 million in tax credits would never have to be repaid to the state. The payback, supporters say, would come from the job creation and business growth that would result from the investments.

"At the end of the day, we try to move toward that point where we can have a strong economic development impact, a strong job creation impact, and also hopefully provide a return to our investors," Jeff Craver, a senior vice president at one of the capital companies, Advantage Capital of St. Louis, told legislators.

Previous effort

Wisconsin put $50 million into a similar program in 1999 that was slated to last for 10 years. Two years past the end of that term, however, the state Department of Commerce has been unable to provide investment performance information about the program.

Instead, David J. Volz, a department spokesman, directed a reporter to a July 2010 study paid for by the Coalition for Capital, the Washington trade group for the certified capital companies. Study author Don Nichols, a retired University of Wisconsin-Madison economics professor, updated his work on May 13 to reflect that 33 state companies that received loans or investments under that program were indirectly responsible for at least 944 and perhaps as many as 1,758 new workers in the state.

Under the proposed Jobs Now program, the state would get 20% to 25% of any profits from the capital companies' investments, but it would never get back the $200 million it put up in the form of tax credits. The capital companies would get to keep the principal at the end of the life of the fund, and also would collect management fees (capped at 2%) and as much as 80% of any profits.

"The bottom line is this is a $200 million toilet Wisconsin is buying," said Julia Sass Rubin, an assistant professor of public policy at Rutgers University. "The question is not 'Does it flush?' It's 'Why the hell are you paying $200 million for a toilet?'"

Venture alternative

Rubin and other critics say capital companies run expensive, inefficient programs that they sell to states with aggressive marketing and intense lobbying efforts - and some point out that better, less-costly alternatives exist.

For instance, Wisconsin-based venture and angel capital groups, at least six of which are in fundraising mode and evaluating investments, have been creating an infrastructure with investing expertise, willingness to collaborate on bigger deals and knowledge of the state's emerging companies. These groups, in fact, could benefit from the other half of the state's venture capital proposal: the Badger Jobs Fund, which would provide $200 million in state money to a mix of venture capital funds. The funds would have to match each dollar of state money with $3 from other investors, and invest the state money in Wisconsin companies.

The existing venture/angel infrastructure could actually be hurt by a program that uses capital companies, according to a study prepared last year by the Minnesota assembly's research department. The study suggested Wisconsin's 1999 program might have had no effect at all, "likely displacing venture capital financing that would have otherwise occurred."

The proposed Badger Jobs Fund would give the state a 100% return of its principal and 80% of any profit on its money. But backers of the two-pronged approach contend that while the Badger Jobs Fund is a good long-term strategy, the Jobs Now Fund would allow capital companies to put money to work in the state more quickly - even though several venture and angel groups in the state would be ready to make investments under the more taxpayer-friendly Badger Jobs Funds very soon.

Local venture and angel groups currently can receive a 25% tax credit after they make their investments, as opposed to the proposed 80% tax credit that's guaranteed to the insurance companies.

"The state can serve a facilitating role and provide incentives, but here they're just providing cash. I don't think that's the role of the state," said Kenneth U. Johnson, managing director of Kegonsa Capital Partners LLC, Madison.

At a news conference Friday at University Research Park, Walker said he was open to "tweaks along the way" but was committed to an investment proposal that could quickly provide capital to emerging businesses. Proponents of capital companies say their relationships with insurance companies allow them to raise funds quickly, so they can get money working faster.

"We needed to jump-start the economy," Hopper said.

Walker portrayed the legislation as collaborative.

"We worked with members of the Legislature and business leaders looking at new and emerging businesses and tried to model something where we had a couple different options, and we avoided some of the challenges that other states have had through this process," Walker said.

Gingee Prince, managing director of Enhanced Capital Partners, a certified capital company in New York, said Walker's office approached them. "We've been asked to help them move it along," Prince said. "The governor's office said, 'This is something we want to do.'"

A dozen states have used capital company programs, she said.

Some have negotiated better terms than Wisconsin's proposal would provide.

Tennessee's TNInvestco program returns 50% of its original principal and 50% of the profits to the state.

The InvestMaryland program, which cut out the capital companies but uses insurance tax credits, gives that state 100% of its principal back along with 80% of the related profits.

To Rubin, the Rutgers professor, the mere act of handing out millions of dollars will stimulate Wisconsin's economy. So the state needs to consider carefully the terms it gets when it contracts to hand out that money, she said.

"I'm all for venture capital, but the state should be treated like every other investor in venture capital," Rubin said. "Is Wisconsin such a dump that you have to get bled to get people to invest in the state?"

***

The Wisconsin Jobs Act



The Jobs Now Fund would issue $200 million in state tax credits to insurance companies that would provide $250 million to certified capital companies. The funds would be invested in state companies, and the tax credits could be used starting in 2016.

The Badger Jobs Fund would raise up to $200 million from the sale of bonds, then invest the money in venture capital funds. The funds would be required to raise money from other sources as well, and would have to invest all the money received from the state in Wisconsin companies.

Jason Stein and Cary Spivak of the Journal Sentinel staff contributed to this article.